Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      to                     
Commission File Number 1-12001
 
 ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
 
Delaware
 
25-1792394
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1000 Six PPG Place
 
 
Pittsburgh, Pennsylvania
 
15222-5479
(Address of Principal Executive Offices)
 
(Zip Code)
(412) 394-2800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the Registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
At July 21, 2017, the registrant had outstanding 108,879,684 shares of its Common Stock.
 

Table of Contents

ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
Quarter Ended June 30, 2017
INDEX
 
Page No.
PART I. - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
Consolidated Statements of Cash Flows
 
 
Statements of Changes in Consolidated Equity
 
 
Notes to Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II. - OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 6. Exhibits
 
 
SIGNATURES
 
 
EXHIBIT INDEX

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Current period unaudited)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
154.6

 
$
229.6

Accounts receivable, net
538.6

 
452.1

Inventories, net
1,076.2

 
1,037.0

Prepaid expenses and other current assets
30.7

 
47.8

Total Current Assets
1,800.1

 
1,766.5

Property, plant and equipment, net
2,492.3

 
2,498.9

Goodwill
643.5

 
641.9

Other assets
250.4

 
262.7

Total Assets
$
5,186.3

 
$
5,170.0

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
355.5

 
$
294.3

Accrued liabilities
278.0

 
309.3

Short term debt and current portion of long-term debt
67.5

 
105.1

Total Current Liabilities
701.0

 
708.7

Long-term debt
1,876.6

 
1,771.9

Accrued postretirement benefits
308.0

 
317.7

Pension liabilities
682.9

 
827.9

Deferred income taxes
20.1

 
15.6

Other long-term liabilities
83.3

 
83.4

Total Liabilities
3,671.9

 
3,725.2

Equity:
 
 
 
ATI Stockholders’ Equity:
 
 
 
Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-none
—

 
—

Common stock, par value $0.10: authorized-500,000,000 shares; issued-109,695,171 shares at June 30, 2017 and December 31, 2016; outstanding-108,879,682 shares at June 30, 2017 and 108,925,254 shares at December 31, 2016
11.0

 
11.0

Additional paid-in capital
1,191.3

 
1,188.8

Retained earnings
1,303.8

 
1,277.1

Treasury stock: 815,489 shares at June 30, 2017 and 769,917 shares at December 31, 2016
(25.4
)
 
(28.0
)
Accumulated other comprehensive loss, net of tax
(1,067.2
)
 
(1,093.7
)
Total ATI stockholders’ equity
1,413.5

 
1,355.2

Noncontrolling interests
100.9

 
89.6

Total Equity
1,514.4

 
1,444.8

Total Liabilities and Equity
$
5,186.3

 
$
5,170.0


The accompanying notes are an integral part of these statements.

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Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Operations
(In millions, except per share amounts)
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Sales
$
880.2

 
$
810.5

 
$
1,746.1

 
$
1,568.0

 
 
 
 
 
 
 
 
Cost of sales
767.9

 
762.3

 
1,521.0

 
1,553.0

Gross profit
112.3

 
48.2

 
225.1

 
15.0

Selling and administrative expenses
66.7

 
59.3

 
126.2

 
121.9

Restructuring charges
—

 
1.0

 
—

 
10.0

Operating income (loss)
45.6

 
(12.1
)
 
98.9

 
(116.9
)
Interest expense, net
(34.5
)
 
(30.3
)
 
(68.0
)
 
(58.6
)
Other income, net
0.2

 
1.0

 
3.5

 
1.8

Income (loss) before income taxes
11.3

 
(41.4
)
 
34.4

 
(173.7
)
Income tax benefit
(2.1
)
 
(25.9
)
 
(0.1
)
 
(60.1
)
Net income (loss)
13.4

 
(15.5
)
 
34.5

 
(113.6
)
Less: Net income attributable to noncontrolling interests
3.3

 
3.3

 
6.9

 
6.4

Net income (loss) attributable to ATI
$
10.1

 
$
(18.8
)
 
$
27.6

 
$
(120.0
)
 
 
 
 
 
 
 
 
Basic net income (loss) attributable to ATI per common share
$
0.09

 
$
(0.18
)
 
$
0.26

 
$
(1.12
)
 
 
 
 
 
 
 
 
Diluted net income (loss) attributable to ATI per common share
$
0.09

 
$
(0.18
)
 
$
0.25

 
$
(1.12
)
 
 
 
 
 
 
 
 
Dividends declared per common share
$
—

 
$
0.08

 
$
—

 
$
0.16

The accompanying notes are an integral part of these statements.


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Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
13.4

 
$
(15.5
)
 
$
34.5

 
$
(113.6
)
Currency translation adjustment
 
 
 
 
 
 
 
Unrealized net change arising during the period
4.4

 
(9.8
)
 
14.8

 
(15.2
)
Derivatives
 
 
 
 
 
 
 
Net derivatives gain (loss) on hedge transactions
(8.2
)
 
26.3

 
(10.8
)
 
17.1

Reclassification to net income (loss) of net realized loss (gain)
(1.4
)
 
2.9

 
(2.3
)
 
7.9

Income taxes on derivative transactions
(5.0
)
 
11.1

 
(5.0
)
 
9.5

Total
(4.6
)
 
18.1

 
(8.1
)
 
15.5

Postretirement benefit plans
 
 
 
 
 
 
 
Actuarial loss
 
 
 
 
 
 
 
