UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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x☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20172020
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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 | | 25-1792394 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification Number) |
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Delaware | | 25-1792394 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification Number)
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1000 Six PPG Place Pittsburgh, Pennsylvania | | 15222-5479 |
| Pittsburgh, | Pennsylvania | | 15222-5479 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (412) 394-2800
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock,stock, par value $0.10 Par Value | ATI | New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx☒ No ¨☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
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, and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, 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 x☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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| Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
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Large accelerated filer | | x | | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
On February 9, 2018,5, 2021, the Registrant had outstanding 125,661,001126,827,573 shares of its Common Stock.
The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 30, 20172020 was approximately $1.9$1.3 billion, based on the closing price per share of Common Stock on June 30, 20172020 of $17.01$10.19 as reported on the New York Stock Exchange. Shares of Common Stock known by the Registrant to be beneficially owned by directors and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Exchange Act.
Documents Incorporated By Reference
Selected portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 201820, 2021 are incorporated by reference into Part III of this Report.
INDEX
PART I
Item 1. Business
The Company
Allegheny Technologies Incorporated is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800, Internet website address www.atimetals.com. Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. References to “Allegheny Technologies,” “ATI,” the “Company,” the “Registrant,” “we,” “our” and “us” and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires.
Our Business
ATIATI’s strategic vision is a global manufacturer of technically advancedto be an aligned and integrated specialty materials and complex components.components company, solving the world’s challenges through materials science. Our strategies target the products and global growth markets that require and value ATI’s technical and manufacturing capabilities. Our largest market ismarkets are aerospace & defense, representing approximately 50% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, electrical energy, medical,downstream processing, and automotive markets.specialty energy. In aggregate, these key markets represent about 80%70% of our revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique manufacturing and precision machining capabilities as well asprocess technologies, including our innovative new product development competence. Our capabilities range from alloy development to final production of highly engineered finished components, as well as producing powders for use in next-generation jet engine forgings and 3D-printed aerospace products.
We operate inEffective January 1, 2020, we began operating under two revised business segments: High Performance Materials & Components (HPMC), and Flat RolledAdvanced Alloys & Solutions (AA&S). All segment reporting information for 2020 and prior periods in this Form 10-K reflect these two revised business segments. In addition, in the fourth quarter 2020, the Company changed its segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of segment EBITDA is defined in Note 2 of the notes to the consolidated financial statements. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment level.
HPMC is comprised of the Specialty Materials and Forged Products (FRP). Over 75% of 2017businesses, as well as our ATI Europe distribution operations. The revised HPMC segment sales were tointensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace and& defense markets and nearly half of HPMC’s total sales areits revenue from products for commercial jet engines. Increasing demand for commercialCommercial aerospace products hashave been the main source of sales and segment operating profitEBITDA growth for HPMC over the last few years. This isyears, and are expected to continue to drive HPMC and overall ATI results for the next several years due toas demand from these markets recovers from reduced 2020 levels resulting from the ongoing expansion in production of next generation jet engines and airplanes.COVID-19 pandemic. Other keymajor HPMC end markets include medical oil & gas, and electrical energy. HPMC produces converts and distributes a wide range of high performance materials, includingand components, and advanced metallic powder alloys made from titanium and titanium-based alloys, nickel-based alloys and superalloys, and a variety of productsother specialty materials. Capabilities range from differentiated alloyscast/wrought and super alloys,powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and metallic powders.3D-printed aerospace products.
OurThe new AA&S segment combines our Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP segment serves a diverse groupbusiness, consisting of end markets. The oil & gas market, including chemicalthe Specialty Rolled Products and hydrocarbon processing,Standard Stainless Sheet Products product lines, the 60%-owned Shanghai STAL Precision Stainless Steel Company Limited (STAL) joint venture, and the automotive market, collectively represent over 40%Uniti LLC and Allegheny & Tsingshan Stainless (A&T Stainless) 50%-owned joint ventures that are reported in AA&S segment results under the equity method of 2017 sales.accounting. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other majorimportant end markets for FRPAA&S include aerospace & defense, food processing equipmentautomotive and appliances, construction and mining, electronics and communication equipment and computers. FRPelectronics. AA&S produces converts and distributes nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless steelproducts in a variety of product forms including plate, sheet, engineeredand strip products.
On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus of increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge Precision Rolled Strip products.® (PRS). As part of this strategic realignment, we intend to cease production of standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the Hot-Rolling & Processing Facility (HRPF), and close various downstream finishing operations that are part of the standard stainless sheet flow path.
ATI’s strategic vision is to be an aligned and integrated specialty materials and components company. Our strategies target the products and global growth markets that require and value ATI’s technical and manufacturing capabilities. Through alloy development, internal growth efforts, and long-term supply agreements on current and next-generation jet engines and airframes, we are well positioned with a fully qualified asset base to meet the expected multi-year demand growth from the commercial aerospace market. Our HPMC segment’s isothermal and hot-die forge press utilization continues to increase to meet aerospace demand growth, including new market share gains.
Strategic end useend-use markets for our products include:
Aerospace & Defense. We are a world leader in the production of specialty materials and components for both commercial and military jet engines and airframes supporting customer needs for initial build requirements and for spare parts. Through alloy development, internal growth efforts, and long-term supply agreements on current and next-generation jet engines and airframes, we are well-positioned with a fully qualified asset base to meet the expected return to multi-year demand growth from the commercial aerospace market as business conditions impacted by the global COVID-19 pandemic recover to more normal levels.
Aerospace & defense applications also require nickel-based alloys and superalloys and specialty alloys such as ours. Nickel-based alloys and superalloys remain extremely strong at high temperatures and resist degradation under extreme conditions. Typical aerospace applications for nickel-based alloys and superalloys and advanced metallic powders include jet engine shafts, discs, blades, vanes, rings and casings. Nickel-based alloys and superalloys remain extremely strong at high temperatures and resist degradation under extreme conditions. The next generation and future-generationnext-generation jet engines use new generations ofadvanced nickel-based superalloys and advanced metallic powder alloys in large part due to increased fuel efficiency requirements that require hotter-burning engines. Our specialty alloysmaterials are also used in the manufacture of aircraft landing gear and structural components, as well as jet engine components.
Products and components made from titanium and titanium-based alloys, such as jet engine components including blades, vanes, discs, and casings, and airframe components such as structural members, landing gears, hydraulic systems, and fasteners, are critical in aerospace and defense applications. These materials and components possess an extraordinary
combination of properties that help to increase jet engine fuel efficiency and product longevity, including superior strength-to-weight ratio, elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance.
In addition to our specialty materials, weWe are a global industry leader in isothermal and hot-die forging technologies for advanced aerospace components. Capital investments for our fourth iso-thermal press and heat-treating capacity expansion at our Iso-Thermal Forging Center of Excellence in Cudahy, WI, which began in 2018, continued through 2020. We produce highly sophisticated components that have differing mechanical properties across a single product unit and are highly-resistant to fatigue and temperature effect.effects. Our precision forgings are used for jet engine components, structural components for aircraft, helicopters, launch vehicles,space propulsion, and other demanding applications. ATI provides a full range of post-production inspection and machining with the certified quality needed to meet demanding application requirements. ATI has
Products and components made from titanium and titanium-based alloys, such as jet engine components including blades, vanes, and discs, and airframe components such as structural members, landing gears, and hydraulic systems, are critical in aerospace applications. These materials and components possess an extraordinary combination of properties that help to increase jet engine fuel efficiency and product longevity, including superior strength-to-weight ratios, elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance.
Our specialty materials and components for defense applications include naval nuclear products, military jet engines, fixed wing and rotorcraft products, and armor applications. We expect to increase our sales in government defense applications in future years, and in 2019, we announced the technology, equipment,expansion and know-how6.5-year extension of our long-term agreement (LTA) with BWX Technologies to cast titanium parts in somesupply materials for the manufacture of the largest and most complex sizes and shapes currently being manufactured for aerospace applications, and our advanced manufacturing capabilities offer OEMs the freedom to design components with intricate geometries, cored passageways, cast-in features, and sculpted surfaces. naval nuclear components.
We continuously seek to develop and manufacture innovative new alloys to better serve the needs of the aerospace and& defense market.markets. For example, ATI 718Plus® nickel-based superalloy, Rene 65 near-powder superalloy, and our powder alloys have won significant share in the current and next-generation jet engines. ATI’s metallic powder technology delivers alloy compositions and refined microstructures that offer increased performance and longer useful lives in high-temperature aerospace environments as well as improving the efficiency of jet engines. Our metallic powder products deliver the most uniform grain structure achievable in near-net shapes. We continue to increase our production capacity for advanced metallic powders for use in next-generation aerospace products, including additive manufacturing applications. Our nickel-based powder alloy expansion in North Carolina was completed in 2017
Energy. This includes oil & gas, downstream processing, and is expected to be commercially qualified in early 2018. We recently announced plans for a titanium powder expansion to be located on the same site, as well as the Net Gen Alloys joint venture with GE Aviation to further develop a meltless titanium manufacturing process to be located on our existing Richburg, SC site.specialty energy markets.
Oil & Gas.The environments in which oil & gas can be found in commercial quantities have become more challenging, involving deep offshore wells, high pressure and high temperature conditions in sour wells and unconventional sources, such as shale oil & gas, and oil sands.sources. These challenging offshore environments are located further off the continental shelf, including locations in arctic and tropical waters where drilling is more difficult than previously-sourced locations. They are often more than one mile below the water’s surface, and up to two miles below the ocean floor. We enable our customer’scustomers’ success in these applications by developing and producing specialty materials for equipment that can operate for up to 30 years in these difficultharsh environments.
Both of our business segments produce specialty materials that are critical to the oil & gas industry. Our specialty materials, including nickel-based alloys, stainless and duplex alloys and other specialty alloys, have the strength and corrosion-resistant properties necessary forto meet these challenging operating conditions.
Our Datalloy2® and DatalloyHP™ specialty stainless materials are used for non-magnetic drill collar applications that enable advanced directional and horizontal drilling techniques. We have developed a family of duplex alloys, including ATI 2003® and ATI 2102®, for use in subsea and deepwater oil and gas applications. Several of our strip, plate and cast products meet NORSOK qualification standards, which are developed by the Norwegian petroleum industry and are intended to identify materials used in oil and gas applications that are safe and cost-effective.
Electrical Energy.Our specialty materials are widely used in the global electrical power generation and distribution industries. We believe clean energy needs, andexpanding environmental policies and the electrification of developing countries will continue to drive demand for our specialty materials and products for use in this industrythese industries over the long term.
For electrical power generation, our specialty materials, including corrosion-resistant alloys (CRAs), are used in coal, nuclear, and natural gas and other fuel source applications. In coal-fired plants, ourOur CRAs are used for pipe, tube, and heat exchanger applications in water systems and in addition to pollution control scrubbers. Our CRAs are also used in water systems, fuel cladding components, and process equipment for nuclear power plants. For nuclear power plants, we are an industry pioneer in producing nuclear reactor fuel cladding and structural components utilizing zirconium and hafnium alloys. We are a technology leader for large diameter components used
in natural gas land-based turbines for power generation. ForOur alloys are also used for alternative energy generation, our alloys are used forin solar, fuel cell and geothermal applications.
Medical. ATI’s advanced specialty materials are used in medical device products that enhance the quality of people’s lives around the world.
Manufacturers of magnetic resonance imaging (MRI) devices rely on our niobium superconducting wire to help produce electromagnetic fields that allow physicians to safely scan the body’s soft tissue. We have a joint technology development agreement with Bruker Energy & Supercon Technologies to advance state-of-the-art niobium-based superconductors, including those used in MRI magnets for the medical industry, and preclinical MRI magnets used in the life-science tools industry.
Our specialty alloys are used for replacement knees, hips and other prosthetic devices. The use of our alloys in these replacement devices offer the potential of longer product lifespans versus previous implant generations.
Our biocompatible nickel-titanium shape memory alloy is used for stents to support collapsed or clogged blood vessels. Reduced in diameter for insertion, these stents expand post-implant to the original tube-like shape due to the metal’s superelasticity. In addition, our ultra fine diameter (0.002 inch/0.051 mm) titanium wire is used for screens to prevent blood clots from entering critical areas of the body.
ManufacturersElectronics. ATI’s materials perform a variety of important roles in the growing consumer electronics market. Nickel alloys and PRS from FRP and our STAL joint venture support computers and smart phones. The magnetic resonance imaging (MRI) devices rely on our niobium superconducting wire to help produce electromagnetic fields that allow physicians to safely scan the body’s soft tissue.
Automotive. For automobiles, ATI specialty materialsproperties of nickel alloys are used for powertrainin relay cores, magnets and structural parts, exhaust systems and emission control parts, gaskets, air bag inflator housings, windshield wipers and blades, fuel systems, fasteners, hose clamps, gaskets and other components. Stainless steelmagnetic shielding, while their thermal expansion is also used on exterior trim for its bright appearance and for internal components for its corrosion resistance.
ATI’s advanced nickel-based alloys and specialty alloysuseful in flat-rolled products are used primarily in engine and exhaust applications for the automotive market. We expect global demand to grow for our high-value precision and engineered strip for automotiveglass-to-metal sealing applications such as gaskets, hose clamps,monitors. PRS is selected for electronics and turbo chargers. Our Hot-Rollingcommunications applications based on corrosion resistance, strength, wear resistance, electrical resistivity or thermal expansion.
In addition, metal precursors – which use chemicals produced by ATI – have a variety of important applications in consumer and Processing Facility (HRPF) provides the capability to produce high-value alloys in wider and longer product forms. As automotive engine operating temperatures rise due to the increasing use of turbochargers to improve fuel efficiency, we believe our expertise in heat-resistant aerospace alloys will enable us to expand our share of this market, improving our high-value product mix. industrial electronics.
Business Segments
Our two business segments accounted for the following percentages of total revenues of $3.53$2.98 billion, $3.13$4.12 billion, and $3.72$4.05 billion for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.
| | | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| High Performance Materials & Components | | 59 | % | | 62 | % | | 53 | % | High Performance Materials & Components | | 39 | % | | 48 | % | | 49 | % |
| Flat Rolled Products | | 41 | % | | 38 | % | | 47 | % | |
| Advanced Alloys & Solutions | | Advanced Alloys & Solutions | | 61 | % | | 52 | % | | 51 | % |
Information with respect to our business segments is presented below and in Note 152 of the notes to the consolidated financial statements.
High Performance Materials & Components Segment
Our HPMC segment produces converts and distributes a wide range of high performance specialty materials, parts and components for several major end markets, including aerospace & defense, (jet enginesmedical, and airframes), oil & gas, electrical energy, and medical. 76%energy. 81% of the HPMC segment’s 20172020 revenues were derived from the aerospace & defense market.markets. Demand for our products is driven primarily by the commercial aerospace cycle. Large aircraft and jet engines are manufactured by a small number of companies, such as The Boeing Company, Airbus S.A.S. (an Airbus Group company), including the former operations of Bombardier Aerospace, (a division of Bombardier Inc.), and Embraer (Empresa Brasileira de Aeronáutica S.A.) for airframes, and GE Aviation (a division of General Electric Company), Rolls-Royce plc, Pratt & Whitney (a division of UnitedRaytheon Technologies Corporation), Snecma (SAFRAN Group), and various joint ventures that manufacture jet engines. These companies, and their suppliers, form a substantial part of our customer base in this business segment. We have LTAs in place with most major aerospace market OEMs. The loss of one or more of our customers in the aerospace & defense marketmarkets could have a material adverse effect on ATI’s results of operations and financial condition. In 2017, we signed strategic long-term agreements that are expected to drive HPMC’s growth trajectory for the next several years, including one with Pratt & Whitney to supply isothermally forged components and metallic powders for use in their next-generation jet engines.condition (see Item 1A. Risk Factors).
Our high performance products are manufactured from a wide range of high performanceadvanced materials and components, and advancedincluding metallic powder alloys, made from nickel-based alloys and superalloys, titanium and titanium-based alloys, nickel-based alloys and superalloys, and a variety of other specialty metals.materials. These materials are made ininto a variety of product forms that include precision forgings, castings, machined parts and others. We are integrated across these alloy systems in melt, forging, finishing, investment casting, and machining processes. Most of the products in this segment are sold directly to end-use customers, and a significantsubstantial portion of our HPMC segment products are sold under multi-year agreements.
Principal competitors in the HPMC segment include: Berkshire Hathaway Inc., for nickel-based alloys and superalloys and specialty steel alloys, titanium and titanium-based alloys, and precision forgings and investment castings through its acquisitionownership of Precision Castparts Corporation and subsidiaries; ArconicHowmet Aerospace Inc., for titanium and titanium-based alloys and precision forgings through its acquisitions of RTI International Metals, Inc. and Firth Rixson;alloys; Carpenter Technology Corporation for nickel-based alloys and superalloys and specialty steel alloys; VSMPO-AVISMA for titanium and titanium-based alloys; and Aubert & Duval for precision forgings.
Advanced Alloys & Solutions Segment
Our FRPAA&S segment produces converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless steel in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip®PRS products. The major end markets for our flat-rolledflat rolled products are oil & gas, automotive,energy, aerospace & defense, food processing equipmentautomotive, and appliances, construction & mining, electronics, communication equipment and computers.electronics. The operations in this segment include ATI Flatour FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, our SAC business, including the Chineseprimary titanium operations in Richland, WA and Albany, OR and the STAL PRS joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL),in China, in which we hold a 60% interest. Segment results also include our 50% interest in the Uniti industrial titanium joint venture known as Uniti LLC.and our 50% interest in A&T Stainless.
Significant global overcapacity for stainless flat-rolled products has intensified the price competition in the AA&S segment over the last several years, despite various anti-dumping and countervailing duties imposed by the United States government in various forms since 1999. On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase its focus on higher-margin products and its aerospace & defense end markets. Additionally, in 2020 we indefinitely idled the manufacturing operations of the A&T Stainless steel, nickel-basedjoint venture due to repeated denials by the U.S. Department of Commerce for exemptions from Section 232 tariffs, which impose a 25% tariff on imported semi-finished stainless slab products from Indonesia.
Nickel-based alloys, titanium, and titaniumstainless sheet products are used in a wide variety of industrial and consumer applications. In 2017,2020, approximately 65% of our stainless sheet products by volume were sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers.
Engineered strip and Precision Rolled StripPRS products, which are under 0.015 inches thick, are used by customers to fabricate a variety of products primarily in the automotive construction, and electronics markets. In 2017,2020, approximately 90% of these products by volume were sold directly to end-use customers or through our own distribution network, with the remainder sold to independent service centers. In 2018, we completed the construction of our third PRS manufacturing facility at our STAL PRS joint venture in China.
Stainless steel, nickel-basedNickel-based alloy, titanium, and titaniumstainless plate products are primarily used in aerospace & defense, and corrosion and industrial markets. In 2017,2020, approximately one-half60% of our plate products by volume were sold to independent service centers, with the remainder sold directly to end-use customers.
Competition in the Flat Rolled Products segment includes domestic stainless steel competitors North American Stainless, Outokumpu Stainless USA, LLC, and AK Steel Corporation, as well as imports from numerous foreign producers, including Aperam, based in Europe. Competitors for nickel-based alloys and superalloys and specialty steel alloys include Haynes International and VDM Metals GmbH.GmbH, a subsidiary of Acerinox S.A. Competition in the AA&S segment includes domestic stainless competitors North American Stainless, a subsidiary of Acerinox S.A., Outokumpu Stainless USA, LLC, and Cleveland-Cliffs Inc., as well as imports from numerous foreign producers, including Aperam, based in Europe.
In 2017, we took important stepsWe continue efforts toward improving the capacity utilization of our HRPF most notably with the announced Allegheny & Tsingshan Stainless joint venture to manufacture 60” wide stainless sheet, which is expected to be formed during the first quarter of 2018.
Significant global overcapacity for stainlesscarbon steel flat-rolled products has intensified the price competition in this segment over the last several years. Some of our foreign competitors are either directly or indirectly subsidized by governments. In 1999, the United States imposed anti-dumping and countervailing duties on unfairly low-priced and subsidized imports of stainless steel sheet and strip in coils and stainless steel plate in coils from companies in ten foreign countries. The anti-dumping and countervailing duty orders were reviewed in 2011 by the U.S. Department of Commerce and the U.S. International Trade Commission to determine whether the orders should remain in place for another five years. The agencies decided that eight such orders against five countries would continue in effect. In July 2016, the U.S. Department of Commerce and the U.S. International Trade Commission initiated a third review of the eight orders. The four orders covering imports of stainless steel plate in coils from three countries were continued for an additional five years in December 2016. In October 2017, the U.S. Department of Commerce published a notice continuing for an additional five years for orders covering imports of stainless steel sheet and strip in coils from three countries.
Additionally, in February 2016, ATI and the three domestic stainless steel competitors filed antidumping and countervailing duty petitions concurrently with the U.S. Department of Commerce and the U.S International Trade Commission, charging that unfairly traded imports of stainless steel sheet and strip from the People’s Republic of China are causing material injury to the domestic stainless steel industry. In February 2017, the U.S. Department of Commerce issued its final determinations, calculating antidumping duties ranging from 64% and 77% percent and countervailing duties ranging from 76% and 191%. These duties are generally applied in combination. The U.S. International Trade Commission reached a unanimous affirmative determination in early March 2017. The antidumping duties and subsidy margins are expected to act as a significant deterrent to the illegal dumping of Chinese government-subsidized imports of stainless steel sheet and strip into the U.S. market. We continue to monitor imports from foreign producers for appropriate action.
hot-rolling third-party conversion services.
Raw Materials and Supplies
Substantially all raw materials and supplies required in the manufacture of our products are available from more than one supplier, and the sources and availability of raw materials essential to our businesses are currently adequate. The principal raw materials we use in the production of our specialty materials are scrap (including iron-, nickel-, chromium-, titanium-, and molybdenum-bearing scrap), nickel, titanium sponge, zirconium sand and sponge, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, manganese and manganese alloys, cobalt, niobium, vanadium and other alloying materials.
Purchase prices of certain principal raw materials have been volatile. As a result, our operating results may be subject to significant fluctuation, particularly in the Flat Rolled Products segment. We use raw material surcharge and index mechanisms to offset the impact of changes in raw material costs; however, competitive factors in the marketplace may limit our ability to institute such mechanisms. There can be a delay between the change in the price of raw materials and the impact of such mechanisms. For example, in 2017 we used approximately 100 million pounds of nickel; therefore a hypothetical change of a $1.00 per pound increase in nickel prices would result in increased costs of approximately $100 million. We also used approximately 400 million pounds of ferrous scrap in the production of our flat-rolled products; a hypothetical change of a $0.01 per pound increase would result in increased costs of approximately $4 million. While we enter into raw materials futures contracts from time-to-timetime 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.
In 2016, we indefinitely idled our Rowley, UT titanium sponge production facility. Over the last several years, significant global capacity has been added to produce titanium sponge, which is a key raw material used to produce ATI’s titanium products. In addition, demand for industrial-grade titanium products from global markets continues to be weak. As a result of these factors, titanium sponge, including aerospace quality sponge, can be purchased from qualified global producers under long-term supply agreements at prices below ATI’s production costs at its Rowley, UT facility. ATI has entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge. The lower cost titanium sponge purchased under these supply agreements replaces the titanium sponge produced at the Rowley facility.
Other raw materials, such as nickel, cobalt, and ferrochromium, are available to us and our specialty materials industry competitors primarily from foreign sources. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which could disrupt supplies or affect the price of these materials.
We purchase our nickel requirements principally from producers in Australia, Canada, Norway, Russia, and the Dominican Republic. Zirconium raw materials are primarily purchased from the United States and China. Cobalt is purchased primarily from producers in Canada. More than 80% of the world’s reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. Niobium is purchased principally from producers in Brazil, and our titanium sponge comes from sources in KazakhstanJapan and Japan.Kazakhstan.
Certain key supplies used in melting and other processing operations, such as graphite electrodes and industrial gases including helium and argon, are from time-to-time limited in availability and may be subject to significant price inflation. We enter into long-term supply contracts where possible to ensure an adequate supply of these items, however, overall industry shortages may impact our operations and scheduling.
Export Sales and Foreign Operations
International sales representedrepresent approximately 41%40% of our total annual sales, in 2017 and 2016, and 42% of our total sales in 2015. These figures includewith direct export sales by our U.S.-based operations to customers in foreign countries which accountedaccounting for approximately 31%30% of our total sales in 2017 and 2016, and 33% of our total sales in 2015.sales. Our overseas sales, marketing and distribution efforts are aided by our international marketing and distribution offices, ATI Europe, ATI Europe Distribution, and ATI Asia, or by independent representatives at various locations throughout the world. We believe that at least 50% of ATI’s 20172020 sales were driven by global markets when we consider exports of our customers. Sales by geographic area in 2017, and as a percentage of total sales, were as follows:
|
| | | | | | | |
| (In millions) | | | | |
| United States | | $ | 2,070.6 |
| | 59 | % |
| Europe | | 767.9 |
| | 21 | % |
| Asia | | 457.8 |
| | 13 | % |
| Canada | | 99.8 |
| | 3 | % |
| South America, Middle East and other | | 129.0 |
| | 4 | % |
| Total sales | | $ | 3,525.1 |
| | 100 | % |
Our HPMC segment has manufacturing capabilities for melting, remelting, forging and finishing nickel-based alloys and specialty alloys in the United Kingdom, and manufacturing capabilities for precision forging and machining in Poland, primarily serving the aerospace, construction & mining and transportation markets. Within our FRPAA&S segment, our STAL joint venture in the People’s Republic of China produces Precision Rolled StripPRS products, which enables us to offer these products
more effectively to markets in China and other Asian countries. Our Uniti LLC joint venture allows us to offer titanium products to global industrial markets more effectively.
Backlog, Seasonality and Cyclicality
Our backlog of confirmed orders was approximately $2.1$1.4 billion at December 31, 20172020 and $1.7$2.3 billion at December 31, 2016.2019. We expect that approximately 90%75% of confirmed orders on hand at December 31, 20172020 will be filled during the year ending December 31, 2018.2021. Our HPMC’s segmentHPMC segment’s backlog of confirmed orders was approximately $1.9$1.0 billion at December 31, 20172020 and $1.6$1.8 billion at December 31, 2016.2019. We expect that approximately 90%70% of the confirmed orders on hand at December 31, 20172020 for this segment will be filled during the year ending December 31, 2018.2021. Our FRP’s segmentAA&S segment’s backlog of confirmed orders was approximately $0.2$0.4 billion at December 31, 20172020 and $0.1$0.5 billion at December 31, 2016.2019. We expect that allapproximately 95% of the confirmed orders on hand at December 31, 20172020 for this segment will be filled during the year ending December 31, 2018.2021.
Generally, our sales and operations are not seasonal. However, demandDemand for our products is cyclical over longer periods because specialty materials customers operate in cyclical industries and are subject to changes in general economic conditions and other factors both external and internal to those industries. The HPMC segment typically experiences modest seasonal weakness in the third quarter of each fiscal year due to many European customers, particularly in the aerospace supply chain, taking plant outages during this summer period. ATI also typically performs corresponding annual preventative maintenance outages at several facilities during this same period.
Cybersecurity
The Company recognizes the increasing significance that cybersecurity has to our operations and the success of our business and the need to continually assess cybersecurity risk and evolve our response in the face of a rapidly and ever-changing environment. We appointed a Chief Digital and Information Officer in 2019 and, to enhance an already comprehensive cybersecurity program, appointed a Chief Information Security Officer to lead our efforts to address and mitigate digital technology risks in partnership with ATI’s business leaders.
In 2020, the need to ensure cybersecurity while enabling a comprehensive and highly reliable remote working environment for a significant portion of our workforce was a central component of our response to the COVID-19. Throughout 2020, special attention was and continues to be given to improving and implementing Cybersecurity Maturity Model Certification controls in support of protecting ATI’s technology and customer data.
Additionally, we have a robust Cybersecurity Incident Response Plan in place which provides a documented framework for handling high severity security incidents and facilitates coordination across multiple parts of the Company. We routinely perform simulations and drills at both a technical and management level. We incorporate external expertise and reviews in all aspects of our program, and all personnel receive regular cybersecurity awareness training.
As part of its program of regular oversight, the Company’s Audit Committee is responsible for overseeing ATI’s cybersecurity risk. The Audit Committee receives quarterly reports from the Chief Digital and Information Officer and the Chief Information Security Officer on ATI’s cybersecurity risk profile and enterprise cybersecurity program.
Research, Development and Technical Services
We believe that our research and development capabilities give ATI an advantage in developing new products and manufacturing processes that contribute to the long-term profitable growth potential of our businesses. We conduct research
and development at our various operating locations both for our own account and, on a limited basis, for customers on a contract basis. Research and development expenditures for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 included the following:
| | | (In millions) | | 2017 | | 2016 | | 2015 | (In millions) | | 2020 | | 2019 | | 2018 |
| Company-Funded: | | | | | | | Company-Funded: | | | | | | |
| High Performance Materials & Components | | $ | 9.3 |
| | $ | 10.9 |
| | $ | 10.0 |
| High Performance Materials & Components | | $ | 7.7 | | | $ | 8.2 | | | $ | 12.0 | |
| Flat Rolled Products | | 2.7 |
| | 3.6 |
| | 4.0 |
| |
| Advanced Alloys & Solutions | | Advanced Alloys & Solutions | | 5.3 | | | 7.4 | | | 8.2 | |
| Corporate | | 1.3 |
| | 0.2 |
| | 0.2 |
| Corporate | | 1.1 | | | 2.2 | | | 2.5 | |
| | | 13.3 |
| | 14.7 |
| | 14.2 |
| | 14.1 | | | 17.8 | | | 22.7 | |
| Customer-Funded: | | | | | | | Customer-Funded: | | | | | | |
| High Performance Materials & Components | | 1.4 |
| | 2.2 |
| | 1.5 |
| High Performance Materials & Components | | 0.7 | | | 2.4 | | | 2.2 | |
| Total Research and Development | | $ | 14.7 |
| | $ | 16.9 |
| | $ | 15.7 |
| Total Research and Development | | $ | 14.8 | | | $ | 20.2 | | | $ | 24.9 | |
Our research, development and technical service activities are closely interrelated and are directed toward development of new products, improvement of existing products, cost reduction, process improvement and control, quality assurance and control, development of new manufacturing methods, and improvement of existing manufacturing methods. The increased activity in 2019 and 2018 was largely related to materials and manufacturing methods for products supporting the aerospace & defense markets. The decline in 2020 reflects the weakened market conditions due to the COVID-19 pandemic.
We own hundreds of United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as our numerous trademarks, technical information, license agreements, and other intellectual property, have been and are expected to be of value, we believe that the loss of any single such item or technically related group of such items would not materially affect the conduct of our business.
Environmental, Health and Safety Matters
We are 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 we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines, civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.
We consider environmental compliance to be an integral part of our operations. We have a comprehensive environmental management and reporting program that focuses on compliance with applicable federal, state, regional and local environmental laws and regulations. Each operating company has an environmental management system that includes mechanisms for regularly evaluating environmental compliance and managing changes in business operations while assessing environmental impact.
Our Corporate Guidelines for Business Conduct and Ethics address compliance with environmental laws as well as employment and workplace safety laws, and also describe our commitment to equal opportunity and fair treatment of employees. We continued to focus on safety across ATI’s operations during 2017. Our 2017 OSHA Total Recordable Incident Rate was 2.36 and our Lost Time Case Rate was 0.54, which we believe to be competitive with world-class performance for our industry.
EmployeesHuman Capital Resources
We have approximately 8,600 full-time6,500 active employees, of which approximately 15%20% are located outside the United States. Approximately 40% of our workforce is covered by various collective bargaining agreements (CBAs), predominantly with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW). CBA’sThe Company’s CBA with the USW involving approximately 1,100 active full-time represented employees located primarily within the AA&S segment operations expired on February 29, 2020. On March 25, 2020, the Company announced an agreement with the USW that cover approximately 600 employeesextended the terms of the expired CBA for one year, to February 28, 2021.
We believe that world-class leadership and fostering a culture that enables us to build and grow a talented engaged team through career development and opportunities is foundational to our vision. We recognize that attracting, retaining and developing members of our workforce is a key to the success and sustainability of our business.
We continuously strive to cultivate and support a highly engaged and productive workforce. As a result, management focuses on a number of human capital measures and objectives, which include the following:
Talent Acquisition: We partner closely with a targeted number of colleges and universities specifically known for programs that are relevant to our business in 2017,order to identify materials science, STEM expertise and operations continue at these facilities while negotiationsother relevant talent, and have developed similar partnerships with the USW are ongoing.high schools and relevant trade schools. In addition, we engage with external professional recruiting firms to enhance our recruiting efforts for key positions. We utilize pre-employment assessment tools to identify qualified candidates who we believe would adapt well to our culture and be most suited to a particular opportunity. We are also actively engaged with campus and professional diversity groups. We pride ourselves on our ability to attract and retain U.S.
military veterans, who comprise approximately 5% of our leadership team and approximately 9% of our total employee population as of the Company has CBAsend of 2020.
Professional Development: We offer a number of programs to our employees intended to support development of the skills each employee needs for success in his or her current position and for future career growth. One of these programs is our Global Leadership Development Program, our Company-wide, flagship program designed to build the skills of our employees across each level of leadership. We also have an Early Career Leadership Development Program, a five-year program designed for high-potential and motivated college graduates designed to prepare our future leaders.
Engagement and Performance Management: We actively seek opportunities for regular engagement and communication by our CEO and other senior executive leaders with approximately 300 full-timeour broader employee population. Annually, we conduct a confidential company-wide employee engagement survey with feedback from these surveys reviewed with our Board and used to develop and refine other aspects of our overall human capital management and other growth strategies. We also maintain a robust annual performance management process across the organization.
Succession Planning: We maintain a formal succession planning process and career mapping framework that is designed to work in connection with our performance management processes and ensure a systematic and ongoing dialog regarding career development and succession planning at both the individual employee level and more broadly at an enterprise level.
Retention: An output of our talent assessment process is a retention toolkit. This toolkit is designed to use both quantitative and qualitative inputs along with predictive analytics to inform our retention strategies.
Health & Safety: Safety is one of our core values. We strive for a Zero Injury Culture committed to the safety of our people, our products, and the communities in which we operate. Our 2020 OSHA Total Recordable Incident Rate was 0.87 per 200,000 hours and our Lost Time Case Rate was 0.21 per 200,000 hours, which we believe to be competitive with world-class performance for our industry. Also, at the end of 2020, 82% of ATI Operations are ISO 18001 or OSHAS 45001 certified. Our goal is to have every operation certified to ISO 18001 or OSHAS 45001 standards by the end of 2022.
Pandemic Response: In response to the COVID-19 pandemic, ATI formed a COVID-19 task force to respond to the various government orders, guidance, and issues facing our business and employees. Our operations are critical to ongoing demands and requirements of our customers and as an essential business, we continued to operate while many businesses were ordered to close. By quickly implementing plans and protocols for keeping our employees safe, we have had no widespread infection among our employees in any of our global locations.
Diversity & Inclusion: We recognize the benefits and importance of diversity amongst our board and management. Three of our 12 current board members, including our Board Chair, are women, and one member of our Board is an ethnic minority. Additionally, two of our eight Executive Council members are women- our Executive Vice President, HPMC and AA&S Segments and our Chief Human Resources Officer. We have adopted recruitment strategies to provide outreach and sourcing of diverse candidates. One of these strategies is to ensure that expire in 2018.one-third of the candidate slate is diverse.
Governance: Our Corporate Guidelines for Business Conduct and Ethics address employment and workplace safety laws, and also describe our commitment to equal opportunity and fair treatment of employees.
Available Information
Our Internet website address is www.atimetals.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy and information statements and other information that we file, are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the United States Securities and Exchange Commission (“SEC”). Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. You may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website at www.sec.gov, which also contains reports, proxy and information statements and other information that we file electronically with the SEC.
Item 1A. Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. See the discussion under “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
RISKS RELATED TO THE COVID-19 PANDEMIC
Impacts on the End-Markets that We Serve and Demand for Our Products. The COVID-19 pandemic, including governmental and other actions taken or restrictions imposed to contain its spread and impact, has subjected our operations, financial performance and financial condition to a number of risks including, but not limited to, those discussed below.
The significant macroeconomic impact of the ongoing COVID-19 pandemic and the measures designed to contain its spread have impacted several of the Company’s end markets. We are experiencing, and expect to continue to experience, lower demand and volume for certain products and services. Our sales to customers in markets that are affected by COVID-19 have been negatively impacted, and the possibility exists that there could be sustained impact to our operations and financial results. For example, a significant portion of the sales of our HPMC segment represents products sold to customers in the commercial aerospace industry. Several of our commercial aerospace customers announced cost-cutting and other measures in response to declining demand stemming from the COVID-19 pandemic, including facility shut-downs, measures to reduce inventory and/or downward adjustments to their stated production rates. Similarly, the energy market, including oil & gas, historically has been a significant end market for both our HPMC and AA&S segments. In recent years, our business has at times been negatively impacted by the downturn and slow recovery in the oil & gas industry. Energy demand, in general, is currently predicted to remain weak due in part to declines in consumer activity and other demand disruptions attributable to the pandemic. The ultimate breadth and duration of these actions and trends and their impact on our business is uncertain and difficult to predict.
Impacts to Our Supply Chain. Additionally, it is possible at some point that due to the pandemic, one or more of our suppliers may not have the materials, capacity, or capability to supply products that we require according to our schedule and specifications. To date, we have not experienced significant disruption to our supply chain. If our suppliers’ operations were to be impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our business, results of operations, financial condition and/or cash flows.
Risk of Operational Disruption. In general, our facilities have continued to operate with federal and state government approvals due to the qualification of our facilities as essential and critical. However, we have experienced and may again in the future experience the temporary shut down of facilities in response to employees being impacted by COVID-19 or changes in government policy. Furthermore, we have instituted a number of short-term idlings at certain manufacturing locations, and future idlings may occur, including as may be necessary to match our production levels to the reduced demand from our customers.
Impacts on Financial and Credit Markets. The current financial market dynamics and volatility pose heightened risks to our liquidity. For example, dramatically lowered interest rates and lower expected asset valuations and returns can materially impact the calculation of long-term liabilities such as our pension. Moreover, there can also be no assurance that we will not face credit rating downgrades as a result of weaker than anticipated performance of our businesses or other factors including overall market conditions. Future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets, and a significant downgrade could have an adverse commercial impact on our businesses. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding (including for receivables securitization or supply chain finance programs used to finance working capital) or our ability to refinance certain of our indebtedness, which could adversely affect our business, financial position, results of operations and/or cash flows.
RISKS RELATED TO CYCLICAL NATURE OF OUR BUSINESS
Cyclical Demand for Products. The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating potential uncertainty regarding future profitability. Various changes in general economic conditions may affect the industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products due to economic downturns. Other factors that may cause fluctuation in our customers’ positions are changes in market demand, lower overall pricing due to domestic and international overcapacity, currency fluctuations, lower priced imports and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation.
Risks Associated with the Commercial Aerospace Industry. A significant portion of the sales of our HPMC segment represents products sold to customers in the commercial aerospace industry. Fulfilling contractual arrangements to provide various products to customers in this industry often involves meeting highly exacting performance requirements and product specifications, and our failure to meet those requirements and specifications on a timely and cost efficient basis could have a material adverse effect on our results of operations, business and financial condition. The commercial aerospace industry has historically been cyclical due to factors both external and internal to the airline industry. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, executionchanges in projected
build rates (including, e.g., the suspension in production of the Boeing 737 MAX aircraft and the decline in projected build rates for Boeing’s 737 MAX and 787 Dreamliner and for other commercial aircraft associated with the global COVID-19 pandemic that is expected to impact the industry for several years), price competition, and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation are influenced by these factors and therefore are difficult to predict with certainty. Demand for our products, particularly those produced in our HPMC segment, is subject to these cyclical trends. Although the commercial aerospace industry is currently experiencing a period of production expansion related to the introduction of next-generation enginesCyclical and aircraft, we cannot provide any assurance as to the ultimate magnitude or duration of this trend or its impact on our business. A downturnevent-driven downturns in the commercial aerospace industry hashave had, and may in the future have, an adverse effect on the prices at which we are able to sell our products, and our results of operations, business and financial condition could be materially adversely affected.
Risks Associated with the Oil & Gas Industry. The oil and& gas industry, which historically has been a significant end market for both our HPMC and FRP segments,ATI, is highly cyclical and subject to volatility as a result of worldwide economic activity and associated demand for oil and natural gas, anticipated future prices for oil and natural gas, fluctuation in the level of drilling activity, changes in applicable regulation, global geopolitical conditions and numerous other factors. Demand for our products are likewise subject to these trends. In recent years, our business has been negatively impacted by thea general downturn and slow recovery in the oil and& gas industry. While we believeindustry, which most recently has been further impacted by the COVID-19 pandemic’s negative effect on global economic activity. We expect that conditions in this end market are improving, and we are beginning to see positive impacts on our business as a result, we expect that it will remain a highly cyclical industry, and future downturns could have an adverse effect on the prices at which we are able to sell our products, and our results of operations, business and financial condition could be materially adversely affected.
Product Pricing. From time-to-time, reduced demand, intense competition and excess manufacturing capacity have resulted in reduced prices, excluding raw material surcharges, for many of our products. These factors have had and may have an adverse impact on our revenues, operating results and financial condition. Although inflationary trends in recent years have been moderate, during most of the same period, certain critical raw material costs, such as nickel, titanium sponge, cobalt, chromium, and molybdenum and scrap containing iron, nickel, titanium, chromium, and molybdenum have been volatile. While we have been able to mitigate some of the adverse impact of volatile raw material costs through raw material surcharges or indices to customers, rapid changes in raw material costs causes volatility in, and may adversely affect, our results of operations.
We change prices on certain of our products from time-to-time. The ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond our control. The benefits of any price increases may be delayed due to long manufacturing lead times and the terms of existing contracts.
RISKS RELATED TO THE RAW MATERIALS AND SUPPLIES THAT WE USE
Dependence on Critical Raw Materials Subject to Price and Availability Fluctuations. We rely to a substantial extent on third parties to supply certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical items are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable to us, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. In particular, we acquire certain important raw materials that we use to produce specialty materials, including nickel, zirconium, niobium, chromium, cobalt, vanadium and titanium sponge, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
Dependence on Critical Supplies Subject to Price and Availability Fluctuations. We rely on third parties for certain supplies, such as graphite electrodes and industrial gases including helium and argon that are critical to the manufacture of our products. Purchase prices and availability of these critical items are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical supplies on a timely basis, on price and other terms acceptable to us, or at all. If suppliers increase the price of these items, we may not have alternative sources of supply. The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages of critical supplies. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
Availability of Energy Resources. We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair our ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has 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.
Volatility of Raw Material Costs. Most of our inventory is valued utilizing the last-in, first-out (LIFO) costing methodology. Inventory of our non-U.S. operations is valued using average cost or first-in, first-out (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. 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. Generally, over time based on overall inflationary trends in raw materials, labor and overhead costs, the use of the LIFO inventory valuation method will result in a LIFO inventory valuation reserve, as the higher current period costs are included in cost of sales and the balance sheet carrying value of inventory is reduced.
The prices for many of the raw materials we use have been extremely volatile during the past several years. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a fall in raw material costs results in a benefit to operating results by reducing cost of sales and increasing the inventory carrying value, while conversely, a rise in raw material costs has a negative effect on our operating results by increasing cost of sales while lowering the carrying value of inventory.
Due primarily to persistent raw material deflation in prior years, we are in an unusual situation of having a LIFO inventory balance that exceeds replacement cost. In cases where inventory at FIFO cost is lower than the LIFO carrying value, a write-down of the inventory to market may be required, subject to a lower of cost or market evaluation. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not be less than net realizable value reduced by an allowance for a normal profit margin). 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.
Due to the long lead times required to manufacture many of our products, volatility in raw material prices exposes us to cash costs that may not be fully recovered through surcharge and index pricing mechanisms.
Product Pricing. From time-to-time, reduced demand, intense competitionOTHER OPERATIONAL AND STRATEGIC RISKS
Export Sales and excess manufacturing capacity have resulted in reduced prices, excluding raw material surcharges,International Trade Matters. We believe that export sales will continue to account for manya significant percentage of our products. These factors have hadfuture revenues. We also import certain raw materials that are important to our business, including nickel, zirconium, niobium, chromium, cobalt, vanadium and may have an adverse impact on our revenues, operating results and financial condition.
Although inflationary trends in recent years have been moderate, during most of the same period, certain critical raw material costs, such as nickel, titanium sponge, chromium,among others. Risks associated with such international trade include, among others: political and molybdenum and scrap containing iron, nickel, titanium, chromium, and molybdenum have been volatile. While we have been able to mitigate some ofeconomic instability, including weak conditions in the adverse impact of volatile raw material costs through raw material surcharges or indices to customers, rapidworld’s economies; accounts receivable collection; export controls; trade sanctions, changes in raw material costs causes volatilitylegal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely affect our results for the period in which they occur.
Additionally, changes in international trade duties and other aspects of operations.
We change pricesinternational trade policy, both in the U.S. and abroad, could materially impact our business. Moreover, tariffs, or other changes in U.S. trade policy, have resulted in and may continue to trigger, retaliatory actions by affected countries. Certain foreign governments have instituted or considered imposing trade sanctions on certain U.S. goods, or taking action to deny U.S. companies access to critical raw materials, in response to U.S. trade actions. A “trade war” of our products from time-to-time. The abilitythis nature or other governmental action related to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond our control. The benefits of any price increases may be delayed duetariffs or international trade agreements or policies has the potential to long manufacturing lead times and the terms of existing contracts.
Goodwill or Long-Lived Asset Impairments. We have various long-lived assets that are subject to impairment testing. We review the recoverability of goodwill annually, or more frequently whenever significant events or changes in circumstances indicate that the recorded goodwill of a reporting unit may be below that reporting unit’s fair value. Our businesses operate in highly cyclical industries, such as commercial aerospace and oil & gas, and as such, our estimates of future cash flows, market demand, the cost of capital, and forecasted growth rates and other factors may fluctuate, which may lead to changes in estimated fair value and, therefore, impairment charges in future periods. For the 2017 annual goodwill impairment evaluation, both of our reporting units with goodwill had fair values that were significantly in excess of carrying value. Additionally, we have a significant amount of property, plant and equipment and acquired intangible assets that may be subject to impairment testing, depending on factors such as market conditions, theadversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, facility utilization levels. Anythus, to adversely impact our businesses.
determination requiring the impairment of a significant portion of goodwill or other long-lived assets has had, and may in the future have, a negative impact on our financial condition and results of operations.
Risks Associated with Strategic Capital Projects.Projects and Maintenance Activities. From time-to-time, we undertake strategic capital projects in order to enhance, expand and/or upgrade our facilities and operational capabilities. For instance, over the last several years we have undertaken major expansions of our titanium and premium-melt nickel-based alloy, superalloy and specialty alloy production capabilities, and finished product commissioning of a new advanced hot-rolling and processing facility. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including a variety of market, operational, permitting, and labor-related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs or delays, our results of operations and financial position may be materially adversely affected. Additionally, we periodically undertake maintenance
Dependence on Critical Raw Materials Subject to Price
activities, routine or otherwise, involving facilities and Availability Fluctuations. We rely to a substantial extent on third parties to supply certain raw materialspieces of equipment that are criticalkey to the manufacture of our products. Purchase pricesoperations, and availability of these critical raw materialsit is possible that unanticipated maintenance needs, or unanticipated circumstances arising in connection with planned maintenance activities could result in equipment outages that are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable to us,longer, or at all.
If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extentcosts that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experienceexceed, those originally anticipated. Significant repair delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. Thisunanticipated costs associated with these activities could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
We acquire certain important raw materials that we use to produce specialty materials, including nickel, zirconium, niobium, chromium, cobalt, and titanium sponge, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials.
Availability of Energy Resources. We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair our ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has 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 effecta negative impact on our results of operations and financial condition.
Risks Associated with Environmental Matters. We are 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 we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites. We also could be subject to future laws and regulations that govern greenhouse gas emissions and various matters related to climate change and other air emissions, which could increase our operating costs.
With respect to proceedings brought under the federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party (PRP) at approximately 4042 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 2134 of these sites, and the potential loss exposure with respect to 128 individual sites is not considered to be material.
We are a party to various cost-sharing arrangements with other PRPs at many of the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements.
We believe that we operate our businesses in compliance in all material respects with applicable environmental laws and regulations. However, from time-to-time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws. When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. In many cases, we are not able to determine whether we are liable or if liability is probable or to reasonably estimate the loss or range of loss. Estimates of our 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 participation number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We intend to adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2017,2020, our reserves for environmental matters totaled approximately $12 million.$14 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition or results of operations.
Risks Associated with Current or Future Litigation and Claims. A number of lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial disputes, government contracting, employment matters, employee and retiree benefits, taxes, environmental matters, health and safety and occupational disease, and stockholder and corporate governance matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us, we do not believe that the disposition of any such pending matters is likely to have a material adverse effect on our 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 our results of operations for that period. Also, we can give no assurance that any other claims brought in the future will not have a material effect on our financial condition, liquidity or results of operations.
Labor Matters. We have approximately 8,600 full-time6,500 active employees, of which approximately 15%20% are located outside the United States. Approximately 40% of our workforce is covered by various collective bargaining agreements (CBAs),CBAs, predominantly with the USW. At various times, our CBAs expire and are subject to renegotiation. CBA’s with the USW that coverWe currently are involved in negotiation on our next significant CBA, which expires February 28, 2021 involving approximately 600 employees expired in 2017, and operations continue at these facilities while negotiations with the USW are ongoing. In addition, the Company has CBAs with approximately 3001,100 USW-represented active full-time employees that expire in 2018.located primarily within the AA&S segment operations. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A labor dispute, which could lead to a strike, lockout, or other work stoppage by the employees covered by one or more of the collective bargaining agreements, could have a material adverse effect on production at one or more of our facilities and, depending upon the length of such dispute or work stoppage,
on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements to replace those that expire.
Export Sales. We believe that export sales will continue to account for a significant percentage of our future revenues. Risks associated with export sales include: political and economic instability, including weak conditions in the world’s economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; trade duties; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely affect our results for the period in which they occur.
Risks Associated with Indebtedness. Our substantial indebtedness could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under our outstanding indebtedness. As of December 31, 2017, our total consolidated indebtedness was approximately $1.5 billion. This substantial level of indebtedness increases the risk that we may be unable to generate enough cash to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, our strategic growth initiatives and development efforts and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from taking advantage of business opportunities;
place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
In addition, the agreements that govern our current indebtedness contain, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.
Risks Associated with Retirement Benefits. At December 31, 2017, our U.S. qualified defined benefit pension plan (ATI Pension Plan) was approximately 76% funded as calculated in accordance with U.S. generally accepted accounting principles. Based upon current regulations and actuarial studies, we expect to make approximately a $40 million cash contribution to the ATI Pension Plan in 2018, and we currently expect to have average annual funding requirements of approximately $85 million for the next few years thereafter, using an expected 7.75% rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including potential changes to mortality tables with revised longevity estimates, and the performance of our pension trust assets. Depending on the timing and amount, a requirement that we fund the ATI Pension Plan could have a material adverse effect on our results of operations and financial condition.
Risks Associated with Acquisition and Disposition Strategies. We intend to continue to strategically position our businesses in order to improve our ability to compete. Strategies we employ to accomplish this may include seeking new or expanding existing specialty market niches for our products, expanding our global presence, acquiring businesses complementary to existing strengths, and continually evaluating the performance and strategic fit of our existing business units. From time-to-time, management holds discussions with management of other companies to explore acquisitions, joint ventures, and other business combination opportunities as well as possible business unit dispositions. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies, growth or other benefits anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions, changes in tax laws and a deterioration in domestic and foreign economic conditions.
Risks Associated with Information Technology. Information technology infrastructure is critical to supporting business objectives; failure of our information technology infrastructure to operate effectively could adversely affect our business. We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.
As we integrate, implement and deploy new information technology processes and information infrastructure across our operations, we could experience disruptions in our business that could have an adverse effect on our business, financial condition, results of operations and cash flow.
Cyber Security Threats. Increased global information technology threats, security requirements, vulnerabilities, and a rise in sophisticated and targeted international computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We believe that ATI faces the threat of such cyber attacks due to the markets we serve, the products we manufacture, the locations of our operations, and global interest in our technology. These risks may be exacerbated by the impact of the COVID-19 pandemic. Due to the evolving nature of cyber security threats, the scope and impact of any incident cannot be predicted. We continually work to strengthen our threat countermeasures, safeguard our systems and mitigate potential risks. Despite our efforts to fortify our cyber security and protect sensitive information and confidential and personal data, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification or destruction of proprietary and other key information, defective products, production downtimes, operational disruptions, and remediation costs, which in turn could adversely affect our reputation, competitiveness and results of operations.
Internal Controls Over Financial Reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles, and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.
Political and Social Turmoil. The war on terrorism as well as political and social turmoil could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers, and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business, financial condition and results of operations could be materially adversely affected.
Risks Associated with Government Contracts. Some of our operating units perform contractual work directly or indirectly for the U.S. Government, which requires compliance with laws and regulations relating to the performance of Government contracts. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) could be asserted against us related to our U.S. Government contract work. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations.
Political and Social Turmoil. The war on terrorism as well as political and social turmoil could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers, and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business, financial condition and results of operations could be materially adversely affected. RISKS ASSOCIATED WITH OUR INDEBTEDNESS; OTHER FINANCIAL AND FINANCIAL ACCOUNTING RISKS
Risks Associated with Indebtedness. Our substantial indebtedness could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under our outstanding indebtedness. As of December 31, 2020, our total consolidated indebtedness was approximately $1.6 billion. This substantial level of indebtedness increases the risk that we may be unable to generate enough cash to pay amounts due in respect of our indebtedness. Our substantial
indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
•make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
•increase our vulnerability to general adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, our strategic growth initiatives and development efforts and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict us from taking advantage of business opportunities;
•place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
In addition, the agreements that govern our current indebtedness contain, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.
In addition, our variable rate indebtedness, including loans outstanding from time to time under our Asset Based Lending (ABL) Credit Facility, may use London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the rate. In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that most, if not all, banks currently reporting information to set LIBOR will stop doing so at such time, which could either cause LIBOR publication to stop immediately or cause LIBOR’s regulator to announce the discontinuation of its publication. During any such transition period, LIBOR may perform differently than in the past. Consequently, LIBOR has been the subject of recent regulatory guidance and proposals for reform that could result in changes to the method by which LIBOR is calculated or in the use of alternate reference rates. Our ABL credit facility includes provisions intended to provide for such transitions, but the potential consequences of these changes cannot be fully predicted and could impact the cost of our variable rate indebtedness or the cost or value of other financial obligations or extensions of credit held by or due to us from time to time, which could adversely affect our financial condition.
Risks Associated with Retirement Benefits. At December 31, 2020, our U.S. qualified defined benefit pension plans were approximately 76% funded as calculated in accordance with U.S. generally accepted accounting principles. Based upon current regulations and actuarial studies, we expect to make approximately $87 million in cash contributions to the U.S. qualified defined benefit pension plans in 2021, and we currently expect to have average annual funding requirements of approximately $50 million for the next few years thereafter for these plans, using a 6.78% weighted average expected rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including the performance of our pension trust assets. Depending on the timing and amount, a requirement that we fund the U.S. qualified defined benefit pension plans could have a material adverse effect on our results of operations and financial condition.
Goodwill or Long-Lived Asset Impairments. We have various long-lived assets that are subject to impairment testing. We review the recoverability of goodwill annually, or more frequently whenever significant events or changes in circumstances indicate that the recorded goodwill of a reporting unit may be below that reporting unit’s fair value. Our businesses operate in highly cyclical industries, such as commercial aerospace and oil & gas, and as such, our estimates of future cash flows, market demand, the cost of capital, and forecasted growth rates and other factors may fluctuate, which may lead to changes in estimated fair value and, therefore, impairment charges in future periods. Additionally, we have a significant amount of property, plant and equipment and acquired intangible assets that may be subject to impairment testing, depending on factors such as market conditions, the demand for our products, and facility utilization levels. Any determination requiring the impairment of a significant portion of goodwill or other long-lived assets has had, and may in the future have, a negative impact on our financial condition and results of operations. In connection with our recent announcements regarding our plans to cease production of certain standard stainless sheet products, our 2020 results include $1,041.5 million of long-lived asset non-cash impairment charges, primarily related to our HRPF and certain stainless steel melting and finishing operations that are part of the AA&S segment’s Brackenridge, Pennsylvania operations. We also recognized an interim goodwill impairment charge of $287.0 million in the second quarter of 2020 for the partial impairment of goodwill at our Forged Products reporting unit in the HPMC segment based on changes in the timing and amount of expected cash flows resulting from lower projected revenues, including recent disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic, and the increasing uncertainty of near-term demand requirements of aero-engine and airframe markets based on government responses to the pandemic and ongoing interactions with customers.
Internal Controls Over Financial Reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles, and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal domestic facilities for our HPMC segment include melting operations and production facilities that perform processing and finishing operations. Domestic melting operations are located in Monroe and Bakers, NC, and Lockport, NY (vacuum induction melting, vacuum arc re-melt, electro-slag re-melt, plasma melting), Richland, WA (electron beam melting), and Albany, OR (vacuum arc re-melt). Production of high performance materials, most of which are in long product form, takes place at our domestic facilities in Monroe and Bakers, NC, Lockport, NY, Richburg, SC, Albany, OR, and Oakdale, PA. Our production of highly engineered forgings and machined components takes place at facilities in Cudahy and Coon Valley, WI, East Hartford, CT, Irvine, CA, and Billerica, MA. Metal alloy-based additive manufacturing for the aerospace & defense industries takes place in New Britain, CT.
Within the AA&S segment, our production of zirconium and related specialty alloys takes place at facilities located in Millersburg, OR and Huntsville, AL. Our production of highly engineered forgings, castings,Titanium melting operation are located in Richland, WA (electron beam melting), and machined components takes place at facilities in Cudahy and Coon Valley, WI, East Hartford, CT, Albany, OR Irvine, CA, Portland, IN, Lebanon, KY, Billerica, MA, and Salem, OR.
(vacuum arc re-melt). Our principal domesticAA&S locations for melting stainless steel and other flat-rolled specialty materials are located in Brackenridge and Latrobe, PA. Hot-rolling is performed at our domestic facilities in Brackenridge and Washington, PA. Finishing of our flat-rolled products takes place at our domestic facilities located in Brackenridge, Vandergrift, Washington, Rochester, Monaca, and Zelienople, PA, and in Waterbury, CT, New Bedford, MA, Louisville, OH, and Bridgeview, IL.
Substantially all of our properties are owned, and three of our properties are subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings.owned.
We also own or lease facilities in a number of foreign countries, including France, Germany, the United Kingdom, Poland, and the People’s Republic of China. We own and/or lease and operate facilities for melting and re-melting, machining and bar mill operations, and have laboratories and offices located in Sheffield, England. We own highly engineered forging and machining operations in Stalowa Wola, Poland. Through our STAL joint venture, we operate facilities for finishing Precision Rolled StripPRS products in the Xin-Zhuang Industrial Zone, Shanghai, China.
Our executive offices, located in PPG Place in Pittsburgh, PA, are leased.
Although our facilities vary in terms of age and condition, we believe that they have been well maintained and are in sufficient condition for us to carry on our activities. In 2020, various facilities experienced short-term outages in order to match demand patterns impacted by the COVID-19 pandemic. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these impacts.
Item 3. Legal Proceedings
From time-to-time, we become involved in various lawsuits, claims and proceedings relating to the conduct of our current and formerly owned businesses, including those pertaining to product liability, environmental, health and safety matters and occupational disease (including as each relates to alleged asbestos exposure), as well as patent infringement, commercial, government contracting, construction, employment, employee and retiree benefits, taxes, environmental, health and safety and occupational disease, and stockholder and corporate governance matters. While we cannot predict the outcome of any lawsuit, claim or proceeding, our management believes that the disposition of any pending matters is not likely to have a material adverse effect on our financial
condition or liquidity. The resolution in any reporting period of one or more of these matters, including those described above, however, could have a material adverse effect on our results of operations for that period.
Information relating to legal proceedings is included in Note 20.21. Commitments and Contingencies of the Notes to Consolidated Financial Statements and incorporated herein by reference.
Allegheny Technologies Incorporated and its subsidiary, ATI Titanium LLC (“ATI Titanium”), are parties to a lawsuit captioned US Magnesium, LLC v. ATI Titanium LLC (Case No. 2:17-cv-00923-DB) and filed in federal district court in Salt Lake City, UT, pertaining to a Supply and Operating Agreement between US Magnesium LLC (“USM”) and ATI Titanium
entered into in 2006 (the “Supply Agreement”). In 2016, ATI Titanium notified USM that it would suspend performance under the Supply Agreement in reliance on certain terms and conditions included in the Supply Agreement. USM subsequently filed a claim challenging ATI Titanium’s right to suspend performance under the Supply Agreement, claiming that such suspension was a material breach of the Supply Agreement and seeking monetary damages, and ATI Titanium filed a counterclaim for breach of contract against USM. In 2018, USM obtained leave of the court to add Allegheny Technologies Incorporated as a separate party defendant, and ATI Titanium filed a motion to dismiss the claim against Allegheny Technologies Incorporated, which the court denied on April 19, 2019. No trial date has been set by the court given the restrictions of the pandemic. While ATI intends to vigorously defend against and pursue these claims, it cannot predict their outcomes at this time.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock is traded on the New York Stock Exchange (symbol ATI). At February 1, 2018,5, 2021, there were 3,3202,562 record holders of Allegheny Technologies Incorporated common stock. We paid no cash dividends during 2020, 2019, 2018 or 2017. We paid a quarterly cash dividend of $0.08 per share of common stock outstanding for the first three quarters of 2016. Effective with the fourth quarter of 2016, our Board of Directors decided to suspend the quarterly dividend. 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. Our Asset Based Lending (ABL) Revolving Credit Facility restricts our ability to pay dividends in certain circumstances. For more information on the restrictions under our ABL facility, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity - Dividends.”
The ranges of high and low sales prices for shares of our common stock for the quarterly periods ended on the dates indicated were as follows:
|
| | | | | | | | | | | | | | | | |
| 2017 | | March 31 | | June 30 | | September 30 | | December 31 |
| High | | $ | 23.69 |
| | $ | 20.11 |
| | $ | 24.00 |
| | $ | 26.59 |
|
| Low | | $ | 15.61 |
| | $ | 14.54 |
| | $ | 16.51 |
| | $ | 21.01 |
|
|
| | | | | | | | | | | | | | | | |
| 2016 | | March 31 | | June 30 | | September 30 | | December 31 |
| High | | $ | 18.38 |
| | $ | 18.03 |
| | $ | 18.67 |
| | $ | 19.20 |
|
| Low | | $ | 7.08 |
| | $ | 10.93 |
| | $ | 12.27 |
| | $ | 13.15 |
|
Cumulative Total Stockholder Return
The graph set forth below shows the cumulative total stockholder return (i.e., price change plus reinvestment of dividends) on our common stock from December 31, 20122015 through December 31, 2017,2020, as compared to the S&P 500 Index, the S&P MidCap 400 Industrials Index and a Peer Group of companies. We have included the SPDR S&P Metals and Mining Index ETF because our stock price trading and volatility trends with the performance of that index. We believe that the Peer Group of companies, which is defined below, is representative of companies in our industry that have served similar markets during the applicable periods. The total stockholder return for the Peer Group is weighted according to the respective issuer’s stock market capitalization at the beginning of each period.Russell 2000 Index. The graph assumes that $100 was invested on December 31, 2012.2015. The stock performance information included in this graph is based on historical results and is not necessarily indicative of future stock price performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company / Index | | Dec 2015 | | Dec 2016 | | Dec 2017 | | Dec 2018 | | Dec 2019 | | Dec 2020 |
| ATI | | 100.00 | | 143.92 | | 218.09 | | 196.68 | | 186.65 | | 151.51 |
| S&P 500 Index | | 100.00 | | 111.96 | | 136.40 | | 130.42 | | 171.49 | | 203.04 |
| S&P MidCap 400 Industrials Index | | 100.00 | | 128.73 | | 159.04 | | 135.36 | | 180.77 | | 210.58 |
| | | | | | | | | | | | |
| Russell 2000 Index | | 100.00 | | 121.31 | | 139.08 | | 123.76 | | 155.35 | | 186.36 |
| Source: Standard & Poor’s | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Company / Index | | Dec 2012 | | Dec 2013 | | Dec 2014 | | Dec 2015 | | Dec 2016 | | Dec 2017 |
| ATI | | 100.00 | | 120.20 |
| | 119.45 |
| | 39.74 |
| | 57.18 |
| | 86.65 |
|
| S&P MidCap 400 Index | | 100.00 | | 133.50 |
| | 146.54 |
| | 143.35 |
| | 173.08 |
| | 201.20 |
|
| Peer Group | | 100.00 | | 133.12 |
| | 128.19 |
| | 103.05 |
| | 134.68 |
| | 150.55 |
|
| SPDR S&P Metals & Mining ETF | | 100.00 | | 94.62 |
| | 70.70 |
| | 34.98 |
| | 72.07 |
| | 87.33 |
|
| Source: Standard & Poor’s | | | | | | | | | | | | |
Peer Group companies for the cumulative five year total return period ended December 31, 2017 were as follows:
|
| | | | |
| | | | |
AK Steel Holding Corporation | | Materion Corp | | Steel Dynamics, Inc. |
Alcoa Inc. | | Nucor Corp. | | The Timken Company |
Carpenter Technology Corporation | | Precision Castparts Corp. | | Timken Steel Corporation |
Castle (A M) & Co. | | Reliance Steel & Aluminum Co. | | United States Steel Corporation |
Commercial Metals Company | | RTI International Metals, Inc. | | Universal Stainless & Alloy Products, Inc. |
Kennametal Inc. | | Schnitzer Steel Industries, Inc. | | Worthington Industries, Inc. |
Alcoa Inc. was included in the total stockholder return Peer Group through October 31, 2016 when it was separated into Alcoa Corp and Arconic Inc. Castle (A M) & Co. was included through August 31, 2017 when it was delisted. Precision Castparts Corp. was included through January 29, 2016 when it was acquired by Berkshire Hathaway Inc. RTI International Metals Inc. was included through July 22, 2015 when it was acquired by Alcoa Inc. Effective in 2014, The Timken Company spun off its steel business into a new public company, Timken Steel Corporation, which was included in the total stockholder return Peer Group starting on June 19, 2014 when it began trading.
Item 6. Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Revenue by Market: | | | | | | | | | | |
| Aerospace & Defense | | $ | 1,360.0 | | | $ | 2,130.4 | | | $ | 1,965.5 | | | $ | 1,718.1 | | | $ | 1,590.4 | |
| Energy* | | 618.9 | | | 796.9 | | | 780.7 | | | 610.4 | | | 513.4 | |
| Automotive | | 263.2 | | | 296.6 | | | 323.4 | | | 273.7 | | | 232.8 | |
| Electronics | | 177.7 | | | 163.2 | | | 156.9 | | | 151.6 | | | 109.7 | |
| Food Equipment & Appliances | | 159.2 | | | 205.8 | | | 244.9 | | | 226.0 | | | 172.2 | |
| Construction/Mining | | 142.0 | | | 195.0 | | | 226.0 | | | 192.9 | | | 160.6 | |
| Medical | | 119.1 | | | 172.4 | | | 183.1 | | | 183.0 | | | 195.8 | |
| Other | | 142.0 | | | 162.2 | | | 166.1 | | | 169.4 | | | 159.7 | |
| Total | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | | | $ | 3,525.1 | | | $ | 3,134.6 | |
*Includes the oil & gas, downstream processing, and specialty energy markets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Results of Operations: | | | | | | | | | | |
| Sales: | | | | | | | | | | |
| High Performance Materials & Components | | $ | 1,164.6 | | | $ | 1,978.5 | | | $ | 1,963.1 | | | $ | 1,704.8 | | | $ | 1,547.8 | |
| Advanced Alloys & Solutions | | 1,817.5 | | | 2,144.0 | | | 2,083.5 | | | 1,820.3 | | | 1,586.8 | |
| Total Sales | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | | | $ | 3,525.1 | | | $ | 3,134.6 | |
| EBITDA | | | | | | | | | | |
| High Performance Materials & Components | | $ | 129.6 | | | $ | 356.2 | | | $ | 360.3 | | | $ | 282.7 | | | $ | 221.0 | |
| Advanced Alloys & Solutions | | 115.0 | | | 172.6 | | | 206.4 | | | 155.6 | | | (48.1) | |
| Total segment EBITDA | | $ | 244.6 | | | $ | 528.8 | | | $ | 566.7 | | | $ | 438.3 | | | $ | 172.9 | |
| Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | | | $ | 247.7 | | | $ | (86.5) | | | $ | (734.0) | |
| Income tax provision (benefit) | | 77.7 | | | (28.5) | | | 11.0 | | | (6.8) | | | (106.9) | |
| Net income (loss) | | (1,559.6) | | | 270.1 | | | 236.7 | | | (79.7) | | | (627.1) | |
| Less: Net income attributable to noncontrolling interests | | 13.0 | | | 12.5 | | | 14.3 | | | 12.2 | | | 13.8 | |
| Net income (loss) attributable to ATI | | $ | (1,572.6) | | | $ | 257.6 | | | $ | 222.4 | | | $ | (91.9) | | | $ | (640.9) | |
| | | | | | | | | | |
| Basic net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 2.05 | | | $ | 1.78 | | | $ | (0.83) | | | $ | (5.97) | |
| | | | | | | | | | |
| Diluted net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 1.85 | | | $ | 1.61 | | | $ | (0.83) | | | $ | (5.97) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | | | | | | | | | | |
| As of and for the Years Ended December 31, | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Working capital | | $ | 1,412.7 | | | $ | 1,453.8 | | | $ | 1,409.8 | | | $ | 1,203.1 | | | $ | 1,057.8 | |
| Total assets | | 4,034.9 | | | 5,634.6 | | | 5,501.8 | | | 5,185.4 | | | 5,170.0 | |
| Long-term debt | | 1,550.0 | | | 1,387.4 | | | 1,535.5 | | | 1,530.6 | | | 1,771.9 | |
| Total debt | | 1,567.8 | | | 1,398.9 | | | 1,542.1 | | | 1,540.7 | | | 1,877.0 | |
| Cash and cash equivalents | | 645.9 | | | 490.8 | | | 382.0 | | | 141.6 | | | 229.6 | |
| Total ATI Stockholders’ equity | | 521.1 | | | 2,090.1 | | | 1,885.7 | | | 1,739.4 | | | 1,355.2 | |
| Noncontrolling interests | | 120.3 | | | 103.1 | | | 105.9 | | | 105.1 | | | 89.6 | |
| Total Stockholders’ equity | | 641.4 | | | 2,193.2 | | | 1,991.6 | | | 1,844.5 | | | 1,444.8 | |
| Dividends declared per common share | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 0.24 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Revenue by Market: | | | | | | | | | | |
| Aerospace & Defense | | $ | 1,718.1 |
| | $ | 1,590.4 |
| | $ | 1,514.0 |
| | $ | 1,446.3 |
| | $ | 1,394.5 |
|
| Oil & Gas | | 418.2 |
| | 280.8 |
| | 538.0 |
| | 752.3 |
| | 706.8 |
|
| Automotive | | 273.7 |
| | 232.8 |
| | 293.8 |
| | 414.4 |
| | 348.3 |
|
| Electrical Energy | | 192.2 |
| | 232.6 |
| | 368.1 |
| | 430.2 |
| | 459.4 |
|
| Medical | | 183.0 |
| | 195.8 |
| | 220.7 |
| | 211.0 |
| | 207.7 |
|
| Subtotal - Key Markets | | 2,785.2 |
| | 2,532.4 |
| | 2,934.6 |
| | 3,254.2 |
| | 3,116.7 |
|
| Food Equipment & Appliances | | 226.0 |
| | 172.2 |
| | 217.3 |
| | 248.8 |
| | 251.7 |
|
| Construction/Mining | | 192.9 |
| | 160.6 |
| | 226.3 |
| | 295.6 |
| | 287.5 |
|
| Electronics/Communication/Computers | | 151.6 |
| | 109.7 |
| | 126.4 |
| | 154.6 |
| | 153.1 |
|
| Transportation | | 83.8 |
| | 77.6 |
| | 129.5 |
| | 172.1 |
| | 136.3 |
|
| Other | | 85.6 |
| | 82.1 |
| | 85.5 |
| | 98.1 |
| | 98.2 |
|
| Total | | $ | 3,525.1 |
| | $ | 3,134.6 |
| | $ | 3,719.6 |
| | $ | 4,223.4 |
| | $ | 4,043.5 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | | | | | | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Results of Operations: | | | | | | | | | | |
| Sales: | |
| | | | | | | | |
| High Performance Materials & Components | | $ | 2,067.4 |
| | $ | 1,930.4 |
| | $ | 1,985.9 |
| | $ | 2,006.8 |
| | $ | 1,944.8 |
|
| Flat Rolled Products | | 1,457.7 |
| | 1,204.2 |
| | 1,733.7 |
| | 2,216.6 |
| | 2,098.7 |
|
| Total Sales | | $ | 3,525.1 |
| | $ | 3,134.6 |
| | $ | 3,719.6 |
| | $ | 4,223.4 |
| | $ | 4,043.5 |
|
| Segment operating profit (loss): | |
| | | | | | | | |
| High Performance Materials & Components | | $ | 246.4 |
| | $ | 168.7 |
| | $ | 157.1 |
| | $ | 234.8 |
| | $ | 159.6 |
|
| Flat Rolled Products | | 37.0 |
| | (163.0 | ) | | (241.9 | ) | | (47.0 | ) | | (147.8 | ) |
| Total segment operating profit (loss) | | $ | 283.4 |
| | $ | 5.7 |
| | $ | (84.8 | ) | | $ | 187.8 |
| | $ | 11.8 |
|
| Income (loss) from continuing operations before income taxes | | $ | (86.5 | ) | | $ | (734.0 | ) | | $ | (478.0 | ) | | $ | 1.5 |
| | $ | (154.8 | ) |
| Income tax benefit | | (6.8 | ) | | (106.9 | ) | | (112.1 | ) | | (8.7 | ) | | (63.6 | ) |
| Income (loss) from continuing operations | | (79.7 | ) | | (627.1 | ) | | (365.9 | ) | | 10.2 |
| | (91.2 | ) |
| Income (loss) from discontinued operations, net of tax | | — |
| | — |
| | — |
| | (0.6 | ) | | 252.8 |
|
| Net income (loss) | | (79.7 | ) | | (627.1 | ) | | (365.9 | ) | | 9.6 |
| | 161.6 |
|
| Less: Net income attributable to noncontrolling interests | | 12.2 |
| | 13.8 |
| | 12.0 |
| | 12.2 |
| | 7.6 |
|
| Net income (loss) attributable to ATI | | $ | (91.9 | ) | | $ | (640.9 | ) | | $ | (377.9 | ) | | $ | (2.6 | ) | | $ | 154.0 |
|
| Basic net income (loss) per common share | |
| | | | | | | | |
| Continuing operations attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | | $ | (0.02 | ) | | $ | (0.93 | ) |
| Discontinued operations attributable to ATI per common share | | — |
| | — |
| | — |
| | (0.01 | ) | | 2.37 |
|
| Basic net income (loss) attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | | $ | (0.03 | ) | | $ | 1.44 |
|
| Diluted net income (loss) per common share | |
| | | | | | | | |
| Continuing operations attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | | $ | (0.02 | ) | | $ | (0.93 | ) |
| Discontinued operations attributable to ATI per common share | | — |
| | — |
| | — |
| | (0.01 | ) | | 2.37 |
|
| Diluted net income (loss) attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | | $ | (0.03 | ) | | $ | 1.44 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts and ratios) | | | | | | | | | | |
| As of and for the Years Ended December 31, | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Working capital | | $ | 1,203.1 |
| | $ | 1,057.8 |
| | $ | 1,181.1 |
| | $ | 1,584.4 |
| | $ | 1,743.3 |
|
| Total assets | | 5,185.4 |
| | 5,170.0 |
| | 5,751.7 |
| | 6,571.7 |
| | 6,885.0 |
|
| Long-term debt | | 1,530.6 |
| | 1,771.9 |
| | 1,491.8 |
| | 1,498.2 |
| | 1,513.9 |
|
| Total debt | | 1,540.7 |
| | 1,877.0 |
| | 1,495.7 |
| | 1,516.0 |
| | 1,933.8 |
|
| Cash and cash equivalents | | 141.6 |
| | 229.6 |
| | 149.8 |
| | 269.5 |
| | 1,026.8 |
|
| Total ATI Stockholders’ equity | | 1,739.4 |
| | 1,355.2 |
| | 2,082.8 |
| | 2,598.4 |
| | 2,894.2 |
|
| Noncontrolling interests | | 105.1 |
| | 89.6 |
| | 101.6 |
| | 110.9 |
| | 100.5 |
|
| Total Stockholders’ equity | | 1,844.5 |
| | 1,444.8 |
| | 2,184.4 |
| | 2,709.3 |
| | 2,994.7 |
|
| Ratio of earnings to fixed charges | | — |
| | — |
| | — |
| | — |
| | — |
|
| Dividends declared per common share | | $ | — |
| | $ | 0.24 |
| | $ | 0.62 |
| | $ | 0.72 |
| | $ | 0.72 |
|
The information presented in Selected Financial Data should be read in conjunction with the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8. Financial Statements and Supplementary Data.
