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Derivative Financial Instruments and Hedging | 9 Months Ended
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Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging | Derivative Financial Instruments and Hedging As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged, and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized in the consolidated statements of operations. The Company sometimes uses futures and swap contracts to manage exposure to changes in prices for forecasted purchases of raw materials, such as nickel, and natural gas. Under these contracts, which are generally accounted for as cash flow hedges, the price of the item being hedged is fixed at the time that the contract is entered into and the Company is obligated to make or receive a payment equal to the net change between this fixed price and the market price at the date the contract matures. The majority of ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of September 30, 2016, the Company had entered into financial hedging arrangements, primarily at the request of its customers, related to firm orders, for an aggregate notional amount of approximately 29 million pounds of nickel with hedge dates through 2020. The aggregate notional amount hedged is approximately 30% of a single year’s estimated nickel raw material purchase requirements. At September 30, 2016, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. In the first nine months of 2016, due to changes in expected operating levels, the Company concluded that additional portions of these natural gas hedges for 2016 and the first quarter of 2017 were ineffective based on forecast changes in underlying natural gas usage. The Company recognized a $0.4 million and $1.7 million pre-tax loss for the three and nine months ended September 30, 2016, respectively, for natural gas cash flow hedge ineffectiveness, which is reported in selling and administrative expenses on the consolidated statement of operations. Approximately 90% of the Company’s annual forecasted domestic requirements for natural gas for 2017 and approximately 25% for 2018 are hedged. While the majority of the Company’s direct export sales are transacted in U.S. dollars, foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The Company sometimes purchases foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk, primarily euros. In addition, the Company may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. In 2015, the Company net settled substantially all of its foreign currency forward contracts designated as cash flow hedges with 2016 and 2017 maturity dates. The portion of the deferred gains on these settled cash flow hedges determined to be effective is currently recognized in accumulated other comprehensive income and is reclassified to earnings when the underlying transactions occur. As of September 30, 2016, the Company held 67.2 million euro notional value of foreign currency forward contracts designated as fair value hedges with maturity dates through 2017. The Company recorded a $0.5 million and $3.0 million charge in the three and nine months ended September 30, 2016, respectively, and a $1.8 million charge and a $5.6 million benefit in the three and nine months ended September 30, 2015, respectively, in costs of sales on the consolidated statement of operations for maturities and mark-to-market changes on these fair value hedges. The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. There were no unsettled derivative financial instruments related to debt balances for the periods presented. There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts are substantial and creditworthy commercial banks that are recognized market makers. The Company controls its credit exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit default swap spreads of its counterparties. The Company also enters into master netting agreements with counterparties when possible. The fair values of the Company’s derivative financial instruments are presented below, representing the gross amounts recognized which are not offset by counterparty or by type of item hedged. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs derived principally from or corroborated by observable market data.
