UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware | 25-1792394 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1000 Six PPG Place Pittsburgh, Pennsylvania |
15222-5479 | |
(Address of Principal Executive Offices) | (Zip Code) |
(412) 394-2800
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At April 30, 2013, the registrant had outstanding 107,954,571 shares of its Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
Quarter Ended March 31, 2013
Allegheny Technologies Incorporated and Subsidiaries
(In millions, except share and per share amounts)
(Current period unaudited)
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 138.0 | $ | 304.6 | ||||
Accounts receivable, net of allowances for doubtful accounts of $5.3 and $5.5 as of March 31, 2013 and December 31, 2012 |
681.5 | 613.3 | ||||||
Inventories, net |
1,537.5 | 1,536.6 | ||||||
Prepaid expenses and other current assets |
89.4 | 56.1 | ||||||
|
|
|
|
|||||
Total Current Assets |
2,446.4 | 2,510.6 | ||||||
Property, plant and equipment, net |
2,597.2 | 2,559.9 | ||||||
Cost in excess of net assets acquired |
736.3 | 740.1 | ||||||
Deferred income taxes |
31.3 | 71.5 | ||||||
Other assets |
363.1 | 365.7 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 6,174.3 | $ | 6,247.8 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 479.4 | $ | 499.9 | ||||
Accrued liabilities |
280.0 | 330.5 | ||||||
Deferred income taxes |
36.6 | 24.0 | ||||||
Short term debt and current portion of long-term debt |
17.1 | 17.1 | ||||||
|
|
|
|
|||||
Total Current Liabilities |
813.1 | 871.5 | ||||||
Long-term debt |
1,462.0 | 1,463.0 | ||||||
Accrued postretirement benefits |
487.8 | 495.2 | ||||||
Pension liabilities |
713.7 | 721.1 | ||||||
Other long-term liabilities |
101.0 | 109.9 | ||||||
|
|
|
|
|||||
Total Liabilities |
3,577.6 | 3,660.7 | ||||||
|
|
|
|
|||||
Equity: |
||||||||
ATI Stockholders Equity: |
||||||||
Preferred stock, par value $0.10: authorized- 50,000,000 shares; issued-none |
| | ||||||
Common stock, par value $0.10: authorized-500,000,000 shares; issued-109,695,171 shares at March 31, 2013 and December 31, 2012; outstanding- 107,957,803 shares at March 31, 2013 and 107,398,963 shares at December 31, 2012 |
11.0 | 11.0 | ||||||
Additional paid-in capital |
1,168.5 | 1,181.7 | ||||||
Retained earnings |
2,404.9 | 2,427.6 | ||||||
Treasury stock: 1,737,368 shares at March 31, 2013 and 2,296,208 shares at December 31, 2012 |
(81.1 | ) | (111.3 | ) | ||||
Accumulated other comprehensive loss, net of tax |
(1,016.2 | ) | (1,029.4 | ) | ||||
|
|
|
|
|||||
Total ATI stockholders equity |
2,487.1 | 2,479.6 | ||||||
Noncontrolling interests |
109.6 | 107.5 | ||||||
|
|
|
|
|||||
Total Equity |
2,596.7 | 2,587.1 | ||||||
|
|
|
|
|||||
Total Liabilities and Equity |
$ | 6,174.3 | $ | 6,247.8 | ||||
|
|
|
|
The accompanying notes are an integral part of these statements.
1
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Sales |
$ | 1,179.4 | $ | 1,352.5 | ||||
Costs and expenses: |
||||||||
Cost of sales |
1,065.1 | 1,145.5 | ||||||
Selling and administrative expenses |
85.7 | 103.4 | ||||||
|
|
|
|
|||||
Income before interest, other income and income taxes |
28.6 | 103.6 | ||||||
Interest expense, net |
(14.4 | ) | (19.9 | ) | ||||
Other income, net |
1.1 | 0.4 | ||||||
|
|
|
|
|||||
Income before income tax provision |
15.3 | 84.1 | ||||||
Income tax provision |
3.7 | 25.8 | ||||||
|
|
|
|
|||||
Net income |
11.6 | 58.3 | ||||||
Less: Net income attributable to noncontrolling interests |
1.6 | 2.1 | ||||||
|
|
|
|
|||||
Net income attributable to ATI |
$ | 10.0 | $ | 56.2 | ||||
|
|
|
|
|||||
Basic net income attributable to ATI per common share |
$ | 0.09 | $ | 0.53 | ||||
|
|
|
|
|||||
Diluted net income attributable to ATI per common share |
$ | 0.09 | $ | 0.50 | ||||
|
|
|
|
|||||
Dividends declared per common share |
$ | 0.18 | $ | 0.18 | ||||
|
|
|
|
The accompanying notes are an integral part of these statements.
2
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Net income |
$ | 11.6 | $ | 58.3 | ||||
|
|
|
|
|||||
Currency translation adjustment |
||||||||
Unrealized net change arising during the period |
(13.0 | ) | 9.4 | |||||
|
|
|
|
|||||
Unrealized holding gain on securities |
||||||||
Net gain arising during the period |
0.1 | 0.1 | ||||||
|
|
|
|
|||||
Derivatives |
||||||||
Net derivatives gain (loss) on hedge transactions |
13.1 | (18.2 | ) | |||||
Reclassification to net income of net realized gain |
0.7 | 2.5 | ||||||
Income taxes on derivative transactions |
5.4 | (6.0 | ) | |||||
|
|
|
|
|||||
Total |
8.4 | (9.7 | ) | |||||
|
|
|
|
|||||
Postretirement benefit plans |
||||||||
Amortization of net actuarial loss |
33.5 | 29.9 | ||||||
Prior service cost |
||||||||
Amortization to net income of net prior service cost (credits) |
(3.8 | ) | (2.9 | ) | ||||
Income taxes on postretirement benefit plans |
11.5 | 10.3 | ||||||
|
|
|
|
|||||
Total |
18.2 | 16.7 | ||||||
|
|
|
|
|||||
Other comprehensive income, net of tax |
13.7 | 16.5 | ||||||
|
|
|
|
|||||
Comprehensive income |
25.3 | 74.8 | ||||||
|
|
|
|
|||||
Less: Comprehensive income attributable to noncontrolling interests |
2.1 | 2.7 | ||||||
|
|
|
|
|||||
Comprehensive income attributable to ATI |
$ | 23.2 | $ | 72.1 | ||||
|
|
|
|
3
Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Operating Activities: |
||||||||
Net income |
$ | 11.6 | $ | 58.3 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
48.5 | 48.0 | ||||||
Deferred taxes |
36.0 | (12.0 | ) | |||||
Changes in operating asset and liabilities: |
||||||||
Inventories |
(0.9 | ) | (127.1 | ) | ||||
Accounts receivable |
(68.2 | ) | (44.0 | ) | ||||
Accounts payable |
(20.4 | ) | 15.2 | |||||
Retirement benefits |
16.6 | 11.5 | ||||||
Accrued income taxes |
(31.9 | ) | 26.8 | |||||
Accrued liabilities and other |
(48.7 | ) | 5.1 | |||||
|
|
|
|
|||||
Cash used in operating activities |
(57.4 | ) | (18.2 | ) | ||||
|
|
|
|
|||||
Investing Activities: |
||||||||
Purchases of property, plant and equipment |
(86.9 | ) | (69.9 | ) | ||||
Asset disposals and other |
0.7 | 0.9 | ||||||
|
|
|
|
|||||
Cash used in investing activities |
(86.2 | ) | (69.0 | ) | ||||
|
|
|
|
|||||
Financing Activities: |
||||||||
Payments on long-term debt and capital leases |
(0.1 | ) | | |||||
Net repayments under credit facilities |
| (1.4 | ) | |||||
Dividends paid to shareholders |
(19.2 | ) | (19.1 | ) | ||||
Taxes on share-based compensation |
2.6 | 0.5 | ||||||
Exercises of stock options and other |
0.4 | 0.2 | ||||||
Shares repurchased for income tax withholding on share-based compensation |
(6.7 | ) | (23.3 | ) | ||||
|
|
|
|
|||||
Cash used in financing activities |
(23.0 | ) | (43.1 | ) | ||||
|
|
|
|
|||||
Decrease in cash and cash equivalents |
(166.6 | ) | (130.3 | ) | ||||
Cash and cash equivalents at beginning of period |
304.6 | 380.6 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 138.0 | $ | 250.3 | ||||
|
|
|
|
The accompanying notes are an integral part of these statements.
4
Allegheny Technologies Incorporated and Subsidiaries
Statements of Changes in Consolidated Equity
(In millions, except per share amounts)
(Unaudited)
ATI Stockholders | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||
Common | Paid-In | Retained | Treasury | Comprehensive | controlling | Total | ||||||||||||||||||||||
Stock | Capital | Earnings | Stock | Income (Loss) | Interests | Equity | ||||||||||||||||||||||
Balance, December 31, 2011 |
$ | 11.0 | $ | 1,207.1 | $ | 2,361.5 | $ | (162.7 | ) | $ | (941.6 | ) | $ | 96.3 | $ | 2,571.6 | ||||||||||||
Net income |
| | 56.2 | | | 2.1 | 58.3 | |||||||||||||||||||||
Other comprehensive income |
| | | | 15.9 | 0.6 | 16.5 | |||||||||||||||||||||
Cash dividends on common stock ($0.18 per share) |
| | (19.1 | ) | | | | (19.1 | ) | |||||||||||||||||||
Dividends declared to noncontrolling interest |
| | | | | (0.1 | ) | (0.1 | ) | |||||||||||||||||||
Employee stock plans |
| (45.7 | ) | (3.7 | ) | 36.1 | | | (13.3 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, March 31, 2012 |
$ | 11.0 | $ | 1,161.4 | $ | 2,394.9 | $ | (126.6 | ) | $ | (925.7 | ) | $ | 98.9 | $ | 2,613.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2012 |
$ | 11.0 | $ | 1,181.7 | $ | 2,427.6 | $ | (111.3 | ) | $ | (1,029.4 | ) | $ | 107.5 | $ | 2,587.1 | ||||||||||||
Net income |
| | 10.0 | | | 1.6 | 11.6 | |||||||||||||||||||||
Other comprehensive income |
| | | | 13.2 | 0.5 | 13.7 | |||||||||||||||||||||
Cash dividends on common stock ($0.18 per share) |
| | (19.2 | ) | | | | (19.2 | ) | |||||||||||||||||||
Employee stock plans |
| (13.2 | ) | (13.5 | ) | 30.2 | | | 3.5 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, March 31, 2013 |
$ | 11.0 | $ | 1,168.5 | $ | 2,404.9 | $ | (81.1 | ) | $ | (1,016.2 | ) | $ | 109.6 | $ | 2,596.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Accounting Policies
The interim consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. Unless the context requires otherwise, Allegheny Technologies, ATI and the Company refer to Allegheny Technologies Incorporated and its subsidiaries.
These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. In managements opinion, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys 2012 Annual Report on Form 10-K. The results of operations for these interim periods are not necessarily indicative of the operating results for any future period. The December 31, 2012 financial information has been derived from the Companys audited financial statements.
New Accounting Pronouncements Adopted
In January 2013, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the disclosure of offsetting assets and liabilities. These changes require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The enhanced disclosures will enable users of an entitys financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entitys financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Other than the additional disclosure requirements, the adoption of these changes had no impact on the consolidated financial statements.
In January 2013, the Company adopted changes issued by the FASB to the reporting of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other comprehensive income. Other than the additional disclosure requirements (see Note 12), the adoption of these changes had no impact on the consolidated financial statements.
Pending Accounting Pronouncements
In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. This guidance requires an entity that is joint and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. Required disclosures include a description of the nature of the arrangement, how the liability arose, the relationship with co-obligors and the terms and conditions of the arrangement. These changes become effective for the Company in fiscal year 2014. The Company does not anticipate a material impact to the consolidated financial statements upon adoption.
In March 2013, the FASB issued changes to a parent entitys accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The amendments specify that a cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. In addition, CTA should be recognized in earnings in a business combination achieved in stages (i.e., a step acquisition). These changes become effective for the Company in fiscal year 2014. The Company does not anticipate a material impact to the consolidated financial statements upon adoption.
6
Note 2. Inventories
Inventories at March 31, 2013 and December 31, 2012 were as follows (in millions):
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Raw materials and supplies |
$ | 367.6 | $ | 351.6 | ||||
Work-in-process |
1,064.8 | 1,063.9 | ||||||
Finished goods |
196.6 | 209.0 | ||||||
|
|
|
|
|||||
Total inventories at current cost |
1,629.0 | 1,624.5 | ||||||
Less allowances to reduce current cost values to LIFO basis |
(76.4 | ) | (76.9 | ) | ||||
Progress payments |
(15.1 | ) | (11.0 | ) | ||||
|
|
|
|
|||||
Total inventories, net |
$ | 1,537.5 | $ | 1,536.6 | ||||
|
|
|
|
Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market, less progress payments. Most of the Companys inventory is valued utilizing the LIFO costing methodology. Inventory of the Companys non-U.S. operations is valued using average cost or FIFO methods. The effect of using the LIFO methodology to value inventory, rather than FIFO, decreased cost of sales by $0.5 million for the first three months of 2013. The effect of using the LIFO methodology to value inventory, rather than FIFO, had no impact on cost of sales for the three months ended March 31, 2012.
Note 3. Property, Plant and Equipment
Property, plant and equipment at March 31, 2013 and December 31, 2012 was as follows (in millions):
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Land |
$ | 34.0 | $ | 34.4 | ||||
Buildings |
934.5 | 921.0 | ||||||
Equipment and leasehold improvements |
3,377.7 | 3,344.4 | ||||||
|
|
|
|
|||||
4,346.2 | 4,299.8 | |||||||
Accumulated depreciation and amortization |
(1,749.0 | ) | (1,739.9 | ) | ||||
|
|
|
|
|||||
Total property, plant and equipment, net |
$ | 2,597.2 | $ | 2,559.9 | ||||
|
|
|
|
The construction in progress portion of property, plant and equipment at March 31, 2013 was $666.3 million.
7
Note 4. Debt
Debt at March 31, 2013 and December 31, 2012 was as follows (in millions):
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Allegheny Technologies 5.95% Notes due 2021 |
$ | 500.0 | $ | 500.0 | ||||
Allegheny Technologies 4.25% Convertible Notes due 2014 |
402.5 | 402.5 | ||||||
Allegheny Technologies 9.375% Notes due 2019 |
350.0 | 350.0 | ||||||
Allegheny Ludlum 6.95% debentures due 2025 |
150.0 | 150.0 | ||||||
ATI Ladish Series B 6.14% Notes due 2016 (a) |
24.6 | 24.8 | ||||||
ATI Ladish Series C 6.41% Notes due 2015 (b) |
32.1 | 32.5 | ||||||
Domestic Bank Group $400 million unsecured credit facility |
| | ||||||
Foreign credit facilities |
13.8 | 14.2 | ||||||
Industrial revenue bonds, due through 2020, and other |
6.1 | 6.1 | ||||||
|
|
|
|
|||||
Total short-term and long-term debt |
1,479.1 | 1,480.1 | ||||||
Short-term debt and current portion of long-term debt |
17.1 | 17.1 | ||||||
|
|
|
|
|||||
Total long-term debt |
$ | 1,462.0 | $ | 1,463.0 | ||||
|
|
|
|
(a) | Includes fair value adjustments of $1.7 million at March 31, 2013 and $1.9 million at December 31, 2012. |
(b) | Includes fair value adjustments of $2.1 million at March 31, 2013 and $2.5 million at December 31, 2012. |
The Company did not borrow funds under its $400 million senior unsecured domestic credit facility during the first three months of 2013, although approximately $4 million has been utilized to support the issuance of letters of credit. This credit facility requires the Company to maintain a leverage ratio (consolidated total indebtedness net of cash on hand in excess of $50 million, divided by consolidated earnings before interest, taxes, depreciation and amortization, and non-cash pension expense) of not greater than 3.25, and maintain an interest coverage ratio (consolidated earnings before interest, taxes, and non-cash pension expense divided by interest expense) of not less than 2.0. For the three months ended March 31, 2013, the leverage ratio was 2.65, and the interest coverage ratio was 5.06.
The Company has an additional separate credit facility for the issuance of letters of credit. As of March 31, 2013, $32 million in letters of credit were outstanding under this facility.
In addition, Shanghai STAL Precision Stainless Steel Company Limited (STAL), the Companys Chinese joint venture company in which ATI has a 60% interest, has a 205 million renminbi (approximately $33 million at March 31, 2013 exchange rates) revolving credit facility with a group of banks, which expires in August 2014. This credit facility is supported solely by STALs financial capability without any guarantees from the joint venture partners. As of March 31, 2013, there were no borrowings under this credit facility.
The ATI Ladish Series B and Series C Notes are guaranteed by ATI and are equally ranked with all of ATIs existing and future senior unsecured debt.
Note 5. Derivative Financial Instruments and Hedging
As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged, and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized in the consolidated statements of 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.
8
The majority of ATIs products are sold utilizing raw material surcharges and index mechanisms. However, as of March 31, 2013, the Company had entered into financial hedging arrangements primarily at the request of its customers, related to firm orders, for an aggregate notional amount of approximately 10% of its estimated annual nickel requirements. These nickel hedges extend to 2016.
At March 31, 2013, the outstanding financial derivatives used to hedge the Companys exposure to energy cost volatility included natural gas cost hedges for approximately 70% of its annual forecasted domestic requirements for 2013, approximately 40% for 2014, and approximately 5% for 2015, and electricity hedges for Western Pennsylvania operations of approximately 10% of its forecasted on-peak and off-peak requirements for 2014.
