UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
For the fiscal year ended December 31, 2020
|☐||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)
|(State or other jurisdiction of|
incorporation or organization)
| ||(I.R.S. Employer|
|1000 Six PPG Place|
|(Address of principal executive offices)|| ||(Zip Code)|
Registrant’s telephone number, including area code: (412) 394-2800
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol||Name of each exchange on which registered|
|Common stock, par value $0.10||ATI||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer|| ||☒|| ||Accelerated filer|| ||☐|
|Non-accelerated filer|| |
☐ (Do not check if a smaller reporting company)
| ||Smaller reporting company|| ||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On February 5, 2021, the Registrant had outstanding 126,827,573 shares of its Common Stock.
The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 30, 2020 was approximately $1.3 billion, based on the closing price per share of Common Stock on June 30, 2020 of $10.19 as reported on the New York Stock Exchange. Shares of Common Stock known by the Registrant to be beneficially owned by directors and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Exchange Act.
Documents Incorporated By Reference
Selected portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2021 are incorporated by reference into Part III of this Report.
Item 1. Business
Allegheny Technologies Incorporated is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800, Internet website address www.atimetals.com. Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. References to “Allegheny Technologies,” “ATI,” the “Company,” the “Registrant,” “we,” “our” and “us” and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires.
ATI’s strategic vision is to be an aligned and integrated specialty materials and components company, solving the world’s challenges through materials science. Our strategies target the products and global growth markets that require and value ATI’s technical and manufacturing capabilities. Our largest markets are aerospace & defense, representing approximately 50% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, downstream processing, and specialty energy. In aggregate, these markets represent about 70% of our revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique process technologies, including our new product development competence.
Effective January 1, 2020, we began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). All segment reporting information for 2020 and prior periods in this Form 10-K reflect these two revised business segments. In addition, in the fourth quarter 2020, the Company changed its segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of segment EBITDA is defined in Note 2 of the notes to the consolidated financial statements. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment level.
HPMC is comprised of the Specialty Materials and Forged Products businesses, as well as our ATI Europe distribution operations. The revised HPMC segment intensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace & defense markets and nearly half of its revenue from products for commercial jet engines. Commercial aerospace products have been the main source of sales and EBITDA growth for HPMC over the last few years, and are expected to continue to drive HPMC and overall ATI results for the next several years as demand from these markets recovers from reduced 2020 levels resulting from the COVID-19 pandemic. Other major HPMC end markets include medical and energy. HPMC produces a wide range of high performance materials, and components, and advanced metallic powder alloys made from titanium and titanium-based alloys, nickel-based alloys and superalloys, and a variety of other specialty materials. Capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and 3D-printed aerospace products.
The new AA&S segment combines our Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, the 60%-owned Shanghai STAL Precision Stainless Steel Company Limited (STAL) joint venture, and the Uniti LLC and Allegheny & Tsingshan Stainless (A&T Stainless) 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other important end markets for AA&S include automotive and electronics. AA&S produces nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless products in a variety of forms including plate, sheet, and strip products.
On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus of increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge Precision Rolled Strip® (PRS). As part of this strategic realignment, we intend to cease production of standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the Hot-Rolling & Processing Facility (HRPF), and close various downstream finishing operations that are part of the standard stainless sheet flow path.
Strategic end-use markets for our products include:
Aerospace & Defense. We are a world leader in the production of specialty materials and components for both commercial and military jet engines and airframes supporting customer needs for initial build requirements and for spare parts. Through alloy development, internal growth efforts, and long-term supply agreements on current and next-generation jet engines and airframes, we are well-positioned with a fully qualified asset base to meet the expected return to multi-year demand growth from the commercial aerospace market as business conditions impacted by the global COVID-19 pandemic recover to more normal levels.
Typical aerospace applications for nickel-based alloys and superalloys and advanced metallic powders include jet engine shafts, discs, blades, vanes, rings and casings. Nickel-based alloys and superalloys remain extremely strong at high temperatures and resist degradation under extreme conditions. The next-generation jet engines use advanced nickel-based superalloys and metallic powder alloys due to increased fuel efficiency requirements that require hotter-burning engines. Our specialty materials are also used in the manufacture of aircraft landing gear and structural components.
We are a global industry leader in isothermal and hot-die forging technologies for advanced aerospace components. Capital investments for our fourth iso-thermal press and heat-treating capacity expansion at our Iso-Thermal Forging Center of Excellence in Cudahy, WI, which began in 2018, continued through 2020. We produce highly sophisticated components that have differing mechanical properties across a single product unit and are highly-resistant to fatigue and temperature effects. Our precision forgings are used for jet engine components, structural components for aircraft, helicopters, space propulsion, and other demanding applications. ATI provides a full range of post-production inspection and machining with the certified quality needed to meet demanding application requirements.
Products and components made from titanium and titanium-based alloys, such as jet engine components including blades, vanes, and discs, and airframe components such as structural members, landing gears, and hydraulic systems, are critical in aerospace applications. These materials and components possess an extraordinary combination of properties that help to increase jet engine fuel efficiency and product longevity, including superior strength-to-weight ratios, elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance.
Our specialty materials and components for defense applications include naval nuclear products, military jet engines, fixed wing and rotorcraft products, and armor applications. We expect to increase our sales in government defense applications in future years, and in 2019, we announced the expansion and 6.5-year extension of our long-term agreement (LTA) with BWX Technologies to supply materials for the manufacture of naval nuclear components.
We continuously seek to develop and manufacture innovative new alloys to better serve the needs of the aerospace & defense markets. For example, ATI 718Plus® nickel-based superalloy, Rene 65 near-powder superalloy, and our powder alloys have won significant share in the current and next-generation jet engines. ATI’s metallic powder technology delivers alloy compositions and refined microstructures that offer increased performance and longer useful lives in high-temperature aerospace environments as well as improving the efficiency of jet engines. Our metallic powder products deliver the most uniform grain structure achievable in near-net shapes. We continue to increase our production capacity for advanced metallic powders for use in next-generation aerospace products, including additive manufacturing applications.
Energy. This includes oil & gas, downstream processing, and specialty energy markets.
The environments in which oil & gas can be found in commercial quantities have become more challenging, involving deep offshore wells, high pressure and high temperature conditions in sour wells and unconventional sources. These challenging offshore environments are located further off the continental shelf, including locations in arctic and tropical waters where drilling is more difficult than previously-sourced locations. We enable our customers’ success in these applications by developing and producing specialty materials for equipment that can operate for up to 30 years in these harsh environments.
Both of our business segments produce specialty materials that are critical to the oil & gas industry. Our specialty materials, including nickel-based alloys, duplex alloys and other specialty alloys, have the strength and corrosion-resistant properties necessary to meet these challenging operating conditions.
Our specialty materials are widely used in the global electrical power generation and distribution industries. We believe clean energy needs, expanding environmental policies and the electrification of developing countries will continue to drive demand for our specialty materials and products for use in these industries over the long term.
For electrical power generation, our specialty materials, including corrosion-resistant alloys (CRAs), are used in nuclear, natural gas and other fuel source applications. Our CRAs are used for pipe, tube, and heat exchanger applications in water systems and in pollution control scrubbers. Our CRAs are also used in water systems, fuel cladding components, and process equipment for nuclear power plants. For nuclear power plants, we are an industry pioneer in producing nuclear reactor fuel cladding and structural components utilizing zirconium and hafnium alloys. We are a technology leader for large diameter components used
in natural gas land-based turbines for power generation. Our alloys are also used for alternative energy generation, in solar, fuel cell and geothermal applications.
Medical. ATI’s advanced specialty materials are used in medical device products that enhance the quality of people’s lives around the world.
Manufacturers of magnetic resonance imaging (MRI) devices rely on our niobium superconducting wire to help produce electromagnetic fields that allow physicians to safely scan the body’s soft tissue. We have a joint technology development agreement with Bruker Energy & Supercon Technologies to advance state-of-the-art niobium-based superconductors, including those used in MRI magnets for the medical industry, and preclinical MRI magnets used in the life-science tools industry.
Our specialty alloys are used for replacement knees, hips and other prosthetic devices. The use of our alloys in these replacement devices offer the potential of longer product lifespans versus previous implant generations.
Our biocompatible nickel-titanium shape memory alloy is used for stents to support collapsed or clogged blood vessels. Reduced in diameter for insertion, these stents expand post-implant to the original tube-like shape due to the metal’s superelasticity. In addition, our ultra fine diameter (0.002 inch/0.051 mm) titanium wire is used for screens to prevent blood clots from entering critical areas of the body.
Electronics. ATI’s materials perform a variety of important roles in the growing consumer electronics market. Nickel alloys and PRS from FRP and our STAL joint venture support computers and smart phones. The magnetic properties of nickel alloys are used in relay cores, magnets and magnetic shielding, while their thermal expansion is useful in glass-to-metal sealing applications such as monitors. PRS is selected for electronics and communications applications based on corrosion resistance, strength, wear resistance, electrical resistivity or thermal expansion.
In addition, metal precursors – which use chemicals produced by ATI – have a variety of important applications in consumer and industrial electronics.
Our two business segments accounted for the following percentages of total revenues of $2.98 billion, $4.12 billion, and $4.05 billion for the years ended December 31, 2020, 2019, and 2018, respectively.
|High Performance Materials & Components||39 ||%||48 ||%||49 ||%|
|Advanced Alloys & Solutions||61 ||%||52 ||%||51 ||%|
Information with respect to our business segments is presented below and in Note 2 of the notes to the consolidated financial statements.
