e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From _____ to _____
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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25-1792394 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1000 Six PPG Place
Pittsburgh, Pennsylvania
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15222-5479 |
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(Address of Principal Executive Offices)
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(Zip Code) |
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(412) 394-2800
(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 submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 October 30, 2009, the registrant had outstanding 98,076,210 shares of its Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
Quarter Ended September 30, 2009
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
(Unaudited)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
826.3 |
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$ |
469.9 |
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Accounts receivable, net of allowances for
doubtful accounts of $6.3 at both
September 30, 2009 and December 31, 2008 |
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415.8 |
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530.5 |
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Inventories, net |
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737.3 |
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887.6 |
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Prepaid expenses and other current assets |
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67.7 |
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41.4 |
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Total Current Assets |
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2,047.1 |
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1,929.4 |
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Property, plant and equipment, net |
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1,852.5 |
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1,633.6 |
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Cost in excess of net assets acquired |
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196.3 |
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190.9 |
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Prepaid pension asset |
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124.7 |
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Deferred income taxes |
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20.6 |
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281.6 |
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Other assets |
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138.8 |
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134.9 |
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Total Assets |
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$ |
4,380.0 |
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$ |
4,170.4 |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
283.0 |
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$ |
278.5 |
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Accrued liabilities |
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278.6 |
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322.0 |
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Deferred income taxes |
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0.3 |
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78.2 |
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Short term debt and current portion of long-term debt |
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20.2 |
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15.2 |
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Total Current Liabilities |
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582.1 |
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693.9 |
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Long-term debt |
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1,050.4 |
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494.6 |
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Accrued postretirement benefits |
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444.4 |
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446.9 |
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Pension liabilities |
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33.6 |
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378.2 |
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Other long-term liabilities |
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116.0 |
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127.8 |
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Total Liabilities |
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2,226.5 |
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2,141.4 |
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Equity: |
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ATI Stockholders Equity: |
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Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none |
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Common stock, par value $0.10: authorized-500,000,000
shares; issued-102,404,256 shares at September 30,
2009 and
December 31, 2008; outstanding-98,077,853 shares at
September 30, 2009 and 97,330,969 shares at
December 31, 2008 |
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10.2 |
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10.2 |
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Additional paid-in capital |
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647.9 |
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651.8 |
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Retained earnings |
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2,210.8 |
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2,286.7 |
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Treasury stock: 4,326,403 shares at September 30, 2009 and
5,073,287 shares at December 31, 2008 |
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(208.4 |
) |
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(244.8 |
) |
Accumulated other comprehensive loss, net of tax |
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(581.8 |
) |
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(746.5 |
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Total ATI stockholders equity |
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2,078.7 |
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1,957.4 |
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Noncontrolling interests |
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74.8 |
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71.6 |
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Total Equity |
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2,153.5 |
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2,029.0 |
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Total Liabilities and Equity |
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$ |
4,380.0 |
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$ |
4,170.4 |
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The accompanying notes are an integral part of these statements.
1
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Sales |
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$ |
697.6 |
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$ |
1,392.4 |
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$ |
2,239.2 |
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$ |
4,197.0 |
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Costs and expenses: |
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Cost of sales |
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603.5 |
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1,085.8 |
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1,989.2 |
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3,267.5 |
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Selling and administrative expenses |
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83.7 |
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74.3 |
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228.9 |
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223.7 |
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Income before interest, other income
and income taxes |
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10.4 |
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232.3 |
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21.1 |
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705.8 |
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Interest expense, net |
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(8.1 |
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(1.7 |
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(9.3 |
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(2.8 |
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Debt extinguishment costs |
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(9.2 |
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Other income, net |
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0.3 |
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0.4 |
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0.3 |
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2.0 |
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Income before income tax provision (benefit) |
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2.6 |
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231.0 |
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2.9 |
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705.0 |
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Income tax provision (benefit) |
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(1.4 |
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83.9 |
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5.3 |
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243.0 |
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Net income (loss) |
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4.0 |
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147.1 |
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(2.4 |
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462.0 |
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Less: Net income attributable to
noncontrolling interests |
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2.6 |
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3.0 |
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3.7 |
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7.0 |
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Net income (loss) attributable to ATI |
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$ |
1.4 |
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$ |
144.1 |
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$ |
(6.1 |
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$ |
455.0 |
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Basic net income (loss) attributable to
ATI per common share |
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$ |
0.01 |
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$ |
1.46 |
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$ |
(0.06 |
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$ |
4.54 |
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Diluted net income (loss) attributable to
ATI per common share |
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$ |
0.01 |
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$ |
1.45 |
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$ |
(0.06 |
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$ |
4.51 |
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Dividends declared per common share |
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$ |
0.18 |
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$ |
0.18 |
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$ |
0.54 |
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$ |
0.54 |
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The accompanying notes are an integral part of these statements.
2
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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Operating Activities: |
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Net income (loss) |
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$ |
(2.4 |
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$ |
462.0 |
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Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
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Depreciation and amortization |
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96.6 |
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86.7 |
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Deferred taxes |
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95.5 |
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64.5 |
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Change in operating assets and liabilities: |
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Inventories |
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150.2 |
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(167.8 |
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Accounts receivable |
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114.7 |
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(92.3 |
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Accounts payable |
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4.5 |
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26.1 |
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Retirement benefits |
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(289.8 |
) |
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(16.7 |
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Accrued income taxes |
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(31.6 |
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11.6 |
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Accrued liabilities and other |
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11.7 |
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(29.5 |
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Cash provided by operating activities |
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149.4 |
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344.6 |
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Investing Activities: |
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Purchases of property, plant and equipment |
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(308.1 |
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(365.1 |
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Asset disposals and other |
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5.5 |
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1.3 |
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Cash used in investing activities |
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(302.6 |
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(363.8 |
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Financing Activities: |
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Issuances of long-term debt |
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752.5 |
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Payments on long-term debt and capital leases |
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(194.5 |
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(14.8 |
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Net borrowings under credit facilities |
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5.1 |
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2.6 |
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Debt issuance costs |
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(18.1 |
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Dividends paid to shareholders |
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(35.3 |
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(54.1 |
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Dividends paid to noncontrolling interests |
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(0.8 |
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Shares repurchased for income tax witholding on share-based
compensation |
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(0.7 |
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(15.5 |
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Exercises of stock options |
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0.5 |
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1.1 |
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Taxes on share-based compensation |
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0.9 |
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(9.0 |
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Purchase of treasury stock |
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(241.8 |
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Cash provided by (used in) financing activities |
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509.6 |
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(331.5 |
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Increase (decrease) in cash and cash equivalents |
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356.4 |
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(350.7 |
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Cash and cash equivalents at beginning of period |
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469.9 |
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623.3 |
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Cash and cash equivalents at end of period |
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$ |
826.3 |
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$ |
272.6 |
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The accompanying notes are an integral part of these statements.
3
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED EQUITY
(In millions, except per share amounts)
(Unaudited)
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ATI Stockholders |
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Accumulated |
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Additional |
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Other |
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Non- |
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Common |
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Paid-In |
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Retained |
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Treasury |
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Comprehensive |
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Comprehensive |
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controlling |
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Total |
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Stock |
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Capital |
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Earnings |
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Stock |
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Income (Loss) |
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Income (Loss) |
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Interests |
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Equity |
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Balance, December 31, 2007 |
|
$ |
10.2 |
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$ |
693.7 |
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$ |
1,830.7 |
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$ |
(75.4 |
) |
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$ |
(237.2 |
) |
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$ |
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$ |
57.2 |
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$ |
2,279.2 |
|
Net income |
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455.0 |
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455.0 |
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7.0 |
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462.0 |
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Other comprehensive income (loss) net of tax: |
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Pension plans and other
postretirement benefits |
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6.1 |
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6.1 |
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6.1 |
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Foreign currency translation gains (losses) |
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(19.7 |
) |
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(19.7 |
) |
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6.9 |
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(12.8 |
) |
Unrealized losses on derivatives |
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(0.2 |
) |
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(0.2 |
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(0.2 |
) |
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Comprehensive income |
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455.0 |
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(13.8 |
) |
|
$ |
441.2 |
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|
13.9 |
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|
455.1 |
|
Purchase of treasury stock |
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(241.8 |
) |
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(241.8 |
) |
Effect of changing the measurement
date for pension plans and other
postretirement benefits, net of tax |
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1.2 |
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1.2 |
|
Cash dividends on common stock
($0.54 per share) |
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|
|
|
(54.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54.1 |
) |
Employee stock plans |
|
|
|
|
|
|
(43.6 |
) |
|
|
(1.2 |
) |
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
10.2 |
|
|
$ |
650.1 |
|
|
$ |
2,230.4 |
|
|
$ |
(280.1 |
) |
|
$ |
(249.8 |
) |
|
|
|
|
|
$ |
71.1 |
|
|
$ |
2,431.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
10.2 |
|
|
$ |
651.8 |
|
|
$ |
2,286.7 |
|
|
$ |
(244.8 |
) |
|
$ |
(746.5 |
) |
|
$ |
|
|
|
$ |
71.6 |
|
|
$ |
2,029.0 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
(6.1 |
) |
|
|
3.7 |
|
|
|
(2.4 |
) |
Other comprehensive income (loss) net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plans and other
postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111.1 |
|
|
|
111.1 |
|
|
|
|
|
|
|
111.1 |
|
Foreign currency translation gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.3 |
|
|
|
27.3 |
|
|
|
0.3 |
|
|
|
27.6 |
|
Unrealized gains on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.3 |
|
|
|
26.3 |
|
|
|
|
|
|
|
26.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
(6.1 |
) |
|
|
|
|
|
|
164.7 |
|
|
$ |
158.6 |
|
|
|
4.0 |
|
|
|
162.6 |
|
Cash dividends on common stock
($0.54 per share) |
|
|
|
|
|
|
|
|
|
|
(52.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52.9 |
) |
Cash dividends paid to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Employee stock plans |
|
|
|
|
|
|
(3.9 |
) |
|
|
(16.9 |
) |
|
|
36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
10.2 |
|
|
$ |
647.9 |
|
|
$ |
2,210.8 |
|
|
$ |
(208.4 |
) |
|
$ |
(581.8 |
) |
|
|
|
|
|
$ |
74.8 |
|
|
$ |
2,153.5 |
|
|
The accompanying notes are an integral part of these statements.
4
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 2008 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. In preparing the financial statements for the period
ended September 30, 2009, the Company has evaluated subsequent events through the date of issue,
which was November 5, 2009. The December 31, 2008 financial information has been derived from the
Companys audited financial statements, which were revised in the current period to reflect changes
in the presentation of noncontrolling interests (formerly minority interests) in accordance with
the required adoption of the accounting standard discussed below. Certain amounts from prior years
have been reclassified to conform with the 2009 presentation.
New Accounting Pronouncements Adopted
As required, in the first quarter 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (FASB) to consolidation accounting and reporting. Early adoption of
this accounting change was prohibited. These changes, among others, required that noncontrolling
interests, formerly termed minority interests, be considered a component of equity for all periods
presented. Noncontrolling interests were previously classified within other long-term liabilities.
In addition, the practice of reporting minority interest expense or benefit changed. The statement
of operations presentation has been revised to separately present consolidated net income (loss),
which now includes the amounts attributable to the Company plus noncontrolling interests (minority
interests), and net income (loss) attributable solely to the Company, for all periods presented.
Absent a change in control, increases and decreases in the noncontrolling ownership interest amount
are accounted for as equity transactions. As a result of adopting this accounting change, the
balance sheet and the income statement have been recast retrospectively for the presentation of
noncontrolling interest in the Companys STAL joint venture.
On January 1, 2009, the Company adopted changes issued by the FASB for fair value measurements
as they relate to nonfinancial assets and nonfinancial liabilities. These changes define fair
value, establish a framework for measuring fair value in accordance with U.S. generally accepted
accounting principles, and expand disclosures about fair value measurements. The fair value changes
apply to other accounting pronouncements that require or permit fair value measurements and are to
be applied prospectively with limited exceptions. The adoption of this change, as it relates to
nonfinancial assets and nonfinancial liabilities, had no impact on the financial statements. The
provisions will be applied at such time a fair value measurement of a nonfinancial asset or
nonfinancial liability is required, which may result in a fair value that is materially different
than would have been calculated prior to the adoption of these changes in the definition and
measurement of fair value.
