|
(dollars
in millions, except per share data, unless otherwise
indicated)
|
NOTE
1 – Basis of Presentation
|
In
the opinion of the management of AK Steel Holding Corporation (“AK Holding”) and
AK Steel Corporation (“AK Steel”, and together with AK Holding, the “Company”),
the accompanying condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments necessary to present
fairly the financial position of the Company as of September 30, 2009, the
results of its operations for the three- and nine-month periods ended September
30, 2009 and 2008, and its cash flows for the nine-month periods ended September
30, 2009 and 2008. The results of operations for the nine months
ended September 30, 2009 are not necessarily indicative of the results to be
expected for the year ending December 31, 2009. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
2008.
NOTE
2 – Earnings and Dividends Per
Share
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
6.2
|
|
|
$
|
188.3
|
|
|
$
|
(114.4
|
)
|
|
$
|
434.6
|
|
Less:
Distributed earnings to common stockholders and holders of certain stock
compensation awards
|
|
|
5.5
|
|
|
|
5.6
|
|
|
|
16.5
|
|
|
|
16.8
|
|
Undistributed
earnings (losses)
|
|
$
|
0.7
|
|
|
$
|
182.7
|
|
|
$
|
(130.9
|
)
|
|
$
|
417.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stockholders earnings – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
earnings to common stockholders
|
|
$
|
5.5
|
|
|
$
|
5.6
|
|
|
$
|
16.4
|
|
|
$
|
16.7
|
|
Undistributed
earnings (losses) to common stockholders
|
|
|
0.7
|
|
|
|
181.8
|
|
|
|
(130.9
|
)
|
|
|
415.9
|
|
Common
stockholders earnings (losses) – basic
|
|
$
|
6.2
|
|
|
$
|
187.4
|
|
|
$
|
(114.5
|
)
|
|
$
|
432.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stockholders earnings – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
earnings to common stockholders
|
|
$
|
5.5
|
|
|
$
|
5.6
|
|
|
$
|
16.4
|
|
|
$
|
16.7
|
|
Undistributed
earnings (losses) to common stockholders
|
|
|
0.7
|
|
|
|
181.8
|
|
|
|
(130.9
|
)
|
|
|
415.9
|
|
Common
stockholders earnings (losses) – diluted
|
|
$
|
6.2
|
|
|
$
|
187.4
|
|
|
$
|
(114.5
|
)
|
|
$
|
432.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares outstanding (weighted average in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
outstanding for basic earnings per share
|
|
|
108.7
|
|
|
|
111.7
|
|
|
|
109.1
|
|
|
|
111.6
|
|
Effect
of dilutive stock-based compensation
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
0.7
|
|
Common
shares outstanding for diluted earnings per share
|
|
|
109.2
|
|
|
|
112.3
|
|
|
|
109.1
|
|
|
|
112.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
earnings
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Undistributed
earnings (losses)
|
|
|
0.01
|
|
|
|
1.63
|
|
|
|
(1.20
|
)
|
|
|
3.73
|
|
Basic
earnings (losses) per share
|
|
$
|
0.06
|
|
|
$
|
1.68
|
|
|
$
|
(1.05
|
)
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
earnings
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Undistributed
earnings (losses)
|
|
|
0.01
|
|
|
|
1.62
|
|
|
|
(1.20
|
)
|
|
|
3.70
|
|
Diluted
earnings (losses) per share
|
|
$
|
0.06
|
|
|
$
|
1.67
|
|
|
$
|
(1.05
|
)
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially
issuable common shares (in millions) excluded from earnings per share
calculation due to anti-dilutive effect
|
|
|
0.1
|
|
|
|
—
|
|
|
|
1.1
|
|
|
|
—
|
|
Beginning
with the three-month period ended March 31, 2009, earnings per share (“EPS”) has
been calculated utilizing the “two-class” method by dividing the sum of
distributed earnings to common stockholders and undistributed earnings allocated
to common stockholders by the weighted average number of common shares
outstanding during the period. In applying the “two-class” method,
undistributed earnings are allocated to both common shares and participating
securities. The restricted stock granted by AK Steel is
entitled to dividends and meets the criteria of a participating
security.
EPS
for the three-month and nine-month periods ended September 30, 2008 was
recalculated using the two-class method. The two-class method did not
change the diluted EPS for the three-month period ended September 30,
2008. The basic EPS for the three- and nine-month periods ended
September 30, 2008 changed from $1.69 to $1.68 and from $3.89 to $3.88,
respectively. The diluted EPS for the nine-month period ended
September 30, 2008 changed from $3.86 to $3.85.
On
October 27, 2009, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share of common stock, payable on December
10, 2009, to stockholders of record on November 13, 2009. Also, on
July 21, 2009, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share of common stock, payable on September
10, 2009, to stockholders of record on August 14, 2009. This was in
addition to previous quarterly cash dividends of $0.05 per share of common stock
paid on March 10, 2009 and June 10, 2009.
Inventories
are valued at the lower of cost or market. The cost of the majority
of inventories is measured on the last in, first out (LIFO)
method. Other inventories are measured principally at average
cost.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Finished
and semi-finished
|
|
$
|
858.8
|
|
|
$
|
877.1
|
|
Raw
materials
|
|
|
310.5
|
|
|
|
512.1
|
|
Total
cost
|
|
|
1,169.3
|
|
|
|
1,389.2
|
|
Adjustment
to state inventories at LIFO value
|
|
|
(556.0
|
)
|
|
|
(
822.4
|
)
|
Net
inventories
|
|
$
|
613.3
|
|
|
$
|
566.8
|
|
NOTE
4 – Pension and other postretirement
benefits
|
The
Company provides noncontributory pension and various healthcare and life
insurance benefits to most employees and retirees. The major pension
plans are not fully funded. Based on actuarial assumptions, the
Company has contributed $210.0 to the qualified pensions plan trusts during
2009. Of this total, $100.0 was made in the first half of 2009, and
$110.0 was made early in the third quarter of 2009. The total
contribution of $210.0 exceeded by approximately $55.0 the amount that the
Company was required to contribute in 2009 and is expected to reduce the
Company’s 2010 contribution obligation. The Company made $225.0 in
contributions during 2008.
Net
periodic benefit costs for pension and other postretirement benefits were as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.9
|
|
|
$
|
2.0
|
|
|
$
|
2.9
|
|
|
$
|
6.0
|
|
Interest
cost
|
|
|
50.6
|
|
|
|
53.3
|
|
|
|
155.5
|
|
|
|
159.7
|
|
Expected
return on assets
|
|
|
(46.3
|
)
|
|
|
(60.5
|
)
|
|
|
(135.6
|
)
|
|
|
(181.4
|
)
|
Amortization
of prior service cost
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
2.5
|
|
|
|
3.0
|
|
Amortization
of loss
|
|
|
4.5
|
|
|
|
4.3
|
|
|
|
13.5
|
|
|
|
12.9
|
|
Net
periodic benefit cost
|
|
$
|
10.6
|
|
|
$
|
0.2
|
|
|
$
|
38.8
|
|
|
$
|
0.2
|
|
Other Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
3.0
|
|
|
$
|
3.3
|
|
Interest
cost
|
|
|
13.8
|
|
|
|
16.2
|
|
|
|
41.4
|
|
|
|
56.4
|
|
Amortization
of prior service credit
|
|
|
(19.7
|
)
|
|
|
(19.6
|
)
|
|
|
(59.2
|
)
|
|
|
(53.5
|
)
|
Amortization
of loss (gain)
|
|
|
(0.8
|
)
|
|
|
0.7
|
|
|
|
(2.5
|
)
|
|
|
2.0
|
|
Net
periodic benefit cost (income)
|
|
$
|
(5.7
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(17.3
|
)
|
|
$
|
8.2
|
|
The
increase in “Net periodic benefit cost” for Pension Benefits for the three and
nine months ended September 30, 2009 was principally caused by a decrease in the
value of pension assets at the end of 2008 compared to the end of 2007, which
resulted in a reduction in the associated calculation of expected return on
assets.
The
decrease in “Net periodic benefit cost (income)” for Other Postretirement
Benefits for the three and nine months ended September 30, 2009 was primarily
the result of the full effect of the March 2008 settlement with a group of
retirees from the Company’s Middletown Works. Under the terms of that
settlement, AK Steel transferred to a Voluntary Employees Beneficiary
Association trust (the “VEBA Trust”) all postretirement benefit obligations (the
“OPEB Obligations”) owed to the Class Members. See discussion of
Middletown Works Retiree Healthcare Benefits Litigation in Note 9.
In
the first quarter of 2008, the Company adopted the measurement date provisions
within Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification Topic 715 (formerly FASB Statement of Financial Accounting
Standards No. 158, “Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and
132(R)”). As a result, the Company recorded a $12.0 pre-tax charge to
retained earnings and a $7.3 pre-tax charge to accumulated other comprehensive
income to reflect the amount of other postretirement net periodic benefit cost
for November 2007 and December 2007, which had been delayed as the result of the
October 31 measurement date used in 2007. In addition, the Company
recorded a minimal charge to retained earnings and a $3.5 pre-tax increase to
accumulated other comprehensive income to reflect the two months of pension net
periodic benefit cost that had been delayed as the result of the October 31
measurement date.
The
total projected future benefit obligation of the Company with respect to
payments for healthcare benefits to the Company’s retirees is accounted for as
“Pension and other postretirement benefit obligations” in the Company’s
condensed consolidated balance sheets. The net amount of the
liability recognized by the Company, as of September 30, 2009, for future
payment of such benefit obligations was approximately $0.9 billion, compared to
nearly $1.0 billion at December 31, 2008.
NOTE
5 – Share-Based Compensation
|
AK
Holding’s Stock Incentive Plan (the “SIP”) permits the granting of nonqualified
stock option, restricted stock, performance share and restricted stock unit
awards to directors, officers and key management employees of the
Company. These nonqualified stock option, restricted stock,
performance share and restricted stock unit awards may be granted with respect
to an aggregate maximum of 16 million shares through the period ending
December 31, 2011. The shares that are issued as the result of these
grants are newly issued shares. The exercise price of each option may not be
less than the market price of the Company’s common stock on the date of the
grant. Stock options have a maximum term of ten years and may not be
exercised earlier than six months following the date of grant or such other term
as may be specified in the award agreement. Stock options granted to officers
and key managers vest and become exercisable in three equal installments on the
first, second and third anniversary of the grant date. Stock options granted to
directors vest and become exercisable after one year. On July 16,
2009, however, the Board of AK
Holding,
upon the recommendation of its outside compensation consultant, approved a
change to the Director compensation program which replaces the grants of stock
options which non-employee Directors previously received upon election to the
Board and at five-year intervals thereafter, with ongoing quarterly awards of
restricted stock units (“RSUs”) in the total annualized amount of thirty five
thousand dollars. This change is prospective and will not affect the
vesting of stock options granted prior to July 16, 2009. Performance
shares vest after a three-year period. The total number of
performance shares issued will be based on the Company’s share performance
compared to a prescribed compounded annual growth rate and the total share
return compared to Standard and Poor’s MidCap 400 index. Restricted
stock awards granted to officers and key managers on or prior to December 31,
2006, that are not yet fully vested were awarded on terms pursuant to which 25%
of the shares covered by a restricted stock award vest two years after the date
of the award and an additional 25% vest on the third, fourth and fifth
anniversaries of the date of the award. Restricted stock awards
granted to officers and key managers after December 31, 2006 will vest ratably
on the first, second and third anniversaries of the grant. Until
October 16, 2008, directors were granted restricted stock as the equity
component of their compensation. On October 16, 2008, the Board of Directors
amended the SIP to allow RSUs to be granted to non-employee Directors in lieu of
restricted shares of common stock as the equity component of a Director’s
compensation. In addition, the Board of Directors permitted each
Director a one-time election to convert all of his or her existing restricted
stock to RSUs. To the extent not so converted, restricted stock
issued to a Director prior to October 16, 2008 vests at the end of the
Director’s full tenure on the Board. New grants of RSUs vest
immediately upon grant, but are not settled (
i.e.
, paid out) until one
year after the date of the grant, unless deferred settlement is elected as
described below. RSUs resulting from converted restricted stock
vested and were settled as of the date of the 2009 Annual Meeting of AK
Holding’s stockholders, subject also to a deferred settlement
election. Directors have the option to defer settlement of their RSUs
until six months following the date they complete their full tenure on the Board
due to attainment of mandatory retirement age, the election by the stockholders
of a replacement Director, or the Director’s death or disability. If
a Director elects this deferral option, he or she also may elect to take
distribution of the shares upon settlement in a single distribution or in annual
installments not to exceed fifteen years.
The
Company’s calculation of fair value of the options is estimated on the date of
grant using the Black-Scholes option valuation model with the following
weighted-average assumptions:
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
30,
|
|
September
30,
|
|
2009
(a)
|
|
2008
(a)
|
|
2009
|
|
2008
|
Expected
volatility
|
—
|
|
—
|
|
81.1%
– 90.8%
|
|
52.4%
– 56.5%
|
Weighted-average
volatility
|
—
|
|
—
|
|
82.56%
|
|
55.47%
|
Expected
term (in years)
|
—
|
|
—
|
|
2.8
– 6.3
|
|
2.9
– 7.3
|
Risk-free
interest rate
|
—
|
|
—
|
|
1.05%
– 1.84%
|
|
2.44%
– 3.31%
|
Dividend
yield
|
—
|
|
—
|
|
2.19%
|
|
0.55%
|
(a) No
grants in the period
The
Company’s policy for amortizing the value of the share-based payments is a
straight-line method. The Company uses historical data regarding
stock option exercise behaviors to estimate the expected life of options granted
based on the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected
volatility is based on historical volatility for a period equal to the stock
option’s expected life. The expected dividend yield is based on the
Company’s historical dividend payments. The Company’s estimate
assumes that 5% of the options issued will be forfeited.
A
summary of stock option activity under the Company’s share-based compensation
plans for the nine months ended September 30, 2009 is presented
below:
Stock Options
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2008
|
|
|
751,313
|
|
|
$
|
17.12
|
|
|
|
|
|
Granted
|
|
|
366,366
|
|
|
|
9.16
|
|
|
|
|
|
Exercised
|
|
|
(21,715
|
)
|
|
|
6.70
|
|
|
|
|
|
Cancelled
|
|
|
(41,793
|
)
|
|
|
17.03
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
|
1,054,171
|
|
|
$
|
14.57
|
|
7.5
yrs
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
to vest at September 30, 2009
|
|
|
481,676
|
|
|
$
|
14.35
|
|
8.9
yrs
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2009
|
|
|
547,144
|
|
|
$
|
14.78
|
|
6.2
yrs
|
|
$
|
1.5
|
|
The
weighted-average grant-date fair value of options granted during the nine months
ended September 30, 2009 and 2008 was $5.08 and $17.54,
respectively. There were no options granted in the three months ended
September 30, 2009 and 2008. The total intrinsic value of options
exercised during the nine months ended September 30, 2009 and 2008, based upon
the average market price during the period, was $0.2 and $24.9,
respectively. For the three months ended September 30, 2009 the
intrinsic value of options exercised was $0.1. There were no options
exercised in the three months ended September 30, 2008. The following
table summarizes information about stock options outstanding at September 30,
2009:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
|
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
|
|
3.05
|
to
|
|
$
|
9.19
|
|
|
|
234,083
|
|
5.8
yrs.
|
|
$
|
7.49
|
|
|
|
212,833
|
|
|
$
|
7.41
|
|
$
|
|
|
9.20
|
to
|
|
$
|
13.64
|
|
|
|
344,184
|
|
9.1
yrs.
|
|
|
9.28
|
|
|
|
9,568
|
|
|
|
11.61
|
|
$
|
|
|
13.65
|
to
|
|
$
|
16.65
|
|
|
|
112,235
|
|
6.0
yrs.
|
|
|
14.77
|
|
|
|
111,168
|
|
|
|
14.77
|
|
$
|
|
|
16.66
|
to
|
|
$
|
18.07
|
|
|
|
231,419
|
|
7.0
yrs.
|
|
|
16.82
|
|
|
|
155,666
|
|
|
|
16.85
|
|
$
|
|
|
18.08
|
to
|
|
$
|
68.47
|
|
|
|
132,250
|
|
8.3
yrs.
|
|
|
36.76
|
|
|
|
57,909
|
|
|
|
36.84
|
|
The
Company granted performance shares in the amounts of 543,089 and 176,250 for the
nine-month periods ended September 30, 2009 and 2008,
respectively. The three-year performance periods for these 2009 and
2008 grants end on December 31, 2011 and 2010, respectively.
