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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, 2016
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 21, 2016, the registrant had outstanding 108,927,240 shares of its Common Stock.
 

Table of Contents

ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
Quarter Ended September 30, 2016
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)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
188.4

 
$
149.8

Accounts receivable, net
454.0

 
400.3

Inventories, net
1,078.9

 
1,271.6

Prepaid expenses and other current assets
40.8

 
45.9

Total Current Assets
1,762.1

 
1,867.6

Property, plant and equipment, net
2,514.4

 
2,928.2

Goodwill
644.4

 
651.4

Other assets
271.4

 
304.5

Total Assets
$
5,192.3

 
$
5,751.7

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
285.2

 
$
380.8

Accrued liabilities
310.9

 
301.8

Short term debt and current portion of long-term debt
5.4

 
3.9

Total Current Liabilities
601.5

 
686.5

Long-term debt
1,870.4

 
1,491.8

Accrued postretirement benefits
311.6

 
359.2

Pension liabilities
708.6

 
833.8

Deferred income taxes
51.3

 
75.6

Other long-term liabilities
86.2

 
108.3

Total Liabilities
3,629.6

 
3,555.2

Redeemable noncontrolling interest
—

 
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, 2016 and December 31, 2015; outstanding-108,927,240 shares at September 30, 2016 and 109,174,882 shares at December 31, 2015
11.0

 
11.0

Additional paid-in capital
1,183.3

 
1,161.7

Retained earnings
1,267.1

 
1,945.9

Treasury stock: 767,931 shares at September 30, 2016 and 520,289 shares at December 31, 2015
(27.9
)
 
(21.3
)
Accumulated other comprehensive loss, net of tax
(961.7
)
 
(1,014.5
)
Total ATI stockholders’ equity
1,471.8

 
2,082.8

Noncontrolling interests
90.9

 
101.6

Total Equity
1,562.7

 
2,184.4

Total Liabilities and Equity
$
5,192.3

 
$
5,751.7


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,
 
2016
 
2015
 
2016
 
2015
Sales
$
770.5

 
$
832.7

 
$
2,338.5

 
$
2,980.7

 
 
 
 
 
 
 
 
Cost of sales
720.3

 
861.4

 
2,273.3

 
2,822.9

Gross profit (loss)
50.2

 
(28.7
)
 
65.2

 
157.8

Selling and administrative expenses
60.5

 
62.5

 
182.4

 
198.0

Restructuring charges
488.6

 
—

 
498.6

 
—

Operating loss
(498.9
)
 
(91.2
)
 
(615.8
)
 
(40.2
)
Interest expense, net
(32.6
)
 
(27.5
)
 
(91.2
)
 
(81.0
)
Other income, net
—

 
0.8

 
1.8

 
2.3

Loss before income taxes
(531.5
)
 
(117.9
)
 
(705.2
)
 
(118.9
)
Income tax provision (benefit)
(4.3
)
 
23.4

 
(64.4
)
 
23.7

Net loss
(527.2
)
 
(141.3
)
 
(640.8
)
 
(142.6
)
Less: Net income attributable to noncontrolling interests
3.6

 
3.3

 
10.0

 
8.4

Net loss attributable to ATI
$
(530.8
)
 
$
(144.6
)
 
$
(650.8
)
 
$
(151.0
)
 
 
 
 
 
 
 
 
Basic net loss attributable to ATI per common share
$
(4.95
)
 
$
(1.35
)
 
$
(6.07
)
 
$
(1.41
)
 
 
 
 
 
 
 
 
Diluted net loss attributable to ATI per common share
$
(4.95
)
 
$
(1.35
)
 
$
(6.07
)
 
$
(1.41
)
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.08

 
$
0.18

 
$
0.24

 
$
0.54

The accompanying notes are an integral part of these statements.


2
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Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(527.2
)
 
$
(141.3
)
 
$
(640.8
)
 
$
(142.6
)
Currency translation adjustment
 
 
 
 
 
 
 
Unrealized net change arising during the period
(4.4
)
 
(16.2
)
 
(19.6
)
 
(18.7
)
Unrealized holding gain on securities
 
 
 
 
 
 
 
Net loss arising during the period
—

 
—

 
—

 
(0.1
)
Derivatives
 
 
 
 
 
 
 
Net derivatives gain (loss) on hedge transactions
4.8

 
(26.8
)
 
21.9

 
(18.7
)
Reclassification to net income (loss) of net realized loss (gain)
0.6

 
(3.3
)
 
8.5

 
(8.1
)
Income taxes on derivative transactions
2.0

 
(11.6
)
 
11.5

 
(10.3
)
Total
3.4

 
(18.5
)
 
18.9

 
(16.5
)
Postretirement benefit plans
 
 
 
 
 
 
 
Actuarial loss
 
 
 
 
 
 
 
Amortization of net actuarial loss
18.7

 
18.8

 
56.2

 
56.2

Net gain arising during the period
—

 
—

 
22.5

 
—

Prior service cost
 
 
 
