Notes to Financial Statements
December 31, 2018
1. Description of the Plan
The ATI Retirement Plan (the Plan) is a defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Plan’s sponsor is Allegheny Technologies Incorporated (ATI, the Plan Sponsor, or the Company). Eligible participants in the Plan consist of employees with defined contribution benefits that are provided in accordance with collectively bargained labor agreements across all of ATI’s U.S. operations. In addition, beginning in 2018, the Plan became a multiple employer plan and includes represented employees of a 50% owned ATI joint venture, A&T Stainless. The following brief description of the Plan is provided for general information purposes only. Participants should refer to the summary plan description for more complete information regarding eligibility, vesting, contributions, and withdrawals.
The purpose of the Plan is to provide retirement benefits to eligible employees through company contributions, and to encourage employee thrift by permitting eligible employees to defer a part of their compensation and contribute such deferrals to the Plan. The Plan allows employees to contribute a portion of eligible wages each pay period through payroll deductions subject to Internal Revenue Code (the Code) limitations. Unless otherwise specified by the participant, contributions are invested in the Qualified Default Investment Alternative, which is the Vanguard Target Retirement Fund that most closely matches the participants 65
th
birthday date.
For certain employees in the Plan, qualifying employee contributions are matched by the respective employing companies that are affiliates of ATI based on various formulas including as a percentage of employee contributions, or as a flat dollar amount which can be based on years of service. Employees at certain ATI operations receive an employer contribution to the Plan based on hours worked or at the discretion of the operation’s Board of Directors based on its current or accumulated profits for the Plan year. The specific conditions, amounts and criteria governing eligibility for the various employer contributions are set forth in the Plan documents or individual bargaining agreements. The Plan allows participants to direct their contributions, and contributions made on their behalf to any of the investment options offered by the Plan.
Participants are vested immediately in their contributions plus actual investment performance thereon. Many employees in the Plan are immediately vested in all company contributions. For certain employees, vesting in the Company’s contributions varies based on employee group classification and/or years of service not to exceed 6 years. Participant forfeitures are used to reduce future employer contributions or in the absence of such contributions, are distributed equally to certain Plan participants.
Separate accounts are maintained by the Plan Sponsor for each participating employee. All expenses incurred in the administration of the Plan, including those charged by the Plan’s trustees are paid by the Plan, except as paid for or reimbursed by the Company. The Plan’s trustee for the Company stock fund is Benefit Trust Company and the Plan’s trustee of all other Plan assets is AON Trust Company. Participants may make “in-service” and hardship withdrawals as outlined in the plan document.
Active employees can borrow up to 50% of their vested account balances minus any outstanding loans. The loan amounts are further limited to a minimum of $1,000 and a maximum of $50,000, and an employee can obtain no more than three loans at one time. Interest rates are determined based on commercially accepted criteria, and payment schedules vary based on the type of the loan. General-purpose loans are repaid over 6 to 60 months, and primary residence loans are repaid over periods up to 180 months. Principal and interest payments are made by payroll deductions.
2. Significant Accounting Policies
Use of Estimates and Basis of Accounting
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements, accompanying notes and supplemental schedules. Actual results could differ from those estimates. The financial statements are prepared under the accrual basis of accounting.
Investment Valuation
The investments in master trusts, representing the Plan’s interest in the net assets of these master trusts, are stated at fair value, or, for fully benefit-responsive investment contracts, at contract value. Contract value is the relevant measurement attributable to fully benefit-responsive investment contracts, because contract value is the amount participants would receive if they were to
initiate permitted transactions under the terms of the Plan. The contract value represents contributions plus earnings, less participant withdrawals and administrative expenses.
The assets of the master trusts, as well as income/losses, are allocated among the participating plans by assigning to each plan those transactions (primarily contributions, benefit payments, and plan-specific expenses) that can be specifically identified and by allocating among all plans, in proportion to the fair value of the assets assigned to each plan, income and expenses resulting from the collective investments of the assets of the master trusts.
Payment of Benefits
Benefits are recorded when paid.
Notes Receivable from Participants
Notes receivable from participants represent participant loans that are recorded at their unpaid principal balance plus any accrued but unpaid interest. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses were recorded as of
December 31, 2018
or
2017
. If a participant ceases to make a note repayment and the Plan administrator deems the note to be a distribution, the note receivable balance is reduced and a benefit payment is recorded.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement Plan”. 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 requirement. This guidance is required to be adopted by the Plan beginning in fiscal year 2020 with early adoption permitted. The Plan does not plan to early adopt this guidance. The adoption of these changes is not expected to have an impact on the Plan’s financial statements other than disclosures.
3. Investments
Certain assets of the Plan, along with the assets of another ATI sponsored plan, are part of master trusts, the Allegheny Technologies Incorporated Master Trust and the ATI Company Stock Fund Master Trust. The Plan also permits self-directed investments in registered investment companies that are maintained in accounts separate from the master trusts.
The following table is a summary, at fair value, of the net assets of the master trusts by investment type as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Master Trust Balances
|
Plan's Interest in Master Trust Balances
|
|
Master Trust Balances
|
Plan's Interest in Master Trust Balances
|
Allegheny Technologies Incorporated Master Trust:
|
|
|
|
|
|
Common collective trusts
|
$
|
490,831,201
|
|
$
|
142,424,172
|
|
|
$
|
543,337,806
|
|
$
|
158,528,675
|
|
Registered investment companies
|
283,919,671
|
|
61,143,462
|
|
|
270,960,966
|
|
60,471,308
|
|
Cash
|
14,141,019
|
|
5,309,582
|
|
|
7,528,354
|
|
2,803,421
|
|
Total investments at fair value
|
$
|
788,891,891
|
|
$
|
208,877,216
|
|
|
$
|
821,827,126
|
|
$
|
221,803,404
|
|
Plan's interest in master trust
|
|
26
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
ATI Company Stock Fund Master Trust:
|
|
|
|
|
|
Corporate common stock
|
$
|
72,336,895
|
|
$
|
31,378,764
|
|
|
$
|
91,616,341
|
|
$
|
40,034,585
|
|
Cash
|
651,576
|
|
282,645
|
|
|
636,100
|
|
277,964
|
|
Total investments at fair value
|
$
|
72,988,471
|
|
$
|
31,661,409
|
|
|
$
|
92,252,441
|
|
$
|
40,312,549
|
|
Plan's interest in master trust
|
|
43
|
%
|
|
|
44
|
%
|
The following table is a summary, at contract value, of the net assets of the Allegheny Technologies Incorporated Master Trust by investment type as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Master Trust Balances
|
Plan's Interest in Master Trust Balances
|
|
Master Trust Balances
|
Plan's Interest in Master Trust Balances
|
Allegheny Technologies Incorporated Master Trust:
|
|
|
|
|
|
Synthetic investment contracts
|
$
|
146,529,203
|
|
$
|
55,380,427
|
|
|
$
|
152,041,371
|
|
$
|
57,182,760
|
|
Total investments at contract value
|
$
|
146,529,203
|
|
$
|
55,380,427
|
|
|
$
|
152,041,371
|
|
$
|
57,182,760
|
|
Investment income (loss) attributable to the master trusts for the year ended
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
Allegheny Technologies Incorporated Master Trust
|
ATI Company Stock Fund Master Trust
|
Net depreciation in fair value of investments
|
$
|
(56,326,831
|
)
|
$
|
(6,314,556
|
)
|
Investment income from investments at fair value
|
6,936,656
|
|
11,461
|
|
Investment income from investments at contract value
|
2,369,017
|
|
—
|
|
Administrative expenses and other, net
|
(797,294
|
)
|
—
|
|
Total investment loss
|
$
|
(47,818,452
|
)
|
$
|
(6,303,095
|
)
|
Administrative fees for the ATI Company Stock Fund Master Trust are paid by the Allegheny Technologies Incorporated Master Trust.
Investments accounted for at contract value are held by the BNY Mellon Stable Value Fund (the Fund), which may invest in a diversified portfolio of guaranteed investment contracts including synthetic investment contracts, separate account contracts, cash and cash equivalents, and other instruments that can be carried at book value. All of these assets allow participant-directed transactions to be made at contract value. The assets underlying the synthetic investment contracts may include U.S. Treasury bonds, agency bonds, corporate bonds, residential mortgage backed securities, asset-backed securities, commercial mortgage-backed securities, and common collective trusts. These assets are owned by the Plan. As of
December 31, 2018
, the Fund had a product allocation of 9% to cash, 21% to fixed maturity contracts and 70% to constant duration contracts.
Interest crediting rates on the contracts held in the Fund are determined at the time of purchase. Such crediting rates are reviewed and may be reset on a quarterly basis.
Typically, the investment contracts in the Fund do not have a stated final maturity, but contracts wrapping individual bonds may have a gradual tapering of duration unless new bonds are purchased within the investment contract. These contracts are referred to as “fixed maturity” contracts, while “constant duration” contracts invest in common collective trusts or actively managed accounts, managed against a stated benchmark or to a targeted duration.
Certain investment contracts in the Fund may provide for adjustment to contract value for withdrawals made prior to termination. If the Plan were deemed to be in violation of ERISA or lose its tax exempt status, among other events, the issuers of the fully benefit responsive investment contracts would have the ability to terminate the contracts and settle at an amount different from contract value.
Certain investments are subject to restrictions or limitations if the Plan Sponsor decides to entirely exit an investment. Investments in registered investment companies, common collective trusts and the Fund may require at least 30 days prior notice to completely withdraw from the investments. The targeted date fund investments held in common collective trusts currently do not require the prior approval of the investment manager if the Plan Sponsor decides to entirely exit these investments, but prior trade date notification is necessary to effect timely securities settlement or delivery of an investment’s liquidation and transfer to another investment. The Plan had no unfunded commitments as of
December 31, 2018
and
2017
.
