10-Q
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 September 30, 2015
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” and “smaller reporting 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
¨
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 October 23, 2015, the registrant had outstanding 109,208,000 shares of its Common Stock.
 

Table of Contents

ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
Quarter Ended September 30, 2015
INDEX
 
Page No.
PART I. - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Income
 
 
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)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
197.5

 
$
269.5

Accounts receivable, net of allowances for doubtful accounts of $4.7 million and $4.8 million as of September 30, 2015 and December 31, 2014, respectively
497.5

 
603.6

Inventories, net
1,356.1

 
1,472.8

Prepaid expenses and other current assets
47.5

 
136.2

Total Current Assets
2,098.6

 
2,482.1

Property, plant and equipment, net
2,938.2

 
2,961.8

Cost in excess of net assets acquired
780.2

 
780.4

Other assets
344.1

 
358.3

Total Assets
$
6,161.1

 
$
6,582.6

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
367.1

 
$
556.7

Accrued liabilities
329.8

 
323.2

Deferred income taxes
36.2

 
62.2

Short term debt and current portion of long-term debt
4.0

 
17.8

Total Current Liabilities
737.1

 
959.9

Long-term debt
1,501.6

 
1,509.1

Accrued postretirement benefits
388.9

 
415.8

Pension liabilities
713.0

 
739.3

Deferred income taxes
190.7

 
80.9

Other long-term liabilities
112.2

 
156.2

Total Liabilities
3,643.5

 
3,861.2

Redeemable noncontrolling interest
12.1

 
12.1

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 September 30, 2015 and December 31, 2014; outstanding-109,208,000 shares at September 30, 2015 and 108,710,914 shares at December 31, 2014
11.0

 
11.0

Additional paid-in capital
1,158.8

 
1,164.2

Retained earnings
2,181.7

 
2,398.9

Treasury stock: 487,171 shares at September 30, 2015 and 984,257 shares at December 31, 2014
(20.4
)
 
(44.3
)
Accumulated other comprehensive loss, net of tax
(925.4
)
 
(931.4
)
Total ATI stockholders’ equity
2,405.7

 
2,598.4

Noncontrolling interests
99.8

 
110.9

Total Equity
2,505.5

 
2,709.3

Total Liabilities and Equity
$
6,161.1

 
$
6,582.6


The accompanying notes are an integral part of these statements.

1
Table of Contents

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Operations
(In millions, except per share amounts)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Sales
$
832.7

 
$
1,069.6

 
$
2,980.7

 
$
3,175.9

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
861.4

 
972.6

 
2,822.9

 
2,919.2

Selling and administrative expenses
62.5

 
68.7

 
198.0

 
202.1

Income (loss) before interest, other income and income taxes
(91.2
)
 
28.3

 
(40.2
)
 
54.6

Interest expense, net
(27.5
)
 
(25.2
)
 
(81.0
)
 
(82.8
)
Other income, net
0.8

 
1.0

 
2.3

 
2.9

Income (loss) from continuing operations before income taxes
(117.9
)
 
4.1

 
(118.9
)
 
(25.3
)
Income tax provision (benefit)
23.4

 
0.5

 
23.7

 
(12.4
)
Income (loss) from continuing operations
(141.3
)
 
3.6

 
(142.6
)
 
(12.9
)
Loss from discontinued operations, net of tax
—

 
(0.7
)
 
—

 
(2.8
)
Net income (loss)
(141.3
)
 
2.9

 
(142.6
)
 
(15.7
)
Less: Net income attributable to noncontrolling interests
3.3

 
3.6

 
8.4

 
9.0

Net loss attributable to ATI
$
(144.6
)
 
$
(0.7
)
 
$
(151.0
)
 
$
(24.7
)
 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations attributable to ATI per common share
$
(1.35
)
 
$
—

 
$
(1.41
)
 
$
(0.20
)
Discontinued operations attributable to ATI per common share
—

 
(0.01
)
 
—

 
(0.03
)
Basic net loss attributable to ATI per common share
$
(1.35
)
 
$
(0.01
)
 
$
(1.41
)
 
$
(0.23
)
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Continuing operations attributable to ATI per common share
$
(1.35
)
 
$
—

 
$
(1.41
)
 
$
(0.20
)
Discontinued operations attributable to ATI per common share
—

 
(0.01
)
 
—

 
(0.03
)
Diluted net loss attributable to ATI per common share
$
(1.35
)
 
$
(0.01
)
 
$
(1.41
)
 
$
(0.23
)
Dividends declared per common share
$
0.18

 
$
0.18

 
$
0.54

 
$
0.54

 
 
 
 
 
 
 
 
Amounts attributable to ATI common stockholders:
 
 
 
 
 
 
 
Loss from continuing operations, net of tax
$
(144.6
)
 
$
—

 
$
(151.0
)
 
$
(21.9
)
Loss from discontinued operations, net of tax
—

 
(0.7
)
 
—

 
(2.8
)
Net loss
$
(144.6
)
 
$
(0.7
)
 
$
(151.0
)
 
$
(24.7
)
The accompanying notes are an integral part of these statements.