 
 
 
 
Amortization to net income (loss) of net prior service cost (credit)
(0.4
)
 
1.5

 
—

 
4.5

Income taxes on postretirement benefit plans
6.9

 
7.8

 
29.8

 
23.2

Total
11.4

 
12.5

 
48.9

 
37.5

Other comprehensive income (loss), net of tax
10.4

 
(22.2
)
 
48.2

 
2.2

Comprehensive loss
(516.8
)
 
(163.5
)
 
(592.6
)
 
(140.4
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
2.0

 
(0.8
)
 
5.4

 
4.6

Comprehensive loss attributable to ATI
$
(518.8
)
 
$
(162.7
)
 
$
(598.0
)
 
$
(145.0
)
The accompanying notes are an integral part of these statements.


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Table of Contents

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
 
Nine months ended September 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net loss
$
(640.8
)
 
$
(142.6
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
130.2

 
141.4

Deferred taxes
(78.1
)
 
9.6

Non-cash restructuring charges
471.3

 
—

Changes in operating assets and liabilities:
 
 
 
Inventories
192.7

 
116.7

Accounts receivable
(53.7
)
 
106.1

Accounts payable
(60.2
)
 
(189.7
)
Retirement benefits (a)
(94.6
)
 
7.9

Accrued income taxes
7.7

 
61.0

Accrued liabilities and other
13.8

 
(1.5
)
Cash provided by (used in) operating activities
(111.7
)
 
108.9

Investing Activities:
 
 
 
Purchases of property, plant and equipment
(174.9
)
 
(99.5
)
Purchases of businesses, net of cash acquired
—

 
(0.5
)
Asset disposals and other
2.1

 
—

Cash used in investing activities
(172.8
)
 
(100.0
)
Financing Activities:
 
 
 
Borrowings on long-term debt
387.5

 
—

Payments on long-term debt and capital leases
(2.4
)
 
(23.3
)
Net borrowings under credit facilities
2.4

 
1.7

Debt issuance costs
(10.4
)
 
—

Dividends paid to stockholders
(25.8
)
 
(57.9
)
Dividends paid to noncontrolling interests
(16.0
)
 
—

Acquisition of noncontrolling interests
(12.2
)
 
—

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

 
(1.4
)
Cash provided by (used in) financing activities
323.1

 
(80.9
)
Increase (decrease) in cash and cash equivalents
38.6

 
(72.0
)
Cash and cash equivalents at beginning of period
149.8

 
269.5

Cash and cash equivalents at end of period
$
188.4

 
$
197.5

(a) Includes a $(115) million contribution to the U.S. defined benefit pension plan in 2016.
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, 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

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)
—

 
—

 
(650.8
)
 
—

 
—

 
10.0

 
(640.8
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
52.8

 
(4.6
)
 
48.2

Cash dividends on common stock ($0.24 per share)
—

 
—

 
(25.8
)
 
—

 
—

 
—

 
(25.8
)
Purchase of subsidiary shares from noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
Dividends to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(16.0
)
 
(16.0
)
Employee stock plans
—

 
21.6

 
(2.2
)
 
(6.6
)
 
—

 
—

 
12.8

Balance, September 30, 2016
$
11.0

 
$
1,183.3

 
$
1,267.1

 
$
(27.9
)
 
$
(961.7
)
 
$
90.9

 
$
1,562.7

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 2015 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, 2015 financial information has been derived from the Company’s audited consolidated financial statements.
Pending Accounting Pronouncements

In March 2016, the FASB issued new guidance 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. This new guidance is effective for the Company’s 2017 fiscal year with early adoption permitted. The Company is currently evaluating the possible impact of this new guidance, but does not anticipate that it will have a material impact on its consolidated financial statements.

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 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 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. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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Table of Contents

Note 2. Inventories
Inventories at September 30, 2016 and December 31, 2015 were as follows (in millions):
 
September 30,
2016
 
December 31,
2015
Raw materials and supplies
$
157.0

 
$
216.0

Work-in-process
865.7

 
990.3

Finished goods
169.4

 
184.1

Total inventories at current cost
1,192.1

 
1,390.4

Adjustment from current cost to LIFO cost basis
113.3

 
136.4

Inventory valuation reserves
(187.5
)
 
(206.3
)
Progress payments
(39.0
)
 
(48.9
)
Total inventories, net
$
1,078.9

 
$
1,271.6

Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market, less progress payments. Most of the 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):
 
 
Nine months ended September 30,
 
 
2016
 
2015
LIFO benefit (charge)
 
$
(23.1
)
 
$
80.3

NRV benefit (charge)
 
