Edgar Filing: ALLEGHENY TECHNOLOGIES INC

Document

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 March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 1-12001

ALLEGHENY TECHNOLOGIES INCORPORATED

(Exact name of registrant as specified in its charter)



Delaware		25-1792394
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1000 Six PPG Place
Pittsburgh, Pennsylvania		15222-5479
(Address of Principal Executive Offices)		(Zip Code)

(412) 394-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the Registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	o	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

At April 19, 2019, the registrant had outstanding 126,034,880 shares of its Common Stock.

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ALLEGHENY TECHNOLOGIES INCORPORATED

SEC FORM 10-Q

Quarter Ended March 31, 2019

INDEX



	Page No.
PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets	1

Consolidated Statements of Income	2

Consolidated Statements of Comprehensive Income	3

Consolidated Statements of Cash Flows	4

Statements of Changes in Consolidated Equity	5

Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3. Quantitative and Qualitative Disclosures About Market Risk	37

Item 4. Controls and Procedures	39

PART II. - OTHER INFORMATION

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6. Exhibits	40

SIGNATURES	41

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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)



	March 31, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	217.0		$	382.0
Accounts receivable, net	565.1			527.8
Short-term contract assets	48.7			51.2
Inventories, net	1,254.4			1,211.1
Prepaid expenses and other current assets	92.7			74.6
Total Current Assets	2,177.9			2,246.7
Property, plant and equipment, net	2,470.7			2,475.0
Goodwill	536.8			534.7
Other assets	305.6			245.4
Total Assets	$	5,491.0		$	5,501.8
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	455.3		$	498.8
Accrued liabilities	220.4			260.1
Short-term contract liabilities	77.9			71.4
Short-term debt and current portion of long-term debt	6.4			6.6
Total Current Liabilities	760.0			836.9
Long-term debt	1,536.2			1,535.5
Accrued postretirement benefits	309.5			318.4
Pension liabilities	701.1			730.0
Deferred income taxes	14.5			12.9
Other long-term liabilities	123.1			76.5
Total Liabilities	3,444.4			3,510.2
Equity:
ATI Stockholders’ Equity:
Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-none	—			—
Common stock, par value $0.10: authorized-500,000,000 shares; issued-126,695,171 shares at March 31, 2019 and December 31, 2018; outstanding-126,034,880 shares at March 31, 2019 and 125,684,396 shares at December 31, 2018	12.7			12.7
Additional paid-in capital	1,599.7			1,615.4
Retained earnings	1,437.0			1,422.0
Treasury stock: 660,291 shares at March 31, 2019 and 1,010,775 shares at December 31, 2018	(19.7		)	(30.6		)
Accumulated other comprehensive loss, net of tax	(1,095.5		)	(1,133.8		)
Total ATI stockholders’ equity	1,934.2			1,885.7
Noncontrolling interests	112.4			105.9
Total Equity	2,046.6			1,991.6
Total Liabilities and Equity	$	5,491.0		$	5,501.8

The accompanying notes are an integral part of these statements.

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Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Income

(In millions, except per share amounts)

(Unaudited)



	Three months ended March 31,
	2019			2018
Sales	$	1,004.8		$	979.0

Cost of sales	873.7			830.4
Gross profit	131.1			148.6
Selling and administrative expenses	68.0			67.1
Operating income	63.1			81.5
Nonoperating retirement benefit expense	(18.3		)	(8.3		)
Interest expense, net	(24.8		)	(25.5		)
Other (expense) income, net	(2.9		)	17.8
Income before income taxes	17.1			65.5
Income tax provision	0.8			5.0
Net income	16.3			60.5
Less: Net income attributable to noncontrolling interests	1.3			2.5
Net income attributable to ATI	$	15.0		$	58.0

Basic net income attributable to ATI per common share	$	0.12		$	0.46

Diluted net income attributable to ATI per common share	$	0.12		$	0.42

The accompanying notes are an integral part of these statements.

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Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)



	Three months ended March 31,
	2019			2018
Net income	$	16.3		$	60.5
Currency translation adjustment
Unrealized net change arising during the period	11.0			23.6
Derivatives
Net derivatives gain on hedge transactions	10.5			3.3
Reclassification to net income of net realized loss (gain)	0.9			(3.0		)
Income taxes on derivative transactions	—			—
Total	11.4			0.3
Postretirement benefit plans
Actuarial loss
Amortization of net actuarial loss	21.7			19.2
Prior service cost
Amortization to net income of net prior service credits	(0.6		)	(0.6		)
Income taxes on postretirement benefit plans	—			—
Total	21.1			18.6
Other comprehensive income, net of tax	43.5			42.5
Comprehensive income	59.8			103.0
Less: Comprehensive income attributable to noncontrolling interests	6.5			9.4
Comprehensive income attributable to ATI	$	53.3		$	93.6

The accompanying notes are an integral part of these statements.