2
Table of Contents

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(141.3
)
 
$
2.9

 
$
(142.6
)
 
$
(15.7
)
Currency translation adjustment
 
 
 
 
 
 
 
Unrealized net change arising during the period
(16.2
)
 
(16.6
)
 
(18.7
)
 
(12.2
)
Unrealized holding gain on securities
 
 
 
 
 
 
 
Net gain (loss) arising during the period
—

 
—

 
(0.1
)
 
0.1

Derivatives
 
 
 
 
 
 
 
Net derivatives gain (loss) on hedge transactions
(26.8
)
 
28.0

 
(18.7
)
 
50.1

Reclassification to net loss of net realized gain
(3.3
)
 
(2.6
)
 
(8.1
)
 
(1.0
)
Income taxes on derivative transactions
(11.6
)
 
9.8

 
(10.3
)
 
18.9

Total
(18.5
)
 
15.6

 
(16.5
)
 
30.2

Postretirement benefit plans
 
 
 
 
 
 
 
Amortization of net actuarial loss
18.8

 
22.1

 
56.2

 
66.1

Prior service cost
 
 
 
 
 
 
 
Amortization to net loss of net prior service cost (credits)
1.5

 
(0.2
)
 
4.5

 
(0.5
)
Income taxes on postretirement benefit plans
7.8

 
8.5

 
23.2

 
25.3

Total
12.5

 
13.4

 
37.5

 
40.3

Other comprehensive income (loss), net of tax
(22.2
)
 
12.4

 
2.2

 
58.4

Comprehensive income (loss)
(163.5
)
 
15.3

 
(140.4
)
 
42.7

Less: Comprehensive income (loss) attributable to noncontrolling interests
(0.8
)
 
5.4

 
4.6

 
7.8

Comprehensive income (loss) attributable to ATI
$
(162.7
)
 
$
9.9

 
$
(145.0
)
 
$
34.9

The accompanying notes are an integral part of these statements.


3
Table of Contents

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
 
Nine months ended September 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net loss
$
(142.6
)
 
$
(15.7
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
141.4

 
131.6

Deferred taxes
9.6

 
15.0

Changes in operating assets and liabilities:
 
 
 
Inventories
116.7

 
(88.6
)
Accounts receivable
106.1

 
(89.9
)
Accounts payable
(189.7
)
 
8.0

Retirement benefits
7.9

 
19.3

Accrued income taxes
61.0

 
(25.1
)
Accrued liabilities and other
(1.5
)
 
7.2

Cash provided by (used in) operating activities
108.9

 
(38.2
)
Investing Activities:
 
 
 
Purchases of property, plant and equipment
(99.5
)
 
(157.5
)
Purchases of businesses, net of cash acquired
(0.5
)
 
(92.5
)
Asset disposals and other
—

 
1.9

Cash used in investing activities
(100.0
)
 
(248.1
)
Financing Activities:
 
 
 
Payments on long-term debt and capital leases
(23.3
)
 
(414.7
)
Net borrowings under credit facilities
1.7

 
—

Dividends paid to stockholders
(57.9
)
 
(57.8
)
Exercises of stock options and other
—

 
0.1

Shares repurchased for income tax withholding on share-based compensation
(1.4
)
 
(3.9
)
Cash used in financing activities
(80.9
)
 
(476.3
)
Decrease in cash and cash equivalents
(72.0
)
 
(762.6
)
Cash and cash equivalents at beginning of period
269.5

 
1,026.8

Cash and cash equivalents at end of period
$
197.5

 
$
264.2

The accompanying notes are an integral part of these statements.


4
Table of Contents

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, 2013
$
11.0

 
$
1,185.9

 
$
2,490.1

 
$
(79.6
)
 
$
(713.2
)
 
$
100.5

 
$
2,994.7

Net income (loss)
—

 
—

 
(24.7
)
 
—

 
—

 
9.1

 
(15.6
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
59.6

 
(1.2
)
 
58.4

Cash dividends on common stock ($0.54 per share)
—

 
—

 
(57.8
)
 
—

 
—

 
—

 
(57.8
)
Conversion of convertible notes
—

 
—

 
(0.5
)
 
5.5

 
—

 
—

 
5.0

Employee stock plans
—

 
(24.0
)
 
(10.7
)
 
29.6

 
—

 
—

 
(5.1
)
Balance, September 30, 2014
$
11.0

 
$
1,161.9

 
$
2,396.4

 
$
(44.5
)
 
$
(653.6
)
 
$
108.4

 
$
2,979.6

Balance, December 31, 2014
$
11.0

 
$
1,164.2

 
$
2,398.9

 
$
(44.3
)
 
$
(931.4
)
 
$
110.9

 
$
2,709.3

Net income (loss)
—

 
—

 
(151.0
)
 
—

 
—

 
8.4

 
(142.6
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
6.0

 
(3.8
)
 
2.2

Cash dividends on common stock ($0.54 per share)
—

 
—

 
(57.9
)
 
—

 
—

 
—

 
(57.9
)
Dividends to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(16.0
)
 
(16.0
)
Redeemable noncontrolling interest
—

 
—

 
(0.3
)
 
—

 
—

 
0.3

 
—

Employee stock plans
—

 
(5.4
)
 
(8.0
)
 
23.9

 
—

 
—

 
10.5

Balance, September 30, 2015
$
11.0

 
$
1,158.8

 
$
2,181.7

 
$
(20.4
)
 
$
(925.4
)
 
$
99.8

 
$
2,505.5

The accompanying notes are an integral part of these statements.