23.5

 
(80.3
)
Net cost of sales impact
 
$
0.4

 
$
—

The first nine months of 2016 and 2015 results included $17.7 million and $16.6 million, respectively, in inventory valuation charges related to the market-based valuation of titanium products. Additionally, in the third quarter of 2016, in conjunction with the indefinite idling of the Company’s Rowley, UT titanium sponge facility (see Note 10 for further explanation), an additional $11.3 million charge was taken to revalue titanium sponge inventory based on revised assessments of industrial grade titanium market conditions and expected utilization of this inventory.
Note 3. Property, Plant and Equipment
Property, plant and equipment at September 30, 2016 and December 31, 2015 was as follows (in millions):
 
September 30,
2016
 
December 31,
2015
Land
$
31.7

 
$
31.0

Buildings
847.3

 
1,048.2

Equipment and leasehold improvements
3,646.8

 
3,858.1

 
4,525.8

 
4,937.3

Accumulated depreciation and amortization
(2,011.4
)
 
(2,009.1
)
Total property, plant and equipment, net
$
2,514.4

 
$
2,928.2

The construction in progress portion of property, plant and equipment at September 30, 2016 was $130.9 million.

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Table of Contents

Note 4. Debt
Debt at September 30, 2016 and December 31, 2015 was as follows (in millions): 
 
September 30,
2016
 
December 31,
2015
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

 
—

Allegheny Ludlum 6.95% debentures due 2025
150.0

 
150.0

Term Loan due 2017
100.0

 
—

U.S. revolving credit facility
—

 
—

Foreign credit facilities
3.8

 
1.4

Industrial revenue bonds, due through 2020, and other
2.5

 
3.8

Debt issuance costs
(18.0
)
 
(9.5
)
Total debt
1,875.8

 
1,495.7

Short-term debt and current portion of long-term debt
5.4

 
3.9

Total long-term debt
$
1,870.4

 
$
1,491.8

 
(a)
Bearing interest at 7.875% effective February 15, 2016.
The stated interest rate payable on the Senior Notes due 2023 (2023 Notes) is subject to adjustment in the event of changes in the credit ratings on the 2023 Notes by either Moody’s or Standard & Poor’s (S&P). During the first quarter of 2016, S&P downgraded the Company’s credit rating one notch to B+ from BB-. This downgrade resulted in an increase of the interest rate on the 2023 Notes from 7.625% as of December 31, 2015 to 7.875% effective with the interest period beginning February 15, 2016 and represents an additional $1.3 million of interest expense measured on an annual basis. Any further credit rating downgrades will not affect the interest rate of the 2023 Notes.
Revolving Credit Facility
The Company has an Asset Based Lending (ABL) Revolving Credit Facility, which matures in September 2020 and 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.
In May 2016, the ABL facility was amended to add an eighteen month term loan (Term Loan) in the amount of $100.0 million, to support the Company’s restructuring actions and operational needs, and to amend certain of the ABL covenants and related defined terms. The interest rate on this Term Loan is 3.5% plus a LIBOR spread. Costs associated with amending the ABL facility were $0.9 million, and are being amortized to interest expense over the term of the facility. Proceeds of the Term Loan were used to pay down outstanding borrowings under the revolving credit portion of the ABL facility. The Term Loan is due on November 13, 2017 and can be prepaid in its entirety on a one-time basis on or after May 13, 2017 if certain minimum liquidity conditions are satisfied. The underwriting fees and other third-party expenses for the issuance of the Term Loan were $1.0 million and are being amortized to interest expense over the eighteen month term of the loan.
As amended, the applicable interest rate for borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 2.0% and 2.5% for LIBOR-based borrowings and between 1.0% and 1.5% for base rate borrowings. As amended, 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 facility is less than the greater of (i) 12.5% of the then applicable maximum borrowing amount or (ii) $40.0 million. The Company does not meet this required fixed charge coverage ratio at September 30, 2016. As a result, the Company is not able to access this remaining 12.5% or $62.5 million 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 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 that such liquidity is available at all times thereafter until the 9.375% Senior Notes due 2019 are paid in full or refinanced. There were no outstanding revolving credit borrowings under the ABL facility as of September 30, 2016, and $10.8 million was utilized to support the issuance of letters of credit. Average revolving credit borrowings under the ABL facility for the first nine months of 2016 were $109 million, bearing an average annual interest rate of 1.757%.

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The Company has an additional separate credit facility for the issuance of letters of credit. As of September 30, 2016, $32 million in letters of credit were outstanding under this facility.