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Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)



	Three months ended March 31,
	2019			2018
Operating Activities:
Net income	$	16.3		$	60.5
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	38.7			39.8
Deferred taxes	1.6			(0.2		)
Gain on joint venture deconsolidation	—			(15.9		)
Changes in operating assets and liabilities:
Inventories	(43.3		)	(108.4		)
Accounts receivable	(37.3		)	(61.7		)
Accounts payable	(43.5		)	79.8
Retirement benefits	(18.4		)	0.5
Accrued income taxes	0.5			2.4
Accrued liabilities and other	(44.6		)	(43.9		)
Cash used in operating activities	(130.0		)	(47.1		)
Investing Activities:
Purchases of property, plant and equipment	(23.5		)	(41.6		)
Asset disposals and other	(0.1		)	0.1
Cash used in investing activities	(23.6		)	(41.5		)
Financing Activities:
Borrowings on long-term debt	—			6.4
Payments on long-term debt and finance leases	(1.5		)	(1.3		)
Net borrowings under credit facilities	—			50.9
Sales to noncontrolling interests	—			7.4
Shares repurchased for income tax withholding on share-based compensation and other	(9.9		)	(6.5		)
Cash (used in) provided by financing activities	(11.4		)	56.9
Decrease in cash and cash equivalents	(165.0		)	(31.7		)
Cash and cash equivalents at beginning of period	382.0			141.6
Cash and cash equivalents at end of period	$	217.0		$	109.9

The accompanying notes are an integral part of these statements.

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Allegheny Technologies Incorporated and Subsidiaries

Statements of Changes in Consolidated Equity

(In millions, except per share amounts)

(Unaudited)



	ATI Stockholders
	Common Stock		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interests		Total Equity
Balance, December 31, 2017	$	12.7	$	1,596.3		$	1,184.3	$	(26.1	)	$	(1,027.8	)	$	105.1	$	1,844.5
Net income	—		—			58.0		—			—			2.5		60.5
Other comprehensive income	—		—			—		—			35.6			6.9		42.5
Cumulative effect of adoption of new accounting standard	—		—			15.5		—			—			—		15.5
Sales of subsidiary shares to noncontrolling interest	—		—			—		—			—			2.7		2.7
Employee stock plans	—		3.2			—		(5.6		)	—			—		(2.4		)
Balance, March 31, 2018	$	12.7	$	1,599.5		$	1,257.8	$	(31.7	)	$	(992.2	)	$	117.2	$	1,963.3
Balance, December 31, 2018	$	12.7	$	1,615.4		$	1,422.0	$	(30.6	)	$	(1,133.8	)	$	105.9	$	1,991.6
Net income	—		—			15.0		—			—			1.3		16.3
Other comprehensive income	—		—			—		—			38.3			5.2		43.5
Employee stock plans	—		(15.7		)	—		10.9			—			—		(4.8		)
Balance, March 31, 2019	$	12.7	$	1,599.7		$	1,437.0	$	(19.7	)	$	(1,095.5	)	$	112.4	$	2,046.6

The accompanying notes are an integral part of these statements.

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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. Certain prior year amounts have been reclassified in order to conform with fiscal year 2019 presentation. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2018 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, 2018 financial information has been derived from the Company’s audited consolidated financial statements.

New Accounting Pronouncements Adopted

In January 2019, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) related to leases. See Note 7 for further explanation related to this adoption, including all newly expanded disclosure requirements.

Pending Accounting Pronouncements

In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on requirement. This guidance is required to be adopted by the Company beginning in fiscal year 2020 with early adoption permitted. The Company does not plan to early adopt this guidance. The adoption of these changes is not expected to have an impact on the Company’s consolidated financial statements other than disclosures.

Note 2. Revenue from Contracts with Customers

Disaggregation of Revenue

The Company operates in two business segments: High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Revenue is disaggregated within these two business segments by diversified global markets, primary geographical markets and diversified products. Comparative information of the Company’s overall revenues (in millions) by global and geographical markets for the first quarters ended March 31, 2019 and 2018 were as follows:



(in millions)	First quarter ended
	March 31, 2019						March 31, 2018
	HPMC		FRP		Total		HPMC		FRP		Total
Diversified Global Markets:
Aerospace & Defense	$	465.1	$	60.5	$	525.6	$	426.7	$	35.7	$	462.4
Oil & Gas	16.7		96.1		112.8		15.2		137.5		152.7
Automotive	3.6		73.3		76.9		2.6		76.5		79.1
Construction/Mining	18.5		39.4		57.9		17.6		38.0		55.6
Electrical Energy	27.3		28.4		55.7		30.8		21.4		52.2
Food Equipment & Appliances	0.1		53.1		53.2		0.1		58.8		58.9
Medical	42.7		3.4		46.1		41.2		3.7		44.9
Electronics/Computers/Communications	1.1		33.0		34.1		1.5		31.4		32.9
Other	26.1		16.4		42.5		25.0		15.3		40.3
Total	$	601.2	$	403.6	$	1,004.8	$	560.7	$	418.3	$	979.0

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(in millions)	First quarter ended
	March 31, 2019						March 31, 2018
	HPMC		FRP		Total		HPMC		FRP		Total
Primary Geographical Market:
United States	$	336.0	$	285.1	$	621.1	$	289.8	$	264.5	$	554.3
Europe	178.3		32.7		211.0		197.0		28.5		225.5
Asia	52.8		70.4		123.2		48.3		102.5		150.8
Canada	19.1		7.3		26.4		16.6		10.6		27.2
South America, Middle East and other	15.0		8.1		23.1		9.0		12.2		21.2
Total	$	601.2	$	403.6	$	1,004.8	$	560.7	$	418.3	$	979.0

Comparative information of the Company’s major high-value and standard products based on their percentages of sales is included in the following table. FRP conversion services are excluded from this presentation.