5
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 2014 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, 2014 financial information has been derived from the Company’s audited consolidated financial statements.
In 2013, the Company sold or announced closures of certain businesses that are reported as discontinued operations. Remaining closure activities were completed in 2014. Financial results for discontinued operations for the three and nine months ended September 30, 2014 were sales of $3.3 million and $14.9 million, respectively, and pretax losses of $0.5 million and $3.5 million, respectively.
New Accounting Pronouncements Adopted
In January 2015, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the criteria for reporting discontinued operations. Under the new criteria, a disposal of a component of an entity is required to be reported as discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The criteria that there be no significant continuing involvement in the operations of the component after the disposal transaction has been removed under the new guidance. The new guidance also requires the presentation of the assets and liabilities of a disposal group that includes a discontinued operation for each comparative period and requires additional disclosures about discontinued operations, including the major line items constituting the pretax profit or loss of the discontinued operation, certain cash flow information for the discontinued operation, expanded disclosures about an entity’s significant continuing involvement in a discontinued operation, and disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The provisions of the new guidance are effective for all disposals that occur for the Company beginning in fiscal year 2015. The adoption of these changes had no impact on the consolidated financial statements.
Pending Accounting Pronouncements

In July 2015, the FASB issued changes 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 are effective for the Company’s 2017 fiscal year, and will 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 is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this guidance. This update will be effective for the Company beginning in fiscal year 2016, with early adoption permitted, and is applied on a retrospective basis. The Company plans to adopt this new guidance in the fourth quarter of fiscal year 2015. As of September 30, 2015 and December 31, 2014, the Company had $9.8 million and $10.9 million, respectively, of debt issuance costs reported as assets on the consolidated balance sheet that will be reclassified to a reduction of the carrying amount of the debt liability upon the Company’s adoption of this new guidance. In August 2015, the FASB issued additional guidance on presentation of debt issuance costs specifically related to line-of-credit arrangements. This guidance indicated no
objection to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding

6
Table of Contents

borrowings on the line-of-credit arrangement. As such, the Company will continue to present such costs, as it does today, as an asset.

In May 2014, the FASB issued changes to revenue recognition with customers. This update provides a five-step analysis of transactions to determine when and how revenue is recognized. 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. In July 2015, the FASB approved a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in fiscal year 2018. This update may be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Note 2. Inventories
Inventories at September 30, 2015 and December 31, 2014 were as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Raw materials and supplies
$
235.0

 
$
249.3

Work-in-process
1,052.2

 
1,184.1

Finished goods
190.0

 
172.2

Total inventories at current cost
1,477.2

 
1,605.6

Adjustment from current cost to LIFO cost basis
85.1

 
4.8

Inventory valuation reserves
(152.9
)
 
(68.8
)
Progress payments
(53.3
)
 
(68.8
)
Total inventories, net
$
1,356.1

 
$
1,472.8

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. The effect of using the LIFO methodology to value inventory, rather than FIFO, decreased cost of sales by $80.3 million for the first nine months of 2015, which was offset by an $80.3 million increase in cost of sales for the change in net realizable value reserves on the carrying value of LIFO-based inventory. The first nine months of 2014 results included a $47.9 million increase in cost of sales from using the LIFO costing methodology, which was offset by a $35.0 million decrease in costs of sales for the reduction in net realizable value reserves on the carrying value of LIFO-based inventory. The first nine months of 2015 and 2014 results included $16.6 million and $18.3 million, respectively, in inventory valuation charges related to the market-based valuation of industrial titanium products.
Note 3. Property, Plant and Equipment
Property, plant and equipment at September 30, 2015 and December 31, 2014 was as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Land
$
30.3

 
$
30.2

Buildings
1,048.2

 
1,048.9

Equipment and leasehold improvements
3,792.4

 
3,702.5

 
4,870.9

 
4,781.6

Accumulated depreciation and amortization
(1,932.7
)
 
(1,819.8
)
Total property, plant and equipment, net
$
2,938.2

 
$
2,961.8

The construction in progress portion of property, plant and equipment at September 30, 2015 was $73.7 million.

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Table of Contents

Note 4. Debt
Debt at September 30, 2015 and December 31, 2014 was as follows (in millions): 
 
September 30,
2015
 
December 31,
2014
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 Ludlum 6.95% debentures due 2025
150.0

 
150.0

ATI Ladish Series B 6.14% Notes due 2016 (b)
—

 
11.9

ATI Ladish Series C 6.41% Notes due 2015 (c)
—

 
10.3

U.S. revolving credit facilities
—

 
—

Foreign credit facilities
1.7

 
—

Industrial revenue bonds, due through 2020, and other
3.9

 
4.7

Total short-term and long-term debt
1,505.6

 
1,526.9

Short-term debt and current portion of long-term debt
4.0

 
17.8

Total long-term debt
$
1,501.6

 
$
1,509.1

 
(a)
Bearing interest at 6.625% effective February 15, 2015.
(b)
Includes fair value adjustments of $0.4 million at December 31, 2014.
(c)
Includes fair value adjustments of $0.3 million at December 31, 2014.