Results of operations include the following items for the years indicated:
2020: Pre-tax results include $1,132.1 million of restructuring and other charges, consisting primarily of $1,041.5 million of long-lived asset impairment charges predominantly related to our Brackenridge, PA operations, including the HRPF, $287.0 million for impairment of a portion of goodwill at our Forged Products operations, and $21.5 million for debt extinguishment on $203.2 million, or 71%, of the principal balance of the outstanding 4.75% Convertible Senior Notes due 2022 (2022 Convertible Notes). 2020 results also include a $77.7 million income tax provision primarily for valuation allowances on U.S. federal and state deferred tax assets.
2019: Results include a $91.7 million pre-tax gain on the sale of oil and gas rights in New Mexico, an $8.1 million pre-tax loss on the sale of two non-core forging facilities, a $6.2 million pre-tax gain on the sale of the Cast Products business, a $4.5 million pre-tax restructuring charge to streamline ATI’s salaried workforce, a $21.6 million pre-tax debt extinguishment charge for the full redemption of the $500 million, 5.95% Senior Notes due 2021 (2021 Notes), and an $11.4 million pre-tax joint venture impairment charge related to the A&T Stainless joint venture. 2019 results also include a $41.9 million net discrete tax benefit primarily related to the reversal of a substantial portion of our deferred tax valuation allowances.
2018: Results include a $15.9 million pre-tax gain on the sale of a 50% noncontrolling interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018.
2017: Results include a $114.4 million pre-tax goodwill impairment charge, a $37.0 million pre-tax and net of tax debt extinguishment charge for the full redemption of the $350.0 million, 9.375% Senior Notes due 2019 (2019 Notes), and $4.1 million of tax benefits from the 2017 Tax Cuts and Jobs Act legislation.
2016 results: Results include $538.5 million of pre-tax restructuring and other charges, primarily related to the indefinite idling of the Rowley, UT titanium sponge production facility. 2016 results also include $171.5 million in deferred tax valuation allowances which reduced the income tax benefit. Results
Total debt in 2020 reflects the issuance of operations in 2015 include $131.5$291.4 million of pre-tax net realizable value inventory reserves,3.5% Convertible Senior Notes due 2025 (2025 Convertible Notes), a portion of the proceeds of which arewere used to repurchase $203.2 million aggregate principal amount of the outstanding 2022 Convertible Notes, and an additional $100 million under the term loan portion of the ABL, which has a September 2024 maturity date. A portion of the 2025 Convertible Notes is required to offset ATI’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost, $216.3be separately accounted for as a component of stockholders’ equity as a result of the flexible settlement feature of these notes (See Note 12 in Item 8. “Financial Statements and Supplementary Data” for further explanation). Total debt in 2019 reflects the issuance of $350 million of pre-tax goodwill impairment, restructuring and inventory revaluation charges, and $74.55.875% Senior Notes due 2027, the proceeds of which were used, along with cash on hand, to redeem the $500 million of deferred tax valuation allowances, which reduced the income tax benefit. 2014 results from continuing operations include postretirement benefit curtailment and settlement gains of $25.5 million pre-tax. Results of operations in 2013 include $67.5 million of pre-tax restructuring charges, primarily related to asset impairments. Additionally, in 2013, we completed the sale of our tungsten materials business and after a strategic review, determined that we would exit our iron castings and fabricated components businesses. These three businesses are classified as discontinued operations. We received cash proceeds, net of transaction costs, of $600.9 million for the sale of the tungsten materials business, and recognized a $428.3 million pretax ($261.4 million after tax) gain which is reported in discontinued operations.
2021 Notes. Total debt in 2017 reflects the redemption of all $350.0$350 million aggregate principal amount of our 9.375% Senior Notes due 2019 Notes.(2019 Notes). In 2016, we issued $287.5 million of 4.75%2022 Convertible Senior Notes, due 2022 (2022 Convertible Notes), and added a $100.0$100 million term loan to our asset basedasset-based lending facility. A portion of the convertible note proceeds were used to make $250.0$250 million in contributions to the ATI Pension PlanU.S. qualified defined benefit pension plan in 2016 and 2017. In 2014, we repaid the remaining $397.5 million outstanding of our 4.25% Convertible Senior Notes due 2014. In 2013, we issued $500.0 million of 5.875% Senior Notes due in 2023 (currently bearing a 7.875% interest rate) (2023 Notes), the net proceeds of which were used for general corporate purposes.
Total ATI stockholders’ equity in 2020 significantly declined as a result of the net loss attributable to ATI in 2020 largely due to the goodwill and long-lived asset impairment charges discussed above. Total ATI stockholders’ equity in 2018 includes a $15.5 million increase to retained earnings for the cumulative effect of adoption of ASC 606, Revenue from Contracts with Customers (see Note 5 in Item 8. “Financial Statements and Supplementary Data” for further explanation). Total ATI stockholders’ equity in 2017 increased due to our issuance of 17 million shares of common stock at $24.00 per share before expenses in an underwritten registered public offering. This offering resulted in proceeds of $397.8 million, net of transaction costs, which were used to redeem all of ATI’s outstanding 2019 Notes. Stockholders’ equity changes include net increases (decreases)decreases of $(42.7)$128.4 million, $(60.6)$139.8 million, $(69.6)$141.4 million, $(266.5)$42.7 million, and $241.0$60.6 million for 2020, 2019, 2018, 2017, 2016, 2015, 2014 and 2013,2016, respectively, related to remeasurements of ATI’s retirement benefit obligations. In addition, ATI stockholders’ equity for 2020, 2019, 2018, 2017 and 2016 included a $8.8 million decrease, a $7.8 million increase, a $20.5 million decrease, a $16.8 million increase and a $45.6 million decrease, respectively, from income tax valuation allowances on amounts recorded in other comprehensive income.
For purposes of determining the ratio of earnings to fixed charges, earnings include pre-tax income (loss) from continuing operations plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on all indebtedness (including capitalized interest) plus that portion of operating lease rentals representative of the interest factor (deemed to be one-third of operating lease rentals). For the years ended December 31, 2017, 2016, 2015, 2014, and 2013 fixed charges exceeded earnings by $101.9 million, $750.2 million, $492.1 million, $7.1 million, and $192.8 million, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results or performance could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those described below. Net income (loss) and net income (loss) per share amounts referenced below are attributable to Allegheny Technologies Incorporated and Subsidiaries.
ATI Overview
ATI is a global manufacturer of technically advanced specialty materials and complex components. Our largest market ismarkets are aerospace & defense, representing approximately 50% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, electrical energy, medical,downstream processing, and automotive markets.specialty energy. In aggregate, these key markets represent about 80%70% of our revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique manufacturing and precision machining capabilities as well asprocess technologies, including our innovative new product development competence. Our capabilities range from alloy development to final production of highly engineered finished components. We are a leader in producing powders for use in next-generation jet engine forgings and 3D-printed aerospace products.
We operate inEffective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC), and Flat Rolled Products (FRP)Advanced Alloys & Solutions (AA&S). Over 75%All segment reporting information for 2020 and prior periods below reflect these two revised business segments. In addition, in the fourth quarter 2020, the Company changed its segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of 2017 HPMCsegment EBITDA is defined further below. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment sales were tolevel.
HPMC is comprised of the Specialty Materials and Forged Products businesses, as well as our ATI Europe distribution operations. The revised HPMC segment intensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace and& defense markets and nearly half of HPMC’s total sales areits revenue from products for commercial jet engines. Increasing demand for commercialCommercial aerospace products hashave been the main source of sales and segment operating profitEBITDA growth for HPMC over the last few years, and isare expected to continue to drive HPMC and overall ATI results for the next several years.years as demand from these markets recovers from reduced 2020 levels resulting from the COVID-19 pandemic. Other keymajor HPMC end markets include medical oil & gas, and electrical energy. HPMC produces converts and distributes a wide range of high performance materials, and components, and advanced metallic powder alloys made from nickel-based alloys and superalloys, titanium and titanium-based alloys, nickel-based alloys and superalloys, and a variety of other specialty metals. These materials are madematerials. Capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and 3D-printed aerospace products.
The new AA&S segment combines our Specialty Alloys & Components (SAC) business, including the primary titanium operations in a varietyRichland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product forms that include precision forgings, castings, machined parts and others.
Our FRP segment serves a diverse group of end markets, withlines, the oil & gas market, including chemical and hydrocarbon processing,60%-owned STAL joint venture, and the automotive market collectively representing over 40%Uniti and A&T Stainless 50%-owned joint ventures that are reported in AA&S segment results under the equity method of 2017 sales.accounting. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other majorimportant end markets for FRPAA&S include food processing equipmentautomotive and appliances, construction and mining, electronics, communication equipment and computers, and aerospace & defense. FRPelectronics. AA&S produces converts and distributes nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless steelproducts in a variety of product forms including plate, sheet, engineeredand strip products. On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and Precision Rolled Strip products.making certain capital investments to increase our focus on higher-margin products and our aerospace & defense end markets.
Overview of 20172020 Financial Performance
Sales in 2017 increased 13%2020 decreased 28%, to $3.53$2.98 billion, and gross profit margin increased 176%decreased 54%, to $449$293 million, compared to 2016. This marked2019, reflecting weakened market conditions resulting from the COVID-19 pandemic. Loss before taxes in 2020 included $1.1 billion of restructuring and other charges, $287 million of goodwill impairment charges, and $22 million in debt extinguishment charges. Results in 2020 also reflect a $78 million income tax provision primarily for valuation allowances on U.S. federal and state net deferred tax assets. The Company’s net loss in 2020 was $1.57 billion, or ($12.43) per share. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, compared to $439.4 million, or 10.7% of sales, for 2019. See the Financial Condition and Liquidity section of Management’s Discussion and Analysis for these non-GAAP definitions and calculations. Despite these weak market conditions, the Company maintained strong liquidity in 2020, ending the year with $646 million in cash and $950 million of total liquidity.
Revenues in our second year of more than doubling the prior year’s gross profit margin, demonstrating the benefits of prior restructuring actions, our ongoing focus on high-value products, and improved utilization of our manufacturing facilities. Total sales to our keylargest end markets, of aerospace & defense, oil & gas, electrical energy, medical, and automotive represented 79% of ATI’s 2017 sales. Sales to our largest end market, aerospace & defense, increased $128decreased $771 million, or 8%36%, over 2016,2019, and represented 49%46% of our 20172020 sales. International sales, including both U.S. exports and foreign sales from our foreign manufacturing operations, were $1.45$1.17 billion in 20172020 and represented 41%39% of total sales.
A summary of our results is as follows.
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Sales | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | |
| Gross profit | | $ | 292.8 | | | $ | 637.8 | | | $ | 630.3 | |
| Gross profit % of sales | | 9.8 | % | | 15.5 | % | | 15.6 | % |
| Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | | | $ | 247.7 | |
| Net income (loss) | | $ | (1,572.6) | | | $ | 257.6 | | | $ | 222.4 | |
| Diluted net income (loss) per common share | | $ | (12.43) | | | $ | 1.85 | | | $ | 1.61 | |
Our major accomplishments during 2020 include the following:
•We took decisive steps toward becoming a more profitable, aerospace & defense focused company. On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus on increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge PRS. As part of this strategic realignment, we intend to cease production of our low-margin standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the HRPF, and close various downstream finishing operations that were part of the standard stainless flow path. In connection with these changes, we plan to cease production activities at five locations by year-end 2021. We expect our AA&S segment revenues to decrease by approximately $450 million, compared to a 2019 baseline, once these strategic actions to exit standard stainless products are completed.
•These AA&S strategic actions resulted in $1,041.5 million of pre-tax, non-cash long-lived asset charges, primarily related to the Brackenridge operations, which do not impact the operating capabilities of the HRPF. Restructuring and other charges in 2020 across all ATI operations also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and medical benefits, and $17.4 million for pension and postretirement medical obligations for workforce right-sizing actions taken to date, and to be completed with the repositioning of the FRP business into a specialty rolled products portfolio.
•We expect annual cost savings from these 2020 charges to be approximately $90 million in 2021 and $100 million when fully implemented in 2023, with approximately 55% realized in cost of sales, with the remainder in selling, general and administrative expenses. Including these and other cost reduction actions taken in response to the rapid decline in demand experienced in 2020, we estimate our total structural cost reductions will be nearly $150 million annually.
•We generated $167 million in cash from operating activities in 2020, including a $157 million reduction in managed working capital. This strong operating cash flow result in an unprofitable year was accomplished even with $130 million in contributions to ATI’s U.S. defined benefit pension trust. As a result of our constant focus on our financial condition in a year of significant economic uncertainty, we ended the year with $646 million of cash on hand and $950 million of liquidity.
•In 2020, ATI issued $291 million aggregate principal amount of the 2025 Convertible Notes, and used the majority of the proceeds to repurchase approximately $203 million aggregate principal amount of the outstanding principal balance of our 2022 Convertible Notes. With those actions, we extended our debt maturity profile and now have substantially completedno significant debt maturities before mid-2023.
•We made further progress on our risk management strategy for retirement benefit obligations by completing an $86 million risk transfer through the purchase of an annuity contract with a nationally recognized insurance company. This annuity buyout removed 8% of plan participants, bringing the total pension participant reduction to more than 55% over the past eight years. In addition, we continued to reduce our net pension liability, which declined by nearly $60 million from year-end 2019, with strong asset performance and company contributions in 2020 offsetting declines in interest rates that increased the pension benefit obligation.
Results of Operations
2020 Compared to 2019
Results for 2020 were sales of $2.98 billion and loss before tax of $1,481.9 million, compared to sales of $4.12 billion and income before tax of $241.6 million in 2019. Results in 2019 included $95 million of sales and minimal segment operating profit related to the divested titanium investment castings and industrial forgings businesses. Our gross profit was $292.8
million, or 9.8% of sales, a $345.0 million decline compared to 2019, reflecting COVID-19 impacts. The 2020 results included $1,443.0 million of pretax charges, all of which are excluded from segment EBITDA and consisted of the following:
•$1,132.1 million of restructuring actions, and there were no additionalother charges,
•$287.0 million for impairment of a portion of goodwill at our Forged Products operations,
•$21.5 million for debt extinguishment on $203.2 million, or 71%, of the principal balance of the outstanding 2022 Convertible Notes, and
•$2.4 million of severance charges at our A&T Stainless joint venture.
The 2020 restructuring and other charges of $1,132.1 million predominantly related to the Company’s December 2020 announcement to cease production of standard stainless sheet products. These restructuring and other charges consisted of the following:
•$1,107.5 million of restructuring charges recorded on the consolidated statement of operations. These restructuring charges consist of $1,041.5 of non-cash long-lived asset impairment charges, $60.5 million of employee benefit costs for hourly and salary employees, and $5.5 million of other costs related to facility idlings.
•$17.4 million of termination benefits for pension and postretirement medical obligations related to facility closures from the standard stainless exit. These costs are classified within nonoperating retirement benefit expense in 2017. Resultsthe consolidated statements of operations.
•$7.2 million of other charges for 2017 include a $114inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, primarily related to the Albany, OR idled facility.
The 2019 results included the following pretax charges, all of which are excluded from segment EBITDA:
•$4.5 million goodwillrestructuring charge for severance obligations to streamline ATI’s salaried workforce, primarily to improve the cost competitiveness of the U.S.-based FRP business.
•$21.6 million for debt extinguishment on the $500 million 5.95% Senior Notes due 2021 (2021 Notes).
•$11.4 million impairment charge for our titanium castings business,A&T Stainless joint venture.
The goodwill impairment, restructuring charges and charges for inventory valuation reserves above are included in operating income (loss) on the consolidated statements of operations, which was an operating loss of $1,302.7 million for 2020, compared to operating income of $366.1 million for 2019.
Nonoperating items included a reduction in nonoperating retirement benefit expense of $11.5 million in 2020, compared to the prior year period, despite the $17.4 million in termination benefits related to facility closures discussed above. Other (nonoperating) income/expense for 2020 included $7.0 million of net losses from operating results of joint ventures accounted for under the equity method and $2.4 million of severance charges for our A&T Stainless joint venture. Other (nonoperating) income/expense for 2019 included $89.8 million in net gains from non-core asset sales, consisting of a $91.7 million gain to monetize oil and gas rights and a $37$6.2 million debt extinguishmentgain on the sale of the Company’s Cast Products business, partially offset by an $8.1 million loss on the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY. Results for 2019 also include an $11.4 million A&T Stainless joint venture impairment charge and $10.7 million of net losses from operating results of joint ventures accounted for under the early redemptionequity method. Equity method joint venture operating results are included in the results of our 2019 Notes. Business segment operating profit, which excludes these charges, was $283 million in 2017, a substantial improvement over 2016, with stronger operating performance in our HPMC segment and a return to profitability in our FRPthe AA&S segment.
We recordedResults for 2020 include a $4.1$77.7 million income tax charge primarily related to deferred tax asset valuation allowances on our U.S. federal and state tax attributes, due to re-entering a three-year cumulative loss position for our U.S. results during the year. Results in 2019 included a $28.5 million income tax benefit, as we determined as of December 31, 2019 that we were no longer in a three year cumulative loss position and a substantial portion of our income tax valuation allowances were no longer required, resulting in a $45.1 million discrete tax benefit. Net loss attributable to ATI was $1,572.6 million, or ($12.43) per share, in 2020, compared to net income attributable to ATI of $257.6 million, or $1.85 per share, for 2019. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, and $439.4 million, or 10.7% of sales, for 2019.
Results for 2020 reflect the continued weakened market conditions resulting from the COVID-19 pandemic. We maintained our solid cash and liquidity positions during 2020, and issued $291.4 million aggregate principal amount of new, five-year convertible debt in 2020 to partially retire our 2022 Convertible Notes while lowering cash interest costs and reducing future stockholder dilution. We also exercised our option to draw another $100 million term loan within our asset based lending credit facility. These actions are further discussed in the Financial Condition and Liquidity section of Management’s Discussion and Analysis.
As discussed above, at the start of 2020, ATI realigned its business segments to streamline operations and unlock synergies, and proactively implemented workforce reduction initiatives in the fourth quarter 2019 and again in 2020 in response to changed market conditions resulting from the COVID-19 pandemic to better match our cost structure to expected demand. To date, we
have reduced company-wide employment levels by approximately 1,400 people, or about 17% of our total workforce. To help further mitigate the financial impact from reduced aerospace and consumer demand levels stemming from the COVID-19 pandemic, we implemented cost reduction efforts throughout 2020 including the temporary idling of operations to reduce costs and inventory, salary reductions for a substantial portion of our staff, reductions in 401(k) benefits for nearly all employees, furlough of non-essential positions, and significant reductions in capital expenditures and corporate expenses. Most of these cost reduction efforts are expected to continue into 2021. These actions provide a strong foundation to respond to the economic challenges created by the COVID-19 pandemic. We will continue to evaluate our demand levels and operating rates and may take additional actions as warranted.
2019 Compared to 2018
Sales were $4.12 billion in 2019, compared to $4.05 billion in 2018. Sales increased 2% in 2019 compared to 2018, despite a 2% negative impact from business divestitures. The continuing sales growth was primarily the result of increased sales to the U.S. federalaerospace & defense markets. Income before tax law changeswas $241.6 million in 2019, compared to $247.7 million in 2018. Net income attributable to ATI in 2019 was $257.6 million, or $1.85 per share, compared to $222.4 million, or $1.61 per share, in 2018.
Results in 2019 include a $28.5 million income tax benefit, while 2018 results reflect $11.0 million of income tax expense. Through December 2017, and31, 2019, we continuecontinued to maintain valuation allowances for U.S. federal and state deferred taxes. Astaxes, and results in all periods include impacts from income taxes that differ from the applicable standard tax rate, primarily related to these income tax valuation allowances. At December 31, 2019, we determined that a resultsubstantial portion of these factorsincome tax valuation allowances were no longer required, and othera $45.1 million discrete tax attributes,benefit was recognized.
In 2019, we completed several strategic actions to improve future financial performance, liquidity and our net-of-tax losses do not reflectfinancial condition. These items noted below are excluded from business segment results unless otherwise noted.
During the typical tax benefits that would applysecond quarter of 2019, we completed the sale of two non-core forging facilities in our HPMC segment for $37 million. Sales from these two forging facilities in 2018 were $86 million. We received net cash proceeds of $33.0 million on the sale of this business and recognized an $8.1 million pre-tax loss in 2019, including $10.4 million of allocated goodwill. During the third quarter of 2019, we completed the sale of our Cast Products titanium investment castings business in our HPMC segment for $127 million. Cast Products’ sales were $105 million in 2018. We received net cash proceeds of $125.1 million on the sale of this business and recognized a $6.2 million gain in 2019. Results of these businesses are included in HPMC segment results to the pretax results.dates of their respective sale. See Note 8 of the Notes to Consolidated Financial Statements for further information on business divestitures.
During the second and third quarters of 2019, we recognized $91.7 million in cash gains on sales of certain oil and gas rights in Eddy County, NM. These oil and gas rights were initially acquired in 1972 along with land purchased by Teledyne, Inc., which later became part of ATI. The land was subsequently sold, with the Company retaining underlying oil and gas rights that it sold in 2019.
A summaryDuring the fourth quarter of our results is as follows:
|
| | | | | | | | | | | | |
| (Dollars in millions, except per share amounts) | | 2017 | | 2016 | | 2015 |
| Sales | | $ | 3,525.1 |
| | $ | 3,134.6 |
| | $ | 3,719.6 |
|
| Gross profit | | $ | 449.0 |
| | $ | 162.5 |
| | $ | 60.3 |
|
| Gross profit % of sales | | 12.7 | % | | 5.2 | % | | 1.6 | % |
| Segment operating profit (loss) | | $ | 283.4 |
| | $ | 5.7 |
| | $ | (84.8 | ) |
| Segment operating profit (loss) % of sales | | 8.0 | % | | 0.2 | % | | (2.3 | )% |
| Restructuring, goodwill impairment and other charges | | $ | (151.4 | ) | | $ | (538.5 | ) | | $ | (216.3 | ) |
| Loss before income taxes | | $ | (86.5 | ) | | $ | (734.0 | ) | | $ | (478.0 | ) |
| Net loss attributable to ATI | | $ | (91.9 | ) | | $ | (640.9 | ) | | $ | (377.9 | ) |
| Diluted net loss attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) |
20172019, a $4.5 million restructuring charge was a yearrecorded for severance obligations for the reduction of important milestones in our ongoing journeyapproximately 70 positions to deliver sustainable long-term profitable growth. In the HPMC segment, our next-generation, differentiated jet engine product mix continuedstreamline ATI’s salaried workforce, primarily to improve with salesthe cost competitiveness of these products up 35% compared to 2016, and our airframe titanium product shipments remained strong. Additionally, our FRP segment made significant progress in achieving sustainable profitability.
Our major strategic accomplishmentsthe U.S.-based Flat Rolled Products business. Also during 2017 include:
Signing strategic long-term agreements that are expected to drive our growth trajectorythe fourth quarter of 2019, we recorded an $11.4 million impairment charge for the next several years, including a long-term agreement with Pratt & Whitney to supply isothermal forgings and powder alloys for next-generation jet engines.
Taking important steps toward improving the capacity utilization of our FRP segment’s HRPF, most notably with the announced Allegheny & TsingshanA&T Stainless joint venture, including ATI’s share of a long-lived asset impairment charge recognized by the joint venture on the carrying value of its production facility in Midland, PA.
In the fourth quarter of 2019, we issued $350 million of 5.875% Senior Notes due 2027 (2027 Notes). Proceeds from the 2027 Notes and cash on hand were used to manufacture 60” wide stainless sheet,redeem the $500 million 5.95% Senior Notes due 2021 (2021 Notes), which is expectedhad a January 15, 2021 maturity date. A $21.6 million debt extinguishment charge was recorded as part of this action.
Results for 2019 included $67.7 million in other (non-operating) income, net on the consolidated statements of operations, which included the net loss on the sales of the Cast Products and industrial forgings businesses discussed above, gains to be formedmonetize oil and gas rights, an $11.4 million A&T Stainless joint venture impairment charge, and $10.7 million of net losses from operating results of joint ventures accounted for under the equity method. Equity method joint venture operating results are included in the first quarterresults of 2018.
Continuing to increase our capacity to produce advanced powder alloys for usethe AA&S segment. Other (non-operating) income, net in next-generation aerospace products, including additive manufacturing applications. Our nickel-based powder alloy expansion in North Carolina was completed and is expected to be commercially qualified in early 2018 and we recently announced plans forincluded a titanium powder expansion to be located$15.9 million pre-tax gain on the same site.sale of a 50% noncontrolling interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018.
Continuing to reposition ATI as
Results by Business Segment
We operated in two business segments during 2020, HPMC and AA&S, and management evaluates financial results on this basis. HPMC sales decreased in 2020 by 41%, driven by a growth-oriented aerospace & defense company. 49% of ATI’s 201742% decrease in sales were to the aerospace & defense markets, which comprise 81% of the sales in this segment, due to declines in demand for products to the commercial aerospace market ledresulting from the COVID-19 pandemic. Sales decreased 15% in 2020 in the AA&S segment, reflecting lower sales across most markets, particularly an 18% decline in sales to the aerospace & defense markets and a 20% decrease in energy market sales. HPMC sales increased in 2019 compared to 2018 by an 11%1%, despite a 5% decline from business divestitures, driven by a 4% increase in 2017sales to the aerospace & defense markets, which comprised 82% of the sales in this segment. Sales increased 3% in 2019 compared to 2018 in the AA&S segment, primarily due to 26% higher sales to the aerospace & defense markets, and a 13% increase in medical market sales, partially offset by declines in sales to most general industrial markets for standard stainless products. Overall, AA&S energy markets sales in 2019 were in line with 2018, with increases in sales of products for commercial aerospace jet engines, including a 35% increasespecialty energy offset by declines in product sales for next-generation engine applications. Through recent acquisitions, alloy development, internal growth strategies, and long-term supply agreements on current and next-generation aero-engines and airframes, we are well positioned with a fully qualified asset base to meet the expected multi-year growth in demand from the commercial aerospace market. Our HPMC segment’s isothermal and hot-die forge press utilization continues to improve to meet aerospace demand growth, including new market share gains.
De-levering the balance sheet in the fourth quarter 2017 through a common stock offering. In November 2017, we issued 17 million shares of common stock at $24.00 per share before expenses, and received proceeds of $397.8 million, net of transaction costs. Proceeds from the stock offering were used to redeem all $350 million aggregate principal amount of our 9.375% Senior Notes due 2019.
Maintaining a solid liquidity position, with $142 million in cash on hand, and $305 million of available borrowing capacity under our domestic asset based lending (ABL) facility. In 2017, we extended the duration of ABL, including the $100 million ABL term loan, to 2022, and improved the funded position of the ATI Pension Plan, the Company’s U.S. qualified defined benefit pension plan, with a $135 million cash contribution. As a result of the redemption of our 2019 Notes and these ABL actions, we have no significant debt maturities until 2021.
Continuing to make capital investments to support our growth initiatives, with $123 million of capital expenditures in 2017, including the previously-mentioned nickel alloy powder expansion, and the ongoing construction of our third Precision Rolled Strip manufacturing facility at our STAL joint venture in China. We are at the end of a significant, multi-year period of capital expansions, and expect our capital expenditures to be well below depreciation expense for the next several years.
Outlook
We expect continued revenue growth and operating margin improvement in our HPMC segment resulting from ongoing aerospace market demand growth and improved asset utilization. We expect 2018 HPMC segment sales growth to increase by a high single digit percentage compared to 2017, including double-digit sales growth in sales to the commercial jet engine market. Our focus continues to be on operational execution, continuous improvement initiatives, and on meeting the aerospace production expansion requirements. In addition, we anticipate that the 2017 financial challenges experienced in our castings business and expenses associated with the start-up and qualification of our new nickel alloys powder facility will provide meaningful HPMC segment operating profit improvement opportunities in 2018.
We expect the FRP segment to build on the operational improvements and product mix benefits achieved in 2017 and to improve operating margins year over year, however quarterly results may be volatile due to out-of-phase raw material surcharge impacts, timing of large project orders, and competitive market conditions. We expect the production ramp-up of the planned Allegheny & Tsingshan Stainless joint venture to meaningfully benefit second half 2018 FRP results.
We expect 2018 to be another step in our continuing journey toward our goals of long-term profitable growth and consistently earning a premium to our cost of capital. Cash generation from operations will remain a key focus throughout 2018. We do not expect to pay any significant U.S. federal or state taxes in 2018 due to net operating loss carryforwards, and we intend to carefully balance our working capital and other cash needs with the pace of our capital expenditure requirements and other obligations. Following the common stock offering and redemption of our 2019 Notes, we expect 2018 interest expense to be lower by approximately $32 million versus 2017. Defined benefit pension and postretirement benefit plan expenses for 2018 are expected to be lower by approximately $19 million compared to 2017.
Results of Operations
Sales were $3.53 billion in 2017, $3.13 billion in 2016, and $3.72 billion in 2015. The 13% sales increase in 2017 includes a 21% increase in FRP sales, primarily due to higher sales to the oil & gas market, which increased over 50% from prior year levels, and stronger shipments of both high-value and standard products due to higher operating levels. HPMC sales increased 7% in 2017, including a 9% increase in sales to the aerospace and defense market, which comprises over 75% of the sales in this segment. The 16% decrease in total 2016 ATI sales compared to 2015 was primarily the result of 31% lower FRP sales, largely as a result of the idling of commodity stainless steel operations in January 2016 and our exit from the grain-oriented electrical steel (GOES) market in April 2016.market.
Segment operating profitEBITDA was $283.4$244.6 million, or 8.0%8.2% of sales, in 2017,2020, compared to segment operating profitEBITDA of $5.7$528.8 million, or 0.2%12.8% of sales, in 2016,2019 and a segment operating loss of $84.8$566.7 million, or (2.3)%14.0% of sales, in 2015.2018. Our measure of segment operating profit (loss),EBITDA, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, closed operations expenses, theall effects of LIFO inventory accounting and any related changes in net realizable value (NRV) inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other expenses, charges for goodwill impairmentand asset impairments, restructuring and other charges, debt extinguishment charges and restructuring costs, if any. Total revenues and segment operating profit (loss)non-operating gains or losses. Results on our management basis of our two business segmentsreporting were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 31, | | December 31, | | December 31, |
| | | 2020 | 2019 | 2018 |
| Sales: | | | | | | |
| High Performance Materials & Components | | $ | 1,164.6 | | | $ | 1,978.5 | | | $ | 1,963.1 | |
| Advanced Alloys & Solutions | | 1,817.5 | | | 2,144.0 | | | 2,083.5 | |
| Total external sales | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | |
| | | | | | |
| EBITDA: | | | | | | |
| High Performance Materials & Components | | $ | 129.6 | | | $ | 356.2 | | | $ | 360.3 | |
| % of Sales | | 11.1 | % | | 18.0 | % | | 18.4 | % |
| Advanced Alloys & Solutions | | 115.0 | | | 172.6 | | | 206.4 | |
| % of Sales | | 6.3 | % | | 8.1 | % | | 9.9 | % |
| Total segment EBITDA | | 244.6 | | | 528.8 | | | 566.7 | |
| % of Sales | | 8.2 | % | | 12.8 | % | | 14.0 | % |
| | | | | | |
| LIFO and net realizable value reserves | | — | | | (0.1) | | | (0.7) | |
| Corporate expenses | | (40.9) | | | (65.3) | | | (57.3) | |
| Closed operations and other expenses | | (7.4) | | | (24.0) | | | (19.5) | |
| Total ATI Adjusted EBITDA | | 196.3 | | | 439.4 | | | 489.2 | |
| | | | | | |
| Depreciation & amortization | | (143.3) | | | (151.1) | | | (156.4) | |
| Interest expense, net | | (94.4) | | | (99.0) | | | (101.0) | |
| Restructuring and other charges | | (1,132.1) | | | (4.5) | | | — | |
| Impairment of goodwill | | (287.0) | | | — | | | — | |
| Joint venture restructuring and impairment charges | | (2.4) | | | (11.4) | | | — | |
| Gain on joint venture deconsolidation | | — | | | — | | | 15.9 | |
| Debt extinguishment charge | | (21.5) | | | (21.6) | | | — | |
| Gains on asset sales, net | | 2.5 | | | 89.8 | | | — | |
| Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | | | $ | 247.7 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | Revenue | | Operating Profit | | Revenue | | Operating Profit (Loss) | | Revenue | | Operating
Profit (Loss) |
| High Performance Materials & Components | | $ | 2,067.4 |
| | $ | 246.4 |
| | $ | 1,930.4 |
| | $ | 168.7 |
| | $ | 1,985.9 |
| | $ | 157.1 |
|
| Flat Rolled Products | | 1,457.7 |
| | 37.0 |
| | 1,204.2 |
| | (163.0 | ) | | 1,733.7 |
| | (241.9 | ) |
| Total ATI | | $ | 3,525.1 |
| | $ | 283.4 |
| | $ | 3,134.6 |
| | $ | 5.7 |
| | $ | 3,719.6 |
| | $ | (84.8 | ) |
Business segment results in 2017 exclude a $114.4 million pre-tax goodwill impairment charge for our ATI Cast Products business, and a $37.0 million debt extinguishment charge for the early redemption of our 2019 Notes. Business segment results in 2016 exclude $538.5 million in pre-tax charges for significant restructuring actions involving HPMC titanium operations and right-sizing actions across the FRP business. These restructuring charges were comprised of $471.3 million of long-lived asset impairments, primarily for the indefinitely idled Rowley, UT titanium sponge production facility, $43.0 million of facility closure costs and related inventory revaluations, and $24.2 million of severance charges and other employee benefit costs. Business segment results in 2015 exclude $347.8 million of pre-tax charges, which included a $126.6 million charge for goodwill impairment, $54.5 million of long-lived asset impairment charges, $131.5 million of net realizable value (NRV) inventory reserve charges, a $25.4 million charge to revalue non-PQ titanium sponge inventory based on current market prices, and $9.8 million of charges for severance actions and idling costs.
Pre-tax results were losses of $86.5 million in 2017, $734.0 million in 2016 and $478.0 million in 2015. The 2017 net loss attributable to ATI was $91.9 million, or $(0.83) per share, compared to a 2016 net loss attributable to ATI of $640.9 million, or
$(5.97) per share, and a 2015 loss attributable to ATI of $377.9 million, or $(3.53) per share. We recorded a $4.1 million tax benefit in 2017 as a result of the U.S. federal tax law changes in December 2017, and we continue to maintain valuation allowances for U.S. federal and state deferred taxes. Results in 2016 and 2015 include $171.5 million and $74.5 million, respectively, of charges for income tax valuation allowances on deferred tax assets. As a result of these factors and other tax attributes, our net-of-tax losses for all periods do not reflect the typical tax benefits that would apply to the pretax results.
Comparative information for our overall revenues (in millions) by end market, including divested businesses prior to sale, and their respective percentages of total revenues is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market | | 2020 | | 2019 | | 2018 |
| Aerospace & Defense: | | | | | | | | | | | | |
| Jet Engines- Commercial | | $ | 600.9 | | | 20 | % | | $ | 1,186.4 | | | 29 | % | | $ | 1,197.6 | | | 30 | % |
| Airframes- Commercial | | 410.8 | | | 14 | % | | 639.2 | | | 16 | % | | 555.9 | | | 14 | % |
| Defense | | 348.3 | | | 12 | % | | 304.8 | | | 7 | % | | 212.0 | | | 5 | % |
| Total Aerospace & Defense | | 1,360.0 | | | 46 | % | | 2,130.4 | | | 52 | % | | 1,965.5 | | | 49 | % |
| Energy: | | | | | | | | | | | | |
| Oil & Gas | | 365.7 | | | 12 | % | | 510.7 | | | 12 | % | | 546.2 | | | 13 | % |
| Specialty Energy | | 253.2 | | | 9 | % | | 286.2 | | | 7 | % | | 234.5 | | | 6 | % |
| Total Energy | | 618.9 | | | 21 | % | | 796.9 | | | 19 | % | | 780.7 | | | 19 | % |
| Automotive | | 263.2 | | | 9 | % | | 296.6 | | | 7 | % | | 323.4 | | | 8 | % |
| Electronics | | 177.7 | | | 6 | % | | 163.2 | | | 4 | % | | 156.9 | | | 4 | % |
| Food Equipment & Appliances | | 159.2 | | | 5 | % | | 205.8 | | | 5 | % | | 244.9 | | | 6 | % |
| Construction/Mining | | 142.0 | | | 5 | % | | 195.0 | | | 5 | % | | 226.0 | | | 6 | % |
| Medical | | 119.1 | | | 4 | % | | 172.4 | | | 4 | % | | 183.1 | | | 4 | % |
| Other | | 142.0 | | | 4 | % | | 162.2 | | | 4 | % | | 166.1 | | | 4 | % |
| Total | | $ | 2,982.1 | | | 100 | % | | $ | 4,122.5 | | | 100 | % | | $ | 4,046.6 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Market | | 2017 | | 2016 | | 2015 |
| Aerospace & Defense | | $ | 1,718.1 |
| | 49 | % | | $ | 1,590.4 |
| | 51 | % | | $ | 1,514.0 |
| | 41 | % |
| Oil & Gas | | 418.2 |
| | 12 | % | | 280.8 |
| | 9 | % | | 538.0 |
| | 14 | % |
| Automotive | | 273.7 |
| | 8 | % | | 232.8 |
| | 7 | % | | 293.8 |
| | 8 | % |
| Electrical Energy | | 192.2 |
| | 5 | % | | 232.6 |
| | 7 | % | | 368.1 |
| | 10 | % |
| Medical | | 183.0 |
| | 5 | % | | 195.8 |
| | 6 | % | | 220.7 |
| | 6 | % |
| Subtotal - Key Markets | | 2,785.2 |
| | 79 | % | | 2,532.4 |
| | 80 | % | | 2,934.6 |
| | 79 | % |
| Food Equipment & Appliances | | 226.0 |
| | 6 | % | | 172.2 |
| | 6 | % | | 217.3 |
| | 6 | % |
| Construction/Mining | | 192.9 |
| | 6 | % | | 160.6 |
| | 5 | % | | 226.3 |
| | 6 | % |
| Electronics/Computers/Communication | | 151.6 |
| | 4 | % | | 109.7 |
| | 4 | % | | 126.4 |
| | 3 | % |
| Other | | 169.4 |
| | 5 | % | | 159.7 |
| | 5 | % | | 215.0 |
| | 6 | % |
| Total | | $ | 3,525.1 |
| | 100 | % | | $ | 3,134.6 |
| | 100 | % | | $ | 3,719.6 |
| | 100 | % |
Comparative information for our major high-value and standard products, including divested businesses prior to sale, based on their percentages of our total revenues is as follows. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items in the AA&S segment as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales in the AA&S segment are excluded from this presentation.
| | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| High-Value Products | | | | | | |
| Nickel-based alloys and specialty alloys | | 33 | % | | 35 | % | | 33 | % |
| Titanium and titanium-based alloys | | 17 | % | | 18 | % | | 17 | % |
| PRS products | | 15 | % | | 12 | % | | 12 | % |
| Precision forgings, castings and components | | 14 | % | | 18 | % | | 20 | % |
| Zirconium and related alloys | | 9 | % | | 6 | % | | 5 | % |
| Total High-Value Products | | 88 | % | | 89 | % | | 87 | % |
| Standard Products | | | | | | |
| Total Standard Products | | 12 | % | | 11 | % | | 13 | % |
| Grand Total | | 100 | % | | 100 | % | | 100 | % |
Sales by geographic area (in millions), including divested businesses prior to sale, and as a percentage of total sales, were as follows:
|
| | | | | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 | | 2015 |
| High-Value Products | | | | | | |
| Nickel-based alloys and specialty alloys | | 28 | % | | 27 | % | | 28 | % |
| Precision forgings, castings and components | | 18 | % | | 18 | % | | 14 | % |
| Titanium and titanium-based alloys | | 17 | % | | 19 | % | | 17 | % |
| Precision and engineered strip | | 14 | % | | 13 | % | | 13 | % |
| Zirconium and related alloys | | 6 | % | | 8 | % | | 7 | % |
| Total High-Value Products, excluding GOES | | 83 | % | | 85 | % | | 79 | % |
| Grain-oriented electrical steel | | — | % | | 1 | % | | 4 | % |
| Total High-Value Products, including GOES | | 83 | % | | 86 | % | | 83 | % |
| Standard Products | | | | | | |
| Stainless steel sheet | | 9 | % | | 7 | % | | 8 | % |
| Specialty stainless sheet | | 4 | % | | 4 | % | | 6 | % |
| Stainless steel plate and other | | 4 | % | | 3 | % | | 3 | % |
| Total Standard Products | | 17 | % | | 14 | % | | 17 | % |
| Grand Total | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| United States | | $ | 1,809.1 | | | 61 | % | | $ | 2,454.6 | | | 58 | % | | $ | 2,348.1 | | | 58 | % |
| Europe | | 479.3 | | | 16 | % | | 800.0 | | | 22 | % | | 877.2 | | | 22 | % |
| Asia | | 516.6 | | | 17 | % | | 638.1 | | | 15 | % | | 602.1 | | | 15 | % |
| Canada | | 68.9 | | | 2 | % | | 106.3 | | | 2 | % | | 106.5 | | | 2 | % |
| Other | | 108.2 | | | 4 | % | | 123.5 | | | 3 | % | | 112.7 | | | 3 | % |
| Total sales | | $ | 2,982.1 | | | 100 | % | | $ | 4,122.5 | | | 100 | % | | $ | 4,046.6 | | | 100 | % |
Information with respect to our business segments is presented below.follows.
High Performance Materials & Components
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| Sales to external customers | | $ | 1,164.6 | | | (41) | % | | $ | 1,978.5 | | | 1 | % | | $ | 1,963.1 | |
| Segment EBITDA | | $ | 129.6 | | | (64) | % | | $ | 356.2 | | | (1) | % | | $ | 360.3 | |
| Segment EBITDA as a percentage of sales | | 11.1 | % | | | | 18.0 | % | | | | 18.4 | % |
| International sales as a percentage of sales | | 45.0 | % | | | | 47.3 | % | | | | 49.9 | % |
|
| | | | | | | | | | | | | | | | | | |
| (In millions) | | 2017 | | % Change | | 2016 | | % Change | | 2015 |
| Sales to external customers | | $ | 2,067.4 |
| | 7 | % | | $ | 1,930.4 |
| | (3 | )% | | $ | 1,985.9 |
|
| Segment operating profit | | $ | 246.4 |
| | 46 | % | | $ | 168.7 |
| | 7 | % | | $ | 157.1 |
|
| Segment operating profit as a percentage of sales | | 11.9 | % | | | | 8.7 | % | | | | 7.9 | % |
| International sales as a percentage of sales | | 47.0 | % | | | | 45.2 | % | | | | 43.1 | % |
20172020 Compared to 20162019
Sales for the HPMC segment in 2017 increased 7%2020 decreased 41%, to $2.07 billion.$1.16 billion, with declines across most major markets. Sales to the aerospace & defense market,markets, which is the largest end market forwere 81% of 2020 HPMC at 76% of total segment sales, were 9% higher. This was driven by an 11% increase42% lower, reflecting a 48% decrease in sales in 2017 to the commercial jet engineaerospace market, includingpartially offset by a 35% improvement24% increase in our salesgovernment defense sales. Sales of next-generationnext generation jet engine products represented 41% of total 2020 HPMC jet engine product sales, a reduction in this sales mix by 13% compared to 2016. Construction and mining market sales were 40% higher, and sales to oil & gas market increased 37% in 2017, both from low prior year demand2019 levels. Sales in the medical and energy markets were 44% and 31% lower, respectively. Results in 2019 included $95 million of sales related to the medical market declined 8% primarily due to increased competitiondivested titanium investment castings and industrial forgings businesses, resulting in MRI end uses, and sales to the electrical energy market decreased 12%.a 3% unfavorable impact from divestitures.
Comparative information for our HPMC segment revenues (in millions) by market,
including divested businesses prior to sale, the respective percentages of overall segment revenues for the years ended
20172020 and
2016,2019, and the percentage change in revenues by market for
20172020 is as follows:
| | | Market | | 2017 | | 2016 | | Change | Market | | 2020 | | 2019 | | Change |
| Aerospace & Defense: | | | | | | | | | | | | | Aerospace & Defense: | | | | | | |
| Jet Engines | | $ | 915.2 |
| | 44 | % | | $ | 823.3 |
| | 43 | % | | $ | 91.9 |
| | 11 | % | |
| Airframes | | 385.2 |
| | 19 | % | | 381.5 |
| | 20 | % | | 3.7 |
| | 1 | % | |
| Government Aerospace & Defense | | 268.5 |
| | 13 | % | | 234.4 |
| | 12 | % | | 34.1 |
| | 15 | % | |
| Jet Engines- Commercial | | Jet Engines- Commercial | | $ | 542.7 | | | 46 | % | | $ | 1,085.7 | | | 55 | % | | $ | (543.0) | | | (50) | % |
| Airframes- Commercial | | Airframes- Commercial | | 219.8 | | | 19 | % | | 389.7 | | | 20 | % | | (169.9) | | | (44) | % |
| Defense | | Defense | | 184.4 | | | 16 | % | | 148.7 | | | 7 | % | | 35.7 | | | 24 | % |
| Total Aerospace & Defense | | 1,568.9 |
| | 76 | % | | 1,439.2 |
| | 75 | % | | 129.7 |
| | 9 | % | Total Aerospace & Defense | | 946.9 | | | 81 | % | | 1,624.1 | | | 82 | % | | (677.2) | | | (42) | % |
| Energy: | | Energy: | |
| Oil & Gas | | Oil & Gas | | 37.3 | | | 3 | % | | 46.2 | | | 2 | % | | (8.9) | | | (19) | % |
| Specialty Energy | | Specialty Energy | | 68.9 | | | 6 | % | | 107.4 | | | 6 | % | | (38.5) | | | (36) | % |
| Total Energy | | Total Energy | | 106.2 | | | 9 | % | | 153.6 | | | 8 | % | | (47.4) | | | (31) | % |
| Medical | | 170.4 |
| | 8 | % | | 185.3 |
| | 10 | % | | (14.9 | ) | | (8 | )% | Medical | | 47.7 | | | 4 | % | | 85.4 | | | 4 | % | | (37.7) | | | (44) | % |
| Electrical Energy | | 113.1 |
| | 6 | % | | 129.1 |
| | 7 | % | | (16.0 | ) | | (12 | )% | |
| Oil & Gas | | 63.9 |
| | 3 | % | | 46.5 |
| | 2 | % | | 17.4 |
| | 37 | % | |
| Construction/Mining | | 51.3 |
| | 2 | % | | 36.7 |
| | 2 | % | | 14.6 |
| | 40 | % | Construction/Mining | | 18.6 | | | 2 | % | | 42.5 | | | 2 | % | | (23.9) | | | (56) | % |
| Other | | 99.8 |
| | 5 | % | | 93.6 |
| | 4 | % | | 6.2 |
| | 7 | % | Other | | 45.2 | | | 4 | % | | 72.9 | | | 4 | % | | (27.7) | | | (38) | % |
| Total | | $ | 2,067.4 |
| | 100 | % | | $ | 1,930.4 |
| | 100 | % | | $ | 137.0 |
| | 7 | % | Total | | $ | 1,164.6 | | | 100 | % | | $ | 1,978.5 | | | 100 | % | | $ | (813.9) | | | (41) | % |
Over the past several years, we have entered into long-term agreements (LTAs)We continue to extend and expand LTAs with certain of our customers for our specialty materials, in the form of mill products,including powders, parts and components, to reduce their supply uncertainty, including several LTAs with aerospace market OEMs. These LTAs are expected to continue to drive HPMC’s growth trajectory for the next several years and are for the sale of ATI’s specialty materials, parts and components that are required for both next-generation and legacy aircraft platforms, andincluding jet engines. Our LTAs include a titanium products supply agreement for aircraft airframes and structural components with The Boeing Company (Boeing), which extends into the next decade.. This LTA covers value-added titanium mill products and provides opportunity for greater use of ATI’s next generation and advanced titanium alloys in both long product and flat-rolled product forms, including highly engineered titanium cast and forged products. The agreement includes both long-product forms that are manufactured within the HPMC segment, and a significant amount of plate products that are manufactured utilizing assets of both the HPMC and FRPAA&S segments. Revenues and profits associated with these titanium products covered by the Boeing long-term agreement are included primarily in the results for the HPMC segment.
We also haveextended LTAs with GE Aviation in 2019 for the supply of premium titanium alloys, nickel-based alloys, and vacuum-melted specialty alloys products for commercial and military jet engine applications which begin in January 2021 and are multi-year agreements, and LTAs with Snecma (Safran) for the supply of premium titanium alloys, nickel-based alloys, and vacuum melted specialty alloys and titanium investment castings for commercial and military jet engine applications. In addition, we have LTAs with Rolls-Royce plc for the supply of nickel-based superalloy disc-quality products and precision forgings and castings for commercial jet engine applications. In 2017,2019, we entered into a new LTAextended our long-term agreement through 2029 with United Technologies CorporationRolls-Royce to supply its Pratt & Whitney subsidiaries with isothermal forgings and powder alloysrotating disc quality specialty materials for their Trent engine family. This agreement covers the production of a wide-range of critical products used to make Rolls-Royce’s next-generation
jet engines as well as spare parts for structural components for airframe applications.in-service engines. We also supply products to other important parts of the aviation market such as helicopters and rotary engine fixed wing aircraft.
The commercial aerospace market is transitioning to the next generation of single aisle and large twin aisle aircraft, and next-generation jet engines. New airframe designs contain a larger percentage of titanium alloys, and the jet engines that power them use newer nickel-based alloys and titanium-based alloys, in both cases for improved performance and more economical operating costs, compared to legacy airframe and engine designs.Even with the production delays and order cancellations that have occurred since the onset of the COVID-19 pandemic, Boeing and Airbus continue to have multi-year backlogs of orders for both legacy models and next-generation aircraft, and there arecontinue to be over 26,00025,000 jet engines with firm orders (Aero Engine News, February 2018)2021). Both Boeing and Airbus have implemented production increases, and announced additional production increases over the next several years, which is expected to positively impact the demand for titanium-based alloys, nickel-based alloys and superalloys for jet engine and airframe applications. Due to manufacturing cycle times, demand for our specialty materials leads the deliveries of new aircraftaircrafts by approximately 6 to 12 months.
Our 2017 HPMC results reflect this demand growth, as the next-generation of aircraft and engines use significantly more of the products we make. Sales of differentiated nickel-based superalloy mill products increased 35% in 2017 compared to 2016.
Use of these newer materials, particularly for jet engine applications, is expected to continue to increase for several years, with strong growth expected in powder metal alloys, including increased usage of isothermal forging and additive manufacturing production processes.
Additionally, new entrants to the commercial jet aircraft market for single aisle and regional jets are expected to increase demand for titanium- and nickel-based alloys over the next few years. In addition, as our specialty materials are used in rotating components of jet engines, demand for our products for spare parts is impacted by aircraft flight activity and engine refurbishment requirements of U.S. and foreign aviation regulatory authorities. As the number of aircraft in service increases, the need for our materials associated with engine refurbishment is expected to increase.
Our HPMC segment produces converts and distributes a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, zirconium and related alloys including hafnium and niobium, advanced powder alloys and other specialty materials, in long product forms such as ingot, billet, bar, rod, wire, shapes and rectangles, and seamless tubes, plus precision forgings, castings, components, and machined parts.
Precision forgings, castings and components sales increased 17% in 2017, reflecting improved commercial aerospace demand. Sales of nickel-based alloys increased 14% compared to 2016, while sales of titanium mill products were 6% lower in 2017. Comparative information for the segment’sHPMC’s major product categories, including divested businesses prior to sale, based on their percentages of 2017 and 2016 segment revenuesthe segment’s overall revenue is as follows: | | | For the Years Ended December 31, | | 2017 | | 2016 | For the Years Ended December 31, | | 2020 | | 2019 |
| High-Value Products | | | | | High-Value Products | | | | |
| Nickel-based alloys and specialty alloys | | Nickel-based alloys and specialty alloys | | 38 | % | | 38 | % |
| Precision forgings, castings and components | | 32 | % | | 29 | % | Precision forgings, castings and components | | 34 | % | | 36 | % |
| Nickel-based alloys and specialty alloys | | 31 | % | | 29 | % | |
| Titanium and titanium-based alloys | | 26 | % | | 29 | % | Titanium and titanium-based alloys | | 28 | % | | 26 | % |
| Zirconium and related alloys | | 11 | % | | 13 | % | |
| Total High-Value Products | | 100 | % | | 100 | % | Total High-Value Products | | 100 | % | | 100 | % |
HPMC segment operating profitEBITDA for 2017 increased 46%2020 decreased 64% to $129.6 million, or 11.1% of sales, compared to 2016, to $246.4$356.2 million, or 12%18.0% of sales, reflecting higher productivity from increasingin 2019. Lower overall demand, including lower sales of higher-margin next-generation jet engine products, and reduced asset utilization rates negatively impacted operating margins. Cost cutting measures helped to offset these negative impacts.
HPMC financial results experienced significant weakness in 2020 due to demand disruptions in the aerospace & defense sales,and energy markets as a richer mixresult of products for next-generation jet engines, which represented 39%the COVID-19 pandemic. Most production facilities operated at lower utilization rates, leading to cost inefficiencies, along with weaker profit margins due to intense market competition. Although we began to see signs of HPMC jet engine product salescommercial aerospace stabilization in 2017, and the benefit of our 2016 titanium operations restructuring activities, including the Rowley, UT titanium sponge operations idling. Through the fourth quarter of 2017, where HPMC segment operating profit was 12.7%2020, these market conditions are presently expected to continue through at least the first half of sales,2021 due to the HPMC segment has achieved six quartersCOVID-19 resurgence and low rates of improvement in segment operating margin of 140 basis points or greater versusglobal air passenger travel. For the priorfull year quarter. Segment results for 2016 included $5.3 million of non-recurring work stoppage2021, we are optimistic that the worst is behind us and returndemand will begin to work costs for represented employees at two HPMC facilities.
HPMC segment results excluderebound as COVID-19 vaccines are increasingly approved and administered around the Rowley, UT titanium sponge operations beginning with the third quarter 2016. During 2016, we completed significant restructuring actions involving certain titanium manufacturing operationsworld. We expect our demand to improve in the HPMC segment, which are excluded from segment results. These actions included the indefinite idlingsecond half of the Rowley, UT titanium spongeyear, led by increasing narrow-body engine production facility, as well as the closure of a small unprofitable titanium wire production facilityvolumes enhanced by ATI’s jet engine-related share gains and new business in Frackville, PA, and the idling of certain titanium manufacturing operations in Albany, OR.airframes.
We anticipate significant industry demand growth for advanced powder materials required to satisfy expanding aerospace and& defense market production requirements, and for emerging additive manufacturing of parts and components. To proactively meet this growing demandcomponents, and recently added new metal-alloy production capacity in 2018 and 2019 for complex powdernickel, superalloy, and titanium alloy products, ATI designed and built an all-new nickel and super alloy powder production facilitypowders. We acquired assets in North Carolina, which is in2018 to accelerate the final stages of industry and customer qualifications. HPMC 2017 results include $8 million of start-up costs for this facility. We recently announced an expansiondevelopment of our titanium alloys powdercapabilities in metal alloy-based additive manufacturing to provide comprehensive customer solutions ranging from the design of parts for additive manufacturing to the production capabilitiesof ready-to-install components. Ongoing strategic capital projects in HPMC to support future growth include the iso-thermal press and heat-treating capacity expansion at the same North Carolina site,our Iso-Thermal Forging Center of Excellence in Cudahy, WI, which is expected to be completedplaced into service in early 2019. Additionally,2021.
Despite near-term uncertainty posed by the ongoing COVID-19 pandemic impacts globally, we expect that the long-term fundamentals driving demand growth in July 2017, we formed Next Gen Alloys,commercial aerospace remain largely intact across a joint venture with GE Aviation, for the developmentrange of a new meltless titanium alloy powder manufacturing process that eliminates the traditional melt step used prior to converting base material to powder form. The JV will construct a new R&D pilot production facility to focus on increasing the scale of this GE-developed manufacturing process.
Competition continues to be very strong across most key end markets, particularly within the aerospace & defense, oil & gas,next-generation aircraft and medical market supply chains. engines.We believe that our HPMC segment is very well-positioned for profitable growth through the expected recovery in
commercial aerospace demand, especially in the next-generation jet engine platforms. Our HPMC segment is expected to continue sustained profitable growth, supported by long-term agreementsplatforms through LTAs that provide significant growth and share gains for ATI on next-generation airplanes and the jet engines that power them. We have sufficient available capacity for the forecasted growth in aerospace demand over the next several years, as well as the ability to meet higher demand for products to other key end markets such as oil & gas and electrical energy, when conditions for these markets improve.
20162019 Compared to 20152018
Sales for the HPMC segment in 2016 decreased 3%, to $1.93 billion,2019 increased 1% compared to 2015.2018, to $1.98 billion, despite a 5% negative impact from business divestitures. Sales to the aerospace & defense market,markets, which isare the largest end marketmarkets for HPMC at 75%82% of total segment sales, in 2016, were 5%4% higher, in 2016 compared to 2015,despite a 3% decline from divestitures. This was driven by a 16%20% increase in airframe sales and 29% increase in defense sales. Total 2019 commercial jet engine sales. However, other HPMC end markets continued to have weak demand in 2016, with lower year-over-year sales. Sales to the oil & gas market declined 57% in 2016sales decreased 3% when compared to 2015, as the continuing impact of low oil prices led2018, despite a 6% increase in next-generation jet engine products, due primarily to reduced demand for productsunfavorable product mix and temporary changes in order patterns from a major aero-engine customer. Energy market sales increased 15% versus 2018 due to thisexport sales into Asia while construction and mining market throughout the year.sales were 42% lower.
Comparative information for our HPMC segment revenues (in millions) by market, including divested businesses prior to sale, the respective percentages of overall segment revenues for the years ended 2019 and 2018, and the percentage change in revenues by market for 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market | | 2019 | | 2018 | | Change |
| Aerospace & Defense: | | | | | | | | | | | | |
| Jet Engines- Commercial | | $ | 1,085.7 | | | 55 | % | | $ | 1,121.5 | | | 57 | % | | $ | (35.8) | | | (3) | % |
| Airframes- Commercial | | 389.7 | | | 20 | % | | 325.9 | | | 17 | % | | 63.8 | | | 20 | % |
| Defense | | 148.7 | | | 7 | % | | 115.5 | | | 6 | % | | 33.2 | | | 29 | % |
| Total Aerospace & Defense | | 1,624.1 | | | 82 | % | | 1,562.9 | | | 80 | % | | 61.2 | | | 4 | % |
| Energy: | | | | | | | | | | | | |
| Oil & Gas | | 46.2 | | | 2 | % | | 52.3 | | | 3 | % | | (6.1) | | | (12) | % |
| Specialty Energy | | 107.4 | | | 6 | % | | 81.6 | | | 4 | % | | 25.8 | | | 32 | % |
| Total Energy | | 153.6 | | | 8 | % | | 133.9 | | | 7 | % | | 19.7 | | | 15 | % |
| Medical | | 85.4 | | | 4 | % | | 106.0 | | | 5 | % | | (20.6) | | | (19) | % |
| Construction/Mining | | 42.5 | | | 2 | % | | 72.7 | | | 4 | % | | (30.2) | | | (42) | % |
| Other | | 72.9 | | | 4 | % | | 87.6 | | | 4 | % | | (14.7) | | | (17) | % |
| Total | | $ | 1,978.5 | | | 100 | % | | $ | 1,963.1 | | | 100 | % | | $ | 15.4 | | | 1 | % |
Stronger demand for titanium and nickel-based products, sales of which increased 12% and 4%, respectively, in 2019 compared to 2018, were partially offset by declines in sales of forged products. Comparative information for HPMC’s major product categories, including divested businesses prior to sale, based on their percentages of the segment’s overall revenue is as follows:
| | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2019 | | 2018 |
| High-Value Products | | | | |
| Nickel-based alloys and specialty alloys | | 38 | % | | 37 | % |
| Precision forgings, castings and components | | 36 | % | | 40 | % |
| Titanium and titanium-based alloys | | 26 | % | | 23 | % |
| Total High-Value Products | | 100 | % | | 100 | % |
HPMC segment EBITDA for 2019 decreased 1% compared to 2018, to $356.2 million, or 18.0% of sales. As the year progressed, results reflected a better balance of raw material prices and index-based selling prices, however, the first half of 2019 reflected adverse impacts from a rapid drop in raw material prices, particularly in cobalt, which compressed profit margins due to the length of the manufacturing cycle compared to index-based selling price changes, offsetting benefits from higher productivity. Results for 2019 also reflect temporary near-term headwinds related to one of our jet engine customer’s cash management efforts. Net results of divested businesses were not material to prior period HPMC segment EBITDA.
Advanced Alloys & Solutions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| Sales to external customers | | $ | 1,817.5 | | | (15) | % | | $ | 2,144.0 | | | 3 | % | | $ | 2,083.5 | |
| Segment EBITDA | | $ | 115.0 | | | (33) | % | | $ | 172.6 | | | (16) | % | | $ | 206.4 | |
| Segment EBITDA as a percentage of sales | | 6.3 | % | | | | 8.1 | % | | | | 9.9 | % |
| International sales as a percentage of sales | | 35.7 | % | | | | 34.1 | % | | | | 34.5 | % |
2020 Compared to 2019
Sales for the AA&S segment in 2020 decreased 15% compared to 2019, to $1.82 billion. Sales to specialty energy markets were 3% higher compared to the prior year, while total sales to all energy markets, which also include oil & gas, downstream processing, and specialty energy, were 20% lower. Declines of 29% and 10% were also noted in the commercial aerospace and automotive markets, respectively, partially offset by higher sales in the defense market and higher HRPF conversion services billings. Sales in 2019 reflect project-based demand for marine scrubber products within the specialty energy markets. Sales of high-value products were 15% lower, largely due to a 26% decline in nickel-based alloys and specialty alloys and a 22% decline in titanium and titanium alloys.
Comparative information for our AA&S segment revenues (in millions) by market, the respective percentages of overall segment revenues, for the years ended 20162020 and 2015,2019, and the percentage change in revenues by market for 20162020 is as follows:
| | | Market | | 2016 | | 2015 | | Change | Market | | 2020 | | 2019 | | Change |
| Energy: | | Energy: | | | | | | |
| Oil & Gas | | Oil & Gas | | $ | 328.5 | | | 18 | % | | $ | 464.5 | | | 22 | % | | $ | (136.0) | | | (29) | % |
| Specialty Energy | | Specialty Energy | | 184.2 | | | 10 | % | | 178.8 | | | 8 | % | | 5.4 | | | 3 | % |
| Total Energy | | Total Energy | | 512.7 | | | 28 | % | | 643.3 | | | 30 | % | | (130.6) | | | (20) | % |
| Aerospace & Defense: | | | | | | | | | | | | | Aerospace & Defense: | |
| Jet Engines | | $ | 823.3 |
| | 43 | % | | $ | 709.6 |
| | 36 | % | | $ | 113.7 |
| | 16 | % | |
| Airframes | | 367.8 |
| | 19 | % | | 379.5 |
| | 19 | % | | (11.7 | ) | | (3 | )% | |
| Government Aerospace & Defense | | 248.1 |
| | 13 | % | | 276.8 |
| | 14 | % | | (28.7 | ) | | (10 | )% | |
| Jet Engines- Commercial | | Jet Engines- Commercial | | 58.2 | | | 3 | % | | 100.8 | | | 5 | % | | (42.6) | | | (42) | % |
| Airframes- Commercial | | Airframes- Commercial | | 191.0 | | | 11 | % | | 249.6 | | | 12 | % | | (58.6) | | | (23) | % |
| Defense | | Defense | | 163.9 | | | 9 | % | | 155.9 | | | 7 | % | | 8.0 | | | 5 | % |
| Total Aerospace & Defense | | 1,439.2 |
| | 75 | % | | 1,365.9 |
| | 69 | % | | 73.3 |
| | 5 | % | Total Aerospace & Defense | | 413.1 | | | 23 | % | | 506.3 | | | 24 | % | | (93.2) | | | (18) | % |
| Automotive | | Automotive | | 257.7 | | | 14 | % | | 286.1 | | | 13 | % | | (28.4) | | | (10) | % |
| Electronics | | Electronics | | 176.8 | | | 10 | % | | 162.7 | | | 8 | % | | 14.1 | | | 9 | % |
| Food Equipment & Appliances | | Food Equipment & Appliances | | 159.2 | | | 9 | % | | 205.5 | | | 9 | % | | (46.3) | | | (23) | % |
| Construction/Mining | | Construction/Mining | | 123.4 | | | 7 | % | | 152.5 | | | 7 | % | | (29.1) | | | (19) | % |
| Medical | | 185.3 |
| | 10 | % | | 208.1 |
| | 10 | % | | (22.8 | ) | | (11 | )% | Medical | | 71.4 | | | 4 | % | | 87.0 | | | 4 | % | | (15.6) | | | (18) | % |
| Electrical Energy | | 129.1 |
| | 7 | % | | 135.8 |
| | 7 | % | | (6.7 | ) | | (5 | )% | |
| Oil & Gas | | 46.5 |
| | 2 | % | | 108.6 |
| | 5 | % | | (62.1 | ) | | (57 | )% | |
| Construction/Mining | | 36.7 |
| | 2 | % | | 46.7 |
| | 2 | % | | (10.0 | ) | | (21 | )% | |
| Other | | 93.6 |
| | 4 | % | | 120.8 |
| | 7 | % | | (27.2 | ) | | (23 | )% | Other | | 103.2 | | | 5 | % | | 100.6 | | | 5 | % | | 2.6 | | | 3 | % |
| Total | | $ | 1,930.4 |
| | 100 | % | | $ | 1,985.9 |
| | 100 | % | | $ | (55.5 | ) | | (3 | )% | Total | | $ | 1,817.5 | | | 100 | % | | $ | 2,144.0 | | | 100 | % | | $ | (326.5) | | | (15) | % |
Our 2016 HPMC results reflect the transitionAA&S segment produces zirconium and related alloys including hafnium and niobium, nickel-based alloys, specialty alloys, titanium and titanium-based alloys, and stainless products, in a variety of forms including plate, sheet, and PRS products. AA&S also provides hot-rolling conversion services, including titanium products of the commercial aerospace market to the next generation of single aisleUniti joint venture (JV) and large twin aisle aircraft, and next-generation jet engines, as the next-generation of aircraft and engines use significantly more of the products we make. Sales of differentiated nickel-based superalloy mill products increased 55% in 2016 compared to 2015, including both external sales and intercompany sales to our forging operations.carbon steel products.