	First quarter ended
	March 31, 2019						March 31, 2018
	HPMC		FRP		Total		HPMC		FRP		Total
Diversified Products and Services:
High-Value Products
Nickel-based alloys and specialty alloys	31	%	29	%	30	%	29	%	31	%	30	%
Precision forgings, castings and components	32	%	—	%	19	%	38	%	—	%	21	%
Titanium and titanium-based alloys	27	%	6	%	19	%	24	%	5	%	16	%
Precision and engineered strip	—	%	33	%	13	%	—	%	31	%	14	%
Zirconium and related alloys	10	%	—	%	6	%	9	%	—	%	5	%
Total High-Value Products	100	%	68	%	87	%	100	%	67	%	86	%
Standard Products
Stainless steel sheet	—	%	17	%	7	%	—	%	20	%	8	%
Specialty stainless sheet	—	%	11	%	4	%	—	%	9	%	4	%
Stainless steel plate and other	—	%	4	%	2	%	—	%	4	%	2	%
Total Standard Products	—	%	32	%	13	%	—	%	33	%	14	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

The Company maintains a backlog of confirmed orders totaling $2.59 billion and $2.05 billion at March 31, 2019 and 2018, respectively. Due to the structure of the Company’s long-term agreements, approximately 80% of this backlog at March 31, 2019 represented booked orders with performance obligations that will be satisfied within the next 12 months. The backlog does not reflect any elements of variable consideration.

Contract balances

As of March 31, 2019 and December 31, 2018, accounts receivable with customers were $570.8 million and $533.8 million, respectively. The following represents the rollforward of accounts receivable - reserve for doubtful accounts and contract assets and liabilities for the three months ended March 31, 2019 and 2018:



(in millions)
Accounts Receivable - Reserve for Doubtful Accounts	March 31, 2019			March 31, 2018
Balance as of beginning of fiscal year	$	6.0		$	5.9
Expense to increase the reserve	0.1			0.3
Write-off of uncollectible accounts	(0.4		)	(0.3		)
Balance as of period end	$	5.7		$	5.9

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(in millions)
Contract Assets
Short-term	March 31, 2019			March 31, 2018
Balance as of beginning of fiscal year	$	51.2		$	36.5
Recognized in current year	23.9			23.4
Reclassified to accounts receivable	(26.4		)	(22.1		)
Impairment	—			—
Reclassification to/from long-term	—			0.8
Balance as of period end	$	48.7		$	38.6

Long-term	March 31, 2019			March 31, 2018
Balance as of beginning of fiscal year	$	0.1		$	16.9
Recognized in current year	—			—
Reclassified to accounts receivable	—			—
Impairment	—			—
Reclassification to/from short-term	—			(0.8		)
Balance as of period end	$	0.1		$	16.1



(in millions)
Contract Liabilities
Short-term	March 31, 2019			March 31, 2018
Balance as of beginning of fiscal year	$	71.4		$	69.7
Recognized in current year	38.6			8.4
Amounts in beginning balance reclassified to revenue	(29.3		)	(14.1		)
Current year amounts reclassified to revenue	(2.8		)	(0.3		)
Other	—			—
Reclassification to/from long-term	—			2.5
Balance as of period end	$	77.9		$	66.2

Long-term	March 31, 2019			March 31, 2018
Balance as of beginning of fiscal year	$	7.3		$	22.2
Recognized in current year	0.3			0.2
Amounts in beginning balance reclassified to revenue	(0.3		)	(0.2		)
Current year amounts reclassified to revenue	—			—
Other	—			—
Reclassification to/from short-term	—			(2.5		)
Balance as of period end	$	7.3		$	19.7

Contract costs for obtaining and fulfilling a contract were $5.2 million as of both March 31, 2019 and December 31, 2018, and are reported in other long-term assets on the consolidated balance sheet. Amortization expense for both the three months ended March 31, 2019 and 2018 of these contract costs was $0.3 million.

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Note 3. Inventories

Inventories at March 31, 2019 and December 31, 2018 were as follows (in millions):



	March 31, 2019			December 31, 2018
Raw materials and supplies	$	212.5		$	191.5
Work-in-process	941.3			914.1
Finished goods	192.4			191.1
Total inventories at current cost	1,346.2			1,296.7
Adjustment from current cost to LIFO cost basis	4.7			2.9
Inventory valuation reserves	(96.5		)	(88.5		)
Total inventories, net	$	1,254.4		$	1,211.1

Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market. 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, the Company maintains NRV inventory valuation reserves to adjust carrying value of LIFO inventory to current replacement cost. These NRV reserves were $9.9 million at March 31, 2019 and $8.0 million at December 31, 2018. Impacts to cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions):



	Three months ended March 31,
	2019			2018
LIFO benefit (charge)	$	1.8		$	(8.2	)
NRV benefit (charge)	(1.9		)	8.2
Net cost of sales impact	$	(0.1	)	$	—

Note 4. Property, Plant and Equipment

Property, plant and equipment at March 31, 2019 and December 31, 2018 was as follows (in millions):



	March 31, 2019			December 31, 2018
Land	$	31.6		$	31.5
Buildings	853.9			851.7
Equipment and leasehold improvements	3,653.0			3,622.7
	4,538.5			4,505.9
Accumulated depreciation and amortization	(2,067.8		)	(2,030.9		)
Total property, plant and equipment, net	$	2,470.7		$	2,475.0

The construction in progress portion of property, plant and equipment at March 31, 2019 was $91.3 million.

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Note 5. Joint Ventures

The financial results of majority-owned joint ventures are consolidated into the Company’s operating results and financial position, with the minority ownership interest recognized in the consolidated statement of income as net income attributable to noncontrolling interests, and as equity attributable to the noncontrolling interests within total stockholders’ equity. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest), are accounted for under the equity method of accounting.

