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 equity method investments is included in the consolidated statements of operations as a component of Other (non-operating) income (expense). See Note 9 for further explanation of the Company’s joint ventures. Intercompany 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 2020 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 major end markets for the ATI’s products are customers in the aerospace & defense, energy, automotive, construction and mining, food equipment and appliances, and medical markets.
At December 31, 2020, ATI has approximately 6,500 active employees, of which approximately 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). The 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 extended the terms of the expired CBAs for one year, to February 28, 2021.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments that are readily convertible to cash with original maturities of three months or less.
Accounts Receivable
Accounts receivable are presented net of a reserve for doubtful accounts of $4.3 million and $4.6 million at December 31, 2020 and 2019, respectively. Trade credit is extended based upon evaluations of each customer’s ability to perform its obligations, which are updated periodically. The Company adopted new accounting guidance in fiscal year 2020 which requires accounts receivable reserves to 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. 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 finance leases. Depreciation is primarily recorded using the straight-line method. Prior to December 2020, property, plant and equipment associated with the Hot-Rolling and Processing Facility (HRPF) in the AA&S segment was being depreciated utilizing the units of production method of depreciation, which the Company believed 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.
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
The 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 ATI’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 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 $14.1 million in 2020, $17.8 million in 2019, and $22.7 million in 2018. Customer funded research and development costs were $0.7 million in 2020, $2.4 million in 2019, and $2.2 million in 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 based on the award attainment status at the end of the 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 the estimated 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 March 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 the accounting for income taxes. The areas for simplification in the guidance involve the 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 income taxes in the area of franchise taxes. This new guidance is effective for the Company in fiscal year 2021, with early adoption permitted. 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 modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on the requirement. 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 based 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 assets 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 August 2020, the FASB issued new 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 coupon interest rate. The new guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation, requiring the if-converted method, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. This new guidance is effective for the Company 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 embedded conversion, which is net of allocated offering costs, previously classified in additional 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.
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(In millions)
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2020
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2019
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2018
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Total sales:
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High Performance Materials & Components
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$
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1,235.4
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$
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2,054.2
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$
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2,039.2
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Advanced Alloys & Solutions
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1,947.5
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|
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2,392.2
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|
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2,302.4
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Total sales
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3,182.9
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4,446.4
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|
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4,341.6
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Intersegment sales:
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High Performance Materials & Components
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70.8
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|
|
75.7
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76.1
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Advanced Alloys & Solutions
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130.0
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248.2
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218.9
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Total intersegment sales
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200.8
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323.9
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295.0
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Sales to external customers:
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High Performance Materials & Components
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1,164.6
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|
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1,978.5
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|
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1,963.1
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Advanced Alloys & Solutions
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1,817.5
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2,144.0
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2,083.5
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Total sales to external customers
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$
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2,982.1
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$
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4,122.5
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$
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4,046.6
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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 $1,303.8 million in 2018.
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(In millions)
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2020
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2019
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2018
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EBITDA:
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High Performance Materials & Components
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$
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129.6
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|
|
$
|
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)
|
|
—
|
|
|
(0.1)
|
|
|
(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)
|
|
|
—
|
|
Impairment of goodwill (See Note 4)
|
|
(287.0)
|
|
|
—
|
|
|
—
|
|
Joint venture restructuring and impairment charge (See Note 9)
|
|
(2.4)
|
|
|
(11.4)
|
|
|
—
|
|
Gain on joint venture deconsolidation (See Note 9)
|
|
—
|
|
|
—
|
|
|
15.9
|
|
Debt extinguishment charge (See Note 12)
|
|
(21.5)
|
|
|
(21.6)
|
|
|
—
|
|
Gain on asset sales, net
|
|
2.5
|
|
|
89.8
|
|
|
—
|
|
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 expense 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 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 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 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 various AA&S segment operations identified for closure as part of the standard 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 incentive 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 year ended December 31, 2020 include:
•$17.4 million of termination benefits for pension and postretirement medical obligations related to facility closures from the standard stainless exit (see Note 16 for further explanation). These costs are classified within nonoperating retirement benefit expense in the consolidated statements of operations.
•$7.2 million of other 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.