Precision forgings, castings and components sales increased 9% in 2016 compared to 2015, reflecting improved commercial aerospace demand. Sales of nickel-based alloys and specialty alloys mill products decreased 8% in 2016 compared to 2015, as lower sales of legacy commercial engine alloys and lower demand from other key end markets, particularly oil & gas, offsetting stronger sales of differentiated nickel-based alloys. Sales of titanium mill products were 4% lower in 2016 compared to 2015.
Comparative information for the AA&S segment’s major product categories, based on their percentages of 2016 and 2015revenue are presented in the following table. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales are excluded from this presentation.
| | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 |
| High-Value Products | | | | |
| Nickel-based alloys and specialty alloys | | 29 | % | | 33 | % |
| PRS products | | 25 | % | | 23 | % |
| Zirconium and related alloys | | 15 | % | | 11 | % |
| Titanium and titanium-based alloys | | 11 | % | | 11 | % |
| Total High-Value Products | | 80 | % | | 78 | % |
| Standard Products | | | | |
| Total Standard Products | | 20 | % | | 22 | % |
| Grand Total | | 100 | % | | 100 | % |
Segment EBITDA was $115.0 million, or 6.3% of sales, a 33% decline from segment revenues isEBITDA of $172.6 million, or 8.1% of sales, in 2019, as follows:
|
| | | | | | |
| For the Years Ended December 31, |
| 2016 |
| 2015 |
| High-Value Products |
|
|
|
|
| Nickel-based alloys and specialty alloys |
| 29 | % |
| 31 | % |
| Titanium and titanium-based alloys |
| 29 | % |
| 30 | % |
| Precision forgings, castings and components |
| 29 | % |
| 26 | % |
| Zirconium and related alloys |
| 13 | % |
| 13 | % |
| Total High-Value Products |
| 100 | % |
| 100 | % |
HPMCweakened market conditions were partially offset by cost cutting measures. AA&S segment operating profitresults for 2016 increased 7%2020 compared to 2015,2019 reflect lower retirement benefit expense of approximately $20 million. Results at our Specialty Alloys & Components business improved year-over-year primarily due to $168.7defense sales. Results in 2020 and 2019 also include $8.2 million or 8.7%and $12.2 million, respectively, in losses from the A&T Stainless joint venture operations. We indefinitely idled the manufacturing operations of sales,the A&T Stainless joint venture in 2020 due primarily to improvedrepeated denials by the U.S. Department of Commerce for exemptions from Section 232 tariffs, which impose a 25% tariff on imported semi-finished stainless slab products from Indonesia. A $2.4 million charge for ATI’s portion of a severance charge recorded by the A&T Stainless joint venture was excluded from segment results.
AA&S financial results experienced significant weakness in 2020 due to demand disruptions in the aerospace, energy and general industrial markets as a result of the COVID-19 pandemic. Lower utilization rates have resulted at most production facilities, leading to cost inefficiencies, along with weaker profit margins due to intense market competition. These market conditions are presently expected to continue through at least the first half of 2021. We continue efforts toward improving the capacity utilization of our HRPF for carbon steel hot-rolling conversion services.
On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production assets from higher aerospace demand, as well as the benefits from our restructuring activities. HPMC segment results exclude the Rowley, UT titanium sponge operations beginning with the third quarter 2016 with the announcementfootprint of the indefinite idling of titanium production at Rowley. Segment operating profit in 2016 includesAA&S segment and making certain capital investments to increase our focus on higher-margin products and our aerospace & defense end markets. These actions are expected to accelerate our future by exiting this low-margin standard stainless sheet product line and redeploying capital to high-return opportunities. This transformation represents a major step forward to making ATI a more sustainably profitable aerospace & defense-focused company. We expect our AA&S segment revenues to decrease by approximately $5$450 million, of higher retirement benefit expense compared to 2015, due primarilya 2019 baseline, once these strategic actions to lower pension plan assets, as well as $5.3 million of non-recurring work stoppage and return to work costs related to a new labor agreement that was concluded in March 2016. Results in both 2016 and 2015 were also negatively impacted by the strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain titanium products.
exit standard stainless products are completed.
Flat Rolled Products
|
| | | | | | | | | | | | | | | | | | |
| (In millions) | | 2017 | | % Change | | 2016 | | % Change | | 2015 |
| Sales to external customers | | $ | 1,457.7 |
| | 21 | % | | $ | 1,204.2 |
| | (31 | )% | | $ | 1,733.7 |
|
| Segment operating profit (loss) | | $ | 37.0 |
| | 123 | % | | $ | (163.0 | ) | | 33 | % | | $ | (241.9 | ) |
| Segment operating profit (loss) as a percentage of sales | | 2.5 | % | | | | (13.5 | )% | | | | (14.0 | )% |
| International sales as a percentage of sales | | 33.2 | % | | | | 33.6 | % | | | | 41.5 | % |
20172019 Compared to 20162018
Sales for the FRPAA&S segment in 20172019 increased 21%3% compared to 2016,2018, to $1.46 billion, primarily due to higher shipment volume and selling prices for both standard stainless products and high-value products.$2.14 billion. Sales to the aerospace & defense markets increased 26% versus 2018, supported by higher demand for materials for naval nuclear components, and significantly higher production of titanium armor plate, additional titanium volumes for commercial airframes, and increased nickel and cobalt-bearing alloy sheet products for jet engines. Sales to the energy markets were flat, as higher specialty energy demand for marine scrubber products for exhaust systems on ships was offset by lower oil & gas market were 51%sales, including downstream processing applications, due primarily to the timing of project-based demand. In the medical market, sales increased 13% due in part to higher primarily due to project-based demand for chemical and hydrocarbon processing projects, and salesMRI magnet demand. Sales to the automotive market were 18% higher. Sales to the electrical energy market declined 23%. Prior year results also include a partial year of sales of unprofitable GOES products and certain commodity standard stainless steel sheet products prior to the idling of the Bagdad, PA and Midland, PA operations.
The FRP segment has undergone significant restructuring to refocus the business to a higher value product mix, and to right-size the operating footprint and cost structure to meet very competitive business conditions, from both domestic and international producers of flat-rolled stainless steel and other specialty metals. These actions included the 2016 idling and ultimate closure of the commodity stainless operations at the Midland, PA facility, and the GOES operations, including the Bagdad, PA finishing facility. Closure-related costs and employee benefit costs of $12.8 million were recognizedindustrial markets declined in the fourth quarter of 2016 from these closure actions, which are excluded from 2016 FRP segment results. Severance charges of $11.8 million for reductions of over 250 employees, or approximately one-third of the ATI Flat Rolled Products salaried workforce, were also excluded from 2016 FRP segment results.
FRP shipments of titanium and ATI-produced Uniti joint venture titanium products2019. Overall, increased 42% compared to 2016, to 5.7 million pounds, reflecting stronger project-based demand in industrial markets. Salessales of high-value products excluding GOES, were 20% higher compared to 2016, andoffset 10% lower sales of standard stainless products, were 32% higher compared to 2016, led by2018.
In 2019, we announced the expansion and 6.5 year extension of our LTA with BWX Technologies to supply materials for the manufacture of naval nuclear components. In 2018, we entered into a 38% increasejoint technology development agreement with Bruker Energy & Supercon Technologies, to advance state-of-the-art niobium-based superconductors, including those used in specialty stainless sheet products.MRI magnets for the medical industry, and preclinical MRI magnets used in the life-science tools industry.
Comparative information for our
Flat Rolled ProductsAA&S segment revenues (in millions) by market, the respective percentages of overall segment revenues, for the years ended
20172019 and
2016,2018, and the percentage change in revenues by market for
20172019 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Market | | 2017 | | 2016 | | Change |
| Oil & Gas | | $ | 354.5 |
| | 24 | % | | $ | 234.4 |
| | 19 | % | | $ | 120.1 |
| | 51 | % |
| Automotive | | 264.9 |
| | 18 | % | | 225.2 |
| | 19 | % | | 39.7 |
| | 18 | % |
| Food Equipment & Appliances | | 224.8 |
| | 15 | % | | 170.5 |
| | 14 | % | | 54.3 |
| | 32 | % |
| Aerospace & Defense | | 149.1 |
| | 10 | % | | 151.2 |
| | 13 | % | | (2.1 | ) | | (1 | )% |
| Electronics/Computers/Communication | | 147.2 |
| | 10 | % | | 106.3 |
| | 9 | % | | 40.9 |
| | 38 | % |
| Construction/Mining | | 141.8 |
| | 10 | % | | 124.0 |
| | 10 | % | | 17.8 |
| | 14 | % |
| Electrical Energy | | 79.2 |
| | 6 | % | | 103.5 |
| | 9 | % | | (24.3 | ) | | (23 | )% |
| Other | | 96.2 |
| | 7 | % | | 89.1 |
| | 7 | % | | 7.1 |
| | 8 | % |
| Total | | $ | 1,457.7 |
| | 100 | % | | $ | 1,204.2 |
| | 100 | % | | $ | 253.5 |
| | 21 | % |
Our FRP segment produces, converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip products. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market | | 2019 | | 2018 | | Change |
| Energy: | | | | | | | | | | | | |
| Oil & Gas | | $ | 464.5 | | | 22 | % | | $ | 493.9 | | | 24 | % | | $ | (29.4) | | | (6) | % |
| Specialty Energy | | 178.8 | | | 8 | % | | 152.9 | | | 7 | % | | 25.9 | | | 17 | % |
| Total Energy | | 643.3 | | | 30 | % | | 646.8 | | | 31 | % | | (3.5) | | | (1) | % |
| Aerospace & Defense: | | | | | | | | | | | | |
| Jet Engines- Commercial | | 100.8 | | | 5 | % | | 76.1 | | | 4 | % | | 24.7 | | | 33 | % |
| Airframes- Commercial | | 249.6 | | | 12 | % | | 230.1 | | | 11 | % | | 19.5 | | | 9 | % |
| Defense | | 155.9 | | | 7 | % | | 96.4 | | | 5 | % | | 59.5 | | | 62 | % |
| Total Aerospace & Defense | | 506.3 | | | 24 | % | | 402.6 | | | 20 | % | | 103.7 | | | 26 | % |
| Automotive | | 286.1 | | | 13 | % | | 313.9 | | | 15 | % | | (27.8) | | | (9) | % |
| Food Equipment & Appliances | | 205.5 | | | 9 | % | | 244.5 | | | 12 | % | | (39.0) | | | (16) | % |
| Electronics | | 162.7 | | | 8 | % | | 155.4 | | | 7 | % | | 7.3 | | | 5 | % |
| Construction/Mining | | 152.5 | | | 7 | % | | 153.3 | | | 7 | % | | (0.8) | | | (1) | % |
| Medical | | 87.0 | | | 4 | % | | 77.1 | | | 4 | % | | 9.9 | | | 13 | % |
| Other | | 100.6 | | | 5 | % | | 89.9 | | | 4 | % | | 10.7 | | | 12 | % |
| Total | | $ | 2,144.0 | | | 100 | % | | $ | 2,083.5 | | | 100 | % | | $ | 60.5 | | | 3 | % |
Comparative information for the Flat Rolled ProductsAA&S segment’s major product categories, based on their percentages of 2017 and 2016 segment revenues is as follows: |
| | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 |
| High-Value Products | | | | |
| Precision and engineered strip | | 34 | % | | 35 | % |
| Nickel-based alloys and specialty alloys | | 24 | % | | 25 | % |
| Titanium and titanium-based alloys | | 5 | % | | 4 | % |
| Total High-Value Products, excluding GOES | | 63 | % | | 64 | % |
| Grain-oriented electrical steel | | — | % | | 2 | % |
| Total High-Value Products, including GOES | | 63 | % | | 66 | % |
| Standard Products | | | | |
| Stainless steel sheet | | 21 | % | | 19 | % |
| Specialty stainless sheet | | 12 | % | | 10 | % |
| Stainless steel plate | | 4 | % | | 5 | % |
| Total Standard Products | | 37 | % | | 34 | % |
| Grand Total | | 100 | % | | 100 | % |
Comparative shipment volume and average selling price information on the segment’s products for the years ended December 31, 2017 and 2016, excluding GOES from high-value products from both periods, is providedrevenue are presented in the following table:table. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales are excluded from this presentation.
|
| | | | | | | | | |
| | | 2017 | | 2016 | | % change |
| Volume (000’s pounds): | | | | | | |
| High-Value | | 323,391 |
| | 293,589 |
| | 10 | % |
| Standard | | 446,542 |
| | 385,010 |
| | 16 | % |
| Total | | 769,933 |
| | 678,599 |
| | 13 | % |
| Average prices (per lb.): | | | | | | |
| High-Value | | $2.81 | | $2.59 | | 8 | % |
| Standard | | $1.21 | | $1.06 | | 14 | % |
| Combined Average | | $1.88 | | $1.72 | | 9 | % |
| | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2019 | | 2018 |
| High-Value Products | | | | |
| Nickel-based alloys and specialty alloys | | 33 | % | | 31 | % |
| PRS products | | 23 | % | | 23 | % |
| Zirconium and related alloys | | 11 | % | | 11 | % |
| Titanium and titanium-based alloys | | 11 | % | | 10 | % |
| Total High-Value Products | | 78 | % | | 75 | % |
| Standard Products | | | | |
| Total Standard Products | | 22 | % | | 25 | % |
| Grand Total | | 100 | % | | 100 | % |
Segment operating profitEBITDA in 20172019 was $37.0$172.6 million, or 2.5%8.1% of sales, compared to a 16% decline from segment operating lossEBITDA of $163.0$206.4 million, or (13.5)%9.9% of sales, in 2016. The substantial improvement in operating2018. AA&S segment results which was the first profitable year since 2012, primarily reflects the benefits of higher operating levels, a greater mix of high-value products, and the benefits of cost reductions and restructuring actions, including the exit from the GOES market and the de-emphasis of certain commodity standard stainless sheet products, as discussed above. Segment operating results in 2017 also included approximately $14 million in lower retirement benefit expense from defined benefit plans compared to 2016, primarily due to lower defined benefit pension costs as a result of pension plan contributions, as well as from lower defined benefit retiree medical plan costs that were the result of changes achieved in the 2016 labor agreement. Segment operating results in 2016 were primarily driven by lower shipment volumes and selling prices, and also included $43.5 million of costs associated with the work stoppage and return-to-work of represented employees.
In November 2017, we announced the creation of Allegheny & Tsingshan Stainless, a 50-50 joint venture between ATI and an affiliate company of the Tsingshan Group (Tsingshan) to manufacture 60” wide stainless sheet, which is expected to be formed in the first quarter of 2018 after receiving regulatory clearances. This joint venture will utilize Tsingshan-supplied stainless steel slabs from its vertically integrated operations in Indonesia. The Tsingshan-supplied stainless steel slabs will be hot-rolled into coils on the FRP segment’s HRPF under a conversion agreement. The hot-rolled coils will be finished into stainless steel sheet using ATI’s previously-idled Direct Roll Anneal and Pickle (DRAP) production facility in Midland, PA, which is ATI’s major investment in the joint venture. We expect to steadily improve the capacity utilization of the HRPF as the joint venture ramps up operations.
2016 Compared to 2015
Sales for the FRP segment in 2016 decreased 31% compared to 2015, to $1.20 billion, as our change in market focus to value, not volume, resulted in our exit from the GOES market in April 2016 and the de-emphasis of certain commodity stainless steel sheet products, lowering sales of these products significantly. Sales were lower across nearly all major end markets in 2016, due primarily to lower shipment volumes. Lower average selling prices also impacted 2016 results compared to 2015, as low raw material surcharges included in transaction prices continued throughout 2016 from low year-end 2015 levels whereas 2015 average selling prices declined during the year due to falling raw material surcharges and competitive market conditions.
In the fourth quarter 2015, due to the challenging business conditions for standard stainless steel products and grain-oriented electrical steel (GOES), we announced actions to return the FRP business to profitability. These actions included the 2016 idling of the commodity stainless steel operations at the Midland, PA facility, and the idling of GOES operations, including the Bagdad, PA finishing facility. Charges of $54.5 million for long-lived asset impairments associated with these actions were excluded from 2015 segment results. In October 2016, we concluded that the Midland and Bagdad facilities could not be operated at an acceptable rate of return, and we announced that these operations would be closed. Closure-related costs and employee benefit costs of $12.8 million were recognized in the fourth quarter of 2016 from these closure actions, which are excluded from 2016 FRP segment results. Severance charges of $11.8 million for reductions of over 250 employees, or approximately one-third of the ATI Flat Rolled Products salaried workforce, were also excluded from 2016 FRP segment results.
Sales to the oil & gas market, which remains the segment’s largest end market, continued at lower levels in 2016, whereas demand remained good in the first half of 2015 as we completed a large nickel plate project, but then declined significantly in the second half of that year. Demand for our flat-rolled titanium products remained at low levels in 2016 for chemical and hydrocarbon processing projects, with shipments of titanium and ATI-produced Uniti joint venture titanium products decreasing 31% in 2016 compared to 2015, to 4.1 million pounds, which followed a 40% decline in 2015. Sales of high-value products, excluding GOES, were 23% lower in 2016 compared to 2015, and sales of standard products were 32% lower in 2016, compared to 2015, led by a 45% decline in specialty stainless sheet products. Segment results in 2016 were also impacted by a seven month work stoppage affecting the domestic operations of ATI Flat Rolled Products, which concluded in March 2016.
Comparative information for our Flat Rolled Products segment revenues (in millions) by market, the respective percentages of overall segment revenues for the years ended 2016 and 2015, and the percentage change in revenues by market for 2016 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Market | | 2016 | | 2015 | | Change |
| Oil & Gas | | $ | 234.4 |
| | 19 | % | | $ | 429.4 |
| | 25 | % | | $ | (195.0 | ) | | (45 | )% |
| Automotive | | 225.2 |
| | 19 | % | | 288.1 |
| | 17 | % | | (62.9 | ) | | (22 | )% |
| Food Equipment & Appliances | | 170.5 |
| | 14 | % | | 214.4 |
| | 12 | % | | (43.9 | ) | | (20 | )% |
| Aerospace & Defense | | 151.2 |
| | 13 | % | | 148.1 |
| | 9 | % | | 3.1 |
| | 2 | % |
| Construction/Mining | | 124.0 |
| | 10 | % | | 179.6 |
| | 10 | % | | (55.6 | ) | | (31 | )% |
| Electronics/Computers/Communication | | 106.3 |
| | 9 | % | | 121.9 |
| | 7 | % | | (15.6 | ) | | (13 | )% |
| Electrical Energy | | 103.5 |
| | 9 | % | | 232.3 |
| | 13 | % | | (128.8 | ) | | (55 | )% |
| Other | | 89.1 |
| | 7 | % | | 119.9 |
| | 7 | % | | (30.8 | ) | | (26 | )% |
| Total | | $ | 1,204.2 |
| | 100 | % | | $ | 1,733.7 |
| | 100 | % | | $ | (529.5 | ) | | (31 | )% |
Comparative information for the Flat Rolled Products segment’s major product categories, based on their percentages of 2016 and 2015 segment revenues is as follows:
|
| | | | | | |
| For the Years Ended December 31, | | 2016 | | 2015 |
| High-Value Products | | | | |
| Precision and engineered strip | | 35 | % | | 29 | % |
| Nickel-based alloys and specialty alloys | | 25 | % | | 25 | % |
| Titanium and titanium-based alloys | | 4 | % | | 3 | % |
| Total High-Value Products, excluding GOES | | 64 | % | | 57 | % |
| Grain-oriented electrical steel | | 2 | % | | 8 | % |
| Total High-Value Products, including GOES | | 66 | % | | 65 | % |
| Standard Products | | | | |
| Stainless steel sheet | | 19 | % | | 18 | % |
| Specialty stainless sheet | | 10 | % | | 13 | % |
| Stainless steel plate | | 5 | % | | 4 | % |
| Total Standard Products | | 34 | % | | 35 | % |
| Grand Total | | 100 | % | | 100 | % |
Comparative shipment volume and average selling price information on the segment’s products for the years ended December 31, 2016 and 2015, excluding GOES from high-value products from both periods, is provided in the following table:
|
| | | | | | | | | |
| | | 2016 | | 2015 | | % change |
| Volume (000’s pounds): | | | | | | |
| High-Value | | 293,589 |
| | 317,054 |
| | (7 | )% |
| Standard | | 385,010 |
| | 514,035 |
| | (25 | )% |
| Total | | 678,599 |
| | 831,089 |
| | (18 | )% |
| Average prices (per lb.): | | | | | | |
| High-Value | | $2.59 | | $3.12 | | (17 | )% |
| Standard | | $1.06 | | $1.16 | | (9 | )% |
| Combined Average | | $1.72 | | $1.91 | | (10 | )% |
Segment operating results in 2016 were a loss of $163.0 million, or (13.5)% of sales, compared to segment operating loss of $241.9 million, or (14.0)% of sales in 2015. The 2016 FRP segment loss improved from 2015 due primarily to restructuring actions, including the idling in early 2016 of production capacity for commodity stainless steel sheet and GOES products, which were not able to be sold at profitable levels based on current market conditions. While 2016 had lower shipment volumes and selling prices compared to 2015, results reflected a better alignment of raw material costs and raw material surcharge recovery in transaction prices, compared to 2015. Base prices for most products were slightly improved in 2016 from year-end 2015 levels. 2016 results were negatively affected by reduced operating efficiencies, primarily affecting the U.S. operations of ATI Flat Rolled Products, during and after the 2015-2016 work stoppage, which ended in March 2016 upon ratification of a new four-year collective bargaining labor agreement by USW-represented employees. The 2016 segment operating loss includes $43.5 million of non-recurring operating costs related to higher-cost material produced prior to the end of the work stoppage, higher conversion costs during the return to more normal operating levels, and costs associated with contractual obligations in the return to work agreement for represented employees. FRP segment operating losses were progressively reduced each quarter during 2016 as a result of these factors, and with the initial benefits of our restructuring actions the fourth quarter 2016 segment operating loss was only $0.8 million. Segment operating results in 2016 also included approximately $4 million in2019 reflect higher retirement benefit expense from defined benefit plans compared to 2015, as higher defined benefit pension costs primarily associated with lower pension plan assets were partially offset by lower defined benefit retiree medical plan costs, which were the result of changes to retiree medical benefits achieved in the 2016 labor agreement.
In 2015, base prices$27 million and a $12 million loss for the most common standard grade stainless sheet product fell 25% to approximately $0.45 per pound in December 2015, which represents a historic low, from a $0.60 per pound level in effect for most of 2014. These base price declines for standard products, combined with falling raw material price surcharges which did not align with manufacturing costs, negatively affected segment operating results in 2015. Additionally, in anticipation of a possible strike action related to the USW labor negotiations, inventory with higher cost raw materials produced in the first half of 2015 was sold in the second half of 2015 and into 2016 at lower transaction prices due to falling raw material surcharges. Based on continued weak demand
for industrial titanium products from global markets, we recorded lower of cost or market inventory charges of $17.7 million in 2016 and $24.5 million in 2015 to reduce the carrying values of these product inventories to current market levels. Segment operating results also include ATI’s share of Uniti’s results, which was income of $0.5the A&T Stainless JV, primarily due to Section 232 tariffs, compared to a $4 million loss from the A&T Stainless JV in 2016 and a loss of $0.1 million2018. While project-based demand for nickel-based alloys in 2015. Resultsthe U.S. business remained solid, weaker demand for standard stainless products resulted in both 2015 and 2016 were also negatively impacted by the strategic decisionlower segment EBITDA compared to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain standard quality titanium products.2018.
LIFO and Net Realizable Value Reserves
The netThere was no effect on our results of operations for changes in LIFO and net realizable value (NRV)NRV inventory reserves was expense of $0.2 million for 2017, and benefits of $0.8 million and $0.1 million in 2016 and 2015, respectively. Rising2020. Falling inventory costs in 2017 and 20162020 resulted in $54.2a $10.5 million and $39.1 million, respectively, pretax LIFO inventory valuation reserve charges,benefit, which werewas offset by $54.0a $10.5 million and $39.9 million, respectively, pretax non-cash benefitscharge for NRV inventory reserves that are required to offset the Company’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost. Rapidly falling raw material prices, primarily for nickel,The net effect of changes in LIFO and NRV inventory reserves was expense of $0.1 million in 2019. Falling inventory costs in 2019 resulted in a $131.6$25.5 million pretax LIFO inventory valuation reserve benefit, in 2015 which was offset by a $131.5$25.6 million pretax non-cash charge for NRV inventory reserves.
Corporate Expenses
Corporate expenses, which are included in selling and administrative expenses in the statement of operations, were $50.5$40.9 million in 20172020 compared to $43.4$65.3 million in 2016, and $44.7 million in 2015. The increase in corporate expenses in 2017 compared to 2016 and 2015 were due2019. This decrease was primarily due to higherlower incentive compensation costs,expense based on expected performance versus targeted metrics, and as well as start-up research and development costs for Next Gen Alloys, our meltless titanium alloy powder joint venture formed with GE in 2017.lower expenses resulting from cost reduction actions.
Closed Operations and Other Expenses
Closed operations and other expenses, which were $34.0 million in 2017, $34.6 million in 2016, and $22.1 million in 2015, include charges for closed operations and other non-operating income or expense. Closed operation and other expenses in 2017 were comparable to 2016 as lower closed facility costs, a $3.7 million benefit for reduction in liabilities for legacy employee benefit programs, and higher royalty income were offset by increased foreign currency exchange losses, primarily related to our European Treasury Center operation, and other legacy costs of closed operations, compared to prior year amounts. The increase in closed company operations in 2016 compared to 2015 is primarily due to operations of our Rowley, UT titanium sponge facility, which were classified in closed operations beginning in the third quarter of 2016 due to the indefinite idling decision and ongoing shutdown activities. Closed operations and other expenses are presented primarily in selling and administrative expenses in the consolidated statements of operations, and include legal, environmental, retirement benefit and insurance obligations associated with closed operations. Closed operations and other expenses were $7.4 million in 2020, compared to $24.0 million in 2019. This decline reflects lower legal and retirement benefit expense of closed operations and a $4.3 million gain from settlements of contract indemnity obligations.
Depreciation and Amortization
The following is depreciation & amortization by business segment:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Depreciation and amortization: | | | | | | |
| High Performance Materials & Components | | $ | 78.1 | | | $ | 84.6 | | | $ | 90.6 | |
| Advanced Alloys & Solutions | | 62.1 | | | 63.5 | | | 62.9 | |
| Other | | 3.1 | | | 3.0 | | | 2.9 | |
| | $ | 143.3 | | | $ | 151.1 | | | $ | 156.4 | |
Interest Expense, Net
Interest expense, net of interest income and interest capitalization, was $94.4 million in 2020, compared to $99.0 million in 2019. This decrease is primarily due to higher capitalized interest in the current year, as well as the net effects of debt reduction actions taken by us in the fourth quarter 2019, partially offset by increased debt resulting from the actions taken in 2020. Interest expense is presented net of interest income of $1.7 million in 2020, $5.9 million in 2019, and $1.1 million in 2018. Interest expense in 2020, 2019, and 2018 was reduced by $7.7 million, $4.7 million, and $4.1 million, respectively, related to interest capitalization on major strategic capital projects.
Restructuring Goodwill Impairment and Other Charges
2017
Business segment results in 2017 exclude a $114.4For the year ended December 31, 2020, we recorded restructuring and other charges of $1,132.1 million, goodwill impairment chargepredominantly related to write-off all the goodwill assignedour December 2020 announcement previously discussed to ATI Cast Products, our titanium investment casting business in the HPMC segment. During the third quartercease production of 2017, we performed an interim goodwill impairment analysis on ATI Cast Products due to impairment indicators, including lower actual results versus projections. As a result of the 2017 interim goodwill impairment evaluation, we determined that the fair value of the Cast Products business was significantly below the carrying value, including goodwill. This was primarily due to lower projected revenues, profitability and cash flows associated with revised expectations for the rate of operational improvement and profitability of this business based on current customer agreements. This goodwill impairment charge wasstandard stainless sheet products, which are excluded from HPMC 2017 business segment results.
2016
Business segment results in 2016 exclude $538.5Restructuring charges recorded on the consolidated statement of operations for the year ended December 31, 2020 were $1,107.5 million, comprised of $1,041.5 million of restructuringnon-cash asset impairment charges, $60.5 million of employee benefit-related costs, and $5.5 million of other charges. These charges include $471.3 million incosts related to facility idlings. The long-lived asset impairment charges $31.7relate to a $1,032.6 million charge related to the Brackenridge, PA operations, including the HRPF, as well as $8.9 million other long-lived asset impairment charges recognized for various AA&S segment operations identified for closure as part of facility shutdown and idling costs, $24.2the standard stainless sheet exit decision.
Restructuring charges also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and $11.3 million of inventory valuation charges.
In August 2016, we announced the indefinite idling of the Rowley, UT titanium sponge production facility and the consolidation of certain titanium manufacturing operations in the HPMC segment. We recorded a non-cash impairment charge of $470.8 million during 2016 to reduce the carrying value of the Rowley, UT facility to an estimated fair value of $15.0 million. The indefinite idling of the Rowley, UT facility was completed in the fourth quarter 2016, as was the closure of a small titanium wire production facility in Frackville, PA, and the idling of certain titanium manufacturing operations in Albany, OR.
We recognized $23.8 million of facility shutdown and idling costs, including contract termination costs, and $7.5 million of employee benefit costs including severance obligationsmedical benefits for the elimination of approximately 1801,400 positions related to the standard stainless exit, as well as for employees impacted by the idling of the Albany, OR primary titanium operations in the fourth quarter of 2020, and workforce right-sizing actions, including both involuntary reductions and voluntary retirement incentive programs implemented throughout 2020 to better match our cost structure to expected demand, primarily as a result of economic challenges created by the COVID-19 pandemic. We expect to generate approximately $90 million in annual savings from these cost reduction programs in 2021 and $100 million annually once fully implemented in 2023. Cash payments associated with these and other HPMC restructuring actions. Also, an $11.3 million charge was recorded in cost of sales to revalue titanium sponge inventory based on revised assessments of industrial grade titanium market conditions andreduction programs are expected utilization of this inventory. The Rowley facility was idled in a manner that allows the facility to be restartedapproximately $35 million in 2021.Other costs of $5.5 million included in 2020 restructuring charges primarily relate to asset retirement and environmental obligations associated with facility idlings.
Other charges for the future if supported by market conditions.year ended December 31, 2020 include:
In October 2016, we announced the closure of the Midland, PA commodity stainless steel operations and the Bagdad, PA GOES finishing facility. These facilities, which were part of our FRP operations, were indefinitely idled earlier in 2016, and management concluded that the facilities could not be operated at an acceptable rate of return. As a result of these actions, during 2016 we recorded $8.4•$17.4 million of closure-related costs and asset impairments, and $4.9 million of employee benefit costs, including $3.4 million of special termination benefits for pension and postretirement medical obligations related to facility closures from the standard stainless exit. These costs are classified within nonoperating retirement benefit expense in the consolidated statements of operations.
•$7.2 million of other postretirement benefit plans.charges for inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, primarily related to excess raw material and work in process inventory at the idled Albany, OR primary titanium facility.
Results for 2016 also include an $11.8In addition, the A&T Stainless JV recorded a $4.8 million charge in 2020 for contractual termination benefits, and ATI recognized a $2.4 million charge in 2020 for its equity method share of these termination benefits. These charges are excluded from segment operating results.
A $4.5 million restructuring charge was recorded on the consolidated statement of operations for the year ended December 31, 2019 for severance obligations in the FRP operations, for the reduction of approximately one-third70 positions in order to streamline our salaried workforce, primarily to improve the cost competitiveness of the salaried workforce at ATI Flat Rolled Products through the elimination of over 250 positions, whichU.S.-based FRP business. This restructuring charge is excluded from business segment results. The $4.5 million was largely completed by the end of 2016. Reserves for restructuring charges at December 31, 2016 were $33 million, consisting of severance and employee benefit and closure costs, and were substantially paid in 2017.2020 upon completion of these reductions.
2015Goodwill Impairment Charge
Business segment results exclude $216.3In the second quarter 2020, due to demand disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic and changes in near-term demand requirements of aero-engine and airframe markets, ATI conducted an interim test for goodwill impairment at our Forged Products operations, and recognized a $287.0 million charge for the partial impairment of goodwill, while retaining $173.4 million of goodwill for this profitable business with good long-term growth prospects. This goodwill impairment restructuringcharge is excluded from HPMC segment results.
Joint Venture Restructuring and otherImpairment Charges
The A&T Stainless JV recorded a $4.8 million charge in 2020 for contractual termination benefits, and ATI recognized a $2.4 million charge in 2020 for its equity method share of these termination benefits. These charges in 2015. are excluded from AA&S segment results.
We recorded a $126.6an $11.4 million pre-tax impairment charge in 2015 to write-off all2019 for the goodwillA&T Stainless JV, including ATI’s share of a long-lived asset impairment charge recognized by the JV on the carrying value of its production facility in the Flat Rolled Products segment. AsMidland, PA. ATI recognized a result$7.1 million equity loss for its 50% share of a $14.2 million long-lived asset impairment recognized by A&T Stainless. In addition, as of December 31, 2019, ATI had net receivables for working capital advances and administrative services from A&T Stainless of $36.8 million that were also evaluated for collectability, and a $4.3 million reserve was recorded in December 2019 based ATI’s share of the annual goodwill impairment evaluations in 2015, we determined that theestimated fair value of the Flat Rolled Products business was below carrying value, including goodwill.JV’s net assets. This was due to challenging market conditions in 2015 in this business, primarily impacting commodity stainless flat-rolled products. This goodwill impairment charge wasis excluded from the Flat Rolled Products 2015 businessAA&S segment results.
In 2015, we recorded $89.7 million in restructuring and other charges, including $54.5 million in long-lived asset impairment charges, $3.5 million in facility idling costs, a $25.4 million charge to revalue inventory, and $6.3 million in employee severance charges.Gain on Joint Venture Deconsolidation
In December 2015,On March 1, 2018, we announced rightsizing actions to better align our Flat Rolled Products operations to the challenging market conditions for commodity products. Such actions includedformation of A&T Stainless, in which ATI has a 50% ownership interest. Our JV partner purchased its 50% JV interest during the idlingfirst quarter of our standard stainless melt shop2018, and sheet finishing operations at the Midland, PA facility, which was completed in January 2016,as a result of this sale and the idling of our GOES operations in Western PA, including the Bagdad, PA facility, which was completed in April 2016. As a result, 2015 operating results include a $54.5 million asset impairment charge to reduce the carrying values of these facilities and $3.5 million of charges for future idling costs at these facilities.
In December 2015, based on current market prices for non-PQ titanium sponge, we recorded a $25.4 million charge to revalue this inventory. The charge includes revised assessmentssubsequent deconsolidation of the non-PQ titanium market conditionsA&T Stainless entity, we recognized a $15.9 million gain in the first quarter of 2018. This gain is reported in other income, net, on the consolidated statement of operations for the year ended December 31, 2018 and expected utilization of this inventory.
In 2015, we implemented a salaried workforce reduction of approximately 100 employees, in response to business conditions, in both the High Performance Materials & Componentsis excluded from AA&S segment and at ATI’s headquarters. Severance charges of $6.3 million were recorded for this action in 2015, the majority of which were paid in 2016.results.
Debt Extinguishment Charge
In December 2017, we redeemed all $3502020, ATI issued $291.4 million aggregate principal amount of the 2025 Convertible Notes, and used the majority of the proceeds to repurchase approximately $203.2 million aggregate principal amount of the outstanding principal balance of our 2019 Notes, resulting in a $37.02022 Convertible Notes. A $21.5 million pre-tax debt extinguishment charge was recognized for this action, which included a $35.8$19.1 million cash payment as a make-whole provision on the early extinguishment of debt, and a $1.2$2.4 million charge for previously-unrecognized debt issue costs.
Interest Expense, NetIn the fourth quarter of 2019, we issued $350 million of the 2027 Notes. Proceeds from the issuance of the 2027 Notes and cash on hand were used to redeem the $500 million 2021 Notes, which had a January 15, 2021 maturity date. A $21.6 million debt extinguishment charge was recorded as part of this action, which included a $20.9 million cash payment as a make-whole provision on the early extinguishment of debt, and a $0.7 million charge for previously-unrecognized debt issue costs.
Interest
Gains on Asset Sales, net
During 2020, we recognized a $2.5 million cash gain for the sale of certain oil and gas rights. This non-core asset sale gain is reported in other income/expense, net, of interest income and interest capitalization, was $133.8 million in 2017, $124.0 million in 2016, and $110.2 million in 2015. The increase in interest expense in 2017 compared to 2016 was primarily due to interest on the $287.5consolidated statement of operations and is excluded from business segment results. During the third quarter of 2019, we completed the sale of our Cast Products business and recognized a $6.2 million 4.75% Convertible Senior Notes due 2022 (2022 Convertible Notes) and the $100.0 million term loan (Term Loan), both of which were issued duringgain. During the second quarter of 2016.2019, we completed the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY, and recognized an $8.1 million pre-tax loss. Also during the second and third quarters of 2019, we recognized $29.3 million and $62.4 million cash gains, respectively, on sales of certain oil and gas rights. The increase2019 results include $89.8 million, respectively, in interest net pretax gains from these non-core asset sales which are reported in other income/expense, in 2016 compared to 2015 was due to the 2022 Convertible Notes and the Term Loan, as well as a higher interest ratenet, on the Company’s 5.875% Senior Notes due 2023 (2023 Notes) resultingconsolidated statement of income and are excluded from credit rating downgrades, and higher average borrowings under the revolving portion of our Asset Based Lending (ABL) Credit Facility. Interest expense is presented net of interest income of $1.1 million in 2017, $1.4 million in 2016, and $1.2 million in 2015.business segment results.
Interest expense in 2017, 2016, and 2015 was reduced by $2.6 million, $4.7 million, and $2.2 million, respectively, related to interest capitalization on major strategic capital projects.
Income Taxes
Since 2015, ATI results have reflected a three year cumulative loss from U.S. operations. In situations where a three year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. Deferred taxes result from temporary differencesResults in the recognition of income2020, 2019 and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as a purchase for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. We established $74.5 million in deferred tax asset valuation allowances in 2015, of which $68.4 million were for certain federal and state deferred tax assets. In 2016, the actions to indefinitely idle the Rowley, UT titanium sponge production facility resulted in a reassessment of the realizability of U.S. federal deferred tax assets. In 2016, our results of operations included an increase to deferred tax asset valuation allowances of $171.5 million, including an additional $165.8 million valuation allowance on federal and state deferred tax assets, as well as additional deferred tax asset valuation allowances in certain foreign jurisdictions. In 2017, ATI continued to maintain income tax valuation allowances on its U.S. Federal and state deferred tax assets. As a result of deferred tax valuation allowances, the remeasurement of our deferred tax assets and liabilities due to the lower enacted federal tax rate in the Tax Cuts and Jobs Act (Tax Act) did not have a significant impact on 2017 results. At December 31, 2017, we had a consolidated net deferred tax liability of $2.1 million.
The 2017 income tax benefit was $6.8 million, or 7.9% of the pre-tax loss, compared to the 2016 income tax benefit of $106.9 million, or 14.6% of the pre-tax loss, and the 2015 income tax benefit of $112.1 million, or 23.5% of pre-tax loss. Results for all periods2018 include impacts from income taxes that differ from theapplicable standard 35% U.S. federal tax rate then in effect,rates, primarily related to income tax valuation allowances. In 2020, ATI’s U.S. operations returned to a three-year cumulative loss position, limiting our ability to utilize future projections as sources of income when analyzing the need for a valuation allowance. The consolidated income tax provision of $77.7 million for fiscal year 2020 is primarily due to increases in deferred tax asset valuation allowances based on an analysis of the expected realization of deferred tax assets and liabilities within applicable expiration periods. While our U.S. operations remain in a three-year cumulative loss position, we expect our reported tax expense to primarily relate to our profitable STAL PRS joint venture in China. We will continue to have minimal cash tax requirements in the U.S. due to the ongoing benefits of NOL tax carryforwards for the next several years.
At December 31, 2019, our U.S. results had switched from a three-year cumulative loss position to a three-year cumulative income position, allowing us to utilize forecasts of future profits as a source of income when evaluating the overall need for a valuation allowance. We determined that valuation allowances on net deferred tax asset balances for federal and certain state jurisdictions are no longer required. Certain individual tax attributes still require a valuation allowance changes.based on expected utilization. The 2017change in the overall valuation allowance for 2019 includes amounts utilized during the year as part of the reported effective tax rate, as well as a $45.1 million reduction at December 31, 2019 based on a change in judgment on the realizability of deferred tax assets. The 2019 income tax benefit was $28.5 million, which included the $45.1 million discrete tax benefit related to the release of U.S. federal and state valuation allowances, along with the current year benefit related to the release of valuation allowances due to positive income in 2019. Total discrete tax items including this valuation allowance change were a $4.1$41.9 million tax benefit in 2019, and our effective tax rate excluding these items was 5.5% of pre-tax income in 2019.
In 2018, we reported income before tax of $247.7 million, of which $190.8 million was attributable to the U.S. The overall income, along with certain taxable income inclusions, resulted in ATI utilizing net operating loss (NOL) deferred tax assets in 2018, causing a U.S. valuation allowance release of $46.3 million for 2018. At December 31, 2018, we continued to maintain a valuation allowance on the remeasurement of certain tax attributes, mainly indefinite-livednet deferred tax liabilities, dueassets for U.S. federal and state income tax purposes, with the exception of the indefinite lived deferred tax liability related to Tax Actgoodwill and the withholding tax liability associated with our permanent reinvestment assertion, and also maintained valuation allowances for certain foreign operations. In 2018, we reported an income tax provision of $11.0 million, or 4.4% of the pre-tax income, in 2018, which also included benefits from NOL utilization and related valuation allowance changes.
Financial Condition and Liquidity
We have a $500 millionan Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of the our domestic operations. The ABL facility, which matures in September 2024, includes a $400$500 million revolving credit facility, which includes a letter of credit sub-facility of up to $200 million, and a $200 million term loan (Term Loan). In June 2020, we exercised our right to borrow an additional $100 million Term Loan.
In June 2017,under the term loan portion of the ABL, facility was amended to extendwith the same September 2024 maturity date of thedate. The Term Loan from November 2017 to February 2022 and to reduce thehas an interest rate on the Term Loan to 3.0%of 2.0% plus a LIBOR spread from 3.5% plus a LIBOR spread. The Term Loanand can be prepaid in minimum increments of $50$25 million if certain minimum liquidity conditions are satisfied. The underwriting costs associated with amendingIn addition, we have the Term Loan were $0.8right to request an increase of up to $200 million and are being amortized, along within the unamortized portionmaximum amount available under the revolving credit facility for the duration of the $1.0ABL. We have a $50 million of previously recognized deferred fees from the issuancefloating-for-fixed interest rate swap which converts a portion of the Term Loan to a 4.21% fixed interest expense over the extended term of the loan ending February 2022.
Alsorate. The swap matures in June 2017, the ABL facility was amended to, among other things, extend the duration of the revolving portion of the facility from September 2020 to February 2022. As amended, the2024.
The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.75%1.25% and 2.25%1.75% for LIBOR-based borrowings (2.0% and 2.5% prior to amendment) and between 1.0%0.25% and 1.5%0.75% for base rate borrowings. The ABL facility contains a financial covenant whereby we must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility is less than the greater of (i) 10%,$87.5 million, calculated as amended,12.5% of the then applicable maximum borrowingadvance amount under the revolving credit portion of the ABL and anythe outstanding Term Loan balance, or (ii) $40$62.5 million. We dodid not meet this required fixed charge coverage ratio at December 31, 2017.2020. As a result, we
are not ableunable to access $50this remaining 12.5%, or $87.5 million, of the revolving credit portion of the ABL facility until we meet the required ratio. Additionally, we must demonstrate minimum liquidity, as calculated in accordance with the terms of the ABL facility, of at least $700 million onduring the date that is 91 days prior to January 15, 2021,90 day period immediately preceding the stated maturity date of each of the 5.95% Senior2022 Convertible Notes and 5.875% Notes due 2021,2023. The ABL also contains customary affirmative and that such liquiditynegative covenants for credit facilities of this type, including limitations on our ability to incur additional indebtedness or liens or to enter into investments, mergers and acquisitions, dispositions of assets and transactions with affiliates, some of which are more restrictive at any time during the term of the ABL when our fixed charge coverage ratio is available at all times thereafter untilless than 1.00:1.00 and our undrawn availability under the 5.95% Senior Notes due 2021 (2021 Notes) are paid in fullrevolving portion of the ABL is less than the greater of (a) $150 million or refinanced. Costs(b) 30% of the sum of the maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance. On September 30, 2019, we amended and restated the ABL and costs associated with entering into the ABLthis amendment were $1.0$2.2 million, and are being amortized along with the unamortized portion of $2.4 million of previously recognized deferred costs, to interest expense over the extended term of the facility ending February 2022.September 2024, along with $2.1 million of unamortized deferred costs that were previously recorded for the ABL.
ThereAs of December 31, 2020, there were no outstanding revolving credit borrowings under the revolving credit portion of the ABL, facility as of December 31, 2017, and $42.3$38.5 million was utilized to support the issuance of letters of credit. Average revolving credit borrowings under the ABL facility for the fiscal year ended December 31, 2017 were $37 million, bearing an average annual interest rate of 3.255%. Average borrowings under the ABL for the fiscal year ended December 31, 20162020 were $82$28 million, bearing an average annual interest rate of 1.8%2.2%. There were no revolving credit borrowings under the ABL for 2019.
In 2020, we issued and sold $291.4 million aggregate principal amount of 2025 Convertible Notes. We used a portion of the net proceeds from the offering of the 2025 Convertible Notes to repurchase $203.2 million aggregate principal amount of our outstanding 2022 Convertible Notes. We also used $19.4 million of the net proceeds of the offering of the 2025 Convertible Notes to pay the cost of capped call transactions, which effectively increase the initial conversion price of the 2025 Convertible Notes into ATI stock from $15.49 per share to $19.76 per share. The remainder of the net proceeds from the offering will be used for general corporate purposes.
On November 7, 2017,22, 2019, we issued 17 million shares of common stock at $24.00 per share before expenses in an underwritten registered public offering. This equity offering resulted in proceeds, net of transaction costs, of $397.8 million that were used to redeem all of the outstanding $350 million aggregate principal amount of our2027 Notes. Underwriting fees and other third-party expenses for the issuance of the 2027 notes were $5.5 million, and are being amortized to interest expense over the eight- year term of the 2027 Notes. Net proceeds of $344.5 million from this issuance, as well as cash on hand, were used to retire all $500 million aggregate principal amount of the 2021 Notes in December 2019, Notes. We recognizedresulting in a $37.0$21.6 million pre-tax debt extinguishment charge, to redeem the 2019 Notes, which included a $35.8$20.9 million cash payment as a make-whole provision on the early extinguishment of debt, and a $1.2$0.7 million charge for previously-unrecognizeddeferred debt issue costs. As a result of the 2019 Notes redemption and the ABL actions, we have no significant debt maturities until 2021.
At December 31, 2017,2020, we had $142$646 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $305$310 million, for total liquidity of more than $950 million. We do not expect to pay any significant U.S. federal or state income taxes in the next fewseveral years due to net operating loss carryforwards. Tax law changes
During the second and third quarters of 2019, we received approximately $250 million in cash from non-core asset sales, net of closing adjustments and transaction costs, consisting of $33 million for the Tax Cutssale of two non-core forging facilities, $125 million for the sale of the Cast Products business, and Jobs Act related to a liability$92 million for foreign earnings are expected to be offset with these net operating loss carryforwards or other tax attributes.the sale of certain oil and gas rights in Eddy County, NM.
In March 2017, we2020, the Company made a $135$130 million in cash contributioncontributions to the ATI Pension Plan, which completed our funding requirements for 2017.its U.S. qualified defined benefit pension plans. Based on recently-issued IRS regulations regarding mortality table changes for 2018, the current year performance of our pension trust assets throughas of December 31, 2017,2020, and the expected rate of return on pension assets in future years, we currently expect our 2018 funding requirements to the ATI Pension PlanU.S. qualified defined benefit pension plans to be approximately $40$87 million in 2021, and to have average annual funding requirements of approximately $85$50 million to the ATI Pension Planthese pension plans for the next few years thereafter. However, these funding estimates are subject to significant uncertainty including the actual pension trust assets’ fair value, and the discount rates used to measure pension liabilities.
We believe that internally generated funds, current cash on hand and available borrowings under the ABL facility will be adequate to meet our liquidity needs, including currently projected required contributions to the ATI Pension Plan, our U.S. qualified defined benefit pension plan.plans. 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. In addition, we regularly review our capital structure, various financing alternatives and conditions in the debt and equity markets in order to opportunistically enhance our capital structure. In connection therewith, we may seek to refinance or retire existing indebtedness, incur new or additional indebtedness or issue equity or equity-linked securities, in each case, depending on market and other conditions.
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.
Cash Flow and Working Capital
Cash provided by operations for 20172020 was $22.4$166.9 million, despiteincluding cash provided by a $135.0$156.6 million contribution to the ATI Pension Plan and a use of cash of $111.8 million from higherreduction in managed working capital balances. Managed working capital increased in 2017 as we continue to expand production levels to support business growth, including large pipeline project orders in our FRP segment, which will be delivered to our customers in early 2018, along with initial materials received to support the pending Allegheny & Tsingshan Stainless joint venture. Cash flow used in operations for 2016 was $43.7 million, which included a $115.0 million contribution to the ATI Pension Plan, and an offsetting benefitThe generation of $91.7 millioncash from lower managed working capital in 2020 reflects our alignment with expected demand levels. Other significant 2020 operating cash flow items included $130.2 million in contributions to a U.S. defined benefit pension plan and payment of 2019 annual incentive compensation. Cash provided by operations was $230.1 million in 2019, which included an $88.4 million reduction in managed working capital balances. This was despite $29 million in short-
term working capital advances to the A&T Stainless JV for 2019 and $145 million of cash contributions to ATI’s U.S. qualified defined benefit pension plans in 2019.
As part of managing the liquidity of theour business, we focus on controlling managed working capital, which is defined as gross accounts receivable, short-term contract assets and gross inventories, less accounts payable.payable and short-term contract liabilities. In measuring performance in controlling this managed working capital, we exclude the effects of LIFO and other inventory valuation reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. We also measure managed working capital as a percentage of the prior three months annualized sales to evaluate our performance based on recent levels of business volume. In 2017,2020, managed working capital decreasedincreased to 38.1%40.5% of annualized total ATI sales compared to 40.0%30.0% of annualized sales at December 31, 2016. The $111.8 million2019. This increase is a result of annualized three-month sales declining at a faster pace in 2020 than the decline in overall managed working capital balances versus year-end 2019, due in part to a first quarter 2020 increase in managed working capital over year-end 2019 levels. The $156.6 million decrease in 2017managed working capital in 2020 resulted from a $145.8$208.6 million decrease in accounts receivable, a $145.9 million decrease in inventory, and a $33.1 million increase in inventory and $91.8 million increase in accounts receivable,short-term contract liabilities, partially offset by a $125.8$0.4 million increase in short-term contract assets and a $230.6 million decrease in accounts payable. Days sales outstanding, which measures actual collection timing for accounts receivable, improvedworsened by approximately 10%7% at year-end 20172020 compared to 2016.2019. No significant accounts receivable collection issues are expected despite the increase in this metric. Gross inventory turns, which exclude the effect of LIFO and any applicable offsetting NRV inventory valuation reserves, remained unchanged in 2017improved by 28% 2020 compared to 2016.
In 2016, managed working capital2019 as our level of operating activity decreased by $91.7 million, due primarilythroughout 2020 in response to inventory reductions in the FRP segment. The $91.7 million decrease resulted from a $232.8 million decrease in inventory, partially offset by an $86.5 million decrease in accounts payable and a $54.6 million increase in accounts receivable.
lower customer demand.
The components of managed working capital were as follows:
| | | (In millions) | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | (In millions) | | December 31,
2020 | | December 31,
2019 |
| Accounts receivable | | $ | 545.3 |
| | $ | 452.1 |
| | $ | 400.3 |
| Accounts receivable | | $ | 345.8 | | | $ | 554.1 | |
| Short-term contract assets | | Short-term contract assets | | 38.9 | | | 38.5 | |
| Inventory | | 1,176.1 |
| | 1,037.0 |
| | 1,271.6 |
| Inventory | | 997.1 | | | 1,155.3 | |
| Accounts payable | | (420.1 | ) | | (294.3 | ) | | (380.8 | ) | Accounts payable | | (290.6) | | | (521.2) | |
| Short-term contract liabilities | | Short-term contract liabilities | | (111.8) | | | (78.7) | |
| Subtotal | | 1,301.3 |
| | 1,194.8 |
| | 1,291.1 |
| Subtotal | | 979.4 | | | 1,148.0 | |
| Allowance for doubtful accounts | | 5.9 |
| | 7.3 |
| | 4.5 |
| Allowance for doubtful accounts | | 4.3 | | | 4.6 | |
| LIFO reserve | | (43.1 | ) | | (97.3 | ) | | (136.4 | ) | LIFO reserve | | (44.1) | | | (33.6) | |
| Inventory reserves | | 121.5 |
| | 169.0 |
| | 206.3 |
| Inventory reserves | | 126.9 | | | 104.1 | |
| Managed working capital | | $ | 1,385.6 |
| | $ | 1,273.8 |
| | $ | 1,365.5 |
| Managed working capital | | $ | 1,066.5 | | | $ | 1,223.1 | |
| Annualized prior 3 months sales | | $ | 3,639.5 |
| | $ | 3,184.2 |
| | $ | 2,955.5 |
| Annualized prior 3 months sales | | $ | 2,633.2 | | | $ | 4,047.4 | |
| Managed working capital as a % of annualized sales | | 38.1 | % | | 40.0 | % | | 46.2 | % | Managed working capital as a % of annualized sales | | 40.5 | % | | 30.0 | % |
| December 31, 2017 change in managed working capital | | $ | 111.8 |
| | | | | |
| December 31, 2020 change in managed working capital | | December 31, 2020 change in managed working capital | | $ | (156.6) | | | |
Cash used in investing activities was $119.6$128.7 million in 2017, with $122.72020, reflecting $136.5 million forin capital expenditures partially offset by cash$5.9 million of proceeds from property, plant and equipment sales, which includes proceeds from the sale of miscellaneous assets. Our capitalcertain oil and gas rights. Capital expenditures in 2020 primarily are related to HPMC growth projects including the new isothermal press and heat-treating expansion project at STAL, our Chinese joint venture in which ATI has a 60% interest, for our third Precision Rolled Strip manufacturing facility is ongoing and will be fully funded by STAL’s operations. The HPMC segment capital expansion project for our new nickel-based powder alloys facility in North Carolina was completed, and is expected to be commercially qualified in early 2018. We are at the end of a significant, multi-year period of capital expansions, and expect our capital expenditures to be well below depreciation expense for the next several years.Cudahy, WI. We expect to fund our capital expenditures with cash on hand and cash flow generated from our operations and, if needed, by using a portion of the ABL facility. Cash provided by investing activities was $81.7 million in 2019, reflecting $250.1 million in net proceeds from non-core asset sales consisting of $33.0 million for the sale of two non-core forging facilities, $125.1 million for the sale of the Cast Products business and $92.0 million of proceeds from property, plant and equipment, largely due to the sale of certain oil and gas rights. Capital expenditures for 2019 were $168.2 million primarily related to HMPC growth projects.
Cash provided by financing activities in 20172020 was $9.2$116.9 million, as $397.8and consisted primarily of $291.4 million of proceeds from our November equity offeringborrowings for the 2025 Convertible Notes issued in 2020 and $100.0 million of additional Term Loan borrowings under the ABL. These were largely offset by $353.0a $203.2 million in long-term debt paymentsrepayment for a portion of the 2022 Convertible Notes and $35.8$19.1 million cash make-whole payment related to the early extinguishment of these 2022 Convertible Notes as required by the applicable indenture, as well as $19.4 million to pay the cost of capped call transactions and $9.1 million for a debt extinguishment chargeissuance costs, both of which reflectassociated with the redemption of our 2019newly issued 2025 Convertible Notes. Cash provided by financing activities in 20162020 also reflects a $7.2 million dividend payment to the 40% noncontrolling interest in our STAL PRS joint venture in China. Cash used in financing activities in 2019 was $323.5$203.0 million, with $387.5 million for the Term Loan and the 2022 Convertible Notes issued in the second quarter of 2016, partially offset by $25.8$507.6 million of dividends paidpayments on long-term debt and finance leases consisting largely of the redemption of all $500 million aggregate principal amount of the 2021 Notes outstanding. The redemption included a $20.9 million cash make-whole payment related to ATI shareholders, $16.0the early extinguishment of this debt as required under the applicable indenture. Borrowings on long-term debt were $350.0 million reflecting the issuance of the 2027 Notes. Such issuance included $5.5 million of payments for
underwriting fees and other third-party expenses. Cash used in financing activities in 2019 also reflects a $14.0 million dividend paymentspayment to the 40% noncontrolling interest in our STAL joint venture, $10.4 million of issuance costs related to the new debt, and $12.2 million primarily for the purchase of the 15% redeemable noncontrolling interest in ATI Flowform Products.venture.
At December 31, 2017,2020, cash and cash equivalents on hand totaled $141.6$645.9 million, an $88.0a $155.1 million decreaseincrease from year-end 2016.2019. Cash and cash equivalents held by our foreign subsidiaries was $58.7$92.9 million at December 31, 2017,2020, of which $26.2$38.3 million was held by the STAL joint venture.
Debt
Total debt outstanding decreased $340.3 million in 2017 to $1,553.8of $1,629.1 million at December 31, 2017. This decrease was2020, increased $217.9 million compared to December 31, 2019, as $291.4 million of borrowings for the 2025 Convertible Notes issued in 2020, a portion of which is required to be recorded in stockholders’ equity as discussed further below, and $100.0 million of additional Term Loan borrowings under the ABL were partially offset by a $203.2 million repayment for a portion of the 2022 Convertible Notes. Total debt outstanding as described above excludes debt issuance costs and includes the $46.8 million unamortized portion of the 2025 Convertible Notes that is required to be classified in stockholders’ equity due to the redemption of the 2019 Notes in the fourth quarter of 2017.
flexible settlement feature available to ATI on conversion. In managing our overall capital structure, some of the measures on which we focus are debt to EBITDA, which measures our ability to repay our incurred debt, 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. TheseWe define EBITDA as income from continuing operations before interest and income taxes, plus depreciation and amortization, goodwill impairment charges and debt extinguishment charges for the latest 12 month period. We define Adjusted EBITDA as EBITDA excluding significant charges or credits, restructuring charges, long-lived asset impairments and other postretirement/pension curtailment and settlement gains and losses. We believe that EBITDA and Adjusted EBITDA are useful to investors because these measures are commonly used to analyze companies on the basis of operating performance, leverage and liquidity. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and capital expenditures. EBITDA and Adjusted EBITDA are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance with U.S. generally accepted accounting principles.
All of these leverage ratios decreasedworsened in 20172020, primarily as a result of the redemption of the 2019 Notes.lower earnings. At year-end 2017,2020, our debt to Adjusted EBITDA ratio was 8.30, compared to 3.21 at December 31, 2019, and net debt to Adjusted EBITDA ratio was 5.01, compared to 2.09 at December 31, 2019.
| | | | | | | | | | | | | | |
| | December 31,
2020 | | December 31,
2019 |
| Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | |
| Interest expense | | 94.4 | | | 99.0 | |
| Depreciation and amortization | | 143.3 | | | 151.1 | |
| Impairment of goodwill | | 287.0 | | | — | |
| Restructuring and other charges | | 1,132.1 | | | 4.5 | |
| Joint venture impairment charge | | 2.4 | | | 11.4 | |
| Debt extinguishment charge | | 21.5 | | | 21.6 | |
| Gain on asset sales, net | | (2.5) | | | $ | (89.8) | |
| Adjusted EBITDA | | $ | 196.3 | | | $ | 439.4 | |
| | | | |
| Total debt (a) | | $ | 1,629.1 | | | $ | 1,411.2 | |
| Less: Cash | | (645.9) | | | (490.8) | |
| Net debt | | $ | 983.2 | | | $ | 920.4 | |
| | | | |
| Debt to Adjusted EBITDA | | 8.30 | | | 3.21 | |
| Net Debt to Adjusted EBITDA | | 5.01 | | | 2.09 | |
At year-end 2020, our net debt to total capitalization was 44.8%67.6%, compared to 55.1%30.6% at December 31, 2016.2019, reflecting significantly lower stockholders' equity as a result of the significant restructuring and other charges recognized in 2020.
| | | (In millions) | | December 31,
2017 | | December 31,
2016 | (In millions) | | December 31,
2020 | | December 31,
2019 |
| Total debt (a) | | $ | 1,553.8 |
| | $ | 1,894.1 |
| Total debt (a) | | $ | 1,629.1 | | | $ | 1,411.2 | |
| Less: Cash | | (141.6 | ) | | (229.6 | ) | Less: Cash | | (645.9) | | | (490.8) | |
| Net debt | | $ | 1,412.2 |
| | $ | 1,664.5 |
| Net debt | | $ | 983.2 | | | $ | 920.4 | |
| Total ATI stockholders’ equity | | 1,739.4 |
| | 1,355.2 |
| |
| Total ATI stockholders’ equity (b) | | Total ATI stockholders’ equity (b) | | 471.3 | | | 2,090.1 | |
| Net ATI capital | | $ | 3,151.6 |
| | $ | 3,019.7 |
| Net ATI capital | | $ | 1,454.5 | | | $ | 3,010.5 | |
| Net debt to ATI capital | | 44.8 | % | | 55.1 | % | Net debt to ATI capital | | 67.6 | % | | 30.6 | % |
Total debt to total capitalization was 47.2%77.6% at December 31, 20172020 compared to 58.3%40.3% at December 31, 2016.2019, also reflecting significantly lower stockholders' equity in 2020.
| | | (In millions) | | December 31,
2017 | | December 31,
2016 | (In millions) | | December 31,
2019 | | December 31,
2019 |
| Total debt (a) | | $ | 1,553.8 |
| | $ | 1,894.1 |
| Total debt (a) | | $ | 1,629.1 | | | $ | 1,411.2 | |
| Total ATI stockholders’ equity | | 1,739.4 |
| | 1,355.2 |
| |
| Total ATI stockholders’ equity (b) | | Total ATI stockholders’ equity (b) | | 471.3 | | | 2,090.1 | |
| Total ATI capital | | $ | 3,293.2 |
| | $ | 3,249.3 |
| Total ATI capital | | $ | 2,100.4 | | | $ | 3,501.3 | |
| Total debt to ATI capital | | 47.2 | % | | 58.3 | % | Total debt to ATI capital | | 77.6 | % | | 40.3 | % |
(a) Excludes debt issuance costs for both periods. The December 31, 2020 debt balance includes $46.8 million for the unamortized portion of the 2025 Convertible Notes recorded in stockholders’ equity due to the flexible settlement feature of the notes.
(b) The December 31, 2020 balance excludes $49.8 million recorded in stockholders’ equity for a portion of the 2025 Convertible Notes, net of debt issuance costs.
In 2020, we issued and sold $291.4 million aggregate principal amount of the 2025 Convertible Notes. Interest on the 2025 Convertible Notes at the 3.5% cash coupon rate is payable semi-annually in arrears on each June 15 and December 2017,15, commencing December 15, 2020. We used a portion of the net proceeds from the offering of the 2025 Convertible Notes to repurchase $203.2 million aggregate principal amount of our outstanding 2022 Convertible Notes, resulting in a $21.5 million debt extinguishment charge, which included a $19.1 million cash make-whole payment related to the early extinguishment of the 2022 Convertible Notes as required by the applicable indenture, and a $2.4 million charge for deferred debt issue costs. We also used $19.4 million of the net proceeds of the offering of the 2025 Convertible Notes to pay the cost of capped call transactions, described below, which was recorded as a reduction to additional paid-in-capital in stockholders’ equity on the consolidated balance sheet. The remainder of the net proceeds from the offering were used for general corporate purposes.
The 2025 Convertible Notes are convertible into our common stock at an initial conversion price of $15.49 per share and may be settled in cash, shares of our common stock or a combination thereof, at our election. As a result of this flexible settlement feature of the 2025 Convertible Notes, the embedded conversion option valued at $51.4 million is required to be separately accounted for as a component of stockholders’ equity. This equity component will be amortized as additional non-cash interest expense, commonly referred to as phantom yield, over the term of the 2025 Convertible Notes. Due to the non-cash phantom yield and including debt issue cost amortization, the 2025 Convertible Notes have reported interest expense in 2020 at an 8.4% rate, higher than the 3.5% cash coupon rate. Effective January 1, 2021, ATI early-adopted new accounting guidance that eliminates the equity component classification of the embedded conversion option, as well as the phantom yield portion of interest expense on a prospective basis. Upon adoption on January 1, 2021, long-term debt increased by $45.4 million, representing the $46.8 million unamortized portion of the equity component of convertible debt as of December 31, 2020, net of reclassified debt issue costs.
In connection with the pricing of the 2025 Convertible Notes, we redeemed allentered into privately negotiated capped call transactions with certain of the initial purchasers or their respective affiliates (collectively, the Counterparties). The capped call transactions are expected generally to reduce potential dilution to our common stock upon any conversion of the 2025 Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2025 Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions initially is approximately $19.76 per share, and is subject to adjustments under the terms of the capped call transactions.
On November 22, 2019, we issued $350 million aggregate principal amount of the 20192027 Notes. Net proceeds of $344.5 million from this issuance were used, together with cash on hand, to redeem all $500 million aggregate principal amount outstanding of the 5.95% 2021 Notes resulting in a $37.0 million pre-tax debt extinguishment charge, which included a $35.8 million cash payment as a make-whole provision on the early extinguishment of debt, and a $1.2 million charge for previously-unrecognized debt issue costs.December 2019.
The 5.875% stated interest rate payable on theour $500 million Notes due 2023 Notes(2023 Notes) is subject to adjustment in the event of changes in the credit ratings on the 2023 Notes by either Moody’s or Standard & Poor’s (S&P). Each notch of credit rating downgrade from the credit ratings in effect when the 2023 Notes were issued in July 2013 increases interest expense by 0.25% on the 2023 Notes, up to a maximum 4of four notches by each of the two rating agencies, or a total 2.0% potential interest rate change up to 7.875%.
In February 2016, theThe 2023 Notes reset one notch topresently bear the maximum 7.875% annual interest rate as a result of a credit rating downgrade by S&P, which resulted in an additional $1.3 million of interest expense measured on an annual basis, compared to 2015.downgrades. Any further credit rating downgrades have no effect on the interest rate of the 2023 Notes, and increases in the Company’sour credit ratings from these ratings agencies would reduce interest expense incrementally on the 2023 Notes to the original 5.875% interest rate in a similar manner.
In Our credit rating from both rating agencies currently remains below the second quarter of 2016,level at which the current 2023 Notes interest rate would reset to a lower rate. At our present credit rating levels, we issuedwould need a two-notch ratings upgrade by Moody’s, to Ba3, and sold $287.5 million aggregate principal amount ofa two-notch increase by S&P, to BB-, before the 2022 Convertible Notes. Interest on the 2022 Convertible2023 Notes is payableinterest rate would be lowered in cash semi-annually in arrears on each January 1 and July 1, commencing January 1, 2017. The 2022 Convertible Notes have a conversion price of $14.45 per share, subject to adjustment in certain events. 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.
STAL, the Company’s Chinese joint venture company in which ATI has a 60% interest, has a separate $20 million revolving credit facility entered into in April 2015. Borrowings under the STAL revolving credit facility are in U.S. dollars based on U.S. interbank offered rates. The credit facility is supported solelycase by STAL’s financial capability without any guarantees from the joint venture partners. The credit facility requires STAL to maintain a minimum level of shareholders’ equity, and certain financial ratios.0.25%.
A summary of required payments under financial instruments (excluding accrued interest) and other commitments are presented below. A liability
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Total | | Less than 1
year | | 1-3
years | | 4-5
years | | After 5
years |
| Contractual Cash Obligations | | | | | | | | | | |
| Total Debt including Finance Leases | | $ | 1,629.1 | | | $ | 17.8 | | | $ | 606.9 | | | $ | 654.2 | | | $ | 350.2 | |
| Interest on Debt (A) | | 386.7 | | | 90.2 | | | 174.4 | | | 81.0 | | | 41.1 | |
| Operating Lease Obligations (B) | | 84.0 | | | 19.6 | | | 29.4 | | | 16.9 | | | 18.1 | |
| Other Long-term Liabilities | | 119.9 | | | — | | | 70.6 | | | 19.2 | | | 30.1 | |
| Pension and OPEB Obligations (C) | | 568.2 | | | 127.9 | | | 197.7 | | | 114.8 | | | 127.8 | |
| Unconditional Purchase Obligations | | | | | | | | | | |
| Raw Materials (D) | | 1,050.1 | | | 263.8 | | | 369.1 | | | 253.2 | | | 164.0 | |
| Capital expenditures | | 74.9 | | | 39.1 | | | 35.8 | | | — | | | — | |
| Other (E) | | 89.6 | | | 49.8 | | | 25.4 | | | 12.2 | | | 2.2 | |
| Total | | $ | 4,002.5 | | | $ | 608.2 | | | $ | 1,509.3 | | | $ | 1,151.5 | | | $ | 733.5 | |
| Other Financial Commitments | | | | | | | | | | |
| Lines of Credit (F) | | $ | 550.3 | | | $ | 50.3 | | | $ | — | | | $ | 500.0 | | | $ | — | |
| Guarantees | | $ | 26.8 | | | | | | | | | |
(A)Amounts include contractual interest payments using the interest rates in effect as of December 31, 2020 applicable to the Company’s 2022 Convertible Notes, the 2023 Notes, the Term Loan due 2024, the 2025 Convertible Notes, the Allegheny Ludlum 6.95% Debentures due 2025 and the 2027 Notes.
(B)Amounts include operating lease obligations at their undiscounted value. These obligations are presented in other current liabilities and other long-term liabilities on the consolidated balance sheets at their discounted value, using applicable interest rates. See Note 13, Leases for taxes duefurther information.
(C)Based on mandatory deemed repatriationcurrent actuarial studies, amounts include payments for the next 10 years to defined benefit pension plans, assuming the expected long-term returns on pension assets are achieved. Projections of earningsminimum required payments to the U.S. qualified defined benefit pension plans are subject to significant uncertainty based on a number of controlledfactors including actual pension plan asset returns, changes in estimates of participant longevity, and changes in interest rates. Amounts also include actuarial projections of payments under other postemployment benefit plans for the next 10 years. In most retiree healthcare plans, our contributions are capped based on the cost as of a certain date. See Note 16, Retirement Benefits for further information.
(D)We have contracted for physical delivery for certain of our raw materials to meet a portion of our needs. These contracts are based upon fixed or variable price provisions. We used current market prices as of December 31, 2020, for raw material obligations with variable pricing.
(E)We have various contractual obligations that extend through 2026 for services involving production facilities and administrative operations. Our purchase obligation as disclosed represents the estimated termination fees payable if we were to exit these contracts.
(F)At December 31, 2020, there were no amounts drawn under foreign corporations,credit agreements. Drawn amounts on the U.S. facility were $38.5 million utilized under the $500 million ABL facility for standby letters of credit, which is onerenew annually. These letters of the provisionscredit are used to support: $29.4 million in workers’ compensation and general insurance arrangements, $5.4 million related to environmental matters and $3.7 million for ATI's assurance of the recently-enacted Tax Act, has been excluded from the contractual cash obligations disclosure because ATI has sufficient net operating loss carryforwards availableperformance to fully offset the tax payment obligation.a customer.