High Performance Materials & Components Segment
Our HPMC segment produces a wide range of high performance specialty materials, parts and components for several major end markets, including aerospace & defense, medical, and energy. 81% of the HPMC segment’s 2020 revenues were derived from the aerospace & defense markets. Demand for our products is driven primarily by the commercial aerospace cycle. Large aircraft and jet engines are manufactured by a small number of companies, such as The Boeing Company, Airbus S.A.S. (an Airbus Group company) including the former operations of Bombardier Aerospace, and Embraer (Empresa Brasileira de Aeronáutica S.A.) for airframes, and GE Aviation (a division of General Electric Company), Rolls-Royce plc, Pratt & Whitney (a division of Raytheon Technologies Corporation), Snecma (SAFRAN Group), and various joint ventures that manufacture jet engines. These companies, and their suppliers, form a substantial part of our customer base in this business segment. We have LTAs in place with most major aerospace market OEMs. The loss of one or more of our customers in the aerospace & defense markets could have a material adverse effect on ATI’s results of operations and financial condition (see Item 1A. Risk Factors).
Our products are manufactured from a wide range of advanced materials including metallic powder alloys, made from nickel-based alloys and superalloys, titanium and titanium-based alloys, and a variety of other specialty materials. These materials are made into a variety of product forms that include precision forgings, machined parts and others. We are integrated across these alloy systems in melt, forging, finishing, and machining processes. Most of the products in this segment are sold directly to end-use customers, and a substantial portion of our HPMC segment products are sold under multi-year agreements.
Principal competitors in the HPMC segment include: Berkshire Hathaway Inc., for nickel-based alloys and superalloys and specialty steel alloys, titanium and titanium-based alloys, and precision forgings through its ownership of Precision Castparts Corporation and subsidiaries; Howmet Aerospace Inc., for titanium and titanium-based alloys; Carpenter Technology Corporation for nickel-based alloys and superalloys and specialty steel alloys; VSMPO-AVISMA for titanium and titanium-based alloys; and Aubert & Duval for precision forgings.
Advanced Alloys & Solutions Segment
Our AA&S segment produces nickel-based alloys, specialty alloys, titanium and titanium-based alloys, and stainless steel in a variety of forms including plate, sheet, and PRS products. The major end markets for our flat rolled products are energy, aerospace & defense, automotive, and electronics. The operations in this segment include our FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, our SAC business, including the primary titanium operations in Richland, WA and Albany, OR and the STAL PRS joint venture in China, in which we hold a 60% interest. Segment results also include our 50% interest in the Uniti industrial titanium joint venture and our 50% interest in A&T Stainless.
Significant global overcapacity for stainless flat-rolled products has intensified the price competition in the AA&S segment over the last several years, despite various anti-dumping and countervailing duties imposed by the United States government in various forms since 1999. On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase its focus on higher-margin products and its aerospace & defense end markets. Additionally, in 2020 we indefinitely idled the manufacturing operations of the A&T Stainless joint venture due to repeated denials by the U.S. Department of Commerce for exemptions from Section 232 tariffs, which impose a 25% tariff on imported semi-finished stainless slab products from Indonesia.
Nickel-based alloys, titanium, and stainless sheet products are used in a wide variety of industrial and consumer applications. In 2020, approximately 65% of our stainless sheet products by volume were sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers.
PRS products, which are under 0.015 inches thick, are used by customers to fabricate a variety of products primarily in the automotive and electronics markets. In 2020, approximately 90% of these products by volume were sold directly to end-use customers or through our own distribution network, with the remainder sold to independent service centers. In 2018, we completed the construction of our third PRS manufacturing facility at our STAL PRS joint venture in China.
Nickel-based alloy, titanium, and stainless plate products are primarily used in aerospace & defense, and corrosion and industrial markets. In 2020, approximately 60% of our plate products by volume were sold to independent service centers, with the remainder sold directly to end-use customers.
Competitors for nickel-based alloys and superalloys and specialty steel alloys include Haynes International and VDM Metals GmbH, a subsidiary of Acerinox S.A. Competition in the AA&S segment includes domestic stainless competitors North American Stainless, a subsidiary of Acerinox S.A., Outokumpu Stainless USA, LLC, and Cleveland-Cliffs Inc., as well as imports from numerous foreign producers, including Aperam, based in Europe.
We continue efforts toward improving the capacity utilization of our HRPF for carbon steel hot-rolling third-party conversion services.
Raw Materials and Supplies
Substantially all raw materials and supplies required in the manufacture of our products are available from more than one supplier, and the sources and availability of raw materials essential to our businesses are currently adequate. The principal raw materials we use in the production of our specialty materials are scrap (including iron-, nickel-, chromium-, titanium-, and molybdenum-bearing scrap), nickel, titanium sponge, zirconium sand and sponge, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, manganese and manganese alloys, cobalt, niobium, vanadium and other alloying materials. While we enter into raw materials futures contracts from time to time to hedge exposure to price fluctuations, such as for nickel, we cannot be certain that our hedge position adequately reduces exposure. We believe that we have adequate controls to monitor these contracts, but we may not be able to accurately assess exposure to price volatility in the markets for critical raw materials.
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. ATI has entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge.
Other raw materials, such as nickel, cobalt, and ferrochromium, are available to us and our specialty materials industry competitors primarily from foreign sources. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which could disrupt supplies or affect the price of these materials.
We purchase our nickel requirements principally from producers in Australia, Canada, Norway, Russia, and the Dominican Republic. Zirconium raw materials are primarily purchased from the United States and China. Cobalt is purchased primarily from producers in Canada. More than 80% of the world’s reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. Niobium is purchased principally from producers in Brazil, and our titanium sponge comes from sources in Japan and Kazakhstan.
Certain key supplies used in melting and other processing operations, such as graphite electrodes and industrial gases including helium and argon, are from time-to-time limited in availability and may be subject to significant price inflation. We enter into long-term supply contracts where possible to ensure an adequate supply of these items, however, overall industry shortages may impact our operations and scheduling.
Export Sales and Foreign Operations
International sales represent approximately 40% of our total annual sales, with direct export sales by our U.S.-based operations to customers in foreign countries accounting for approximately 30% of our total sales. Our overseas sales, marketing and distribution efforts are aided by our international marketing and distribution offices, ATI Europe, ATI Europe Distribution, and ATI Asia, or by independent representatives at various locations throughout the world. We believe that at least 50% of ATI’s 2020 sales were driven by global markets when we consider exports of our customers.
Our HPMC segment has manufacturing capabilities for melting, remelting, forging and finishing nickel-based alloys and specialty alloys in the United Kingdom, and manufacturing capabilities for precision forging and machining in Poland, primarily serving the aerospace, construction & mining and transportation markets. Within our AA&S segment, our STAL joint venture in the People’s Republic of China produces PRS products, which enables us to offer these products more effectively to markets in China and other Asian countries. Our Uniti LLC joint venture allows us to offer titanium products to global industrial markets more effectively.
Backlog, Seasonality and Cyclicality
Our backlog of confirmed orders was approximately $1.4 billion at December 31, 2020 and $2.3 billion at December 31, 2019. We expect that approximately 75% of confirmed orders on hand at December 31, 2020 will be filled during the year ending December 31, 2021. Our HPMC segment’s backlog of confirmed orders was approximately $1.0 billion at December 31, 2020 and $1.8 billion at December 31, 2019. We expect that approximately 70% of the confirmed orders on hand at December 31, 2020 for this segment will be filled during the year ending December 31, 2021. Our AA&S segment’s backlog of confirmed orders was approximately $0.4 billion at December 31, 2020 and $0.5 billion at December 31, 2019. We expect that approximately 95% of the confirmed orders on hand at December 31, 2020 for this segment will be filled during the year ending December 31, 2021.
Demand for our products is cyclical over longer periods because specialty materials customers operate in cyclical industries and are subject to changes in general economic conditions and other factors both external and internal to those industries. The HPMC segment typically experiences modest seasonal weakness in the third quarter of each fiscal year due to many European customers, particularly in the aerospace supply chain, taking plant outages during this summer period. ATI also typically performs corresponding annual preventative maintenance outages at several facilities during this same period.
The Company recognizes the increasing significance that cybersecurity has to our operations and the success of our business and the need to continually assess cybersecurity risk and evolve our response in the face of a rapidly and ever-changing environment. We appointed a Chief Digital and Information Officer in 2019 and, to enhance an already comprehensive cybersecurity program, appointed a Chief Information Security Officer to lead our efforts to address and mitigate digital technology risks in partnership with ATI’s business leaders.
In 2020, the need to ensure cybersecurity while enabling a comprehensive and highly reliable remote working environment for a significant portion of our workforce was a central component of our response to the COVID-19. Throughout 2020, special attention was and continues to be given to improving and implementing Cybersecurity Maturity Model Certification controls in support of protecting ATI’s technology and customer data.
Additionally, we have a robust Cybersecurity Incident Response Plan in place which provides a documented framework for handling high severity security incidents and facilitates coordination across multiple parts of the Company. We routinely perform simulations and drills at both a technical and management level. We incorporate external expertise and reviews in all aspects of our program, and all personnel receive regular cybersecurity awareness training.
As part of its program of regular oversight, the Company’s Audit Committee is responsible for overseeing ATI’s cybersecurity risk. The Audit Committee receives quarterly reports from the Chief Digital and Information Officer and the Chief Information Security Officer on ATI’s cybersecurity risk profile and enterprise cybersecurity program.
Research, Development and Technical Services
We believe that our research and development capabilities give ATI an advantage in developing new products and manufacturing processes that contribute to the long-term profitable growth potential of our businesses. We conduct research
and development at our various operating locations both for our own account and, on a limited basis, for customers on a contract basis. Research and development expenditures for the years ended December 31, 2020, 2019, and 2018 included the following:
|High Performance Materials & Components||$||7.7 ||$||8.2 ||$||12.0 |
|Advanced Alloys & Solutions||5.3 ||7.4 ||8.2 |
|Corporate||1.1 ||2.2 ||2.5 |
|14.1 ||17.8 ||22.7 |
|High Performance Materials & Components||0.7 ||2.4 ||2.2 |
|Total Research and Development||$||14.8 ||$||20.2 ||$||24.9 |
Our research, development and technical service activities are closely interrelated and are directed toward development of new products, improvement of existing products, cost reduction, process improvement and control, quality assurance and control, development of new manufacturing methods, and improvement of existing manufacturing methods. The increased activity in 2019 and 2018 was largely related to materials and manufacturing methods for products supporting the aerospace & defense markets. The decline in 2020 reflects the weakened market conditions due to the COVID-19 pandemic.