Restructuring charges for the fiscal year ended December 31, 2019 of $4.5 million, which are reported as restructuring charges on the consolidated statement of operations and excluded from business segment results, are comprised of severance obligations for the reduction of approximately 70 positions in order to streamline 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 fourth quarter 2019 and throughout 2020, the majority of which are expected to be 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
|
|
$
|
—
|
|
Additions
|
60.5
|
|
4.5
|
|
Payments
|
(21.6)
|
|
—
|
|
End of year balance
|
$
|
43.4
|
|
$
|
4.5
|
|
Of 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 December 31, 2020 consolidated balance sheet. The $4.5 million restructuring reserve balance at December 31, 2019 is recorded in other current liabilities on the December 31, 2019 consolidated balance sheet.
Note 4. Goodwill and Other Intangible Assets
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.
The Company performs its annual goodwill impairment evaluations in the fourth quarter of each year. During the second quarter of 2020, the Company performed an interim goodwill impairment analysis on the Forged Products reporting 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 evaluation, this reporting unit had a fair value that exceeded carrying value by approximately 30%. For the 2020 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 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 second quarter 2020 interim goodwill impairment evaluation, the Company determined that the fair value of the Forged Products reporting unit was below carrying value, including 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 due to near-term reductions in commercial aerospace market demand. 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, 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 2020 HPMC business segment results.
The $240.7 million of goodwill remaining as of December 31, 2020 on the Company’s 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 the Company’s annual goodwill impairment evaluation performed in the fourth quarter of 2020, quantitative goodwill assessments were performed for these two HPMC reporting units 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 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 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 year ended December 31, 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 years ended December 31, 2019 and 2018. Accumulated goodwill impairment losses as of December 31, 2020 were $528.0 million and as 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 goodwill of $6.0 million, 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, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(in millions)
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
Technology
|
|
$
|
76.8
|
|
|
$
|
(33.4)
|
|
|
$
|
76.8
|
|
|
$
|
(29.7)
|
|
Customer relationships
|
|
27.0
|
|
|
(10.4)
|
|
|
27.0
|
|
|
(9.3)
|
|
Trademarks
|
|
52.4
|
|
|
(24.5)
|
|
|
52.4
|
|
|
(20.9)
|
|
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, 2020, 2019 and 2018, respectively. For each of the years ending December 31, 2021 through 2025, annual amortization expense is expected to be approximately $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 two business segments: HPMC and AA&S. Revenue is disaggregated within these two 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
|
|
—
|
|
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
|
|
—
|
%
|
25
|
%
|
15
|
%
|
|
—
|
%
|
23
|
%
|
12
|
%
|
|
—
|
%
|
23
|
%
|
12
|
%
|
Precision forgings, castings and components
|
|
34
|
%
|
—
|
%
|
14
|
%
|
|
36
|
%
|
—
|
%
|
18
|
%
|
|
40
|
%
|
—
|
%
|
20
|
%
|
Zirconium and related alloys
|
|
—
|
%
|
15
|
%
|
9
|
%
|
|
—
|
%
|
11
|
%
|
6
|
%
|
|
—
|
%
|
11
|
%
|
5
|
%
|
Total High-Value Products
|
|
100
|
%
|
80
|
%
|
88
|
%
|
|
100
|
%
|
78
|
%
|
89
|
%
|
|
100
|
%
|
75
|
%
|
87
|
%
|
Standard Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard stainless products
|
|
—
|
%
|
20
|
%
|
12
|
%
|
|
—
|
%
|
22
|
%
|
11
|
%
|
|
—
|
%
|
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
|
—
|
|
—
|
|
—
|
|
Reclassification to/from long-term
|
0.1
|
|
—
|
|
16.8
|
|
Divestiture
|
—
|
|
(7.3)
|
|
—
|
|
Other
|
—
|
|
—
|
|
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
|
—
|
|
—
|
|
—
|
|
Reclassified to accounts receivable
|
—
|
|
—
|
|
—
|
|
Impairment
|
—
|
|
—
|
|
—
|
|
Reclassification to/from short-term
|
(0.1)
|
|
—
|
|
(16.8)
|
|
Balance as of period end
|
$
|
—
|
|
$
|
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
|
—
|
|
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
|
—
|
|
—
|
|
—
|
|
Other
|
—
|
|
—
|
|
—
|
|
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
|
|
$
|
—
|
|
$
|
(0.1)
|
|
$
|
(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 two 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 two 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 AA&S segment, and manufactures PRS stainless products mainly for the electronics and automotive markets located in Asia. Cash and cash equivalents held by STAL as of December 31, 2020 were $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, 2020 were $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 no 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 was $1.2 million in 2020, $1.5 million in 2019, and $2.9 million in 2018, which is included in AA&S segment’s operating results, and within other income/expense, net, on the consolidated statements of operations. Sales to Uniti, which are included in ATI’s consolidated statements of operations, were $36.7 million in 2020, $31.3 million in 2019, and $49.4 million in 2018. Accounts receivable from Uniti were $1.4 million and $0.2 million at December 31, 2020 and 2019, respectively.