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Contractual Cash Obligations | | | | | | | | | | |
| Total Debt including Capital Leases | | $ | 1,553.8 |
| | $ | 10.1 |
| | $ | 5.5 |
| | $ | 888.2 |
| | $ | 650.0 |
|
| Interest on Debt (A) | | 507.6 |
| | 99.7 |
| | 202.2 |
| | 135.0 |
| | 70.7 |
|
| Operating Lease Obligations | | 77.4 |
| | 20.0 |
| | 26.0 |
| | 17.5 |
| | 13.9 |
|
| Other Long-term Liabilities | | 73.2 |
| | — |
| | 22.4 |
| | 9.1 |
| | 41.7 |
|
| Pension and OPEB Obligations (B) | | 684.3 |
| | 81.1 |
| | 258.9 |
| | 192.3 |
| | 152.0 |
|
| Unconditional Purchase Obligations | | | | | | | | | | |
| Raw Materials (C) | | 1,049.3 |
| | 367.3 |
| | 489.0 |
| | 193.0 |
| | — |
|
| Capital expenditures | | 62.8 |
| | 50.6 |
| | 12.2 |
| | — |
| | — |
|
| Other (D) | | 146.3 |
| | 68.3 |
| | 47.3 |
| | 22.4 |
| | 8.3 |
|
| Total | | $ | 4,154.7 |
| | $ | 697.1 |
| | $ | 1,063.5 |
| | $ | 1,457.5 |
| | $ | 936.6 |
|
| Other Financial Commitments | | | | | | | | | | |
| Lines of Credit (E) | | $ | 469.7 |
| | $ | 69.7 |
| | $ | — |
| | $ | 400.0 |
| | $ | — |
|
| Guarantees | | $ | 31.2 |
| | | | | | | | |
| |
(A) | Amounts include contractual interest payments using the interest rates in effect as of December 31, 2017 applicable to the Company’s 2021 Notes, the Term Loan due 2022, the 2022 Convertible Notes, the 2023 Notes and the 6.95% Debentures due 2025. |
| |
(B) | Based on current actuarial studies, amounts include payments for the next 10 years to defined benefit pension plans, assuming the expected long-term return on pension assets is achieved. Projections of minimum required payments to the ATI Pension Plan are subject to significant uncertainty based on a number of factors including actual pension plan asset returns, changes in estimates of participant longevity, and changes in interest rates. Amounts also include actuarial projections of payments under other postemployment benefit plans for the next 10 years. In most retiree healthcare plans, our contributions are capped based on the cost as of a certain date. See Note 11, Retirement Benefits for further information. |
| |
(C) | We have contracted for physical delivery for certain of our raw materials to meet a portion of our needs. These contracts are based upon fixed or variable price provisions. We used current market prices as of December 31, 2017, for raw material obligations with variable pricing. |
| |
(D) | We have various contractual obligations that extend through 2026 for services involving production facilities and administrative operations. Our purchase obligation as disclosed represents the estimated termination fees payable if we were to exit these contracts. |
| |
(E) | At December 31, 2017, there was $6.3 million drawn under foreign credit agreements. Drawn amounts on the U.S. facility were $42.3 million utilized under the $400 million ABL facility for standby letters of credit, which renew annually. These letters of credit are used to support: $29.1 million in workers’ compensation and general insurance arrangements, $12.4 million related to environmental matters and $0.8 million for ATI’s assurance of performance to a customer. |
Commitments and Contingencies
At December 31, 2017,2020, our reserves for environmental remediation obligations totaled approximately $12$14 million,, of which $7$4 million was included in other current liabilities. These reserves included estimated probable future costs of: $2$3 million for federal Superfund and comparable state-managed sites; $8$9 million for formerly owned or operated sites for remediation or indemnification obligations; $1$1 million for owned or controlled sites at which our operations have been discontinued; and $1$1 million for sites utilized by the Company in ourits ongoing operations. We continue to evaluate whether we may be able to recover a portion of future costs for environmental liabilities from third parties and to pursue such recoveries where appropriate. The timing of expenditures depends on a number of factors that vary by site. ATI 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.
At December 31, 2017,2020, we had recognized asset retirement obligations (AROs) of $24$24 million related to landfill closures, decommissioning costs, facility leases and conditional AROs associated with manufacturing activities using what may be characterized as potentially hazardous materials.
Based on currently available information, it is reasonably possible that the costs for active matters may exceed our recorded reserves by as much as $15 million. However, future investigation or remediation activities may result in the discovery of additional hazardous materials, potentially higher levels of contamination than discovered during prior investigation, and may impact costs of the success or lack thereof in remedial solutions. Therefore, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on the ATI’s consolidated financial condition or results of operations.
Labor Matters
CollectiveWe currently are involved in negotiation on our next significant collective bargaining agreementsagreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW) that cover, which expires February 28, 2021 involving approximately 600 employees expired in 2017, and operations continue at these facilities while negotiations with the USW are ongoing. In addition, the Company has CBAs with approximately 3001,100 USW-represented active full-time employees that expire in 2018.located primarily within the AA&S segment operations.
Retirement Benefits
We instituted several liability management actions over the last few years to effect changes to our retirement benefit programs. As a result of these actions, nearly allAll of ATI’s operations have defined benefit pensions thatpension plans are eithernow closed to new entrants, and at most ATI operations with pension participants the plans are frozen for all future benefit accruals, or closed to new entrants, andwith less than 10% of participants in ATI’s U.S. qualified defined benefit plans still earning additional pension service. Additionally, all of the remaining collectively-bargained defined benefit retiree health care plans thatat ATI’s operations are capped andnow closed to new entrants, transitioningwith cost caps in place for these obligations. As a result of these actions, ATI’s retirement benefitsavings and other postretirement benefit programs have largely transitioned to a defined contribution structure.
At December 31, 2017, the ATI Pension Plan was2020, our U.S. qualified defined benefit pension plans were approximately 76% funded in accordance with generally accepted accounting principles, and waswere remeasured at that date using a 3.85%2.60% discount rate to measure the projected benefit obligation. For ERISA funding purposes, discount rates used to measure pension liabilities for U.S. qualified defined benefit plans are calculated on a different basis using an IRS-determined segmented yield curve, which currently results in a higher discount rate than the discount rate methodology required by accounting standards. Funding requirements are also affected by IRS-determined mortality assumptions, which may differ from those used under accounting standards. Based upon current regulations and actuarial studies, we currently expect to make approximately a $40$87 million in cash contributioncontributions to the ATI Pension PlanU.S. qualified defined benefit pension plans in 2018,2021, and we currently expect to have average annual funding requirements of approximately $85$50 million to these pension plans for the next few years for this plan,thereafter, using ana 6.78% weighted average expected 7.75% rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including potential changes to mortality tables with revised longevity estimates, and the performance of our pension trust assets.assets and the discount rates used to measure pension liabilities. Pension trust asset performance for both our accounting and ERISA funding calculations is determined using the market value of plan assets at the end of each year. Since July 2016, we
We have contributed $250 millioncertain collective bargaining agreements that include participation in casha multiemployer pension plan. Under current law, an employer that withdraws or partially withdraws from a multiemployer pension plan may incur a withdrawal liability to the ATIplan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. A subsidiary of the Company participates in the Steelworkers Western Independent Shops Pension Plan (WISPP) for union-represented employees of our primary titanium operations in Albany, OR, which is
funded on an hours-worked basis. As of December 31, 2020, manufacturing operations at this facility are indefinitely idled, and a limited number of employees that participate in the WISPP remain active in maintenance and other functions. It is reasonably possible that a significant reduction or the elimination of hours-worked contributions due to improvechanges in operating rates at this facility could result in a withdrawal liability assessment in a future period. As of the plan’s funded position.WISPP fiscal plan year ended September 30, 2018, which is the most recent information available from the Plan Administrator, our subsidiary’s liability for a complete withdrawal was estimated by the Plan Administrator to be approximately $38 million on an undiscounted basis. If the withdrawal liability was incurred, we estimate that payments of this obligation would be required on a straight-line basis over a 20-year period.
Dividends
Effective with the fourth quarter of 2016,, our Board of Directors decided to suspend the quarterly dividend. A quarterly dividend of $0.08 per share of common stock outstanding was paid for each of the first three quarters of 2016. The payment of dividends and the amount of such dividends depends upon matters deemed relevant by our Board of Directors on a quarterly basis, 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. Under the ABL facility, there is no limit on dividend declarations or payments provided that the undrawn availability, after giving effect to a particular dividend payment, is at least the greater of $100$150 million and 25%30% of the sum of the maximum revolving credit availability,advance amount and the outstanding principal amount of any term loans (the Maximum Loan Amount), and no event of default under the ABL facility has occurred and is continuing or would result from paying athe dividend. In addition, there is no limit on dividend declarations or payments if the undrawn availability is less than the greater of $100$150 million and 25%30% of the maximum revolving credit advance amountMaximum Loan Amount but more than the greater of $60$75 million and 15% of the maximum revolving credit advance amount,Maximum Loan Amount, if (i) no event of default has occurred and is continuing or would result from paying the dividend, and (ii) we demonstrate to the administrative agent that, prior to and after giving effect to the payment of the dividend (A) the undrawn availability, as measured both at the time of the dividend payment and as an average for the 60 consecutive day period immediately preceding the dividend payment, is at least the greater of $60$75 million and 15% of the maximum revolving credit availability,Maximum Loan Amount, and (B) we maintain a fixed charge coverage ratio of at least 1.00:1.00, as calculated in accordance with the terms of the ABL facility.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of these accounting principles requires our management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.
Inventories
At December 31, 2017,2020, we had net inventory of $1,176.1$997.1 million. Inventories are stated at the lower of cost (LIFO, FIFO and average cost methods) or market, less progress payments.market. 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. 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. Generally, over time based on overall inflationary trends in raw materials, labor and overhead costs, the use of the LIFO inventory valuation method will result in a LIFO inventory valuation reserve, as the higher current period costs are included in cost of sales and the balance sheet carrying value of inventory is reduced.
The prices for many of the raw materials we use have been extremely volatile during the past several years, while labor and overhead costs have been generally stable, with a modest inflationary trend. Raw material cost changes typically have the largest impact on the LIFO inventory costing methodology based on the overall proportion of raw material costs to other inventoriable costs. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a fall in material
costs generally results in a benefit to operating results by reducing cost of sales and increasing the inventory carrying value, while conversely, a rise in raw material costs generally has a negative effect on our operating results by increasing cost of sales while lowering the carrying value of inventory. For example, for the years ended December 31, 20172020 and 2016,2019, the LIFO inventory valuation method resulted in cost of sales that were $54.2$10.5 million and $39.1$25.5 million, respectively, higherlower than would have been recognized under the FIFO methodology to value our inventory. Our NRV reserves were $44.1 million and $33.6 million at December 31, 2020 and 2019, respectively.
Due primarily to persistent raw material deflation in prior years, we are in the unusual situation of having a LIFO inventory balance that exceeds replacement cost. In cases where inventory at FIFO cost is lower than the LIFO carrying value, a write-down of the inventory to market may be required, subject to a lower of cost or market evaluation. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not be less than net realizable value reduced by an allowance for a normal profit margin). We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting NRV inventory reserve, if any, is recognized as an expense in the period that the need for the reserve is identified.
The impact to our cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions): |
| | | | | | | | | | |
| | | Fiscal year ended December 31, |
| | | 2017 | 2016 | 2015 |
| LIFO benefit (charge) | | $ | (54.2 | ) | $ | (39.1 | ) | $ | 131.6 |
|
| NRV benefit (charge) | | 54.0 |
| 39.9 |
| (131.5 | ) |
| Net cost of sales impact | | $ | (0.2 | ) | $ | 0.8 |
| $ | 0.1 |
|
We also recorded inventory valuation charges for the market-based valuation of Rowley-produced titanium sponge inventory. These lower of cost or market charges in 2016 and 2015 were $17.7 million and $24.5 million, respectively. Additionally, in the third quarter of 2016, in conjunction with the indefinite idling of our Rowley, UT titanium sponge facility, an additional $11.3 million charge was taken to revalue titanium sponge inventory based on revised assessments of industrial grade titanium market conditions and expected utilization of this inventory. In December 2015, based on current market prices for non-premium quality (PQ) grades of titanium sponge, we recorded an additional $25.4 million charge to revalue this inventory. This charge included revised assessments of the non-PQ titanium market conditions and expected utilization of this inventory. | | | | | | | | | | | | | | |
| | Fiscal year ended December 31, |
| | 2020 | 2019 | 2018 |
| LIFO benefit (charge) | | $ | 10.5 | | $ | 25.5 | | $ | (28.6) | |
| NRV benefit (charge) | | (10.5) | | (25.6) | | 27.9 | |
| Net cost of sales impact | | $ | — | | $ | (0.1) | | $ | (0.7) | |
It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months due to the longer manufacturing and distribution process for certain products.
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.
Asset Impairment
We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value, and the asset’s carrying value exceeds its fair value. Changes in the expected use of a long-lived asset group, and the financial performance of the long-lived asset group and its operating segment, are evaluated as indicators of possible impairment. Future cash flow value may include appraisals for property, plant and equipment, land and improvements, future cash flow estimates from operating the long-lived assets, and other operating considerations. In the fourth quarter of each year in conjunction with the annual business planning cycle, or more frequently if new material information is available, we evaluate the recoverability of idled facilities.
In August 2016, ATIOn December 2, 2020, we announced a strategic repositioning of our FRP business within the indefinite idlingAA&S segment, with a focus of increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge PRS. As part of this strategic realignment, we intend to cease production of standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Rowley, Utah titanium spongeBrackenridge, PA operations, including the HRPF, and close various downstream finishing operations that are part of the standard stainless sheet flow path. The December 2, 2020 decision to exit production facility, with the orderly wind-down of operations to occur through December 2016. Over the last several yearsstandard stainless products represented a significant global capacity had been added to produce titanium sponge, which is a key raw material used to produce ATI’s titanium products. In addition, demand for industrial-grade titanium products from global markets continued to be weak. As a resultindicator of these factors, titanium sponge, including aerospace quality sponge, could be purchased from qualified global producers under long-term supply agreements at prices lower than the production costs at ATI’s titanium sponge facilityimpairment in Rowley, UT. The Rowley facility was idled in a manner that allows the facility to be restarted in the future if supported by market conditions. As a result of this idling decision, we evaluated the recoverability of this facility and concluded that the expected net undiscounted future cash flows from these
assets were less than their carrying value. A $470.8 million impairment charge was recognized in 2016 to reduce the carrying value of certain long-lived assets. Based on projected cash flows of the Rowley, UTBrackenridge, PA operations, including the HRPF, we completed a fair value analysis as of the beginning of the fourth quarter of 2020 and recognized a $1,032.6 million impairment charge for this facility tobased on an estimated fair value based onof $354 million. This long-lived asset appraisalsimpairment charge was determined using a held in use framework and an income approach, which represents Level 3 unobservable information in the fair value hierarchy. This impairment assessment and valuation method require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost incomeof capital. Many of these assumptions are determined by reference to market participants we have identified. For example, the weighted average cost of capital used in our discounted cash flow assessment was 9.3% and market approaches.
In December 2015,the long-term growth rate was 2%. Although we announced rightsizing actions to better align our Flat Rolled Productsbelieve that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. Other long-lived asset impairment charges of $8.9 million were also recognized for various AA&S segment operations to the challenging market conditionsidentified for our commodity products. Such actions included the idlingclosure as part of the standard stainless operations at the Midland, PA facility, which was completed in January 2016, and the GOES operations in Western PA, including the Bagdad, PA facility, which was completed in April 2016. In October 2016, the Company announced the closure of these facilities as management concluded that the facilities could not be operated at an acceptable rate of return. As a result of these idlings in 2015, we evaluated the recoverability of these idled facilities and concluded that the expected net undiscounted future cash flows from these assets were less than their carrying value. A $24.2 million impairment charge was recognized to reduce the carrying value of the Midland facility to estimated fair value and a $30.3 million impairment charge was recognized to reduce the carrying value of GOES operations assets to estimated fair value in 2015. These long-lived asset impairment charges were based on analysis of the estimated fair values, including asset appraisals using income and market approaches.sheet exit decision.
Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. At December 31, 2020, the Company had $240.7 million of goodwill on its consolidated balance sheet, all
of which relates to the HPMC segment. Goodwill decreased $285.1 million in 2020 due to a $287.0 million interim impairment charge in the HPMC segment, partially offset by a $1.9 million increase from the impact of foreign currency translation on goodwill denominated in functional currencies other than the U.S. dollar.
During the thirdsecond quarter of 2017,2020, we performed an interim goodwill impairment analysis on ATI Castthe Forged Products a titanium investment casting business, duereporting unit and its $460.4 million goodwill balance based on assessed potential indicators of impairment, including recent disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic, and the increasing uncertainty of near-term demand requirements of aero-engine and airframe markets based on government responses to the pandemic and ongoing interactions with customers. In the previous 2019 annual goodwill impairment indicators including lower actual results versus projections. Thisevaluation, this reporting unit had a fair value that exceeded carrying value by 12% as a result of our 2016 annual goodwill impairment evaluation.approximately 30%. As a result of the 2017second quarter 2020 interim goodwill impairment evaluation, we determined that the fair value of the CastForged Products businessreporting unit was significantly below the carrying value, including goodwill.goodwill, by $287.0 million. This was primarily due to changes in the timing and amount of expected cash flows resulting from lower projected revenues, profitability and cash flows associated with revised expectations for the rate of operational improvement and profitability of this business based on current customer agreements.due to near-term reductions in commercial aerospace market demand. Consequently, during the thirdsecond quarter of 2017,2020, we recorded a $114.4$287.0 million pre-tax impairment charge to write-off allfor the partial impairment of theForged Products reporting unit goodwill, associated with ATI Cast Products, most of which was assigned from ourthe Company’s 2011 Ladish acquisition that was not deductible for income tax purposes.
Also duringFor the third2020 interim impairment analysis, fair value was determined by a quantitative assessment that used a discounted cash flow technique, which represents Level 3 unobservable information in the fair value hierarchy. The impairment assessment and valuation method require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants we have identified. For example, our weighted average cost of capital used in our discounted cash flow assessment was 11.6%, and long-term growth rate was 3.5%. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.
For our annual goodwill impairment evaluation performed in the fourth quarter of 2017, management concluded that2020, quantitative goodwill assessments were performed for the goodwill impairment at ATI Cast Products was an impairment indicator to evaluate the recoverability of other long-lived assets of thistwo HPMC reporting unit, including property, plant, equipment, and intangible assets. No impairment was determined to exist in these long-lived assets as a result of this interim impairment test.
For both our annual and interim goodwill impairment analysis in 2017, fairunits with goodwill. Fair values were determined by using a quantitative assessment that may include discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any, which represents Level 3 unobservable information in the fair value hierarchy. These impairment assessments and valuation methods require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants we have identified. For example, our weighted average costscost of capital used in our discounted cash flow assessments ranged from approximately 10% to 11%was 11.7% and long-term growth rates ranged from 3% to 4.5%3.5%. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.
The $240.7 million of goodwill remaining as of December 31, 2020 on our consolidated balance sheet is comprised of $173.4 million at the Forged Products reporting unit and $67.3 million at the Specialty Materials reporting unit. For our annual goodwill impairment evaluation performed in the fourth quarter of 2020, the Specialty Materials reporting unit had a fair value that was significantly in excess of carrying value. The Forged Products reporting unit had a fair value that exceeded carrying value by approximately 2%, representing a slight increase in fair value subsequent to the interim goodwill impairment charge recorded for this reporting unit in the second quarter of 2020 as discussed above. As a result, no impairments were determined to exist from the annual goodwill impairment evaluation for the years ended December 31, 2020, 2019 and 2018. In order to validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premiumpremium. In addition, no indicators of impairment were observed in order to validate2020 associated with any of our long-lived assets in the reasonablenessHPMC segment
As part of the divestiture of the titanium investment castings business, which was completed early in the third quarter 2019, ATI retained a small post-casting machining operation in Salem, OR. We recognized a $10.2 million impairment charge in 2019 on the carrying value of long-lived assets of the retained Salem operation ($4.5 million for property, plant and equipment, $1.4 million for operating lease right of use assets, $1.0 million for finance lease right of use assets, and $3.3 million of finite-lived intangible assets). This long-lived asset impairment charge was based on an analysis of the estimated fair values, of the reporting units as of the valuation date. No impairments were determined to exist from the annual goodwill impairment evaluations for the years ended December 31, 2017 and 2016. For the 2017 evaluation, our two HPMC reporting units with goodwill had fair values that were significantlyincluding asset appraisals using market approaches, which represent Level 3 unobservable information in excess of carrying value.
As a result of this assessment in 2015, we determined that the fair value hierarchy. This impairment charge is categorized as part of the Flat Rolled Products business was below carrying value, including goodwill. Duringnet gain on sale of the fourth quarter of 2015, we recorded a $126.6 million pre-tax impairment charge to write-off all the goodwill in the Flat Rolled Products segment. This was due to challenging market conditions in 2015 in this business, primarily impacting commodity stainless flat-rolled products. No other goodwill impairments were determined to exist for the year ended December 31, 2015.
titanium investment castings business.
Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets.
The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. In situations where a three year cumulative loss condition exists, accounting standards limitThe verifiable evidence such as future reversals of existing temporary differences and the ability to consider projectionscarryback are considered before the subjective sources such as estimate future taxable income exclusive of future results as positive evidence to assess the realizability of deferredtemporary differences and tax assets.planning strategies. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.
Since 2015, ATI results have reflectedResults in 2020, 2019 and 2018 include impacts from income taxes that differ from applicable standard tax rates, primarily related to income tax valuation allowances. In 2020, ATI’s U.S. operations returned to a three yearthree-year cumulative loss from U.S. operations. We established $74.5position, limiting our ability to utilize future projections as sources of income when analyzing the need for a valuation allowance. The consolidated income tax provision of $77.7 million in deferred tax asset valuation allowances in 2015, of which $68.4 million were for certain federal and state deferred tax assets. In 2016, the actionsfiscal year 2020 primarily relates to indefinitely idle the Rowley, UT titanium sponge production facility resulted in a reassessment of the realizability of U.S. federal deferred tax assets. In 2016, our results of operations included an increaseincreases to deferred tax asset valuation allowances of $171.5 million, includingbased on an additional $165.8 million valuation allowance on federal and state deferred tax assets as well as additional deferred tax asset valuation allowances in certain foreign jurisdictions. These deferred tax valuation allowances in 2015 and 2016 had the effect of significantly reducing the reported income tax benefit applicable to the pre-tax loss in each period. In 2017, ATI continued to maintain income tax valuation allowances on its U.S. Federal and state deferred tax assets. In addition we have a $28.8 million valuation allowance on amounts recorded in other comprehensive income as of December 31, 2017.
While we remain in a cumulative loss condition, our ability to evaluate the realizability of deferred tax assets is generally limited to the ability to offset timing differences on taxable income associated with deferred tax liabilities. Therefore, a change in estimate of deferred tax asset valuation allowances for federal, state, or foreign jurisdictions during this cumulative loss condition period will primarily be affected by changes in estimatesanalysis of the time periods thatexpected realization of deferred tax assets and liabilities will be realized, or on a limited basis to tax planning strategies that may result in a change in the amount of taxable income realized. within applicable expiration periods.
At December 31, 2017,2019, our U.S. results had switched from a three-year cumulative loss position to a three-year cumulative income position, allowing ATI to utilize forecasts of future profits as a source of income when evaluating the overall need for a valuation allowance. We determined that valuation allowances on net deferred tax asset balances for federal and certain state jurisdictions are no longer required. Certain individual tax attributes still require a valuation allowance based on expected utilization. At December 31, 2019, our deferred tax asset valuation allowance was $274.0$94.5 million. The change in the overall valuation allowance for 2019 includes amounts utilized during the year as part of the reported effective tax rate, as well as a $45.1 million reduction at December 31, 2019 based on a change in judgment on the realizability of deferred tax assets.
In 2018, we reported income before tax of $247.7 million, of which $190.8 million was attributable to the U.S. The overall income, along with the Global Intangible Low-Taxed Income inclusion for the year, resulted in ATI utilizing NOL deferred tax assets in 2018, which resulted in a U.S. valuation allowance release of $46.3 million for 2018. At December 31, 2018, we continued to maintain a valuation allowance on the net deferred tax assets for U.S. federal and state income tax purposes, with the exception of the indefinite lived deferred tax liability related to goodwill and the withholding tax liability associated with its permanent reinvestment assertion, as well as valuation allowances for certain foreign operations.
On December 22, 2017,March 27, 2020, the U.S. government enacted comprehensivethe Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes certain income tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act makes broad and complex changes, in response to the U.S.COVID-19 pandemic. We have determined that the CARES Act changes do not result in a material income tax code, including, but not limited to:
(1) reducing the U.S. federal corporateexpense or benefit to ATI. We are currently assessing payroll tax rate from 35% to 21%;
(2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;
(3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries;
(4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations;
(5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized;
(6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax;
(7) creating a new limitation on deductible interest expense; and
(8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
We continue to evaluate various aspects of the Tax Act, including the following significant items:
Reduction of US federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysesrefund opportunities related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income andemployee retention credit under the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation. However, as we gather additional information and receive additional guidance from the U.S. Treasury on the application of certain provisions of Tax Act, we will refine our estimate.
Global intangible low taxed income (GILTI): The Tax Act creates a new requirement effective for fiscal years beginning after December 31, 2017, that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740, however, we have estimated that no expense would be required to be recorded in the current year.
Base Erosion and Anti-Abuse (BEAT): The Tax Act imposes a new “base erosion” minimum tax that is generally calculated after adding back certain deductible payments made to related foreign subsidiaries to taxable income and is applicable for years
beginning after December 31, 2017. We continue to review the impact of BEAT but have preliminarily estimated that no expense would be required to be recorded in the current year.
Valuation allowances: ATI must assess whether its valuation allowance analyses or deferred tax assets are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, and new categories of foreign tax credits). We recorded provisional amounts related to certain portions of the Tax Act, therefore any corresponding determination of the need for or change in a valuation allowance is also provisional.CARES Act.
Retirement Benefits
We have defined contribution retirement plans or benefit pension plans covering substantially all of our employees. We also sponsor several postretirement plans covering certain hourly and salaried employees and retirees. These plans provide health care and life insurance benefits for eligible employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked, and are funded with cash. We instituted several liability management actions over the last few years to effect changes to our retirement benefit programs. As a result of these actions, nearly allAll of ATI’s operations have defined benefit pensions thatpension plans are eithernow closed to new entrants, and at most ATI operations with pension participants the plans are frozen for all future benefit accruals, or closed to new entrants, andwith less than 10% of participants in ATI’s U.S. qualified defined benefit plans still earning additional pension service. Additionally, all of the remaining, collectively-bargained defined benefit retiree health care plans thatat ATI’s operations are capped andnow closed to new entrants, transitioningwith cost caps in place for these obligations. As a result of these actions, ATI’s retirement benefitsavings and other postretirement benefit programs have largely transitioned to a defined contribution structure.
Under U.S. generally accepted accounting principles, amounts recognized in financial statements for defined benefit pension plans are determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining our pension income or expense in accordance with the accounting standards is the expected investment return on plan assets. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration input from our third party pension plan asset managers and actuaries regarding the types of securities the plan assets are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. Our weighted average expected long-term return on pension plan investments was 7.75%7.16% in 20172020, and the weighted average expected long-term rate of return on pension plan investments for 2021 will be 6.78%. We apply this assumed rate to the market value of plan assets at the end of the previous year. This produces the expected return on plan assets that is included in annual pension expense for the current year. The actual returns on pension plan assets for the last five years have been 16.9%15.2% for 2017, 5.3%2020, 15.1% for 2016, (1.2)2019, (4.8)% for 2015, 6.5%2018, 16.9% for 2014,2017, and 14.3%5.3% for 2013.2016. The effect of increasing, or lowering, the expected return on pension plan investments by 0.25% would result in additional pre-tax annual income, or expense, of approximately $5 million. The cumulative difference between the expected return and the actual return on plan assets is deferred and amortized into pension income or expense over future periods. The amount of expected return on plan
assets can vary significantly from year-to-year since the calculation is dependent on the market value of plan assets as of the end of the preceding year. TheU.S. generally accepted accounting principles allow companies to calculate the expected long-term rate of return on pension assets using either an average of fair market values of pension assets over a period not to exceed five years, which reduces the volatility in reported pension income or expense, or their fair market value at the end of the previous year. However, the U.S. Securities and Exchange Commission currently does not permit companies to change from the fair market value at the end of the previous year methodology, which is the methodology that we use, to an averaging of fair market values of plan investments for 2018 is 7.75%.assets methodology. As a result, our results of operations and those of other companies, including companies with which we compete, may not be comparable due to these different methodologies in calculating the expected return on pension investments.
In accordance with accounting standards, we determine the discount rate used to value pension plan liabilities as of the last day of our fiscal year. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rates of return on high quality, fixed-income investments with maturities matched to the expected future retirement benefit payments. Based on this assessment, we established a discount rate of 3.85%2.60% for valuing the pension liabilities as of December 31, 2017,2020, and for determining the pension expense for 2018.2021. We had previously assumed a discount rate of 4.45%3.40% at the end of 20162019 and 4.65%4.40% at the end of 2015.2018. The estimated effect of changing the discount rate by 0.50% would decrease pension liabilities in the case of an increase in the discount rate, or increase pension liabilities in the case of a decrease in the discount rate, by approximately $150$155 million. Such a change in the discount rate would decrease pension expense in the case of an increase in the discount rate, or increase pension expense in the case of a decrease in the discount rate, by approximately $2less than $1 million. The effect on pension liabilities for changes to the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, are deferred and amortized over future periods in accordance with the accounting standards.
As discussed above, gains and losses due to differences between actual and expected results for investment returns on plan assets, changes in the discount rate used to value benefit obligations, and other changes in estimates such as participant life expectancy are deferred and recognized in the consolidated statement of operations over future periods. However, for balance sheet presentation, these gains and losses are included in the determination of benefit obligations, net of plan assets, included on the year-end consolidated balance sheet. At December 31, 2017,2020, the Company had $1.4approximately $1.6 billion of pre-tax net actuarial losses on its pension obligations, primarily related to an extended decline over the last several years in the discount rate used to value the pension obligations. These actuarial losses have been recognized on the consolidated balance sheet through a reduction in stockholders’ equity, and are being recognized in the consolidated statement of operations through expense amortizations over future years. Due to nearly all of ATI’s defined benefit plans being either frozen for all future benefit accruals or closed to new entrants, and in most cases frozen for future benefit accruals, the amortization period for accumulated other comprehensive loss recognition for all of these plans is average remaining life expectancy, which is approximately 1718 years on a weighted average basis.
With respect to our postretirement plans, under most of the plans, our contributions towards retiree medical premiums are capped based upon the cost as of certain dates, thereby creating a defined contribution. In accordance with U.S. generally accepted accounting standards, postretirement expenses recognized in financial statements associated with defined benefit plans are determined on an actuarial basis, rather than as benefits are paid. We use actuarial assumptions, including the discount rate and the expected trend in health care costs, to estimate the costs and benefit obligations for these plans. The discount rate, which is determined annually at the end of each fiscal year, is developed based upon rates of return on high quality, fixed-income investments. At the end of 2017,2020, we determined the rate to be 3.80%2.45%, compared to a 3.25% discount rate in 2019, and a 4.35% discount rate in 2016, and a 4.50% discount rate in 2015.2018. The estimated effect of changing the discount rate by 0.50% would decrease postretirement obligations in the case of an increase in the discount rate, or increase postretirement obligations in the case of a decrease in the discount rate, by approximately $14$17 million. Such a change in the discount rate would decrease postretirement benefit expense in the case of an increase in the discount rate, or increase postretirement benefit expense in the case of a decrease in the discount rate, by approximatelyless than $1 million. Based upon predictions of continued significant medical cost inflation in future years, the annual assumed rate of increase in the per capita cost of covered benefits of health care plans is 6.8%5.6% in 20182021 and is assumed to gradually decrease to 4.5% in the year 2038 and remain level thereafter. Assumed health care cost trend rates can have a significant effect on the benefit obligation for health care plans, however, the Company’s contributions for most of its’its retiree health plans are capped based on a fixed premium amount, which limits the impact of future health care cost increases.
New Accounting Pronouncements Adopted
In January 2017, the Company early adopted changes issued byMarch 2020, the Financial Accounting Standards Board (FASB) issued new optional accounting guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The new accounting guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain
criteria are met. The new accounting guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. Management is continuing to evaluate the issue, and presently does not expect a transition away from LIBOR, primarily involving ATI’s domestic credit facility and an interest rate swap contract, to have any significant financial impact to ATI.
In December 2019, the FASB issued new guidance to simplify how an entity is required to test goodwillthe accounting for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, which is currently required if a reporting unit with goodwill fails a Step 1 test comparing the fair value of the reporting unit to its carrying value including goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test using just the Step 1 test of comparing the fair value of a reporting unit with its carrying amount. Any goodwill impairment, representing the amount by which the carrying amount exceeds the reporting unit’s fair value, is determined using this Step 1 test. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit.
In January 2017, the Company adopted changes issued by the FASB to simplify employee share-based payment accounting.income taxes. The areas for simplification in thisthe guidance involve several aspectsthe removal of certain exceptions to the general principals in the current guidance, including intraperiod allocation and the calculation of income taxes in an interim period when a year to date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, which will be prospectively adopted. The adoption of these changes did not have a material impact on the Company’s financial statements.
In January 2017, the Company adopted changes issued by the FASB to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling pricetaxes in the ordinary coursearea of business, less reasonably predictable costs of completion, disposal and transportation. The new inventory measurement requirements replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. This change in the measurement of inventory does not apply to inventory valued on a LIFO basis, which is the accounting basis used for most of the Company’s inventory. The adoption of these changes did not have a material impact on the Company’s financial statements.
In the fourth quarter 2017, the Company early adopted changes issued by the FASB on classification of cash receipts and cash payments on the statement of cash flows. The adoption of these changes did not have a material impact on the Company’s financial statements other than requiring the classification of the cash portion of the Company’s debt extinguishment charge in 2017 as a financing activity in the 2017 consolidated statement of cash flows. See Note 8. Debt for further discussion of this debt extinguishment charge.
Pending Accounting Pronouncements
In February 2018, the FASB issued limited changes to accounting standards to address the income tax accounting for certain provisions of the Tax Cuts and Jobs Act (the “Tax Act”). Accounting standards require the effect of a change in tax laws or rates on deferred tax assets and liabilities to be included in income from continuing operations in the reporting period that the change was enacted, including tax effects that were initially recognized directly in other comprehensive income at the previous rate. This results in stranded amounts in accumulated other comprehensive income (AOCI) related to the income tax rate differential, as the net-of-tax AOCI balance is not adjusted for the tax rate change. This new accounting guidance provides the option to make a one-time reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly
enacted U.S. federal tax rate under the Tax Act, calculated on the basis of the difference between the historical and newly enacted U.S. federal tax rate on deferred tax assets and liabilities related to items within AOCI. Adoption of the new accounting guidance is not required, and the Company has elected not to adopt this new guidance.
In August 2017, the FASB issued changes to its accounting guidance for derivatives and hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Some changes resulting from this new guidance include the elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow hedges, changes to the recognition and presentation of changes in the fair value of the hedging instrument, enhancement of the ability to use the critical-terms-match method for the cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date, and the addition of new disclosure requirements and amendments to existing ones.franchise taxes. This new guidance is effective for the Company’s 2019Company in fiscal year 2021, with early adoption permittedpermitted. This guidance was early adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.
In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and all transitionmodifications of various current disclosures as well as some additional disclosure requirements and elections beingfor Level 3 fair value measurements. Some of these disclosure changes must be applied to hedging relationships existingprospectively while others retrospectively depending on the date of adoption. Therequirement. This guidance was adopted by the Company in fiscal year 2020 without an impact on the Company’s consolidated financial statements other than disclosures.
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is currently evaluating the impact ofbased on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to trade receivables, other receivables, contract assets and most debt instruments. The CECL model does not have a minimum threshold for recognition of impairment losses, and entities will need to measure expected credit losses on itsassets that have a low risk of loss. This guidance was adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.
Pending Accounting Pronouncements
In March 2017,August 2020, the FASB issued changesnew accounting guidance related to accounting for convertible instruments. Under this new guidance, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. As such, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the reported interest rate of convertible debt instruments typically will be closer to the accounting for defined benefit pension and other postretirement benefit expenses. Thiscoupon interest rate. The new guidance requires the disaggregation of the service cost component from the other components of net benefit cost. The service cost component of net benefit cost is to be reportedalso addresses how convertible instruments are accounted for in the same line item ondiluted earnings per share calculation, requiring the consolidated statementif-converted method, and requires enhanced disclosures about the terms of operations as other compensation costs arising from services rendered by the pertinent employees, while the other components of net benefit cost are to be presentedconvertible instruments and contracts in the consolidated statement of operations separately, outside a subtotal of operating income. The amendments also provide explicit guidance to allow only the service cost component of net benefit cost to be eligible for capitalization.an entity’s own equity. This new guidance is effective for the Company’s 2018 fiscal year, with the adoption of the change in presentation of net benefit cost in the consolidated statement of operations to be applied retrospectively, and the change in capitalization for only service cost applied prospectively. The guidance allows a practical expedient that permits the use of the amounts disclosed in the retirement benefits footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company will adopt this new guidance in the first quarter of fiscal year 2018 using this practical expedient.
The Company expects such adoption to have a material impact to reported operating income in the consolidated statement of operations due to the change in presentation of non-service cost expense components. For example, applying the practical expedient to fiscal year 2017 results, operating income for 2017 would be $54.3 million higher, with the reclassification of this amount representing the other components of net benefit cost to a newly-created non-operating retirement benefit expense category, with no net impact to the reported 2017 loss before income taxes. This statement of operations change in presentation of net benefit cost will not affect ATI’s measure of segment operating profit; all defined benefit pension and other postretirement benefit expense attributable to business segment operations remains a component of business segment financial performance. The Company expects to have a one-time, unfavorable impact of approximately $6 million to pre-tax reported results in the first quarter of 2018 upon adoption primarily affecting the Flat Rolled Products business segment, due to the change limiting only the service cost component of net benefit cost to be capitalizable into inventory.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the Company’s 2019 fiscal year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In May 2014, the FASB issued changes to revenue recognition with customers, which is required to be adopted by the Company in fiscal year 2018. This update provides a five-step analysis of transactions to determine when and how revenue is recognized, along2022, with expanded disclosure requirements. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. early adoption permitted.
The Company will adoptadopted this new accounting standard updateguidance related to accounting for convertible instruments effective January 1, 2021 using the modified retrospective method,transition approach with the cumulative effect recognized as an adjustment to the opening balance of initially applying this update recognizedretained earnings. This new guidance is applicable to the 2025 Convertible Notes that were issued in June 2020, for which the first reporting periodembedded conversion option was required to be separately accounted for as a component of 2018. The Company has evaluatedstockholders’ equity. Upon adoption on January 1, 2021, long-term debt increased by $45.4 million and stockholders’ equity decreased by the same amount, representing the net impact of this standard on individual customer contracts and based on this evaluation determined that there are several customer agreements involving productiontwo adjustments: (1) the $49.8 million value of parts and components in the High Performance Materials and Components segment that require revenue to be recognized over time due to there being no alternative use for the product without significant economic loss and an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. Over-time recognition is a change from current accounting,embedded conversion, which is atnet of allocated offering costs, previously classified in additional paid-in-capital in stockholders’ equity, and (2) a point-in-time for these products. As a result, the Company will recognize a $15.5$4.4 million increase to retained earnings at the beginning of the 2018 fiscal year for the cumulative effect of applyingadoption primarily related to the over-time revenue recognition to prior periods, representingnon-cash interest expense recorded in fiscal year 2020 for the favorable impact to prior results had the over-time revenue recognition method been applied. Due to certain
customer agreements with limited duration, 2018 gross profit is now expected to be lower by approximately $5 million as a resultamortization of the cumulative effect adjustmentportion of the 2025 Convertible Notes allocated to stockholders’ equity. Prospectively, the reported interest expense for over-time recognition. the 2025 Convertible Notes will no longer include the non-cash interest expense of the equity component as required under prior accounting standards and will be closer to the 3.5% cash coupon rate.There iswill be no other significant impact to the Company upon adoption, withCompany’s earnings per share calculation as it previously applied the exceptionif-converted method to the 2025 Convertible Notes given ATI’s flexibility to settle conversions of reclassifications to contract assets and liabilities on the consolidated balance sheet. As2025 Convertible Notes in cash, shares of January 1, 2018, total assets and total liabilities both increased by approximately $33 million, representing the reclassification of amounts recorded previously in accounts receivable and inventory to contract liabilities on the consolidated balance sheet. The Company also expects an increase to financial statement footnote disclosures in 2018 regarding revenues, contract assets and contract liabilities asATI’s common stock or a result of this accounting standard update.combination thereof, at ATI’s election.
Forward-Looking Statements
From time-to-time, the Company has 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. Such forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control,
that may cause our actual results or performance to materially differ from any future results or performance expressed or implied by such statements. Various of these factors are described in Item 1A, Risk Factors, of this Annual Report on Form 10-K and will be described from time-to-time in the Company filings with the SEC, including the Company’s Annual Reports on Form 10-K and the Company’s subsequent reports filed with the SEC on Form 10-Q and Form 8-K, which are available on the SEC’s website at www.sec.gov and on the Company’s website at www.atimetals.com. We assume no duty to update our forward-looking statements.
Item 7A. 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 energy and raw material prices, foreign currencies, and interest rates. We monitor the third-party financial institutions whichthat 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 Company’s credit risk. Our exposure to volatility in interest rates is presently not material, as nearly all of our debt is at fixed interest rates.
Volatility of Interest Rates. We may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. The Company has a $50 million floating-for-fixed interest rate swap which, as amended and extended to June 2024, converts a portion of the Term Loan to a 4.21% fixed rate. The Company designated the interest rate swap as a cash flow hedge of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The ineffectiveness at hedge inception, determined from the fair value of the swap immediately prior to amendment, will be amortized to interest expense over the initial Term Loan swap maturity date of January 12, 2021. Any gain or loss associated with this hedging arrangement is included in interest expense. At December 31, 2020, the net mark-to-market valuation of the outstanding interest rate swap was an unrealized pre-tax loss of $3.5 million, comprised of $1.0 million in other current liabilities and $2.5 million in other long-term liabilities on the balance sheet.
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 85 to 107 million MMBtu’s 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 $8$5 to $10$7 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 December 31, 2017,2020, the outstanding financial derivatives used to hedge our exposure to energy cost volatility included natural gas hedges. During the fiscal years ended December 31, 2016 and 2015 due to changes in expected operating levels, we concluded that a portion of these natural gas cash flow hedges for 2016 and the first quarter of 2017 were ineffective based on forecast changes in underlying natural gas usage. We recognized $1.3 million and $3.3 million of pre-tax losses for the ineffective portion of these cash flow hedges for the years ended December 31, 2016 and 2015, respectively, which is reported in selling and administrative expenses on the consolidated statement of operations. At December 31, 2017,2020, we hedged approximately 40%70% of our annual forecasted domestic requirements for natural gas for 2018, approximately 35% for 2019,2021 and approximately 15%25% for 2020. The2022. There was no gain or loss from the net mark-to-market valuation of the outstanding natural gas hedges at December 31, 2017 was an unrealized pre-tax loss of $0.8 million, comprised of $0.12020, with $0.2 million in prepaid expenses and other current assets, $0.2 million in other assets, $0.3 million in other assets, $0.9 million in accruedcurrent liabilities and $0.3$0.1 million in other long-term liabilities on the balance sheet. For the year ended December 31, 2017,2020, the effects of natural gas hedging activity increased cost of sales by $5.3$3.7 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 20172020 we used approximately 10050 million pounds of nickel; therefore a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $100$50 million. In addition, in 20172020 we also used approximately 400300 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 $4$3.0 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 December 31, 2017,2020, we had entered into financial hedging arrangements, primarily at the request of our customers, related to firm orders, for an aggregate amount of approximately 183 million pounds of nickel with hedge dates through 2021.2023. The aggregate notional amount hedged is approximately 20%5% of a single year’s estimated nickel raw material purchase requirements. Any gain or loss
associated with these hedging arrangements is included in cost of sales. At December 31, 2017,2020, the net mark-to-market valuation of our outstanding raw material hedges was an unrealized pre-tax gain of $11.7$4.3 million, comprised of $10.5$3.7 million in prepaid expenses and other current assets, $5.5$0.7 million in other assets, $2.1 million in accrued liabilities, and $2.2$0.1 million in other long-termcurrent liabilities 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, primarily the euro. In addition, we may also hedge forecasted capital expenditures and designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions.
During the fiscal year ended December 31, 2015, we net settled 211.9 million euro notional value of foreign currency forward contracts designated as cash flow hedges with 2016 and 2017 maturity dates, receiving cash proceeds of $56.5 million which is reported in cash provided by operating activities on the consolidated statement of cash flows. In the fourth quarter 2015, due to management actions in the Flat Rolled Products segment to de-emphasize commodity stainless steel sheet products in 2016, we concluded that a portion of these settled euro cash flow hedges for 2016 were ineffective based on forecast changes for euro-denominated sales. We recognized a $14.3 million pre-tax gain for the ineffective portion of these cash flow hedges, which is reported in selling and administrative expenses on the consolidated statement of operations for the year ended December 31, 2015. As of December 31, 2017, all of the deferred gains on the effective portion of these settled cash flow hedges, which were previously recognized in accumulated other comprehensive income, have been reclassified to earnings due to the occurrence of the underlying transactions. In 2015, we entered into 244.7 million euro notional value of foreign currency forward contracts designated as fair value hedges with 2015, 2016 and 2017 maturity dates to replace a portion of the settled euro cash flow hedges, of which none were outstanding as of December 31, 2017 and 43.2 million and 139.2 million euro notional value were outstanding as of December 31, 2016 and 2015, respectively. We recorded $2.7 million of charges during the fiscal year ended December 31, 2017 and $1.0 million and $9.0 million of benefits during the fiscal years ended December 31, 2016 and 2015, respectively, in costs of sales on the consolidated statement of operations for maturities and mark-to-market changes on these fair value hedges.
We may also enter into foreign currency forward contracts that are not designated as hedges, which are denominated in the same foreign currency in which export sales are denominated. We have 10 million euro notional value outstanding as of December 31, 2017 of foreign currency forward contracts not designated as hedges, with maturity dates into the fourth quarter of 2018.
At December 31, 2017, the net mark-to-market valuation of the2020, we had no significant outstanding foreign currency forward contracts was not material.contracts.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Allegheny Technologies Incorporated and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Allegheny Technologies Incorporated and Subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and statements of changes in consolidated equity for each of the three years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with USU.S. generally accepted accounting principles.principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 201826, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the USU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Valuation of goodwill |
| Description of the Matter | At December 31, 2020, the Company had $240.7 million of goodwill. As discussed in Note 1 to the consolidated financial statements, goodwill is tested annually for impairment, or more frequently if impairment indicators arise. The assessment of goodwill for impairment requires a comparison of the estimated fair value of each reporting unit that has goodwill associated with its operations to its carrying value, including goodwill. If the Company’s carrying value of a reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying value over the calculated fair value. As discussed further in Note 4, as a result of the second quarter 2020 interim goodwill impairment evaluation, the Company determined that the fair value of the Forged Products reporting unit was below carrying value. Consequently, during the second quarter of 2020, the Company recorded a $287.0 million impairment charge for the partial impairment of the Forged Products reporting unit goodwill.
Auditing the Company’s interim, and subsequently, annual goodwill impairment analyses was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting units. In particular, the fair value estimate was sensitive to significant assumptions, such as future operating results, cash flows and the weighted average cost of capital. These significant assumptions are forward looking and could be materially affected by future market or economic conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment evaluation process, including controls over management’s review of the significant assumptions described above.
Our audit procedures to test the estimated fair value of the Company’s reporting units included, among others, evaluating management’s significant assumptions described above and used within the fair value method, and testing the completeness and accuracy of the underlying data. We engaged our valuation specialists to assist in assessing fair valuation methodologies utilized in the Company’s goodwill impairment analyses. For the goodwill impairment analyses performed by the Company, we evaluated the reasonableness of management’s significant assumptions by analyzing the general economic environment and the economic environment of the Company’s industry. We compared certain significant assumptions to existing market information and, where relevant, to the plans of the Company, including management’s expectations with regard to the Company’s business model, customer base, product mix and other relevant factors. We assessed the historical accuracy of management’s projected cash flows, where applicable, and performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We involved our valuation specialists to assist in evaluating the discount rates, which included comparison of the selected discount rates to the Company’s weighted average cost of capital and the risk associated with projected cash flows. With respect to the second quarter 2020 interim goodwill impairment evaluation, we also validated interim impairment indicator triggers and assessed the arithmetic accuracy of the impairment charge discussed above. Furthermore, we tested management’s annual reconciliation of the fair value of the reporting units to the market capitalization of the Company. In addition, we assessed the adequacy of the disclosures in the consolidated financial statements.
|
| |
| | | | | |
| Long-lived assets and asset impairment valuation |
| Description of the Matter | During the fourth quarter of 2020, the Company made the strategic decision to exit the stainless sheet market to focus on higher performing specialty products. As further described in footnote 3, as a result this strategic decision, the Company determined that the fair value of a certain long-lived asset group contained within its Advanced Alloys & Solutions (AA&S) business segment was below carrying value. Consequently, the Company recorded a long-lived asset impairment charge of $1.03 billion.
Auditing the Company's long-lived asset impairment analysis was complex and highly judgmental due to the significant estimation required to determine the fair value of the long-lived asset group. In particular, the fair value estimate was sensitive to significant assumptions, such as future operating results and the weighted average cost of capital. These significant assumptions are forward looking and could be materially affected by future market or economic conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's long-lived asset impairment evaluation process, including controls over management's review of the significant assumptions described above.
Our audit procedures to evaluate the measurement of the Company’s long-lived asset impairment loss included, among others, evaluating the reasonableness of management’s significant assumptions described above and used within the fair value method, and testing the completeness and accuracy of the underlying data. We engaged our valuation specialists to assist in assessing the fair valuation methodology utilized in the Company’s impairment analysis. For the long-lived asset impairment analysis performed by the Company we evaluated the reasonableness of management’s significant assumptions by analyzing the impact of the strategic decision to exit commodity stainless products on the Company’s projected financial results. For example, we evaluated the projected financial information used within the Company’s discounted cash flow valuation analysis, which included assessing the reasonableness of the projected EBITDA margins based on the Company’s capital deployment plans for utilizing the remaining assets as well as specific cost saving measures. We additionally performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the long-lived asset group that would result from changes in the assumptions. We involved our valuation specialists to assist in evaluating the discount rate, which included comparison of the selected discount rates to the Company’s weighted average cost of capital and the risk associated with projected cash flows. In addition, we evaluated the Company’s disclosures related to the matters described above. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.
Pittsburgh, Pennsylvania
February 20, 201826, 2021
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Operations
(In millions, except per share amounts)
| | | For the Years Ended December 31, | | 2017 | | 2016 | | 2015 | For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| Sales | | $ | 3,525.1 |
| | $ | 3,134.6 |
| | $ | 3,719.6 |
| Sales | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | |
| | | | | | | | |
| Cost of sales | | 3,076.1 |
| | 2,972.1 |
| | 3,659.3 |
| Cost of sales | | 2,689.3 | | | 3,484.7 | | | 3,416.3 | |
| Gross profit | | 449.0 |
| | 162.5 |
| | 60.3 |
| Gross profit | | 292.8 | | | 637.8 | | | 630.3 | |
| Selling and administrative expenses | | 254.3 |
| | 247.7 |
| | 238.8 |
| Selling and administrative expenses | | 201.0 | | | 267.2 | | | 268.2 | |
| Impairment of goodwill | | 114.4 |
| | — |
| | 126.6 |
| Impairment of goodwill | | 287.0 | | | 0 | | | 0 | |
| Restructuring charges | | — |
| | 527.2 |
| | 64.3 |
| Restructuring charges | | 1,107.5 | | | 4.5 | | | 0 | |
| Operating income (loss) | | 80.3 |
| | (612.4 | ) | | (369.4 | ) | Operating income (loss) | | (1,302.7) | | | 366.1 | | | 362.1 | |
| Nonoperating retirement benefit expense | | Nonoperating retirement benefit expense | | (62.1) | | | (73.6) | | | (33.9) | |
| Interest expense, net | | (133.8 | ) | | (124.0 | ) | | (110.2 | ) | Interest expense, net | | (94.4) | | | (99.0) | | | (101.0) | |
| Debt extinguishment charge | | (37.0 | ) | | — |
| | — |
| Debt extinguishment charge | | (21.5) | | | (21.6) | | | 0 | |
| Other income, net | | 4.0 |
| | 2.4 |
| | 1.6 |
| |
| Loss before income taxes | | (86.5 | ) | | (734.0 | ) | | (478.0 | ) | |
| Income tax benefit | | (6.8 | ) | | (106.9 | ) | | (112.1 | ) | |
| Net loss | | (79.7 | ) | | (627.1 | ) | | (365.9 | ) | |
| Other income (loss), net | | Other income (loss), net | | (1.2) | | | 69.7 | | | 20.5 | |
| Income (loss) before income taxes | | Income (loss) before income taxes | | (1,481.9) | | | 241.6 | | | 247.7 | |
| Income tax provision (benefit) | | Income tax provision (benefit) | | 77.7 | | | (28.5) | | | 11.0 | |
| Net income (loss) | | Net income (loss) | | (1,559.6) | | | 270.1 | | | 236.7 | |
| Less: Net income attributable to noncontrolling interests | | 12.2 |
| | 13.8 |
| | 12.0 |
| Less: Net income attributable to noncontrolling interests | | 13.0 | | | 12.5 | | | 14.3 | |
| Net loss attributable to ATI | | $ | (91.9 | ) | | $ | (640.9 | ) | | $ | (377.9 | ) | |
| Net income (loss) attributable to ATI | | Net income (loss) attributable to ATI | | $ | (1,572.6) | | | $ | 257.6 | | | $ | 222.4 | |
| | | | | | | | |
| Basic net loss attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | |
| | | | | | | | |
| Diluted net loss attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) | |
| | Basic net income (loss) attributable to ATI per common share | | Basic net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 2.05 | | | $ | 1.78 | |
| | | Diluted net income (loss) attributable to ATI per common share | | Diluted net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 1.85 | | | $ | 1.61 | |
The accompanying notes are an integral part of these statements.
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | | For the Years Ended December 31, | | 2017 | | 2016 | | 2015 | For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| Net loss | | $ | (79.7 | ) | | $ | (627.1 | ) | | $ | (365.9 | ) | |
| Net income (loss) | | Net income (loss) | | $ | (1,559.6) | | | $ | 270.1 | | | $ | 236.7 | |
| Currency translation adjustment | | | | | | | Currency translation adjustment | |
| Unrealized net change arising during the period | | 39.1 |
| | (47.1 | ) | | (37.0 | ) | Unrealized net change arising during the period | | 32.5 | | | (4.0) | | | (26.6) | |
| Reclassification adjustment included in net loss | | — |
| | — |
| | — |
| |
| Total | | 39.1 |
| | (47.1 | ) | | (37.0 | ) | |
| Unrealized holding gain (loss) on securities | | | | | | | |
| Net gain (loss) arising during the period | | — |
| | — |
| | — |
| |
| Derivatives | | | | | | | Derivatives | |
| Net derivatives gain (loss) on hedge transactions | | 14.3 |
| | 21.2 |
| | (33.3 | ) | Net derivatives gain (loss) on hedge transactions | | (2.8) | | | 9.7 | | | (6.4) | |
| Reclassification to net income of net realized loss (gain) | | (7.2 | ) | | 7.9 |
| | (18.2 | ) | |
| Reclassification to net income (loss) of net realized (gain) loss | | Reclassification to net income (loss) of net realized (gain) loss | | 6.0 | | | (4.1) | | | (11.7) | |
| Income taxes on derivative transactions | | — |
| | 9.5 |
| | (19.5 | ) | Income taxes on derivative transactions | | 0 | | | (4.7) | | | 0 | |
| Total | | 7.1 |
| | 19.6 |
| | (32.0 | ) | Total | | 3.2 | | | 10.3 | | | (18.1) | |
| Postretirement benefit plans | | | | | | | Postretirement benefit plans | |
| Actuarial loss | | | | | | | Actuarial loss | |
| Amortization of net actuarial loss | | 71.6 |
| | 75.0 |
| | 75.0 |
| Amortization of net actuarial loss | | 85.3 | | | 87.2 | | | 76.5 | |
| Net loss arising during the period | | (42.7 | ) | | (92.1 | ) | | (95.8 | ) | Net loss arising during the period | | (128.4) | | | (180.5) | | | (141.4) | |
| Prior service cost | | | | | | | Prior service cost | |
| Amortization to net loss of net prior service cost (credits) | | (1.6 | ) | | (0.4 | ) | | 6.2 |
| |
| Amortization to net income (loss) of net prior service credits | | Amortization to net income (loss) of net prior service credits | | (3.1) | | | (2.6) | | | (2.6) | |
| Income taxes on postretirement benefit plans | | — |
| | 43.9 |
| | 5.1 |
| Income taxes on postretirement benefit plans | | 0 | | | (20.4) | | | 0 | |
| Total | | 27.3 |
| | (61.4 | ) | | (19.7 | ) | Total | | (46.2) | | | (75.5) | | | (67.5) | |
| Other comprehensive income (loss), net of tax | | 73.5 |
| | (88.9 | ) | | (88.7 | ) | |
| Comprehensive loss | | (6.2 | ) | | (716.0 | ) | | (454.6 | ) | |
| Other comprehensive loss, net of tax | | Other comprehensive loss, net of tax | | (10.5) | | | (69.2) | | | (112.2) | |
| Comprehensive income (loss) | | Comprehensive income (loss) | | (1,570.1) | | | 200.9 | | | 124.5 | |
| Less: Comprehensive income attributable to noncontrolling interests | | 19.8 |
| | 4.1 |
| | 6.4 |
| Less: Comprehensive income attributable to noncontrolling interests | | 24.4 | | | 11.2 | | | 8.1 | |
| Comprehensive loss attributable to ATI | | $ | (26.0 | ) | | $ | (720.1 | ) | | $ | (461.0 | ) | |
| Comprehensive income (loss) attributable to ATI | | Comprehensive income (loss) attributable to ATI | | $ | (1,594.5) | | | $ | 189.7 | | | $ | 116.4 | |
The accompanying notes are an integral part of these statements.
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Balance Sheets
| | | (In millions, except share and per share amounts) | | December 31,
2017 | | December 31,
2016 | (In millions, except share and per share amounts) | | December 31,
2020 | | December 31,
2019 |
| Assets | | | | | Assets | |
| Cash and cash equivalents | | $ | 141.6 |
| | $ | 229.6 |
| Cash and cash equivalents | | $ | 645.9 | | | $ | 490.8 | |
| Accounts receivable, net | | 545.3 |
| | 452.1 |
| Accounts receivable, net | | 345.8 | | | 554.1 | |
| Shot-term contract assets | | Shot-term contract assets | | 38.9 | | | 38.5 | |
| Inventories, net | | 1,176.1 |
| | 1,037.0 |
| Inventories, net | | 997.1 | | | 1,155.3 | |
| Prepaid expenses and other current assets | | 52.7 |
| | 47.8 |
| Prepaid expenses and other current assets | | 38.3 | | | 64.3 | |
| Total Current Assets | | 1,915.7 |
| | 1,766.5 |
| Total Current Assets | | 2,066.0 | | | 2,303.0 | |
| Property, plant and equipment, net | | 2,495.7 |
| | 2,498.9 |
| Property, plant and equipment, net | | 1,469.2 | | | 2,450.1 | |
| Goodwill | | 531.4 |
| | 641.9 |
| Goodwill | | 240.7 | | | 525.8 | |
| Other assets | | 242.6 |
| | 262.7 |
| Other assets | | 259.0 | | | 355.7 | |
| Total Assets | | $ | 5,185.4 |
| | $ | 5,170.0 |
| Total Assets | | $ | 4,034.9 | | | $ | 5,634.6 | |
| Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | |
| Accounts payable | | $ | 420.1 |
| | $ | 294.3 |
| Accounts payable | | $ | 290.6 | | | $ | 521.2 | |
| Accrued liabilities | | 282.4 |
| | 309.3 |
| |
| Short-term contract liabilities | | Short-term contract liabilities | | 111.8 | | | 78.7 | |
| Short-term debt and current portion of long-term debt | | 10.1 |
| | 105.1 |
| Short-term debt and current portion of long-term debt | | 17.8 | | | 11.5 | |
| Other current liabilities | | Other current liabilities | | 233.1 | | | 237.8 | |
| Total Current Liabilities | | 712.6 |
| | 708.7 |
| Total Current Liabilities | | 653.3 | | | 849.2 | |
| Long-term debt | | 1,530.6 |
| | 1,771.9 |
| Long-term debt | | 1,550.0 | | | 1,387.4 | |
| Accrued postretirement benefits | | 317.8 |
| | 317.7 |
| Accrued postretirement benefits | | 326.7 | | | 312.5 | |
| Pension liabilities | | 697.0 |
| | 827.9 |
| Pension liabilities | | 673.6 | | | 731.5 | |
| Deferred income taxes | | 9.7 |
| | 15.6 |
| |
| Other long-term liabilities | | 73.2 |
| | 83.4 |
| Other long-term liabilities | | 189.9 | | | 160.8 | |
| Total Liabilities | | 3,340.9 |
| | 3,725.2 |
| Total Liabilities | | 3,393.5 | | | 3,441.4 | |
| | Equity: | | | | | Equity: | |
| ATI Stockholders’ Equity: | | | | | ATI Stockholders’ Equity: | |
| Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-none | | — |
| | — |
| |
| Common stock, par value $0.10: authorized-500,000,000 shares; issued- 126,695,171 shares at December 31, 2017 and 109,695,171 shares at December 31, 2016; outstanding-125,857,197 shares at December 31, 2017 and 108,925,254 shares at December 31, 2016 | | 12.7 |
| | 11.0 |
| |
| Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-NaN | | Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-NaN | | 0 | | | 0 | |
| Common stock, par value $0.10: authorized-500,000,000 shares; issued- 126,820,440 shares at December 31, 2020 and 126,695,171 shares at December 31, 2019; outstanding-126,817,768 shares at December 31, 2020 and 126,085,348 shares at December 31, 2019 | | Common stock, par value $0.10: authorized-500,000,000 shares; issued- 126,820,440 shares at December 31, 2020 and 126,695,171 shares at December 31, 2019; outstanding-126,817,768 shares at December 31, 2020 and 126,085,348 shares at December 31, 2019 | | 12.7 | | | 12.7 | |
| Additional paid-in capital | | 1,596.3 |
| | 1,188.8 |
| Additional paid-in capital | | 1,625.5 | | | 1,618.0 | |
| Retained earnings | | 1,184.3 |
| | 1,277.1 |
| Retained earnings | | 106.5 | | | 1,679.3 | |
| Treasury stock: 837,974 shares at December 31, 2017 and 769,917 shares at December 31, 2016 | | (26.1 | ) | | (28.0 | ) | |
| Treasury stock: 2,672 shares at December 31, 2020 and 609,823 shares at December 31, 2019 | | Treasury stock: 2,672 shares at December 31, 2020 and 609,823 shares at December 31, 2019 | | 0 | | | (18.2) | |
| Accumulated other comprehensive loss, net of tax | | (1,027.8 | ) | | (1,093.7 | ) | Accumulated other comprehensive loss, net of tax | | (1,223.6) | | | (1,201.7) | |
| Total ATI Stockholders’ Equity | | 1,739.4 |
| | 1,355.2 |
| Total ATI Stockholders’ Equity | | 521.1 | | | 2,090.1 | |
| Noncontrolling Interests | | 105.1 |
| | 89.6 |
| Noncontrolling Interests | | 120.3 | | | 103.1 | |
| Total Stockholders’ Equity | | 1,844.5 |
| | 1,444.8 |
| Total Stockholders’ Equity | | 641.4 | | | 2,193.2 | |
| Total Liabilities and Stockholders’ Equity | | $ | 5,185.4 |
| | $ | 5,170.0 |
| Total Liabilities and Stockholders’ Equity | | $ | 4,034.9 | | | $ | 5,634.6 | |
The accompanying notes are an integral part of these statements.
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
|
| | | | | | | | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 | | 2015 |
| Operating Activities: | | | | | | |
| Net loss | | $ | (79.7 | ) | | $ | (627.1 | ) | | $ | (365.9 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization | | 160.8 |
| | 170.3 |
| | 189.9 |
|
| Deferred taxes | | (1.4 | ) | | (119.8 | ) | | (118.0 | ) |
| Impairment of goodwill | | 114.4 |
| | — |
| | 126.6 |
|
| Non-cash restructuring charges | | — |
| | 471.3 |
| | 54.5 |
|
| Debt extinguishment charge | | 37.0 |
| | — |
| | — |
|
| Change in operating assets and liabilities: | | | | | | |
| Retirement benefits (a) | | (110.3 | ) | | (80.0 | ) | | 14.3 |
|
| Accounts receivable | | (93.2 | ) | | (51.8 | ) | | 203.3 |
|
| Inventories | | (139.2 | ) | | 234.7 |
| | 201.2 |
|
| Accounts payable | | 125.8 |
| | (51.2 | ) | | (211.3 | ) |
| Accrued income taxes | | (1.9 | ) | | 9.3 |
| | 55.8 |
|
| Accrued liabilities and other | | 10.1 |
| | 0.6 |
| | (19.0 | ) |
| Cash provided by (used in) operating activities | | 22.4 |
| | (43.7 | ) | | 131.4 |
|
| Investing Activities: | | | | | | |
| Purchases of property, plant and equipment | | (122.7 | ) | | (202.2 | ) | | (144.5 | ) |
| Purchases of businesses, net of cash acquired | | — |
| | — |
| | (0.5 | ) |
| Asset disposals and other | | 3.1 |
| | 2.2 |
| | (0.1 | ) |
| Cash used in investing activities | | (119.6 | ) | | (200.0 | ) | | (145.1 | ) |
| Financing Activities: | | | | | | |
| Borrowings on long-term debt | | 8.5 |
| | 387.5 |
| | — |
|
| Payments on long-term debt and capital leases | | (353.0 | ) | | (2.7 | ) | | (23.6 | ) |
| Net borrowings under credit facilities | | 1.6 |
| | 3.1 |
| | 1.5 |
|
| Debt issuance costs | | (0.8 | ) | | (10.4 | ) | | — |
|
| Debt extinguishment charge | | (35.8 | ) | | — |
| | — |
|
| Issuance of common stock | | 397.8 |
| | — |
| | — |
|
| Dividends paid to shareholders | | — |
| | (25.8 | ) | | (66.5 | ) |
| Dividends paid to noncontrolling interests | | (8.0 | ) | | (16.0 | ) | | (16.0 | ) |
| Sale to noncontrolling interest | | 3.7 |
| | — |
| | — |
|
| Acquisition of noncontrolling interests | | — |
| | (12.2 | ) | | — |
|
| Shares repurchased for income tax withholding on share-based compensation | | (4.8 | ) | | — |
| | (1.4 | ) |
| Cash provided by (used in) financing activities | | 9.2 |
| | 323.5 |
| | (106.0 | ) |
| Increase (decrease) in cash and cash equivalents | | (88.0 | ) | | 79.8 |
| | (119.7 | ) |
| Cash and cash equivalents at beginning of year | | 229.6 |
| | 149.8 |
| | 269.5 |
|
| Cash and cash equivalents at end of year | | $ | 141.6 |
| | $ | 229.6 |
| | $ | 149.8 |
|
(a) Includes a $(135) million contribution to the U.S. defined benefit pension plan in 2017 and a $(115) million contribution to the U.S. defined benefit pension plan in 2016. | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| Operating Activities: | | | | | | |
| Net income (loss) | | $ | (1,559.6) | | | $ | 270.1 | | | $ | 236.7 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 143.3 | | | 151.1 | | | 156.4 | |
| Deferred taxes | | 69.9 | | | (40.9) | | | 2.1 | |
| Gain on joint venture deconsolidation | | 0 | | | 0 | | | (15.9) | |
| Impairment of goodwill | | 287.0 | | | 0 | | | 0 | |
| Debt extinguishment charge | | 21.5 | | | 21.6 | | | 0 | |
| Gain from disposal of property, plant and equipment, net | | (2.9) | | | (90.6) | | | (1.2) | |
| Net loss from sales of businesses | | 0 | | | 1.8 | | | 0 | |
| Non-cash restructuring charges | | 1,041.5 | | | 0 | | | 0 | |
| Non-cash joint venture impairment charge | | 0 | | | 11.4 | | | 0 | |
| Change in operating assets and liabilities: | | | | | | |
| Retirement benefits | | (91.9) | | | (103.3) | | | (32.6) | |
| Accounts receivable | | 208.4 | | | (52.1) | | | 16.0 | |
| Inventories | | 158.2 | | | 25.4 | | | (108.5) | |
| Accounts payable | | (230.5) | | | 30.1 | | | 153.7 | |
| Accrued income taxes | | 2.4 | | | 4.9 | | | 1.4 | |
| Accrued liabilities and other | | 119.6 | | | 0.6 | | | (15.3) | |
| Cash provided by operating activities | | 166.9 | | | 230.1 | | | 392.8 | |
| Investing Activities: | | | | | | |
| Purchases of property, plant and equipment | | (136.5) | | | (168.2) | | | (139.2) | |
| Proceeds from disposal of property, plant and equipment | | 5.9 | | | 92.0 | | | 2.8 | |
| Purchases of businesses | | 0 | | | 0 | | | (10.0) | |
| Proceeds from sales of businesses, net of transaction costs | | 0 | | | 158.1 | | | 0 | |
| Other | | 1.9 | | | (0.2) | | | 1.3 | |
| Cash provided by (used in) investing activities | | (128.7) | | | 81.7 | | | (145.1) | |
| Financing Activities: | | | | | | |
| Borrowings on long-term debt | | 391.4 | | | 350.0 | | | 7.1 | |
| Payments on long-term debt and finance leases | | (212.1) | | | (507.6) | | | (6.4) | |
| Net borrowings (payments) under credit facilities | | 0.2 | | | 4.9 | | | (5.9) | |
| Purchase of convertible note capped call | | (19.4) | | | 0 | | | 0 | |
| Debt issuance costs | | (9.1) | | | (5.5) | | | 0 | |
| Debt extinguishment charge | | (19.1) | | | (20.9) | | | 0 | |
| Dividends paid to noncontrolling interests | | (7.2) | | | (14.0) | | | (10.0) | |
| Sale to noncontrolling interest | | 0 | | | 0 | | | 14.4 | |
| Shares repurchased for income tax withholding on share-based compensation | | (7.8) | | | (9.9) | | | (6.5) | |
| Cash (used in) provided by financing activities | | 116.9 | | | (203.0) | | | (7.3) | |
| Increase in cash and cash equivalents | | 155.1 | | | 108.8 | | | 240.4 | |
| Cash and cash equivalents at beginning of year | | 490.8 | | | 382.0 | | | 141.6 | |
| Cash and cash equivalents at end of year | | $ | 645.9 | | | $ | 490.8 | | | $ | 382.0 | |
Amounts presented on the Consolidated Statements of Cash Flows may not agree to the corresponding changes in consolidated balance sheet items due to the accounting for purchases and sales of businesses and the effects of foreign currency translation.
The accompanying notes are an integral part of these statements.