Convertible Notes
In May 2016, the Company issued and sold $250 million aggregate principal amount of 4.75% Convertible Senior Notes due 2022 (the Convertible Notes). The Company granted the underwriters a 30-day option to purchase up to an additional $37.5 million aggregate principal amount of Convertible Notes on the same terms and conditions to cover over-allotments, if any. On June 1, 2016, the Company announced that the underwriters exercised this option in full and on June 2, 2016, the Company completed the offering and sale of the additional $37.5 million aggregate principal amount of Convertible Notes. Interest on the Convertible Notes is payable in cash semi-annually in arrears on each January 1 and July 1, commencing January 1, 2017. The Company used a portion of the proceeds from the Convertible Notes to make a $115 million contribution in July 2016 to the Company’s U.S. defined benefit pension plan, and expects to use additional Convertible Note proceeds to meet future pension funding requirements. The underwriting fees and other third-party expense for the issuance of the Convertible Notes were $9.4 million and are being amortized to interest expense over the 6-year term of the Convertible Notes.
The Company does not have the right to redeem the Convertible Notes prior to their stated maturity date. Holders of the Convertible Notes have the option to convert their notes into shares of the Company’s common stock, at any time prior to the close of business on the business day immediately preceding the stated maturity date (July 1, 2022). The initial conversion rate for the Convertible Notes is 69.2042 shares of ATI common stock per $1,000 (in whole dollars) principal amount of Notes (19.9 million shares), equivalent to conversion price of $14.45 per share, subject to adjustment in certain events. Other than receiving cash in lieu of fractional shares, holders do not have the option to receive cash instead of shares of common stock upon conversion. Accrued and unpaid interest that exists upon conversion of a note will be deemed paid by the delivery of shares of ATI common stock and no cash payment or additional shares will be given to the holders.
If the Company undergoes a fundamental change, holders of the Convertible Notes may require the Company to repurchase the notes in whole or in part for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the repurchase date.
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, 2016, 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 29 million pounds of nickel with hedge dates through 2020. The aggregate notional amount hedged is approximately 30% of a single year’s estimated nickel raw material purchase requirements.
At September 30, 2016, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. In the first nine months of 2016, due to changes in expected operating levels, the Company concluded that additional portions of these natural gas hedges for 2016 and the first quarter of 2017 were ineffective based on forecast changes in underlying natural gas usage. The Company recognized a $0.4 million and $1.7 million pre-tax loss for the three and nine months ended September 30, 2016, respectively, for natural gas cash flow hedge ineffectiveness, which is reported in selling and administrative expenses on the consolidated statement of operations. Approximately 90% of the Company’s annual forecasted domestic requirements for natural gas for 2017 and approximately 25% for 2018 are hedged.

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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 September 30, 2016, the Company held 67.2 million euro notional value of foreign currency forward contracts designated as fair value hedges with maturity dates through 2017. The Company recorded a $0.5 million and $3.0 million charge in the three and nine months ended September 30, 2016, respectively, and a $1.8 million charge and a $5.6 million benefit in the three and nine months ended September 30, 2015, respectively, in costs of sales on the consolidated statement of operations for maturities and mark-to-market changes on these fair value hedges.
The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. There were no unsettled derivative financial instruments related to debt balances for the periods presented.
There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts 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.

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Table of Contents

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,
2016
 
December 31,
2015
Derivatives designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other current assets
 
$
0.2

 
$
1.6

Nickel and other raw material contracts
 
Prepaid expenses and other current assets
 
3.5

 
—

Foreign exchange contracts
 
Other assets
 
0.2

 
0.4

Nickel and other raw material contracts
 
Other assets
 
5.8

 
—

Total derivatives designated as hedging instruments
 
9.7

 
2.0

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other current assets
 
0.2

 
0.4

Total derivatives not designated as hedging instruments
 
0.2

 
0.4

Total asset derivatives
 
 
 
$
9.9

 
$
2.4

Liability derivatives
 
Balance sheet location
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Natural gas contracts
 
Accrued liabilities
 
$
8.5

 
$
17.3

Nickel and other raw material contracts
 
Accrued liabilities
 
8.8

 
22.2

Foreign exchange contracts
 
Accrued liabilities
 
1.4

 
0.1

Natural gas contracts
 
Other long-term liabilities
 
0.8

 
8.5

Nickel and other raw material contracts
 
Other long-term liabilities
 
8.7

 
23.0

Foreign exchange contracts
 
Other long-term liabilities
 
0.3

 
0.1

Total derivatives designated as hedging instruments
 
28.5

 
71.2

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

 
0.1

Total derivatives not designated as hedging instruments
 
—

 
0.1

Total liability derivatives
 
 
 
$
28.5

 
$
71.3

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, 2016, a loss of $9.3 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, 2016 and 2015 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
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Nickel and other raw material contracts
$
4.2

 
$
(13.5
)
 
$
(2.2
)
 
$
(2.4
)
 
$
—

 
$
—

Natural gas contracts
(1.2
)
 
(3.7
)
 
(1.3
)
 
(1.6
)
 
(0.3
)
 
—

Electricity contracts
—

 
—

 
—

 
—

 
—

 
—

Foreign exchange contracts
—

 
0.7

 
3.4

 
6.0

 
—

 
—

Total
$
3.0

 
$
(16.5
)
 
$
(0.1
)
 
$
2.0

 
$
(0.3
)
 
$
—

 
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
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Nickel and other raw material contracts
$
13.0

 
$
(26.6
)
 
$
(9.9
)
 
$
(7.0
)
 
$
—

 
$
—

Natural gas contracts
1.1

 
(9.5
)
 
