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 and net income 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. Our largest markets are aerospace & defense, representing approximately 50% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, downstream processing, and specialty energy. In aggregate, these markets represent about 70% of our revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique process technologies, including our new product development competence.

Effective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). All segment reporting information for 2020 and prior periods below reflect these two revised business segments. In addition, in the fourth quarter 2020, the Company changed its segment performance measure from segment operating profit to segment EBITDA, based on internal reporting changes. Prior period results are presented using the new performance measure. The measure of segment EBITDA is defined further below. Management believes segment EBITDA, as defined, provides an appropriate measure of controllable operating results at the business segment level.

HPMC is comprised of the Specialty Materials and Forged Products businesses, as well as our ATI Europe distribution operations. The revised HPMC segment intensifies its primary focus on maximizing aero-engine materials and components growth, with approximately 80% of its revenue derived from the aerospace & defense markets and nearly half of its revenue from products for commercial jet engines. Commercial aerospace products have been the main source of sales and EBITDA growth for HPMC over the last few years, and are expected to continue to drive HPMC and overall ATI results for the next several years as demand from these markets recovers from reduced 2020 levels resulting from the COVID-19 pandemic. Other major HPMC end markets include medical and energy. HPMC produces a wide range of high performance materials, and components, and advanced metallic powder alloys made from nickel-based alloys and superalloys, titanium and titanium-based alloys, and a variety of other specialty materials. Capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used for next-generation jet engine forgings and 3D-printed aerospace products.

The new AA&S segment combines our Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, the 60%-owned STAL joint venture, and the Uniti and A&T Stainless 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. AA&S is focused on delivering high-value flat products primarily to the energy, aerospace, and defense end-markets, which comprise approximately 50% of its revenue. AA&S was created to align melting technologies with hot-rolling capabilities to produce products with faster flow times and lower costs. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020. Other important end markets for AA&S include automotive and electronics. AA&S produces nickel-based alloys, specialty alloys, and titanium and titanium-based alloys, and stainless products in a variety of forms including plate, sheet, and strip products. On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase our focus on higher-margin products and our aerospace & defense end markets.

Overview of 2020 Financial Performance

Sales in 2020 decreased 28%, to $2.98 billion, and gross profit decreased 54%, to $293 million, compared to 2019, reflecting weakened market conditions resulting from the COVID-19 pandemic. Loss before taxes in 2020 included $1.1 billion of restructuring and other charges, $287 million of goodwill impairment charges, and $22 million in debt extinguishment charges. Results in 2020 also reflect a $78 million income tax provision primarily for valuation allowances on U.S. federal and state net deferred tax assets. The Company’s net loss in 2020 was $1.57 billion, or ($12.43) per share. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, compared to $439.4 million, or 10.7% of sales, for 2019. See the Financial Condition and Liquidity section of Management’s Discussion and Analysis for these non-GAAP definitions and calculations. Despite these weak market conditions, the Company maintained strong liquidity in 2020, ending the year with $646 million in cash and $950 million of total liquidity.

Revenues in our largest end markets, aerospace & defense, decreased $771 million, or 36%, over 2019, and represented 46% of our 2020 sales. International sales, including both U.S. exports and foreign sales from our foreign manufacturing operations, were $1.17 billion in 2020 and represented 39% of total sales.

A summary of our results is as follows.

(Dollars in millions, except per share amounts) 2020 2019 2018

Gross profit % of sales 9.8 % 15.5 % 15.6 %

Diluted net income (loss) per common share $ (12.43) $ 1.85 $ 1.61

Our major accomplishments during 2020 include the following:

•We took decisive steps toward becoming a more profitable, aerospace & defense focused company. On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus on increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge PRS. As part of this strategic realignment, we intend to cease production of our low-margin standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the HRPF, and close various downstream finishing operations that were part of the standard stainless flow path. In connection with these changes, we plan to cease production activities at five locations by year-end 2021. We expect our AA&S segment revenues to decrease by approximately $450 million, compared to a 2019 baseline, once these strategic actions to exit standard stainless products are completed.

•These AA&S strategic actions resulted in $1,041.5 million of pre-tax, non-cash long-lived asset charges, primarily related to the Brackenridge operations, which do not impact the operating capabilities of the HRPF. Restructuring and other charges in 2020 across all ATI operations also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and medical benefits, and $17.4 million for pension and postretirement medical obligations for workforce right-sizing actions taken to date, and to be completed with the repositioning of the FRP business into a specialty rolled products portfolio.

•We expect annual cost savings from these 2020 charges to be approximately $90 million in 2021 and $100 million when fully implemented in 2023, with approximately 55% realized in cost of sales, with the remainder in selling, general and administrative expenses. Including these and other cost reduction actions taken in response to the rapid decline in demand experienced in 2020, we estimate our total structural cost reductions will be nearly $150 million annually.

•We generated $167 million in cash from operating activities in 2020, including a $157 million reduction in managed working capital. This strong operating cash flow result in an unprofitable year was accomplished even with $130 million in contributions to ATI’s U.S. defined benefit pension trust. As a result of our constant focus on our financial condition in a year of significant economic uncertainty, we ended the year with $646 million of cash on hand and $950 million of liquidity.

•In 2020, ATI issued $291 million aggregate principal amount of the 2025 Convertible Notes, and used the majority of the proceeds to repurchase approximately $203 million aggregate principal amount of the outstanding principal balance of our 2022 Convertible Notes. With those actions, we extended our debt maturity profile and now have no significant debt maturities before mid-2023.

•We made further progress on our risk management strategy for retirement benefit obligations by completing an $86 million risk transfer through the purchase of an annuity contract with a nationally recognized insurance company. This annuity buyout removed 8% of plan participants, bringing the total pension participant reduction to more than 55% over the past eight years. In addition, we continued to reduce our net pension liability, which declined by nearly $60 million from year-end 2019, with strong asset performance and company contributions in 2020 offsetting declines in interest rates that increased the pension benefit obligation.

Results of Operations

2020 Compared to 2019

Results for 2020 were sales of $2.98 billion and loss before tax of $1,481.9 million, compared to sales of $4.12 billion and income before tax of $241.6 million in 2019. Results in 2019 included $95 million of sales and minimal segment operating profit related to the divested titanium investment castings and industrial forgings businesses. Our gross profit was $292.8

million, or 9.8% of sales, a $345.0 million decline compared to 2019, reflecting COVID-19 impacts. The 2020 results included $1,443.0 million of pretax charges, all of which are excluded from segment EBITDA and consisted of the following:

•$1,132.1 million of restructuring and other charges,

•$287.0 million for impairment of a portion of goodwill at our Forged Products operations,

•$21.5 million for debt extinguishment on $203.2 million, or 71%, of the principal balance of the outstanding 2022 Convertible Notes, and

•$2.4 million of severance charges at our A&T Stainless joint venture.

The 2020 restructuring and other charges of $1,132.1 million predominantly related to the Company’s December 2020 announcement to cease production of standard stainless sheet products. These restructuring and other charges consisted of the following:

•$1,107.5 million of restructuring charges recorded on the consolidated statement of operations. These restructuring charges consist of $1,041.5 of non-cash long-lived asset impairment charges, $60.5 million of employee benefit costs for hourly and salary employees, and $5.5 million of other costs related to facility idlings.

•$17.4 million of termination benefits for pension and postretirement medical obligations related to facility closures from the standard stainless exit. These costs are classified within nonoperating retirement benefit expense in the consolidated statements of operations.

•$7.2 million of other charges for inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, primarily related to the Albany, OR idled facility.

The 2019 results included the following pretax charges, all of which are excluded from segment EBITDA:

•$4.5 million restructuring charge for severance obligations to streamline ATI’s salaried workforce, primarily to improve the cost competitiveness of the U.S.-based FRP business.

•$21.6 million for debt extinguishment on the $500 million 5.95% Senior Notes due 2021 (2021 Notes).

•$11.4 million impairment charge for our A&T Stainless joint venture.

The goodwill impairment, restructuring charges and charges for inventory valuation reserves above are included in operating income (loss) on the consolidated statements of operations, which was an operating loss of $1,302.7 million for 2020, compared to operating income of $366.1 million for 2019.

Nonoperating items included a reduction in nonoperating retirement benefit expense of $11.5 million in 2020, compared to the prior year period, despite the $17.4 million in termination benefits related to facility closures discussed above. Other (nonoperating) income/expense for 2020 included $7.0 million of net losses from operating results of joint ventures accounted for under the equity method and $2.4 million of severance charges for our A&T Stainless joint venture. Other (nonoperating) income/expense for 2019 included $89.8 million in net gains from non-core asset sales, consisting of a $91.7 million gain to monetize oil and gas rights and a $6.2 million gain on the sale of the Company’s Cast Products business, partially offset by an $8.1 million loss on the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY. Results for 2019 also include an $11.4 million A&T Stainless joint venture impairment charge and $10.7 million of net losses from operating results of joint ventures accounted for under the equity method. Equity method joint venture operating results are included in the results of the AA&S segment.

Results for 2020 include a $77.7 million income tax charge primarily related to deferred tax asset valuation allowances on our U.S. federal and state tax attributes, due to re-entering a three-year cumulative loss position for our U.S. results during the year. Results in 2019 included a $28.5 million income tax benefit, as we determined as of December 31, 2019 that we were no longer in a three year cumulative loss position and a substantial portion of our income tax valuation allowances were no longer required, resulting in a $45.1 million discrete tax benefit. Net loss attributable to ATI was $1,572.6 million, or ($12.43) per share, in 2020, compared to net income attributable to ATI of $257.6 million, or $1.85 per share, for 2019. Adjusted EBITDA was $196.3 million, or 6.6% of sales, for 2020, and $439.4 million, or 10.7% of sales, for 2019.

Results for 2020 reflect the continued weakened market conditions resulting from the COVID-19 pandemic. We maintained our solid cash and liquidity positions during 2020, and issued $291.4 million aggregate principal amount of new, five-year convertible debt in 2020 to partially retire our 2022 Convertible Notes while lowering cash interest costs and reducing future stockholder dilution. We also exercised our option to draw another $100 million term loan within our asset based lending credit facility. These actions are further discussed in the Financial Condition and Liquidity section of Management’s Discussion and Analysis.

As discussed above, at the start of 2020, ATI realigned its business segments to streamline operations and unlock synergies, and proactively implemented workforce reduction initiatives in the fourth quarter 2019 and again in 2020 in response to changed market conditions resulting from the COVID-19 pandemic to better match our cost structure to expected demand. To date, we

have reduced company-wide employment levels by approximately 1,400 people, or about 17% of our total workforce. To help further mitigate the financial impact from reduced aerospace and consumer demand levels stemming from the COVID-19 pandemic, we implemented cost reduction efforts throughout 2020 including the temporary idling of operations to reduce costs and inventory, salary reductions for a substantial portion of our staff, reductions in 401(k) benefits for nearly all employees, furlough of non-essential positions, and significant reductions in capital expenditures and corporate expenses. Most of these cost reduction efforts are expected to continue into 2021. These actions provide a strong foundation to respond to the economic challenges created by the COVID-19 pandemic. We will continue to evaluate our demand levels and operating rates and may take additional actions as warranted.

2019 Compared to 2018

Sales were $4.12 billion in 2019, compared to $4.05 billion in 2018. Sales increased 2% in 2019 compared to 2018, despite a 2% negative impact from business divestitures. The continuing sales growth was primarily the result of increased sales to the aerospace & defense markets. Income before tax was $241.6 million in 2019, compared to $247.7 million in 2018. Net income attributable to ATI in 2019 was $257.6 million, or $1.85 per share, compared to $222.4 million, or $1.61 per share, in 2018.

Results in 2019 include a $28.5 million income tax benefit, while 2018 results reflect $11.0 million of income tax expense. Through December 31, 2019, we continued to maintain valuation allowances for U.S. federal and state deferred taxes, and results in all periods include impacts from income taxes that differ from the applicable standard tax rate, primarily related to these income tax valuation allowances. At December 31, 2019, we determined that a substantial portion of these income tax valuation allowances were no longer required, and a $45.1 million discrete tax benefit was recognized.

In 2019, we completed several strategic actions to improve future financial performance, liquidity and our financial condition. These items noted below are excluded from business segment results unless otherwise noted.