5
Note 2. Inventories
Inventories at September 30, 2009 and December 31, 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Raw materials and supplies |
|
$ |
158.1 |
|
|
$ |
163.6 |
|
Work-in-process |
|
|
620.3 |
|
|
|
772.6 |
|
Finished goods |
|
|
108.2 |
|
|
|
164.9 |
|
|
|
|
|
|
|
|
Total inventories at current cost |
|
|
886.6 |
|
|
|
1,101.1 |
|
Less allowances to reduce current cost values to LIFO basis |
|
|
(146.6 |
) |
|
|
(205.6 |
) |
Progress payments |
|
|
(2.7 |
) |
|
|
(7.9 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
737.3 |
|
|
$ |
887.6 |
|
|
|
|
|
|
|
|
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, decreased cost of sales by $59.0 million for the nine first
months of 2009 compared to a decrease to cost of sales of $36.3 million for the first nine months
of 2008.
Note 3. Supplemental Financial Statement Information
The estimated fair value of financial instruments at September 30, 2009 and December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
(In millions) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
Cash and cash equivalents |
|
$ |
826.3 |
|
|
$ |
826.3 |
|
|
$ |
469.9 |
|
|
$ |
469.9 |
|
Derivative financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
17.8 |
|
|
|
17.8 |
|
|
|
17.2 |
|
|
|
17.2 |
|
Liabilities |
|
|
20.1 |
|
|
|
20.1 |
|
|
|
61.5 |
|
|
|
61.5 |
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allegheny Technologies $402.5 million 4.25%
Convertible Notes due 2014 |
|
|
402.5 |
|
|
|
478.0 |
|
|
|
|
|
|
|
|
|
Allegheny Technologies $350 million 9.375%
Notes due 2019 |
|
|
350.0 |
|
|
|
404.7 |
|
|
|
|
|
|
|
|
|
Allegheny Technologies $300 million 8.375%
Notes due 2011, net (a) |
|
|
118.0 |
|
|
|
118.9 |
|
|
|
304.2 |
|
|
|
306.6 |
|
Allegheny Ludlum 6.95% debentures due 2025 |
|
|
150.0 |
|
|
|
138.8 |
|
|
|
150.0 |
|
|
|
144.3 |
|
Promissory note for J&L asset acquisition |
|
|
20.5 |
|
|
|
20.5 |
|
|
|
30.7 |
|
|
|
30.7 |
|
Foreign credit agreements |
|
|
21.4 |
|
|
|
21.4 |
|
|
|
15.6 |
|
|
|
15.6 |
|
Industrial revenue bonds, due through 2020 |
|
|
8.1 |
|
|
|
8.1 |
|
|
|
9.0 |
|
|
|
9.0 |
|
Capitalized leases and other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
(a) |
|
Includes fair value adjustments for settled interest rate swap contracts of $2.0 million at
September 30, 2009, and $6.7 million at December 31, 2008 |
The following methods and assumptions were used by the Company in estimating the fair value of
its financial instruments:
Cash and cash equivalents: The carrying amount on the balance sheet approximates fair value.
6
Derivative financial instruments: Fair values for derivatives were measured using
exchange-traded prices for the hedged items. The fair value was determined using Level 2
information, including consideration of counterparty risk and the Companys credit risk.
Short-term and long-term debt: The fair values of the Allegheny Technologies 4.25% Convertible
Notes, the Allegheny Technologies 9.375% Notes, the Allegheny Technologies 8.375% Notes, and the
Allegheny Ludlum 6.95% debentures were based on quoted market prices. The carrying amounts of the
other short-term and long-term debt approximate fair value.
Property, plant and equipment at September 30, 2009 and December 31, 2008 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
23.8 |
|
|
$ |
23.1 |
|
Buildings |
|
|
349.9 |
|
|
|
310.9 |
|
Equipment and leasehold improvements |
|
|
2,769.3 |
|
|
|
2,508.5 |
|
|
|
|
|
|
|
|
|
|
|
3,143.0 |
|
|
|
2,842.5 |
|
Accumulated depreciation and amortization |
|
|
(1,290.5 |
) |
|
|
(1,208.9 |
) |
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
$ |
1,852.5 |
|
|
$ |
1,633.6 |
|
|
|
|
|
|
|
|
Note 4. Debt
Debt at September 30, 2009 and December 31, 2008 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Allegheny Technologies $402.5 million 4.25%
Convertible Notes due 2014 |
|
$ |
402.5 |
|
|
$ |
|
|
Allegheny Technologies $350 million 9.375%
Notes due 2019 |
|
|
350.0 |
|
|
|
|
|
Allegheny Technologies $300 million 8.375%
Notes due 2011, net (a) |
|
|
118.0 |
|
|
|
304.2 |
|
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 |
|
|
20.5 |
|
|
|
30.7 |
|
Foreign credit agreements |
|
|
21.4 |
|
|
|
15.6 |
|
Industrial revenue bonds, due through 2020 |
|
|
8.1 |
|
|
|
9.0 |
|
Capitalized leases and other |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Total short-term and long-term debt |
|
|
1,070.6 |
|
|
|
509.8 |
|
Short-term debt and current portion of long-term debt |
|
|
(20.2 |
) |
|
|
(15.2 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,050.4 |
|
|
$ |
494.6 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes fair value adjustments for settled interest rate swap contracts of $2.0
million at September 30, 2009 and $6.7 million at December 31, 2008. |
Convertible Notes
In June 2009, the Company issued and sold $402.5 million in aggregate principal amount of 4.25%
Convertible Senior Notes due 2014 (the Convertible Notes). Interest is payable semi-annually on
June 1 and December 1 of each year. The Convertible Notes were issued under ATIs shelf
registration statement and are not listed on any national securities exchange. Net proceeds of
$390.2 million from the sale of the Convertible Notes were used to make a $350 million voluntary
cash contribution to the Companys U.S. defined benefit pension plan, and the balance was used for
general corporate purposes including funding of contributions to trusts established to fund
7
retiree medical benefits. The Convertible Notes are unsecured and unsubordinated obligations of the
Company and equally ranked with all of its existing and future senior unsecured debt. The
underwriting fees and other third-party expenses for the issuance of the Convertible Notes were
$12.3 million and will be amortized to interest expense over the 5-year term of the Convertible
Notes.
The Company does not have the right to redeem the Convertible Notes prior to the stated
maturity date. Holders of the Convertible Notes have the option to convert their notes into shares
of ATI common stock at any time prior to the close of business on the second scheduled trading day
immediately preceding the stated maturity date (June 1, 2014). The initial conversion rate for the
Convertible Notes is 23.9263 shares of ATI common stock per $1,000 (in whole dollars) principal
amount of notes (9,630,336 shares), equivalent to a conversion price of approximately $41.795 per
share, subject to adjustment, as defined in the Convertible Notes. Other than receiving cash in
lieu of fractional shares, holders do not have the option to receive cash instead of shares of
common stock upon conversion. Accrued and unpaid interest that exists upon conversion of a note
will be deemed paid by the delivery of shares of ATI common stock and no cash payment or additional
shares will be given to holders.
If the Company undergoes a fundamental change, as defined in the Convertible Notes, holders
may require the Company to repurchase all or a portion of their notes at a price equal to 100% of
the principal amount of the notes to be purchased plus any accrued and unpaid interest up to, but
excluding, the repurchase date. Such a repurchase will be made in cash.
2019 Notes
In June 2009, the Company issued $350 million in aggregate principal amount of 9.375% unsecured
Senior Notes with a maturity of June 2019 (the 2019 Notes). Interest is payable semi-annually on
June 1 and December 1 of each year. The 2019 Notes were issued under ATIs shelf registration
statement and are not listed on any national securities exchange. Net proceeds of $344.2 million
from the sale of the 2019 Notes were used to retire $183.3 million of the Companys 2011 Notes, as
discussed below, and for general corporate purposes. The underwriting fees, discount, and other
third-party expenses for the issuance of the 2019 Notes were $5.8 million and will be amortized to
interest expense over the 10-year term of the 2019 Notes. The 2019 Notes are unsecured and
unsubordinated obligations of the Company and equally ranked with all of its existing and future
senior unsecured debt. The 2019 Notes restrict the Companys ability to create certain liens, to
enter into sale leaseback transactions, and to consolidate, merge or transfer all, or substantially
all, of its assets. The Company has the option to redeem the 2019 Notes, as a whole or in part, at
any time or from time to time, on at least 30 days, but not more than 60 days, prior notice to the
holders of the Notes at a redemption price specified in the 2019 Notes. The 2019 Notes are subject
to repurchase upon the occurrence of a change in control repurchase event (as defined in the 2019
Notes) at a repurchase price in cash equal to 101% of the aggregate principal amount of the Notes
repurchased, plus any accrued and unpaid interest on the 2019 Notes repurchased.
Retirement of 2011 Notes
In June 2009, the Company completed a tender offer for the Companys 8.375% Notes due in 2011 (the
2011 Notes) of which $300 million in aggregate principal amount was outstanding prior to the
tender offer. As a result of the tender offer, the Company retired $183.3 million of the 2011 Notes
and recognized a pre-tax charge of $9.2 million in the 2009 second quarter for the costs of
acquiring the 2011 Notes. As of September 30, 2009, $116.7 million in face value of the 2011 Notes
remain outstanding.
Amendment to Unsecured Credit Agreement
In May 2009, the Company amended its $400 million domestic bank group credit agreement to redefine
the two financial covenants to provide additional financial flexibility. The amendment restates
the definition of consolidated earnings before interest and taxes, and consolidated earnings before
income, taxes, depreciation and amortization as used in the interest coverage and leverage ratios
to exclude any non-cash pension expense or income and restates the definition of consolidated
indebtedness used in the leverage ratio, which previously was based on gross indebtedness, to be
net of cash on hand in excess of $50 million. As of September 30, 2009, there had been no
borrowings made under the facility, although a portion of the facility was used to support
approximately $10 million in letters of credit.
The Company has an additional separate credit facility for the issuance of letters of credit.
As of September 30, 2009, $30 million in letters of credit was outstanding under this facility.
In addition, STAL, the Companys Chinese joint venture company in which ATI has a 60%
interest, had approximately $4 million in letters of credit outstanding as of September 30, 2009
related to the expansion of its
8
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 (loss) per common share
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator for basic and diluted net income (loss)
per common share net income (loss) attributable
to ATI |
|
$ |
1.4 |
|
|
$ |
144.1 |
|
|
$ |
(6.1 |
) |
|
$ |
455.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per
common share-weighted average shares |
|
|
97.2 |
|
|
|
99.0 |
|
|
|
97.2 |
|
|
|
100.2 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option equivalents |
|
|
0.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
0.5 |
|
Contingently issuable shares |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per
common share adjusted weighted average
shares and assumed conversions |
|
|
98.0 |
|
|
|
99.7 |
|
|
|
97.2 |
|
|
|
100.9 |
|
Basic net income (loss) attributable to ATI per
common share |
|
$ |
0.01 |
|
|
$ |
1.46 |
|
|
$ |
(0.06 |
) |
|
$ |
4.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to ATI per
common share |
|
$ |
0.01 |
|
|
$ |
1.45 |
|
|
$ |
(0.06 |
) |
|
$ |
4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock that would be issuable upon the assumed conversion of the 2014 Convertible Notes
and other option equivalents and contingently issuable shares were excluded from the computation of
contingently issuable shares, and therefore, from the denominator for diluted earnings per share
for the three months and nine months ended September 30, 2009, because the effect of inclusion
would have been anti-dilutive. Excluded shares for the three months and nine months ended September
30, 2009 were 9.6 million and 5.1 million, respectively.
Note 6. Derivative Financial Instruments and Hedging
As part of its risk management strategy, the Company, from time-to-time, utilizes derivative
financial instruments to manage its exposure to changes in raw material prices, energy costs,
foreign currencies, and interest rates. In accordance with applicable accounting standards, the
Company accounts for all of these contracts as hedges. In general, hedge effectiveness is
determined by examining the relationship between offsetting changes in fair value or cash flows
attributable to the item being hedged, and the financial instrument being used for the hedge.
Effectiveness is measured utilizing regression analysis and other techniques to determine whether
the change in the fair market value or cash flows of the derivative exceeds the change in fair
value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately
recognized on the statement of operations.
The Company sometimes uses futures and swap contracts to manage exposure to changes in prices
for forecasted purchases of raw materials, such as nickel, and natural gas. Generally under these
contracts, which are accounted for as cash flow hedges, the price of the item being hedged is fixed
at the time that the contract is entered into and the Company is obligated to make or receive a
payment equal to the net change between this fixed price and the market price at the date the
contract matures.