(7.2
)
 
(6.4
)
 
(1.2
)
 
—

Electricity contracts
—

 
—

 
—

 
(0.1
)
 
—

 
—

Foreign exchange contracts
(0.5
)
 
24.6

 
13.0

 
18.5

 
—

 
—

Total
$
13.6

 
$
(11.5
)
 
$
(4.1
)
 
$
5.0

 
$
(1.2
)
 
$
—

(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 10 million euro notional value outstanding as of September 30, 2016 of foreign currency forward contracts not designated as hedges, with maturity dates into the second quarter of 2017. These derivatives that are not designated as hedging instruments were as follows:
(In millions)
Amount of Gain (Loss) Recognized
in Income on Derivatives
Derivatives Not Designated
Three months ended September 30,
 
Nine months ended September 30,
as Hedging Instruments
2016
 
2015
 
2016
 
2015
Foreign exchange contracts
$
(0.2
)
 
$
—

 
$
(0.1
)
 
$
3.0

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, 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
$
188.4

 
$
188.4

 
$
188.4

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
9.9

 
9.9

 
—

 
9.9

Liabilities
28.5

 
28.5

 
—

 
28.5

Debt (a)
1,893.8

 
1,980.9

 
1,874.6

 
106.3


The estimated fair value of financial instruments at December 31, 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
$
149.8

 
$
149.8

 
$
149.8

 
$
—

Derivative financial instruments:
 
 
 
 
 
 
 
Assets
2.4

 
2.4

 
—

 
2.4

Liabilities
71.3

 
71.3

 
—

 
71.3

Debt (a)
1,505.2

 
969.7

 
964.5

 
5.2

(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 2016 or 2015.

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. Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans or defined contribution retirement 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 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 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, 2016 and 2015, 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 September 30,
 
Three months ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost - benefits earned during the year
$
5.2

 
$
5.7

 
$
0.6

 
$
0.7

Interest cost on benefits earned in prior years
31.4

 
30.3

 
4.0

 
4.4

Expected return on plan assets
(37.2
)
 
(42.1
)
 
—

 
—

Amortization of prior service cost (credit)
0.3

 
0.3

 
(0.7
)
 
1.2

Amortization of net actuarial loss
16.3

 
15.1

 
2.4

 
3.7

Total retirement benefit expense
$
16.0

 
$
9.3

 
$
6.3

 
$
10.0

For the nine month periods ended September 30, 2016 and 2015, 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
 
Nine months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost - benefits earned during the year
$
15.5

 
$
17.1

 
$
1.9

 
$
2.1

Interest cost on benefits earned in prior years
94.1

 
90.8

 
12.0

 
13.4

Expected return on plan assets
(111.5
)
 
(126.2
)
 
—

 
—

Amortization of prior service cost (credit)
0.9

 
0.9

 
(0.9
)
 
3.6

Amortization of net actuarial loss
49.0

 
45.3

 
7.2

 
10.9

Total retirement benefit expense
$
48.0

 
$
27.9

 
$
20.2

 
$
30.0

On March 4, 2016, the Company announced that it had reached a four-year labor agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) covering USW-represented employees of its ATI Flat Rolled Products business unit and at two locations in the High Performance Materials & Components business segment. The new labor agreement included changes to several retirement benefit programs, including a freeze to new entrants to ATI’s defined benefit pension plan, the elimination of defined benefit retiree healthcare for new employees, and changes in the levels of profit-based contributions for retiree medical benefits. The Company remeasured its other postretirement benefit obligation as of the March 1, 2016 contract effective date using a 4.05% discount rate, compared to a 4.50% discount rate as of December 31, 2015. Based on the remeasurement, other postretirement benefit liabilities decreased $22.5 million, and other postretirement benefit expense will decrease by $7.5 million in the March through December 2016 period.
In July 2016, the Company made a $115 million contribution to its U.S. defined benefit pension plan and expects to use additional proceeds from its recent convertible debt issuance to meet future pension funding requirements.

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Table of Contents

Note 8. Income Taxes
Third quarter 2016 results included a benefit for income taxes of $4.3 million, or 0.8% of the loss before income taxes, which includes a $173.1 million income tax valuation allowance charge on U.S. federal deferred tax assets, and $4.1 million of discrete charges. The third quarter 2016 effective tax rate was 34.1% excluding these charges. Beginning in the third quarter of 2015, the Company’s results reflected a three year cumulative loss for U.S. operations; prior thereto, the Company’s historical results reflected a three year cumulative profit. The three year cumulative loss condition, which continues in 2016, limits the ability to consider other positive subjective evidence, such as projections of future results, to assess the realizability of deferred tax assets. The third quarter 2016 actions to indefinitely idle the Rowley, UT titanium sponge production facility (see Note 10 for further information) resulted in a reassessment of the realizability of U.S. federal deferred tax assets. The third quarter 2015 provision for income taxes was $23.4 million, which included a $63.9 million deferred tax valuation allowance. The 2015 valuation allowance included $56.6 million for certain state and federal tax benefits recognized in prior years, and $7.3 million valuation allowance recorded as part of the 2015 effective tax rate, representing approximately a 6% tax rate impact.
For the first nine months of 2016, the benefit for income taxes was $64.4 million, or 9.1% of the loss before income taxes, compared to a provision for income taxes of $23.7 million for the 2015 comparable period. The income tax rates for both year-to-date periods were impacted by the valuation allowance charges discussed above. The first nine months of 2016 included discrete tax expense of $0.5 million and income taxes in the first nine months of 2015 included discrete tax expense of $57.9 million, primarily due to the valuation allowance discussed above.
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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Total sales:
 