Note 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)
|
|
|
—
|
|
Balance at end of year
|
|
$
|
24.0
|
|
|
$
|
23.7
|
|
Note 11. Supplemental Financial Statement Information
Cash and cash equivalents at December 31, 2020 and 2019 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
|
|
Other current liabilities included salaries, wages and other employee-related liabilities of $92.8 million and $94.5 million, and accrued interest of $18.0 million and $25.0 million at December 31, 2020 and 2019, respectively.
Other income (expense) for the years ended December 31, 2020, 2019, and 2018 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)
|
|
—
|
|
|
(1.9)
|
|
|
—
|
|
Gain on joint venture deconsolidation (See Note 9)
|
|
—
|
|
|
—
|
|
|
15.9
|
|
Joint venture restructuring and impairment charges (See Note 9)
|
|
(2.4)
|
|
|
(11.4)
|
|
|
—
|
|
Adjustment to indemnification for conditional ARO costs (See Note 10)
|
|
4.3
|
|
|
—
|
|
|
—
|
|
Other
|
|
0.1
|
|
|
0.1
|
|
|
1.2
|
|
Total other income (expense), net
|
|
$
|
(1.2)
|
|
|
$
|
69.7
|
|
|
$
|
20.5
|
|
Gains from disposal of property, plant and equipment, net for the years ended December 31, 2020 and 2019 include a $2.5 million and $91.7 million gain, respectively, on the sale of certain oil and gas rights in Eddy County, NM. These cash gains are reported as an investing activity on the consolidated statement of cash flows for the years ended December 31, 2020 and 2019, and are excluded from segment operating results. 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 the underlying oil and gas rights that it sold in 2019 and 2020.
Note 12. Debt
Debt at December 31, 2020 and 2019 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
|
|
|
—
|
|
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
|
|
—
|
|
|
—
|
|
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)
|
|
|
—
|
|
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
|
|
(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 $96.1 million in 2020, $104.9 million in 2019, and $102.1 million in 2018. Interest expense was reduced by $7.7 million, $4.7 million, and $4.1 million, in 2020, 2019, and 2018, respectively, from interest capitalization on capital projects. Interest and commitment fees paid were $95.4 million in 2020, $105.7 million in 2019, and $102.6 million in 2018. Net interest expense includes interest income of $1.7 million in 2020, $5.9 million in 2019, and $1.1 million in 2018.
Scheduled principal payments during the next five years are $17.8 million in 2021, $95.9 million in 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 2019, the Company redeemed all $500 million aggregate principal amount outstanding of the 5.95% Senior Notes due 2021 (2021 Notes), which had a January 15, 2021 maturity date, resulting in a $21.6 million pre-tax debt extinguishment charge, which included a $20.9 million cash make-whole payment related to the early extinguishment of the 2021 Notes as required by the applicable indenture, and a $0.7 million charge for deferred debt issue costs.
2025 Convertible Notes
In June 2020, the Company issued and sold $285.0 million aggregate principal amount of 2025 Convertible Notes. The Company 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 same 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 on July 2, 2020, subsequent to the end of the second quarter 2020. 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 15, commencing December 15, 2020.
The Company used a portion of the net proceeds from the offering 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 for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on the trading day immediately preceding the date on which ATI provides written notice of redemption.
The initial conversion rate for the 2025 Convertible Notes is 64.5745 shares of ATI common stock per $1,000 principal amount of the 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 combination thereof, at ATI’s election.