Majority-Owned Joint Ventures

The Company has a 60% interest in the Chinese joint venture known as Shanghai STAL Precision Stainless Steel Company Limited (STAL). The remaining 40% interest in STAL is owned by China Baowu Steel Group Corporation Limited, a state authorized investment company whose equity securities are publicly traded in the People’s Republic of China. STAL is part of ATI’s Flat Rolled Products segment, and manufactures Precision Rolled Strip stainless products mainly for the electronics, communication equipment, computer and automotive markets located in Asia. Cash and cash equivalents held by STAL as of March 31, 2019 were $39.4 million.

The Company has a 51% interest in Next Gen Alloys LLC, a joint venture with GE Aviation for the development of a new meltless titanium alloy powder manufacturing technology. The titanium alloy powders are being developed for use in additive manufacturing applications, including 3D printing. Cash and cash equivalents held by this joint venture as of March 31, 2019 were $9.0 million. During the first quarter 2018, the Company received $2.7 million for the sale of noncontrolling interest related to Next Gen Alloys LLC, which is reported as a financing activity on the consolidated statements of cash flows.

Equity Method Joint Ventures

On March 1, 2018, the Company announced the formation of the Allegheny & Tsingshan Stainless (A&T Stainless) joint venture with an affiliate company of Tsingshan Group (Tsingshan) to produce 60-inch wide stainless sheet products for sale in North America. Tsingshan purchased a 50% joint venture interest in A&T Stainless for $17.5 million, of which $12.0 million was received in 2018, with $5.0 million received in the first quarter of 2018 and reported as a financing activity on the consolidated statements of cash flows. The A&T Stainless operations include the Company’s previously-idled direct roll and pickle (DRAP) facility in Midland, PA. ATI provides hot-rolling conversion services to A&T Stainless using the FRP segment’s Hot-Rolling and Processing Facility. As a result of this sale of a 50% noncontrolling interest and the subsequent deconsolidation of the A&T Stainless entity, the Company recognized a $15.9 million gain during the first quarter of 2018 under deconsolidation and derecognition accounting guidance covering the loss of control of a subsidiary determined to be a business. The gain, including ATI’s retained 50% share, was based on the fair value of the joint venture, as determined by the cash purchase price for the noncontrolling interest, and is reported in other (expense) income, net on the consolidated statement of income, and is excluded from FRP segment results. Following this deconsolidation, ATI accounts for the A&T Stainless joint venture under the equity method of accounting. As of March 31, 2019, ATI’s equity method investment in the A&T Stainless joint venture was $7.8 million.

ATI’s share of the A&T Stainless joint venture results were losses of $3.3 million and $0.6 million for the three months ended March 31, 2019 and 2018, respectively, which is included in the FRP segment’s operating results, and within other (expense) income, net, on the consolidated statements of income. In late March 2018, ATI filed for an exclusion from the recently enacted Section 232 tariffs on behalf of the A&T Stainless joint venture, which imports semi-finished stainless slab products from Indonesia. On April 24, 2019, the Company learned that this exclusion request had been denied by the U.S. Department of Commerce. Therefore, the joint venture will continue to be subject to the 25% tariff levied on its imports of semi-finished stainless slab products from Indonesia. Results of A&T Stainless have been and will continue to be negatively impacted by these tariffs.

ATI has a 50% interest in the industrial titanium joint venture known as Uniti LLC (Uniti), with the remaining 50% interest held by VSMPO, a Russian producer of titanium, aluminum, and specialty steel products. Uniti is accounted for under the equity method of accounting. ATI’s share of Uniti’s income was $0.5 million for both the three months ended March 31, 2019 and 2018, which is included in the FRP segment’s operating results, and within other (expense) income, net on the consolidated statements of income.

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Note 6. Debt

Debt at March 31, 2019 and December 31, 2018 was as follows (in millions):



	March 31, 2019			December 31, 2018
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 4.75% Convertible Senior Notes due 2022	287.5			287.5
Allegheny Ludlum 6.95% Debentures due 2025	150.0			150.0
Term Loan due 2022	100.0			100.0
U.S. revolving credit facility	—			—
Foreign credit facilities	—			—
Other	14.8			15.0
Debt issuance costs	(9.7		)	(10.4		)
Total debt	1,542.6			1,542.1
Short-term debt and current portion of long-term debt	6.4			6.6
Total long-term debt	$	1,536.2		$	1,535.5

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

Revolving Credit Facility

The Company has a $500 million Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of the Company’s domestic operations. The ABL facility, which matures in February 2022, includes a $400 million revolving credit facility, a letter of credit sub-facility of up to $200 million, and a $100 million term loan (Term Loan). The Term Loan has an interest rate of 2.5% plus a LIBOR spread and can be prepaid in increments of $50 million if certain minimum liquidity conditions are satisfied. The Company has a $50 million floating-for-fixed interest rate swap which converts half of the Term Loan to a 5.44% fixed interest rate. The swap matures in January 2021.