Amortization of net actuarial loss
18.0

 
18.8

 
35.8

 
37.5

Net gain arising during the period
—

 
—

 
—

 
22.5

Prior service cost
 
 
 
 
 
 
 
Amortization to net income (loss) of net prior service cost (credits)
(0.4
)
 
(0.5
)
 
(0.8
)
 
0.4

Income taxes on postretirement benefit plans
13.0

 
6.9

 
13.0

 
22.9

Total
4.6

 
11.4

 
22.0

 
37.5

Other comprehensive income, net of tax
4.4

 
19.7

 
28.7

 
37.8

Comprehensive income (loss)
17.8

 
4.2

 
63.2

 
(75.8
)
Less: Comprehensive income attributable to noncontrolling interests
3.5

 
1.8

 
9.1

 
3.4

Comprehensive income (loss) attributable to ATI
$
14.3

 
$
2.4

 
$
54.1

 
$
(79.2
)
The accompanying notes are an integral part of these statements.


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Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
 
Six months ended June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss)
$
34.5

 
$
(113.6
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
80.6

 
87.8

Deferred taxes
7.6

 
(62.4
)
Changes in operating assets and liabilities:
 
 
 
Inventories
(39.2
)
 
177.3

Accounts receivable
(86.5
)
 
(92.2
)
Accounts payable
58.2

 
(37.3
)
Retirement benefits (a)
(135.0
)
 
10.3

Accrued income taxes
0.9

 
0.1

Accrued liabilities and other
(6.6
)
 
(3.6
)
Cash used in operating activities
(85.5
)
 
(33.6
)
Investing Activities:
 
 
 
Purchases of property, plant and equipment
(55.3
)
 
(145.3
)
Asset disposals and other
3.3

 
1.8

Cash used in investing activities
(52.0
)
 
(143.5
)
Financing Activities:
 
 
 
Borrowings on long-term debt
7.3

 
387.5

Payments on long-term debt and capital leases
(0.8
)
 
(0.6
)
Net borrowings under credit facilities
59.4

 
2.5

Debt issuance costs
(0.8
)
 
(10.4
)
Dividends paid to stockholders
—

 
(17.2
)
Acquisition of noncontrolling interests
—

 
(12.2
)
Sale to noncontrolling interests
2.2

 
—

Shares repurchased for income tax withholding on share-based compensation
(4.8
)
 
—

Cash provided by financing activities
62.5

 
349.6

Increase (decrease) in cash and cash equivalents
(75.0
)
 
172.5

Cash and cash equivalents at beginning of period
229.6

 
149.8

Cash and cash equivalents at end of period
$
154.6

 
$
322.3

(a) Includes a $(135) million contribution to the U.S. defined benefit pension plan in 2017.
The accompanying notes are an integral part of these statements.


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Allegheny Technologies Incorporated and Subsidiaries
Statements of Changes in Consolidated Equity
(In millions, except per share amounts)
(Unaudited)
 
 
ATI Stockholders
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance, December 31, 2015
$
11.0

 
$
1,161.7

 
$
1,945.9

 
$
(21.3
)
 
$
(1,014.5
)
 
$
101.6

 
$
2,184.4

Net income (loss)
—

 
—

 
(120.0
)
 
—

 
—

 
6.4

 
(113.6
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
40.8

 
(3.0
)
 
37.8

Cash dividends on common stock ($0.16 per share)
—

 
—

 
(17.2
)
 
—

 
—

 
—

 
(17.2
)
Purchase of subsidiary shares from noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
Employee stock plans
—

 
16.4

 
(2.0
)
 
(6.4
)
 
—

 
—

 
8.0

Balance, June 30, 2016
$
11.0

 
$
1,178.1

 
$
1,806.7

 
$
(27.7
)
 
$
(973.7
)
 
$
104.9

 
$
2,099.3

Balance, December 31, 2016
$
11.0

 
$
1,188.8

 
$
1,277.1

 
$
(28.0
)
 
$
(1,093.7
)
 
$
89.6

 
$
1,444.8

Net income
—

 
—

 
27.6

 
—

 
—

 
6.9

 
34.5

Other comprehensive income
—

 
—

 
—

 
—

 
26.5

 
2.2

 
28.7

Sales of subsidiary shares to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
2.2

 
2.2

Employee stock plans
—

 
2.5

 
(0.9
)
 
2.6

 
—

 
—

 
4.2

Balance, June 30, 2017
$
11.0

 
$
1,191.3

 
$
1,303.8

 
$
(25.4
)
 
$
(1,067.2
)
 
$
100.9

 
$
1,514.4

The accompanying notes are an integral part of these statements.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Accounting Policies
The interim consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. Unless the context requires otherwise, “Allegheny Technologies”, “ATI” and “the Company” refer to Allegheny Technologies Incorporated and its subsidiaries.
These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. In management’s opinion, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K. The results of operations for these interim periods are not necessarily indicative of the operating results for any future period. The December 31, 2016 financial information has been derived from the Company’s audited consolidated financial statements.
New Accounting Pronouncements Adopted

In January 2017, the Company early adopted changes issued by the Financial Accounting Standards Board (FASB) to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, which is currently required if a reporting unit with goodwill fails a Step 1 test comparing the fair value of the reporting unit to its carrying value including goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test using just the Step 1 test of comparing the fair value of a reporting unit with its carrying amount. Any goodwill impairment, representing the amount by which the carrying amount exceeds the reporting unit’s fair value, is determined using this Step 1 test. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit. The adoption of these changes did not have a material impact on the Company’s financial statements.