During the second quarter of 2019, we completed the sale of two non-core forging facilities in our HPMC segment for $37 million. Sales from these two forging facilities in 2018 were $86 million. We received net cash proceeds of $33.0 million on the sale of this business and recognized an $8.1 million pre-tax loss in 2019, including $10.4 million of allocated goodwill. During the third quarter of 2019, we completed the sale of our Cast Products titanium investment castings business in our HPMC segment for $127 million. Cast Products’ sales were $105 million in 2018. We received net cash proceeds of $125.1 million on the sale of this business and recognized a $6.2 million gain in 2019. Results of these businesses are included in HPMC segment results to the dates of their respective sale. See Note 8 of the Notes to Consolidated Financial Statements for further information on business divestitures.

During the second and third quarters of 2019, we recognized $91.7 million in cash gains on sales of certain oil and gas rights in Eddy County, NM. These oil and gas rights were initially acquired in 1972 along with land purchased by Teledyne, Inc., which later became part of ATI. The land was subsequently sold, with the Company retaining underlying oil and gas rights that it sold in 2019.

During the fourth quarter of 2019, a $4.5 million restructuring charge was recorded for severance obligations for the reduction of approximately 70 positions to streamline ATI’s salaried workforce, primarily to improve the cost competitiveness of the U.S.-based Flat Rolled Products business. Also during the fourth quarter of 2019, we recorded an $11.4 million impairment charge for the A&T Stainless joint venture, including ATI’s share of a long-lived asset impairment charge recognized by the joint venture on the carrying value of its production facility in Midland, PA.

In the fourth quarter of 2019, we issued $350 million of 5.875% Senior Notes due 2027 (2027 Notes). Proceeds from the 2027 Notes and cash on hand were used to redeem the $500 million 5.95% Senior Notes due 2021 (2021 Notes), which had a January 15, 2021 maturity date. A $21.6 million debt extinguishment charge was recorded as part of this action.

Results for 2019 included $67.7 million in other (non-operating) income, net on the consolidated statements of operations, which included the net loss on the sales of the Cast Products and industrial forgings businesses discussed above, gains to monetize oil and gas rights, an $11.4 million A&T Stainless joint venture impairment charge, and $10.7 million of net losses from operating results of joint ventures accounted for under the equity method. Equity method joint venture operating results are included in the results of the AA&S segment. Other (non-operating) income, net in 2018 included a $15.9 million pre-tax gain on the sale of a 50% noncontrolling interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018.

Results by Business Segment

We operated in two business segments during 2020, HPMC and AA&S, and management evaluates financial results on this basis. HPMC sales decreased in 2020 by 41%, driven by a 42% decrease in sales to the aerospace & defense markets, which comprise 81% of the sales in this segment, due to declines in demand for products to the commercial aerospace market resulting from the COVID-19 pandemic. Sales decreased 15% in 2020 in the AA&S segment, reflecting lower sales across most markets, particularly an 18% decline in sales to the aerospace & defense markets and a 20% decrease in energy market sales. HPMC sales increased in 2019 compared to 2018 by 1%, despite a 5% decline from business divestitures, driven by a 4% increase in sales to the aerospace & defense markets, which comprised 82% of the sales in this segment. Sales increased 3% in 2019 compared to 2018 in the AA&S segment, primarily due to 26% higher sales to the aerospace & defense markets, and a 13% increase in medical market sales, partially offset by declines in sales to most general industrial markets for standard stainless products. Overall, AA&S energy markets sales in 2019 were in line with 2018, with increases in sales of products for specialty energy offset by declines in sales to the oil & gas market.

Segment EBITDA was $244.6 million, or 8.2% of sales, in 2020, compared to segment EBITDA of $528.8 million, or 12.8% of sales, in 2019 and $566.7 million, or 14.0% of sales, in 2018. Our measure of segment EBITDA, which we use to analyze the performance and results of our business segments, excludes all effects of LIFO inventory accounting and any related changes in net realizable value (NRV) inventory reserves which offset the Company’s aggregate net debit LIFO valuation balance, income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other expenses, charges for goodwill and asset impairments, restructuring and other charges, debt extinguishment charges and non-operating gains or losses. Results on our management basis of reporting were as follows (in millions):

Fiscal Year Ended

December 31, December 31, December 31,

Sales:

EBITDA:

High Performance Materials & Components $ 129.6 $ 356.2 $ 360.3

LIFO and net realizable value reserves — (0.1) (0.7)

Closed operations and other expenses (7.4) (24.0) (19.5)

Restructuring and other charges (1,132.1) (4.5) —

Impairment of goodwill (287.0) — —

Joint venture restructuring and impairment charges (2.4) (11.4) —

Gain on joint venture deconsolidation — — 15.9

Debt extinguishment charge (21.5) (21.6) —

Gains on asset sales, net 2.5 89.8 —

Comparative information for our overall revenues (in millions) by end market, including divested businesses prior to sale, and their respective percentages of total revenues is as follows:

Aerospace & Defense:

Energy:

Comparative information for our major high-value and standard products, including divested businesses prior to sale, based on their percentages of revenues is as follows. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items in the AA&S segment as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales in the AA&S segment are excluded from this presentation.

High-Value Products

Nickel-based alloys and specialty alloys 33 % 35 % 33 %

Titanium and titanium-based alloys 17 % 18 % 17 %

Precision forgings, castings and components 14 % 18 % 20 %

Zirconium and related alloys 9 % 6 % 5 %

Total High-Value Products 88 % 89 % 87 %

Standard Products

Total Standard Products 12 % 11 % 13 %

Sales by geographic area (in millions), including divested businesses prior to sale, and as a percentage of total sales, were as follows:

Information with respect to our business segments follows.

High Performance Materials & Components

Segment EBITDA as a percentage of sales 11.1 % 18.0 % 18.4 %

International sales as a percentage of sales 45.0 % 47.3 % 49.9 %

2020 Compared to 2019

Sales for the HPMC segment in 2020 decreased 41%, to $1.16 billion, with declines across most major markets. Sales to the aerospace & defense markets, which were 81% of 2020 HPMC sales, were 42% lower, reflecting a 48% decrease in sales to the commercial aerospace market, partially offset by a 24% increase in government defense sales. Sales of next generation jet engine products represented 41% of total 2020 HPMC jet engine product sales, a reduction in this sales mix by 13% compared to 2019 levels. Sales in the medical and energy markets were 44% and 31% lower, respectively. Results in 2019 included $95 million of sales related to the divested titanium investment castings and industrial forgings businesses, resulting in a 3% unfavorable impact from divestitures.

Comparative information for our HPMC segment revenues (in millions) by market, including divested businesses prior to sale, the respective percentages of overall segment revenues for the years ended 2020 and 2019, and the percentage change in revenues by market for 2020 is as follows:

Aerospace & Defense:

Energy:

We continue to extend and expand LTAs with certain of our customers for our specialty materials, including powders, parts and components, to reduce their supply uncertainty, including several LTAs with aerospace market OEMs. These LTAs are expected to continue to drive HPMC’s growth trajectory for the next several years and are for the sale of ATI’s specialty materials, parts and components that are required for both next-generation and legacy aircraft platforms, including jet engines. Our LTAs include a titanium products supply agreement for aircraft airframes and structural components with The Boeing Company (Boeing). This LTA covers value-added titanium 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 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 AA&S 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 extended LTAs with GE Aviation in 2019 for the supply of premium titanium alloys, nickel-based alloys, and vacuum-melted specialty alloys products for commercial and military jet engine applications which begin in January 2021 and are multi-year agreements, and LTAs with Snecma (Safran) for the supply of premium titanium alloys, nickel-based alloys, and vacuum melted specialty alloys for commercial and military jet engine applications. In addition, we have LTAs with Rolls-Royce plc for the supply of disc-quality products and precision forgings for commercial jet engine applications. In 2019, we extended our long-term agreement through 2029 with Rolls-Royce to supply rotating disc quality specialty materials for their Trent engine family. This agreement covers the production of a wide-range of critical products used to make Rolls-Royce’s next-generation

jet engines as well as spare parts for in-service engines. We also supply products to other important parts of the aviation market such as helicopters and rotary engine fixed wing aircraft.

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.Even with the production delays and order cancellations that have occurred since the onset of the COVID-19 pandemic, Boeing and Airbus continue to have multi-year backlogs of orders for both legacy models and next-generation aircraft, and there continue to be over 25,000 jet engines with firm orders (Aero Engine News, February 2021).Due to manufacturing cycle times, demand for our specialty materials leads the deliveries of new aircrafts by approximately 6 to 12 months.

Use of these newer materials, particularly for jet 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.

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.

Our HPMC segment produces a wide range of high performance materials, including titanium and titanium-based alloys, nickel- and cobalt-based alloys and superalloys, 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, components, and machined parts.

Comparative information for HPMC’s major product categories, including divested businesses prior to sale, based on their percentages of the segment’s overall revenue is as follows:

High-Value Products

Nickel-based alloys and specialty alloys 38 % 38 %

Precision forgings, castings and components 34 % 36 %

Titanium and titanium-based alloys 28 % 26 %

Total High-Value Products 100 % 100 %

HPMC segment EBITDA for 2020 decreased 64% to $129.6 million, or 11.1% of sales, compared to $356.2 million, or 18.0% of sales, in 2019. Lower overall demand, including lower sales of higher-margin next-generation jet engine products, and reduced asset utilization rates negatively impacted operating margins. Cost cutting measures helped to offset these negative impacts.

HPMC financial results experienced significant weakness in 2020 due to demand disruptions in the aerospace & defense and energy markets as a result of the COVID-19 pandemic. Most production facilities operated at lower utilization rates, leading to cost inefficiencies, along with weaker profit margins due to intense market competition. Although we began to see signs of commercial aerospace stabilization in the fourth quarter of 2020, these market conditions are presently expected to continue through at least the first half of 2021 due to the COVID-19 resurgence and low rates of global air passenger travel. For the full year 2021, we are optimistic that the worst is behind us and demand will begin to rebound as COVID-19 vaccines are increasingly approved and administered around the world. We expect our demand to improve in the second half of the year, led by increasing narrow-body engine production volumes enhanced by ATI’s jet engine-related share gains and new business in airframes.

We anticipate industry demand growth for advanced powder materials to satisfy aerospace & defense market production requirements, and for emerging additive manufacturing of parts and components, and recently added new metal-alloy production capacity in 2018 and 2019 for nickel, superalloy, and titanium alloy powders. We acquired assets in 2018 to accelerate the development of our capabilities in metal alloy-based additive manufacturing to provide comprehensive customer solutions ranging from the design of parts for additive manufacturing to the production of ready-to-install components. Ongoing strategic capital projects in HPMC to support future growth include the iso-thermal press and heat-treating capacity expansion at our Iso-Thermal Forging Center of Excellence in Cudahy, WI, which is expected to be placed into service in 2021.

Despite near-term uncertainty posed by the ongoing COVID-19 pandemic impacts globally, we expect that the long-term fundamentals driving demand growth in commercial aerospace remain largely intact across a range of next-generation aircraft and engines.We believe that our HPMC segment is well-positioned for profitable growth through the expected recovery in

commercial aerospace demand, especially in the next-generation jet engine platforms through LTAs that provide significant growth and share gains for ATI on next-generation airplanes and the jet engines that power them.

2019 Compared to 2018

Sales for the HPMC segment in 2019 increased 1% compared to 2018, to $1.98 billion, despite a 5% negative impact from business divestitures. Sales to the aerospace & defense markets, which are the largest end markets for HPMC at 82% of total segment sales, were 4% higher, despite a 3% decline from divestitures. This was driven by a 20% increase in airframe sales and 29% increase in defense sales. Total 2019 commercial jet engine sales decreased 3% when compared to 2018, despite a 6% increase in next-generation jet engine products, due primarily to unfavorable product mix and temporary changes in order patterns from a major aero-engine customer. Energy market sales increased 15% versus 2018 due to export sales into Asia while construction and mining market sales were 42% lower.

Comparative information for our HPMC segment revenues (in millions) by market, including divested businesses prior to sale, the respective percentages of overall segment revenues for the years ended 2019 and 2018, and the percentage change in revenues by market for 2019 is as follows:

Aerospace & Defense:

Energy:

Stronger demand for titanium and nickel-based products, sales of which increased 12% and 4%, respectively, in 2019 compared to 2018, were partially offset by declines in sales of forged products. Comparative information for HPMC’s major product categories, including divested businesses prior to sale, based on their percentages of the segment’s overall revenue is as follows:

High-Value Products

Nickel-based alloys and specialty alloys 38 % 37 %

Precision forgings, castings and components 36 % 40 %

Titanium and titanium-based alloys 26 % 23 %

Total High-Value Products 100 % 100 %

HPMC segment EBITDA for 2019 decreased 1% compared to 2018, to $356.2 million, or 18.0% of sales. As the year progressed, results reflected a better balance of raw material prices and index-based selling prices, however, the first half of 2019 reflected adverse impacts from a rapid drop in raw material prices, particularly in cobalt, which compressed profit margins due to the length of the manufacturing cycle compared to index-based selling price changes, offsetting benefits from higher productivity. Results for 2019 also reflect temporary near-term headwinds related to one of our jet engine customer’s cash management efforts. Net results of divested businesses were not material to prior period HPMC segment EBITDA.

Advanced Alloys & Solutions

Segment EBITDA as a percentage of sales 6.3 % 8.1 % 9.9 %

International sales as a percentage of sales 35.7 % 34.1 % 34.5 %

2020 Compared to 2019

Sales for the AA&S segment in 2020 decreased 15% compared to 2019, to $1.82 billion. Sales to specialty energy markets were 3% higher compared to the prior year, while total sales to all energy markets, which also include oil & gas, downstream processing, and specialty energy, were 20% lower. Declines of 29% and 10% were also noted in the commercial aerospace and automotive markets, respectively, partially offset by higher sales in the defense market and higher HRPF conversion services billings. Sales in 2019 reflect project-based demand for marine scrubber products within the specialty energy markets. Sales of high-value products were 15% lower, largely due to a 26% decline in nickel-based alloys and specialty alloys and a 22% decline in titanium and titanium alloys.

Comparative information for our AA&S segment revenues (in millions) by market, the respective percentages of overall segment revenues, for the years ended 2020 and 2019, and the percentage change in revenues by market for 2020 is as follows:

Energy:

Aerospace & Defense:

Our AA&S segment produces zirconium and related alloys including hafnium and niobium, nickel-based alloys, specialty alloys, titanium and titanium-based alloys, and stainless products, in a variety of forms including plate, sheet, and PRS products. AA&S also provides hot-rolling conversion services, including titanium products of the Uniti joint venture (JV) and carbon steel products.

Comparative information for the AA&S segment’s major product categories, based on their percentages of revenue are presented in the following table. In conjunction with the announced ongoing exit of standard stainless products, ATI reclassified certain items as High-Value Products. Prior period information reflects these reclassifications. HRPF conversion service sales are excluded from this presentation.

High-Value Products

Nickel-based alloys and specialty alloys 29 % 33 %

PRS products 25 % 23 %

Zirconium and related alloys 15 % 11 %

Titanium and titanium-based alloys 11 % 11 %

Total High-Value Products 80 % 78 %

Standard Products

Total Standard Products 20 % 22 %

Segment EBITDA was $115.0 million, or 6.3% of sales, a 33% decline from segment EBITDA of $172.6 million, or 8.1% of sales, in 2019, as weakened market conditions were partially offset by cost cutting measures. AA&S segment results for 2020 compared to 2019 reflect lower retirement benefit expense of approximately $20 million. Results at our Specialty Alloys & Components business improved year-over-year primarily due to defense sales. Results in 2020 and 2019 also include $8.2 million and $12.2 million, respectively, in losses from the A&T Stainless joint venture operations. We indefinitely idled the manufacturing operations of the A&T Stainless joint venture in 2020 due to repeated denials by the U.S. Department of Commerce for exemptions from Section 232 tariffs, which impose a 25% tariff on imported semi-finished stainless slab products from Indonesia. A $2.4 million charge for ATI’s portion of a severance charge recorded by the A&T Stainless joint venture was excluded from segment results.

AA&S financial results experienced significant weakness in 2020 due to demand disruptions in the aerospace, energy and general industrial markets as a result of the COVID-19 pandemic. Lower utilization rates have resulted at most production facilities, leading to cost inefficiencies, along with weaker profit margins due to intense market competition. These market conditions are presently expected to continue through at least the first half of 2021. We continue efforts toward improving the capacity utilization of our HRPF for carbon steel hot-rolling conversion services.

On December 2, 2020, we announced a strategic repositioning of our FRP business, which includes exiting standard stainless sheet products, streamlining the production footprint of the AA&S segment and making certain capital investments to increase our focus on higher-margin products and our aerospace & defense end markets. These actions are expected to accelerate our future by exiting this low-margin standard stainless sheet product line and redeploying capital to high-return opportunities. This transformation represents a major step forward to making ATI a more sustainably profitable aerospace & defense-focused company. We expect our AA&S segment revenues to decrease by approximately $450 million, compared to a 2019 baseline, once these strategic actions to exit standard stainless products are completed.

2019 Compared to 2018

Sales for the AA&S segment in 2019 increased 3% compared to 2018, to $2.14 billion. Sales to the aerospace & defense markets increased 26% versus 2018, supported by higher demand for materials for naval nuclear components, and significantly higher production of titanium armor plate, additional titanium volumes for commercial airframes, and increased nickel and cobalt-bearing alloy sheet products for jet engines. Sales to the energy markets were flat, as higher specialty energy demand for marine scrubber products for exhaust systems on ships was offset by lower oil & gas market sales, including downstream processing applications, due primarily to the timing of project-based demand. In the medical market, sales increased 13% due in part to higher MRI magnet demand. Sales to the automotive and other industrial markets declined in 2019. Overall, increased sales of high-value products offset 10% lower sales of standard stainless products, compared to 2018.

In 2019, we announced the expansion and 6.5 year extension of our LTA with BWX Technologies to supply materials for the manufacture of naval nuclear components. In 2018, we entered into a joint technology development agreement with Bruker Energy & Supercon Technologies, to advance state-of-the-art niobium-based superconductors, including those used in MRI magnets for the medical industry, and preclinical MRI magnets used in the life-science tools industry.

Comparative information for our AA&S segment revenues (in millions) by market, the respective percentages of overall segment revenues, for the years ended 2019 and 2018, and the percentage change in revenues by market for 2019 is as follows:

Energy:

Aerospace & Defense:

High-Value Products

Nickel-based alloys and specialty alloys 33 % 31 %

PRS products 23 % 23 %

Zirconium and related alloys 11 % 11 %

Titanium and titanium-based alloys 11 % 10 %

Total High-Value Products 78 % 75 %

Standard Products

Total Standard Products 22 % 25 %

Segment EBITDA in 2019 was $172.6 million, or 8.1% of sales, a 16% decline from segment EBITDA of $206.4 million, or 9.9% of sales, in 2018. AA&S segment results for 2019 reflect higher retirement benefit expense of $27 million and a $12 million loss for ATI’s share of the A&T Stainless JV, primarily due to Section 232 tariffs, compared to a $4 million loss from the A&T Stainless JV in 2018. While project-based demand for nickel-based alloys in the U.S. business remained solid, weaker demand for standard stainless products resulted in lower segment EBITDA compared to 2018.

LIFO and Net Realizable Value Reserves

There was no effect on our results of operations for changes in LIFO and NRV inventory reserves for 2020. Falling inventory costs in 2020 resulted in a $10.5 million pretax LIFO inventory valuation reserve benefit, which was offset by a $10.5 million pretax non-cash charge for NRV inventory reserves that are required to offset the Company’s aggregate net debit LIFO inventory balance that exceeds current inventory replacement cost. The net effect of changes in LIFO and NRV inventory reserves was expense of $0.1 million in 2019. Falling inventory costs in 2019 resulted in a $25.5 million pretax LIFO inventory valuation reserve benefit, which was offset by a $25.6 million pretax non-cash charge for NRV inventory reserves.

Corporate Expenses

Corporate expenses, which are included in selling and administrative expenses in the statement of operations, were $40.9 million in 2020 compared to $65.3 million in 2019. This decrease was primarily due to lower incentive compensation expense based on expected performance versus targeted metrics, and lower expenses resulting from cost reduction actions.

Closed Operations and Other Expenses

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. Closed operations and other expenses were $7.4 million in 2020, compared to $24.0 million in 2019. This decline reflects lower legal and retirement benefit expense of closed operations and a $4.3 million gain from settlements of contract indemnity obligations.

Depreciation and Amortization

The following is depreciation & amortization by business segment:

Depreciation and amortization:

High Performance Materials & Components $ 78.1 $ 84.6 $ 90.6

Interest Expense, Net

Interest expense, net of interest income and interest capitalization, was $94.4 million in 2020, compared to $99.0 million in 2019. This decrease is primarily due to higher capitalized interest in the current year, as well as the net effects of debt reduction actions taken by us in the fourth quarter 2019, partially offset by increased debt resulting from the actions taken in 2020. Interest expense is presented net of interest income of $1.7 million in 2020, $5.9 million in 2019, and $1.1 million in 2018. Interest expense in 2020, 2019, and 2018 was reduced by $7.7 million, $4.7 million, and $4.1 million, respectively, related to interest capitalization on major strategic capital projects.

Restructuring and Other Charges

For the year ended December 31, 2020, we recorded restructuring and other charges of $1,132.1 million, predominantly related to our December 2020 announcement previously discussed to cease production of standard stainless sheet products, which are excluded from business segment results.

Restructuring charges recorded on the consolidated statement of operations for the year ended December 31, 2020 were $1,107.5 million, comprised of $1,041.5 million of non-cash asset impairment charges, $60.5 million of employee benefit-related costs, and $5.5 million of other costs related to facility idlings. The long-lived asset impairment charges relate to a $1,032.6 million charge related to the Brackenridge, PA operations, including the HRPF, as well as $8.9 million other long-lived asset impairment charges recognized for various AA&S segment operations identified for closure as part of the standard stainless sheet exit decision.

Restructuring charges also include $60.5 million of employee benefit costs, representing severance, supplemental unemployment and medical benefits for the elimination of approximately 1,400 positions related to the standard stainless exit, as well as for employees impacted by the idling of the Albany, OR primary titanium operations in the fourth quarter of 2020, and workforce right-sizing actions, including both involuntary reductions and voluntary retirement incentive programs implemented throughout 2020 to better match our cost structure to expected demand, primarily as a result of economic challenges created by the COVID-19 pandemic. We expect to generate approximately $90 million in annual savings from these cost reduction programs in 2021 and $100 million annually once fully implemented in 2023. Cash payments associated with these cost reduction programs are expected to be approximately $35 million in 2021.Other costs of $5.5 million included in 2020 restructuring charges primarily relate to asset retirement and environmental obligations associated with facility idlings.

Other charges for the year ended December 31, 2020 include:

•$7.2 million of other charges for inventory valuation reserves, classified in cost of sales on the consolidated statement of operations, primarily related to excess raw material and work in process inventory at the idled Albany, OR primary titanium facility.

In addition, the A&T Stainless JV recorded a $4.8 million charge in 2020 for contractual termination benefits, and ATI recognized a $2.4 million charge in 2020 for its equity method share of these termination benefits. These charges are excluded from segment operating results.

A $4.5 million restructuring charge was recorded on the consolidated statement of operations for the year ended December 31, 2019 for severance obligations for the reduction of approximately 70 positions in order to streamline our salaried workforce, primarily to improve the cost competitiveness of the U.S.-based FRP business. This restructuring charge is excluded from business segment results. The $4.5 million was substantially paid in 2020 upon completion of these reductions.

Goodwill Impairment Charge

In the second quarter 2020, due to demand disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic and changes in near-term demand requirements of aero-engine and airframe markets, ATI conducted an interim test for goodwill impairment at our Forged Products operations, and recognized a $287.0 million charge for the partial impairment of goodwill, while retaining $173.4 million of goodwill for this profitable business with good long-term growth prospects. This goodwill impairment charge is excluded from HPMC segment results.

Joint Venture Restructuring and Impairment Charges

The A&T Stainless JV recorded a $4.8 million charge in 2020 for contractual termination benefits, and ATI recognized a $2.4 million charge in 2020 for its equity method share of these termination benefits. These charges are excluded from AA&S segment results.

We recorded an $11.4 million impairment charge in 2019 for the A&T Stainless JV, including ATI’s share of a long-lived asset impairment charge recognized by the JV on the carrying value of its production facility in Midland, PA. ATI recognized a $7.1 million equity loss for its 50% share of a $14.2 million long-lived asset impairment recognized by A&T Stainless. In addition, as of December 31, 2019, ATI had net receivables for working capital advances and administrative services from A&T Stainless of $36.8 million that were also evaluated for collectability, and a $4.3 million reserve was recorded in December 2019 based ATI’s share of the estimated fair value of the JV’s net assets. This charge is excluded from AA&S segment results.

Gain on Joint Venture Deconsolidation

On March 1, 2018, we announced the formation of A&T Stainless, in which ATI has a 50% ownership interest. Our JV partner purchased its 50% JV interest during the first quarter of 2018, and as a result of this sale and the subsequent deconsolidation of the A&T Stainless entity, we recognized a $15.9 million gain in the first quarter of 2018. This gain is reported in other income, net, on the consolidated statement of operations for the year ended December 31, 2018 and is excluded from AA&S segment results.

Debt Extinguishment Charge

In 2020, ATI issued $291.4 million aggregate principal amount of the 2025 Convertible Notes, and used the majority of the proceeds to repurchase approximately $203.2 million aggregate principal amount of the outstanding principal balance of our 2022 Convertible Notes. A $21.5 million debt extinguishment charge was recognized for this action, which included a $19.1 million cash payment as a make-whole provision on the early extinguishment of debt, and a $2.4 million charge for previously-unrecognized debt issue costs.

In the fourth quarter of 2019, we issued $350 million of the 2027 Notes. Proceeds from the issuance of the 2027 Notes and cash on hand were used to redeem the $500 million 2021 Notes, which had a January 15, 2021 maturity date. A $21.6 million debt extinguishment charge was recorded as part of this action, which included a $20.9 million cash payment as a make-whole provision on the early extinguishment of debt, and a $0.7 million charge for previously-unrecognized debt issue costs.

Gains on Asset Sales, net

During 2020, we recognized a $2.5 million cash gain for the sale of certain oil and gas rights. This non-core asset sale gain is reported in other income/expense, net, on the consolidated statement of operations and is excluded from business segment results. During the third quarter of 2019, we completed the sale of our Cast Products business and recognized a $6.2 million gain. During the second quarter of 2019, we completed the sale of two non-core forging facilities, located in Portland, IN and Lebanon, KY, and recognized an $8.1 million pre-tax loss. Also during the second and third quarters of 2019, we recognized $29.3 million and $62.4 million cash gains, respectively, on sales of certain oil and gas rights. The 2019 results include $89.8 million, respectively, in net pretax gains from these non-core asset sales which are reported in other income/expense, net, on the consolidated statement of income and are excluded from business segment results.

Income Taxes

Results in 2020, 2019 and 2018 include impacts from income taxes that differ from applicable standard tax rates, primarily related to income tax valuation allowances. In 2020, ATI’s U.S. operations returned to a three-year cumulative loss position, limiting our ability to utilize future projections as sources of income when analyzing the need for a valuation allowance. The consolidated income tax provision of $77.7 million for fiscal year 2020 is primarily due to increases in deferred tax asset valuation allowances based on an analysis of the expected realization of deferred tax assets and liabilities within applicable expiration periods. While our U.S. operations remain in a three-year cumulative loss position, we expect our reported tax expense to primarily relate to our profitable STAL PRS joint venture in China. We will continue to have minimal cash tax requirements in the U.S. due to the ongoing benefits of NOL tax carryforwards for the next several years.

At December 31, 2019, our U.S. results had switched from a three-year cumulative loss position to a three-year cumulative income position, allowing us to utilize forecasts of future profits as a source of income when evaluating the overall need for a valuation allowance. We determined that valuation allowances on net deferred tax asset balances for federal and certain state jurisdictions are no longer required. Certain individual tax attributes still require a valuation allowance based on expected utilization. The change in the overall valuation allowance for 2019 includes amounts utilized during the year as part of the reported effective tax rate, as well as a $45.1 million reduction at December 31, 2019 based on a change in judgment on the realizability of deferred tax assets. The 2019 income tax benefit was $28.5 million, which included the $45.1 million discrete tax benefit related to the release of U.S. federal and state valuation allowances, along with the current year benefit related to the release of valuation allowances due to positive income in 2019. Total discrete tax items including this valuation allowance change were a $41.9 million tax benefit in 2019, and our effective tax rate excluding these items was 5.5% of pre-tax income in 2019.

In 2018, we reported income before tax of $247.7 million, of which $190.8 million was attributable to the U.S. The overall income, along with certain taxable income inclusions, resulted in ATI utilizing net operating loss (NOL) deferred tax assets in 2018, causing a U.S. valuation allowance release of $46.3 million for 2018. At December 31, 2018, we continued to maintain a valuation allowance on the net deferred tax assets for U.S. federal and state income tax purposes, with the exception of the indefinite lived deferred tax liability related to goodwill and the withholding tax liability associated with our permanent reinvestment assertion, and also maintained valuation allowances for certain foreign operations. In 2018, we reported an income tax provision of $11.0 million, or 4.4% of the pre-tax income, in 2018, which also included benefits from NOL utilization and related valuation allowance changes.

Financial Condition and Liquidity

We have an Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of the our domestic operations. The ABL facility, which matures in September 2024, includes a $500 million revolving credit facility, a letter of credit sub-facility of up to $200 million, and a $200 million term loan (Term Loan). In June 2020, we exercised our right to borrow an additional $100 million under the term loan portion of the ABL, with the same September 2024 maturity date. The Term Loan has an interest rate of 2.0% plus a LIBOR spread and can be prepaid in increments of $25 million if certain minimum liquidity conditions are satisfied. In addition, we have the right to request an increase of up to $200 million in the maximum amount available under the revolving credit facility for the duration of the ABL. We have a $50 million floating-for-fixed interest rate swap which converts a portion of the Term Loan to a 4.21% fixed interest rate. The swap matures in June 2024.

The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.25% and 1.75% for LIBOR-based borrowings and between 0.25% and 0.75% for base rate borrowings. The ABL facility 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 revolving credit portion of the facility is less than the greater of (i) $87.5 million, calculated as 12.5% of the then applicable maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance, or (ii) $62.5 million. We did not meet this required fixed charge coverage ratio at December 31, 2020. As a result, we

are unable to access this remaining 12.5%, or $87.5 million, of the ABL facility until we meet the required ratio. Additionally, we must demonstrate minimum liquidity, as calculated in accordance with the terms of the ABL facility, during the 90 day period immediately preceding the stated maturity date of each of the 2022 Convertible Notes and 5.875% Notes due 2023. The ABL also contains customary affirmative and negative covenants for credit facilities of this type, including limitations on our ability to incur additional indebtedness or liens or to enter into investments, mergers and acquisitions, dispositions of assets and transactions with affiliates, some of which are more restrictive at any time during the term of the ABL when our fixed charge coverage ratio is less than 1.00:1.00 and our undrawn availability under the revolving portion of the ABL is less than the greater of (a) $150 million or (b) 30% of the sum of the maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance. On September 30, 2019, we amended and restated the ABL and costs associated with entering into this amendment were $2.2 million, and are being amortized to interest expense over the term of the facility ending September 2024, along with $2.1 million of unamortized deferred costs that were previously recorded for the ABL.

As of December 31, 2020, there were no outstanding borrowings under the revolving credit portion of the ABL, and $38.5 million was utilized to support the issuance of letters of credit. Average borrowings under the ABL for the fiscal year ended December 31, 2020 were $28 million, bearing an average annual interest rate of 2.2%. There were no revolving credit borrowings under the ABL for 2019.

In 2020, we issued and sold $291.4 million aggregate principal amount of 2025 Convertible Notes. We used a portion of the net proceeds from the offering of the 2025 Convertible Notes to repurchase $203.2 million aggregate principal amount of our outstanding 2022 Convertible Notes. We also used $19.4 million of the net proceeds of the offering of the 2025 Convertible Notes to pay the cost of capped call transactions, which effectively increase the initial conversion price of the 2025 Convertible Notes into ATI stock from $15.49 per share to $19.76 per share. The remainder of the net proceeds from the offering will be used for general corporate purposes.

On November 22, 2019, we issued $350 million aggregate principal amount of 2027 Notes. Underwriting fees and other third-party expenses for the issuance of the 2027 notes were $5.5 million, and are being amortized to interest expense over the eight- year term of the 2027 Notes. Net proceeds of $344.5 million from this issuance, as well as cash on hand, were used to retire all $500 million aggregate principal amount of the 2021 Notes in December 2019, resulting in a $21.6 million pre-tax debt extinguishment charge, which included a $20.9 million cash payment as a make-whole provision on the early extinguishment of debt, and a $0.7 million charge for deferred debt issue costs.

At December 31, 2020, we had $646 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $310 million, for total liquidity of more than $950 million. We do not expect to pay any significant U.S. federal or state income taxes in the next several years due to net operating loss carryforwards.

During the second and third quarters of 2019, we received approximately $250 million in cash from non-core asset sales, net of closing adjustments and transaction costs, consisting of $33 million for the sale of two non-core forging facilities, $125 million for the sale of the Cast Products business, and $92 million for the sale of certain oil and gas rights in Eddy County, NM.

In 2020, the Company made $130 million in cash contributions to its U.S. qualified defined benefit pension plans. Based on pension trust assets as of December 31, 2020, and the expected rate of return on pension assets in future years, we currently expect our funding requirements to the U.S. qualified defined benefit pension plans to be approximately $87 million in 2021, and to have average annual funding requirements of approximately $50 million to these pension plans for the next few years thereafter. However, these funding estimates are subject to significant uncertainty including the actual pension trust assets’ fair value, and the discount rates used to measure pension liabilities.

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 our pension plans. If we needed to obtain additional financing using the credit markets, the cost and the terms and conditions of such borrowings may be influenced by our credit rating. In addition, we regularly review our capital structure, various financing alternatives and conditions in the debt and equity markets in order to opportunistically enhance our capital structure. In connection therewith, we may seek to refinance or retire existing indebtedness, incur new or additional indebtedness or issue equity or equity-linked securities, in each case, depending on market and other conditions.

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 provided by operations for 2020 was $166.9 million, including cash provided by a $156.6 million reduction in managed working capital balances. The generation of cash from managed working capital in 2020 reflects our alignment with expected demand levels. Other significant 2020 operating cash flow items included $130.2 million in contributions to a U.S. defined benefit pension plan and payment of 2019 annual incentive compensation. Cash provided by operations was $230.1 million in 2019, which included an $88.4 million reduction in managed working capital balances. This was despite $29 million in short-

term working capital advances to the A&T Stainless JV for 2019 and $145 million of cash contributions to ATI’s U.S. qualified defined benefit pension plans in 2019.

As part of managing the liquidity of our business, we focus on controlling managed working capital, which is defined as gross accounts receivable, short-term contract assets and gross inventories, less accounts payable and short-term contract liabilities. 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 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 2020, managed working capital increased to 40.5% of annualized total ATI sales compared to 30.0% of annualized sales at December 31, 2019. This increase is a result of annualized three-month sales declining at a faster pace in 2020 than the decline in overall managed working capital balances versus year-end 2019, due in part to a first quarter 2020 increase in managed working capital over year-end 2019 levels. The $156.6 million decrease in managed working capital in 2020 resulted from a $208.6 million decrease in accounts receivable, a $145.9 million decrease in inventory, and a $33.1 million increase in short-term contract liabilities, partially offset by a $0.4 million increase in short-term contract assets and a $230.6 million decrease in accounts payable. Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by approximately 7% at year-end 2020 compared to 2019. No significant accounts receivable collection issues are expected despite the increase in this metric. Gross inventory turns, which exclude the effect of LIFO and any applicable offsetting NRV inventory valuation reserves, improved by 28% 2020 compared to 2019 as our level of operating activity decreased throughout 2020 in response to lower customer demand.

The components of managed working capital were as follows:

Short-term contract assets 38.9 38.5

Short-term contract liabilities (111.8) (78.7)

Allowance for doubtful accounts 4.3 4.6

Managed working capital as a % of annualized sales 40.5 % 30.0 %

December 31, 2020 change in managed working capital $ (156.6)

Cash used in investing activities was $128.7 million in 2020, reflecting $136.5 million in capital expenditures partially offset by $5.9 million of proceeds from property, plant and equipment sales, which includes proceeds from the sale of certain oil and gas rights. Capital expenditures in 2020 primarily are related to HPMC growth projects including the new isothermal press and heat-treating expansion in Cudahy, WI. We expect to fund our capital expenditures with cash on hand and cash flow generated from our operations and, if needed, by using a portion of the ABL facility. Cash provided by investing activities was $81.7 million in 2019, reflecting $250.1 million in net proceeds from non-core asset sales consisting of $33.0 million for the sale of two non-core forging facilities, $125.1 million for the sale of the Cast Products business and $92.0 million of proceeds from property, plant and equipment, largely due to the sale of certain oil and gas rights. Capital expenditures for 2019 were $168.2 million primarily related to HMPC growth projects.

Cash provided by financing activities in 2020 was $116.9 million, and consisted primarily of $291.4 million of borrowings for the 2025 Convertible Notes issued in 2020 and $100.0 million of additional Term Loan borrowings under the ABL. These were offset by a $203.2 million repayment for a portion of the 2022 Convertible Notes and $19.1 million cash make-whole payment related to the early extinguishment of these 2022 Convertible Notes as required by the applicable indenture, as well as $19.4 million to pay the cost of capped call transactions and $9.1 million for debt issuance costs, both associated with the newly issued 2025 Convertible Notes. Cash provided by financing activities in 2020 also reflects a $7.2 million dividend payment to the 40% noncontrolling interest in our STAL PRS joint venture in China. Cash used in financing activities in 2019 was $203.0 million, with $507.6 million of payments on long-term debt and finance leases consisting largely of the redemption of all $500 million aggregate principal amount of the 2021 Notes outstanding. The redemption included a $20.9 million cash make-whole payment related to the early extinguishment of this debt as required under the applicable indenture. Borrowings on long-term debt were $350.0 million reflecting the issuance of the 2027 Notes. Such issuance included $5.5 million of payments for

underwriting fees and other third-party expenses. Cash used in financing activities in 2019 also reflects a $14.0 million dividend payment to the 40% noncontrolling interest in our STAL joint venture.

At December 31, 2020, cash and cash equivalents on hand totaled $645.9 million, a $155.1 million increase from year-end 2019. Cash and cash equivalents held by our foreign subsidiaries was $92.9 million at December 31, 2020, of which $38.3 million was held by the STAL joint venture.

Debt

Total debt outstanding of $1,629.1 million at December 31, 2020, increased $217.9 million compared to December 31, 2019, as $291.4 million of borrowings for the 2025 Convertible Notes issued in 2020, a portion of which is required to be recorded in stockholders’ equity as discussed further below, and $100.0 million of additional Term Loan borrowings under the ABL were partially offset by a $203.2 million repayment for a portion of the 2022 Convertible Notes. Total debt outstanding as described above excludes debt issuance costs and includes the $46.8 million unamortized portion of the 2025 Convertible Notes that is required to be classified in stockholders’ equity due to the flexible settlement feature available to ATI on conversion. In managing our overall capital structure, some of the measures on which we focus are debt to EBITDA, which measures our ability to repay our incurred debt, net debt to total capitalization, which is the percentage of our debt, net of cash that may be available to reduce borrowings, to our total invested and borrowed capital, and total debt to total capitalization, which excludes cash balances. We define EBITDA as income from continuing operations before interest and income taxes, plus depreciation and amortization, goodwill impairment charges and debt extinguishment charges for the latest 12 month period. We define Adjusted EBITDA as EBITDA excluding significant charges or credits, restructuring charges, long-lived asset impairments and other postretirement/pension curtailment and settlement gains and losses. We believe that EBITDA and Adjusted EBITDA are useful to investors because these measures are commonly used to analyze companies on the basis of operating performance, leverage and liquidity. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and capital expenditures. EBITDA and Adjusted EBITDA are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance with U.S. generally accepted accounting principles.

All of these leverage ratios worsened in 2020, primarily as a result of lower earnings. At year-end 2020, our debt to Adjusted EBITDA ratio was 8.30, compared to 3.21 at December 31, 2019, and net debt to Adjusted EBITDA ratio was 5.01, compared to 2.09 at December 31, 2019.

Income (loss) before income taxes $ (1,481.9) $ 241.6

Depreciation and amortization 143.3 151.1

Impairment of goodwill 287.0 —

Restructuring and other charges 1,132.1 4.5

Joint venture impairment charge 2.4 11.4

Debt extinguishment charge 21.5 21.6

Gain on asset sales, net (2.5) $ (89.8)

Debt to Adjusted EBITDA 8.30 3.21

Net Debt to Adjusted EBITDA 5.01 2.09

At year-end 2020, our net debt to total capitalization was 67.6%, compared to 30.6% at December 31, 2019, reflecting significantly lower stockholders' equity as a result of the significant restructuring and other charges recognized in 2020.

Total ATI stockholders’ equity (b) 471.3 2,090.1

Net debt to ATI capital 67.6 % 30.6 %

Total debt to total capitalization was 77.6% at December 31, 2020 compared to 40.3% at December 31, 2019, also reflecting significantly lower stockholders' equity in 2020.

Total ATI stockholders’ equity (b) 471.3 2,090.1

Total debt to ATI capital 77.6 % 40.3 %

(a) Excludes debt issuance costs for both periods. The December 31, 2020 debt balance includes $46.8 million for the unamortized portion of the 2025 Convertible Notes recorded in stockholders’ equity due to the flexible settlement feature of the notes.

(b) The December 31, 2020 balance excludes $49.8 million recorded in stockholders’ equity for a portion of the 2025 Convertible Notes, net of debt issuance costs.

In 2020, we issued and sold $291.4 million aggregate principal amount of the 2025 Convertible Notes. Interest on the 2025 Convertible Notes at the 3.5% cash coupon rate is payable semi-annually in arrears on each June 15 and December 15, commencing December 15, 2020. We used a portion of the net proceeds from the offering of the 2025 Convertible Notes to repurchase $203.2 million aggregate principal amount of our outstanding 2022 Convertible Notes, resulting in a $21.5 million debt extinguishment charge, which included a $19.1 million cash make-whole payment related to the early extinguishment of the 2022 Convertible Notes as required by the applicable indenture, and a $2.4 million charge for deferred debt issue costs. We also used $19.4 million of the net proceeds of the offering of the 2025 Convertible Notes to pay the cost of capped call transactions, described below, which was recorded as a reduction to additional paid-in-capital in stockholders’ equity on the consolidated balance sheet. The remainder of the net proceeds from the offering were used for general corporate purposes.

The 2025 Convertible Notes are convertible into our common stock at an initial conversion price of $15.49 per share and may be settled in cash, shares of our common stock or a combination thereof, at our election. As a result of this flexible settlement feature of the 2025 Convertible Notes, the embedded conversion option valued at $51.4 million is required to be separately accounted for as a component of stockholders’ equity. This equity component will be amortized as additional non-cash interest expense, commonly referred to as phantom yield, over the term of the 2025 Convertible Notes. Due to the non-cash phantom yield and including debt issue cost amortization, the 2025 Convertible Notes have reported interest expense in 2020 at an 8.4% rate, higher than the 3.5% cash coupon rate. Effective January 1, 2021, ATI early-adopted new accounting guidance that eliminates the equity component classification of the embedded conversion option, as well as the phantom yield portion of interest expense on a prospective basis. Upon adoption on January 1, 2021, long-term debt increased by $45.4 million, representing the $46.8 million unamortized portion of the equity component of convertible debt as of December 31, 2020, net of reclassified debt issue costs.

In connection with the pricing of the 2025 Convertible Notes, we entered into privately negotiated capped call transactions with certain of the initial purchasers or their respective affiliates (collectively, the Counterparties). The capped call transactions are expected generally to reduce potential dilution to our common stock upon any conversion of the 2025 Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2025 Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions initially is approximately $19.76 per share, and is subject to adjustments under the terms of the capped call transactions.

On November 22, 2019, we issued $350 million aggregate principal amount of the 2027 Notes. Net proceeds of $344.5 million from this issuance were used, together with cash on hand, to redeem all $500 million aggregate principal amount outstanding of the 5.95% 2021 Notes in December 2019.

The 5.875% stated interest rate payable on our $500 million Notes due 2023 (2023 Notes) is subject to adjustment in the event of changes in the credit ratings on the 2023 Notes by either Moody’s or Standard & Poor’s (S&P). Each notch of credit rating downgrade from the credit ratings in effect when the 2023 Notes were issued in July 2013 increases interest expense by 0.25% on the 2023 Notes, up to a maximum of four notches by each of the two rating agencies, or a total 2.0% potential interest rate change up to 7.875%.

The 2023 Notes presently bear the maximum 7.875% annual interest rate as a result of credit rating downgrades. Any further credit rating downgrades have no effect on the interest rate of the 2023 Notes, and increases in our credit ratings from these ratings agencies would reduce interest expense incrementally on the 2023 Notes to the original 5.875% interest rate in a similar manner. Our credit rating from both rating agencies currently remains below the level at which the current 2023 Notes interest rate would reset to a lower rate. At our present credit rating levels, we would need a two-notch ratings upgrade by Moody’s, to Ba3, and a two-notch increase by S&P, to BB-, before the 2023 Notes interest rate would be lowered in each case by 0.25%.

A summary of required payments under financial instruments (excluding accrued interest) and other commitments are presented below.

(In millions) Total Less than 1year 1-3years 4-5years After 5years

Contractual Cash Obligations

Unconditional Purchase Obligations

Other Financial Commitments

Guarantees $ 26.8

(A)Amounts include contractual interest payments using the interest rates in effect as of December 31, 2020 applicable to the Company’s 2022 Convertible Notes, the 2023 Notes, the Term Loan due 2024, the 2025 Convertible Notes, the Allegheny Ludlum 6.95% Debentures due 2025 and the 2027 Notes.

(B)Amounts include operating lease obligations at their undiscounted value. These obligations are presented in other current liabilities and other long-term liabilities on the consolidated balance sheets at their discounted value, using applicable interest rates. See Note 13, Leases for further information.

(C)Based on current actuarial studies, amounts include payments for the next 10 years to defined benefit pension plans, assuming the expected long-term returns on pension assets are achieved. Projections of minimum required payments to the U.S. qualified defined benefit pension plans are subject to significant uncertainty based on a number of factors including actual pension plan asset returns, changes in estimates of participant longevity, and changes in interest rates. Amounts also include actuarial projections of payments under other postemployment benefit plans for the next 10 years. In most retiree healthcare plans, our contributions are capped based on the cost as of a certain date. See Note 16, Retirement Benefits for further information.

(D)We have contracted for physical delivery for certain of our raw materials to meet a portion of our needs. These contracts are based upon fixed or variable price provisions. We used current market prices as of December 31, 2020, for raw material obligations with variable pricing.

(E)We have various contractual obligations that extend through 2026 for services involving production facilities and administrative operations. Our purchase obligation as disclosed represents the estimated termination fees payable if we were to exit these contracts.

(F)At December 31, 2020, there were no amounts drawn under foreign credit agreements. Drawn amounts on the U.S. facility were $38.5 million utilized under the $500 million ABL facility for standby letters of credit, which renew annually. These letters of credit are used to support: $29.4 million in workers’ compensation and general insurance arrangements, $5.4 million related to environmental matters and $3.7 million for ATI's assurance of performance to a customer.

Commitments and Contingencies

At December 31, 2020, our reserves for environmental remediation obligations totaled approximately $14 million, of which $4 million was included in other current liabilities. These reserves included estimated probable future costs of: $3 million for federal Superfund and comparable state-managed sites; $9 million for formerly owned or operated sites for remediation or indemnification obligations; $1 million for owned or controlled sites at which our operations have been discontinued; and $1 million for sites utilized by the Company in its ongoing operations. We continue to evaluate whether we may be able to recover a portion of future costs for environmental liabilities from third parties and to pursue such recoveries where appropriate. The timing of expenditures depends on a number of factors that vary by site. ATI expects that it will expend present accruals over many years and that remediation of all sites with which it has been identified will be completed within thirty years.

At December 31, 2020, we had recognized asset retirement obligations (AROs) of $24 million related to landfill closures, decommissioning costs, facility leases and conditional AROs associated with manufacturing activities using what may be characterized as potentially hazardous materials.

Based on currently available information, it is reasonably possible that the costs for active matters may exceed our recorded reserves by as much as $15 million. However, future investigation or remediation activities may result in the discovery of additional hazardous materials, potentially higher levels of contamination than discovered during prior investigation, and may impact costs of the success or lack thereof in remedial solutions. Therefore, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on the ATI’s consolidated financial condition or results of operations.

Labor Matters

We currently are involved in negotiation on our next significant collective bargaining agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (USW), which expires February 28, 2021 involving approximately 1,100 USW-represented active full-time employees located primarily within the AA&S segment operations.

Retirement Benefits

All of ATI’s defined benefit pension plans are now closed to new entrants, and at most ATI operations with pension participants the plans are frozen for all future benefit accruals, with less than 10% of participants in ATI’s U.S. qualified defined benefit plans still earning additional pension service. Additionally, all of the remaining collectively-bargained defined benefit retiree health care plans at ATI’s operations are now closed to new entrants, with cost caps in place for these obligations. As a result of these actions, ATI’s retirement savings and other postretirement benefit programs have largely transitioned to a defined contribution structure.

At December 31, 2020, our U.S. qualified defined benefit pension plans were approximately 76% funded in accordance with generally accepted accounting principles, and were remeasured at that date using a 2.60% discount rate to measure the projected benefit obligation. For ERISA funding purposes, discount rates used to measure pension liabilities for U.S. qualified defined benefit plans are calculated on a different basis using an IRS-determined segmented yield curve, which currently results in a higher discount rate than the discount rate methodology required by accounting standards. Funding requirements are also affected by IRS-determined mortality assumptions, which may differ from those used under accounting standards. Based upon current regulations and actuarial studies, we currently expect to make approximately $87 million in cash contributions to the U.S. qualified defined benefit pension plans in 2021, and we expect to have average annual funding requirements of approximately $50 million to these pension plans for the next few years thereafter, using a 6.78% weighted average expected rate of return on pension plan assets. However, these estimates are subject to significant uncertainty, including the performance of our pension trust assets and the discount rates used to measure pension liabilities. Pension trust asset performance for both our accounting and ERISA funding calculations is determined using the market value of plan assets at the end of each year.

We have certain collective bargaining agreements that include participation in a multiemployer pension plan. Under current law, an employer that withdraws or partially withdraws from a multiemployer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. A subsidiary of the Company participates in the Steelworkers Western Independent Shops Pension Plan (WISPP) for union-represented employees of our primary titanium operations in Albany, OR, which is

funded on an hours-worked basis. As of December 31, 2020, manufacturing operations at this facility are indefinitely idled, and a limited number of employees that participate in the WISPP remain active in maintenance and other functions. It is reasonably possible that a significant reduction or the elimination of hours-worked contributions due to changes in operating rates at this facility could result in a withdrawal liability assessment in a future period. As of the WISPP fiscal plan year ended September 30, 2018, which is the most recent information available from the Plan Administrator, our subsidiary’s liability for a complete withdrawal was estimated by the Plan Administrator to be approximately $38 million on an undiscounted basis. If the withdrawal liability was incurred, we estimate that payments of this obligation would be required on a straight-line basis over a 20-year period.

Dividends

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 on a quarterly basis, 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. Under the ABL facility, there is no limit on dividend declarations or payments provided that the undrawn availability, after giving effect to a particular dividend payment, is at least the greater of $150 million and 30% of the sum of the maximum revolving advance amount and the outstanding principal amount of any term loans (the Maximum Loan Amount), and no event of default under the ABL facility has occurred and is continuing or would result from paying the dividend. In addition, there is no limit on dividend declarations or payments if the undrawn availability is less than the greater of $150 million and 30% of the Maximum Loan Amount but more than the greater of $75 million and 15% of the Maximum Loan Amount, if (i) no event of default has occurred and is continuing or would result from paying the dividend, and (ii) we demonstrate to the administrative agent that, prior to and after giving effect to the payment of the dividend (A) the undrawn availability, as measured both at the time of the dividend payment and as an average for the 60 consecutive day period immediately preceding the dividend payment, is at least the greater of $75 million and 15% of the Maximum Loan Amount, and (B) we maintain a fixed charge coverage ratio of at least 1.00:1.00, as calculated in accordance with the terms of the ABL facility.

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of these accounting principles requires our management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.

Inventories

At December 31, 2020, we had net inventory of $997.1 million. Inventories are stated at the lower of cost (LIFO, FIFO and average cost methods) or market. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations is valued using average cost or FIFO methods. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these material and other costs may have been incurred at significantly different values due to the length of time of our production cycle. 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 volatile during the past several years, while labor and overhead costs have been generally stable, with a modest inflationary trend. Raw material cost changes typically have the largest impact on the LIFO inventory costing methodology based on the overall proportion of raw material costs to other inventoriable costs. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a fall in material costs generally 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 generally has a negative effect on our operating results by increasing cost of sales while lowering the carrying value of inventory. For example, for the years ended December 31, 2020 and 2019, the LIFO inventory valuation method resulted in cost of sales that were $10.5 million and $25.5 million, respectively, lower than would have been recognized under the FIFO methodology to value our inventory. Our NRV reserves were $44.1 million and $33.6 million at December 31, 2020 and 2019, respectively.

Due primarily to persistent raw material deflation in prior years, we are in the 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 NRV inventory reserve, if any, is recognized as an expense in the period that the need for the reserve is identified.

The impact to our cost of sales for changes in the LIFO costing methodology and associated NRV inventory reserves were as follows (in millions):

Fiscal year ended December 31,

Net cost of sales impact $ — $ (0.1) $ (0.7)

It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months due to the longer manufacturing and distribution process for certain products.

The LIFO inventory valuation methodology is not utilized by many of the companies with which we compete, including foreign competitors. As such, our results of operations may not be comparable to those of our competitors during periods of volatile material costs due, in part, to the differences between the LIFO inventory valuation method and other acceptable inventory valuation methods.

Asset Impairment

We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value, and the asset’s carrying value exceeds its fair value. Changes in the expected use of a long-lived asset group, and the financial performance of the long-lived asset group and its operating segment, are evaluated as indicators of possible impairment. Future cash flow value may include appraisals for property, plant and equipment, land and improvements, future cash flow estimates from operating the long-lived assets, and other operating considerations. In the fourth quarter of each year in conjunction with the annual business planning cycle, or more frequently if new material information is available, we evaluate the recoverability of idled facilities.

On December 2, 2020, we announced a strategic repositioning of our FRP business within the AA&S segment, with a focus of increasing emphasis on the specialty rolled products portion of its product portfolio, which comprise titanium-based alloys including aerospace-grade titanium plate products, nickel-based alloys, and stainless products with more differentiated characteristics for specialty applications, including thin-gauge PRS. As part of this strategic realignment, we intend to cease production of standard stainless sheet products over approximately a one-year period, significantly reducing the operating levels of the Brackenridge, PA operations, including the HRPF, and close various downstream finishing operations that are part of the standard stainless sheet flow path. The December 2, 2020 decision to exit production of standard stainless products represented a significant indicator of impairment in the carrying value of certain long-lived assets. Based on projected cash flows of the Brackenridge, PA operations, including the HRPF, we completed a fair value analysis as of the beginning of the fourth quarter of 2020 and recognized a $1,032.6 million impairment charge for this facility based on an estimated fair value of $354 million. This long-lived asset impairment charge was determined using a held in use framework and an income approach, which represents Level 3 unobservable information in the fair value hierarchy. This impairment assessment and valuation method require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants we have identified. For example, the weighted average cost of capital used in our discounted cash flow assessment was 9.3% and the long-term growth rate was 2%. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. Other long-lived asset impairment charges of $8.9 million were also recognized for various AA&S segment operations identified for closure as part of the standard stainless sheet exit decision.

Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. At December 31, 2020, the Company had $240.7 million of goodwill on its consolidated balance sheet, all

of which relates to the HPMC segment. Goodwill decreased $285.1 million in 2020 due to a $287.0 million interim impairment charge in the HPMC segment, partially offset by a $1.9 million increase from the impact of foreign currency translation on goodwill denominated in functional currencies other than the U.S. dollar.

During the second quarter of 2020, we performed an interim goodwill impairment analysis on the Forged Products reporting unit and its $460.4 million goodwill balance based on assessed potential indicators of impairment, including recent disruptions to the global commercial aerospace market resulting from the COVID-19 pandemic, and the increasing uncertainty of near-term demand requirements of aero-engine and airframe markets based on government responses to the pandemic and ongoing interactions with customers. In the previous 2019 annual goodwill impairment evaluation, this reporting unit had a fair value that exceeded carrying value by approximately 30%. As a result of the second quarter 2020 interim goodwill impairment evaluation, we determined that the fair value of the Forged Products reporting unit was below carrying value, including goodwill, by $287.0 million. This was primarily due to changes in the timing and amount of expected cash flows resulting from lower projected revenues, profitability and cash flows due to near-term reductions in commercial aerospace market demand. Consequently, during the second quarter of 2020, we recorded a $287.0 million impairment charge for the partial impairment of Forged Products reporting unit goodwill, most of which was assigned from the Company’s 2011 Ladish acquisition that was not deductible for income tax purposes.

For the 2020 interim impairment analysis, fair value was determined by a quantitative assessment that used a discounted cash flow technique, which represents Level 3 unobservable information in the fair value hierarchy. The impairment assessment and valuation method require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants we have identified. For example, our weighted average cost of capital used in our discounted cash flow assessment was 11.6%, and long-term growth rate was 3.5%. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.

For our annual goodwill impairment evaluation performed in the fourth quarter of 2020, quantitative goodwill assessments were performed for the two HPMC reporting units with goodwill. Fair values were determined by using a quantitative assessment that may include discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any, which represents Level 3 unobservable information in the fair value hierarchy. These impairment assessments and valuation methods require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Many of these assumptions are determined by reference to market participants we have identified. For example, our weighted average cost of capital used in our discounted cash flow assessments was 11.7% and long-term growth rates ranged from 3% to 3.5%. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.

The $240.7 million of goodwill remaining as of December 31, 2020 on our consolidated balance sheet is comprised of $173.4 million at the Forged Products reporting unit and $67.3 million at the Specialty Materials reporting unit. For our annual goodwill impairment evaluation performed in the fourth quarter of 2020, the Specialty Materials reporting unit had a fair value that was significantly in excess of carrying value. The Forged Products reporting unit had a fair value that exceeded carrying value by approximately 2%, representing a slight increase in fair value subsequent to the interim goodwill impairment charge recorded for this reporting unit in the second quarter of 2020 as discussed above. As a result, no impairments were determined to exist from the annual goodwill impairment evaluation for the years ended December 31, 2020, 2019 and 2018. In order to validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium. In addition, no indicators of impairment were observed in 2020 associated with any of our long-lived assets in the HPMC segment

As part of the divestiture of the titanium investment castings business, which was completed early in the third quarter 2019, ATI retained a small post-casting machining operation in Salem, OR. We recognized a $10.2 million impairment charge in 2019 on the carrying value of long-lived assets of the retained Salem operation ($4.5 million for property, plant and equipment, $1.4 million for operating lease right of use assets, $1.0 million for finance lease right of use assets, and $3.3 million of finite-lived intangible assets). This long-lived asset impairment charge was based on an analysis of the estimated fair values, including asset appraisals using market approaches, which represent Level 3 unobservable information in the fair value hierarchy. This impairment charge is categorized as part of the net gain on sale of the titanium investment castings business.

Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets.