As 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 component 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 non-cash interest expense, commonly referred to as phantom yield, over the term of the 2025 Convertible Notes using the effective interest method, and is not remeasured as long as it continues to meet the conditions for equity classification. Offering costs attributable to the debt component totaling $7.5 million are being amortized to interest expense over the term of the 2025 Convertible Notes, and offering costs attributable to the equity component totaling $1.6 million were netted within stockholders’ equity. As a result, $49.8 million of the 2025 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 $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 will, 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 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.
2022 Convertible Notes
As of December 31, 2020, the Company had $84.2 million of aggregate principal amount of the 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 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 (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.
2027 Notes
On November 22, 2019, ATI issued $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 existing and future senior unsecured debt. The 2027 Notes restrict the Company’s ability 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 is collateralized by the accounts receivable and inventory of the Company’s domestic operations. The ABL facility, which matures in September 2024, includes a $500 million revolving credit facility, a 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 term 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 for 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 June 2024.
The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.25% 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 less 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 time during the term 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 ending 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 no outstanding borrowings under the revolving portion of the ABL, and $38.5 million was utilized to support the issuance of 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 no 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, 2020, the Company had not guaranteed any third-party indebtedness.
Note 13. Leases
Adoption Method and Impact
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 non-lease components for all asset classes, and did not elect the hindsight practical expedient to determine the lease term. The Company has made an accounting policy election to apply 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 impact on the Company’s results of operations or cash flows, and had no impact to the net deferred tax position on the consolidated balance sheet due to the Company’s income tax valuation allowances for federal and state purposes (see Note 19).
The Company has entered into finance lease contracts with lenders for progress payments on machinery and equipment that is being constructed at the request and specification of the Company. As of December 31, 2020, the lenders had made $17.2 million of progress payments on behalf of the Company, and $29.0 million of progress payments are scheduled to be paid. Upon payment of the final progress payments by the lenders, finance leases will commence, and $46.2 million, discounted using the applicable discount rates at lease inceptions, of ROU assets and lease liabilities will be recognized by the Company.
The following represents the components of lease cost and other information for both operating and financing leases for the fiscal years ending December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
($ 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)
|
|
—
|
|
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 real property lease contracts include options to extend the lease term. During the fourth quarter of 2019 and 2020, the Company reassessed the likelihood of renewal and included $10.2 million for the renewal options in fiscal year ended December 31, 2019 for several of these operating leases in the ROU 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 in 2018.
The following table reconciles future minimum undiscounted rental commitments for operating leases to the operating lease liabilities recorded on the consolidated balance sheet as of December 31, 2020 (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, 2020 (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
|
|
Note 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 no 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
|
|
|
$
|
—
|
|
Nickel and other raw material contracts
|
|
Prepaid expenses and other current assets
|
|
3.7
|
|
|
4.4
|
|
Natural gas contracts
|
|
Other assets
|
|
0.2
|
|
|
—
|
|
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
|
|
$
|
—
|
|
|
$
|
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, 2020 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
|
|
|
$
|
—
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Assets
|
|
4.8
|
|
|
4.8
|
|
|
—
|
|
|
4.8
|
|
Liabilities
|
|
4.0
|
|
|
4.0
|
|
|
—
|
|
|
4.0
|
|
Debt (a)
|
|
1,629.1
|
|
|
1,847.7
|
|
|
1,594.2
|
|
|
253.5
|
|
The estimated fair value of financial instruments at December 31, 2019 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
|
|
|
$
|
—
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Assets
|
|
5.6
|
|
|
5.6
|
|
|
—
|
|
|
5.6
|
|
Liabilities
|
|
7.5
|
|
|
7.5
|
|
|
—
|
|
|
7.5
|
|
Debt (a)
|
|
1,411.2
|
|
|
1,676.5
|
|
|
1,552.8
|
|
|
123.7
|
|
(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. The December 31, 2020 debt carrying value includes $46.8 million for the unamortized balance of the portion of the 2025 Convertible Notes recorded in stockholders’ equity due to the flexible settlement feature of the notes (see Note 12).
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.