In January 2017, the Company adopted changes issued by the FASB to simplify employee share-based payment accounting. The areas for simplification in this guidance involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, which will be prospectively adopted. The adoption of these changes did not have a material impact on the Company’s financial statements.

In January 2017, the Company adopted changes issued by the FASB to simplify the measurement of inventory valuation at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The new inventory measurement requirements replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. This change in the measurement of inventory does not apply to inventory valued on a LIFO basis, which is the accounting basis used for most of the Company’s inventory.  The adoption of these changes did not have a material impact on the Company’s financial statements.

Pending Accounting Pronouncement

In March 2017, the FASB issued changes to the accounting for defined benefit pension and other postretirement benefit expenses. This new guidance requires the disaggregation of the service cost component from the other components of net benefit cost. The service cost component of net benefit cost is to be reported in the same line item on the consolidated statement of operations as other compensation costs arising from services rendered by the pertinent employees, while the other components of net benefit cost are to be presented in the consolidated statement of operations separately, outside a subtotal of operating income. The amendments also provide explicit guidance to allow only the service cost component of net benefit cost to be eligible for capitalization. This new guidance is effective for the Company’s 2018 fiscal year, with the adoption of the change in presentation of net benefit cost in the consolidated statement of operations to be applied retrospectively, and the change in capitalization for only service cost applied prospectively. The guidance allows a practical expedient that permits the use of the amounts disclosed in the retirement benefits footnote for the prior comparative periods as the estimation basis for

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applying the retrospective presentation requirements. The Company will adopt this new guidance in the first quarter of fiscal year 2018 using this practical expedient.

The Company expects such adoption to have a material impact to reported operating income due to the change in presentation of non-service cost expense components. For example, applying the practical expedient to fiscal year 2016 results, operating income for 2016 would be $70.6 million higher, with the reclassification of this amount representing the other components of net benefit cost to a newly-created non-operating retirement benefit expense category, with no net impact to the reported 2016 loss before income taxes. The Company expects to have a one-time, unfavorable impact to pre-tax reported results in the first quarter of 2018 upon adoption due to the change limiting only the service cost component of net benefit cost to be capitalizable into inventory. Using expected fiscal year 2017 defined benefit retirement expense and current inventory levels, this impact in the first quarter of 2018 is projected to be approximately $5 million, pre-tax.

In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the Company’s 2019 fiscal year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In May 2014, the FASB issued changes to revenue recognition with customers, which is required to be adopted by the Company in fiscal year 2018. This update provides a five-step analysis of transactions to determine when and how revenue is recognized, along with expanded disclosure requirements. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company plans to adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. Although the Company is currently evaluating the impact of this standard on individual customer contracts, the Company has evaluated the impact of this standard on the broad categories of its customer contracts, and anticipates the adoption of this guidance will not have a material impact on the consolidated statement of operations but does expect an impact to the consolidated balance sheet for reclassifications to contract assets and liabilities, the magnitude of which is still being determined. The Company also expects an increase to financial statement footnote disclosures regarding revenues, contract assets and contract liabilities as a result of this accounting standard update.
Note 2. Inventories
Inventories at June 30, 2017 and December 31, 2016 were as follows (in millions):
 
June 30,
2017
 
December 31,
2016
Raw materials and supplies
$
141.6

 
$
149.6

Work-in-process
886.7

 
837.9

Finished goods
159.4

 
161.7

Total inventories at current cost
1,187.7

 
1,149.2

Adjustment from current cost to LIFO cost basis
79.1

 
97.3

Inventory valuation reserves
(150.2
)
 
(169.0
)
Progress payments
(40.4
)
 
(40.5
)
Total inventories, net
$
1,076.2

 
$
1,037.0


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Table of Contents

Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market, less progress payments. Most of the 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. Due to deflationary impacts primarily related to raw materials, the carrying value of the Company’s inventory as valued on LIFO exceeds current replacement cost, and based on a lower of cost or market value analysis, a net realizable value (NRV) inventory reserve is required. Impacts to cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions):
 
 
Six months ended June 30,
 
 
2017
 
2016
LIFO benefit (charge)
 
$
(18.2
)
 
$
(4.6
)
NRV benefit (charge)
 
18.1

 
5.0

Net cost of sales impact
 
$
(0.1
)
 
$
0.4

The first six months of 2016 results included $17.7 million in inventory valuation charges related to the market-based valuation of titanium products.
Note 3. Property, Plant and Equipment
Property, plant and equipment at June 30, 2017 and December 31, 2016 was as follows (in millions):
 
June 30,
2017
 
December 31,
2016
Land
$
31.5

 
$
31.4

Buildings
840.3

 
829.6

Equipment and leasehold improvements
3,527.0

 
3,497.2

 
4,398.8

 
4,358.2

Accumulated depreciation and amortization
(1,906.5
)
 
(1,859.3
)
Total property, plant and equipment, net
$
2,492.3

 
$
2,498.9

The construction in progress portion of property, plant and equipment at June 30, 2017 was $77.1 million.
Note 4. Debt
Debt at June 30, 2017 and December 31, 2016 was as follows (in millions): 
 
June 30,
2017
 
December 31,
2016
Allegheny Technologies 5.875% Notes due 2023 (a)
$
500.0

 
$
500.0

Allegheny Technologies 5.95% Notes due 2021
500.0

 
500.0

Allegheny Technologies 9.375% Notes due 2019
350.0

 
350.0

Allegheny Technologies 4.75% Convertible Senior Notes due 2022
287.5

 
287.5

Allegheny Ludlum 6.95% debentures due 2025
150.0

 
150.0

Term Loan due 2022
100.0

 
100.0

U.S. revolving credit facility
60.0

 
—

Foreign credit facilities
4.0

 
4.4

Other
8.6

 
2.2

Debt issuance costs
(16.0
)
 
(17.1
)
Total debt
1,944.1

 
1,877.0

Short term debt and current portion of long-term debt
67.5

 
105.1

Total long-term debt
$
1,876.6

 
$
1,771.9

 
(a)
Bearing interest at 7.875% effective February 15, 2016.