While the majority of the Companys 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 March 31, 2013, the outstanding financial derivatives, including both hedges and undesignated derivatives, that are used to manage the Companys exposure to foreign currency, primarily euros, represented approximately 10% of its forecasted total international sales through 2015. 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.
There are no credit risk-related contingent features in the Companys 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 Companys derivative contracts are substantial and creditworthy commercial banks that are recognized market makers. The Company controls its credit exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit default swap spreads of its counterparties. The Company also enters into master netting agreements with counterparties when possible.
The fair values of the Companys derivative financial instruments are presented below, representing the gross amounts recognized which are not offset by counterparty or by type of item hedged. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs derived principally from or corroborated by observable market data.
9
(in millions): | March 31, | December 31, | ||||||||
Asset derivatives |
Balance sheet location | 2013 | 2012 | |||||||
Derivatives designated as hedging instruments: |
||||||||||
Foreign exchange contracts |
Prepaid expenses and other current assets | $ | 7.5 | $ | 2.9 | |||||
Nickel and other raw material contracts |
Prepaid expenses and other current assets | 0.1 | 0.6 | |||||||
Natural gas contracts |
Prepaid expenses and other current assets | 1.8 | 0.4 | |||||||
Foreign exchange contracts |
Other assets | 4.6 | 0.9 | |||||||
Nickel and other raw material contracts |
Other assets | 0.1 | 0.3 | |||||||
Natural gas contracts |
Other assets | 0.7 | 0.7 | |||||||
|
|
|
|
|||||||
Total derivatives designated as hedging instruments: |
14.8 | 5.8 | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign exchange contracts |
Prepaid expenses and other current assets | 0.6 | 0.4 | |||||||
|
|
|
|
|||||||
Total derivatives not designated as hedging instruments: |
0.6 | 0.4 | ||||||||
|
|
|
|
|||||||
Total asset derivatives |
$ | 15.4 | $ | 6.2 | ||||||
|
|
|
|
|||||||
Liability derivatives |
Balance sheet location | |||||||||
Derivatives designated as hedging instruments: |
||||||||||
Natural gas contracts |
Accrued liabilities | $ | 1.8 | $ | 4.4 | |||||
Nickel and other raw material contracts |
Accrued liabilities | 2.6 | 1.1 | |||||||
Foreign exchange contracts |
Accrued liabilities | | 1.7 | |||||||
Electricity contracts |
Accrued liabilities | | 0.3 | |||||||
Natural gas contracts |
Other long-term liabilities | 0.4 | 0.6 | |||||||
Electricity contracts |
Other long-term liabilities | 0.3 | 0.4 | |||||||
Foreign exchange contracts |
Other long-term liabilities | | 1.4 | |||||||
Nickel and other raw material contracts |
Other long-term liabilities | 0.4 | 0.3 | |||||||
|
|
|
|
|||||||
Total derivatives designated as hedging instruments: |
5.5 | 10.2 | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign exchange contracts |
Accrued liabilities | 0.5 | 1.6 | |||||||
|
|
|
|
|||||||
Total derivatives not designated as hedging instruments: |
0.5 | 1.6 | ||||||||
|
|
|
|
|||||||
Total liability derivatives |
$ | 6.0 | $ | 11.8 | ||||||
|
|
|
|
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.
10
Activity with regard to derivatives designated as cash flow hedges for the three month periods ended March 31, 2013 and 2012 was 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 | March 31, | March 31, | March 31, | |||||||||||||||||||||
Hedging Relationships |
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
Nickel and other raw material contracts |
$ | (1.4 | ) | $ | (1.6 | ) | $ | 0.1 | $ | (0.1 | ) | $ | | $ | | |||||||||
Natural gas contracts |
1.6 | (4.5 | ) | (1.0 | ) | (2.6 | ) | | | |||||||||||||||
Electricity contracts |
0.1 | (1.0 | ) | (0.2 | ) | (0.7 | ) | | | |||||||||||||||
Foreign exchange contracts |
7.7 | (4.1 | ) | 0.7 | 1.9 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 8.0 | $ | (11.2 | ) | $ | (0.4 | ) | $ | (1.5 | ) | $ | | $ | | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales in the same period or periods in which the hedged item affects earnings. |
(b) | The gains (losses) recognized in income on derivatives related to the ineffective portion and the amount excluded from effectiveness testing are presented in selling and administrative expenses. |
Assuming market prices remain constant with those at March 31, 2013, a gain of $3.1 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:
Amount of Gain (Loss) Recognized |
||||||||
in Income on Derivatives |
||||||||
In millions Derivatives Not Designated |
Three Months Ended March 31, |
|||||||
as Hedging Instruments |
2013 | 2012 | ||||||
Foreign exchange contracts |
$ | 0.8 | $ | (1.4 | ) | |||
|
|
|
|
Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales.
11
Note 6. Fair Value of Financial Instruments
The estimated fair value of financial instruments at March 31, 2013 was as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Total | Total | Active Markets for | Observable | |||||||||||||
Carrying | Estimated | Identical Assets | Inputs | |||||||||||||
(In millions) |
Amount | Fair Value | (Level 1) | (Level 2) | ||||||||||||
Cash and cash equivalents |
$ | 138.0 | $ | 138.0 | $ | 138.0 | $ | | ||||||||
Derivative financial instruments: |
||||||||||||||||
Assets |
15.4 | 15.4 | | 15.4 | ||||||||||||
Liabilities |
6.0 | 6.0 | | 6.0 | ||||||||||||
Debt |
1,479.1 | 1,700.7 | 1,624.2 | 76.5 |
The estimated fair value of financial instruments at December 31, 2012 was as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Total | Total | Active Markets for | Observable | |||||||||||||
Carrying | Estimated | Identical Assets | Inputs | |||||||||||||
(In millions) |
Amount | Fair Value | (Level 1) | (Level 2) | ||||||||||||
Cash and cash equivalents |
$ | 304.6 | $ | 304.6 | $ | 304.6 | $ | | ||||||||
Derivative financial instruments: |
||||||||||||||||
Assets |
6.2 | 6.2 | | 6.2 | ||||||||||||
Liabilities |
11.8 | 11.8 | | 11.8 | ||||||||||||
Debt |
1,480.1 | 1,703.2 | 1,625.6 | 77.6 |
In accordance with accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards established three levels of a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents: Fair value was determined using Level 1 information.
Derivative financial instruments: Fair values for derivatives were measured using exchange-traded prices for the hedged items. The fair value was determined using Level 2 information, including consideration of counterparty risk and the Companys credit risk.
Short-term and long-term debt: The fair values of the Companys publicly traded debt were based on Level 1 information. The fair values of the other short-term and long-term debt were determined using Level 2 information.
12
Note 7. Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans and defined contribution plans covering substantially all employees. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the U.S. pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code.
The Company also sponsors several postretirement plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution. For the non-collectively bargained plans, the Company maintains the right to amend or terminate the plans at its discretion.
For the three month periods ended March 31, 2013 and 2012, the components of pension expense and components of other postretirement benefit expense for the Companys defined benefit plans included the following (in millions):
Pension Benefits | Other Postretirement Benefits |
|||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Service costbenefits earned during the year |
$ | 10.0 | $ | 8.8 | $ | 0.8 | $ | 0.8 | ||||||||
Interest cost on benefits earned in prior years |
30.3 | 33.1 | 5.6 | 6.5 | ||||||||||||
Expected return on plan assets |
(43.8 | ) | (45.4 | ) | (0.1 | ) | (0.2 | ) | ||||||||
Amortization of prior service cost (credit) |
0.8 | 1.6 | (4.6 | ) | (4.5 | ) | ||||||||||
Amortization of net actuarial loss |
29.2 | 26.3 | 4.3 | 3.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total retirement benefit expense |
$ | 26.5 | $ | 24.4 | $ | 6.0 | $ | 6.2 | ||||||||
|
|
|
|
|
|
|
|
Note 8. Income Taxes
First quarter 2013 results included a provision for income taxes of $3.7 million, or 24.2% of income before tax, compared to $25.8 million, or 30.7% of income before tax, for the comparable prior year period. The first quarter 2013 included a discrete tax benefit of $2.0 million, primarily related to 2013 Federal tax law changes. Excluding the discrete tax benefit, the effective tax rate was 37.6%. The first quarter 2012 included a discrete tax benefit of $3.7 million primarily related to state income taxes.
13
Note 9. Business Segments
Following is certain financial information with respect to the Companys business segments for the periods indicated (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Total sales: |
||||||||
High Performance Metals |
$ | 538.3 | $ | 607.7 | ||||
Flat-Rolled Products |
562.6 | 643.2 | ||||||
Engineered Products |
113.8 | 143.8 | ||||||
|
|
|
|
|||||
1,214.7 | 1,394.7 | |||||||
Intersegment sales: |
||||||||
High Performance Metals |
19.9 | 26.4 | ||||||
Flat-Rolled Products |
4.5 | 7.2 | ||||||
Engineered Products |
10.9 | 8.6 | ||||||
|
|
|
|
|||||
35.3 | 42.2 | |||||||
Sales to external customers: |
||||||||
High Performance Metals |
518.4 | 581.3 | ||||||
Flat-Rolled Products |
558.1 | 636.0 | ||||||
Engineered Products |
102.9 | 135.2 | ||||||
|
|
|
|
|||||
$ | 1,179.4 | $ | 1,352.5 | |||||
|
|
|
|
|||||
Operating profit: |
||||||||
High Performance Metals |
$ | 75.3 | $ | 104.1 | ||||
Flat-Rolled Products |
2.4 | 46.8 | ||||||
Engineered Products |
0.6 | 12.3 | ||||||
|
|
|
|
|||||
Total operating profit |
78.3 | 163.2 | ||||||
Corporate expenses |
(12.4 | ) | (21.7 | ) | ||||
Interest expense, net |
(14.4 | ) | (19.9 | ) | ||||
Closed company and other expenses |
(3.7 | ) | (6.9 | ) | ||||
Retirement benefit expense |
(32.5 | ) | (30.6 | ) | ||||
|
|
|
|
|||||
Income before income taxes |
$ | 15.3 | $ | 84.1 | ||||
|
|
|
|
Retirement benefit expense represents defined benefit plan pension expense, and other postretirement benefit expense for both defined benefit and defined contribution plans. Operating profit with respect to the Companys business segments excludes any retirement benefit expense. Costs associated with multiemployer pension plans are included in segment operating profit, and costs associated with defined contribution pension plans are included in segment operating profit or corporate expenses, as applicable.
Corporate expenses for the three months ended March 31, 2013 were $12.4 million compared to $21.7 million for the three months ended March 31, 2012. The decrease in corporate expenses was primarily related to lower incentive compensation expenses associated with annual and long-term performance plans.
Closed company and other expenses primarily includes charges incurred in connection with closed operations and other non-operating income or expense. These items are presented primarily in selling and administrative expenses and in other expense in the statement of operations. These items resulted in net charges of $3.7 million for the three months ended March 31, 2013 and $6.9 million for the three months ended March 31, 2012. The decrease over the prior year quarter was primarily related to a decrease in environmental and legal expenses associated with closed operations.
14
Note 10. Per Share Information
The following table sets forth the computation of basic and diluted net income per common share:
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions, except per share amounts): | 2013 | 2012 | ||||||
Numerator for basic net income per common share - |
||||||||
Net income attributable to ATI |
$ | 10.0 | $ | 56.2 | ||||
Effect of dilutive securities: |
||||||||
4.25% Convertible Notes due 2014 |
| 2.3 | ||||||
|
|
|
|
|||||
Numerator for diluted net income per common share - |
||||||||
Net income available to ATI after assumed conversions |
$ | 10.0 | $ | 58.5 | ||||
|
|
|
|
|||||
Denominator for basic net income per common share-weighted average shares |
106.6 | 105.9 | ||||||
Effect of dilutive securities: |
||||||||
Share-based compensation |
0.5 | 0.9 | ||||||
4.25% Convertible Notes due 2014 |
| 9.6 | ||||||
|
|
|
|
|||||
Denominator for diluted net income per common share adjusted weighted average shares assuming conversions |
107.1 | 116.4 | ||||||
|
|
|
|
|||||
Basic net income attributable to ATI per common share |
$ | 0.09 | $ | 0.53 | ||||
|
|
|
|
|||||
Diluted net income attributable to ATI per common share |
$ | 0.09 | $ | 0.50 | ||||
|
|
|
|
Common stock that would be issuable upon the assumed conversion of the 2014 Convertible Notes and other option equivalents and contingently issuable shares are excluded from the computation of contingently issuable shares, and therefore, from the denominator for diluted earnings per share, if the effect of inclusion is anti-dilutive. Excluded shares for the three month period ended March 31, 2013 were 9.6 million shares. There were no anti-dilutive shares for the period ended March 31, 2012.
Note 11. Financial Information for Subsidiary and Guarantor Parent
The payment obligations under the $150 million 6.95% debentures due 2025 issued by Allegheny Ludlum, LLC (formerly known as Allegheny Ludlum Corporation) (the Subsidiary) are fully and unconditionally guaranteed by Allegheny Technologies Incorporated (the Guarantor Parent). In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separately financial information with respect to the Subsidiary, the non-guarantor subsidiaries and the Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. Investments in subsidiaries, which are eliminated in consolidation, are included in other assets on the consolidated balance sheets.
Allegheny Technologies is the plan sponsor for the U.S. qualified defined benefit pension plan (the Plan) which covers certain current and former employees of the Subsidiary and the non-guarantor subsidiaries. As a result, the balance sheets presented for the Subsidiary and the non-guarantor subsidiaries do not include any Plan assets or liabilities, or the related deferred taxes. The Plan assets, liabilities and related deferred taxes and pension income or expense are recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation.
Cash flows related to intercompany activity between the Guarantor Parent, the Subsidiary, and the non-guarantor subsidiaries are presented as financing activities on the condensed statements of cash flows.