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 2022 and 2025 Convertible Notes, the 2023 Notes, 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 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)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
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)
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
(0.2)
|
|
|
—
|
|
|
—
|
|
Termination benefits
|
|
10.9
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
|
—
|
|
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%
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average expected long-term rate of return on assets
|
|
7.16
|
%
|
|
7.52
|
%
|
|
7.75
|
%
|
|
—
|
%
|
|
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%
|
|
—
|
|
|
—
|
|
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
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Effect of currency rates
|
|
4.3
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
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
|
|
—
|
|
|
—
|
|
|
(2.5)
|
|
|
—
|
|
Plan amendments
|
|
—
|
|
|
9.5
|
|
|
—
|
|
|
(5.2)
|
|
Termination benefits
|
|
10.9
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
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)
|
|
|
—
|
|
Employer contributions
|
|
138.8
|
|
|
153.4
|
|
|
—
|
|
|
—
|
|
Effect of currency rates
|
|
4.6
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(258.0)
|
|
|
(274.6)
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
|
$
|
2,046.4
|
|
|
$
|
1,902.1
|
|
|
$
|
—
|
|
|
$
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International equities
|
|
477.1
|
|
|
448.7
|
|
|
28.4
|
|
|
—
|
|
|
—
|
|
Debt securities and cash:
|
|
|
|
|
|
|
|
|
|
|
Fixed income and cash equivalents
|
|
588.0
|
|
|
306.3
|
|
|
80.3
|
|
|
201.4
|
|
|
—
|
|
Floating rate
|
|
47.4
|
|
|
47.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private equity
|
|
130.0
|
|
|
130.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hedge funds
|
|
325.0
|
|
|
325.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Real estate and other
|
|
26.9
|
|
|
26.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
2,046.4
|
|
|
$
|
1,549.0
|
|
|
$
|
296.0
|
|
|
$
|
201.4
|
|
|
$
|
—
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International equities
|
|
326.1
|
|
|
299.6
|
|
|
26.5
|
|
|
—
|
|
|
—
|
|
Debt securities and cash:
|
|
|
|
|
|
|
|
|
|
|
Fixed income and cash equivalents
|
|
650.7
|
|
|
419.9
|
|
|
58.7
|
|
|
172.1
|
|
|
—
|
|
Floating rate
|
|
51.0
|
|
|
51.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private equity
|
|
129.0
|
|
|
129.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hedge funds
|
|
263.9
|
|
|
263.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Real estate and other
|
|
37.8
|
|
|
37.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
1,902.1
|
|
|
$
|
1,455.9
|
|
|
$
|
274.1
|
|
|
$
|
172.1
|
|
|
$
|
—
|
|
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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
—
|
|
|
(132.5)
|
|
|
|
Amounts reclassified from AOCI
|
(a)
|
55.9
|
|
|
(b)
|
—
|
|
|
(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
|
|
|
|
—
|
|
|
(136.9)
|
|
|
|
Amounts reclassified from AOCI
|
(a)
|
64.3
|
|
|
(b)
|
—
|
|
|
(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)
|
|
|
|
—
|
|
|
(80.2)
|
|
|
|
Amounts reclassified from AOCI
|
(a)
|
62.5
|
|
|
(b)
|
—
|
|
|
(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
|
$
|
—
|
|
|
$
|
17.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17.3
|
|
|
|
OCI before reclassifications
|
|
—
|
|
|
|
(6.2)
|
|
|
|
—
|
|
|
|
—
|
|
|
(6.2)
|
|
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(b)
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
Net current-period OCI
|
|
—
|
|
|
|
(6.2)
|
|
|
|
—
|
|
|
|
—
|
|
|
(6.2)
|
|
|
|
Balance, December 31, 2018
|
|
—
|
|
|
|
11.1
|
|
|
|
—
|
|
|
|
—
|
|
|
11.1
|
|
|
|
OCI before reclassifications
|
|
—
|
|
|
|
(1.3)
|
|
|
|
—
|
|
|
|
—
|
|
|
(1.3)
|
|
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(b)
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
Net current-period OCI
|
|
—
|
|
|
|
(1.3)
|
|
|
|
—
|
|
|
|
—
|
|
|
(1.3)
|
|
|
|
Balance, December 31, 2019
|
|
—
|
|
|
|
9.8
|
|
|
|
—
|
|
|
|
—
|
|
|
9.8
|
|
|
|
OCI before reclassifications
|
|
—
|
|
|
|
11.4
|
|
|
|
—
|
|
|
|
—
|
|
|
11.4
|
|
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(b)
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
Net current-period OCI
|
|
—
|
|
|
|
11.4
|
|
|
|
—
|
|
|
|
—
|
|
|
11.4
|
|
|
|
Balance, December 31, 2020
|
$
|
—
|
|
|
$
|
21.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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, 2020, there were no shares of preferred stock issued.