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Table of Contents

Revolving Credit Facility
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 revolving credit portion of the ABL facility is $400 million, which includes a letter of credit sub-facility of up to $200 million. The ABL facility includes a term loan (Term Loan) in the amount of $100.0 million.
In June 2017, the ABL facility was amended to, among other things, extend the duration of the facility from September 2020 to February 2022. As amended, the applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.75% and 2.25% for LIBOR-based borrowings and between 1.0% and 1.5% for base rate borrowings. The ABL facility contains a financial covenant whereby the Company must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility is less than the greater of (i) 10%, as amended, of the then applicable maximum borrowing amount under the revolving credit portion of the ABL and any outstanding Term Loan balance, or (ii) $40.0 million. The Company does not meet this required fixed charge coverage ratio at June 30, 2017. As a result, the Company is not able to access $50.0 million of the revolving credit portion of the ABL facility until it meets the required ratio. Additionally, the Company must demonstrate liquidity, as calculated in accordance with the terms of the ABL facility, of at least $500 million on the date that is 91 days prior to June 1, 2019, the maturity date of the 9.375% Senior Notes due 2019 and at least $700 million on the date that is 91 days prior to January 15, 2021, the maturity date of the 5.95% Senior Notes due 2021, and that such liquidity is available at all times thereafter until the 9.375% Senior Notes due 2019 and the 5.95% Senior Notes due 2021 are paid in full or refinanced. Costs associated with entering into the ABL amendment were $1.0 million, and are being amortized, along with any previous unamortized deferred costs, to interest expense over the extended term of the facility ending February 2022.
Also in June 2017, the $100.0 million Term Loan was amended to extend the maturity date from November 2017 to February 2022 and to reduce the interest rate to 3.0% plus a LIBOR spread. The amended Term Loan can be prepaid in minimum increments of $50.0 million on or after the earlier of December 2018 or upon refinancing or retirement of the 9.375% Senior Notes due 2019 if certain minimum liquidity conditions are satisfied. The underwriting costs associated with amending the Term Loan were $0.8 million, and are being amortized, along with any previous unamortized deferred costs, to interest expense over the extended term of the loan ending February 2022.
As of June 30, 2017, there were $60.0 million of outstanding borrowings under the ABL facility, and $45.1 million was utilized to support the issuance of letters of credit. Average revolving credit borrowings under the ABL facility for the first six months of 2017 and 2016 were $36 million and $164 million, respectively, bearing an average annual interest rate of 3.376% and 1.757%, respectively.
Note 5. 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. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged, and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized in the consolidated statements of operations.
The Company sometimes uses futures and swap contracts to manage exposure to changes in prices for forecasted purchases of raw materials, such as nickel, and natural gas. 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 June 30, 2017, 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 27 million pounds of nickel with hedge dates through 2021. The aggregate notional amount hedged is approximately 35% of a single year’s estimated nickel raw material purchase requirements.

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At June 30, 2017, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. In the first six months of 2016, due to changes in expected operating levels within Flat Rolled Products segment operations, the Company concluded that additional portions of these natural gas cash flow hedges for 2016 and the first quarter of 2017 were ineffective based on forecast changes in underlying natural gas usage. The Company recognized $0.2 million and $1.3 million of pre-tax losses for the three and six months ended June 30, 2016, respectively, for natural gas cash flow hedge ineffectiveness, which is reported in selling and administrative expenses on the consolidated statement of operations. At June 30, 2017 the Company hedged approximately 70% of the Company’s forecasted domestic requirements for natural gas for the remainder of 2017, approximately 35% for 2018, and approximately 25% for 2019.
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 designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions.
In 2015, the Company net settled substantially all of its foreign currency forward contracts designated as cash flow hedges with 2016 and 2017 maturity dates. The portion of the deferred gains on these settled cash flow hedges determined to be effective is currently recognized in accumulated other comprehensive income and is reclassified to earnings when the underlying transactions occur. As of June 30, 2017, the Company held 21.6 million euro notional value of foreign currency forward contracts designated as fair value hedges with maturity dates through 2017. The Company recorded $1.9 million and $2.2 million of charges in the three and six months ended June 30, 2017, respectively, and a $3.1 million benefit and a $2.5 million charge in the three and six months ended June 30, 2016, respectively, in costs of sales on the consolidated statement of operations for maturities and mark-to-market changes on these fair value hedges.
The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. There were no unsettled derivative financial instruments related to debt balances for the periods presented.
There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts are 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 counterparty 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.