During the first quarter of 2015, Standard & Poor’s (“S&P”) downgraded the Company’s credit rating one notch to BB+ from BBB-, and during the third quarter of 2015, Moody’s downgraded the Company’s credit rating one notch to Ba2 from Ba1. These downgrades resulted in an increase of the interest rate on the Senior Notes due 2023 (the “2023 Notes”) from 6.125% as of December 31, 2014 to 6.625% effective with the interest period beginning February 15, 2015.
Additionally, on October 23, 2015, S&P downgraded the Company’s credit rating two notches, to BB-. This downgrade will result in an increase to the interest rate on the 2023 Notes to 7.125%, effective for the interest period beginning August 16, 2015, and represents an additional $2.5 million of interest expense measured on an annual basis. Future downgrades of the Company’s credit ratings by S&P or Moody’s could result in additional increases to the interest cost with respect to the 2023 Notes. Each notch of credit rating downgrade increases interest expense by 0.25% on the 2023 Notes, up to a maximum 4 notches for each of the two credit rating agencies, or a total 2.0% potential interest rate change, of which 1.25% has now occurred following the October 23, 2015 S&P credit rating change.
During the third quarter of 2015, the Company prepaid $5.7 million in aggregate principal amount of its 6.14% ATI Ladish Series B senior notes due May 16, 2016 (the “Series B Notes”), representing all of the remaining outstanding Series B Notes. Also during the third quarter of 2015, the Company repaid the $10.0 million aggregate principal amount of its outstanding 6.41% ATI Ladish Series C senior notes, due September 2, 2015 (the “Series C Notes”). The Series B and C Notes were assumed by the Company in the 2011 Ladish acquisition.
On September 23, 2015, the Company entered into a $400 million Asset Based Lending (“ABL”) Revolving Credit Facility, which includes a letter of credit sub-facility of up to $200 million. The ABL facility replaces a $400 million revolving credit facility originally entered into on July 31, 2007 (as amended, the “Prior Credit Facility”). Costs associated with entering into the ABL facility were $1.3 million, and are being amortized to interest expense over the 5-year term of the facility. The ABL facility matures in September 2020 and is collateralized by the accounts receivable and inventory of the Company’s domestic operations. The applicable interest rate for 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. Compared to the Prior Credit Facility, the ABL facility contains no leverage or interest coverage ratios but does contain 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 or if the undrawn availability under ABL facility is less than the greater of (i) 10% of the then applicable maximum borrowing amount or (ii) $40.0 million. Additionally, the Company must demonstrate liquidity, as calculated in accordance with the terms of the agreement, 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 such liquidity is available until the notes are paid in full or refinanced. There was no impact on the Company’s outstanding debt as a result of the ABL facility. There were no outstanding borrowings made under the ABL facility as of September 30, 2015, although approximately $4.6 million has been utilized to

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support the issuance of letters of credit. Average borrowings under the Prior Credit Facility for the first nine months of 2015 were $49.2 million, bearing an average annual interest rate of 2.4%.
The Company has an additional separate credit facility for the issuance of letters of credit. As of September 30, 2015, $32 million in letters of credit were outstanding under this facility.
Shanghai STAL Precision Stainless Steel Company Limited (STAL), the Company’s Chinese joint venture company in which ATI has a 60% interest, has a separate $20 million revolving credit facility entered into in April 2015. Borrowings under the STAL revolving credit facility are in U.S. dollars based on U.S. interbank offered rates. The credit facility is supported solely by STAL’s financial capability without any guarantees from the joint venture partners. The credit facility requires STAL to maintain a minimum level of shareholders’ equity, and certain financial ratios.
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 September 30, 2015, 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 2020. The aggregate notional amount hedged is approximately 25% of a single year’s estimated nickel raw material purchase requirements.
At September 30, 2015, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges for approximately 95% of its annual forecasted domestic requirements for 2015, approximately 90% for 2016, approximately 55% for 2017, and approximately 15% for 2018.
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. At September 30, 2015, the Company held euro forward sales contracts designated as hedges with a notional value of approximately 257 million euro with maturity dates through June 2018, including approximately 54 million euro with maturities in 2015. In addition, the Company may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions.
During the first nine months of 2015, the Company net settled 222.5 million euro notional value of foreign currency forward contracts designated as cash flow hedges with 2015 and 2016 maturity dates, receiving cash proceeds of $51 million which is reported in cash provided by operating activities on the consolidated cash flow statement. Deferred gains on these settled cash flow hedges currently recognized in accumulated other comprehensive income will be reclassified to earnings when the underlying transactions occur. The Company subsequently entered into 211 million euro notional value of foreign currency forward contracts designated as fair value hedges in the first nine months of 2015, all with 2015 and 2016 maturity dates and of which 130.5 million euro notional was outstanding as of September 30, 2015. The Company recorded a $1.8 million charge and $5.6 million benefit in costs of sales on the consolidated statement of operations in the third quarter and nine months ended September 30, 2015, respectively, for mark-to-market changes on these fair value hedges.

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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.
(In millions)
Asset derivatives
 
Balance sheet location
 
September 30,
2015
 
December 31,
2014
Derivatives designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other current assets
 
$
12.3

 
$
23.6

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

 
1.1

Foreign exchange contracts
 
Other assets
 
18.1

 
28.3

Nickel and other raw material contracts
 
Other assets
 
—

 
0.5

Total derivatives designated as hedging instruments
 
30.4

 
53.5

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

 
6.4

Total derivatives not designated as hedging instruments
 
—

 
6.4

Total asset derivatives
 
 
 
$
30.4

 
$
59.9

Liability derivatives
 
Balance sheet location
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Natural gas contracts
 