 
 
 
 
 
 
High Performance Materials & Components
$
474.7

 
$
490.1

 
$
1,493.7

 
$
1,588.5

Flat Rolled Products
321.7

 
377.8

 
927.2

 
1,516.0

 
796.4

 
867.9

 
2,420.9

 
3,104.5

Intersegment sales:
 
 
 
 
 
 
 
High Performance Materials & Components
12.9

 
15.4

 
40.5

 
59.9

Flat Rolled Products
13.0

 
19.8

 
41.9

 
63.9

 
25.9

 
35.2

 
82.4

 
123.8

Sales to external customers:
 
 
 
 
 
 
 
High Performance Materials & Components
461.8

 
474.7

 
1,453.2

 
1,528.6

Flat Rolled Products
308.7

 
358.0

 
885.3

 
1,452.1

 
$
770.5

 
$
832.7

 
$
2,338.5

 
$
2,980.7

Operating profit (loss):
 
 
 
 
 
 
 
High Performance Materials & Components
$
47.0

 
$
18.8

 
$
114.9

 
$
136.1

Flat Rolled Products
(20.8
)
 
(91.8
)
 
(162.2
)
 
(121.8
)
Total operating profit (loss)
26.2

 
(73.0
)
 
(47.3
)
 
14.3

LIFO and net realizable value reserves
—

 
(0.2
)
 
0.4

 
—

Corporate expenses
(9.8
)
 
(10.7
)
 
(32.6
)
 
(33.6
)
Closed operations and other expenses
(15.4
)
 
(6.5
)
 
(24.6
)
 
(18.6
)
Restructuring and other charges
(499.9
)
 
—

 
(509.9
)
 
—

Interest expense, net
(32.6
)
 
(27.5
)
 
(91.2
)
 
(81.0
)
Loss before income taxes
$
(531.5
)
 
$
(117.9
)
 
$
(705.2
)
 
$
(118.9
)


15
Table of Contents

Restructuring and other charges for the third quarter ended September 30, 2016 primarily relate to the indefinite idling of the Company’s Rowley, UT titanium sponge facility and include $471.3 million of long-lived asset impairment charges, $11.3 million of inventory valuation charges for titanium sponge that are classified in cost of sales (see Note 2 for additional information), and $17.3 million of facility shutdown, idling and employee benefit costs. The nine months ended September 30, 2016 also include a $9.0 million charge for severance obligations in the FRP operations, and a $1.0 million charge for severance obligations in the HPMC segment. See Note 10 for additional information on restructuring charges. Results for the HPMC segment exclude the Rowley, UT titanium sponge operations beginning with the third quarter of 2016, with such operations being reported in closed operations and other expenses, and identifiable assets for the HPMC segment decreased by $521 million from December 31, 2015 as a result of this reporting change and the above asset impairment charge for Rowley.
Note 10. Restructuring Charges
For the three and nine months ended September 30, 2016, the Company recorded restructuring charges of $488.6 million and $498.6 million, respectively, which are presented as restructuring charges in the consolidated statement of operations. These charges for the three months ended September 30, 2016 were comprised of $471.3 million in long-lived impairment charges, $16.3 million of facility shutdown and idling costs and $1.0 million of employee benefit costs.
On August 24, 2016, the Company announced the indefinite idling of the Rowley, UT titanium sponge production facility and the consolidation of certain titanium manufacturing operations. Over the last several years, significant global capacity has been added to produce titanium sponge, which is a key raw material used to produce ATI’s titanium products. In addition, demand for industrial-grade titanium products from global markets continues to be weak. As a result of these factors, titanium sponge, including aerospace quality sponge, can now be purchased from qualified global producers under long-term supply agreements at prices lower than the production costs at ATI’s titanium sponge facility in Rowley, UT. ATI has entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge. The lower cost titanium sponge purchased under these supply agreements will replace the titanium sponge produced at the Rowley facility. As a result of these actions, the Company recorded a non-cash impairment charge of $470.8 million during the third quarter ended September 30, 2016 to reduce the carrying value of the Rowley, UT facility to an estimated fair value of $15.0 million. The long-lived asset impairment charges were based on analysis of the estimated fair values, including asset appraisals using cost, income and market approaches, which represent Level 3 unobservable information in the fair value hierarchy. In addition, during the third quarter ended September 30, 2016, the Company recognized $16.3 million of facility shutdown and idling costs, including contract termination costs, and $1.0 million of employee benefit costs including severance obligations. Additional closure costs for the Rowley facility, including additional severance costs for the elimination of approximately 150 positions, are expected to be recorded in the fourth quarter of 2016 with the orderly wind-down of operations through December 2016. The Rowley facility is being idled in a manner that allows the facility to be restarted in the future if supported by market conditions.