10
Table of Contents

(In millions)
Asset derivatives
 
Balance sheet location
 
June 30,
2017
 
December 31,
2016
Derivatives designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other current assets
 
$
0.2

 
$
2.4

Natural gas contacts
 
Prepaid expenses and other current assets
 
0.1

 
0.2

Nickel and other raw material contracts
 
Prepaid expenses and other current assets
 
1.3

 
2.2

Foreign exchange contracts
 
Other assets
 
—

 
0.2

Natural gas contracts
 
Other assets
 
0.2

 
0.2

Nickel and other raw material contracts
 
Other assets
 
1.2

 
3.3

Total derivatives designated as hedging instruments
 
3.0

 
8.5

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other current assets
 
—

 
0.6

Total derivatives not designated as hedging instruments
 
—

 
0.6

Total asset derivatives
 
 
 
$
3.0

 
$
9.1

Liability derivatives
 
Balance sheet location
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Natural gas contracts
 
Accrued liabilities
 
$
1.9

 
$
2.5

Nickel and other raw material contracts
 
Accrued liabilities
 
8.1

 
6.7

Foreign exchange contracts
 
Accrued liabilities
 
0.7

 
—

Natural gas contracts
 
Other long-term liabilities
 
0.2

 
—

Nickel and other raw material contracts
 
Other long-term liabilities
 
9.6

 
9.4

Foreign exchange contracts
 
Other long-term liabilities
 
—

 
0.1

Total derivatives designated as hedging instruments
 
20.5

 
18.7

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Accrued Liabilities
 
0.3

 
—

Total derivatives not designated as hedging instruments
 
0.3

 
—

Total liability derivatives
 
 
 
$
20.8

 
$
18.7

For derivative financial instruments that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period results. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes, excluding any impacts of changes to income tax valuation allowances effecting results of operations or other comprehensive income, when applicable (see Note 12 for further explanation).
Assuming market prices remain constant with those at June 30, 2017, a loss of $5.7 million, net of tax and excluding income tax valuation allowance changes, is expected to be recognized over the next 12 months.

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Activity with regard to derivatives designated as cash flow hedges for the three and six month periods ended June 30, 2017 and 2016 was as follows (in millions): 
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (a)
 
Amount of Gain (Loss)
Recognized in Income
on Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) (b)
Derivatives in Cash Flow
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
Hedging Relationships
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Nickel and other raw material contracts
$
(4.6
)
 
$
12.2

 
$
(1.0
)
 
$
(3.8
)
 
$
—

 
$
—

Natural gas contracts
(0.5
)
 
4.3

 
(0.7
)
 
(2.7
)
 
—

 
(0.2
)
Foreign exchange contracts
(0.1
)
 
(0.2
)
 
2.5

 
4.9

 
—

 
—

Total
$
(5.2
)
 
$
16.3

 
$
0.8

 
$
(1.6
)
 
$
—

 
$
(0.2
)
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (a)
 
Amount of Gain (Loss)
Recognized in Income
on Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) (b)
Derivatives in Cash Flow
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
Hedging Relationships
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Nickel and other raw material contracts
$
(4.4
)
 
$
8.8

 
$
(1.6
)
 
$
(7.7
)
 
$
—

 
$
—

Natural gas contracts
(2.1
)
 
2.3

 
(2.1
)
 
(5.9
)
 
—

 
(0.9
)
Foreign exchange contracts
(0.2
)
 
(0.5
)
 
5.1

 
9.6

 
—

 
—

Total
$
(6.7
)
 
$
10.6

 
$
1.4

 
$
(4.0
)
 
$
—

 
$
(0.9
)
(a)
The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales in the same period or periods in which the hedged item affects earnings.
(b)
The gains (losses) recognized in income on derivatives related to the ineffective portion and the amounts excluded from effectiveness testing are presented in selling and administrative expenses.
The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset.
The Company has 8 million euro notional value outstanding as of June 30, 2017 of foreign currency forward contracts not designated as hedges, with maturity dates into the fourth quarter of 2017. These derivatives that are not designated as hedging instruments were as follows:
(In millions)
Amount of Gain (Loss) Recognized on Derivatives
 
Three months ended June 30,
 
Six months ended June 30,
Derivatives Not Designated as Hedging Instruments
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
$
(0.5
)
 
$
0.7

 
$
(0.6
)
 
$
0.1

Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows.

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Table of Contents

Note 6. Fair Value of Financial Instruments
The estimated fair value of financial instruments at June 30, 2017 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
$
154.6

 
$
154.6

 
$
154.6

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
3.0

 
3.0

 
—

 
3.0

Liabilities
20.8

 
20.8

 
—

 
20.8

Debt (a)
1,960.1

 
2,122.1

 
1,949.5

 
172.6


The estimated fair value of financial instruments at December 31, 2016 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
$
229.6

 
$
229.6

 
$
229.6

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
9.1

 
9.1

 
—

 
9.1

Liabilities
18.7

 
18.7

 
—

 
18.7

Debt (a)
1,894.1

 
1,975.0

 
1,868.4

 
106.6

(a)
The total carrying amount for debt excludes debt issuance costs related to the recognized debt liability which is presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability.
In accordance with accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards established three levels of a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. No transfers between levels were reported in 2017 or 2016.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents: Fair value was 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.