The evaluation includes the consideration of all available evidence, both positive and negative, regarding the estimated future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimate future taxable income exclusive of temporary differences and tax planning strategies. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

At December 31, 2019, our U.S. results had switched from a three-year cumulative loss position to a three-year cumulative income position, allowing ATI to utilize forecasts of future profits as a source of income when evaluating the overall need for a valuation allowance. We determined that valuation allowances on net deferred tax asset balances for federal and certain state jurisdictions are no longer required. Certain individual tax attributes still require a valuation allowance based on expected utilization. At December 31, 2019, our deferred tax asset valuation allowance was $94.5 million. The change in the overall valuation allowance for 2019 includes amounts utilized during the year as part of the reported effective tax rate, as well as a $45.1 million reduction at December 31, 2019 based on a change in judgment on the realizability of deferred tax assets.

In 2018, we reported income before tax of $247.7 million, of which $190.8 million was attributable to the U.S. The overall income, along with the Global Intangible Low-Taxed Income inclusion for the year, resulted in ATI utilizing NOL deferred tax assets in 2018, which resulted in a U.S. valuation allowance release of $46.3 million for 2018. At December 31, 2018, we continued to maintain a valuation allowance on the net deferred tax assets for U.S. federal and state income tax purposes, with the exception of the indefinite lived deferred tax liability related to goodwill and the withholding tax liability associated with its permanent reinvestment assertion, as well as valuation allowances for certain foreign operations.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes certain income tax changes, in response to the COVID-19 pandemic. We have determined that the CARES Act changes do not result in a material income tax expense or benefit to ATI. We are currently assessing payroll tax refund opportunities related to the employee retention credit under the CARES Act.

Retirement Benefits

We have defined contribution retirement plans or benefit pension plans covering substantially all of our employees. We also sponsor several postretirement plans covering certain hourly and salaried employees and retirees. These plans provide health care and life insurance benefits for eligible employees. Company contributions to defined contribution retirement plans are generally based on a percentage of eligible pay or based on hours worked, and are funded with cash. All of ATI’s defined benefit pension plans are now closed to new entrants, and at most ATI operations with pension participants the plans are frozen for all future benefit accruals, with less than 10% of participants in ATI’s U.S. qualified defined benefit plans still earning additional pension service. Additionally, all of the remaining, collectively-bargained defined benefit retiree health care plans at ATI’s operations are now closed to new entrants, with cost caps in place for these obligations. As a result of these actions, ATI’s retirement savings and other postretirement benefit programs have largely transitioned to a defined contribution structure.

Under U.S. generally accepted accounting principles, amounts recognized in financial statements for defined benefit pension plans are determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining our pension income or expense in accordance with the accounting standards is the expected investment return on plan assets. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration input from our third party pension plan asset managers and actuaries regarding the types of securities the plan assets are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. Our weighted average expected long-term return on pension plan investments was 7.16% in 2020, and the weighted average expected long-term rate of return on pension plan investments for 2021 will be 6.78%. We apply this assumed rate to the market value of plan assets at the end of the previous year. This produces the expected return on plan assets that is included in annual pension expense for the current year. The actual returns on pension plan assets for the last five years have been 15.2% for 2020, 15.1% for 2019, (4.8)% for 2018, 16.9% for 2017, and 5.3% for 2016. The effect of increasing, or lowering, the expected return on pension plan investments by 0.25% would result in additional pre-tax annual income, or expense, of approximately $5 million. The cumulative difference between the expected return and the actual return on plan assets is deferred and amortized into pension income or expense over future periods. The amount of expected return on plan

assets can vary significantly from year-to-year since the calculation is dependent on the market value of plan assets as of the end of the preceding year. U.S. generally accepted accounting principles allow companies to calculate the expected return on pension assets using either an average of fair market values of pension assets over a period not to exceed five years, which reduces the volatility in reported pension income or expense, or their fair market value at the end of the previous year. However, the U.S. Securities and Exchange Commission currently does not permit companies to change from the fair market value at the end of the previous year methodology, which is the methodology that we use, to an averaging of fair market values of plan assets methodology. As a result, our results of operations and those of other companies, including companies with which we compete, may not be comparable due to these different methodologies in calculating the expected return on pension investments.

In accordance with accounting standards, we determine the discount rate used to value pension plan liabilities as of the last day of our fiscal year. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rates of return on high quality, fixed-income investments with maturities matched to the expected future retirement benefit payments. Based on this assessment, we established a discount rate of 2.60% for valuing the pension liabilities as of December 31, 2020, and for determining the pension expense for 2021. We had previously assumed a discount rate of 3.40% at the end of 2019 and 4.40% at the end of 2018. The estimated effect of changing the discount rate by 0.50% would decrease pension liabilities in the case of an increase in the discount rate, or increase pension liabilities in the case of a decrease in the discount rate, by approximately $155 million. Such a change in the discount rate would decrease pension expense in the case of an increase in the discount rate, or increase pension expense in the case of a decrease in the discount rate, by less than $1 million. The effect on pension liabilities for changes to the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, are deferred and amortized over future periods in accordance with the accounting standards.

As discussed above, gains and losses due to differences between actual and expected results for investment returns on plan assets, changes in the discount rate used to value benefit obligations, and other changes in estimates such as participant life expectancy are deferred and recognized in the consolidated statement of operations over future periods. However, for balance sheet presentation, these gains and losses are included in the determination of benefit obligations, net of plan assets, included on the year-end consolidated balance sheet. At December 31, 2020, the Company had approximately $1.6 billion of pre-tax net actuarial losses on its pension obligations, primarily related to an extended decline over the last several years in the discount rate used to value the pension obligations. These actuarial losses have been recognized on the consolidated balance sheet through a reduction in stockholders’ equity, and are being recognized in the consolidated statement of operations through expense amortizations over future years. Due to all of ATI’s defined benefit plans being closed to new entrants, and in most cases frozen for future benefit accruals, the amortization period for accumulated other comprehensive loss recognition for all of these plans is average remaining life expectancy, which is approximately 18 years on a weighted average basis.

With respect to our postretirement plans, under most of the plans, our contributions towards retiree medical premiums are capped based upon the cost as of certain dates, thereby creating a defined contribution. In accordance with U.S. generally accepted accounting standards, postretirement expenses recognized in financial statements associated with defined benefit plans are determined on an actuarial basis, rather than as benefits are paid. We use actuarial assumptions, including the discount rate and the expected trend in health care costs, to estimate the costs and benefit obligations for these plans. The discount rate, which is determined annually at the end of each fiscal year, is developed based upon rates of return on high quality, fixed-income investments. At the end of 2020, we determined the rate to be 2.45%, compared to a 3.25% discount rate in 2019, and a 4.35% discount rate in 2018. The estimated effect of changing the discount rate by 0.50% would decrease postretirement obligations in the case of an increase in the discount rate, or increase postretirement obligations in the case of a decrease in the discount rate, by approximately $17 million. Such a change in the discount rate would decrease postretirement benefit expense in the case of an increase in the discount rate, or increase postretirement benefit expense in the case of a decrease in the discount rate, by less than $1 million. Based upon predictions of continued significant medical cost inflation in future years, the annual assumed rate of increase in the per capita cost of covered benefits of health care plans is 5.6% in 2021 and is assumed to gradually decrease to 4.5% in the year 2038 and remain level thereafter. Assumed health care cost trend rates can have a significant effect on the benefit obligation for health care plans, however, the Company’s contributions for most of its retiree health plans are capped based on a fixed premium amount, which limits the impact of future health care cost increases.

New Accounting Pronouncements Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued new optional accounting guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The new accounting guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain

criteria are met. The new accounting guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. Management is continuing to evaluate the issue, and presently does not expect a transition away from LIBOR, primarily involving ATI’s domestic credit facility and an interest rate swap contract, to have any significant financial impact to ATI.

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. The areas for simplification in the guidance involve the removal of certain exceptions to the general principals in the current guidance, including intraperiod allocation and the calculation of income taxes in an interim period when a year to date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes in the area of franchise taxes. This new guidance is effective for the Company in fiscal year 2021, with early adoption permitted. This guidance was early adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.

In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on the requirement. This guidance was adopted by the Company in fiscal year 2020 without an impact on the Company’s consolidated financial statements other than disclosures.

In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to trade receivables, other receivables, contract assets and most debt instruments. The CECL model does not have a minimum threshold for recognition of impairment losses, and entities will need to measure expected credit losses on assets that have a low risk of loss. This guidance was adopted by the Company in fiscal year 2020 without significant impact to the consolidated financial statements.

Pending Accounting Pronouncements

In August 2020, the FASB issued new accounting guidance related to accounting for convertible instruments. Under this new guidance, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. As such, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the reported interest rate of convertible debt instruments typically will be closer to the coupon interest rate. The new guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation, requiring the if-converted method, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. This new guidance is effective for the Company in fiscal year 2022, with early adoption permitted.

The Company adopted this new accounting guidance related to accounting for convertible instruments effective January 1, 2021 using the modified transition approach with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. This new guidance is applicable to the 2025 Convertible Notes that were issued in June 2020, for which the embedded conversion option was required to be separately accounted for as a component of stockholders’ equity. Upon adoption on January 1, 2021, long-term debt increased by $45.4 million and stockholders’ equity decreased by the same amount, representing the net impact of two adjustments: (1) the $49.8 million value of the embedded conversion, which is net of allocated offering costs, previously classified in additional paid-in-capital in stockholders’ equity, and (2) a $4.4 million increase to retained earnings for the cumulative effect of adoption primarily related to the non-cash interest expense recorded in fiscal year 2020 for the amortization of the portion of the 2025 Convertible Notes allocated to stockholders’ equity. Prospectively, the reported interest expense for the 2025 Convertible Notes will no longer include the non-cash interest expense of the equity component as required under prior accounting standards and will be closer to the 3.5% cash coupon rate.There will be no impact to the Company’s earnings per share calculation as it previously applied the if-converted method to the 2025 Convertible Notes given ATI’s flexibility to settle conversions of the 2025 Convertible Notes in cash, shares of ATI’s common stock or a combination thereof, at ATI’s election.

Forward-Looking Statements

From time-to-time, the Company has made and may continue to make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Such forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control,

that may cause our actual results or performance to materially differ from any future results or performance expressed or implied by such statements. Various of these factors are described in Item 1A, Risk Factors, of this Annual Report on Form 10-K and will be described from time-to-time in the Company filings with the SEC, including the Company’s Annual Reports on Form 10-K and the Company’s subsequent reports filed with the SEC on Form 10-Q and Form 8-K, which are available on the SEC’s website at www.sec.gov and on the Company’s website at www.atimetals.com. We assume no duty to update our forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As part of our risk management strategy, we utilize derivative financial instruments, from time to time, to hedge our exposure to changes in energy and raw material prices, foreign currencies, and interest rates. We monitor the third-party financial institutions that are our counterparty to these financial instruments on a daily basis and diversify our transactions among counterparties to minimize exposure to any one of these entities. Fair values for derivatives were measured using exchange-traded prices for the hedged items including consideration of counterparty risk and the Company’s credit risk. Our exposure to volatility in interest rates is presently not material, as nearly all of our debt is at fixed interest rates.

Volatility of Interest Rates. We 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, as amended and extended to June 2024, converts a portion of the Term Loan to a 4.21% fixed rate. 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 amendment, will be amortized to interest expense over the initial Term Loan swap maturity date of January 12, 2021. Any gain or loss associated with this hedging arrangement is included in interest expense. At December 31, 2020, the net mark-to-market valuation of the outstanding interest rate swap was an unrealized pre-tax loss of $3.5 million, comprised of $1.0 million in other current liabilities and $2.5 million in other long-term liabilities on the balance sheet.

Volatility of Energy Prices. Energy resources markets are subject to conditions that create uncertainty in the prices and availability of energy resources. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Increases in energy costs, or changes in costs relative to energy costs paid by competitors, have and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition. We use approximately 5 to 7 million MMBtu’s of natural gas annually, depending upon business conditions, in the manufacture of our products. These purchases of natural gas expose us to risk of higher gas prices. For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $5 to $7 million. We use several approaches to minimize any material adverse effect on our financial condition or results of operations from volatile energy prices. These approaches include incorporating an energy surcharge on many of our products and using financial derivatives to reduce exposure to energy price volatility.