15
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
March 31, 2013
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 4.3 | $ | 8.5 | $ | 125.2 | $ | | $ | 138.0 | ||||||||||
Accounts receivable, net |
0.2 | 217.5 | 463.8 | | 681.5 | |||||||||||||||
Inventories, net |
| 333.5 | 1,204.0 | | 1,537.5 | |||||||||||||||
Prepaid expenses and other current assets |
33.1 | 13.9 | 42.4 | | 89.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
37.6 | 573.4 | 1,835.4 | | 2,446.4 | |||||||||||||||
Property, plant and equipment, net |
3.7 | 946.9 | 1,646.6 | | 2,597.2 | |||||||||||||||
Cost in excess of net assets acquired |
| 112.1 | 624.2 | | 736.3 | |||||||||||||||
Deferred income taxes |
31.3 | | | | 31.3 | |||||||||||||||
Investments in subsidiaries and other assets |
5,508.3 | 205.4 | 795.3 | (6,145.9 | ) | 363.1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,580.9 | $ | 1,837.8 | $ | 4,901.5 | $ | (6,145.9 | ) | $ | 6,174.3 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and stockholders equity: |
||||||||||||||||||||
Accounts payable |
$ | 3.3 | $ | 264.5 | $ | 211.6 | $ | | $ | 479.4 | ||||||||||
Accrued liabilities |
1,026.9 | 554.2 | 314.9 | (1,616.0 | ) | 280.0 | ||||||||||||||
Deferred income taxes |
36.6 | | | | 36.6 | |||||||||||||||
Short-term debt and current portion of long-term debt |
0.3 | 0.1 | 16.7 | | 17.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
1,067.1 | 818.8 | 543.2 | (1,616.0 | ) | 813.1 | ||||||||||||||
Long-term debt |
1,253.5 | 350.5 | 58.0 | (200.0 | ) | 1,462.0 | ||||||||||||||
Accrued postretirement benefits |
| 193.6 | 294.2 | | 487.8 | |||||||||||||||
Pension liabilities |
647.2 | 5.0 | 61.5 | | 713.7 | |||||||||||||||
Other long-term liabilities |
16.4 | 18.8 | 65.8 | | 101.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
2,984.2 | 1,386.7 | 1,022.7 | (1,816.0 | ) | 3,577.6 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
2,596.7 | 451.1 | 3,878.8 | (4,329.9 | ) | 2,596.7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,580.9 | $ | 1,837.8 | $ | 4,901.5 | $ | (6,145.9 | ) | $ | 6,174.3 | |||||||||
|
|
|
|
|
|
|
|
|
|
16
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income and Comprehensive Income
For the three months ended March 31, 2013
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Sales |
$ | | $ | 477.1 | $ | 702.3 | $ | | $ | 1,179.4 | ||||||||||
Cost of sales |
17.5 | 466.7 | 580.9 | | 1,065.1 | |||||||||||||||
Selling and administrative expenses |
29.1 | 10.4 | 46.2 | | 85.7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before interest, other income and income taxes |
(46.6 | ) | | 75.2 | | 28.6 | ||||||||||||||
Interest expense, net |
(11.7 | ) | (2.6 | ) | (0.1 | ) | | (14.4 | ) | |||||||||||
Other income (loss) including equity in income of unconsolidated subsidiaries |
73.6 | (5.4 | ) | 9.2 | (76.3 | ) | 1.1 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income tax provision |
15.3 | (8.0 | ) | 84.3 | (76.3 | ) | 15.3 | |||||||||||||
Income tax provision (benefit) |
3.7 | (2.5 | ) | 29.8 | (27.3 | ) | 3.7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
11.6 | (5.5 | ) | 54.5 | (49.0 | ) | 11.6 | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
| | 1.6 | | 1.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to ATI |
$ | 11.6 | $ | (5.5 | ) | $ | 52.9 | $ | (49.0 | ) | $ | 10.0 | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) attributable to ATI |
$ | 23.2 | $ | (5.4 | ) | $ | 40.0 | $ | (34.6 | ) | $ | 23.2 | ||||||||
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
For the three months ended March 31, 2013
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash flows provided by (used in)operating activities |
$ | (25.9 | ) | $ | 20.1 | $ | (51.6 | ) | $ | | $ | (57.4 | ) | |||||||
Cash flows used in investing activities |
| (74.9 | ) | (11.3 | ) | | (86.2 | ) | ||||||||||||
Cash flows provided by (used in)financing activities |
24.6 | 50.2 | (97.8 | ) | | (23.0 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
$ | (1.3 | ) | $ | (4.6 | ) | $ | (160.7 | ) | $ | | $ | (166.6 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
17
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2012
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 5.5 | $ | 13.1 | $ | 286.0 | $ | | $ | 304.6 | ||||||||||
Accounts receivable, net |
0.4 | 190.1 | 422.8 | | 613.3 | |||||||||||||||
Inventories, net |
| 311.1 | 1,225.5 | | 1,536.6 | |||||||||||||||
Prepaid expenses and other current assets |
1.1 | 10.2 | 44.8 | | 56.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
7.0 | 524.5 | 1,979.1 | | 2,510.6 | |||||||||||||||
Property, plant and equipment, net |
3.9 | 882.2 | 1,673.8 | | 2,559.9 | |||||||||||||||
Cost in excess of net assets acquired |
| 112.1 | 628.0 | | 740.1 | |||||||||||||||
Deferred income taxes |
71.5 | | | | 71.5 | |||||||||||||||
Investments in subsidiaries and other assets |
5,595.9 | 210.3 | 657.0 | (6,097.5 | ) | 365.7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,678.3 | $ | 1,729.1 | $ | 4,937.9 | $ | (6,097.5 | ) | $ | 6,247.8 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and stockholders equity: |
||||||||||||||||||||
Accounts payable |
$ | 5.3 | $ | 262.6 | $ | 232.0 | $ | | $ | 499.9 | ||||||||||
Accrued liabilities |
1,137.4 | 419.8 | 401.1 | (1,627.8 | ) | 330.5 | ||||||||||||||
Deferred income taxes |
24.0 | | | | 24.0 | |||||||||||||||
Short-term debt and current portion of long-term debt |
0.3 | 0.1 | 16.7 | | 17.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
1,167.0 | 682.5 | 649.8 | (1,627.8 | ) | 871.5 | ||||||||||||||
Long-term debt |
1,253.4 | 350.6 | 59.1 | (200.1 | ) | 1,463.0 | ||||||||||||||
Accrued postretirement benefits |
| 198.2 | 297.0 | | 495.2 | |||||||||||||||
Pension liabilities |
651.7 | 5.1 | 64.3 | | 721.1 | |||||||||||||||
Other long-term liabilities |
19.1 | 20.8 | 70.0 | | 109.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
3,091.2 | 1,257.2 | 1,140.2 | (1,827.9 | ) | 3,660.7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
2,587.1 | 471.9 | 3,797.7 | (4,269.6 | ) | 2,587.1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,678.3 | $ | 1,729.1 | $ | 4,937.9 | $ | (6,097.5 | ) | $ | 6,247.8 | |||||||||
|
|
|
|
|
|
|
|
|
|
18
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income and Comprehensive Income
For the three months ended March 31, 2012
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Sales |
$ | | $ | 557.0 | $ | 795.5 | $ | | $ | 1,352.5 | ||||||||||
Cost of sales |
13.3 | 508.5 | 623.7 | | 1,145.5 | |||||||||||||||
Selling and administrative expenses |
43.1 | 10.5 | 49.8 | | 103.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before interest, other income and income taxes |
(56.4 | ) | 38.0 | 122.0 | | 103.6 | ||||||||||||||
Interest income (expense), net |
(17.0 | ) | (2.6 | ) | (0.3 | ) | | (19.9 | ) | |||||||||||
Other income including equity in income of unconsolidated subsidiaries |
157.5 | 1.6 | 1.5 | (160.2 | ) | 0.4 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income tax provision |
84.1 | 37.0 | 123.2 | (160.2 | ) | 84.1 | ||||||||||||||
Income tax provision |
25.8 | 14.0 | 40.8 | (54.8 | ) | 25.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
58.3 | 23.0 | 82.4 | (105.4 | ) | 58.3 | ||||||||||||||
Less: Net income attributable to noncontrolling interests |
| | 2.1 | | 2.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to ATI |
$ | 58.3 | $ | 23.0 | $ | 80.3 | $ | (105.4 | ) | $ | 56.2 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) attributable to ATI |
$ | 72.1 | $ | 22.7 | $ | 89.6 | $ | (112.3 | ) | $ | 72.1 | |||||||||
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
For the three months ended March 31, 2012
Guarantor | Non-guarantor | |||||||||||||||||||
(In millions) |
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash flows provided by (used in) operating activities |
$ | (12.5 | ) | $ | 3.1 | $ | (1.0 | ) | $ | (7.8 | ) | $ | (18.2 | ) | ||||||
Cash flows used in investing activities |
(0.1 | ) | (51.6 | ) | (17.3 | ) | | (69.0 | ) | |||||||||||
Cash flows provided by (used in)financing activities |
13.8 | 5.5 | (70.2 | ) | 7.8 | (43.1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
$ | 1.2 | $ | (43.0 | ) | $ | (88.5 | ) | $ | | $ | (130.3 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
19
Note 12. Accumulated Other Comprehensive Income (Loss)
The changes in the accumulated other comprehensive income (loss) (AOCI) by component, net of tax, for the quarter ended March 31, 2013 were as follows:
Post- | Currency | Unrealized | ||||||||||||||||||
retirement | translation | holding gains | ||||||||||||||||||
benefit plans | adjustment | on securities | Derivatives | Total | ||||||||||||||||
Attributable to ATI: |
||||||||||||||||||||
Balance, December 31, 2012 |
$ | (1,030.0 | ) | $ | 3.4 | $ | (0.1 | ) | $ | (2.7 | ) | $ | (1,029.4 | ) | ||||||
OCI before reclassifications |
| (13.5 | ) | 0.1 | 8.0 | (5.4 | ) | |||||||||||||
Amounts reclassified from AOCI |
(a) | 18.2 | (b) | | (b) | | (c) | 0.4 | 18.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period OCI |
18.2 | (13.5 | ) | 0.1 | 8.4 | 13.2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, March 31, 2013 |
$ | (1,011.8 | ) | $ | (10.1 | ) | $ | | $ | 5.7 | $ | (1,016.2 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Attributable to noncontrolling interests: |
||||||||||||||||||||
Balance, December 31, 2012 |
$ | | $ | 23.7 | $ | | $ | | $ | 23.7 | ||||||||||
OCI before reclassifications |
| 0.5 | | | 0.5 | |||||||||||||||
Amounts reclassified from AOCI |
| (b) | | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period OCI |
| 0.5 | | | 0.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, March 31, 2013 |
$ | | $ | 24.2 | $ | | $ | | $ | 24.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Amounts were included in net periodic benefit cost for pension and other postretirement benefit plans (see Note 7). |
(b) | No amounts were reclassified to earnings. |
(c) | Amounts were included in cost of goods sold in the period or periods the hedged item affects earnings (see Note 5). |
Reclassifications out of AOCI for the quarter ended March 31, 2013 were as follows:
Details about AOCI Components (in millions) |
Amount reclassified from AOCI (c) |
Affected line item in the | ||||
Postretirement benefit plans |
$ | |||||
Prior service (cost) credit |
3.8 | (a) | ||||
Actuarial losses |
(33.5 | ) (a) | ||||
|
|
|||||
(29.7 | ) (c) | Total before tax | ||||
(11.5 | ) | Tax provision (benefit) | ||||
|
|
|||||
$ | (18.2 | ) | Net of tax | |||
|
|
|||||
Derivatives |
||||||
Nickel and other raw material contracts |
$ | 0.1 | (b) | |||
Natural gas contracts |
(1.7 | ) (b) | ||||
Electricity contracts |
(0.3 | ) (b) | ||||
Foreign exchange contracts |
1.2 | (b) | ||||
|
|
|||||
(0.7 | ) (c) | Total before tax | ||||
(0.3 | ) | Tax provision (benefit) | ||||
|
|
|||||
$ | (0.4 | ) | Net of tax | |||
|
|
(a) | Amounts are included in the computation of pension and other postretirement benefit expense, which is reported in both cost of goods sold and selling and administrative expenses. For additional information, see Note 7. |
(b) | Amounts are included in cost of goods sold in the period or periods the hedged item affects earnings. For additional information, see Note 5. |
(c) | For pretax items, positive amounts are income and negative amounts are expense in terms of the impact to net income. Tax effects are presented in conformity with ATIs presentation in the consolidated statements of income. |
20
Note 13. Commitments and Contingencies
The Company is 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 it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. The Company 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 noncompliance with environmental permits required at its facilities. The Company is currently involved in the investigation and remediation of a number of its current and former sites, as well as third party sites.
Environmental liabilities are recorded when the Companys liability is probable and the costs are reasonably estimable. In many cases, however, the Company is not able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of the Companys 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 number, participation, and financial condition of other potentially responsible parties (PRPs). The Company adjusts its accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on the Companys results of operations in a given period, but the Company cannot reliably predict the amounts of such future adjustments.
At March 31, 2013, the Companys reserves for environmental remediation obligations totaled approximately $14 million, of which $7 million was included in other current liabilities. The reserve includes estimated probable future costs of $5 million for federal Superfund and comparable state-managed sites; $6 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $2 million for owned or controlled sites at which Company operations have been discontinued; and $1 million for sites utilized by the Company in its ongoing operations. The Company continues to evaluate whether it may be able to recover a portion of past and future costs for environmental liabilities from third parties and to pursue such recoveries where appropriate.
Based on currently available information, it is reasonably possible that costs for active matters may exceed the Companys recorded reserves by as much as $2 million. However, future investigation or remediation activities may result in the discovery of additional hazardous materials, potentially higher levels of contamination than discovered during prior investigation, and may impact costs of the success or lack thereof in remedial solutions. Therefore, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on the Companys financial condition or results of operations.
The timing of expenditures depends on a number of factors that vary by site. The Company expects that it will expend present accruals over many years and that remediation of all sites with which it has been identified will be completed within thirty years.
See Note 16. Commitments and Contingencies to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2012 for a discussion of legal proceedings affecting the Company.
A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, government contracting, employment, employee and retiree benefits, taxes, environmental, health and safety and occupational disease, and stockholder and corporate governance matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Companys 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 the Companys results of operations for that period.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. We use innovative technologies to offer global markets a wide range of specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium, and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, forgings, castings, and fabrication and machining capabilities. Our specialty metals are produced in a wide range of alloys and product forms and are selected for use in applications that demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. ATI is a fully integrated supplier, from alloy development, to raw materials (for titanium sponge) to melting and hot-working (for other specialty alloy systems), through highly engineered finished components.
Sales for the first quarter 2013 decreased 12.8% to $1.18 billion, compared to $1.35 billion in the first quarter 2012 as revenues were impacted by lower base prices for many of our products, falling raw material indices/ surcharges, and decreased demand from the oil and gas, jet engine aftermarket, electrical energy, and construction and mining markets. Compared to the first quarter 2012, sales decreased 11% in the High Performance Metals segment, 12% in the Flat-Rolled Products segment, and 24% in the Engineered Products segment. Compared to the fourth quarter 2012, sales increased 3% in the High Performance Metals segment, 13% in the Flat-Rolled Products segment, and 1% in the Engineered Products segment.
Demand from the global aerospace and defense, oil and gas/chemical process industry, electrical energy, and medical markets represented 68% of our sales for the first three months of 2013 and 2012. Comparative information for our overall revenues (in millions) by market and their respective percentages of total revenues for the three month periods ended March 31, 2013 and 2012 were as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
Market |
March 31, 2013 | March 31, 2012 | ||||||||||||||
Aerospace & Defense |
$ | 401.8 | 34 | % | $ | 436.5 | 32 | % | ||||||||
Oil & Gas/Chemical Process Industry |
217.8 | 18 | % | 277.4 | 21 | % | ||||||||||
Electrical Energy |
129.0 | 11 | % | 146.9 | 11 | % | ||||||||||
Medical |
59.2 | 5 | % | 57.8 | 4 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
SubtotalKey Markets |
807.8 | 68 | % | 918.6 | 68 | % | ||||||||||
Automotive |
91.6 | 8 | % | 105.9 | 8 | % | ||||||||||
Construction/Mining |
79.5 | 7 | % | 103.4 | 8 | % | ||||||||||
Food Equipment & Appliances |
65.4 | 6 | % | 55.2 | 4 | % | ||||||||||
Transportation |
51.9 | 4 | % | 54.1 | 4 | % | ||||||||||
Electronics/Computers/Communication |
36.3 | 3 | % | 45.3 | 3 | % | ||||||||||
Machine & Cutting Tools |
26.0 | 2 | % | 36.2 | 3 | % | ||||||||||
Conversion Services & Other |
20.9 | 2 | % | 33.8 | 2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,179.4 | 100 | % | $ | 1,352.5 | 100 | % |
For the first quarter 2013, direct international sales were $450.5 million and represented over 38% of total sales. Sales of our high-value products (titanium and titanium alloys, nickel-based alloys and specialty alloys, zirconium and related alloys, precision forgings and castings, grain-oriented electrical steel, precision and engineered strip, and tungsten materials) represented 78% of total sales. Comparative information for our major high-value and standard products based on their percentages of our total sales is as follows:
22
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
High-Value Products |
||||||||
Nickel-based alloys and specialty alloys |
24 | % | 27 | % | ||||
Titanium and titanium alloys |
16 | % | 13 | % | ||||
Precision forgings and castings |
12 | % | 13 | % | ||||
Precision and engineered strip |
11 | % | 11 | % | ||||
Tungsten-based materials |
7 | % | 7 | % | ||||
Zirconium and related alloys |
5 | % | 5 | % | ||||
Grain-oriented electrical steel |
3 | % | 4 | % | ||||
|
|
|
|
|||||
Total High-Value Products |
78 | % | 80 | % | ||||
Standard Products |
||||||||
Specialty stainless sheet |
9 | % | 9 | % | ||||
Stainless steel sheet |
9 | % | 7 | % | ||||
Stainless steel plate |
2 | % | 2 | % | ||||
Iron castings and other |
2 | % | 2 | % | ||||
|
|
|
|
|||||
Total Standard Products |
22 | % | 20 | % | ||||
|
|
|
|
|||||
Grand Total |
100 | % | 100 | % |
Total titanium mill product shipments for the first three months of 2013, including ATI-produced products for our Uniti titanium joint venture, were 10.3 million pounds, a 15% increase compared to the fourth quarter 2012 and a 3% increase compared to the first quarter 2012, reflecting increased demand from the commercial aerospace market in the High Performance Metals segment and ongoing shipments for certain large projects, primarily affecting our Flat-Rolled Products business segment.
Segment operating profit for the first quarter 2013 was $78.3 million, or 6.6% of sales, compared to $163.2 million, or 12.1% of sales for the first quarter 2012. Higher inventory costs resulting from higher unit conversion costs due to lower operating rates in the fourth quarter 2012, combined with the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices/surcharges, reduced operating profit, especially in the High Performance Metals segment. Segment operating profit for the first quarter 2013 in the High Performance Metals segment was $75.3 million or 14.5% of sales and was also impacted by low demand from the jet engine aftermarket, weak demand for zirconium alloys, reduced demand for forgings from the construction and mining market, and pricing pressures on transaction, or spot, business. Flat-Rolled Products segment operating profit was $2.4 million, or 0.4% of sales, reflecting a weaker high-value product mix as well as record-low base-selling prices for standard stainless sheet. Operating profit in our Engineered Products segment was essentially break-even, as lower operating rates affected profit margins.
Segment operating profit as a percentage of sales for the three month periods ended March 31, 2013 and 2012 was:
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
High Performance Metals |
14.5 | % | 17.9 | % | ||||
Flat-Rolled Products |
0.4 | % | 7.4 | % | ||||
Engineered Products |
0.6 | % | 9.1 | % |
Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, retirement benefit expense, closed company expenses and restructuring costs, if any. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Income before tax for the first quarter 2013 was $15.3 million, or 1.3% of sales, compared to $84.1 million, or 6.2% of sales for the first quarter 2012. The first quarter 2013 benefited from lower corporate expenses, primarily the result of reduced annual and long-term performance-based incentive compensation expenses, and lower interest expense.
23
Net income attributable to ATI for the first quarter 2013 was $10.0 million, or $0.09 per share, compared to $56.2 million, or $0.53 per share for the first quarter 2012.
At March 31, 2013, we had cash on hand of $138.0 million, a decrease of $166.6 million from year-end 2012. Cash flow used in operations for the first quarter 2013 was $57.4 million and included an investment of $84.4 million in managed working capital. Additionally, we invested $86.9 million in capital expenditures, primarily related to the Flat-Rolled Products segments Hot-Rolling and Processing Facility (HRPF). Net debt to total capitalization was 35.0% and total debt to total capitalization was 37.3% at March 31, 2013. At December 31, 2012, net debt to total capitalization was 32.2% and total debt to total capitalization was 37.4%.
While we see some signs of improvement as we enter the second quarter and it appears the fourth quarter 2012 may have been the trough in demand, we expect challenging conditions to continue to impact many of our end markets throughout the second quarter. We believe our customers will continue to remain cautious as near-term global economic uncertainties remain, lead times remain short, and raw materials prices, especially for nickel and titanium scrap, remain under pressure. We remain cautiously optimistic that business conditions will gradually improve as we move through 2013. We expect some improvement in demand from our key global markets and moderate recovery in domestic economic growth from the expected improvement in the housing construction market.
While the short-term is challenging, we continue to focus on taking actions to improve ATIs financial performance while we continue to strengthen our position for long-term profitable growth. We are accelerating cost reduction actions, aggressively identifying and acting on market opportunities that provide important short-term business volume opportunities, and implementing actions to reduce managed working capital.