The majority of ATIs products are sold utilizing raw material surcharges and index
mechanisms. However, as of September 30, 2009, the Company had entered into financial hedging
arrangements primarily at the request of its customers, related to firm orders, for approximately
5% of the Companys total annual nickel requirements through
9
2010. Any gain or loss associated with these hedging arrangements is included in the selling
price to the customer requesting the hedge over the designated hedge period.
At September 30, 2009, the outstanding financial derivatives used to hedge the Companys
exposure to natural gas cost volatility represented approximately 50% of its forecasted
requirements through 2011.
While the majority of the Companys direct export sales are transacted in U.S. dollars,
foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to
changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The
Company sometimes purchases foreign currency forward contracts that permit it to sell specified
amounts of foreign currencies expected to be received from its export sales for pre-established
U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign
currencies in which export sales are denominated. These contracts are designated as hedges of the
variability in cash flows of a portion of the forecasted future export sales transactions which
otherwise would expose the Company to foreign currency risk. At September 30, 2009, the outstanding
financial derivatives used to hedge the Companys exposure to foreign currency, primarily euros,
represented approximately 6% of our forecasted total international sales through 2011. In
addition, the Company may also designate cash balances held in foreign currencies as hedges of
forecasted foreign currency transactions.
The Company may enter into derivative interest rate contracts to maintain a reasonable balance
between fixed- and floating-rate debt. There were no unsettled derivative financial instruments
related to debt balances for the periods presented, although previously settled contracts remain a
component of the recorded value of debt. See Note 4. Debt, for further information.
The fair values of the Companys derivative financial instruments are presented below. All
fair values for these derivatives were measured using Level 2 information as defined by the
accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are
not active, and inputs derived principally from or corroborated by observable market data.
|
|
|
|
|
|
|
|
|
|
|
(in millions): |
|
|
|
September 30, |
|
|
December 31, |
|
Asset derivatives |
|
Balance sheet location |
|
2009 |
|
|
2008 |
|
Nickel and other raw
material contracts
|
|
Prepaid expenses and other
current assets
|
|
$ |
10.9 |
|
|
$ |
7.0 |
|
Foreign exchange contracts
|
|
Prepaid expenses and other
current assets
|
|
|
2.1 |
|
|
|
|
|
Natural gas contracts
|
|
Prepaid expenses and other
current assets
|
|
|
0.2 |
|
|
|
|
|
Foreign exchange contracts
|
|
Other assets
|
|
|
2.4 |
|
|
|
10.2 |
|
Nickel and other raw
material contracts
|
|
Other assets
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
|
|
$ |
17.8 |
|
|
$ |
17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
|
Accrued liabilities
|
|
$ |
12.1 |
|
|
$ |
14.3 |
|
Foreign exchange contracts
|
|
Accrued liabilities
|
|
|
0.1 |
|
|
|
0.2 |
|
Nickel and other raw
material contracts
|
|
Accrued liabilities
|
|
|
|
|
|
|
31.6 |
|
Natural gas contracts
|
|
Other long-term liabilities
|
|
|
7.9 |
|
|
|
5.4 |
|
Nickel and other raw
material contracts
|
|
Other long-term liabilities
|
|
|
|
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
Total liability derivatives
|
|
|
|
$ |
20.1 |
|
|
$ |
61.5 |
|
For derivative financial instruments that are designated as cash flow hedges, the
effective portion of the gain or loss on the derivative is reported as a component of other
comprehensive income (OCI) and reclassified into earnings in the same period or periods during
which the hedged item affects earnings. Gains and losses on the derivative representing
either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness
are recognized in current period results. The Company did not use fair value or net
investment hedges for the periods presented.
Activity with regard to derivatives designated as cash flow hedges for the three and nine month
periods ended September 30, 2009 was as follows (in millions):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
Recognized in Income |
|
|
|
Amount of Gain |
|
|
Reclassified from |
|
|
on Derivatives (Ineffective |
|
|
|
(loss) Recognized in |
|
|
Accumulated OCI |
|
|
Portion and Amount |
|
|
|
OCI on Derivatives |
|
|
into Income |
|
|
Excluded from |
|
|
|
(Effective Portion) |
|
|
(Effective Portion) (a) |
|
|
Effectiveness Testing (b) |
|
Derivatives in Cash Flow |
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
Hedging Relationships |
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Nickel and other raw
material contracts |
|
$ |
3.1 |
|
|
$ |
(0.1 |
) |
|
$ |
|
|
Natural gas contracts |
|
|
(1.4 |
) |
|
|
(3.1 |
) |
|
|
|
|
Foreign exchange contracts |
|
|
(4.0 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2.3 |
) |
|
$ |
(2.4 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Nickel and other raw
material contracts |
|
$ |
19.2 |
|
|
$ |
(12.1 |
) |
|
$ |
|
|
Natural gas contracts |
|
|
(9.5 |
) |
|
|
(12.2 |
) |
|
|
|
|
Foreign exchange contracts |
|
|
(3.2 |
) |
|
|
4.5 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6.5 |
|
|
$ |
(19.8 |
) |
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The gains (losses) reclassified from accumulated OCI into income related to the
effective portion of the derivatives are presented in cost of sales. |
|
(b) |
|
The gains (losses) recognized in income on derivatives related to the ineffective
portion and the amount excluded from effectiveness testing are presented in selling and
administrative expenses. |
Assuming market prices remain constant with the rates at September 30, 2009, a gain of $0.6
million is expected to be recognized over the next 12 months.
The disclosures of gains or losses presented above for nickel and other raw material contracts
and foreign currency contracts do not take into account the anticipated underlying transactions.
Since these derivative contracts represent hedges, the net effect of any gain or loss on results of
operations may be fully or partially offset.
There are no credit risk-related contingent features in the Companys derivative contracts,
and the contracts contained no provisions under which the Company has posted, or would be required
to post, collateral. The counterparties to the Companys derivative contracts were substantial and
creditworthy commercial banks that are recognized market makers. The Company controls its credit
exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit
default swap spreads of its counterparties. The Company also enters into master netting agreements
with counterparties when possible.
Note 7. Income Taxes
A $1.4 million tax benefit was recognized during the third quarter 2009. This resulted from
an effective tax rate of 39.6% reduced by an income tax benefit of $2.4 million for adjustment of
taxes paid in a prior year. The third quarter 2008 included an income tax provision of $83.9
million, or 36.3% of income before tax.
For the first nine months of 2009, the provision for income taxes was $5.3 million compared to
$243.0 million, or 34.5% of income before tax, for the first nine months of 2008. The 2009
provision included a non-recurring tax charge of $11.5 million, primarily associated with the tax
consequences of the June 2009 $350 million voluntary contribution to the pension plan partially
offset by net discrete income tax benefit adjustments of $7.3 million associated with prior years
taxes.
Primarily as a result of the $350 million voluntary pension contribution in June 2009 which
was designated to pertain to the 2008 tax year, the Company received a U.S. Federal income tax
refund of $108.5 million in the 2009 second quarter.
11
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. In June 2009, the Company made a $350 million voluntary cash contribution to its U.S.
defined benefit pension plan to improve the plans funded position.
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 and nine month periods ended September 30, 2009 and 2008, the components of
pension (income) expense and components of other postretirement benefit expense for the Companys
defined benefit plans included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
Pension Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost benefits earned during the year |
|
$ |
5.6 |
|
|
$ |
7.1 |
|
|
$ |
17.7 |
|
|
$ |
21.1 |
|
Interest cost on benefits earned in prior years |
|
|
34.8 |
|
|
|
32.6 |
|
|
|
103.7 |
|
|
|
97.9 |
|
Expected return on plan assets |
|
|
(42.1 |
) |
|
|
(50.3 |
) |
|
|
(114.0 |
) |
|
|
(150.7 |
) |
Amortization of prior service cost |
|
|
4.1 |
|
|
|
4.3 |
|
|
|
12.3 |
|
|
|
12.6 |
|
Amortization of net actuarial loss |
|
|
17.4 |
|
|
|
3.3 |
|
|
|
59.2 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension (income) expense |
|
$ |
19.8 |
|
|
$ |
(3.0 |
) |
|
$ |
78.9 |
|
|
$ |
(9.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
Other Postretirement Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost benefits earned during the year |
|
$ |
0.7 |
|
|
$ |
0.8 |
|
|
$ |
2.2 |
|
|
$ |
2.3 |
|
Interest cost on benefits earned in prior years |
|
|
8.1 |
|
|
|
7.9 |
|
|
|
24.4 |
|
|
|
23.7 |
|
Expected return on plan assets |
|
|
(0.4 |
) |
|
|
(1.4 |
) |
|
|
(1.2 |
) |
|
|
(4.2 |
) |
Amortization of prior service credit |
|
|
(4.8 |
) |
|
|
(5.4 |
) |
|
|
(14.4 |
) |
|
|
(16.0 |
) |
Amortization of net actuarial loss |
|
|
1.6 |
|
|
|
1.3 |
|
|
|
4.8 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other postretirement benefit expense |
|
$ |
5.2 |
|
|
$ |
3.2 |
|
|
$ |
15.8 |
|
|
$ |
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retirement benefit expense defined
benefit plans |
|
$ |
25.0 |
|
|
$ |
0.2 |
|
|
$ |
94.7 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other postretirement benefit costs for a defined contribution plan were $0.5 million and $1.5
million for the three and nine months ended September 30, 2009, respectively. For 2008, other
postretirement costs for a defined contribution plan were $2.3 million and $5.4 million for the
three and nine months ended September 30, 2008, respectively.
12
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Performance Metals |
|
$ |
292.8 |
|
|
$ |
554.1 |
|
|
$ |
1,036.5 |
|
|
$ |
1,639.5 |
|
Flat-Rolled Products |
|
|
369.2 |
|
|
|
779.1 |
|
|
|
1,098.3 |
|
|
|
2,390.6 |
|
Engineered Products |
|
|
59.9 |
|
|
|
130.1 |
|
|
|
195.6 |
|
|
|
394.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721.9 |
|
|
|
1,463.3 |
|
|
|
2,330.4 |
|
|
|
4,424.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Performance Metals |
|
|
13.6 |
|
|
|
43.9 |
|
|
|
48.9 |
|
|
|
143.8 |
|
Flat-Rolled Products |
|
|
5.0 |
|
|
|
14.5 |
|
|
|
20.7 |
|
|
|
45.0 |
|
Engineered Products |
|
|
5.7 |
|
|
|
12.5 |
|
|
|
21.6 |
|
|
|
38.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.3 |
|
|
|
70.9 |
|
|
|
91.2 |
|
|
|
227.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Performance Metals |
|
|
279.2 |
|
|
|
510.2 |
|
|
|
987.6 |
|
|
|
1,495.7 |
|
Flat-Rolled Products |
|
|
364.2 |
|
|
|
764.6 |
|
|
|
1,077.6 |
|
|
|
2,345.6 |
|
Engineered Products |
|
|
54.2 |
|
|
|
117.6 |
|
|
|
174.0 |
|
|
|
355.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
697.6 |
|
|
$ |
1,392.4 |
|
|
$ |
2,239.2 |
|
|
$ |
4,197.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Performance Metals |
|
$ |
51.3 |
|
|
$ |
139.6 |
|
|
$ |
146.6 |
|
|
$ |
421.8 |
|
Flat-Rolled Products |
|
|
11.3 |
|
|
|
105.7 |
|
|
|
41.3 |
|
|
|
322.2 |
|
Engineered Products |
|
|
(8.6 |
) |
|
|
6.1 |
|
|
|
(24.1 |
) |
|
|
22.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
54.0 |
|
|
|
251.4 |
|
|
|
163.8 |
|
|
|
766.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(15.7 |
) |
|
|
(13.4 |
) |
|
|
(38.7 |
) |
|
|
(46.5 |
) |
Interest expense, net |
|
|
(8.1 |
) |
|
|
(1.7 |
) |
|
|
(9.3 |
) |
|
|
(2.8 |
) |
Other expense, net of gains on asset sales |
|
|
(2.1 |
) |
|
|
(2.8 |
) |
|
|
(7.5 |
) |
|
|
(6.7 |
) |
Debt extinguishment costs |
|
|
|
|
|
|
|
|
|
|
(9.2 |
) |
|
|
|
|
Retirement benefit expense |
|
|
(25.5 |
) |
|
|
(2.5 |
) |
|
|
(96.2 |
) |
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
2.6 |
|
|
$ |
231.0 |
|
|
$ |
2.9 |
|
|
$ |
705.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit expense represents defined benefit plan pension expense, and other
postretirement benefit expense for both defined benefit and defined contribution plans. Operating
profit with respect to the Companys business segments excludes any retirement benefit expense.