We own hundreds of United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as our numerous trademarks, technical information, license agreements, and other intellectual property, have been and are expected to be of value, we believe that the loss of any single such item or technically related group of such items would not materially affect the conduct of our business.
Environmental, Health and Safety Matters
We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines, civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.
We consider environmental compliance to be an integral part of our operations. We have a comprehensive environmental management and reporting program that focuses on compliance with applicable federal, state, regional and local environmental laws and regulations. Each operating company has an environmental management system that includes mechanisms for regularly evaluating environmental compliance and managing changes in business operations while assessing environmental impact.
Human Capital Resources
We have approximately 6,500 active employees, of which approximately 20% are located outside the United States. Approximately 40% of our workforce is covered by various collective bargaining agreements (CBAs), predominantly with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW). The Company’s CBA with the USW involving approximately 1,100 active full-time represented employees located primarily within the AA&S segment operations expired on February 29, 2020. On March 25, 2020, the Company announced an agreement with the USW that extended the terms of the expired CBA for one year, to February 28, 2021.
We believe that world-class leadership and fostering a culture that enables us to build and grow a talented engaged team through career development and opportunities is foundational to our vision. We recognize that attracting, retaining and developing members of our workforce is a key to the success and sustainability of our business.
We continuously strive to cultivate and support a highly engaged and productive workforce. As a result, management focuses on a number of human capital measures and objectives, which include the following:
Talent Acquisition: We partner closely with a targeted number of colleges and universities specifically known for programs that are relevant to our business in order to identify materials science, STEM expertise and other relevant talent, and have developed similar partnerships with high schools and relevant trade schools. In addition, we engage with external professional recruiting firms to enhance our recruiting efforts for key positions. We utilize pre-employment assessment tools to identify qualified candidates who we believe would adapt well to our culture and be most suited to a particular opportunity. We are also actively engaged with campus and professional diversity groups. We pride ourselves on our ability to attract and retain U.S.
military veterans, who comprise approximately 5% of our leadership team and approximately 9% of our total employee population as of the end of 2020.
Professional Development: We offer a number of programs to our employees intended to support development of the skills each employee needs for success in his or her current position and for future career growth. One of these programs is our Global Leadership Development Program, our Company-wide, flagship program designed to build the skills of our employees across each level of leadership. We also have an Early Career Leadership Development Program, a five-year program designed for high-potential and motivated college graduates designed to prepare our future leaders.
Engagement and Performance Management: We actively seek opportunities for regular engagement and communication by our CEO and other senior executive leaders with our broader employee population. Annually, we conduct a confidential company-wide employee engagement survey with feedback from these surveys reviewed with our Board and used to develop and refine other aspects of our overall human capital management and other growth strategies. We also maintain a robust annual performance management process across the organization.
Succession Planning: We maintain a formal succession planning process and career mapping framework that is designed to work in connection with our performance management processes and ensure a systematic and ongoing dialog regarding career development and succession planning at both the individual employee level and more broadly at an enterprise level.
Retention: An output of our talent assessment process is a retention toolkit. This toolkit is designed to use both quantitative and qualitative inputs along with predictive analytics to inform our retention strategies.
Health & Safety: Safety is one of our core values. We strive for a Zero Injury Culture committed to the safety of our people, our products, and the communities in which we operate. Our 2020 OSHA Total Recordable Incident Rate was 0.87 per 200,000 hours and our Lost Time Case Rate was 0.21 per 200,000 hours, which we believe to be competitive with world-class performance for our industry. Also, at the end of 2020, 82% of ATI Operations are ISO 18001 or OSHAS 45001 certified. Our goal is to have every operation certified to ISO 18001 or OSHAS 45001 standards by the end of 2022.
Pandemic Response: In response to the COVID-19 pandemic, ATI formed a COVID-19 task force to respond to the various government orders, guidance, and issues facing our business and employees. Our operations are critical to ongoing demands and requirements of our customers and as an essential business, we continued to operate while many businesses were ordered to close. By quickly implementing plans and protocols for keeping our employees safe, we have had no widespread infection among our employees in any of our global locations.
Diversity & Inclusion: We recognize the benefits and importance of diversity amongst our board and management. Three of our 12 current board members, including our Board Chair, are women, and one member of our Board is an ethnic minority. Additionally, two of our eight Executive Council members are women- our Executive Vice President, HPMC and AA&S Segments and our Chief Human Resources Officer. We have adopted recruitment strategies to provide outreach and sourcing of diverse candidates. One of these strategies is to ensure that one-third of the candidate slate is diverse.
Governance: Our Corporate Guidelines for Business Conduct and Ethics address employment and workplace safety laws, and also describe our commitment to equal opportunity and fair treatment of employees.
Our Internet website address is www.atimetals.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy and information statements and other information that we file, are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the United States Securities and Exchange Commission (“SEC”). Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. The SEC maintains an Internet website at www.sec.gov, which also contains reports, proxy and information statements and other information that we file electronically with the SEC.
Item 1A. Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. See the discussion under “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
RISKS RELATED TO THE COVID-19 PANDEMIC
Impacts on the End-Markets that We Serve and Demand for Our Products. The COVID-19 pandemic, including governmental and other actions taken or restrictions imposed to contain its spread and impact, has subjected our operations, financial performance and financial condition to a number of risks including, but not limited to, those discussed below.
The significant macroeconomic impact of the ongoing COVID-19 pandemic and the measures designed to contain its spread have impacted several of the Company’s end markets. We are experiencing, and expect to continue to experience, lower demand and volume for certain products and services. Our sales to customers in markets that are affected by COVID-19 have been negatively impacted, and the possibility exists that there could be sustained impact to our operations and financial results. For example, a significant portion of the sales of our HPMC segment represents products sold to customers in the commercial aerospace industry. Several of our commercial aerospace customers announced cost-cutting and other measures in response to declining demand stemming from the COVID-19 pandemic, including facility shut-downs, measures to reduce inventory and/or downward adjustments to their stated production rates. Similarly, the energy market, including oil & gas, historically has been a significant end market for both our HPMC and AA&S segments. In recent years, our business has at times been negatively impacted by the downturn and slow recovery in the oil & gas industry. Energy demand, in general, is currently predicted to remain weak due in part to declines in consumer activity and other demand disruptions attributable to the pandemic. The ultimate breadth and duration of these actions and trends and their impact on our business is uncertain and difficult to predict.
Impacts to Our Supply Chain. Additionally, it is possible at some point that due to the pandemic, one or more of our suppliers may not have the materials, capacity, or capability to supply products that we require according to our schedule and specifications. To date, we have not experienced significant disruption to our supply chain. If our suppliers’ operations were to be impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our business, results of operations, financial condition and/or cash flows.
Risk of Operational Disruption. In general, our facilities have continued to operate with federal and state government approvals due to the qualification of our facilities as essential and critical. However, we have experienced and may again in the future experience the temporary shut down of facilities in response to employees being impacted by COVID-19 or changes in government policy. Furthermore, we have instituted a number of short-term idlings at certain manufacturing locations, and future idlings may occur, including as may be necessary to match our production levels to the reduced demand from our customers.
Impacts on Financial and Credit Markets. The current financial market dynamics and volatility pose heightened risks to our liquidity. For example, dramatically lowered interest rates and lower expected asset valuations and returns can materially impact the calculation of long-term liabilities such as our pension. Moreover, there can also be no assurance that we will not face credit rating downgrades as a result of weaker than anticipated performance of our businesses or other factors including overall market conditions. Future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets, and a significant downgrade could have an adverse commercial impact on our businesses. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding (including for receivables securitization or supply chain finance programs used to finance working capital) or our ability to refinance certain of our indebtedness, which could adversely affect our business, financial position, results of operations and/or cash flows.
RISKS RELATED TO CYCLICAL NATURE OF OUR BUSINESS
Cyclical Demand for Products. The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating potential uncertainty regarding future profitability. Various changes in general economic conditions may affect the industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products due to economic downturns. Other factors that may cause fluctuation in our customers’ positions are changes in market demand, lower overall pricing due to domestic and international overcapacity, currency fluctuations, lower priced imports and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation.
Risks Associated with the Commercial Aerospace Industry. A significant portion of the sales of our HPMC segment represents products sold to customers in the commercial aerospace industry. Fulfilling contractual arrangements to provide various products to customers in this industry often involves meeting highly exacting performance requirements and product specifications, and our failure to meet those requirements and specifications on a timely and cost efficient basis could have a material adverse effect on our results of operations, business and financial condition. The commercial aerospace industry has historically been cyclical due to factors both external and internal to the airline industry. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, changes in projected
build rates (including, e.g., the suspension in production of the Boeing 737 MAX aircraft and the decline in projected build rates for Boeing’s 737 MAX and 787 Dreamliner and for other commercial aircraft associated with the global COVID-19 pandemic that is expected to impact the industry for several years), price competition, and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation are influenced by these factors and therefore are difficult to predict with certainty. Demand for our products, particularly those produced in our HPMC segment, is subject to these cyclical trends. Cyclical and event-driven downturns in the commercial aerospace industry have had, and may in the future have, an adverse effect on the prices at which we are able to sell our products, and our results of operations, business and financial condition could be materially adversely affected.
Risks Associated with the Oil & Gas Industry. The oil & gas industry, which historically has been a significant end market for ATI, is highly cyclical and subject to volatility as a result of worldwide economic activity and associated demand for oil and natural gas, anticipated future prices for oil and natural gas, fluctuation in the level of drilling activity, changes in applicable regulation, global geopolitical conditions and numerous other factors. Demand for our products are likewise subject to these trends. In recent years, our business has been negatively impacted by a general downturn and slow recovery in the oil & gas industry, which most recently has been further impacted by the COVID-19 pandemic’s negative effect on global economic activity. We expect that this end market will remain a highly cyclical industry, and future downturns could have an adverse effect on the prices at which we are able to sell our products, and our results of operations, business and financial condition could be materially adversely affected.