Looking beyond the short-term challenges, we believe ATI remains well-positioned for profitable growth over the long-term as a result of our unmatched diversification in specialty metals products, technology leadership, and unsurpassed manufacturing capabilities. We continue to believe that market conditions remain favorable for long-term secular growth from our key markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical.
Business Segment Results
We operate in three business segments: High Performance Metals, Flat-Rolled Products, and Engineered Products. These segments represented the following percentages of our total revenues and segment operating profit for the first three months of 2013 and 2012:
2013 | 2012 | |||||||||||||||
Operating | Operating | |||||||||||||||
Revenue | Profit | Revenue | Profit | |||||||||||||
High Performance Metals |
44 | % | 96 | % | 43 | % | 64 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Flat-Rolled Products |
47 | % | 3 | % | 47 | % | 29 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Engineered Products |
9 | % | 1 | % | 10 | % | 7 | % | ||||||||
|
|
|
|
|
|
|
|
High Performance Metals Segment
First quarter 2013 sales decreased 11% to $518.4 million compared to the first quarter 2012, primarily as a result of lower mill product shipments of nickel-based and specialty alloys and zirconium and related alloys, and a decrease in sales of precision forged and cast components due to lower demand from the jet engine, construction and mining, nuclear energy, and oil and gas markets. In addition, lower raw material indices and lower base-selling prices negatively affected sales.
24
Comparative information for our High Performance Metals segment revenues (in millions) by market and their respective percentages of the segments overall revenues for the three month periods ended March 31, 2013 and 2012 is as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
Market |
March 31, 2013 | March 31, 2012 | ||||||||||||||
Aerospace: |
||||||||||||||||
Jet Engines |
$ | 170.5 | 33 | % | $ | 201.9 | 35 | % | ||||||||
Airframes |
103.4 | 20 | % | 105.9 | 18 | % | ||||||||||
Government |
52.4 | 10 | % | 53.2 | 9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Aerospace |
326.3 | 63 | % | 361.0 | 62 | % | ||||||||||
Medical |
49.4 | 10 | % | 49.7 | 9 | % | ||||||||||
Oil & Gas/Chemical Process Industry |
44.2 | 9 | % | 54.4 | 9 | % | ||||||||||
Electrical Energy |
38.4 | 7 | % | 36.9 | 6 | % | ||||||||||
Defense |
23.0 | 4 | % | 21.2 | 4 | % | ||||||||||
Construction/Mining |
7.7 | 1 | % | 19.8 | 3 | % | ||||||||||
Other |
29.4 | 6 | % | 38.3 | 7 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 518.4 | 100 | % | $ | 581.3 | 100 | % |
Direct international sales represented nearly 46% of total segment sales. Comparative information for the High Performance Metals segments major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
High-Value Products |
||||||||
Nickel-based alloys and specialty alloys |
32 | % | 37 | % | ||||
Titanium and titanium alloys |
31 | % | 26 | % | ||||
Precision forgings and castings |
25 | % | 25 | % | ||||
Zirconium and related alloys |
12 | % | 12 | % | ||||
|
|
|
|
|||||
Total High-Value Products |
100 | % | 100 | % |
Segment operating profit in the first quarter 2013 decreased to $75.3 million, or 14.5% of total sales, including surcharges, compared to $104.1 million, or 17.9% of total sales, for the first quarter 2012. The decrease in operating profit primarily resulted from lower shipment volumes for most products, the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices, and lower base-selling prices for some products. Results benefited from $26.5 million in gross cost reductions in the first quarter 2013.
Flat-Rolled Products Segment
First quarter 2013 sales decreased 12% compared to the first quarter 2012, to $558.1 million, primarily due to lower base-selling prices, lower raw material surcharges, and a product mix that had a higher percentage of standard stainless products and a lower percentage of high-value products. Shipments of standard stainless products (sheet and plate) increased 10%, to 173.8 million pounds. High-value products shipments declined 6% compared to the first quarter 2012, to 113 million pounds, as higher shipments of our Precision Rolled Strip® and titanium products were more than offset by reduced shipments of our nickel-based and specialty steel alloys and grain-oriented electrical steel products. First quarter 2013 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 3.1 million pounds, a 3% decrease compared to the fourth quarter 2012 but a 3% increase compared to the first quarter. Titanium shipments on projects in the chemical process industry are expected to favorably impact the second and third quarters of 2013. Average selling prices for all products, which include surcharges, declined 15%. Average base selling prices remain at historically low levels for standard stainless products.
25
Comparative information for our Flat-Rolled Products revenues (in millions) by market and their respective percentages of the segments overall revenues for the three month periods ended March 31, 2013 and 2012 is as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
Market |
March 31, 2013 | March 31, 2012 | ||||||||||||||
Oil & Gas/Chemical Process Industry |
$ | 145.1 | 26 | % | $ | 185.3 | 29 | % | ||||||||
Electrical Energy |
84.4 | 15 | % | 102.0 | 16 | % | ||||||||||
Automotive |
83.4 | 15 | % | 96.2 | 15 | % | ||||||||||
Food Equipment & Appliances |
64.9 | 12 | % | 54.6 | 8 | % | ||||||||||
Construction/Mining |
57.0 | 10 | % | 63.5 | 10 | % | ||||||||||
Aerospace & Defense |
41.9 | 8 | % | 42.3 | 7 | % | ||||||||||
Electronics/Computers/Communication |
36.0 | 6 | % | 41.8 | 7 | % | ||||||||||
Transportation |
29.7 | 5 | % | 23.2 | 4 | % | ||||||||||
Medical |
7.1 | 1 | % | 5.4 | 1 | % | ||||||||||
Other |
8.6 | 2 | % | 21.7 | 3 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 558.1 | 100 | % | $ | 636.0 | 100 | % |
Direct international sales represented 34% of total segment sales for the first quarter 2013. Comparative information for the Flat-Rolled Products segments major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
High-Value Products |
||||||||
Precision and engineered strip |
24 | % | 22 | % | ||||
Nickel-based alloys and specialty alloys |
21 | % | 26 | % | ||||
Grain-oriented electrical steel |
7 | % | 9 | % | ||||
Titanium and titanium alloys |
5 | % | 4 | % | ||||
|
|
|
|
|||||
Total High-Value Products |
57 | % | 61 | % | ||||
Standard Products |
||||||||
Specialty stainless sheet |
20 | % | 19 | % | ||||
Stainless steel sheet |
19 | % | 16 | % | ||||
Stainless steel plate |
4 | % | 4 | % | ||||
|
|
|
|
|||||
Total Standard Products |
43 | % | 39 | % | ||||
|
|
|
|
|||||
Grand Total |
100 | % | 100 | % |
Segment operating profit for the first quarter 2013 was $2.4 million, or 0.4% of sales, compared to $46.8 million, or 7.4% of sales, for the first quarter 2012, reflecting a sales mix of more standard stainless products, as well as lower selling prices for most products. The first quarter 2013 benefited from $10.0 million in gross cost reductions. Comparative information on the segments products for the three months ended March 31, 2013 and 2012 is provided in the following table:
Three Months Ended | ||||||||||||
March 31, | % | |||||||||||
2013 | 2012 | Change | ||||||||||
Volume (000s pounds): |
||||||||||||
High value |
113,023 | 120,504 | (6 | )% | ||||||||
Standard |
173,818 | 157,320 | 10 | % | ||||||||
|
|
|
|
|||||||||
Total |
286,841 | 277,824 | 3 | % | ||||||||
Average prices (per lb.): |
||||||||||||
High value |
$ | 2.80 | $ | 3.21 | (13 | )% | ||||||
Standard |
$ | 1.38 | $ | 1.56 | (12 | )% | ||||||
Combined Average |
$ | 1.94 | $ | 2.28 | (15 | )% |
26
Engineered Products Segment
Sales for the first quarter 2013 were $102.9 million, a 24% decrease compared to the first quarter 2012, primarily as a result of lower overall demand for tungsten-based products and carbon alloy steel forgings.
Comparative information for our Engineered Products revenues (in millions) by market and their respective percentages of the segments overall revenues for the three month periods ended March 31, 2013 and 2012 is as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
Market |
March 31, 2013 | March 31, 2012 | ||||||||||||||
Oil & Gas/Chemical Process Industry |
$ | 28.6 | 28 | % | $ | 37.7 | 28 | % | ||||||||
Machine & Cutting Tools |
16.9 | 16 | % | 23.2 | 17 | % | ||||||||||
Transportation |
15.8 | 15 | % | 22.9 | 17 | % | ||||||||||
Construction/Mining |
14.9 | 14 | % | 20.1 | 15 | % | ||||||||||
Aerospace & Defense |
10.8 | 11 | % | 11.9 | 9 | % | ||||||||||
Electrical Energy |
6.2 | 6 | % | 7.9 | 6 | % | ||||||||||
Automotive |
6.0 | 6 | % | 7.4 | 5 | % | ||||||||||
Medical |
2.8 | 3 | % | 2.7 | 2 | % | ||||||||||
Other |
0.9 | 1 | % | 1.4 | 1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 102.9 | 100 | % | $ | 135.2 | 100 | % |
Direct international sales represented 23% of total segment sales for the first quarter 2013. Comparative information for the Flat-Rolled Products segments major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
High-Value Products |
||||||||
Tungsten-based materials |
73 | % | 66 | % | ||||
Precision forgings |
21 | % | 26 | % | ||||
|
|
|
|
|||||
Total High-Value Products |
94 | % | 92 | % | ||||
Standard Products |
||||||||
Iron castings and other |
6 | % | 8 | % | ||||
|
|
|
|
|||||
Total Standard Products |
6 | % | 8 | % | ||||
|
|
|
|
|||||
Grand Total |
100 | % | 100 | % |
Segment operating profit for the first quarter 2013 was $0.6 million, compared to $12.3 million in the first quarter 2012. Segment operating profit for the first quarter 2013 was negatively impacted by higher raw material inventory costs for tungsten-based products and lower business activity levels across most operating units in this segment. Segment operating profit benefited from $2.8 million in gross cost reductions in the first quarter 2013.
Corporate Items
Corporate expenses for the first quarter 2013 were $12.4 million, compared to $21.7 million in the first quarter 2012. The decrease in 2013 was primarily the result of reduced annual and long-term performance-based incentive compensation expenses.
Interest expense, net of interest income, in the first quarter 2013 was $14.4 million, compared to net interest expense of $19.9 million in the first quarter 2012. The decrease in interest expense was primarily due to increased capitalized interest on major strategic projects. Capitalized interest on major strategic capital projects reduced interest expense by $9.6 million for the first quarter 2013 compared to a reduction of $4.5 million for the first quarter 2012. The interest costs capitalized in both periods were primarily related to the HRPF project.
27
Closed company and other expenses primarily includes charges incurred in connection with closed operations and other non-operating income or expense. These items are presented primarily in selling and administrative expenses and in other expense in the statement of operations. These items resulted in net charges of $3.7 million for the first quarter 2013 and $6.9 million for the first quarter 2012. The decrease over the prior year quarter was primarily related to a decrease in environmental and legal expenses associated with closed operations.
Retirement benefit expense, which includes pension expense and other postretirement expense, increased to $32.5 million in the first quarter 2013, compared to $30.6 million in the first quarter 2012. This increase was primarily due to the utilization of a lower discount rate to value retirement benefit obligations. For the first quarter 2013, retirement benefit expense of $25.3 million was included in cost of sales and $7.2 million was included in selling and administrative expenses. For the first quarter 2012, the amount of retirement benefit expense included in cost of sales was $22.0 million, and the amount included in selling and administrative expenses was $8.6 million.
Income Taxes
The first quarter 2013 provision for income taxes was $3.7 million, or 24.2% of income before tax, compared to the 2012 provision for income taxes of $25.8 million, or 30.7% of income before tax. The first quarter 2013 included discrete tax benefits of $2.0 million, primarily related to 2013 Federal tax law changes. Excluding these items, the effective tax rate was 37.6%. The first quarter 2012 included discrete tax benefits of $3.7 million primarily related to state income taxes.
Financial Condition and Liquidity
We believe that internally generated funds, current cash on hand, and available borrowings under existing credit lines will be adequate to meet foreseeable liquidity needs, including a substantial expansion of our production capabilities over the next few years. Changes in our credit rating do not impact our access to, or the cost of, our existing credit facilities.
We did not borrow funds under our senior unsecured domestic credit facility during the first three months of 2013. However, as of March 31, 2013, approximately $4 million of this facility was utilized to support letters of credit. This credit facility requires that we maintain a leverage ratio (consolidated total indebtedness net of cash on hand in excess of $50 million, divided by consolidated earnings before interest, taxes, depreciation and amortization, and non-cash pension expense) of not greater than 3.25, and maintain an interest coverage ratio (consolidated earnings before interest, taxes, and non-cash pension expense divided by interest expense) of not less than 2.0. For the three months ended March 31, 2013, the leverage ratio was 2.65, and the interest coverage ratio was 5.06. While we remain in compliance with the financial covenants of our senior unsecured domestic credit facility, we have several options should we need to address financial covenant concerns. If we needed to obtain additional financing using the credit markets, the cost and the terms and conditions of such borrowings may be influenced by our credit rating.
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.
Cash Flow and Working Capital
For the three months ended March 31, 2013, cash flow used in operations was $57.4 million, including an investment of $84.4 million in managed working capital. Cash used in investing activities was $86.2 million in the first three months of 2013 and consisted primarily of capital expenditures. Cash used in financing activities was $23.0 million in the first three months of 2013 and included dividend payments of $19.2 million. At March 31, 2013, cash and cash equivalents on hand totaled $138.0 million, a decrease of $166.6 million from year end 2012. As of March 31, 2013, $84.8 million of cash and cash equivalents were held by our foreign subsidiaries.
As part of managing the liquidity of our business, we focus on controlling managed working capital, which is defined as gross accounts receivable and gross inventories, less accounts payable. In measuring performance in controlling managed working capital, we exclude the effects of LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. At March 31, 2013, managed working capital decreased to 37.8% of annualized sales, compared to 41.1% of annualized sales at December 31, 2012. During the first three months of 2013, managed working capital increased by $84.4 million, to $1.9 billion. The growth in managed working capital from December 31, 2012 resulted from a $69.0 million increase in accounts receivable, a $3.7 million decrease in inventory, and an $19.1 million decrease in accounts payable. While accounts receivable balances increased during 2013, days sales outstanding, which measures actual collection timing for accounts receivable, improved when compared to year end 2012. Gross inventory turns, which exclude the effect of LIFO inventory valuation reserves, remained essentially unchanged at March 31, 2013 compared to year end 2012.
28
The Components of managed working capital were as follows:
(in millions) | March 31, 2013 |
December 31, 2012 |
||||||
Accounts receivable |
$ | 681.5 | $ | 613.3 | ||||
Inventory |
1,537.5 | 1,536.6 | ||||||
Accounts payable |
(479.4 | ) | (499.9 | ) | ||||
|
|
|
|
|||||
Subtotal |
1,739.6 | 1,650.0 | ||||||
Allowance for doubtful accounts |
5.3 | 5.5 | ||||||
LIFO reserve |
76.4 | 76.9 | ||||||
Corporate and other |
63.9 | 68.4 | ||||||
|
|
|
|
|||||
Managed working capital |
1,885.2 | 1,800.8 | ||||||
|
|
|
|
|||||
Annualized prior 2 months sales |
$ | 4,988.3 | $ | 4,380.0 | ||||
|
|
|
|
|||||
Managed working capital as a % of annualized sales |
37.8 | % | 41.1 | % | ||||
Change in managed working capital from December 31, 2012 |
$ | 84.4 | ||||||
|
|
Capital Expenditures
We have significantly expanded and continue to expand our manufacturing capabilities to meet expected intermediate and long-term demand from the aerospace (engine and airframe), oil and gas, chemical process industry, electrical energy, and medical markets, especially for titanium and titanium-based alloys, nickel-based alloys and superalloys, specialty alloys, and zirconium and related alloys.
Ongoing capital expenditure projects include the design and construction of a new advanced specialty metals Hot-Rolling and Processing Facility (HRPF) at our existing Flat-Rolled Products segment Brackenridge, PA site for approximately $1.2 billion. The HRPF construction is progressing on schedule and on budget. Construction is expected to be completed with assets ready for service by the end of 2013, and formal commissioning is expected to occur in the first half of 2014. The HRPF is designed to be the most powerful mill in the world for production of specialty metals. It is designed to produce thinner and wider hot-rolled coils of exceptional quality at reduced cost with shorter lead times, and require lower working capital requirements. When completed, we believe ATIs new HRPF will provide unsurpassed manufacturing capability and versatility in the production of a wide range of flat-rolled specialty metals. We expect improved productivity, lower costs, and higher quality for our diversified product mix of flat-rolled specialty metals, including nickel-based and specialty alloys, titanium and titanium alloys, zirconium alloys, Precision Rolled Strip ® products, and stainless sheet and coiled plate products.
Capital expenditures were $86.9 million for the first three months of 2013, primarily related to the HRPF project. We currently expect our 2013 capital expenditures to be approximately $550 million, which includes approximately $450 million relating to the HRPF project. We expect 2013 to be our peak year of capital expenditures. Our objective is to fund these capital expenditures with cash on hand and cash flow generated from our operations, and if needed, by using a portion of our $400 million unsecured domestic credit facility.
Debt
At March 31, 2013, we had $1,479.1 million in total outstanding debt, compared to $1,480.1 million at December 31, 2012.