Corporate expenses for the three months ended September 30, 2009 were $15.7 million, compared
to $13.4 million for the three months ended September 30, 2008. This increase is due primarily to
higher expenses associated with long-term performance-based incentive compensation programs.
Other expense, net of gains on asset sales, primarily includes charges incurred in connection
with closed operations 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
operations. These items resulted in net charges of $2.1 million for the three months ended
September 30, 2009 and $2.8 million for the three months ended September 30, 2008. The decrease in
the quarter was primarily related to lower expenses at closed operations. For the nine months
ended 2009, other expense, net of gains on asset sales, was $7.5 million, compared to $6.7 million
for the prior year period. This increase on a year to date basis was primarily related to lower
foreign currency gains, and higher franchise and other non-income related taxes.
13
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.
Cash flows related to intercompany activity between the Guarantor Parent, the Subsidiary, and
the non-guarantor subsidiaries are presented as financing activities on the condensed statements of
cash flows.
14
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
0.2 |
|
|
$ |
606.6 |
|
|
$ |
219.5 |
|
|
$ |
|
|
|
$ |
826.3 |
|
Accounts receivable, net |
|
|
1.4 |
|
|
|
161.4 |
|
|
|
253.0 |
|
|
|
|
|
|
|
415.8 |
|
Inventories, net |
|
|
|
|
|
|
145.4 |
|
|
|
591.9 |
|
|
|
|
|
|
|
737.3 |
|
Prepaid expenses and other current
assets |
|
|
21.3 |
|
|
|
8.0 |
|
|
|
38.4 |
|
|
|
|
|
|
|
67.7 |
|
|
|
|
Total current assets |
|
|
22.9 |
|
|
|
921.4 |
|
|
|
1,102.8 |
|
|
|
|
|
|
|
2,047.1 |
|
Property, plant and equipment, net |
|
|
3.7 |
|
|
|
417.3 |
|
|
|
1,431.5 |
|
|
|
|
|
|
|
1,852.5 |
|
Cost in excess of net assets acquired |
|
|
|
|
|
|
112.1 |
|
|
|
84.2 |
|
|
|
|
|
|
|
196.3 |
|
Prepaid pension asset |
|
|
124.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124.7 |
|
Deferred income taxes |
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.6 |
|
Investments in subsidiaries and
other assets |
|
|
3,917.7 |
|
|
|
1,282.8 |
|
|
|
1,029.6 |
|
|
|
(6,091.3 |
) |
|
|
138.8 |
|
|
|
|
Total assets |
|
$ |
4,089.6 |
|
|
$ |
2,733.6 |
|
|
$ |
3,648.1 |
|
|
$ |
(6,091.3 |
) |
|
$ |
4,380.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3.0 |
|
|
$ |
139.6 |
|
|
$ |
140.4 |
|
|
$ |
|
|
|
$ |
283.0 |
|
Accrued liabilities |
|
|
1,007.2 |
|
|
|
63.2 |
|
|
|
607.1 |
|
|
|
(1,398.9 |
) |
|
|
278.6 |
|
Deferred income taxes |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Short-term debt and current portion
of long-term debt |
|
|
|
|
|
|
10.5 |
|
|
|
9.7 |
|
|
|
|
|
|
|
20.2 |
|
|
|
|
Total current liabilities |
|
|
1,010.5 |
|
|
|
213.3 |
|
|
|
757.2 |
|
|
|
(1,398.9 |
) |
|
|
582.1 |
|
Long-term debt |
|
|
870.5 |
|
|
|
361.3 |
|
|
|
18.6 |
|
|
|
(200.0 |
) |
|
|
1,050.4 |
|
Accrued postretirement benefits |
|
|
|
|
|
|
263.0 |
|
|
|
181.4 |
|
|
|
|
|
|
|
444.4 |
|
Pension liabilities |
|
|
9.5 |
|
|
|
2.8 |
|
|
|
21.3 |
|
|
|
|
|
|
|
33.6 |
|
Other long-term liabilities |
|
|
45.6 |
|
|
|
22.2 |
|
|
|
48.2 |
|
|
|
|
|
|
|
116.0 |
|
|
|
|
Total liabilities |
|
|
1,936.1 |
|
|
|
862.6 |
|
|
|
1,026.7 |
|
|
|
(1,598.9 |
) |
|
|
2,226.5 |
|
|
|
|
Total stockholders equity |
|
|
2,153.5 |
|
|
|
1,871.0 |
|
|
|
2,621.4 |
|
|
|
(4,492.4 |
) |
|
|
2,153.5 |
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
4,089.6 |
|
|
$ |
2,733.6 |
|
|
$ |
3,648.1 |
|
|
$ |
(6,091.3 |
) |
|
$ |
4,380.0 |
|
|
|
|
15
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Sales |
|
$ |
|
|
|
$ |
984.0 |
|
|
$ |
1,255.2 |
|
|
$ |
|
|
|
$ |
2,239.2 |
|
Cost of sales |
|
|
52.1 |
|
|
|
925.0 |
|
|
|
1,012.1 |
|
|
|
|
|
|
|
1,989.2 |
|
Selling and administrative expenses |
|
|
89.8 |
|
|
|
27.1 |
|
|
|
112.0 |
|
|
|
|
|
|
|
228.9 |
|
Interest income (expense), net |
|
|
(2.1 |
) |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
(9.3 |
) |
Debt extinguishment costs |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
Other income (expense) including
equity in income of
unconsolidated
subsidiaries |
|
|
156.1 |
|
|
|
1.7 |
|
|
|
4.3 |
|
|
|
(161.8 |
) |
|
|
0.3 |
|
|
|
|
Income before income tax provision |
|
|
2.9 |
|
|
|
26.4 |
|
|
|
135.4 |
|
|
|
(161.8 |
) |
|
|
2.9 |
|
Income tax provision |
|
|
5.3 |
|
|
|
11.4 |
|
|
|
60.2 |
|
|
|
(71.6 |
) |
|
|
5.3 |
|
|
|
|
Net income (loss) |
|
|
(2.4 |
) |
|
|
15.0 |
|
|
|
75.2 |
|
|
|
(90.2 |
) |
|
|
(2.4 |
) |
Less: Net income attributable to
noncontrolling interest |
|
|
3.7 |
|
|
|
|
|
|
|
3.7 |
|
|
|
(3.7 |
) |
|
|
3.7 |
|
|
|
|
Net income (loss) attributable to ATI |
|
$ |
(6.1 |
) |
|
$ |
15.0 |
|
|
$ |
71.5 |
|
|
$ |
(86.5 |
) |
|
$ |
(6.1 |
) |
|
|
|
Condensed Statements of Cash Flows
For the nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Cash flows provided by
operating activities |
|
$ |
16.6 |
|
|
$ |
77.0 |
|
|
$ |
79.0 |
|
|
$ |
(23.2 |
) |
|
$ |
149.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
(132.8 |
) |
|
|
(55.3 |
) |
|
|
(248.9 |
) |
|
|
134.4 |
|
|
|
(302.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing
activities |
|
|
113.2 |
|
|
|
303.1 |
|
|
|
204.5 |
|
|
|
(111.2 |
) |
|
|
509.6 |
|
|
|
|
Increase (decrease) in cash
and cash equivalents |
|
$ |
(3.0 |
) |
|
$ |
324.8 |
|
|
$ |
34.6 |
|
|
$ |
|
|
|
$ |
356.4 |
|
|
|
|
16
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3.2 |
|
|
$ |
281.8 |
|
|
$ |
184.9 |
|
|
$ |
|
|
|
$ |
469.9 |
|
Accounts receivable, net |
|
|
0.3 |
|
|
|
191.9 |
|
|
|
338.3 |
|
|
|
|
|
|
|
530.5 |
|
Inventories, net |
|
|
|
|
|
|
190.4 |
|
|
|
697.2 |
|
|
|
|
|
|
|
887.6 |
|
Prepaid expenses and other current
assets |
|
|
0.6 |
|
|
|
4.7 |
|
|
|
36.1 |
|
|
|
|
|
|
|
41.4 |
|
|
|
|
Total current assets |
|
|
4.1 |
|
|
|
668.8 |
|
|
|
1,256.5 |
|
|
|
|
|
|
|
1,929.4 |
|
Property, plant and equipment, net |
|
|
1.5 |
|
|
|
395.2 |
|
|
|
1,236.9 |
|
|
|
|
|
|
|
1,633.6 |
|
Cost in excess of net assets acquired |
|
|
|
|
|
|
112.1 |
|
|
|
78.8 |
|
|
|
|
|
|
|
190.9 |
|
Deferred income taxes |
|
|
281.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281.6 |
|
Investments in subsidiaries and
other assets |
|
|
4,666.3 |
|
|
|
1,514.7 |
|
|
|
1,304.3 |
|
|
|
(7,350.4 |
) |
|
|
134.9 |
|
|
|
|
Total assets |
|
$ |
4,953.5 |
|
|
$ |
2,690.8 |
|
|
$ |
3,876.5 |
|
|
$ |
(7,350.4 |
) |
|
$ |
4,170.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3.7 |
|
|
$ |
83.7 |
|
|
$ |
191.1 |
|
|
$ |
|
|
|
$ |
278.5 |
|
Accrued liabilities |
|
|
2,132.3 |
|
|
|
74.5 |
|
|
|
798.1 |
|
|
|
(2,682.9 |
) |
|
|
322.0 |
|
Deferred income taxes |
|
|
78.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.2 |
|
Short-term debt and current portion
of long-term debt |
|
|
|
|
|
|
10.5 |
|
|
|
4.7 |
|
|
|
|
|
|
|
15.2 |
|
|
|
|
Total current liabilities |
|
|
2,214.2 |
|
|
|
168.7 |
|
|
|
993.9 |
|
|
|
(2,682.9 |
) |
|
|
693.9 |
|
Long-term debt |
|
|
304.2 |
|
|
|
371.8 |
|
|
|
18.6 |
|
|
|
(200.0 |
) |
|
|
494.6 |
|
Accrued postretirement benefits |
|
|
|
|
|
|
270.9 |
|
|
|
176.0 |
|
|
|
|
|
|
|
446.9 |
|
Pension liabilities |
|
|
351.2 |
|
|
|
3.2 |
|
|
|
23.8 |
|
|
|
|
|
|
|
378.2 |
|
Other long-term liabilities |
|
|
54.9 |
|
|
|
18.3 |
|
|
|
54.6 |
|
|
|
|
|
|
|
127.8 |
|
|
|
|
Total liabilities |
|
|
2,924.5 |
|
|
|
832.9 |
|
|
|
1,266.9 |
|
|
|
(2,882.9 |
) |
|
|
2,141.4 |
|
|
|
|
Total stockholders equity |
|
|
2,029.0 |
|
|
|
1,857.9 |
|
|
|
2,609.6 |
|
|
|
(4,467.5 |
) |
|
|
2,029.0 |
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
4,953.5 |
|
|
$ |
2,690.8 |
|
|
$ |
3,876.5 |
|
|
$ |
(7,350.4 |
) |
|
$ |
4,170.4 |
|
|
|
|
17
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Sales |
|
$ |
|
|
|
$ |
2,163.9 |
|
|
$ |
2,033.1 |
|
|
$ |
|
|
|
$ |
4,197.0 |
|
Cost of sales |
|
|
(7.6 |
) |
|
|
1,832.0 |
|
|
|
1,443.1 |
|
|
|
|
|
|
|
3,267.5 |
|
Selling and administrative expenses |
|
|
69.0 |
|
|
|
29.5 |
|
|
|
125.2 |
|
|
|
|
|
|
|
223.7 |
|
Interest income (expense), net |
|
|
(1.2 |
) |
|
|
(7.5 |
) |
|
|
5.9 |
|
|
|
|
|
|
|
(2.8 |
) |
Other income (expense) including
equity in income of
unconsolidated
subsidiaries |
|
|
767.6 |
|
|
|
21.4 |
|
|
|
(0.1 |
) |
|
|
(786.9 |
) |
|
|
2.0 |
|
|
|
|
Income before income tax provision |
|
|
705.0 |
|
|
|
316.3 |
|
|
|
470.6 |
|
|
|
(786.9 |
) |
|
|
705.0 |
|
Income tax provision |
|
|
243.0 |
|
|
|
116.9 |
|
|
|
157.8 |
|
|
|
(274.7 |
) |
|
|
243.0 |
|
|
|
|
Net income |
|
|
462.0 |
|
|
|
199.4 |
|
|
|
312.8 |
|
|
|
(512.2 |
) |
|
|
462.0 |
|
Less: Net income attributable to
noncontrolling interest |
|
|
7.0 |
|
|
|
|
|
|
|
7.0 |
|
|
|
(7.0 |
) |
|
|
7.0 |
|
|
|
|
Net income attributable to ATI |
|
$ |
455.0 |
|
|
$ |
199.4 |
|
|
$ |
305.8 |
|
|
$ |
(505.2 |
) |
|
$ |
455.0 |
|
|
|
|
Condensed Statements of Cash Flows
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Cash flows provided by (used in)
operating activities |
|
$ |
(65.7 |
) |
|
$ |
117.9 |
|
|
$ |
292.4 |
|
|
$ |
|
|
|
$ |
344.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
(0.1 |
) |
|
|
(39.2 |
) |
|
|
(324.5 |
) |
|
|
|
|
|
|
(363.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in)
financing activities |
|
|
71.2 |
|
|
|
(178.6 |
) |
|
|
(224.1 |
) |
|
|
|
|
|
|
(331.5 |
) |
|
|
|
Increase (decrease) in cash
and cash equivalents |
|
$ |
5.4 |
|
|
$ |
(99.9 |
) |
|
$ |
(256.2 |
) |
|
$ |
|
|
|
$ |
(350.7 |
) |
|
|
|
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.