Product Pricing. From time-to-time, reduced demand, intense competition and excess manufacturing capacity have resulted in reduced prices, excluding raw material surcharges, for many of our products. These factors have had and may have an adverse impact on our revenues, operating results and financial condition. Although inflationary trends in recent years have been moderate, during most of the same period, certain critical raw material costs, such as nickel, titanium sponge, cobalt, chromium, and molybdenum and scrap containing iron, nickel, titanium, chromium, and molybdenum have been volatile. While we have been able to mitigate some of the adverse impact of volatile raw material costs through raw material surcharges or indices to customers, rapid changes in raw material costs causes volatility in, and may adversely affect, our results of operations.
We change prices on certain of our products from time-to-time. The ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond our control. The benefits of any price increases may be delayed due to long manufacturing lead times and the terms of existing contracts.
RISKS RELATED TO THE RAW MATERIALS AND SUPPLIES THAT WE USE
Dependence on Critical Raw Materials Subject to Price and Availability Fluctuations. We rely to a substantial extent on third parties to supply certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical items are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable to us, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. In particular, we acquire certain important raw materials that we use to produce specialty materials, including nickel, zirconium, niobium, chromium, cobalt, vanadium and titanium sponge, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
Dependence on Critical Supplies Subject to Price and Availability Fluctuations. We rely on third parties for certain supplies, such as graphite electrodes and industrial gases including helium and argon that are critical to the manufacture of our products. Purchase prices and availability of these critical items are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical supplies on a timely basis, on price and other terms acceptable to us, or at all. If suppliers increase the price of these items, we may not have alternative sources of supply. The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages of critical supplies. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
Availability of Energy Resources. We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair our ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
Volatility of Raw Material Costs. Most of our inventory is valued utilizing the last-in, first-out (LIFO) costing methodology. Inventory of our non-U.S. operations is valued using average cost or first-in, first-out (FIFO) methods. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these material and other costs may have been incurred at significantly different values due to the length of time of our production cycle. In a period of rising prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold. Generally, over time based on overall inflationary trends in raw materials, labor and overhead costs, the use of the LIFO inventory valuation method will result in a LIFO inventory valuation reserve, as the higher current period costs are included in cost of sales and the balance sheet carrying value of inventory is reduced.
The prices for many of the raw materials we use have been volatile during the past several years. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a fall in raw material costs results in a benefit to operating results by reducing cost of sales and increasing the inventory carrying value, while conversely, a rise in raw material costs has a negative effect on our operating results by increasing cost of sales while lowering the carrying value of inventory.
Due primarily to persistent raw material deflation in prior years, we are in an unusual situation of having a LIFO inventory balance that exceeds replacement cost. In cases where inventory at FIFO cost is lower than the LIFO carrying value, a write-down of the inventory to market may be required, subject to a lower of cost or market evaluation. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not be less than net realizable value reduced by an allowance for a normal profit margin). We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. Due to the long lead times required to manufacture many of our products, volatility in raw material prices exposes us to cash costs that may not be fully recovered through surcharge and index pricing mechanisms.
OTHER OPERATIONAL AND STRATEGIC RISKS
Export Sales and International Trade Matters. We believe that export sales will continue to account for a significant percentage of our future revenues. We also import certain raw materials that are important to our business, including nickel, zirconium, niobium, chromium, cobalt, vanadium and titanium sponge, among others. Risks associated with such international trade include, among others: political and economic instability, including weak conditions in the world’s economies; accounts receivable collection; export controls; trade sanctions, changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely affect our results for the period in which they occur.
Additionally, changes in international trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact our business. Moreover, tariffs, or other changes in U.S. trade policy, have resulted in and may continue to trigger, retaliatory actions by affected countries. Certain foreign governments have instituted or considered imposing trade sanctions on certain U.S. goods, or taking action to deny U.S. companies access to critical raw materials, in response to U.S. trade actions. A “trade war” of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses.
Risks Associated with Strategic Capital Projects and Maintenance Activities. From time-to-time, we undertake strategic capital projects in order to enhance, expand and/or upgrade our facilities and operational capabilities. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including a variety of market, operational, permitting, and labor-related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs or delays, our results of operations and financial position may be materially adversely affected. Additionally, we periodically undertake maintenance
activities, routine or otherwise, involving facilities and pieces of equipment that are key to our operations, and it is possible that unanticipated maintenance needs, or unanticipated circumstances arising in connection with planned maintenance activities could result in equipment outages that are longer, or costs that exceed, those originally anticipated. Significant repair delays or unanticipated costs associated with these activities could have a negative impact on our results of operations and financial condition.
Risks Associated with Environmental Matters. We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites. We also could be subject to future laws and regulations that govern greenhouse gas emissions and various matters related to climate change and other air emissions, which could increase our operating costs. With respect to proceedings brought under the federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party (PRP) at approximately 42 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 34 of these sites, and the potential loss exposure with respect to 8 individual sites is not considered to be material. We are a party to various cost-sharing arrangements with other PRPs at many of the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements.
We believe that we operate our businesses in compliance in all material respects with applicable environmental laws and regulations. However, from time-to-time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws. When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. In many cases, we are not able to determine whether we are liable or if liability is probable or to reasonably estimate the loss or range of loss. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the participation number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We intend to adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2020, our reserves for environmental matters totaled approximately $14 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition or results of operations.
Risks Associated with Current or Future Litigation and Claims. A number of lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial disputes, government contracting, employment matters, employee and retiree benefits, taxes, environmental matters, health and safety and occupational disease, and stockholder and corporate governance matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us, we do not believe that the disposition of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. Also, we can give no assurance that any other claims brought in the future will not have a material effect on our financial condition, liquidity or results of operations.
Labor Matters. We have approximately 6,500 active employees, of which approximately 20% are located outside the United States. Approximately 40% of our workforce is covered by various CBAs, predominantly with the USW. At various times, our CBAs expire and are subject to renegotiation. We currently are involved in negotiation on our next significant CBA, which expires February 28, 2021 involving approximately 1,100 USW-represented active full-time employees located primarily within the AA&S segment operations. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A labor dispute, which could lead to a strike, lockout, or other work stoppage by the employees covered by one or more of the collective bargaining agreements, could have a material adverse effect on production at one or more of our facilities and, depending upon the length of such dispute or work stoppage,
on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements to replace those that expire.
Risks Associated with Acquisition and Disposition Strategies. We intend to continue to strategically position our businesses in order to improve our ability to compete. Strategies we employ to accomplish this may include seeking new or expanding existing specialty market niches for our products, expanding our global presence, acquiring businesses complementary to existing strengths, and continually evaluating the performance and strategic fit of our existing business units. From time-to-time, management holds discussions with management of other companies to explore acquisitions, joint ventures, and other business combination opportunities as well as possible business unit dispositions. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies, growth or other benefits anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions, changes in tax laws and a deterioration in domestic and foreign economic conditions.
Risks Associated with Information Technology. Information technology infrastructure is critical to supporting business objectives; failure of our information technology infrastructure to operate effectively could adversely affect our business. We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate. As we integrate, implement and deploy new information technology processes and information infrastructure across our operations, we could experience disruptions in our business that could have an adverse effect on our business, financial condition, results of operations and cash flow.
Cyber Security Threats. Increased global information technology threats, vulnerabilities, and a rise in sophisticated and targeted international computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We believe that ATI faces the threat of such cyber attacks due to the markets we serve, the products we manufacture, the locations of our operations, and global interest in our technology. These risks may be exacerbated by the impact of the COVID-19 pandemic. Due to the evolving nature of cyber security threats, the scope and impact of any incident cannot be predicted. We continually work to strengthen our threat countermeasures, safeguard our systems and mitigate potential risks. Despite our efforts to fortify our cyber security and protect sensitive information and confidential and personal data, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification or destruction of proprietary and other key information, production downtimes, operational disruptions, and remediation costs, which in turn could adversely affect our reputation, competitiveness and results of operations.
Risks Associated with Government Contracts. Some of our operating units perform contractual work directly or indirectly for the U.S. Government, which requires compliance with laws and regulations relating to the performance of Government contracts. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) could be asserted against us related to our U.S. Government contract work. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations.
Political and Social Turmoil. The war on terrorism as well as political and social turmoil could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers, and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business, financial condition and results of operations could be materially adversely affected.
RISKS ASSOCIATED WITH OUR INDEBTEDNESS; OTHER FINANCIAL AND FINANCIAL ACCOUNTING RISKS
Risks Associated with Indebtedness. Our substantial indebtedness could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under our outstanding indebtedness. As of December 31, 2020, our total consolidated indebtedness was approximately $1.6 billion. This substantial level of indebtedness increases the risk that we may be unable to generate enough cash to pay amounts due in respect of our indebtedness. Our substantial
indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
•make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
•increase our vulnerability to general adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, our strategic growth initiatives and development efforts and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict us from taking advantage of business opportunities;
•place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
In addition, the agreements that govern our current indebtedness contain, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.
In addition, our variable rate indebtedness, including loans outstanding from time to time under our Asset Based Lending (ABL) Credit Facility, may use London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the rate. In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that most, if not all, banks currently reporting information to set LIBOR will stop doing so at such time, which could either cause LIBOR publication to stop immediately or cause LIBOR’s regulator to announce the discontinuation of its publication. During any such transition period, LIBOR may perform differently than in the past. Consequently, LIBOR has been the subject of recent regulatory guidance and proposals for reform that could result in changes to the method by which LIBOR is calculated or in the use of alternate reference rates. Our ABL credit facility includes provisions intended to provide for such transitions, but the potential consequences of these changes cannot be fully predicted and could impact the cost of our variable rate indebtedness or the cost or value of other financial obligations or extensions of credit held by or due to us from time to time, which could adversely affect our financial condition.