Accrued liabilities
 
$
13.6

 
$
10.2

Nickel and other raw material contracts
 
Accrued liabilities
 
19.6

 
5.8

Foreign exchange contracts
 
Accrued liabilities
 
0.6

 
—

Electricity contracts
 
Accrued liabilities
 
—

 
0.1

Natural gas contracts
 
Other long-term liabilities
 
9.4

 
7.9

Nickel and other raw material contracts
 
Other long-term liabilities
 
19.8

 
3.0

Foreign exchange contracts
 
Other long-term liabilities
 
0.3

 
—

Total derivatives designated as hedging instruments
 
63.3

 
27.0

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Accrued liabilities
 
1.1

 
—

Total derivatives not designated as hedging instruments
 
1.1

 
—

Total liability derivatives
 
 
 
$
64.4

 
$
27.0

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. 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.
Assuming market prices remain constant with those at September 30, 2015, a loss of $13.2 million 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 nine month periods ended September 30, 2015 and 2014 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 September 30,
 
Three months ended September 30,
 
Three months ended September 30,
Hedging Relationships
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Nickel and other raw material contracts
$
(13.5
)
 
$
(4.7
)
 
$
(2.4
)
 
$
1.3

 
$
—

 
$
—

Natural gas contracts
(3.7
)
 
(3.0
)
 
(1.6
)
 
—

 
—

 
—

Electricity contracts
—

 
(0.2
)
 
—

 
(0.1
)
 
—

 
—

Foreign exchange contracts
0.7

 
25.1

 
6.0

 
0.4

 
—

 
—

Total
$
(16.5
)
 
$
17.2

 
$
2.0

 
$
1.6

 
$
—

 
$
—

 
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
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
Hedging Relationships
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Nickel and other raw material contracts
$
(26.6
)
 
$
5.4

 
$
(7.0
)
 
$
0.5

 
$
—

 
$
—

Natural gas contracts
(9.5
)
 
(1.7
)
 
(6.4
)
 
2.4

 
—

 
—

Electricity contracts
—

 
0.6

 
(0.1
)
 
0.4

 
—

 
—

Foreign exchange contracts
24.6

 
26.5

 
18.5

 
(2.7
)
 
—

 
—

Total
$
(11.5
)
 
$
30.8

 
$
5.0

 
$
0.6

 
$
—

 
$
—

(a)
The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales in the same period or periods in which the hedged item affects earnings.
(b)
The gains (losses) recognized in income on derivatives related to the ineffective portion and the amount excluded from effectiveness testing are presented in selling and administrative expenses.
The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset.
During the first quarter of 2015, the Company net settled 40.3 million euro notional value of foreign currency forward contracts that were not designated as hedges, receiving cash proceeds of $11.8 million which is reported in cash provided by operating activities on the consolidated cash flow statement. The Company also entered into 33 million euro notional value of foreign currency forward contracts not designated as hedges in the first quarter of 2015, of which 32 million euro notional value are outstanding as of September 30, 2015, with maturity dates into the third quarter of 2016.
Derivatives that are not designated as hedging instruments were as follows:
(In millions)
Amount of Gain (Loss) Recognized
in Income on Derivatives
Derivatives Not Designated
Three months ended September 30,
 
Nine months ended September 30,
as Hedging Instruments
2015
 
2014
 
2015
 
2014
Foreign exchange contracts
$
—

 
$
3.1

 
$
3.0

 
$
4.2

Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales.

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Note 6. Fair Value of Financial Instruments
The estimated fair value of financial instruments at September 30, 2015 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
$
197.5

 
$
197.5

 
$
197.5

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
30.4

 
30.4

 
—

 
30.4

Liabilities
64.4

 
64.4

 
—

 
64.4

Debt
1,505.6

 
1,404.4

 
1,398.8

 
5.6

The estimated fair value of financial instruments at December 31, 2014 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
$
269.5

 
$
269.5

 
$
269.5

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
59.9

 
59.9

 
—

 
59.9

Liabilities
27.0

 
27.0

 
—

 
27.0

Debt
1,526.9

 
1,616.0

 
1,589.1

 
26.9

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 2015 or 2014.

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.
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.

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Note 7. Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans or defined contribution plans covering substantially all employees. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the U.S. pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code.
The Company also sponsors several postretirement plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution. For the non-collectively bargained plans, the Company maintains the right to amend or terminate the plans at its discretion.
For the three month periods ended September 30, 2015 and 2014, the components of pension expense and components of other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions): 
 
Pension Benefits
 
Other Postretirement Benefits
 
Three months ended September 30,
 
Three months ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost - benefits earned during the year
$
5.7

 
$
7.3

 
$
0.7

 
$
0.7

Interest cost on benefits earned in prior years
30.3

 
33.4

 
4.4

 
6.0

Expected return on plan assets
(42.1
)
 
(46.1
)
 
—

 
(0.1
)
Amortization of prior service cost (credit)
0.3

 
0.6

 
1.2

 
(0.8
)
Amortization of net actuarial loss
15.1

 
18.5

 
3.7

 
3.6

Total retirement benefit expense
$
9.3

 
$
13.7

 
$
10.0

 
$
9.4

For the nine month periods ended September 30, 2015 and 2014, the components of pension expense and components of other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions): 
 
Pension Benefits
 
Other Postretirement Benefits
 
Nine months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost - benefits earned during the year
$
17.1

 
$
22.0

 
$
2.1

 
$
2.1

Interest cost on benefits earned in prior years
90.8

 
100.2

 
13.4

 
18.0

Expected return on plan assets
(126.2
)
 