29
In managing our overall capital structure, some of the measures on which we focus are net debt to total capitalization, which is the percentage of our debt, net of cash that may be available to reduce borrowings, to our total invested and borrowed capital, and total debt to total capitalization, which excludes cash balances. Net debt as a percentage of total capitalization was 35.0% at March 31, 2013, compared to 32.2% at December 31, 2012. The net debt to total capitalization was determined as follows:
($ in millions) | March 31, 2013 |
December 31, 2012 |
||||||
Total debt |
$ | 1,479.1 | $ | 1,480.1 | ||||
Less: Cash |
(138.0 | ) | (304.6 | ) | ||||
|
|
|
|
|||||
Net debt |
$ | 1,341.1 | $ | 1,175.5 | ||||
Net debt |
$ | 1,341.1 | $ | 1,175.5 | ||||
Total ATI stockholders equity |
2,487.1 | 2,479.6 | ||||||
|
|
|
|
|||||
Net ATI total capital |
$ | 3,828.2 | $ | 3,655.1 | ||||
Net debt to ATI total capital |
35.0 | % | 32.2 | % | ||||
|
|
|
|
Total debt to total capitalization decreased to 37.3% at March 31, 2013 from 37.4% December 31, 2012.
Total debt to total capitalization was determined as follows:
($ in millions) | March 31, 2013 |
December 31, 2012 |
||||||
Total debt |
$ | 1,479.1 | $ | 1,480.1 | ||||
Total ATI stockholders equity |
2,487.1 | 2,479.6 | ||||||
|
|
|
|
|||||
Total ATI capital |
$ | 3,966.2 | $ | 3,959.7 | ||||
Total debt to total ATI capital |
37.3 | % | 37.4 | % | ||||
|
|
|
|
We did not borrow funds under our $400 million senior unsecured domestic credit facility during the first three months of 2013, although approximately $4 million has been utilized to support the issuance of letters of credit. The unsecured facility requires us to maintain a leverage ratio (consolidated total indebtedness net of cash on hand in excess of $50 million, divided by consolidated earnings before interest, taxes, depreciation and amortization, and non-cash pension expense) of not greater than 3.25, and maintain an interest coverage ratio (consolidated earnings before interest, taxes, and non-cash pension expense divided by interest expense) of not less than 2.0. For the three months ended March 31, 2013, our leverage ratio was 2.65 and our interest coverage ratio was 5.06.
We have an additional, separate credit facility for the issuance of letters of credit. As of March 31, 2013, $32 million in letters of credit was outstanding under this facility.
In addition, STAL, the Companys Chinese joint venture company in which ATI has a 60% interest, has a 205 million renminbi (approximately $33 million at March 31, 2013 exchange rates) revolving credit facility with a group of banks which expires in August 2014. This credit facility is supported solely by STALs financial capability without any guarantees from the joint venture partners. As of March 31, 2013, there were no borrowings under this credit facility.
Retirement Benefits
At December 31, 2012, our U.S. qualified defined benefit pension plan (U.S. Plan) was approximately 77% funded as calculated in accordance with generally accepted accounting principles. Based upon current regulations and actuarial studies, we are not required to make a cash contribution to the U.S. Plan for 2013. However, we may elect, depending upon investment performance of the pension plan assets and other factors, to make voluntary cash contributions to this plan in the future.
Dividends
A regular quarterly dividend of $0.18 per share of common stock was paid on March 27, 2013 to stockholders of record at the close of business on February 28, 2013. 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.
30
Critical Accounting Policies
Inventory
At March 31, 2013, we had net inventory of $1,537.5 million. Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO) and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations is valued using average cost or 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. The prices for many of the raw materials we use have been extremely volatile during the past four years. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a rise in raw material costs has a negative effect on our operating results, while, conversely, a fall in material costs results in a benefit to operating results. For example, in 2012 and 2011, the effect of falling raw material costs on our LIFO inventory valuation method resulted in cost of sales which were $76.8 million and $9.3 million lower than would have been recognized had we utilized the FIFO methodology to value our inventory. Conversely, in 2010, the effect of rising raw material costs on our LIFO inventory valuation method resulted in cost of sales which were $60.2 million higher than would have been recognized had we utilized the FIFO methodology to value our inventory. 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.
Since the LIFO inventory valuation methodology is designed for annual determination, interim estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO inventory valuation method on an interim basis by projecting the expected annual LIFO cost and allocating that projection to the interim quarters equally. These projections of annual LIFO inventory valuation reserve changes are updated quarterly and are evaluated based upon material, labor and overhead costs and projections for such costs at the end of the year plus projections regarding year-end inventory levels. We recorded a $0.5 million reduction to our LIFO inventory valuation reserve in the first three months of 2013.
The LIFO inventory valuation methodology is not utilized by many of the companies with which we compete, including foreign competitors. As such, our results of operations may not be comparable to those of our competitors during periods of volatile material costs due, in part, to the differences between the LIFO inventory valuation method and other acceptable inventory valuation methods.
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. At March 31, 2013, no significant reserves were required. It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months due to the longer manufacturing and distribution process for such products.
Other Critical Accounting Policies
A summary of other significant accounting policies is discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, retirement plans, income taxes, environmental and other contingencies as well as asset impairment, inventory valuation and collectability of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.
31
New Accounting Pronouncements Adopted
In January 2013, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the disclosure of offsetting assets and liabilities. These changes require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The enhanced disclosures will enable users of an entitys financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entitys financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Other than the additional disclosure requirements, the adoption of these changes had no impact on the consolidated financial statements.
In January 2013, the Company adopted changes issued by the FASB to the reporting of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other comprehensive income. Other than the additional disclosure requirements (see Note 8.), the adoption of these changes had no impact on the consolidated financial statements.
Pending Accounting Pronouncements
In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. This guidance requires an entity that is joint and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. Required disclosures include a description of the nature of the arrangement, how the liability arose, the relationship with co-obligors and the terms and conditions of the arrangement. These changes become effective for the Company in fiscal year 2014. We do not anticipate a material impact on our financial statements upon adoption.
In March 2013, the FASB issued changes to a parent entitys accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The amendments specify that a cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. In addition, CTA should be recognized in earnings in a business combination achieved in stages (i.e., a step acquisition). These changes become effective for the Company in fiscal year 2014. We do not anticipate a material impact on our financial statements upon adoption.
Forward-Looking and Other Statements
From time to time, we have made and may continue to make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as anticipates, believes, estimates, expects, would, should, will, will likely result, forecast, outlook, projects, and similar expressions. Forward-looking statements are based on managements current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for our specialty metals; (b) material adverse changes in the markets we serve, including the aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, construction and mining, and other markets; (c) our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated by management, from strategic investments and the integration of acquired businesses, whether due to significant increases in energy, raw materials or employee benefits costs, the possibility of project cost overruns or unanticipated costs and expenses, or other factors; (d) volatility of prices and availability of supply of the raw materials that are critical to the manufacture of our products; (e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding; (f) significant legal proceedings or investigations adverse to us; and (g) other risk factors summarized in our Annual Report on Form 10-K for the year ended December 31, 2012, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As part of our risk management strategy, we utilize derivative financial instruments, from time to time, to hedge our exposure to changes in raw material prices, energy prices, foreign currencies, and interest rates. We monitor the third-party financial institutions which are our counterparty to these financial instruments on a daily basis and diversify our transactions among counterparties to minimize exposure to any one of these entities. Fair values for derivatives were measured using exchange-traded prices for the hedged items including consideration of counterparty risk and the Companys credit risk.
Volatility of Energy Prices. Energy resources markets are subject to conditions that create uncertainty in the prices and availability of energy resources. 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. Increases in energy costs, or changes in costs relative to energy costs paid by competitors, have 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. We use approximately 10 to 12 million MMBtus of natural gas annually, depending upon business conditions, in the manufacture of our products. These purchases of natural gas expose us to risk of higher natural gas prices. For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $10 to $12 million. We use several approaches to minimize any material adverse effect on our results of operations or financial condition from volatile energy prices. These approaches include incorporating an energy surcharge on many of our products and using financial derivatives to reduce exposure to energy price volatility.
At March 31, 2013, the outstanding financial derivatives used to hedge our exposure to energy cost volatility included both natural gas and electricity hedges. For natural gas, approximately 70% of our forecasted domestic requirements are hedged for 2013, approximately 40% for 2014, and approximately 5% for 2015. The net mark-to-market valuation of these outstanding natural gas hedges at March 31, 2013 was an unrealized pre-tax gain of $0.3 million, comprised of $1.8 million classified in prepaid expenses and other current assets, $0.7 million was included in other long-term assets, $1.8 million in accrued liabilities, and $0.4 million in other long-term liabilities. For the three months ended March 31, 2013, the effects of natural gas hedging activity increased cost of sales by $1.8 million. For electricity usage in our Western Pennsylvania operations, we have hedged approximately 10% of our on-peak and off-peak forecasted requirements for 2014. The net mark-to-market valuation of the electricity hedges was an unrealized pre-tax loss of $0.3 million, which was classified in other long-term liabilities on the balance sheet. The effects of the hedging activity are recognized in income over the designated hedge periods.
Volatility of Raw Material Prices. We use raw materials surcharge and index mechanisms to offset the impact of increased raw material costs for a majority of our products; however, competitive factors in the marketplace can limit our ability to institute such mechanisms, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of such mechanisms. For example, in 2012, we used approximately 100 million pounds of nickel; therefore, a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $100 million. In addition, in 2012, we also used approximately 795 million pounds of ferrous scrap in the production of our flat-rolled products; a hypothetical change of $0.01 per pound would result in increased costs of approximately $8 million. 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.
As of March 31, 2013, we had entered into financial hedging arrangements primarily at the request of our customers related to firm orders for approximately 10% of our total annual nickel requirements. These nickel hedges extend to 2016. Any gain or loss associated with these hedging arrangements is included in cost of sales. At March 31, 2013, the net mark-to-market valuation of our outstanding raw material hedges was an unrealized pre-tax loss of $2.8 million, comprised of $0.1 million in prepaid expenses and other current assets, $0.1 million in other long-term assets, $2.6 million in accrued liabilities, and $0.4 million in long-term other liabilities on the balance sheet.
33
Foreign Currency Risk. Foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates. We sometimes purchase foreign currency forward contracts that permit us to sell specified amounts of foreign currencies expected to be received from our 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. We 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 March 31, 2013, the outstanding financial derivatives, including both hedges and undesignated derivatives, that are used to manage our exposure to foreign currency, primarily euros, represented approximately 10% of our forecasted total international sales through 2015. In addition, we may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. At March 31, 2013, the net mark-to-market valuation of the outstanding foreign currency forward contracts was a net asset of $12.1 million, of which $7.5 million is included in prepaid expenses and other current assets, and $4.6 million was included other long-term assets on the balance sheet.
Item 4. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
Our Chief Executive Officer and Chief Financial Officer have evaluated the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2013, and they concluded that these disclosure controls and procedures are effective.
(b) | Changes in Internal Controls |
There was no change in our internal control over financial reporting identified in connection with the evaluation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2013, conducted by our Chief Executive Officer and Chief Financial Officer, that occurred during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
A number of lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its currently or formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, government contracting, employment, employee and retiree benefits, taxes, environmental, health and safety and occupational disease, and stockholder and corporate governance matters. Certain of such lawsuits, claims and proceedings are described in our Annual Report on Form 10-K for the year ended December 31, 2012, and addressed in Note 13 to the unaudited interim financial statements included herein. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Companys 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 the Companys results of operations for that period.
The following is an update to, and should be read in conjunction with, Item 1A. Risk Factors contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2012. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
34
Labor Matters. We have approximately 11,100 full-time employees. Approximately 44% of our workforce is covered by various collective bargaining agreements, predominantly with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW). At various times, our collective bargaining agreements with unions expire and are subject to renegotiation. Our collective bargaining agreement with the USW that covers approximately 500 ATI Wah Chang employees that expired on Apri1 1, 2013 has been extended during negotiations with the USW, which are ongoing. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could have a material adverse effect on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Set forth below is information regarding the Companys stock repurchases during the period covered by this report, comprising shares repurchased by ATI from employees to satisfy employee-owed taxes on share-based compensation.
Period |
Total Number of Shares (or Units) Purchased |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
January 1-31, 2013 |
192,219 | $ | 30.23 | | $ | | ||||||||||
February 1-28, 2013 |
25,009 | 32.03 | | | ||||||||||||
March 1-31, 2013 |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
217,228 | $ | 30.43 | | $ | |
(a) | Exhibits |
10.1 | 2013 Annual Incentive Plan (filed herewith). | |
10.2 | Form of Performance/Restricted Stock Agreement dated February 28, 2013 (filed herewith). | |
10.3 | Form of Total Shareholder Return Incentive Compensation Program Award Agreement effective as of January 1, 2013 (filed herewith). | |
10.4 | Form of Key Executive Performance Plan Agreement dated February 28, 2013, including Key Executive Performance Plan as amended February 28, 2013 (filed herewith). | |
10.5 | Letter Agreement amending the Change in Control Severance Agreement, between the Company and Richard J. Harshman, dated March 4, 2013 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K dated March 5, 2013 (File No. 1-12001)). | |
12.1 | Computation of the Ratio of Earnings to Fixed Charges (filed herewith). | |
31.1 | Certification of Chief Executive Officer required by Securities and Exchange Commission Rule 13a 14(a) or 15d 14(a) (filed herewith). | |
31.2 | Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a 14(a) or 15d 14(a) (filed herewith). | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350 (filed herewith). | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
35
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLEGHENY TECHNOLOGIES INCORPORATED | ||||
(Registrant) | ||||
Date: May 6, 2013 | By | /s/ Dale G. Reid | ||
Dale G. Reid | ||||
Executive Vice President, Finance and | ||||
Chief Financial Officer | ||||
(Principal Financial Officer and Duly Authorized Officer) | ||||
Date: May 6, 2013 | By | /s/ Karl D. Schwartz | ||
Karl D. Schwartz | ||||
Controller and Chief Accounting Officer | ||||
(Principal Accounting Officer) |
36
10.1 | 2013 Annual Incentive Plan (filed herewith). | |
10.2 | Form of Performance/Restricted Stock Agreement dated February 28, 2013 (filed herewith). | |
10.3 | Form of Total Shareholder Return Incentive Compensation Program Award Agreement effective as of January 1, 2013 (filed herewith). | |
10.4 | Form of Key Executive Performance Plan Agreement dated February 28, 2013, including Key Executive Performance Plan as amended February 28, 2013 (filed herewith). | |
10.5 | Letter Agreement amending the Change in Control Severance Agreement, between the Company and Richard J. Harshman, dated March 4, 2013 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K dated March 5, 2013 (File No. 1-12001)). | |
12.1 | Computation of the Ratio of Earnings to Fixed Charges (filed herewith). | |
31.1 | Certification of Chief Executive Officer required by Securities and Exchange Commission Rule 13a 14(a) or 15d 14(a). | |
31.2 | Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a 14(a) or 15d 14(a). | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
37
Exhibit 10.1
The Annual Incentive Plan
For Year 2013
Contents |
Page | |||
At a Glance |
1 | |||
What is the Annual Incentive Plan? |
1 | |||
Who is Eligible for This Plan? |
1 | |||
How Does the Annual Incentive Plan Work? |
1 | |||
Calculation of the Annual Incentive Plan Award |
2 | |||
Target Bonus Percentage |
2 | |||
2013 Performance Goals |
3 | |||
How the AIP Incentive Award is Calculated When All Goals Are 100% Achieved |
4 | |||
How the AIP Incentive Award is Calculated for Other Achievement Levels |
5 | |||
Maximums and Minimums |
5 | |||
Additional Guidelines for the Annual Incentive Plan |
6 | |||
Adjustments |
6 | |||
Some Special Circumstances |
6 | |||
Making Payments |
6 | |||
Administration Details |
7 |
At a Glance
What is the Annual Incentive Plan?
The Annual Incentive Plan (the AIP or the Plan) provides participants of Allegheny Technologies Incorporated (ATI or the Company) and its operating companies with the opportunity to earn an incentive award when certain pre-established goals are met at the corporate and operating company levels.
Who is Eligible for This Plan?
Generally, participants who have a significant impact on the Companys operations will be eligible to participate in the Plan. Individuals eligible for participation are determined annually, based on recommendations of the operating company presidents, if applicable, and the Companys chief executive officer and the Companys vice president, human resources, with the approval of the Personnel and Compensation Committee of the Companys Board of Directors.
How Does the Annual Incentive Plan Work?
Under the Plan, participants may earn an incentive award based on a percentage of their base salary, depending on the extent to which pre-established operating company and/or corporate performance goals have been achieved.
| For purposes of the Plan, base salary is generally the participants annual base salary rate as of the end of the year, excluding any commission or other incentive pay. For some special circumstances affecting the amount of base salary used in the Plan, see page 6. |
| A target bonus percentage for each participant is used in calculating the incentive award and is explained on page 2. |
| The bonus percentage will be adjusted (upward or downward) based on the extent to which various performance goals are achieved. |
Incentive award payments will be distributed in cash, subject to applicable clawback provisions, as soon as reasonably possible after the year ends and the awards have been approved by the Personnel and Compensation Committee.
Page 1
Calculation of the Annual Incentive Plan Award
Target Bonus Percentage
The Plan establishes an incentive opportunity for each Plan participant, calculated as a percentage of the participants base salary. Each participant will be provided with an initial percentage, referred to as a target bonus percentage.
Generally, the target bonus percentage is the percentage of base salary that can be earned as an award under the Plan if 100% of the various performance goals are achieved. For 2013, if 100% of the performance goals are achieved, 100% of the target bonus percentage can be earned.
Generally, if there is a change in a participants target bonus percentage during the year, the newly adjusted target bonus percentage will be used to calculate the individuals award for the full year. If an individual becomes a participant in AIP during the year, the individuals award for the year will be based on a pro rata calculation.
For business unit presidents who are members of the Management Executive Council, 65% of the goals overall weight will be based on the performance of the business unit presidents operating company, and 35% of the goals overall weight will be based on corporate-wide performance.