The
estimated pre-tax expense associated with share-based compensation for 2009 is
$7.9, of which $2.0 ($1.2 after tax) and $5.9 ($3.6 after tax) was expensed in
the three- and nine-month periods ended September 30, 2009,
respectively. The share-based compensation expense taken includes
expense for both nonqualified stock options and performance shares granted from
the SIP.
A
summary of the activity for non-vested restricted stock awards as of September
30, 2009 and changes during the nine-month period is presented
below.
Restricted Stock Awards
|
|
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding
at December 31, 2008
|
|
|
598,508
|
|
|
$
|
17.64
|
|
Granted
|
|
|
418,659
|
|
|
|
9.17
|
|
Vested
|
|
|
(279,395
|
)
|
|
|
15.87
|
|
Cancelled
|
|
|
(53,521
|
)
|
|
|
14.85
|
|
Outstanding
at September 30, 2009
|
|
|
684,251
|
|
|
$
|
13.39
|
|
Common
stock compensation expense related to restricted stock awards granted under the
Company’s SIP was $3.5 ($2.2 after tax) and $3.6 ($2.2 after tax) for the
nine-month periods ended September 30, 2009 and 2008,
respectively. For the three-month periods ended September 30, 2009
and 2008, the expense was $1.1 ($0.7 after tax) and $1.1 ($0.7 after tax),
respectively.
As
of September 30, 2009, there were $5.5 of total unrecognized compensation costs
related to non-vested share-based compensation awards granted under the
SIP. Those costs are expected to be recognized over a weighted
average period of 1.7 years.
During
the first half of 2009, the Company repurchased a portion of its 7 3/4% senior
notes due in 2012. In connection with these repurchases, the Company
recorded non-cash, pre-tax gains in amounts which have been previously
reported. The Company did not make any repurchases in the third
quarter of 2009. Total repurchases for the first nine months of 2009
were $26.4 with cash payments of $22.8 and non-cash, pre-tax gains of
approximately $3.6, resulting in an outstanding balance of $504.0 at September
30, 2009 for the remaining senior notes. The repurchases were funded
from the Company’s existing cash balances. The Company from time to
time may continue to make cash repurchases of its outstanding senior notes
through open market purchases, privately negotiated transactions or
otherwise. Such repurchases, if any, will depend upon whether any
senior notes are offered to the Company by the holders, prevailing market
conditions, the Company’s cash and liquidity position and needs, and other
relevant factors. The amounts involved in the repurchases may or may
not be material.
The
carrying value of the Company’s financial instruments does not differ materially
from their estimated fair value at September 30, 2009 and the end of 2008, with
the exception of the Company’s long-term debt. At September 30, 2009,
the fair value of the Company’s long-term debt, including current maturities,
was approximately $609.7. The fair value estimate was based on
financial market information available to management as of September 30,
2009. Management is not aware of any significant factors that would
materially alter this estimate since that date. The fair value of the
Company’s long-term debt, including current maturities, at December 31, 2008 was
approximately $515.8.
The
senior note indenture includes restrictive covenants regarding (a) the use of
proceeds from asset sales, (b) some investments, (c) the amount of
sale/leaseback transactions, and (d) transactions by subsidiaries and with
affiliates. Furthermore, the senior note indenture imposes the
following additional financial covenants:
●
|
A
minimum interest coverage ratio of at least 2.5 to 1 for the incurrence of
debt. Failure to meet this covenant would not constitute an
event of default. Rather it would limit the amount of
additional debt the Company could incur to $100.0 beyond the borrowing
available under our existing revolving credit facility. At
September 30, 2009, the ratio fell below the 2.5 to 1 incurrence
test. Other than the impact on borrowing noted above,
noncompliance with this covenant does not materially impact the Company’s
cash or liquidity position. The ratio is calculated by dividing
the interest expense, including capitalized interest and fees on letters
of credit, into EBITDA (defined, essentially, as operating income (i)
before interest, income taxes, depreciation, amortization of intangible
assets and restricted stock, extraordinary items and purchase accounting
and asset distributions, (ii) adjusted for income before income taxes for
discontinued operations, and (iii) reduced for the charges related to
impairment of goodwill special charges, and pension and other
postretirement employee benefit obligation corridor
charges). The corridor charges are amortized over a 10-year
period for this calculation.
|
●
|
A
limitation on “restricted payments,” which consist primarily of dividends
and share repurchases, of $25.0 plus 50% of cumulative net income (or
minus 100% of cumulative net loss) from April 1, 2002. As of
September 30, 2009, the limitation on restricted payments is
$58.6.
|
The
Company’s $850.0 five-year revolving credit facility secured by the Company’s
inventory and accounts receivable contains restrictions on, among other things,
distributions and dividends, acquisitions and investments, indebtedness, liens
and affiliate transactions. In addition, the facility requires
maintenance of a minimum fixed charge coverage ratio of 1 to 1 if availability
under the facility is less than $125.0.
Income
taxes recorded through September 30, 2009 have been estimated based on
year-to-date income and projected results for the full year. The
amounts recorded reflect the provisions within FASB Accounting Standards
Codification Topic 740 (formerly FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”), which clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements and prescribes
standards for the recognition and measurement of tax positions taken or expected
to be taken on a tax return.
NOTE
8 – Comprehensive Income (Loss)
|
Comprehensive
income (loss), net of tax, is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
6.2
|
|
|
$
|
188.3
|
|
|
$
|
(114.4
|
)
|
|
$
|
434.6
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
0.4
|
|
|
|
(2.6
|
)
|
|
|
1.3
|
|
|
|
(1.4
|
)
|
Derivative
instrument hedges, mark to market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss)
arising in period
|
|
|
2.7
|
|
|
|
(31.5
|
)
|
|
|
(19.2
|
)
|
|
|
—
|
|
Reclass
of (gain) loss included in net income
|
|
|
13.3
|
|
|
|
(11.1
|
)
|
|
|
27.0
|
|
|
|
(13.7
|
)
|
Unrealized
holding gain (loss) on securities
|
|
|
1.7
|
|
|
|
(0.8
|
)
|
|
|
1.9
|
|
|
|
(1.2
|
)
|
Pension
and other postretirement benefit adjustment
|
|
|
(9.0
|
)
|
|
|
(8.0
|
)
|
|
|
(27.1
|
)
|
|
|
153.3
|
|
Comprehensive
income (loss)
|
|
$
|
15.3
|
|
|
$
|
134.3
|
|
|
$
|
(130.5
|
)
|
|
$
|
571.6
|
|
A
deferred tax rate of approximately 38.25% was applied to derivative instrument
hedges, unrealized gains and losses and the pension and other postretirement
benefit adjustment.
Accumulated
other comprehensive income, net of tax, is as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Foreign
currency translation
|
|
$
|
4.6
|
|
|
$
|
3.3
|
|
Derivative
instrument hedges
|
|
|
(21.2
|
)
|
|
|
(29.0
|
)
|
Unrealized
loss on investments
|
|
|
(2.0
|
)
|
|
|
(3.9
|
)
|
Employee
benefit liability
|
|
|
162.1
|
|
|
|
189.2
|
|
Accumulated
other comprehensive income
|
|
$
|
143.5
|
|
|
$
|
159.6
|
|
NOTE
9 – Environmental and Legal
Contingencies
|
Environmental Contingencies
:
Domestic steel producers, including AK Steel, are subject to stringent federal,
state and local laws and regulations relating to the protection of human health
and the environment. Over the past three years, the Company has
expended the following for environmental-related capital investments and
environmental compliance:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Environmental-related
capital investments
|
|
$
|
1.8
|
|
|
$
|
2.4
|
|
|
$
|
9.6
|
|
Environmental
compliance costs
|
|
|
126.5
|
|
|
|
122.8
|
|
|
|
125.5
|
|
AK
Steel and its predecessors have been conducting steel manufacturing and related
operations since the year 1900. Although the Company believes its
operating practices have been consistent with prevailing industry standards
during this time, hazardous materials may have been released in the past at one
or more operating sites or third party sites, including operating sites that the
Company no longer owns. The Company has estimated potential
remediation expenditures for those sites where future remediation efforts are
probable based on identified conditions, regulatory requirements or contractual
obligations arising from the sale of a business or facility. At
September 30, 2009, the Company had recorded $16.7 in accrued liabilities and
$40.6 in other non-current liabilities on its condensed
consolidated
balance sheets for estimated probable costs relating to environmental
matters. The comparable balances recorded by the Company at December
31, 2008 were $16.5 in accrued liabilities and $40.8 in other non-current
liabilities. In general, the material components of these accruals
include the costs associated with investigations, delineations, risk
assessments, remedial work, governmental response and oversight costs, site
monitoring, and preparation of reports to the appropriate environmental
agencies. The ultimate costs to the Company with respect to each site
cannot be predicted with certainty because of the evolving nature of the
investigation and remediation process. Rather, to develop the
estimates of the probable costs, the Company must make certain
assumptions.
The
most significant of these assumptions relate to the nature and scope of the work
which will be necessary to investigate and remediate a particular site and the
cost of that work. Other significant assumptions include the cleanup
technology which will be used, whether and to what extent any other parties will
participate in paying the investigation and remediation costs, reimbursement of
governmental agency past response and future oversight costs, and the reaction
of the governing environmental agencies to the proposed work
plans. Costs of future expenditures are not discounted to their
present value. The Company does not believe that there is a
reasonable possibility that a loss or losses exceeding the amounts accrued will
be incurred in connection with the environmental matters discussed below that
would, either individually or in the aggregate, have a material adverse effect
on the Company’s consolidated financial condition, results of operations or cash
flows. However, since amounts recognized in the financial statements
in accordance with accounting principles generally accepted in the United States
exclude costs that are not probable or that may not be currently estimable, the
ultimate costs of these environmental proceedings may be higher than those
currently recorded in the Company’s condensed consolidated financial
statements.
Pursuant
to the Resource Conservation and Recovery Act (“RCRA”), which governs the
treatment, handling and disposal of hazardous waste, the EPA and authorized
state environmental agencies may conduct inspections of RCRA regulated
facilities to identify areas where there have been releases of hazardous waste
or hazardous constituents into the environment and may order the facilities to
take corrective action to remediate such releases. AK Steel’s major steelmaking
facilities are subject to RCRA inspections by environmental
regulators. While the Company cannot predict the future actions of
these regulators, it is possible that they may identify conditions in future
inspections of these facilities which they believe require corrective
action.
Under
authority conferred by the Comprehensive Environmental Response, Compensation
and Liability Act (“CERCLA”), the EPA and state environmental authorities have
conducted site investigations at certain of AK Steel’s facilities and other
third-party facilities, portions of which previously may have been used for
disposal of materials that are currently subject to regulation. The
results of these investigations are still pending, and AK Steel could be
directed to expend funds for remedial activities at the former disposal
areas. Because of the uncertain status of these investigations,
however, the Company cannot reliably predict whether or when such expenditures
might be required, their magnitude or the timeframe during which these potential
costs would be incurred.
On
July 27, 2001, AK Steel received a Special Notice Letter from the EPA requesting
that AK Steel agree to conduct a Remedial Investigation/Feasibility Study
(“RI/FS”) and enter into an administrative order on consent pursuant to Section
122 of CERCLA regarding the former Hamilton Plant located in New Miami,
Ohio. The Hamilton Plant ceased operations in 1990, and all of its
former structures have been demolished and removed. Although AK Steel
did not believe that a site-wide RI/FS was necessary or appropriate, in April
2002, it entered into a mutually agreed-upon administrative order on consent to
perform such an investigation and study of the Hamilton Plant
site. The site-wide RI has been submitted. The FS is
projected to be completed in 2010. AK Steel currently has accrued
$0.7 for the remaining cost of the RI/FS. Until the RI is approved
and the FS is completed, AK Steel cannot reliably estimate the additional costs,
if any, associated with any potentially required remediation of the site or the
timeframe during which these potential costs would be incurred.
On
September 30, 1998, AK Steel received an order from the EPA under Section 3013
of RCRA requiring it to develop a plan for investigation of eight areas of
Mansfield Works that allegedly could be sources of contamination. A
site investigation began in November 2000 and is continuing. AK Steel
cannot reliably estimate at this time how long it will take to complete this
site investigation. AK Steel currently has accrued approximately $2.1
for the projected cost of the study at Mansfield Works. Until the
site investigation is completed, AK Steel cannot reliably estimate the
additional costs, if any, associated with any potentially required remediation
of the site or the timeframe during which these potential costs would be
incurred.
On
October 9, 2002, AK Steel received an order from the EPA under Section 3013 of
RCRA requiring it to develop a plan for investigation of several areas of
Zanesville Works that allegedly could be sources of contamination. A
site
investigation
began in early 2003 and is continuing. AK Steel estimates that it
will take approximately two more years to complete this site
investigation. AK Steel currently has accrued approximately $1.0 for
the projected cost of the study and remediation at Zanesville
Works. Until the site investigation is completed, AK Steel cannot
reliably estimate the additional costs, if any, associated with any potentially
required remediation of the site or the timeframe during which these potential
costs would be incurred.
On
November 26, 2004, Ohio EPA issued a Notice of Violation (“NOV”) for alleged
waste violations associated with an acid leak at AK Steel’s Coshocton
Works. In November 2007, Ohio EPA and AK Steel reached an agreement
to resolve this NOV. Pursuant to that agreement, AK Steel implemented
an inspection program, initiated an investigation of the area where the acid
leak occurred, submitted a closure plan, and upon approval from Ohio EPA, will
implement that closure plan. Also, as part of the agreement, AK Steel
paid a civil penalty of twenty-eight thousand dollars and funded a supplemental
environmental project in the amount of seven thousand dollars. Until
the investigation is completed and a closure plan is approved, AK Steel cannot
reliably estimate the costs associated with closure or the timeframe during
which the closure costs will be incurred.
On
December 20, 2006, Ohio EPA issued an NOV with respect to two electric arc
furnaces at AK Steel’s Mansfield Works alleging failure of the Title V stack
tests with respect to several air pollutants. The Company is investigating this
claim and is working with Ohio EPA to attempt to resolve it. AK Steel
believes it will reach a settlement in this matter that will not have a material
financial impact on AK Steel, but cannot be certain that a settlement will be
reached. If a settlement is reached, the Company cannot reliably
estimate at this time how long it will take to reach such a settlement or what
its terms might be. AK Steel will vigorously contest any claims which
cannot be resolved through a settlement. Until it has reached a
settlement with Ohio EPA or the claims that are the subject of the NOV are
otherwise resolved, AK Steel cannot reliably estimate the costs, if any,
associated with any potentially required operational changes at the furnaces or
the timeframe over which any potential costs would be incurred.