(138.2
)
 
—

 
(0.2
)
Amortization of prior service cost (credit)
0.9

 
1.8

 
3.6

 
(2.3
)
Amortization of net actuarial loss
45.3

 
55.5

 
10.9

 
10.6

Termination benefits
—

 
0.3

 
—

 
—

Total retirement benefit expense
$
27.9

 
$
41.6

 
$
30.0

 
$
28.2

Other postretirement benefit costs for a defined contribution plan were $0.7 million and $2.0 million for the three and nine months ended September 30, 2014, respectively.
Note 8. Income Taxes
The provision for income taxes for the third quarter 2015 was $23.4 million, which includes a $63.9 million valuation allowance on a portion of the Company’s deferred tax assets with future expiration dates. Through the nine months ended September 30, 2015, the Company's results reflected a three year cumulative loss from U.S. operations; prior thereto, the Company's historical results reflected a three year cumulative profit. The three year cumulative loss limits the ability to consider other positive subjective evidence, such as projections of future results, to assess the realizability of deferred tax assets. As a result of this assessment, the Company established a valuation allowance during the three month period ended September 30, 2015. The non-cash charge was comprised of a $56.6 million valuation allowance for certain state and federal tax benefits recognized in prior years, and a $7.3 million valuation allowance recorded as part of the current year’s effective tax rate, representing approximately a 6% tax rate impact. Third quarter 2014 results included a provision for income taxes of $0.5 million, which included discrete tax benefits of $3.4 million primarily associated with adjustments to prior years’ and foreign taxes.

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Table of Contents

For the nine months ended September 30, 2015, the provision for income taxes was $23.7 million, compared to a benefit for income taxes of $12.4 million for the 2014 comparable period. In addition to the valuation allowance discussed above, the income tax rate in 2015 and 2014 is also impacted by the Company’s inability to use the federal domestic manufacturing deduction tax benefit due to net operating loss carryforwards. Year to date results for 2015 included discrete tax expense of $57.9 million, primarily due to the $63.9 million valuation allowance discussed above. The prior year to date period included discrete tax benefits of $7.8 million, primarily associated with adjustments to prior years’ and foreign taxes. A federal income tax refund of $59.9 million was received in the first quarter of 2015. Also in 2015, the Company resolved various uncertain tax position matters related to temporary differences which resulted in $60.9 million of the long-term liability for uncertain tax positions as of December 31, 2014 being reclassified to a deferred tax liability.
Note 9. Business Segments
The Company operates in two business segments: High Performance Materials & Components and Flat Rolled Products. Effective with the third quarter 2015, the Company changed its method of determining business unit performance as internally reported to its senior management, CEO, and Board of Directors. Segment operating results are now reported excluding 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.
Additionally, segment operating results are now measured including all retirement benefit expense attributable to the business unit, for both current and former employees. Previously, the Company excluded defined benefit pension expense and all defined benefit and defined contribution postretirement medical and life insurance expense from segment operating profit. This change better aligns comparative operating performance following the 2014 U.S. defined benefit pension freeze for all non-represented employees and the change in 2015 to a company-wide defined contribution retirement plan structure. Under the Company’s previous reporting methodology, defined contribution retirement plan expense remained in segment operating results whereas defined benefit plan costs were excluded. Operating results for business segments, corporate and closed company and other expenses now include all applicable retirement benefit plan costs for pension and other postretirement benefits.
For the three and nine month periods ended September 30, 2015 and 2014, the amount of defined benefit pension expense and all defined benefit and defined contribution postretirement medical and life insurance expense included in business segment results, corporate expense and closed company and other expenses was as follows:
(in millions)
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
High Performance Materials & Components
$
3.0

 
$
5.1

 
$
9.1

 
$
15.6

Flat Rolled Products
14.7

 
15.6

 
44.1

 
46.8

Total
17.7

 
20.7

 
53.2

 
62.4

Corporate expenses
1.0

 
1.3

 
2.9

 
4.0

Closed company and other expenses
0.6

 
1.8

 
1.7

 
5.4

Total retirement benefit expense
$
19.3

 
$
23.8

 
$
57.8

 
$
71.8

Management considers these changes to be a more useful method of measuring business unit financial performance based on changes to retirement benefit plans and the impact of the Company’s aggregate net debit LIFO position. The segment results below reflect these changes for all periods presented.
The measure of segment operating profit also excludes income taxes, corporate expenses, net interest expense, closed company expenses and restructuring costs, if any. Discontinued operations are also excluded. Management believes segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.

14
Table of Contents

Following is certain financial information with respect to the Company’s business segments for the periods indicated (in millions):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Total sales:
 
 
 
 
 
 
 
High Performance Materials & Components
$
490.1

 
$
527.1

 
$
1,588.5

 
$
1,562.6

Flat Rolled Products
377.8

 
587.0

 
1,516.0

 
1,747.1

 
867.9

 
1,114.1

 
3,104.5

 
3,309.7

Intersegment sales:
 
 
 
 
 
 
 
High Performance Materials & Components
15.4

 
19.4

 
59.9

 
56.4

Flat Rolled Products
19.8

 
25.1

 
63.9

 
77.4

 
35.2

 
44.5

 
123.8

 
133.8

Sales to external customers:
 
 
 
 
 
 
 