At the end of the year, the Company will measure actual performance against each of the pre-established objectives.
The achievements attributable to each performance goal as noted above, then will be added together, and that sum will be multiplied by:
Page 2
2013 Performance Goals
For 2013, AIP awards will be measured based on a weighted formula that takes into account several different factors as measurable indices of performance, as indicated in the pie chart below.
Targeted achievements as to each performance goal above have been established for each operating company and for corporate participants. Together the above goals comprise 100% of the target bonus percentage.
No annual incentive will be paid if the achievement of Corporate Operating Earnings is less than the established applicable minimum of Operating Earnings, notwithstanding the achievements as to the other applicable performance goals for 2013.
A prerequisite to any AIP award is compliance with ATIs Corporate Guidelines for Business Conduct and Ethics.
Page 3
How the AIP Incentive Award is Calculated When All Goals are 100% Achieved
For the Year 2013, if 100% of the performance goals are achieved, then 100% of the target bonus percentage will be credited to the participant:
Goals |
Goal % Target |
Goal % Achieved |
Earned % of Target * |
|||||||||
Operating Earnings |
40 | % | 100 | % | 40 | % | ||||||
Operating Cash Flow |
30 | % | 100 | % | 30 | % | ||||||
Manufacturing Improvements |
15 | % | 100 | % | 15 | % | ||||||
Customer Responsiveness |
10 | % | 100 | % | 10 | % | ||||||
Safety and Environmental Compliance |
5 | % | 100 | % | 5 | % | ||||||
TOTAL |
100 | % | 100 | % |
* | Earned % of Target = Goal % of Target X Goal Achieved % |
In this example, assume that the participants target bonus percentage is 15%.
The target bonus percentage of 15% is then multiplied by 100% to produce a bonus award equal to 15% of base salary:
The sections below discuss the impact of achieving more or less than 100% of various goals, and they also discuss the impact of other potential adjustments.
Page 4
How the AIP Incentive Award is Calculated for Other Achievement Levels
The percentage of a goal achieved will determine the earned percentage of target for that particular goal. The earned percentage of target will be extrapolated for achievement between the established minimum level and the established target level for a particular goal. Similarly, the earned percentage of target will be extrapolated for achievement between the established target level and the established maximum level for a particular goal.
Maximums and Minimums
| Generally, the maximum percentage calculated as an earned percentage of target for any goal is 200%, and the overall maximum incentive award that a participant can earn under the weighting formula is 200% of the participants target bonus percentage. |
| Where the established minimum of a performance goal is achieved, only 50% of that goals share will be allocated to the participants target bonus percentage. |
| Where less than the established minimum of a performance goal is achieved, no amount of that goal will be allocated to the participants target bonus percentage. |
No annual incentive will be paid if the achievement of Corporate Operating Earnings is less than the established applicable minimum of Operating Earnings, notwithstanding the achievements as to the other applicable performance goals for 2013.
Page 5
Additional Guidelines for the Annual Incentive Plan
Adjustments
Under the Plan qualitative performance factors of an individuals performance up to +20% or 20% of an individuals calculated award. However, generally, the sum of qualitative adjustments for all eligible participants cannot exceed +5% of the aggregate calculated awards.
Some Special Circumstances
The above formulas generally determine the amount of the incentive award for the year. Other factors that may affect the actual award follow:
| If a participant leaves the Company due to retirement, death, or disability, an award will be calculated based on the actual base salary earned during the year in which the participant leftso long as the participant worked at least six months of that year. |
| If a participant leaves the Company before the end of the plan year for any other reason, the participant will not receive a bonus award for that year. |
| If a participant voluntarily leaves the Company after the end of the year but before the award is paid, the participant would receive any bonus due unless the employment is terminated for cause. If employment is terminated for cause, the participant would not be entitled to receive an award under the Plan. |
| Participants who are hired mid-year may earn a pro-rated award for that year, based on the salary earned during that year. However, participants with less than two months service in a plan year (i.e. hired after October 31) would not be eligible for an award for that year. |
| A prerequisite to any AIP award is compliance with ATIs Corporate Guidelines for Business Conduct and Ethics. |
Making Payments
All incentive award payments will be paid in cash, less applicable withholding taxes, after the year-end audit is complete and payment has been considered and approved by the Personnel and Compensation Committee.
Page 6
Administration Details
This summary relates to the Annual Incentive Plan (AIP) of ATI and its subsidiaries. The Plan is administered by the Personnel and Compensation Committee, which has full authority to:
| Interpret the Plan; |
| Designate eligible participants and categories of eligible participants; |
| Set the terms and conditions of incentive awards; and |
| Establish and modify administrative rules for the Plan. |
Plan participants may obtain additional information about the plan and the Committee from:
Mary Beth Moore
Vice President, Human Resources
Allegheny Technologies Incorporated
1000 Six PPG Place
Pittsburgh, PA 15222-5479
Phone: 412-394-2935
Fax: 412-394-3017
The Plan will remain in effect until terminated by the Personnel and Compensation Committee. The Personnel and Compensation Committee may also amend the Plan at its sole discretion.
The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and is not qualified under Section 401(a) of the Internal Revenue Code.
Page 7
Exhibit 10.2
PERFORMANCE/RESTRICTED STOCK AGREEMENT
This Performance/Restricted Stock Agreement (the Agreement) made as of the 28th day of February 2013 by and between ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the Corporation) and [NAME] (the Employee).
WHEREAS, the Corporation sponsors and maintains the Allegheny Technologies Incorporated Stock 2007 Incentive Plan (the Incentive Plan);
WHEREAS, the Corporation desires to encourage the Employee to remain an employee of the Corporation and, during such employment, to contribute substantially to the financial performance of the Corporation and, to provide that incentive, the Corporation has awarded, subject to the performance and employment restrictions described herein, the Employee an aggregate of [NUMBER OF SHARES] shares of the common stock of the Corporation, $0.10 par value per share (Common Stock);
WHEREAS, half of the Shares Subject to Restrictions are subject to the Corporations attainment of the performance requirements set forth in Paragraph 3(b) (the Performance Criteria); and half of the Shares Subject to Restrictions are subject to the Employees remaining an Employee (except in instances of death, disability or Retirement as described below) during the Restriction Period set forth in Paragraph 3(c), subject to accelerated termination of the Restriction in the event of attainment of the Performance Criteria; and
WHEREAS, the Corporation and the Employee desire to evidence the award of the Shares Subject to Restrictions and the terms and conditions applicable thereto in this Restricted Stock Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants contained herein and intending to be legally bound, the Corporation and the Employee agree as follows:
1. Grant of Shares Subject to Restrictions. The Corporation hereby grants to the Employee, as of the date first written above, the Shares Subject to Restrictions subject to the restrictions and other terms and conditions set forth herein. Simultaneously with the execution and delivery of this Agreement, the Employee shall deliver to the Corporation a stock power endorsed in blank relating to the Shares Subject to Restrictions (including in such power any increases or adjustments to the Shares Subject to Restrictions). As soon as practicable after the Date of Grant, the Corporation shall direct that the Shares Subject to Restrictions be registered in the name of and issued to the Employee and initially bearing the legend described in Paragraph 6. The Shares Subject to Restrictions and any certificate or certificates representing the Shares Subject to Restrictions shall be held in the custody of the Corporation or its designee until the expiration of the applicable Restrictions. Upon any forfeiture in accordance with Paragraph 4 of the Shares Subject to Restrictions, the forfeited
shares and any certificate or certificates representing the forfeited Shares Subject to Restrictions shall be canceled.
2. Restrictions. Employee shall have all rights and privileges of a stockholder of the Corporation with respect to the Shares Subject to Restrictions, except that the following restrictions shall apply:
(a) None of the Shares Subject to Restrictions may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restriction Period as defined below, except to the extent of the Corporations earlier attainment of the Performance Criteria, as defined below.
(b) The Shares Subject to Restrictions are subject to forfeiture during the Restriction Period in accordance with Paragraph 4 of this Agreement.
(c) The Shares Subject to Restrictions and any certificate representing the Shares Subject to Restrictions shall be held in custody by the Corporation or its designee until such time as either the Performance Criteria are attained or the Restriction Period shall have been completed.
(d) Dividends paid with respect to the Shares Subject to Restrictions during the Restriction Period shall not be paid to the Employee and, instead, shall be converted into additional shares of Restricted Stock at the price at which shares of common stock of the Corporation are purchased under the Corporations outstanding dividend reinvestment program and on the date such purchases are made and such shares of Restricted Stock shall be additions to the shares subject to the Restrictions hereunder.
3. Term of Restriction.
(a) Subject to the forfeiture provisions of Paragraph 4 of this Agreement, the Restrictions shall lapse (i) with respect to half of the Shares Subject to Restrictions on March 1, 2018 if the Employee is an employee of the Corporation on March 1, 2018, unless the Employees cessation of employment was due to the Employees death, disability or Retirement (as defined below), or (y), subject to applicable clawback provisions, as soon as reasonably feasible after January 1, 2016 as it may be determined that the Performance Criteria have been attained and (ii) with respect to half of the Shares Subject to Restrictions, subject to applicable clawback provisions, as soon reasonably feasible after it may be determined that the Performance Criteria have been attained. With respect to the half of the Shares Subject to Restrictions subject only to the Performance Criteria, if the Corporation does not attain the Performance Criteria on or before the three year measurement period ending December 31, 2015, such half of the Shares Subject to Restrictions shall be forfeited immediately upon the completion of that three-year measurement period.
2
(b) For purposes of this Agreement, the Performance Criteria shall mean that the net income of the Corporation, measured under GAAP, shall exceed $450 million, in the aggregate, for the 2013, 2014 and 2015 fiscal years of the Corporation. The period for measuring the Performance Criteria shall end as of December 31, 2015 and the Personnel and Compensation Committee shall as promptly as possible following the completion of the audit of the Corporation for the 2015 fiscal year determine whether the Performance Criteria have been met.
(c) The period from the Date of Grant until the lapse of the applicable Restrictions with respect to the Shares Subject to Restrictions is the Restriction Period for purposes of this Agreement.
(d) As soon as administratively practicable following the lapse of the Restrictions without a forfeiture of the applicable Shares Subject to Restrictions, and upon the satisfaction of all other applicable conditions as to such Shares Subject to Restrictions, including, but not limited to, the payment by the Employee of all applicable withholding taxes, if any, the Corporation shall deliver or cause to be delivered to the Employee shares of Common Stock, which may be in the form of a certificate or certificates for such shares, equal in number to the applicable Shares Subject to Restrictions, which shall not be subject to the transfer restrictions set forth above and shall not bear the legend described in Paragraph 6. Without limiting the foregoing, (i) if the Performance Criteria are met, all Shares Subject to Restrictions shall become non-forfeitable and such Shares or the certificate representing such non-forfeitable shares of common stock of the Corporation shall be delivered as described above and (ii) if the Performance Criteria are not met, (x) half of the Shares Subject to Restrictions shall be forfeited immediately after the end of the measurement period for such Performance Criteria and (y) the remaining half of the Shares Subject to Restrictions shall be non-forfeitable, if at all, at the end of the Restriction Period.
4. Forfeiture of Shares Subject to Restrictions. If Employees employment with the Corporation and all of its direct or indirect subsidiaries is terminated by either party for any reason, including, but not limited to, the involuntary termination of the Employees employment with the Corporation for any reason, with or without cause, other than the Employees death, disability or retirement with the consent of the Corporation when the Employee is at least 55 years of age with at least five years of service (Retirement), (i) all rights of the Employee to the Shares Subject to Restrictions which remain subject to the Restrictions shall terminate immediately and be forfeited in their entirety, and (ii) the forfeited Shares Subject to Restrictions and any stock certificate or certificates representing the forfeited Shares Subject to Restrictions shall be canceled. If the Employee dies or becomes disabled during the Restriction Period, the Shares Subject to Restrictions will immediately vest. If the Employee retires with the consent of the Corporation when the Employee is at least 55 years of age with at least five years of service, the Employee (or the Employees beneficiary) shall receive the Shares Subject to Restrictions when, if and to the extent, the Restrictions lapse under Paragraph 3.
3
5. Change of Control. All Shares Subject to Restrictions shall fully vest in the event of a Change of Control as defined in the Incentive Plan.
6. Legend. During the Restriction Period, the shares of Restricted Stock and any share certificate or certificates evidencing the Shares Subject to Restrictions shall be endorsed with the following legend (in addition to any legend required under applicable securities laws or any agreement by which the Corporation is bound):
THE TRANSFERABILITY OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A RESTRICTED STOCK AGREEMENT ENTERED INTO BY AND BETWEEN ALLEGHENY TECHNOLOGIES INCORPORATED AND THE HOLDER OF THIS CERTIFICATE. A COPY OF SUCH AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATION.
7. Withholding. The Corporation or its direct or indirect subsidiary may withhold from the number of Shares Subject to Restrictions or from any cash amount payable hereunder or any other cash payments due to Employee all taxes, including social security taxes, which the Corporation or its direct or indirect subsidiary is required or otherwise authorized to withhold with respect to the Shares Subject to Restrictions.
8. Adjustments to Number of Shares. Any shares issued to Employee with respect to the Shares Subject to Restrictions in the event of any change in the number of outstanding common stock of the Corporation through the declaration of a stock dividend or a stock split or combination of shares or any other similar capitalization change shall be deemed to be Shares Subject to Restrictions subject to all the terms set forth in this Agreement.
9. No Right to Continued Employment; Effect on Benefit Plans. This Agreement shall not confer upon Employee any right with respect to continuance of his or her employment or other relationship, nor shall it interfere in any way with the right of the Corporation or its direct or indirect subsidiary to terminate his or her employment or other relationship at any time. Income realized by Employee pursuant to this Agreement shall not be included in Employees earnings for the purpose of any benefit plan in which Employee may be enrolled or for which Employee may become eligible unless otherwise specifically provided for in such plan.
10. Employee Representations. In connection with the issuance of the Shares Subject to Restrictions, Employee represents the following:
(a) Employee has reviewed with Employees own tax advisors, the federal, state, local and foreign tax consequences of this Agreement and the transactions contemplated hereby. Employee is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents. Employee understands that
4
Employee (and not the Corporation) shall be responsible for Employees own tax liability that may arise as a result of this Agreement and the transactions contemplated hereby.
(b) Employee has received, read and understood this Agreement and the Incentive Plan and agrees to abide by and be bound by their respective terms and conditions.
11. Miscellaneous.
(a) Governing Law. This Agreement shall be governed and construed in accordance with the domestic laws of the Commonwealth of Pennsylvania without regard to such Commonwealths principles of conflicts of laws.
(b) Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation without the consent of all parties hereto.
(c) Entire Agreement; Amendment. This Agreement contain the entire understanding between the parties hereto with respect to the subject matter of this Agreement and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, with respect to the subject matter of this Agreement. This Agreement may not be amended or modified without the written consent of the Corporation and Employee.
(d) Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original and all of which together shall constitute one document.
(e) Compliance with Corporate Policies. No payment will be made under this Agreement or the PRSP unless the Employee has fully complied with all corporate policies of the Corporation, including but not limited to, the Corporations Corporate Guidelines for Business Conduct and Ethics.
(f) Clawback. The Employee acknowledges and agrees that the Employee will repay any Overpayment as defined in any Clawback of Incentive Payments letter agreement between the Corporation and the Employee and that any such letter agreement is incorporated by reference herein.
5
(e) Definitions. Initially capitalized terms not otherwise defined in this Restricted Stock Agreement shall have the meanings ascribed thereto in the Incentive Plan.
IN WITNESS WHEREOF, the parties have executed this Shares Subject to Restrictions Agreement as of the date first written above.
ALLEGHENY TECHNOLOGIES INCORPORATED | ||
By: | /s/ Elliot S. Davis | |
Name: | Elliot S. Davis | |
Title: | Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary |
PARTICIPANT | WITNESS | |||
|
6
Exhibit 10.3
TOTAL SHAREHOLDER RETURN INCENTIVE COMPENSATION PROGRAM
AWARD AGREEMENT
This Total Shareholder Return Incentive Compensation Program Award Agreement (the Agreement) effective as of January 1, 2013 by and between ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the Company) and [NAME] (the Employee).
WHEREAS, the Company has adopted the Allegheny Technologies Incorporated 2007 Incentive Plan (the Plan) and, in accordance with the Plan, has adopted Administrative Rules for the Total Shareholder Return Incentive Compensation Program, as amended (the TSRP) as a portion of the Plan to (i) assist the Company retain and motivate key management employees; (ii) reward key management employees for the overall success of the Company; and (iii) provide a means of encouraging key management employees to acquire and hold shares of Company Common Stock.
WHEREAS, the TSRP provides that each TSR Target Award made under the TSRP shall be evidenced by an Award Agreement between the Company and the key management employee who receives a TSR Target Award under the TSRP setting forth the terms and conditions of such TSR Target Award;
WHEREAS, the Company desires to make a TSR Target Award to the Participant and evidence such TSR Target Award by this Award Agreement and the Participant, having read and understood the Plan and the TSRP, is willing to enter into this Award Agreement on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the covenants and agreements herein contained and intending to be legally bound, the parties hereto agree with each other as follows:
Subject to the attainment of the Performance Levels described below and to the terms and conditions of the Plan, the TSRP and the Terms and Conditions of Award attached hereto and incorporated herein by reference, by which Participant agrees to be bound, the Company awards to Participant the Award described below, with respect to the Performance Period described below:
PERFORMANCE PERIOD: January 1, 2013 through December 31, 2015
TSR TARGET AWARD: [NUMBER OF SHARES] of Company Common Stock, equals applicable base salary times [PERCENTAGE] (which is the Participants target award opportunity as a percent of salary) divided by $27.69 (which is the average of the high and low trading prices of stock for the 30 trading days prior to January 1, 2013).