Dividends
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 demonstrates 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 and 15% of the maximum revolving credit availability, and (B) the Company maintains a fixed charge coverage ratio of at least 1.00:1.00, as calculated in accordance with the terms of the ABL facility.
Share-based Compensation
In May 2020, the Company’s stockholders approved the Allegheny Technologies Incorporated 2020 Incentive Plan (the “2020 Incentive Plan”). Following adoption, all new share-based compensation awards are being made under the 2020 Incentive Plan. Shares previously remaining available for grant under prior incentive plans, or which become available for award due to the forfeiture or cancellation of prior awards under those prior plans, are available for award under the 2020 Incentive Plan. Outstanding grants previously made under prior incentive plans remain in effect in accordance with 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, 2020, 5.3 million shares of common stock were available for future awards under the 2020 Incentive Plan. The general terms of each arrangement granted under the 2020 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). The Company’s previous share-based compensation program included a Performance/Restricted Stock Program (PRSP) of nonvested stock awards for which vesting and expense continued into fiscal year 2020 for certain participants.
Nonvested stock awards/units:
Restricted Share 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.
Nonvested stock 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.
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 2013, 2014 and 2015 under the Company’s PRSP, one-half of the nonvested stock (“performance shares”) vested 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 2013 and 2014 vest over a service period of five years, with accelerated vesting to three years if the performance shares’ vesting criterion was attained. Expense for each of these awards was recognized based on estimates of attaining the performance criterion, including estimated forfeitures. The three-year cumulative income statement metrics in 2013, 2014 and 2015 PRSP awards were not met, and the
performance share portions were forfeited. The remaining service portions of the 2013, 2014 and 2015 PRSP awards vested at the completion of the applicable service periods.
Compensation expense related to all nonvested stock awards and units was $9.6 million in 2020, $9.8 million in 2019, and $9.7 million in 2018. Approximately $6.5 million of unrecognized fair value compensation expense relating to restricted stock units is expected to be recognized through 2023, including $4.8 million expected to be recognized in 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, 2020, 2019, and 2018 was as follows:
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|
(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)
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|
|
(11.2)
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|
|
(681)
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|
|
(14.5)
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|
|
(540)
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|
|
(11.7)
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Forfeited
|
|
(24)
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|
|
(0.6)
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|
|
(14)
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|
|
(0.4)
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|
|
(15)
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|
(0.3)
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|
Nonvested, end of year
|
|
929
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|
|
$
|
17.9
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|
|
756
|
|
|
$
|
19.6
|
|
|
1,055
|
|
|
$
|
23.7
|
|
The beginning of the year 2018 nonvested weighted average grant date fair value in the table above includes a $4.6 million reduction from the prior year disclosure to correct vesting and forfeiture activity related to dividend equivalents for grants under the PRSP.
Performance awards:
Performance Share 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 for 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 2018, 2019 and 2020, the Company awarded 456,318, 479,364 and 673,962 share units, respectively, at the target level with a weighted average grant date fair value of $12.9 million, $14.7 million and $13.5 million, respectively. The 2018, 2019 and 2020 PSU performance, and share units, each have a threshold attainment of 25% and a maximum attainment of 200% of the target financial performance metrics and target share units, measured over the applicable three-year performance period. At December 31, 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 vested between threshold and target attainment, and at -10% for the TSR Modifier, resulting in 301,170 shares being issued in early 2021. At December 31, 2019, the 2017 PSU awards vested above target attainment 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 2019 and 2020 PSU awards could range from zero to $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 $11.4 million and $14.6 million of compensation expense in 2018 and 2019, respectively, for the PSU 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, 2020, ATI projects that performance attainment will be below threshold for both the 2019 and 2020 PSU awards. Based on these estimates, there is no cumulative unrecognized compensation expense
remaining for the PSU awards. Forfeited share units in 2018, 2019 and 2020 were 21,848, 48,598 and 50,050, respectively, with a weighted average grant date fair value of $0.5 million, $1.1 million and $1.4 million, respectively.