The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.75% and 2.25% for LIBOR-based borrowings and between 1.0% and 1.5% for base rate borrowings. The ABL facility contains a financial covenant whereby the Company must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility is less than the greater of (i) 10% of the then applicable maximum borrowing amount under the revolving credit portion of the ABL and any outstanding Term Loan balance, or (ii) $40.0 million. The Company was in compliance with the fixed charge coverage ratio covenant at March 31, 2019. Additionally, the Company must demonstrate liquidity, as calculated in accordance with the terms of the ABL facility, of at least $700 million on the date that is 91 days prior to January 15, 2021, the maturity date of the 5.95% Senior Notes due 2021, and that such liquidity is available at all times thereafter until the 5.95% Senior Notes due 2021 are paid in full or refinanced. As of March 31, 2019, there were no outstanding borrowings under the revolving portion of the ABL facility, and $35.3 million was utilized to support the issuance of letters of credit. There were no average revolving credit borrowings under the ABL facility for the first quarter of 2019, and average borrowings of $53 million, bearing an average annual interest rate of 3.50%, for the first quarter of 2018.

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Note 7. Leases

On January 1, 2019 the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. This new guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using the discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate (IBR) for the expected lease term is used. The Company’s IBRs approximate the rate the Company would have to pay to borrow on a collateralized basis over a similar term at lease inception. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received.

The Company has lease contracts for real property and machinery and equipment, primarily for mobile, office and information technology equipment. At inception of a contract, the Company determines whether the contract is or contains a lease. If the Company has a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. Several of the Company’s real property lease contracts include options to extend the lease term; however, the Company currently has not included the renewal options for these leases in the ROU asset and lease liability because the likelihood of renewal was not determined to be reasonably certain. The Company will reassess the likelihood of renewal on at least an annual basis. In addition, several real property leases include variable lease payments, for items such as common area maintenance and utilities, which are expensed as incurred as variable lease expense.

There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. The criteria used for a lease to be classified as a finance lease is generally consistent with the criteria under the previous lease accounting guidance, ASC 840, for capital leases. All other leases not meeting the finance lease criteria are classified as operating leases. Operating lease expense is recognized on a straight-line basis on the consolidated statement of income. Finance leases have front-loaded expense recognition which is reported as amortization expense and interest expense on the consolidated statement of income. ROU assets for operating leases are classified in other long-term assets, and ROU assets for finance leases are classified in property, plant and equipment on the consolidated balance sheet. For operating leases, short-term lease liabilities are classified in accrued liabilities, and long-term lease liabilities are classified in other long-term liabilities on the consolidated balance sheet. For finance leases, short-term lease liabilities are classified in short-term debt, and long-term lease liabilities are classified in long-term debt on the consolidated balance sheet. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity.

Adoption Method and Impact

The Company applied ASC 842 to all leases in effect at January 1, 2019 and adopted the accounting standard using the alternative transition method, which does not require the restatement of prior years. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company has also elected the practical expedient to not separate lease components from non-lease components for all asset classes, and did not elect the hindsight practical expedient to determine the lease term. The Company has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. On January 1, 2019, the Company recognized $51.7 million of ROU assets and $55.6 million of lease liabilities ($12.5 million short-term and $43.1 million long-term) on the consolidated balance sheet for operating leases, with the difference due to deferred rent balances as of December 31, 2018 that reduced the ROU asset balance on January 1, 2019. The adoption did not have a material impact on the Company’s results of operations or cash flows, and had no impact to the net deferred tax position on the consolidated balance sheet due to the Company’s income tax valuation allowances for federal and state purposes (see Note 11).

The Company has entered into finance lease contracts with lenders for progress payments on machinery and equipment that is being constructed at the request and specification of the Company. As of March 31, 2019, the lenders had made $1.7 million of progress payments on behalf of the Company, and $5.8 million of progress payments are scheduled to be paid. Upon payment of the final progress payments by the lenders, finance leases will commence, and $7.5 million, discounted using the applicable discount rates at lease inceptions, of ROU assets and lease liabilities will be recognized by the Company.

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The following represents the components of lease cost and other information for both operating and financing leases for the three months ending March 31, 2019:



($ in millions)	Three months ended
	March 31, 2019
Lease Cost
Finance Lease Cost:
Amortization of right of use asset	$	0.2
Interest on lease liabilities	0.1
Operating lease cost	5.1
Short-term lease cost	0.9
Variable lease cost	0.1
Sublease income	—
Total lease cost	$	6.4

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	0.1
Operating cash flows from operating leases	$	5.1
Financing cash flows from finance leases	$	0.3
Right of use assets obtained in exchange for new finance lease liabilities	$	3.6
Right of use assets obtained in exchange for new operating lease liabilities	$	12.4
Weighted average remaining lease term - finance leases	4.22 years
Weighted average remaining lease term - operating leases	5.88 years
Weighted average discount rate - finance leases	6.3		%
Weighted average discount rate - operating leases	7.4		%

The following table reconciles future minimum undiscounted rental commitments for operating leases to the operating lease liabilities recorded on the consolidated balance sheet as of March 31, 2019 (in millions):



	March 31, 2019
Remainder of 2019	$	14.4
2020	16.3
2021	14.6
2022	11.7
2023	8.2
2024 and Thereafter	18.9
Total undiscounted lease payments	$	84.1
Present value adjustment	(17.1		)
Operating lease liabilities	$	67.0

The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the consolidated balance sheet as of March 31, 2019 (in millions):



	March 31, 2019
Remainder of 2019	$	1.4
2020	1.8
2021	1.6
2022	1.2
2023	1.0
2024 and Thereafter	0.1
Total undiscounted lease payments	$	7.1
Present value adjustment	(0.4		)
Finance lease liabilities	$	6.7

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Note 8. Derivative Financial Instruments and Hedging

As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges.