At December 31, 2020, the outstanding financial derivatives used to hedge our exposure to energy cost volatility included natural gas hedges. At December 31, 2020, we hedged approximately 70% of our annual forecasted domestic requirements for natural gas for 2021 and approximately 25% for 2022. There was no gain or loss from the net mark-to-market valuation of the outstanding natural gas hedges at December 31, 2020, with $0.2 million in prepaid expenses and other current assets, $0.2 million in other assets, $0.3 million in other current liabilities and $0.1 million in other long-term liabilities on the balance sheet. For the year ended December 31, 2020, the effects of natural gas hedging activity increased cost of sales by $3.7 million.

Volatility of Raw Material Prices. We use raw materials surcharge and index mechanisms to offset the impact of increased raw material costs; however, competitive factors in the marketplace can limit our ability to institute such mechanisms, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of such mechanisms. For example, in 2020 we used approximately 50 million pounds of nickel; therefore a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $50 million. In addition, in 2020 we also used approximately 300 million pounds of ferrous scrap in the production of our flat-rolled products and a hypothetical change of $0.01 per pound would result in increased costs of approximately $3.0 million. While we enter into raw materials futures contracts from time-to-time to hedge exposure to price fluctuations, such as for nickel, we cannot be certain that our hedge position adequately reduces exposure. We believe that we have adequate controls to monitor these contracts, but we may not be able to accurately assess exposure to price volatility in the markets for critical raw materials.

The majority of our products are sold utilizing raw material surcharges and index mechanisms. However as of December 31, 2020, we had entered into financial hedging arrangements, primarily at the request of our customers, related to firm orders, for an aggregate amount of approximately 3 million pounds of nickel with hedge dates through 2023. The aggregate notional amount hedged is approximately 5% of a single year’s estimated nickel raw material purchase requirements. Any gain or loss

associated with these hedging arrangements is included in cost of sales. At December 31, 2020, the net mark-to-market valuation of our outstanding raw material hedges was an unrealized pre-tax gain of $4.3 million, comprised of $3.7 million in prepaid expenses and other current assets, $0.7 million in other assets, and $0.1 million in other current liabilities on the balance sheet.

Foreign Currency Risk. Foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates. We sometimes purchase foreign currency forward contracts that permit us to sell specified amounts of foreign currencies expected to be received from our export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk, primarily the euro. In addition, we may also hedge forecasted capital expenditures and designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions. At December 31, 2020, we had no significant outstanding foreign currency forward contracts.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Allegheny Technologies Incorporated and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Allegheny Technologies Incorporated and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and statements of changes in consolidated equity for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of goodwill

Long-lived assets and asset impairment valuation

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1996.

Pittsburgh, Pennsylvania

February 26, 2021

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Operations

(In millions, except per share amounts)

Impairment of goodwill 287.0 — —

Nonoperating retirement benefit expense (62.1) (73.6) (33.9)

Debt extinguishment charge (21.5) (21.6) —

Income tax provision (benefit) 77.7 (28.5) 11.0

Less: Net income attributable to noncontrolling interests 13.0 12.5 14.3

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In millions)

Currency translation adjustment

Unrealized net change arising during the period 32.5 (4.0) (26.6)

Derivatives

Net derivatives gain (loss) on hedge transactions (2.8) 9.7 (6.4)

Income taxes on derivative transactions — (4.7) —

Postretirement benefit plans

Actuarial loss

Amortization of net actuarial loss 85.3 87.2 76.5

Prior service cost

Amortization to net income (loss) of net prior service credits (3.1) (2.6) (2.6)

Income taxes on postretirement benefit plans — (20.4) —

Other comprehensive loss, net of tax (10.5) (69.2) (112.2)

Comprehensive income (loss) attributable to ATI $ (1,594.5) $ 189.7 $ 116.4

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Balance Sheets

Assets

Cash and cash equivalents $ 645.9 $ 490.8

Shot-term contract assets 38.9 38.5

Prepaid expenses and other current assets 38.3 64.3

Liabilities and Stockholders’ Equity

Short-term contract liabilities 111.8 78.7

Short-term debt and current portion of long-term debt 17.8 11.5

Accrued postretirement benefits 326.7 312.5

Equity:

ATI Stockholders’ Equity:

Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-none — —

Accumulated other comprehensive loss, net of tax (1,223.6) (1,201.7)

Total Liabilities and Stockholders’ Equity $ 4,034.9 $ 5,634.6

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(In millions)

Operating Activities:

Gain on joint venture deconsolidation — — (15.9)

Impairment of goodwill 287.0 — —

Debt extinguishment charge 21.5 21.6 —

Gain from disposal of property, plant and equipment, net (2.9) (90.6) (1.2)

Net loss from sales of businesses — 1.8 —

Non-cash restructuring charges 1,041.5 — —

Non-cash joint venture impairment charge — 11.4 —

Change in operating assets and liabilities:

Accrued income taxes 2.4 4.9 1.4

Accrued liabilities and other 119.6 0.6 (15.3)

Investing Activities:

Purchases of property, plant and equipment (136.5) (168.2) (139.2)

Proceeds from disposal of property, plant and equipment 5.9 92.0 2.8

Purchases of businesses — — (10.0)

Proceeds from sales of businesses, net of transaction costs — 158.1 —

Cash provided by (used in) investing activities (128.7) 81.7 (145.1)

Financing Activities:

Payments on long-term debt and finance leases (212.1) (507.6) (6.4)

Net borrowings (payments) under credit facilities 0.2 4.9 (5.9)

Purchase of convertible note capped call (19.4) — —

Debt issuance costs (9.1) (5.5) —

Debt extinguishment charge (19.1) (20.9) —

Dividends paid to noncontrolling interests (7.2) (14.0) (10.0)

Sale to noncontrolling interest — — 14.4

Cash (used in) provided by financing activities 116.9 (203.0) (7.3)

Cash and cash equivalents at beginning of year 490.8 382.0 141.6

Cash and cash equivalents at end of year $ 645.9 $ 490.8 $ 382.0

Amounts presented on the Consolidated Statements of Cash Flows may not agree to the corresponding changes in consolidated balance sheet items due to the accounting for purchases and sales of businesses and the effects of foreign currency translation.

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries

Statements of Changes in Consolidated Equity

ATI Stockholders

Other comprehensive loss — — — — (106.0) (6.2) (112.2)

Cumulative effect of adoption of new accounting standard — — 15.5 — — — 15.5

Dividends paid to noncontrolling interest — — — — — (10.0) (10.0)

Sale of subsidiary shares to noncontrolling interest — — — — — 2.7 2.7

Other comprehensive loss — — — — (67.9) (1.3) (69.2)

Dividends paid to noncontrolling interest — — — — — (14.0) (14.0)

Other comprehensive income (loss) — — — — (21.9) 11.4 (10.5)

Equity component of convertible note — 49.8 — — — — 49.8

Convertible note capped call — (19.4) — — — — (19.4)

Dividends paid to noncontrolling interest — — — — — (7.2) (7.2)

The accompanying notes are an integral part of these statements.

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Reporting

The consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. The financial results of majority-owned joint ventures are consolidated into the Company’s operating results and financial position, with the minority ownership interest recognized in the consolidated statement of operations as net income attributable to noncontrolling interests, and as equity attributable to the noncontrolling interests within total stockholders’ equity. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting, whereby ATI’s carrying value of the equity method investment on the statement of financial position is the capital investment and any undistributed profit or loss, and is classified in Other (noncurrent) assets. The profit or loss attributable to ATI from equity method investments is included in the consolidated statements of operations as a component of Other (non-operating) income (expense). See Note 9 for further explanation of the Company’s joint ventures. Intercompany accounts and transactions have been eliminated. Unless the context requires otherwise, “Allegheny Technologies,” “ATI” and the “Company” refer to Allegheny Technologies Incorporated and its subsidiaries.

Effective January 1, 2020, the Company began operating under two revised business segments: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). HPMC is now comprised of the Specialty Materials and Forged Products businesses, as well as the ATI Europe distribution operations. The new AA&S segment combines the Specialty Alloys & Components (SAC) business, including the primary titanium operations in Richland, WA and Albany, OR, with ATI’s former Flat Rolled Products (FRP) business segment, which included the FRP business, consisting of the Specialty Rolled Products and Standard Stainless Sheet Products product lines, and the 60%-owned Shanghai STAL Precision Stainless Steel Company Limited (STAL), as well as the Uniti LLC (Uniti) and Allegheny & Tsingshan Stainless (A&T Stainless) 50%-owned joint ventures that are reported in AA&S segment results under the equity method of accounting. See Note 2, Business Segments, for further information. Financial results of aerospace-grade titanium plate products also transferred from HPMC to AA&S effective January 1, 2020.

Risks and Uncertainties and Use of Estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. Certain prior year amounts have been reclassified in order to conform with the 2020 presentation.

The Company markets its products to a diverse customer base, principally throughout the United States. No single customer accounted for more than 10% of sales for any year presented. The major end markets for the ATI’s products are customers in the aerospace & defense, energy, automotive, construction and mining, food equipment and appliances, and medical markets.

At December 31, 2020, ATI has approximately 6,500 active employees, of which approximately 20% are located outside the United States. Approximately 40% of ATI’s 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). The Company’s CBA with the USW involving approximately 1,100 active full-time represented employees located primarily within the AA&S segment operations expired on February 29, 2020. On March 25, 2020, the Company announced an agreement with the USW that extended the terms of the expired CBAs for one year, to February 28, 2021.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments that are readily convertible to cash with original maturities of three months or less.

Accounts Receivable

Accounts receivable are presented net of a reserve for doubtful accounts of $4.3 million and $4.6 million at December 31, 2020 and 2019, respectively. Trade credit is extended based upon evaluations of each customer’s ability to perform its obligations, which are updated periodically. The Company adopted new accounting guidance in fiscal year 2020 which requires accounts receivable reserves to be determined based on expected credit losses rather than incurred losses, as further discussed below in the section on New Accounting Pronouncements Adopted. Prior to the adoption of this new accounting guidance, account receivable reserves were determined based upon an aging of accounts and a review for collectability of specific accounts. Amounts are written-off against the reserve in the period it is determined that the receivable is uncollectible.

Inventories

Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of the Company’s inventory is valued utilizing the LIFO costing methodology. Inventory of the Company’s non-U.S. operations is valued using average cost or FIFO methods.

The Company evaluates product lines on a quarterly basis to identify inventory carrying values that exceed estimated net realizable value. 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). The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. However, 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 the ceiling and floor. It is the Company’s general policy to write-down to scrap value any inventory that is identified as slow-moving or aged more than twelve months, subject to sales, backlog and anticipated orders considerations. In some instances this aging criterion is up to twenty-four months. Inventory valuation reserves also include amounts pertaining to intercompany profit elimination between different subsidiaries.

Long-Lived Assets

Property, plant and equipment are recorded at cost, including capitalized interest, and include long-lived assets acquired under finance leases. Depreciation is primarily recorded using the straight-line method. Prior to December 2020, property, plant and equipment associated with the Hot-Rolling and Processing Facility (HRPF) in the AA&S segment was being depreciated utilizing the units of production method of depreciation, which the Company believed provided a better matching of costs and revenues. However, based on changed business conditions resulting from the decision to exit production of standard stainless sheet products and the recognition of an impairment charge on the property, plant and equipment associated with the HRPF in December 2020 (see Note 3 for further discussion), depreciation of the remaining carrying value of the HRPF now uses the straight-line method. The Company periodically reviews estimates of useful life and production capacity assigned to new and in service assets. Significant enhancements, including major maintenance activities that extend the lives of property and equipment, are capitalized. Costs related to repairs and maintenance are charged to expense in the period incurred. The cost and related accumulated depreciation of property and equipment retired or disposed of are removed from the accounts and any related gains or losses are included in income.

The Company monitors the recoverability of the carrying value of its long-lived assets. An impairment charge is recognized when an indicator of impairment occurs and the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value and the asset’s carrying value exceeds its fair value. If an impairment loss is recognized, the adjusted carrying value of the long-lived asset is its new cost basis and this new cost basis is depreciated over the remaining useful life of the asset. Assets to be disposed of by sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized.

Leases

ATI US Equity

ATI · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

ATI US Equity☆

ATI · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

ATI US Equity