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Derivative Financial Instruments and Hedging
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Derivative Financial Instruments and Hedging
As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges.
The Company sometimes uses futures and swap contracts to manage exposure to changes in prices for forecasted purchases of raw materials, such as nickel, and natural gas. Under these contracts, which are generally accounted for as cash flow hedges, the price of the item being hedged is fixed at the time that the contract is entered into, and the Company is obligated to make or receive a payment equal to the net change between this fixed price and the market price at the date the contract matures.
The majority of ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of March 31, 2020, the Company had entered into financial hedging arrangements, primarily at the request of its customers, related to firm orders, for an aggregate notional amount of approximately 6 million pounds of nickel with hedge dates through 2023. The aggregate notional amount hedged is approximately 6% of a single year’s estimated nickel raw material purchase requirements.
At March 31, 2020, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges. At March 31, 2020, the Company hedged approximately 70% of the Company’s forecasted domestic requirements for natural gas for the remainder of 2020 and approximately 50% for 2021.
While the majority of the Company’s direct export sales are transacted in U.S. dollars, foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The Company sometimes purchases foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk, primarily euro. In addition, the Company may also hedge forecasted capital expenditures and designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. At March 31, 2020, the Company held euro forward purchase contracts for forecasted capital expenditures designated as cash flow hedges with a notional value of approximately 2 million euro with maturity dates through May 2020.
The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. The Company has a $50 million floating-for-fixed interest rate swap which converts half of the Term Loan to a 4.21% fixed rate. The swap matures in June 2024. The Company designated the interest rate swap as a cash flow hedge of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The ineffectiveness at hedge inception, determined from the fair value of the swap immediately prior to its July 2019 amendment, will be amortized to interest expense over the initial Term Loan swap maturity date of January 12, 2021.
There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts are substantial and creditworthy commercial banks that are recognized market makers. The Company controls its credit exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit default swap spreads of its counterparties. The Company also enters into master netting agreements with counterparties when possible.
The fair values of the Company’s derivative financial instruments are presented below, representing the gross amounts recognized which are not offset by counterparty or by type of item hedged. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs derived principally from or corroborated by observable market data.
(In millions)
Asset derivatives
 
Balance sheet location
 
March 31,
2020
 
December 31,
2019
Derivatives designated as hedging instruments:
 
 
 
 
Nickel and other raw material contracts
 
Prepaid expenses and other current assets
 
0.7

 
4.4

Nickel and other raw material contracts
 
Other assets
 
0.1

 
1.2

Total derivatives designated as hedging instruments
 
0.8

 
5.6

Total asset derivatives
 
 
 
$
0.8

 
$
5.6

Liability derivatives
 
Balance sheet location
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swap
 
Other current liabilities
 
$
1.0

 
$
0.3

Foreign exchange contracts
 
Other current liabilities
 
0.1

 
—

Natural gas contracts
 
Other current liabilities
 
3.0

 
2.5

Nickel and other raw material contracts
 
Other current liabilities
 
4.7

 
2.5

Interest rate swap
 
Other long-term liabilities
 
3.0

 
1.2

Natural gas contracts
 
Other long-term liabilities
 
0.8

 
1.0

Nickel and other raw material contracts
 
Other long-term liabilities
 
0.8

 
—

Total derivatives designated as hedging instruments
 
13.4

 
7.5

Total liability derivatives
 
 
 
$
13.4

 
$
7.5


For derivative financial instruments that are designated as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. For derivative financial instruments that are designated as fair value hedges, changes in the fair value of these derivatives are recognized in current period results and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. There were no outstanding fair value hedges as of March 31, 2020. The Company did not use net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes, excluding any impacts of changes to income tax valuation allowances affecting results of operations or other comprehensive income, when applicable (see Note 14 for further explanation).
Assuming market prices remain constant with those at March 31, 2020, a pre-tax loss of $8.1 million is expected to be recognized over the next 12 months.
Activity with regard to derivatives designated as cash flow hedges for the three month periods ended March 31, 2020 and 2019 was as follows (in millions): 
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income (a)
 
Three months ended March 31,
 
Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships
2020
 
2019
 
2020
 
2019
Nickel and other raw material contracts
$
(6.2
)
 
$
8.3

 
$
(0.2
)
 
$
(0.4
)
Natural gas contracts
(1.2
)
 
(0.4
)
 
(1.0
)
 
0.1

Foreign exchange contracts
(0.1
)
 
0.3

 
—

 
(0.3
)
Interest rate swap
(1.9
)
 
(0.2
)
 
(0.2
)
 
(0.1
)
Total
$
(9.4
)
 
$
8.0

 
$
(1.4
)
 
$
(0.7
)
(a)
The gains (losses) reclassified from accumulated OCI into income related to the derivatives, with the exception of the interest rate swap, are presented in cost of sales in the same period or periods in which the hedged item affects earnings. The gains (losses) reclassified from accumulated OCI into income on the interest rate swap are presented in interest expense in the same period as the interest expense on the Term Loan is recognized in earnings.
The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset.
Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales and are reported as changes within accrued liabilities and other on the consolidated statements of cash flows. The Company has no outstanding foreign currency forward contracts not designated as hedges as of March 31, 2020.
(In millions)
Amount of Gain (Loss) Recognized in Income on Derivatives
 
Three months ended March 31,
Derivatives Not Designated as Hedging Instruments
2020
 
2019
Foreign exchange contracts
$
—

 
$
0.1