Derivative Financial Instruments and Hedging

6 Months Ended

Jun. 30, 2012

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging

Note 5. Derivative Financial Instruments and Hedging

As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged, and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized on the statement of income.

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

The majority of ATI's products are sold utilizing raw material surcharges and index mechanisms. However, as of June 30, 2012, the Company had entered into financial hedging arrangements primarily at the request of its customers, related to firm orders, representing approximately 13% of its annual nickel requirements. These nickel hedges extend to 2016.

At June 30, 2012, the outstanding financial derivatives used to hedge the Company's exposure to energy cost volatility included natural gas cost hedges for approximately 75% of itsannual forecasted domestic requirements for 2012,approximately 50% for 2013, and approximately 30% for 2014, and electricity hedges for Western Pennsylvania operations of approximately 30% of its forecasted on-peak and off-peak requirements for 2012and approximately 10% for 2014.

While the majority of the Company's direct export sales are transacted in U.S. dollars, foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The Company sometimes purchases foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk. The Company may also enter into foreign currency forward contracts that are not designated as hedges, which are denominated in the same foreign currency in which export sales are denominated. At June 30, 2012, the outstanding financial derivatives, including both hedges and undesignated derivatives, that are used to manage the Company's exposure to foreign currency, primarily euros, represented approximately 10% ofits forecasted total international sales through 2014. In addition, the Company may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions.

The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. There were no unsettled derivative financial instruments related to debt balances for the periods presented.

The fair values of the Company's derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs derived principally from or corroborated by observable market data.

(in millions):		June 30,		December 31,
Asset derivatives	Balance sheet location	2012		2011
Derivatives designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets	$	11.6	$	9.5
Nickel and other raw material contracts	Prepaid expenses and other current assets		-		0.7
Natural gas contracts	Prepaid expenses and other current assets		0.2		-
Foreign exchange contracts	Other assets		8.1		5.9
Nickel and other raw material contracts	Other assets		0.1		1.1
Natural gas contracts	Other assets		0.3		-
Total derivatives designated as hedging instruments:			20.3		17.2
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expenses and other current assets		4.1		3.5
Total derivatives not designated as hedging instruments:			4.1		3.5
Total asset derivatives		$	24.4	$	20.7
Liability derivatives	Balance sheet location
Derivatives designated as hedging instruments:
Natural gas contracts	Accrued liabilities	$	8.1	$	10.1
Nickel and other raw material contracts	Accrued liabilities		4.9		1.6
Foreign exchange contracts	Accrued liabilities		0.1		-
Electricity contracts	Accrued liabilities		1.6		2.0
Natural gas contracts	Other long-term liabilities		2.9		3.3
Electricity contracts	Other long-term liabilities		0.4		-
Nickel and other raw material contracts	Other long-term liabilities		1.5		0.1
Total liability derivatives		$	19.5	$	17.1

For derivative financial instruments that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period results. The Company did not use fair value or net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes.

Activity with regard to derivatives designated as cash flow hedges for the three and six month periods ended June 30, 2012 and 2011was as follows (in millions):

										Amount of Gain (Loss)
						Amount of Gain (Loss)				Recognized in Income
		Amount of Gain (Loss)				Reclassified from				on Derivatives (Ineffective
		Recognized in OCI on				Accumulated OCI				Portion and Amount
		Derivatives				into Income				Excluded from
		(Effective Portion)				(Effective Portion) (a)				Effectiveness Testing) (b)
		Three months ended				Three months ended				Three months ended
Derivatives in Cash Flow		June 30,				June 30,				June 30,
Hedging Relationships		2012		2011		2012		2011		2012		2011
Nickel and other raw		$	(3.1)	$	(3.2)	$	(0.7)	$	0.2	$	-	$	-
	material contracts
Natural gas contracts			1.2		(0.6)		(2.4)		(2.7)		-		-
Electricity contracts			(0.1)		0.1		(0.4)		-		-		-
Foreign exchange contracts			11.8		(3.7)		3.2		(1.6)		-		-
Total		$	9.8	$	(7.4)	$	(0.3)	$	(4.1)	$	-	$	-

										Amount of Gain (Loss)
						Amount of Gain (Loss)				Recognized in Income
		Amount of Gain (Loss)				Reclassified from				on Derivatives (Ineffective
		Recognized in OCI on				Accumulated OCI				Portion and Amount
		Derivatives				into Income				Excluded from
		(Effective Portion)				(Effective Portion) (a)				Effectiveness Testing) (b)
		Six Months Ended				Six Months Ended				Six Months Ended
Derivatives in Cash Flow		June 30,				June 30,				June 30,
Hedging Relationships		2012		2011		2012		2011		2012		2011
Nickel and other raw		$	(4.7)	$	(3.0)	$	(0.8)	$	2.0	$	-	$	-
	material contracts
Natural gas contracts			(3.3)		(1.4)		(5.0)		(6.2)		-		-
Electricity contracts			(1.1)		-		(1.1)		-		-		-
Foreign exchange contracts			7.7		(13.5)		5.1		(1.1)		-		-
Total		$	(1.4)	$	(17.9)	$	(1.8)	$	(5.3)	$	-	$	-

• The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales.
• The gains (losses)recognized in income on derivatives related to the ineffective portion and the amount excluded from effectiveness testing are presented in selling and administrative expenses.

Assuming market prices remain constant with those at June 30, 2012, a loss of $1.9 million is expected to be recognized over the next 12 months.

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

Derivatives that are not designated as hedging instruments were as follows:

In millions	Amount of Gain (Loss) Recognized
	in Income on Derivatives
		Three Months Ended				Six Months Ended
Derivatives Not Designated		June 30,				June 30,
as Hedging Instruments		2012		2011		2012		2011
Foreign exchange contracts	$	1.3	$	(3.1)	$	(0.1)	$	(3.5)

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

There are no credit risk-related contingent features in the Company's derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company's derivative contracts were substantial and creditworthy commercial banks that are recognized market makers. The Company controls its credit exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit default swap spreads of its counterparties. The Company also enters into master netting agreements with counterparties when possible.