On
July 23, 2007 and on December 9, 2008, the EPA issued NOVs with respect to the
Coke Plant at AK Steel’s Ashland Works alleging violations of pushing and
combustion stack limits. The Company is investigating this claim and
is working with the EPA to attempt to resolve it. AK Steel believes
it will reach a settlement in this matter that will not have a material
financial impact on AK Steel, but cannot be certain that a settlement will be
reached. If a settlement is reached, the Company cannot reliably
estimate at this time how long it will take to reach such a settlement or what
its terms might be. AK Steel will vigorously contest any claims which
cannot be resolved through a settlement. Until it has reached a
settlement with the EPA or the claims that are the subject of the NOV are
otherwise resolved, AK Steel cannot reliably estimate the costs, if any,
associated with any potentially required operational changes at the batteries or
the timeframe over which any potential costs would be incurred.
AK
Steel previously reported that it has been negotiating with the Pennsylvania
Department of Environmental Protection (“PADEP”) to resolve an alleged
unpermitted discharge of wastewater from the closed Hillside Landfill at the
former Ambridge Works. AK Steel now has reached a settlement in this
matter and on July 15, 2009 the parties entered into a Consent Order and
Agreement (the “Consent Order”) to memorialize that settlement. Under
the terms of the Consent Order, AK Steel will implement various corrective
actions, including an investigation of the area where activities were conducted
regarding the landfill, submission of a plan to collect and treat surface waters
and seep discharges, and upon approval from PADEP, implementation of that
plan. Also, as part of the Consent Order, AK Steel paid a civil
penalty of five hundred twenty-five thousand dollars. AK Steel
anticipates that the cost associated with this matter will be approximately $2.8
in capital costs and $0.85 in expenses. The Company has accrued the
$0.85 for anticipated expenses associated with this matter.
In
addition to the foregoing matters, AK Steel is or may be involved in proceedings
with various regulatory authorities that may require AK Steel to pay fines,
comply with more rigorous standards or other requirements or incur capital and
operating expenses for environmental compliance. Management believes
that the ultimate disposition of the foregoing proceedings will not have,
individually or in the aggregate, a material adverse effect on the Company’s
consolidated financial condition, results of operations or cash
flows.
Legal Contingencies
: In
addition to these environmental matters, and the items discussed below, there
are various claims pending against AK Steel and its subsidiaries involving
product liability, commercial, employee benefits and other matters arising in
the ordinary course of business. Unless otherwise noted, in
management’s opinion, the ultimate liability resulting from all of these claims,
individually and in the aggregate, should not have a material adverse effect on
the Company’s consolidated financial position, results of operations or cash
flows.
As
previously reported, on June 29, 2000, the United States filed a complaint on
behalf of the EPA against AK Steel in the U.S. District Court for the Southern
District of Ohio (the “Court”), Case No. C-1-00530, for alleged violations of
the Clean Air Act, the Clean Water Act and the RCRA at the Middletown
Works. Subsequently, the State of Ohio, the Sierra Club and the
National Resources Defense Council intervened. On April 3, 2006, a
proposed Consent Decree in Partial Resolution of Pending Claims (the “Consent
Decree”), executed by all parties, was lodged with the Court. After a
30-day notice period, the Consent Decree was entered by the Court on May 15,
2006. Under the Consent Decree, the Company will implement certain
RCRA corrective action interim measures to address polychlorinated biphenyls
(“PCBs”) in sediments and soils relating to Dicks Creek and certain other
specified surface waters, adjacent floodplain areas, and other previously
identified geographic areas. The Company also will undertake a comprehensive
RCRA facility investigation at its Middletown Works and, as appropriate,
complete a corrective measures study. Under the Consent Decree, the Company paid
a civil penalty of $0.46 and agreed to perform a supplemental environmental
project to remove ozone-depleting refrigerants from certain equipment at an
estimated cost of $0.85. The Company has completed performance of the
supplemental environmental project, and the project has been approved by the
EPA. The Company anticipates that the cost of the remaining remedial
work required under the Consent Decree will be approximately $18.0, consisting
of approximately $3.2 in capital investments and $14.8 in
expenses. The Company has accrued the $14.8 for anticipated expenses
associated with this project. Additional work will be performed to more
definitively delineate the soils and sediments which will need to be removed
under the Consent Decree. Until that process is complete, the Company
cannot reliably determine whether the actual cost of the work required under the
Consent Decree will exceed the amount presently accrued. If there are
additional costs, the Company does not anticipate at this time that they will
have a material financial impact on the Company. The Company cannot
reliably estimate at this time the timeframe during which the accrued or
potential additional costs would be incurred.
Since
1990, AK Steel (or its predecessor, Armco Inc.) has been named as a defendant in
numerous lawsuits alleging personal injury as a result of exposure to
asbestos. As of December 31, 2008, there were approximately 437 such
lawsuits pending against AK Steel. The great majority of these
lawsuits have been filed on behalf of people who claim to have been exposed to
asbestos while visiting the premises of a current or former AK Steel
facility. Approximately 40% of these premises suits arise out of
claims of exposure at a facility in Houston, Texas that has been closed since
1984. When such an asbestos lawsuit initially is filed, the complaint
typically does not include a specific dollar claim for damages. Only
137 of the 437 cases pending at December 31, 2008 in which AK Steel is a
defendant include specific dollar claims for damages in the filed
complaints. Those 137 cases involve a total of 2,534 plaintiffs and
17,488 defendants. In these cases, the complaint typically includes a
monetary claim for compensatory damages and a separate monetary claim in an
equal amount for punitive damages, and does not attempt to allocate the total
monetary claim among the various defendants. For example, 121 of the
137 cases involve claims of $0.2 or less, eight involve claims of between $0.2
and $5.0, five involve claims of between $5.0 and $15.0, and three involve
claims of $20.0. In each case, the amount described is per plaintiff
against all of the defendants, collectively. Thus, it usually is not
possible at the outset of a case to determine the specific dollar amount of a
claim against AK Steel. In fact, it usually is not even possible at
the outset to determine which of the plaintiffs actually will pursue a claim
against AK Steel. Typically, that can only be determined through
written interrogatories or other discovery after a case has been
filed. Thus, in a case involving multiple plaintiffs and multiple
defendants, AK Steel initially only accounts for the lawsuit as one claim
against it. After AK Steel has determined through discovery whether a
particular plaintiff will pursue a claim against it, it makes an appropriate
adjustment to statistically account for that specific claim. It has
been AK Steel’s experience to date that only a small percentage of asbestos
plaintiffs ultimately identify AK Steel as a target defendant from whom they
actually seek damages and most of these claims ultimately are either dismissed
or settled for a small fraction of the damages initially claimed. Set
forth below is a chart showing the number of new claims filed (accounted for as
described above), the number of pending claims disposed of (i.e. settled or
otherwise dismissed), and the approximate net amount of dollars paid on behalf
of AK Steel in settlement of asbestos-related claims in 2008 and
2007.
|
|
2008
|
|
|
2007
|
|
New
Claims Filed
|
|
|
41
|
|
|
|
71
|
|
Claims
Disposed Of
|
|
|
39
|
|
|
|
138
|
|
Total
Amount Paid in Settlements
|
|
$
|
0.7
|
|
|
$
|
0.4
|
|
Since
the onset of asbestos claims against AK Steel in 1990, five asbestos claims
against it have proceeded to trial in four separate cases. All five
concluded with a verdict in favor of AK Steel. AK Steel intends to
continue its practice of vigorously defending the asbestos claims asserted
against it. Based upon its present knowledge, and the factors set
forth above, AK Steel believes it is unlikely that the resolution in the
aggregate of the asbestos claims against AK Steel
will
have a materially adverse effect on the Company’s consolidated results of
operations, cash flows or financial condition. However, predictions
as to the outcome of pending litigation, particularly claims alleging asbestos
exposure, are subject to substantial uncertainties. These
uncertainties include (1) the significantly variable rate at which new claims
may be filed, (2) the impact of bankruptcies of other companies currently or
historically defending asbestos claims, (3) the uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case to case, (4)
the type and severity of the disease alleged to be suffered by each claimant,
and (5) the potential for enactment of legislation affecting asbestos
litigation.
As
previously reported, on January 2, 2002, John D. West, a former employee, filed
a purported class action in the United States District Court for the Southern
District of Ohio against the AK Steel Corporation Retirement Accumulation
Pension Plan, or AK RAPP, and the AK Steel Corporation Benefit Plans
Administrative Committee. Mr. West claims that the method used under
the AK RAPP to determine lump sum distributions does not comply with the
Employment Retirement Income Security Act of 1974 (“ERISA”) and resulted in
underpayment of benefits to him and the other class members. The
District Court ruled in favor of the plaintiff class and on March 29, 2006
entered an amended final judgment against the defendants in the amount of $37.6
in damages and $7.3 in prejudgment interest, for a total of approximately $44.9,
with post judgment interest accruing at the rate of 4.7% per annum until
paid. The defendants appealed to the United States Court of Appeals
for the Sixth Circuit. On April 20, 2007, a panel of the Court of
Appeals issued an opinion in which it affirmed the decision of the District
Court. On November 16, 2007, defendants filed a petition for
certiorari with the Supreme Court of the United States. On January
12, 2009, the Supreme Court rejected the defendants’ petition, leaving intact
the decisions of the courts below. On January 29, 2009, plaintiffs
filed a motion for an order to determine the manner of satisfying the
judgment. On March 25, 2009, the Court entered an agreed order
granting that motion. Pursuant to that agreed order, on April 1, 2009
defendants paid the sum of approximately $51.5 into a court-approved interest
bearing account. The funds used to make this payment were from the AK Steel
Master Pension Trust. The payment ends defendants’ liability to the class
members pursuant to the judgment in this matter, including with respect to
interest which accrues on the judgment. It does not resolve defendants’
liability with respect to a claim for attorneys’ fees by plaintiffs’
counsel. On April 2, 2009 plaintiffs’ counsel filed two motions
seeking awards of attorneys’ fees. The first motion seeks a statutory
award of fees in the approximate amount of $1.9 which would be paid by
defendants if the motion is granted. The second motion seeks a
separate award of fees in the amount of 28% of the funds already paid into court
which would be paid out of those funds if the motion is granted. On
May 18, 2009 and May 19, 2009, the defendants filed separate memoranda in
opposition to each of these motions. On August 31, 2009, the court
granted the motion for a statutory award of fees, awarding fees in the
approximate amount of $1.4. The court denied the motion that sought a
separate award of fees in the amount of 28% of the funds already paid into the
court. On September 15, 2009, plaintiffs’ counsel filed a motion to
amend the order granting an award of attorneys’ fees. This motion
remains pending.
On
October 20, 2005, two individuals filed a purported class action against AK
Steel and the AK Steel Corporation Benefit Plans Administrative Committee in the
United States District Court for the Southern District of Ohio, Case No.
1:05-cv-681. The complaint alleges that the defendants incorrectly calculated
the amount of surviving spouse benefits due to be paid to the plaintiffs under
the applicable pension plan. On December 19, 2005, the defendants
filed their answer to the complaint. The parties subsequently filed
cross-motions for summary judgment on the issue of whether the applicable plan
language had been properly interpreted. On September 28, 2007, the
United States Magistrate Judge assigned to the case issued a Report and
Recommendation in which he recommended that the plaintiffs’ motion for partial
summary judgment be granted and that the defendants’ motion be
denied. The defendants filed timely objections to the Magistrate’s
Report and Recommendation. On March 31, 2008, the court issued
an order adopting the Magistrate’s recommendation and granting partial summary
judgment to the plaintiffs on the issue of plan interpretation. The
plaintiffs’ motion for class certification was granted by the Court on October
27, 2008. The case is proceeding with respect to discovery on the
issue of damages. No trial date has been set. The
defendants intend to contest this matter vigorously.
In
September and October, 2008, several companies filed purported class actions in
the United States District Court for the Northern District of Illinois, against
nine steel manufacturers, including AK Holding. The Case Nos. for
these actions are 08CV5214, 08CV5371, 08CV5468, 08CV5633, 08CV5700, 08CV5942 and
08CV6197. The plaintiffs are companies which claim to have purchased
steel products, directly or indirectly, from one or more of the defendants and
they purport to file the actions on behalf of all persons and entities who
purchased steel products for delivery or pickup in the United States from any of
the named defendants at any time from at least as early as January 2005 to the
present. The complaints allege that the defendant steel producers have conspired
to restrict output and to fix, raise, stabilize and maintain artificially high
prices with respect to steel products in the United States. On
January 2, 2009, the defendants filed motions to dismiss all of the claims set
forth in the Complaints. On June 12, 2009, the court
issued
an Order denying the defendants’ motions to dismiss. Discovery has
not yet commenced and no trial date has been set. AK Holding intends
to contest this matter vigorously.
On
January 28, 2009, the City of Monroe, Ohio (“Monroe”) filed an action in the
United States District Court for the Southern District of Ohio against
Middletown Coke Company, Inc. and SunCoke Energy, Inc., Case No.
1-09-CV-63. The complaint purports to be filed pursuant to
Section 304(a)(3) of the Clean Air Act (“CAA”), 42 U.S.C. § 7604(a)(3), and
seeks injunctive relief, civil penalties, attorney fees, and other relief to
prevent the construction of a new cokemaking facility on property adjacent to
the Company’s Middletown Works. The coke produced by the
facility would be used by the Middletown Works. See discussion of
SunCoke contract in Note 12. The Complaint alleges that the new
facility will be a stationary source of air pollution without a permit issued
under the New Source Review program of the CAA, including its Prevention of
Significant Deterioration and Nonattainment New Source Review
requirements. On February 27, 2009, the defendants filed a motion to
dismiss, or in the alternative to stay, the action pending final resolution of
appeals to the Ohio Environmental Review Appeals Commission (“ERAC”) by Monroe
and others of a Permit to Install the cokemaking facility issued by the Ohio
Environmental Protection Agency, Case Nos. 096256, 096265 and 096268-096285,
consolidated. In March 2009, AK Steel became a party to both the
pending federal action and the pending appeals to the Ohio ERAC for the purpose
of supporting the issuance of the permit to install and opposing the efforts by
Monroe and others to prevent construction of the facility. On August
20, 2009, the Court in the federal action granted defendants’ motion to
dismiss. On September 16, 2009, Monroe filed a Notice of Appeal to
the United States Court of Appeals for the Sixth Circuit from the order
dismissing the federal action. The ERAC appeals also remain
pending. A final hearing had been scheduled for February 1, 2010 in
the ERAC appeals. AK Steel intends to contest both matters
vigorously.
On
June 1, 2009 the Chinese Ministry of Commerce (“MOFCOM”) initiated antidumping
and countervailing duty investigations of imports of grain oriented electrical
steel (“GOES”) from Russia and the United States. China initiated the
investigations based on a petition filed by two Chinese
steelmakers. These two steelmakers allege that AK Steel and Allegheny
Technologies Inc. of the United States and Novolipetsk Steel of Russia exported
GOES to China at less than fair value, and that the production of GOES in the
United States has been subsidized by the government. Under the rules
of the World Trade Organization, such investigations normally take twelve months
to complete and must be completed within eighteen months. If the
Chinese authorities find dumping or subsidization, they may impose additional
duties on future imports of GOES from Russia and/or the United States to
China. The duties would not apply to past imports. AK
Steel intends to fully cooperate with MOFCOM in the investigations, but plans to
vigorously contest the trade complaints filed by the two Chinese steel
companies.