During the first quarter of 2016, a $9.0 million charge was recorded for severance obligations in the Flat Rolled Products (FRP) operations, with the reduction of approximately one-third of FRP’s salaried workforce through the elimination of over 250 positions, which is expected to be completed by the end of 2016. During the second quarter of 2016, an additional $1.0 million charge was recorded for severance obligations for approximately 20 employees in the High Performance Materials & Components segment.

Reserves for restructuring charges at September 30, 2016 consist of severance and employee benefit costs and closure costs incurred in both 2015 and 2016, the majority of which are expected to be paid over the next twelve months. Restructuring reserves are as follows:
 
 
Severance and Employee Benefit Costs
 
Closure Costs
 
Total Restructuring Reserves
Balance at December 31, 2015
 
$
4.5

 
$
3.6

 
$
8.1

Additions
 
11.0

 
16.0

 
27.0

Payments
 
(8.6
)
 
(3.3
)
 
(11.9
)
Balance at September 30, 2016
 
$
6.9

 
$
16.3

 
$
23.2

Note 11. Redeemable Noncontrolling Interest
During the first nine months of 2016, the 15.0% redeemable noncontrolling interest in ATI Flowform Products was purchased by ATI at the $12.1 million acquisition date carrying value, resulting in no remaining redeemable noncontrolling interest held in ATI Flowform Products as of September 30, 2016.

16
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Note 12. Per Share Information
The following table sets forth the computation of basic and diluted loss per common share: 
 
Three months ended
 
Nine months ended
(In millions, except per share amounts)
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Numerator for basic loss per common share –
 
 
 
 
 
 
 
Loss attributable to ATI
$
(530.8
)
 
$
(144.6
)
 
$
(650.8
)
 
$
(151.0
)
Redeemable noncontrolling interest (Note 11)
—

 
(0.2
)
 
—

 
(0.3
)
Effect of dilutive securities:
 
 
 
 
 
 
 
4.75% Convertible Senior Notes due 2022
—

 
—

 
—

 
—

Numerator for diluted loss per common share –
 
 
 
 
 
 
 
Loss attributable to ATI after assumed conversions
$
(530.8
)
 
$
(144.8
)
 
$
(650.8
)
 
$
(151.3
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic net loss per common share – weighted average shares
107.3

 
107.3

 
107.3

 
107.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation
—

 
—

 
—

 
—

4.75% Convertible Senior Notes due 2022
—

 
—

 
—

 
—

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

 
107.3

 
107.3

 
107.3

Basic loss attributable to ATI per common share
$
(4.95
)
 
$
(1.35
)
 
$
(6.07
)
 
$
(1.41
)
Diluted loss attributable to ATI per common share
$
(4.95
)
 
$
(1.35
)
 
$
(6.07
)
 
$
(1.41
)
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 21.0 million and 10.3 million anti-dilutive shares for the three and nine month periods ended September 30, 2016, respectively. There were 0.8 million and 0.9 million anti-dilutive shares for the three and nine month periods ended September 30, 2015, respectively.
Note 13. 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.

17
Table of Contents

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
September 30, 2016
 
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2.3

 
$
4.3

 
$
181.8

 
$
—

 
$
188.4

Accounts receivable, net
0.1

 
115.7

 
338.2

 
—

 
454.0

Intercompany notes receivable
—

 
—

 
2,955.8

 
(2,955.8
)
 
—

Inventories, net
—

 
137.6

 
941.3

 
—

 
1,078.9

Prepaid expenses and other current assets
3.3

 
4.9

 
32.6

 
—

 
40.8

Total current assets
5.7

 
262.5

 
4,449.7

 
(2,955.8
)
 
1,762.1

Property, plant and equipment, net
1.5

 
1,587.7

 
925.2

 
—

 
2,514.4

Goodwill
—

 
—

 
644.4

 
—

 
644.4

Intercompany notes receivable
—

 
—

 
200.0

 
(200.0
)
 
—

Investment in subsidiaries
5,363.3

 
37.7

 
—

 
(5,401.0
)
 
—

Other assets
22.1

 
26.1

 
223.2

 
—

 
271.4

Total assets
$
5,392.6

 
$
1,914.0

 
$
6,442.5

 
$
(8,556.8
)
 