Risks Associated with Retirement Benefits. At December 31, 2020, our U.S. qualified defined benefit pension plans were approximately 76% funded as calculated in accordance with U.S. generally accepted accounting principles. Based upon current regulations and actuarial studies, we expect to make approximately $87 million in cash contributions to the U.S. qualified defined benefit pension plans in 2021, and we currently expect to have average annual funding requirements of approximately $50 million for the next few years thereafter for these plans, using a 6.78% weighted average expected rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including the performance of our pension trust assets. Depending on the timing and amount, a requirement that we fund the U.S. qualified defined benefit pension plans could have a material adverse effect on our results of operations and financial condition.
Goodwill or Long-Lived Asset Impairments. We have various long-lived assets that are subject to impairment testing. We review the recoverability of goodwill annually, or more frequently whenever significant events or changes in circumstances indicate that the recorded goodwill of a reporting unit may be below that reporting unit’s fair value. Our businesses operate in highly cyclical industries, such as commercial aerospace and oil & gas, and as such, our estimates of future cash flows, market demand, the cost of capital, and forecasted growth rates and other factors may fluctuate, which may lead to changes in estimated fair value and, therefore, impairment charges in future periods. Additionally, we have a significant amount of property, plant and equipment and acquired intangible assets that may be subject to impairment testing, depending on factors such as market conditions, the demand for our products, and facility utilization levels. Any determination requiring the impairment of a significant portion of goodwill or other long-lived assets has had, and may in the future have, a negative impact on our financial condition and results of operations. In connection with our recent announcements regarding our plans to cease production of certain standard stainless sheet products, our 2020 results include $1,041.5 million of long-lived asset non-cash impairment charges, primarily related to our HRPF and certain stainless steel melting and finishing operations that are part of the AA&S segment’s Brackenridge, Pennsylvania operations. We also recognized an interim goodwill impairment charge of $287.0 million in the second quarter of 2020 for the partial impairment of goodwill at our Forged Products reporting unit in the HPMC segment based on changes in the timing and amount of expected cash flows resulting from lower projected revenues, including recent disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic, and the increasing uncertainty of near-term demand requirements of aero-engine and airframe markets based on government responses to the pandemic and ongoing interactions with customers.
Internal Controls Over Financial Reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles, and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal domestic facilities for our HPMC segment include melting operations and production facilities that perform processing and finishing operations. Domestic melting operations are located in Monroe and Bakers, NC, and Lockport, NY (vacuum induction melting, vacuum arc re-melt, electro-slag re-melt, plasma melting). Production of high performance materials, most of which are in long product form, takes place at our domestic facilities in Monroe and Bakers, NC, Lockport, NY, Richburg, SC, and Oakdale, PA. Our production of highly engineered forgings and machined components takes place at facilities in Cudahy and Coon Valley, WI, East Hartford, CT, Irvine, CA, and Billerica, MA. Metal alloy-based additive manufacturing for the aerospace & defense industries takes place in New Britain, CT.
Within the AA&S segment, our production of zirconium and related specialty alloys takes place at facilities located in Millersburg, OR and Huntsville, AL. Titanium melting operation are located in Richland, WA (electron beam melting), and Albany, OR (vacuum arc re-melt). Our principal AA&S locations for melting stainless steel and other flat-rolled specialty materials are located in Brackenridge and Latrobe, PA. Hot-rolling is performed at our domestic facilities in Brackenridge and Washington, PA. Finishing of our flat-rolled products takes place at our domestic facilities located in Vandergrift, Washington, Rochester, Monaca, and Zelienople, PA, and in New Bedford, MA, Louisville, OH, and Bridgeview, IL. Substantially all of our properties are owned.
We also own or lease facilities in a number of foreign countries, including France, Germany, the United Kingdom, Poland, and the People’s Republic of China. We own and/or lease and operate facilities for melting and re-melting, machining and bar mill operations, and have laboratories and offices in Sheffield, England. We own highly engineered forging and machining operations in Stalowa Wola, Poland. Through our STAL joint venture, we operate facilities for finishing PRS products in the Xin-Zhuang Industrial Zone, Shanghai, China.
Our executive offices, located in PPG Place in Pittsburgh, PA, are leased.
Although our facilities vary in terms of age and condition, we believe that they have been well maintained and are in sufficient condition for us to carry on our activities. In 2020, various facilities experienced short-term outages in order to match demand patterns impacted by the COVID-19 pandemic. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these impacts.
Item 3. Legal Proceedings
From time-to-time, we become involved in various lawsuits, claims and proceedings relating to the conduct of our current and formerly owned businesses, including those pertaining to product liability, environmental, health and safety matters and occupational disease (including as each relates to alleged asbestos exposure), as well as patent infringement, commercial, government contracting, construction, employment, employee and retiree benefits, taxes, environmental, and stockholder and corporate governance matters. While we cannot predict the outcome of any lawsuit, claim or proceeding, our management believes that the disposition of any pending matters is not likely to have a material adverse effect on our financial condition or liquidity. The resolution in any reporting period of one or more of these matters, including those described above, however, could have a material adverse effect on our results of operations for that period.
Information relating to legal proceedings is included in Note 21. Commitments and Contingencies of the Notes to Consolidated Financial Statements and incorporated herein by reference.
Allegheny Technologies Incorporated and its subsidiary, ATI Titanium LLC (“ATI Titanium”), are parties to a lawsuit captioned US Magnesium, LLC v. ATI Titanium LLC (Case No. 2:17-cv-00923-DB) and filed in federal district court in Salt Lake City, UT, pertaining to a Supply and Operating Agreement between US Magnesium LLC (“USM”) and ATI Titanium
entered into in 2006 (the “Supply Agreement”). In 2016, ATI Titanium notified USM that it would suspend performance under the Supply Agreement in reliance on certain terms and conditions included in the Supply Agreement. USM subsequently filed a claim challenging ATI Titanium’s right to suspend performance under the Supply Agreement, claiming that such suspension was a material breach of the Supply Agreement and seeking monetary damages, and ATI Titanium filed a counterclaim for breach of contract against USM. In 2018, USM obtained leave of the court to add Allegheny Technologies Incorporated as a separate party defendant, and ATI Titanium filed a motion to dismiss the claim against Allegheny Technologies Incorporated, which the court denied on April 19, 2019. No trial date has been set by the court given the restrictions of the pandemic. While ATI intends to vigorously defend against and pursue these claims, it cannot predict their outcomes at this time.
Item 4. Mine Safety Disclosures
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock is traded on the New York Stock Exchange (symbol ATI). At February 5, 2021, there were 2,562 record holders of Allegheny Technologies Incorporated common stock. We paid no cash dividends during 2020, 2019, 2018 or 2017. Effective with the fourth quarter of 2016, our Board of Directors decided to suspend the quarterly dividend. The payment of dividends and the amount of such dividends depends upon matters deemed relevant by our Board of Directors, such as our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by law, credit agreements or senior securities, and other factors deemed relevant and appropriate. Our Asset Based Lending (ABL) Credit Facility restricts our ability to pay dividends in certain circumstances. For more information on the restrictions under our ABL facility, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity - Dividends.”
Cumulative Total Stockholder Return
The graph set forth below shows the cumulative total stockholder return (i.e., price change plus reinvestment of dividends) on our common stock from December 31, 2015 through December 31, 2020, as compared to the S&P 500 Index, the S&P MidCap 400 Industrials Index and the Russell 2000 Index. The graph assumes that $100 was invested on December 31, 2015. The stock performance information included in this graph is based on historical results and is not necessarily indicative of future stock price performance.
|Company / Index||Dec 2015||Dec 2016||Dec 2017||Dec 2018||Dec 2019||Dec 2020|
|S&P 500 Index||100.00||111.96||136.40||130.42||171.49||203.04|
|S&P MidCap 400 Industrials Index||100.00||128.73||159.04||135.36||180.77||210.58|
|Russell 2000 Index||100.00||121.31||139.08||123.76||155.35||186.36|
|Source: Standard & Poor’s|
Item 6. Selected Financial Data
|For the Years Ended December 31,||2020||2019||2018||2017||2016|
|Revenue by Market:|
|Aerospace & Defense||$||1,360.0 ||$||2,130.4 ||$||1,965.5 ||$||1,718.1 ||$||1,590.4 |
|Energy*||618.9 ||796.9 ||780.7 ||610.4 ||513.4 |
|Automotive||263.2 ||296.6 ||323.4 ||273.7 ||232.8 |
|Electronics||177.7 ||163.2 ||156.9 ||151.6 ||109.7 |
|Food Equipment & Appliances||159.2 ||205.8 ||244.9 ||226.0 ||172.2 |
|Construction/Mining||142.0 ||195.0 ||226.0 ||192.9 ||160.6 |
|Medical||119.1 ||172.4 ||183.1 ||183.0 ||195.8 |
|Other||142.0 ||162.2 ||166.1 ||169.4 ||159.7 |
|Total||$||2,982.1 ||$||4,122.5 ||$||4,046.6 ||$||3,525.1 ||$||3,134.6 |
*Includes the oil & gas, downstream processing, and specialty energy markets.