The Company sometimes uses futures and swap contracts to manage exposure to changes in prices for forecasted purchases of raw materials, such as nickel, and natural gas. Under these contracts, which are generally accounted for as cash flow hedges, the price of the item being hedged is fixed at the time that the contract is entered into, and the Company is obligated to make or receive a payment equal to the net change between this fixed price and the market price at the date the contract matures.

The majority of ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of March 31, 2019, 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 14 million pounds of nickel with hedge dates through 2023. The aggregate notional amount hedged is approximately 14% of a single year’s estimated nickel raw material purchase requirements.

At March 31, 2019, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. At March 31, 2019, the Company hedged approximately 55% of the Company’s forecasted domestic requirements for natural gas for the remainder of 2019 and approximately 40% for 2020.

While the majority of the Company’s direct export sales are transacted in U.S. dollars, foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The Company sometimes purchases foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk, primarily euro. In addition, the Company may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. At March 31, 2019, the Company held euro forward sales contracts designated as cash flow hedges with a notional value of approximately 33 million euro with maturity dates through December 2019.

The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. The Company has a $50 million floating-for-fixed interest rate swap which converts half of the Term Loan to a 5.44% fixed interest rate. The Company designated the interest rate swap as a cash flow hedge of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The swap matures in January 2021.

There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts 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.

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(In millions) Asset derivatives	Balance sheet location	March 31, 2019		December 31, 2018
Derivatives designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	0.3	$	—
Natural gas contacts	Prepaid expenses and other current assets	0.3		0.8
Nickel and other raw material contracts	Prepaid expenses and other current assets	4.6		1.2
Natural gas contracts	Other assets	—		0.2
Nickel and other raw material contracts	Other assets	2.4		0.8
Total derivatives designated as hedging instruments		7.6		3.0
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	0.5		0.4
Total derivatives not designated as hedging instruments		0.5		0.4
Total asset derivatives		$	8.1	$	3.4
Liability derivatives	Balance sheet location
Derivatives designated as hedging instruments:
Interest rate swap	Accrued liabilities	$	0.3	$	0.2
Foreign exchange contracts	Accrued liabilities	—		0.6
Natural gas contracts	Accrued liabilities	0.1		0.1
Nickel and other raw material contracts	Accrued liabilities	1.9		6.8
Interest rate swap	Other long-term liabilities	0.3		0.3
Natural gas contracts	Other long-term liabilities	0.2		0.3
Nickel and other raw material contracts	Other long-term liabilities	0.5		2.1
Total derivatives designated as hedging instruments		3.3		10.4
Total liability derivatives		$	3.3	$	10.4

For derivative financial instruments that are designated as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. There were no outstanding fair value hedges as of March 31, 2019. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes, excluding any impacts of changes to income tax valuation allowances effecting results of operations or other comprehensive income, when applicable (see Note 15 for further explanation).

Assuming market prices remain constant with those at March 31, 2019, a pre-tax gain of $2.9 million is expected to be recognized over the next 12 months.

Activity with regard to derivatives designated as cash flow hedges for the three month periods ended March 31, 2019 and 2018 was as follows (in millions):



	Amount of Gain (Loss) Recognized in OCI on Derivatives						Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (a)
	Three months ended March 31,						Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships	2019			2018			2019			2018
Nickel and other raw material contracts	$	8.3		$	3.1		$	(0.4	)	$	2.8
Natural gas contracts	(0.4		)	0.2			0.1			(0.3		)
Foreign exchange contracts	0.3			(0.8		)	(0.3		)	(0.2		)
Interest rate swap	(0.2		)	—			(0.1		)	—
Total	$	8.0		$	2.5		$	(0.7	)	$	2.3


(a)	The gains (losses) reclassified from accumulated OCI into income related to the derivatives, with the exception of the interest rate swap, are presented in cost of sales in the same period or periods in which the hedged item affects earnings.

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The gains (losses) reclassified from accumulated OCI into income on the interest rate swap are presented in interest expense in the same period as the interest expense on the Term Loan is recognized in earnings.

The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset.

The Company has 7 million euro notional value outstanding as of March 31, 2019 of foreign currency forward contracts not designated as hedges, with maturity dates into the second quarter of 2019. These derivatives that are not designated as hedging instruments were as follows:



(In millions)	Amount of Gain (Loss) Recognized in Income on Derivatives
	Three months ended March 31,
Derivatives Not Designated as Hedging Instruments	2019		2018
Foreign exchange contracts	$	0.1	$	(0.2	)

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

Note 9. Fair Value of Financial Instruments

The estimated fair value of financial instruments at March 31, 2019 was as follows:



			Fair Value Measurements at Reporting Date Using
(In millions)	Total Carrying Amount		Total Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)
Cash and cash equivalents	$	217.0	$	217.0	$	217.0	$	—
Derivative financial instruments:
Assets	8.1		8.1		—		8.1
Liabilities	3.3		3.3		—		3.3
Debt (a)	1,552.3		1,866.6		1,751.8		114.8

The estimated fair value of financial instruments at December 31, 2018 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	$	382.0	$	382.0	$	382.0	$	—
Derivative financial instruments:
Assets	3.4		3.4		—		3.4
Liabilities	10.4		10.4		—		10.4
Debt (a)	1,552.5		1,739.4		1,624.4		115.0


(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.

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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 2019 or 2018.

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.

Note 10. Retirement Benefits

The Company has defined contribution retirement plans or defined benefit pension plans covering substantially all employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the U.S. pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code (IRC).