PERFORMANCE LEVELS: The following table shows the performance award relationship under the TSRP for the 2013-2015 performance period:
Outcome Relative to Peer Group TSR |
||||||
Level of Performance |
Three-Year Percentile Ranking in TSR |
Percent of Target Award Earned |
||||
Below Threshold |
Below 35th percentile | 0 | % | |||
Threshold |
35th percentile | 50 | % | |||
Target |
50th percentile | 100 | % | |||
Outstanding |
90th percentile | 200 | % |
Note: Interpolation between points will be made on a straight line basis on each scale. Below the 35th percentile and above the 90th percentile, there will be no extrapolation.
THE ACTUAL AWARD UNDER THE TSRP WILL EQUAL THE TSR TARGET AWARD TIMES THE APPLICABLE PERCENT OF TARGET AWARD EARNED. NO AWARD SHALL BE DELIVERED UNLESS THE EMPLOYEE HAS FULLY COMPLIED WITH ALL CORPORATION POLICIES, INCLUDING, BUT NOT LIMITED TO, THE COMPANYS CORPORATE GUIDELIINES FOR BUSINESS CONDUCT AND ETHICS.
IN WITNESS WHEREOF, the parties hereto have executed this Total Shareholder Return Incentive Compensation Program Award Agreement effective the day and year first above written.
ALLEGHENY TECHNOLOGIES INCORPORATED | ||
By: | /s/ Elliot S. Davis | |
Name: | Elliot S. Davis | |
Title: | Senior Vice President, General Counsel, | |
Chief Compliance Officer | ||
and Corporate Secretary |
PARTICIPANT | WITNESS | |||
|
2
TERMS AND CONDITIONS OF TSRP AWARD
Section 1: Definitions
Capitalized words used but not defined below or elsewhere in these Terms and Conditions shall have the meanings ascribed to them in the Plan.
Administrative Rules or TSRP shall mean the Administrative Rules for the TSRP adopted by the Committee effective January 1, 2001, as amended effective February 24, 2005 and as amended effective February 21, 2008 and as further amended effective December 9, 2011, as the same may be amended from time to time.
Award shall mean the grant of a TSR Target Award evidenced by this Award Agreement.
Committee means the Personnel and Compensation Committee of the Board of Directors.
Common Stock shall mean the common stock, $0.10 par value per share, of Allegheny Technologies Incorporated.
Company shall mean Allegheny Technologies Incorporated and its subsidiaries, unless the context requires otherwise.
Disability shall mean the total and permanent disability of Participant as determined by the Committee in its sole discretion.
Outstanding shall mean a relative standing of the Companys TSR as against the TSR for the Peer Group, in each case for the TSR Performance Period, equal to or greater than 90%.
Peer Group shall mean the corporations listed on Exhibit 1 to this Award Agreement, subject to the adjustments to such group as permitted under the Administrative Rules.
Retirement means a termination of employment with the Company and each of its subsidiaries, with the consent of the Company, at or after (i) attaining age 55 and (ii) completing five years of employment with the Company and/or any subsidiary of the Company.
Target shall mean a relative standing of the Companys TSR as against the TSR of the Peer Group, in each case for the TSR Performance Period, of equal to or greater than 50% but less than 75%.
Threshold shall mean a relative standing of the Companys TSR as against the TSR of the Peer Group, in each case for the TSR Performance Period, of equal to or greater than 35% but less than 50%.
TSR Performance Level means the measure of Company TSR performance relative to the Peer Group, as set forth on page 2 of this Award Agreement. In determining the final Performance Level, the Committee shall use straight-line interpolation between Threshold and Target, and between Target and Outstanding. No TSR Reward will be earned for a Performance
3
Level less than Threshold. No additional TSR Reward above Outstanding will be earned for a Performance Level greater than Outstanding.
Section 2: TSRP Award
2.1 Subject to the attainment of the TSR Performance Levels and to the terms and conditions otherwise set forth in the Plan, the TSRP and this Award Agreement, the Company awards to Participant the TSRP Award described in the first two pages of this Award Agreement with respect to the Performance Period described therein.
Section 3: Payment
3.1 Subject to the withholding obligations and any requirements of Section 4 then applicable, the Company shall deliver to the Participant certificates representing the TSR Rewards, if any, for the TSR Performance Period within 75 days after the end of the TSR Performance Period.
3.2 If the Participant terminates employment with the Company and each subsidiary of the Company during a then uncompleted TSR Performance Period for reasons other than death, Disability or Retirement, any TSR Target Award for any then uncompleted TSR Performance Period shall be forfeited automatically and the shares represented by such TSR Target Awards shall again be eligible for awards under the Rules.
3.3 If the Participant terminates employment with the Company and each Subsidiary of the Company during a then uncompleted TSR Performance Period due to the Participants death, Disability, or Retirement, a pro rata award based on the number of full months worked by the Participant during that Performance Period will be calculated, based on goal achievement over the entire performance period. Any award determined to be payable shall be paid after the end of the applicable Performance Period.
Section 4: Miscellaneous
4.1 General Restriction. To the extent any TSR Target Award is denominated in Common Stock under this Award Agreement, it shall be subject to the requirement that if at any time the Committee shall determine that any listing or registration of the shares of Common Stock or any consent or approval of any governmental body or any other agreement or consent is necessary or desirable as a condition of the issuance of shares of Common Stock or cash in satisfaction thereof, such issuance of shares of Common Stock may not be consummated unless such requirement is satisfied in a manner acceptable to the Committee. The Company shall in no event be obligated to register any securities pursuant to the Securities Act of 1933 (as the same shall be in effect from time to time) or to take any other affirmative action to cause the issuance of shares pursuant to the distribution of TSR Rewards to comply with any law or regulation of any governmental authority.
4.2 Non-Assignability. No TSR Target Award granted under this Award Agreement shall be assignable or transferable by the Participant, except by will or by the laws of descent and distribution. During the life of the Participant, any TSR Rewards shall be payable only to the Participant. No assignment or transfer of a TSR Target Award or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise (except by will or
4
the laws of descent and distribution), shall vest in the assignee or transferee any interest or right herein whatsoever, and immediately upon such purported assignment or transfer, the TSR Target Awards shall terminate and become of no further effect.
4.3 Withholding Obligations. Whenever the Company makes delivery under the Plan, in whole or in part, the Company shall notify the Participant of the amount of withholding for tax, if any, which must be paid under federal and, where applicable, state and local law. The Company shall, in the discretion of the Company, but with the consent of the Committee, arrange for payment for such withholding for taxes in any one or combination of the following ways: (i) acceptance of an amount in cash paid by the Participant; or (ii) reduction in the number of shares to be issued by that number of shares which, in aggregate, have a value equal to such withholding amount. If the full amount of the required withholding is not recovered in the above manner, the Participant shall, forthwith upon receipt of notice, remit the deficiency to the Company. No shares of Common Stock shall be issued or delivered to the Participant (and/or the Participants designee) until all applicable withholding obligations shall have been satisfied in full.
4.4 Delivery of Certificates. As soon as practicable after compliance by the Participant with all applicable conditions including, but not limited to, the satisfaction of the Withholding Obligations described in Section 4.3 hereof, the Company will issue and deliver by mail, or cause delivery by mail, to the Participant at the address of the Companys records, certificates registered in the name of the Participant (and/or the Participants designee) for the number of shares of Common Stock which the Participant is entitled to receive (subject to reduction for withholding as provided in Section 4.3 hereof) under the provisions of this Award Agreement.
4.5 No Right to Employment. Nothing in the Plan or in this Award Agreement shall confer upon the Participant the right to continue in the employ of the Company or any subsidiary or affect any right that the Company or a subsidiary may have to terminate the employment of the Participant.
4.6 Amendment or Termination of the Plan. The Plan, or any part thereof (including the TSRP and/or Administrative Rules) may be terminated or may, from time to time, be amended, each in accordance with the Plan, TSRP or Administrative Rules, as applicable, provided, however, the termination or amendment of the Plan, the Administrative Rules or TSRP shall not, without the consent of the Participant, affect Participants rights under this Award Agreement.
4.7 Investment Representation. Under the federal and/or state securities laws, the Participant may be required to deliver, and, if so, shall deliver, to the Committee, upon demand by the Committee, at the time of any payment of Common Stock, a written representation that the shares to be acquired are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to delivery of any shares shall be a condition precedent to the right of the Participant to receive any shares.
4.8 No Rights as Shareholder. The Participant shall have no rights as a stockholder of the Company with respect to shares of Common Stock subject to the Award evidenced this Award
5
Agreement unless and until a certificate for shares of Common Stock is issued to the Participant.
4.9 Adjustment of Award. In the event of any change or changes in the outstanding Common Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares or any rights offering to purchase a substantial amount of Common Stock at a price substantially below fair market value or of any similar change affecting the Common Stock, any of which takes effect after the first grant of a TSR Target Award under this Award Agreement, the Committee may, in its discretion, appropriately adjust the number of shares of Common Stock which may be issued under this Award Agreement, the number of shares of Common Stock subject to TSR Target Awards under this Award Agreement and any and all other adjustments deemed appropriate by the Committee to prevent substantial dilution or enlargement of the rights granted to the Participant in such manner as the Committee shall deem appropriate. Any adjustment so made shall be final and binding upon the Participant.
4.10 Awards Not a Bar to Corporate Event. The existence of the TSR Target Awards granted hereunder shall not affect in any way the right or the power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Companys capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
4.11 Not Income for Qualified Plans. No amounts of income received by a Participant pursuant to this Award Agreement shall be considered compensation for purposes of any pension or retirement plan, insurance plan or any other employee benefit plan of the Company or any of its affiliates.
4.12 Meaning of Participant. Whenever the word Participant is used in any provision of this Award Agreement under circumstances where the provision should logically be construed to apply to the executors, the administrators, or the person or persons to whom the TSR Target Awards may be transferred by will or by the laws of descent and distribution, the word Participant shall be deemed to include such person or persons.
4.13 Determinations of Committee. The actions taken and determinations of the Committee made pursuant to this Award Agreement and of the Committee pursuant to the Plan, the TSRP and the Administrative Rules shall be final, conclusive and binding upon the Company and upon the Participant. No member of the Committee shall be liable for any action taken or determination made relating to this Award Agreement, the Plan, the TSRP, or the Administrative Rules if made in good faith.
6
Exhibit 1: List of Peer Companies (2013-2015 Performance Period)
Alcoa Inc.
AK Steel Holding Corp.
Carpenter Technology Corp.
AM Castle & Co.
Commercial Metals Company
Kennametal Inc.
Materion Corporation
Nucor Corporation
Precision Castparts Corp.
Reliance Steel & Aluminum Co.
RTI International Metals, Inc.
Schnitzer Steel Industries, Inc.
Steel Dynamics Inc.
Timken Co.
United States Steel Corporation
Universal Stainless & Alloy Products
Worthington Industries, Inc.
7
Exhibit 10.4
KEY EXECUTIVE PERFORMANCE PLAN AGREEMENT
This Key Executive Performance Plan Agreement (the Agreement) made as of the 28th day of February, 2013 by and between ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the Corporation) and [NAME] (the Employee).
WHEREAS, the Corporation sponsors and maintains the Allegheny Technologies Incorporated Key Executive Performance Plan (the KEPP);
WHEREAS, the Corporation desires to encourage the Employee to remain an employee of the Corporation and, during the KEPP Performance Period measuring calendar years 2013, 2014 and 2015 (the 2013-2015 Performance Period) to contribute substantially to the financial performance of the Corporation and, to provide that incentive, the Corporation has awarded the Employee the opportunity to participate in the KEPP for the 2013-2015 Performance Period, subject to the terms and conditions set forth in the KEPP and in this Agreement; and
WHEREAS, the Corporation and the Employee desire to evidence the Award of the opportunity to participate in the KEPP for the 2013-2015 Performance Period and the terms and conditions applicable thereto in this KEPP Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants contained herein and intending to be legally bound, the Corporation and the Employee agree as follows:
1. KEPP Document Controls; Definitions. In the event of any conflict between the provisions of the KEPP document and this Agreement, the provisions of the KEPP document shall control. Initially capitalized terms not specifically defined in this Agreement shall have the meanings ascribed thereto under the KEPP document, which is attached hereto as Exhibit I and made a part hereof.
2. Grant of Award for 2013-2015 Performance Period. The Corporation hereby grants an Award under KEPP to the Employee to participate in the KEPP for the 2013-2015 Performance Period. The Employees opportunity is measured as a multiple of his annual base salary at the rate in effect on the Date of Award, which for the Employee for the 2013-2015 Performance Period is [BASE SALARY] (the Base Amount). For each gradation of achievement of Earnings in Level I, the Base Amount shall be multiplied by the designated gradation of achievement as set forth under Section 3 or as determined by the Committee under Section 4 of this Agreement.
3. Level I Earnings Gradations. For the 2013-2015 Performance Period, Earnings shall be measured in aggregate income before taxes as reported by the Corporation for calendar years 2013, 2014 and 2015. The gradations and amounts shall be as follows for the 2013-2015 Performance Period:
Gradation | Earnings (in income before taxes of | |||
the Corporation, in millions) | ||||
1X |
$ | 1,085 | ||
2X |
$ | 1,305 | ||
3X |
$ | 1,565 | ||
4X |
$ | 1,875 | ||
5X |
$ | 2,255 |
No KEPP Payments will be made under Level I if aggregate income before taxes of the Corporation for 2013, 2014 and 2015 is less than $1,085 million. No KEPP payment in excess of 5X will be made if aggregate income before taxes of the Corporation for 2013, 2014 and 2015 is in excess of $2,255 million.
4. Level II Opportunities. No Level II opportunities are granted for the 2013-2015 Performance Period.
5. Termination of Employment. If Employees employment with the Corporation and all of its direct or indirect subsidiaries is terminated by either party for any reason prior to January 1, 2016 (except if such date is preceded by a Change in Control as provided in Section 6 below, including, but not limited to, the involuntary termination of the Employees employment with the Corporation for any reason, with or without cause, other than the Employees death, disability or retirement with the consent of the Corporation when the Employee is at least 55 years of age with at least five years of service (Retirement)), all rights of the Employee to the Award made under this Agreement shall terminate immediately and be forfeited in their entirety. Without limiting the foregoing, the Employee will not be considered for any KEPP Payment under Level II. If the Employee dies, has a Retirement or becomes disabled during the 2013-2015 Performance Period, the Employee shall be entitled to a KEPP Payment equal to the greater of (i) a pro rata KEPP Award determined by multiplying (a) the gradation of earnings under Level I actually achieved by the Corporation for the 2013-2015 Performance Period by (b) the Employees Base Amount and then by (c) a fraction of which the numerator is the number of months beginning on January 1, 2013 and ending on the effective date of the Employees death, Disability or Retirement and the denominator is 36 and (ii) the amount reserved in the Participant Retention Achievement Bank as of the last day of the calendar year immediately preceding the date of the Employees death, Disability or Retirement. Any KEPP Payment due to the Employee if he becomes disabled or has a Retirement or to the Beneficiary of the Employee if he dies shall be paid after the end of the 2013-2015 Performance Period when KEPP Payments are made to other participants in KEPP for the 2013-2015 Performance Period.
2
6. Change of Control. In the event of a Change in Control, the Employee shall be entitled to receive an amount determined under Section 8.01 of the KEPP Document.
7. Withholding. The Corporation or its direct or indirect subsidiary may withhold from amount of any KEPP Payment due to Employee all taxes, including social security taxes, which the Corporation or its direct or indirect subsidiary is required or otherwise authorized to withhold with respect to any KEPP Payment.
8. No Right to Continued Employment; Effect on Benefit Plans. This Agreement shall not confer upon Employee any right with respect to continuance of his or her employment or other relationship, nor shall it interfere in any way with the right of the Corporation or its direct or indirect subsidiary to terminate his or her employment or other relationship at any time. Income realized by Employee pursuant to this Agreement shall not be included in Employees earnings for the purpose of any benefit plan, qualified or non-qualified, in which Employee may be enrolled or for which Employee may become eligible unless otherwise specifically provided for in such plan.
9. Employee Representations. In connection with this Award, the Employee represents the following:
(a) Employee has reviewed with Employees own tax advisors, the federal, state, local and foreign tax consequences of this Agreement and the transactions contemplated hereby. Employee is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents. Employee understands that Employee (and not the Corporation) shall be responsible for Employees own tax liability that may arise as a result of this Agreement and the transactions contemplated hereby.
(b) Employee has received, read and understood this Agreement and KEPP and agrees to abide by and be bound by their respective terms and conditions.
10. Miscellaneous.
(a) Governing Law. This Agreement shall be governed and construed in accordance with the domestic laws of the Commonwealth of Pennsylvania without regard to such Commonwealths principles of conflicts of laws.
(b) Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation without the consent of all parties hereto.
(c) Entire Agreement; Amendment. This Agreement contain the entire understanding between the parties hereto with respect to the subject matter of this
3
Agreement and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, with respect to the subject matter of this Agreement. This Agreement may not be amended or modified without the written consent of the Corporation and Employee.
(d) Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original and all of which together shall constitute one document.
(e) Compliance with Corporate Policies. No payment will be made under this Agreement or the KEPP unless the Employee has fully complied with all Corporation policies, including, but not limited to, the Corporations Corporate Guidelines for Business Conduct and Ethics.
(f) Clawback. The Employee acknowledges and agrees that the Employee will repay any Overpayment as defined in any Clawback of Incentive Payments letter agreement between the Corporation and the Employee and that any such letter agreement is incorporated by reference herein.
IN WITNESS WHEREOF, the parties have executed this Key Executive Performance Plan Agreement as of the date first written above.