Allegheny Technologies Incorporated and Subsidiaries
Statements of Changes in Consolidated Equity
| | | | | ATI Stockholders | | | | | | | ATI Stockholders | | | | |
| (In millions, except per share amounts) | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Non- controlling Interests | | Total Equity | (In millions, except per share amounts) | | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Treasury
Stock | | Accumulated
Other
Comprehensive
Income (Loss) | | Non-
controlling
Interests | | Total
Equity |
| Balance, December 31, 2014 | | $ | 11.0 |
| | $ | 1,164.2 |
| | $ | 2,398.9 |
| | $ | (44.3 | ) | | $ | (931.4 | ) | | $ | 110.9 |
| | $ | 2,709.3 |
| |
| Net income (loss) | | — |
| | — |
| | (377.9 | ) | | — |
| | — |
| | 12.0 |
| | (365.9 | ) | |
| Balance, December 31, 2017 | | Balance, December 31, 2017 | | $ | 12.7 | | | $ | 1,596.3 | | | $ | 1,184.3 | | | $ | (26.1) | | | $ | (1,027.8) | | | $ | 105.1 | | | $ | 1,844.5 | |
| Net income | | Net income | | — | | | — | | | 222.4 | | | — | | | — | | | 14.3 | | | 236.7 | |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (83.1 | ) | | (5.6 | ) | | (88.7 | ) | Other comprehensive loss | | — | | | — | | | — | | | — | | | (106.0) | | | (6.2) | | | (112.2) | |
| Cash dividends on common stock ($0.62 per share) | | — |
| | — |
| | (66.5 | ) | | — |
| | — |
| | — |
| | (66.5 | ) | |
| Cumulative effect of adoption of new accounting standard | | Cumulative effect of adoption of new accounting standard | | — | | | — | | | 15.5 | | | — | | | — | | | — | | | 15.5 | |
| Dividends paid to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (16.0 | ) | | (16.0 | ) | Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | (10.0) | | | (10.0) | |
| Redeemable noncontrolling interest | | — |
| | — |
| | (0.3 | ) | | — |
| | — |
| | 0.3 |
| | — |
| |
| Sale of subsidiary shares to noncontrolling interest | | Sale of subsidiary shares to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | 2.7 | | | 2.7 | |
| Employee stock plans | | — |
| | (2.5 | ) | | (8.3 | ) | | 23.0 |
| | — |
| | — |
| | 12.2 |
| Employee stock plans | | — | | | 19.1 | | | (0.2) | | | (4.5) | | | — | | | — | | | 14.4 | |
| Balance, December 31, 2015 | | $ | 11.0 |
| | $ | 1,161.7 |
| | $ | 1,945.9 |
| | $ | (21.3 | ) | | $ | (1,014.5 | ) | | $ | 101.6 |
| | $ | 2,184.4 |
| |
| Net income (loss) | | — |
| | — |
| | (640.9 | ) | | — |
| | — |
| | 13.8 |
| | (627.1 | ) | |
| Balance, December 31, 2018 | | Balance, December 31, 2018 | | $ | 12.7 | | | $ | 1,615.4 | | | $ | 1,422.0 | | | $ | (30.6) | | | $ | (1,133.8) | | | $ | 105.9 | | | $ | 1,991.6 | |
| Net income | | Net income | | — | | | — | | | 257.6 | | | — | | | — | | | 12.5 | | | 270.1 | |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (79.2 | ) | | (9.7 | ) | | (88.9 | ) | Other comprehensive loss | | — | | | — | | | — | | | — | | | (67.9) | | | (1.3) | | | (69.2) | |
| Cash dividends on common stock ($0.24 per share) | | — |
| | — |
| | (25.8 | ) | | — |
| | — |
| | — |
| | (25.8 | ) | |
| Purchase of subsidiary shares from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) | |
| Dividends paid to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (16.0 | ) | | (16.0 | ) | Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | (14.0) | | | (14.0) | |
| Employee stock plans | | — |
| | 27.1 |
| | (2.1 | ) | | (6.7 | ) | | — |
| | — |
| | 18.3 |
| Employee stock plans | | — | | | 2.6 | | | (0.3) | | | 12.4 | | | — | | | — | | | 14.7 | |
| Balance, December 31, 2016 | | $ | 11.0 |
| | $ | 1,188.8 |
| | $ | 1,277.1 |
| | $ | (28.0 | ) | | $ | (1,093.7 | ) | | $ | 89.6 |
| | $ | 1,444.8 |
| |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 12.7 | | | $ | 1,618.0 | | | $ | 1,679.3 | | | $ | (18.2) | | | $ | (1,201.7) | | | $ | 103.1 | | | $ | 2,193.2 | |
| Net income (loss) | | — |
| | — |
| | (91.9 | ) | | — |
| | — |
| | 12.2 |
| | (79.7 | ) | Net income (loss) | | — | | | — | | | (1,572.6) | | | — | | | — | | | 13.0 | | | (1,559.6) | |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 65.9 |
| | 7.6 |
| | 73.5 |
| |
| Issuance of common stock | | 1.7 |
| | 396.1 |
| | — |
| | — |
| | — |
| | — |
| | 397.8 |
| |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | (21.9) | | | 11.4 | | | (10.5) | |
| Equity component of convertible note | | Equity component of convertible note | | — | | | 49.8 | | | — | | | — | | | — | | | — | | | 49.8 | |
| Convertible note capped call | | Convertible note capped call | | — | | | (19.4) | | | — | | | — | | | — | | | — | | | (19.4) | |
| Dividends paid to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (8.0 | ) | | (8.0 | ) | Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | (7.2) | | | (7.2) | |
| Sales of subsidiary shares to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | 3.7 |
| | 3.7 |
| |
| Employee stock plans | | — |
| | 11.4 |
| | (0.9 | ) | | 1.9 |
| | — |
| | — |
| | 12.4 |
| Employee stock plans | | — | | | (22.9) | | | (0.2) | | | 18.2 | | | — | | | — | | | (4.9) | |
| Balance, December 31, 2017 | | $ | 12.7 |
| | $ | 1,596.3 |
| | $ | 1,184.3 |
| | $ | (26.1 | ) | | $ | (1,027.8 | ) | | $ | 105.1 |
| | $ | 1,844.5 |
| |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | 12.7 | | | $ | 1,625.5 | | | $ | 106.5 | | | $ | 0 | | | $ | (1,223.6) | | | $ | 120.3 | | | $ | 641.4 | |
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Reporting
The consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. The financial results of majority-owned joint ventures are consolidated into the Company’s operating results and financial position, with the minority ownership interest recognized in the consolidated statement of operations as net income attributable to noncontrolling interests, and as equity attributable to the noncontrolling interests within total stockholders’ equity. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting, whereby ATI’s carrying value of the equity method investment on the statement of financial position is the capital investment and any undistributed profit or loss, and is classified in Other (noncurrent) assets. The profit or loss attributable to ATI from an equity method investmentinvestments is included in the resultsconsolidated statements of operations.operations as a component of Other (non-operating) income (expense). See Note 59 for further explanation of the Company’s joint ventures. Significant intercompanyIntercompany accounts and transactions have been eliminated. Unless the context requires otherwise, “Allegheny Technologies,” “ATI” and the “Company” refer to Allegheny Technologies Incorporated and its subsidiaries.
Effective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). HPMC is now comprised of the Specialty Materials and Forged Products businesses, as well as the ATI Europe distribution operations. The new AA&S segment combines the Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, and the 60%-owned Shanghai STAL Precision Stainless Steel Company Limited (STAL), as well as the Uniti LLC (Uniti) and Allegheny & Tsingshan Stainless (A&T Stainless) 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. See Note 2, Business Segments, for further information. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020.
Risks and Uncertainties and Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. Certain prior year amounts have been reclassified in order to conform with the 20172020 presentation.
The Company markets its products to a diverse customer base, principally throughout the United States. No single customer accounted for more than 10% of sales for any year presented. The principalmajor end markets for the ATI’s products are customers in the aerospace & defense, oil & gas, electrical energy, automotive, construction and mining, food equipment and appliances, and medical markets.
At December 31, 2017,2020, ATI has approximately 8,600 full-time6,500 active employees, of which approximately 15%20% are located outside the United States. Approximately 40% of ATI’s workforce is covered by various collective bargaining agreements (CBAs), predominantly with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW). CBAsThe Company’s CBA with the USW involving approximately 1,100 active full-time represented employees located primarily within the AA&S segment operations expired on February 29, 2020. On March 25, 2020, the Company announced an agreement with the USW that cover approximately 600 employeesextended the terms of the expired in 2017, and operations continue at these facilities while negotiations with the USW are ongoing. In addition, the Company has CBAs with approximately 300 full-time employees that expire in 2018.for one year, to February 28, 2021.
Cash Equivalents and InvestmentsCash Equivalents
Cash equivalents are highly liquid investments valued at cost, which approximates fair value, acquiredthat are readily convertible to cash with an original maturitymaturities of three months or less.
Accounts Receivable
Accounts receivable are presented net of a reserve for doubtful accounts of $5.9$4.3 million and $7.3$4.6 million at December 31, 20172020 and 2016,2019, respectively. Trade credit is extended based upon evaluations of each customer’s ability to perform its obligations, which are updated periodically. AccountsThe Company adopted new accounting guidance in fiscal year 2020 which requires accounts receivable reserves areto be determined based on expected credit losses rather than incurred losses, as further discussed below in the section on New Accounting Pronouncements Adopted. Prior to the adoption of this new accounting guidance, account receivable reserves were determined based upon an aging of accounts and a review for collectability of specific accounts. Amounts are written-off against the reserve in the period it is determined that the receivable is uncollectible.
Inventories
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.market. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of the Company’s inventory is valued utilizing the LIFO costing methodology. Inventory of the Company’s non-U.S. operations is valued using average cost or FIFO methods.
The Company evaluates product lines on a quarterly basis to identify inventory carrying values that exceed estimated net realizable value. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not be less than net realizable value reduced by an allowance for a normal profit margin). The calculation of a resulting reserve, if any, is recognized as an expense in the period
that the need for the reserve is identified. However, in cases where inventory at FIFO cost is lower than the LIFO carrying value, a write-down of the inventory to market may be required, subject to the ceiling and floor. It is the Company’s general policy to write-down to scrap value any inventory that is identified as slow-moving or aged more than twelve months, subject to sales, backlog and anticipated orders considerations. In some instances this aging criterion is up to twenty-four months. Inventory valuation reserves also include amounts pertaining to intercompany profit elimination between different subsidiaries.
Long-Lived Assets
Property, plant and equipment are recorded at cost, including capitalized interest, and include long-lived assets acquired under capitalfinance leases. Depreciation is primarily recorded using the straight-line method. Property,Prior to December 2020, property, plant and equipment associated with the Company’s Rowley titanium sponge production facility in the High Performance Materials & Components segment (prior to its indefinite idling in August 2016 - see Note 16 for further explanation), and the Hot-Rolling and Processing Facility (HRPF) in the Flat Rolled ProductsAA&S segment arewas being depreciated utilizing the units of production method of depreciation, which the Company believes providesbelieved provided a better matching of costs and revenues. However, based on changed business conditions resulting from the decision to exit production of standard stainless sheet products and the recognition of an impairment charge on the property, plant and equipment associated with the HRPF in December 2020 (see Note 3 for further discussion), depreciation of the remaining carrying value of the HRPF now uses the straight-line method. The Company periodically reviews estimates of useful life and production capacity assigned to new and in service assets. Significant enhancements, including major maintenance activities that extend the lives of property and equipment, are capitalized. Costs related to repairs and maintenance are charged to expense in the period incurred. The cost and related accumulated depreciation of property and equipment retired or disposed of are removed from the accounts and any related gains or losses are included in income.
The Company monitors the recoverability of the carrying value of its long-lived assets. An impairment charge is recognized when an indicator of impairment occurs and the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value and the asset’s carrying value exceeds its fair value. If an impairment loss is recognized, the adjusted carrying value of the long-lived asset is its new cost basis and this new cost basis is depreciated over the remaining useful life of the asset. Assets to be disposed of by sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized.
Leases
The following is the Company’s accounting policy as it relates to Accounting Standards Codification Topic 842 (ASC 842), Leases. This guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using the discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate (IBR) for the expected lease term is used. The Company’s IBRs approximate the rate the Company would have to pay to borrow on a collateralized basis over a similar term at lease inception. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received.
The Company has lease contracts for real property and machinery and equipment, primarily for mobile, office and information technology equipment. At inception of a contract, the Company determines whether the contract is or contains a lease. If the Company has a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. Several of the Company’s real property lease contracts include options to extend the lease term, and the Company reassesses the likelihood of renewal on at least an annual basis. In addition, several real property leases include variable lease payments, for items such as common area maintenance and utilities, which are expensed as incurred as variable lease expense.
There are two types of leases: operating leases and finance leases. Lease classification is determined at lease commencement. The criteria used for a lease to be classified as a finance lease is generally consistent with the criteria under the previous lease accounting guidance, ASC 840, for capital leases. All other leases not meeting the finance lease criteria are classified as operating leases. Operating lease expense is recognized on a straight-line basis on the consolidated statement of operations. Finance leases have front-loaded expense recognition which is reported as amortization expense and interest expense on the consolidated statement of operations. ROU assets for operating leases are classified in other long-term assets, and ROU assets for finance leases are classified in property, plant and equipment on the consolidated balance sheet. For operating leases, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities on the consolidated balance sheet. For finance leases, short-term lease liabilities are classified in short-term debt, and long-term lease liabilities are classified in long-term debt on the consolidated balance sheet. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity.
Goodwill
Goodwill is reviewed annually for impairment, or more frequently if impairment indicators arise. The review for goodwill impairment requires a comparison of the fair value of each reporting unit that has goodwill associated with its operations with its carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of the carrying value over the calculated fair value as required by the new accounting guidance early adopted by the Company in 2017. See New Accounting Pronouncements Adopted section below for further explanation of this new accounting guidance.value.
Generally accepted accounting standards provide the option to qualitatively assess goodwill for impairment before completing a quantitative assessment. Under the qualitative approach, if, after assessing the totality of events or circumstances, including both macroeconomic, industry and market factors, and entity-specific factors, the Company determines it is likely (more likely than not) that the fair value of a reporting unit is greater than its carrying amount, then the quantitative impairment analysis is not required. The quantitative assessment may be performed each year for a reporting unit at the Company’s option without first performing a qualitative assessment. The Company’s quantitative assessment of goodwill for possible impairment includes estimating the fair market value of a reporting unit which has goodwill associated with its operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These impairment assessments and valuation methods require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants identified by the Company. Although management believes that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.
Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. While a decline in stock price and market capitalization is not specifically cited as a goodwill impairment indicator, a company’s stock price and market capitalization should be considered in determining whether it is more likely than not that the fair value of a reporting unit is less that its carrying value. Additionally, a significant decline in a company’s stock price may suggest that an adverse change in the business climate may have caused the fair value of one or more reporting units to fall below carrying value. A sustained decline in market capitalization below book value may be determined to require an interim goodwill impairment review.
Environmental
Costs that mitigate or prevent future environmental contamination or extend the life, increase the capacity or improve the safety or efficiency of property utilized in current operations are capitalized. Other costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company’s liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or the
Company’s recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations proceed, adjustments of the accruals are made to reflect new information as appropriate. Accruals for losses from environmental remediation obligations do not take into account the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from
insurance carriers or other third parties, but do reflect allocations among potentially responsible parties (PRPs) at Federal Superfund sites or similar state-managed sites after an assessment is made of the likelihood that such parties will fulfill their obligations at such sites and after appropriate cost-sharing or other agreements are entered. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration the Company’s prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of the Company’s environmental experts in consultation with outside environmental specialists, when necessary.
Foreign Currency Translation
Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Sales Recognition
SalesThe following is the Company’s accounting policy as it relates to Accounting Standards Codification Topic 606 (ASC 606), Revenue from Customers. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The following is the Company’s accounting policy as it relates to the five-step analysis for revenue recognition:
1.Identify the contract: The Company has determined that the contract with the customer is established when the customer purchase order is accepted or acknowledged. Long-term agreements (LTAs), which typically extend multiple years, are used by the Company and certain of its customers for its specialty materials, in the form of mill products, powders, parts and components, to reduce their supply uncertainty. While these LTAs generally define commercial terms including pricing, termination clauses and other contractual requirements, they do not represent the contract with the customer.
2.Identify the performance obligation in the contract: When the Company accepts or acknowledges the customer purchase order, the type of good or service is defined on a line by line basis. Individual performance obligations are established by virtue of the individual line items identified on the sales order acknowledgment at the time of issuance. Generally, the Company’s revenue relates to the sale of goods and contains a single performance obligation for each distinct good. Conversion services that transform customer-owned inventory to a different dimension, product form, and/or changed mechanical properties are classified as “goods”.
3.Determine the transaction price: Pricing is also defined on a sales order acknowledgment on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Variable consideration is when the selling price of the good is not known or is subject to adjustment under certain conditions. Types of variable consideration may include volume discounts, customer rebates and surcharges. ATI also provides assurances that goods or services will meet the product specifications contained within the acknowledged customer contract. As such, returns and refunds reserves are estimated based upon past product line history or, at certain locations, on a claim by claim basis.
4.Allocate the transaction price to the performance obligation: Since a customer contract generally contains only one performance obligation, this step of the analysis is generally not applicable to the Company.
5.Recognize revenue when or as the performance obligation is satisfied: Performance obligations generally occur at a point in time and are satisfied when control passes to the customer. For most transactions, control passes at the time of shipment in accordance with agreed upon delivery terms. On occasion, shipping and handling charges occur after the customer obtains control of the good. When this occurs, the shipping and handling services are considered activities to fulfill the promise to transfer the good.
Certain customer agreements involving production of parts and components require revenue to be recognized over time due to there being no alternative use for the product without significant economic loss and an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. The Company uses an input method for determining the amount of revenue, and associated standard cost, to recognize over-time revenue, cost and gross margin for these customer agreements. The input methods used for these agreements include costs incurred and labor hours expended, both of which give an accurate representation of the progress made toward complete satisfaction of that particular performance obligation.
Contract assets are recognized when title passesATI’s conditional right to consideration for goods or services have transferred to the customer. A conditional right indicates that additional performance obligations associated with the contract are yet to be satisfied. Contract assets are assessed separately for impairment purposes. If ATI’s right to consideration from the customer is unconditional, this asset is accounted for as a receivable and presented separately from other contract assets. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due. Performance obligations that are recognized as revenue at a point-in-time and are billed to the customer are recognized as accounts receivable. Payment terms vary from customer to customer depending upon credit worthiness, prior payment history and other credit considerations.
Contract costs are the incremental costs of obtaining and fulfilling a contract (i.e., costs that would not have been incurred if the contract had not been obtained) to provide goods and services to customers. Contract costs for ATI largely consist of design and development costs for molds, dies and other tools that ATI will own and that will be used in producing the products under the supply arrangement. Contract costs are rendered.classified as non-current assets and amortized to expense on a systematic and rational basis over a period consistent with the transfer to the customer of the goods or services to which the asset relates.
Contract liabilities are recognized when ATI has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the contract. Elements of variable consideration discussed above may be recorded as contract liabilities. In addition, progress billings and advance payments from customers for costs incurred to date are also reported as contract liabilities.
Research and Development
Our research, development and technical service activities are closely interrelated and are directed toward development of new products, improvement of existing products, cost reduction, process improvement and control, quality assurance and control, development of new manufacturing methods, and improvement of existing manufacturing methods. Research and development costs are expensed as incurred. Company funded research and development costs were $13.3$14.1 million in 2017, $14.72020, $17.8 million in 2016,2019, and $14.2$22.7 million in 2015 and were expensed as incurred.2018. Customer funded research and development costs were $1.4$0.7 million in 2017,2020, $2.4 million in 2019, and $2.2 million in 2016, and $1.5 million in 2015.2018.
Stock-based Compensation
The Company accounts for stock-based compensation transactions, such as nonvested restricted stock or stock units and performance equity awards, using fair value. Compensation expense for an award is estimated at the date of grant and is recognized over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. However, compensation expense already recognized on plans which vest based solely on the attainment of market conditions, such as total shareholder return measures, is not adjusted if market conditions are not met, such asbased on the Company’s total shareholder return performance relative to a peer group under certainaward attainment status at the end of the Company’s performance equity awards.measurement period. Compensation expense is adjusted for estimated forfeitures over the award measurement period.
Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law.
The Company evaluates on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimate future taxable income exclusive of temporary differences and tax planning strategies.
It is the Company’s policy to classify interest and penalties recognized on underpayment of income taxes as income tax expense. It is also the Company’s policy to recognize deferred tax amounts stranded in accumulated other comprehensive income (AOCI), which result from tax rate differences on changes in AOCI balances, as an element of income tax expense in the period that the related balance sheet item associated with the AOCI balance ceases to exist. In the case of derivative financial instruments accounted for as hedges, or marketable securities, ATI uses the portfolio method where the stranded
deferred tax amount is recognized when all items of a particular category, such as cash flow hedges of a particular risk such as a foreign currency hedge, are settled. In the case of defined benefit pension and other postretirement benefit plans, the stranded deferred tax balance is recognized as an element of income tax expense in the period the benefit plan is extinguished.
Net Income Per Common Share
Basic and diluted net income per share are calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding. The calculations of all diluted income/loss per share figures for a period exclude the potentially dilutive effect of dilutive share equivalents if there is a net loss since the inclusion in the calculation of additional shares in the net loss per share would result in a lower per share loss and therefore be anti-dilutive.
New Accounting Pronouncements Adopted
In January 2017, the Company early adopted changes issued byMarch 2020, the Financial Accounting Standards Board (FASB) issued new optional accounting guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The new accounting guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The new accounting guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. Management is continuing to evaluate the issue, and presently does not expect a transition away from LIBOR, primarily involving ATI’s domestic credit facility and an interest rate swap contract, to have any significant financial impact to ATI.
In December 2019, the FASB issued new guidance to simplify how an entity is required to test goodwillthe accounting for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, which is currently required if a reporting unit with goodwill fails a Step 1 test comparing the fair value of the reporting unit to its carrying value including goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test using just the Step 1 test of comparing the fair value of a reporting unit with its carrying amount. Any goodwill impairment, representing the amount by which the carrying amount exceeds the reporting unit’s fair value, is determined using this Step 1 test. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit.
In January 2017, the Company adopted changes issued by the FASB to simplify employee share-based payment accounting.income taxes. The areas for simplification in thisthe guidance involve several aspectsthe removal of certain exceptions to the general principles in the current guidance, including intraperiod allocation and the calculation of income taxes in an interim period when a year to date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, which will be prospectively adopted. The adoption of these changes did not have a material impact on the Company’s financial statements.
In January 2017, the Company adopted changes issued by the FASB to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling pricetaxes in the ordinary coursearea of business, less reasonably predictable costs of completion, disposal and transportation. The new inventory measurement requirements replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. This change in the measurement of inventory does not apply to inventory valued on a last-in, first-out (LIFO) basis, which is the accounting basis used for most of the Company’s inventory. The adoption of these changes did not have a material impact on the Company’s financial statements.
In the fourth quarter 2017, the Company early adopted changes issued by the FASB on classification of cash receipts and cash payments on the statement of cash flows. The adoption of these changes did not have a material impact on the Company’s financial statements other than requiring the classification of the cash portion of the Company’s debt extinguishment charge in 2017 as a financing activity in the 2017 consolidated statement of cash flows. See Note 8 for further discussion of this debt extinguishment charge.
Pending Accounting Pronouncements
In February 2018, the FASB issued limited changes to accounting standards to address the income tax accounting for certain provisions of the Tax Cuts and Jobs Act (the “Tax Act”). Accounting standards require the effect of a change in tax laws or rates on deferred tax assets and liabilities to be included in income from continuing operations in the reporting period that the change was enacted, including tax effects that were initially recognized directly in other comprehensive income at the previous rate. This results in stranded amounts in accumulated other comprehensive income (AOCI) related to the income tax rate differential, as the net-of-tax AOCI balance is not adjusted for the tax rate change. This new accounting guidance provides the option to make a one-time reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted U.S. federal tax rate under the Tax Act, calculated on the basis of the difference between the historical and newly enacted U.S. federal tax rate on deferred tax assets and liabilities related to items within AOCI. Adoption of the new accounting guidance is not required, and the Company has elected not to adopt this new guidance.
In August 2017, the FASB issued changes to its accounting guidance for derivatives and hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Some changes resulting from this new guidance include the elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow hedges, changes to the recognition and presentation of changes in the fair value of the hedging instrument, enhancement of the ability to use the critical-terms-match method for the cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date, and the addition of new disclosure requirements and amendments to existing ones.franchise taxes. This new guidance is effective for the Company’s 2019Company in fiscal year 2021, with early adoption permittedpermitted. This guidance was early adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.
In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and all transitionmodifications of various current disclosures as well as some additional disclosure requirements and elections beingfor Level 3 fair value measurements. Some of these disclosure changes must be applied to hedging relationships existingprospectively while others retrospectively depending on the date of adoption. Therequirement. This guidance was adopted by the Company in fiscal year 2020 without an impact on the Company’s consolidated financial statements other than disclosures.
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is currently evaluating the impact ofbased on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to trade receivables, other receivables, contract assets and most debt instruments. The CECL model does not have a minimum threshold for recognition of impairment losses, and entities will need to measure expected credit losses on itsassets that have a low risk of loss. This guidance was adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.
Pending Accounting Pronouncements
In March 2017,August 2020, the FASB issued changesnew accounting guidance related to accounting for convertible instruments. Under this new guidance, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. As such, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the reported interest rate of convertible debt instruments typically will be closer to the accounting for defined benefit pension and other postretirement benefit expenses. Thiscoupon interest rate. The new guidance requires the disaggregation of the service cost component from the other components of net benefit cost. The service cost component of net benefit cost is to be reportedalso addresses how convertible instruments are accounted for in the same line item ondiluted earnings per share calculation, requiring the consolidated statementif-converted method, and requires enhanced disclosures about the terms of operations as other compensation costs arising from services rendered by the pertinent employees, while the other components of net benefit cost are to be presentedconvertible instruments and contracts in the consolidated statement of operations separately, outside a subtotal of operating income. The amendments also provide explicit guidance to allow only the service cost component of net benefit cost to be eligible for capitalization.an entity’s own equity. This new guidance is effective for the Company’s 2018Company in fiscal year 2022, with early adoption permitted.
The Company adopted this new accounting guidance related to accounting for convertible instruments effective January 1, 2021 using the modified transition approach with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. This new guidance is applicable to the Company’s 3.5% Convertible Senior Notes due 2025 (the 2025 Convertible Notes) that were issued in June 2020, for which the embedded conversion option was required to be separately accounted for as a component of stockholders’ equity. Upon adoption on January 1, 2021, long-term debt increased by $45.4 million and stockholders’ equity decreased by the same amount, representing the net impact of two adjustments: (1) the $49.8 million value of the changeembedded conversion, which is net of allocated offering costs, previously classified in presentationadditional paid-in-capital in stockholders’ equity, and (2) a $4.4 million increase to retained earnings for the cumulative effect of adoption primarily related to the non-cash interest expense recorded in fiscal year 2020 for the amortization of the portion of the 2025 Convertible Notes allocated to stockholders’ equity. Prospectively, the reported interest expense for the 2025 Convertible Notes will no longer include the non-cash interest expense of the equity component as required under prior accounting standards and will be closer to the 3.5% cash coupon rate.There will be no impact to the Company’s earnings per share calculation as it previously applied the if-converted method to the 2025 Convertible Notes given ATI’s flexibility to settle conversions of the 2025 Convertible Notes in cash, shares of ATI’s common stock or a combination thereof, at ATI’s election.
Note 2. Business Segments
Effective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). All segment reporting information for 2020 and prior periods below reflect these two revised business segments.
HPMC is comprised of the Specialty Materials and Forged Products businesses, as well as the ATI Europe distribution operations. The revised HPMC segment intensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace & defense markets and nearly half of its revenue from products for commercial jet engines. Other major HPMC end markets include medical and energy. HPMC produces a wide range of high performance materials, and components, and advanced metallic powder alloys made from nickel-based alloys and superalloys, titanium and titanium-based alloys, and a variety of other specialty materials. Capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and 3D-printed aerospace products.
The new AA&S segment combines the Specialty Alloys & Components business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, the 60%-owned STAL joint venture, and the Uniti and A&T Stainless 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. See Note 9 for further information on the Company’s joint ventures. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other important end markets for AA&S include automotive and electronics. AA&S produces nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless products in a variety of forms including plate, sheet, and strip products. On December 2, 2020, the Company announced a strategic repositioning of its FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase its focus on higher-margin products and its aerospace & defense end markets. See Note 3 for further discussion of this strategic realignment and its associated asset impairment, restructuring and other charges recorded in the fourth quarter of 2020.
In the fourth quarter 2020, the Company changed its’ segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of segment EBITDA excludes all effects of LIFO inventory accounting and any related changes in net realizable value inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other expenses, charges for goodwill and asset impairments, restructuring and other charges, debt extinguishment charges and non-operating gains or losses. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Intersegment sales are generally recorded at full cost or market. Common services are allocated on the basis of estimated utilization.
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Total sales: | | | | | | |
| High Performance Materials & Components | | $ | 1,235.4 | | | $ | 2,054.2 | | | $ | 2,039.2 | |
| Advanced Alloys & Solutions | | 1,947.5 | | | 2,392.2 | | | 2,302.4 | |
| Total sales | | 3,182.9 | | | 4,446.4 | | | 4,341.6 | |
| Intersegment sales: | | | | | | |
| High Performance Materials & Components | | 70.8 | | | 75.7 | | | 76.1 | |
| Advanced Alloys & Solutions | | 130.0 | | | 248.2 | | | 218.9 | |
| Total intersegment sales | | 200.8 | | | 323.9 | | | 295.0 | |
| Sales to external customers: | | | | | | |
| High Performance Materials & Components | | 1,164.6 | | | 1,978.5 | | | 1,963.1 | |
| Advanced Alloys & Solutions | | 1,817.5 | | | 2,144.0 | | | 2,083.5 | |
| Total sales to external customers | | $ | 2,982.1 | | | $ | 4,122.5 | | | $ | 4,046.6 | |
Total international sales were $1,173.0 million in 2020, $1,667.9 million in 2019, and $1,698.4 million in 2018. Of these amounts, sales by operations in the United States to customers in other countries were $812.3 million in 2020, $1,262.6 million in 2019, and $1,303.8 million in 2018.
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| EBITDA: | | | | | | |
| High Performance Materials & Components | | $ | 129.6 | | | $ | 356.2 | | | $ | 360.3 | |
| Advanced Alloys & Solutions | | 115.0 | | | 172.6 | | | 206.4 | |
| Total segment EBITDA | | 244.6 | | | 528.8 | | | 566.7 | |
| LIFO and net realizable value reserves (See Note 6) | | 0 | | | (0.1) | | | (0.7) | |
| Corporate expenses | | (40.9) | | | (65.3) | | | (57.3) | |
| Closed operations and other expenses | | (7.4) | | | (24.0) | | | (19.5) | |
| Total ATI Adjusted EBITDA | | 196.3 | | | 439.4 | | | 489.2 | |
| | | | | | |
| Depreciation & amortization | | (143.3) | | | (151.1) | | | (156.4) | |
| Interest expense, net | | (94.4) | | | (99.0) | | | (101.0) | |
| Restructuring and other charges (See Note 3) | | (1,132.1) | | | (4.5) | | | 0 | |
| Impairment of goodwill (See Note 4) | | (287.0) | | | 0 | | | 0 | |
| Joint venture restructuring and impairment charge (See Note 9) | | (2.4) | | | (11.4) | | | 0 | |
| Gain on joint venture deconsolidation (See Note 9) | | 0 | | | 0 | | | 15.9 | |
| Debt extinguishment charge (See Note 12) | | (21.5) | | | (21.6) | | | 0 | |
| Gain on asset sales, net | | 2.5 | | | 89.8 | | | 0 | |
| Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | | | $ | 247.7 | |
Corporate expenses were lower in 2020 compared to 2019 and 2018 primarily due to lower incentive compensation expense based on expected performance versus targeted metrics, and lower expenses resulting from cost reduction actions.
Closed operations and other expenses are primarily presented in selling and administrative expenses in the consolidated statements of operations. These items included costs at closed facilities, including legal matters, environmental, real estate and other facility costs, and changes in foreign currency remeasurement impacts primarily related to ATI's European Treasury Center operation. Closed operations and other expenses were lower in 2020 compared to 2019 and 2018, reflecting lower legal and retirement benefit costexpense of closed operations and a $4.3 million gain from settlements of contract indemnity obligations.
The $2.5 million net gain on asset sales in 2020 consists of a gain on the sale of certain oil and gas rights (see Note 11). The $89.8 million net gain on asset sales in 2019 consists of a $91.7 million gain on the sale of certain oil and gas rights (see Note 11) and a $6.2 million gain on the sale of the Company’s Cast Products business, partially offset by an $8.1 million loss on the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY. See Note 8 for further explanation regarding the sale of business transactions.
Certain additional information regarding the Company’s business segments is presented below:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Depreciation and amortization: | | | | | | |
| High Performance Materials & Components | | $ | 78.1 | | | $ | 84.6 | | | $ | 90.6 | |
| Advanced Alloys & Solutions | | 62.1 | | | 63.5 | | | 62.9 | |
| Other | | 3.1 | | | 3.0 | | | 2.9 | |
| Total depreciation and amortization | | $ | 143.3 | | | $ | 151.1 | | | $ | 156.4 | |
| Capital expenditures: | | | | | | |
| High Performance Materials & Components | | $ | 83.1 | | | $ | 119.9 | | | $ | 71.7 | |
| Advanced Alloys & Solutions | | 45.9 | | | 47.4 | | | 64.5 | |
| Corporate | | 7.5 | | | 0.9 | | | 3.0 | |
| Total capital expenditures | | $ | 136.5 | | | $ | 168.2 | | | $ | 139.2 | |
| | | | | | | | | | | | | | | | | | | | |
| Identifiable assets: | | 2020 | | 2019 | | 2018 |
| High Performance Materials & Components | | $ | 1,753.9 | | | $ | 2,324.6 | | | $ | 2,400.7 | |
| Advanced Alloys & Solutions | | 1,548.8 | | | 2,621.1 | | | 2,590.4 | |
| Corporate: | | | | | | |
| Deferred Taxes | | 5.1 | | | 64.5 | | | 8.7 | |
| Cash and cash equivalents and other | | 727.1 | | | 624.4 | | | 502.0 | |
| Total assets | | $ | 4,034.9 | | | $ | 5,634.6 | | | $ | 5,501.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | 2020 | | Percent
of total | | 2019 | | Percent
of total | | 2018 | | Percent
of total |
| Total assets: | | | | | | | | | | | | |
| United States | | $ | 3,356.8 | | | 83 | % | | $ | 4,956.4 | | | 88 | % | | $ | 4,859.1 | | | 88 | % |
| China | | 325.5 | | | 8 | % | | 288.1 | | | 5 | % | | 287.3 | | | 5 | % |
| United Kingdom | | 122.4 | | | 3 | % | | 141.3 | | | 3 | % | | 136.7 | | | 3 | % |
| Other | | 230.2 | | | 6 | % | | 248.8 | | | 4 | % | | 218.7 | | | 4 | % |
| Total Assets | | $ | 4,034.9 | | | 100 | % | | $ | 5,634.6 | | | 100 | % | | $ | 5,501.8 | | | 100 | % |
Note 3. Restructuring and other charges
For the year ended December 31, 2020, the Company recorded restructuring and other charges of $1,132.1 million, predominantly related to the Company's December 2020 announcement to cease production of standard stainless sheet products, which are excluded from business segment results.On December 2, 2020, the Company announced a strategic repositioning of its FRP business within the AA&S segment, with a focus of increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge Precision Rolled Strip® (PRS).As part of this strategic realignment, the Company intends to cease production of standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the HRPF, and close various downstream finishing operations that are part of the standard stainless sheet flow path.
Restructuring charges recorded on the consolidated statement of operations for the year ended December 31, 2020 were $1,107.5 million, comprised of $1,041.5 million of non-cash asset impairment charges, $60.5 million of employee benefit-related costs, and $5.5 million of other costs related to be applied retrospectively,facility idlings. The December 2, 2020 decision to exit production of standard stainless products represented a significant indicator of impairment in the carrying value of certain long-lived assets. Based on projected cash flows of the Brackenridge, PA operations, including the HRPF, the Company completed a fair value analysis as of the beginning of the fourth quarter of 2020 and recognized a $1,032.6 million impairment charge for this facility based on an estimated fair value of $354 million. This long-lived asset impairment charge was determined using a held in use framework and an income approach, which represents Level 3 unobservable information in the fair value hierarchy. This impairment assessment and valuation method require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the changecost of capital. Many of these assumptions are determined by reference to market participants the Company has identified. For example, the weighted average cost of capital used in capitalizationthe discounted cash flow assessment was 9.3% and the long-term growth rate was 2%. Although the Company believes that the estimates and assumptions used were reasonable, actual results could
differ from those estimates and assumptions. Other long-lived asset impairment charges of $8.9 million were also recognized for only service cost applied prospectively. The guidance allows a practical expedient that permits the usevarious AA&S segment operations identified for closure as part of the amounts disclosedstandard stainless sheet exit decision.
Restructuring charges also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and medical benefits for the elimination of approximately 1,400 positions related to the standard stainless exit, as well as for employees impacted by the idling of the Albany, OR primary titanium operations in the fourth quarter of 2020, and workforce right-sizing actions, including both involuntary reductions and voluntary retirement benefits footnoteincentive programs implemented throughout 2020 to better match the Company’s cost structure to expected demand, primarily as a result of economic challenges created by the COVID-19 pandemic. Other costs of $5.5 million included in 2020 restructuring charges primarily relate to asset retirement and environmental obligations (see Note 10 for further explanation) associated with facility idlings.
Other charges for the prior comparative periods asyear ended December 31, 2020 include:
•$17.4 million of termination benefits for pension and postretirement medical obligations related to facility closures from the estimation basisstandard stainless exit (see Note 16 for applying the retrospective presentation requirements. The Company will adopt this new guidancefurther explanation). These costs are classified within nonoperating retirement benefit expense in the first quarterconsolidated statements of fiscal year 2018 using this practical expedient.operations.
The Company expects such adoption to have a material impact to reported operating income•$7.2 million of other charges for inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, dueprimarily related to excess raw material and work in process inventory at the change in presentation of non-service cost expense components. For example, applyingidled Albany, OR primary titanium facility.
Restructuring charges for the practical expedient to fiscal year 2017 results, operating income for 2017 would be $54.3ended December 31, 2019 of $4.5 million, higher, withwhich are reported as restructuring charges on the reclassification of this amount representing the other components of net benefit cost to a newly-created non-operating retirement benefit expense category, with no net impact to the reported 2017 loss before income taxes. Thisconsolidated statement of operations change in presentation of net benefit cost will not affect ATI’s measure of segment operating profit; all defined benefit pension and other postretirement benefit expense attributable toexcluded from business segment operations remains a componentresults, are comprised of business segment financial performance. The Company expects to have a one-time, unfavorable impactseverance obligations for the reduction of approximately $6 million70 positions in order to pre-tax reported resultsstreamline ATI’s salaried workforce primarily to improve the cost competitiveness of the U.S.-based FRP business.
Reserves for restructuring charges at December 31, 2020 and 2019 primarily consist of severance and employee benefit costs incurred in the firstfourth quarter 2019 and throughout 2020, the majority of 2018 upon adoption primarily affecting the Flat Rolled Products business segment, due to the change limiting only the service cost component of net benefit costwhich are expected to be capitalizable into inventory.paid by the end of 2021. Restructuring reserves activity is as follows:
| | | | | | | | |
| Severance and Employee |
| Benefit Costs |
| December 31, 2020 | December 31, 2019 |
| Beginning of year balance | $ | 4.5 | | $ | 0 | |
| Additions | 60.5 | | 4.5 | |
| Payments | (21.6) | | 0 | |
| End of year balance | $ | 43.4 | | $ | 4.5 | |
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assetsOf this $43.4 million restructuring reserve balance at December 31, 2020, $33.8 million is recorded in other current liabilities and $9.6 million is recorded in other long-term liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the Company’s 2019 fiscal year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In May 2014, the FASB issued changes to revenue recognition with customers, which is required to be adopted by the Company in fiscal year 2018. This update provides a five-step analysis of transactions to determine when and how revenue is recognized, along with expanded disclosure requirements. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. The Company has evaluated the impact of this standard on individual customer contracts and based on this evaluation determined that there are several customer agreements involving production of parts and components in the High Performance Materials and Components segment that require revenue to be recognized over time due to there being no alternative use for the product without significant economic loss and an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. Over-time recognition is a change from current accounting, which is at a point-in-time for these products. As a result, the Company will recognize a $15.5 million increase to retained earnings at the beginning of the 2018 fiscal year for the cumulative effect of applying the over-time revenue recognition to prior periods, representing the favorable impact to prior results had the over-time revenue recognition method been applied. Due to certain customer agreements with limited duration, 2018 gross profit is now expected to be lower by approximately $5 million as a result of the cumulative effect adjustment for over-time recognition. There is no other significant impact to the Company upon adoption, with the exception of reclassifications to contract assets and liabilities on the consolidated balances sheet. As of January 1, 2018, total assets and total liabilities both increased by approximately $33 million, representing the reclassification of amounts recorded previously in accounts receivable and inventory to contract liabilities on theDecember 31, 2020 consolidated balance sheet. The Company also expects an increase to financial statement footnote disclosures in 2018 regarding revenues, contract assets and contract liabilities as a result of this accounting standard update.
Note 2. Inventories
Inventories$4.5 million restructuring reserve balance at December 31, 2017 and 2016 were as follows (in millions):
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Raw materials and supplies | | $ | 162.8 |
| | $ | 149.6 |
|
| Work-in-process | | 955.5 |
| | 837.9 |
|
| Finished goods | | 165.0 |
| | 161.7 |
|
| Total inventories at current cost | | 1,283.3 |
| | 1,149.2 |
|
| Adjustment from current cost to LIFO cost basis | | 43.1 |
| | 97.3 |
|
| Inventory valuation reserves | | (121.5 | ) | | (169.0 | ) |
| Progress payments | | (28.8 | ) | | (40.5 | ) |
| Total inventories, net | | $ | 1,176.1 |
| | $ | 1,037.0 |
|
Inventories, before progress payments, determined2019 is recorded in other current liabilities on the LIFO method were $821.2 million at December 31, 2017, and $736.3 million at December 31, 2016. The remainder of the inventory was determined using the FIFO and average cost methods, and these inventory values do not differ materially from current cost. Due to deflationary impacts primarily related to raw materials, the carrying value of the Company’s inventory as valued on LIFO exceeds current replacement cost, and based on a lower of cost or market value analysis, a net realizable value (NRV) inventory reserve is required. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not exceed net realizable value reduced by an allowance for a normal profit margin). Impacts to cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions): |
| | | | | | | | | | |
| | | Fiscal year ended December 31, |
| | | 2017 | 2016 | 2015 |
| LIFO benefit (charge) | | $ | (54.2 | ) | $ | (39.1 | ) | $ | 131.6 |
|
| NRV benefit (charge) | | 54.0 |
| 39.9 |
| (131.5 | ) |
| Net cost of sales impact | | $ | (0.2 | ) | $ | 0.8 |
| $ | 0.1 |
|
During 2017, 2016 and 2015, inventory usage resulted in liquidations of LIFO inventory quantities, increasing cost of sales by $4.6 million, $61.5 million and $9.6 million, respectively. These inventories were carried at differing costs prevailing in prior years as compared with the cost of current manufacturing cost and purchases.
The results for fiscal years 2016 and 2015 included $17.7 million and $24.5 million, respectively, in inventory valuation charges related to the market-based valuation of titanium products. Additionally, in the third quarter of 2016, in conjunction with the indefinite idling of the Company’s Rowley, UT titanium sponge facility (see Note 16 for further explanation), an additional $11.3 million charge was taken to revalue titanium sponge inventory based on revised assessments of industrial grade titanium market conditions and expected utilization of this inventory. In December 2015, based on current market prices for non-premium quality (PQ) grades of titanium sponge, the Company recorded an additional $25.4 million charge to revalue this inventory. This charge included revised assessments of the non-PQ titanium market conditions and expected utilization of this inventory.
Note 3. Property, Plant and Equipment
Property, plant and equipment at December 31, 2017 and 2016 was as follows:
|
| | | | | | | | |
| (In millions) | | 2017 | | 2016 |
| Land | | $ | 31.7 |
| | $ | 31.4 |
|
| Buildings | | 844.5 |
| | 829.6 |
|
| Equipment and leasehold improvements | | 3,597.6 |
| | 3,497.2 |
|
| | | 4,473.8 |
| | 4,358.2 |
|
| Accumulated depreciation and amortization | | (1,978.1 | ) | | (1,859.3 | ) |
| Total property, plant and equipment, net | | $ | 2,495.7 |
| | $ | 2,498.9 |
|
Construction in progress at December 31, 2017 and 2016 was $90.7 million and $87.4 million, respectively. Depreciation and amortization for the years ended December 31, 2017, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Depreciation of property, plant and equipment | | $ | 135.2 |
| | $ | 141.9 |
| | $ | 159.6 |
|
| Software and other amortization | | 25.6 |
| | 28.4 |
| | 30.3 |
|
| Total depreciation and amortization | | $ | 160.8 |
| | $ | 170.3 |
| | $ | 189.9 |
|
Note 4. Goodwill and Other Intangible Assets
At December 31, 2017,2020, the Company had $531.4$240.7 million of goodwill on its consolidated balance sheet, all of which relates to the High Performance Materials & Components (HPMC)HPMC segment. Goodwill decreased $110.5$285.1 million in 2017 as2020 due to a result of a $114.4$287.0 million interim impairment charge in the HPMC segment, partially offset by $3.9a $1.9 million increase from the impact of foreign currency translation on goodwill denominated in functional currencies other than the U.S. dollar.
The Company performs its annual goodwill impairment evaluations in the fourth quarter of each year. During the thirdsecond quarter of 2017,2020, the Company performed an interim goodwill impairment analysis on ATI Castthe Forged Products a titanium investment casting business, duereporting unit and its $460.4 million goodwill balance based on assessed potential indicators of impairment, including recent disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic, and the increasing uncertainty of near-term demand requirements of aero-engine and airframe markets based on government responses to the pandemic and ongoing interactions with customers. In the previous 2019 annual goodwill impairment indicators including lower actual results versus projections. Thisevaluation, this reporting unit had a fair value that exceeded carrying value by 12% according to our 2016 annual goodwill impairment evaluation.approximately 30%. For the 20172020 interim impairment analysis, fair value was determined by using a quantitative assessment usingthat used a discounted cash flow technique, which represents Level 3 unobservable information in the fair value hierarchy. The impairment assessment and valuation method require the Company to make estimates and assumptions
regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants the Company has identified. For example, the weighted average cost of capital used in the discounted cash flow assessment was 11.6%, and the long-term growth rate was 3.5%. Although the Company believes that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. As a result of the 2017second quarter 2020 interim goodwill impairment evaluation, the Company determined that the fair value of the CastForged Products businessreporting unit was significantly below the carrying value, including goodwill.goodwill, by $287.0 million. This was primarily due to changes in the timing and amount of expected cash flows resulting from lower projected revenues, profitability and cash flows associated with revised expectations for the rate of operational improvement and profitability of this business based on current customer agreements.due to near-term reductions in commercial aerospace market demand. Consequently, during the thirdsecond quarter of 2017,2020, the Company recorded a $114.4$287.0 million pre-tax impairment charge to write-off allfor the partial impairment of the Forged Products reporting unit goodwill, associated with ATI Cast Products, most of which was assigned from the Company’s 2011 Ladish acquisition that was not deductible for income tax purposes. This goodwill impairment charge was excluded from 20172020 HPMC business segment results.
Also duringThe $240.7 million of goodwill remaining as of December 31, 2020 on the third quarterCompany’s consolidated balance sheet is comprised of 2017, management concluded that$173.4 million at the goodwill impairment at ATI CastForged Products was an impairment indicator to evaluate the recoverability of other long-lived assets of this reporting unit including property, plant, equipment, and intangible assets. No impairment was determined to exist in these long-lived assets as a result of this interim impairment test.
$67.3 million at the Specialty Materials reporting unit. For the Company’s annual goodwill impairment evaluation performed in the fourth quarter of 2017,2020, quantitative goodwill assessments were performed for thethese two HPMC reporting units with goodwill. BothFair values were determined by using a quantitative assessment that may include discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any, which represents Level 3 unobservable information in the fair value hierarchy. These impairment assessments and valuation methods require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants the Company has identified. For example, the weighted average cost of capital used in the discounted cash flow assessment was 11.7% and the long-term growth rates ranged from 3% to 3.5%. Although the Company believes that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. The Specialty Materials reporting unitsunit had a fair valuesvalue that werewas significantly in excess of carrying value. The Forged Products reporting unit had a fair value andthat exceeded carrying value by approximately 2%, representing a slight increase in fair value subsequent to the interim goodwill impairment charge recorded for this reporting unit in the second quarter of 2020 as discussed above. As a result, no0 impairments were determined to exist from the annual goodwill impairment evaluation for the year ended December 31, 2017.2020. In order to validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium.
No indicators of impairment were observed in 2020 associated with any of the Company’s long-lived assets in the HPMC segment. There were no goodwill impairments for the yearyears ended December 31, 2016. As a result of the annual goodwill impairment evaluations in 2015, the Company determined that the fair value of the Flat Rolled Products business was below carrying value, including goodwill. During the fourth quarter of 2015, the Company recorded a $126.6 million pre-tax impairment charge to write-off all the goodwill in the Flat Rolled Products segment. This was due to challenging market conditions in 2015 in this business, primarily impacting commodity stainless flat-rolled products. This goodwill impairment charge was excluded from the Flat Rolled Products 2015 business segment results.2019 and 2018. Accumulated goodwill impairment losses as of December 31, 20172020 were $528.0 million and 2016as of 2019 and 2018 were $241.0 million.
On July 12, 2018, the Company acquired the assets of Addaero Manufacturing for $10.0 million of cash consideration. Addaero Manufacturing is a metal alloy-based additive manufacturer for the aerospace & defense industries, located in New Britain, CT. This business is reported as part of the HPMC segment from the date of the acquisition. The purchase price allocation included a $2.0 million technology intangible asset and $126.6goodwill of $6.0 million, respectively.
which is deductible for tax purposes. The final allocation of the purchase price was completed in the third quarter of 2018.
Other intangible assets, which are included in Other assets on the accompanying consolidated balance sheets as of December 31, 20172020 and 20162019 were as follows:
| | | | | December 31, 2017 | | December 31, 2016 | | | December 31, 2020 | | December 31, 2019 |
| (in millions) | | Gross carrying amount | | Accumulated amortization | | Gross carrying amount | | Accumulated amortization | (in millions) | | Gross
carrying
amount | | Accumulated
amortization | | Gross
carrying
amount | | Accumulated
amortization |
| Technology | | $ | 91.4 |
| | $ | (27.4 | ) | | $ | 91.4 |
| | $ | (23.0 | ) | Technology | | $ | 76.8 | | | $ | (33.4) | | | $ | 76.8 | | | $ | (29.7) | |
| Customer relationships | | 35.7 |
| | (9.1 | ) | | 35.7 |
| | (7.6 | ) | Customer relationships | | 27.0 | | | (10.4) | | | 27.0 | | | (9.3) | |
| Trademarks | | 64.6 |
| | (17.2 | ) | | 64.6 |
| | (12.9 | ) | Trademarks | | 52.4 | | | (24.5) | | | 52.4 | | | (20.9) | |
| Total amortizable intangible assets | | $ | 191.7 |
| | $ | (53.7 | ) | | $ | 191.7 |
| | $ | (43.5 | ) | Total amortizable intangible assets | | $ | 156.2 | | | $ | (68.3) | | | $ | 156.2 | | | $ | (59.9) | |
Amortization expense related to intangible assets was approximately $8 million, $10 million and $10 million for the years ended December 31, 2017, 20162020, 2019 and 2015.2018, respectively. For each of the years ending December 31, 20182021 through 2022,2025, annual amortization expense is expected to be approximately $10$8 million.
Note 5. Revenue from Contracts with Customers
Adoption Method and Impact
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers. The Company applied ASC 606 to all contracts not completed at January 1, 2018 and adopted the accounting standard using the modified retrospective method, with the cumulative effect of initially applying ASC 606 recognized at the beginning of the 2018 fiscal year. The Company recognized a $15.5 million increase to retained earnings at the beginning of the 2018 fiscal year for the cumulative effect of adoption of this standard, representing the favorable impact to prior results had the over-time revenue recognition requirements under ASC 606 been applied to several customer agreements. There was no impact to cash flow from operating activities on the consolidated statement of cash flows as a result of this accounting standard adoption.
Disaggregation of Revenue
The Company operates in 2 business segments: HPMC and AA&S. Revenue is disaggregated within these 2 business segments by diversified global markets, primary geographical markets, and diversified products. Comparative information of the Company’s overall revenues (in millions) by global and geographical markets for the fiscal years ended December 31, 2020, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2020 | | 2019 | | 2018 |
| | HPMC | AA&S | Total | | HPMC | AA&S | Total | | HPMC | AA&S | Total |
| Diversified Global Markets: | | | | | | | | | | | | |
| Aerospace & Defense | | $ | 946.9 | | $ | 413.1 | | $ | 1,360.0 | | | $ | 1,624.1 | | $ | 506.3 | | $ | 2,130.4 | | | $ | 1,562.9 | | $ | 402.6 | | $ | 1,965.5 | |
| Energy* | | 106.2 | | 512.7 | | 618.9 | | | 153.6 | | 643.3 | | 796.9 | | | 133.9 | | 646.8 | | 780.7 | |
| Automotive | | 5.5 | | 257.7 | | 263.2 | | | 10.5 | | 286.1 | | 296.6 | | | 9.5 | | 313.9 | | 323.4 | |
| Electronics | | 0.9 | | 176.8 | | 177.7 | | | 0.5 | | 162.7 | | 163.2 | | | 1.5 | | 155.4 | | 156.9 | |
| Food Equipment & Appliances | | 0 | | 159.2 | | 159.2 | | | 0.3 | | 205.5 | | 205.8 | | | 0.4 | | 244.5 | | 244.9 | |
| Construction/Mining | | 18.6 | | 123.4 | | 142.0 | | | 42.5 | | 152.5 | | 195.0 | | | 72.7 | | 153.3 | | 226.0 | |
| Medical | | 47.7 | | 71.4 | | 119.1 | | | 85.4 | | 87.0 | | 172.4 | | | 106.0 | | 77.1 | | 183.1 | |
| Other | | 38.8 | | 103.2 | | 142.0 | | | 61.6 | | 100.6 | | 162.2 | | | 76.2 | | 89.9 | | 166.1 | |
| Total | | $ | 1,164.6 | | $ | 1,817.5 | | $ | 2,982.1 | | | $ | 1,978.5 | | $ | 2,144.0 | | $ | 4,122.5 | | | $ | 1,963.1 | | $ | 2,083.5 | | $ | 4,046.6 | |
*Includes the oil & gas, downstream processing, and specialty energy markets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2020 | | 2019 | | 2018 |
| | HPMC | AA&S | Total | | HPMC | AA&S | Total | | HPMC | AA&S | Total |
| Primary Geographical Market: | | | | | | | | | | |
| United States | | $ | 641.0 | | $ | 1,168.1 | | $ | 1,809.1 | | | $ | 1,042.6 | | $ | 1,412.0 | | $ | 2,454.6 | | | $ | 983.6 | | $ | 1,364.5 | | $ | 2,348.1 | |
| China | | 31.0 | | 284.5 | | 315.5 | | | 93.9 | | 261.7 | | 355.6 | | | 71.2 | | 248.8 | | 320.0 | |
| United Kingdom | | 101.9 | | 24.6 | | 126.5 | | | 156.7 | | 17.1 | | 173.8 | | | 225.6 | | 16.5 | | 242.1 | |
| Germany | | 76.6 | | 48.8 | | 125.4 | | | 147.2 | | 72.1 | | 219.3 | | | 159.0 | | 88.2 | | 247.2 | |
| Japan | | 44.7 | | 41.5 | | 86.2 | | | 95.0 | | 52.7 | | 147.7 | | | 128.1 | | 86.8 | | 214.9 | |
| France | | 66.6 | | 18.4 | | 85.0 | | | 132.7 | | 22.8 | | 155.5 | | | 146.3 | | 37.3 | | 183.6 | |
| Rest of World | | 202.8 | | 231.6 | | 434.4 | | | 310.4 | | 305.6 | | 616.0 | | | 249.3 | | 241.4 | | 490.7 | |
| Total | | $ | 1,164.6 | | $ | 1,817.5 | | $ | 2,982.1 | | | $ | 1,978.5 | | $ | 2,144.0 | | $ | 4,122.5 | | | $ | 1,963.1 | | $ | 2,083.5 | | $ | 4,046.6 | |
Comparative information of the Company’s major high-value and standard products based on their percentages of sales is included in the following table. In conjunction with the Company’s announced ongoing exit of standard stainless products, ATI reclassified certain items as High-Value Products within AA&S segment results. Prior period information reflects these reclassifications. HRPF conversion service sales in the AA&S segment are excluded from this presentation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | HPMC | AA&S | Total | | HPMC | AA&S | Total | | HPMC | AA&S | Total |
| Diversified Products: | | | | | | | | | | | | |
| High-Value Products | | | | | | | | | | | | |
| Nickel-based alloys and specialty alloys | | 38 | % | 29 | % | 33 | % | | 38 | % | 33 | % | 35 | % | | 37 | % | 31 | % | 33 | % |
| Titanium and titanium-based alloys | | 28 | % | 11 | % | 17 | % | | 26 | % | 11 | % | 18 | % | | 23 | % | 10 | % | 17 | % |
| PRS products | | 0 | % | 25 | % | 15 | % | | 0 | % | 23 | % | 12 | % | | 0 | % | 23 | % | 12 | % |
| Precision forgings, castings and components | | 34 | % | 0 | % | 14 | % | | 36 | % | 0 | % | 18 | % | | 40 | % | 0 | % | 20 | % |
| Zirconium and related alloys | | 0 | % | 15 | % | 9 | % | | 0 | % | 11 | % | 6 | % | | 0 | % | 11 | % | 5 | % |
| Total High-Value Products | | 100 | % | 80 | % | 88 | % | | 100 | % | 78 | % | 89 | % | | 100 | % | 75 | % | 87 | % |
| Standard Products | | | | | | | | | | | | |
| Standard stainless products | | 0 | % | 20 | % | 12 | % | | 0 | % | 22 | % | 11 | % | | 0 | % | 25 | % | 13 | % |
| Total | | 100 | % | 100 | % | 100 | % | | 100 | % | 100 | % | 100 | % | | 100 | % | 100 | % | 100 | % |
The Company maintains a backlog of confirmed orders totaling $1.4 billion, $2.3 billion and $2.2 billion at December 31, 2020, 2019 and 2018, respectively. Due to the structure of the Company’s LTAs, 75% of this backlog at December 31, 2020 represented booked orders with performance obligations that will be satisfied within the next twelve months. The backlog does not reflect any elements of variable consideration.
Accounts Receivable
As of December 31, 2020 and 2019, accounts receivable with customers were $350.1 million and $558.7 million, respectively. The following represents the rollforward of accounts receivable - reserve for doubtful accounts for the fiscal years ended December 31, 2020, 2019 and 2018:
| | | | | |
| (in millions) |
| Accounts Receivable - Reserve for Doubtful Accounts |
| Balance as of December 31, 2017 | $ | 5.9 | |
| Expense to increase the reserve | 1.9 | |
| Write-off of uncollectible accounts | (1.8) | |
| Balance as of December 31, 2018 | 6.0 | |
| Expense to increase the reserve | 0.2 | |
| Write-off of uncollectible accounts | (1.6) | |
| Balance as of December 31, 2019 | 4.6 | |
| Expense to increase the reserve | 0.2 | |
| Write-off of uncollectible accounts | (0.5) | |
| Balance as of December 31, 2020 | $ | 4.3 | |
Contract balances
The following represents the rollforward of contract assets and liabilities for the fiscal years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | |
| (in millions) | |
| Contract Assets | |
| Short-term | 2020 | 2019 | 2018 |
| Balance as of beginning of fiscal year | $ | 38.5 | | $ | 51.2 | | $ | 36.5 | |
| Recognized in current year | 84.2 | | 74.5 | | 92.9 | |
| Reclassified to accounts receivable | (83.9) | | (79.9) | | (95.8) | |
| Impairment | 0 | | 0 | | 0 | |
| Reclassification to/from long-term | 0.1 | | 0 | | 16.8 | |
| Divestiture | 0 | | (7.3) | | 0 | |
| Other | 0 | | 0 | | 0.8 | |
| Balance as of period end | $ | 38.9 | | $ | 38.5 | | $ | 51.2 | |
| | | |
| Long-term | 2020 | 2019 | 2018 |
| Balance as of beginning of fiscal year | $ | 0.1 | | $ | 0.1 | | $ | 16.9 | |
| Recognized in current year | 0 | | 0 | | 0 | |
| Reclassified to accounts receivable | 0 | | 0 | | 0 | |
| Impairment | 0 | | 0 | | 0 | |
| Reclassification to/from short-term | (0.1) | | 0 | | (16.8) | |
| Balance as of period end | $ | 0 | | $ | 0.1 | | $ | 0.1 | |
| | | | | | | | | | | |
| (in millions) | |
| Contract Liabilities | |
| Short-term | 2020 | 2019 | 2018 |
| Balance as of beginning of fiscal year | $ | 78.7 | | $ | 71.4 | | $ | 69.7 | |
| Recognized in current year | 170.3 | | 126.1 | | 76.7 | |
| Amounts in beginning balance reclassified to revenue | (54.9) | | (49.2) | | (49.6) | |
| Current year amounts reclassified to revenue | (90.1) | | (76.0) | | (42.7) | |
| Other | 0 | | 1.9 | | 2.7 | |
| Reclassification to/from long-term | 7.8 | | 4.5 | | 14.6 | |
| Balance as of period end | $ | 111.8 | | $ | 78.7 | | $ | 71.4 | |
| | | |
| Long-term | 2020 | 2019 | 2018 |
| Balance as of beginning of fiscal year | $ | 25.9 | | $ | 7.3 | | $ | 22.2 | |
| Recognized in current year | 14.9 | | 24.2 | | 0.7 | |
| Amounts in beginning balance reclassified to revenue | (1.0) | | (1.1) | | (1.0) | |
| Current year amounts reclassified to revenue | 0 | | 0 | | 0 | |
| Other | 0 | | 0 | | 0 | |
| Reclassification to/from short-term | (7.8) | | (4.5) | | (14.6) | |
| Balance as of period end | $ | 32.0 | | $ | 25.9 | | $ | 7.3 | |
Contract costs for obtaining and fulfilling a contract were $5.4 million and $6.5 million as of December 31, 2020 and 2019, respectively, which are reported in other long-term assets on the consolidated balance sheet. Amortization expense for the fiscal years ended December 31, 2020, 2019 and 2018 of these contract costs was $1.4 million, $1.4 million, and $1.2 million, respectively.
Note 6. Inventories
Inventories at December 31, 2020 and 2019 were as follows (in millions):
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Raw materials and supplies | | $ | 207.6 | | | $ | 164.9 | |
| Work-in-process | | 690.7 | | | 899.6 | |
| Finished goods | | 181.6 | | | 161.3 | |
| Total inventories at current cost | | 1,079.9 | | | 1,225.8 | |
| Adjustment from current cost to LIFO cost basis | | 44.1 | | | 33.6 | |
| Inventory valuation reserves | | (126.9) | | | (104.1) | |
| Total inventories, net | | $ | 997.1 | | | $ | 1,155.3 | |
Inventories determined on the LIFO method were $627.5 million at December 31, 2020, and $776.1 million at December 31, 2019. The remainder of the inventory was determined using the FIFO and average cost methods, and these inventory values do not differ materially from current cost. Due to deflationary impacts primarily related to raw materials, the carrying value of the Company’s inventory as valued on LIFO exceeds current replacement cost, and based on a lower of cost or market value analysis, the Company maintains net realizable value (NRV) inventory valuation reserves to adjust carrying value of LIFO inventory to current replacement cost. These NRV reserves were $44.1 million and $33.6 million at December 31, 2020 and 2019, respectively. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not exceed net realizable value reduced by an allowance for a normal profit margin).
Impacts to cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions):
| | | | | | | | | | | | | | |
| | Fiscal year ended December 31, |
| | 2020 | 2019 | 2018 |
| LIFO benefit (charge) | | $ | 10.5 | | $ | 25.5 | | $ | (28.6) | |
| NRV benefit (charge) | | (10.5) | | (25.6) | | 27.9 | |
| Net cost of sales impact | | $ | 0 | | $ | (0.1) | | $ | (0.7) | |
During 2020 and 2019, inventory usage resulted in liquidations of LIFO inventory quantities, increasing cost of sales by $22.6 million and $1.8 million, respectively. During 2018, inventory usage resulted in liquidations of LIFO inventory quantities, decreasing cost of sales by $0.8 million. These inventories were carried at differing costs prevailing in prior years as compared with the cost of current manufacturing cost and purchases.
Note 7. Property, Plant and Equipment
Property, plant and equipment at December 31, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 |
| Land | | $ | 34.8 | | | $ | 34.6 | |
| Buildings | | 564.7 | | | 832.7 | |
| Equipment and leasehold improvements | | 2,736.9 | | | 3,671.3 | |
| | 3,336.4 | | | 4,538.6 | |
| Accumulated depreciation and amortization | | (1,867.2) | | | (2,088.5) | |
| Total property, plant and equipment, net | | $ | 1,469.2 | | | $ | 2,450.1 | |
The significant declines in the reported balances for buildings, equipment and leasehold improvements, accumulated depreciation and amortization, and net amounts of property, plant and equipment in 2020 reflect asset impairment charges predominantly related to the Company’s December 2020 announcement to cease production of standard stainless sheet products (see Note 3 for further explanation) and the adjustment of the cost basis of these long-lived assets to the carrying value following these impairments.
Construction in progress at December 31, 2020 and 2019 was $233.4 million and $177.3 million, respectively. Depreciation and amortization for the years ended December 31, 2020, 2019 and 2018 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Depreciation of property, plant and equipment | | $ | 119.5 | | | $ | 127.1 | | | $ | 131.9 | |
| Software and other amortization | | 23.8 | | | 24.0 | | | 24.5 | |
| Total depreciation and amortization | | $ | 143.3 | | | $ | 151.1 | | | $ | 156.4 | |
Note 8. Divestitures
On June 3, 2019, the Company completed the sale of 2 non-core forging facilities for $37 million. Located in Portland, IN and Lebanon, KY, these operations primarily use traditional forging methods to produce carbon steel forged products for use in the oil & gas, transportation and construction & mining industries. The Company received cash proceeds, net of transaction costs and net working capital adjustments, of $33.0 million on the sale of this business during the fiscal year ended December 31, 2019, which is reported as an investing activity on the consolidated statement of cash flows. With $10.4 million of goodwill allocated to these operations from ATI’s Forged Products reporting unit, the Company recognized an $8.1 million pre-tax loss in 2019, which is recorded in other income, net, on the consolidated statement of income and is excluded from HPMC segment results. This business is reported as part of the HPMC segment through the date of sale. Sales from these 2 forging facilities in 2018 were $86 million in the aggregate.
On July 22, 2019, the Company completed the sale of its Cast Products business, which produces titanium investment castings that are primarily used by aerospace & defense OEMs in the production of commercial jet airframes and engines. As part of the $127 million transaction, ATI retained a small post-casting machining facility in Salem, OR and continues to provide these services to the buyer and others. The Company received cash proceeds, net of transaction costs and net working capital adjustments, of $125.1 million on the sale of this business in 2019, which is reported as an investing activity on the consolidated statement of cash flows. The Company recognized a $6.2 million gain in 2019, which included a $10.2 million impairment charge on the carrying value of long-lived assets of the retained Salem operation ($4.5 million for property, plant and equipment, $1.4 million for operating lease right of use assets, $1.0 million for finance lease right of use assets, and $3.3 million of finite-lived intangible assets). This long-lived asset impairment charge was based on an analysis of the estimated fair values, including asset appraisals using market approaches, which represent Level 3 unobservable information in the fair value hierarchy. This gain on the sale of the Cast Products business is recorded in other income, net, on the consolidated statement of income and is excluded from HPMC segment results. This business is reported as part of the HPMC segment through the date of sale. Cast Products’ sales were $105 million in 2018.
Note 9. Joint Ventures
The financial results of majority-owned joint ventures are consolidated into the Company’s operating results and financial position, with the minority ownership interest recognized in the consolidated statement of operations as net income attributable to noncontrolling interests, and as equity attributable to the noncontrolling interests within total stockholders’ equity. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting.
Stockholders’ equity includes undistributed earnings of investees accounted for under the equity method of accounting of approximately $12.7 million at December 31, 2020.
Majority-Owned Joint Ventures
STAL:
The Company has a 60% interest in the Chinese joint venture known as Shanghai STAL Precision Stainless Steel Company Limited (STAL). The remaining 40% interest in STAL is owned by China Baowu Steel Group Corporation Limited, a state authorized investment company whose equity securities are publicly traded in the People’s Republic of China. STAL is part of ATI's Flat Rolled ProductsATI’s AA&S segment, and manufactures Precision Rolled StripPRS stainless products mainly for the electronics communication equipment, computers and automotive markets located in Asia. Cash and cash equivalents held by STAL as of December 31, 20172020 were $26.2$38.3 million.
Next Gen Alloys LLC:
During 2017, the Company formed Next Gen Alloys LLC, a joint venture with GE Aviation for the development of a new meltless titanium alloy powder manufacturing technology. ATI owns a 51% interest in this joint venture. The titanium alloy powders are being developed for use in additive manufacturing applications, including 3D printing. Next Gen Alloys LLC funds its development activities through the sale of shares to the two joint venture partners, and in 2018 the Company received
$2.7 million from sales of noncontrolling interests to its joint venture partner, which is reported as a financing activity on the consolidated statements of cash flows. Cash and cash equivalents held by this joint venture as of December 31, 20172020 were $7.0$2.7 million.
Equity Method Joint Ventures
A&T Stainless:
The Company has a 50% interest in A&T Stainless, a joint venture with an affiliate company of Tsingshan Group (Tsingshan) to produce 60-inch wide stainless sheet products for sale in North America. Tsingshan purchased its 50% joint venture interest in A&T Stainless in 2018 for $17.5 million, of which $12.0 million was received in 2018 and reported as a financing activity on the consolidated statements of cash flows. The A&T Stainless operations included the Company’s previously-idled direct roll and pickle (DRAP) facility in Midland, PA. ATI provided hot-rolling conversion services to A&T Stainless using the AA&S segment’s Hot-Rolling and Processing Facility. As a result of this sale of a 50% noncontrolling interest and the subsequent deconsolidation of the A&T Stainless entity, the Company recognized a $15.9 million gain during the first quarter of 2018 under deconsolidation and derecognition accounting guidance covering the loss of control of a subsidiary determined to be a business. The gain, including ATI’s retained 50% share, was based on the fair value of the joint venture, as determined by the cash purchase price for the noncontrolling interest, and is reported in other income, net on the consolidated statement of operations, and is excluded from AA&S segment results. Following this deconsolidation, ATI accounted for the A&T Stainless joint venture under the equity method of accounting.
In late March 2018, ATI filed for an exclusion from the Section 232 tariffs on behalf of A&T Stainless, which imports semi- inished stainless slab products from Indonesia. In April 2019, the Company learned that this exclusion request was denied by the U.S. Department of Commerce. ATI filed new requests on behalf of A&T Stainless for exclusion from the Section 232 tariffs in October 2019. These requests were denied by the U.S. Department of Commerce in the second quarter of 2020, and the 25% tariff remains in place.
In 2019, A&T Stainless evaluated its long-lived assets for impairment as the tariff exclusion denial represented a potential impairment indicator. The joint venture partners had continued to evaluate longer-term solutions to return this strategic initiative to profitability, and determined during the fourth quarter of 2019 that idling this facility was probable if a near-term tariff exclusion was not received. As a result, A&T Stainless recorded a $14.2 million non-cash impairment charge during December 2019 on its long-lived assets. ATI recognized a $7.1 million equity loss for its 50% share of this $14.2 million impairment. In addition, as of December 31, 2019, ATI had net receivables for working capital advances and administrative services from A&T Stainless of $36.8 million, of which $8.3 million was reported in prepaid expenses and other current assets and $28.5 million in other long-term assets on the consolidated balance sheet. These balances were also evaluated for collectability in 2019, and a $4.3 million reserve was recorded in December 2019 based on ATI’s share of the estimated fair value of the joint venture’s net assets. The total $11.4 million joint venture impairment charge for the long-lived asset impairment and receivables reserve was reported within other income, net on the consolidated statement of operations in December 2019 and was excluded from AA&S segment results.