High Performance Materials & Components
474.7

 
507.7

 
1,528.6

 
1,506.2

Flat Rolled Products
358.0

 
561.9

 
1,452.1

 
1,669.7

 
$
832.7

 
$
1,069.6

 
$
2,980.7

 
$
3,175.9

Operating profit (loss):
 
 
 
 
 
 
 
High Performance Materials & Components
$
18.8

 
$
53.8

 
$
136.1

 
$
162.5

Flat Rolled Products
(91.8
)
 
6.1

 
(121.8
)
 
(32.7
)
Total operating profit (loss)
(73.0
)
 
59.9

 
14.3

 
129.8

LIFO and net realizable value reserves
(0.2
)
 
(10.0
)
 
—

 
(12.9
)
Corporate expenses
(10.7
)
 
(11.4
)
 
(33.6
)
 
(37.3
)
Closed company and other expenses
(6.5
)
 
(9.2
)
 
(18.6
)
 
(22.1
)
Interest expense, net
(27.5
)
 
(25.2
)
 
(81.0
)
 
(82.8
)
Income (loss) from continuing operations before income taxes
$
(117.9
)
 
$
4.1

 
$
(118.9
)
 
$
(25.3
)
Note 10. Redeemable Noncontrolling Interest
The holders of the 15% noncontrolling interest in ATI Flowform Products have a put option to require the Company to purchase their equity interest at a redemption value determinable from a specified formula based on a multiple of EBITDA (subject to a fixed minimum linked to the original acquisition date value). The put option is fully exercisable beginning in the second quarter of 2017, and is also exercisable under certain other circumstances. The put option cannot be separated from the noncontrolling interest, and the combination of a noncontrolling interest and the redemption feature requires classification as redeemable noncontrolling interest in the consolidated balance sheet, separate from Stockholders’ Equity.
The carrying amount of the redeemable noncontrolling interest approximates its maximum redemption value. Any subsequent change in maximum redemption value is adjusted through retained earnings. The adjustment to the carrying amount for the nine months ended September 30, 2015 reduced retained earnings by $0.3 million. The Company applied the two-class method of calculating earnings per share, and as such this adjustment to the carrying amount was reflected in earnings per share. The redeemable noncontrolling interest was $12.1 million as of September 30, 2015 and December 31, 2014, which was unchanged from the acquisition date value.

15
Table of Contents

Note 11. Per Share Information
The following table sets forth the computation of basic and diluted income from continuing operations per common share: 
 
Three months ended
 
Nine months ended
(In millions, except per share amounts)
September 30,
 
September 30,
2015
 
2014
 
2015
 
2014
Numerator for basic loss from continuing operations per common share –
 
 
 
 
 
 
 
Loss from continuing operations attributable to ATI
$
(144.6
)
 
$
—

 
$
(151.0
)
 
$
(21.9
)
Redeemable noncontrolling interest (Note 10)
(0.2
)
 
—

 
(0.3
)
 
—

Numerator for diluted loss from continuing operations per common share –
 
 
 
 
 
 
 
Loss from continuing operations available to ATI after assumed conversions
$
(144.8
)
 
$
—

 
$
(151.3
)
 
$
(21.9
)
Denominator for basic net loss per common share – weighted average shares
107.3

 
107.2

 
107.3

 
107.1

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation
—

 
0.8

 
—

 
—

4.25% Convertible Notes due 2014
—

 
—

 
—

 
—

Denominator for diluted net loss per common share – adjusted weighted average shares assuming conversions
107.3

 
108.0

 
107.3

 
107.1

Basic loss from continuing operations attributable to ATI per common share
$
(1.35
)
 
$
—

 
$
(1.41
)
 
$
(0.20
)
Diluted loss from continuing operations attributable to ATI per common share
$
(1.35
)
 
$
—

 
$
(1.41
)
 
$
(0.20
)
Common stock that would be issuable upon the assumed conversion of the 2014 Convertible Notes (prior to maturity on June 2, 2014) 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 0.8 million and 0.9 million anti-dilutive shares for the three and nine month periods ended September 30, 2015, respectively, and 6.0 million anti-dilutive shares for the nine month period ended September 30, 2014. There were no anti-dilutive shares for three months ended September 30, 2014.
Note 12. 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 U.S. qualified defined benefit pension plan (the “Plan”) which covers certain current and former employees of the Subsidiary and the Non-guarantor Subsidiaries. As a result, the balance sheets presented for the Subsidiary and the Non-guarantor Subsidiaries do not include any Plan assets or liabilities, or the related deferred taxes. The Plan assets, liabilities and related deferred taxes and pension income or expense are recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to the Non-guarantor Subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation.