Note 19. Income Taxes
Income (loss) before income taxes for the Company’s U.S. and non-U.S. operations was as follows:
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|
|
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|
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(In millions)
|
|
2020
|
|
2019
|
|
2018
|
U.S.
|
|
$
|
(1,505.4)
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|
|
$
|
190.2
|
|
|
$
|
190.8
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|
Non-U.S.
|
|
23.5
|
|
|
51.4
|
|
|
56.9
|
|
Income (loss) before income taxes
|
|
$
|
(1,481.9)
|
|
|
$
|
241.6
|
|
|
$
|
247.7
|
|
The income tax provision (benefit) was as follows:
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|
|
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(In millions)
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2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
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0.6
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|
|
$
|
2.2
|
|
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$
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1.0
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State
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|
(1.1)
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|
|
0.2
|
|
|
(0.8)
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Foreign
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|
6.7
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|
|
8.1
|
|
|
10.1
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|
Total
|
|
6.2
|
|
|
10.5
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|
|
10.3
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Deferred:
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|
|
|
|
|
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Federal
|
|
26.6
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|
(4.6)
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|
|
1.3
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State
|
|
47.1
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|
|
(40.4)
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|
|
(0.5)
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|
Foreign
|
|
(2.2)
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|
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6.0
|
|
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(0.1)
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|
Total
|
|
71.5
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|
|
(39.0)
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|
|
0.7
|
|
Income tax provision (benefit)
|
|
$
|
77.7
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|
|
$
|
(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 provision (benefit):
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|
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|
|
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(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Taxes computed at the federal rate
|
|
$
|
(311.2)
|
|
|
$
|
50.7
|
|
|
$
|
52.0
|
|
Goodwill impairment
|
|
50.4
|
|
|
—
|
|
|
—
|
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State and local income taxes, net of federal tax benefit
|
|
(0.2)
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|
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0.3
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|
|
(0.5)
|
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Valuation allowance
|
|
335.5
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|
|
(90.1)
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|
|
(48.0)
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Repatriation of foreign earnings (GILTI )
|
|
0.2
|
|
|
3.5
|
|
|
5.4
|
|
Restructuring
|
|
—
|
|
|
4.2
|
|
|
—
|
|
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
|
|
—
|
|
|
—
|
|
|
(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
|
|
A $287.0 million pre-tax charge for goodwill impairment (see Note 4 for additional information) included a portion that was non-deductible for tax purposes, resulting in a $50.4 million charge included as a reconciling item in the table above.
The Company recognizes deferred tax assets to the extent it 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 the tax benefit of the deferred tax asset will not be realized. In making such determination, the Company considers all available evidence, both positive and negative, regarding the estimated 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-year cumulative loss position exists, the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets is subjective. If the Company determines that it would not be able to realize its deferred tax assets in the future in excess of their recorded net amount, an adjustment to the deferred tax asset valuation allowance would result.
In 2020, ATI’s U.S. operations returned to a three-year cumulative loss position, limiting the ability to utilize future projections as verifiable sources of income when analyzing the need for a valuation allowance. The consolidated income tax provision for fiscal year 2020 includes a $335.5 million increase to the deferred tax asset valuation allowance based on an analysis of the 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 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 expected utilization of the tax attributes was not more likely than not to be realized by the Company. The change in the overall valuation allowance for 2019 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 judgment on the realizability of deferred tax assets.
The Company also maintained valuation allowances on deferred tax amounts recorded in accumulated other comprehensive loss in 2018, 2019 and 2020 of $49.3 million, $41.5 million and $50.3 million, respectively, which are not reflected in the preceding table reconciling amounts recognized in the income tax provision (benefit) recorded in the statement of operations (see Note 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 March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the global COVID-19 pandemic. The CARES Act enacted tax credits and various temporary changes to current tax regulations. Changes impacting the Company’s tax provision include the following:
•As part of the Tax Cuts and Jobs 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 required companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, with $5.9 million included in the 2018 tax provision, shown as “Impact of U.S. tax reform” in 2018.
Additionally, the Tax Act, requires a current year inclusion in U.S. federal taxable income of certain earnings of controlled foreign 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.
In 2018, the Company was granted a preferential tax 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 the Company will prospectively utilize the 25% statutory tax rate pending a ruling by the Chinese government on a new preferential tax rate application.
In 2019, the Company restructured certain foreign legal entities, including the elimination of entities that were no longer cost-effective following changes of the Tax Act, which resulted in $4.2 million of tax expense related to previously-recognized net operating loss carryforwards.