Due to repeated tariff exclusion denials, ATI announced on March 31, 2020 that A&T Stainless would be idling the DRAP facility in 2020, in an orderly shut down process that was completed in the third quarter of 2020. A&T Stainless recorded a $4.8 million charge for contractual termination benefits as a result of the idling decision. ATI’s share of the A&T Stainless results were losses of $10.6 million, $19.3 million, and $3.9 million for the fiscal years ended December 31, 2020, 2019 and 2018, respectively, which is included within other income/expense, net, on the consolidated statements of operations. AA&S segment results in 2020, 2019 and 2018 include equity method recognition of A&T Stainless operating losses of $8.2 million, $12.2 million and $3.9 million, respectively. ATI’s share of the A&T Stainless charges for termination benefits in 2020 and long-lived asset impairment charges in 2019 were excluded from AA&S segment results.
No additional impairment charges were required during 2020 on the long-lived assets of A&T Stainless or ATI’s receivables from the joint venture, based on ATI’s share of the estimated fair value of its net assets. As of December 31, 2020, ATI had net receivables from A&T Stainless for working capital advances and administrative services, including the $4.3 million reserve, of $14.0 million, of which $0.5 million was reported in prepaid expenses and other current assets and $13.5 million in other long-term assets on the consolidated balance sheet. In addition, ATI evaluated the collectability of its remaining $5.5 million receivable from Tsingshan, which is reported in other long-term assets on the consolidated balance sheet, and concluded that no impairment or loss in expected value exists at this time.
Sales to A&T Stainless, which are included in ATI’s consolidated statement of operations for the 2020, 2019 and 2018 fiscal years, were $18.4 million, $14.6 million and $4.1 million, respectively. There were 0 accounts receivable from A&T Stainless at December 31, 2020 and there were $0.1 million at December 31, 2019.
Uniti:
ATI has a 50% interest in the industrial titanium joint venture known as Uniti LLC (Uniti), with the remaining 50% interest held by VSMPO, a Russian producer of titanium, aluminum, and specialty steel products. Uniti is accounted for under the equity method of accounting. ATI’s share of Uniti’s income/(loss)income was $0.6$1.2 million in 2017, $0.52020, $1.5 million in 2016,2019, and $(0.1)$2.9 million in 2015,2018, which is included in the Flat Rolled ProductsAA&S segment’s operating results, and within cost of sales inother income/expense, net, on the consolidated statements of operations. Sales to Uniti, which are included in ATI’s consolidated statements of operations, were $38.6$36.7 million in 2017, $20.32020, $31.3 million in 2016,2019, and $55.4$49.4 million in 2015.2018. Accounts receivable from Uniti were $1.2$1.4 million and $1.5$0.2 million at December 31, 20172020 and 2016,2019, respectively.
Stockholders’ equity includes undistributed earnings of investees accounted for under the equity method of accounting of approximately $10 million at December 31, 2017.
Note 6. Asset Retirement Obligations
The Company maintains reserves where a legal obligation exists to perform an asset retirement activity and the fair value of the liability can be reasonably estimated. These asset retirement obligations (AROs) include liabilities where the timing and (or) method of settlement may be conditional on a future event, that may or may not be within the control of the entity. At December 31, 2017, the Company had recognized AROs of $23.5 million related to landfill closures, decommissioning costs, facility leases and conditional AROs associated with manufacturing activities using what may be characterized as potentially hazardous materials.
Estimates of AROs are evaluated annually in the fourth quarter, or more frequently if material new information becomes known. Accounting for asset retirement obligations requires significant estimation and in certain cases, the Company has determined that an ARO exists, but the amount of the obligation is not reasonably estimable. The Company may determine that additional AROs are required to be recognized as new information becomes available.
Changes in asset retirement obligations for the years ended December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| (In millions) | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 23.3 |
| | $ | 25.0 |
|
| Accretion expense | | 0.8 |
| | 0.7 |
|
| Payments | | (0.7 | ) | | (2.0 | ) |
| Revision of estimates | | 0.1 |
| | (0.4 | ) |
| Balance at end of year | | $ | 23.5 |
| | $ | 23.3 |
|
Note 7.10. Asset Retirement Obligations
The Company maintains reserves where a legal obligation exists to perform an asset retirement activity and the fair value of the liability can be reasonably estimated. These asset retirement obligations (AROs) include liabilities where the timing and (or) method of settlement may be conditional on a future event, that may or may not be within the control of the entity. At December 31, 2020, the Company had recognized AROs of $24.0 million related to landfill closures, decommissioning costs, facility leases and conditional AROs associated with manufacturing activities using what may be characterized as potentially hazardous materials.
Estimates of AROs are evaluated annually in the fourth quarter, or more frequently if material new information becomes known. Accounting for asset retirement obligations requires significant estimation and in certain cases, the Company has determined that an ARO exists, but the amount of the obligation is not reasonably estimable. The Company may determine that additional AROs are required to be recognized as new information becomes available.
In 2020, the Company finalized a settlement agreement for an indemnity claim concerning a conditional ARO with the buyer of a formerly-owned business and as a result, the Company reduced ARO reserves by $4.3 million, which is recorded in other income/expense, net, on the consolidated statements of operations (see Note 11). The Company increased ARO reserves by $4.1 million in 2020 as a result of changes in the expected timing of payments on ARO’s resulting from facility idlings as discussed in Note 3, which is recorded in restructuring charges on the consolidated statement of operations. Both of these 2020 items are presented as revisions of estimates in the table below.
Changes in asset retirement obligations for the years ended December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 23.7 | | | $ | 23.1 | |
| Accretion expense | | 0.9 | | | 0.9 | |
| Payments | | (0.4) | | | (0.3) | |
| Revisions of estimates | | (0.2) | | | 0 | |
| Balance at end of year | | $ | 24.0 | | | $ | 23.7 | |
Note 11. Supplemental Financial Statement Information
Cash and cash equivalents at December 31, 20172020 and 20162019 were as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 |
| Cash | | $ | 158.2 | | | $ | 190.8 | |
| Other short-term investments | | 487.7 | | | 300.0 | |
| Total cash and cash equivalents | | $ | 645.9 | | | $ | 490.8 | |
|
| | | | | | | | |
| (In millions) | | 2017 | | 2016 |
| Cash | | $ | 140.2 |
| | $ | 164.1 |
|
| Other short-term investments | | 1.4 |
| | 65.5 |
|
| Total cash and cash equivalents | | $ | 141.6 |
| | $ | 229.6 |
|
Accounts receivable are presented net of a reserve for doubtful accounts of $5.9 million at December 31, 2017, and $7.3 million at December 31, 2016. During 2017, the Company recognized expense of $0.1 million to increase the reserve for doubtful accounts and wrote off $1.5 million of uncollectible accounts, which decreased the reserve. During 2016, the Company recognized expense of $4.8 million to increase the reserve for doubtful accounts and wrote off $2.0 million of uncollectible accounts, which decreased the reserve. During 2015, the Company recognized expense of $1.1 million to increase the reserve for doubtful accounts and wrote off $1.4 million of uncollectible accounts, which decreased the reserve.
AccruedOther current liabilities included salaries, wages and other payroll-relatedemployee-related liabilities of $61.6$92.8 million and $54.6$94.5 million,, and accrued interest of $36.2$18.0 million and $40.4$25.0 million at December 31, 20172020 and 2016,2019, respectively.
Other income (expense) for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2020 | | 2019 | | 2018 |
| Rent, royalty income and other income | | $ | 0.9 | | | $ | 2.9 | | | $ | 3.1 | |
| Gains from disposal of property, plant and equipment, net | | 2.9 | | | 90.7 | | | 1.3 | |
| Net equity loss on joint ventures (See Note 9) | | (7.0) | | | (10.7) | | | (1.0) | |
| Loss on sales of businesses, net (See Note 8) | | 0 | | | (1.9) | | | 0 | |
| Gain on joint venture deconsolidation (See Note 9) | | 0 | | | 0 | | | 15.9 | |
| Joint venture restructuring and impairment charges (See Note 9) | | (2.4) | | | (11.4) | | | 0 | |
| Adjustment to indemnification for conditional ARO costs (See Note 10) | | 4.3 | | | 0 | | | 0 | |
| Other | | 0.1 | | | 0.1 | | | 1.2 | |
| Total other income (expense), net | | $ | (1.2) | | | $ | 69.7 | | | $ | 20.5 | |
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Rent and royalty income | | $ | 3.5 |
| | $ | 1.4 |
| | $ | 2.0 |
|
| Net gains on property and investments | | 0.5 |
| | 1.0 |
| | — |
|
| Other | | — |
| | — |
| | (0.4 | ) |
| Total other income, net | | $ | 4.0 |
| | $ | 2.4 |
| | $ | 1.6 |
|
Note 8.12. Debt
Debt at December 31, 20172020 and 20162019 was as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 |
| Allegheny Technologies $500 million 5.875% Senior Notes due 2023 (a) | | $ | 500.0 | | | $ | 500.0 | |
| Allegheny Technologies $350 million 5.875% Senior Notes due 2027 | | 350.0 | | | 350.0 | |
| Allegheny Technologies $291.4 million 3.5% Convertible Senior Notes due 2025 | | 291.4 | | | 0 | |
| Allegheny Technologies $287.5 million 4.75% Convertible Senior Notes due 2022 | | 84.2 | | | 287.5 | |
| Allegheny Ludlum 6.95% Debentures due 2025 (b) | | 150.0 | | | 150.0 | |
| Term Loan due 2024 | | 200.0 | | | 100.0 | |
| U.S. revolving credit facility | | 0 | | | 0 | |
| Foreign credit agreements | | 5.5 | | | 4.9 | |
| Finance leases and other | | 48.0 | | | 18.8 | |
| Debt issuance costs | | (14.5) | | | (12.3) | |
| Equity component of convertible debt | | (46.8) | | | 0 | |
| Total short-term and long-term debt | | 1,567.8 | | | 1,398.9 | |
| Short-term debt and current portion of long-term debt | | 17.8 | | | 11.5 | |
| Total long-term debt | | $ | 1,550.0 | | | $ | 1,387.4 | |
|
| | | | | | | | |
| (In millions) | | 2017 | | 2016 |
| Allegheny Technologies $500 million 5.875% Senior Notes due 2023 (a) | | $ | 500.0 |
| | $ | 500.0 |
|
| Allegheny Technologies $500 million 5.95% Senior Notes due 2021 | | 500.0 |
| | 500.0 |
|
| Allegheny Technologies $350 million 9.375% Senior Notes due 2019 | | — |
| | 350.0 |
|
| Allegheny Technologies $287.5 million 4.75% Convertible Senior Notes due 2022 | | 287.5 |
| | 287.5 |
|
| Allegheny Ludlum 6.95% Debentures due 2025 | | 150.0 |
| | 150.0 |
|
| Term Loan due 2022 | | 100.0 |
| | 100.0 |
|
| U.S. revolving credit facility | | — |
| | — |
|
| Foreign credit agreements | | 6.3 |
| | 4.4 |
|
| Other | | 10.0 |
| | 2.2 |
|
| Debt issuance costs | | (13.1 | ) | | (17.1 | ) |
| Total short-term and long-term debt | | 1,540.7 |
| | 1,877.0 |
|
| Short-term debt and current portion of long-term debt | | 10.1 |
| | 105.1 |
|
| Total long-term debt | | $ | 1,530.6 |
| | $ | 1,771.9 |
|
| |
(a) | Bearing interest at 7.875% effective February 15, 2016. |
(b)The payment obligations of these debentures issued by Allegheny Ludlum, LLC are fully and unconditionally guaranteed by ATI.
Interest expense was $134.9$96.1 million in 2017, $125.42020, $104.9 million in 2016,2019, and $111.4$102.1 million in 2015.2018. Interest expense was reduced by $2.6$7.7 million,, $4.7 $4.7 million,, and $2.2$4.1 million,, in 2017, 2016,2020, 2019, and 2015,2018, respectively, from interest capitalization on capital projects. Interest and commitment fees paid were $133.8$95.4 million in 2017, $127.22020, $105.7 million in 2016,2019, and $113.4$102.6 million in 2015.2018. Net interest expense includes interest income of $1.1$1.7 million in 2017, $1.42020, $5.9 million in 2016,2019, and $1.2$1.1 million in 2015.2018.
Scheduled principal payments during the next five years are $10.1 million in 2018, $4.5 million in 2019, $1.1 million in 2020, $500.5$17.8 million in 2021, and $387.7$95.9 million in 2022.2022, $511.0 million in 2023, $208.1 million in 2024, and $446.1 million in 2025. See Note 13, Leases, for the portion of these payments that are related to finance leases.
Debt Extinguishment Charges
In June 2020, ATI recognized a $21.5 million debt extinguishment charge on the partial redemption of the 4.75% Convertible Senior Notes due 2022 (the 2022 Convertible Notes), which included a $19.1 million cash make-whole payment related to the early extinguishment of the 2022 Convertible Notes as required by the applicable indenture, and a $2.4 million charge for deferred debt issue costs, as further discussed below.
In December 2017,2019, the Company redeemed all $350$500 million aggregate principal amount outstanding of the 9.375%5.95% Senior Notes due 2019 (20192021 (2021 Notes), which had a January 15, 2021 maturity date, resulting in a $37.0$21.6 million pre-tax debt extinguishment charge, which included a $35.8$20.9 million cash make-whole payment as a make-whole provision onrelated to the early extinguishment of debt,the 2021 Notes as required by the applicable indenture, and a $1.2$0.7 million charge for previously-unrecognizeddeferred debt issue costs.
20232025 Convertible Notes
In June 2020, the Company issued and sold $285.0 million aggregate principal amount of 2025 Convertible Notes. The 5.875% stated interest rate payableCompany granted the underwriters a 13-day option to purchase up to an additional $40.0 million aggregate principal amount of 2025 Convertible Notes on the Company’s Seniorsame terms and conditions to cover over-allotments, if any. The underwriters exercised a portion of this option on June 30, 2020, and the Company completed the offering and sale of an additional $6.4 million aggregate principal amount of 2025 Convertible Notes due 2023 (2023 Notes) is subjecton July 2, 2020, subsequent to adjustment in the eventend of changes in the credit ratingssecond quarter 2020. Interest on the 20232025 Convertible Notes by either Moody’s or Standard & Poor’s (S&P). Each notchat the 3.5% cash coupon rate is payable semi-annually in arrears on each June 15 and December 15, commencing December 15, 2020.
The Company used a portion of credit rating downgradethe net proceeds from the credit ratingsoffering of the 2025 Convertible Notes to repurchase $203.2 million aggregate principal amount of its outstanding 2022 Convertible Notes, resulting in a $21.5 million debt extinguishment charge. The Company also used $19.4 million of the net proceeds of the offering of the 2025 Convertible Notes to pay the cost of capped call transactions, described below, which was recorded as a reduction to additional paid-in-capital in stockholders’ equity on the consolidated balance sheet. The remainder of the net proceeds from the offering were used for general corporate purposes.
The Company does not have the right to redeem the 2025 Convertible Notes prior to June 15, 2023. On or after June 15, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, the Company may redeem all or any portion of the 2025 Convertible Notes, at its option, at a redemption price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest if the last reported sale price of ATI’s common stock has been at least 130% of the conversion price then in effect whenfor at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the 2023 Notes were issued in July 2013 increases interest expense by 0.25%last trading day of such period) ending on the 2023trading day immediately preceding the date on which ATI provides written notice of redemption.
The initial conversion rate for the 2025 Convertible Notes up to a maximum 4 notches by eachis 64.5745 shares of ATI common stock per $1,000 principal amount of the two rating agencies,2025 Convertible Notes, equivalent to an initial conversion price of approximately $15.49 per share (18.8 million shares). Prior to the close of business on the business day immediately preceding March 15, 2025, the 2025 Convertible Notes will be convertible at the option of the holders of 2025 Convertible Notes only upon the satisfaction of specified conditions and during certain periods. Thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2025 Convertible Notes will be convertible at the option of holders of 2025 Convertible Notes at any time regardless of these conditions. Conversions of the 2025 Convertible Notes may be settled in cash, shares of ATI’s common stock or a total 2.0% potential interest rate change up to 7.875%.combination thereof, at ATI’s election.
In February 2016, the 2023 Notes reset one notch to the maximum 7.875% annual interest rate asAs a result of this flexible settlement feature of the 2025 Convertible Notes, the embedded conversion option is required to be separately accounted for as a credit rating downgrade by S&P, which resulted incomponent of stockholders’ equity. The value of the embedded conversion option was determined to be $51.4 million based on the estimated fair value of comparable senior unsecured debt without the conversion feature, using an income approach of expected present value. The equity component will be amortized as additional $1.3 million ofnon-cash interest expense, measured on an annual basis, comparedcommonly referred to 2015. Any further credit rating downgrades have no effect onas phantom yield, over the interest rateterm of the 20232025 Convertible Notes using the effective interest method, and increases inis not remeasured as long as it continues to meet the Company’s credit ratings from these ratings agencies would reduce interest expense incrementally on the 2023 Notesconditions for equity classification. Offering costs attributable to the original 5.875% interest rate in a similar manner.
Credit Agreements
The Company has a $500debt component totaling $7.5 million Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of the Company’s domestic operations. The ABL includes a $400 million revolving credit facility, which includes a letter of credit sub-facility of up to $200 million, and a $100.0 million term loan (Term Loan).
In June 2017, the ABL facility was amended to extend the maturity date of the Term Loan from November 2017 to February 2022 and to reduce the interest rate on the Term Loan to 3.0% plus a LIBOR spread from 3.5% plus a LIBOR spread. The Term Loan can be prepaid in minimum increments of $50 million if certain minimum liquidity conditions are satisfied. The underwriting costs associated with amending the Term Loan were $0.8 million, and are being amortized along with the
unamortized portion of the $1.0 million of previously recognized deferred fees from the issuance of the Term Loan, to interest expense over the extended term of the loan ending February 2022.
Also in June 2017,2025 Convertible Notes, and offering costs attributable to the ABL facility was amended to, among other things, extend the duration of the revolving portion of the facility from September 2020 to February 2022. As amended, the applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.75% and 2.25% for LIBOR-based borrowings (2.0% and 2.5% prior to amendment) and between 1.0% and 1.5% for base rate borrowings. The ABL facility contains a financial covenant whereby the Company must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the revolving credit portion of the facility is less than the greater of (i) 10%, as amended, of the then applicable maximum borrowing amount under the revolving credit portion of the ABL and any outstanding Term Loan balance, or (ii) $40 million. The Company does not meet this required fixed charge coverage ratio at December 31, 2017.equity component totaling $1.6 million were netted within stockholders’ equity. As a result, the Company is not able to access $50$49.8 million of the revolving credit2025 Convertible Notes was recorded in additional paid-in-capital in stockholders’ equity ($51.4 million of the gross $291.4 million, net of $1.6 million of allocated offering costs). Due to the non- ash phantom yield and including debt issue cost amortization, the 2025 Convertible Notes have reported interest expense in 2020 at an 8.4% rate, higher than the 3.5% cash coupon rate. Effective January 1, 2021, ATI early-adopted new accounting guidance that eliminates the equity component classification of the embedded conversion option, as well as the phantom yield portion of interest expense on a prospective basis. Upon adoption on January 1, 2021, long-term debt increased by $45.4
million, representing the ABL facility until$46.8 million equity component of convertible debt in the above table, net of reclassified debt issue costs.
Holders of the 2025 Convertible Notes may require ATI to repurchase their 2025 Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the 2025 Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In connection with certain corporate events or if ATI issues a notice of redemption, it meetswill, under certain circumstances, increase the conversion rate for holders who elect to convert their 2025 Convertible Notes in connection with such corporate event or during the relevant redemption period.
In connection with the pricing of the 2025 Convertible Notes, ATI entered into privately negotiated capped call transactions with certain of the initial purchasers or their respective affiliates (collectively, the Counterparties). The capped call transactions are expected generally to reduce potential dilution to ATI’s common stock upon any conversion of the 2025 Convertible Notes and/or offset any cash payments ATI is required ratio. Additionally,to make in excess of the Company must demonstrate liquidity,principal amount of converted 2025 Convertible Notes, as calculated in accordancethe case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions initially is approximately $19.76 per share, and is subject to adjustments under the terms of the ABL facility, of at least $700 million on the date that is 91 days prior to January 15, 2021, the maturity date of the 5.95% Seniorcapped call transactions.
2022 Convertible Notes due 2021, and that such liquidity is available at all times thereafter until the 5.95% Senior Notes due 2021 are paid in full or refinanced. Costs associated with entering into the ABL amendment were $1.0 million, and are being amortized, along with the unamortized portion of $2.4 million of previously recognized deferred costs, to interest expense over the extended term of the facility ending February 2022.
There were no outstanding revolving credit borrowings under the ABL facility asAs of December 31, 2017, and $42.3 million was utilized to support the issuance of letters of credit. Average revolving credit borrowings under the ABL facility for the fiscal year ended December 31, 2017 were $37 million, bearing an average annual interest rate of 3.255%. Average borrowings under the ABL for the fiscal year ended December 31, 2016 were $82 million, bearing an average annual interest rate of 1.8%.
Convertible Notes
In the second quarter of 2016,2020, the Company issued and sold $287.5had $84.2 million of aggregate principal amount of 4.75%the 2022 Convertible Senior Notes due 2022 (2022 Convertible Notes).outstanding. Interest on the 2022 Convertible Notes is payable in cash semi-annually in arrears on each January 1 and July 1, commencing January 1, 2017. The underwriting fees and other third-party expense for the issuance of the 2022 Convertible Notes were $9.4 million and are being amortized to interest expense over the 6-year term of the 2022 Convertible Notes.
The Company does not have the right to redeem the 2022 Convertible Notes prior to their stated maturity date. Holders of the 2022 Convertible Notes have the option to convert their notes into shares of the Company’s common stock, at any time prior to the close of business on the business day immediately preceding the stated maturity date (July 1, 2022). The initial conversion rate for the remaining $84.2 million of 2022 Convertible Notes is 69.2042 shares of ATI common stock per $1,000 (in whole dollars) principal amount of Notes (19.9(5.8 million shares), equivalent to conversion price of $14.45 per share, subject to adjustment in certain events. 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 the holders.
If the Company undergoes a fundamental change as defined in the agreement, holders of the 2022 Convertible Notes may require the Company to repurchase the notes in whole or in part for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the repurchase date.
Ladish2027 Notes
In conjunction with the acquisition of Ladish Co., Inc. (“Ladish”, nowOn November 22, 2019, ATI Ladish LLC) in May 2011, the Company assumed the Series B and Series C Notes previously issued by Ladish. During 2015, the Company prepaid $5.7 million in aggregate principal amount of its 6.14% ATI Ladish Series B senior notes due May 16, 2016, representing all of the remaining outstanding Series B Notes. Also during 2015, the Company repaid the $10.0$350 million aggregate principal amount of 5.875% Senior Note due 2027 (2027 Notes). Interest on the 2027 Notes is payable semi-annually in arrears at a rate of 5.875% per year and will mature on December 1, 2027. Net proceeds of $344.5 million from this issuance, as well as cash on hand, were used to retire the 2021 Notes as discussed above. Underwriting fees and other third-party expenses for the issuance of the 2027 notes were $5.5 million, and are being amortized to interest expense over the 8-year term of the 2027 Notes. The 2027 Notes are unsecured and unsubordinated obligations of the Company and equally ranked with all of its outstanding 6.41% ATI Ladish Series Cexisting and future senior notes, due September 2, 2015.
Foreign and Other Credit Facilities
STAL,unsecured debt. The 2027 Notes restrict the Company’s Chinese joint venture companyability to create certain liens, to enter into sale leaseback transactions, guarantee indebtedness and to consolidate or merge all, or substantially all, of its assets. The Company has the option to redeem the 2027 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 redemption prices specified in the 2027 Notes. The 2027 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the 2027 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 2027 Notes repurchased.
2023 Notes
The 5.875% stated interest rate payable on the Company’s Senior Notes due 2023 (2023 Notes) is subject to adjustment in the event of changes in the credit ratings on the 2023 Notes by either Moody’s or Standard & Poor’s. Each notch of credit rating downgrade from the credit ratings in effect when the 2023 Notes were issued in July 2013 increases interest expense by 0.25% on the 2023 Notes, up to a maximum 4 notches by each of the two rating agencies, or a total 2.0% potential interest rate change up to 7.875%.
The annual interest rate on the 2023 Notes has been at the maximum 7.875% since February 2016. Any further credit rating downgrades have no effect on the interest rate of the 2023 Notes, and increases in the Company’s credit ratings from these ratings agencies would reduce interest expense incrementally on the 2023 Notes to the original 5.875% interest rate in a similar manner.
Credit Agreements
The Company has an Asset Based Lending (ABL) Credit Facility, which ATI hasis collateralized by the accounts receivable and inventory of the Company’s domestic operations. The ABL facility, which matures in September 2024, includes a 60% interest, has a separate $20$500 million revolving credit facility, entered into in April 2015. Borrowingsa letter of credit sub-facility of up to $200 million, and as of December 31, 2020, a $200 million term loan (Term Loan). In June 2020, the Company exercised its right to borrow an additional $100 million under the STALterm loan portion of the ABL, with the same September 2024 maturity date. The Term Loan has an interest rate of 2.0% plus a LIBOR spread and can be prepaid in increments of $25 million if certain minimum liquidity conditions are satisfied. In addition, the Company has the right to request an increase of up to $200 million in the maximum amount available under the revolving credit facility arefor the duration of the ABL. The Company has a $50 million floating-for-fixed interest rate swap which converts a portion of the Term Loan to a 4.21% fixed interest rate. The swap matures in U.S. dollarsJune 2024.
The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on U.S. interbank offered rates.available borrowing capacity that range between 1.25% and 1.75% for LIBOR-based borrowings and between 0.25% and 0.75% for base rate borrowings. The ABL facility contains a financial covenant whereby the Company must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility is supported solely by STAL’s financial capability withoutless than the greater of (i) $87.5 million, calculated as 12.5% of the then applicable maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance, or (ii) $62.5 million. The Company does not meet this required fixed charge coverage ratio at December 31, 2020. As a result, the Company is unable to access this remaining 12.5%, or $87.5 million, of the ABL facility until it meets the required ratio. Additionally, the Company must demonstrate minimum liquidity, as calculated in accordance with the terms of the ABL facility, during the 90 day period immediately preceding the stated maturity date of each of the 4.75% Convertible Notes due 2022 and 5.875% Notes due 2023. The ABL also contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company’s ability to incur additional indebtedness or liens or to enter into investments, mergers and acquisitions, dispositions of assets and transactions with affiliates, some of which are more restrictive at any guarantees fromtime during the joint venture partners. Theterm of the ABL when the Company’s fixed charge coverage ratio is less than 1.00:1.00 and its undrawn availability under the revolving portion of the ABL is less than the greater of (a) $150 million or (b) 30% of the sum of the maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance. On September 30, 2019, the Company amended and restated the ABL and costs associated with entering into this amendment were $2.2 million, and are being amortized to interest expense over the term of the facility requires STALending September 2024, along with $2.1 million of unamortized deferred costs that were previously recorded for the ABL.
As of December 31, 2020, there were 0 outstanding borrowings under the revolving portion of the ABL, and $38.5 million was utilized to maintain a minimum levelsupport the issuance of shareholders’ equity, and certain financial ratios.letters of credit. Average borrowings under the ABL for the fiscal year ended December 31, 2020 were $28 million, bearing an average annual interest rate of 2.2%. There were 0 revolving credit borrowings under the ABL for 2019.
The Company has no off-balance sheet financing relationships as defined in Item 303(a)(4) of SEC Regulation S-K, with variable interest entities, structured finance entities, or any other unconsolidated entities. At December 31, 2017,2020, the Company had not guaranteed any third-party indebtedness.
Note 9. Derivative Financial Instruments13. Leases
Adoption Method and HedgingImpact
As part of its risk management strategy,On January 1, 2019 the Company adopted ASC 842, Leases. The Company applied ASC 842 to all leases in effect at January 1, 2019 and adopted the accounting standard using the alternative transition method, which does not require the restatement of prior years. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company has also elected the practical expedient to not separate lease components from time-to-time, utilizes derivative financial instrumentsnon-lease components for all asset classes, and did not elect the hindsight practical expedient to manage its exposuredetermine the lease term. The Company has made an accounting policy election to changes in rawapply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. The adoption did not have a material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards,impact on the Company accounts for mostCompany’s results of these contracts as hedges. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair valueoperations or cash flows, attributableand had no impact 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 recognizednet deferred tax position on the statement of operations.consolidated balance sheet due to the Company’s income tax valuation allowances for federal and state purposes (see Note 19).
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. 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 ishas entered into finance lease contracts with lenders for progress payments on machinery and the Companyequipment that 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 ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of December 31, 2017, the Company had entered into financial hedging arrangements primarilybeing constructed at the request and specification of its customers, related to firm orders, for an aggregate notional amountthe Company. As of approximately 18 million pounds of nickel with hedge dates through 2021. The aggregate notional amount hedged is approximately 20% of a single year’s estimated nickel raw material purchase requirements.
At December 31, 2017,2020, the outstanding financial derivatives usedlenders had made $17.2 million of progress payments on behalf of the Company, and $29.0 million of progress payments are scheduled to hedgebe paid. Upon payment of the Company’s exposure to energyfinal progress payments by the lenders, finance leases will commence, and $46.2 million, discounted using the applicable discount rates at lease inceptions, of ROU assets and lease liabilities will be recognized by the Company.
The following represents the components of lease cost volatility included natural gas hedges. Duringand other information for both operating and financing leases for the fiscal years endedending December 31, 20162020 and 2015, due to changes in expected operating levels, the Company concluded that portions of these natural gas cash flow hedges for 2016 and the first quarter 2017 were ineffective based on forecast changes in underlying natural gas usage. The Company recognized $1.3 million and $3.3 million of pre-tax losses for the ineffective portion of these cash flow hedges for the years ended December 31, 2016 and 2015, respectively, which is reported in selling and administrative expenses on the consolidated statement of operations. At December 31, 2017, the company hedged approximately 40%2019:
| | | | | | | | | | | |
| ($ in millions) | | Fiscal year ended | Fiscal year ended |
| | December 31, 2020 | December 31, 2019 |
| Lease Cost | | | |
| Finance Lease Cost: | | | |
| Amortization of right of use asset | | $ | 3.5 | | $ | 1.7 | |
| Interest on lease liabilities | | 1.0 | | 0.5 | |
| Operating lease cost | | 20.8 | | 20.5 | |
| Short-term lease cost | | 1.9 | | 3.1 | |
| Variable lease cost | | 0.9 | | 0.8 | |
| Sublease income | | (0.1) | | 0 | |
| Total lease cost | | $ | 28.0 | | $ | 26.6 | |
| | | |
| Other information | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | |
| Operating cash flows from finance leases | | $ | 1.0 | | $ | 0.5 | |
| Operating cash flows from operating leases | | $ | 21.7 | | $ | 20.8 | |
| Financing cash flows from finance leases | | $ | 6.2 | | $ | 2.4 | |
| Right of use assets obtained in exchange for new finance lease liabilities | | $ | 42.3 | | $ | 14.1 | |
| Right of use assets obtained in exchange for new operating lease liabilities (a) | | $ | 12.4 | | $ | 35.9 | |
| Weighted average remaining lease term - finance leases | | 4 years | 4 years |
| Weighted average remaining lease term - operating leases | | 6 years | 6 years |
| Weighted average discount rate - finance leases | | 6.2 | % | 5.3 | % |
| Weighted average discount rate - operating leases | | 6.9 | % | 7.0 | % |
(a) Several of the Company’s annual forecasted domestic requirements for natural gas for 2018, approximately 35% forreal property lease contracts include options to extend the lease term. During the fourth quarter of 2019 and approximately 15% for 2020.
While the majority of the Company’s 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 expose2020, the Company to foreign currency risk, primarily euros. In addition,reassessed the Company may also designate cash balances heldlikelihood of renewal and included $10.2 million for the renewal options in foreign currencies as hedges of forecasted foreign currency transactions.
During the fiscal year ended December 31, 2015,2019 for several of these operating leases in the Company net settled 211.9ROU asset and lease liability because the likelihood of renewal was determined to be reasonably certain. No adjustments were required in 2020 as a result of this reassessment.
Rental expense under operating leases was $24.4 million euro notional value of foreign currency forward contracts designated as cash flow hedges with 2016 and 2017 maturity dates, receiving cash proceeds of $56.5 million, which is reported in cash provided by2018.
The following table reconciles future minimum undiscounted rental commitments for operating activitiesleases to the operating lease liabilities recorded on the consolidated statement of cash flows. In the fourth quarter 2015, due to management actions in the Flat Rolled Products segment to de-emphasize commodity stainless steelbalance sheet products in 2016, the Company concluded that a portion of these settled euro cash flow hedges for 2016 were ineffective based on forecast changes for euro-denominated sales. The Company recognized a $14.3 million pre-tax gain for the ineffective portion of these cash flow hedges, which is reported in selling and administrative expenses on the consolidated statement of operations for the year ended December 31, 2015. As of December 31, 2017, all of the deferred gains on the effective portion of these settled cash flow hedges, which were previously recognized in accumulated other comprehensive income, have been reclassified to earnings due to the occurrence of the underlying transactions. In 2015, the Company entered into 244.7 million euro notional value of foreign currency forward contracts designated as fair value hedges with 2015, 2016 and 2017 maturity dates to replace a portion of the settled euro cash flow hedges, of which none were outstanding as of December 31, 2017 and 43.2 million and 139.2 million euro notional values were outstanding2020 (in millions):
| | | | | | | | |
| | December 31, 2020 |
| 2021 | | $ | 19.6 | |
| 2022 | | 16.6 | |
| 2023 | | 12.8 | |
| 2024 | | 9.3 | |
| 2025 | | 7.6 | |
| 2026 and thereafter | | 18.1 | |
| Total undiscounted lease payments | | $ | 84.0 | |
| Present value adjustment | | (16.1) | |
| Operating lease liabilities | | $ | 67.9 | |
The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the consolidated balance sheet as of December 31, 2016 and 2015, respectively. The Company recorded $2.7 million of charges during the fiscal year ended December 31, 2017 and $1.0 million and $9.0 million of benefits during the fiscal years ended December 31, 2016 and 2015, respectively, in costs of sales on the consolidated statement of operations for maturities and mark-to-market changes on these fair value hedges.
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.
There are no credit risk-related contingent features in the Company’s 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 Company’s 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.
The fair values of the Company’s derivative financial instruments are presented below, representing the gross amounts recognized which are not offset by counterpart or by type of item hedged. 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) | | | | December 31,
2017 | | December 31,
2016 |
| Asset derivatives | | Balance sheet location | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Foreign exchange contracts | | Prepaid expenses and other current assets | | $ | — |
| | $ | 2.4 |
|
| Natural gas contracts | | Prepaid expenses and other current assets | | 0.1 |
| | 0.2 |
|
| Nickel and other raw material contracts | | Prepaid expenses and other current assets | | 10.5 |
| | 2.2 |
|
| Foreign exchange contracts | | Other assets | | — |
| | 0.2 |
|
| Natural gas contracts | | Other assets | | 0.3 |
| | 0.2 |
|
| Nickel and other raw material contracts | | Other assets | | 5.5 |
| | 3.3 |
|
| Total derivatives designated as hedging instruments | | | | 16.4 |
| | 8.5 |
|
| Derivatives not designated as hedging instruments: | | | | | | |
| Foreign exchange contracts | | Prepaid expenses and other current assets | | 0.1 |
| | 0.6 |
|
| Total derivatives not designated as hedging instruments: | | 0.1 |
| | 0.6 |
|
| Total asset derivatives | | | | $ | 16.5 |
| | $ | 9.1 |
|
| | | | | | | |
| Liability derivatives | | Balance sheet location | | | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Natural gas contracts | | Accrued liabilities | | $ | 0.9 |
| | $ | 2.5 |
|
| Nickel and other raw material contracts | | Accrued liabilities | | 2.1 |
| | 6.7 |
|
| Foreign exchange contracts | | Other long-term liabilities | | — |
| | 0.1 |
|
| Natural gas contracts | | Other long-term liabilities | | 0.3 |
| | — |
|
| Nickel and other raw material contracts | | Other long-term liabilities | | 2.2 |
| | 9.4 |
|
| Total derivatives designated as hedging instruments | | | | 5.5 |
| | 18.7 |
|
| Total liability derivatives | | | | $ | 5.5 |
| | $ | 18.7 |
|
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. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes, excluding any impacts of changes to income tax valuation allowances affecting results of operations or other comprehensive income, when applicable (see Note 12 for further explanation).
Assuming market prices remain constant with those at December 31, 2017, a pre-tax loss of $7.6 million is expected to be recognized over the next 12 months.
Activity with regard to derivatives designated as cash flow hedges for the year ended December 31, 2017 were as follows2020 (in millions):
| | | | | | | | |
| | December 31, 2020 |
| 2021 | | $ | 13.8 | |
| 2022 | | 13.2 | |
| 2023 | | 12.2 | |
| 2024 | | 8.7 | |
| 2025 | | 4.8 | |
| 2026 and thereafter | | 0.1 | |
| Total undiscounted lease payments | | $ | 52.8 | |
| Present value adjustment | | (6.4) | |
| Finance lease liabilities | | $ | 46.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (a) | | Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (b) |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Nickel and other raw material contracts | | $ | 14.1 |
| | $ | 9.4 |
| | $ | (2.1 | ) | | $ | (12.1 | ) | | $ | — |
| | $ | — |
|
| Natural gas contracts | | (2.8 | ) | | 3.8 |
| | (3.3 | ) | | (8.4 | ) | | — |
| | (0.8 | ) |
| Foreign exchange contracts | | (0.2 | ) | | — |
| | 9.9 |
| | 16.4 |
| | — |
| | — |
|
| Total | | $ | 11.1 |
| | $ | 13.2 |
| | $ | 4.5 |
| | $ | (4.1 | ) | | $ | — |
| | $ | (0.8 | ) |
| |
(a) | The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales in the same period or periods in which the hedged item affects earnings. |
| |
(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. |
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.
The Company has 10 million euro notional value outstanding as of December 31, 2017 of foreign currency forward contracts not designated as hedges, with maturity dates into the fourth quarter of 2018. These derivatives that are not designated as hedging instruments were as follows:
|
| | | | | | | | |
| (In millions) | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives Not Designated as Hedging Instruments | | 2017 | | 2016 |
| Foreign exchange contracts | | $ | (0.8 | ) | | $ | (0.2 | ) |
Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows.
Note 10.14. 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 most of these contracts as hedges.
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. Under these contracts, which are generally 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 ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of December 31, 2020, the Company had entered into financial hedging arrangements primarily at the request of its customers, related to firm orders, for an aggregate notional amount of approximately 3 million pounds of nickel with hedge dates through 2023. The aggregate notional amount hedged is approximately 5% of a single year’s estimated nickel raw material purchase requirements.
At December 31, 2020, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. At December 31, 2020, the company hedged approximately 70% of the Company’s annual forecasted domestic requirements for natural gas for 2021 and approximately 25% for 2022.
While the majority of the Company’s 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, primarily euros. In addition, the Company may also hedge forecasted capital expenditures and designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. At December 31, 2020, the Company had 0 significant outstanding foreign currency forward contracts.
The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. In July 2019, the Company amended its $50 million floating-for-fixed interest rate swap which converts half of the Term Loan to a fixed rate (now 4.21% following the September 30, 2019 ABL amendment), with a June 2024 maturity. The Company designated the interest rate swap as a cash flow hedge of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The ineffectiveness at hedge inception, determined from the fair value of the swap immediately prior to amendment, will be amortized to interest expense over the initial Term Loan swap maturity date of January 12, 2021.
There are no credit risk-related contingent features in the Company’s 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 Company’s 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.
The fair values of the Company’s derivative financial instruments are presented below, representing the gross amounts recognized which are not offset by counterpart or by type of item hedged. 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) | | | | December 31,
2020 | | December 31,
2019 |
| Asset derivatives | | Balance sheet location | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Natural gas contracts | | Prepaid expenses and other current assets | | $ | 0.2 | | | $ | 0 | |
| Nickel and other raw material contracts | | Prepaid expenses and other current assets | | 3.7 | | | 4.4 | |
| Natural gas contracts | | Other assets | | 0.2 | | | 0 | |
| Nickel and other raw material contracts | | Other assets | | 0.7 | | | 1.2 | |
| Total derivatives designated as hedging instruments | | | | 4.8 | | | 5.6 | |
| Total asset derivatives | | | | $ | 4.8 | | | $ | 5.6 | |
| | | | | | |
| Liability derivatives | | Balance sheet location | | | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Interest rate swap | | Other current liabilities | | $ | 1.0 | | | $ | 0.3 | |
| Natural gas contracts | | Other current liabilities | | 0.3 | | | 2.5 | |
| Nickel and other raw material contracts | | Other current liabilities | | 0.1 | | | 2.5 | |
| Interest rate swap | | Other long-term liabilities | | 2.5 | | | 1.2 | |
| Natural gas contracts | | Other long-term liabilities | | 0.1 | | | 1.0 | |
| Total derivatives designated as hedging instruments | | | | 4.0 | | | 7.5 | |
| Total liability derivatives | | | | $ | 4.0 | | | $ | 7.5 | |
Assuming market prices remain constant with those at December 31, 2020, a pre-tax gain of $2.5 million is expected to be recognized over the next 12 months.
For derivative financial instruments that are designated as cash flow hedges, 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. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. There were no outstanding fair value hedges as of December 31, 2020 or 2019. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes, excluding any impacts of changes to income tax valuation allowances affecting results of operations or other comprehensive income, when applicable. The 2019 income tax provision includes $6.0 million of tax expense for the recognition of a stranded deferred tax balance arising from deferred tax valuation allowances that was associated with a cash flow hedge portfolio that fully settled in the fourth quarter of 2019 (see Notes 17 and 19 for further explanation on tax impacts within accumulated other comprehensive income (loss)). This tax impact is also excluded from the table below.
Activity with regard to derivatives designated as cash flow hedges for the years ended December 31, 2020 and 2019 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gain (Loss)
Recognized in OCI on
Derivatives | | Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income (a) |
| 2020 | | 2019 | | 2020 | | 2019 |
| Nickel and other raw material contracts | | $ | 0 | | | $ | 11.3 | | | $ | (0.6) | | | $ | 3.9 | |
| Natural gas contracts | | (0.1) | | | (4.0) | | | (2.8) | | | (0.9) | |
| Foreign exchange contracts | | (0.1) | | | 1.0 | | | (0.1) | | | 0.5 | |
| Interest rate swap | | (1.8) | | | (0.9) | | | (1.1) | | | (0.4) | |
| Total | | $ | (2.0) | | | $ | 7.4 | | | $ | (4.6) | | | $ | 3.1 | |
(a)The gains (losses) reclassified from accumulated OCI into income related to the derivatives, with the exception of the interest rate swap, are presented in cost of sales in the same period or periods in which the hedged item affects earnings. The gains (losses) reclassified from accumulated OCI into income on the interest rate swap are presented in interest expense in the same period as the interest expense on the Term Loan is recognized in earnings.
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.
Note 15. Fair Value of Financial Instruments
The estimated fair value of financial instruments at December 31, 20172020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| (In millions) | | Total
Carrying
Amount | | Total
Estimated
Fair Value | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) |
| Cash and cash equivalents | | $ | 645.9 | | | $ | 645.9 | | | $ | 645.9 | | | $ | 0 | |
| Derivative financial instruments: | | | | | | | | |
| Assets | | 4.8 | | | 4.8 | | | 0 | | | 4.8 | |
| Liabilities | | 4.0 | | | 4.0 | | | 0 | | | 4.0 | |
| Debt (a) | | 1,629.1 | | | 1,847.7 | | | 1,594.2 | | | 253.5 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| (In millions) | | Total Carrying Amount | | Total Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) |
| Cash and cash equivalents | | $ | 141.6 |
| | $ | 141.6 |
| | $ | 141.6 |
| | $ | — |
|
| Derivative financial instruments: | | | | | | | | |
| Assets | | 16.5 |
| | 16.5 |
| | — |
| | 16.5 |
|
| Liabilities | | 5.5 |
| | 5.5 |
| | — |
| | 5.5 |
|
| Debt (a) | | 1,553.8 |
| | 1,853.2 |
| | 1,736.9 |
| | 116.3 |
|
The estimated fair value of financial instruments at December 31, 20162019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| (In millions) | | Total
Carrying
Amount | | Total
Estimated
Fair Value | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) |
| Cash and cash equivalents | | $ | 490.8 | | | $ | 490.8 | | | $ | 490.8 | | | $ | 0 | |
| Derivative financial instruments: | | | | | | | | |
| Assets | | 5.6 | | | 5.6 | | | 0 | | | 5.6 | |
| Liabilities | | 7.5 | | | 7.5 | | | 0 | | | 7.5 | |
| Debt (a) | | 1,411.2 | | | 1,676.5 | | | 1,552.8 | | | 123.7 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| (In millions) | | Total Carrying Amount | | Total Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) |
| Cash and cash equivalents | | $ | 229.6 |
| | $ | 229.6 |
| | $ | 229.6 |
| | $ | — |
|
| Derivative financial instruments: | | | | | | | | |
| Assets | | 9.1 |
| | 9.1 |
| | — |
| | 9.1 |
|
| Liabilities | | 18.7 |
| | 18.7 |
| | — |
| | 18.7 |
|
| Debt (a) | | 1,894.1 |
| | 1,975.0 |
| | 1,868.4 |
| | 106.6 |
|
| |
(a) | The total carrying amount for debt excludes debt issuance costs related to the recognized debt liability which is presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability. |
In accordance with accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards established three levels of a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. No transfers between levels were reported in 2017 or 2016.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents: Fair values were determined using Level 1 information.
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 Company’s credit risk.
Short-term and long-term debt: The fair values of the 20192022 and 2025 Convertible Notes, (prior to redemption in December 2017), the Allegheny Technologies 5.95% Senior2023 Notes, due 2021, the Allegheny Technologies 4.75% Convertible Senior Notes due 2022, the Allegheny Technologies 5.875% Senior Notes due 2023 and the Allegheny Ludlum 6.95% Debentures due 2025 and the 2027 Notes were determined using Level 1 information. The fair values of other short-term and long-term debt were determined using Level 2 information.
Note 11. Retirement Benefits
The Company has defined contribution retirement plans or defined benefit pension plans covering substantially all employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked. 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. defined benefit pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code (“Code”).
The Company also sponsors several postretirement plans covering certain collectively-bargained salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most retiree health care plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution.
The Company instituted several liability management actions over the last few years to effect changes to its retirement benefit programs. As a result of these actions, nearly all of ATI’s operations have defined benefit pensions that are either frozen for all future benefit accruals or closed to new entrants, and remaining collectively-bargained defined benefit retiree health care plans that are capped and closed to new entrants, transitioning ATI’s retirement benefit and other postretirement benefit programs largely to a defined contribution structure.
Costs for defined contribution retirement plans were $35.5 million in 2017, $34.5 million in 2016, and $41.2 million in 2015. Company contributions to these defined contribution plans are funded with cash. Other postretirement benefit costs for a defined contribution plan were $1.7 million for the fiscal year ended December 31, 2017.
The components of pension and other postretirement benefit expense for the Company’s defined benefit plans included the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Service cost—benefits earned during the year | | $ | 14.1 |
| | $ | 20.6 |
| | $ | 22.8 |
| | $ | 2.4 |
| | $ | 2.6 |
| | $ | 2.7 |
|
| Interest cost on benefits earned in prior years | | 116.7 |
| | 125.4 |
| | 121.0 |
| | 14.6 |
| | 16.0 |
| | 17.9 |
|
| Expected return on plan assets | | (146.9 | ) | | (148.7 | ) | | (168.3 | ) | | — |
| | (0.1 | ) | | (0.1 | ) |
| Amortization of prior service cost (credit) | | 1.3 |
| | 1.3 |
| | 1.3 |
| | (2.9 | ) | | (1.7 | ) | | 4.9 |
|
| Amortization of net actuarial loss | | 62.6 |
| | 65.4 |
| | 60.4 |
| | 9.0 |
| | 9.6 |
| | 14.6 |
|
| Termination benefits | | — |
| | 1.1 |
| | — |
| | — |
| | 2.3 |
| | — |
|
| Total retirement benefit expense | | $ | 47.8 |
| | $ | 65.1 |
| | $ | 37.2 |
| | $ | 23.1 |
| | $ | 28.7 |
| | $ | 40.0 |
|
Special termination benefits recorded in 2016 related to both pension and other postretirement benefits for USW-represented employees associated with the permanent idling of the Flat Rolled Products segment’s Midland, PA commodity stainless operations and Bagdad, PA GOES finishing facility that occurred in the fourth quarter of 2016, and these costs were reported in restructuring charges in the consolidated statement of operations and for segment reporting (see Notes 15 and 16).
Actuarial assumptions used to develop the components of defined benefit pension expense and other postretirement benefit expense were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate (a) | | 4.45 | % | | 4.65 | % | | 4.25 | % | | 4.35 | % | | 4.05 - 4.50% |
| | 4.10 | % |
| Rate of increase in future compensation levels | | 0.50 - 1.00% |
| | 3.0 - 3.50% |
| | 3.0 - 3.50% |
| | — |
| | — |
| | — |
|
| Expected long-term rate of return on assets | | 7.75 | % | | 8.00 | % | | 8.00 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % |
| |
(a) | Other postretirement benefits expense for 2016 was initially measured at a 4.50% discount rate. A portion of the obligation was remeasured using a 4.05% discount rate as of March 1, 2016, following a new USW labor agreement. |
Actuarial assumptions used for the valuation of defined benefit pension and other postretirement benefit obligations at the end of the respective periods were as follows:
|
| | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | 3.85 | % | | 4.45 | % | | 3.80 | % | | 4.35 | % |
| Rate of increase in future compensation levels | | 0.50 - 1.00% |
| | 1.00 | % | | — |
| | — |
|
A reconciliation of the funded status for the Company’s defined benefit pension and other postretirement benefit plans at December 31, 2017 and 2016 was as follows:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in benefit obligations: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 2,727.7 |
| | $ | 2,805.9 |
| | $ | 354.8 |
| | $ | 400.8 |
|
| Service cost | | 14.1 |
| | 20.6 |
| | 2.4 |
| | 2.6 |
|
| Interest cost | | 116.7 |
| | 125.4 |
| | 14.6 |
| | 16.0 |
|
| Benefits paid | | (220.1 | ) | | (255.4 | ) | | (38.6 | ) | | (47.7 | ) |
| Subsidy paid | | — |
| | — |
| | 0.6 |
| | 0.8 |
|
| Participant contributions | | — |
| | 0.2 |
| | — |
| | — |
|
| Effect of currency rates | | 7.4 |
| | (17.3 | ) | | — |
| | — |
|
| Net actuarial (gains) losses – discount rate change | | 174.6 |
| | 57.8 |
| | 16.6 |
| | 4.6 |
|
| – other | | 9.4 |
| | (3.9 | ) | | (0.5 | ) | | (2.1 | ) |
| Plan curtailments | | — |
| | (6.7 | ) | | — |
| | — |
|
| Plan amendments | | — |
| | — |
| | — |
| | (22.5 | ) |
| Special termination benefits | | — |
| | 1.1 |
| | — |
| | 2.3 |
|
| Benefit obligation at end of year | | $ | 2,829.8 |
| | $ | 2,727.7 |
| | $ | 349.9 |
| | $ | 354.8 |
|
A $6.7 million plan curtailment for pension benefits as a result of the hard freeze of the U.K. pension plan reduced the pension benefit obligation in 2016. Plan amendments as a result of changes to retirement benefit programs in the 2016 USW labor agreement reduced the other postretirement benefits obligation by $22.5 million in 2016.
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 1,894.6 |
| | $ | 1,962.3 |
| | $ | 0.7 |
| | $ | 1.8 |
|
| Actual returns on plan assets and plan expenses | | 304.1 |
| | 79.7 |
| | 0.2 |
| | (0.8 | ) |
| Employer contributions | | 143.4 |
| | 125.1 |
| | — |
| | — |
|
| Participant contributions | | — |
| | 0.2 |
| | — |
| | — |
|
| Effect of currency rates | | 7.6 |
| | (17.3 | ) | | — |
| | — |
|
| Benefits paid | | (220.1 | ) | | (255.4 | ) | | (0.3 | ) | | (0.3 | ) |
| Fair value of plan assets at end of year | | $ | 2,129.6 |
| | $ | 1,894.6 |
| | $ | 0.6 |
| | $ | 0.7 |
|
Pension benefit payments in 2017 include approximately $22 million associated with a voluntary lump-sum cash out offer to terminated vested participants in the ATI Pension Plan, the Company’s U.S. qualified defined benefit pension plan. Pension benefit payments in 2016 include $47 million for the annuity buyout of small pension balances in the ATI Pension Plan.
|
| | | | | | | | | | | | | | | | |
| Assets (liabilities) recognized in the consolidated balance sheets: | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Noncurrent assets | | $ | 2.1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | | (5.3 | ) | | (5.2 | ) | | (31.5 | ) | | (36.4 | ) |
| Noncurrent liabilities | | (697.0 | ) | | (827.9 | ) | | (317.8 | ) | | (317.7 | ) |
| Total amount recognized | | $ | (700.2 | ) | | $ | (833.1 | ) | | $ | (349.3 | ) | | $ | (354.1 | ) |
Changes to accumulated other comprehensive loss related to pension and other postretirement benefit plans in 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning of year accumulated other comprehensive loss | | $ | (1,462.7 | ) | | $ | (1,418.2 | ) | | $ | (74.4 | ) | | $ | (101.4 | ) |
| Amortization of net actuarial loss | | 62.6 |
| | 65.4 |
| | 9.0 |
| | 9.6 |
|
| Amortization of prior service cost (credit) | | 1.3 |
| | 1.3 |
| | (2.9 | ) | | (1.7 | ) |
| Remeasurements | | (27.3 | ) | | (111.2 | ) | | (15.4 | ) | | 19.1 |
|
| End of year accumulated other comprehensive loss | | $ | (1,426.1 | ) | | $ | (1,462.7 | ) | | $ | (83.7 | ) | | $ | (74.4 | ) |
| Net change in accumulated other comprehensive loss | | $ | 36.6 |
| | $ | (44.5 | ) | | $ | (9.3 | ) | | $ | 27.0 |
|
Amounts included in accumulated other comprehensive loss at December 31, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Prior service (cost) credit | | $ | (1.0 | ) | | $ | (2.3 | ) | | $ | 11.7 |
| | $ | 14.6 |
|
| Net actuarial loss | | (1,425.1 | ) | | (1,460.4 | ) | | (95.4 | ) | | (89.0 | ) |
| Accumulated other comprehensive loss | | (1,426.1 | ) | | (1,462.7 | ) | | (83.7 | ) | | (74.4 | ) |
| Deferred tax effect | | 525.6 |
| | 543.4 |
| | 29.7 |
| | 28.2 |
|
| Accumulated other comprehensive loss, net of tax | | $ | (900.5 | ) | | $ | (919.3 | ) | | $ | (54.0 | ) | | $ | (46.2 | ) |
Amounts in accumulated other comprehensive loss presented above do not include any effects of deferred tax asset valuation allowances. See Note 12 for further discussion on deferred tax asset valuation allowances.
Retirement benefit expense for 2018 for defined benefit plans is estimated to be approximately $52 million, comprised of $29 million for pension expense and $23 million of expense for other postretirement benefits. The net actuarial loss is recognized in the consolidated statement of operations using a corridor method. Because all of ATI’s pension plans are inactive, cumulative gains and losses in excess of 10% of the greater of the projected benefit obligation or the market value of plan assets are amortized over the expected average remaining future lifetime of participants, which is approximately 17 years on a weighted average basis. Prior service cost (credit) amortization is recognized in level amounts over the expected service of the active membership as of the amendment effective date. Amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in 2018 are:
|
| | | | | | | | | | | | |
| (In millions) | | Pension Benefits | | Other Postretirement Benefits | | Total |
| Amortization of prior service cost (credit) | | $ | 0.4 |
| | $ | (2.9 | ) | | $ | (2.5 | ) |
| Amortization of net actuarial loss | | 65.9 |
| | 10.6 |
| | 76.5 |
|
| Amortization of accumulated other comprehensive loss | | $ | 66.3 |
| | $ | 7.7 |
| | $ | 74.0 |
|
The accumulated benefit obligation for all defined benefit pension plans was $2,810.5 million and $2,710.7 million at December 31, 2017 and 2016, respectively. Additional information for pension plans with accumulated benefit obligations in excess of plan assets:
|
| | | | | | | | |
| | | Pension Benefits |
| (In millions) | | 2017 | | 2016 |
| Projected benefit obligation | | $ | 2,737.4 |
| | $ | 2,727.7 |
|
| Accumulated benefit obligation | | $ | 2,718.0 |
| | $ | 2,710.7 |
|
| Fair value of plan assets | | $ | 2,035.1 |
| | $ | 1,894.6 |
|
In March 2017, the Company made a $135 million cash contribution to the ATI Pension Plan in order to complete its funding requirements for 2017. In July 2016, the Company made a $115 million contribution to the ATI Pension Plan to improve the plan’s funded position. Based upon current regulations and actuarial studies, the Company expects to make approximately a $40 million cash contribution to the ATI Pension Plan in 2018, and use credit balance from prior years prefunding for the remaining required contribution during the year. In addition, for 2018, the Company expects to fund benefits of approximately $9 million for its U.S. nonqualified benefit pension plans and its U.K. defined benefit plan.
The following table summarizes expected benefit payments from the Company’s various pension and other postretirement defined benefit plans through 2027, and also includes estimated Medicare Part D subsidies projected to be received during this period based on currently available information. Pension benefit payments for the ATI Pension Plan and the U.K. defined benefit plan are made from pension plan assets.
|
| | | | | | | | | | | | |
| (In millions) | | Pension Benefits | | Other Postretirement Benefits | | Medicare Part D Subsidy |
| 2018 | | $ | 201.0 |
| | $ | 32.1 |
| | $ | 0.8 |
|
| 2019 | | 194.1 |
| | 31.2 |
| | 0.8 |
|
| 2020 | | 192.0 |
| | 29.7 |
| | 0.8 |
|
| 2021 | | 188.8 |
| | 28.1 |
| | 0.7 |
|
| 2022 | | 186.8 |
| | 26.2 |
| | 0.7 |
|
| 2023 - 2027 | | 891.5 |
| | 109.0 |
| | 2.8 |
|
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 6.8% in 2018 and is assumed to gradually decrease to 4.5% in the year 2038 and remain at that level thereafter. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans, however, the Company’s contributions for most of its’ retiree health plans are capped based on a fixed premium amount, which limits the impact of future health care cost increases. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
| | | | | | | | |
| (In millions) | | One Percentage Point Increase | | One Percentage Point Decrease |
| Effect on total of service and interest cost components for the year ended December 31, 2017 | | $ | 0.3 |
| | $ | (0.3 | ) |
| Effect on other postretirement benefit obligation at December 31, 2017 | | $ | 5.7 |
| | $ | (5.1 | ) |
The plan assets for the ATI Pension Plan represent approximately 96% of total pension plan assets at December 31, 2017. The ATI Pension Plan invests in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include U.S. domestic equities, non-U.S. developed market equities, emerging market equities, hedge funds, private equity, global high quality and high yield fixed income, floating rate debt and real estate. The Company continually monitors the investment results of these asset classes and its fund managers, and explores other potential asset classes for possible future investment.
ATI Pension Plan assets at December 31, 2017 and 2016 included 3.0 million shares of ATI common stock with a fair value of $71.3 million and $47.1 million, respectively. Dividends of $0.7 million were received by the ATI Pension Plan in 2016 on the ATI common stock held by this plan.
The fair values of the Company’s pension plan assets are determined using net asset value (NAV) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value, as further discussed in Note 10. The fair values at December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | Significant Unobservable Inputs |
| Asset category | | Total | | NAV | | (Level 1) | | (Level 2) | | (Level 3) |
| Equity securities: | | | | | | | | | | |
| ATI common stock | | $ | 71.3 |
| | $ | — |
| | $ | 71.3 |
| | $ | — |
| | $ | — |
|
| Other U.S. equities | | 416.0 |
| | 267.7 |
| | 148.3 |
| | — |
| | — |
|
| International equities | | 432.5 |
| | 385.9 |
| | 46.6 |
| | — |
| | — |
|
| Global debt securities and cash: | | | | | | | | | | |
| Fixed income and cash equivalents | | 501.1 |
| | 92.6 |
| | 10.0 |
| | 398.5 |
| | — |
|
| Floating rate | | 169.9 |
| | 122.6 |
| | 47.3 |
| | — |
| | — |
|
| Private equity | | 137.5 |
| | 137.5 |
| | — |
| | — |
| | — |
|
| Hedge funds | | 307.4 |
| | 307.4 |
| | — |
| | — |
| | — |
|
| Real estate and other | | 93.9 |
| | 90.7 |
| | — |
| | 3.2 |
| | — |
|
| Total assets | | $ | 2,129.6 |
| | $ | 1,404.4 |
| | $ | 323.5 |
| | $ | 401.7 |
| | $ | — |
|
The fair values of the Company’s pension plan assets at December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | Significant Unobservable Inputs |
| Asset category | | Total | | NAV | | (Level 1) | | (Level 2) | | (Level 3) |
| Equity securities: | | | | | | | | | | |
| ATI common stock | | $ | 47.1 |
| | $ | — |
| | $ | 47.1 |
| | $ | — |
| | $ | — |
|
| Other U.S. equities | | 311.1 |
| | 204.0 |
| | 107.1 |
| | — |
| | — |
|
| International equities | | 375.7 |
| | 339.2 |
| | 36.5 |
| | — |
| | — |
|
| Global debt securities and cash: | | | | | | | | | | |
| Fixed income and cash equivalents | | 412.2 |
| | 82.3 |
| | 0.5 |
| | 329.2 |
| | 0.2 |
|
| Floating rate | | 225.5 |
| | 225.5 |
| | — |
| | — |
| | — |
|
| Private equity | | 142.6 |
| | 142.6 |
| | — |
| | — |
| | — |
|
| Hedge funds | | 283.9 |
| | 283.9 |
| | — |
| | — |
| | — |
|
| Real estate and other | | 96.5 |
| | 91.5 |
| | — |
| | 5.0 |
| | — |
|
| Total assets | | $ | 1,894.6 |
| | $ | 1,369.0 |
| | $ | 191.2 |
| | $ | 334.2 |
| | $ | 0.2 |
|
In order to conform with current year presentation, approximately $62 million was reclassified from private equity investments to floating rate debt for pension plan assets at December 31, 2016. In addition, approximately $99 million in floating rate debt securities previously classified as Level 3 was reclassified to net asset value (NAV) at December 31, 2016.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in U.S. and International equities, and Fixed Income are predominantly held in common/collective trust funds and registered investment companies. These investments are public investment vehicles valued using the NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. These investments are not classified in the fair value hierarchy. In addition, some fixed income instruments are investments in debt instruments that are valued using external pricing vendors and are classified within Level 2 of the fair value hierarchy.
Floating interest rate global debt instruments are both domestic and foreign and include first lien debt, second lien debt and structured finance obligations, among others. These instruments are valued using NAV and are not classified in the fair value hierarchy, or are publicly traded securities and are classified as Level 1.
Private equity investments include both Direct Funds and Fund-of-Funds. Direct Funds are investments in Limited Partnership (LP) interests. Fund-of-Funds are investments in private equity funds that invest in other private equity funds or LPs. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
Hedge fund investments are made as a limited partner in hedge funds managed by a general partner. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
Real estate investments are made either (1) as a limited partner in a portfolio of properties managed by a general partner or (2) through a CIF that invests in a portfolio of real estate funds. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
For certain investments which have formal financial valuations reported on a one-quarter lag, fair value is determined utilizing net asset values adjusted for subsequent cash flows, estimated financial performance and other significant events.
The fair value of Level 3 pension plan assets for the year ended December 31, 2017 was not material. Changes in the fair value of Level 3 pension plan assets for the year ended December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | January 1, 2016 Balance | | Net Realized and Unrealized Gains (Losses) | | Net Purchases, Issuances and Settlements | | Net Transfers Into (Out Of) Level 3 | | December 31, 2016 Balance |
| Global debt securities and cash: | | | | | | | | | | |
| Fixed income and cash equivalents | | $ | 0.3 |
| | $ | — |
| | $ | (0.1 | ) | | $ | — |
| | $ | 0.2 |
|
| Floating rate debt | | 194.3 |
| | 4.8 |
| | (199.1 | ) | | — |
| | — |
|
| Total | | $ | 194.6 |
| | $ | 4.8 |
| | $ | (199.2 | ) | | $ | — |
| | $ | 0.2 |
|
For 2018, the expected long-term rate of returns on defined benefit pension assets will be 7.75%. In developing the expected long-term rate of return assumptions, the Company evaluated input from its third party pension plan asset managers and actuaries, including reviews of their asset class return expectations and long-term inflation assumptions. The expected long-term rate of return is based on expected asset allocations within ranges for each investment category and projected annual compound returns. The Company’s actual returns on pension assets for the last five years have been 16.9% for 2017, 5.3% for 2016, (1.2)% for 2015, 6.5% for 2014, and 14.3% for 2013.
The target asset allocations for pension plans for 2018, by major investment category, are: |
| | |
Asset category | | Target asset allocation range |
Equity securities: | | |
U. S. equities | | 18% - 40% |
International equities | | 10% - 30% |
Global debt securities and cash | | 15% - 40% |
Private equity | | 0% - 15% |
Hedge funds | | 10% - 20% |
Real estate and other | | 0% - 10% |
As of December 31, 2017, the ATI Pension Plan has outstanding commitments to invest up to $84 million in global debt securities, $72 million in private equity investments, $11 million in hedge funds and $10 million in real estate investments. These commitments are expected to be satisfied through the reallocation of pension trust assets while maintaining investments within the target asset allocation ranges.
At December 31, 2017, other postretirement benefit plan assets of $0.6 million are primarily invested in private equity investments, which are classified as Level 3 in the valuation hierarchy, as the valuations are substantially based upon unobservable information.
The Company contributes to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain of its union-represented employees. The risks of participating in such plans are different from the risks of single-employer plans, in the following respects:
| |
a. | Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
| |
b. | If a participating employer ceases to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
| |
c. | If the Company ceases to have an obligation to contribute to the multiemployer plan in which it had been a contributing employer, it may be required to pay to the plan an amount based on the underfunded status of the plan and on the history of the Company’s participation in the plan prior to the cessation of its obligation to contribute. The amount that an employer that has ceased to have an obligation to contribute to a multiemployer plan is required to pay to the plan is referred to as a withdrawal liability. |
The Company’s participation in multiemployer plans for the years ended December 31, 2017, 2016 and 2015 is reported in the following table. The Company’s contributions to the Steelworkers Western Independent Shops Pension Plan exceed 5% of this plan’s total contributions for the plan year ended September 30, 2016, which is the most recent information available from the Plan Administrator.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Protection Act Zone Status (1) | | FIP / RP Status Pending / Implemented (2) | | in millions | | | | Expiration Dates of Collective Bargaining Agreements |
| | | EIN / Pension Plan Number | | | | Company Contributions | | Surcharge Imposed (3) | |
| Pension Fund | | | 2017 | | 2016 | | | 2017 | | 2016 | | 2015 | | |
| Steelworkers Western Independent Shops Pension Plan | | 90-0169564 / 001 | | Green | | Green | | N/A | | $ | 0.6 |
| | $ | 1.2 |
| | $ | 0.7 |
| | No | | 2/29/2020 |
| Boilermakers-Blacksmiths National Pension Trust | | 48-6168020 / 001 | | Yellow | | Yellow | | Yes | | 2.2 |
| | 1.8 |
| | 1.8 |
| | No | | 9/30/2026 |
| IAM National Pension Fund | | 51-6031295 / 002 | | Green | | Green | | N/A | | 1.7 |
| | 1.6 |
| | 1.5 |
| | No | | Various between 2018-2022 (4) |
| Total contributions | | | | | | | | | | $ | 4.5 |
| | $ | 4.6 |
| | $ | 4.0 |
| | | | |
| |
(1) | The most recent Pension Protection Act Zone Status available for ATI’s fiscal years 2017 and 2016 is for plan years ending in calendar years 2016 and 2015, respectively. The zone status is based on information provided to ATI and other participating employers by each plan and is certified by the plan’s actuary. A plan in the “red” zone had been determined to be in “critical status”, based on criteria established by the Code, and is generally less than 65% funded. A plan in the “yellow” zone has been determined to be in “endangered status”, based on criteria established under the Code, and is generally less than 80% funded. A plan in the “green” zone has been determined to be neither in “critical status” nor in “endangered status”, and is generally at least 80% funded.
|
| |
(2) | The “FIP / RP Status Pending / Implemented” column indicates whether a Funding Improvement Plan, as required under the Code by plans in the “yellow” zone, or a Rehabilitation Plan, as required under the Code to be adopted by plans in the “red” zone, is pending or has been implemented as of the end of the plan year that ended in 2017.
|
| |
(3) | The “Surcharge Imposed” column indicates whether ATI’s contribution rate for 2017 included an amount in addition to the contribution rate specified in the applicable collective bargaining agreement, as imposed by a plan in “critical status”, in accordance with the requirements of the Code.
|
| |
(4) | The Company is party to five separate bargaining agreements that require contributions to this plan. Expiration dates of these collective bargaining agreements range between April 22, 2018 and February 27, 2022. |
Note 12. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) (AOCI) by component, net of tax, for the fiscal years ended December 31, 2017, 2016 and 2015 were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Post- retirement benefit plans | | Currency translation adjustment | | Unrealized holding gains on securities | | Derivatives | | | Deferred Tax Asset Valuation Allowance | | Total |
| Attributable to ATI: | | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | $ | (931.5 | ) | | $ | (16.2 | ) | | $ | — |
| | $ | 16.3 |
| | $ | — |
| | $ | (931.4 | ) |
| OCI before reclassifications | | (69.6 | ) | | | (31.4 | ) | | | — |
| | | (20.7 | ) | | | — |
| | (121.7 | ) |
| Amounts reclassified from AOCI | (a) | 49.9 |
| | (b) | — |
| | (b) | — |
| | (c) | (11.3 | ) | | | — |
| | 38.6 |
|
| Net current-period OCI | | (19.7 | ) | | | (31.4 | ) | | | — |
| | | (32.0 | ) | | | — |
| | (83.1 | ) |
| Balance, December 31, 2015 | | (951.2 | ) | | | (47.6 | ) | | | — |
| | | (15.7 | ) | | | — |
| | (1,014.5 | ) |
| OCI before reclassifications | | (60.6 | ) | | | (37.4 | ) | | | — |
| | | 13.2 |
| | | (45.6 | ) | | (130.4 | ) |
| Amounts reclassified from AOCI | (a) | 46.3 |
| | (b) | — |
| | (b) | — |
| | (c) | 4.9 |
| | | — |
| | 51.2 |
|
| Net current-period OCI | | (14.3 | ) | | | (37.4 | ) | | | — |
| | | 18.1 |
| | | (45.6 | ) | | (79.2 | ) |
| Balance, December 31, 2016 | | (965.5 | ) | | | (85.0 | ) | | | — |
| | | 2.4 |
| | | (45.6 | ) | | (1,093.7 | ) |
| OCI before reclassifications | | (32.5 | ) | | | 31.5 |
| | | — |
| | | 11.1 |
| | | — |
| | 10.1 |
|
| Amounts reclassified from AOCI | (a) | 43.5 |
| | (b) | — |
| | (b) | — |
| | (c) | (4.5 | ) | | | 16.8 |
| | 55.8 |
|
| Net current-period OCI | | 11.0 |
| | | 31.5 |
| | | — |
| | | 6.6 |
| | | 16.8 |
| | 65.9 |
|
| Balance, December 31, 2017 | $ | (954.5 | ) | | $ | (53.5 | ) | | $ | — |
| | $ | 9.0 |
| | $ | (28.8 | ) | | $ | (1,027.8 | ) |
| Attributable to noncontrolling interests: | | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | $ | — |
| | $ | 25.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25.0 |
|
| OCI before reclassifications | | — |
| | | (5.6 | ) | | | — |
| | | — |
| | | — |
| | (5.6 | ) |
| Amounts reclassified from AOCI | | — |
| | (b) | — |
| | | — |
| | | — |
| | | — |
| | — |
|
| Net current-period OCI | | — |
| | | (5.6 | ) | | | — |
| | | — |
| | | — |
| | (5.6 | ) |
| Balance, December 31, 2015 | | — |
| | | 19.4 |
| | | — |
| | | — |
| | | — |
| | 19.4 |
|
| OCI before reclassifications | | — |
| | | (9.7 | ) | | | — |
| | | — |
| | | — |
| | (9.7 | ) |
| Amounts reclassified from AOCI | | — |
| | (b) | — |
| | | — |
| | | — |
| | | — |
| | — |
|
| Net current-period OCI | | — |
| | | (9.7 | ) | | | — |
| | | — |
| | | — |
| | (9.7 | ) |
| Balance, December 31, 2016 | | — |
| | | 9.7 |
| | | — |
| | | — |
| | | — |
| | 9.7 |
|
| OCI before reclassifications | | — |
| | | 7.6 |
| | | — |
| | | — |
| | | — |
| | 7.6 |
|
| Amounts reclassified from AOCI | | — |
| | (b) | — |
| | | — |
| | | — |
| | | — |
| | — |
|
| Net current-period OCI | | — |
| | | 7.6 |
| | | — |
| | | — |
| | | — |
| | 7.6 |
|
| Balance, December 31, 2017 | $ | — |
| | $ | 17.3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17.3 |
|
| |
(a) | Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 11). |
| |
(b) | No amounts were reclassified to earnings. |
| |
(c) | Amounts related to the effective portion of the derivatives are included in cost of goods sold in the period or periods the hedged item affects earnings. Amounts related to the ineffective portion of the derivatives are presented in selling and administrative expenses on the consolidated statements of operations (see Note 9). |
Other comprehensive income (loss) amounts (OCI) reported above by category are net of applicable income tax expense (benefit) for each year presented. Income tax expense (benefit) on OCI items is recorded as a change in a deferred tax asset or liability. Amounts recognized in OCI in 2016 and 2017 include the impact of any deferred tax asset valuation allowances (see Note 14 for further explanation), primarily relating to remeasurement of the Company’s postretirement benefit plans. Foreign currency translation adjustments, including those pertaining to noncontrolling interests, are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Reclassifications out of AOCI for the fiscal years ended December 31, 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | | | |
| | | Amount reclassified from AOCI (c) | | | |
| | | Fiscal year ended | | | |
Details about AOCI Components (In millions) | | December 31, 2017 | | | | December 31, 2016 | | December 31, 2015 | | | Affected line item in the consolidated statement of operations |
| Postretirement benefit plans | | |
| | | | | | | | | |
| Prior service credit (cost) | | $ | 1.6 |
| | (a) | | $ | 0.4 |
| (a) | $ | (6.2 | ) | (a) | | |
| Actuarial losses | | (71.6 | ) | | (a) | | (75.0 | ) | (a) | (75.0 | ) | (a) | | |
| | | (70.0 | ) | | (c) | | (74.6 | ) | (c) | (81.2 | ) | (c) | | Total before tax |
| | | (26.5 | ) | | | | (28.3 | ) | | (31.3 | ) | | | Tax benefit (d) |
| | | $ | (43.5 | ) | | | | $ | (46.3 | ) | | $ | (49.9 | ) | | | Net of tax |
| | | | | | | | | | | | |
| Derivatives | | | | | | | | | | | |
| Nickel and other raw material contracts | | $ | (3.4 | ) | | (b) | | $ | (19.5 | ) | (b) | $ | (16.9 | ) | (b) | | |
| Natural gas contracts | | (5.3 | ) | | (b) | | (14.8 | ) | (b) | (18.2 | ) | (b) | | |
| Electricity contracts | | — |
| | (b) | | — |
| (b) | (0.2 | ) | (b) | | |
| Foreign exchange contracts | | 15.9 |
| | (b) | | 26.4 |
| (b) | 53.5 |
| (b) | | |
| | | 7.2 |
| | (c) | | (7.9 | ) | (c) | 18.2 |
| (c) | | Total before tax |
| | | 2.7 |
| | | | (3.0 | ) | | 6.9 |
| | | Tax provision (benefit) (d) |
| | | $ | 4.5 |
| | | | $ | (4.9 | ) | | $ | 11.3 |
| | | Net of tax |
| | | | | | | | | | | | |
| |
(a) | Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses. For additional information, see Note 11. |
| |
(b) | Amounts related to the effective portion of the derivatives are included in cost of goods sold in the period or periods the hedged item affects earnings. Amounts related to the ineffective portion of the derivatives are presented in selling and administrative expenses on the consolidated statements of operations (see Note 9). |
| |
(c) | For pretax items, positive amounts are income and negative amounts are expense in terms of the impact to net income. Tax effects are presented in conformity with ATI’s presentation in the consolidated statements of operations. |
| |
(d) | These amounts exclude the impact of any deferred tax asset valuation allowances (see Note 14 for further explanation). |
Note 13.16. Retirement Benefits
The Company has defined contribution retirement plans or defined benefit pension plans covering substantially all employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay.