4. Fair Value Measurement
In accordance with accounting standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The accounting standards establish a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
Determination of Fair Value
Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. In addition to market information, models may also incorporate transaction details, such as maturity. Valuation adjustments, such as liquidity valuation adjustments, may be necessary when the Plan is unable to observe a recent market price for a financial instrument that trades in inactive (or less active) markets. Liquidity adjustments are not taken for positions classified within Level 1 (as defined below) of the fair value hierarchy.
The methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. There have been no changes in the methodologies used at
December 31, 2018
and
2017
.
Valuation Hierarchy
The three levels of inputs to measure fair value are as follows:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Valuation Methodologies
The valuation methodologies used for assets and liabilities measured at fair value, including their general classification based on the fair value hierarchy, include the following:
|
|
•
|
Cash and cash equivalents – Where the net asset value (NAV) is a quoted price in a market that is active, it is classified within Level 1 of the valuation hierarchy. In certain cases, NAV is a quoted price in a market that is not active, or is based on quoted prices for similar assets and liabilities in active markets, and these investments are classified within Level 2 of the valuation hierarchy.
|
|
|
•
|
Corporate common stocks – These investments are valued at the closing price reported on the major market on which the individual securities are traded. Common stock is classified within Level 1 of the valuation hierarchy.
|
|
|
•
|
Common collective trust funds – These investments are investment vehicles valued using the NAV, as a practical expedient, provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding.
|
|
|
•
|
Registered investment companies – These investments are public investment vehicles valued using the NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Where the NAV is a quoted price in a market that is active, it is classified within Level 1 of the valuation hierarchy.
|
The following tables present the financial instruments of the master trusts at fair value by caption on the statement of net assets available for benefits and by category of the valuation hierarchy (as described above) as of
December 31, 2018
and
2017
. The master trusts had no assets classified within Level 2 or Level 3 of the valuation hierarchy. There were no reclassifications of assets between levels of the fair value hierarchy for the periods presented.
Master trust assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
NAV (a)
|
|
Total
|
Common collective trusts
|
|
$
|
—
|
|
|
$
|
490,831,201
|
|
|
$
|
490,831,201
|
|
Registered investment companies
|
|
283,919,671
|
|
|
—
|
|
|
283,919,671
|
|
Corporate common stock
|
|
72,336,895
|
|
|
—
|
|
|
72,336,895
|
|
Cash
|
|
14,792,595
|
|
|
—
|
|
|
14,792,595
|
|
|
|
$
|
371,049,161
|
|
|
$
|
490,831,201
|
|
|
$
|
861,880,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
NAV (a)
|
|
Total
|
Common collective trusts
|
|
$
|
—
|
|
|
$
|
543,337,806
|
|
|
$
|
543,337,806
|
|
Registered investment companies
|
|
270,960,966
|
|
|
—
|
|
|
270,960,966
|
|
Corporate common stock
|
|
91,616,341
|
|
|
—
|
|
|
91,616,341
|
|
Cash
|
|
8,164,454
|
|
|
—
|
|
|
8,164,454
|
|
|
|
$
|
370,741,761
|
|
|
$
|
543,337,806
|
|
|
$
|
914,079,567
|
|
(a) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Note 3 and to the statements of assets available for benefits.
In addition to the Plan’s investments in the master trusts, the Plan held
$1,253,471
and
$1,907,673
in self-directed accounts as of
December 31, 2018
and
2017
, respectively. These self-directed accounts are invested in registered investment companies and are categorized as Level 1 assets.
5. Income Tax Status
The Plan has received a determination letter from the Internal Revenue Service (IRS) dated October 13, 2015, stating that the Plan is qualified under Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. Subsequent to the effective date of the amendments addressed by the determination letter, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax-exempt.
The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of
December 31, 2018
and
2017
, there are no uncertain positions taken or expected to be taken. The earliest tax year open to U.S. Federal examination is 2015.
6. Plan Termination
Although it has not expressed any intent to do so, the employing companies have the right under the Plan to discontinue their contributions at any time and to terminate their respective participation in the Plan subject to the provisions of ERISA. However, no such action may deprive any participant or beneficiary under the Plan of any vested right. In the event of Plan termination, participants would become 100% vested in their employer contributions.
7. Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risk such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.
8. Party-In-Interest Transactions
At
December 31, 2018
and
2017
, the Plan held
1,219,440
and
1,402,054
shares, respectively, of common stock of ATI, the sponsoring employer, with fair value of
$31,378,764
and
$40,034,585
, respectively. The shares held by the Plan at
December 31, 2018
and
2017
reflect the Plan’s interest in the ATI Company Stock Fund Master Trust. During the year ended
December 31, 2018
, the Plan recorded an investment loss of
$2,721,525
related to its investment in the common stock of ATI.