18
Based on currently available information, the Company does not believe that there is a
reasonable possibility that a loss exceeding the amount already accrued for any of the sites with
which the Company is currently associated (either individually or in the aggregate) will be an
amount that would be material to a decision to buy or sell the 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 September 30, 2009, the Companys reserves for environmental remediation obligations
totaled approximately $17 million, of which $8 million was included in other current liabilities.
The reserve includes estimated probable future costs of $5 million for federal Superfund and
comparable state-managed sites; $6 million for formerly owned or operated sites for which the
Company has remediation or indemnification obligations; $3 million for owned or controlled sites at
which Company operations have been discontinued; and $3 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 12. 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, 2008 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 contract work,
employment, employee benefits, taxes, environmental, health and safety, occupational disease, 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.
Note 12. Subsequent Event
On October 23, 2009, the Company acquired the assets of Crucible Compaction Metals and
Crucible Research, a western Pennsylvania producer of advanced powder metal products, for $40.95
million. This business has been named ATI Powder Metals and will be part of the High Performance
Metals business segment.
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Allegheny Technologies is one of the largest and most diversified specialty metals producers
in the world. We use innovative technologies to offer global markets a wide range of specialty
metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and
superalloys, zirconium, hafnium, and niobium, stainless and specialty steel alloys, grain-oriented
electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings,
and large grey and ductile iron castings. Our specialty metals are produced in a wide range of
alloys and product forms and are selected for use in applications that demand metals having
exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a
combination of these characteristics.
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 nine months of 2009 and 2008:
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
Operating |
|
|
|
|
|
Operating |
|
|
Revenue |
|
Profit (Loss) |
|
Revenue |
|
Profit |
High Performance Metals |
|
|
44 |
% |
|
|
90 |
% |
|
|
36 |
% |
|
|
55 |
% |
|
|
|
|
|
Flat-Rolled Products |
|
|
48 |
% |
|
|
25 |
% |
|
|
56 |
% |
|
|
42 |
% |
|
|
|
|
|
Engineered Products |
|
|
8 |
% |
|
|
(15 |
%) |
|
|
8 |
% |
|
|
3 |
% |
|
|
|
|
|
Sales for the third quarter 2009 were $697.6 million, a decrease of 50% compared to the third
quarter 2008, as the challenging business conditions resulting from the severe global economic
recession led to significantly lower shipments and raw material surcharges and indices for most
products. Compared to the 2008 third quarter, sales for the 2009 third quarter decreased 45% in
the High Performance Metals segment, 52% in the Flat-Rolled Products segment, and 54% in the
Engineered Products segment. For the nine months ended September 30, 2009, sales were $2.24
billion, a decrease of 47% compared to same period of 2008. Sales for the first nine months of
2009 decreased 34% in the High Performance Metals segment, 54% in the Flat-Rolled Products segment,
and 51% in the Engineered Products segment compared to the 2008 period.
Demand from the global aerospace and defense, electrical energy, chemical process industry,
oil and gas, and medical markets accounted for 75% of our sales for the first nine months of 2009.
Aerospace and defense was the largest of our markets at 32% of sales for the first nine months of
2009, with the electrical energy market representing 20% of total sales, and sales to the chemical
process industry and oil and gas markets representing 19%. Commercial aerospace continued to be
impacted by schedule pushouts and uncertainties as the supply chain adjusted to revised 2009
commercial airplane build schedules, uncertain 2010 build schedules, and reduced demand from the
aeroengine aftermarket due primarily to the global recession. In the electrical energy market,
demand for our grain-oriented electrical steel held up well despite reduced demand from the housing
market due to our long-term agreements with major customers. In addition, demand for our exotic
alloys for nuclear energy applications remained solid. In the oil and gas market, downhole
drilling demand was sluggish as drill rig activity decreased significantly due to the global
recession and lower crude oil prices. On the other hand, demand for our products for offshore and
large pipeline projects held up well as these long-term projects remained on track. In the
chemical process industry, demand for our exotic alloys decreased due to the timing of projects.
Demand for our large castings for wind energy applications was nearly nonexistent, as most of these
projects remain on hold due to the tight credit market. Demand from consumer-related markets, such
as appliance and residential construction, improved slightly but remained weak by historical
standards.
For the first nine months of 2009, direct international sales were $691.3 million, or 31% of
total sales, compared to 29% for the comparable 2008 period. Sales of our high-value products
(titanium and titanium alloys, nickel-based alloys and superalloys, and specialty alloys, exotic
alloys, Precision Rolled Strip® and standard strip products, grain-oriented electrical steel and
tungsten materials) represented 79% of total sales compared to nearly 71% of sales in the first
nine months of 2008. Titanium product shipments, including ATI-produced products for our Uniti
titanium joint venture, were 27.1 million pounds in the first nine months of 2009, which represents
21% of total sales, and compares to 36.1 million pounds in the first nine months of 2008.
Segment operating profit for the third quarter 2009 was $54.0 million, or 7.7% of sales,
compared to $251.4 million, or 18.1% of sales, in the third quarter 2008. For the first nine
months of 2009, segment operating profit was $163.8 million, or 7.3% of sales, compared to $766.8
million, or 18.3% of sales, in the comparable period of 2008. Segment operating profit for 2009
was adversely affected by the decline in shipments for most products due primarily to the global
economic recession and lower base selling prices due to a more competitive pricing environment. In
addition, 2009 results were negatively impacted by idle facility, workforce reduction and start-up
costs of $18.9 million in the 2009 third quarter and $43.1 million for the first nine months of
2009.
The selling prices for many of our products include surcharges or indices by which we attempt
to match changes in raw material costs, and in some cases energy costs, with shipments. The first
nine months of 2009 results were adversely impacted by approximately $83 million in out-of-phase
raw material surcharges and indices, all of which occurred in the first six months of 2009, due
primarily to the rapid decrease in the cost of raw materials in late 2008. This was partially
offset by a LIFO inventory valuation reserve benefit of $4.5 million in the 2009 third quarter, and
$59.0 million in the first nine months of 2009 as a result of a decline in raw material costs in
2009. Results for the third quarter and first nine months of 2008 included a LIFO inventory
valuation reserve benefit of $41.0 million and $36.3 million, respectively. Third quarter 2009
benefited from gross cost reductions, before the effects of inflation, of $47.2 million bringing
gross cost reductions for the first nine months of 2009 to $121.4
20
million. Segment operating profit (loss) as a percentage of sales for the three month and nine
month periods ended September 30, 2009 and 2008 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
High Performance Metals |
|
|
18.4 |
% |
|
|
27.4 |
% |
|
|
14.8 |
% |
|
|
28.2 |
% |
Flat-Rolled Products |
|
|
3.1 |
% |
|
|
13.8 |
% |
|
|
3.8 |
% |
|
|
13.7 |
% |
Engineered Products |
|
|
(15.9 |
%) |
|
|
5.2 |
% |
|
|
(13.9 |
%) |
|
|
6.4 |
% |
Our measure of segment operating profit, which we use to analyze the performance and results
of our business segments, excludes income taxes, corporate expenses, net interest income or
expense, retirement benefit expense, and other costs net of gains on asset sales. We believe
segment operating profit, as defined, provides an appropriate measure of controllable operating
results at the business segment level.
In June 2009, we completed several proactive liability management actions including the
issuance of $350 million of 9.375% 10-year Senior Notes and $402.5 million of 4.25% 5-year
Convertible Senior Notes with the stated intent of repurchasing the existing $300 million of 8.375%
Notes due in 2011 and improving the funded position of our U.S. defined benefit pension plan. As a
result of the tender offer, in June 2009 we retired $183.3 million of the outstanding 8.375% Notes
which resulted in a charge of $9.2 million pre-tax, or $5.5 million after-tax, being recognized in
the 2009 second quarter. In addition, we made a $350 million voluntary cash contribution to our
domestic pension plan to significantly improve the plans funded position. The second quarter 2009
tax provision included an unfavorable discrete tax charge of $11.5 million, primarily associated
with the tax consequences of the $350 million voluntary second quarter 2009 pension contribution.
As a result of the $350 million voluntary pension contribution, which was designated to pertain to
the 2008 tax year, we received a U.S. Federal tax refund of $108.5 million in the second quarter
2009.
Income before tax for the third quarter 2009 was $2.6 million compared to $231.0 million for
the third quarter 2008. For the first nine months of 2009, income before tax was $2.9 million
compared to $705.0 million for the comparable period of 2008. In addition to the factors discussed
above, income before tax was adversely impacted by an increase in retirement benefit expenses of
$23.0 million and $90.4 million for the three and nine months ended September 30, 2009,
respectively, resulting from lower returns on benefit plan assets in 2008 notwithstanding the
positive impact of the voluntary pension contributions made over the last several years.
Net income attributable to common stockholders for the third quarter 2009 was $1.4 million, or
$0.01 per share, compared to the third quarter 2008 net income attributable to common stockholders
of $144.1 million, or $1.45 per share. For the nine months ended September 30, 2009, net loss
attributable to common stockholders, including special charges, was $6.1 million, or $0.06 per
share compared to net income of $455.0 million, or $4.51 per share, for the comparable 2008 period.
As discussed above, the second quarter 2009 included non-recurring after-tax charges of $17.0
million, or $0.17 per share, related to debt retirement and the tax implications of the $350
million voluntary pension contribution. Excluding special charges, for the nine months ended
September 30, 2009, net income attributable to common stockholders was $10.9 million, or $0.11 per
share.
We ended the 2009 first nine months with cash on hand of $826.3 million. During the first
nine months of 2009, cash flow from operating activities was $391 million, excluding the voluntary
cash contribution to the pension plan and the federal tax refund associated with the pension
contribution. This strong cash flow was used, in part, to self-fund approximately $308 million in
strategic capital investments. In addition to the proactive liability management actions discussed
above, in June 2009 we also amended our $400 million domestic credit facility to increase financial
flexibility. At the end of the 2009 third quarter, we had no borrowings under this credit facility
and no significant near-term debt maturities. Net debt to total capitalization was 10.5% and total
debt to total capitalization was 34.0%.
For the fourth quarter 2009 short-term outlook, we are seeing some positive data points in
certain markets; however, many of our customers remain cautious due to the uncertain global economy
and are keeping inventories low. This uncertainty is exaggerated by recent volatility in prices of
raw materials, particularly nickel, which impacts customer buying patterns from month to month and
at year-end. As a result of these conditions, and
21
expected new facility start-up and other costs, we expect ATIs fourth quarter 2009 earnings
performance to be similar to that achieved in the third quarter 2009.
Looking ahead, we expect our operating earnings performance to improve throughout 2010 as
compared to 2009. We believe 2010 to be a transition year to the next growth cycle in most of our
markets, particularly the aerospace and global infrastructure markets.
Although we expect only a modest economic recovery in 2010, we are focused on continuing to
position ATI in targeted global markets. We expect to benefit greater than the recovery and growth
in our core markets in 2010 and beyond by improving our position with key customers, adding new
products to our unique specialty metals portfolio, improving our cost structure, maintaining our
financial flexibility, and bringing on-line new world-class manufacturing capabilities.
High Performance Metals Segment
Third quarter 2009 sales decreased 45% to $279.2 million compared to the same 2008 period.
Shipments decreased 37% for both titanium and titanium alloys and nickel-based alloys and
superalloys and specialty alloys primarily due to lower demand from the commercial aerospace market
and oil and gas markets. As previously announced, we temporarily idled our titanium sponge
facility in Albany, OR, effective July 31, 2009, to adjust production to market conditions.