The Company also sponsors several postretirement plans covering certain collectively-bargained salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most retiree health care plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution.
ATI instituted several actions over the last few years as part of its retirement benefit liability management strategy. Future benefit accruals for all participants in the U.S. defined benefit pension plans other than those subject to a CBA were frozen at the end of 2014, and subsequently CBAs were negotiated to close these plans to new entrants. As a result of these actions, the Company has now completely closed all defined benefit pension plans to new entrants, and has substantially limited the number of employees still accruing benefit service to approximately 1,300 participants, or less than 10% of the population in the U.S. qualified defined benefit pension plans. Additionally, all of ATI’s remaining collectively-bargained, capped defined benefit retiree health care plans are now closed to new entrants. These liability management actions have transitioned ATI’s retirement benefit and other postretirement benefit programs largely to a defined contribution structure.
Beginning on June 1, 2020, in response to the economic challenges created by the COVID-19 pandemic, the Company reduced its qualified non-elective contribution percentage and suspended all Company match contributions for salaried participants in the ATI 401(k) Savings Plan, and deferred the funding of Company contributions to this plan until 2021, resulting in $7.3 million reported in other current liabilities for this deferral on the consolidated balance sheet as of December 31, 2020. Costs for defined contribution retirement plans were $29.9 million in 2020, $44.8 million in 2019, and $39.9 million in 2018. Company contributions to these defined contribution plans are funded with cash. Other postretirement benefit costs for a defined contribution plan were $0.7 million, $1.0 million, and $1.0 million for the fiscal years ended December 31, 2020, 2019 and 2018, respectively.
The components of pension and other postretirement benefit expense for the Company’s defined benefit plans included the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Service cost—benefits earned during the year | | $ | 12.7 | | | $ | 12.7 | | | $ | 16.4 | | | $ | 2.3 | | | $ | 1.9 | | | $ | 2.5 | |
| Interest cost on benefits earned in prior years | | 86.3 | | | 105.5 | | | 104.8 | | | 10.7 | | | 14.8 | | | 12.7 | |
| Expected return on plan assets | | (134.5) | | | (131.3) | | | (157.9) | | | 0 | | | 0 | | | 0 | |
| Amortization of prior service cost (credit) | | 0.7 | | | 0.3 | | | 0.3 | | | (3.8) | | | (2.9) | | | (2.9) | |
| Amortization of net actuarial loss | | 74.5 | | | 73.7 | | | 65.9 | | | 10.8 | | | 13.5 | | | 10.6 | |
| Curtailment loss (gain) | | 0 | | | 0 | | | 0.4 | | | (0.2) | | | 0 | | | 0 | |
| Termination benefits | | 10.9 | | | 0 | | | 0 | | | 6.7 | | | 0 | | | 0 | |
| Total retirement benefit expense | | $ | 50.6 | | | $ | 60.9 | | | $ | 29.9 | | | $ | 26.5 | | | $ | 27.3 | | | $ | 22.9 | |
In the fourth quarter of 2020, the Company recorded a $17.4 million termination benefits charge for pension and postretirement medical obligations, net of a $0.2 million curtailment gain, related to facility closures in the AA&S segment resulting from the Company’s strategic shift to exit standard stainless products. See Note 3 for further explanation.
On June 1, 2018, a new CBA was ratified by USW-represented employees of the Company’s Specialty Alloys & Components (SAC) operations in Millersburg, OR. The new SAC CBA resulted in changes to retirement benefit programs, including a freeze to new entrants to the U.S. defined benefit pension plan and to postretirement health care benefits, and a hard freeze for most current pension plan participants covered by the SAC CBA, effective July 31, 2018. New hires covered by the CBA, and pension plan participants who are subject to the hard freeze, will receive Company contributions to a defined contribution retirement plan. The CBA also included pension benefit increases for all current pension plan participants affecting both prior and future service. The Company recognized a $0.4 million pension curtailment charge in the second quarter 2018 for the prior service cost of these pension benefit increases in connection with employees being hard frozen in the pension plan.
Actuarial assumptions used to develop the components of defined benefit pension expense and other postretirement benefit expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Discount rate | | 3.40 | % | | 4.40 | % | | 3.85 | % | | 3.25 | % | | 4.35 | % | | 3.80 | % |
| Rate of increase in future compensation levels | | 1.0 | % | | 0.5% - 1.0% | | 0.5% - 1.0% | | 0 | | | 0 | | | 0 | |
| Weighted average expected long-term rate of return on assets | | 7.16 | % | | 7.52 | % | | 7.75 | % | | 0 | % | | 4.0 | % | | 4.0 | % |
Actuarial assumptions used for the valuation of defined benefit pension and other postretirement benefit obligations at the end of the respective periods were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Discount rate | | 2.60 | % | | 3.40 | % | | 2.45 | % | | 3.25 | % |
| Rate of increase in future compensation levels | | 1.0 | % | | 0.5%- 1.0% | | 0 | | | 0 | |
A reconciliation of the funded status for the Company’s defined benefit pension and other postretirement benefit plans at December 31, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Change in benefit obligations: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 2,633.9 | | | $ | 2,497.7 | | | $ | 345.3 | | | $ | 359.1 | |
| Service cost | | 12.7 | | | 12.7 | | | 2.3 | | | 1.9 | |
| Interest cost | | 86.3 | | | 105.5 | | | 10.7 | | | 14.8 | |
| Benefits paid | | (258.0) | | | (274.6) | | | (30.4) | | | (37.7) | |
| Subsidy received | | 0 | | | 0 | | | 0.8 | | | 0 | |
| Effect of currency rates | | 4.3 | | | 2.8 | | | 0 | | | 0 | |
| Net actuarial (gains) losses – discount rate change | | 235.3 | | | 266.0 | | | 25.5 | | | 30.5 | |
| – other | | (5.3) | | | 14.3 | | | (0.8) | | | (18.1) | |
| Plan curtailments | | 0 | | | 0 | | | (2.5) | | | 0 | |
| Plan amendments | | 0 | | | 9.5 | | | 0 | | | (5.2) | |
| Termination benefits | | 10.9 | | | 0 | | | 6.7 | | | 0 | |
| Benefit obligation at end of year | | $ | 2,720.1 | | | $ | 2,633.9 | | | $ | 357.6 | | | $ | 345.3 | |
Pension plan amendments in 2019 pertain to an updated actuarial equivalence evaluation for alternate forms of benefit payments for certain covered groups. Other postretirement benefit plan amendments in 2019 are the result of converting certain covered groups to prospectively receive post-age 65 subsidies on a third-party retiree medical plan exchange, rather than continuing to receive Company-provided health plan benefits. Actuarial effects of changes in discount rates are separately identified in the preceding table.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 1,902.1 | | | $ | 1,772.2 | | | $ | 0.1 | | | $ | 0.1 | |
| Actual returns on plan assets and plan expenses | | 258.9 | | | 248.2 | | | (0.1) | | | 0 | |
| Employer contributions | | 138.8 | | | 153.4 | | | 0 | | | 0 | |
| Effect of currency rates | | 4.6 | | | 2.9 | | | 0 | | | 0 | |
| Benefits paid | | (258.0) | | | (274.6) | | | 0 | | | 0 | |
| Fair value of plan assets at end of year | | $ | 2,046.4 | | | $ | 1,902.1 | | | $ | 0 | | | $ | 0.1 | |
Pension benefit payments in 2020 include $86 million for the annuity buyout of smaller pension balances in a U.S. defined benefit pension plan involving approximately 1,200, or 8% of participants. Pension benefit payments in 2019 include $96 million for the annuity buyout of smaller pension balances in a U.S. defined benefit pension plan involving approximately 1,800, or 10% of participants. These actions were also part of ATI’s retirement benefit liability management strategy to reduce the overall size of the pension obligation and to lower administrative costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets (liabilities) recognized in the consolidated balance sheets: | | | | | | |
| | Pension Benefits | | Other Postretirement Benefits |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Noncurrent assets | | $ | 5.4 | | | $ | 4.8 | | | $ | 0 | | | $ | 0 | |
| Current liabilities | | (5.5) | | | (5.1) | | | (30.9) | | | (32.7) | |
| Noncurrent liabilities | | (673.6) | | | (731.5) | | | (326.7) | | | (312.5) | |
| Total amount recognized | | $ | (673.7) | | | $ | (731.8) | | | $ | (357.6) | | | $ | (345.2) | |
Changes to accumulated other comprehensive loss related to pension and other postretirement benefit plans in 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Beginning of year accumulated other comprehensive loss | | $ | (1,569.7) | | | $ | (1,470.3) | | | $ | (103.5) | | | $ | (107.0) | |
| Amortization of net actuarial loss | | 74.5 | | | 73.7 | | | 10.8 | | | 13.5 | |
| Amortization of prior service cost (credit) | | 0.7 | | | 0.3 | | | (3.8) | | | (2.9) | |
| Remeasurements | | (105.8) | | | (173.4) | | | (22.6) | | | (7.1) | |
| End of year accumulated other comprehensive loss | | $ | (1,600.3) | | | $ | (1,569.7) | | | $ | (119.1) | | | $ | (103.5) | |
| Net change in accumulated other comprehensive loss | | $ | (30.6) | | | $ | (99.4) | | | $ | (15.6) | | | $ | 3.5 | |
Amounts included in accumulated other comprehensive loss at December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Prior service (cost) credit | | $ | (10.6) | | | $ | (11.2) | | | $ | 7.0 | | | $ | 11.0 | |
| Net actuarial loss | | (1,589.7) | | | (1,558.5) | | | (126.1) | | | (114.5) | |
| Accumulated other comprehensive loss | | (1,600.3) | | | (1,569.7) | | | (119.1) | | | (103.5) | |
| Deferred tax effect | | 561.4 | | | 555.7 | | | 38.1 | | | 34.4 | |
| Accumulated other comprehensive loss, net of tax | | $ | (1,038.9) | | | $ | (1,014.0) | | | $ | (81.0) | | | $ | (69.1) | |
Amounts in accumulated other comprehensive loss presented above do not include any effects of deferred tax asset valuation allowances. See Note 17 for further discussion on deferred tax asset valuation allowances.
Retirement benefit expense for 2021 for defined benefit plans is estimated to be approximately $44 million, comprised of $23 million for pension expense and $21 million of expense for other postretirement benefits. The net actuarial loss is recognized in the consolidated statement of operations using a corridor method. Because all of ATI’s pension plans are inactive, cumulative gains and losses in excess of 10% of the greater of the projected benefit obligation or the market value of plan assets are amortized over the expected average remaining future lifetime of participants, which is approximately 18 years on a weighted average basis. Prior service cost (credit) amortization is recognized in level amounts over the expected service of the active membership as of the amendment effective date. Amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in 2021 are:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Pension
Benefits | | Other
Postretirement
Benefits | | Total |
| Amortization of prior service cost (credit) | | $ | 0.6 | | | $ | (2.5) | | | $ | (1.9) | |
| Amortization of net actuarial loss | | 75.6 | | | 13.2 | | | 88.8 | |
| Amortization of accumulated other comprehensive loss | | $ | 76.2 | | | $ | 10.7 | | | $ | 86.9 | |
The accumulated benefit obligation for all defined benefit pension plans was $2,703.9 million and $2,621.1 million at December 31, 2020 and 2019, respectively. Additional information for pension plans with accumulated benefit obligations and projected benefit obligations in excess of plan assets:
| | | | | | | | | | | | | | |
| | | Pension Benefits |
| (In millions) | | 2020 | | 2019 |
| Projected benefit obligation | | $ | 2,611.8 | | | $ | 2,538.9 | |
| Accumulated benefit obligation | | $ | 2,595.6 | | | $ | 2,526.1 | |
| Fair value of plan assets | | $ | 1,932.8 | | | $ | 1,802.4 | |
Cash contributions to ATI’s U.S. qualified defined benefit pension plans were $130 million in 2020, $145 million in 2019 and $40 million in 2018. The Company funds the U.S. defined benefit pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. Based upon current regulations and actuarial studies, the Company expects to make approximately $87 million in cash contributions to its U.S. qualified defined benefit pension plans in 2021. In addition, for 2021, the Company expects approximately $10 million of payments for U.S. nonqualified pension benefits and for contributions to its U.K. defined benefit pension plan. Certain U.K. assets are pledged as collateral to the trustee of the U.K. defined benefit pension plan to support statutory funding requirements. This security agreement has a maximum value of approximately $62 million based on year-end 2020 exchange rates.
The following table summarizes expected benefit payments from the Company’s various pension and other postretirement defined benefit plans through 2030, and also includes estimated Medicare Part D subsidies projected to be received during this period based on currently available information. Pension benefit payments for the U.S. qualified defined benefit pension plans and the U.K. defined benefit plan are made from pension plan assets.
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Pension
Benefits | | Other
Postretirement
Benefits | | Medicare Part
D Subsidy |
| 2021 | | $ | 167.2 | | | $ | 30.9 | | | $ | 0.1 | |
| 2022 | | 165.0 | | | 29.7 | | | 0.1 | |
| 2023 | | 164.1 | | | 30.1 | | | 0.1 | |
| 2024 | | 161.5 | | | 28.5 | | | 0.1 | |
| 2025 | | 158.8 | | | 26.5 | | | 0.1 | |
| 2026-2030 | | 747.4 | | | 107.2 | | | 0.3 | |
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 5.6% in 2021 and is assumed to gradually decrease to 4.5% in the year 2038 and remain at that level thereafter. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans, however, the Company’s contributions for most of its’ retiree health plans are capped based on a fixed premium amount, which limits the impact of future health care cost increases.
The fair values of the Company’s pension plan assets are determined using net asset value (NAV) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value, as further discussed in Note 15. The fair values at December 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | Quoted Prices in
Active Markets for
Identical Assets | | Significant
Observable Inputs | | Significant
Unobservable Inputs |
| Asset category | | Total | | NAV | | (Level 1) | | (Level 2) | | (Level 3) |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 452.0 | | | $ | 264.7 | | | $ | 187.3 | | | $ | 0 | | | $ | 0 | |
| International equities | | 477.1 | | | 448.7 | | | 28.4 | | | 0 | | | 0 | |
| Debt securities and cash: | | | | | | | | | | |
| Fixed income and cash equivalents | | 588.0 | | | 306.3 | | | 80.3 | | | 201.4 | | | 0 | |
| Floating rate | | 47.4 | | | 47.4 | | | 0 | | | 0 | | | 0 | |
| Private equity | | 130.0 | | | 130.0 | | | 0 | | | 0 | | | 0 | |
| Hedge funds | | 325.0 | | | 325.0 | | | 0 | | | 0 | | | 0 | |
| Real estate and other | | 26.9 | | | 26.9 | | | 0 | | | 0 | | | 0 | |
| Total assets | | $ | 2,046.4 | | | $ | 1,549.0 | | | $ | 296.0 | | | $ | 201.4 | | | $ | 0 | |
The fair values of the Company’s pension plan assets at December 31, 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | Quoted Prices in
Active Markets for
Identical Assets | | Significant
Observable Inputs | | Significant
Unobservable Inputs |
| Asset category | | Total | | NAV | | (Level 1) | | (Level 2) | | (Level 3) |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 443.6 | | | $ | 254.7 | | | $ | 188.9 | | | $ | 0 | | | $ | 0 | |
| International equities | | 326.1 | | | 299.6 | | | 26.5 | | | 0 | | | 0 | |
| Debt securities and cash: | | | | | | | | | | |
| Fixed income and cash equivalents | | 650.7 | | | 419.9 | | | 58.7 | | | 172.1 | | | 0 | |
| Floating rate | | 51.0 | | | 51.0 | | | 0 | | | 0 | | | 0 | |
| Private equity | | 129.0 | | | 129.0 | | | 0 | | | 0 | | | 0 | |
| Hedge funds | | 263.9 | | | 263.9 | | | 0 | | | 0 | | | 0 | |
| Real estate and other | | 37.8 | | | 37.8 | | | 0 | | | 0 | | | 0 | |
| Total assets | | $ | 1,902.1 | | | $ | 1,455.9 | | | $ | 274.1 | | | $ | 172.1 | | | $ | 0 | |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in U.S. and International equities, and Fixed Income are predominantly held in common/collective trust funds and registered investment companies. Some of these investments are publicly traded securities and are classified as Level 1, while others are public investment vehicles valued using the NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. These investments are not classified in the fair value hierarchy. In addition, some fixed income instruments are investments in debt instruments that are valued using external pricing vendors and are classified within Level 2 of the fair value hierarchy.
Floating interest rate global debt instruments are both domestic and foreign and include first lien debt, second lien debt and structured finance obligations, among others. These instruments are valued using NAV and are not classified in the fair value hierarchy, or are publicly traded securities and are classified as Level 1.
Private equity investments include both Direct Funds and Fund-of-Funds. Direct Funds are investments in Limited Partnership (LP) interests. Fund-of-Funds are investments in private equity funds that invest in other private equity funds or LPs. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
Hedge fund investments are made as a limited partner in hedge funds managed by a general partner. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
Real estate investments are made as a limited partner in a portfolio of properties managed by a general partner. Fair value of these investments is determined utilizing net asset values, and are not classified in the fair value hierarchy.
For certain investments which have formal financial valuations reported on a one-quarter lag, fair value is determined utilizing net asset values adjusted for subsequent cash flows, estimated financial performance and other significant events.
For 2021, the weighted average expected long-term rate of return on defined benefit pension assets is 6.78%. In developing expected long-term rate of return assumptions, the Company evaluated input from its third party pension plan asset managers and actuaries, including reviews of their asset class return expectations and long-term inflation assumptions. An expected long-term rate of return is based on expected asset allocations within ranges for each investment category and projected annual compound returns. The Company’s actual, weighted average returns on pension assets for the last five years have been 15.2% for 2020, 15.1% for 2019, (4.8)% for 2018, 16.9% for 2017, and 5.3% for 2016.
The plan assets for the ATI Pension Plan, the Company’s primary U.S. qualified defined benefit pension plan, represent over 90% of total pension plan assets at December 31, 2020. The ATI Pension Plan invests in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include U.S. domestic equities, non-U.S. developed market equities, emerging market equities, hedge funds, private equity, traditional fixed income consisting of long government/credit and alternative credit, and real estate. The Company continually monitors the investment results of these asset classes and its fund managers, and explores other potential asset classes for possible future investment.
The target asset allocations for ATI Pension Plan for 2021, by major investment category, are:
| | | | | | | | |
| Asset category | | Target asset allocation range |
| U.S. equity | | 18% - 40% |
| Global equity | | 10% - 30% |
| Debt securities and cash | | 15% - 40% |
| Private equity | | 0% - 15% |
| Hedge funds | | 10% - 20% |
| Real estate and other | | 0% - 10.0% |
As of December 31, 2020, the Company’s pension plans had outstanding commitments to invest up to $78 million in global debt securities, $94 million in private equity investments and $8 million in real estate investments. These commitments are expected to be satisfied through the reallocation of pension trust assets while maintaining investments within the target asset allocation ranges.
The Company contributes to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain of its union-represented employees. The risks of participating in such plans are different from the risks of single-employer plans, in the following respects:
a.Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
b.If a participating employer ceases to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
c.If the Company ceases to have an obligation to contribute to the multiemployer plan in which it had been a contributing employer, it may be required to pay to the plan an amount based on the underfunded status of the plan and on the history of the Company’s participation in the plan prior to the cessation of its obligation to contribute. The amount that an employer that has ceased to have an obligation to contribute to a multiemployer plan is required to pay to the plan is referred to as a withdrawal liability.
A subsidiary of the Company participates in the Steelworkers Western Independent Shops Pension Plan (WISPP) for union-represented employees of the primary titanium operations in Albany, OR, which is funded on an hours-worked basis. ATI’s contributions to the WISPP exceed 5% of this plan’s total contributions for the plan year ended September 30, 2019, which is the most recent information available from the Plan Administrator. As of December 31, 2020, manufacturing operations at this facility are indefinitely idled, and a limited number of employees that participate in the WISPP remain active in maintenance and other functions. It is reasonably possible that a significant reduction or the elimination of hours-worked contributions due to changes in operating rates at this facility could result in a withdrawal liability assessment in a future period. A complete withdrawal liability is estimated to be approximately $38 million on an undiscounted basis. If this complete withdrawal liability was incurred, ATI estimates that payments of the obligation would be required on a straight-line basis over a 20-year period.
The Company’s participation in multiemployer plans for the years ended December 31, 2020, 2019 and 2018 is reported in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension
Protection Act
Zone Status (1) | | FIP / RP Status
Pending /
Implemented (2) | | in millions | | | | Expiration Dates
of Collective
Bargaining
Agreements |
| | | EIN / Pension
Plan Number | | | | Company Contributions | | Surcharge
Imposed (3) | |
| Pension Fund | | | 2020 | | 2019 | | | 2020 | | 2019 | | 2018 | | |
| Steelworkers Western Independent Shops Pension Plan | | 90-0169564
/ 001 | | Green | | Green | | N/A | | $ | 0.7 | | | $ | 0.9 | | | $ | 0.8 | | | No | | 2/28/2021 |
| Boilermakers-Blacksmiths National Pension Trust | | 48-6168020
/ 001 | | Yellow | | Red | | Yes | | 2.1 | | | 2.5 | | | 2.5 | | | No | | 9/30/2026 |
| IAM National Pension Fund | | 51-6031295
/ 002 | | Red | | Red | | Yes | | 2.0 | | | 2.2 | | | 2.1 | | | Yes | | Various between 2021-2022 (4) |
| Total contributions | | | | | | | | | | $ | 4.8 | | | $ | 5.6 | | | $ | 5.4 | | | | | |
(1)The most recent Pension Protection Act Zone Status is based on information provided to ATI and other participating employers by each plan, as certified by the plan’s actuary. A plan in the “deep red” zone had been determined to be in “critical and declining status”, based on criteria established by the Internal Revenue Code (Code), and is in critical status (as defined by the “red” zone) and is projected to become insolvent (run out of money to pay benefits) within 15 years (or within 20 years if a special rule applies). A plan in the “red” zone had been determined to be in “critical status”, based on criteria established by the Code, and is generally less than 65% funded. A plan in the “yellow” zone has been determined to be in “endangered status”, based on criteria established under the Code, and is generally less than 80% funded. A plan in the “green” zone has been determined to be neither in “critical status” nor in “endangered status”, and is generally at least 80% funded. Additionally, a plan may voluntarily place itself into a rehabilitation plan.
In April 2019, the Company received notification from the IAM National Pension Fund (IAM Fund) that its’ actuary certified the IAM Fund as “endangered status” for the plan year beginning January 1, 2019, and that the IAM Fund was voluntarily placing itself in “red” zone status and implementing a rehabilitation plan. In April 2020, the Company received notification from the IAM Fund that it was certified by its actuary as being in “red” zone status for the plan year beginning January 1, 2020. A 5% contribution surcharge was imposed as of June 1, 2019 for the rest of 2019, increasing to a 10% surcharge rate beginning January 1, 2020 in addition to the contribution rate specified in the applicable collective bargaining agreements. The contribution surcharge ends when an employer begins contributing under a collective bargaining agreement that includes terms consistent with the rehabilitation plan.
In April 2019, the Company received notifications from the Boilermakers-Blacksmiths National Pension Trust (Blacksmiths Trust) that it was certified by its actuary as being in “red” zone status for the plan year beginning January 1, 2019. A rehabilitation plan has been adopted for the Blacksmiths Trust, and the Company and the Blacksmiths union agreed to adopt the rehabilitation plan in 2019 prior to a contribution surcharge being imposed. In April 2020, the funding status improved for the Blacksmiths Trust as it was certified by its actuary as being in the “yellow” zone for the plan year beginning January 1, 2020.
(2)The “FIP / RP Status Pending / Implemented” column indicates whether a Funding Improvement Plan, as required under the Code by plans in the “yellow” zone, or a Rehabilitation Plan, as required under the Code to be adopted by plans in the “red” or “deep red” zones, is pending or has been implemented as of the end of the plan year that ended in 2020.
(3)The “Surcharge Imposed” column indicates whether ATI’s contribution rate for 2020 included an amount in addition to the contribution rate specified in the applicable collective bargaining agreement, as imposed by a plan in “critical status” or “critical and declining status”, in accordance with the requirements of the Code.
(4)The Company is party to five separate bargaining agreements that require contributions to this plan. Expiration dates of these collective bargaining agreements range between November 14, 2021 and July 14, 2022.
Note 17. Accumulated Other Comprehensive Income (Loss)
The changes in AOCI by component, net of tax, for the fiscal years ended December 31, 2020, 2019 and 2018 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Post-
retirement
benefit plans | | Currency
translation
adjustment | | Derivatives | | | Deferred Tax Asset Valuation Allowance | | Total | | |
| Balance, December 31, 2017 | $ | (954.5) | | | $ | (53.5) | | | $ | 9.0 | | | $ | (28.8) | | | $ | (1,027.8) | | | |
| OCI before reclassifications | | (107.2) | | | | (20.4) | | | | (4.9) | | | | 0 | | | (132.5) | | | |
| Amounts reclassified from AOCI | (a) | 55.9 | | | (b) | 0 | | | (c) | (8.9) | | | (d) | (20.5) | | | 26.5 | | | |
| Net current-period OCI | | (51.3) | | | | (20.4) | | | | (13.8) | | | | (20.5) | | | (106.0) | | | |
| Balance, December 31, 2018 | | (1,005.8) | | | | (73.9) | | | | (4.8) | | | | (49.3) | | | (1,133.8) | | | |
| OCI before reclassifications | | (141.6) | | | | (2.7) | | | | 7.4 | | | | 0 | | | (136.9) | | | |
| Amounts reclassified from AOCI | (a) | 64.3 | | | (b) | 0 | | | (c) | (3.1) | | | (d) | 7.8 | | | 69.0 | | | |
| Net current-period OCI | | (77.3) | | | | (2.7) | | | | 4.3 | | | | 7.8 | | | (67.9) | | | |
| Balance, December 31, 2019 | | (1,083.1) | | | | (76.6) | | | | (0.5) | | | | (41.5) | | | (1,201.7) | | | |
| OCI before reclassifications | | (99.3) | | | | 21.1 | | | | (2.0) | | | | 0 | | | (80.2) | | | |
| Amounts reclassified from AOCI | (a) | 62.5 | | | (b) | 0 | | | (c) | 4.6 | | | (d) | (8.8) | | | 58.3 | | | |
| Net current-period OCI | | (36.8) | | | | 21.1 | | | | 2.6 | | | | (8.8) | | | (21.9) | | | |
| Balance, December 31, 2020 | $ | (1,119.9) | | | $ | (55.5) | | | $ | 2.1 | | | $ | (50.3) | | | $ | (1,223.6) | | | |
| | | | | | | | | | | | | | | |
| Attributable to noncontrolling interests: | | | | | | | | | | | | | | | |
| Balance, December 31, 2017 | $ | 0 | | | $ | 17.3 | | | $ | 0 | | | $ | 0 | | | $ | 17.3 | | | |
| OCI before reclassifications | | 0 | | | | (6.2) | | | | 0 | | | | 0 | | | (6.2) | | | |
| Amounts reclassified from AOCI | | 0 | | | (b) | 0 | | | | 0 | | | | 0 | | | 0 | | | |
| Net current-period OCI | | 0 | | | | (6.2) | | | | 0 | | | | 0 | | | (6.2) | | | |
| Balance, December 31, 2018 | | 0 | | | | 11.1 | | | | 0 | | | | 0 | | | 11.1 | | | |
| OCI before reclassifications | | 0 | | | | (1.3) | | | | 0 | | | | 0 | | | (1.3) | | | |
| Amounts reclassified from AOCI | | 0 | | | (b) | 0 | | | | 0 | | | | 0 | | | 0 | | | |
| Net current-period OCI | | 0 | | | | (1.3) | | | | 0 | | | | 0 | | | (1.3) | | | |
| Balance, December 31, 2019 | | 0 | | | | 9.8 | | | | 0 | | | | 0 | | | 9.8 | | | |
| OCI before reclassifications | | 0 | | | | 11.4 | | | | 0 | | | | 0 | | | 11.4 | | | |
| Amounts reclassified from AOCI | | 0 | | | (b) | 0 | | | | 0 | | | | 0 | | | 0 | | | |
| Net current-period OCI | | 0 | | | | 11.4 | | | | 0 | | | | 0 | | | 11.4 | | | |
| Balance, December 31, 2020 | $ | 0 | | | $ | 21.2 | | | $ | 0 | | | $ | 0 | | | $ | 21.2 | | | |
(a)Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 16).
(b)No amounts were reclassified to earnings.
(c)Amounts related to derivatives are included in cost of goods sold or interest expense in the period or periods the hedged item affects earnings (see Note 14).
(d) Represents the net change in deferred tax asset valuation allowances on changes in AOCI balances between the balance sheet dates. The 2019 income tax provision includes $6.0 million of tax expense for the recognition of a stranded deferred tax balance arising from deferred tax valuation allowances that was associated with a cash flow hedge portfolio that fully settled in the fourth quarter of 2019.
Other comprehensive income (loss) amounts (OCI) reported above by category are net of applicable income tax expense (benefit) for each year presented. Income tax expense (benefit) on OCI items is recorded as a change in a deferred tax asset or liability. Amounts recognized in OCI include the impact of any deferred tax asset valuation allowances, when applicable. Foreign currency translation adjustments, including those pertaining to noncontrolling interests, are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Reclassifications out of AOCI for the fiscal years ended December 31, 2020, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount reclassified from AOCI (c) | | | |
| | Fiscal year ended | | | |
Details about AOCI Components (In millions) | | December 31, 2020 | | | | December 31, 2019 | | December 31, 2018 | | | Affected line item in the
consolidated statement of operations |
| Postretirement benefit plans | | | | | | | | | | | |
| Prior service credit | | $ | 3.1 | | | (a) | | $ | 2.6 | | (a) | $ | 2.6 | | (a) | | |
| Actuarial losses | | (85.3) | | | (a) | | (87.2) | | (a) | (76.5) | | (a) | | |
| | (82.2) | | | (c) | | (84.6) | | (c) | (73.9) | | (c) | | Total before tax |
| | (19.7) | | | | | (20.3) | | | (18.0) | | | | Tax benefit (d) |
| | $ | (62.5) | | | | | $ | (64.3) | | | $ | (55.9) | | | | Net of tax |
| | | | | | | | | | | |
| Derivatives | | | | | | | | | | | |
| Nickel and other raw material contracts | | $ | (0.8) | | | (b) | | $ | 5.1 | | (b) | $ | 10.2 | | (b) | | |
| Natural gas contracts | | (3.7) | | | (b) | | (1.2) | | (b) | 0.5 | | (b) | | |
| Foreign exchange contracts | | (0.1) | | | (b) | | 0.7 | | (b) | 1.3 | | (b) | | |
| Interest rate swap | | (1.4) | | | (b) | | (0.5) | | (b) | (0.3) | | (b) | | |
| | (6.0) | | | (c) | | 4.1 | | (c) | 11.7 | | (c) | | Total before tax |
| | (1.4) | | | | | 1.0 | | | 2.8 | | | | Tax provision (benefit) (d) |
| | $ | (4.6) | | | | | $ | 3.1 | | | $ | 8.9 | | | | Net of tax |
| | | | | | | | | | | |
(a)Amounts are included in nonoperating retirement benefit expense (see Note 16).
(b)Amounts related to derivatives, with the exception of the interest rate swap are included in cost of goods sold in the period or periods the hedged item affects earnings. Amounts related to the interest rate swap are included in interest expense in the same period as the interest expense on the Term Loan is recognized in earnings (see Note 14).
(c)For pretax items, positive amounts are income and negative amounts are expense in terms of the impact to net income. Tax effects are presented in conformity with ATI’s presentation in the consolidated statements of operations.
(d)These amounts exclude the impact of any deferred tax asset valuation allowances, when applicable, including recognition of stranded balances (see Note 19 for further explanation).
Note 18. Stockholders’ Equity
Preferred Stock
Authorized preferred stock may be issued in one or more series, with designations, powers and preferences as shall be designated by the Board of Directors. At December 31, 2017,2020, there were no0 shares of preferred stock issued.
Common StockDividends
On November 7, 2017,Under the ABL facility, there is no limit on dividend declarations or payments provided that the undrawn availability, after giving effect to a particular dividend payment, is at least the greater of $150 million and 30% of the maximum revolving credit availability, and no event of default under the ABL facility has occurred and is continuing or would result from paying the dividend. In addition, there is no limit on dividend declarations or payments if the undrawn availability is less than the greater of $150 million and 30% of the maximum revolving credit advance amount but more than the greater of $75 million and 15% of the maximum revolving credit advance amount, if (i) no event of default has occurred and is continuing or would result from paying the dividend, (ii) the Company issued 17demonstrates to the administrative agent that, prior to and after giving effect to the payment of the dividend (A) the undrawn availability, as measured both at the time of the dividend payment and as an average for the 60 consecutive day period immediately preceding the dividend payment, is at least the greater of $75 million sharesand 15% of common stock at $24.00 per share before expenses in an underwritten registered public offering. This equity offering resulted in proceeds, net of transaction costs, of $397.8 million. In December 2017,the maximum revolving credit availability, and (B) the Company usedmaintains a fixed charge coverage ratio of at least 1.00:1.00, as calculated in accordance with the proceeds from the equity offering to redeem allterms of the 2019 Notes (see Note 8).ABL facility.
Share-based Compensation
During 2007,In May 2020, the Company adoptedCompany’s stockholders approved the Allegheny Technologies Incorporated 20072020 Incentive Plan (the “2007 Incentive Plan”), which was amended and restated in 2010 and further amended in 2012, and in 2015, the Company adopted the Allegheny Technologies Incorporated 2015 Incentive Plan (the “2015“2020 Incentive Plan”). In May 2017, the Company adopted the Allegheny Technologies Incorporated 2017 Incentive Plan (the “2017 Incentive Plan”).
UponFollowing adoption, of the 2017 Incentive Plan, all new share-based compensation awards are being made under the 20172020 Incentive Plan. Shares previously remaining available for grant under the 2015 Incentive Plan,prior incentive plans, or which become available for award due to the forfeiture or cancellation of prior awards under the 2015 Incentive Plan,those prior plans, are available for award under the 2017 Incentive Plan. Shares that are subject to awards under the 2007 Incentive Plan that are canceled or forfeited do not become available for use under the 20172020 Incentive Plan. Outstanding grants previously made under the 2015 Incentive Plan or the 2007 Incentive Planprior incentive plans remain in effect in accordance with their terms and the terms of their respective Plan.relevant terms.
Awards earned under the Company’s share-based incentive compensation programs are generally paid with shares held in treasury, if sufficient treasury shares are held, and any additional required share payments are made with newly issued shares. At December 31, 2017, 5.62020, 5.3 million shares of common stock were available for future awards under the 20172020 Incentive Plan. The general terms of each arrangement granted under the 2007 Incentive Plan, the 2015 Incentive Plan or the 20172020 Incentive Plan, and predecessor plans, the method of estimating fair value for each arrangement, and award activity is reported below.
Beginning in 2016, the Company implemented a new share-based incentive compensation program, the Long-Term Incentive Plan (LTIP). The LTIP consists of both Restricted Share Units (RSU) and Performance Share Units (PSU).
For years prior to 2016, the The Company’s two principalprevious share-based incentive compensation programs were theprogram included a Performance/Restricted Stock Program (PRSP) of nonvested stock awards for which vesting and the Long-Term Performance Plan (LTPP). The LTPP was adopted in 2014 and included performance shares under the Total Shareholder Return (TSR) portion and nonvested stock awards under the Long-Term Shareholder Value (LTSV) portion.expense continued into fiscal year 2020 for certain participants.
Nonvested stock awards/units:
Restricted Share Units:In 2016 and 2017, awards of RSUs were granted to employees, with service conditions. Units:RSUs are rights to receive shares of Company stock when the award vests. The RSUs generally vest over three years based on employment service, with one-third of the award vesting on each of the first, second and third anniversaries of the grant date. RSU awards to non-employee directors vest in one year. No dividends are accumulated or paid on the RSUs. The fair value of the RSU award is measured based on the stock price at the grant date. In 2016 and 2017, 587,661 and 320,679 RSUs, respectively, were awarded to employees under the LTIP. In February 2017, one-third of the 2016 RSU award vested, comprising 190,421 shares.
Nonvested stock awards:awards: Prior to 2016, awards of nonvested stock were granted to employees under the PRSP, with either performance and/or service conditions. Awards of nonvested stock are also granted to non-employee directors, with service conditions. For nonvested stock awards, dividend equivalents, whether in stock or cash form, accumulate but are not paid until the underlying award vests.
LTSV awards vest at the end of a three-year measurement period subject to the achievement, in whole or in part, of specified operational goals. At December 31, 2017, 60% of the operational goals for the 2015 LTSV were attained and 122,882 shares vested. All of the operational goals for the 2014 LTSV award were attained at December 31, 2016, and 116,989 shares vested.
The fair value of nonvested stock awards is measured based on the stock price at the grant date, adjusted for non-participating dividends, as applicable, based on the current dividend rate. For nonvested stock awards to employees in 2012, 2013, 2014 and 2015 under the Company’s PRSP, one-half of the nonvested stock (“performance shares”) vestsvested only on the attainment of an income target, measured cumulatively over a three-year period. The remaining nonvested stock awarded to most employees under the 2015 PRSP vests over a service period of three years; for certain senior executives this service period is five years for the 2015 award. The remaining PRSP nonvested stock awarded to employees under the 2012, 2013 and 2014 vestsvest over a service period of five years, with accelerated vesting to three years if the performance shares’ vesting criterion iswas attained. Expense for each of these awards iswas recognized based on estimates of attaining the performance criterion, including estimated forfeitures. The three-year cumulative income statement metrics for the 2012,in 2013, 2014 and 2015 PRSP awards were not met, and the
performance share forfeituresportions were 171,083 shares, 244,899 shares, 214,571 shares, and 196,196 shares, respectively.forfeited. The remaining service portion of the 2012 PRSP, comprising of 166,929 shares, vested in February 2017. The remaining service portion of the 2015 PRSP for all employees except certain senior executives, comprising of 126,585 shares, vested at December 31, 2017. Vesting of the remaining service portionportions of the 2013, and 2014 PRSP awards and the 2015 PRSP awards for certain senior executives continues overvested at the five-yearcompletion of the applicable service periods through February 2018, 2019, and 2020, respectively.
periods.
Compensation expense related to all nonvested stock awards and units was $9.6 million in 2020, $9.8 million in 2017, $11.22019, and $9.7 million in 2016, and $5.5 million in 2015. Reduced compensation expense in 2015 is primarily the result of changes in estimates that PRSP award performance shares would vest.2018. Approximately $7.3$6.5 million of unrecognized fair value compensation expense relating to nonvested stock awards and restricted stock units is expected to be recognized through 2020,2023, including $4.6$4.8 million expected to be recognized in 2018,2021, based on estimated service period forfeitures. Activity under the Company’s nonvested stock awards and restricted share units for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Shares in thousands, $ in millions) | | 2020 | | 2019 | | 2018 |
| | | Number of
shares/units | | Weighted
Average
Grant Date
Fair Value | | Number of
shares/units | | Weighted
Average Grant
Date Fair
Value | | Number of
shares | | Weighted
Average Grant
Date Fair
Value |
| Nonvested, beginning of year | | 756 | | | $ | 19.6 | | | 1,055 | | | $ | 23.7 | | | 1,320 | | | $ | 27.9 | |
| Granted | | 647 | | | 10.1 | | | 396 | | | 10.8 | | | 290 | | | 7.8 | |
| Vested | | (450) | | | (11.2) | | | (681) | | | (14.5) | | | (540) | | | (11.7) | |
| Forfeited | | (24) | | | (0.6) | | | (14) | | | (0.4) | | | (15) | | | (0.3) | |
| Nonvested, end of year | | 929 | | | $ | 17.9 | | | 756 | | | $ | 19.6 | | | 1,055 | | | $ | 23.7 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| (Shares in thousands, $ in millions) | | 2017 | | 2016 | | 2015 |
| | | Number of shares/units | | Weighted Average Grant Date Fair Value | | Number of shares/units | | Weighted Average Grant Date Fair Value | | Number of shares | | Weighted Average Grant Date Fair Value |
| Nonvested, beginning of year | | 1,852 |
| | $ | 51.5 |
| | 1,652 |
| | $ | 57.0 |
| | 1,376 |
| | $ | 47.8 |
|
| Granted | | 378 |
| | 7.1 |
| | 682 |
| | 8.4 |
| | 669 |
| | 20.8 |
|
| Vested | | (640 | ) | | (18.4 | ) | | (154 | ) | | (4.3 | ) | | (23 | ) | | (0.8 | ) |
| Forfeited | | (270 | ) | | (7.7 | ) | | (328 | ) | | (9.6 | ) | | (370 | ) | | (10.8 | ) |
| Nonvested, end of year | | 1,320 |
| | $ | 32.5 |
| | 1,852 |
| | $ | 51.5 |
| | 1,652 |
| | $ | 57.0 |
|
Performance awards:
Performance Share Units:Units: In 2016, the Company established the PSU award. PSU award opportunities are determined at a target number of shares, and the number of shares awarded is based on attainment of two ATI financial performance metrics. The metrics measuringfor awards through 2018 measured (1) net income attributable to ATI and (2) return on invested capital, over a three-year performance period. The metrics for the 2019 and 2020 awards measured (1) net income attributable to ATI and (2) return on capital employed, over a three-year performance period. For certain senior executives, the number of PSUs to be awarded based on the performance criteria is modified up or down by up to 20% based on the Company’s relative total shareholder return over the performance measurement period (“TSR Modifier”), but not above the maximum number of PSUs to be vested. The TSR Modifier is measured as the return of the Company’s stock price (including assumed dividend reinvestment, if any) at the end of the performance period as compared to the stock prices (including assumed dividend reinvestment, if any) of a group of industry peers. The fair value of the PSU award is measured based on the stock price at the grant date, including the effect of the TSR Modifier. The fair value of the TSR Modifier is estimated using Monte Carlo simulations of stock price correlation, projected dividend yields and other variables over a three-year time horizon matching the TSR performance measurement period.
In 20162018, 2019 and 2017,2020, the Company awarded 936,558456,318, 479,364 and 589,612673,962 share units, respectively, at the target level.level with a weighted average grant date fair value of $12.9 million, $14.7 million and $13.5 million, respectively. The 20162018, 2019 and 20172020 PSU performance, and share units, each have a threshold attainment of 25% and a maximum attainment of 150%200% of the target financial performance metrics and target share units, measured over the applicable three-year performance period. At December 31, 2017,2020, a maximum of 2.2 million shares have been reserved for issuance for the PSU awards. At December 31, 2020, the 2018 PSU awards tovested between threshold and target attainment, and at -10% for the 150%TSR Modifier, resulting in 301,170 shares being issued in early 2021. At December 31, 2019, the 2017 PSU awards vested above target attainment level. and at +20% for the TSR Modifier, resulting in the issuance of 669,898 shares. At December 31, 2018, the 2016 PSU awards vested with financial performance attainment between threshold and target and at +20% for the TSR Modifier, resulting in the issuance of 329,897 shares.
Aggregate compensation expense recognized over the three year performance periods for the 20162019 and 20172020 PSU awards could range from zero0 to $33.3$52 million, including estimated forfeitures, based on the actual financial performance attained. Compensation expense for the PSUs during the performance period is recognized based on estimates of attaining the performance criteria, including estimated forfeitures, which is evaluated on a quarterly basis. The Company recognized $1.9$11.4 million and $3.8$14.6 million of compensation expense in 20162018 and 2017,2019, respectively, for the PSU awards.awards, and compensation income of $6.7 million in 2020 due to decreased financial performance attainment estimates, which required reversal of previously-recognized expense. As of December 31, 2017,2020, ATI estimates achieving financialprojects that performance attainment will be below threshold for both the 20162019 and 2020 PSU award between the threshold and target levels, and approximately at the target level for the 2017 PSU award.awards. Based on these estimates, there is $8.8 million of0 cumulative unrecognized compensation expense
remaining for the PSU awards, including estimated forfeitures, which is expected to be recognized over the remaining performance periods through fiscal yearawards. Forfeited share units in 2018, 2019 including $4.9and 2020 were 21,848, 48,598 and 50,050, respectively, with a weighted average grant date fair value of $0.5 million, expected to be recognized in 2018. Activity under the Company’s PSUs at target for the years ended December 31, 2017$1.1 million and 2016 was as follows:$1.4 million, respectively.
|
| | | | | | | | | | | | | | |
| (Shares in thousands, $ in millions) | | 2017 | | 2016 |
| | | Number of shares/units | | Weighted Average Grant Date Fair Value | | Number of shares/units | | Weighted Average Grant Date Fair Value |
| Nonvested, beginning of year | | 919 |
| | $ | 11.3 |
| | — |
| | $ | — |
|
| Granted | | 590 |
| | 12.4 |
| | 937 |
| | 11.5 |
|
| Forfeited | | (68 | ) | | (1.0 | ) | | (18 | ) | | (0.2 | ) |
| Nonvested, end of year | | 1,441 |
| | $ | 22.7 |
| | 919 |
| | $ | 11.3 |
|
Total Shareholder Return: Award opportunities under the TSR portion of the formerly-used LTPP incentive compensation program are determined at a target number of shares, and performance equity awards pay out based on the measured return of the Company’s stock price and dividend performance at the end of three-year periods as compared to the stock price and dividend performance of a group of industry peers. The actual number of shares awarded at the end of the performance measurement period may range from a minimum of zero to a maximum of two times target. Fair values for these performance awards were estimated using Monte Carlo simulations of stock price correlation, projected dividend yields and other variables over three-year time horizons matching the total shareholder return performance measurement periods. Compensation expense was $3.6 million in 2017, $6.6 million in 2016, and $10.6 million in 2015 for the TSR awards.
Based on the Company’s stock price and dividend performance for the three-year period ended December 31, 2017 relative to the peer group, no award for the 2015-2017 TSRP performance period was earned. At December 31, 2017, there are no remaining TSR awards under the LTPP outstanding.
Note 14.19. Income Taxes
Income (loss) before income taxes for the Company’s U.S. and non-U.S. operations was as follows:
| | | (In millions) | | 2017 | | 2016 | | 2015 | (In millions) | | 2020 | | 2019 | | 2018 |
| U.S. | | $ | (119.8 | ) | | $ | (782.1 | ) | | $ | (534.6 | ) | U.S. | | $ | (1,505.4) | | | $ | 190.2 | | | $ | 190.8 | |
| Non-U.S. | | 33.3 |
| | 48.1 |
| | 56.6 |
| Non-U.S. | | 23.5 | | | 51.4 | | | 56.9 | |
| Loss before income taxes | | $ | (86.5 | ) | | $ | (734.0 | ) | | $ | (478.0 | ) | |
| Income (loss) before income taxes | | Income (loss) before income taxes | | $ | (1,481.9) | | | $ | 241.6 | | | $ | 247.7 | |
The income tax provision (benefit) was as follows:
| | | (in millions) | | 2017 | | 2016 | | 2015 | |
| (In millions) | | (In millions) | | 2020 | | 2019 | | 2018 |
| Current: | | | | | | | Current: | | | | | | |
| Federal | | $ | (0.8 | ) | | $ | 0.5 |
| | $ | (60.7 | ) | Federal | | $ | 0.6 | | | $ | 2.2 | | | $ | 1.0 | |
| State | | (1.3 | ) | | (1.5 | ) | | (0.4 | ) | State | | (1.1) | | | 0.2 | | | (0.8) | |
| Foreign | | 6.2 |
| | 14.4 |
| | 9.4 |
| Foreign | | 6.7 | | | 8.1 | | | 10.1 | |
| Total | | 4.1 |
| | 13.4 |
| | (51.7 | ) | Total | | 6.2 | | | 10.5 | | | 10.3 | |
| Deferred: | | | | | | | Deferred: | | | | | | |
| Federal | | 2.4 |
| | (115.8 | ) | | (90.9 | ) | Federal | | 26.6 | | | (4.6) | | | 1.3 | |
| State | | (14.4 | ) | | (3.5 | ) | | 30.4 |
| State | | 47.1 | | | (40.4) | | | (0.5) | |
| Foreign | | 1.1 |
| | (1.0 | ) | | 0.1 |
| Foreign | | (2.2) | | | 6.0 | | | (0.1) | |
| Total | | (10.9 | ) | | (120.3 | ) | | (60.4 | ) | Total | | 71.5 | | | (39.0) | | | 0.7 | |
| Income tax benefit | | $ | (6.8 | ) | | $ | (106.9 | ) | | $ | (112.1 | ) | |
| Income tax provision (benefit) | | Income tax provision (benefit) | | $ | 77.7 | | | $ | (28.5) | | | $ | 11.0 | |
The following is a reconciliation of income taxes computed at the statutory U.S. Federal income tax rate to the actual effective income tax benefit:provision (benefit):
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Taxes computed at the federal rate | | $ | (311.2) | | | $ | 50.7 | | | $ | 52.0 | |
| Goodwill impairment | | 50.4 | | | 0 | | | 0 | |
| State and local income taxes, net of federal tax benefit | | (0.2) | | | 0.3 | | | (0.5) | |
| Valuation allowance | | 335.5 | | | (90.1) | | | (48.0) | |
| Repatriation of foreign earnings (GILTI ) | | 0.2 | | | 3.5 | | | 5.4 | |
| Restructuring | | 0 | | | 4.2 | | | 0 | |
| Impacts of U.S. Tax Act | | — | | | — | | | 5.9 | |
| Foreign earnings taxed at different rate | | 1.7 | | | 2.7 | | | 3.2 | |
| Adjustment to prior years’ taxes | | 0 | | | 0 | | | (5.8) | |
| Withholding taxes | | 2.1 | | | 2.7 | | | 2.7 | |
| Preferential tax rate | | (4.6) | | | (4.1) | | | (4.8) | |
| Other | | 3.8 | | | 1.6 | | | 0.9 | |
| Income tax provision (benefit) | | $ | 77.7 | | | $ | (28.5) | | | $ | 11.0 | |
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Taxes computed at the federal rate | | $ | (30.3 | ) | | $ | (256.9 | ) | | $ | (167.3 | ) |
| Goodwill impairment | | 36.6 |
| | — |
| | — |
|
| State and local income taxes, net of federal tax benefit | | — |
| | (26.8 | ) | | (20.6 | ) |
| Valuation allowance | | (14.5 | ) | | 171.5 |
| | 74.5 |
|
| Repatriation of foreign earnings | | 14.2 |
| | 2.1 |
| | 13.4 |
|
| Change in federal tax rate and law change | | (4.1 | ) | | — |
| | — |
|
| Foreign earnings taxed at different rate | | (7.2 | ) | | (5.3 | ) | | (11.2 | ) |
| Adjustment to prior years’ taxes | | (5.2 | ) | | 3.4 |
| | (5.4 | ) |
| Foreign exchange differences | | 2.6 |
| | — |
| | — |
|
| Withholding taxes | | 2.2 |
| | — |
| | — |
|
| Other | | (1.1 | ) | | 5.1 |
| | 4.5 |
|
| Income tax benefit | | $ | (6.8 | ) | | $ | (106.9 | ) | | $ | (112.1 | ) |
We recognizeThe Company recognizes deferred tax assets to the extent that we believe thatit believes these deferred tax assets are more likely than not to be realized. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. In making such determination, we considerthe Company considers all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimate future taxable income exclusive of temporary
differences and tax planning strategies. In situations where a three yearthree-year cumulative loss conditionposition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets.assets is subjective. If we determinethe Company determines that weit would not be able to realize ourits deferred tax assets in the future in excess of their recorded net amount, we would make an adjustment to the deferred tax asset valuation allowance.allowance would result.
Since 2015, the Company’s results have reflectedIn 2020, ATI’s U.S. operations returned to a three yearthree-year cumulative loss from U.S. operations. Asposition, limiting the ability to utilize future projections as verifiable sources of income when analyzing the need for a result,valuation allowance. The consolidated income tax provision for fiscal year 2020 includes a $335.5 million increase to the Company established $74.5 million in deferred tax asset valuation allowances in 2015,allowance based on an analysis of which $68.4 million were for certainthe expected more likely than not realization of deferred tax assets and liabilities within applicable expiration periods, primarily on U.S. federal and state tax attributes.
Previously, at December 31, 2019, the Company’s U.S. results reported a three-year cumulative income position, allowing the Company to utilize forecasts of future profits as a verifiable source of income when evaluating whether it was more likely than not that the deferred tax assets. In 2016,assets would be realized. The Company determined that a valuation allowance on certain net deferred tax asset balances for federal and certain state jurisdictions were no longer required. Certain individual tax attributes still required a valuation allowance based on the actionsexpected utilization of the tax attributes was not more likely than not to indefinitely idlebe realized by the Rowley, UT titanium sponge production facility (see Note 16Company. The change in the overall valuation allowance for further information) resulted2019 included amounts utilized during the year as part of the reported effective tax rate, as well as a $45.1 million reduction at December 31, 2019 based on a change in a reassessment ofjudgment on the realizability of U.S. federal deferred tax assets. In 2016, the Company’s results of operations included an increase to deferred tax asset valuation allowances of $171.5 million, including an additional $165.8 million valuation allowance on federal and state deferred tax assets. In addition, the
The Company establishedalso maintained valuation allowances on deferred tax amounts recorded in accumulated other comprehensive incomeloss in 20162018, 2019 and 20172020 of $45.6$49.3 million, $41.5 million and $28.8$50.3 million, respectively, which are not reflected in the preceding table reconciling amounts recognized in the income tax benefitprovision (benefit) recorded onin the statement of operations (see Note 12)17).
The 2019 income tax provision includes $6.0 million of tax expense for the recognition of a stranded deferred tax balance in accumulated other comprehensive loss arising from deferred tax valuation allowances that was associated with a cash flow hedge portfolio that fully settled in the fourth quarter of 2019. See Notes 14 and 17 for additional information on cash flow hedge activity.
On December 22, 2017,March 27, 2020, the U.S. government enacted comprehensivethe Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the global COVID-19 pandemic. The CARES Act enacted tax legislation commonly referredcredits and various temporary changes to ascurrent tax regulations. Changes impacting the Company’s tax provision include the following:
•As part of the Tax Cuts and Jobs Act (the “Tax Act”).(Tax Act) in 2017, a new limitation on deductible interest expense was created, for which the Company was limited to deductible interest expense based upon 30% of adjusted taxable income. As part of the CARES Act, the limitation was increased from 30% of adjusted taxable income to 50% of adjusted taxable income for tax years 2019 and 2020. Additionally, a taxpayer is able to utilize the 2019 adjusted taxable income calculation for the 2020 tax year. The Company did not have a limitation for the 2019 tax year with the change in limitation percentage, therefore no limitation was calculated as part of the 2020 tax provision.
•Deferral of payments related to payroll taxes. The employer portion of the Social Security payroll tax payments related to tax year 2020 were deferred beginning in April 2020 and will be paid in two installments: one-half on December 31, 2021 and the remaining one-half on December 31, 2022. The Company disallowed the expense and established a deferred tax asset which will be deductible when the payments are made in 2021 and 2022.
In 2018, the Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to:
(1) reducing the U.S. federal corporate tax rate from 35% to 21%;
(2) requiringrequired companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;subsidiaries, with $5.9 million included in the 2018 tax provision, shown as “Impact of U.S. tax reform” in 2018.
(3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries;
(4) requiringAdditionally, the Tax Act, requires a current year inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations;corporations, commonly referred to as Global Intangible Low-Taxed Income (GILTI). The impact in 2020 related to GILTI is minimal due to the global COVID-19 pandemic. In 2019 and 2018, the Company utilized pre-January 1, 2018 net operating losses (NOLs) to offset the 2019 income inclusion of $16.8 million ($3.5 million net tax effect) and to offset the 2018 income inclusion of $25.7 million ($5.4 million net tax effect). The Company has elected to recognize GILTI liabilities as an element of income tax expense in the period incurred.
(5) eliminatingIn 2018, the corporate alternative minimumCompany was granted a preferential tax (AMT)rate related to the STAL PRS joint venture operations in China for tax years 2018 through 2020. The preferential tax rate is 15%, compared to the statutory rate of 25%. As of December 31, 2020, the preferential tax rate has expired and changing how existing AMT credits can be realized;
(6) creating the base erosion anti-abuseCompany will prospectively utilize the 25% statutory tax (BEAT),rate pending a ruling by the Chinese government on a new minimum tax;preferential tax rate application.
(7) creating a new limitation on deductible interest expense; and
(8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
In connection with ATI’s initial analysis2019, the Company restructured certain foreign legal entities, including the elimination of the impactentities that were no longer cost-effective following changes of the Tax Act, the following Tax Act impacts within the current year financial statements have been accounted for as provisional estimated amounts, pending further information which includes final tax return filings, and additional analysis of foreign earnings and profits, and the Company expects to finalize adjustments by the fourth quarter of 2018. The change in the U.S. federal corporate tax rate from 35% to 21% resulted in a $2.6$4.2 million benefit as it relates to the re-measurement of indefinite lived deferred tax liabilities. The repeal of the alternative minimum tax resulted in a $1.5 million decrease in the deferred tax asset valuation allowance. The $4.1 million combination of these items is reflected above in the income tax benefit reconciliation on the line labeled as change in federal tax rate and law change. In addition to these adjustments, the Company calculated an estimateexpense related to the mandatory repatriation of foreign earnings resulting in 2017 federal taxable income of approximately $100 million, for which the Company expects to fully offset with the federalpreviously-recognized net operating loss carryover deferred tax asset.carryforwards.
The Company will finalize the calculation of the mandatory repatriation throughout 2018, but does not anticipate a tax charge. In addition to the items related to the Tax Act, the Company had a current year goodwill impairment charge related to the ATI Cast Products operations which did not have a tax basis, resulting in a $36.6 million tax charge included within the net tax benefit for 2017.
The Company continues to maintain a valuation allowance on the federal, state and some foreign net deferred tax assets as of December 31, 2017. Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense at December 31, 20172020 and 20162019 were as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 |
| Deferred income tax assets | | | | |
| Net operating loss tax carryovers | | $ | 309.4 | | | $ | 264.4 | |
| Pensions | | 153.8 | | | 155.5 | |
| Postretirement benefits other than pensions | | 86.5 | | | 83.8 | |
| Tax credits | | 37.7 | | | 42.6 | |
| Other items | | 82.9 | | | 86.1 | |
| Gross deferred income tax assets | | 670.3 | | | 632.4 | |
| Valuation allowance for deferred tax assets | | (461.8) | | | (94.5) | |
| Total deferred income tax assets | | 208.5 | | | 537.9 | |
| Deferred income tax liabilities | | | | |
| Bases of property, plant and equipment | | 119.2 | | | 364.2 | |
| Inventory valuation | | 53.3 | | | 65.5 | |
| Bases of amortizable intangible assets | | 12.5 | | | 23.7 | |
| Other items | | 35.9 | | | 27.0 | |
| Total deferred tax liabilities | | 220.9 | | | 480.4 | |
| Net deferred tax asset (liability) | | $ | (12.4) | | | $ | 57.5 | |
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Deferred income tax assets | | | | |
| Pensions | | $ | 158.0 |
| | $ | 294.9 |
|
| Postretirement benefits other than pensions | | 86.5 |
| | 129.5 |
|
| Net operating loss tax carryovers | | 336.1 |
| | 407.8 |
|
| Tax credits | | 92.6 |
| | 56.7 |
|
| Deferred compensation and other benefit plans | | 13.8 |
| | 25.7 |
|
| Other items | | 55.9 |
| | 107.4 |
|
| Gross deferred income tax assets | | 742.9 |
| | 1,022.0 |
|
| Valuation allowance for deferred tax assets | | (274.0 | ) | | (291.4 | ) |
| Total deferred income tax assets | | 468.9 |
| | 730.6 |
|
| Deferred income tax liabilities | | | | |
| Bases of property, plant and equipment | | 375.3 |
| | 547.1 |
|
| Inventory valuation | | 50.0 |
| | 77.6 |
|
| Bases of amortizable intangible assets | | 38.7 |
| | 65.6 |
|
| Other items | | 7.0 |
| | 43.9 |
|
| Total deferred tax liabilities | | 471.0 |
| | 734.2 |
|
| Net deferred tax liability | | $ | (2.1 | ) | | $ | (3.6 | ) |
Federal deferred tax asset and liability balances at December 31, 2017 have been remeasured as a result of the Tax Act legislation, including the impact of the new 21% U.S. federal tax rate. Additionally, deferred tax balances at December 31, 2016 have been restated to correct classification differences between certain deferred tax assets, liabilities, and the valuation allowance, which was not material to reported results. The correction increased both total deferred income tax assets and liabilities by $48.9 million, with no net impact to the ending balance sheet position.
The following summarizes the carryforward periods for the tax attributes related to net operating losses (NOL)NOLs and credits by jurisdiction. | | | ($ in millions) | | |
($ in millions, U.S. and U.K. NOL amounts are pre-tax and all other items are after-tax)
| | ($ in millions, U.S. and U.K. NOL amounts are pre-tax and all other items are after-tax)
| |
| Jurisdiction | Attribute | Amount | Expiration Period | Amount expiring within 5 years | Amount expiring in 5-20 years | Jurisdiction | Attribute | Amount | Expiration Period | Amount expiring within 5 years | Amount expiring in 5-20 years |
| U.S. | | U.S. | NOL | $800 | 20 years | $0 | $800 |
| U.S. | NOL | $980 | 20 years | $— | $980 | U.S. | NOL | $126 | Indefinite | $0 |
| U.S. | Foreign Tax Credit | $65 | 10 years | $19 | $46 | U.S. | Foreign Tax Credit | $22 | 10 years | $5 | $17 |
| U.S. | Research and Development Credit | $11 | 20 years | $— | $11 | U.S. | Research and Development Credit | $4 | 20 years | $0 | $4 |
| State | NOL | $168 | Various | $19 | $149 | State | NOL | $146 | Various | $31 | $115 |
| State | Credits | $23 | Various | $5 | $18 | State | NOL | $1 | Indefinite | $0 |
| State | | State | Credits | $11 | Various | $3 | $8 |
| U.K. | NOL | $6 | Indefinite | $— | U.K. | NOL | $39 | Indefinite | $0 |
| Luxembourg | NOL | $19 | Indefinite | $— | |
| Poland | Economic Zone Credit | $12 | 9 years | $— | $12 | Poland | Economic Zone Credit | $3 | 7 years | $0 | $3 |
Income taxes paid and amounts received as refunds were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Income taxes paid | | $ | 7.8 | | | $ | 15.1 | | | $ | 9.7 | |
| Income tax refunds received | | (2.5) | | | (9.2) | | | (1.6) | |
| Income taxes paid, net | | $ | 5.3 | | | $ | 5.9 | | | $ | 8.1 | |
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Income taxes paid | | $ | 10.4 |
| | $ | 8.6 |
| | $ | 10.8 |
|
| Income tax refunds received | | (7.1 | ) | | (10.5 | ) | | (63.3 | ) |
| Income taxes paid (received), net | | $ | 3.3 |
| | $ | (1.9 | ) | | $ | (52.5 | ) |
In general, the Company is responsible for filing consolidated U.S. Federal,federal, foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liability by the applicable taxing authorities. In 2016 and 2017, the Company received $7.3 million and $3.2 million, respectively, for federal tax refunds of prior years’ taxes paid.
Deferred taxes of $2.2$4.4 million have been recorded for foreign withholding taxes on earnings expected to be repatriated to the U.S. parent. The Company does not intend to distribute previously taxed earnings resulting from the approximately $100 million taxedone-time transition tax under the Tax Act, and has not recorded any deferred taxes related to such amounts. The remaining excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries is indefinitely reinvested, and the determination of any deferred tax liability on this amount is not practicable.
Uncertain tax positions are recorded using a two-step process based on (1) determining whether it is more likely than not thatmore-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those positions that meet the more-likely-than-not-recognitionmore-likely-than-not recognition threshold, the Company records the largest amount of the tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The changes in the liability for unrecognized income tax benefits for the years ended December 31, 2017, 20162020, 2019 and 20152018 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2020 | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 14.4 | | | $ | 14.7 | | | $ | 14.7 | |
| Increases in prior period tax positions | | 0 | | | 0 | | | 0 | |
| Decreases in prior period tax positions | | 0 | | | 0 | | | (0.1) | |
| Increases in current period tax positions | | 2.7 | | | 0.9 | | | 0.7 | |
| Expiration of the statute of limitations | | (1.9) | | | (1.2) | | | (0.6) | |
| Settlements | | 0 | | | 0 | | | 0 | |
| Balance at end of year | | $ | 15.2 | | | $ | 14.4 | | | $ | 14.7 | |
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 22.7 |
| | $ | 19.6 |
| | $ | 76.8 |
|
| Increases in prior period tax positions | | — |
| | 7.9 |
| | 4.3 |
|
| Decreases in prior period tax positions | | (0.7 | ) | | (0.1 | ) | | (0.2 | ) |
| Increases in current period tax positions | | 0.7 |
| | 0.6 |
| | 1.3 |
|
| Expiration of the statute of limitations | | (0.4 | ) | | (1.1 | ) | | (0.5 | ) |
| Settlements | | (7.6 | ) | | (4.2 | ) | | (62.1 | ) |
| Balance at end of year | | $ | 14.7 |
| | $ | 22.7 |
| | $ | 19.6 |
|
The liability atFor years ended December 31, 20172020, 2019 and 2018, the liability includes $11.7$13.0 million, $11.5 million and $12.1 million, respectively, of unrecognized tax benefits that are classified within deferred income taxes as a reduction of net operating loss carryforwards. We recognizeNOL carryforwards and other tax attributes. The total estimated unrecognized tax benefit that, if recognized, would affect ATI’s effective tax rate is approximately $2 million. At this time, the Company believes that it is reasonably possible that approximately $2 million of the estimated unrecognized tax benefits as of December 31, 2020 will be recognized within the next twelve months based on the expiration of statutory review periods.
The Company recognizes accrued interest and penalties related to uncertain tax positions as income tax expense. The amounts accrued for interest and penalty charges for the years ended December 31, 2017, 20162020, 2019 and 20152018 were not significant. At December 31, 20172020 and 2016,2019, the accrued liabilities for interest and penalties related to unrecognized tax benefits were $3.2$2.3 million.and $2.7 million, and $3.6 million, respectively.
For the year beginning January 1, 2015, $60.9 million of the liability for unrecognized income tax benefits related to temporary differences, which would not impact the effective tax rate upon resolution of the uncertainty. In 2015, the Company resolved these various uncertain tax position matters related to temporary differences which resulted in this $60.9 million long-term liability for uncertain tax positions to be reclassified to a deferred tax liability. The total estimated unrecognized tax benefit that, if recognized, would affect ATI’s effective tax rate is approximately $6 million. At this time, the Company believes that it is reasonably possible that approximately $1 million of the estimated unrecognized tax benefits as of December 31, 2017 will be recognized within the next twelve months based on the expiration of statutory review periods.