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, 2020 and 2019 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
|
|
The following summarizes the carryforward periods for the tax attributes related to NOLs and credits by jurisdiction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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
|
U.S.
|
NOL
|
$800
|
20 years
|
$—
|
$800
|
U.S.
|
NOL
|
$126
|
Indefinite
|
$—
|
$—
|
U.S.
|
Foreign Tax Credit
|
$22
|
10 years
|
$5
|
$17
|
U.S.
|
Research and Development Credit
|
$4
|
20 years
|
$—
|
$4
|
State
|
NOL
|
$146
|
Various
|
$31
|
$115
|
State
|
NOL
|
$1
|
Indefinite
|
$—
|
$—
|
State
|
Credits
|
$11
|
Various
|
$3
|
$8
|
U.K.
|
NOL
|
$39
|
Indefinite
|
$—
|
$—
|
Poland
|
Economic Zone Credit
|
$3
|
7 years
|
$—
|
$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 general, the Company is responsible for filing consolidated U.S. 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.
Deferred taxes of $4.4 million have been recorded for foreign withholding taxes on earnings expected to be repatriated to the U.S. The Company does not intend to distribute previously taxed earnings resulting from the one-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 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 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, 2020, 2019 and 2018 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
|
|
—
|
|
|
—
|
|
|
—
|
|
Decreases in prior period tax positions
|
|
—
|
|
|
—
|
|
|
(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
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of year
|
|
$
|
15.2
|
|
|
$
|
14.4
|
|
|
$
|
14.7
|
|
For years ended December 31, 2020, 2019 and 2018, the liability includes $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 NOL 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, 2020, 2019 and 2018 were not significant. At December 31, 2020 and 2019, the accrued liabilities for interest and penalties related to unrecognized tax benefits were $2.3 million.and $2.7 million, respectively.
The Company, and/or one of its subsidiaries, files income tax returns in the U.S. federal 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
|
|
2019
|
States:
|
|
|
Pennsylvania
|
|
2017
|
Foreign:
|
|
|
China
|
|
2017
|
Poland
|
|
2014
|
United Kingdom
|
|
2018
|
Note 20. Per Share Information
The following table sets forth the computation of basic and diluted net income (loss) per common share:
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
12.8
|
|
|
12.9
|
|
3.5% Convertible Senior Notes due 2025
|
|
—
|
|
|
—
|
|
|
—
|
|
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
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
4.75% Convertible Senior Notes due 2022
|
|
—
|
|
|
19.9
|
|
|
19.9
|
|
3.5% Convertible Senior Notes due 2025
|
|
—
|
|
|
—
|
|
|
—
|
|
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 is anti-dilutive. There were 22.8 million anti-dilutive shares for 2020. There were no anti-dilutive shares for 2019 and 2018.
Note 21. Commitments and Contingencies
Future minimum rental commitments under leases are disclosed in Note 13. Commitments for expenditures on property, plant and equipment at December 31, 2020 were approximately $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 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, 2020, the Company’s reserves for environmental remediation obligations totaled approximately $14 million, of which $4 million was included in other current liabilities. The reserve includes estimated probable future costs of $3 million for federal Superfund and comparable state-managed sites; $9 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $1 million for owned or controlled sites at which Company operations have been discontinued; and $1 million for sites utilized by the Company in its ongoing operations. The Company
continues to evaluate whether it may be able to recover a portion of future costs for environmental liabilities from third parties 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 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
|
|
Quarterly earnings per share amounts above may not add to year-to-date amounts due to rounding as well as the impact of dilutive securities for each individual quarterly period versus the year-to-date period.
First quarter 2020 results include an $8.0 million pre-tax ($5.5 million, net of tax) restructuring 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 HPMC 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 8 for further explanation.
Fourth quarter 2019 results include the following:
•$4.5 million pre-tax ($4.3 million, net of tax) 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 2021 Notes. See Note 12 for further explanation.
•$11.4 million pre-tax ($10.8 million, net of tax) joint venture impairment charge related to the A&T Stainless joint venture. See Note 9 for further explanation.
•$41.9 million net discrete tax benefit primarily related to the reversal of a significant portion of the Company’s deferred tax valuation allowances. See Note 19 for further explanation.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.