Shipments of exotic alloys decreased 24% primarily due to the timing of projects for the chemical
process industry, which more than offset strong demand from the nuclear energy market. Average
selling prices declined 23% for titanium and titanium alloys and 21% for nickel-based alloys and
superalloys and specialty alloys. These average selling price decreases were primarily due to
lower raw material indices as a result of lower raw material costs, and a more competitive pricing
environment. Average selling prices for exotic alloys increased 23% due to increased demand for
certain products and favorable product mix.
Segment operating profit in the 2009 third quarter decreased to $51.3 million, or 18.4% of
sales compared to $139.6 million, or 27.4% of sales, in the third quarter 2008. The decrease in
operating profit primarily resulted from lower base selling prices for most products due to reduced
demand and competitive pricing pressures, and reduced shipments for most products. In addition,
operating profit was adversely affected by approximately $11.7 million for idle facility, workforce
reduction, and start-up costs. These negative impacts were partially offset by higher margins on
exotic alloys and the benefits of gross cost reductions. A LIFO inventory valuation reserve
benefit of $10.0 million was recognized in the 2009 third quarter. In the third quarter 2008, a
LIFO inventory valuation of $16.7 million was recognized.
Segment results for 2009 benefited from $17.7 million of gross cost reductions in the third
quarter, bringing first nine months gross cost reductions to $58.3 million.
On October 23, 2009, we acquired the assets of Crucible Compaction Metals and Crucible
Research, a producer of advanced powder metal products, for $40.95 million. This business has been
named ATI Powder Metals and will be part of the High Performance Metals business segment.
Certain comparative information on the segments major products for the three months ended
September 30, 2009 and 2008 is provided in the following table:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
% |
|
|
2009 |
|
2008 |
|
Change |
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
|
5,488 |
|
|
|
8,707 |
|
|
|
(37 |
%) |
Nickel-based and specialty alloys |
|
|
6,511 |
|
|
|
10,365 |
|
|
|
(37 |
%) |
Exotic alloys |
|
|
1,038 |
|
|
|
1,365 |
|
|
|
(24 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per pound): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
$ |
20.08 |
|
|
$ |
25.95 |
|
|
|
(23 |
%) |
Nickel-based and specialty alloys |
|
$ |
14.87 |
|
|
$ |
18.82 |
|
|
|
(21 |
%) |
Exotic alloys |
|
$ |
61.61 |
|
|
$ |
49.91 |
|
|
|
23 |
% |
For the nine months ended September 30, 2009, segment sales decreased 34% to $987.6 million,
compared to the comparable prior year period. Shipments of titanium mill products and
nickel-based alloys and superalloys and specialty alloys declined due primarily to inventory
reduction actions in the aerospace supply chain. The aerospace supply chain has been responding to
lower 2009 aircraft build rates, uncertain 2010 build rates, and reduced demand from the
aftermarket due to the global recession. While demand for our exotic alloys from the nuclear
electrical energy market continued to grow, shipments of exotic alloys decreased 12% primarily due
to the timing of products for the chemical process industry. Average selling prices declined 18%
for titanium and titanium alloys and 23% for nickel-based and specialty alloys. The average
selling prices for titanium and titanium alloys and nickel-based alloys and superalloys and
specialty alloys decreased primarily due to lower raw material indices as a result of lower raw
material costs, and a more competitive pricing environment. Average selling prices for exotic
alloys increased 23% due to increased demand for certain products and favorable product mix.
Segment operating profit was $146.6 million for the nine months ended September 30, 2009, or
14.8% of sales, compared to $421.8 million, or 28.2% of sales, for the comparable prior year
period. The decrease in operating profit primarily resulted from lower base selling prices for
most products due to reduced demand and competitive pricing pressures, and reduced shipments for
most products. In addition, operating profit was adversely affected by approximately $24 million
from the impact of higher cost raw materials, primarily nickel and titanium, purchased in prior
periods flowing through cost of sales in the first six months of 2009 and not being in phase with
the raw material indices included in our selling prices. This was due primarily to the rapid
decrease in raw material costs in late 2008 and the long manufacturing times of some of our
products. Segment operating profit for the first nine months of 2009 was also adversely affected
by approximately $22 million for idle facility, workforce reduction, and start-up costs. These
negative impacts were partially offset by higher margins on exotic alloys and the benefits of gross
cost reductions. In addition, as a result of lower raw material costs, LIFO inventory valuation
reserve benefits of $9.5 million and $30.1 million were recognized in the first nine months of 2009
and 2008, respectively.
Certain comparative information on the segments major products for the nine months ended
September 30, 2009 and 2008 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
% |
|
|
2009 |
|
2008 |
|
Change |
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
|
18,386 |
|
|
|
25,184 |
|
|
|
(27 |
%) |
Nickel-based and specialty alloys |
|
|
24,652 |
|
|
|
31,395 |
|
|
|
(21 |
%) |
Exotic alloys |
|
|
3,674 |
|
|
|
4,194 |
|
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per pound): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
$ |
21.38 |
|
|
$ |
25.93 |
|
|
|
(18 |
%) |
Nickel-based and specialty alloys |
|
$ |
14.21 |
|
|
$ |
18.55 |
|
|
|
(23 |
%) |
Exotic alloys |
|
$ |
58.85 |
|
|
$ |
47.74 |
|
|
|
23 |
% |
23
Flat-Rolled Products Segment
Third quarter 2009 sales were $364.2 million, 52% lower than the third quarter 2008, due
primarily to significantly lower shipments and reduced raw material surcharges. Shipments of
standard stainless products (sheet and plate) decreased 3% while total high-value products
shipments decreased 32%. Average transaction prices for all products, which include surcharges,
were 42% lower due primarily to significantly reduced raw material surcharges.
Segment operating profit for the third quarter 2009 decreased to $11.3 million, or 3.1% of
sales, compared to $105.7 million, or 13.8% of sales, for the third quarter 2008. Segment
operating profit for 2009 third quarter was negatively impacted by lower shipments and
approximately $6.0 million of costs associated with idle facilities and workforce reductions. In
addition, operating profit was negatively affected by a $6.8 million charge to adjust the LIFO
inventory valuation reserve as a result of rising raw material costs. This segment recognized a
$26.1 million benefit for LIFO inventory valuation in both the first and second quarters of 2009.
The third quarter 2008 included a LIFO inventory valuation benefit of $25.1 million.
Segment results for 2009 benefited from $25.5 million in gross cost reductions in the third
quarter, bringing the first nine months gross cost reductions in this segment to $53.5 million.
Comparative information on the segments products for the three months ended September 30,
2009 and 2008 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
|
90,602 |
|
|
|
133,322 |
|
|
|
(32 |
)% |
Standard |
|
|
126,911 |
|
|
|
130,888 |
|
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
217,513 |
|
|
|
264,210 |
|
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per lb.): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
$ |
2.33 |
|
|
$ |
3.44 |
|
|
|
(32 |
)% |
Standard |
|
$ |
1.18 |
|
|
$ |
2.27 |
|
|
|
(48 |
)% |
Combined Average |
|
$ |
1.66 |
|
|
$ |
2.86 |
|
|
|
(42 |
)% |
For the nine months ended September 30, 2009, Flat-Rolled Products sales were $1.08 billion,
which was 54% lower than the nine months ended September 30, 2008. The decline in sales was due
primarily to significantly lower shipments and reduced raw material surcharges. Shipments of
standard stainless products (sheet and plate) decreased 28% while total high-value products
shipments decreased 30%. Average transaction prices for all products, which include surcharges,
were 36% lower due to a combination of significantly reduced raw material surcharges and lower base
prices for some products due to competitive pricing pressures. Demand from the electrical energy,
chemical process industry, oil and gas, and aerospace and defense accounted for over 62% of sales
in the first nine months of 2009.
Segment operating profit for the first nine months of 2009 declined to $41.3 million, or 3.8%
of sales, compared to $322.2 million, or 13.7% of sales, for the comparable prior year period. The
decline in operating profit primarily resulted from lower shipments and average base selling prices
for some of our products and the negative impact from $59 million of higher cost material purchased
in prior periods flowing through cost of sales in the first six months of 2009 and not being in
phase with raw material surcharges included in selling prices. This was due primarily to the rapid
decrease in raw material costs in late 2008 and the long manufacturing times of some of our
products. Segment operating profit for the first nine months of 2009 was also adversely impacted by
approximately $17 million associated with idle facilities and workforce reduction costs. In
addition, the segment benefited from a $45.6 million decrease in the LIFO inventory valuation
reserve in the first nine months of 2009 due primarily to lower raw material costs. Results for
the first nine months of 2008 benefited from a decrease in the LIFO inventory valuation reserve of
$8.7 million.
Comparative information on the segments products for the nine months ended September 30, 2009
and 2008 is provided in the following table:
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
|
268,720 |
|
|
|
386,113 |
|
|
|
(30 |
)% |
Standard |
|
|
346,696 |
|
|
|
481,372 |
|
|
|
(28 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
615,416 |
|
|
|
867,485 |
|
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per lb.): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
$ |
2.46 |
|
|
$ |
3.29 |
|
|
|
(25 |
)% |
Standard |
|
$ |
1.14 |
|
|
$ |
2.18 |
|
|
|
(48 |
)% |
Combined Average |
|
$ |
1.71 |
|
|
$ |
2.68 |
|
|
|
(36 |
)% |
Engineered Products Segment
Sales for the third quarter and first nine months of 2009 were $54.2 million and $174.0
million, respectively, which were 54% and 51% lower than the same periods of 2008. Demand for our
tungsten and tungsten carbide products, forged products, and cast products remained weak. Demand
for our precision finishing services was good. Segment operating results for the third quarter
2009 was a loss of $8.6 million compared to income of $6.1 million, or 5.2% of sales, for the
comparable 2008 period. For the nine months ended September 30, 2009, segment operating loss was
$24.1 million, compared to income of $22.8 million, or 6.4% of sales in 2008. The decrease in
2009 segment operating profit was primarily due to the significantly lower shipments, reduced
selling prices, and $4.4 million of workforce reduction and idle facilities costs. The segment
benefited from a $1.3 million decrease in the LIFO inventory valuation reserve for the 2009 third
quarter and a $4.0 million decrease for the first nine months of 2009. The third quarter and first
nine months of 2008 included a LIFO inventory valuation reserve charge of $0.8 million and $2.5
million, respectively.
Results for 2009 also benefited from $4.0 million of gross cost reductions in the third
quarter 2009, bringing gross cost reductions for the first nine months to $9.6 million.
Corporate Items
Corporate expenses increased to $15.7 million for the third quarter of 2009, compared to $13.4
million in the year-ago period. For the nine months ended September 30, 2009, corporate expenses
decreased to $38.7 million compared to $46.5 million in the prior year-to-date period. These
changes in corporate expenses for the 2009 third quarter and nine month period, compared to the
comparable prior year periods, were primarily due to adjustments of expenses associated with annual
and long-term performance-based cash incentive compensation programs.
Interest expense, net of interest income, in the third quarter 2009 was $8.1 million compared
to $1.7 million in the third quarter 2008. For the nine months ended September 30, 2009, net
interest expense was $9.3 million compared to $2.8 million in the prior year-to-date period. The
increase in interest expense was due to debt issuances completed in the second quarter 2009.
Interest expense benefited from the capitalization of interest costs on strategic capital projects
of $30.2 million in the first nine months of 2009 and by $17.7 million in the first nine months of
2008.
In June 2009, we completed a tender offer resulting in the retirement of $183.3 million of the
Companys 8.375% notes due in December 2011, which left $116.7 million in face value of the 2011
Notes outstanding at the end of June 2009. As a result of this transaction, we recognized a
pre-tax charge of $9.2 million in the 2009 second quarter for the costs of the debt retirement.
Other expense, net of gains on asset sales, primarily includes charges incurred in connection
with closed operations 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 operations and resulted in other expense of $2.1 million for the third quarter
2009 and $2.8 million for the third quarter 2008. For the nine months ended September 30, 2009,
other expense, net of gains on asset sales was $7.5 million, compared to $6.7 million for the
comparable 2008 period. The changes in expenses primarily related to the recognition of foreign
currency gains and losses, and legal expenses.