The Company also sponsors several postretirement plans covering certain collectively-bargained salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most retiree health care plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution.

For the three month periods ended March 31, 2019 and 2018, 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 March 31,						Three months ended March 31,
	2019			2018			2019			2018
Service cost - benefits earned during the year	$	3.2		$	4.2		$	0.5		$	0.6
Interest cost on benefits earned in prior years	26.3			26.1			3.7			3.1
Expected return on plan assets	(32.8		)	(39.5		)	—			—
Amortization of prior service cost (credit)	0.1			0.1			(0.7		)	(0.7		)
Amortization of net actuarial loss	18.4			16.5			3.3			2.7
Total retirement benefit expense	$	15.2		$	7.4		$	6.8		$	5.7

Note 11. Income Taxes

The Company maintains income tax valuation allowances on its U.S. Federal and state deferred tax assets based upon the examination of all positive and negative evidence as of the reporting date. Results in both 2019 and 2018 include impacts from income taxes that differ from applicable standard tax rates, primarily related to the income tax valuation allowance. First quarter 2019 and 2018 results included a provision for income taxes of $0.8 million, or 4.7% of income before taxes, and $5.0 million, or 7.6% of income before income taxes, respectively, primarily related to the benefit from the valuation allowances mentioned above and income taxes on non-U.S. operations. The Company continues to analyze the impact of the Tax Cut and Jobs Act as additional guidance is finalized. At this time, the Company has not made any material adjustments to the previously presented amounts in the 2018 and 2017 financial statements.

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Note 12. Business Segments

The Company operates in two business segments: High Performance Materials & Components and Flat Rolled Products. 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 and other expenses, restructuring and asset impairment charges, and non-operating gains and losses. 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 March 31,
	2019		2018
Total sales:
High Performance Materials & Components	$	623.9	$	579.4
Flat Rolled Products	427.2		439.1
	1,051.1		1,018.5
Intersegment sales:
High Performance Materials & Components	22.7		18.7
Flat Rolled Products	23.6		20.8
	46.3		39.5
Sales to external customers:
High Performance Materials & Components	601.2		560.7
Flat Rolled Products	403.6		418.3
	$	1,004.8	$	979.0



	Three months ended March 31,
	2019			2018
Operating profit (loss):
High Performance Materials & Components	$	72.6		$	85.5
Flat Rolled Products	(10.9		)	10.9
Total operating profit	61.7			96.4
LIFO and net realizable value reserves	(0.1		)	—
Corporate expenses	(16.6		)	(13.2		)
Closed operations and other expenses	(3.1		)	(8.1		)
Gain on joint venture deconsolidation (See Note 5)	—			15.9
Interest expense, net	(24.8		)	(25.5		)
Income before income taxes	$	17.1		$	65.5

Closed operations and other expenses were lower in the first quarter of 2019, compared to the prior year period, primarily from lower carry costs and environmental costs for closed facilities in 2019, along with foreign currency remeasurement gains in 2019 compared to losses in 2018 from the Company’s European Treasury Center. The increase in Corporate expenses in the first quarter 2019, compared to the prior year period, includes higher expense for company-owned life insurance policies and higher incentive compensation costs.

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Note 13. Per Share Information

The following table sets forth the computation of basic and diluted income per common share:



	Three months ended
(In millions, except per share amounts)	March 31,
(In millions, except per share amounts)	2019		2018
Numerator:
Numerator for basic income per common share –
Net income attributable to ATI	$	15.0	$	58.0
Effect of dilutive securities:
4.75% Convertible Senior Notes due 2022	—		3.2
Numerator for diluted income per common share –
Net income attributable to ATI after assumed conversions	$	15.0	$	61.2
Denominator:
Denominator for basic net income per common share – weighted average shares	125.4		125.0
Effect of dilutive securities:
Share-based compensation	0.7		0.6
4.75% Convertible Senior Notes due 2022	—		19.9
Denominator for diluted net income per common share – adjusted weighted average shares and assumed conversions	126.1		145.5
Basic net income attributable to ATI per common share	$	0.12	$	0.46
Diluted net income attributable to ATI per common share	$	0.12	$	0.42

Common stock that would be issuable upon the assumed conversion of the 4.75% Convertible Senior Notes due 2022 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 19.9 million anti-dilutive shares for the three months ended March 31, 2019. There were no anti-dilutive shares for the three months ended March 31, 2018.

Note 14. 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 plans, which cover 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 U.S. qualified defined benefit pension assets or liabilities, or the related deferred taxes and valuation allowances. These 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. The effects of income tax valuation allowances on U.S. Federal and State deferred tax assets are excluded from the Subsidiary’s financial results, and are reported by the Guarantor Parent or the non-guarantor subsidiaries, as applicable.