16
Table of Contents

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
September 30, 2015
 
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5.4

 
$
6.9

 
$
185.2

 
$
—

 
$
197.5

Accounts receivable, net
0.1

 
125.2

 
372.2

 
—

 
497.5

Intercompany notes receivable
—

 
—

 
2,561.0

 
(2,561.0
)
 
—

Inventories, net
—

 
303.8

 
1,052.3

 
—

 
1,356.1

Prepaid expenses and other current assets
5.4

 
4.9

 
37.2

 
—

 
47.5

Total current assets
10.9

 
440.8

 
4,207.9

 
(2,561.0
)
 
2,098.6

Property, plant and equipment, net
2.3

 
1,557.2

 
1,378.7

 
—

 
2,938.2

Cost in excess of net assets acquired
—

 
126.6

 
653.6

 
—

 
780.2

Intercompany notes receivable
—

 
—

 
200.0

 
(200.0
)
 
—

Investment in subsidiaries
6,150.7

 
37.7

 
—

 
(6,188.4
)
 
—

Other assets
22.7

 
33.8

 
287.6

 
—

 
344.1

Total assets
$
6,186.6

 
$
2,196.1

 
$
6,727.8

 
$
(8,949.4
)
 
$
6,161.1

Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
Accounts payable
$
5.2

 
$
160.7

 
$
201.2

 
$
—

 
$
367.1

Accrued liabilities
35.4

 
84.7

 
209.7

 
—

 
329.8

Intercompany notes payable
1,386.6

 
1,174.4

 
—

 
(2,561.0
)
 
—

Deferred income taxes
36.2

 
—

 
—

 
—

 
36.2

Short-term debt and current portion of long-term debt
0.6

 
0.1

 
3.3

 
—

 
4.0

Total current liabilities
1,464.0

 
1,419.9

 
414.2

 
(2,561.0
)
 
737.1

Long-term debt
1,350.8

 
150.2

 
0.6

 
—

 
1,501.6

Intercompany notes payable
—

 
200.0

 
—

 
(200.0
)
 
—

Accrued postretirement benefits
—

 
248.2

 
140.7

 
—

 
388.9

Pension liabilities
654.9

 
5.6

 
52.5

 
—

 
713.0

Deferred income taxes
190.7

 
—

 
—

 
—

 
190.7

Other long-term liabilities
20.7

 
20.9

 
70.6

 
—

 
112.2

Total liabilities
3,681.1

 
2,044.8

 
678.6

 
(2,761.0
)
 
3,643.5

Redeemable noncontrolling interest
—

 
—

 
12.1

 
—

 
12.1

Total stockholders’ equity
2,505.5

 
151.3

 
6,037.1

 
(6,188.4
)
 
2,505.5

Total liabilities and stockholders’ equity
$
6,186.6

 
$
2,196.1

 
$
6,727.8

 
$
(8,949.4
)
 
$
6,161.1



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 September 30, 2015  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
286.3

 
$
546.4

 
$
—

 
$
832.7

Cost of sales
9.2

 
363.5

 
488.7

 
—

 
861.4

Selling and administrative expenses
22.9

 
9.3

 
30.3

 
—

 
62.5

Income (loss) before interest, other income and income taxes
(32.1
)
 
(86.5
)
 
27.4

 
—

 
(91.2
)
Interest income (expense), net
(29.5
)
 
(12.6
)
 
14.6

 
—

 
(27.5
)
Other income (loss) including equity in income of unconsolidated subsidiaries
(56.3
)
 
0.2

 
0.7

 
56.2

 
0.8

Income (loss) from continuing operations before income tax provision (benefit)
(117.9
)
 
(98.9
)
 
42.7

 
56.2

 
(117.9
)
Income tax provision (benefit)
23.4

 
(35.1
)
 
11.0

 
24.1

 
23.4

Income (loss) from continuing operations
(141.3
)
 
(63.8
)
 
31.7

 
32.1

 
(141.3
)
Income (loss) from discontinued operations, net of tax
—

 
—

 
—

 
—

 
—

Net income (loss)
(141.3
)
 
(63.8
)
 
31.7

 
32.1

 
(141.3
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
3.3

 
—

 
3.3

Net income (loss) attributable to ATI
$
(141.3
)
 
$
(63.8
)
 
$
28.4

 
$
32.1

 
$
(144.6
)
Comprehensive income (loss) attributable to ATI
$
(163.5
)
 
$
(60.5
)
 
$
16.7

 
$
44.6

 
$
(162.7
)

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations and Comprehensive Income
For the nine months ended September 30, 2015  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
1,231.5

 
$
1,749.2

 
$
—

 
$
2,980.7

Cost of sales
22.0

 
1,296.5

 
1,504.4

 
—

 
2,822.9

Selling and administrative expenses
70.1

 
30.4

 
97.5

 
—

 
198.0

Income (loss) before interest, other income and income taxes
(92.1
)
 
(95.4
)
 
147.3

 
—

 
(40.2
)
Interest income (expense), net
(86.1
)
 
(37.3
)
 
42.4

 
—

 
(81.0
)
Other income (loss) including equity in income of unconsolidated subsidiaries
59.3

 
0.8

 
1.8

 
(59.6
)
 
2.3

Income (loss) from continuing operations before income tax provision (benefit)
(118.9
)
 
(131.9
)
 
191.5

 
(59.6
)
 
(118.9
)
Income tax provision (benefit)
23.7

 
(46.3
)
 
67.4

 
(21.1
)
 
23.7

Income (loss) from continuing operations
(142.6
)
 
(85.6
)
 
124.1

 
(38.5
)
 
(142.6
)
Income (loss) from discontinued operations, net of tax
—

 
—

 
—

 
—

 
—

Net income (loss)
(142.6
)
 
(85.6
)
 
124.1

 
(38.5
)
 
(142.6
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
8.4

 
—

 
8.4

Net income (loss) attributable to ATI
$
(142.6
)
 
$
(85.6
)
 
$
115.7

 
$
(38.5
)
 
$
(151.0
)
Comprehensive income (loss) attributable to ATI
$
(140.4
)
 
$
(76.0
)
 
$
101.9

 
$
(30.5