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Table of Contents

Short-term and long-term debt: The fair values of the Company’s publicly traded debt were based on Level 1 information. The fair values of the other short-term and long-term debt were determined using Level 2 information.
Note 7. Retirement Benefits
The Company has defined contribution retirement plans or defined benefit pension plans covering substantially all employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the U.S. pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code.
The Company also sponsors several postretirement plans covering certain 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.
For the three month periods ended June 30, 2017 and 2016, the components of pension and other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions): 
 
Pension Benefits
 
Other Postretirement Benefits
 
Three months ended June 30,
 
Three months ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost - benefits earned during the year
$
3.5

 
$
5.1

 
$
0.6

 
$
0.7

Interest cost on benefits earned in prior years
29.2

 
31.3

 
3.6

 
3.9

Expected return on plan assets
(36.7
)
 
(37.1
)
 
—

 
—

Amortization of prior service cost (credit)
0.3

 
0.3

 
(0.7
)
 
(0.8
)
Amortization of net actuarial loss
15.7

 
16.4

 
2.3

 
2.4

Total retirement benefit expense
$
12.0

 
$
16.0

 
$
5.8

 
$
6.2

For the six month periods ended June 30, 2017 and 2016, the components of pension and other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions): 
 
Pension Benefits
 
Other Postretirement Benefits
 
Six months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost - benefits earned during the year
$
7.0

 
$
10.3

 
$
1.2

 
$
1.3

Interest cost on benefits earned in prior years
58.4

 
62.7

 
7.3

 
8.0

Expected return on plan assets
(73.4
)
 
(74.3
)
 
—

 
—

Amortization of prior service cost (credit)
0.6

 
0.6

 
(1.4
)
 
(0.2
)
Amortization of net actuarial loss
31.3

 
32.7

 
4.5

 
4.8

Total retirement benefit expense
$
23.9

 
$
32.0

 
$
11.6

 
$
13.9

Effective January 31, 2017, closure of the U.K. defined benefit pension plan to future accruals for service and pay (hard freeze) occurred. In March 2017, the Company made a $135 million cash contribution to the ATI Pension Plan, its U.S. qualified defined benefit pension plan, completing the Company’s funding requirements for 2017.
Note 8. Income Taxes
The Company maintains income tax valuation allowances on its U.S. Federal and state deferred tax assets due to a three year cumulative loss condition which limits the ability to consider other positive subjective evidence, such as projections of future results, to assess the realizability of deferred tax assets. Results in both 2017 and 2016 include impacts from income taxes which differ from a standard 35% tax rate, primarily related to income tax valuation allowance changes. Second quarter 2017 results included a benefit for income taxes of $2.1 million, which includes $5.4 million of discrete tax benefits recognized in the quarter largely for the effects of amending tax returns for prior periods in certain domestic jurisdictions. The second quarter 2016 benefit for income taxes was $25.9 million, which includes $2.8 million of discrete tax benefits.

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Table of Contents

For the first six months of 2017, the benefit for income taxes was $0.1 million, compared to a benefit for income taxes of $60.1 million, or 34.6% of the loss before income taxes, for the comparable 2016 period. The first six months of 2017 and 2016 included discrete tax benefits of $6.7 million and $3.6 million, respectively.
Note 9. Business Segments
The Company operates in two business segments: High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). The measure of segment operating profit, which is used to analyze the performance and results of the business segments, excludes all effects of LIFO inventory accounting and any related changes in net realizable value inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, corporate expenses, net interest expense, closed operations expenses and restructuring costs, if any. Management believes segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level. Following is certain financial information with respect to the Company’s business segments for the periods indicated (in millions):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Total sales:
 
 
 
 
 
 
 
High Performance Materials & Components
$
543.3

 
$
511.1

 
$
1,067.0

 
$
1,019.0

Flat Rolled Products
373.2

 
324.3

 
746.2

 
605.5

 
916.5

 
835.4

 
1,813.2

 
1,624.5

Intersegment sales:
 
 
 
 
 
 
 
High Performance Materials & Components
16.9

 
12.7

 
30.2

 
27.6

Flat Rolled Products
19.4

 
12.2

 
36.9

 
28.9

 
36.3

 
24.9

 
67.1

 
56.5

Sales to external customers:
 
 
 
 
 
 
 
High Performance Materials & Components
526.4

 
498.4

 
1,036.8

 
991.4

Flat Rolled Products
353.8

 
312.1

 
709.3

 
576.6

 
$
880.2

 
$
810.5

 
$
1,746.1

 
$
1,568.0

Operating profit (loss):
 
 
 
 
 
 
 
High Performance Materials & Components
$
68.0

 
$
38.8

 
$
118.9

 
$
67.9

Flat Rolled Products
2.9

 
(31.8
)
 
21.9

 
(141.4
)
Total operating profit (loss)
70.9

 
7.0

 
140.8

 
(73.5
)
LIFO and net realizable value reserves
(0.1
)
 
0.4

 
(0.1
)
 
0.4

Corporate expenses
(11.8
)
 
(11.8
)
 
(22.1
)
 
(22.8
)
Closed operations and other expenses
(13.2
)
 
(5.7
)
 
(16.2
)
 
(9.2
)
Restructuring and other charges
—

 
(1.0
)
 
—

 
(10.0
)
Interest expense, net
(34.5
)
 
(30.3
)
 
(68.0
)
 
(58.6
)
Income (loss) before income taxes
$
11.3

 
$
(41.4
)
 
$
34.4

 
$
(173.7
)

Closed operations and other expenses in 2017 reflect higher costs due to the additions of the Rowley, UT, Midland, PA and Bagdad, PA facilities as a result of closure actions in 2016. Closed operations and other expenses in 2017 also reflect more significant foreign currency impacts, primarily from the Company’s European Treasury Center operation.