$
5,192.3

Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
Accounts payable
$
3.5

 
$
123.9

 
$
157.8

 
$
—

 
$
285.2

Accrued liabilities
35.6

 
91.0

 
184.3

 
—

 
310.9

Intercompany notes payable
1,442.1

 
1,513.7

 
—

 
(2,955.8
)
 
—

Short-term debt and current portion of long-term debt
0.7

 
0.3

 
4.4

 
—

 
5.4

Total current liabilities
1,481.9

 
1,728.9

 
346.5

 
(2,955.8
)
 
601.5

Long-term debt
1,620.9

 
149.9

 
99.6

 
—

 
1,870.4

Intercompany notes payable
—

 
200.0

 
—

 
(200.0
)
 
—

Accrued postretirement benefits
—

 
245.1

 
66.5

 
—

 
311.6

Pension liabilities
658.9

 
4.7

 
45.0

 
—

 
708.6

Deferred income taxes
51.3

 
—

 
—

 
—

 
51.3

Other long-term liabilities
16.9

 
18.8

 
50.5

 
—

 
86.2

Total liabilities
3,829.9

 
2,347.4

 
608.1

 
(3,155.8
)
 
3,629.6

Total stockholders’ equity (deficit)
1,562.7

 
(433.4
)
 
5,834.4

 
(5,401.0
)
 
1,562.7

Total liabilities and stockholders’ equity
$
5,392.6

 
$
1,914.0

 
$
6,442.5

 
$
(8,556.8
)
 
$
5,192.3

















18
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, 2016  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
253.0

 
$
517.5

 
$
—

 
$
770.5

Cost of sales
14.0

 
266.6

 
439.7

 
—

 
720.3

Gross profit (loss)
(14.0
)
 
(13.6
)
 
77.8

 
—

 
50.2

Selling and administrative expenses
23.8

 
4.2

 
32.5

 
—

 
60.5

Restructuring charges
—

 
0.5

 
488.1

 
—

 
488.6

Operating loss
(37.8
)
 
(18.3
)
 
(442.8
)
 
—

 
(498.9
)
Interest income (expense), net
(36.5
)
 
(19.3
)
 
23.2

 
—

 
(32.6
)
Other income (loss) including equity in income of unconsolidated subsidiaries
(457.2
)
 
0.2

 
(0.2
)
 
457.2

 
—

Income (loss) before income tax provision (benefit)
(531.5
)
 
(37.4
)
 
(419.8
)
 
457.2

 
(531.5
)
Income tax provision (benefit)
(4.3
)
 
(9.1
)
 
(165.8
)
 
174.9

 
(4.3
)
Net income (loss)
(527.2
)
 
(28.3
)
 
(254.0
)
 
282.3

 
(527.2
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
3.6

 
—

 
3.6

Net income (loss) attributable to ATI
$
(527.2
)
 
$
(28.3
)
 
$
(257.6
)
 
$
282.3

 
$
(530.8
)
Comprehensive income (loss) attributable to ATI
$
(516.8
)
 
$
(27.0
)
 
$
(260.0
)
 
$
285.0

 
$
(518.8
)

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations and Comprehensive Income
For the nine months ended September 30, 2016  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
727.7

 
$
1,610.8

 
$
—

 
$
2,338.5

Cost of sales
43.0

 
852.0

 
1,378.3

 
—

 
2,273.3

Gross profit (loss)
(43.0
)
 
(124.3
)
 
232.5

 
—

 
65.2

Selling and administrative expenses
66.3

 
18.8

 
97.3

 
—

 
182.4

Restructuring charges
—

 
9.5

 
489.1

 
—

 
498.6

Operating loss
(109.3
)
 
(152.6
)
 
(353.9
)
 
—

 
(615.8
)
Interest income (expense), net
(101.4
)
 
(51.0
)
 
61.2

 
—

 
(91.2
)
Other income (loss) including equity in income of unconsolidated subsidiaries
(494.5
)
 
0.6

 
1.5

 
494.2

 
1.8

Income (loss) before income tax provision (benefit)
(705.2
)
 
(203.0
)
 
(291.2
)
 
494.2

 
(705.2
)
Income tax provision (benefit)
(64.4
)
 
(70.1
)
 
(116.3
)
 
186.4

 
(64.4
)
Net income (loss)
(640.8
)
 
(132.9
)
 
(174.9
)
 
307.8

 
(640.8
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
10.0

 
—

 
10.0

Net income (loss) attributable to ATI
$
(640.8
)
 
$
(132.9
)
 
$
(184.9
)
 
$
307.8

 
$
(650.8
)
Comprehensive income (loss) attributable to ATI
$
(592.6
)
 
$
(114.2
)
 
$
(199.0
)
 
$
307.8

 
$
(598.0
)


19
Table of Contents

Condensed Statements of Cash Flows
For the nine months ended September 30, 2016  
(In millions)
Guarantor
Parent
 
Subsidiary
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities
$
(73.0
)
 
$
(183.7
)
 
$
169.0

 
$
(24.0
)
 
$
(111.7
)
Investing Activities: