10-K 1 atify201610-k.htm 10-K Document
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
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 Number)
 
 
1000 Six PPG Place, Pittsburgh, Pennsylvania
 
15222-5479
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (412) 394-2800
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.10 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is well known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes   x    No  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨     No  x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
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. (Check one): 
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
On February 10, 2017, the Registrant had outstanding 108,767,403 shares of its Common Stock.
The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 30, 2016 was approximately $1.4 billion, based on the closing price per share of Common Stock on June 30, 2016 of $12.75 as reported on the New York Stock Exchange. Shares of Common Stock known by the Registrant to be beneficially owned by directors and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Exchange Act.
Documents Incorporated By Reference
Selected portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2017 are incorporated by reference into Part III of this Report.
 
 
 
 
 

1


INDEX
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I
Item 1. Business
The Company
Allegheny Technologies Incorporated is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800, Internet website address www.atimetals.com. References to “Allegheny Technologies,” “ATI,” the “Company,” the “Registrant,” “we,” “our” and “us” and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires.
Our Business
ATI is a global manufacturer of technically advanced specialty materials and complex components. Over 50% of our sales are to the aerospace & defense market, particularly jet engines, and we have a strong presence in the oil & gas, electrical energy, medical, automotive, and other industrial markets. ATI is a market leader in manufacturing differentiated specialty alloys and forgings that require our unique manufacturing and precision machining capabilities and our innovative new product development competence. ATI produces nickel-based alloys and superalloys, titanium and titanium-based alloys, specialty alloys, stainless steels, and zirconium and other related alloys in many mill product forms. Our capabilities range from alloy development, to melting and hot-working, through highly engineered finished components. We are also a leader in producing nickel-based alloy and titanium-based alloy powders for use in next-generation jet engine forgings and 3D-printed products.
We operate in two business segments: High Performance Materials & Components (HPMC), and Flat Rolled Products (FRP). Our HPMC segment produces, converts and distributes a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, zirconium and related alloys including hafnium and niobium, advanced powder alloys and other specialty materials, in long product forms such as ingot, billet, bar, rod, wire, shapes and rectangles, and seamless tubes, plus precision forgings, castings, components and machined parts. These products are designed for the high performance requirements of major end markets such as aerospace & defense, oil & gas, electrical energy, and medical. Our FRP segment produces, converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip products. The major end markets for our flat-rolled products are oil & gas, automotive, food processing equipment and appliances, construction and mining, electronics, communication equipment and computers, and aerospace & defense.
ATI’s strategic vision is to be an aligned and integrated specialty materials and components company. Our strategies target the products and global growth markets that require and value ATI’s technical and manufacturing capability leadership. These differentiated products serve key global markets including aerospace & defense, oil & gas, electrical energy, medical and automotive, and sales to these key global markets represented 80% of total 2016 sales.
More than 50% of ATI’s 2016 sales, and 75% of the HPMC segment’s 2016 sales, are to the aerospace & defense market, led by products for commercial aerospace jet engines. Through acquisitions, alloy development, internal growth strategies, and long-term supply agreements on current and next-generation aero-engines and airframes, we are well positioned with a fully qualified asset base to meet the expected multi-year growth in demand from the commercial aerospace market. Our HPMC segment’s isothermal and hot-die forge press utilization continues to improve to meet aerospace demand growth, including new market share gains.
Strategic end use markets for our products include:
Aerospace & Defense. We are a world leader in the production of premium titanium-based alloys, nickel-based and cobalt-based alloys and superalloys, and vacuum-melted specialty alloys used in the manufacture of components for both commercial and military jet engines, as well as replacement parts for those engines. We also produce titanium-based alloys, vacuum-melted specialty alloys, and high-strength stainless alloys for use in commercial and military airframes, airframe components and missiles.
Titanium and titanium-based alloys are critical metals in aerospace and defense applications. They possess an extraordinary combination of properties, including superior strength-to-weight ratio, elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance. These metals are used to produce jet engine components such as blades, vanes, discs, and casings, and airframe components such as structural members, landing gear, hydraulic systems, and fasteners. The latest and next-generation airframes and jet engines use increasing amounts of titanium and titanium alloys in component parts in order to minimize weight and maximize fuel efficiency.
Our nickel-based alloys and superalloys and specialty alloys are also widely used in aerospace and defense applications. Nickel-based alloys and superalloys remain extremely strong at high temperatures and resist degradation under extreme

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conditions. Typical aerospace applications for nickel-based alloys and superalloys and advanced powder alloys include jet engine shafts, discs, blades, vanes, rings and casings. The next generation and future-generation jet engines use new generations of nickel-based superalloys and advanced powder alloys in large part due to increased fuel efficiency requirements that require hotter-burning engines. Our specialty alloys include vacuum-melted maraging steels used in the manufacture of aircraft landing gear and structural components, as well as jet engine components.
Our titanium-based alloy, nickel-based alloy, and specialty alloy precision forgings are used for components for jet engines, structural components for aircraft, helicopters, launch vehicles, and other demanding applications. We are a world leader in isothermal and hot-die forging technologies for advanced aerospace components.  We produce highly sophisticated components that have differing mechanical properties in different parts of the same piece for greater resistance to fatigue and temperature effects. ATI provides a full range of post-forging inspection, machining and finishing services with the certified quality needed to meet demanding application requirements.  ATI has the technology, equipment and know-how to cast titanium parts in some of the largest sizes and most complex shapes currently being manufactured for aerospace applications. ATI’s advanced manufacturing capabilities offer OEMs the freedom to design components with intricate geometries, cored passageways, cast-in features and sculpted surfaces. 
ATI’s powder metal technology delivers extreme alloy compositions and refined microstructures that offer increased performance and longer useful lives in high-temperature aerospace environments.  Powder metal technology boosts the efficiency of jet engines. Powder delivers the most uniform grain structure achievable, in near-net shapes. We are expanding our powder metal production capacity in Bakers, NC to better serve these markets, and we expect to qualify these assets with key strategic customers and increase our sales of these products in 2017.
We continuously seek to develop innovative new alloys to better serve the needs of this end use market. For example, ATI 718Plus® nickel-based superalloy, Rene 65 near-powder superalloy, and our powder alloys have won significant share in the current and next-generation jet engines.
Oil & Gas. The environments in which oil and gas can be found in commercial quantities have become more challenging, involving deep offshore wells, high pressure and high temperature conditions in sour wells and unconventional sources, such as shale oil and gas, and oil sands. Challenging offshore environments are in deepwater remote locations that are further off the continental shelf, including arctic and tropical locations, often one mile or more below the water’s surface, and up to two miles below the ocean floor. The requirements for equipment that can operate for up to 30 years in these environments are fulfilled by the specialty materials that we produce.
Both of our business segments produce specialty materials that are critical to the oil and gas industry. Our specialty materials, including titanium and titanium-based alloys, nickel-based alloys, zirconium alloys, stainless and duplex alloys and other specialty alloys have the strength, wear corrosion-resistant properties necessary for difficult environments.
Our Datalloy2® and DatalloyHP™ specialty stainless is used for non-magnetic drill collars that enable the most advanced directional and horizontal drilling techniques to be guided to the exact position desired for the reservoir. We have developed a family of duplex alloys, including ATI 2003® and ATI 2102® lean duplex alloys, for use in subsea and deepwater oil and gas applications. Several of our strip, plate and cast products are NORSOK qualified. The NORSOK standards are developed by the Norwegian petroleum industry and are intended to identify materials used in oil and gas applications that are safe and cost-effective.
Electrical Energy. Our specialty materials are widely used in the global electrical power generation and distribution industry. We believe energy needs and environmental policies and the electrification of developing countries will continue to drive demand for our specialty materials and products for use in this industry.
For electrical power generation, our specialty materials, including corrosion-resistant alloys (CRAs), are used in coal, nuclear, and natural gas applications. In coal-fired plants, our CRAs are used for pipe, tube, and heat exchanger applications in water systems in addition to pollution control scrubbers. Our CRAs are also used in water systems, fuel cladding components, and process equipment for nuclear power plants. For nuclear power plants, we are an industry pioneer in producing reactor-grade zirconium and hafnium alloys used in nuclear fuel cladding and structural components. We are a technology leader for large diameter nickel-based superalloys used in natural gas land-based turbines for power generation. For alternative energy generation, our alloys are used for solar, fuel cell and geothermal applications.
Medical. ATI’s advanced specialty materials are used in medical device products that save and enhance the quality of lives.
Our zirconium-niobium, titanium- and cobalt-based alloys are used for knees, hips and other prosthetic devices. These replacement devices offer the potential of lasting much longer than previous implant options.

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Our biocompatible nickel-titanium shape memory alloy is used for stents to support collapsed or clogged blood vessels. Reduced in diameter for insertion, these stents expand to the original tube-like shape due to the metal’s superelasticity. Our ultra fine diameter (0.002 inch/0.051 mm) titanium wire is used for screens to prevent blood clots from entering critical areas of the body. In addition, our titanium bar and wire are used to make surgical screws for bone repairs.
Manufacturers of magnetic resonance imaging (MRI) devices rely on our niobium superconducting wire to help produce electromagnetic fields that allow physicians to safely scan the body’s soft tissue.
Automotive. For automobiles, nickel-based alloys, stainless steel and other ATI specialty materials are the choice for powertrain and structural parts, exhaust system and emission control parts, gaskets, air bag inflator housings, windshield wipers and blades, fuel systems, fasteners, hose clamps, gaskets and other components. Stainless steel is also used on exterior trim for its bright appearance and for internal components for its corrosion resistance.
ATI’s advanced nickel-based alloys and specialty alloys in flat-rolled products are used primarily in engine and exhaust applications in the automotive market.  Global demand is expected to grow for our high-value precision and engineered strip for automotive applications such as gaskets, hose clamps, and turbo chargers.  As automotive engine operating temperatures get hotter as a result of turbochargers, we bring our expertise in aerospace alloys to the automotive market, and our alloy mix continues to trend favorably.  Our HRPF provides the capability to produce these high-value alloys in wider and longer coils. 
We also provide a variety of heat-resistant and corrosion-resistant automotive exhaust alloys.  Again, in this application we focus on those exhaust applications that are closer to the engine where exhaust temperatures are highest and corrosion resistance is most severe.
Business Segments
Our two business segments accounted for the following percentages of total revenues of $3.13 billion, $3.72 billion, and $4.22 billion for the years ended December 31, 2016, 2015, and 2014, respectively.
 
 
2016
 
2015
 
2014
High Performance Materials & Components
 
62
%
 
53
%
 
48
%
Flat Rolled Products
 
38
%
 
47
%
 
52
%
Information with respect to our business segments is presented below and in Note 16 of the notes to the consolidated financial statements.
High Performance Materials & Components Segment
Our HPMC segment produces, converts and distributes a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, zirconium and related alloys including hafnium and niobium, advanced powder alloys and other specialty materials, in long product forms such as ingot, billet, bar, rod, wire, shapes and rectangles, and seamless tubes, plus precision forgings and castings, components and machined parts. These products are designed for the high performance requirements of such major end markets as aerospace & defense (jet engines and airframes), oil & gas, electrical energy, and medical. We are integrated across these alloy systems in melt, remelt, mill product forging, finishing, investment casting, and machining processes. Most of the products in this segment are sold directly to end-use customers, and a significant portion of our HPMC segment products are sold under multi-year agreements.
75% of the HPMC segment’s 2016 revenues were derived from the aerospace & defense market. Demand for our products is driven primarily by the commercial aerospace cycle. Large aircraft and jet engines are manufactured by a small number of companies, such as The Boeing Company, Airbus S.A.S. (an Airbus Group company), Bombardier Aerospace (a division of Bombardier Inc.), and Embraer (Empresa Brasileira de Aeronáutica S.A.) for airframes, and GE Aviation (a division of General Electric Company), Rolls-Royce plc, Pratt & Whitney (a division of United Technologies Corporation), Snecma (SAFRAN Group), and various joint ventures that manufacture jet engines. These companies and their suppliers form a substantial part of our customer base in this business segment. The loss of one or more of our customers in the aerospace & defense market could have a material adverse effect on ATI’s results of operations and financial condition.
Principal competitors in the HPMC segment include Berkshire Hathaway Inc., for nickel-based alloys and superalloys and specialty steel alloys, titanium and titanium-based alloys, precision forgings and investment castings through its recent acquisition of Precision Castparts Corporation and subsidiaries; Arconic Inc., for titanium and titanium-based alloys and precision forgings through its recent acquisitions of RTI International Metals, Inc. and Firth Rixson; Carpenter Technology Corporation for nickel-based alloys and superalloys and specialty steel alloys; VSMPO-AVISMA for titanium and titanium-based alloys; and Aubert & Duval for precision forgings.

5


Flat Rolled Products Segment
Our FRP segment produces, converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip® products. The major end markets for our flat-rolled products are oil & gas, automotive, aerospace & defense, food processing equipment and appliances, construction and mining, electronics, communication equipment and computers. The operations in this segment are ATI Flat Rolled Products and the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL), in which we hold a 60% interest. Segment results also include our 50% interest in the industrial titanium joint venture known as Uniti LLC.
Stainless steel, nickel-based alloys and titanium sheet products are used in a wide variety of industrial and consumer applications. In 2016, approximately 65% by volume of our stainless sheet products were sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers.
Engineered strip and very thin Precision Rolled Strip products, which are under 0.015 inches thick, are used by customers to fabricate a variety of products primarily in the automotive, construction, and electronics markets. In 2016, approximately 90% by volume of our engineered strip and Precision Rolled Strip products were sold directly to end-use customers or through our own distribution network, with the remainder sold to independent service centers.
Stainless steel, nickel-based alloy and titanium plate products are primarily used in aerospace, corrosion and industrial markets. In 2016, approximately one-half by volume of our plate products were sold to independent service centers, with the remainder sold directly to end-use customers.
Competition in the Flat Rolled Products segment includes domestic stainless steel competitors AK Steel Corporation, North American Stainless, and Outokumpu Stainless USA, LLC, as well as imports from numerous foreign producers, including Aperam, based in Europe. Competitors for nickel-based alloys and superalloys and specialty steel alloys include Haynes International and VDM Metals GmbH.
Significant global overcapacity for stainless steel flat-rolled products has intensified the price competition in this segment over the last several years. Some of our foreign competitors are either directly or indirectly subsidized by governments. In 1999, the United States imposed anti-dumping and countervailing duties on dumped and subsidized imports of stainless steel sheet and strip in coils and stainless steel plate in coils from companies in ten foreign countries. The anti-dumping and countervailing duty orders were reviewed in 2011 by the U.S. Department of Commerce and the U.S. International Trade Commission to determine whether the orders should remain in place for another five years. The agencies decided that eight such orders against five countries will continue in effect. In July 2016, the U.S. Department of Commerce and the U.S. International Trade Commission initiated a third review of the eight orders. The four orders covering imports of stainless steel plate in coils from three countries were continued for an additional five years in December 2016. A determination concerning continuation of the four orders covering imports of stainless steel sheet and strip in coils from three countries is expected in the third quarter of 2017.
Additionally, in February 2016, ATI and the three domestic stainless steel competitors filed antidumping and countervailing duty petitions concurrently with the U.S. Department of Commerce and the U.S International Trade Commission, charging that unfairly traded imports of stainless steel sheet and strip from the People’s Republic of China are causing material injury to the domestic stainless steel industry. In February 2017, the U.S. Department of Commerce issued its final determinations, calculating antidumping duties ranging from 64% and 77% percent and countervailing duties ranging from 76% and 191%. These duties are generally applied in combination. The U.S. International Trade Commission is scheduled to announce its final determination in early March 2017. The antidumping duties and subsidy margins are expected to act as a significant deterrent to the illegal dumping of Chinese government-subsidized imports of stainless steel sheet and strip into the U.S. market. We continue to monitor imports from foreign producers for appropriate action.
Raw Materials and Supplies
Substantially all raw materials and supplies required in the manufacture of our products are available from more than one supplier and the sources and availability of raw materials essential to our businesses are currently adequate. The principal raw materials we use in the production of our specialty materials are scrap (including iron-, nickel-, chromium-, titanium-, and molybdenum-bearing scrap), nickel, titanium sponge, zirconium sand and sponge, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, manganese and manganese alloys, cobalt, niobium, vanadium and other alloying materials.
Purchase prices of certain principal raw materials have been volatile. As a result, our operating results may be subject to significant fluctuation. We use raw materials surcharge and index mechanisms to offset the impact of changes in raw material costs; however, competitive factors in the marketplace may limit our ability to institute such mechanisms, and there can be a delay between the change in the price of raw materials and the impact of such mechanisms. For example, in 2016 we used

6


approximately 80 million pounds of nickel; therefore a hypothetical change of a $1.00 per pound increase in nickel prices would result in increased costs of approximately $80 million. We also used approximately 300 million pounds of ferrous scrap in the production of our flat-rolled products; a hypothetical change of a $0.01 per pound increase would result in increased costs of approximately $3 million.
In August 2016, we announced the indefinite idling of our Rowley, UT titanium sponge production in the HPMC segment, which was completed in December 2016. Over the last several years, significant global capacity has been added to produce titanium sponge, which is a key raw material used to produce ATI’s titanium products. In addition, demand for industrial-grade titanium products from global markets continues to be weak. As a result of these factors, titanium sponge, including aerospace quality sponge, can now be purchased from qualified global producers under long-term supply agreements at prices lower than the production costs at ATI’s titanium sponge facility in Rowley, UT. ATI has entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge. The lower cost titanium sponge purchased under these supply agreements will replace the titanium sponge produced at the Rowley facility.
Other raw materials, such as nickel, cobalt, and ferrochromium, are available to us and our specialty materials industry competitors primarily from foreign sources. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which could disrupt supplies or affect the price of these materials.
We purchase our nickel requirements principally from producers in Australia, Canada, Norway, Russia, and the Dominican Republic. Zirconium raw materials are primarily purchased from the United States and China. Cobalt is purchased primarily from producers in Canada. More than 80% of the world’s reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. Niobium is purchased primarily from producers in Brazil. We also purchase titanium sponge from sources in Kazakhstan and Japan.
Export Sales and Foreign Operations
Direct international sales represented approximately 41% of our total annual sales in 2016, 42% of our total sales in 2015, and 38% of our total sales in 2014. These figures include direct export sales by our U.S.-based operations to customers in foreign countries, which accounted for approximately 31% of our total sales in 2016, 33% of our total sales in 2015, and 28% of our total sales in 2014. Our overseas sales, marketing and distribution efforts are aided by our international marketing and distribution offices, ATI Europe, ATI Europe Distribution, and ATI Asia, or by independent representatives at various locations throughout the world. We believe that at least 50% of ATI’s 2016 sales were driven by global markets when we consider exports of our customers. Direct sales by geographic area in 2016, and as a percentage of total sales, were as follows:
(In millions)
 
 
 
 
United States
 
$
1,857.5

 
59
%
Europe
 
639.7

 
21
%
Asia
 
418.9

 
13
%
Canada
 
97.6

 
3
%
South America, Middle East and other
 
120.9

 
4
%
Total sales
 
$
3,134.6

 
100
%
Our HPMC segment has manufacturing capabilities for melting, remelting, forging and finishing nickel-based alloys and specialty alloys in the United Kingdom, and manufacturing capabilities for precision forging and machining in Poland, primarily serving the aerospace, construction and transportation markets. Within our FRP segment, our STAL joint venture in the People’s Republic of China produces Precision Rolled Strip products, which enables us to offer these products more effectively to markets in China and other Asian countries. Our Uniti LLC joint venture allows us to offer titanium products to industrial markets more effectively worldwide.
Backlog, Seasonality and Cyclicality
Our backlog of confirmed orders was approximately $1.7 billion at December 31, 2016 and $1.5 billion at December 31, 2015. We expect that approximately 85% of confirmed orders on hand at December 31, 2016 will be filled during the year ending December 31, 2017. Backlog of confirmed orders of our HPMC segment was approximately $1.6 billion at December 31, 2016 and $1.3 billion at December 31, 2015. We expect that approximately 83% of the confirmed orders on hand at December 31, 2016 for this segment will be filled during the year ending December 31, 2017. Backlog of confirmed orders of our FRP segment was approximately $0.1 billion at December 31, 2016 and $0.2 billion at December 31, 2015. We expect that all of the confirmed orders on hand at December 31, 2016 for this segment will be filled during the year ending December 31, 2017.

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Generally, our sales and operations are not seasonal. However, demand for our products is cyclical over longer periods because specialty materials customers operate in cyclical industries and are subject to changes in general economic conditions and other factors both external and internal to those industries.
Research, Development and Technical Services
We believe that our research and development capabilities give ATI an advantage in developing new products and manufacturing processes that contribute to the profitable growth potential of our businesses on a long-term basis. We conduct research and development at our various operating locations both for our own account and, on a limited basis, for customers on a contract basis. Research and development expenditures for the years ended December 31, 2016, 2015, and 2014 included the following:
(In millions)
 
2016
 
2015
 
2014
Company-Funded:
 
 
 
 
 
 
High Performance Materials & Components
 
$
10.9

 
$
10.0

 
$
12.9

Flat Rolled Products
 
3.6

 
4.0

 
4.3

Corporate
 
0.2

 
0.2

 
0.2

 
 
14.7

 
14.2

 
17.4

Customer-Funded:
 
 
 
 
 
 
High Performance Materials & Components
 
2.2

 
1.5

 
2.7

Total Research and Development
 
$
16.9

 
$
15.7

 
$
20.1

Our research, development and technical service activities are closely interrelated and are directed toward cost reduction and process improvement, process control, quality assurance and control, system development, the development of new manufacturing methods, the improvement of existing manufacturing methods, the improvement of existing products, and the development of new products.
We own hundreds of United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as our numerous trademarks, technical information, license agreements, and other intellectual property, have been and are expected to be of value, we believe that the loss of any single such item or technically related group of such items would not materially affect the conduct of our business.
Environmental, Health and Safety Matters
We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants, and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines, civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.
We consider environmental compliance to be an integral part of our operations. We have a comprehensive environmental management and reporting program that focuses on compliance with applicable federal, state, regional and local environmental laws and regulations. Each operating company has an environmental management system that includes mechanisms for regularly evaluating environmental compliance and managing changes in business operations while assessing environmental impact.
Our Corporate Guidelines for Business Conduct and Ethics address compliance with environmental laws as well as employment and workplace safety laws, and also describe our commitment to equal opportunity and fair treatment of employees. We continued to focus on safety across ATI’s operations during 2016. Our 2016 OSHA Total Recordable Incident Rate was 2.11 and our Lost Time Case Rate was 0.44, which we believe to be competitive with world-class performance for our industry.
Employees
We have approximately 8,500 full-time employees, of which approximately 15% are located outside the United States. Approximately 40% of our workforce is covered by various collective bargaining agreements (CBAs), predominantly with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW). On March 4, 2016, ATI announced that it had reached a four-year labor agreement with the USW

8


covering USW-represented employees of its ATI Flat Rolled Products business unit and at two locations in the HPMC business segment. The Company has CBAs with approximately 800 full-time employees that expire in 2017.
Available Information
Our Internet website address is www.atimetals.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy and information statements and other information that we file, are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the United States Securities and Exchange Commission (“SEC”). Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. You may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website at www.sec.gov, which contains reports, proxy and information statements and other information that we file electronically with the SEC.
Item 1A. Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. See the discussion under “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Cyclical Demand for Products. The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating potential uncertainty regarding future profitability. Various changes in general economic conditions may affect the industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products due to economic downturns. Other factors that may cause fluctuation in our customers’ positions are changes in market demand, lower overall pricing due to domestic and international overcapacity, currency fluctuations, lower priced imports and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation.
Worldwide economic conditions deteriorated significantly in the recent past and could remain weak in the future. These conditions have had, and may continue to have, an adverse effect on demand for our customers’ products and, in turn, on demand for our products. If these conditions persist or worsen, our results of operations and financial condition could be materially adversely affected.
Volatility of Raw Material 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. In a period of rising prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold. Generally, over time based on overall inflationary trends in raw materials, labor and overhead costs, the use of the LIFO inventory valuation method will result in a LIFO inventory valuation reserve, as the higher current period costs are included in cost of sales and the balance sheet carrying value of inventory is reduced.
The prices for many of the raw materials we use have been extremely volatile during the past several years. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a fall in raw material costs results in a benefit to operating results by reducing cost of sales and increasing the inventory carrying value, while conversely, a rise in raw material costs has a negative effect on our operating results by increasing cost of sales while lowering the carrying value of inventory.
Due primarily to persistent raw material deflation over the last several years, we are in an unusual situation of having a LIFO inventory balance that exceeds replacement cost. In cases where inventory at FIFO cost is lower than the LIFO carrying value, a write-down of the inventory to market may be required, subject to a lower of cost or market evaluation. In applying the lower of cost or market principle, market means current replacement cost, subject to a ceiling (market value shall not exceed net realizable value) and a floor (market shall not be less than net realizable value reduced by an allowance for a normal profit margin). We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified.

9


Due to the long lead times required to manufacture many of our products, volatility in raw material prices exposes us to cash costs that may not be fully recovered through surcharge and index pricing mechanisms.
Product Pricing. From time-to-time, reduced demand, intense competition and excess manufacturing capacity have resulted in reduced prices, excluding raw material surcharges, for many of our products. These factors have had and may have an adverse impact on our revenues, operating results and financial condition.
Although inflationary trends in recent years have been moderate, during most of the same period certain critical raw material costs, such as nickel, titanium sponge, chromium, and molybdenum and scrap containing iron, nickel, titanium, chromium, and molybdenum have been volatile. While we have been able to mitigate some of the adverse impact of volatile raw material costs through raw material surcharges or indices to customers, rapid changes in raw material costs may adversely affect our results of operations.
We change prices on certain of our products from time-to-time. The ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond our control. The benefits of any price increases may be delayed due to long manufacturing lead times and the terms of existing contracts.
Risks Associated with Commercial Aerospace. A significant portion of the sales of our HPMC segment represents products sold to customers in the commercial aerospace industry. Fulfilling contractual arrangements to provide various products to customers in this industry often involves meeting highly exacting performance requirements and product specifications, and our failure to meet those requirements and specifications on a timely and cost efficient basis could have a material adverse effect on our results of operations, business and financial condition. The commercial aerospace industry has historically been cyclical due to factors both external and internal to the airline industry. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, execution of projected build rates, price competition, and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation are influenced by these factors and therefore are difficult to predict with certainty. Demand for our products in this segment is subject to these cyclical trends. A downturn in the commercial aerospace industry has had, and may in the future have, an adverse effect on the prices at which we are able to sell these and other products, and our results of operations, business and financial condition could be materially adversely affected.
Goodwill or Long-Lived Asset Impairments. We have various long-lived assets that are subject to impairment testing. We review the recoverability of goodwill annually, or more frequently whenever significant events or changes in circumstances indicate that the recorded goodwill of a reporting unit may be below that reporting unit’s fair value. Our businesses operate in highly cyclical industries, such as commercial aerospace and oil & gas, and as such our estimates of future cash flows, market demand, the cost of capital, and forecasted growth rates and other factors may fluctuate, which may lead to changes in estimated fair value and, therefore, impairment charges in future periods. For the 2016 goodwill impairment evaluation, one reporting unit with goodwill of $470.8 million has a fair value that exceeds carrying value by 14%, and one reporting unit with goodwill of $114.4 million has a fair value that exceeds carrying value by 12%. Additionally, we have a significant amount of property, plant and equipment and acquired intangible assets that may be subject to impairment testing, depending on factors such as market conditions, the demand for our products, and facility utilization levels. Any determination requiring the impairment of a significant portion of goodwill or other long-lived assets has had, and may in the future have, a negative impact on our financial condition and results of operations.
Risks Associated with Strategic Capital Projects. From time-to-time, we undertake strategic capital projects in order to enhance, expand and/or upgrade our facilities and operational capabilities. For instance, over the last several years we have undertaken major expansions of our titanium and premium-melt nickel-based alloy, superalloy and specialty alloy production capabilities, and finished product commissioning of a new advanced hot-rolling and processing facility. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including a variety of market, operational, permitting, and labor-related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs or delays, our results of operations and financial position may be materially adversely affected.

10


Dependence on Critical Raw Materials Subject to Price and Availability Fluctuations. We rely to a substantial extent on third parties to supply certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical raw materials are subject to volatility. At any given time we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable, or at all.
If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
We acquire certain important raw materials that we use to produce specialty materials, including nickel, zirconium, niobium, chromium, cobalt, and titanium sponge, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials.
Availability of Energy Resources. We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair the ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
Risks Associated with Environmental Matters. We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants, and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites. We also could be subject to future laws and regulations that govern greenhouse gas emissions and various matters related to climate change, which could increase our operating costs.
With respect to proceedings brought under the federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party (PRP) at approximately 42 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 25 of these sites, and the potential loss exposure with respect to 12 individual sites is not considered to be material.
We are a party to various cost-sharing arrangements with other PRPs at most of the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements.
We believe that we operate our businesses in compliance in all material respects with applicable environmental laws and regulations. However, from time-to-time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws. When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. In many cases, we are not able to determine whether we are liable or if liability is probable to reasonably estimate the loss or range of loss. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the participation number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We intend to adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2016, our reserves for environmental matters totaled approximately $16 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments,

11


administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition or results of operations.
Risks Associated with Current or Future Litigation and Claims. A number of lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, government contracting, employment, employee and retiree benefits, taxes, environmental, health and safety and occupational disease, and stockholder and corporate governance matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us, we do not believe that the disposition of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. Also, we can give no assurance that any other matters brought in the future will not have a material effect on our financial condition, liquidity or results of operations.
Labor Matters. We have approximately 8,500 full-time employees, of which approximately 15% are located outside the United States. Approximately 40% of our workforce is covered by various collective bargaining agreements (CBAs), predominantly with the USW. At various times, our CBAs expire and are subject to renegotiation. The Company has CBAs with approximately 800 full-time employees that expire in 2017. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A labor dispute, which could lead to a strike, lockout, or other work stoppage by the employees covered by one or more of the collective bargaining agreements, could have a material adverse effect on production at one or more of our facilities and, depending upon the length of such dispute or work stoppage, on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements to replace those that expire.
Export Sales. We believe that export sales will continue to account for a significant percentage of our future revenues. Risks associated with export sales include: political and economic instability, including weak conditions in the world’s economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; trade duties; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely affect our results for the period in which they occur.
Risks Associated with Indebtedness. Our substantial indebtedness could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under our outstanding indebtedness. As of December 31, 2016, our total consolidated indebtedness was approximately $1.9 billion. This substantial level of indebtedness increases the risk that we may be unable to generate enough cash to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, our strategic growth initiatives and development efforts and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from taking advantage of business opportunities;
place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
In addition, the agreements that govern our current indebtedness contain, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.
Risks Associated with Retirement Benefits. At December 31, 2016, our U.S. qualified defined benefit pension plan (U.S. Plan)was approximately 70% funded as calculated in accordance with U.S. generally accepted accounting principles. Based upon current regulations and actuarial studies, we expect to make a $135 million cash contribution to the U.S. Plan in 2017, and we currently expect to continue to have average annual funding requirements of approximately $135 million for the next few years, using an expected 7.75% rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including potential changes to mortality tables with revised longevity estimates, and the performance of our pension trust

12


assets. Depending on the timing and amount, a requirement that we fund our U.S. Plan could have a material adverse effect on our results of operations and financial condition.
Risks Associated with Acquisition and Disposition Strategies. We intend to continue to strategically position our businesses in order to improve our ability to compete. Strategies we employ to accomplish this may include seeking new or expanding existing specialty market niches for our products, expanding our global presence, acquiring businesses complementary to existing strengths, and continually evaluating the performance and strategic fit of our existing business units. From time-to-time, management holds discussions with management of other companies to explore acquisitions, joint ventures, and other business combination opportunities as well as possible business unit dispositions. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies, growth or other benefits anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions, changes in tax laws and a deterioration in domestic and foreign economic conditions.
Risks Associated with Information Technology. Information technology infrastructure is critical to supporting business objectives; failure of our information technology infrastructure to operate effectively could adversely affect our business. We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.
As we integrate, implement and deploy new information technology processes and information infrastructure across our operations, we could experience disruptions in our business that could have an adverse effect on our business, financial condition, results of operations and cash flow.
Cyber Security Threats. Increased global information technology threats, security requirements, vulnerabilities, and a rise in sophisticated and targeted international computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We believe that ATI faces the threat of such cyber attacks due to the markets we serve, the products we manufacture, the locations of our operations, and global interest in our technology. Due to the evolving nature of cyber security threats, the scope and impact of any incident cannot be predicted. We continually work to safeguard our systems and mitigate potential risks. Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification or destruction of proprietary and other key information, defective products, production downtimes, operational disruptions, and remediation costs, which in turn could adversely affect our reputation, competitiveness and results of operations.
Internal Controls Over Financial Reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles, and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.
Political and Social Turmoil. The war on terrorism as well as political and social turmoil could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers, and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business, financial condition and results of operations could be materially adversely affected.

13


Risks Associated with Government Contracts. Some of our operating units perform contractual work directly or indirectly for the U.S. Government, which requires compliance with laws and regulations relating to the performance of Government contracts. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) could be asserted against us related to our U.S. Government contract work. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal domestic facilities for our HPMC segment include melting operations and production facilities that perform processing and finishing operations. Domestic melting operations are located in Monroe and Bakers, NC, and Lockport, NY (vacuum induction melting, vacuum arc re-melt, electro-slag re-melt, plasma melting), Richland, WA (electron beam melting), and Albany, OR (vacuum arc re-melt). Production of high performance materials, most of which are in long product form, takes place at our domestic facilities in Monroe and Bakers, NC, Lockport, NY, Richburg, SC, Albany, OR, and Oakdale, PA. Our production of zirconium and related specialty alloys takes place at facilities located in Millersburg, OR and Huntsville, AL. Our production of highly engineered forgings, castings, and machined components takes place at facilities in Cudahy and Coon Valley, WI, East Hartford, CT, Albany, OR, Irvine, CA, Portland, IN, Lebanon, KY, Billerica, MA, and Salem, OR.
Our principal domestic locations for melting stainless steel and other flat-rolled specialty materials are located in Brackenridge and Latrobe, PA. Hot-rolling is performed at our domestic facilities in Brackenridge and Washington, PA. Finishing of our flat-rolled products takes place at our domestic facilities located in Brackenridge, Vandergrift, Washington, Rochester, Monaca, and Zelienople, PA, and in Waterbury, CT, New Bedford, MA, Louisville, OH, and Bridgeview, IL.
Substantially all of our properties are owned, and three of our properties are subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings.
We also own or lease facilities in a number of foreign countries, including France, Germany, the United Kingdom, Poland, and the People’s Republic of China. We own and/or lease and operate facilities for melting and re-melting, machining and bar mill operations, laboratories and offices located in Sheffield, England. We own highly engineered forging and machining operations in Stalowa Wola, Poland. Through our STAL joint venture, we operate facilities for finishing Precision Rolled Strip products in the Xin-Zhuang Industrial Zone, Shanghai, China.
Our executive offices, located in PPG Place in Pittsburgh, PA, are leased.
Although our facilities vary in terms of age and condition, we believe that they have been well maintained and are in sufficient condition for us to carry on our activities.
Item 3. Legal Proceedings
From time-to-time, we become involved in various lawsuits, claims and proceedings relating to the conduct of our current and formerly owned businesses, including those pertaining to product liability, 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 we cannot predict the outcome of any lawsuit, claim or proceeding, our management believes that the disposition of any pending matters is not likely to have a material adverse effect on our financial condition or liquidity. The resolution in any reporting period of one or more of these matters, including those described above, however, could have a material adverse effect on our results of operations for that period.
Information relating to legal proceedings is included in Note 21. Commitments and Contingencies of the Notes to Consolidated Financial Statements and incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.

14


PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock is traded on the New York Stock Exchange (symbol ATI). At February 2, 2017, there were 3,561 record holders of Allegheny Technologies Incorporated common stock. We paid a quarterly cash dividend of $0.08 per share of common stock outstanding for the first three quarters of 2016 and the fourth quarter of 2015. A quarterly dividend of $0.18 per share of common stock outstanding was paid for the first three quarters of 2015. Effective with the fourth quarter of 2016, our Board of Directors decided to suspend the quarterly dividend. The payment of dividends and the amount of such dividends depends upon matters deemed relevant by our Board of Directors, such as our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by law, credit agreements or senior securities, and other factors deemed relevant and appropriate.  Our Asset Based Lending (ABL) Revolving Credit Facility restricts our ability to pay dividends in certain circumstances.  For more information on the restrictions under our ABL facility, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity - Dividends.”
The ranges of high and low sales prices for shares of our common stock for the quarterly periods ended on the dates indicated were as follows:
2016
 
March 31
 
June 30
 
September 30
 
December 31
High
 
$
18.38

 
$
18.03

 
$
18.67

 
$
19.20

Low
 
$
7.08

 
$
10.93

 
$
12.27

 
$
13.15

2015
 
March 31
 
June 30
 
September 30
 
December 31
High
 
$
35.10

 
$
37.76

 
$
31.02

 
$
19.10

Low
 
$
27.12

 
$
29.05

 
$
13.66

 
$
10.15

Cumulative Total Stockholder Return
The graph set forth below shows the cumulative total stockholder return (i.e., price change plus reinvestment of dividends) on our common stock from December 31, 2011 through December 31, 2016, as compared to the S&P MidCap 400 Index and a Peer Group of companies. We have included the SPDR S&P Metals and Mining Index ETF because our stock price trading and volatility trends with the performance of that index. We believe that the Peer Group of companies, which is defined below, is representative of companies in our industry that have served similar markets during the applicable periods. The total stockholder return for the Peer Group is weighted according to the respective issuer’s stock market capitalization at the beginning of each period. The graph assumes that $100 was invested on December 31, 2011. The stock performance information included in this graph is based on historical results and is not necessarily indicative of future stock price performance.
atify201410_chart-06350a03.jpg

15


Company / Index
 
Dec 2011
 
Dec 2012
 
Dec 2013
 
Dec 2014
 
Dec 2015
 
Dec 2016
ATI
 
100.00
 
64.89

 
78.00

 
77.52

 
25.79

 
37.11

S&P MidCap 400 Index
 
100.00
 
117.88

 
157.37

 
172.74

 
168.98

 
204.03

Peer Group
 
100.00
 
111.53

 
148.47

 
142.97

 
114.93

 
150.21

SPDR S&P Metals & Mining ETF
 
100.00
 
92.12

 
85.90

 
62.99

 
30.52

 
62.07

Source: Standard & Poor’s
 
 
 
 
 
 
 
 
 
 
 
 
Peer Group companies for the cumulative five year total return period ended December 31, 2016 were as follows:
 
 
 
 
 
AK Steel Holding Corporation
 
Materion Corp
 
Steel Dynamics, Inc.
Alcoa Inc.
 
Nucor Corp.
 
The Timken Company
Carpenter Technology Corporation
 
Precision Castparts Corp.
 
Timken Steel Corporation
Castle (A M) & Co.
 
Reliance Steel & Aluminum Co.
 
United States Steel Corporation
Commercial Metals Company
 
RTI International Metals, Inc.
 
Universal Stainless & Alloy Products, Inc.
Kennametal Inc.
 
Schnitzer Steel Industries, Inc.
 
Worthington Industries, Inc.

Alcoa Inc. was included in the total shareholder return Peer Group through October 31, 2016 when it was separated into Alcoa Corp and Arconic. Precision Castparts Corp. was included through January 29, 2016 when it was acquired by Berkshire Hathaway Inc. RTI International Metals Inc. was included through July 22, 2015 when it was acquired by Alcoa Inc. Effective in 2014, The Timken Company spun off its steel business into a new public company, Timken Steel Corporation, which was included in the total shareholder return Peer Group starting on June 19, 2014 when it began trading.
Item 6. Selected Financial Data 
(In millions)
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Revenue by Market:
 
 
 
 
 
 
 
 
 
 
Aerospace & Defense
 
$
1,590.4

 
$
1,514.0

 
$
1,446.3

 
$
1,394.5

 
$
1,584.5

Oil & Gas
 
280.8

 
538.0

 
752.3

 
706.8

 
837.6

Automotive
 
232.8

 
293.8

 
414.4

 
348.3

 
363.7

Electrical Energy
 
232.6

 
368.1

 
430.2

 
459.4

 
571.5

Medical
 
195.8

 
220.7

 
211.0

 
207.7

 
211.5

Subtotal - Key Markets
 
2,532.4

 
2,934.6

 
3,254.2

 
3,116.7

 
3,568.8

Food Equipment & Appliances
 
172.2

 
217.3

 
248.8

 
251.7

 
215.4

Construction/Mining
 
160.6

 
226.3

 
295.6

 
287.5

 
364.2

Electronics/Communication/Computers
 
109.7

 
126.4

 
154.6

 
153.1

 
170.0

Transportation
 
77.6

 
129.5

 
172.1

 
136.3

 
196.1

Other
 
82.1

 
85.5

 
98.1

 
98.2

 
152.4

Total
 
$
3,134.6

 
$
3,719.6

 
$
4,223.4

 
$
4,043.5

 
$
4,666.9



16


(In millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Results of Operations:
 
 
 
 
 
 
 
 
 
 
Sales:
 

 
 
 
 
 
 
 
 
High Performance Materials & Components
 
$
1,930.4

 
$
1,985.9

 
$
2,006.8

 
$
1,944.8

 
$
2,314.0

Flat Rolled Products
 
1,204.2

 
1,733.7

 
2,216.6

 
2,098.7

 
2,352.9

Total Sales
 
$
3,134.6

 
$
3,719.6

 
$
4,223.4

 
$
4,043.5

 
$
4,666.9

Segment operating profit (loss):
 

 
 
 
 
 
 
 
 
High Performance Materials & Components
 
$
168.7

 
$
157.1

 
$
234.8

 
$
159.6

 
$
315.7

Flat Rolled Products
 
(163.0
)
 
(241.9
)
 
(47.0
)
 
(147.8
)
 
19.7

Total segment operating profit (loss)
 
$
5.7

 
$
(84.8
)
 
$
187.8

 
$
11.8

 
$
335.4

Income (loss) from continuing operations before income taxes
 
$
(734.0
)
 
$
(478.0
)
 
$
1.5

 
$
(154.8
)
 
$
232.3

Income tax provision (benefit)
 
(106.9
)
 
(112.1
)
 
(8.7
)
 
(63.6
)
 
72.4

Income (loss) from continuing operations
 
(627.1
)
 
(365.9
)
 
10.2

 
(91.2
)
 
159.9

Income (loss) from discontinued operations, net of tax
 

 

 
(0.6
)
 
252.8

 
7.9

Net income (loss)
 
(627.1
)
 
(365.9
)
 
9.6

 
161.6

 
167.8

Less: Net income attributable to noncontrolling interests
 
13.8

 
12.0

 
12.2

 
7.6

 
9.4

Net income (loss) attributable to ATI
 
$
(640.9
)
 
$
(377.9
)
 
$
(2.6
)
 
$
154.0

 
$
158.4

Basic net income (loss) per common share
 

 
 
 
 
 
 
 
 
Continuing operations attributable to ATI per common share
 
$
(5.97
)
 
$
(3.53
)
 
$
(0.02
)
 
$
(0.93
)
 
$
1.42

Discontinued operations attributable to ATI per common share
 

 

 
(0.01
)
 
2.37

 
0.07

Basic net income (loss) attributable to ATI per common share
 
$
(5.97
)
 
$
(3.53
)
 
$
(0.03
)
 
$
1.44

 
$
1.49

Diluted net income (loss) per common share
 

 
 
 
 
 
 
 
 
Continuing operations attributable to ATI per common share
 
$
(5.97
)
 
$
(3.53
)
 
$
(0.02
)
 
$
(0.93
)
 
$
1.36

Discontinued operations attributable to ATI per common share
 

 

 
(0.01
)
 
2.37

 
0.07

Diluted net income (loss) attributable to ATI per common share
 
$
(5.97
)
 
$
(3.53
)
 
$
(0.03
)
 
$
1.44

 
$
1.43

 
(In millions, except per share amounts and ratios)
 
 
 
 
 
 
 
 
 
 
As of and for the Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Dividends declared per common share
 
$
0.24

 
$
0.62

 
$
0.72

 
$
0.72

 
$
0.72

Ratio of earnings to fixed charges
 

 

 

 

 
2.8x

Working capital
 
$
1,057.8

 
$
1,181.1

 
$
1,584.4

 
$
1,743.3

 
$
1,663.1

Total assets
 
5,170.0

 
5,751.7

 
6,571.7

 
6,885.0

 
6,234.6

Long-term debt
 
1,771.9

 
1,491.8

 
1,498.2

 
1,513.9

 
1,449.8

Total debt
 
1,877.0

 
1,495.7

 
1,516.0

 
1,933.8

 
1,466.9

Cash and cash equivalents
 
229.6

 
149.8

 
269.5

 
1,026.8

 
304.6

Total ATI Stockholders’ equity
 
1,355.2

 
2,082.8

 
2,598.4

 
2,894.2

 
2,479.6

Noncontrolling interests
 
89.6

 
101.6

 
110.9

 
100.5

 
107.5

Total Stockholders’ equity
 
1,444.8

 
2,184.4

 
2,709.3

 
2,994.7

 
2,587.1

The information presented in Selected Financial Data should be read in conjunction with the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8. Financial Statements and Supplementary Data.

Results of operations in 2016 include $538.5 million of pre-tax restructuring and other charges, primarily related to the indefinite idling of the Rowley, UT titanium sponge production facility. 2016 results also include $171.5 million in deferred tax valuation allowances which reduced the income tax benefit. Results of operations in 2015 include $131.5 million of pre-tax net realizable value inventory reserves, which are required to offset ATI’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost, $216.3 million of pre-tax goodwill impairment, restructuring and inventory

17


revaluation charges, and $74.5 million of deferred tax valuation allowances, which reduced the income tax benefit. 2014 results from continuing operations include postretirement benefit curtailment and settlement gains of $25.5 million pre-tax. Results of operations in 2013 include $67.5 million of pre-tax restructuring charges, primarily related to asset impairments. Additionally, in 2013, we completed the sale of our tungsten materials business and after a strategic review, determined that we would exit our iron castings and fabricated components businesses. These three businesses are classified as discontinued operations. We received cash proceeds, net of transaction costs, of $600.9 million for the sale of the tungsten materials business, and recognized a $428.3 million pretax ($261.4 million after tax) gain which is reported in discontinued operations.

Total debt includes the 2016 issuance of $287.5 million of 4.75% Convertible Senior Notes due 2022, and a $100.0 million term loan added to our asset based lending revolving credit facility. A portion of the convertible note proceeds were used to make a $115.0 million contribution to the U.S. defined benefit pension plan. In 2014, we repaid the remaining $397.5 million outstanding of our 4.25% Convertible Senior Notes due 2014. In 2013, we issued $500.0 million of 5.875% Senior Notes due in 2023 (currently bearing a 7.875% interest rate), the net proceeds of which were used for general corporate purposes.

Total ATI stockholders’ equity included net increases (decreases) of $(60.6) million, $(69.6) million, $(266.5) million, $241.0 million, and $(164.1) million for 2016, 2015, 2014, 2013 and 2012, respectively, related to remeasurements of ATI’s retirement benefit obligations. In addition, ATI stockholders’ equity for 2016 included a $45.6 million decrease from income tax valuation allowances on amounts recorded in other comprehensive income.

For purposes of determining the ratio of earnings to fixed charges, earnings include pre-tax income (loss) from continuing operations plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on all indebtedness (including capitalized interest) plus that portion of operating lease rentals representative of the interest factor (deemed to be one-third of operating lease rentals). For the years ended December 31, 2016, 2015, 2014 and 2013, fixed charges exceeded earnings by $750.2 million, $492.1 million, $7.1 million and $192.8 million, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results or performance could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those described below. Net income (loss) and net income (loss) per share amounts referenced below are attributable to Allegheny Technologies Incorporated and Subsidiaries.
ATI Overview
ATI is a global manufacturer of technically advanced specialty materials and complex components. Over 50% of our sales are to the aerospace & defense market, particularly jet engines, and we have a strong presence in the oil & gas, electrical energy, medical, automotive, and other industrial markets. ATI is a market leader in manufacturing differentiated specialty alloys and forgings that require our unique manufacturing and precision machining capabilities and our innovative new product development competence. ATI produces nickel-based alloys and superalloys, titanium and titanium-based alloys, specialty alloys, stainless steels, and zirconium and other related alloys in many mill product forms. Our capabilities range from alloy development, to melting and hot-working, through highly engineered finished components. We are also a leader in producing nickel-based alloy and titanium-based alloy powders for use in next-generation jet engine forgings and 3D-printed products.
We operate in two business segments: High Performance Materials & Components (HPMC), and Flat Rolled Products (FRP). Our HPMC segment produces, converts and distributes a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, zirconium and related alloys including hafnium and niobium, advanced powder alloys and other specialty materials, in long product forms such as ingot, billet, bar, rod, wire, shapes and rectangles, and seamless tubes, plus precision forgings, castings, components and machined parts. These products are designed for the high performance requirements of major end markets such as aerospace & defense, oil & gas, electrical energy, and medical. Our FRP segment produces, converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip products. The major end markets for our flat-rolled products are oil & gas, automotive, food processing equipment and appliances, construction and mining, electronics, communication equipment and computers, and aerospace & defense.

18


Overview of 2016 Financial Performance
Sales in 2016 decreased 16% to $3.1 billion, while cost of sales decreased 19%, compared to 2015, resulting in a 170% increase in gross profit margin, to $162.5 million. This improvement in our gross profit margin was primarily due to our exit in the FRP business from the unprofitable grain-oriented electrical steel (GOES) product line and significantly reducing FRP’s sales volume of commodity stainless steel sheet products, both occurring in early 2016. Results in 2016 were adversely impacted by effects of the seven-month work stoppage associated with USW labor agreement negotiations that concluded in March 2016, which predominantly affected FRP segment operations.
Total sales to our key end markets of aerospace & defense, oil & gas, electrical energy, medical, and automotive represented 80% of ATI’s 2016 sales. Sales to our largest end market, aerospace & defense, increased 5% over 2015 and represented 51% of our 2016 sales. We continued our strategic focus on key high-value specialty products, including nickel-based alloys and specialty alloys, titanium and titanium-based alloys, precision castings and forgings, and zirconium and related alloys, with 2016 sales of these key high-value products representing 85% of our total sales, excluding GOES. Direct international sales, including both U.S. exports and foreign sales from our foreign manufacturing operations, were $1.3 billion in 2016 and represented 41% of total sales.
In 2016, we restructured our titanium operations in the HPMC segment, permanently closed the FRP segment’s Midland, PA commodity stainless steel melt and sheet finishing facility and the Bagdad, PA GOES finishing facility, and implemented salaried workforce reductions in the FRP segment. Our 2016 results include $539 million of pre-tax restructuring and other charges, including $471 million of long-lived asset impairment charges arising from the indefinite idling of our Rowley, UT titanium sponge production facility, and contractual obligations, closure costs, inventory charges and employment benefit costs for these closure-related actions. Business segment operating profit, which excludes these restructuring charges, was $6 million in 2016, a $91 million improvement over 2015, with stronger operating performance in our HPMC segment and a smaller operating loss in our FRP segment, particularly in the second half of 2016. We also recorded $172 million of income tax valuation allowances in 2016, including $150 million for U.S. federal income taxes, and reported a loss attributable to ATI of $641 million, or $(5.97) per share.
A summary of our results from continuing operations is as follows:
(In millions, except per share amounts)
 
2016
 
2015
 
2014
Sales
 
$
3,134.6

 
$
3,719.6

 
$
4,223.4

Gross profit
 
$
162.5

 
$
60.3

 
$
378.6

Segment operating profit (loss)
 
$
5.7

 
$
(84.8
)
 
$
187.8

Restructuring, goodwill impairment and other charges
 
$
(538.5
)
 
$
(216.3
)
 
$

Income (loss) from continuing operations before income taxes
 
$
(734.0
)
 
$
(478.0
)
 
$
1.5

Net loss attributable to ATI
 
$
(640.9
)
 
$
(377.9
)
 
$
(2.0
)
Diluted net loss attributable to ATI per common share
 
$
(5.97
)
 
$
(3.53
)
 
$
(0.02
)
2016 was a difficult year, with significant losses in our FRP business and important restructuring actions to improve future financial performance across both the HPMC and FRP business segments. The actions taken in 2016 are the result of a disciplined management review process, taking into account current and expected future market conditions, including forecasted growth in demand for our products from all end markets and assessments of global supply and demand dynamics. This disciplined process is a key part of our commitment to make the tough decisions that are required to strengthen and enhance ATI’s ability to deliver sustainable profitable growth, and create value for our customers and our shareholders over the long-term.
Our major strategic accomplishments during 2016 include:
Continuing to reposition ATI as a growth-oriented aerospace & defense company. More than 50% of ATI’s 2016 sales were to the aerospace & defense market, led by a 13% increase in 2016 sales of products for commercial aerospace jet engines. Through recent acquisitions, alloy development, internal growth strategies, and long-term supply agreements on current and next-generation aero-engines and airframes, we are well positioned with a fully qualified asset base to meet the expected multi-year growth in demand from the commercial aerospace market. Our HPMC segment’s isothermal and hot-die forge press utilization continues to improve to meet aerospace demand growth, including new market share gains.
Restructuring our HPMC segment titanium operations to improve cost competitiveness, including the indefinite idling of the Rowley, UT titanium sponge production facility, which resulted in $514 million of restructuring charges, including $11 million of titanium sponge inventory revaluation classified in cost of sales in the consolidated statement of operations. We entered into long-term, cost competitive supply agreements with several leading global producers of premium-grade and standard-grade titanium sponge, with the lower cost titanium

19


sponge purchased under these agreements replacing the titanium sponge produced at the Rowley facility. We recognized a $471 million asset impairment charge for the Rowley facility idling, along with $43 million primarily for related closure costs for Rowley, charges to close a small, unprofitable titanium wire production facility in Frackville, PA, and to consolidate certain titanium operations in Albany, OR. These charges were excluded from HPMC segment results. The HPMC restructuring actions are expected to improve ATI’s operating earnings by approximately $50 million beginning in 2017.
Restructuring the FRP business to focus on value, not volume. Building on actions taken in 2015, we permanently idled the Midland, PA commodity stainless steel melt and sheet finishing facility, and the Bagdad, PA GOES finishing facility. We recognized $13 million in restructuring charges for contractual obligations, closure costs, and employment benefits for these facility closures. These actions have significantly lessened ATI’s exposure to more commoditized products and markets in the FRP segment. We continue to reposition the FRP business to a higher value product mix, and achieved near-breakeven results in this segment in the fourth quarter of 2016, after four years of operating losses. We also reduced the size of the FRP salaried workforce by more than 250 employees, and recognized $12 million of pre-tax severance charges. These facility closure and severance charges were excluded from FRP segment results. The FRP restructuring actions related to severance and facility closures are expected to improve ATI’s operating earnings by approximately $40 million, with benefits beginning in the third quarter of 2016.
Concluding difficult labor negotiations, ending a seven month work stoppage in March 2016. We incurred approximately $49 million in costs in the first half of 2016, primarily in the FRP segment, for operating inefficiencies and contractual obligations associated with the work stoppage and return to work of represented employees. The new labor agreement includes important changes to retirement benefit programs, including a freeze to new entrants to ATI’s defined benefit pension plan and the elimination of retiree medical benefits for new employees, and other changes affecting plant operations that improve our cost competitiveness.
Maintaining a solid liquidity position, while addressing several near-term funding challenges, and ending the year with $230 million in cash on hand and $310 million of available borrowing capacity under our asset based domestic lending (ABL) facility. We issued $288 million of six-year convertible notes to provide additional financial flexibility to fund our U.S. defined benefit pension plan and to support pension liability management actions, including an annuity buyout of small balance pensions. We amended our ABL facility to add a $100 million term loan that matures in November 2017 to provide additional liquidity as we complete our significant restructuring actions and capital expenditure commitments.
Continuing to make capital investments to support our growth initiatives, with $202 million of capital expenditures in 2016, including $85 million of scheduled payments on the Hot Rolling and Processing Facility, and the expansion of nickel alloy powder production capacity in the HPMC segment. We are at the end of a significant, multi-year period of capital expansions, and expect our capital expenditures to be well below depreciation expense for the next several years.
Outlook
Our HPMC segment is very well-positioned for profitable growth, especially in the next-generation jet engine platforms, and we expect 2017 HPMC segment sales growth of approximately 10%, and operating profit as a percentage of sales to improve to the low-teens. Our HPMC segment is expected to continue sustained profitable growth, supported by long-term agreements that provide significant growth and share gains for ATI on next-generation airplanes and the jet engines that power them. We expect our cost structure to continue to improve throughout the year as a result of our 2016 titanium operations restructuring actions, including achieving a better balance of titanium raw material cost inputs following the idling of our Rowley titanium sponge production facility. We have sufficient available capacity for the forecasted growth in demand over the next several years.
The FRP segment made tremendous progress throughout 2016 toward returning to profitability, but our work is not done. We continue the process of creating a smaller, more agile, streamlined, cohesive, and efficient flat-rolled products business that will be more focused on products and markets with significant technical barriers to entry. As we continue to reposition this business to a higher-value product mix, we expect shipments of our specialty coil and plate products to improve in 2017 and benefit from the HRPF capabilities, particularly for our 48”-wide nickel-based alloy sheet. In 2017, we expect the FRP segment to achieve sequential sales growth through the first two quarters of 2017, however, our visibility in the second half of 2017 remains cautious, and market conditions remain challenging in certain key end markets. We expect the FRP segment to reach a low-single digit operating profit level, as a percentage of sales.
We expect 2017 to be another step in our continuing journey toward our goals of long-term profitable growth and consistently earning a premium to our cost of capital. Cash generation from operations will remain a key focus throughout 2017. We do not expect to pay any U.S. federal taxes in 2017 due to net operating loss carryforwards, and we intend to carefully balance our

20


working capital and other cash needs with the pace of our capital expenditure requirements, pension funding requirements, and debt obligations. We expect 2017 capital expenditures to be approximately $125 million, including 2016 carryover and approximately $40 million for the expansion at our 60% owned Chinese joint venture, STAL. Beyond 2017, we continue to expect capital expenditures to average no more than $100 million annually for the next several years. Depreciation and amortization expense in 2017 is forecast to be approximately $160 million. We currently expect 2017 pre-tax retirement benefit expense to be about $71 million, or approximately $23 million lower than 2016. We expect to make a $135 million cash contribution to the U.S. qualified defined benefit pension plan in 2017.
Results of Operations
Sales from continuing operations were $3.13 billion in 2016, $3.72 billion in 2015, and $4.22 billion in 2014. The 16% sales decrease in 2016 is primarily the result of 31% lower FRP sales, largely as a result of the idling of commodity stainless steel melt and sheet finishing capacity in January 2016 and our exit from the GOES market in April 2016. HPMC sales were 3% lower compared to 2015, as stronger commercial aerospace sales were offset by weakness in other key end markets including oil & gas, electrical energy, and medical. The 12% sales decrease in 2015 compared to 2014 is primarily the result of lower shipment volumes of most flat-rolled products, and weak selling prices for standard stainless flat-rolled products due to global competition, particularly imports from China, and declining raw material costs, which affect transaction prices.
Segment operating profit was $5.7 million, or 0.2% of sales in 2016, compared to a segment operating loss of $84.8 million, or (2.3)% of sales, in 2015, and segment operating profit of $187.8 million, or 4.4% of sales, in 2014. Our measure of segment operating profit (loss), which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, closed operations expenses, the effects of LIFO inventory accounting and any related changes in net realizable value (NRV) inventory reserves, goodwill impairment charges and restructuring costs, if any. Total revenues and segment operating profit (loss) of our two business segments were as follows (in millions):
 
 
2016
 
2015
 
2014
 
 
Revenue
 
Operating Profit (Loss)
 
Revenue
 
Operating Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
High Performance Materials & Components
 
$
1,930.4

 
$
168.7

 
$
1,985.9

 
$
157.1

 
$
2,006.8

 
$
234.8

Flat Rolled Products
 
1,204.2

 
(163.0
)
 
1,733.7

 
(241.9
)
 
2,216.6

 
(47.0
)
Total ATI
 
$
3,134.6

 
$
5.7

 
$
3,719.6

 
$
(84.8
)
 
$
4,223.4

 
$
187.8

Business segment results in 2016 exclude $538.5 million in pre-tax charges for significant restructuring actions involving HPMC titanium operations and right-sizing actions across the FRP business. These restructuring charges are comprised of $471.3 million of long-lived asset impairments, primarily for the indefinitely idled Rowley, UT titanium sponge production facility, $43.0 million of facility closure costs and related inventory revaluations, and $24.2 million of severance charges and other employee benefit costs. Business segment results in 2015 exclude $347.8 million of pre-tax charges, which included a $126.6 million charge for goodwill impairment, $54.5 million of long-lived asset impairment charges, $131.5 million of net realizable value (NRV) inventory reserve charges, a $25.4 million charge to revalue non-PQ titanium sponge inventory based on current market prices, and $9.8 million of charges for severance actions and idling costs. 2014 results include $25.5 million of pre-tax curtailment and settlement gains relating to postretirement benefit plan changes, primarily included in FRP segment results, and $63.1 million pre-tax HRPF commissioning and Rowley PQ qualification costs.
Pre-tax results were losses of $734.0 million in 2016 and $478.0 million in 2015, while the 2014 pre-tax result from continuing operations was income of $1.5 million.
The 2016 net loss attributable to ATI was $640.9 million, or $(5.97) per share, compared to a 2015 net loss attributable to ATI of $377.9 million, or $(3.53) per share, and a 2014 loss attributable to ATI of $2.6 million, or $(0.03) per share. Results in 2016 and 2015 reflect below-normal income tax benefits as a percentage of the pre-tax losses due to $171.5 million and $74.5 million, respectively, of income tax valuation allowances on deferred tax assets, primarily due to cumulative losses from U.S. operations.
Results of discontinued operations were immaterial for all periods covered by this annual report.

21


Comparative information for our overall revenues (in millions) by end market and their respective percentages of total revenues is as follows:
Market
 
2016
 
2015
 
2014
Aerospace & Defense
 
$
1,590.4

 
51
%
 
$
1,514.0

 
41
%
 
$
1,446.3

 
34
%
Oil & Gas
 
280.8

 
9
%
 
538.0

 
14
%
 
752.3

 
18
%
Automotive
 
232.8

 
7
%
 
293.8

 
8
%
 
414.4

 
10
%
Electrical Energy
 
232.6

 
7
%
 
368.1

 
10
%
 
430.2

 
10
%
Medical
 
195.8

 
6
%
 
220.7

 
6
%
 
211.0

 
5
%
Subtotal - Key Markets
 
2,532.4

 
80
%
 
2,934.6

 
79
%
 
3,254.2

 
77
%
Food Equipment & Appliances
 
172.2

 
6
%
 
217.3

 
6
%
 
248.8

 
6
%
Construction/Mining
 
160.6

 
5
%
 
226.3

 
6
%
 
295.6

 
7
%
Electronics/Computers/Communication
 
109.7

 
4
%
 
126.4

 
3
%
 
154.6

 
4
%
Transportation
 
77.6

 
2
%
 
129.5

 
4
%
 
172.1

 
4
%
Other
 
82.1

 
3
%
 
85.5

 
2
%
 
98.1

 
2
%
Total
 
$
3,134.6

 
100
%
 
$
3,719.6

 
100
%
 
$
4,223.4

 
100
%
Comparative information for our major high-value and standard products based on their percentages of our total revenues is as follows:
For the Years Ended December 31,
 
2016
 
2015
 
2014
High-Value Products
 
 
 
 
 
 
Nickel-based alloys and specialty alloys
 
27
%
 
28
%
 
26
%
Titanium and titanium-based alloys
 
19
%
 
17
%
 
15
%
Precision forgings, castings and components
 
18
%
 
14
%
 
13
%
Precision and engineered strip
 
13
%
 
13
%
 
13
%
Zirconium and related alloys
 
8
%
 
7
%
 
6
%
Total High-Value Products, excluding GOES
 
85
%
 
79
%
 
73
%
Grain-oriented electrical steel
 
1
%
 
4
%
 
4
%
Total High-Value Products, including GOES
 
86
%
 
83
%
 
77
%
Standard Products
 
 
 
 
 
 
Stainless steel sheet
 
7
%
 
8
%
 
9
%
Specialty stainless sheet
 
4
%
 
6
%
 
10
%
Stainless steel plate and other
 
3
%
 
3
%
 
4
%
Total Standard Products
 
14
%
 
17
%
 
23
%
Grand Total
 
100
%
 
100
%
 
100
%
Information with respect to our business segments is presented below.
High Performance Materials & Components
(In millions)
 
2016
 
% Change
 
2015
 
% Change
 
2014
Sales to external customers
 
$
1,930.4

 
(3
)%
 
$
1,985.9

 
(1
)%
 
$
2,006.8

Segment operating profit
 
$
168.7

 
7
 %
 
$
157.1

 
(33
)%
 
$
234.8

Segment operating profit as a percentage of sales
 
8.7
%
 
 
 
7.9
%
 
 
 
11.7
%
Direct international sales as a percentage of sales
 
45.2
%
 
 
 
43.1
%
 
 
 
41.2
%
Our HPMC segment produces, converts and distributes a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, zirconium and related alloys including hafnium and niobium, advanced powder alloys and other specialty materials, in long product forms such as ingot, billet, bar, rod, wire, shapes and rectangles, and seamless tubes, plus precision forgings, castings, components, and machined parts. These products are designed for the high performance requirements of such major end markets as aerospace & defense, oil & gas, electrical energy, and medical.

22


2016 Compared to 2015
Sales for the HPMC segment in 2016 decreased 3%, to $1.93 billion. Sales to the aerospace & defense market, which is the largest end market for HPMC at 75% of total segment sales, were 5% higher, driven by a 16% increase in commercial jet engine sales. However, other HPMC end markets continued to have weak demand, with lower year-over-year sales. Sales to the oil & gas market declined 57% compared to 2015, as the continuing impact of low oil prices led to reduced demand for products to this market throughout the year.
Comparative information for our HPMC segment revenues (in millions) by market, the respective percentages of overall segment revenues for the years ended 2016 and 2015, and the percentage change in revenues by market for 2016 is as follows:
Market
 
2016
 
2015
 
Change
Aerospace & Defense:
 
 
 
 
 
 
 
 
 
 
 
 
Jet Engines
 
$
823.3

 
43
%
 
$
709.6

 
36
%
 
$
113.7

 
16
 %
Airframes
 
367.8

 
19
%
 
379.5

 
19
%
 
(11.7
)
 
(3
)%
Government Aerospace & Defense
 
248.1

 
13
%
 
276.8

 
14
%
 
(28.7
)
 
(10
)%
Total Aerospace & Defense
 
1,439.2

 
75
%
 
1,365.9

 
69
%
 
73.3

 
5
 %
Medical
 
185.3

 
10
%
 
208.1

 
10
%
 
(22.8
)
 
(11
)%
Electrical Energy
 
129.1

 
7
%
 
135.8

 
7
%
 
(6.7
)
 
(5
)%
Oil & Gas
 
46.5

 
2
%
 
108.6

 
5
%
 
(62.1
)
 
(57
)%
Construction/Mining
 
36.7

 
2
%
 
46.7

 
2
%
 
(10.0
)
 
(21
)%
Transportation
 
23.8

 
1
%
 
46.9

 
3
%
 
(23.1
)
 
(49
)%
Other
 
69.8

 
3
%
 
73.9

 
4
%
 
(4.1
)
 
(6
)%
Total
 
$
1,930.4

 
100
%
 
$
1,985.9

 
100
%
 
$
(55.5
)
 
(3
)%
Over the past several years, we have entered into long-term agreements (LTAs) with certain of our customers for our specialty materials, in the form of mill products and components, to reduce their supply uncertainty, including several LTAs with aerospace market OEMs. These LTAs are for ATI’s specialty materials mill products, forgings and investment castings required for both next-generation and legacy aircraft platforms and jet engines. Our LTAs include a titanium products supply agreement for aircraft airframes and structural components with The Boeing Company (Boeing), which extends into the next decade. This long-term agreement covers value-added titanium mill products and provides opportunity for greater use of ATI’s next generation and advanced titanium alloys in both long product and flat-rolled product forms, including highly engineered titanium cast and forged products. The agreement includes both long-product forms that are manufactured within the HPMC segment, and a significant amount of plate products that are manufactured utilizing assets of both the HPMC and FRP segments. Revenues and profits associated with these titanium products covered by the Boeing long-term agreement are included primarily in the results for the HPMC segment. We also have LTAs with GE Aviation for the supply of premium titanium alloys, nickel-based alloys, and vacuum-melted specialty alloys products for commercial and military jet engine applications and with Snecma (Safran) for the supply of premium titanium alloys, nickel-based alloys, vacuum melted specialty alloys, and titanium investment castings for commercial and military jet engine applications. In addition, we have LTAs with Rolls-Royce plc for the supply of nickel-based superalloy disc-quality products and precision forgings and castings for commercial jet engine applications. We have supply contracts with United Technologies Corporation for jet engine components through its Pratt & Whitney subsidiaries, as well as for structural components for airframe applications. We also supply products to other important parts of the aviation market such as helicopters and rotary engine fixed wing aircraft.
The commercial aerospace market is transitioning to the next generation of single aisle and large twin aisle aircraft, and next-generation jet engines. New airframe designs contain a larger percentage of titanium alloys, and the jet engines that power them use newer nickel-based alloys and titanium-based alloys, in both cases for improved performance and more economical operating costs, compared to legacy airframe and engine designs. Boeing and Airbus have multi-year backlogs of orders for both legacy models and next-generation aircraft, and there are over 22,000 jet engines with firm orders (Aero Engine News, January 2017). Both Boeing and Airbus have implemented production increases, and announced additional production increases over the next several years, which is expected to positively impact the demand for titanium-based alloys, nickel-based alloys and superalloys for jet engine and airframe applications. Due to manufacturing cycle times, demand for our specialty materials leads the deliveries of new aircraft by between 6 to 12 months.
Our 2016 HPMC results reflect this demand growth, as the next-generation of aircraft and engines use significantly more of the products we make. Sales of differentiated nickel-based superalloy mill products increased 55% in 2016 compared to 2015, including both external sales and intercompany sales to our forging operations. Use of these newer materials, particularly for jet

23


engine applications, is expected to continue to increase for several years, with strong growth expected in powder metal alloys, including increased usage of isothermal forging and additive manufacturing production processes.
Additionally, new entrants to the commercial jet aircraft market for single aisle and regional jets are expected to increase demand for titanium- and nickel-based alloys over the next few years. In addition, as our specialty materials are used in rotating components of jet engines, demand for our products for spare parts is impacted by aircraft flight activity and engine refurbishment requirements of U.S. and foreign aviation regulatory authorities. As the number of aircraft in service increases, the need for our materials associated with engine refurbishment is expected to increase.
Precision forgings, castings and components sales increased 9% in 2016, reflecting improved commercial aerospace demand. Sales of nickel-based alloys and specialty alloys mill products decreased 8% compared to 2015, as lower sales of legacy commercial engine alloys and lower demand from other key end markets, particularly oil & gas, offsetting stronger sales of differentiated nickel-based alloys. Sales of titanium mill products were 4% lower in 2016. Comparative information for the segment’s major product categories, based on their percentages of 2016 and 2015 segment revenues is as follows:
For the Years Ended December 31,
 
2016
 
2015
High-Value Products
 
 
 
 
Nickel-based alloys and specialty alloys
 
29
%
 
31
%
Titanium and titanium-based alloys
 
29
%
 
30
%
Precision forgings, castings and components
 
29
%
 
26
%
Zirconium and related alloys
 
13
%
 
13
%
Total High-Value Products
 
100
%
 
100
%
HPMC segment operating profit for 2016 increased 7% compared to 2015, to $168.7 million, or 8.7% of sales, due primarily to improved utilization of our production assets from higher aerospace demand, as well as the benefits from our restructuring activities. The HPMC segment has achieved six quarters of sequential improvement in segment operating profit and operating profit as a percentage of segment sales through the fourth quarter of 2016, where segment operating profit was 11.3% of sales. HPMC segment results exclude the Rowley, UT titanium sponge operations beginning with the third quarter 2016. In August 2016, we announced the indefinite idling of titanium production at Rowley, with shutdown activities continuing through December 2016. Segment operating profit in 2016 includes approximately $5 million of higher retirement benefit expense compared to 2015, due primarily to lower pension plan assets, as well as $5.3 million of non-recurring work stoppage and return to work costs related to a new labor agreement that was concluded in March 2016. Results in both 2016 and 2015 were also negatively impacted by the strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain titanium products.
In 2016, we completed significant restructuring actions involving certain titanium manufacturing operations in the HPMC segment, which are excluded from segment results. These actions included the previously-mentioned indefinite idling of the Rowley, UT titanium sponge production facility, as well as the closure of a small unprofitable titanium wire production facility in Frackville, PA, and the idling of certain titanium manufacturing operations in Albany, OR. These actions are expected to reduce 2017 sales by approximately $25 million, and improve ATI’s operating earnings by approximately $50 million beginning in 2017.
Competition continues to be very strong across most key end markets, particularly within the aerospace & defense, oil & gas, and medical market supply chains. Our HPMC segment is very well-positioned for profitable growth, especially in the next-generation jet engine platforms, and we expect 2017 HPMC segment sales growth of approximately 10% and operating profit as a percentage of sales to improve to the low-teens. Our HPMC segment is expected to continue sustained profitable growth, supported by long-term agreements that provide significant growth and share gains for ATI on next-generation airplanes and the jet engines that power them. We expect our cost structure to continue to improve throughout the year as a result of our 2016 titanium operations restructuring actions, including achieving a better balance of titanium raw material cost inputs following the idling of our Rowley titanium sponge production facility. We have sufficient available capacity for the forecasted growth in aerospace demand over the next several years, as well as the ability to meet higher demand for products to other key end markets such as oil & gas and electrical energy, when conditions for these markets improve.

24


2015 Compared to 2014
Sales for the HPMC segment in 2015 decreased 1%, to $1.99 billion, compared to 2014, with sales to the aerospace market up 4%, driven by a 12% increase in commercial jet engine sales. Sales to the oil & gas market declined 43%, as the impact of the significant decline in oil prices led to falling demand for products to this market throughout the year.
Comparative information for our HPMC segment revenues (in millions) by market, the respective percentages of overall segment revenues for the years ended 2015 and 2014, and the percentage change in revenues by market for 2015 is as follows:
Market
 
2015
 
2014
 
Change
Aerospace & Defense:
 
 
 
 
 
 
 
 
 
 
 
 
Jet Engines
 
$
709.6

 
36
%
 
$
632.9

 
32
%
 
$
76.7

 
12
 %
Airframes
 
379.5

 
19
%
 
376.1

 
19
%
 
3.4

 
1
 %
Government Aerospace & Defense
 
276.8

 
14
%
 
285.0

 
14
%
 
(8.2
)
 
(3
)%
Total Aerospace & Defense
 
1,365.9

 
69
%
 
1,294.0

 
65
%
 
71.9

 
6
 %
Medical
 
208.1

 
10
%
 
187.6

 
9
%
 
20.5

 
11
 %
Electrical Energy
 
135.8

 
7
%
 
124.0

 
6
%
 
11.8

 
10
 %
Oil & Gas
 
108.6

 
5
%
 
189.1

 
9
%
 
(80.5
)
 
(43
)%
Transportation
 
46.9

 
3
%
 
47.8

 
3
%
 
(0.9
)
 
(2
)%
Construction/Mining
 
46.7

 
2
%
 
64.3

 
3
%
 
(17.6
)
 
(27
)%
Other
 
73.9

 
4
%
 
100.0

 
5
%
 
(26.1
)
 
(26
)%
Total
 
$
1,985.9

 
100
%
 
$
2,006.8

 
100
%
 
$
(20.9
)
 
(1
)%
Sales of titanium mill products were 7% higher in 2015. Sales of nickel-based alloys and specialty alloys mill products decreased 6% compared to 2014. Comparative information for the segment’s major product categories, based on their percentages of 2015 and 2014 segment revenues is as follows:
For the Years Ended December 31,

2015

2014
High-Value Products




Nickel-based alloys and specialty alloys

31
%

32
%
Titanium and titanium-based alloys

30
%

28
%
Precision forgings, castings and components

26
%

27
%
Zirconium and related alloys

13
%

13
%
Total High-Value Products

100
%

100
%
In 2015 and 2014, the aerospace market represented 63% and 60%, respectively, of the revenues of the segment with the majority of the sales to the jet engine market. In 2015 and 2014, sales of our material into the airframe market represented approximately 36% and 32%, respectively, of our aerospace market sales.
HPMC segment operating profit for 2015 decreased 33% compared to 2014, to $157.1 million, or 7.9% of sales, due primarily to more competitive pricing and the mismatch of falling raw material prices included in index pricing mechanisms compared to the manufacturing cycle time of higher-cost materials, and lower operating levels primarily due to reduced demand from the oil & gas and construction and mining markets, which unfavorably impacted productivity costs. Results in both periods were also negatively impacted by the strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain standard quality titanium products.
Flat Rolled Products
(In millions)
 
2016
 
% Change
 
2015
 
% Change
 
2014
Sales to external customers
 
$
1,204.2

 
(31
)%
 
$
1,733.7

 
(22
)%
 
$
2,216.6

Segment operating loss
 
$
(163.0
)
 
33
 %
 
$
(241.9
)
 
(415
)%
 
$
(47.0
)
Segment operating loss as a percentage of sales
 
(13.5
)%
 
 
 
(14.0
)%
 
 
 
(2.1
)%
Direct international sales as a percentage of sales
 
33.6
 %
 
 
 
41.5
 %
 
 
 
35.2
 %
Our FRP segment produces, converts and distributes stainless steel, nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, engineered strip, and Precision Rolled Strip products.

25


The major end markets for our flat-rolled products are oil & gas, automotive, food processing equipment and appliances, construction and mining, electronics, communication equipment and computers, and aerospace & defense.
2016 Compared to 2015
Sales for the FRP segment in 2016 decreased 31% compared to 2015, to $1.20 billion, as our change in market focus to value, not volume, resulted in our exit from the GOES market in April 2016 and the de-emphasis of certain commodity stainless steel sheet products, lowering sales of these products significantly. Sales were lower across nearly all major end markets, due primarily to lower shipment volumes. Lower average selling prices also impacted 2016 results compared to 2015, as low raw material surcharges included in transaction prices continued throughout 2016 from low year-end 2015 levels whereas 2015 average selling prices declined during the year due to falling raw material surcharges and competitive market conditions.
The FRP segment has been undergoing significant restructuring to refocus the business to a higher value product mix, and to right-size the operating footprint and cost structure to meet very competitive business conditions, from both domestic and international producers of flat-rolled stainless steel and other specialty metals. In the fourth quarter 2015, due to the challenging business conditions for standard stainless steel products and grain-oriented electrical steel (GOES), we announced actions to return the FRP business to profitability. These actions included the 2016 idling of the commodity stainless steel melt and sheet finishing operations at the Midland, PA facility, and the idling of GOES operations, including the Bagdad, PA finishing facility. Charges of $54.5 million for long-lived asset impairments associated with these actions were excluded from 2015 segment results and are discussed separately. In October 2016, we concluded that the Midland and Bagdad facilities could not be operated at an acceptable rate of return, and we announced that these operations would be permanently closed. Closure-related costs and employee benefit costs of $12.8 million were recognized in the fourth quarter of 2016 from these permanent closure actions, which are excluded from 2016 FRP segment results. Severance charges of $11.8 million for reductions of over 250 employees, or approximately one-third of the ATI Flat Rolled Products salaried workforce, were also excluded from 2016 FRP segment results. The FRP restructuring actions related to severance and facility closures are expected to improve ATI’s operating earnings by approximately $40 million, with benefits beginning in the third quarter of 2016.
Sales to the oil & gas market, which remains the segment’s largest end market, continued at lower levels in 2016, whereas demand remained good in the first half of 2015 as we completed a large nickel plate project, but then declined significantly in the second half of that year. Demand for our flat-rolled titanium products remained at low levels for chemical and hydrocarbon processing projects, with shipments of titanium and ATI-produced Uniti titanium products decreasing 31% compared to 2015, to 4.1 million pounds, which followed a 40% decline in 2015. Sales of high-value products, excluding GOES, were 23% lower compared to 2015, and sales of standard products were 32% lower, compared to 2015, led by a 45% decline in specialty stainless sheet products. Segment results were also impacted by a seven month work stoppage affecting the domestic operations of ATI Flat Rolled Products, which concluded in March 2016.
Comparative information for our Flat Rolled Products segment revenues (in millions) by market, the respective percentages of overall segment revenues for the years ended 2016 and 2015, and the percentage change in revenues by market for 2016 is as follows:
Market
 
2016
 
2015
 
Change
Oil & Gas
 
$
234.4

 
19
%
 
$
429.4

 
25
%
 
$
(195.0
)
 
(45
)%
Automotive
 
225.2

 
19
%
 
288.1

 
17
%
 
(62.9
)
 
(22
)%
Food Equipment & Appliances
 
170.5

 
14
%
 
214.4

 
12
%
 
(43.9
)
 
(20
)%
Aerospace & Defense
 
151.2

 
13
%
 
148.1

 
9
%
 
3.1

 
2
 %
Construction/Mining
 
124.0

 
10
%
 
179.6

 
10
%
 
(55.6
)
 
(31
)%
Electronics/Computers/Communication
 
106.3

 
9
%
 
121.9

 
7
%
 
(15.6
)
 
(13
)%
Electrical Energy
 
103.5

 
9
%
 
232.3

 
13
%
 
(128.8
)
 
(55
)%
Transportation
 
53.8

 
4
%
 
82.6

 
5
%
 
(28.8
)
 
(35
)%
Medical
 
10.5

 
1
%
 
12.6

 
1
%
 
(2.1
)
 
(17
)%
Other
 
24.8

 
2
%
 
24.7

 
1
%
 
0.1

 
 %
Total
 
$
1,204.2

 
100
%
 
$
1,733.7

 
100
%
 
$
(529.5
)
 
(31
)%

26


Comparative information for the Flat Rolled Products segment’s major product categories, based on their percentages of 2016 and 2015 segment revenues is as follows:
For the Years Ended December 31,
 
2016
 
2015
High-Value Products
 
 
 
 
Precision and engineered strip
 
35
%
 
29
%
Nickel-based alloys and specialty alloys
 
25
%
 
25
%
Titanium and titanium-based alloys
 
4
%
 
3
%
Total High-Value Products, excluding GOES
 
64
%
 
57
%
Grain-oriented electrical steel
 
2
%
 
8
%
Total High-Value Products, including GOES
 
66
%
 
65
%
Standard Products
 
 
 
 
Stainless steel sheet
 
19
%
 
18
%
Specialty stainless sheet
 
10
%
 
13
%
Stainless steel plate
 
5
%
 
4
%
Total Standard Products
 
34
%
 
35
%
Grand Total
 
100
%
 
100
%
Comparative shipment volume and average selling price information on the segment’s products for the years ended December 31, 2016 and 2015, excluding GOES from high-value products from both periods, is provided in the following table:
 
 
2016
 
2015
 
% change
Volume (000’s pounds):
 
 
 
 
 
 
High-Value
 
293,589

 
317,054

 
(7
)%
Standard
 
385,010

 
514,035

 
(25
)%
Total
 
678,599

 
831,089

 
(18
)%
Average prices (per lb.):
 
 
 
 
 
 
High-Value
 
$2.59
 
$3.12
 
(17
)%
Standard
 
$1.06
 
$1.16
 
(9
)%
Combined Average
 
$1.72
 
$1.91
 
(10
)%
Segment operating results in 2016 were a loss of $163.0 million, or (13.5)% of sales, compared to segment operating loss of $241.9 million, or (14.0)% of sales in 2015. The 2016 FRP segment loss improved from 2015 due primarily to restructuring actions, including the idling in early 2016 of production capacity for commodity stainless steel sheet and GOES products, which were not able to be sold at profitable levels based on current market conditions. While 2016 had lower shipment volumes and selling prices compared to 2015, results reflected a better alignment of raw material costs and raw material surcharge recovery in transaction prices, compared to 2015. Base prices for most products were slightly improved from year-end 2015 levels. 2016 results were negatively affected by reduced operating efficiencies, primarily affecting the U.S. operations of ATI Flat Rolled Products, during and after the recent work stoppage, which ended in March 2016 upon ratification of a new four-year collective bargaining labor agreement by USW-represented employees. The 2016 segment operating loss includes $43.5 million of non-recurring operating costs related to higher-cost material produced prior to the end of the work stoppage, higher conversion costs during the return to more normal operating levels, and costs associated with contractual obligations in the return to work agreement for represented employees. FRP segment operating losses were progressively reduced each quarter during 2016 as a result of these factors and the initial benefits of our restructuring actions, and the fourth quarter 2016 segment operating loss was only $0.8 million. Segment operating results in 2016 also included approximately $4 million in higher retirement benefit expense from defined benefit plans, as higher defined benefit pension costs primarily associated with lower pension plan assets were partially offset by lower defined benefit retiree medical plan costs, which were the result of changes to retiree medical benefits achieved in the 2016 labor agreement.
In 2015, base prices for the most common standard grade stainless sheet product fell 25% to approximately $0.45 per pound in December 2015, which represents a historic low, from a $0.60 per pound level in effect for most of 2014. These base price declines for standard products, combined with falling raw material price surcharges which did not align with manufacturing costs, negatively affected segment operating results in 2015. Additionally, in anticipation of a possible strike action related to the USW labor negotiations, inventory with higher cost raw materials produced in the first half of 2015 was sold in the second half of 2015 and into 2016 at lower transaction prices due to falling raw material surcharges. Based on continued weak demand

27


for industrial titanium products from global markets, we recorded lower of cost or market inventory charges of $17.7 million in 2016 and $24.5 million in 2015 to reduce the carrying values of these product inventories to current market levels. Segment operating results also include ATI’s share of Uniti’s results, which was income of $0.5 million in 2016 and a loss of $0.1 million in 2015. Results in both periods were also negatively impacted by the strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain standard quality titanium products.
We expect the FRP segment to achieve sequential sales growth in the first two quarters of 2017, however, our visibility in the second half of 2017 remains cautious, and market conditions remain challenging in certain key end markets. North American and global production capacity continues to exceed demand, particularly for standard stainless steel products. We expect the FRP segment to reach a low-single digit operating profit level, as a percentage of sales in 2017.
2015 Compared to 2014
Sales for the FRP segment for 2015 decreased 22%, to $1.74 billion. Sales were significantly lower across nearly all major end markets, due to both lower selling prices attributable to falling raw material surcharges included in transaction prices, and lower shipment volumes in many end markets. Sales to the oil & gas market, which is the segment’s largest end market, remained good in the first half of 2015 as we completed a large nickel plate project, but then declined significantly in the second half of the year. Market conditions for standard stainless sheet products deteriorated throughout 2015, due in part to a surge of imports in the U.S. market in the first half of the year, and excess North American and global capacities. Sales of standard stainless sheet products were nearly 20% lower than 2014 due to both lower shipment volumes and lower selling prices. Segment results in 2015 were also impacted by a work stoppage which began in August 2015 affecting more than 2,000 USW-represented employees in the domestic operations of ATI Flat Rolled Products. Affected facilities resumed operations with salaried employees and temporary workers for the remainder of 2015.
Comparative information for our FRP segment revenues (in millions) by market, the respective percentages of overall segment revenues for the years ended 2015 and 2014, and the percentage change in revenues by market for 2015 is as follows:
Market
 
2015
 
2014
 
Change
Oil & Gas
 
$
429.4

 
25
%
 
$
563.1

 
25
%
 
$
(133.7
)
 
(24
)%
Automotive
 
288.1

 
17
%
 
395.7

 
18
%
 
(107.6
)
 
(27
)%
Electrical Energy
 
232.3

 
13
%
 
306.2

 
14
%
 
(73.9
)
 
(24
)%
Food Equipment & Appliances
 
214.4

 
12
%
 
245.7

 
11
%
 
(31.3
)
 
(13
)%
Construction/Mining
 
179.6

 
10
%
 
231.3

 
10
%
 
(51.7
)
 
(22
)%
Aerospace & Defense
 
148.1

 
9
%
 
152.4

 
7
%
 
(4.3
)
 
(3
)%
Electronics/Computers/Communication
 
121.9

 
7
%
 
151.4

 
7
%
 
(29.5
)
 
(19
)%
Transportation
 
82.6

 
5
%
 
124.3

 
6
%
 
(41.7
)
 
(34
)%
Medical
 
12.6

 
1
%
 
23.4

 
1
%
 
(10.8
)
 
(46
)%
Other
 
24.7

 
1
%
 
23.1

 
1
%
 
1.6

 
7
 %
Total
 
$
1,733.7

 
100
%
 
$
2,216.6

 
100
%
 
$
(482.9
)
 
(22
)%
Comparative information for the Flat Rolled Products segment’s major product categories, based on their percentages of 2015 and 2014 segment revenues is as follows:
For the Years Ended December 31,
 
2015
 
2014
High-Value Products
 
 
 
 
Precision and engineered strip
 
29
%
 
26
%
Nickel-based alloys and specialty alloys
 
25
%
 
21
%
Titanium and titanium-based alloys
 
3
%
 
4
%
Total High-Value Products, excluding GOES
 
57
%
 
51
%
Grain-oriented electrical steel
 
8
%
 
8
%
Total High-Value Products, including GOES
 
65
%
 
59
%
Standard Products
 
 
 
 
Stainless steel sheet
 
18
%
 
17
%
Specialty stainless sheet
 
13
%
 
19
%
Stainless steel plate
 
4
%
 
5
%
Total Standard Products
 
35
%
 
41
%
Grand Total
 
100
%
 
100
%

28


Very weak market conditions for standard products reduced the overall sales mix of these products for the FRP segment. However, demand for our titanium products from the oil & gas market for chemical and hydrocarbon processing industry projects was weaker as project-based activity remained at lower levels, with shipments of titanium and ATI-produced Uniti titanium products decreasing 40% compared to 2014, to 5.9 million pounds.
Comparative shipment volume and average selling price information on the segment’s products for the years ended December 31, 2015 and 2014, excluding GOES from high-value products from both periods, is provided in the following table:
 
 
2015
 
2014
 
% change
Volume (000’s pounds):
 
 
 
 
 
 
High-Value
 
317,054

 
350,316

 
(9
)%
Standard
 
514,035

 
678,022

 
(24
)%
Total
 
831,089

 
1,028,338

 
(19
)%
Average prices (per lb.):
 
 
 
 
 
 
High-Value
 
$3.12
 
$3.18
 
(2
)%
Standard
 
$1.16
 
$1.35
 
(14
)%
Combined Average
 
$1.91
 
$1.97
 
(3
)%
Segment operating results in 2015 were a loss of $241.9 million, or (14.0)% of sales, compared to a segment operating loss of $47.0 million, or (2.1)% of sales, in 2014. Base prices for the most common standard grade stainless sheet product fell 25% to approximately $0.45 per pound in December 2015, which represents a historic low, from a $0.60 per pound level in effect for most of 2014. These base price declines for standard products, combined with falling raw material price surcharges which did not align with manufacturing costs, negatively affected segment operating results. Additionally, in anticipation of a possible strike action related to USW labor negotiations, inventory with higher cost raw materials produced in the first half of 2015 was sold in the second half of 2015 at lower transaction prices due to falling raw material surcharges. Segment operating results in 2015 also included approximately $15 million of higher retirement benefit expense. Based on continued weak demand for industrial titanium products from global markets, we recorded lower of cost or market inventory charges of $24.5 million in 2015 and $23.2 million in 2014 in the segment to reduce the carrying value of these product inventories to current market levels. Segment operating results also include ATI’s share of Uniti’s results, which were losses of $0.1 million in 2015 and $8.9 million in 2014. Results in both periods were also negatively impacted by the strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain standard quality titanium products.
In the fourth quarter of 2015, due to the challenging business conditions for standard stainless products and grain-oriented electrical steel (GOES), we announced actions to return the Flat Rolled Products business to profitability. These actions included the idling of the commodity stainless melt and sheet finishing operations at the Midland, PA facility, and the idling of GOES operations, including the Bagdad, PA finishing facility. $54.5 million of long-lived asset impairment charges associated with these actions were excluded from 2015 segment results and are discussed separately.
LIFO and Net Realizable Value Reserves

The net effects of changes in LIFO and net realizable value (NRV) inventory reserves for 2016, 2015 and 2014 were benefits of $0.8 million, $0.1 million and $0.3 million, respectively. Rising inventory costs resulted in a $39.1 million pretax LIFO inventory valuation reserve charge in 2016, which was offset by a $39.9 million pretax non-cash benefit for NRV inventory reserves that are required to offset the Company’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost. Rapidly falling raw material prices, primarily for nickel, resulted in a $131.6 million LIFO inventory valuation reserve benefit in 2015 which was offset by a $131.5 million charge for NRV inventory reserves. In 2014, rising raw material prices resulted in a $24.7 million LIFO inventory valuation reserve charge which was offset by a $25.0 million benefit for NRV inventory reserves.
Corporate Expenses
Corporate expenses, which are included in selling and administrative expenses in the statement of operations, were $43.4 million in 2016 compared to $44.7 million in 2015, and $49.6 million in 2014. The decreases in corporate expenses in 2016 and 2015 compared to 2014 were due primarily to reduced annual and long-term performance-based compensation expenses.

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Closed Operations and Other Expenses
Closed operations and other expenses, which were $34.6 million in 2016, $22.1 million in 2015, and $28.3 million in 2014, include charges incurred in connection with closed operations and other non-operating income or expense. The increase in closed company operations in 2016 compared to prior years is primarily due to operations of our Rowley, UT titanium sponge facility, which were classified in closed operations beginning in the third quarter of 2016 due to the indefinite idling decision and ongoing shutdown activities. Closed operations and other expenses are presented primarily in selling and administrative expenses in the consolidated statements of operations, and include legal, environmental, retirement benefit and insurance obligations associated with closed operations.
Restructuring, Goodwill Impairment and Other Charges
2016
Business segment results in 2016 exclude $538.5 million of restructuring and other charges. These charges include $471.3 million in long-lived asset impairment charges, $31.7 million of facility shutdown and idling costs, $24.2 million of employee benefit costs and $11.3 million of inventory valuation charges.
In August 2016, we announced the indefinite idling of the Rowley, UT titanium sponge production facility and the consolidation of certain titanium manufacturing operations in the HPMC segment. Over the last several years, significant global capacity has been added to produce titanium sponge, which is a key raw material used to produce our titanium products. In addition, demand for industrial-grade titanium products from global markets continues to be weak. As a result of these factors, titanium sponge, including aerospace quality sponge, can now be purchased from qualified global producers under long-term supply agreements at prices lower than the production costs at our titanium sponge facility in Rowley, UT. We have entered into long-term cost competitive supply agreements with several producers of premium-grade and standard-grade titanium sponge. The lower cost titanium sponge purchased under these supply agreements will replace the titanium sponge produced at the Rowley facility. As a result of these actions, we recorded a non-cash impairment charge of $470.8 million during 2016 to reduce the carrying value of the Rowley, UT facility to an estimated fair value of $15.0 million. The indefinite idling of the Rowley, UT facility was completed in the fourth quarter 2016, as was the closure of a small titanium wire production facility in Frackville, PA, and the idling of certain titanium manufacturing operations in Albany, OR. We recognized $23.8 million of facility shutdown and idling costs, including contract termination costs, and $7.5 million of employee benefit costs including severance obligations for the elimination of approximately 180 positions associated with these and other HPMC restructuring actions. Also, an $11.3 million charge was recorded in cost of sales to revalue titanium sponge inventory based on revised assessments of industrial grade titanium market conditions and expected utilization of this inventory. The Rowley facility is being idled in a manner that allows the facility to be restarted in the future if supported by market conditions.
In October 2016, we announced the permanent closure of the Midland, PA commodity stainless steel melt and sheet finishing facility and the Bagdad, PA GOES finishing facility. These facilities, which were part of our FRP operations, were indefinitely idled earlier in 2016, and management concluded that the facilities cannot be operated at an acceptable rate of return. As a result of these actions, during 2016 we recorded $8.4 million of closure-related costs and asset impairments, and $4.9 million of employee benefit costs, including $3.4 million of special termination benefits for pension and other postretirement benefit plans.
Results for 2016 also include an $11.8 million charge for severance obligations in the FRP operations, for the reduction of approximately one-third of the salaried workforce at ATI Flat Rolled Products through the elimination of over 250 positions, which was largely completed by the end of 2016. Reserves for restructuring charges at December 31, 2016 were $33 million, consisting of severance and employee benefit and closure costs, and are expected to be substantially paid in 2017.
2015
Business segment results exclude $216.3 million of goodwill impairment, restructuring and other charges in 2015. We recorded a $126.6 million pre-tax impairment charge in 2015 to write-off all the goodwill in the Flat Rolled Products segment. As a result of the annual goodwill impairment evaluations in 2015, we determined that the fair value of the Flat Rolled Products business was below carrying value, including goodwill. This was due to challenging market conditions in 2015 in this business, primarily impacting commodity stainless flat-rolled products. This goodwill impairment charge was excluded from the Flat Rolled Products 2015 business segment results.
In 2015, we recorded $89.7 million in restructuring and other charges, including $54.5 million in long-lived asset impairment charges, $3.5 million in facility idling costs, a $25.4 million charge to revalue inventory, and $6.3 million in employee severance charges.

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In December 2015, we announced rightsizing actions to better align our Flat Rolled Products operations to the challenging market conditions for commodity products. Such actions included the idling of our standard stainless melt shop and sheet finishing operations at the Midland, PA facility, which was completed in January 2016, and the idling of our grain-oriented electrical steel (GOES) operations in Western PA, including the Bagdad, PA facility, which was completed in April 2016. As a result, 2015 operating results include a $54.5 million asset impairment charge to reduce the carrying values of these facilities and $3.5 million of charges for future idling costs at these facilities.
In December 2015, based on current market prices for non-PQ titanium sponge, we recorded a $25.4 million charge to revalue this inventory. The charge includes revised assessments of the non-PQ titanium market conditions and expected utilization of this inventory.
In 2015, we implemented a salaried workforce reduction of approximately 100 employees, in response to business conditions, in both the High Performance Materials & Components segment and at ATI’s headquarters. Severance charges of $6.3 million were recorded for this action in 2015, the majority of which were paid in 2016.
Interest Expense, Net
Interest expense, net of interest income and interest capitalization, was $124.0 million in 2016, $110.2 million in 2015, and $108.7 million in 2014. The increase in interest expense in 2016 compared to 2015 was due to interest on the $287.5 million 4.75% Convertible Senior Notes due 2022 (2022 Convertible Notes) and the $100.0 million eighteen-month term loan (Term Loan), both of which were issued during the second quarter of 2016, a higher interest rate on the Company’s 5.875% Senior Notes due 2023 (2023 Notes) resulting from credit rating downgrades, and higher average borrowings on our Asset Based Lending (ABL) Revolving Credit Facility. For 2015, interest expense increased compared to 2014 primarily due to a higher interest rate on the Company’s 2023 Notes resulting from credit rating downgrades and $3 million of lower interest capitalization on capital projects, partially offset by the impact from the payment of the Company’s 4.25% Convertible Senior Notes due in 2014. Interest expense is presented net of interest income of $1.4 million in 2016, $1.2 million in 2015, and $1.1 million in 2014.
Interest expense in 2016, 2015, and 2014 was reduced by $4.7 million, $2.2 million, and $5.3 million, respectively, related to interest capitalization on major strategic capital projects.
Income Taxes
In 2015, ATI’s results reflected a three year cumulative loss from U.S. operations; prior thereto, the historical domestic results reflected a three year cumulative profit. In situations where a three year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. Deferred taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as a purchase for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. As a result, we established $74.5 million in deferred tax asset valuation allowances in 2015, of which $68.4 million were for certain federal and state deferred tax assets. The three year cumulative loss condition continued in 2016, and the actions to indefinitely idle the Rowley, UT titanium sponge production facility in 2016 resulted in a reassessment of the realizability of U.S. federal deferred tax assets. In 2016, our results of operations included an increase to deferred tax asset valuation allowances of $171.5 million, including an additional $165.8 million valuation allowance on federal and state deferred tax assets as well as additional deferred tax asset valuation allowances in certain foreign jurisdictions. At December 31, 2016, we had a consolidated net deferred tax liability of $3.6 million.
The 2016 income tax benefit from continuing operations was $106.9 million, or 14.6% of the pre-tax loss, and the 2015 income tax benefit from continuing operations was $112.1 million, or 23.5% of the pre-tax loss. The income tax rates for both of these periods were impacted by the valuation allowance charges discussed above. The 2014 tax benefit from continuing operations was $8.7 million. Income taxes in 2016, 2015 and 2014 also reflect the absence of the benefits of the U.S. Federal manufacturing deduction due to operating losses in all three years.
Financial Condition and Liquidity
In September 2015, we entered into a $400 million Asset Based Lending (ABL) Revolving Credit Facility, which includes a letter of credit sub-facility of up to $200 million. The ABL facility matures in September 2020 and is collateralized by the accounts receivable and inventory of ATI’s domestic operations. The ABL facility replaced a $400 million revolving credit facility originally entered into in July 2007 (as amended, the “Prior Credit Facility”). Costs associated with entering into the ABL facility were $1.5 million, and are being amortized to interest expense over the 5-year term of the facility.

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In May 2016, the ABL facility was amended to add an eighteen-month term loan (Term Loan) in the amount of $100.0 million, to support the Company’s restructuring actions and operational needs, and to amend certain of the ABL covenants and related defined terms. The interest rate on this Term Loan is 3.5% plus a LIBOR spread. Costs associated with amending the ABL facility were $0.9 million, and are being amortized to interest expense over the term of the facility. Proceeds of the Term Loan were used to pay down outstanding borrowings under the revolving credit portion of the ABL facility. The Term Loan is due on November 13, 2017 and can be prepaid in its entirety on a one-time basis on or after May 13, 2017 if certain minimum liquidity conditions are satisfied. The underwriting fees and other third-party expenses for the issuance of the Term Loan were $1.0 million and are being amortized to interest expense over the eighteen-month term of the loan.
As amended, the applicable interest rate for borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 2.0% and 2.5% for LIBOR-based borrowings and between 1.0% and 1.5% for base rate borrowings. As amended, the ABL contains a financial covenant whereby we must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL facility is less than the greater of (i) 12.5% of the then applicable maximum borrowing amount or (ii) $40.0 million. We did not meet this required fixed charge coverage ratio at December 31, 2016. As a result, we are not able to access this remaining 12.5% or $62.5 million of the ABL facility until we meet the required ratio. Additionally, we must demonstrate liquidity, as calculated in accordance with the terms of the agreement, of at least $500 million on the date that is 91 days prior to June 1, 2019, the maturity date of the 9.375% Senior Notes due 2019, and that such liquidity is available at all times thereafter until the 9.375% Senior Notes due 2019 are paid in full or refinanced. There were no outstanding revolving credit borrowings under the ABL facility as of December 31, 2016, and $25.9 million was utilized to support the issuance of letters of credit. Average revolving credit borrowings under the ABL facility for the fiscal year ended December 31, 2016 were $82.0 million, bearing an average annual interest rate of 1.757%. Average borrowings under the ABL and the Prior Credit Facility for the fiscal year ended December 31, 2015 were $61 million, bearing an average annual interest rate of 2.0%.
In May 2016, we issued and sold $287.5 million aggregate principal amount of 4.75% 2022 Convertible Notes. We used a portion of the proceeds from the 2022 Convertible Notes to make a $115 million contribution in July 2016 to our U.S. defined benefit pension plan, and expect to use additional 2022 Convertible Note proceeds to meet future pension funding requirements.
At December 31, 2016, we had $230 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $310 million. We do not expect to pay any U.S. federal taxes in 2017 due to net operating loss carryforwards. We believe that internally generated funds, current cash on hand, and available borrowings under the ABL facility will be adequate to meet our liquidity needs, including currently projected required contributions to the ATI Pension Plan, our U.S. qualified defined benefit pension plan. We expect to make a $135 million cash contribution to the ATI Pension Plan in 2017, and we currently expect to continue to have average annual funding requirements of approximately $135 million for the next few years for this plan, using the expected rate of return on pension plan assets. However, these pension funding estimates are subject to significant uncertainty, including potential changes to mortality tables with revised longevity estimates, and the performance of our pension trust assets. If we need 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
Cash used in operations for 2016 was $43.7 million, and included a $115.0 million contribution to the ATI Pension Plan, and an offsetting benefit of $91.7 million from lower managed working capital balances. Cash flow provided by operations for 2015 was $131.4 million, which included a $229.0 million decline in managed working capital primarily associated with decreased business activity. Operating cash activities in 2015 also included a $59.9 million federal tax refund and the net settlement of certain foreign currency forward contracts for cash proceeds of $56.5 million (see Note 10. Derivatives for further explanation).
As part of managing the liquidity of the 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 this managed working capital, we exclude the effects of LIFO and other inventory valuation reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. We also measure managed working capital as a percentage of the prior three months annualized sales to evaluate our performance based on recent levels of business volume. In 2016, managed working capital decreased to 40.0% of annualized total ATI sales compared to 46.2% of annualized sales at December 31, 2015. In 2016, managed working capital decreased by $91.7 million, primarily due to inventory reductions in the FRP segment. The $91.7 million decrease resulted from a $232.8 million decrease in inventory, partially offset by an $86.5 million decrease in accounts payable and a $54.6 million increase in accounts receivable. Days sales outstanding, which measures actual collection timing for accounts receivable, improved by approximately 12% at year-end 2016 compared to 2015. Gross

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inventory turns, which exclude the effect of LIFO and any applicable offsetting NRV inventory valuation reserves, remained unchanged in 2016 compared to 2015.
In 2015, managed working capital decreased $229.0 million, due primarily to decreased business activity and also the effects of falling raw material values. The $229.0 million decrease resulted from a $195.5 million decrease in inventory and a $203.5 million decrease in accounts receivable, partially offset by a $170.0 million decrease in accounts payable.
The components of managed working capital were as follows:
(In millions)
 
December 31,
2016
 
December 31,
2015
 
December 31,
2014
Accounts receivable
 
$
452.1

 
$
400.3

 
$
603.6

Inventory
 
1,037.0

 
1,271.6

 
1,472.8

Accounts payable
 
(294.3
)
 
(380.8
)
 
(556.7
)
Subtotal
 
1,194.8

 
1,291.1

 
1,519.7

Allowance for doubtful accounts
 
7.3

 
4.5

 
4.8

LIFO reserve
 
(97.3
)
 
(136.4
)
 
(4.8
)