25
Retirement benefit expense, which includes pension expense and other postretirement expense,
increased to $25.5 million in the third quarter 2009, compared to $2.5 million in the third quarter
2008. For the first nine months of 2009 retirement benefit expense increased to $96.2 million,
compared to $5.8 million for the comparable 2008 period. These increases are primarily a result of
lower returns on plan assets in 2008 partially offset by the positive benefits of voluntary pension
contributions made over the last several years. However, retirement benefit expense decreased $7.9
million to $25.5 million in the third quarter 2009, compared to the second quarter 2009, primarily
as a result a $350 million voluntary contribution to our U.S. defined benefit pension plan in June
2009, which significantly improved the plans funded position. For the third quarter 2009,
retirement benefit expense of $15.9 million was included in cost of sales and $9.6 million was
included in selling and administrative expenses. For the third quarter 2008, the amount of
retirement benefit expense included in cost of sales was $1.6 million, and the amount included in
selling and administrative expenses was $0.9 million. For the nine months ended September 30, 2009,
retirement benefit expense of $67.2 million was included in cost of sales and $29.0 million was
included in selling and administrative expenses. For the nine months ended September 30, 2008, the
amount of retirement benefit expense included in cost of sales was $3.4 million, and the amount
included in selling and administrative expenses was $2.4 million.
Income Taxes
A $1.4 million tax benefit was recognized during the third quarter 2009. This resulted from an
effective tax rate of 39.6% reduced by an income tax benefit of $2.4 million for adjustment of
taxes paid in a prior year. The third quarter 2008 included an income tax provision of $83.9
million, or 36.3% of income before tax.
For the first nine months of 2009, the provision for income taxes was $5.3 million compared to
$243.0 million, or 34.5% of income before tax, for the first nine months of 2008. The 2009
provision included a non-recurring tax charge of $11.5 million, primarily associated with the tax
consequences of the June 2009 $350 million voluntary contribution to the pension plan partially
offset by net discrete income tax benefit adjustments of $7.3 million associated with prior years
taxes.
Primarily as a result of the $350 million voluntary pension contribution in June 2009, which
was designated to pertain to the 2008 tax year, the Company received a U.S. Federal income tax
refund of $108.5 million in the 2009 second quarter.
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 nine months of 2009.
However, as of September 30, 2009 approximately $10 million of this facility was utilized to
support letters of credit.
If we needed to obtain additional financing using the credit markets, the cost and the terms
and conditions of such borrowings may be influenced by our credit rating. As of September 30,
2009, Moodys Investor Services senior unsecured debt rating for our Company was Baa3 with a
stable ratings outlook. As of September 30, 2009, Standard & Poors Ratings Services corporate
credit and senior unsecured debt rating for our Company was BBB- with a stable ratings 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 arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.
Cash Flow and Working Capital
For the nine months ended September 30, 2009, cash provided by operating activities was $149.4
million, which includes a reduction in managed working capital of $344.8 million due to lower
business activity and raw material costs, partially offset by a voluntary net cash pension
contribution of $241.5 million ($350 million contribution less $108.5 million federal income tax
refund). Excluding the voluntary net cash pension contribution, cash flow from operations was
$390.9 million for the first nine months of 2009. Cash used in investing activities was $302.6
million in the 2009 first nine months and consisted primarily of capital expenditures. Cash
provided by financing activities was $509.6 million in the 2009 first nine months due to receipt of
$734.4 million of net proceeds
26
from the second quarter 2009 debt issuances, partially offset by
debt retirements of $189.4 million and dividend
payments of $35.3 million. At September 30, 2009, cash and cash equivalents on hand totaled
$826.3 million, an increase of $356.4 million from year end 2008.
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
September 30, 2009, managed working capital was 35.0% of annualized sales, compared to 35.2% of
annualized sales at December 31, 2008. During the first nine months of 2009, managed working
capital decreased by $344.8 million, to $1,066.9 million. The decrease in managed working capital
from December 31, 2008, resulted from a $115.3 million decrease in accounts receivable, a $224.2
million decrease in inventory, and a $5.3 million increase in accounts payable. While accounts
receivable balances decreased during the first nine months of 2009, days sales outstanding, which
measures actual collection timing for accounts receivable, remained comparable to year end 2008.
Gross inventory turns, which excludes the effect of LIFO inventory valuation reserves, declined
across all of our business segments due to significantly lower business activity.
The Components of managed working capital were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Accounts receivable |
|
$ |
415.8 |
|
|
$ |
530.5 |
|
Inventory |
|
|
737.3 |
|
|
|
887.6 |
|
Accounts payable |
|
|
(283.0 |
) |
|
|
(278.5 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
870.1 |
|
|
|
1,139.6 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
6.3 |
|
|
|
6.3 |
|
LIFO reserve |
|
|
146.6 |
|
|
|
205.6 |
|
Corporate and other |
|
|
43.9 |
|
|
|
60.2 |
|
|
|
|
|
|
|
|
Managed working capital |
|
|
1,066.9 |
|
|
|
1,411.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized prior 2 months sales |
|
$ |
3,051.7 |
|
|
$ |
4,008.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed working capital as a % of annualized sales |
|
|
35.0 |
% |
|
|
35.2 |
% |
|
|
|
|
|
|
|
|
|
Change in managed working capital from December
31, 2008 |
|
$ |
(344.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
We currently expect capital expenditures for 2009, including purchases of businesses, to be
approximately $475 million, of which approximately $308 million was expended in the first nine
months of 2009. We are significantly expanding our manufacturing capabilities to meet expected
intermediate and long-term increased demand 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. We are committed to continuing to self-fund these projects and can further adjust
the timing of any project, if necessary. These self-funded capital investments include:
|
|
|
The expansion of ATIs aerospace quality titanium sponge production capabilities.
Titanium sponge is an important raw material used to produce our titanium mill products.
Our greenfield premium-grade titanium sponge (jet engine rotating parts) facility in
Rowley, UT is expected to begin initial production by the end of 2009. When this Utah
sponge facility is fully operational, our total annual sponge production capacity including
our Albany, OR standard grade titanium sponge facility is projected to be approximately 46
million pounds. These secure supply sources are intended to reduce our purchased titanium
sponge and purchased titanium scrap requirements. 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 temporarily idled our Albany, OR titanium sponge
|
27
|
|
|
facility, effective July 31, 2009, to adjust production and inventory levels to current
market demand for titanium and titanium-based products. |
|
|
|
|
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 produce
large diameter products needed for certain demanding applications. The conditioning,
finishing and inspection facilities began operations in the third quarter 2008, and the
forging operations began operations in the third quarter 2009. Forging is a hot-forming
process that produces wrought forging billet and forged machining bar from an ingot. |
|
|
|
|
A new advanced specialty metals hot rolling and processing facility at our existing
Brackenridge, PA site. The project is estimated to cost approximately $1.16 billion and
take at least four years to complete. Our new advanced hot-rolling and processing facility
is designed to be the most powerful mill in the world for production of specialty metals.
It is designed to produce exceptional quality, thinner, and wider hot-rolled coils at
reduced cost with shorter lead times, and require lower working capital requirements. When
completed, we believe ATIs new advanced specialty metals hot rolling and processing
facility will provide unsurpassed manufacturing capability and versatility in the
production of a wide range of flat-rolled specialty metals. We expect improved
productivity, lower costs, and higher quality for our diversified product mix of
flat-rolled specialty metals, including nickel-based and specialty alloys, titanium and
titanium alloys, zirconium alloys, Precision Rolled Strip® products, and stainless sheet
and coiled plate products. It is designed to roll and process exceptional quality hot bands
of up to 78.62 inches, or 2 meters, wide. |
|
|
|
|
In connection with the new advanced specialty metals hot rolling and processing
facility, we announced the consolidation of our Natrona, PA grain-oriented electrical steel
melt shop into ATIs Brackenridge, PA melt shop. This consolidation is expected to improve
the overall productivity of ATIs flat-rolled grain-oriented electrical steel and other
stainless and specialty alloys, and reduce the cost of producing slabs and ingots. The
investment should also result in significant reduction of particulate emissions. We expect
to realize considerable cost savings from this project beginning in late 2010. |
|
|
|
|
We are increasing our capacity to produce zirconium products through capital expansions
of zirconium sponge production and VAR melting. This new zirconium sponge and melting
capacity better positions ATI for the current and expected strong growth in demand from the
nuclear electrical energy and chemical process industry markets. |
|
|
|
|
Our STAL joint venture commenced an expansion of its operations in Shanghai, China in
late 2006. This expansion tripled STALs rolling and slitting capacity to produce Precision
Rolled Strip® products at a cost of approximately $100 million. The additional slitting
capacity commenced operations in June 2009 and the remainder of the facility was
essentially completed in the third quarter 2009. |
|
|
|
|
On October 23, 2009, we acquired the assets of Crucible Compaction Metals and Crucible
Research, a western Pennsylvania producer of advanced powder metal products, for $40.95
million. This acquisition, which has been named ATI Powder Metals, expands our specialty
metals product portfolio. Powder metals are used in the production of complex alloy
chemistries, typically when conventional processes can not be used. Powder metals
represent a growth opportunity for ATI as more powder metals are used in the aerospace
industry for the latest generation of jet engines and for the production of near-net shape
parts. Additional markets for these powder metals products include oil and gas, electrical
energy, and medical. |
Debt
At September 30, 2009, we had $1,070.6 million in total outstanding debt, compared to $509.8
million at December 31, 2008, an increase of $560.8 million. The increase in debt was primarily
due to new debt issuances, net of debt retirements, discussed below.
28
Convertible Notes
In June 2009, we issued and sold $402.5 million in aggregate principal amount of 4.25%
Convertible Senior Notes due 2014 (the Convertible Notes). Interest is payable semi-annually on
June 1 and December 1 of each year. The Convertible Notes were issued under ATIs shelf
registration statement and are not listed on any national securities exchange. Net proceeds of
$390.2 million from the sale of the Convertible Notes were used to make a $350 million voluntary
cash contribution to our U.S. defined benefit pension plan, and the balance was used for general
corporate purposes including funding of contributions to trusts established to fund retiree medical
benefits. The Convertible Notes are unsecured and unsubordinated obligations of the Company and
equally ranked with all of its existing and future senior unsecured debt. The underwriting fees and
other third-party expenses for the issuance of the Convertible Notes were $12.3 million and will be
amortized to interest expense over the 5-year term of the Convertible Notes.
We do not have the right to redeem the Convertible Notes prior to the stated maturity date.
Holders of the Convertible Notes have the option to convert their notes into shares of ATI common
stock at any time prior to the close of business on the second scheduled trading day immediately
preceding the stated maturity date (June 1, 2014). The initial conversion rate for the Convertible
Notes is 23.9263 shares of ATI common stock per $1,000 (in whole dollars) principal amount of notes
(9,630,336 shares), equivalent to a conversion price of approximately $41.795 per share, subject to
adjustment, as defined in the Convertible Notes. Other than receiving cash in lieu of fractional
shares, holders do not have the option to receive cash instead of shares of common stock upon
conversion. Accrued and unpaid interest that exists upon conversion of a note will be deemed paid
by the delivery of shares of ATI common stock and no cash payment or additional shares will be
given to holders.
If the Company undergoes a fundamental change, as defined in the Convertible Notes, holders
may require us to repurchase all or a portion of their notes at a price equal to 100% of the
principal amount of the notes to be purchased plus any accrued and unpaid interest up to, but
excluding, the repurchase date. Such a repurchase will be made in cash.
2019 Notes
In June 2009, we issued $350 million aggregate principal amount of 9.375% unsecured Senior Notes
with a maturity of June 2019 (the 2019 Notes). Interest is payable semi-annually on June 1 and
December 1 of each year. The 2019 Notes were issued under ATIs shelf registration statement and
are not listed on any national securities exchange. Net proceeds of $344.2 million from the sale of
the 2019 Notes were used to retire $183.3 million of the Companys 2011 Notes, as discussed below,
and for general corporate purposes. The underwriting fees, discount and other third-party expenses
for the issuance of the 2019 Notes were $5.8 million and will be amortized to interest expense over
the 10-year term of the 2019 Notes. The 2019 Notes are unsecured and unsubordinated obligations of
the Company and equally ranked with all of its existing and future senior unsecured debt. The 2019
Notes restrict our ability to create certain liens, to enter into sale leaseback transactions, and
to consolidate, merge or transfer all, or substantially all, of our assets. We have the option to
redeem the 2019 Notes, as a whole or in part, at any time or from time to time, on at least 30
days, but not more than 60 days, prior notice to the holders of the Notes at a redemption price
specified in the 2019 Notes. The 2019 Notes are subject to repurchase upon the occurrence of a
change in control repurchase event (as defined in the 2019 Notes) at a repurchase price in cash
equal to 101% of the aggregate principal amount of the Notes repurchased, plus any accrued and
unpaid interest on the 2019 Notes repurchased.