(In millions) Asset derivatives |  | Balance sheet location |  | September 30, 2016 |  | December 31, 2015
Derivatives designated as hedging instruments: |  |  |  |
Foreign exchange contracts |  | Prepaid expenses and other current assets |  | $ | 0.2 |  |  | $ | 1.6 |
Nickel and other raw material contracts |  | Prepaid expenses and other current assets |  | 3.5 |  |  | — |
Foreign exchange contracts |  | Other assets |  | 0.2 |  |  | 0.4 |
Nickel and other raw material contracts |  | Other assets |  | 5.8 |  |  | — |
Total derivatives designated as hedging instruments |  | 9.7 |  |  | 2.0 |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign exchange contracts |  | Prepaid expenses and other current assets |  | 0.2 |  |  | 0.4 |
Total derivatives not designated as hedging instruments |  | 0.2 |  |  | 0.4 |
Total asset derivatives |  |  |  | $ | 9.9 |  |  | $ | 2.4 |
Liability derivatives |  | Balance sheet location |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |
Natural gas contracts |  | Accrued liabilities |  | $ | 8.5 |  |  | $ | 17.3 |
Nickel and other raw material contracts |  | Accrued liabilities |  | 8.8 |  |  | 22.2 |
Foreign exchange contracts |  | Accrued liabilities |  | 1.4 |  |  | 0.1 |
Natural gas contracts |  | Other long-term liabilities |  | 0.8 |  |  | 8.5 |
Nickel and other raw material contracts |  | Other long-term liabilities |  | 8.7 |  |  | 23.0 |
Foreign exchange contracts |  | Other long-term liabilities |  | 0.3 |  |  | 0.1 |
Total derivatives designated as hedging instruments |  | 28.5 |  |  | 71.2 |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign exchange contracts |  | Accrued liabilities |  | — |  |  | 0.1 |
Total derivatives not designated as hedging instruments |  | — |  |  | 0.1 |
Total liability derivatives |  |  |  | $ | 28.5 |  |  | $ | 71.3 |
For derivative financial instruments that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period results. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes. Assuming market prices remain constant with those at September 30, 2016, a loss of $9.3 million is expected to be recognized over the next 12 months. Activity with regard to derivatives designated as cash flow hedges for the three and nine month periods ended September 30, 2016 and 2015 was as follows (in millions):
| Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (a) |  | Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (b)
Derivatives in Cash Flow | Three months ended September 30, |  | Three months ended September 30, |  | Three months ended September 30,
Hedging Relationships | 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015
Nickel and other raw material contracts | $ | 4.2 |  |  | $ | (13.5 | ) |  | $ | (2.2 | ) |  | $ | (2.4 | ) |  | $ | — |  |  | $ | — |
Natural gas contracts | (1.2 | ) |  | (3.7 | ) |  | (1.3 | ) |  | (1.6 | ) |  | (0.3 | ) |  | — |
Electricity contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Foreign exchange contracts | — |  |  | 0.7 |  |  | 3.4 |  |  | 6.0 |  |  | — |  |  | — |
Total | $ | 3.0 |  |  | $ | (16.5 | ) |  | $ | (0.1 | ) |  | $ | 2.0 |  |  | $ | (0.3 | ) |  | $ | — |
| Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (a) |  | Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (b)
Derivatives in Cash Flow | Nine months ended September 30, |  | Nine months ended September 30, |  | Nine months ended September 30,
Hedging Relationships | 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015
Nickel and other raw material contracts | $ | 13.0 |  |  | $ | (26.6 | ) |  | $ | (9.9 | ) |  | $ | (7.0 | ) |  | $ | — |  |  | $ | — |
Natural gas contracts | 1.1 |  |  | (9.5 | ) |  | (7.2 | ) |  | (6.4 | ) |  | (1.2 | ) |  | — |
Electricity contracts | — |  |  | — |  |  | — |  |  | (0.1 | ) |  | — |  |  | — |
Foreign exchange contracts | (0.5 | ) |  | 24.6 |  |  | 13.0 |  |  | 18.5 |  |  | — |  |  | — |
Total | $ | 13.6 |  |  | $ | (11.5 | ) |  | $ | (4.1 | ) |  | $ | 5.0 |  |  | $ | (1.2 | ) |  | $ | — |
(a) | The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales in the same period or periods in which the hedged item affects earnings.
(b) | The gains (losses) recognized in income on derivatives related to the ineffective portion and the amounts excluded from effectiveness testing are presented in selling and administrative expenses.
The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset. The Company has 10 million euro notional value outstanding as of September 30, 2016 of foreign currency forward contracts not designated as hedges, with maturity dates into the second quarter of 2017. These derivatives that are not designated as hedging instruments were as follows:
(In millions) | Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated | Three months ended September 30, |  | Nine months ended September 30,
as Hedging Instruments | 2016 |  | 2015 |  | 2016 |  | 2015
Foreign exchange contracts | $ | (0.2 | ) |  | $ | — |  |  | $ | (0.1 | ) |  | $ | 3.0 |
Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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