|(In millions, except per share amounts)|
|For the Years Ended December 31,||2020||2019||2018||2017||2016|
|Results of Operations:|
|High Performance Materials & Components||$||1,164.6 ||$||1,978.5 ||$||1,963.1 ||$||1,704.8 ||$||1,547.8 |
|Advanced Alloys & Solutions||1,817.5 ||2,144.0 ||2,083.5 ||1,820.3 ||1,586.8 |
|Total Sales||$||2,982.1 ||$||4,122.5 ||$||4,046.6 ||$||3,525.1 ||$||3,134.6 |
|High Performance Materials & Components||$||129.6 ||$||356.2 ||$||360.3 ||$||282.7 ||$||221.0 |
|Advanced Alloys & Solutions||115.0 ||172.6 ||206.4 ||155.6 ||(48.1)|
|Total segment EBITDA||$||244.6 ||$||528.8 ||$||566.7 ||$||438.3 ||$||172.9 |
|Income (loss) before income taxes||$||(1,481.9)||$||241.6 ||$||247.7 ||$||(86.5)||$||(734.0)|
|Income tax provision (benefit)||77.7 ||(28.5)||11.0 ||(6.8)||(106.9)|
|Net income (loss)||(1,559.6)||270.1 ||236.7 ||(79.7)||(627.1)|
|Less: Net income attributable to noncontrolling interests||13.0 ||12.5 ||14.3 ||12.2 ||13.8 |
|Net income (loss) attributable to ATI||$||(1,572.6)||$||257.6 ||$||222.4 ||$||(91.9)||$||(640.9)|
|Basic net income (loss) attributable to ATI per common share||$||(12.43)||$||2.05 ||$||1.78 ||$||(0.83)||$||(5.97)|
|Diluted net income (loss) attributable to ATI per common share||$||(12.43)||$||1.85 ||$||1.61 ||$||(0.83)||$||(5.97)|
|(In millions, except per share amounts)|| || || || |
|As of and for the Years Ended December 31,||2020||2019||2018||2017||2016|
|Working capital||$||1,412.7 ||$||1,453.8 ||$||1,409.8 ||$||1,203.1 ||$||1,057.8 |
|Total assets ||4,034.9 ||5,634.6 ||5,501.8 ||5,185.4 ||5,170.0 |
|Long-term debt ||1,550.0 ||1,387.4 ||1,535.5 ||1,530.6 ||1,771.9 |
|Total debt ||1,567.8 ||1,398.9 ||1,542.1 ||1,540.7 ||1,877.0 |
|Cash and cash equivalents||645.9 ||490.8 ||382.0 ||141.6 ||229.6 |
|Total ATI Stockholders’ equity||521.1 ||2,090.1 ||1,885.7 ||1,739.4 ||1,355.2 |
|Noncontrolling interests||120.3 ||103.1 ||105.9 ||105.1 ||89.6 |
|Total Stockholders’ equity||641.4 ||2,193.2 ||1,991.6 ||1,844.5 ||1,444.8 |
|Dividends declared per common share||$||— ||$||— ||$||— ||$||— ||$||0.24 |
The information presented in Selected Financial Data should be read in conjunction with the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8. Financial Statements and Supplementary Data.
Results of operations include the following items for the years indicated:
2020: Pre-tax results include $1,132.1 million of restructuring and other charges, consisting primarily of $1,041.5 million of long-lived asset impairment charges predominantly related to our Brackenridge, PA operations, including the HRPF, $287.0 million for impairment of a portion of goodwill at our Forged Products operations, and $21.5 million for debt extinguishment on $203.2 million, or 71%, of the principal balance of the outstanding 4.75% Convertible Senior Notes due 2022 (2022 Convertible Notes). 2020 results also include a $77.7 million income tax provision primarily for valuation allowances on U.S. federal and state deferred tax assets.
2019: Results include a $91.7 million pre-tax gain on the sale of oil and gas rights in New Mexico, an $8.1 million pre-tax loss on the sale of two non-core forging facilities, a $6.2 million pre-tax gain on the sale of the Cast Products business, a $4.5 million pre-tax restructuring charge to streamline ATI’s salaried workforce, a $21.6 million pre-tax debt extinguishment charge for the full redemption of the $500 million, 5.95% Senior Notes due 2021 (2021 Notes), and an $11.4 million pre-tax joint venture impairment charge related to the A&T Stainless joint venture. 2019 results also include a $41.9 million net discrete tax benefit primarily related to the reversal of a substantial portion of our deferred tax valuation allowances.
2018: Results include a $15.9 million pre-tax gain on the sale of a 50% noncontrolling interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018.
2017: Results include a $114.4 million pre-tax goodwill impairment charge, a $37.0 million pre-tax debt extinguishment charge for the full redemption of the $350.0 million, 9.375% Senior Notes due 2019 (2019 Notes), and $4.1 million of tax benefits from the 2017 Tax Cuts and Jobs Act legislation.
2016: Results include $538.5 million of pre-tax restructuring and other charges, primarily related to the indefinite idling of the Rowley, UT titanium sponge production facility. 2016 results also include $171.5 million in deferred tax valuation allowances which reduced the income tax benefit.
Total debt in 2020 reflects the issuance of $291.4 million of 3.5% Convertible Senior Notes due 2025 (2025 Convertible Notes), a portion of the proceeds of which were used to repurchase $203.2 million aggregate principal amount of the outstanding 2022 Convertible Notes, and an additional $100 million under the term loan portion of the ABL, which has a September 2024 maturity date. A portion of the 2025 Convertible Notes is required to be separately accounted for as a component of stockholders’ equity as a result of the flexible settlement feature of these notes (See Note 12 in Item 8. “Financial Statements and Supplementary Data” for further explanation). Total debt in 2019 reflects the issuance of $350 million of 5.875% Senior Notes due 2027, the proceeds of which were used, along with cash on hand, to redeem the $500 million 2021 Notes. Total debt in 2017 reflects the redemption of all $350 million aggregate principal amount of our 9.375% Senior Notes due 2019 (2019 Notes). In 2016, we issued $287.5 million of 2022 Convertible Notes, and added a $100 million term loan to our asset-based lending facility. A portion of the convertible note proceeds were used to make $250 million in contributions to the U.S. qualified defined benefit pension plan in 2016 and 2017.
Total ATI stockholders’ equity in 2020 significantly declined as a result of the net loss attributable to ATI in 2020 largely due to the goodwill and long-lived asset impairment charges discussed above. Total ATI stockholders’ equity in 2018 includes a $15.5 million increase to retained earnings for the cumulative effect of adoption of ASC 606, Revenue from Contracts with Customers (see Note 5 in Item 8. “Financial Statements and Supplementary Data” for further explanation). Total ATI stockholders’ equity in 2017 increased due to our issuance of 17 million shares of common stock at $24.00 per share before expenses in an underwritten registered public offering. This offering resulted in proceeds of $397.8 million, net of transaction costs, which were used to redeem all of ATI’s outstanding 2019 Notes. Stockholders’ equity changes include net decreases of $128.4 million, $139.8 million, $141.4 million, $42.7 million, and $60.6 million for 2020, 2019, 2018, 2017, and 2016, respectively, related to remeasurements of ATI’s retirement benefit obligations. In addition, ATI stockholders’ equity for 2020, 2019, 2018, 2017 and 2016 included a $8.8 million decrease, a $7.8 million increase, a $20.5 million decrease, a $16.8 million increase and a $45.6 million decrease, respectively, from income tax valuation allowances on amounts recorded in other comprehensive income.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results or performance could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those described below. Net income and net income per share amounts referenced below are attributable to Allegheny Technologies Incorporated and Subsidiaries.
ATI is a global manufacturer of technically advanced specialty materials and complex components. Our largest markets are aerospace & defense, representing approximately 50% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, downstream processing, and specialty energy. In aggregate, these markets represent about 70% of our revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique process technologies, including our new product development competence.
Effective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). All segment reporting information for 2020 and prior periods below reflect these two revised business segments. In addition, in the fourth quarter 2020, the Company changed its segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of segment EBITDA is defined further below. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment level.
HPMC is comprised of the Specialty Materials and Forged Products businesses, as well as our ATI Europe distribution operations. The revised HPMC segment intensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace & defense markets and nearly half of its revenue from products for commercial jet engines. Commercial aerospace products have been the main source of sales and EBITDA growth for HPMC over the last few years, and are expected to continue to drive HPMC and overall ATI results for the next several years as demand from these markets recovers from reduced 2020 levels resulting from the COVID-19 pandemic. Other major HPMC end markets include medical and energy. HPMC produces a wide range of high performance materials, and components, and advanced metallic powder alloys made from nickel-based alloys and superalloys, titanium and titanium-based alloys, and a variety of other specialty materials. Capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and 3D-printed aerospace products.
The new AA&S segment combines our Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, the 60%-owned STAL joint venture, and the Uniti and A&T Stainless 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other important end markets for AA&S include automotive and electronics. AA&S produces nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless products in a variety of forms including plate, sheet, and strip products. On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase our focus on higher-margin products and our aerospace & defense end markets.
Overview of 2020 Financial Performance
Sales in 2020 decreased 28%, to $2.98 billion, and gross profit decreased 54%, to $293 million, compared to 2019, reflecting weakened market conditions resulting from the COVID-19 pandemic. Loss before taxes in 2020 included $1.1 billion of restructuring and other charges, $287 million of goodwill impairment charges, and $22 million in debt extinguishment charges. Results in 2020 also reflect a $78 million income tax provision primarily for valuation allowances on U.S. federal and state net deferred tax assets. The Company’s net loss in 2020 was $1.57 billion, or ($12.43) per share. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, compared to $439.4 million, or 10.7% of sales, for 2019. See the Financial Condition and Liquidity section of Management’s Discussion and Analysis for these non-GAAP definitions and calculations. Despite these weak market conditions, the Company maintained strong liquidity in 2020, ending the year with $646 million in cash and $950 million of total liquidity.
Revenues in our largest end markets, aerospace & defense, decreased $771 million, or 36%, over 2019, and represented 46% of our 2020 sales. International sales, including both U.S. exports and foreign sales from our foreign manufacturing operations, were $1.17 billion in 2020 and represented 39% of total sales.