Retirement of 2011 Notes
In June 2009, we completed a tender offer for our 8.375% Notes due in 2011 (the 2011 Notes)
of which $300 million in aggregate principal amount was outstanding prior to the tender offer. As a
result of the tender offer, we retired $183.3 million of the 2011 Notes and recognized a pre-tax
charge of $9.2 million in the 2009 second quarter for the costs of acquiring the 2011 Notes. As of
September 30, 2009, $116.7 million in face value of the 2011 Notes remain outstanding.
In managing our overall capital structure, some of the measures on which we focus are net debt
to total capitalization, which is the percentage of our debt, net of cash that may be available to
reduce borrowings, to our total invested and borrowed capital, and total debt to total
capitalization, which excludes cash balances. Net debt as a percentage of capitalization was 10.5%
at September 30, 2009, compared to 2.0% at December 31, 2008. The net debt to capitalization was
determined as follows:
29
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Total debt |
|
$ |
1,070.6 |
|
|
$ |
509.8 |
|
Less: Cash |
|
|
(826.3 |
) |
|
|
(469.9 |
) |
|
|
|
|
|
|
|
Net debt |
|
$ |
244.3 |
|
|
$ |
39.9 |
|
|
|
|
|
|
|
|
|
|
Net debt |
|
$ |
244.3 |
|
|
$ |
39.9 |
|
Total ATI stockholders equity |
|
|
2,078.7 |
|
|
|
1,957.4 |
|
|
|
|
|
|
|
|
Net ATI capital |
|
$ |
2,323.0 |
|
|
$ |
1,997.3 |
|
|
|
|
|
|
|
|
|
|
Net debt to ATI capital |
|
|
10.5 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
Total debt to capitalization increased to 34% at September 30, 2009 from 20.7% December 31, 2008.
Total debt to total capitalization was determined as follows:
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Total debt |
|
$ |
1,070.6 |
|
|
$ |
509.8 |
|
Total ATI stockholders equity |
|
|
2,078.7 |
|
|
|
1,957.4 |
|
|
|
|
|
|
|
|
Total ATI capital |
|
$ |
3,149.3 |
|
|
$ |
2,467.2 |
|
|
|
|
|
|
|
|
|
|
Total debt to total ATI capital |
|
|
34.0 |
% |
|
|
20.7 |
% |
|
|
|
|
|
|
|
In May 2009, we amended our $400 million senior unsecured domestic bank group credit agreement
to redefine the two financial covenants to provide additional financial flexibility. The amendment
restates the definition of consolidated earnings before interest and taxes, and consolidated
earnings before income, taxes, depreciation and amortization as used in the interest coverage and
leverage ratios to exclude any non-cash pension expense or income and restates the definition of
consolidated indebtedness used in the leverage ratio, which previously was based on gross
indebtedness, to be net of cash on hand in excess of $50 million. As of September 30, 2009, there
had been no borrowings made under the facility, although approximately $10 million of the facility
was used to support letters of credit. The unsecured facility requires us to maintain a leverage
ratio (consolidated total indebtedness divided by consolidated earnings before interest, taxes and
depreciation and amortization) of not greater than 3.25, and maintain an interest coverage ratio
(consolidated earnings before interest and taxes divided by interest expense) of not less than 2.0.
For the twelve months ended September 30, 2009, our leverage ratio was 0.90, and our interest
coverage ratio was 18.49.
The Company has an additional separate credit facility for the issuance of letters of credit.
As of September 30, 2009, $30 million in letters of credit were outstanding under this facility.
STAL, our Chinese joint venture company in which ATI has a 60% interest, has a 585 million
renminbi (approximately $86 million at September 30, 2009 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
September 30, 2009, there were no borrowings under this credit facility although STAL had
approximately $4 million in letters of credit outstanding related to the expansion of its
operations.
Dividends
A regular quarterly dividend of $0.18 per share of common stock was declared on September 10,
2009, payable on September 29, 2009 to stockholders of record at the close of business on September
21, 2009. 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.
30
Critical Accounting Policies
Inventory
At September 30, 2009, we had net inventory of $737.3 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
2008, the effect of falling raw material costs on our LIFO inventory valuation method resulted in
cost of sales which was $169.0 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 nine months of 2009, we recognized a $59.0
million 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 September 30, 2009, no
significant reserves were required.
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, 2008.
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 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
As required, in the first quarter 2009, we adopted changes issued by the Financial Accounting
Standards Board (FASB) to consolidation accounting and reporting. Early adoption of this
accounting change was prohibited. These changes, among others, required that noncontrolling
interests, formerly termed minority interests, be considered a component of equity for all periods
presented. Noncontrolling interests were previously classified within other long-term liabilities.
In addition, the practice of reporting minority interest expense or benefit changed. The statement
of operations presentation has been revised to separately present consolidated net income (loss),
which
31
now includes the amounts attributable to ATI plus noncontrolling interests (minority
interests), and net income (loss) attributable solely to ATI, for all periods presented. Absent a
change in control, increases and decreases in the noncontrolling ownership interest amount are
accounted for as equity transactions. As a result of adopting this accounting change, the balance
sheet and the income statement have been recast retrospectively for the presentation of
noncontrolling interest in our STAL joint venture.
On January 1, 2009, we adopted changes issued by the FASB for fair value measurements as they
relate to nonfinancial assets and nonfinancial liabilities. These changes define fair value,
establish a framework for measuring fair value in accordance with U.S. generally accepted
accounting principles, and expand disclosures about fair value measurements. The fair value changes
apply to other accounting pronouncements that require or permit fair value measurements and are to
be applied prospectively with limited exceptions. The adoption of this change, as it relates to
nonfinancial assets and nonfinancial liabilities, had no impact on the financial statements. The
provisions will be applied at such time a fair value measurement of a nonfinancial asset or
nonfinancial liability is required, which may result in a fair value that is materially different
than would have been calculated prior to the adoption of these changes in the definition and
measurement of fair value.
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 credit market conditions and related issues, and global
supply and demand conditions and prices for 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,
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) other risk factors summarized in our
Annual Report on Form 10-K for the year ended December 31, 2008, and in 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
As part of our risk management strategy, we utilize derivative financial instruments, from
time to time, to hedge our exposure to changes in raw material prices, foreign currencies, and
interest rates. We monitor the third-party financial institutions which are our counterparty to
these financial instruments on a daily basis and diversify our transactions among counterparties to
minimize exposure to any one of these entities. Fair values for derivatives were measured using
exchange-traded prices for the hedged items including consideration of counterparty risk and the
Companys credit risk.
Interest Rate Risk. We attempt to maintain a reasonable balance between fixed- and floating-rate
debt to keep financing costs as low as possible. At September 30, 2009, we had approximately $42
million of floating rate debt outstanding with a weighted average interest rate of approximately
1.5%. Approximately $20 million of this floating rate debt is capped at a 6% maximum interest rate.
Since the interest rate on floating rate debt changes with the short-term market rate of interest,
we are exposed to the risk that these interest rates may increase, raising our interest expense in
situations where the interest rate is not capped. For example, a hypothetical 1% increase in the
rate of interest on the $22 million of our outstanding floating rate debt not subjected to a cap
would result in increased annual financing costs of approximately $0.2 million.
32
Volatility of Energy Prices. Energy resources markets are subject to conditions that create
uncertainty in the prices and availability of energy resources. 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. Increases in energy costs, or changes in costs
relative to energy costs paid by competitors, have and may continue to adversely affect our
profitability. To the extent that these uncertainties cause suppliers and customers to be more cost
sensitive, increased energy prices may have an adverse effect on our results of operations and
financial condition. We use approximately 10 to 12 million MMBtus of natural gas annually,
depending upon business conditions, in the manufacture of our products. These purchases of natural
gas expose us to 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. We use several approaches to minimize any material adverse effect on our financial
condition or results of operations from volatile energy prices. These approaches include
incorporating an energy surcharge on many of our products and using financial derivatives to reduce
exposure to energy price volatility.
At September 30, 2009, the outstanding financial derivatives used to hedge our exposure to
natural gas cost volatility represented approximately 50% of our forecasted requirements through
2011. The net mark-to-market valuation of these outstanding hedges at September 30, 2009 was an
unrealized pre-tax loss of $19.8 million, of which $12.1 million was presented in accrued
liabilities on the balance sheet with the remainder included in other long-term liabilities. The
effects of the hedging activity will be recognized in income over the designated hedge periods.
For the three months ended September 30, 2009, the effects of natural gas hedging activity
increased cost of sales by $5.1 million.
Volatility of Raw Material Prices. We use raw materials surcharge and index mechanisms to offset
the impact of increased raw material costs; however, competitive factors in the marketplace can
limit our ability to institute such mechanisms, and there can be a delay between the increase in
the price of raw materials and the realization of the benefit of such mechanisms. For example, in
2008 we used approximately 80 million pounds of nickel; therefore a hypothetical change of $1.00
per pound in nickel prices would result in increased costs of approximately $80 million. In
addition, in 2008 we also used approximately 500 million pounds of ferrous scrap in the production
of our flat-rolled products and a hypothetical change of $0.01 per pound would result in increased
costs of approximately $5 million. While we enter into raw materials futures contracts from
time-to-time to hedge exposure to price fluctuations, such as for nickel, we cannot be certain that
our hedge position adequately reduces exposure. We believe that we have adequate controls to
monitor these contracts, but we may not be able to accurately assess exposure to price volatility
in the markets for critical raw materials.
The majority of our products are sold utilizing raw material surcharges and index mechanisms.
However as of September 30, 2009, we had entered into financial hedging arrangements primarily at
the request of our customers related to firm orders for approximately 5% of our total annual nickel
requirements through 2010. Any gain or loss associated with these hedging arrangements is included
in the selling price to the customer requesting the hedge over the designated hedge period. At
September 30, 2009, the net mark-to-market valuation of our outstanding raw material hedges was an
unrealized pre-tax gain of $13.1 million, comprised of $10.9 million included in prepaid expenses
and other current assets and $2.2 million in other long-term assets on the balance sheet.
Foreign Currency Risk. Foreign currency exchange contracts are used, from time-to-time, to limit
transactional exposure to changes in currency exchange rates. We sometimes purchase foreign
currency forward contracts that permit us to sell specified amounts of foreign currencies expected
to be received from our export sales for pre-established U.S. dollar amounts at specified dates.
The forward contracts are denominated in the same foreign currencies in which export sales are
denominated. These contracts are designated as hedges of the variability in cash flows of a portion
of the forecasted future export sales transactions which otherwise would expose the Company to
foreign currency risk. At September 30, 2009, the outstanding financial derivatives used to hedge
our exposure to foreign currency, primarily euros, represented approximately 6% of our forecasted
total international sales through 2011. In addition, we may also designate cash balances held in
foreign currencies as hedges of forecasted foreign currency transactions. At September 30, 2009,
the net mark-to-market valuation of the outstanding foreign currency forward contracts was an
unrealized pre-tax gain of $4.4 million, of which $2.1 million is included in other current assets,
$2.4 million in other long-term assets, and $0.1 million in accrued liabilities on the balance
sheet.
Item 4. Controls and Procedures
|
(a) |
|
Evaluation of Disclosure Controls and Procedures |
33
Our Chief Executive Officer and Chief Financial Officer have evaluated the Companys disclosure
controls and procedures as of September 30, 2009, 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 September 30,
2009, conducted by our Chief Executive Officer and Chief Financial Officer, that occurred during
the quarter ended September 30, 2009 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 |
Allegheny Ludlum Corporation entered into a consent order and agreement with the Pennsylvania
Department of Environmental Protection (PADEP) relating to
allegations by the PADEP that it violated The Pennsylvania Clean Streams Law at the Companys Specialty Plate Facility in
Washington, PA. Pursuant to the agreement, the Company paid a civil penalty of $126,000.
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, taxes,
environmental, health and safety, occupational disease, 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, 2008, 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, 2008, 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.
34
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
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). |
|
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
35
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: November 5, 2009
|
|
By
|
|
/s/ Richard J. Harshman
Richard J. Harshman
|
|
|
|
|
|
|
Executive Vice President, Finance and |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial Officer and Duly Authorized Officer) |
|
|
|
|
|
|
|
|
|
Date: November 5, 2009
|
|
By
|
|
/s/ Dale G. Reid
Dale G. Reid
|
|
|
|
|
|
|
Vice President, Controller and |
|
|
|
|
|
|
Chief Accounting Officer and Treasurer |
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
36
EXHIBIT INDEX
|
|
|
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. |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
37