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Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Balance Sheets

March 31, 2019



(In millions)	Guarantor Parent		Subsidiary			Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets:
Cash and cash equivalents	$	0.3	$	12.5		$	204.2	$	—		$	217.0
Accounts receivable, net	—		157.0			408.1		—			565.1
Intercompany notes receivable	—		—			4,158.6		(4,158.6		)	—
Short-term contract assets	—		—			48.7		—			48.7
Inventories, net	—		250.4			1,004.0		—			1,254.4
Prepaid expenses and other current assets	7.0		47.7			38.0		—			92.7
Total current assets	7.3		467.6			5,861.6		(4,158.6		)	2,177.9
Property, plant and equipment, net	2.7		1,538.0			930.0		—			2,470.7
Goodwill	—		—			536.8		—			536.8
Intercompany notes receivable	—		—			200.0		(200.0		)	—
Investment in subsidiaries	6,183.1		37.7			—		(6,220.8		)	—
Other assets	43.0		54.1			208.5		—			305.6
Total assets	$	6,236.1	$	2,097.4		$	7,736.9	$	(10,579.4	)	$	5,491.0
Liabilities and stockholders’ equity:
Accounts payable	$	5.1	$	174.7		$	275.5	$	—		$	455.3
Accrued liabilities	27.3		74.8			118.3		—			220.4
Intercompany notes payable	2,186.7		1,971.9			—		(4,158.6		)	—
Short-term contract liabilities	—		50.3			27.6		—			77.9
Short-term debt and current portion of long-term debt	0.4		0.1			5.9		—			6.4
Total current liabilities	2,219.5		2,271.8			427.3		(4,158.6		)	760.0
Long-term debt	1,280.1		149.7			106.4		—			1,536.2
Intercompany notes payable	—		200.0			—		(200.0		)	—
Accrued postretirement benefits	—		255.4			54.1		—			309.5
Pension liabilities	653.4		3.8			43.9		—			701.1
Deferred income taxes	14.5		—			—		—			14.5
Other long-term liabilities	22.0		36.8			64.3		—			123.1
Total liabilities	4,189.5		2,917.5			696.0		(4,358.6		)	3,444.4
Total stockholders’ equity (deficit)	2,046.6		(820.1		)	7,040.9		(6,220.8		)	2,046.6
Total liabilities and stockholders’ equity	$	6,236.1	$	2,097.4		$	7,736.9	$	(10,579.4	)	$	5,491.0

Table of Contents

Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Statements of Income and Comprehensive Income

For the three months ended March 31, 2019



(In millions)	Guarantor Parent			Subsidiary			Non-guarantor Subsidiaries			Eliminations			Consolidated
Sales	$	—		$	335.5		$	669.3		$	—		$	1,004.8
Cost of sales	3.2			318.4			552.1			—			873.7
Gross profit (loss)	(3.2		)	17.1			117.2			—			131.1
Selling and administrative expenses	30.4			7.4			30.2			—			68.0
Operating income (loss)	(33.6		)	9.7			87.0			—			63.1
Nonoperating retirement benefit expense	(11.7		)	(6.2		)	(0.4		)	—			(18.3		)
Interest income (expense), net	(37.9		)	(33.9		)	47.0			—			(24.8		)
Other income (loss) including equity in income of unconsolidated subsidiaries	100.3			(2.9		)	(0.4		)	(99.9		)	(2.9		)
Income (loss) before income tax provision (benefit)	17.1			(33.3		)	133.2			(99.9		)	17.1
Income tax provision (benefit)	0.8			(8.0		)	29.9			(21.9		)	0.8
Net income (loss)	16.3			(25.3		)	103.3			(78.0		)	16.3
Less: Net income attributable to noncontrolling interests	—			—			1.3			—			1.3
Net income (loss) attributable to ATI	$	16.3		$	(25.3	)	$	102.0		$	(78.0	)	$	15.0
Comprehensive income (loss) attributable to ATI	$	59.8		$	(22.1	)	$	107.8		$	(92.2	)	$	53.3

Condensed Statements of Cash Flows

For the three months ended March 31, 2019



(In millions)	Guarantor Parent			Subsidiary			Non-guarantor Subsidiaries			Eliminations			Consolidated
Cash flows provided by (used in) operating activities	$	(53.5	)	$	(115.8	)	$	39.3		$	—		$	(130.0	)
Investing Activities:
Purchases of property, plant and equipment	(0.3		)	(2.4		)	(20.8		)	—			(23.5		)
Net receipts/(payments) on intercompany activity	—			—			(184.0		)	184.0			—
Asset disposals and other	(0.1		)	—			—			—			(0.1		)
Cash flows provided by (used in) investing activities	(0.4		)	(2.4		)	(204.8		)	184.0			(23.6		)
Financing Activities:
Payments on long-term debt and finance leases	(0.1		)	—			(1.4		)	—			(1.5		)
Net receipts/(payments) on intercompany activity	64.1			119.9			—			(184.0		)	—
Shares repurchased for income tax withholding on share-based compensation and other	(9.9		)	—			—			—			(9.9		)
Cash flows provided by (used in) financing activities	54.1			119.9			(1.4		)	(184.0		)	(11.4		)
Increase (decrease) in cash and cash equivalents	$	0.2		$	1.7		$	(166.9	)	$	—		$	(165.0	)

Table of Contents

Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Balance Sheets

December 31, 2018



	Guarantor				Non-guarantor
(In millions)	Parent		Subsidiary		Subsidiaries		Eliminations			Consolidated
Assets:
Cash and cash equivalents	$	0.1	$	10.8	$	371.1	$	—		$	382.0
Accounts receivable, net	—		126.3		401.5		—			527.8
Intercompany notes receivable	—		—		3,968.8		(3,968.8		)	—
Short-term contract assets	—		—		51.2		—			51.2
Inventories, net	—		216.1		995.0		—			1,211.1
Prepaid expenses and other current assets	12.9		29.3		32.4		—			74.6
Total current assets	13.0		382.5		5,820.0		(3,968.8		)	2,246.7
Property, plant and equipment, net	1.7		1,548.4		924.9