On
June 18, 2009, three former hourly members of the Butler Armco Independent Union
filed a purported class action against AK Steel in the United States District
Court for the Southern District of Ohio, Case No. 1-09CV00423 (the “2009 Retiree
Action”), alleging that AK Steel did not have a right to make changes to their
healthcare benefits. On June 29, 2009, the plaintiffs filed an
amended complaint. The named plaintiffs in the 2009 Retiree Action
seek, among other things, injunctive relief for themselves and the other members
of a proposed class, including an order retroactively rescinding certain changes
to retiree healthcare benefits negotiated by AK Steel with its
unions. The proposed class the plaintiffs seek to represent would
consist of all union-represented retirees of AK Steel other than those retirees
who were included in the class covered by the Middletown Works Retiree
Healthcare Benefits Litigation described immediately below. On August
21, 2009, the Company filed an answer to the amended complaint and filed a
motion for summary judgment which, if granted in full, would end the
litigation. On September 14, 2009, plaintiffs filed a motion for
partial summary judgment and responded to defendant’s
motion. Discovery has commenced, but no trial date has yet been
set. AK Steel intends to contest this matter
vigorously.
On
August 26, 2009, Consolidated Coal Company (“Consolidated”) filed an action
against AK Steel and Neville Coke LLC (“Neville”) in the Court of Common Pleas
of Allegheny County, Pennsylvania, Case No. GD-09-14830. The
complaint alleges that Consolidated and Neville entered into a contract whereby
Consolidated would supply approximately 80,000 tons of metallurgical coal for
use by Neville in its coke making operations. Consolidated asserts
that Neville breached the alleged contract when it refused to purchase coal from
Consolidated. The complaint also alleges that AK Steel tortiously
interfered with the purported contractual and business relationship between
Consolidated and Neville. Consolidated seeks monetary damages from AK
Steel in an amount in excess of $30.0 and monetary damages from Neville in an
amount in excess of $20.0. AK Steel tentatively has agreed to
indemnify and defend Neville in this action pursuant to the terms of a
contractual agreement between AK Steel and Neville. AK Steel is still
investigating the facts underlying this matter, however, and has reserved its
right to change its position should facts establish that it does not have an
obligation to indemnify or defend Neville. On October 20, 2009, AK
Steel filed Preliminary Objections to Plaintiff’s Complaint on behalf of itself
and Neville, seeking to dismiss the
action. Discovery
has not yet commenced and no trial date has yet been set. AK
Steel intends to contest this matter vigorously.
Middletown Works Retiree
Healthcare Benefits Litigation
On
June 1, 2006, AK Steel notified approximately 4,600 of its current retirees (or
their surviving spouses) who formerly were hourly and salaried members of the
Armco Employees Independent Federation (“AEIF”) that AK Steel was terminating
their existing healthcare insurance benefits plan and implementing a new plan
more consistent with current steel industry practices which would require the
retirees to contribute to the cost of their healthcare benefits, effective
October 1, 2006. On July 18, 2006, a group of nine former hourly and
salaried members of the AEIF filed a purported class action (the “Retiree
Action”) in the United States District Court for the Southern District of Ohio
(the “Court”), Case No. 1-06CV0468, alleging that AK Steel did not have a right
to make changes to their healthcare benefits. The named plaintiffs in the
Retiree Action sought, among other things, injunctive relief (including an order
retroactively rescinding the changes) for themselves and the other members of
the class. On August 4, 2006, the plaintiffs in the Retiree Action
filed a motion for a preliminary injunction seeking to prevent AK Steel from
implementing the previously announced changes to healthcare benefits with
respect to the AEIF-represented hourly employees. AK Steel opposed
that motion, but on September 22, 2006 the trial court issued an order granting
the motion. On October 8, 2007, the Company announced that it had
reached a tentative settlement (the “Settlement”) of the claims of the retirees
in the Retiree Action.
The
Settlement was subject to approval by the Court. On October 25, 2007,
the parties filed a joint motion asking the Court to approve the
Settlement. On November 1, 2007, an order was issued by the Court
granting the plaintiffs’ motion for class certification. On November 2, 2007,
the Court issued an order giving preliminary approval of the Settlement and
scheduled a hearing (the “Fairness Hearing”) on final approval of the Settlement
beginning on February 12, 2008. In November 2007, notice of the
Settlement was sent to all retirees or their surviving spouses who would be
covered by the terms of the Settlement (collectively, the “Class
Members”). Between the time the original notification of the benefit
changes was sent on June 1, 2006 and the time that membership in the class was
determined, the number of Class Members had increased to approximately
4,870. With dependents of the Class Members, the total number of
persons covered by the Settlement is approximately 8,300.
The
Class Members were given the opportunity to object to the Settlement in writing
and, if they so objected in writing, to oppose it orally at the Fairness
Hearing. A group of retirees did file objections. The
Fairness Hearing was conducted on February 12-13, 2008. The objecting
retirees were represented by counsel at the Fairness Hearing and did oppose the
Settlement. On February 21, 2008, the Court issued a written decision
approving the Settlement. The final judgment (the “Judgment”)
formally approving the Settlement was entered on February 29,
2008. The Settlement became effective on that date. The
Class Members who opposed the Settlement filed appeals from the Judgment to the
United States Court of Appeals for the Sixth Circuit, Case Nos. 08-3166 and
08-3354. On April 7, 2009, the Court of Appeals issued an opinion in
which it affirmed the decision of the trial court to approve the
Settlement. Under the applicable rules, the Class Members who opposed
the Settlement had up to ninety days to seek review of that
opinion. No such review was sought and the Settlement thus became
final on July 6, 2009.
Under
terms of the Settlement, AK Steel has transferred to a Voluntary Employees
Beneficiary Association trust (the “VEBA Trust”) all postretirement benefit
obligations (the “OPEB Obligations”) owed to the Class Members under the
Company’s applicable health and welfare plans and will have no further liability
for any claims incurred by the Class Members after the effective date of the
Settlement relating to their OPEB Obligations. The VEBA Trust will be
utilized to fund the future OPEB Obligations to the Class
Members. Under the terms of the Settlement, AK Steel was obligated to
initially fund the VEBA Trust with a contribution of $468.0 in cash within two
business days of the effective date of the Settlement. AK Steel made
this contribution on March 4, 2008. AK Steel further is obligated
under the Settlement to make three subsequent annual cash contributions of $65.0
each, for a total contribution of $663.0. On March 3, 2009, AK Steel
made the first of these three annual cash contribution of $65.0, leaving AK
Steel obligated to make two more annual cash contributions of $65.0
each.
Because
the appeal was pending at the time of this first annual payment, that payment
was made into an escrow account. As noted above, the appeal now has
been resolved and the Settlement is final. Thus, the funds which were
being held in an escrow account have been transferred to the VEBA
Trust. The Company’s only remaining liability with respect to the
OPEB Obligations to the Class Members will be to make the remaining two annual
cash contributions of $65.0 each to the VEBA Trust that have not yet been
paid.
At
the time of the Fairness Hearing, the Company’s total OPEB liability for all of
its retirees was approximately $2.0 billion. Of that amount,
approximately $1.0 billion was attributable to the Class
Members. Immediately following the Judgment approving the Settlement,
the Company’s total OPEB liability was reduced by approximately
$339.1. This reduction in the Company’s OPEB liability is being
treated as a negative plan amendment and amortized as a reduction to net
periodic benefit cost over approximately eleven years. This negative
plan amendment will result in an annual net periodic benefit cost reduction of
approximately $30.0 in addition to the lower interest costs associated with the
lower OPEB liability. Upon payment on March 4, 2008 of the initial
$468.0 contribution by AK Steel to the VEBA Trust in accordance with the terms
of the Settlement, the Company’s total OPEB liability was reduced further to
approximately $1.1 billion. The Company’s total OPEB liability was
further reduced by the $65.0 payment made by the Company on March 3,
2009. The Company’s total OPEB liability will be reduced further by
the amount of each subsequent annual $65.0 payment. In total, it is
expected that the $663.0 Settlement with the Class Members ultimately will
reduce the Company’s total OPEB liability by approximately $1.0
billion.
For
accounting purposes, a settlement of the Company’s OPEB Obligations related to
the Class Members will be deemed to have occurred when AK Steel makes the last
$65.0 payment called for under the Settlement.
NOTE
10 – Fair Value Measurements
|
The
Company adopted provisions within FASB Accounting Standards Codification Topic
820 (formerly Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements”), effective January 1, 2008. Under this standard, fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (
i.e.,
the “exit price”) in an
orderly transaction between market participants at the measurement
date.
In
determining fair value, the Company uses various valuation
approaches. The hierarchy of those valuation approaches is broken
down into three levels based on the reliability of inputs as
follows:
Level
1 inputs are quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement
date. An active market for the asset or liability is a market in
which transactions for the asset or liability occur with sufficient frequency
and volume to provide pricing information on an ongoing basis. The
valuation under this approach does not entail a significant degree of
judgment.
Level
2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar assets
or liabilities in active markets, inputs other than quoted prices that are
observable for the asset or liability, (
e.g.,
interest rates and
yield curves observable at commonly quoted intervals or current market) and
contractual prices for the underlying financial instrument, as well as other
relevant economic measures.
Level
3 inputs are unobservable inputs for the asset or
liability. Unobservable inputs shall be used to measure fair value to
the extent that observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
The
following fair value table presents information about the Company’s assets and
liabilities measured at fair value on a recurring basis as of September 30,
2009, and December 31, 2008. There were no valuations using Level 3
inputs.
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale investments–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities (1)
|
|
$
|
26.4
|
|
|
$
|
—
|
|
|
$
|
26.4
|
|
|
$
|
23.0
|
|
|
$
|
—
|
|
|
$
|
23.0
|
|
Commodity
hedge contracts (2)
|
|
|
—
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
—
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Assets
measured at fair value
|
|
$
|
26.4
|
|
|
$
|
2.7
|
|
|
$
|
29.1
|
|
|
$
|
23.0
|
|
|
$
|
0.6
|
|
|
$
|
23.6
|
|
Liabilities
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
Commodity
hedge contracts
|
|
|
—
|
|
|
|
24.0
|
|
|
|
24.0
|
|
|
|
—
|
|
|
|
52.2
|
|
|
|
52.2
|
|
Liabilities
measured at fair value
|
|
$
|
—
|
|
|
$
|
24.8
|
|
|
$
|
24.8
|
|
|
$
|
—
|
|
|
$
|
53.5
|
|
|
$
|
53.5
|
|
(1)
Held in a trust and included in Other investments on the Condensed
Consolidated Balance Sheets.
|
(2)
Included in Other current assets or Other non-current assets on the
Condensed Consolidated Balance Sheets.
|
(3)
Included in Accrued liabilities or Other non-current liabilities on the
Condensed Consolidated Balance
Sheets.
|
NOTE
11 – Investments in an Unrealized Loss
Position
|
The
Company has investments for a nonqualified pension plan with fair values at
September 30, 2009 less than cost. The investments are in four mutual
funds representing the S&P 500 index, the Russell 1000 Value index, the
Russell 1000 Growth index, and a Europe, Australasia, Far East, or “EAFE”
index. The funds suffered significant declines which started in the
second half of 2008 and continued into the first few months of 2009, consistent
with the significant downturn in the equity markets that occurred during that
period. The funds did begin to recover some of the losses beginning in March and
continued to improve through the third quarter of 2009. The Company
evaluated past periods of market declines and the related periods of
recovery. The investments in index funds represent broad asset
categories designed to track macro economic conditions. The Company
believes that the current macro economic conditions are temporary and that its
investments in the above-referenced funds will recover to levels higher than
cost within a reasonable period of time. The Company has no short
term cash requirements for these investments and has no intentions of
liquidating them before a period of time sufficient for the markets to
recover. Based on this market evaluation and the Company’s ability
and intent to hold these investments for a reasonable period of time sufficient
for a recovery of fair value, the Company does not consider those investments to
be other than temporarily impaired at September 30, 2009. The Company
will continue to monitor the positions. It is possible that a portion
of the unrealized loss could be recognized in the future if the market
experiences declines over current levels.
INVESTMENTS
IN AN UNREALIZED LOSS POSITION
|
|
At
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Position
|
|
|
Loss
Position
|
|
|
Loss
Position
|
|
|
|
Less
Than 12 Months
|
|
|
Greater
Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Equity Securities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
18.7
|
|
|
$
|
3.6
|
|
|
$
|
18.7
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
12 – Variable Interest Entity
|
In
the first quarter of 2008, the Company’s Board of Directors approved a 20-year
supply contract with Middletown Coke Company, Inc. (“Middletown Coke”), an
affiliate of SunCoke Energy, Inc. (“SunCoke”), to provide the Company with
metallurgical-grade coke and electrical power. The coke and power
will come from a new facility to be constructed, owned and operated by
Middletown Coke adjacent to the Company’s Middletown Works. The
proposed new facility is expected to produce about 550,000 tons of coke and 50
megawatts of electrical power annually. The anticipated cost to build
the facility is approximately $340.0. Under the agreement, the
Company will purchase all of the coke and electrical power generated from the
new plant for at least 20 years, helping the Company achieve its goal of more
fully integrating its raw material supply and providing about 25% of the power
requirements of Middletown Works. The agreement is contingent upon,
among other conditions, Middletown Coke receiving all
necessary
local, state and federal approvals and permits, as well as available economic
incentives, to build and operate the proposed new facility. See
discussion of Monroe litigation in Note 9. There are no plans to idle
any existing cokemaking capacity if the proposed SunCoke project is
consummated. Even though the Company has no ownership interest in
Middletown Coke, the expected production from the facility is completely
committed to the Company. As such, Middletown Coke is deemed to be a
variable interest entity and the financial results of Middletown Coke are
required to be consolidated with the results of the Company as directed by
guidance within FASB Accounting Standards Codification Topic 810 (formerly FASB
Interpretation No. 46 (Revised), Consolidation of Variable Interest
Entities). At September 30, 2009, Middletown Coke had added
approximately $69.8 in assets net of current liabilities and $70.8 in other
liabilities to the Company’s condensed consolidated balance sheets.
NOTE
13 –Disclosures About Derivative Instruments and Hedging
Activities
|
In
the ordinary course of business, the Company is exposed to market risk for price
fluctuations of raw materials and energy sources. The Company is also
subject to risks of exchange rate fluctuations on a portion of inter-company
receivables that are denominated in foreign currencies. The Company
occasionally uses forward currency contracts to manage exposures to certain of
these currency price fluctuations. As of September 30, 2009, the
Company had entered into forward currency contracts in the amount of 14,000,000
euros.
The
Company uses cash settled commodity price swaps and/or options to hedge the
market risk associated with the purchase of certain of its raw materials and
energy requirements. Such hedges routinely are used with respect to a
portion of the Company’s natural gas and nickel requirements and are sometimes
used with respect to its aluminum and zinc requirements. The
Company’s hedging strategy is designed to protect it against normal
volatility. However, abnormal price increases in any of these
commodity markets could negatively impact operating costs. The
effective portion of the gains and losses from the use of these instruments for
natural gas are deferred in accumulated other comprehensive income on the
condensed consolidated balance sheets and recognized into cost of products sold
in the same period as the underlying transaction. Gains and losses on
the derivative representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in current
earnings. All other commodity price swaps and options are marked to
market and recognized into cost of products sold with the offset recognized as
other current assets or other accrued liabilities.
Accounting
guidance requires companies to recognize all derivative instruments as either
assets or liabilities at fair value in the statement of financial
position. In accordance with FASB Accounting Standards Codification
(“ASC”) Topic 815 the Company designates commodity price swaps and options as
cash flow hedges of forecasted purchases of raw materials and energy
sources.
Existing
commodity hedges at September 30, 2009 have settlement dates ranging from
October 2009 to December 2010. The amount of the existing losses
expected to be reclassified into earnings with the next twelve months is
$19.5.