The Company, and/or one of its subsidiaries, files income tax returns in the U.S. Federalfederal jurisdiction and in various state and foreign jurisdictions. A summary of tax years that remain subject to examination, by major tax jurisdiction, is as follows:
|
| | | | | | | |
| Jurisdiction | | Earliest Year Open to
Examination |
| U.S. Federal | | 20162019 |
| States: | | |
| Pennsylvania | | 20142017 |
| Foreign: | | |
| China | | 20142017 |
| Poland | | 20112014 |
| United Kingdom | | 20152018 |
Note 15. Business Segments
The Company operates in two business segments: High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Over 75% of 2017 HPMC business segment sales are to the aerospace and defense markets, and nearly half of HPMC’s total sales are products for commercial jet engines. Other key HPMC end markets include medical, oil & gas, and electrical energy. HPMC produces, converts and distributes a wide range of high performance materials, and components, and advanced metallic powder alloys made from titanium and titanium-based alloys, nickel-based alloys and superalloys, and a variety of other specialty metals. These materials are made in a variety of product forms that include precision forgings, castings, machined parts and others.
The FRP segment serves a diverse group of end markets, with the oil & gas market, including chemical and hydrocarbon processing, and the automotive market collectively representing over 40% of 2017 sales. Other major end markets for FRP include food processing equipment and appliances, construction and mining, electronics, communication equipment and computers, and aerospace & defense. FRP produces, converts and distributes nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless steel in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip products. The business units in this segment include ATI Flat Rolled Products and STAL, in which the Company has a 60% ownership interest. Segment results also include ATI’s 50% interest in Uniti, which is accounted for under the equity method. See Note 5 for further information on the Company’s joint ventures.
The measure of segment operating profit excludes all effects of LIFO inventory accounting and any related changes in net realizable value inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, corporate expenses, net interest expense, closed operations and other expenses, charges for goodwill impairment (see Note 4), restructuring charges and other costs (see Note 16) and debt extinguishment charges (see Note 8). Management believes segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Intersegment sales are generally recorded at full cost or market. Common services are allocated on the basis of estimated utilization.
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Total sales: | | | | | | |
| High Performance Materials & Components | | $ | 2,127.0 |
| | $ | 1,979.5 |
| | $ | 2,062.7 |
|
| Flat Rolled Products | | 1,527.5 |
| | 1,260.8 |
| | 1,807.9 |
|
| Total sales | | 3,654.5 |
| | 3,240.3 |
| | 3,870.6 |
|
| Intersegment sales: | | | | | | |
| High Performance Materials & Components | | 59.6 |
| | 49.1 |
| | 76.8 |
|
| Flat Rolled Products | | 69.8 |
| | 56.6 |
| | 74.2 |
|
| Total intersegment sales | | 129.4 |
| | 105.7 |
| | 151.0 |
|
| Sales to external customers: | | | | | | |
| High Performance Materials & Components | | 2,067.4 |
| | 1,930.4 |
| | 1,985.9 |
|
| Flat Rolled Products | | 1,457.7 |
| | 1,204.2 |
| | 1,733.7 |
|
| Total sales to external customers | | $ | 3,525.1 |
| | $ | 3,134.6 |
| | $ | 3,719.6 |
|
Total international sales were $1,454.5 million in 2017, $1,277.1 million in 2016, and $1,577.0 million in 2015. Of these amounts, sales by operations in the United States to customers in other countries were $1,078.6 million in 2017, $971.4 million in 2016, and $1,215.8 million in 2015.
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Operating profit (loss): | | | | | | |
| High Performance Materials & Components | | $ | 246.4 |
| | $ | 168.7 |
| | $ | 157.1 |
|
| Flat Rolled Products | | 37.0 |
| | (163.0 | ) | | (241.9 | ) |
| Total operating profit (loss) | | 283.4 |
| | 5.7 |
| | (84.8 | ) |
| LIFO and net realizable value reserves (See Note 2) | | (0.2 | ) | | 0.8 |
| | 0.1 |
|
| Corporate expenses | | (50.5 | ) | | (43.4 | ) | | (44.7 | ) |
| Closed operations and other expenses | | (34.0 | ) | | (34.6 | ) | | (22.1 | ) |
| Restructuring and other charges (See Note 16) | | — |
| | (538.5 | ) | | (89.7 | ) |
| Impairment of goodwill (See Note 4) | | (114.4 | ) | | — |
| | (126.6 | ) |
| Debt extinguishment charge (See Note 8) | | (37.0 | ) | | — |
| | — |
|
| Interest expense, net | | (133.8 | ) | | (124.0 | ) | | (110.2 | ) |
| Loss before income taxes | | $ | (86.5 | ) | | $ | (734.0 | ) | | $ | (478.0 | ) |
In the third quarter of 2016, the Company announced the indefinite idling of the Rowley, UT titanium sponge facility and the consolidation of certain titanium manufacturing operations. See Note 16 for further explanation. Results for the HPMC segment exclude the Rowley operations beginning with the third quarter of 2016, with such operations being reported in closed operations and other expenses. In October 2016, the Company announced the closure of the Midland, PA commodity stainless operations and the Bagdad, PA grain-oriented electrical steel (GOES) finishing facility. These facilities were indefinitely idled earlier in 2016, and management concluded that the facilities could not be operated at an acceptable rate of return. See Note 16 for further explanation. Results for the FRP segment exclude the ongoing holding costs of these facilities beginning in October 2016, with such costs being reported in closed operations and other expenses.
Restructuring and other charges for the year ended December 31, 2016 are comprised of $471.3 million in long-lived asset impairment charges, $31.7 million of facility shutdown and idling costs, $24.2 million of employee benefit costs and $11.3 million of inventory valuation charges for titanium sponge that are classified in cost of sales (see Note 2 for additional information). The shutdown and idling costs primarily relate to the indefinite idling of the Company’s Rowley, UT titanium sponge facility, and the closures of the Midland, PA commodity stainless operations and the Bagdad, PA GOES finishing facility. The employee benefit costs largely relate to FRP severance charges for salaried workforce reductions and costs associated with the previously mentioned facility idlings and closures. Restructuring and other charges for the year ended December 31, 2015 include $54.5 million in long-lived asset impairment charges, $25.4 million of inventory valuation charges for non-PQ titanium sponge (see Note 2 for additional information) and charges for severance and facility idling costs. See Note 16 for additional information on restructuring charges.
Closed operations and other expenses, which were $34.0 million in 2017, $34.6 million in 2016 and $22.1 million in 2015, includes charges incurred in connection with closed operations and other non-operating income or expense. These items are primarily presented in selling and administrative expenses in the consolidated statements of operations. In 2017, these items included $22.7 million for costs at closed facilities, including legal matters and real estate and other facility costs, $7.3 million for negative foreign currency remeasurement impacts primarily related to our European Treasury Center operation, $2.9 million for closed operations environmental costs, and $4.8 million for retirement benefit expense. These 2017 costs were offset by a $3.7 million benefit for reductions in liabilities for legacy employee benefit programs. In 2016, the Company recorded $34.6 million in other charges primarily related to closed operations, including $5.8 million for environmental costs, $5.0 million for retirement benefit expense, and $23.8 million for other expenses including legal matters and real estate costs at closed operations, primarily for Rowley following the indefinite idling. In 2015, the Company recorded $22.1 million in other charges primarily related to closed operations, including $2.3 million for retirement benefit expense, $4.5 million for environmental costs, and $15.3 million for other expenses including legal matters and real estate costs at closed operations.
Certain additional information regarding the Company’s business segments is presented below:
|
| | | | | | | | | | | | |
| (In millions) | | 2017 | | 2016 | | 2015 |
| Depreciation and amortization: | | | | | | |
| High Performance Materials & Components | | $ | 109.3 |
| | $ | 118.4 |
| | $ | 131.8 |
|
| Flat Rolled Products | | 45.6 |
| | 48.8 |
| | 55.6 |
|
| Corporate | | 5.9 |
| | 3.1 |
| | 2.5 |
|
| Total depreciation and amortization | | $ | 160.8 |
| | $ | 170.3 |
| | $ | 189.9 |
|
| Capital expenditures: | | | | | | |
| High Performance Materials & Components | | $ | 62.7 |
| | $ | 89.9 |
| | $ | 75.8 |
|
| Flat Rolled Products | | 59.1 |
| | 111.8 |
| | 68.0 |
|
| Corporate | | 0.9 |
| | 0.5 |
| | 0.7 |
|
| Total capital expenditures | | $ | 122.7 |
| | $ | 202.2 |
| | $ | 144.5 |
|
|
| | | | | | | | | | | | |
| Identifiable assets: | | 2017 | | 2016 | | 2015 |
| High Performance Materials & Components | | $ | 2,662.3 |
| | $ | 2,744.3 |
| | $ | 3,355.5 |
|
| Flat Rolled Products | | 2,218.4 |
| | 2,056.4 |
| | 2,189.5 |
|
| Discontinued Operations | | 0.2 |
| | 0.4 |
| | 0.9 |
|
| Corporate: | | | | | | |
| Deferred Taxes | | 7.6 |
| | 12.1 |
| | — |
|
| Cash and cash equivalents and other | | 296.9 |
| | 356.8 |
| | 205.8 |
|
| Total assets | | $ | 5,185.4 |
| | $ | 5,170.0 |
| | $ | 5,751.7 |
|
In 2016, identifiable assets for the HPMC segment decreased by $521 million from December 31, 2015 as a result of the reporting change and the asset impairment charges for Rowley discussed above. In 2016, identifiable assets for the FRP segment decreased by $32 million from December 31, 2015 as a result of the reporting change to closed operations for the Midland and Bagdad facilities as discussed above.
|
| | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | 2017 | | Percent of total | | 2016 | | Percent of total | | 2015 | | Percent of total |
| External sales: | | | | | | | | | | | | |
| United States | | $ | 2,070.6 |
| | 59 | % | | $ | 1,857.5 |
| | 59 | % | | $ | 2,142.6 |
| | 58 | % |
| China | | 265.6 |
| | 7 | % | | 214.1 |
| | 7 | % | | 246.9 |
| | 7 | % |
| United Kingdom | | 231.6 |
| | 6 | % | | 183.8 |
| | 6 | % | | 198.2 |
| | 5 | % |
| Germany | | 217.1 |
| | 6 | % | | 177.7 |
| | 6 | % | | 193.3 |
| | 5 | % |
| France | | 165.6 |
| | 5 | % | | 142.6 |
| | 4 | % | | 153.3 |
| | 4 | % |
| Japan | | 131.7 |
| | 4 | % | | 151.9 |
| | 5 | % | | 202.3 |
| | 5 | % |
| Canada | | 99.8 |
| | 3 | % | | 97.6 |
| | 3 | % | | 154.5 |
| | 4 | % |
| Mexico | | 96.1 |
| | 3 | % | | 89.7 |
| | 3 | % | | 78.4 |
| | 2 | % |
| Other | | 247.0 |
| | 7 | % | | 219.7 |
| | 7 | % | | 350.1 |
| | 10 | % |
| Total External Sales | | $ | 3,525.1 |
| | 100 | % | | $ | 3,134.6 |
| | 100 | % | | $ | 3,719.6 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | 2017 | | Percent of total | | 2016 | | Percent of total | | 2015 | | Percent of total |
| Total assets: | | | | | | | | | | | | |
| United States | | $ | 4,547.7 |
| | 88 | % | | $ | 4,591.5 |
| | 89 | % | | $ | 5,073.1 |
| | 88 | % |
| China | | 276.0 |
| | 5 | % | | 249.3 |
| | 5 | % | | 260.0 |
| | 5 | % |
| United Kingdom | | 122.7 |
| | 2 | % | | 122.8 |
| | 2 | % | | 154.3 |
| | 3 | % |
| Other | | 239.0 |
| | 5 | % | | 206.4 |
| | 4 | % | | 264.3 |
| | 4 | % |
| Total Assets | | $ | 5,185.4 |
| | 100 | % | | $ | 5,170.0 |
| | 100 | % | | $ | 5,751.7 |
| | 100 | % |
Note 16. Restructuring Charges
2016
For the year ended December 31, 2016, the Company recorded restructuring charges of $527.2 million, which are presented as restructuring charges in the consolidated statement of operations. These charges were comprised of $471.3 million in long-lived asset impairment charges, $31.7 million of facility shutdown and idling costs, and $24.2 million of employee benefit costs.
On August 24, 2016, the Company announced the indefinite idling of the Rowley, UT titanium sponge production facility and the consolidation of certain titanium manufacturing operations in the HPMC segment. Over the last several years, significant global capacity had been added to produce titanium sponge, which is a key raw material used to produce ATI’s titanium products. In addition, demand for industrial-grade titanium products from global markets continued to be weak. As a result of these factors, titanium sponge, including aerospace quality sponge, could now be purchased from qualified global producers under long-term supply agreements at prices lower than the production costs at ATI’s titanium sponge facility in Rowley, UT. ATI entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge. The lower cost titanium sponge purchased under these supply agreements replaced the titanium sponge produced at the Rowley facility. As a result of these actions, the Company recorded a non-cash impairment charge of $470.8 million during the quarter ended September 30, 2016 to reduce the carrying value of the Rowley, UT facility to an estimated fair value of $15.0 million. The long-lived asset impairment charge was based on an analysis of the estimated fair value, including asset appraisals using cost, income and market approaches, which represent Level 3 unobservable information in the fair value hierarchy. The indefinite idling of the Rowley, UT facility was completed in the fourth quarter 2016, as was the closure of a small titanium wire production facility in Frackville, PA, and the idling of certain titanium manufacturing operations in Albany, OR. In addition, during the fiscal year ended December 31, 2016, the Company recognized $23.8 million of facility shutdown and idling costs, including contract termination costs, and $7.5 million of employee benefit costs including severance obligations for the elimination of approximately 180 positions associated with these and other HPMC restructuring actions. The Rowley facility was idled in a manner that allows the facility to be restarted in the future if supported by market conditions.
On October 25, 2016, the Company announced the closure of the Midland, PA commodity stainless operations and the Bagdad, PA grain-oriented electrical steel (GOES) finishing facility. These facilities, which were part of the Company’s Flat Rolled Products (FRP) operations, were indefinitely idled earlier in 2016, and management concluded that the facilities could not be operated at an acceptable rate of return. As a result of these actions, the Company recorded $8.4 million during the year ended December 31, 2016 of closure-related costs and asset impairments, and $4.9 million of employee benefit costs, including $3.4 million of special termination benefits for pension and other postretirement benefit plans.
Also during 2016, an $11.8 million charge was recorded for severance obligations in the FRP operations, for the reduction of approximately one-third of FRP’s salaried workforce through the elimination of over 250 positions, which was largely completed by the end of 2016.
2015
For the year ended December 31, 2015, the Company recorded restructuring charges of $64.3 million, which are presented as restructuring charges in the consolidated statement of operations. These charges were comprised of $54.5 million in long-lived asset impairment charges, $3.5 million in facility idling costs, and $6.3 million in employee severance charges. The long-lived asset impairment charges were based on analysis of the estimated fair values, including asset appraisals using income and market approaches, which represents Level 3 unobservable information in the fair value hierarchy.
In December 2015, the Company announced the following rightsizing actions to better align its Flat Rolled Products operations to the challenging market conditions for its commodity products:
Idling the commodity stainless melt and sheet finishing operations at the Midland, PA facility, which was completed in January 2016. A $24.2 million impairment charge was recognized to reduce the carrying value of the Midland facility to estimated fair value.
Idling GOES operations in Western PA, including the Bagdad, PA finishing facility, which was completed in April 2016. A $30.3 million impairment charge was recognized to reduce the carrying value of GOES operations assets to estimated fair value.
A $3.5 million charge for future idling costs of the Midland and GOES operations was also recognized.
As announced in October 2015, in the fourth quarter 2015 the Company implemented a salaried workforce reduction of approximately 100 employees, in response to business conditions, in both the HPMC segment and at ATI’s headquarters. Severance charges of $6.3 million were recorded in the fourth quarter for this action.
Reserves for restructuring charges at December 31, 2017 and 2016 consist of severance and employee benefit costs and closure costs incurred in both 2015 and 2016, which were substantially paid in 2017. Restructuring reserves are as follows:
|
| | | | | | | | | | | | |
| | | Severance and Employee Benefit Costs | | Closure Costs | | Total Restructuring Reserves |
| Balance at December 31, 2015 | | $ | 4.5 |
| | $ | 3.6 |
| | $ | 8.1 |
|
| Additions | | 20.8 |
| | 28.0 |
| | 48.8 |
|
| Payments | | (11.4 | ) | | (12.4 | ) | | (23.8 | ) |
| Balance at December 31, 2016 | | 13.9 |
| | 19.2 |
| | 33.1 |
|
| Reversals | | (1.6 | ) | | (1.1 | ) | | $ | (2.7 | ) |
| Payments | | (11.5 | ) | | (17.3 | ) | | $ | (28.8 | ) |
| Balance at December 31, 2017 | | $ | 0.8 |
|
| $ | 0.8 |
| | $ | 1.6 |
|
Note 17. Redeemable Noncontrolling Interest
During 2016, the 15% redeemable noncontrolling interest in ATI Flowform Products was purchased by ATI at the $12.1 million acquisition date carrying value, resulting in no remaining redeemable noncontrolling interest held in ATI Flowform Products as of December 31, 2017 and 2016.
The previous holders of the 15% redeemable noncontrolling interest in ATI Flowform Products had a put option to require the Company to purchase their equity interest at a specified redemption value. The put option could not be separated from the noncontrolling interest, and the combination of a noncontrolling interest and the redemption feature required classification as redeemable noncontrolling interest in the consolidated balance sheet, separate from Stockholders’ Equity. The carrying amount of the redeemable noncontrolling interest approximated its maximum redemption value. Any subsequent change in maximum redemption value was adjusted through retained earnings. The adjustment to the carrying amount for the year ended December 31, 2015 reduced retained earnings by $0.3 million. The Company applied the two-class method of calculating earnings per share, and as such this adjustment to the carrying amount was reflected in earnings per share. The redeemable noncontrolling interest was $12.1 million as of December 31, 2015, which was unchanged from the acquisition date value.
Note 18.20. Per Share Information
The following table sets forth the computation of basic and diluted net lossincome (loss) per common share:
(In millions, except per share amounts)
|
| | | | | | | | | | | | |
| For the Years Ended December 31, | | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | | |
| Numerator for basic net loss per common share - | | | | | | |
| Net loss attributable to ATI | | $ | (91.9 | ) | | $ | (640.9 | ) | | $ | (377.9 | ) |
| Redeemable noncontrolling interest (Note 17) | | — |
| | — |
| | (0.3 | ) |
| Effect of dilutive securities: | | | | | | |
| 4.75% Convertible Senior Notes due 2022 | | — |
| | — |
| | — |
|
| Numerator for diluted net loss per common share - | | | | | | |
| Net loss attributable to ATI after assumed conversions | | $ | (91.9 | ) | | $ | (640.9 | ) | | $ | (378.2 | ) |
| Denominator: | | | | | | |
| Denominator for basic net loss per common share—weighted average shares | | 110.1 |
| | 107.3 |
| | 107.3 |
|
| Effect of dilutive securities: | | | | | | |
| Share-based compensation | | — |
| | — |
| | — |
|
| 4.75% Convertible Senior Notes due 2022 | | — |
| | — |
| | — |
|
| Denominator for diluted net loss per common share—adjusted weighted average shares and assumed conversions | | 110.1 |
| | 107.3 |
| | 107.3 |
|
| Basic net loss attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) |
| Diluted net loss attributable to ATI per common share | | $ | (0.83 | ) | | $ | (5.97 | ) | | $ | (3.53 | ) |
| | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | | |
| Numerator for basic net income (loss) per common share - | | | | | | |
| Net income (loss) attributable to ATI | | $ | (1,572.6) | | | $ | 257.6 | | | $ | 222.4 | |
| Effect of dilutive securities: | | | | | | |
| 4.75% Convertible Senior Notes due 2022 | | 0 | | | 12.8 | | | 12.9 | |
| 3.5% Convertible Senior Notes due 2025 | | 0 | | | 0 | | | 0 | |
| Numerator for diluted net income (loss) per common share - | | | | | | |
| Net income (loss) attributable to ATI after assumed conversions | | $ | (1,572.6) | | | $ | 270.4 | | | $ | 235.3 | |
| Denominator: | | | | | | |
| Denominator for basic net income (loss) per common share—weighted average shares | | 126.5 | | | 125.8 | | | 125.2 | |
| Effect of dilutive securities: | | | | | | |
| Share-based compensation | | 0 | | | 0.8 | | | 0.8 | |
| 4.75% Convertible Senior Notes due 2022 | | 0 | | | 19.9 | | | 19.9 | |
| 3.5% Convertible Senior Notes due 2025 | | 0 | | | 0 | | | 0 | |
| Denominator for diluted net income (loss) per common share—adjusted weighted average shares and assumed conversions | | 126.5 | | | 146.5 | | | 145.9 | |
| Basic net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 2.05 | | | $ | 1.78 | |
| Diluted net income (loss) attributable to ATI per common share | | $ | (12.43) | | | $ | 1.85 | | | $ | 1.61 | |
Common stock that would be issuable upon the assumed conversion of the 2022 Convertible Notes and the 2025 Convertible Notes and other option equivalents and contingently issuable shares are excluded from the computation of contingently issuable shares, and therefore, from the denominator for diluted earnings per share, if the effect of inclusion would have beenis anti-dilutive. ExcludedThere were 22.8 million anti-dilutive shares for 2020. There were 20.8 million0 anti-dilutive shares for 2017, 13.1 million for 20162019 and 0.8 million for 2015.2018.
Note 19. Financial Information for Subsidiary and Guarantor Parent
The payment obligations under the $150.0 million 6.95% Debentures due 2025 issued by Allegheny Ludlum, LLC (formerly known as Allegheny Ludlum Corporation) (the “Subsidiary”) are fully and unconditionally guaranteed by ATI (the “Guarantor Parent”). In accordance with positions established by the U.S. 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.
ATI is the plan sponsor for the ATI Pension Plan, the U.S. qualified defined benefit pension 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 ATI Pension Plan assets or liabilities, or the related deferred taxes. The ATI Pension 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.
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2.1 |
| | $ | 13.5 |
| | $ | 126.0 |
| | $ | — |
| | $ | 141.6 |
|
| Accounts receivable, net | | 0.2 |
| | 141.6 |
| | 403.5 |
| | — |
| | 545.3 |
|
| Intercompany notes receivable | | — |
| | — |
| | 3,505.6 |
| | (3,505.6 | ) | | — |
|
| Inventories, net | | — |
| | 207.9 |
| | 968.2 |
| | — |
| | 1,176.1 |
|
| Prepaid expenses and other current assets | | 6.6 |
| | 4.5 |
| | 41.6 |
| | — |
| | 52.7 |
|
| Total current assets | | 8.9 |
| | 367.5 |
| | 5,044.9 |
| | (3,505.6 | ) | | 1,915.7 |
|
| Property, plant and equipment, net | | 0.9 |
| | 1,581.6 |
| | 913.2 |
| | — |
| | 2,495.7 |
|
| Goodwill | | — |
| | — |
| | 531.4 |
| | — |
| | 531.4 |
|
| Intercompany notes receivable | | — |
| | — |
| | 200.0 |
| | (200.0 | ) | | — |
|
| Investments in subsidiaries | | 5,645.6 |
| | 37.7 |
| | — |
| | (5,683.3 | ) | | — |
|
| Other assets | | 25.4 |
| | 18.0 |
| | 199.2 |
| | — |
| | 242.6 |
|
| Total assets | | $ | 5,680.8 |
| | $ | 2,004.8 |
| | $ | 6,888.7 |
| | $ | (9,388.9 | ) | | $ | 5,185.4 |
|
| Liabilities and stockholders’ equity: | | | | | | | | | | |
| Accounts payable | | $ | 3.0 |
| | $ | 180.3 |
| | $ | 236.8 |
| | $ | — |
| | $ | 420.1 |
|
| Accrued liabilities | | 54.1 |
| | 88.5 |
| | 139.8 |
| | — |
| | 282.4 |
|
| Intercompany notes payable | | 1,836.5 |
| | 1,669.1 |
| | — |
| | (3,505.6 | ) | | — |
|
| Short-term debt and current portion of long-term debt | | 0.3 |
| | 0.6 |
| | 9.2 |
| | — |
| | 10.1 |
|
| Total current liabilities | | 1,893.9 |
| | 1,938.5 |
| | 385.8 |
| | (3,505.6 | ) | | 712.6 |
|
| Long-term debt | | 1,275.7 |
| | 150.7 |
| | 104.2 |
| | — |
| | 1,530.6 |
|
| Intercompany notes payable | | — |
| | 200.0 |
| | — |
| | (200.0 | ) | | — |
|
| Accrued postretirement benefits | | — |
| | 250.2 |
| | 67.6 |
| | — |
| | 317.8 |
|
| Pension liabilities | | 644.3 |
| | 4.4 |
| | 48.3 |
| | — |
| | 697.0 |
|
| Deferred income taxes | | 9.7 |
| | — |
| | — |
| | — |
| | 9.7 |
|
| Other long-term liabilities | | 12.7 |
| | 17.2 |
| | 43.3 |
| | — |
| | 73.2 |
|
| Total liabilities | | 3,836.3 |
| | 2,561.0 |
| | 649.2 |
| | (3,705.6 | ) | | 3,340.9 |
|
| Total stockholders’ equity (deficit) | | 1,844.5 |
| | (556.2 | ) | | 6,239.5 |
| | (5,683.3 | ) | | 1,844.5 |
|
| Total liabilities and stockholders’ equity | | $ | 5,680.8 |
| | $ | 2,004.8 |
| | $ | 6,888.7 |
| | $ | (9,388.9 | ) | | $ | 5,185.4 |
|
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the year ended December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Sales | | $ | — |
| | $ | 1,178.9 |
| | $ | 2,346.2 |
| | $ | — |
| | $ | 3,525.1 |
|
| Cost of sales | | 42.4 |
| | 1,103.5 |
| | 1,930.2 |
| | — |
| | 3,076.1 |
|
| Gross profit (loss) | | (42.4 | ) | | 75.4 |
| | 416.0 |
| | — |
| | 449.0 |
|
| Selling and administrative expenses | | 91.0 |
| | 37.6 |
| | 125.7 |
| | — |
| | 254.3 |
|
| Impairment of goodwill | | — |
| | — |
| | 114.4 |
| | — |
| | 114.4 |
|
| Operating income (loss) | | (133.4 | ) | | 37.8 |
| | 175.9 |
| | — |
| | 80.3 |
|
| Interest income (expense), net | | (155.8 | ) | | (90.0 | ) | | 112.0 |
| | — |
| | (133.8 | ) |
| Debt extinguishment charge | | (37.0 | ) | | — |
| | — |
| | — |
| | (37.0 | ) |
| Other income (expense) including equity in income of unconsolidated subsidiaries | | 239.7 |
| | 1.6 |
| | 2.4 |
| | (239.7 | ) | | 4.0 |
|
| Income (loss) before income taxes | | (86.5 | ) | | (50.6 | ) | | 290.3 |
| | (239.7 | ) | | (86.5 | ) |
| Income tax provision (benefit) | | (6.8 | ) | | (16.6 | ) | | 131.4 |
| | (114.8 | ) | | (6.8 | ) |
| Net income (loss) | | (79.7 | ) | | (34.0 | ) | | 158.9 |
| | (124.9 | ) | | (79.7 | ) |
| Less: Net income attributable to noncontrolling interest | | — |
| | — |
| | 12.2 |
| | — |
| | 12.2 |
|
| Net income (loss) attributable to ATI | | $ | (79.7 | ) | | $ | (34.0 | ) | | $ | 146.7 |
| | $ | (124.9 | ) | | $ | (91.9 | ) |
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Comprehensive Income (Loss)
For the year ended December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income (loss) | | $ | (79.7 | ) | | $ | (34.0 | ) | | $ | 158.9 |
| | $ | (124.9 | ) | | $ | (79.7 | ) |
| Other comprehensive income (loss) | | | | | | | | | | |
| Currency translation adjustment arising during the period | | 39.1 |
| | — |
| | 39.1 |
| | (39.1 | ) | | 39.1 |
|
| Net derivative gain on hedge transactions | | 7.1 |
| | — |
| | — |
| | — |
| | 7.1 |
|
| Pension and postretirement benefits | | 27.3 |
| | (5.8 | ) | | (10.7 | ) | | 16.5 |
| | 27.3 |
|
| Other comprehensive income (loss), net of tax | | 73.5 |
| | (5.8 | ) | | 28.4 |
| | (22.6 | ) | | 73.5 |
|
| Comprehensive income (loss) | | (6.2 | ) | | (39.8 | ) | | 187.3 |
| | (147.5 | ) | | (6.2 | ) |
| Less: Comprehensive income attributable to noncontrolling interest | | — |
| | — |
| | 19.8 |
| | — |
| | 19.8 |
|
| Comprehensive income (loss) attributable to ATI | | $ | (6.2 | ) | | $ | (39.8 | ) | | $ | 167.5 |
| | $ | (147.5 | ) | | $ | (26.0 | ) |
Condensed Statements of Cash Flows
For the year ended December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash flows provided by (used in) operating activities | | $ | (78.8 | ) | | $ | (101.5 | ) | | $ | 214.7 |
| | $ | (12.0 | ) | | $ | 22.4 |
|
| Investing Activities: | | | | | | | | | | |
| Purchases of property, plant and equipment | | (0.9 | ) | | (38.5 | ) | | (83.3 | ) | | — |
| | (122.7 | ) |
| Net receipts (payments) on intercompany activity | | — |
| | — |
| | (223.9 | ) | | 223.9 |
| | — |
|
| Asset disposals and other | | — |
| | 0.1 |
| | 3.0 |
| | — |
| | 3.1 |
|
| Cash flows provided by (used in) investing activities | | (0.9 | ) | | (38.4 | ) | | (304.2 | ) | | 223.9 |
| | (119.6 | ) |
| Financing Activities: | | | | | | | | | | |
| Borrowings on long-term debt | | — |
| | — |
| | 8.5 |
| | — |
| | 8.5 |
|
| Payments on long-term debt and capital leases | | (350.4 | ) | | (0.3 | ) | | (2.3 | ) | | — |
| | (353.0 | ) |
| Net borrowings under credit facilities | | — |
| | — |
| | 1.6 |
| | — |
| | 1.6 |
|
| Debt issuance costs | | — |
| | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
| Debt extinguishment charge | | (35.8 | ) | | — |
| | — |
| | — |
| | (35.8 | ) |
| Net receipts (payments) on intercompany activity | | 72.7 |
| | 151.2 |
| | — |
| | (223.9 | ) | | — |
|
| Issuance of common stock | | 397.8 |
| | — |
| | — |
| | — |
| | 397.8 |
|
| Dividends paid to stockholders | | — |
| | — |
| | (12.0 | ) | | 12.0 |
| | — |
|
| Dividends paid to noncontrolling interests | | — |
| | — |
| | (8.0 | ) | | — |
| | (8.0 | ) |
| Sale to noncontrolling interests | | — |
| | — |
| | 3.7 |
| | — |
| | 3.7 |
|
| Shares repurchased for income tax withholding on share-based compensation and other | | (4.8 | ) | | — |
| | — |
| | — |
| | (4.8 | ) |
| Cash flows provided by (used in) financing activities | | 79.5 |
| | 150.9 |
| | (9.3 | ) | | (211.9 | ) | | 9.2 |
|
| Increase (decrease) in cash and cash equivalents | | $ | (0.2 | ) | | $ | 11.0 |
| | $ | (98.8 | ) | | $ | — |
| | $ | (88.0 | ) |
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2.3 |
| | $ | 2.5 |
| | $ | 224.8 |
| | $ | — |
| | $ | 229.6 |
|
| Accounts receivable, net | | 0.1 |
| | 107.8 |
| | 344.2 |
| | — |
| | 452.1 |
|
| Intercompany notes receivable | | — |
| | — |
| | 2,892.9 |
| | (2,892.9 | ) | | — |
|
| Inventories, net | | — |
| | 106.7 |
| | 930.3 |
| | — |
| | 1,037.0 |
|
| Prepaid expenses and other current assets | | 6.6 |
| | 5.2 |
| | 36.0 |
| | — |
| | 47.8 |
|
| Total current assets | | 9.0 |
| | 222.2 |
| | 4,428.2 |
| | (2,892.9 | ) | | 1,766.5 |
|
| Property, plant and equipment, net | | 1.3 |
| | 1,583.6 |
| | 914.0 |
| | — |
| | 2,498.9 |
|
| Goodwill | | — |
| | — |
| | 641.9 |
| | — |
| | 641.9 |
|
| Intercompany notes receivable | | — |
| | — |
| | 200.0 |
| | (200.0 | ) | | — |
|
| Investments in subsidiaries | | 5,241.2 |
| | 37.7 |
| | — |
| | (5,278.9 | ) | | — |
|
| Other assets | | 23.0 |
| | 25.5 |
| | 214.2 |
| | — |
| | 262.7 |
|
| Total assets | | $ | 5,274.5 |
| | $ | 1,869.0 |
| | $ | 6,398.3 |
| | $ | (8,371.8 | ) | | $ | 5,170.0 |
|
| Liabilities and stockholders’ equity: | | | | | | | | | | |
| Accounts payable | | $ | 3.1 |
| | $ | 97.4 |
| | $ | 193.8 |
| | $ | — |
| | $ | 294.3 |
|
| Accrued liabilities | | 54.6 |
| | 83.3 |
| | 171.4 |
| | — |
| | 309.3 |
|
| Intercompany notes payable | | 1,341.1 |
| | 1,551.8 |
| | — |
| | (2,892.9 | ) | | — |
|
| Short-term debt and current portion of long-term debt | | 0.4 |
| | 0.3 |
| | 104.4 |
| | — |
| | 105.1 |
|
| Total current liabilities | | 1,399.2 |
| | 1,732.8 |
| | 469.6 |
| | (2,892.9 | ) | | 708.7 |
|
| Long-term debt | | 1,621.7 |
| | 150.0 |
| | 0.2 |
| | — |
| | 1,771.9 |
|
| Intercompany notes payable | | — |
| | 200.0 |
| | — |
| | (200.0 | ) | | — |
|
| Accrued postretirement benefits | | — |
| | 244.0 |
| | 73.7 |
| | — |
| | 317.7 |
|
| Pension liabilities | | 778.5 |
| | 5.2 |
| | 44.2 |
| | — |
| | 827.9 |
|
| Deferred income taxes | | 15.6 |
| | — |
| | — |
| | — |
| | 15.6 |
|
| Other long-term liabilities | | 14.7 |
| | 18.1 |
| | 50.6 |
| | — |
| | 83.4 |
|
| Total liabilities | | 3,829.7 |
| | 2,350.1 |
| | 638.3 |
| | (3,092.9 | ) | | 3,725.2 |
|
| Total stockholders’ equity (deficit) | | 1,444.8 |
| | (481.1 | ) | | 5,760.0 |
| | (5,278.9 | ) | | 1,444.8 |
|
| Total liabilities and stockholders’ equity | | $ | 5,274.5 |
| | $ | 1,869.0 |
| | $ | 6,398.3 |
| | $ | (8,371.8 | ) | | $ | 5,170.0 |
|
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the year ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Sales | | $ | — |
| | $ | 983.6 |
| | $ | 2,151.0 |
| | $ | — |
| | $ | 3,134.6 |
|
| Cost of sales | | 53.4 |
| | 1,102.0 |
| | 1,816.7 |
| | — |
| | 2,972.1 |
|
| Gross profit (loss) | | (53.4 | ) | | (118.4 | ) | | 334.3 |
| | — |
| | 162.5 |
|
| Selling and administrative expenses | | 89.9 |
| | 32.3 |
| | 125.5 |
| | — |
| | 247.7 |
|
| Restructuring charges | | — |
| | 25.1 |
| | 502.1 |
| | — |
| | 527.2 |
|
| Operating loss | | (143.3 | ) | | (175.8 | ) | | (293.3 | ) | | — |
| | (612.4 | ) |
| Interest income (expense), net | | (138.3 | ) | | (70.7 | ) | | 85.0 |
| | — |
| | (124.0 | ) |
| Other income (expense) including equity in income of unconsolidated subsidiaries | | (452.4 | ) | | 1.0 |
| | 1.4 |
| | 452.4 |
| | 2.4 |
|
| Income (loss) before income taxes | | (734.0 | ) | | (245.5 | ) | | (206.9 | ) | | 452.4 |
| | (734.0 | ) |
| Income tax provision (benefit) | | (106.9 | ) | | (85.5 | ) | | (66.7 | ) | | 152.2 |
| | (106.9 | ) |
| Net income (loss) | | (627.1 | ) | | (160.0 | ) | | (140.2 | ) | | 300.2 |
| | (627.1 | ) |
| Less: Net income attributable to noncontrolling interest | | — |
| | — |
| | 13.8 |
| | — |
| | 13.8 |
|
| Net income (loss) attributable to ATI | | $ | (627.1 | ) | | $ | (160.0 | ) | | $ | (154.0 | ) | | $ | 300.2 |
| | $ | (640.9 | ) |
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Comprehensive Income (Loss)
For the year ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income (loss) | | $ | (627.1 | ) | | $ | (160.0 | ) | | $ | (140.2 | ) | | $ | 300.2 |
| | $ | (627.1 | ) |
| Other comprehensive income (loss) | | | | | | | | | | |
| Currency translation adjustment arising during the period | | (47.1 | ) | | — |
| | (47.1 | ) | | 47.1 |
| | (47.1 | ) |
| Net derivative gain on hedge transactions | | 19.6 |
| | — |
| | — |
| | — |
| | 19.6 |
|
| Pension and postretirement benefits | | (61.4 | ) | | 17.2 |
| | 1.8 |
| | (19.0 | ) | | (61.4 | ) |
| Other comprehensive income (loss), net of tax | | (88.9 | ) | | 17.2 |
| | (45.3 | ) | | 28.1 |
| | (88.9 | ) |
| Comprehensive income (loss) | | (716.0 | ) | | (142.8 | ) | | (185.5 | ) | | 328.3 |
| | (716.0 | ) |
| Less: Comprehensive income attributable to noncontrolling interest | | — |
| | — |
| | 4.1 |
| | — |
| | 4.1 |
|
| Comprehensive income (loss) attributable to ATI | | $ | (716.0 | ) | | $ | (142.8 | ) | | $ | (189.6 | ) | | $ | 328.3 |
| | $ | (720.1 | ) |
Condensed Statements of Cash Flows
For the year ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash flows provided by (used in) operating activities | | $ | (78.5 | ) | | $ | (232.3 | ) | | $ | 291.1 |
| | $ | (24.0 | ) | | $ | (43.7 | ) |
| Investing Activities: | | | | | | | | | | |
| Purchases of property, plant and equipment | | (0.5 | ) | | (98.7 | ) | | (103.0 | ) | | — |
| | (202.2 | ) |
| Net receipts (payments) on intercompany activity | | — |
| | — |
| | (160.0 | ) | | 160.0 |
| | — |
|
| Asset disposals and other | | — |
| | 0.2 |
| | 2.0 |
| | — |
| | 2.2 |
|
| Cash flows provided by (used in) investing activities | | (0.5 | ) | | (98.5 | ) | | (261.0 | ) | | 160.0 |
| | (200.0 | ) |
| Financing Activities: | | | | | | | | | | |
| Borrowings on long-term debt | | 287.5 |
| | — |
| | 100.0 |
| | — |
| | 387.5 |
|
| Payments on long-term debt and capital leases | | (0.7 | ) | | (0.2 | ) | | (1.8 | ) | | — |
| | (2.7 | ) |
| Net borrowings under credit facilities | | — |
| | — |
| | 3.1 |
| | — |
| | 3.1 |
|
| Debt issuance costs | | (9.4 | ) | | — |
| | (1.0 | ) | | — |
| | (10.4 | ) |
| Net receipts (payments) on intercompany acivity | | (170.7 | ) | | 330.7 |
| | — |
| | (160.0 | ) | | — |
|
| Dividends paid to stockholders | | (25.8 | ) | | — |
| | (24.0 | ) | | 24.0 |
| | (25.8 | ) |
| Dividends paid to noncontrolling interests | | — |
| | — |
| | (16.0 | ) | | — |
| | (16.0 | ) |
| Acquisition of noncontrolling interests | | — |
| | — |
| | (12.2 | ) | | — |
| | (12.2 | ) |
| Cash flows provided by (used in) financing activities | | 80.9 |
| | 330.5 |
| | 48.1 |
| | (136.0 | ) | | 323.5 |
|
| Increase (decrease) in cash and cash equivalents | | $ | 1.9 |
| | $ | (0.3 | ) | | $ | 78.2 |
| | $ | — |
| | $ | 79.8 |
|
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the year ended December 31, 2015
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Sales | | $ | — |
| | $ | 1,453.2 |
| | $ | 2,266.4 |
| | $ | — |
| | $ | 3,719.6 |
|
| Cost of sales | | 27.3 |
| | 1,643.2 |
| | 1,988.8 |
| | — |
| | 3,659.3 |
|
| Gross profit (loss) | | (27.3 | ) | | (190.0 | ) | | 277.6 |
| | — |
| | 60.3 |
|
| Selling and administrative expenses | | 88.2 |
| | 29.4 |
| | 121.2 |
| | — |
| | 238.8 |
|
| Impairment of goodwill | | — |
| | 126.6 |
| | — |
| | — |
| | 126.6 |
|
| Restructuring charges | | 1.6 |
| | 58.0 |
| | 4.7 |
| | — |
| | 64.3 |
|
| Operating income (loss) | | (117.1 | ) | | (404.0 | ) | | 151.7 |
| | — |
| | (369.4 | ) |
| Interest income (expense), net | | (117.3 | ) | | (50.9 | ) | | 58.0 |
| | — |
| | (110.2 | ) |
| Other income (expense) including equity in income of unconsolidated subsidiaries | | (243.6 | ) | | 1.1 |
| | 0.8 |
| | 243.3 |
| | 1.6 |
|
| Income (loss) before income taxes | | (478.0 | ) | | (453.8 | ) | | 210.5 |
| | 243.3 |
| | (478.0 | ) |
| Income tax provision (benefit) | | (112.1 | ) | | (165.7 | ) | | 51.6 |
| | 114.1 |
| | (112.1 | ) |
| Net income (loss) | | (365.9 | ) | | (288.1 | ) | | 158.9 |
| | 129.2 |
| | (365.9 | ) |
| Less: Net income attributable to noncontrolling interest | | — |
| | — |
| | 12.0 |
| | — |
| | 12.0 |
|
| Net income (loss) attributable to ATI | | $ | (365.9 | ) | | $ | (288.1 | ) | | $ | 146.9 |
| | $ | 129.2 |
| | $ | (377.9 | ) |
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Comprehensive Income (Loss)
For the year ended December 31, 2015
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income (loss) | | $ | (365.9 | ) | | $ | (288.1 | ) | | $ | 158.9 |
| | $ | 129.2 |
| | $ | (365.9 | ) |
| Other comprehensive income (loss) | | | | | | | | | | |
| Currency translation adjustment arising during the period | | (37.0 | ) | | — |
| | (37.0 | ) | | 37.0 |
| | (37.0 | ) |
| Net derivative loss on hedge transactions | | (32.0 | ) | | — |
| | — |
| | — |
| | (32.0 | ) |
| Pension and postretirement benefits | | (19.7 | ) | | 29.8 |
| | 3.1 |
| | (32.9 | ) | | (19.7 | ) |
| Other comprehensive income (loss), net of tax | | (88.7 | ) | | 29.8 |
| | (33.9 | ) | | 4.1 |
| | (88.7 | ) |
| Comprehensive income (loss) | | (454.6 | ) | | (258.3 | ) | | 125.0 |
| | 133.3 |
| | (454.6 | ) |
| Less: Comprehensive income attributable to noncontrolling interest | | — |
| | — |
| | 6.4 |
| | — |
| | 6.4 |
|
| Comprehensive income (loss) attributable to ATI | | $ | (454.6 | ) | | $ | (258.3 | ) | | $ | 118.6 |
| | $ | 133.3 |
| | $ | (461.0 | ) |
Condensed Statements of Cash Flows
For the year ended December 31, 2015
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Guarantor Parent | | Subsidiary | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash flows provided by (used in) operating activities | | $ | (70.0 | ) | | $ | (134.8 | ) | | $ | 360.2 |
| | $ | (24.0 | ) | | $ | 131.4 |
|
| Investing Activities: | | | | | | | | | | |
| Purchases of property, plant and equipment | | (0.6 | ) | | (66.9 | ) | | (77.0 | ) | | — |
| | (144.5 | ) |
| Net receipts (payments) on intercompany activity | | — |
| | — |
| | (327.9 | ) | | 327.9 |
| | — |
|
| Purchases of businesses, net of cash acquired | | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| Asset disposals and other | | — |
| | 0.2 |
| | (0.3 | ) | | — |
| | (0.1 | ) |
| Cash flows provided by (used in) investing activities | | (0.6 | ) | | (66.7 | ) | | (405.7 | ) | | 327.9 |
| | (145.1 | ) |
| Financing Activities: | | | | | | | | | | |
| Payments on long-terms debt and capital leases | | (0.6 | ) | | (0.1 | ) | | (22.9 | ) | | — |
| | (23.6 | ) |
| Net receipts (payments) on intercompany activity | | 137.3 |
| | 190.6 |
| | — |
| | (327.9 | ) | | — |
|
| Dividends paid to stockholders | | (66.5 | ) | | — |
| | (24.0 | ) | | 24.0 |
| | (66.5 | ) |
| Dividends paid to noncontrolling interests | | — |
| | — |
| | (16.0 | ) | | — |
| | (16.0 | ) |
| Other | | (1.4 | ) | | — |
| | 1.5 |
| | — |
| | 0.1 |
|
| Cash flows provided by (used in) financing activities | | 68.8 |
| | 190.5 |
| | (61.4 | ) | | (303.9 | ) | | (106.0 | ) |
| Increase (decrease) in cash and cash equivalents | | $ | (1.8 | ) | | $ | (11.0 | ) | | $ | (106.9 | ) | | $ | — |
| | $ | (119.7 | ) |
Note 20.21. Commitments and Contingencies
Rental expense under operating leases was $21.1 million in 2017, $22.6 million in 2016, and $23.1 million in 2015. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year at December 31, 2017, were as follows: $20.0 millionare disclosed in 2018, $13.5 million in 2019, $12.5 million in 2020, $11.3 million in 2021, $6.2 million in 2022 and $13.9 million thereafter.Note 13. Commitments for expenditures on property, plant and equipment at December 31, 20172020 were approximately $62.8$74.9 million.
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 Company’s 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 Company’s 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).PRPs. The Company adjusts its accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on the Company’s consolidated results of operations in a given period, but the Company cannot reliably predict the amounts of such future adjustments.
At December 31, 2017,2020, the Company’s reserves for environmental remediation obligations totaled approximately $12$14 million,, of which $7$4 million was included in other current liabilities. The reserve includes estimated probable future costs of $2$3 million for federal Superfund and comparable state-managed sites; $8$9 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $1$1 million for owned or controlled sites at which Company operations have been discontinued; and $1$1 million for sites utilized by the Company in its ongoing operations. The Company
continues to evaluate whether it may be able to recover a portion of future costs for environmental liabilities from third parties and to pursue such recoveries where appropriate.
Based on currently available information, it is reasonably possible that the costs for active matters may exceed the Company’s recorded reserves by as much as $15 million. Future investigation or remediation activities may result in the discovery of additional hazardous materials, potentially higher levels of contamination than discovered during prior investigation, and may impact costs of the success or lack thereof in remedial solutions. Therefore, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
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.
A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, government contracting, construction, employment, employee and retiree benefits, taxes, environmental, health and safety, occupational disease, and stockholder and corporate governance 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 Company’s consolidated 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 Company’s consolidated results of operations for that period.
Allegheny Technologies Incorporated and its subsidiary, ATI Titanium LLC (“ATI Titanium”), are parties to a lawsuit captioned US Magnesium, LLC v. ATI Titanium LLC (Case No. 2:17-cv-00923-DB) and filed in federal district court in Salt Lake City, UT, pertaining to a Supply and Operating Agreement between US Magnesium LLC (“USM”) and ATI Titanium entered into in 2006 (the “Supply Agreement”). In 2016, ATI Titanium notified USM that it would suspend performance under the Supply Agreement in reliance on certain terms and conditions included in the Supply Agreement. USM subsequently filed a claim challenging ATI Titanium’s right to suspend performance under the Supply Agreement, claiming that such suspension was a material breach of the Supply Agreement and seeking monetary damages, and ATI Titanium filed a counterclaim for breach of contract against USM. In 2018, USM obtained leave of the court to add Allegheny Technologies Incorporated as a separate party defendant, and ATI Titanium filed a motion to dismiss the claim against Allegheny Technologies Incorporated, which the court denied on April 19, 2019. No trial date has been set by the court given the restrictions of the pandemic. While ATI intends to vigorously defend against and pursue these claims, it cannot predict their outcomes at this time.
Note 21.22. Selected Quarterly Financial Data
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| (In millions, except per share amounts) | | March 31 | | June 30 | | September 30 | | December 31 |
| 2020 - | | | | | | | | |
| Sales | | $ | 955.5 | | | $ | 770.3 | | | $ | 598.0 | | | $ | 658.3 | |
| Gross Profit | | 134.8 | | | 74.7 | | | 38.1 | | | 45.2 | |
| Net income (loss) | | 23.6 | | | (419.9) | | | (47.0) | | | (1,116.3) | |
| Net income (loss) attributable to ATI | | 21.1 | | | (422.6) | | | (50.1) | | | (1,121.0) | |
| Basic income (loss) attributable to ATI per common share | | $ | 0.17 | | | $ | (3.34) | | | $ | (0.40) | | | $ | (8.85) | |
| Diluted income (loss) attributable to ATI per common share | | $ | 0.16 | | | $ | (3.34) | | | $ | (0.40) | | | $ | (8.85) | |
| Average shares outstanding | | 126.3 | | | 126.7 | | | 126.8 | | | 126.8 | |
| 2019 - | | | | | | | | |
| Sales | | $ | 1,004.8 | | | $ | 1,080.4 | | | $ | 1,018.7 | | | $ | 1,018.6 | |
| Gross Profit | | 131.1 | | | 177.7 | | | 159.7 | | | 169.3 | |
| Net income | | 16.3 | | | 78.5 | | | 115.3 | | | 60.0 | |
| Net income attributable to ATI | | 15.0 | | | 75.1 | | | 111.0 | | | 56.5 | |
| Basic income attributable to ATI per common share | | $ | 0.12 | | | $ | 0.60 | | | $ | 0.88 | | | $ | 0.45 | |
| Diluted income attributable to ATI per common share | | $ | 0.12 | | | $ | 0.54 | | | $ | 0.78 | | | $ | 0.41 | |
| Average shares outstanding | | 125.8 | | | 126.1 | | | 126.1 | | | 126.1 | |
|
| | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| (In millions, except per share amounts) | | March 31 | | June 30 | | September 30 | | December 31 |
| 2017 - | | | | | | | | |
| Sales | | $ | 865.9 |
| | $ | 880.2 |
| | $ | 869.1 |
| | $ | 909.9 |
|
| Gross Profit | | 112.8 |
| | 112.3 |
| | 93.3 |
| | 130.6 |
|
| Net income (loss) | | 21.1 |
| | 13.4 |
| | (119.4 | ) | | 5.2 |
|
| Net income (loss) attributable to ATI | | 17.5 |
| | 10.1 |
| | (121.2 | ) | | 1.7 |
|
| Basic income (loss) attributable to ATI per common share | | $ | 0.16 |
| | $ | 0.09 |
| | $ | (1.12 | ) | | $ | 0.01 |
|
| Diluted income (loss) attributable to ATI per common share | | $ | 0.16 |
| | $ | 0.09 |
| | $ | (1.12 | ) | | $ | 0.01 |
|
| Average shares outstanding | | 108.8 |
| | 108.9 |
| | 108.9 |
| | 118.6 |
|
| 2016 - | | | | | | | | |
| Sales | | $ | 757.5 |
| | $ | 810.5 |
| | $ | 770.5 |
| | $ | 796.1 |
|
| Gross Profit (loss) | | (33.2 | ) | | 48.2 |
| | 50.2 |
| | 97.3 |
|
| Net income (loss) | | (98.1 | ) | | (15.5 | ) | | (527.2 | ) | | 13.7 |
|
| Net income (loss) attributable to ATI | | (101.2 | ) | | (18.8 | ) | | (530.8 | ) | | 9.9 |
|
| Basic income (loss) attributable to ATI per common share | | $ | (0.94 | ) | | $ | (0.18 | ) | | $ | (4.95 | ) | | $ | 0.09 |
|
| Diluted income (loss) attributable to ATI per common share | | $ | (0.94 | ) | | $ | (0.18 | ) | | $ | (4.95 | ) | | $ | 0.09 |
|
| Average shares outstanding | | 109.0 |
| | 108.9 |
| | 108.9 |
| | 108.9 |
|
ThirdFirst quarter 2017 includes a $114.42020 results include an $8.0 million pre-tax ($113.65.5 million, net of tax) non-cashrestructuring charge for a voluntary retirement incentive program. See Note 3 for further explanation.
Second quarter 2020 results include the following:
•$287.0 million pre-tax ($281.4 million, net of tax) goodwill impairment charge to write-off a portion of the Company’s goodwill related to its Forged Products reporting unit. See Note 4 for further explanation.
•$16.7 million pre-tax ($16.4 million, net of tax) restructuring charge related to severance charges for involuntary reductions and voluntary retirement incentive programs for the Company’sHPMC segment. See Note 3 for further explanation.
•$2.4 million pre-tax and net of tax charge for ATI’s 50% portion of severance charges recorded by the A&T Stainless joint venture. See Note 9 for further explanation.
•$21.5 million pre-tax ($21.1 million, net of tax) debt extinguishment charge for the partial redemption of the 2022 Convertible Notes. See Note 12 for further explanation.
•$99.0 million discrete tax charge related to deferred tax valuation allowances due to re-entering a three-year cumulative loss condition for U.S. Federal and state jurisdictions. See Note 19 for further explanation on deferred tax asset valuation allowances.
Third quarter 2020 results include a $2.3 million pre-tax and net of tax restructuring charge for additional employee severance actions. See Note 3 for further explanation.
Fourth quarter 2020 results include $1,105.1 million in pre-tax and net of tax restructuring and other charges, including $1,041.5 million of long-lived asset impairment charges primarily related to the AA&S segment’s Brackenridge, PA operations, which include the HRPF, as well as stainless melting and finishing operations, $33.5 million of severance-related costs for hourly and salary employees, $12.7 million of other costs related to facility idlings including asset retirement obligations and inventory valuation reserves, and $17.4 million in pre-tax charges for termination benefits for pension and postretirement medical obligations related to facility closures. See Note 3 for further explanation. Fourth quarter 2020 results also include a $26.0 million net tax benefit associated with the tax impacts of the long-lived asset impairments and other restructuring charges and associated deferred tax asset valuation allowances. See Note 19 for further explanation on deferred tax asset valuation allowances.
Second quarter 2019 results include a $29.3 million pre-tax ($27.3 million, net of tax) gain on the sale of oil and gas rights in New Mexico. See Note 11 for further explanation. Second quarter 2019 results also include a $7.7 million pre-tax ($7.2 million, net of tax) loss on the sale of two non-core forging facilities. See Note 8 for further explanation.
Third quarter 2019 results include a $62.4 million pre-tax ($60.5 million, net of tax) gain on an additional sale of oil and gas rights in New Mexico. See Note 11 for further explanation. Third quarter 2019 results also include a $6.2 million pre-tax ($6.0 million, net of tax) net gain on the sale of the Cast Products business. See Note 48 for further explanation.
Fourth quarter 2017 includes a $37.02019 results include the following:
•$4.5 million pre-tax and($4.3 million, net of taxtax) restructuring charge to streamline ATI’s salaried workforce primarily to improve the cost competitiveness of the U.S.-based Flat Rolled Products business. See Note 3 for further explanation.
•$21.6 million pre-tax ($20.5 million, net of tax) debt extinguishment charge for the full redemption of the $350 million, 9.375% Senior Notes due 2019. Fourth quarter 2017 also includes $4.1 million of tax benefits from the 2017 Tax Cuts and Jobs Act legislation. Fourth quarter 2017 shares outstanding reflect the Company's issuance of 17 million shares of common stock on November 7, 2017 (see2021 Notes. See Note 1312 for further explanation).explanation.
First quarter 2016 results include a $9.0•$11.4 million pre-tax ($6.710.8 million, net of tax) joint venture impairment charge related to the A&T Stainless joint venture. See Note 9 for severance obligations in the FRP operations, and $26.4 million pre-tax ($19.7further explanation.
•$41.9 million net of tax) of work stoppage and return-to-work costs primarily affecting FRP operations following the ratification of the new labor agreement for USW-represented employees. First quarter 2016 results also include $12.0 million of below-normal incomediscrete tax benefits compared to those that would apply at a standard 35% tax rate.
Second quarter 2016 results include $22.4 million pre-tax ($8.4 million, net of tax) of work stoppage and return-to-work costs affecting FRP operations, and $11.4 million of above-normal income tax benefits compared to those that would apply at a standard 35% tax rate.
Third quarter 2016 results include $471.3 million pre-tax ($310.3 million, net of tax) long-lived asset impairment charges, $16.3 million pre-tax ($10.7 million, net of tax) of facility shutdown and idling costs, and $11.3 million pre-tax ($7.4 million, net of tax) of inventory valuation charges for titanium sponge. These chargesbenefit primarily related to the indefinite idlingreversal of a significant portion of the Company’s Rowley, UT titanium sponge facility. In addition, third quarter 2016 results include a $173.1 million charge for incomedeferred tax valuation allowances recorded on U.S. federal deferred tax assets.allowances. See Note 19 for further explanation.
Fourth quarter 2016 results include $15.4 million pre-tax ($10.0 million, net of tax) of facility shutdown and idling costs primarily related to the indefinite idling of the Company’s Rowley, UT titanium sponge facility, the consolidation of certain titanium manufacturing operations and the permanent closure of the Midland, PA commodity stainless steel melt and sheet finishing facility and the Bagdad, PA GOES finishing facility. In addition, fourth quarter 2016 results include $13.2 million pre-tax ($8.6 million, net of tax) of employee benefit costs associated with these facility idlings and closures as well as additional FRP severance charges for salaried workforce reductions. Fourth quarter 2016 results also include $32.4 million for above-normal income tax benefits compared to those that would apply at a standard 35% tax rate. The above-normal income tax benefit is due primarily to a $22.5 million correcting adjustment to reduce income tax valuation allowances on U.S. deferred tax assets that were established in the third quarter 2016; the correcting adjustment was not deemed material to the third quarter results.
Net of tax amounts presented above generally use the effective tax rate for the applicable quarterly period which differs from the effective tax rate for the full year. In periods with significant tax valuation allowance adjustments, net of tax amounts use a standard 35% tax rate, with separate identification by quarter of unusual income tax provision or benefit effects.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
In accordance with Securities Exchange Act Rules 13-1-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.2020.
(b) Management’s Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO) in Internal Control-Integrated Framework.
Based on that assessment, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2017,2020, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report issued an attestation report on effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020.
(c) Changes to Internal Control over Financial Reporting.
There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Certifications
The certifications of the Company’s Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act are included as Exhibits 31 and 32 to this Annual Report on Form 10-K. In addition, in 2017,2020, the Company’s Chief Executive Officer provided to the New York Stock Exchange the annual CEO certification pursuant to Section 303A regarding the Company’s compliance with the New York Stock Exchange’s corporate governance listing standards.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Allegheny Technologies Incorporated and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Allegheny Technologies Incorporated and Subsidiaries’ internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Allegheny Technologies Incorporated and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016, and2019, the related consolidated statements of operations, comprehensive income (loss), cash flows and statement of changes in consolidated equity for each of the three years in the period ended December 31, 2017,2020, and the related notes and our report dated February 20, 201826, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 20, 201826, 2021
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning our directors required by this item is incorporated and made part hereof by reference to the material appearing under the heading “Our Corporate Governance” and “Election of Directors” and the information concerning our executive officers required by this item is incorporated and made part hereof by reference to the material appearing under the heading “Members of ATI's Executive Management,” in the Allegheny Technologies Proxy Statement for the 20182021 Annual Meeting of Stockholders (the “2018“2021 Proxy Statement”), which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year. Information concerning the Audit Committee and its financial expert required by this item is incorporated and made part hereof by reference to the material appearing under the heading “Our Corporate Governance-Board Information- Board Committees” in the 2018 Proxy Statement. Information required by this item regarding compliance with Section 16(a) of the Exchange Act is incorporated and made a part hereof by reference to the material appearing under the heading “Stock Ownership Information- Section 16(a) Beneficial Ownership Reporting Compliance” in the 20182021 Proxy Statement.
Allegheny Technologies has adopted Corporate Guidelines for Business Conduct and Ethics that apply to all employees including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Corporate Guidelines for Business Conduct and Ethics as well as the charters for the Company’s Audit, Finance, Nominating and Governance, Personnel and Compensation, and Technology Committees, as well as periodic and current reports filed with the SEC, are available through the Company’s website at http://www.atimetals.com and are available in print free of charge to any shareholder upon request. To obtain a copy, contact the Corporate Secretary, Allegheny Technologies Incorporated, 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479 (telephone: 412-394-2800). The Company intends to post on its website any waiver from or amendment to the guidelines that apply to the Company’s Principal Executive Officer, Principal Financial Officer or Principal Accounting Officer or Controller (or persons performing similar functions) that relate to elements of the code of ethics identified by the Securities and Exchange Commission in Item 406(b) of Regulation S-K.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to “Our Corporate Governance- Director Compensation,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” as set forth in the 20182021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to the ownership of equity securities by certain beneficial owners and management is incorporated by reference to “Stock Ownership Information” as set forth in the 20182021 Proxy Statement.
Equity Compensation Plan Information
Information about our equity compensation plans at December 31, 20172020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (a) | | | | |
| (In thousands, except per share amounts) | | Number of
Shares to be
Issued Upon
Exercise of
Outstanding
Options, Warrants and Rights (1) | | Weighted
Average
Exercise Price of
Outstanding
Options, Warrants and Rights (2) | | Number of Shares
Remaining Available
for Future Issuance
Under Equity
Compensation Plans (3)
(excluding securities
reflected in column (a)) |
| Equity Compensation Plans Approved by Shareholders | | 747 | | | $ | — | | | 5,300 | |
| Equity Compensation Plans Not Approved by Shareholders | | — | | | — | | | — | |
| Total | | 747 | | | $ | — | | | 5,300 | |
(1)Includes stock-settled equity awards previously granted under the Allegheny Technologies Incorporated 2020 Incentive Plan (the “2020 Incentive Plan”) and prior incentive plans. Amounts reflected for such performance-based awards represent the maximum number of shares to be awarded at the conclusion of the applicable performance cycle.
(2)Outstanding stock-settled awards are not included in this calculation.
|
| | | | | | | | | | |
| | | (a) | | | | |
| (In thousands, except per share amounts) | | Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (2) | | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (3) (excluding securities reflected in column (a)) |
| Equity Compensation Plans Approved by Shareholders | | 3,017 |
| | $ | — |
| | 5,621 |
|
| Equity Compensation Plans Not Approved by Shareholders | | — |
| | — |
| | — |
|
| Total | | 3,017 |
| | $ | — |
| | 5,621 |
|
| |
(1) | Includes stock-settled equity awards previously granted under the Allegheny Technologies Incorporate 2015 Incentive Plan (the “2015 Incentive Plan”) and the Allegheny Technologies Incorporate 2017 Incentive Plan (the “2017 Incentive Plan”). Amounts reflected for such performance-based awards represent the maximum number of shares to be awarded at the conclusion of the applicable performance cycle. |
| |
(2) | Outstanding stock-settled awards are not included in this calculation. |
| |
(3) | Represents shares available for issuance under the 2017 Incentive Plan (which provides for the issuance of stock options, stock appreciation rights, restricted shares, restricted stock units, performance and other stock-based awards). See Note 13. Stockholders’ Equity for a discussion of the Company’s stock-based compensation plans. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference to “Related Party Transactions” and “Our Corporate Governance- Board Information- Board Composition and Independence” as set forth in the 20182021 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information required by this item is incorporated by reference to “Ratification of Selection of Independent Auditors” as set forth in the 20182021 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statements and Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules and Exhibits:
(1) Financial Statements
The following consolidated financial statements and report are filed as part of this report under Item 8 – “Financial Statements and Supplementary Data”:
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Statements of Operations — Years Ended December 31, 2017, 2016,2020, 2019, and 20152018
Consolidated Statements of Comprehensive Income (Loss) — Years Ended December 31, 2017, 2016,2020, 2019, and 20152018
Consolidated Balance Sheets at December 31, 20172020 and 20162019
Consolidated Statements of Cash Flows — Years Ended December 31, 2017, 2016,2020, 2019, and 20152018
Statements of Changes in Consolidated Equity — Years Ended December 31, 2017, 2016,2020, 2019, and 20152018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules set forth in the applicable accounting regulations of the Securities and Exchange Commission either are not required under the related instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K.
EXHIBIT INDEX
| | | | | | | | |
Exhibit
No. | | Description |
| | |
Exhibit
No.
3.1 | | Description |
| | |
3.1 | | |
| 3.2 | | |
| | | | | | | | |
4.1Exhibit
No. | | Description |
| 4.1 | | |
| 4.2 | | |
4.24.3 | | |
4.34.4 | | |
4.44.5 | | Third Supplemental Indenture, dated January 7, 2011, between Allegheny Technologies Incorporated and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated January 7, 2011 (File No. 1-12001)). |
4.5 | | Form of 5.950% Senior Note due 2021 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated January 7, 2011 (File No. 1-12001)). |
4.6 | | |
4.74.6 | | |
4.84.7 | |
|
4.94.8 | |
|
10.14.9 | | |
| 4.10 | | |
| 4.11 | | |
| 4.12 | | |
| 4.13 | | |
| 10.1 | | |
| 10.2 | | Supplemental Pension Plan for Certain Key Employees of Allegheny Technologies Incorporated and its subsidiaries (formerly known as the Allegheny Ludlum Corporation Key Man Salary Continuation Plan) (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12001)).* |
10.3 | | |
10.410.3 | | |
10.5 | | Administrative Rules for the Non-Employee Director Restricted Stock Program, effective as of May 2, 2007, as amended through May 7, 2010 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 1-12001)).* |
10.6 | | Allegheny Technologies Incorporated 2007 Incentive Plan As Amended and Restated, effective May 7, 2010 (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 dated May 7, 2010 (File No 333-166628)).* |
10.7 | | Aircraft Time Sharing Agreement, effective as of January 1, 2012, by and between Allegheny Technologies Incorporated and Richard J. Harshman (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-12001)). |
|
| 10.4 | | |
Exhibit
No.
| | Description |
10.8 | | Form of Performance/Restricted Stock Agreement dated February 22, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10- for the quarter ended March 31, 2012 (File No. 1-12001)).* |
10.9 | | Form of Clawback Agreement regarding incentive payments under the Annual Incentive Plan dated March 15, 2012 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-12001)).* |
10.10 | | Form of Clawback Agreement regarding incentive payments under the long-term incentive plans dated March 15, 2012 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-12001)).* |
10.11 | | Amendment No. 1 to the Allegheny Technologies Incorporated 2007 Incentive Plan, as Amended and Restated, effective May 11, 2012 (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 dated May 17, 2012 (File No. 333-181491)).* |
10.12 | | Form of Performance/Restricted Stock Agreement dated February 28, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (File No. 1-12001)).* |
10.13 | | Amended and Restated Change in Control Severance Agreement between the Company and Richard J. Harshman, dated August 2, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 1-12001)).* |
10.14 | | Form of Amended and Restated Change in Control Severance Agreement (incorporated by reference to Exhibit 10.399.1 to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended September 30, 20138-K dated December 10, 2019 (File No. 1-12001)).* |
10.1510.5 | | Form of 2014 Performance/Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (File No. 1-12001)).* |
10.16 | | Form of Amended and Restated Change in Control Severance Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (File No. 1-12001)).* |
10.17 | | Form of Long Term Shareholder Value Award Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 1-12001)).* |
10.18 | | |
10.1910.6 | | Form of Total Shareholder Return Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 1-12001)).* |
10.20 | | |
10.2110.7 | | |
| | | | | | | | |
10.22Exhibit
No. | | Description |
| 10.8 | | |
10.2310.9 | |
|
10.2410.10 | | Form of Annual Performance Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 6, 2016 (File No. 1-12001)).*
|
10.25 | | Allegheny Technologies Incorporated 2017 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 1-12001)).* |
10.2610.11 | | |
| 10.12 | | |
| 10.13 | | |
| 10.14 | | |
| 10.15 | | |
| 10.16 | | |
| 10.17 | | |
| 10.18 | | First Amended and Restated Revolving Credit, Term Loan, Delayed Draw Term Loan and Security Agreement, dated as of September 15, 2015,30, 2019, by and among the borrowers party thereto, the Company and other guarantors party thereto, the lenders party thereto, and PNC Bank, National Association, as Lender and Agent and PNC Capital Markets LLC, as Sole Lead Arranger and Sole Bookrunner(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (File No. 1-12001)). |
| 10.19 | | |
10.27 | | First Amendment to Revolving Credit and Security Agreement, dated as of May 13, 2016, by and among the borrowers party thereto, the guarantors party thereto, the lenders party thereto and PNC Bank, National Association, as agent for the lenders (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 16, 2016 (File No. 1-12001)).
|
10.28 | | Acknowledgement Letter Agreement, dated as of July 7, 2016, between TDY Industries, LLC, as borrowing agent, and PNC Bank, National Association, as agent for the lenders (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed August 3, 2016 (File No. 1-12001)).).
|
|
| 21.1 | | |
Exhibit
No.
| | Description |
10.29 | | Second Amendment to Revolving Credit and Security Agreement, dated June 21, 2017, by and among the borrowers party thereto, the guarantors party thereto, the lenders party thereto, and PNC Bank, National Association, in its capacity as agent for the lenders (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed June 27, 2017). |
12.1 | | |
21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema DocumentDocument. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. |
| 104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
| |
* | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Report. |
* Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Report.
Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have been omitted from the Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. A copy of any omitted document will be furnished to the Commission upon request.
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | ALLEGHENY TECHNOLOGIES INCORPORATED |
| | | | |
| Date: | February 26, 2021 | ALLEGHENY TECHNOLOGIES INCORPORATEDBy | | /s/ Robert S. Wetherbee |
| | | | Robert S. Wetherbee |
Date: | February 20, 2018 | By | | /s/ Richard J. Harshman |
| | | | Richard J. Harshman |
| | | | Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the 20th26th day of February, 2018.
|
| | | | | | | |
/s/ Richard J. HarshmanRobert S. Wetherbee | | /s/ Patrick J. DeCourcyDonald P. Newman |
Richard J. HarshmanRobert S. Wetherbee
Chairman, President and Chief
Executive Officer and Director
(Principal Executive Officer) | | Patrick J. DeCourcyDonald P. Newman
Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) |
| | |
| /s/ Diane C. Creel | | /s/ Karl D. Schwartz |
Diane C. Creel Board Chair | | Karl D. Schwartz Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) |
| | |
| /s/ Leroy M. Ball | | /s/ David P. Hess |
Leroy M. Ball Director | | David P. Hess Director |
| | |
| /s/ Herbert J. Carlisle | | /s/ Marianne Kah |
Herbert J. Carlisle Director | | Marianne Kah Director |
| | |
| /s/ Carolyn Corvi | | /s/ David J. Morehouse |
Carolyn Corvi Director | | David J. Morehouse Director |
| | |
/s/ DianeJames C. CreelDiggs | | /s/ John R. Pipski |
DianeJames C. CreelDiggs
Director | | John R. Pipski Director |
| | |
/s/ James C. DiggsJ. Brett Harvey | | /s/ James E. Rohr |
James C. Diggs
Director
| | James E. Rohr
Director
|
| | |
/s/ J. Brett Harvey | | /s/ John D. Turner |
J. Brett Harvey Director | | John D. TurnerJames E. Rohr
Director |
| | |
/s/ Barbara S. Jeremiah | | |
Barbara S. Jeremiah
Director
| | |