The first six months of 2016 include $10.0 million of restructuring charges for severance obligations. During the first quarter of 2016, a $9.0 million charge was recorded for severance obligations in the FRP operations, with the reduction of approximately one-third of FRP’s salaried workforce, which was largely completed by the end of 2016. During the second quarter of 2016, an additional $1.0 million charge was recorded for severance obligations in the HPMC segment. These severance charges were excluded from segment operating results. Reserves for restructuring charges at June 30, 2017 were $13.4 million, of which $6.6 million relates to severance and employee benefit costs and $6.8 million to closure costs. The decline in these reserves compared to $33.1 million at December 31, 2016 is due to payments. These restructuring reserves are expected to be substantially paid in 2017.

15
Table of Contents

Note 10. Per Share Information
The following table sets forth the computation of basic and diluted income (loss) per common share: 
 
Three Months Ended
 
Six months ended
(In millions, except per share amounts)
June 30,
 
June 30,
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Numerator for basic income (loss) per common share –
 
 
 
 
 
 
 
Net income (loss) attributable to ATI
$
10.1

 
$
(18.8
)
 
$
27.6

 
$
(120.0
)
Effect of dilutive securities:
 
 
 
 
 
 
 
4.75% Convertible Senior Notes due 2022
1.8

 
—

 
4.8

 
—

Numerator for diluted income (loss) per common share –
 
 
 
 
 
 
 
Net income (loss) attributable to ATI after assumed conversions
$
11.9

 
$
(18.8
)
 
$
32.4

 
$
(120.0
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income (loss) per common share – weighted average shares
107.7

 
107.3

 
107.6

 
107.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation
0.7

 
—

 
0.8

 
—

4.75% Convertible Senior Notes due 2022
19.9

 
—

 
19.9

 
—

Denominator for diluted net income (loss) per common share – adjusted weighted average shares and assumed conversions
128.3

 
107.3

 
128.3

 
107.3

Basic net income (loss) attributable to ATI per common share
$
0.09

 
$
(0.18
)
 
$
0.26

 
$
(1.12
)
Diluted net income (loss) attributable to ATI per common share
$
0.09

 
$
(0.18
)
 
$
0.25

 
$
(1.12
)
Common stock that would be issuable upon the assumed conversion of the 2022 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 no anti-dilutive shares for the three and six month period ended June 30, 2017. There were 9.3 million and 5.0 million anti-dilutive shares for the three and six month period ended June 30, 2016, respectively.
Note 11. Financial Information for Subsidiary and Guarantor Parent
The payment obligations under the $150 million 6.95% debentures due 2025 issued by Allegheny Ludlum, LLC (the “Subsidiary”) are fully and unconditionally guaranteed by Allegheny Technologies Incorporated (the “Guarantor Parent”). In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separately financial information with respect to the Subsidiary, the non-guarantor subsidiaries and the Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions.
ATI is the plan sponsor for the ATI Pension Plan, the Company’s U.S. qualified defined benefit pension plan (the “Plan”) which covers certain current and former employees of the Subsidiary and the non-guarantor subsidiaries. As a result, the balance sheets presented for the Subsidiary and the non-guarantor subsidiaries do not include any Plan assets or liabilities, or the related deferred taxes and valuation allowances. The Plan assets, liabilities and related deferred taxes and pension income or expense are recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation.


16
Table of Contents

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
June 30, 2017
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2.5

 
$
2.6

 
$
149.5

 
$
—

 
$
154.6

Accounts receivable, net
0.1

 
136.8

 
401.7

 
—

 
538.6

Intercompany notes receivable
—

 
—

 
3,282.0

 
(3,282.0
)
 
—

Inventories, net
—

 
160.2

 
916.0

 
—

 
1,076.2

Prepaid expenses and other current assets
5.3

 
4.1

 
21.3

 
—

 
30.7

Total current assets
7.9

 
303.7

 
4,770.5

 
(3,282.0
)
 
1,800.1

Property, plant and equipment, net
1.1

 
1,585.6

 
905.6

 
—

 
2,492.3

Goodwill
—

 
—

 
643.5

 
—

 
643.5

Intercompany notes receivable
—

 
—

 
200.0

 
(200.0
)
 
—

Investment in subsidiaries
5,498.2

 
37.7

 
—

 
(5,535.9
)
 
—

Other assets
26.8

 
19.3

 
204.3

 
—

 
250.4

Total assets
$
5,534.0

 
$
1,946.3

 
$
6,723.9

 
$
(9,017.9
)
 
$
5,186.3

Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
Accounts payable
$
3.1

 
$
161.2

 
$
191.2

 
$
—

 
$
355.5

Accrued liabilities
51.8

 
75.9

 
150.3

 
—

 
278.0

Intercompany notes payable
1,670.6

 
1,611.4

 
—

 
(3,282.0
)
 
—

Short term debt and current portion of long-term debt
0.3

 
0.3

 
66.9

 
—

 
67.5

Total current liabilities
1,725.8

 
1,848.8

 
408.4

 
(3,282.0
)
 
701.0

Long-term debt
1,623.1

 
149.8

 
103.7

 
—

 
1,876.6

Intercompany notes payable
—

 
200.0

 
—

 
(200.0
)
 
—

Accrued postretirement benefits
—

 
238.4

 
69.6

 
—

 
308.0

Pension liabilities
634.8

 
4.9

 
43.2

 
—

 
682.9

Deferred income taxes
20.1

 
—

 
—

 
—

 
20.1

Other long-term liabilities
15.8

 
18.6

 
48.9

 
—

 
83.3

Total liabilities
4,019.6

 
2,460.5

 
673.8

 
(3,482.0
)
 