ALLEGHENY TECHNOLOGIES INCORPORATED | ||
By: | /s/ Elliot S. Davis | |
Name: | Elliot S. Davis | |
Title: | Senior Vice President, General Counsel, | |
Chief Compliance Officer | ||
and Corporate Secretary |
PARTICIPANT | WITNESS | |||
|
|
4
APPENDIX I
ALLEGHENY TECHNOLOGIES INCORPORATED
KEY EXECUTIVE PERFORMANCE PLAN
Effective as of January 1, 2004
And as amended through February 28, 2013
Article I. Adoption and Purpose of the Key Executive Performance Plan
1.01 Adoption. This Key Executive Performance Plan is adopted by the Personnel and Compensation Committee of the Board of Directors as a part of the Allegheny Technologies Incorporated executive compensation program effective January 1, 2004. The KEPP Payments, if any, earned under this Plan are intended as performance based compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, as incentive compensation determined solely with reference to attainment in predetermined levels of Earnings and Operational Goals within the relevant Performance Period.
1.02 Purpose. The purposes of the KEPP are (i) to direct the focus of key management employees to the achievement of goals deemed necessary for the success of the Corporation, (ii) to assist the Corporation in retaining and motivating selected key management employees of the Corporation and its subsidiaries who will contribute to the success of the Corporation and (iii) to reward key management employees for the overall success of the Corporation as determined with reference to predetermined levels of Earnings of the Corporation and attainment of Operational Goals. The KEPP is intended to act as an incentive to participating key management employees to achieve long-term objectives that will inure to the benefit of all stockholders of the Corporation measured in terms of achievement of predetermined levels of Earnings of the Corporation and attainment of Operational Goals.
1.03 Plan Document. This KEPP plan document is intended as the plan document as adopted by the Committee, which will govern all Performance Periods of the KEPP after 2007 as the Incentive Plan was reapproved by the shareholders at the Annual Meeting in May of 2012.
Article II. Definitions
For purposes of this Plan, the capitalized terms set forth below shall have the following meanings:
A-1
2.01 Award means an opportunity to earn a KEPP Payment in a particular Performance Period. Each Award shall be denominated in dollars that can be earned upon attainment of predetermined Earnings thresholds (Level 1) and, if Level 2 awards are deemed appropriate, the maximum amount that may be paid with respect to Operational Goals before the application of Negative Discretion (Level 2).
2.02 Award Agreement means a written agreement between the Corporation and a Participant or a written acknowledgment from the Corporation specifically setting forth the terms and conditions of a KEPP Award granted to a Participant pursuant to Article VI of this Plan.
2.03 Board means the Board of Directors of the Corporation.
2.04 Cause means a determination by the Committee that a Participant has engaged in conduct that is dishonest or illegal, involves moral turpitude or jeopardizes the Corporations right to operate its business in the manner in which it is now operated.
2.05 Change in Control means any of the events set forth below:
(a) The acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Corporation Voting Securities in excess of 25% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or
(b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on January 1, 2012 and (ii) persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on January 1, 2012; provided, however, that any person nominated for election by the Board at a time when at least two-thirds of the members of the Board were persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); or
(c) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or
A-2
trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or
(d) Approval by the stockholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) a sale or other disposition of all or substantially all the assets of the Corporation.
2.06 Committee means the Personnel and Compensation Committee of the Board.
2.07 Corporation means Allegheny Technologies Incorporated, a Delaware corporation, and its successors.
2.08 Corporation Voting Securities means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board.
2.09 Date of Award means the date as of which an Award is granted in accordance with Article VI of this Plan.
2.10 Disability means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. Notwithstanding the foregoing, if a Participants employment by the Corporation or an applicable subsidiary terminates by reason of a disability, as defined in an Employment Agreement between such Participant and the Corporation or an applicable subsidiary, such Participant shall be deemed to be disabled for purposes of the KEPP.
2.11 Earnings means income before taxes.
2.12 Effective Date means January 1, 2004.
2.13 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.14 KEPP Payment means the amount actually earned by a Participant in a particular Performance Period. Each KEPP Payment shall be the sum of the amounts earned by a Participant during a Performance Period as Level 1 and, if awarded, Level 2 achievement or, if greater, the amount under the Participant Retention Achievement Bank under Section 8.04.
A-3
2.15 Level 1 means that portion of an Award that may be earned based on attainment of Earnings.
2.16 Level 2 means that portion of an Award, if a Level 2 award has been made, that may be earned after application of Negative Discretion by the Committee, based on the relative attainment of Operational Goals. The Level 2 portion of any Award shall be denominated in the maximum amount that may be earned with respect to Operational Goals prior to the application of Negative Discretion.
2.17 Negative Discretion means the power of the Committee to be exercised solely in the Committees discretion to reduce the Level 2 portion of any Award. It is anticipated that the Committee will review with the Chief Executive Officer of the Corporation the relative attainment of Operational Goals during a particular Performance Period before the Committee exercises its Negative Discretion.
2.18 Operational Goals means the goals set by the Committee at the commencement of a Performance Period to be attained by the Participants during the course of a particular Performance Period. Operational Goals will be set forth in terms of operating objectives and/or criteria, which may or may not be earnings measures that, in the judgment of the Committee after consultation with the Chief Executive Officer of the Corporation, will enhance the success of the Corporation during and beyond a particular Performance Period.
2.19 Participant means any key management employee selected by the Committee, pursuant to Section 5.01 of this Plan, as eligible to participate under the KEPP for any one or more Performance Period.
2.20 Performance Period means a period of more than one fiscal year of the Corporation over which the attainment of Earnings and Operational Goals shall be measured.
2.21 Plan or KEPP means the Key Executive Performance Plan as set forth in this plan document or as the same may be amended from time to time.
2.22 Retirement means, a termination of employment with the Corporation and each subsidiary of the Corporation at or after (i) attaining age 55 and (ii) completing five years of employment with the Corporation and/or any subsidiary of the Corporation.
2.23 Withholding Obligations means the amount of federal, state and local income and payroll taxes the Corporation determines in good faith must be withheld with respect to a KEPP Payment. Withholding Obligations may be settled by the Participant, as permitted by the Committee in its discretion, in cash, previously owned shares of common stock of the Corporation or any combination of the foregoing.
A-4
Article III. Administration
In addition to any power reserved to the Committee under the governing documents of the Corporation, the KEPP shall be administered by the Committee, which shall have exclusive and final authority and discretion in each determination, interpretation or other action affecting the KEPP and its Participants. The Committee shall have the sole and absolute authority and discretion to interpret the KEPP, to amend or modify this Plan for the KEPP, to select, in accordance with Section 5.01 of this Plan, the persons who will be Participants hereunder, to set all Earnings thresholds and Operational Goals, to determine all performance criteria, levels of Awards and KEPP Payments payable, to determine, after review of the Corporations financial reports, the degree to which any threshold of Earnings has been achieved for a Performance Period with respect to the Level 1 portion of any Award, to review the attainment of Operational Goals and exercise Negative Discretion with respect to the Level 2 portion of any Award, to impose such conditions and restrictions as it determines appropriate and to take such other actions and make such other determinations in connection with the KEPP as it may deem necessary or advisable.
Article IV. Overview of KEPP
4.01 Cash Bonus Plan. KEPP is designed to pay cash bonuses to participating key executives after the end of a Performance Period based on the level (i) of achievement of predetermined Earnings thresholds and, if the Committee determines a Level 2 award is appropriate, (ii) attainment of Operational Goals (to which the Committee may exercise Negative Discretion).
4.02 Levels of Awards. KEPP Awards may be granted with two levels. The first level, Level 1, is a cash bonus payment based on achievement of Earnings that the Committee has no discretion to reduce. KEPP Payments earned under Level 1 will be earned solely with reference to Earnings attained during the Performance Period. The second level, Level 2, if formed, is a cash bonus payment based on the level of attainment of Operational Goals that the Committee has the Negative Discretion to reduce. The Committees judgment in exercising its Negative Discretion to arrive at a KEPP Payment under Level 2 is expected to be guided by the degree to which the Corporation generally or the participating key executives in particular have attained predetermined Operational Goals. The Committee is expected to review the level of attainment of Operational Goals with the Chief Executive Officer of the Corporation before exercising any Negative Discretion.
4.03 Participating Key Executives. It is intended that the number of participating key executives shall be limited to those key executives with the most direct influence on the attainment of Earnings and operational goals.
A-5
Article V. Participation
5.01 Designation of Participants. Participants in the KEPP shall be such key management employees of the Corporation or of its subsidiaries as the Committee, in its sole discretion, may designate as eligible to participate in the KEPP for any one or more Performance Periods. No later than 90 days after the commencement of each Performance Period during the term of the KEPP, the Committee shall designate the Participants who are eligible to participate in the KEPP during such Performance Period. The Committees designation of a Participant with respect to any Performance Period shall not require the Committee to designate such person as a Participant with respect to any other Performance Period. The Committee shall consider such factors as it deems pertinent in selecting Participants. The Committee shall promptly provide to each person selected as a Participant written notice of such selection.
Article VI. Grants under the KEPP
6.01 Annual Determination Regarding Performance Period. No later than the 60th day of each calendar year, the Committee shall determine whether to establish a Performance Period, provided, however, for a Performance Period established in calendar year 2004, the Committee may make a determination under this Section 6.01 at any time prior to the 90th day of calendar year 2004.
6.02 Determination of Grants, Awards (both Level 1 and Level 2) and Performance Criteria. For each Performance Period, the Committee shall take the following actions no later than the 90th day of the first calendar year of that Performance Period:
(a) Identify Participants for that Performance Period.
(b) Establish the level of Level 1 and, if deemed appropriate, Level 2 opportunities for each Participant.
(c) Set the Earnings target(s).
(d) If Level 2 is formed for a Performance Period, set the Operational Goals and relative weightings after discussing such goals and weighting with the Chief Executive Officer in order to bring the Operational Goals as closely as possible in line with the Corporations business plans.
6.03 Termination of Employment. If a Participant terminates employment with the Corporation and each subsidiary of the Corporation during a then uncompleted Performance Period for reasons other than death, Disability or Retirement, any KEPP Award for any then uncompleted Performance Period shall be forfeited automatically. If a Participant terminates employment with the Corporation and each subsidiary of the
A-6
Corporation for reasons of death, Disability or Retirement during a then uncompleted Performance Period, the Participant shall be entitled to receive a pro rata KEPP Payment for each then uncompleted Performance Period determined:
(a) when the KEPP Payments for all other Participants in such Performance Period(s) are determined; and
(b) based on the actual level of achievement of Earnings for that Performance Period and the attainment of Operational Goals, after the application of Negative Discretion.
Article VII. Determination of Achievement of Earnings and Operational Goals
7.01 Determination of Earnings and Operational Goals. As promptly as administratively feasible but in no event later than the March 1st of the calendar year following last calendar year of each Performance Period, the Committee shall determine Earnings of the Corporation and the attainment of Operational Goals and the degree, if any, to which the Committee will exercise Negative Discretion.
7.02 Determination of KEPP Payments. KEPP Payments for a particular Performance Period for a particular Participant shall be the result of adding (i) the amount earned by a particular Participant under Level 1 based on the Corporations actual Earnings during the Performance Period and (ii) the amount earned by a particular Participant under Level 2 based on attainment of Operational Goals and after the application, if any, by the Committee of Negative Discretion or, if greater, the Participant Retention Achievement Bank amount determined under Section 8.04.
Article VIII. Miscellaneous
8.01 Change in Control. In the event of a Change in Control, KEPP Payments shall be determined for all then uncompleted Performance Periods as of the date of the Change in Control at the highest level Earnings for each such uncompleted Performance Period and KEPP Payments shall be delivered to the Participant as soon after the Change in Control as is administratively feasible.
8.02 Non-Uniform Determinations. The actions and determinations of the Committee need not be uniform and may be taken or made by the Committee selectively among employees or Participants, whether or not similarly situated.
8.03 Amendment and Termination of the Plan. The Committee shall have complete power and authority to amend or terminate this Plan at any time it is deemed necessary or appropriate. No termination or amendment of the Plan may, without the consent of the Participant to whom any award shall theretofore have been granted under the KEPP, adversely affect the right of such individual under such award; provided,
A-7
however, that the Committee may, in its sole discretion, make such provision in the Award Agreement for amendments which, in its sole discretion, it deems appropriate.
8.04 Participant Retention Achievement Bank. In order to retain participants designated as eligible to participate in KEPP for the 2006-2008 and each subsequent Performance Period (Banking Performance Period(s)), for those Performance Periods, KEPP Payments will be made under this Participant Retention Achievement Bank provision if greater than the KEPP Payment otherwise due under the KEPP for the relevant Banking Performance Periods. The aggregate amount in the Participant Retention Achievement Bank shall be equal to the sum of the three amounts (none less than 0) determined as of the close of each year in the relevant Banking Performance Period by taking the amount of Earnings for that year multiplied by three and determining the Level 1 amount due for that level of achievement for the entire three year, relevant Banking Performance Period(s) and then dividing the KEPP Payment due under the foregoing clause by three. The resulting amount will be one of the three amounts added together (one for each year in the relevant Banking Performance Period) to comprise the aggregate Participant Retention Achievement Bank. The amount of the KEPP Payment due to any individual Participant for the relevant Banking Performance Period will be equal to the amount determined by multiplying the Participant Retention Achievement Bank by a fraction, the numerator of which is the Level 1 KEPP Payment due to that Participant if actual performance for the relevant Banking Performance Period was at the 1X Threshold Reference and the denominator of which is the sum of all payments due at Level 1 for 1X achievement for all Participants for the relevant Banking Performance Period.
A-8
Exhibit 12.1
Allegheny Technologies Incorporated
Computation of Ratio of Earnings to Fixed Charges
(Dollars in millions)
(Unaudited)
Three | ||||
Months | ||||
Ended | ||||
3/31/2013 | ||||
Income before income tax provision and cumulative effect of change in accounting principle |
$ | 15.3 | ||
(Income) loss recognized on less than fifty percent owned persons |
8.6 | |||
Noncontrolling interest in the income of subsidiary with fixed charges |
(1.6 | ) | ||
|
|
|||
$ | 22.3 | |||
Fixed Charges: |
||||
Interest expense |
$ | 13.8 | ||
Portion of rents deemed to be interest |
1.9 | |||
Capitalized interest |
9.6 | |||
Amortization of debt expense |
0.9 | |||
|
|
|||
Fixed charges excluding capitalized interest |
26.2 | |||
Earnings adjustments: |
||||
Capitalized interest |
(9.6 | ) | ||
|
|
|||
Earnings, as adjusted |
$ | 38.9 | ||
|
|
|||
Ratio of earnings to fixed charges |
1.5 | |||
|
|
EXHIBIT 31.1
CERTIFICATIONS
I, Richard J. Harshman certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Allegheny Technologies Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 6, 2013
/s/ Richard J. Harshman |
Richard J. Harshman |
Chairman, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, Dale G. Reid certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Allegheny Technologies Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 6, 2013
/s/ Dale G. Reid |
Dale G. Reid |
Executive Vice President, Finance and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Allegheny Technologies Incorporated (the Company) on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 6, 2013 | /s/ Richard J. Harshman | |
Richard J. Harshman | ||
Chairman, President and Chief Executive Officer | ||
Date: May 6, 2013 | /s/ Dale G. Reid | |
Dale G. Reid | ||
Executive Vice President, Finance and Chief Financial Officer |
'!A8VME="!B96=I;CTG[[N_)R!I9#TG5S5-,$UP0V5H:4AZ 7,@9+-[26NP\$"F;97`N)IMPI0
M&N*I:B;IVKV4ENHT J=E4ODM?L;3&+<0,SB0YIB$WJC '!A
M8VME="!B96=I;CTG[[N_)R!I9#TG5S5-,$UP0V5H:4AZ!&"*1($IAHL!QD6@=EJ"4KX0XV=5
MD9N&-IF4C$*4W37K0I<&HYO6/(6X\@21:$!N.]R*+H4A2RN^JR8F&;PY184.=%DC(RFD\&
M293!52IE"G`>>N9DPU983#0`SW!"[,XQD(L!P2ZQI4$<4LVH1-CD9G:2[QF>
M4-\8K-'IFH2ODCCLI"]C\KA38[>/"K7[,[5(JM(K1#6TK@+Q*)'LEKS3TL97
M9N?'WP&*X9C'FUR1-;LS+4#$R3DB(/7JB9.N./.\KV&^5$'.!
6O9ED;(,L*=BHW4U]P
M:!WPDD8%X2)!"=T:+0YCM:'-#:G&0I-:I,%HC+NYGB.*``V.Y*P(65`N[;J.
MBWEU=:FR!^6SN(V2AU<6W,0RLH-YU&.<:_4INJMEJEM;P6#I6YKF%[HZ4P=!
M)B^IWQ5[1]K@5R%[#?K7%]79&Z54XR&=2VP))8NS#I7JZ%*;-J"76%!%6#6J
ML'N<*T+8QQ`AR,3Q-W=41HG%''$@0I@_UPC2I3H]09%I,K[0NN'R.?.6%N>-
MSV;&%Y`#:TC FZSTNJ21,>U&_2]4D;SBTSO:25T3-T:3KB1/;FXM*`]8DSY9
MP`E(LIVE.P]#W!"W:N:3BTDKHNCV>L4CC6TO0(D<@8HE:U=LMIU1)52AM>Y*
MC
43&$Y%8\Y^X2DITK7^G6Y^TOV@G:T2XQ^:T?O*@_(H]2QK^GVN)
M.KA4UP?&YT[O_)+1X>C9S]%W8^"2G__9.$))300A``````!5`````0$````/
M`$$`9`!O`&(`90`@`%``:`!O`'0`;P!S`&@`;P!P````$P!!`&0`;P!B`&4`
M(`!0`&@`;P!T`&\`