As
of September 30, 2009 the Company had the following outstanding commodity price
swaps and/or options that were entered into to hedge forecasted
purchases.
Commodity
|
|
Amount
|
|
Unit
|
Nickel
|
|
|
692,160
|
|
lbs
|
Zinc
|
|
|
1,500,000
|
|
lbs
|
Natural
Gas
|
|
|
8,150,000
|
|
MMBTUs
|
Fair Value
of Derivative Instruments in the Condensed Consolidated Balance
Sheets
|
|
as
of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Asset
Fair
Value
|
|
|
Liability
Fair Value
|
|
Derivatives designated as hedging
instruments
|
|
|
|
|
|
|
Commodity
contracts
|
Accrued
liabilities
|
|
|
—
|
|
|
$
|
23.1
|
|
Commodity
contracts
|
Other
non-current liabilities
|
|
|
—
|
|
|
|
0.9
|
|
Total
derivatives designated as hedging instruments
|
|
|
—
|
|
|
$
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
Accrued
liabilities
|
|
|
—
|
|
|
$
|
0.9
|
|
Commodity
contracts
|
Other
current assets
|
|
$
|
2.3
|
|
|
|
—
|
|
Commodity
contracts
|
Other
non-current assets
|
|
|
0.4
|
|
|
|
—
|
|
Total
derivatives not designated as hedging instruments
|
|
$
|
2.7
|
|
|
$
|
0.9
|
|
Total
derivatives
|
|
|
$
|
2.7
|
|
|
$
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
Table
reflects derivative classification under ASC Topic 815
|
|
The
Effect of Derivative Instruments on the Condensed Consolidated Statement
of Operations
|
|
for
the three and nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss)
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30, 2009
|
|
|
September
30, 2009
|
|
DERIVATIVES
IN ASC Topic 815 CASH FLOW HEDGING RELATIONSHIPS:
|
|
|
|
|
|
|
Commodity Contracts
|
|
|
|
|
|
|
Amount
recognized in Other Comprehensive Income (“OCI”)
|
|
$
|
2.7
|
|
|
$
|
(19.2
|
)
|
Amount
reclassified from accumulated OCI into cost of products sold (effective
portion)
|
|
|
(13.3
|
)
|
|
|
(27.0
|
)
|
Amount
recognized in cost of products sold (ineffective portion and amount
excluded from effectiveness testing)
|
|
|
(1.4
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
DERIVATIVES
NOT DESIGNATED AS HEDGING INSTRUMENTS UNDER ASC Topic 815:
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
Amount
recognized in other income, net
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
|
|
|
|
|
|
|
|
Amount
recognized in cost of products sold
|
|
|
0.8
|
|
|
|
3.4
|
|
NOTE
14 – Subsequent Events
|
There
were no reportable subsequent events or transactions that occurred in the time
period after the September 30, 2009 balance sheet date and prior to November 3,
2009, which is the date of this Form 10-Q filing with the Securities and
Exchange Commission.
NOTE
15 – New Accounting Pronouncements
|
Certain
amounts in prior year financial statements have been reclassified to reflect the
reporting requirements of FASB Accounting Standards Codification Topic 810
(formerly Financial Accounting Standard No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”).
Earnings
per share have been restated in prior periods in conformity with ASC Topic 260
(formerly FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share Based Payment Transactions Are Participating
Securities”).
In
June 2009, the FASB issued ASC Topic 810 (formerly Statement of Financial
Accounting Standards No. 167, “Amendments to FASB Interpretation No.
46(R)”). Topic 810 requires an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This
Statement is effective for fiscal years beginning on or after November 15,
2009. The Company believes that this guidance does not alter the
accounting treatment previously accorded to the consolidation of Middletown
Coke.
Effective
with the Company’s Annual Report on Form 10-K for the year ending December 31,
2009, the Company will amend its disclosure relating to postretirement benefit
plan assets in compliance with FASB Accounting Standards Codification Topic 715
(formerly FASB 132(R)-1, “Employers Disclosures about Postretirement Benefit
Plan Assets”). The disclosure will include discussion
on:
●
investment
policies and strategies;
●
categories
of plan assets;
●
fair
value measurements of plan assets; and
●
significant
concentrations of risk.
No
other new accounting pronouncement issued or effective during the fiscal year
has had or is expected to have a material impact on the Company’s consolidated
financial statements.
In
August 2009, the Board approved an agreement with Haverhill North Coke
Company,
an affiliate
of SunCoke, to provide the Company with 550,000 tons of coke annually from
SunCoke’s Haverhill facility located in southern Ohio. The agreement
has a 12-year term with two five-year renewal options. Under the
agreement, the Company also will purchase a portion of the electricity
co-generated from the heat recovery coke battery.
NOTE
17 – Supplemental Guarantor
Information
|
AK
Holding, along with AK Tube, LLC and AK Steel Investments Inc. (the “Guarantor
Subsidiaries”), fully and unconditionally, jointly and severally, guarantee the
payment of interest, principal and premium, if any, on AK Steel’s 7 3/4% senior
notes due in 2012. AK Tube, LLC is owned 100% by AKS Investments Inc.
and AKS Investments Inc. is 100% owned by AK Steel. AK Steel is 100%
owned by AK Holding. The Company has determined that full financial
statements and other disclosures concerning AK Holding and the Guarantor
Subsidiaries are not required to be presented. The presentation of
the supplemental guarantor information reflects all investments in subsidiaries
under the equity method. Net income (loss) of the subsidiaries
accounted for under the equity method is therefore reflected in their respective
parents’ investment accounts. The principal elimination entries
eliminate investments in subsidiaries and inter-company balances and
transactions. The following supplemental condensed consolidating
financial statements present information about AK Holding, AK Steel, the
Guarantor Subsidiaries and the other subsidiaries. The other
subsidiaries are not guarantors of the senior notes.
Condensed
Statements of Operations
|
|
For
the Three Months Ended September 30, 2009
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
Net
sales
|
|
$
|
—
|
|
|
$
|
921.4
|
|
|
$
|
35.1
|
|
|
$
|
110.0
|
|
|
$
|
(25.4
|
)
|
|
$
|
1,041.1
|
|
Cost
of products sold
|
|
|
0.1
|
|
|
|
816.0
|
|
|
|
30.5
|
|
|
|
100.5
|
|
|
|
(17.9
|
)
|
|
|
929.2
|
|
Selling
and administrative expenses
|
|
|
0.7
|
|
|
|
46.5
|
|
|
|
2.1
|
|
|
|
3.9
|
|
|
|
(7.6
|
)
|
|
|
45.6
|
|
Depreciation
|
|
|
—
|
|
|
|
49.2
|
|
|
|
1.7
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
51.0
|
|
Total
operating costs
|
|
|
0.8
|
|
|
|
911.7
|
|
|
|
34.3
|
|
|
|
104.5
|
|
|
|
(25.5
|
)
|
|
|
1,025.8
|
|
Operating
profit (loss)
|
|
|
(0.8
|
)
|
|
|
9.7
|
|
|
|
0.8
|
|
|
|
5.5
|
|
|
|
0.1
|
|
|
|
15.3
|
|
Interest
expense
|
|
|
—
|
|
|
|
9.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9.0
|
|
Other
income (expense)
|
|
|
—
|
|
|
|
(1.2
|
)
|
|
|
—
|
|
|
|
9.1
|
|
|
|
(5.0
|
)
|
|
|
2.9
|
|
Income
(loss) before income taxes
|
|
|
(0.8
|
)
|
|
|
(0.5
|
)
|
|
|
0.8
|
|
|
|
14.6
|
|
|
|
(4.9
|
)
|
|
|
9.2
|
|
Income
tax provision (benefit)
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
|
|
0.3
|
|
|
|
5.3
|
|
|
|
(0.9
|
)
|
|
|
3.5
|
|
Income
(loss) from continuing operations
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
9.3
|
|
|
|
(4.0
|
)
|
|
|
5.7
|
|
Less:
income (loss) attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
(0.5
|
)
|
Income
(loss) attributable to AK Holding
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
9.8
|
|
|
|
(4.0
|
)
|
|
|
6.2
|
|
Equity
in net income of subsidiaries
|
|
|
6.7
|
|
|
|
6.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13.0
|
)
|
|
|
—
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
6.2
|
|
|
$
|
6.7
|
|
|
$
|
0.5
|
|
|
$
|
9.8
|
|
|
$
|
(17.0
|
)
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Operations
|
|
For
the Three Months Ended September 30, 2008
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
Net
sales
|
|
$
|
—
|
|
|
$
|
1,980.8
|
|
|
$
|
57.3
|
|
|
$
|
166.5
|
|
|
$
|
(47.0
|
)
|
|
$
|
2,157.6
|
|
Cost
of products sold
|
|
|
—
|
|
|
|
1,574.0
|
|
|
|
48.0
|
|
|
|
138.9
|
|
|
|
(20.0
|
)
|
|
|
1,740.9
|
|
Selling
and administrative expenses
|
|
|
0.9
|
|
|
|
64.3
|
|
|
|
3.0
|
|
|
|
4.7
|
|
|
|
(16.3
|
)
|
|
|
56.6
|
|
Depreciation
|
|
|
—
|
|
|
|
48.8
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
50.5
|
|
Total
operating costs
|
|
|
0.9
|
|
|
|
1,687.1
|
|
|
|
52.6
|
|
|
|
143.7
|
|
|
|
(36.3
|
)
|
|
|
1,848.0
|
|
Operating
profit (loss)
|
|
|
(0.9
|
)
|
|
|
293.7
|
|
|
|
4.7
|
|
|
|
22.8
|
|
|
|
(10.7
|
)
|
|
|
309.6
|
|
Interest
expense
|
|
|
—
|
|
|
|
11.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11.6
|
|
Other
income (expense)
|
|
|
—
|
|
|
|
(2.3
|
)
|
|
|
2.0
|
|
|
|
5.2
|
|
|
|
(4.0
|
)
|
|
|
0.9
|
|
Income
(loss) before income taxes
|
|
|
(0.9
|
)
|
|
|
279.8
|
|
|
|
6.7
|
|
|
|
28.0
|
|
|
|
(14.7
|
)
|
|
|
298.9
|
|
Income
tax provision (benefit)
|
|
|
(0.3
|
)
|
|
|
77.5
|
|
|
|
2.4
|
|
|
|
9.5
|
|
|
|
21.3
|
|
|
|
110.4
|
|
Income
(loss) from continuing operations
|
|
|
(0.6
|
)
|
|
|
202.3
|
|
|
|
4.3
|
|
|
|
18.5
|
|
|
|
(36.0
|
)
|
|
|
188.5
|
|
Less:
income (loss) attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
0.2
|
|
Income
(loss) attributable to AK Holding
|
|
|
(0.6
|
)
|
|
|
202.3
|
|
|
|
4.3
|
|
|
|
18.3
|
|
|
|
(36.0
|
)
|
|
|
188.3
|
|
Equity
in net income of subsidiaries
|
|
|
188.9
|
|
|
|
(13.4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(175.5
|
)
|
|
|
—
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
188.3
|
|
|
$
|
188.9
|
|
|
$
|
4.3
|
|
|
$
|
18.3
|
|
|
$
|
(211.5
|
)
|
|
$
|
188.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Operations
|
|
For
the Nine Months Ended September 30, 2009
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
Net
sales
|
|
$
|
—
|
|
|
$
|
2,403.6
|
|
|
$
|
92.3
|
|
|
$
|
329.8
|
|
|
$
|
(68.8
|
)
|
|
$
|
2,756.9
|
|
Cost
of products sold
|
|
|
0.1
|
|
|
|
2,273.0
|
|
|
|
83.1
|
|
|
|
307.7
|
|
|
|
(45.1
|
)
|
|
|
2,618.8
|
|
Selling
and administrative expenses
|
|
|
2.7
|
|
|
|
140.0
|
|
|
|
6.8
|
|
|
|
12.6
|
|
|
|
(20.8
|
)
|
|
|
141.3
|
|
Depreciation
|
|
|
—
|
|
|
|
148.5
|
|
|
|
5.0
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
153.9
|
|
Total
operating costs
|
|
|
2.8
|
|
|
|
2,561.5
|
|
|
|
94.9
|
|
|
|
320.7
|
|
|
|
(65.9
|
)
|
|
|
2,914.0
|
|
Operating
profit (loss)
|
|
|
(2.8
|
)
|
|
|
(157.9
|
)
|
|
|
(2.6
|
)
|
|
|
9.1
|
|
|
|
(2.9
|
)
|
|
|
(157.1
|
)
|
Interest
expense
|
|
|
—
|
|
|
|
28.3
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
28.4
|
|
Other
income (expense)
|
|
|
—
|
|
|
|
(1.2
|
)
|
|
|
—
|
|
|
|
40.2
|
|
|
|
(30.4
|
)
|
|
|
8.6
|
|
Income
(loss) before income taxes
|
|
|
(2.8
|
)
|
|
|
(187.4
|
)
|
|
|
(2.6
|
)
|
|
|
49.2
|
|
|
|
(33.3
|
)
|
|
|
(176.9
|
)
|
Income
tax provision (benefit)
|
|
|
(1.0
|
)
|
|
|
(72.0
|
)
|
|
|
(0.9
|
)
|
|
|
18.2
|
|
|
|
(5.3
|
)
|
|
|
(61.0
|
)
|
Income
(loss) from continuing operations
|
|
|
(1.8
|
)
|
|
|
(115.4
|
)
|
|
|
(1.7
|
)
|
|
|
31.0
|
|
|
|
(28.0
|
)
|
|
|
(115.9
|
)
|
Less:
income (loss) attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.5
|
)
|
|
|
—
|
|
|
|
(1.5
|
)
|
Income
(loss) attributable to AK Holding
|
|
|
(1.8
|
)
|
|
|
(115.4
|
)
|
|
|
(1.7
|
)
|
|
|
32.5
|
|
|
|
(28.0
|
)
|
|
|
(114.4
|
)
|
Equity
in net income of subsidiaries
|
|
|
(112.6
|
)
|
|
|
2.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109.8
|
|
|
|
—
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
(114.4
|
)
|
|
$
|
(112.6
|
)
|
|
$
|
(1.7
|
)
|
|
|
32.5
|
|
|
$
|
81.8
|
|
|
$
|
(114.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Operations
|
|
For
the Nine Months Ended September 30, 2008
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
Net
sales
|
|
$
|
—
|
|
|
$
|
5,698.9
|
|
|
$
|
176.7
|
|
|
$
|
470.7
|
|
|
$
|
(160.7
|
)
|
|
$
|
6,185.6
|
|
Cost
of products sold
|
|
|
0.1
|
|
|
|
4,707.1
|
|
|
|
152.2
|
|
|
|
391.3
|
|
|
|
(104.3
|
)
|
|
|
5,146.4
|
|
Selling
and administrative expenses
|
|
|
2.6
|
|
|
|
188.6
|
|
|
|
9.3
|
|
|
|
13.9
|
|
|
|
(46.3
|
)
|
|
|
168.1
|
|
Depreciation
|
|
|
—
|
|
|
|
148.5
|
|
|
|
5.0
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
153.9
|
|
Total
operating costs
|
|
|
2.7
|
|
|
|
5,044.2
|
|
|
|
166.5
|
|
|
|
405.6
|
|
|
|
(150.6
|
)
|
|
|
5,468.4
|
|
Operating
profit (loss)
|
|
|
(2.7
|
)
|
|
|
654.7
|
|
|
|
10.2
|
|
|
|
65.1
|
|
|
|
(10.1
|
)
|
|
|
717.2
|
|
Interest
expense
|
|
|
—
|
|
|
|
34.8
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
34.9
|
|
Other
income (expense)
|
|
|
—
|
|
|
|
(8.2
|
)
|
|
|
13.7
|
|
|
|
31.9
|
|
|
|
(27.3
|
)
|
|
|
10.1
|
|
Income
(loss) before income taxes
|
|
|
(2.7
|
)
|
|
|
611.7
|
|
|
|
23.9
|
|
|
|
96.9
|
|
|
|
(37.4
|
)
|
|
|
692.4
|
|
Income
tax provision (benefit)
|
|
|
(0.9
|
)
|
|
|
226.4
|
|
|
|
8.4
|
|
|
|
32.5
|
|
|
|
(9.0
|
)
|
|
|
257.4
|
|
Income
(loss) from continuing operations
|
|
|
(1.8
|
)
|
|
|
385.3
|
|
|
|
15.5
|
|
|
|
64.4
|
|
|
|
(28.4
|
)
|
|
|
435.0
|
|
Less:
income (loss) attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
0.4
|
|
Income
(loss) attributable to AK Holding
|
|
|
(1.8
|
)
|
|
|
385.3
|
|
|
|
15.5
|
|
|
|
64.0
|
|
|
|
(28.4
|
)
|
|
|
434.6
|
|
Equity
in net income of subsidiaries
|
|
|
436.4
|
|
|
|
51.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(487.5
|
)
|
|
|
—
|
|
Net
income (loss) attributable to AK Holding
|
|
$
|
434.6
|
|
|
$
|
436.4
|
|
|
$
|
15.5
|
|
|
$
|
64.0
|
|
|
$
|
(515.9
|
)
|
|
$
|
434.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Balance Sheets
|
|
As
of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
|
$
|
326.1
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
339.5
|
|
Accounts
receivable, net
|
|
|
—
|
|
|
|
331.0
|
|
|
|
18.7
|
|
|
|
54.1
|
|
|
|
(0.1
|
)
|
|
|
403.7
|
|
Inventories,
net
|
|
|
—
|
|
|
|
546.9
|
|
|
|
14.5
|
|
|
|
68.2
|
|
|
|
(16.3
|
)
|
|
|
613.3
|
|
Deferred
tax asset
|
|
|
—
|
|
|
|
355.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
355.2
|
|
Other
current assets
|
|
|
0.3
|
|
|
|
50.8
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
52.0
|
|
Total
Current Assets
|
|
|
0.3
|
|
|
|
1,610.0
|
|
|
|
33.6
|
|
|
|
136.2
|
|
|
|
(16.4
|
)
|
|
|
1,763.7
|
|
Property,
Plant and Equipment
|
|
|
—
|
|
|
|
5,193.9
|
|
|
|
89.7
|
|
|
|
83.4
|
|
|
|
—
|
|
|
|
5,367.0
|
|
Less
accumulated depreciation
|
|
|
—
|
|
|
|
(3,304.5
|
)
|
|
|
(46.0
|
)
|
|
|
(9.7
|
)
|
|
|
—
|
|
|
|
(3,360.2
|
)
|
Property,
Plant and Equipment, Net
|
|
|
—
|
|
|
|
1,889.4
|
|
|
|
43.7
|
|
|
|
73.7
|
|
|
|
—
|
|
|
|
2,006.8
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in AFSG Holdings, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
55.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55.6
|
|
Investment
in affiliates
|
|
|
(1,237.6
|
)
|
|
|
1,237.6
|
|
|
|
40.1
|
|
|
|
987.1
|
|
|
|
(1,027.2
|
)
|
|
|
—
|
|
Inter-company
accounts
|
|
|
2,055.9
|
|
|
|
(3,006.6
|
)
|
|
|
(24.7
|
)
|
|
|
(296.4
|
)
|
|
|
1,271.8
|
|
|
|
—
|
|
Other
investments
|
|
|
—
|
|
|
|
30.6
|
|
|
|
—
|
|
|
|
18.3
|
|
|
|
—
|
|
|
|
48.9
|
|
Goodwill
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
32.9
|
|
|
|
4.3
|
|
|
|
—
|
|
|
|
37.1
|
|
Other
intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
Deferred
tax asset
|
|
|
—
|
|
|
|
485.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
485.8
|
|
Other
non-current assets
|
|
|
—
|
|
|
|
9.2
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
9.4
|
|
TOTAL
ASSETS
|
|
$
|
818.6
|
|
|
$
|
2,255.9
|
|
|
$
|
181.4
|
|
|
$
|
923.4
|
|
|
$
|
228.2
|
|
|
$
|
4,407.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
—
|
|
|
$
|
527.4
|
|
|
$
|
4.4
|
|
|
$
|
9.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
541.4
|
|
Accrued
liabilities
|
|
|
—
|
|
|
|
193.8
|
|
|
|
2.3
|
|
|
|
3.3
|
|
|
|
—
|
|
|
|
199.4
|
|
Current
portion of long-term debt
|
|
|
—
|
|
|
|
0.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.7
|
|
Current
portion of pension and other postretirement benefit
obligations
|
|
|
—
|
|
|
|
148.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
148.8
|
|
Total
Current Liabilities
|
|
|
—
|
|
|
|
870.7
|
|
|
|
6.7
|
|
|
|
13.0
|
|
|
|
(0.1
|
)
|
|
|
890.3
|
|
Non-current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
—
|
|
|
|
605.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
605.9
|
|
Pension
and other postretirement benefit obligations
|
|
|
—
|
|
|
|
1,870.7
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,871.2
|
|
Other
non-current liabilities
|
|
|
—
|
|
|
|
146.2
|
|
|
|
—
|
|
|
|
72.9
|
|
|
|
1.2
|
|
|
|
220.3
|
|
Total
Non-current Liabilities
|
|
|
—
|
|
|
|
2,622.8
|
|
|
|
0.5
|
|
|
|
72.9
|
|
|
|
1.2
|
|
|
|
2,697.4
|
|
TOTAL
LIABILITIES
|
|
|
—
|
|
|
|
3,493.5
|
|
|
|
7.2
|
|
|
|
85.9
|
|
|
|
1.1
|
|
|
|
3,587.7
|
|
TOTAL
AK HOLDING STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
818.6
|
|
|
|
(1,237.6
|
)
|
|
|
174.2
|
|
|
|
836.3
|
|
|
|
227.1
|
|
|
|
818.6
|
|
Noncontrolling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
1.2
|
|
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
818.6
|
|
|
|
(1,237.6
|
)
|
|
|
174.2
|
|
|
|
837.5
|
|
|
|
227.1
|
|
|
|
819.8
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
818.6
|
|
|
$
|
2,255.9
|
|
|
$
|
181.4
|
|
|
$
|
923.4
|
|
|
$
|
228.2
|
|
|
$
|
4,407.5
|
|
Condensed
Balance Sheets
|
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
|
$
|
548.6
|
|
|
$
|
—
|
|
|
$
|
14.1
|
|
|
$
|
—
|
|
|
$
|
562.7
|
|
Accounts
receivable, net
|
|
|
—
|
|
|
|
394.7
|
|
|
|
19.5
|
|
|
|
57.2
|
|
|
|
(1.5
|
)
|
|
|
469.9
|
|
Inventories,
net
|
|
|
—
|
|
|
|
481.1
|
|
|
|
18.6
|
|
|
|
71.8
|
|
|
|
(4.7
|
)
|
|
|
566.8
|
|
Deferred
tax asset
|
|
|
—
|
|
|
|
333.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
333.0
|
|
Other
current assets
|
|
|
0.1
|
|
|
|
69.4
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
70.4
|
|
Total
Current Assets
|
|
|
0.1
|
|
|
|
1,826.8
|
|
|
|
38.4
|
|
|
|
143.7
|
|
|
|
(6.2
|
)
|
|
|
2,002.8
|
|
Property,
Plant and Equipment
|
|
|
—
|
|
|
|
5,179.8
|
|
|
|
89.5
|
|
|
|
12.8
|
|
|
|
—
|
|
|
|
5,282.1
|
|
Less
accumulated depreciation
|
|
|
—
|
|
|
|
(3,170.6
|
)
|
|
|
(41.0
|
)
|
|
|
(9.2
|
)
|
|
|
—
|
|
|
|
(3,220.8
|
)
|
Property,
Plant and Equipment, Net
|
|
|
—
|
|
|
|
2,009.2
|
|
|
|
48.5
|
|
|
|
3.6
|
|
|
|
—
|
|
|
|
2,061.3
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in AFSG Holdings, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
55.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55.6
|
|
Investments
in affiliates
|
|
|
(1,074.2
|
)
|
|
|
1,074.2
|
|
|
|
40.1
|
|
|
|
960.9
|
|
|
|
(1,001.0
|
)
|
|
|
—
|
|
Inter-company
accounts
|
|
|
2,042.1
|
|
|
|
(2,800.2
|
)
|
|
|
(33.5
|
)
|
|
|
(281.9
|
)
|
|
|
1,073.5
|
|
|
|
—
|
|
Other
investments
|
|
|
—
|
|
|
|
27.3
|
|
|
|
—
|
|
|
|
23.1
|
|
|
|
—
|
|
|
|
50.4
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
32.8
|
|
|
|
4.3
|
|
|
|
—
|
|
|
|
37.1
|
|
Other
intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.3
|
|
Deferred
tax asset
|
|
|
—
|
|
|
|
459.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
459.1
|
|
Other
non-current assets
|
|
|
—
|
|
|
|
15.2
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
15.4
|
|
TOTAL
ASSETS
|
|
$
|
968.0
|
|
|
$
|
2,611.6
|
|
|
$
|
182.2
|
|
|
$
|
853.9
|
|
|
$
|
66.3
|
|
|
$
|
4,682.0
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
—
|
|
|
$
|
337.7
|
|
|
$
|
2.1
|
|
|
$
|
9.8
|
|
|
$
|
(1.5
|
)
|
|
$
|
348.1
|
|
Accrued
liabilities
|
|
|
—
|
|
|
|
221.3
|
|
|
|
2.8
|
|
|
|
8.9
|
|
|
|
—
|
|
|
|
233.0
|
|
Current
portion of long-term debt
|
|
|
—
|
|
|
|
0.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.7
|
|
Current
portion of pension and other postretirement benefit
obligations
|
|
|
—
|
|
|
|
152.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
152.4
|
|
Total
Current Liabilities
|
|
|
—
|
|
|
|
712.1
|
|
|
|
4.9
|
|
|
|
18.7
|
|
|
|
(1.5
|
)
|
|
|
734.2
|
|
Non-current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
—
|
|
|
|
632.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
632.6
|
|
Pension
and other postretirement benefit obligations
|
|
|
—
|
|
|
|
2,143.7
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,144.2
|
|
Other
non-current liabilities
|
|
|
—
|
|
|
|
197.4
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
2.6
|
|
|
|
200.3
|
|
Total
Non-current Liabilities
|
|
|
—
|
|
|
|
2,973.7
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
2.6
|
|
|
|
2,977.1
|
|
TOTAL
LIABILITIES
|
|
|
—
|
|
|
|
3,685.8
|
|
|
|
5.4
|
|
|
|
19.0
|
|
|
|
1.1
|
|
|
|
3,711.3
|
|
TOTAL
AK HOLDING STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
968.0
|
|
|
|
(1,074.2
|
)
|
|
|
176.8
|
|
|
|
832.2
|
|
|
|
65.2
|
|
|
|
968.0
|
|
Noncontrolling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.7
|
|
|
|
—
|
|
|
|
2.7
|
|
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
968.0
|
|
|
|
(1,074.2
|
)
|
|
|
176.8
|
|
|
|
834.9
|
|
|
|
65.2
|
|
|
|
970.7
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
968.0
|
|
|
$
|
2,611.6
|
|
|
$
|
182.2
|
|
|
$
|
853.9
|
|
|
$
|
66.3
|
|
|
$
|
4,682.0
|
|
Condensed
Statements of Cash Flows
|
|
For
the Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
Net
cash flows from operating activities
|
|
$
|
(1.5
|
)
|
|
$
|
(111.9
|
)
|
|
$
|
10.0
|
|
|
$
|
33.8
|
|
|
$
|
(17.8
|
)
|
|
$
|
(87.4
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
investments
|
|
|
—
|
|
|
|
(90.6
|
)
|
|
|
(0.3
|
)
|
|
|
(22.8
|
)
|
|
|
—
|
|
|
|
(113.7
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
—
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
0.5
|
|
Other
investing items, net
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
1.7
|
|
|
|
—
|
|
|
|
1.8
|
|
Net
cash flows from investing activities
|
|
|
—
|
|
|
|
(90.0
|
)
|
|
|
(0.3
|
)
|
|
|
(21.1
|
)
|
|
|
—
|
|
|
|
(111.4
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
—
|
|
|
|
(23.3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23.3
|
)
|
Purchase
of treasury stock
|
|
|
(11.4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11.4
|
)
|
Common
stock dividends paid
|
|
|
(16.5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16.5
|
)
|
Inter-company
activity
|
|
|
29.3
|
|
|
|
2.6
|
|
|
|
(9.7
|
)
|
|
|
(40.0
|
)
|
|
|
17.8
|
|
|
|
—
|
|
Advances
from minority interest owner
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25.3
|
|
|
|
—
|
|
|
|
25.3
|
|
Other
financing items, net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
1.5
|
|
Net
cash flows from financing activities
|
|
|
1.5
|
|
|
|
(20.6
|
)
|
|
|
(9.7
|
)
|
|
|
(13.4
|
)
|
|
|
17.8
|
|
|
|
(24.4
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
—
|
|
|
|
(222.5
|
)
|
|
|
—
|
|
|
|
(0.7
|
)
|
|
|
—
|
|
|
|
(223.2
|
)
|
Cash
and equivalents, beginning of period
|
|
|
—
|
|
|
|
548.6
|
|
|
|
—
|
|
|
|
14.1
|
|
|
|
—
|
|
|
|
562.7
|
|
Cash
and equivalents, end of period
|
|
$
|
—
|
|
|
$
|
326.1
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
339.5
|
|
Condensed
Statements of Cash Flows
|
|
For
the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Guarantor
Subsidiaries
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
$
|
(1.3
|
)
|
|
$
|
(186.7
|
)
|
|
$
|
17.8
|
|
|
$
|
53.8
|
|
|
$
|
(22.7
|
)
|
|
$
|
(139.1
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
investments
|
|
|
—
|
|
|
|
(118.8
|
)
|
|
|
(1.7
|
)
|
|
|
(0.3
|
)
|
|
|
—
|
|
|
|
(120.8
|
)
|
Investments,
net
|
|
|
|
|
|
|
(8.2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8.2
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
|
|
|
|
8.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8.0
|
|
Other
investing items, net
|
|
|
—
|
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
|
0.3
|
|
Net
cash flows from investing activities
|
|
|
—
|
|
|
|
(118.4
|
)
|
|
|
(1.8
|
)
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
(120.7
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.5
|
)
|
Proceeds
from exercise of stock options
|
|
|
3.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.3
|
|
Purchase
of treasury stock
|
|
|
(9.6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9.6
|
)
|
Common
stock dividends paid
|
|
|
(16.8
|
)
|
|
|
10.4
|
|
|
|
(13.7
|
)
|
|
|
(14.1
|
)
|
|
|
17.4
|
|
|
|
(16.8
|
)
|
Inter-company
activity
|
|
|
24.5
|
|
|
|
7.2
|
|
|
|
(2.2
|
)
|
|
|
(34.8
|
)
|
|
|
5.3
|
|
|
|
—
|
|
Tax
benefits from stock-based transactions
|
|
|
—
|
|
|
|
12.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12.4
|
|
Other
financing items, net
|
|
|
(0.1
|
)
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
(1.4
|
)
|
|
|
—
|
|
|
|
(1.2
|
)
|
Net
cash flows from financing activities
|
|
|
1.3
|
|
|
|
29.9
|
|
|
|
(16.0
|
)
|
|
|
(50.3
|
)
|
|
|
22.7
|
|
|
|
(12.4
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
—
|
|
|
|
(275.2
|
)
|
|
|
—
|
|
|
|
3.0
|
|
|
|
—
|
|
|
|
(272.2
|
)
|
Cash
and equivalents, beginning of period
|
|
|
—
|
|
|
|
699.0
|
|
|
|
—
|
|
|
|
14.6
|
|
|
|
—
|
|
|
|
713.6
|
|
Cash
and equivalents, end of period
|
|
$
|
—
|
|
|
$
|
423.8
|
|
|
$
|
—
|
|
|
$
|
17.6
|
|
|
$
|
—
|
|
|
$
|
441.4
|
|
Item
2.
|
|
|
(dollars
in millions, except per share and per ton
data)
|
Results of
Operations
Overview
The
Company’s operations consist of seven steelmaking and finishing plants located
in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon
steels, including premium-quality coated, cold-rolled and hot-rolled products,
and specialty stainless and electrical steels that are sold in hot band, sheet
and strip form. These products are sold to the automotive,
infrastructure and manufacturing, and distributors and converters
markets. The Company sells its carbon products principally to
domestic customers. The Company’s electrical and stainless steel
products are sold both domestically and, increasingly,
internationally. The Company’s operations also include AK Tube LLC
(“AK Tube”), which further finishes flat-rolled carbon and stainless steel at
two tube plants, one located in Ohio and one located in Indiana, into welded
steel tubing used in the automotive, large truck and construction
markets. In addition, the Company’s operations include European
trading companies that buy and sell steel and steel products and other
materials.
Beginning
late in 2008, the Company reacted quickly to the economic downturn and initiated
a concerted, Company-wide effort to reduce controllable costs wherever possible
and focused on efforts to conserve cash. That effort continued
throughout the first nine months of 2009, and included the temporary idling of
certain of the Company’s manufacturing facilities for various periods during the
year to better match the Company’s production with its customer
demand. The Company used such lower customer demand
opportunistically, when possible, in order to prepare for maximum production
efficiency when the global economy recovers. For example, while the
Company’s Middletown Works blast furnace was idled due to the reduced volume
demand during the second and early part of the third quarter of 2009, the
Company took advantage of that opportunity to perform significant maintenance on
that furnace. The furnace was down for approximately sixteen weeks
and was started back up in July 2009. Despite its ongoing cost
containment efforts, the Company continues to focus on its core values – safety,
quality and productivity. The Company achieved considerable success
during the first nine months with respect to all of those efforts – reducing
costs, conserving cash, operating safely, and producing the highest quality
steel as efficiently as possible under the current market
conditions. With respect to safety, the Company’s recordable injury
rate continues to lead the steel industry by a wide margin. With
respect to quality, the Company continues to be recognized in leading surveys
for being industry-best in overall quality for carbon, stainless and electrical
steels. With respect to costs and other financial measures, the
Company’s quick and sustained reaction to the economic downturn helped the
Company to generate a net income for the first time since the downturn began
last fall.
The
Company’s net income during the third quarter was aided by increased shipments
and revenues compared to the previous quarter, as the Company experienced near
term, incremental improvement in steel demand and economic
conditions. This increased demand was spurred in part by improved
automotive demand for inventory replacement in the wake of the U.S. government’s
successful “Cash for Clunkers” program. Despite these recent positive
economic trends, however, the global economic climate remains volatile and steel
demand is likely to be well below the historically-high levels of 2007 and 2008
for the foreseeable future. This is evidenced by the fact that third
quarter 2009 shipments and revenue, though up from the immediately preceding
quarter, were still substantially below the second quarter of 2008 record
shipment levels.
In
short, the Company continues to struggle against the anemic global demand for
steel products that has persisted throughout the first three quarters of 2009,
but has made substantial progress in reducing its costs to the point where it is
capable of making a net income even in these extremely challenging economic
conditions.
Steel
Shipments
Steel
shipments for the three months ended September 30, 2009 and 2008 were 1,047,800
tons and 1,476,300 tons, respectively. For the three-month period
ended September 30, 2009, value-added products comprised 85.3% of total
shipments compared to 79.6% for the three-month period ended September 30,
2008. Shipments for the nine months ended September 30, 2009 and 2008
were 2,567,200 tons and 4,792,500 tons, respectively. For the
nine-month period ended September 30, 2009, value-added products comprised 85.8%
of total shipments compared to 80.0% for the nine-month period ended September
30, 2008. The percentage of value-added shipments was higher in the
respective three-
and
nine-month periods in 2009 primarily due to lower hot-rolled carbon shipments
compared to the same 2008 periods, both in real terms and as a percentage of
total shipments. Total shipments for the nine months ended September
30, 2009 were substantially lower than the same period in 2008 due to weak steel
demand in all markets, but especially in the automotive market. The
weak demand in the automotive market was driven by a year-on-year 27% decline in
U.S. light vehicles sales for the first nine months of 2009, resulting in excess
inventories of unsold vehicles and the need to reduce production at every North
American manufacturer of light vehicles. In addition, Chrysler
temporarily idled all of its operations on April 30, 2009, and General Motors
also idled many of its plants during the second quarter. As a result,
total North American light vehicle production was down 42% for the first nine
months of 2009 compared to the first nine months of 2008. The
significant reduction in automotive demand was the principal reason for lower
coated, cold-rolled, and tubular shipments during the third quarter of 2009
compared to the third quarter of 2008. The automotive market did
begin to improve in the third quarter of 2009, however, resulting in an increase
in shipments compared to the second quarter of 2009. The reduction in
stainless / electrical steel shipments also reflects lower demand in the
automotive market with respect to stainless and, with respect to electrical, the
weakness in the domestic housing market and global economy. The
reduction in hot-rolled shipments was due to weak spot market conditions
globally. The Company continues to focus on maximizing product
profitability based on current and projected market demands – both domestically
and internationally. The following presents net shipments by product
line:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(tons
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stainless
/ electrical
|
|
|
178.0
|
|
|
|
17.0
|
%
|
|
|
240.3
|
|
|
|
16.3
|
%
|
|
|
485.6
|
|
|
|
18.9
|
%
|
|
|
752.1
|
|
|
|
15.7
|
%
|
Coated
|
|
|
497.3
|
|
|
|
47.5
|
%
|
|
|
592.0
|
|
|
|
40.1
|
%
|
|
|
1,170.1
|
|
|
|
45.6
|
%
|
|
|
2,015.4
|
|
|
|
42.1
|
%
|
Cold-rolled
|
|
|
194.4
|
|
|
|
18.6
|
%
|
|
|
314.2
|
|
|
|
21.3
|
%
|
|
|
487.4
|
|
|
|
19.0
|
%
|
|
|
970.2
|
|
|
|
20.2
|
%
|
Tubular
|
|
|
23.5
|
|
|
|
2.2
|
%
|
|
|
28.3
|
|
|
|
1.9
|
%
|
|
|
58.3
|
|
|
|
2.3
|
%
|
|
|
96.0
|
|
|
|
2.0
|
%
|
Subtotal
value-added shipments
|
|
|
893.2
|
|
|
|
85.3
|
%
|
|
|
1,174.8
|
|
|
|
79.6
|
%
|
|
|
2,201.4
|
|
|
|
85.8
|
%
|
|
|
3,833.7
|
|
|
|
80.0
|
%
|
Hot-rolled
|
|
|
118.5
|
|
|
|
11.3
|
%
|
|
|
260.7
|
|
|
|
17.7
|
%
|
|
|
258.9
|
|
|
|
10.1
|
%
|
|
|
816.7
|
|
|
|
17.0
|
%
|
Secondary
|
|
|
36.1
|
|
|
|
3.4
|
%
|
|
|
40.8
|
|
|
|
2.7
|
%
|
|
|
106.9
|
|
|
|
4.1
|
%
|
|
|
142.1
|
|
|
|
3.0
|
%
|
Subtotal
non value-added shipments
|
|
|
154.6
|
|
|
|
14.7
|
%
|
|
|
301.5
|
|
|
|
20.4
|
%
|
|
|
365.8
|
|
|
|
14.2
|
%
|
|
|
958.8
|
|
|
|
20.0
|
%
|
Total
shipments
|
|
|
1,047.8
|
|
|
|
100.0
|
%
|
|
|
1,476.3
|
|
|
|
100.0
|
%
|
|
|
2,567.2
|
|
|
|
100.0
|
%
|
|
|
4,792.5
|
|
|
|
100.0
|
%
|
Sales
For
the three months ended September 30, 2009, net sales were $1,041.1, reflecting
an approximate 52% decrease from third quarter 2008 net sales of
$2,157.6. On a positive note, such sales represented an approximate
31% increase from second quarter 2009 net sales of $793.6. Net sales
during the first nine months of 2009 and 2008 were $2,756.9 and $6,185.6,
respectively. The 2009 decrease in net sales compared to the same
periods in 2008 was caused by weak demand for all steel products, particularly
in the automotive market, resulting from the worst global economic conditions in
decades. The increase in net sales for the third quarter of 2009
compared to the second quarter of 2009 was the result of increased carbon
shipments, principally to the automotive and distributors and converters
markets. Net sales to customers outside the United States for the
three- and nine-month periods ended September 30, 2009 totaled $194.0 and
$564.9, respectively, compared to the three- and nine-month periods ended
September 30, 2008 totaling $349.3 and $1,004.6, respectively. A
substantial majority of the revenue outside of the United States is associated
with electrical and, to a lesser extent, stainless steel
products. The Company’s average selling price for the third quarter
of 2009 was $994 per ton, a reduction of approximately 32% from the Company’s
third quarter 2008 average selling price of $1,462 per ton and a 7% decrease
from the second quarter 2009 average selling price of $1,072 per
ton. The decrease in average selling price in the third quarter of
2009 versus the third quarter of 2008 was primarily due to lower prices in the
spot market and lower surcharges on many of the Company’s
products. The lower average selling price in the third quarter of
2009 versus the second quarter of 2009 was primarily the result of an increase
in carbon shipments.
Maintenance
Outage Costs
The
Company’s maintenance outage costs in the first nine months of 2009 were
approximately $31.5, compared to costs of approximately $55.2 in the
corresponding period in 2008. The outage costs in the third quarter
of 2009 were comparable to outage costs in the third quarter of
2008.
Raw
Material and Energy Costs
The
Company expects to incur lower raw material costs, primarily related to iron
ore, during the remainder of 2009 and already is experiencing significant
reductions in some of these costs. Because, however, of the
abnormally low production and shipment volumes caused by the poor business
conditions starting in the fourth quarter of 2008, the Company continues to
consume some of the raw materials, particularly iron ore and hot briquetted iron
(“HBI”), which were purchased in 2008 at higher prices than prevail
currently. The Company has experienced some of the benefit of the
lower costs it currently is paying for raw materials and it expects to benefit
increasingly from lower raw material costs during the fourth quarter of this
year. Associated with these anticipated lower costs, as well as lower
levels of inventories, the Company recorded a LIFO credit of $106.3 and $266.4,
respectively, for the three and nine months ended September 30, 2009, compared
to a LIFO charge of $65.4 and $267.3, respectively, for the three and nine
months ended September 30, 2008. While the Company has benefited from a
LIFO credit in 2009, in the absence of a continued decline in raw material
costs, energy costs and/or inventory levels in 2010, the Company would not
anticipate a substantial LIFO credit for 2010.
Selling
and Administrative Expenses
The
Company continued its disciplined approach to containing costs during the third
quarter. Selling and administrative expense for the third quarter of
2009 was $45.6 compared to $56.6 for the same period in 2008. The
reduction was due primarily to lower compensation and employee benefit costs,
driven largely by a reduction in headcount, and an overall lower level of
spending on other overhead items. This general reduction in spending
resulted from the Company’s prompt and proactive steps to reduce controllable
costs in the face of the poor steel industry and overall economic
conditions. Depreciation expense was $51.0 for the third quarter of
2009, slightly higher than the $50.5 for the third quarter of 2008.
Operating
Profit
The
Company recorded operating profit of $15.3 and $309.6, respectively, for the
three-month periods ended September 30, 2009 and 2008. The
Company recorded an operating loss of $157.1 for the nine-month period ended
September 30, 2009. This compares to an operating profit of $717.2
for the nine-month period ended September 30, 2008. The principal
cause of this decline in operating performance was significantly lower steel
shipments driven by reduced customer demand, negatively affecting both revenues
and overhead absorption. The lower steel shipments also resulted in
the Company carrying over iron ore inventory from 2008 into
2009. This inventory had higher costs than the current market prices
for iron ore, and its use in 2009 also negatively impacted 2009 operating profit
results.
Interest
Expense
Interest
expense for the three and nine months ended September 30, 2009 was $9.0 and
$28.4, respectively, compared to $11.6 and $34.9, respectively, for the same
periods in 2008. The decrease was due primarily to the Company’s
repurchase, in 2008 and 2009, of a portion of its 7 3/4% senior notes due in
2012 and a reduction of rates on variable-interest debt.
Other
Income
Other
income, net for the three and nine months ended September 30, 2009 was $2.9 and
$8.6, respectively, compared to $0.9 and $10.1 for the corresponding periods in
2008. The increase for the three-month period was due primarily to foreign
exchange gains partially offset by lower interest income due to lower levels of
cash and investment rates. The decrease for the nine-month period was
due primarily to lower interest income resulting from lower cash and investment
rates partially offset by foreign exchange gains.
Income
Taxes
Income
taxes recorded for the year 2009 have been estimated based on year-to-date
income and projected financial results for the full year. The final
effective tax rate to be applied to 2009 will depend, among other things, on the
actual amount of taxable income generated by the Company for the full
year.
Net
Income
The
Company reported net income in the three months ended September 30, 2009 of
$6.2, or $0.06 per diluted share. For the nine months ended September
30, 2009, the net loss was $114.4, or $1.05 per diluted share. During
the
comparable
three- and nine- month periods in 2008, the Company reported net income of
$188.3, or $1.67 per diluted share, and $434.6, or $3.85 per diluted share,
respectively.
Outlook
All
of the statements in this “Outlook” section are subject to, and qualified by,
the cautionary information set forth under the heading “Forward-Looking
Statements.”
The
Company expects shipments in the fourth quarter of 2009 to be approximately
1,300,000 tons, reflecting an increase of nearly 24% over third quarter 2009
shipments. This increase is the result of anticipated increased
shipments in carbon steel products, principally due to improved automotive
demand as the domestic automotive companies rebuild depleted inventories during
the fourth quarter. The Company anticipates its average per-ton
selling price to decline approximately 2% compared to the third quarter of 2009
level. The expected decline in the average selling price is due to an
anticipated higher percentage of carbon steel shipments relative to stainless
and electrical shipments in the fourth quarter as compared to the third
quarter. The Company also anticipates that maintenance costs will be
approximately $10.0 higher compared to the third quarter as a result of
maintenance work at the Company’s Middletown Works blast furnace and Ashland
Works basic oxygen furnace. The Company expects to benefit from lower
operating costs and lower raw material costs, primarily related to iron ore, in
the fourth quarter compared to the third quarter. Based on these
factors, the Company currently expects to earn an operating profit of between
$30 and $35 per ton for the fourth quarter of 2009. The Company
expects to incur a non-cash charge of approximately $5.0, or $0.05 per share of
common stock, primarily as the result of a decrease in the value of the
Company’s deferred tax assets as the result of state tax law
changes.