A summary of our results is as follows.
|(Dollars in millions, except per share amounts)||2020||2019||2018|
|Sales||$||2,982.1 ||$||4,122.5 ||$||4,046.6 |
|Gross profit||$||292.8 ||$||637.8 ||$||630.3 |
|Gross profit % of sales||9.8 ||%||15.5 ||%||15.6 ||%|
|Income (loss) before income taxes||$||(1,481.9)||$||241.6 ||$||247.7 |
|Net income (loss)||$||(1,572.6)||$||257.6 ||$||222.4 |
|Diluted net income (loss) per common share||$||(12.43)||$||1.85 ||$||1.61 |
Our major accomplishments during 2020 include the following:
•We took decisive steps toward becoming a more profitable, aerospace & defense focused company. On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus on increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge PRS. As part of this strategic realignment, we intend to cease production of our low-margin standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the HRPF, and close various downstream finishing operations that were part of the standard stainless flow path. In connection with these changes, we plan to cease production activities at five locations by year-end 2021. We expect our AA&S segment revenues to decrease by approximately $450 million, compared to a 2019 baseline, once these strategic actions to exit standard stainless products are completed.
•These AA&S strategic actions resulted in $1,041.5 million of pre-tax, non-cash long-lived asset charges, primarily related to the Brackenridge operations, which do not impact the operating capabilities of the HRPF. Restructuring and other charges in 2020 across all ATI operations also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and medical benefits, and $17.4 million for pension and postretirement medical obligations for workforce right-sizing actions taken to date, and to be completed with the repositioning of the FRP business into a specialty rolled products portfolio.
•We expect annual cost savings from these 2020 charges to be approximately $90 million in 2021 and $100 million when fully implemented in 2023, with approximately 55% realized in cost of sales, with the remainder in selling, general and administrative expenses. Including these and other cost reduction actions taken in response to the rapid decline in demand experienced in 2020, we estimate our total structural cost reductions will be nearly $150 million annually.
•We generated $167 million in cash from operating activities in 2020, including a $157 million reduction in managed working capital. This strong operating cash flow result in an unprofitable year was accomplished even with $130 million in contributions to ATI’s U.S. defined benefit pension trust. As a result of our constant focus on our financial condition in a year of significant economic uncertainty, we ended the year with $646 million of cash on hand and $950 million of liquidity.
•In 2020, ATI issued $291 million aggregate principal amount of the 2025 Convertible Notes, and used the majority of the proceeds to repurchase approximately $203 million aggregate principal amount of the outstanding principal balance of our 2022 Convertible Notes. With those actions, we extended our debt maturity profile and now have no significant debt maturities before mid-2023.
•We made further progress on our risk management strategy for retirement benefit obligations by completing an $86 million risk transfer through the purchase of an annuity contract with a nationally recognized insurance company. This annuity buyout removed 8% of plan participants, bringing the total pension participant reduction to more than 55% over the past eight years. In addition, we continued to reduce our net pension liability, which declined by nearly $60 million from year-end 2019, with strong asset performance and company contributions in 2020 offsetting declines in interest rates that increased the pension benefit obligation.
Results of Operations
2020 Compared to 2019
Results for 2020 were sales of $2.98 billion and loss before tax of $1,481.9 million, compared to sales of $4.12 billion and income before tax of $241.6 million in 2019. Results in 2019 included $95 million of sales and minimal segment operating profit related to the divested titanium investment castings and industrial forgings businesses. Our gross profit was $292.8
million, or 9.8% of sales, a $345.0 million decline compared to 2019, reflecting COVID-19 impacts. The 2020 results included $1,443.0 million of pretax charges, all of which are excluded from segment EBITDA and consisted of the following:
•$1,132.1 million of restructuring and other charges,
•$287.0 million for impairment of a portion of goodwill at our Forged Products operations,
•$21.5 million for debt extinguishment on $203.2 million, or 71%, of the principal balance of the outstanding 2022 Convertible Notes, and
•$2.4 million of severance charges at our A&T Stainless joint venture.
The 2020 restructuring and other charges of $1,132.1 million predominantly related to the Company’s December 2020 announcement to cease production of standard stainless sheet products. These restructuring and other charges consisted of the following:
•$1,107.5 million of restructuring charges recorded on the consolidated statement of operations. These restructuring charges consist of $1,041.5 of non-cash long-lived asset impairment charges, $60.5 million of employee benefit costs for hourly and salary employees, and $5.5 million of other costs related to facility idlings.
•$17.4 million of termination benefits for pension and postretirement medical obligations related to facility closures from the standard stainless exit. These costs are classified within nonoperating retirement benefit expense in the consolidated statements of operations.
•$7.2 million of other charges for inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, primarily related to the Albany, OR idled facility.
The 2019 results included the following pretax charges, all of which are excluded from segment EBITDA:
•$4.5 million restructuring charge for severance obligations to streamline ATI’s salaried workforce, primarily to improve the cost competitiveness of the U.S.-based FRP business.
•$21.6 million for debt extinguishment on the $500 million 5.95% Senior Notes due 2021 (2021 Notes).
•$11.4 million impairment charge for our A&T Stainless joint venture.
The goodwill impairment, restructuring charges and charges for inventory valuation reserves above are included in operating income (loss) on the consolidated statements of operations, which was an operating loss of $1,302.7 million for 2020, compared to operating income of $366.1 million for 2019.
Nonoperating items included a reduction in nonoperating retirement benefit expense of $11.5 million in 2020, compared to the prior year period, despite the $17.4 million in termination benefits related to facility closures discussed above. Other (nonoperating) income/expense for 2020 included $7.0 million of net losses from operating results of joint ventures accounted for under the equity method and $2.4 million of severance charges for our A&T Stainless joint venture. Other (nonoperating) income/expense for 2019 included $89.8 million in net gains from non-core asset sales, consisting of a $91.7 million gain to monetize oil and gas rights and a $6.2 million gain on the sale of the Company’s Cast Products business, partially offset by an $8.1 million loss on the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY. Results for 2019 also include an $11.4 million A&T Stainless joint venture impairment charge and $10.7 million of net losses from operating results of joint ventures accounted for under the equity method. Equity method joint venture operating results are included in the results of the AA&S segment.
Results for 2020 include a $77.7 million income tax charge primarily related to deferred tax asset valuation allowances on our U.S. federal and state tax attributes, due to re-entering a three-year cumulative loss position for our U.S. results during the year. Results in 2019 included a $28.5 million income tax benefit, as we determined as of December 31, 2019 that we were no longer in a three year cumulative loss position and a substantial portion of our income tax valuation allowances were no longer required, resulting in a $45.1 million discrete tax benefit. Net loss attributable to ATI was $1,572.6 million, or ($12.43) per share, in 2020, compared to net income attributable to ATI of $257.6 million, or $1.85 per share, for 2019. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, and $439.4 million, or 10.7% of sales, for 2019.
Results for 2020 reflect the continued weakened market conditions resulting from the COVID-19 pandemic. We maintained our solid cash and liquidity positions during 2020, and issued $291.4 million aggregate principal amount of new, five-year convertible debt in 2020 to partially retire our 2022 Convertible Notes while lowering cash interest costs and reducing future stockholder dilution. We also exercised our option to draw another $100 million term loan within our asset based lending credit facility. These actions are further discussed in the Financial Condition and Liquidity section of Management’s Discussion and Analysis.
As discussed above, at the start of 2020, ATI realigned its business segments to streamline operations and unlock synergies, and proactively implemented workforce reduction initiatives in the fourth quarter 2019 and again in 2020 in response to changed market conditions resulting from the COVID-19 pandemic to better match our cost structure to expected demand. To date, we
have reduced company-wide employment levels by approximately 1,400 people, or about 17% of our total workforce. To help further mitigate the financial impact from reduced aerospace and consumer demand levels stemming from the COVID-19 pandemic, we implemented cost reduction efforts throughout 2020 including the temporary idling of operations to reduce costs and inventory, salary reductions for a substantial portion of our staff, reductions in 401(k) benefits for nearly all employees, furlough of non-essential positions, and significant reductions in capital expenditures and corporate expenses. Most of these cost reduction efforts are expected to continue into 2021. These actions provide a strong foundation to respond to the economic challenges created by the COVID-19 pandemic. We will continue to evaluate our demand levels and operating rates and may take additional actions as warranted.
2019 Compared to 2018
Sales were $4.12 billion in 2019, compared to $4.05 billion in 2018. Sales increased 2% in 2019 compared to 2018, despite a 2% negative impact from business divestitures. The continuing sales growth was primarily the result of increased sales to the aerospace & defense markets. Income before tax was $241.6 million in 2019, compared to $247.7 million in 2018. Net income attributable to ATI in 2019 was $257.6 million, or $1.85 per share, compared to $222.4 million, or $1.61 per share, in 2018.
Results in 2019 include a $28.5 million income tax benefit, while 2018 results reflect $11.0 million of income tax expense. Through December 31, 2019, we continued to maintain valuation allowances for U.S. federal and state deferred taxes, and results in all periods include impacts from income taxes that differ from the applicable standard tax rate, primarily related to these income tax valuation allowances. At December 31, 2019, we determined that a substantial portion of these income tax valuation allowances were no longer required, and a $45.1 million discrete tax benefit was recognized.
In 2019, we completed several strategic actions to improve future financial performance, liquidity and our financial condition. These items noted below are excluded from business segment results unless otherwise noted.
During the second quarter of 2019, we completed the sale of two non-core forging facilities in our HPMC segment for $37 million. Sales from these two forging facilities in 2018 were $86 million. We received net cash proceeds of $33.0 million on the sale of this business and recognized an $8.1 million pre-tax loss in 2019, including $10.4 million of allocated goodwill. During the third quarter of 2019, we completed the sale of our Cast Products titanium investment castings business in our HPMC segment for $127 million. Cast Products’ sales were $105 million in 2018. We received net cash proceeds of $125.1 million on the sale of this business and recognized a $6.2 million gain in 2019. Results of these businesses are included in HPMC segment results to the dates of their respective sale. See Note 8 of the Notes to Consolidated Financial Statements for further information on business divestitures.