3,671.9

Total stockholders’ equity (deficit)
1,514.4

 
(514.2
)
 
6,050.1

 
(5,535.9
)
 
1,514.4

Total liabilities and stockholders’ equity
$
5,534.0

 
$
1,946.3

 
$
6,723.9

 
$
(9,017.9
)
 
$
5,186.3


17
Table of Contents

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations and Comprehensive Income
For the three months ended June 30, 2017  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
291.2

 
$
589.0

 
$
—

 
$
880.2

Cost of sales
12.0

 
278.6

 
477.3

 
—

 
767.9

Gross profit (loss)
(12.0
)
 
12.6

 
111.7

 
—

 
112.3

Selling and administrative expenses
23.1

 
8.7

 
34.9

 
—

 
66.7

Operating income (loss)
(35.1
)
 
3.9

 
76.8

 
—

 
45.6

Interest income (expense), net
(39.7
)
 
(22.5
)
 
27.7

 
—

 
(34.5
)
Other income (loss) including equity in income of unconsolidated subsidiaries
86.1

 
0.3

 
(0.1
)
 
(86.1
)
 
0.2

Income (loss) before income tax provision (benefit)
11.3

 
(18.3
)
 
104.4

 
(86.1
)
 
11.3

Income tax provision (benefit)
(2.1
)
 
(6.6
)
 
33.6

 
(27.0
)
 
(2.1
)
Net income (loss)
13.4

 
(11.7
)
 
70.8

 
(59.1
)
 
13.4

Less: Net income attributable to noncontrolling interests
—

 
—

 
3.3

 
—

 
3.3

Net income (loss) attributable to ATI
$
13.4

 
$
(11.7
)
 
$
67.5

 
$
(59.1
)
 
$
10.1

Comprehensive income (loss) attributable to ATI
$
17.8

 
$
(11.3
)
 
$
92.5

 
$
(84.7
)
 
$
14.3


Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations and Comprehensive Income
For the six months ended June 30, 2017  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
578.4

 
$
1,167.7

 
$
—

 
$
1,746.1

Cost of sales
23.0

 
538.7

 
959.3

 
—

 
1,521.0

Gross profit (loss)
(23.0
)
 
39.7

 
208.4

 
—

 
225.1

Selling and administrative expenses
44.3

 
18.4

 
63.5

 
—

 
126.2

Operating income (loss)
(67.3
)
 
21.3

 
144.9

 
—

 
98.9

Interest income (expense), net
(78.3
)
 
(43.7
)
 
54.0

 
—

 
(68.0
)
Other income (loss) including equity in income of unconsolidated subsidiaries
180.0

 
0.8

 
2.7

 
(180.0
)
 
3.5

Income (loss) before income tax provision (benefit)
34.4

 
(21.6
)
 
201.6

 
(180.0
)
 
34.4

Income tax provision (benefit)
(0.1
)
 
(7.7
)
 
69.1

 
(61.4
)
 
(0.1
)
Net income (loss)
34.5

 
(13.9
)
 
132.5

 
(118.6
)
 
34.5

Less: Net income attributable to noncontrolling interests
—

 
—

 
6.9

 
—

 
6.9

Net income (loss) attributable to ATI
$
34.5

 
$
(13.9
)
 
$
125.6

 
$
(118.6
)
 
$
27.6

Comprehensive income (loss) attributable to ATI
$
63.2

 
$
(11.6
)
 
$
138.4

 
$
(135.9
)
 
$
54.1



18
Table of Contents

Condensed Statements of Cash Flows
For the six months ended June 30, 2017  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities
$
(54.6
)
 
$
(55.4
)
 
$
24.5

 
$
—

 
$
(85.5
)
Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
—

 
(19.9
)
 
(35.4
)
 
—

 
(55.3
)
Net receipts/(payments) on intercompany activity
—

 
—

 
(135.3
)
 
135.3

 
—

Asset disposals and other
—

 
0.1

 
3.2

 
—

 
3.3

Cash flows provided by (used in) investing activities
—

 
(19.8
)
 
(167.5
)
 
135.3

 
(52.0
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt
—

 
—

 
7.3

 
—

 
7.3

Payments on long-term debt and capital leases
(0.2
)
 
(0.2
)
 
(0.4
)
 
—

 
(0.8
)
Net borrowings under credit facilities
—

 
—

 
59.4

 
—

 
59.4

Debt issuance costs
—

 
—

 
(0.8
)
 
—

 
(0.8
)
Net receipts/(payments) on intercompany activity
59.8

 
75.5

 
—

 
(135.3
)
 
—

Sale to noncontrolling interests
—

 
—

 
2.2

 
—

 
2.2

Shares repurchased for income tax withholding on share-based compensation

(4.8
)
 
—

 
—

 
—

 
(4.8
)
Cash flows provided by (used in) financing activities
54.8

 
75.3

 
67.7

 
(135.3
)
 
62.5

Increase (decrease) in cash and cash equivalents
$
0.2

 
$
0.1

 
$
(75.3
)
 
$
—

 
$
(75.0
)

19
Table of Contents

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2016
 
Guarantor
 
 
 
Non-guarantor
 
 
 
 
(In millions)
Parent
 
Subsidiary
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2.3

 
$