Under
its method of accounting for pension and other postretirement benefit plans, the
Company recognizes into income (loss), as a fourth quarter adjustment, any
unrecognized actuarial gains and losses that exceed 10% of the larger of
projected benefit obligations or plan assets (the “corridor”). These corridor
charges are driven mainly by events and circumstances beyond the Company’s
control, primarily changes in interest rates, performance of the financial
markets, healthcare cost trends and mortality and retirement
experience. It thus is impossible to reliably forecast or predict
whether they will occur in any given year or, if they do, what the magnitude
will be. Based upon currently available information and
reasonable projections, however, the Company does not anticipate a fourth
quarter 2009 corridor charge related to its other postretirement benefit plans.
Although the Company, at this time, cannot determine whether there will be
such a corridor charge with respect to its pension plans, it is possible
that a pension-related corridor charge could occur depending on year-end
interest rates and pension plan asset values.
Impact of Chrysler and
General Motors Bankruptcy Filings on AK Steel
On
April 30, 2009, Chrysler filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code to reorganize its business. On
June 1, 2009, General Motors filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code to reorganize its
business. On June 10, 2009, most of the assets of Chrysler were sold
to a new entity known as Chrysler Group LLC (“New Chrysler”). On July 10, 2009,
substantially all of the assets of General Motors were sold to a new entity
known as NGMCO, Inc. Both Chrysler and General Motors idled
facilities in anticipation of, and/or in connection with, those bankruptcy
filings. Most of those facilities have now been re-started by the new
entities that acquired assets out of the Chrysler and General Motors
bankruptcies. To the extent that the idling of any of the Chrysler or
General Motors facilities will continue into the fourth quarter, the anticipated
impact of that continued idling is included in the Company’s fourth quarter
Outlook, above. In addition, however, the filing of the Chrysler and
General Motors bankruptcies and the idling of their facilities may increase the
likelihood of bankruptcy filings by other suppliers to the automotive industry
which also are customers of the Company. The Company cannot at this time
reasonably predict which, if any, of those customers will file bankruptcy
petitions or what impact, if any, these additional filings may have on its
Outlook for the fourth quarter.
Ashland Works Arbitration
Award
On
May 13, 2009, the Company announced its intention to idle most of the Ashland
Works beginning in late July or early August. The planned idling was
due to depressed business conditions and the resulting lack of sufficient orders
to operate both of the Company’s blast furnaces. The Company’s intent
was to idle the Ashland Works blast furnace relatively soon after restarting its
Middletown Works blast furnace, which had been idled since late March 2009 as
part of a planned outage to replace its hearth. On May 22, 2009, the
United Steelworkers of America Local 1865 (“Local 1865”) filed a grievance which
challenged the right of the Company to proceed with its planned
idling. The grievance
was
heard on June 17-18, 2009 and on July 15, 2009 the arbitrator issued an opinion
which sustained the grievance. In summary, the arbitrator held that,
under the terms of the applicable collective bargaining agreement, the Ashland
Works cannot be idled so long as there is demand for products which can be
produced at Ashland. The Company disagreed with that interpretation
of the parties’ collective bargaining, but the Company has re-started the
Ashland Works blast furnace and has entered into an agreement with Local 1865 to
resolve this matter and related disputes.
Liquidity and Capital
Resources
Overview
The
Company continued its strong and stable liquidity position in the third quarter,
with a total liquidity of over one billion dollars. At September 30,
2009, the Company had total liquidity of $1,052.0, consisting of $339.5 of cash
and cash equivalents and $712.5 of availability under the Company’s $850.0
five-year revolving credit facility. At September 30, 2009, there
were no outstanding borrowings under the credit facility; however, availability
was reduced by $137.5 due to outstanding letters of credit. The
Company’s obligation under its credit facility is secured by its inventory and
accounts receivable. Thus, availability also may be reduced by a
decline in the level of eligible collateral, which can fluctuate monthly under
the terms of the credit facility. The Company’s eligible collateral,
after application of applicable advance rates, exceeded $850.0 as of September
30, 2009.
Cash
used by operations totaled $87.4 for the nine months ended September 30,
2009. Primary uses of cash were the net loss from the Company’s
operating activities, a pension contribution of $210.0, and a $65.0 contribution
to a VEBA Trust established for Middletown Works retirees. Partially
offsetting the Company’s use of cash in the first nine months was the generation
of cash in the amount of $174.6 from a decrease in working
capital. The decrease in working capital resulted primarily from
lower accounts receivable attributable to the reduced level of sales revenue
that resulted from the idling of numerous automotive production facilities by
the Company’s customers. Also contributing to the decrease in working
capital was a higher level of accounts payable reflecting the improved business
conditions in the third quarter.
Pension-
and Retiree Healthcare Benefit-related Matters
During
the first nine months of 2009, the Company made pension contributions totaling
$210.0. The third-quarter pension contribution of $110.0 was
approximately double the $55.0 that was required for the balance of 2009 and is
expected to reduce the Company’s 2010 contribution obligation. The
additional contribution brought the total 2009 pension contributions to $210.0
and increased the Company’s total pension fund contributions since 2005 to over
$1.0 billion. Currently, the Company estimates required annual
pension contributions for 2010 to be approximately $105.0 and for 2011 to be
approximately $280.0. The calculation of estimated future pension
contributions requires the use of assumptions concerning future
events. The most significant of these assumptions relate to future
investment performance of the pension funds, actuarial data relating to plan
participants, and the benchmark interest rate used to discount future benefits
to their present value. Because of the variability of factors underlying these
assumptions, including the possibility of future pension legislation, the
reliability of estimated future pension contributions decreases as the length of
time until the contributions must be made increases.
In
the first quarter of 2008, the Company received court approval regarding the
October 2007 settlement with the Middletown Works retirees that required the
Company to make a total of $663.0 in cash payments to a VEBA
Trust. The Company made the initial contribution of $468.0 in the
first quarter of 2008 and the first of three subsequent annual payments of $65.0
in March 2009. See discussion of Middletown Works Retiree Healthcare
Benefits Litigation in Note 9 of Part I, Item 1.
Investment
and Financing Activity
During
the nine months ended September 30, 2009, net cash used by investing activities
totaled $111.4, which includes $91.2 of capital investments by the Company and
$22.5 in capital investments related to the investment by Middletown Coke
Company, Inc. (“Middletown Coke”) in capital equipment for the coke plant to be
constructed in Middletown, Ohio.
In
March 2008, the Company’s Board of Directors approved a 20-year supply contract
with Middletown Coke, an affiliate of SunCoke Energy, Inc. (“SunCoke”), to
provide the Company with metallurgical-grade coke and electrical
power. The coke and power will come from a new facility (“SunCoke
Middletown”) to be constructed, owned and
operated
by Middletown Coke adjacent to the Company’s Middletown Works. The
proposed new SunCoke Middletown facility will produce about 550,000 tons of coke
and 50 megawatts of electrical power annually. The anticipated cost
to build the facility is approximately $340.0. Under the agreement,
the Company will purchase all of the coke and electrical power generated from
SunCoke Middletown for at least 20 years, helping the Company achieve its goal
of more fully integrating its raw material supply and providing about 25% of the
power requirements of Middletown Works. The agreement is contingent
upon, among other conditions, Middletown Coke receiving all necessary local,
state and federal approvals and permits, as well as available economic
incentives, to build and operate the proposed new
facility. Currently, there is litigation pending which challenges the
issuance of an environmental permit necessary to construct the new
facility. See discussion of Monroe litigation in Note 9 of Part I,
Item 1.
In
August 2009, the Board also approved an agreement with Haverhill North Coke
Company,
an affiliate
of SunCoke, to provide the Company with 550,000 tons of coke annually from
SunCoke’s Haverhill facility (“SunCoke Haverhill”) located in southern
Ohio. The agreement has a 12-year term with two five-year renewal
options. Under the agreement, the Company also will purchase a
portion of the electricity co-generated from the heat recovery coke
battery. Like the SunCoke Middletown agreement, this agreement
enhances the Company’s long-term supply of cost-competitive coke and energy in
an environmentally responsible fashion. It also furthers the
Company’s strategic goals to assure an adequate supply of a key raw material and
to better insulate itself from volatile coke and energy prices. The
SunCoke Haverhill agreement does not replace or diminish the Company’s need for
the coke and electricity from the SunCoke Middletown facility. The
Company continues to need the coke from that facility on a long-term basis and
has no immediate plans to idle any of its existing cokemaking
capacity. However, the age and rapidly escalating environmental
compliance costs associated with the Company’s Ashland coke batteries are
continuing concerns.
In
October 2007, the Company announced its intent to build a new electric arc
furnace (“EAF”) and ladle metallurgy furnace at its Butler
Works. Currently, the Company operates three EAFs at Butler
Works. This project involves a capital investment of approximately
$140.0 and will replace two of the existing EAFs with a single furnace capable
of melting more than 1.45 million tons annually, about 40% more than is
currently produced with a three-furnace operation. The project was
initially expected to be completed by the end of 2009. However, the
project is behind schedule due to delays in obtaining a required environmental
permit and the Company currently anticipates completing the project in early
2011.
In
July 2008, the Company announced a $21.0 capital investment to further expand
the Company’s production capabilities for high value-added, grain-oriented
electrical steels. The project includes installation of new
production equipment at the Company’s Butler Works to utilize the Company’s
proprietary special annealing technology, as well as upgrades to an existing
processing line at Butler Works. This capital investment is an
addition to a previously-announced, but not-yet-completed, project at the
Company’s Butler and Zanesville Works which also was for the purpose of
expanding production of electrical steels. Due to the current
depressed business conditions, the Company has temporarily suspended work on
both of these projects.
During
the nine months ended September 30, 2009, cash used by financing activities
totaled $24.4. This includes $23.3 relating principally to the
repurchase of a portion of the Company’s debt obligations, the purchase of $11.4
of the Company’s common stock primarily related to the Company’s share
repurchase program, and the payment of common stock dividends in the amount of
$16.5. Cash used was offset by $25.3 in advances from minority
interest owner SunCoke to Middletown Coke.
Revolving
Credit Facility
Despite
the existing depressed business conditions, the Company believes that its
current liquidity will be adequate to meet its obligations for the foreseeable
future. Future liquidity requirements for employee benefit plan
contributions, scheduled debt maturities, planned debt redemptions and capital
investments are expected to be funded by internally generated cash and/or other
financing sources. To the extent, if at all, that the Company would
need to fund any of its planned capital investments other than through
internally generated cash, the Company currently has an $850.0 five-year
revolving credit facility available for that purpose. At September
30, 2009, there were no outstanding borrowings under the credit
facility. However, availability under the facility was reduced by
$137.5 to support outstanding letters of credit. This resulted in
remaining availability under the facility as of September 30, 2009 in the amount
of $712.5. From time to time, availability may be adjusted by the
amount of eligible collateral, after application of applicable advance
rates. It is extremely difficult to provide reliable financial
forecasts, even on a quarterly basis, in the current economic
climate. The Company’s forward looking statement on liquidity is
based on currently available information and, to the extent the information is
inaccurate, there could be a material adverse impact to the Company’s
liquidity.
Dividends
On
October 27, 2009, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share of common stock, payable on December
10, 2009, to stockholders of record on November 13, 2009. Also, on
July 21, 2009, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share of common stock, payable on September
10, 2009, to stockholders of record on August 14, 2009. This was in
addition to previous quarterly cash dividends of $0.05 per share of common stock
paid on March 10, 2009 and June 10, 2009.
The
payment of cash dividends is subject to a restrictive covenant contained in the
instruments governing most of the Company’s outstanding senior
debt. The covenant allows the payment of dividends, if declared by
the Board of Directors, and the redemption or purchase of shares of its
outstanding capital stock, subject to a formula that reflects cumulative net
earnings. As of September 30, 2009, the limitation on these
restricted payments is $58.6. Restrictive covenants also are
contained in the instruments governing the Company’s $850.0 asset-based
revolving credit facility. Under the credit facility covenants,
dividends and share repurchases are not restricted unless availability falls
below $150.0, at which point dividends would be limited to $12.0 annually and
share repurchases would be prohibited. As of September 30, 2009, the
availability under the asset-based revolving credit facility of $712.5
significantly exceeds $150.0. Accordingly, none of the covenants
currently prevent the Company from declaring and paying a dividend to its
stockholders.
Senior
Notes
During
the first nine months of 2009, the Company repurchased $26.4 of its 7 3/4%
senior notes due in 2012, with cash payments totaling $22.8. In
connection with these repurchases, the Company recorded non-cash, pre-tax gains
of approximately $3.6. The repurchases were funded from the Company’s
existing cash balances. The Company, from time to time, may continue
to make cash repurchases of its outstanding senior notes through open market
purchases, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend upon whether any senior notes are offered to
the Company by the holders, prevailing market conditions, the Company’s cash and
liquidity position and needs, and other relevant factors. The amounts
involved in the repurchases may or may not be material.
Restrictions
under Revolving Credit Facility and Senior Notes
The
indentures governing the Company’s outstanding 7 3/4% senior notes due in 2012
and its $850.0 revolving credit facility contain restrictions and covenants that
may limit the Company’s operating flexibility.
The
senior note indenture includes restrictive covenants regarding (a) the use of
proceeds from asset sales, (b) some investments, (c) the amount of
sale/leaseback transactions, and (d) transactions by subsidiaries and with
affiliates. Furthermore, the senior note indenture imposes the
following additional financial covenants:
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A
minimum interest coverage ratio of at least 2.5 to 1 for the incurrence of
debt. Failure to meet this covenant would not constitute an
event of default. Rather, it would limit the amount of
additional debt the Company could incur to $100.0 beyond the borrowing
available under our existing revolving credit facility. At
September 30, 2009, the ratio fell below the 2.5 to 1 incurrence
test. Other than the impact on borrowing noted above,
noncompliance with this covenant does not materially impact the Company’s
cash or liquidity position. The ratio is calculated by dividing
the interest expense, including capitalized interest and fees on letters
of credit, into EBITDA (defined, essentially, as operating income (i)
before interest, income taxes, depreciation, amortization of intangible
assets and restricted stock, extraordinary items and purchase accounting
and asset distributions, (ii) adjusted for income before income taxes for
discontinued operations, and (iii) reduced for the charges related to
impairment of goodwill special charges, and pension and other
postretirement employee benefit obligation corridor
charges). The corridor charges are amortized over a 10-year
period for this calculation.
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limitation on “restricted payments,” which consist primarily of dividends
and share repurchases, of $25.0 plus 50% of cumulative net income (or
minus 100% of cumulative net loss) from April 1, 2002. As of
September 30, 2009, the limitation on restricted payments was
$58.6.
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The
Company’s $850.0 five-year revolving credit facility secured by the Company’s
product inventory and accounts receivable contains restrictions on, among other
things, distributions and dividends, acquisitions and investments, indebtedness,
liens and affiliate transactions. In addition, the facility requires
maintenance of a minimum fixed charge coverage ratio of 1 to 1 if availability
under the facility is less than $125.0.
Forward-Looking
Statements
Certain
statements made or incorporated by reference in this Form 10-Q, or made in press
releases or in oral presentations made by Company employees, reflect
management’s estimates and beliefs and are intended to be, and are hereby
identified as “forward-looking statements” for purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. These include, but are not limited to, the discussions herein
under the headings “Outlook,” “Liquidity and Capital Resources” and “Risk
Factors.”
As
discussed in its Annual Report on Form 10-K for the year ended December 31,
2008, the Company cautions readers that such forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those currently expected by management. See “Risk Factors” in
Part II, Item 1A of this report and in Part I, Item 1A of the Company’s Form
10-K for the year ended December 31, 2008.
Except
as required by law, the Company disclaims any obligation to update any
forward-looking statements to reflect future developments or
events.