During the second and third quarters of 2019, we recognized $91.7 million in cash gains on sales of certain oil and gas rights in Eddy County, NM. These oil and gas rights were initially acquired in 1972 along with land purchased by Teledyne, Inc., which later became part of ATI. The land was subsequently sold, with the Company retaining underlying oil and gas rights that it sold in 2019.
During the fourth quarter of 2019, a $4.5 million restructuring charge was recorded for severance obligations for the reduction of approximately 70 positions to streamline ATI’s salaried workforce, primarily to improve the cost competitiveness of the U.S.-based Flat Rolled Products business. Also during the fourth quarter of 2019, we recorded an $11.4 million impairment charge for the A&T Stainless joint venture, including ATI’s share of a long-lived asset impairment charge recognized by the joint venture on the carrying value of its production facility in Midland, PA.
In the fourth quarter of 2019, we issued $350 million of 5.875% Senior Notes due 2027 (2027 Notes). Proceeds from the 2027 Notes and cash on hand were used to redeem the $500 million 5.95% Senior Notes due 2021 (2021 Notes), which had a January 15, 2021 maturity date. A $21.6 million debt extinguishment charge was recorded as part of this action.
Results for 2019 included $67.7 million in other (non-operating) income, net on the consolidated statements of operations, which included the net loss on the sales of the Cast Products and industrial forgings businesses discussed above, gains to monetize oil and gas rights, an $11.4 million A&T Stainless joint venture impairment charge, and $10.7 million of net losses from operating results of joint ventures accounted for under the equity method. Equity method joint venture operating results are included in the results of the AA&S segment. Other (non-operating) income, net in 2018 included a $15.9 million pre-tax gain on the sale of a 50% noncontrolling interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018.
Results by Business Segment
We operated in two business segments during 2020, HPMC and AA&S, and management evaluates financial results on this basis. HPMC sales decreased in 2020 by 41%, driven by a 42% decrease in sales to the aerospace & defense markets, which comprise 81% of the sales in this segment, due to declines in demand for products to the commercial aerospace market resulting from the COVID-19 pandemic. Sales decreased 15% in 2020 in the AA&S segment, reflecting lower sales across most markets, particularly an 18% decline in sales to the aerospace & defense markets and a 20% decrease in energy market sales. HPMC sales increased in 2019 compared to 2018 by 1%, despite a 5% decline from business divestitures, driven by a 4% increase in sales to the aerospace & defense markets, which comprised 82% of the sales in this segment. Sales increased 3% in 2019 compared to 2018 in the AA&S segment, primarily due to 26% higher sales to the aerospace & defense markets, and a 13% increase in medical market sales, partially offset by declines in sales to most general industrial markets for standard stainless products. Overall, AA&S energy markets sales in 2019 were in line with 2018, with increases in sales of products for specialty energy offset by declines in sales to the oil & gas market.
Segment EBITDA was $244.6 million, or 8.2% of sales, in 2020, compared to segment EBITDA of $528.8 million, or 12.8% of sales, in 2019 and $566.7 million, or 14.0% of sales, in 2018. Our measure of segment EBITDA, which we use to analyze the performance and results of our business segments, excludes all effects of LIFO inventory accounting and any related changes in net realizable value (NRV) inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other expenses, charges for goodwill and asset impairments, restructuring and other charges, debt extinguishment charges and non-operating gains or losses. Results on our management basis of reporting were as follows (in millions):
|Fiscal Year Ended|
|December 31,||December 31,||December 31,|
|High Performance Materials & Components||$||1,164.6 ||$||1,978.5 ||$||1,963.1 |
|Advanced Alloys & Solutions||1,817.5 ||2,144.0 ||2,083.5 |
|Total external sales||$||2,982.1 ||$||4,122.5 ||$||4,046.6 |
|High Performance Materials & Components||$||129.6 ||$||356.2 ||$||360.3 |
|% of Sales||11.1 ||%||18.0 ||%||18.4 ||%|
|Advanced Alloys & Solutions||115.0 ||172.6 ||206.4 |
|% of Sales||6.3 ||%||8.1 ||%||9.9 ||%|
|Total segment EBITDA||244.6 ||528.8 ||566.7 |
|% of Sales||8.2 ||%||12.8 ||%||14.0 ||%|
|LIFO and net realizable value reserves||— ||(0.1)||(0.7)|
|Closed operations and other expenses||(7.4)||(24.0)||(19.5)|
|Total ATI Adjusted EBITDA||196.3 ||439.4 ||489.2 |
|Depreciation & amortization||(143.3)||(151.1)||(156.4)|
|Interest expense, net||(94.4)||(99.0)||(101.0)|
|Restructuring and other charges||(1,132.1)||(4.5)||— |
|Impairment of goodwill||(287.0)||— ||— |
|Joint venture restructuring and impairment charges||(2.4)||(11.4)||— |
|Gain on joint venture deconsolidation||— ||— ||15.9 |
|Debt extinguishment charge||(21.5)||(21.6)||— |
|Gains on asset sales, net||2.5 ||89.8 ||— |
|Income (loss) before income taxes||$||(1,481.9)||$||241.6 ||$||247.7 |
Comparative information for our overall revenues (in millions) by end market, including divested businesses prior to sale, and their respective percentages of total revenues is as follows:
|Aerospace & Defense:|
| Jet Engines- Commercial||$||600.9 ||20 ||%||$||1,186.4 ||29 ||%||$||1,197.6 ||30 ||%|
| Airframes- Commercial||410.8 ||14 ||%||639.2 ||16 ||%||555.9 ||14 ||%|
| Defense||348.3 ||12 ||%||304.8 ||7 ||%||212.0 ||5 ||%|
| Total Aerospace & Defense||1,360.0 ||46 ||%||2,130.4 ||52 ||%||1,965.5 ||49 ||%|
| Oil & Gas||365.7 ||12 ||%||510.7 ||12 ||%||546.2 ||13 ||%|
| Specialty Energy||253.2 ||9 ||%||286.2 ||7 ||%||234.5 ||6 ||%|
| Total Energy||618.9 ||21 ||%||796.9 ||19 ||%||780.7 ||19 ||%|
|Automotive||263.2 ||9 ||%||296.6 ||7 ||%||323.4 ||8 ||%|
|Electronics||177.7 ||6 ||%||163.2 ||4 ||%||156.9 ||4 ||%|
|Food Equipment & Appliances||159.2 ||5 ||%||205.8 ||5 ||%||244.9 ||6 ||%|
|Construction/Mining||142.0 ||5 ||%||195.0 ||5 ||%||226.0 ||6 ||%|
|Medical||119.1 ||4 ||%||172.4 ||4 ||%||183.1 ||4 ||%|
|Other||142.0 ||4 ||%||162.2 ||4 ||%||166.1 ||4 ||%|
|Total||$||2,982.1 ||100 ||%||$||4,122.5 ||100 ||%||$||4,046.6 ||100 ||%|
Comparative information for our major high-value and standard products, including divested businesses prior to sale, based on their percentages of revenues is as follows. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items in the AA&S segment as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales in the AA&S segment are excluded from this presentation.
|For the Years Ended December 31,||2020||2019||2018|
|Nickel-based alloys and specialty alloys||33 ||%||35 ||%||33 ||%|
|Titanium and titanium-based alloys||17 ||%||18 ||%||17 ||%|
|PRS products||15 ||%||12 ||%||12 ||%|
|Precision forgings, castings and components ||14 ||%||18 ||%||20 ||%|
|Zirconium and related alloys||9 ||%||6 ||%||5 ||%|
|Total High-Value Products||88 ||%||89 ||%||87 ||%|
|Total Standard Products||12 ||%||11 ||%||13 ||%|
|Grand Total||100 ||%||100 ||%||100 ||%|
Sales by geographic area (in millions), including divested businesses prior to sale, and as a percentage of total sales, were as follows:
|For the Years Ended December 31,||2020||2019||2018|
|United States||$||1,809.1 ||61 ||%||$||2,454.6 ||58 ||%||$||2,348.1 ||58 ||%|
|Europe||479.3 ||16 ||%||800.0 ||22 ||%||877.2 ||22 ||%|
|Asia||516.6 ||17 ||%||638.1 ||15 ||%||602.1 ||15 ||%|
|Canada||68.9 ||2 ||%||106.3 ||2 ||%||106.5 ||2 ||%|
|Other||108.2 ||4 ||%||123.5 ||3 ||%||112.7 ||3 ||%|
|Total sales||$||2,982.1 ||100 ||%||$||4,122.5 ||100 ||%||$||4,046.6 ||100 ||%|
Information with respect to our business segments follows.
High Performance Materials & Components
|(In millions)||2020||% Change||2019||% Change||2018|
|Sales to external customers||$||1,164.6 ||(41)||%||$||1,978.5 ||1 ||%||$||1,963.1 |
|Segment EBITDA||$||129.6 ||(64)||%||$||356.2 ||(1)||%||$||360.3 |
|Segment EBITDA as a percentage of sales||11.1 ||%||18.0 ||%||18.4 ||%|
|International sales as a percentage of sales||45.0 ||%||47.3 ||%||49.9 ||%|
2020 Compared to 2019
Sales for the HPMC segment in 2020 decreased 41%, to $1.16 billion, with declines across most major markets. Sales to the aerospace & defense markets, which were 81% of 2020 HPMC sales, were 42% lower, reflecting a 48% decrease in sales to the commercial aerospace market, partially offset by a 24% increase in government defense sales. Sales of next generation jet engine products represented 41% of total 2020 HPMC jet engine product sales, a reduction in this sales mix by 13% compared to 2019 levels. Sales in the medical and energy markets were 44% and 31% lower, respectively. Results in 2019 included $95 million of sales related to the divested titanium investment castings and industrial forgings businesses, resulting in a 3% unfavorable impact from divestitures.
Comparative information for our HPMC segment revenues (in millions) by market, including divested businesses prior to sale, the respective percentages of overall segment revenues for the years ended 2020 and 2019, and the percentage change in revenues by market for 2020 is as follows: