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AK Steel Holding 10-K 2010 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2009.
OR
¨ Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period
from to .
Commission
File No. 1-13696.
AK
STEEL HOLDING CORPORATION
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code:(513) 425-5000.
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No £.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes £ No T.
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No £.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. T.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes T No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Act.
Indicate
by check mark whether the registrant is a shell company, as defined in Rule
12b-2 of the Securities Exchange Act of 1934. Yes £ No T.
Aggregate
market value of the registrant’s voting stock held by non-affiliates at June 30,
2009: $2,076,650,398.
At
February 19, 2010, there were 109,866,415 shares of the registrant’s Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required to be furnished pursuant to Part III of this Form 10-K will
be set forth in, and incorporated by reference from, the registrant’s definitive
proxy statement for the annual meeting of stockholders (the “2010 Proxy
Statement”), which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year ended December 31,
2009.
AK
Steel Holding Corporation
(Dollars
in millions, except per share and per ton amounts)
PART I
Operations
Overview
AK
Steel Holding Corporation (“AK Holding”) is a corporation formed under the laws
of Delaware in 1993 and is a fully-integrated producer of flat-rolled carbon,
stainless and electrical steels and tubular products through its wholly-owned
subsidiary, AK Steel Corporation (“AK Steel” and, together with AK Holding, the
“Company”). AK Steel is the successor through merger to Armco Inc.,
which was formed in 1900.
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, and
sheet and strip form. 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.
Customers
In
conducting its steel operations, the Company principally directs its marketing
efforts toward those customers who require the highest quality flat-rolled steel
with precise “just-in-time” delivery and technical support. Management believes
that the Company’s enhanced product quality and delivery capabilities, and its
emphasis on customer technical support and product planning, are critical
factors in its ability to serve this segment of the market. The
Company’s standards of excellence have been embraced by a wide array of diverse
customers and, accordingly, no single customer accounted for more than 10% of
net sales of the Company during 2009.
The
Company’s flat-rolled carbon steel products are sold primarily to automotive
manufacturers and to customers in the infrastructure and manufacturing
markets. This includes electrical transmission, heating, ventilation
and air conditioning, and appliances. The Company also sells coated,
cold rolled, and hot rolled carbon steel products to distributors, service
centers and converters who may further process these products prior to reselling
them. To the extent management believes necessary, the Company
carries increased inventory levels to meet the requirements of certain of its
customers for “just-in-time” delivery.
The
Company sells its stainless steel products to manufacturers and their suppliers
in the automotive industry, to manufacturers of food handling, chemical
processing, pollution control, medical and health equipment and to distributors
and service centers. The Company sells electrical steels, which are
iron-silicon alloys with unique magnetic properties, primarily to manufacturers
of power transmission and distribution transformers and electrical motors and
generators in the infrastructure and manufacturing markets.
The
Company sells its carbon products principally to customers in the United
States. The Company’s electrical and stainless steel products are
sold both domestically and internationally. The Company’s customer
base is geographically diverse and, there is no single country outside of the
United States as to which sales are material relative to the Company’s total
sales revenue. The Company attributes revenue from foreign
countries based upon the destination of physical shipment of a
product. Revenue from direct sales, and sales as a percentage
of total sales, in 2009, 2008 and 2007 domestically and internationally were as
follows:
The
Company does not have any material long-lived assets located outside of the
United States.
The
Company’s sales in 2009 were adversely impacted by significantly depressed
global economic conditions, and, particularly, declines in the automotive market
and construction markets, both residential and non-residential. The
effects of the recession on each of the Company’s markets resulted in declines
in shipments in every product category
for
the Company. The most significant decline was felt in the
distributors and converters market, due to reduced end-use demand, inventory
reduction throughout the supply chain, and falling steel prices, which resulted
in a decrease in its percentage of total Company sales as compared to the
Company’s other two markets.
Despite
an absolute reduction in total direct automotive sales from year to year, the
Company’s direct automotive revenues as a percent of its total business rose to
approximately 36% in 2009, compared to 32% in 2008. The relative
increase in automotive sales was principally due to that market being the most
heavily weighted toward contract business. During downturns, contract business
maintains more consistent volumes and provides greater price stability than spot
market business because of contractual requirements that limit demand and price
volatility. The Company’s infrastructure and manufacturing market
sales also experienced a reduction in absolute dollars of sales. The
percentage of Company revenue attributable to that market increased, however, to
31% of total Company revenue in 2009, from 29% in 2008, primarily as a result of
the relatively greater revenue decline in the distributors and converters
market.
The
following table sets forth the percentage of the Company’s net sales
attributable to each of its markets:
The
Company is a party to contracts with all of its major automotive and most of its
infrastructure and manufacturing industry customers. These contracts, which are
primarily one year in duration, set forth prices to be paid for each product
during their term. Approximately 83% of the Company’s shipments to
current contract customers permit price adjustments to reflect changes in
prevailing market conditions or certain energy and raw material
costs. Approximately 55% of the Company’s shipments of flat-rolled
steel products in 2009 were made to contract customers, and the balance of the
Company’s shipments were made in the spot market at prevailing prices at the
time of sale.
In
2009, the automotive industry experienced its worst market conditions in
decades. The dramatic downturn in the domestic and global economies,
which started in the fall of 2008, significantly reduced demand for light
vehicles. As a result, North American light vehicle production in
2009 was substantially below historic levels. Because the automotive
market continues to be an important element of the Company’s business, reduced
North American light vehicle production adversely impacts the Company’s total
sales and shipments. Lower prices and shipments to the automotive
market contributed to a dramatic decrease in the Company’s total sales in
2009. Although the Company has seen an improvement in shipments since
the low point in 2009, a level of sales significantly below recent historic
levels likely will continue throughout 2010. At this point, it is impossible to
determine when, or if, the domestic and/or global economies will return to
pre-recession levels.
In
addition, continued low levels of North American light vehicle production could
cause further financial difficulties (including possible bankruptcy filings) for
additional automotive manufacturers and suppliers to the automotive industry,
many of whom are customers of the Company. The Company could be
adversely impacted by such financial difficulties and bankruptcies, including
not only reductions in future sales, but also losses associated with an
inability to collect outstanding accounts receivables from those
customers. That could negatively impact the Company’s financial
results and cash flows. The Company is continuing to monitor this
situation closely and has taken steps to try to mitigate its exposure to such
adverse impacts, but because of current market conditions and the volume of
business involved, it cannot eliminate these risks entirely.
Raw
Materials and Other Inputs
The
principal raw materials required for the Company’s steel manufacturing
operations are iron ore, coal, coke, chrome, nickel, silicon, manganese, zinc,
limestone, and carbon and stainless steel scrap. The Company also
uses large volumes of natural gas, electricity and oxygen in its steel
manufacturing operations. In addition, the Company
historically
has purchased approximately 500,000 to 700,000 tons annually of carbon steel
slabs from other steel producers to supplement the production from its own
steelmaking facilities, though it did not do so in 2009 because of substantially
reduced demand for the Company’s products. The Company makes most of
its purchases of iron ore, coal, coke and oxygen at negotiated prices under
annual and multi-year agreements. The Company typically makes
purchases of carbon steel slabs, carbon and stainless steel scrap, natural gas,
a majority of its electricity, and other raw materials at prevailing market
prices, which are subject to price fluctuations in accordance with supply and
demand. The Company enters into financial instruments designated as
hedges with respect to some purchases of natural gas and certain raw materials,
the prices of which may be subject to volatile fluctuations. In 2009,
the Company experienced a significant decline in raw material and energy costs,
primarily carbon scrap, nickel and natural gas.
To
the extent that multi-year contracts are available in the marketplace, the
Company has used such contracts to secure adequate sources of supply to satisfy
key raw materials needs for the next three to five years. Where
multi-year contracts are not available, or are not available on terms acceptable
to the Company, the Company continues to seek to secure the remainder of its raw
materials needs through annual contracts or spot purchases. The
Company also continues to attempt to reduce the risk of future supply shortages
by considering equity investments with respect to certain raw materials and by
evaluating alternative sources and substitute materials.
The
Company currently believes that it either has, or will be able to secure,
adequate sources of supply for its raw material and energy requirements for
2010. As a result, however, of lower than normal year-end inventories
in 2009, and increased demand beyond the Company’s initial projections for 2010,
the Company still needs to secure additional volumes of some raw materials,
principally iron ore, for 2010. Based on current reduced demand for
most raw materials, the Company does not anticipate major shortages in the
market unless substantial supply capacity is taken out of the
market. The potential exists, however, for production disruptions due
to shortages of raw materials in the future. If such a disruption
were to occur, it could have a material impact on the Company’s financial
condition, operations and cash flows.
The
Company produces most of the coke it consumes in its blast furnaces, but had
also been purchasing approximately 350,000 net tons annually from a third party
pursuant to a ten-year supply contract (the “Shenango Coke Contract”) which
expired on December 31, 2009. In anticipation of the expiration of
the Shenango Coke Contract, the Company entered into a long-term agreement with
Haverhill North Coke Company (“SunCoke Haverhill”), an affiliate of SunCoke
Energy, Inc. (“SunCoke”), to provide the Company with metallurgical-grade coke
from the SunCoke Haverhill facility in southern Ohio. Under the
agreement, SunCoke Haverhill provides AK Steel with up to 550,000 tons of coke
annually. The Company will also benefit under the agreement from
electricity co-generated from the heat recovery coke battery. This is
in addition to the previously announced project with Middletown Coke Company,
Inc., another SunCoke affiliate (“Middletown Coke”), to construct a new
state-of-the-art, environmentally friendly heat-recovery coke battery contiguous
to the Company’s Middletown Works which will be capable of producing 550,000 net
tons of metallurgical grade coke annually. It is likely that the
Company will need the production from both SunCoke facilities due to reduced
production available from, and uncertainties with respect to, the Company’s
Ashland, Kentucky coke batteries as a result of environmental
issues. To the extent the two SunCoke facilities, combined with the
Company’s existing coke batteries in Ashland, Kentucky and Middletown, Ohio,
provide more coke than the Company needs for its steel production, the Company
anticipates that it will be able to sell any excess coke in the merchant coke
market.
Research
and Development
The
Company conducts a broad range of research and development activities aimed at
improving existing products and manufacturing processes and developing new
products and processes. Research and development costs incurred in
2009, 2008 and 2007 were $6.2, $8.1 and $8.0, respectively.
Employees
At
December 31, 2009, the Company’s operations included approximately 6,500
employees, of which approximately 4,900 are represented by labor unions under
various contracts that will expire in the years 2010 through
2013. See discussion under Labor Agreements in the Liquidity and Capital
Resources> section below for additional information on these
agreements. Because of the extraordinary economic conditions which
have adversely impacted the Company’s business, the Company announced in late
2008 that it would temporarily idle certain facilities and lay off some of its
employees. By the end of 2009, most of the idled facilities had been
returned to production and most of the laid-off employees had been returned to
work. However, some of the Company’s facilities continue to be idled
and some of its employees continue to be laid off. That circumstance
is expected to continue until market conditions improve.
Competition
The
Company competes with domestic and foreign flat-rolled carbon, stainless and
electrical steel producers (both integrated steel producers and mini-mill
producers) and producers of plastics, aluminum and other materials that can be
used in lieu of flat-rolled steels in manufactured
products. Mini-mills generally offer a narrower range of products
than integrated steel mills, but can have some competitive cost advantages as a
result of their different production processes and typically non-union work
forces. Price, quality, on-time delivery and customer service are the
primary competitive factors in the steel industry and vary in relative
importance according to the category of product and customer
requirements.
Domestic
steel producers, including the Company, face significant competition from
foreign producers. For a variety of reasons, these foreign producers
often are able to sell products in the United States at prices substantially
lower than domestic producers. These reasons include lower labor, raw material,
energy and regulatory costs, as well as significant government subsidies and
preferential trade practices in their home countries. The annual
level of imports of foreign steel into the United States also is affected to
varying degrees by the strength of demand for steel outside the United States
and the relative strength or weakness of the U.S. dollar against various foreign
currencies. U.S. imports of finished steel decreased slightly from
the 2008 level and accounted for approximately 22% of domestic steel market
demand in 2009. By comparison, imports of finished steel accounted
for approximately 29% and 27%, respectively, of domestic steel demand in 2008
and 2007.
The
Company’s ability to compete has been negatively impacted by the bankruptcies of
numerous domestic steel companies, including several former major competitors of
the Company, and the subsequent and continuing global steel industry
consolidation. Those bankruptcies facilitated the global
consolidation of the steel industry by enabling other entities to purchase and
operate the facilities of the bankrupt steel companies without accepting any
responsibility for most, and in some instances any, pension or healthcare
obligations to the retirees of the bankrupt companies. In contrast,
the Company has continued to provide pension and healthcare benefits to its
retirees, resulting in a competitive disadvantage compared to certain other
domestic integrated steel companies and the mini-mills that do not provide such
benefits to any or most of their retirees. Over the course of the
last several years, however, the Company has negotiated progressive new labor
agreements that have significantly reduced total employment costs at all of its
union-represented facilities. The new labor agreements have increased
the Company’s ability to compete in the highly competitive global steel market
while, at the same time, enhancing the ability of the Company to continue to
support its retirees’ pension and healthcare needs. In addition, the
Company has eliminated approximately $1.0 billion of its retiree healthcare
costs associated with a group of retirees from its Middletown Works as part of
the settlement reached with those retirees in October 2007. For a
more detailed description of this settlement, see the discussion in the “Legal Contingencies” section
of Note 9 to the Consolidated Financial Statements in Item 7 below.
The
Company also is facing the likelihood of increased competition from
foreign-based and domestic steel producers who have announced plans, or have
already started to build or expand steel production and/or finishing facilities
in the United States.
Environmental
Information
with respect to the Company’s environmental compliance, remediation and
proceedings may be found in Note 9 to Consolidated Financial Statements in Item
7 of this Form 10-K, which is incorporated herein by reference.
Executive
Officers of the Registrant
The
following table sets forth the name, age and principal position with the Company
of each of its executive officers as of February 19, 2010:
James
L. Wainscott was elected Chairman of the Board of Directors of the Company,
effective January 1, 2006, and elected President and Chief Executive Officer in
October 2003. Previously, Mr. Wainscott had been the Company’s
Chief
Financial Officer since July 1998. Mr. Wainscott also served as
Treasurer from April 1995 until April 2001. He was elected Senior
Vice President in January 2000, having previously served as a Vice President
from April 1995 until that date. Before joining the Company, Mr.
Wainscott held a number of increasingly responsible financial positions for
National Steel Corporation, and was elected Treasurer and Assistant Secretary
for National Steel in 1993.
David
C. Horn was elected Senior Vice President, General Counsel and Secretary in
January 2005. Mr. Horn was elected Vice President and General Counsel
in April 2001 and assumed the additional position of Secretary in August
2003. Before joining the Company as Assistant General Counsel in
December 2000, Mr. Horn was a partner in the Cincinnati-based law firm now known
as Frost Brown Todd LLC.
John
F. Kaloski was elected Senior Vice President, Operations in January
2005. Mr. Kaloski was named Vice President in April
2003. Prior to joining the Company in October 2002 as Director,
Operations Technology, Mr. Kaloski served as a Senior Vice President at
National Steel Corporation and held senior management positions at U.S. Steel
Corporation.
Albert
E. Ferrara, Jr. was elected Vice President, Finance and Chief Financial Officer
in November 2003. Mr. Ferrara joined the Company in June 2003 as
Director, Strategic Planning and was named Acting Chief Financial Officer in
September 2003. Prior to joining the Company, Mr. Ferrara was Vice
President, Corporate Development for NS Group, Inc., a tubular products
producer, and previously held positions as Senior Vice President and Treasurer
with U.S. Steel Corporation and Vice President, Strategic Planning at USX
Corporation.
Douglas
W. Gant was elected Vice President, Sales and Customer Service in January
2004. From February 2001 until that date, Mr. Gant was Director,
Sales and Marketing, having previously served as General Manager, Sales since
May 1999. Mr. Gant was a regional sales manager from September 1995
until May 1999.
Alan
H. McCoy was elected Vice President, Government and Public Relations in January
1997. From 1994 to 1997, Mr. McCoy was General Manager, Public
Relations.
Lawrence
F. Zizzo, Jr. was elected Vice President, Human Resources in January
2004. Before joining the Company, Mr. Zizzo was Vice President, Human
Resources at National Steel Corporation. Prior to that position, Mr.
Zizzo was Regional Director, Human Resources at National Steel.
Available
Information
The
Company maintains an internet website at www.aksteel.com. Information
about the Company is available on the website free of charge, including the
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission. Information on the Company’s
website is not incorporated by reference into this report.
The
Company cautions readers that its business activities involve risks and
uncertainties that could cause actual results to differ materially from those
currently expected by management. The most significant of those risks
are:
While
the previously listed items represent the most significant risks to the Company,
the Company regularly monitors and reports risks to management and the Board of
Directors by means of a formal Total Enterprise Risk Management
program.
The
Company has no unresolved Securities and Exchange Commission staff
comments.
The
Company is leasing a building in West Chester, Ohio which the Company is using
as its corporate headquarters. The lease commenced in 2007 and the
initial term is twelve years with two five-year options to extend the
lease. The Company continues to own its former headquarters and
research buildings, but has razed other surrounding buildings located in
Middletown, Ohio. Steelmaking, finishing and tubing operations are
conducted at nine facilities located in Indiana, Kentucky, Ohio and
Pennsylvania. All of these facilities are owned by the Company, either directly
or through wholly-owned subsidiaries.
Middletown
Works is situated on approximately 2,400 acres in Middletown,
Ohio. It consists of a coke facility, blast furnace, basic oxygen
furnaces and continuous caster for the production of carbon
steel. Also located at the Middletown site are a hot rolling mill,
cold rolling mill, two pickling lines, four annealing facilities, two temper
mills and three coating lines for finishing the product.
Ashland
Works is located on approximately 600 acres in Ashland, Kentucky. It
consists of a coke facility, blast furnace, basic oxygen furnaces and continuous
caster for the production of carbon steel. A coating line at Ashland
also helps to complete the finishing operation of the material processed at the
Middletown plant.
Rockport
Works is located on approximately 1,700 acres near Rockport,
Indiana. The 1.7 million square-foot plant consists of a
state-of-the-art continuous cold rolling mill, a continuous hot-dip galvanizing
and galvannealing line, a continuous carbon and stainless steel pickling line, a
continuous stainless steel annealing and pickling line, hydrogen annealing
facilities and a temper mill.
Butler
Works is situated on approximately 1,300 acres in Butler,
Pennsylvania. The 3.5 million square-foot plant produces stainless,
electrical and carbon steel. Melting takes place in three electric
arc furnaces that feed an argon-oxygen decarburization unit. These
units feed two double strand continuous casters. The Butler Works
also includes a hot rolling mill, annealing and pickling units and two fully
automated tandem cold rolling mills. It also has various intermediate and
finishing operations for both stainless and electrical steels.
Coshocton
Works is located on approximately 650 acres in Coshocton, Ohio. The
570,000 square-foot stainless steel finishing plant contains two Sendzimer mills
and two Z-high mills for cold reduction, four annealing and pickling lines, nine
bell annealing furnaces, four hydrogen annealing furnaces, two bright annealing
lines and other processing equipment, including temper rolling, slitting and
packaging facilities.
Mansfield
Works is located on approximately 350 acres in Mansfield, Ohio. The
1.1 million square-foot facility produces stainless steel and includes a melt
shop with two electric arc furnaces, an argon-oxygen decarburization unit, a
thin-slab continuous caster, and a six-stand hot rolling mill.
Zanesville
Works is located on 130 acres in Zanesville, Ohio. It consists of a
508,000 square-foot finishing plant for some of the stainless and electrical
steel produced at Butler Works and Mansfield Works and has a Sendzimer cold
rolling mill, annealing and pickling lines, high temperature box anneal and
other decarburization and coating units.
AK
Tube’s Walbridge plant, located in Ohio, operates six electric resistance weld
tube mills and two slitters housed in a 330,000 square foot
facility. AK Tube’s Columbus plant, located in Indiana, is a 142,000
square-foot facility with eight electric resistance weld and two laser weld tube
mills.
Information
with respect to this item may be found in Note 9 to Consolidated Financial
Statements in Item 7 of this Form 10-K, which is incorporated herein by
reference.
AK
Holding’s common stock has been listed on the New York Stock Exchange since
April 5, 1995 (symbol: AKS). The table below sets forth, for the
calendar quarters indicated, the reported high and low sales prices of the
common stock:
As
of February 19, 2010 there were 109,866,415 shares of common stock outstanding
and held of record by 5,007 stockholders. The closing stock price on
February 19, 2010 was $23.36
per share. Because depositories, brokers and other nominees held many
of these shares, the number of record holders is not representative of the
number of beneficial holders.
The
payment of cash dividends is subject to a restrictive covenant contained in the
instruments governing 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. During
the period from 2001 to the third quarter of 2007, the Company was not permitted
under the formula to pay a cash dividend on its common stock or repurchase its
shares as a result of cumulative losses recorded before and during that
period. During the third quarter of 2007, the cumulative losses
calculated under the formula were eliminated due to the improved financial
performance of the Company. Accordingly, since that time, payment of
a cash dividend and repurchase of the Company’s shares have been permissible
under the senior debt covenants. As of December 31, 2009, the
limitation on these restricted payments was approximately
$55.2. 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 December 31, 2009, the availability under the
asset-based revolving credit facility of $600.4 significantly exceeds
$150.0. Accordingly, there currently are no covenant restrictions on
the Company’s ability to declare and pay a dividend to its
shareholders.
The
Company established an initial quarterly common stock dividend rate of $0.05 per
share effective with the March 2008 dividend payment. Information
concerning the amount and frequency of dividends declared and paid in 2009 and
2008 is as follows:
On
January 25, 2010, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share of common stock, payable on March 10,
2010, to shareholders of record on February 12, 2010.
There
were no unregistered sales of equity securities in the quarter or year ended
December 31, 2009.
ISSUER
PURCHASES OF EQUITY SECURITIES
The
following graph compares cumulative total stockholder return on the Company’s
common stock for the five-year period from January 1, 2005 through December 31,
2009 with the cumulative total return for the same period of (i) the Standard
& Poor’s 500 Stock Index and (ii) S&P 500 Metals & Mining
Index. The S&P 500 Metals & Mining Index is made up of AK
Steel Holding Corporation, Alcoa Inc., Titanium Metals Corporation, Newmont
Mining Corporation, Nucor Corporation, Freeport-McMoRan Copper & Gold Inc.,
Allegheny Technologies Inc., Cliffs Natural Resources, Inc., and United States
Steel Corporation. These comparisons assume an investment of $100 at
the commencement of the period and reinvestment of dividends.
Cumulative
Total Returns
January
1, 2005 through December 31, 2009
(Value
of $100 invested on January 1, 2005)
The
following selected historical consolidated financial data for each of the five
years in the period ended December 31, 2009 have been derived from the Company’s
audited consolidated financial statements. The selected historical consolidated
financial data presented herein are qualified in their entirety by, and should
be read in conjunction with, the consolidated financial statements of the
Company set forth in Item 7 and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” set forth in Item 6.
Operations
Overview
The
Company’s operations consist of seven steelmaking and finishing plants 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 continuing operations also include two
plants operated by AK Tube where flat-rolled carbon and stainless steel is
further finished into welded steel tubing. In addition, the Company operates
European trading companies that buy and sell steel and steel products and other
materials.
Safety,
quality and productivity are the focal points of AK Steel’s operations and the
hallmarks of its success. In 2009, the Company experienced another
year of outstanding safety performance and received a variety of
awards. The coke plants in Ashland, Kentucky and Middletown, Ohio,
were co-recipients in 2009 of the Max Eward Safety Award, which annually
recognizes the coke plant with the best safety record in the U.S. among members
of the American Coke and Coal Chemicals Institute. The Ashland coke
plant received this award for the fourth consecutive year and the Middletown
coke plant is now an eight-time recipient of the award. The Company’s
Zanesville Works was honored in 2009 by the Ohio Bureau of Workers Compensation
with three awards for its safety performance. Also in 2009, the
Columbus, Indiana and Walbridge, Ohio plants of AK Tube LLC, a wholly-owned
subsidiary of the Company, were recognized for their outstanding safety
performances in 2008 by the Fabricators & Manufacturers Association,
International and CNA Insurance. Furthermore, AK Tube’s Columbus,
Indiana plant was re-certified as a “Star” site in the Voluntary Protection
Program (“VPP”) of the Indiana Department of Labor’s Occupational Safety
and
Health Administration (“OSHA”), a prestigious designation signifying that the
excellence of its safety programs exceeded the requirements established by
OSHA. AK Tube’s Columbus plant has been VPP Star certified since
2006. The Company’s Rockport and Zanesville Works experienced no
recordable injuries for 2009.
The
Company also had outstanding performance with respect to quality in
2009. The Company continued to be recognized in leading surveys for
being industry-best in overall quality for carbon, stainless and electrical
steels. Jacobson and Associates recently named the Company number one
in overall customer satisfaction, quality and delivery. The Company
also received a variety of quality awards from customers and others in
2009.
With
respect to productivity, the severe downturn in the economy in 2009 resulted in
the Company reducing its operations substantially and idling various pieces of
equipment and facilities at various times throughout the year. Thus,
in 2009 the Company focused on making and finishing its products in the most
cost effective manner possible to conserve cash, reduce costs and maximize its
competitiveness. As a result of a general improvement in steel
demand, the Company was able to increase its production levels at virtually all
of its facilities during the second half of 2009.
Despite
the downturn in the economy and the need to conserve cash, the Company continued
to perform maintenance in 2009 where needed and to invest its capital for the
future. For example, the Company invested approximately $27.0 to
successfully complete the reline of the hearth and bosh sections for its
Middletown Works blast furnace.
Also
in 2009, the Company announced that it had reached agreement with Haverhill
North Coke Company (“SunCoke Haverhill”), an affiliate of SunCoke Energy, Inc.
(“SunCoke”) to provide the Company with metallurgical-grade coke from the
SunCoke Haverhill facility in southern Ohio. Under the agreement,
SunCoke Haverhill provides AK Steel with up to 550,000 tons of coke
annually. The Company will also benefit under the agreement from the
electricity co-generated from the heat recovery coke battery. This is
in addition to the previously announced project with Middletown Coke Company,
Inc., another SunCoke affiliate (“Middletown Coke”), to construct a new
state-of-the-art, environmentally friendly heat-recovery coke battery contiguous
to the Company’s Middletown Works which will be capable of producing 550,000 net
tons of metallurgical grade coke annually. It is likely that the
Company will need the production from both SunCoke facilities due to reduced
production available from, and uncertainties with respect to, the Company’s
Ashland, Kentucky coke batteries as a result of environmental
issues. To the extent the two SunCoke facilities, combined with the
Company’s existing coke batteries in Ashland, Kentucky and Middletown, Ohio,
provide more coke than the Company needs for its steel production, the Company
anticipates that it will be able to sell any excess coke in the merchant coke
market.
2009
Financial Results Overview
The
Company faced challenging times throughout 2009 as the entire steel industry was
adversely impacted by the significant decline in the domestic and global
economies. The Company took immediate and proactive measures to
address the challenging economic conditions, including reducing its operations
to match customer demand, reducing overhead costs, implementing a five-percent
pay cut for all salaried employees until conditions improved at the start of the
fourth quarter, locking and freezing the defined benefit plans for its salaried
employees, temporary layoffs of hourly and salaried employees, and reducing the
size of its salaried workforce by offering an early retirement package and
eliminating positions. While 2009 began with weak demand for the
Company’s products, market conditions improved as the year progressed and the
Company improved its financial performance each quarter throughout
2009. The Company achieved both operating profit and net income in
the second half of 2009. For the full year, the Company reported an
operating loss of $70.1 and a net loss attributable to AK Steel
Holding Corporation of $74.6, or $0.68 per share.
The
Company reported record low shipments in the first half of 2009 but saw
significant improvement in the second half as the recession bottomed out and
customer demand began to improve. In fact, the Company finished the
year strong with shipments of 1,368,300 tons in the fourth
quarter. This still was below the record levels experienced in 2008,
but nearly double the record low shipments the Company experienced in the second
quarter of 2009.
In
the face of extremely challenging economic conditions and depressed sales, the
Company took proactive steps to maintain a strong liquidity position during
2009. At the end of 2009, the Company had cash of
$461.7. While this was less than the $562.7 in cash the Company had
at the end of 2008, it was an excellent result under the circumstances,
particularly given that the Company was able to achieve it without accessing the
capital markets or utilizing its credit facility for cash. The
Company’s solid year-end cash position, along with $600.4 of availability under
its credit facility, resulted in total liquidity of almost $1.1 billion as of
December 31, 2009.
Key
Factors Generally Impacting Financial Results
The
key factor impacting the Company’s 2009 financial results was the severe decline
in the domestic and global economies which began late in 2008 and continued
throughout 2009. Although the Company began to see improvements for
the demand for its products in the second half of 2009, overall for the year it
experienced a significant decline in demand for all of its
products. This severe decline resulted in the Company reducing its
operations to try to match customer demand, including periodically idling
various operations throughout the year. These steps were required to
mitigate the financial impact to the Company and to allow it to manage its
working capital in an efficient manner.
2009
Compared to 2008
Shipments
Steel
shipments in 2009 were 3,935,500 tons, compared to 5,866,000 tons in
2008. The year-over-year reduction was primarily the result of
decreased customer demand throughout the year due to the severe decline in
overall economic conditions. Shipments declined in all reported
product categories in 2009 compared to 2008, but the percentage of decline was
greatest with respect to hot-rolled steel products. As a
result, the Company’s value-added shipments as a percent of total volume shipped
increased to 85.5% in 2009 compared to 80.7% in 2008. Tons shipped by
product category for 2009 and 2008, with percent of total shipments, were as
follows:
Net
Sales
Net
sales in 2009 were $4,076.8, down 47% from the Company’s all-time annual record
for net sales of $7,644.3 in 2008. The year-to-year decrease resulted
from lower selling prices across all of the Company’s product categories as a
result of the severe decline in the demand for steel products driven by the
economic recession. The average selling price was $1,036 per net ton
in 2009, compared to $1,303 per net ton in 2008. The Company has
variable pricing mechanisms with most of its contract customers, under which
both rising and falling commodity costs are passed through to the customer
during the life of the contract. The Company had such variable
pricing mechanisms with respect to approximately 83% of its contract shipments
in 2009. In 2009, the Company experienced a significant decline in
its raw material and energy costs. As a consequence, surcharges to
customers were reduced and that contributed to both the lower average selling
price and the lower net sales for the year.
Net
sales to customers outside the United States were $767.0, or 19% of total steel
sales, for 2009, compared to $1,267.9, or 17% of total steel sales, for
2008. A substantial majority of the revenue from sales outside of the
United States is associated with electrical and stainless steel
products. The increase in the percentage of total sales represented
by international sales in 2009 was principally due to the fact that domestic
sales declined proportionately more than international sales.
Although
the percentage of the Company’s net sales attributable to the automotive
industry increased in 2009 versus 2008, its total volume of direct automotive
sales declined. The decline in automotive sales was principally
the result of significantly reduced light vehicle production in North America
due to the downturn in the economy, which led to reduced orders from the
Company’s automotive customers. The lowest point of customer demand
was in the second quarter of the year, and demand began to increase during the
second half of 2009. This increase in demand was buoyed by the United
States federal government’s “cash for clunkers” program in the third quarter
which helped boost
the
sale of light vehicles in the United States and subsequently resulted in the
need for automotive manufacturers to increase vehicle production, spurring
demand for the Company’s automotive market products.
The
Company likewise experienced a decline in its sales to the infrastructure and
manufacturing markets. This decrease also was driven primarily by the
decline in global and domestic economies. Sales of the Company’s
electrical steel products make up a significant component of its infrastructure
and manufacturing sales. Those electrical steel sales were down
significantly in 2009 principally because of the decline in the United States
housing market, which drives the need for new electrical
transformers. To a much lesser degree, the Company’s electrical steel
sales were negatively impacted in the fourth quarter of 2009 by the trade cases
initiated in China with respect to grain oriented electrical steel imported from
the United States and Russia into China.
The
most significant sales decline in 2009 was in the distributors and converters
market, particularly with respect to hot-rolled steel
shipments. During 2007 and the first half of 2008, spot market
pricing in the steel industry rose to unprecedented levels. As a
result, the Company elected to increase its sales to the spot market as a means
of maximizing its earnings. Starting, however, in the second half of
2008 and continuing through most of 2009, the opposite was true - that is, the
spot market price for steel, particularly hot-rolled steel, declined and the
Company made a concerted effort to move away from such sales. This
led to a disproportionate decline in sales to the distributor and converter
market relative to the Company’s other markets, which typically are more heavily
weighted toward contract sales.
The
following table sets forth the percentage of the Company’s net sales
attributable to each of its markets:
Operating Profit (Loss) and Adjusted
Operating Profit
The
Company reported an operating loss for 2009 of $70.1, compared to an operating
profit of $28.0 for 2008. Included in 2008 annual results were a pre-tax,
non-cash corridor charge and a pre-tax, non-cash pension curtailment charge,
which are described more fully below. The exclusion of those charges
for 2008 would have resulted in adjusted operating profit of $727.5 for
2008. Exclusion of the non-cash charges from the operating results is
presented in order to clarify the effects of those charges on the Company’s
operating results and to reflect more clearly the operating performance of the
Company on a comparative basis for 2009 and 2008.
In
2009, the Company incurred no corridor charges. In 2008, however, the
Company incurred a pension corridor charge of $660.1. A corridor
charge, if required after a re-measurement of the Company’s pension and/or other
postretirement obligations, historically has been recorded in the fourth quarter
of the year in accordance with the method of accounting for pension and other
postretirement benefits which the Company adopted as a result of its merger with
Armco Inc. in 1999. Since 2001, the Company has recorded
approximately $2.5 billion in non-cash pre-tax corridor charges as a result of
this accounting treatment. These corridor charges have had a
significant negative impact on the Company’s financial statements including a
substantial increase in the Company’s accumulated deficit. Though
these corridor charges have been required in seven of the last nine years, it is
impossible to reliably forecast or predict whether they will occur in future
years or, if they do, what the magnitude will be. They 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.
The
Company also experienced a pension curtailment charge in 2008. This
curtailment charge was the result of salaried workforce cost reductions
implemented by the Company. A defined benefit plan covering all
salaried employees was “locked and frozen” and was replaced with a defined
contribution pension plan. Under the new defined contribution pension
plan, the Company makes a fixed percent contribution to the participants’
retirement accounts, but no longer guarantees a minimum or specific level of
retirement benefit. As a result, the Company was required to
recognize in the fourth quarter of 2008 the past service pension expense that
previously would have been amortized.
Additional
information concerning both the pension corridor charge and the pension
curtailment charge is contained in the “Pension & Other Postretirement
Employee Benefit Charges” section below.
Management
believes that reporting adjusted operating profit (as a total and on a per-ton
basis), which is not a financial measure under generally accepted accounting
principles (“GAAP”), more clearly reflects the Company’s current operating
results and provides investors with a better understanding of the Company’s
overall financial performance. In addition, the adjusted operating
results facilitate the ability to compare the Company’s financial results to
those of our competitors. Management views the reported results of
adjusted operating profit as an important operating performance measure and, as
such, believes that the GAAP financial measure most directly comparable to it is
operating profit. Adjusted operating profit is used by management as
a supplemental financial measure to evaluate the performance of the
business. Management believes that the non-GAAP measure, when
analyzed in conjunction with the Company’s GAAP results and the accompanying
reconciliations, provides additional insight into the financial trends of the
Company’s business versus the GAAP results alone. Management also
believes that investors and potential investors in the Company’s securities
should not rely on adjusted operating profit as a substitute for any GAAP
financial measure and the Company encourages investors and potential investors
to review the reconciliations of adjusted operating profit to the comparable
GAAP financial measure. While management believes that the non-GAAP
measures allow for comparability to competitors, the most significant limitation
on that comparison is that the Company immediately recognizes the pension and
other postretirement benefit corridor charges, if required, after a
re-measurement of the liability, historically, in the fourth quarter of the
year. The Company’s competitors do not recognize these pension and
other postretirement costs immediately, but instead, amortize these costs over
future years. Management compensates for the limitations of this
non-GAAP financial measure by recommending that this non-GAAP measure be
evaluated in conjunction with the GAAP financial measure.
The
following table reflects the reconciliation of non-GAAP financial measures for
the full year 2009 and 2008 results:
Reconciliation
of Operating Profit (Loss) to Adjusted Operating Profit (Loss)
Reconciliation
of Operating Profit (Loss) Per Ton to Adjusted Operating Profit (Loss) Per
Ton
Operating
Costs
Operating
costs in 2009 and 2008 were $4,146.9 and $7,616.3, respectively. The
primary reason that operating costs for 2009 were lower was the substantial
decrease in sales from 2008 to 2009. Also contributing in 2009 were
reduced raw material and energy costs and a LIFO credit instead of a LIFO
charge. The Company experienced lower raw material and energy costs
in 2009, primarily associated with carbon scrap, natural gas and alloys, as a
result of reduced pricing in response to the global decline in business
conditions. The Company recorded a LIFO credit in 2009 of $417.2 as a
result of its lower raw material costs, as well as a decline in its year-end
inventories. The Company lowered inventory levels as the year
progressed to conserve cash and to align with customer
demand. Conversely, in 2008, demand for raw materials increased
throughout much of the year, resulting in rising prices for raw materials until
the fourth quarter. As a result of such progressively increasing
costs in 2008, the Company recorded a LIFO charge in 2008 of
$283.3.
Selling
and Administrative Expense
The
Company’s selling and administrative expense decreased to $192.7 in 2009 from
$223.6 in 2008. This decline is the result of a reduction in the
salaried workforce, a 5% pay cut for all salaried employees which applied for
the first
three
quarters of 2009, additional cost sharing for employees’ health care costs,
lower overhead costs as the result of locking and freezing the Company’s defined
benefit pension plan for all salaried employees, and lower insurance
costs. There was also an overall reduction in spending in response to
the economic downturn.
Depreciation
Expense
Depreciation
expense increased to $204.6 in 2009 from $202.1 in 2008, consistent with the
increases in the Company’s capital investments in recent years.
Goodwill
Impairment
The
Company is required to review its goodwill for possible impairment at least
annually and did so in 2009 and 2008. Management judgment is used to
evaluate the impact of changes in operations and to estimate future cash flows
to measure fair value. Assumptions such as forecasted growth rates
and cost of capital are consistent with internal projections. The
evaluation requires that the reporting unit underlying the goodwill be measured
at fair value and, if this value is less than the carrying value of the unit, a
second test must be performed. Under the second test, the current
fair value of the reporting unit is allocated to the assets and liabilities of
the unit including an amount for “implied” goodwill. If implied
goodwill is less than the net carrying amount of goodwill, the difference
becomes the amount of the impairment that must be recorded in that
year. Neither the 2009 nor the 2008 annual reviews identified any
goodwill impairment for the Company.
Pension
& Other Postretirement Employee Benefit Charges
The
Company adopted its method of accounting for pension and other postretirement
benefit plans at the time of its merger with Armco Inc. in
1999. Under such method, the Company did not incur a corridor charge
in 2009, but did incur a non-cash, pre-tax corridor charge in 2008 of $660.1
with respect to its pension benefit plans. Pursuant to this method of
accounting, the Company is required to recognize into its results of operations,
as a non-cash “corridor” adjustment, any unrecognized actuarial net gains or
losses that exceed 10% of the larger of projected benefit obligations or plan
assets. Prior to January 31, 2009, amounts inside this 10% corridor
were amortized over the average remaining service life of active plan
participants. Beginning January 31, 2009, the date of the “lock and
freeze” of a defined benefit pension plan covering all salaried employees, the
actuarial gains and losses will be amortized over the plan participants’ life
expectancy. Actuarial net gains and losses occur when actual
experience differs from any of the many assumptions used to value the benefit
plans, or when the assumptions change, as they may each year when a valuation is
performed. The effect of prevailing interest rates on the discount
rate used to value projected plan obligations as of the December 31 measurement
date is one of the more important factors used to determine the Company’s
year-end liability, corridor adjustment and subsequent year’s expense for these
benefit plans. The 2008 corridor charge of $660.1 was caused
principally by actuarial losses on the investment performance of pension
assets. The Company did not incur a corridor charge related to
other postretirement benefits in 2009 or 2008.
ASC
Topic 715 “Compensation-Retirement Benefits” provides guidance for accounting
for pensions and other postretirement benefit plans. This guidance
requires companies to recognize on their balance sheet the overfunded or
underfunded position of their plans with a corresponding adjustment to
accumulated other comprehensive income, net of tax. The Company
changed its measurement date from October 31 to December 31 during 2008 to meet
the requirements of ASC Subparagraph 715-20-65-1. The change in the
measurement date resulted in an increase in the deferred tax asset of $5.6, an
increase to pension and other postretirement benefit liabilities of $15.8, a
decrease to retained earnings of $7.4 and a decrease to accumulated other
comprehensive income of $2.8.
In
the fourth quarter of 2008, the Company recognized a curtailment charge of $39.4
as a result of the Company’s decision to “lock and freeze”, as of January 31,
2009, the accruals for a defined benefit pension plan covering all salaried
employees. The defined benefit pension accruals were replaced by a
fixed percent contribution to a defined contribution pension plan. As
a result, the Company was required to recognize in the fourth quarter of 2008
the past service pension expense that previously would have been
amortized.
Interest
Expense
The
Company’s interest expense for 2009 was $37.0, which was $9.5 lower than in
2008. This decrease was due primarily to the Company’s early
redemption during 2009 of $26.4 of its $550.0 outstanding senior notes due in
2012 and lower interest rates on the Company’s variable rate
debt. The Company also recognized higher capitalized interest due
primarily to the ongoing electrical steel projects at the Company’s Butler
Works.
Interest
Income
The
Company’s interest income for 2009 was $2.7, which was $7.8 lower than in
2008. The reduction is attributable to lower levels of cash and cash
equivalents, as well as lower returns earned on that cash and cash equivalents
in 2009 compared to 2008.
Other
Income
The
Company’s other income for 2009 was $6.4, which was $4.8 higher than in
2008. This increase was due primarily to foreign exchange gains as a
result of the strengthening of the euro against the dollar.
Income
Taxes
In
2009, the Company had an income tax benefit of $20.0, which included a charge of
$5.1 due to a state tax law change, compared to an income tax benefit of $10.9
in 2008. This increase in the tax benefit was due primarily to a
higher pre-tax loss in 2009.
Net
Income (Loss) Attributable to AK Steel Holding Corporation
The
Company’s net loss in 2009 was $74.6, or $0.68 per diluted share. In
2008, the Company reported net income of $4.0, or $0.04 per diluted share. The
reduction in 2009 compared to 2008 was principally a result of the severe
economic downturn in the domestic and global economies, which caused a
significant decline in sales in all of the Company’s markets. The
Company had sales of $4,076.8 for 2009 compared to record sales of $7,644.3 for
2008. This extraordinary decline in sales was attributable to both a
decline in volume and a decline in average selling price. The
detrimental impact of this loss of revenue from 2008 to 2009 on the Company’s
net results was partially offset by the fact that the Company incurred a pre-tax
non-cash curtailment charge and a pre-tax, non-cash pension corridor charge in
2008 which totaled $699.5. There were no curtailment or corridor
charges in 2009.
2008
Compared to 2007
Shipments
Steel
shipments in 2008 were 5,866,000 tons, compared to 6,478,700 tons in
2007. The year-to-year decrease was primarily the result of decreased
sales in the fourth quarter due to the extreme decline in overall economic
conditions. Shipments of stainless, coated, cold-rolled and tubular
products all declined in 2008 compared to 2007. Partially offsetting
these declines were increases in shipments of the Company’s high-end,
grain-oriented electrical steel products and shipments by the Company’s European
operations. The increase in high-end electrical steel shipments
was principally the result of strong demand for such products through the first
nine months of the year, both domestically and internationally, and was
facilitated by the Company’s prior capital investments to increase its
production capacity of electrical steel products. As a result of the
overall decline throughout most of the Company’s business, the value-added
shipments remained relatively constant at 80.7% compared to
80.3%. Tons shipped by product category for 2008 and 2007 were as
follows:
Net
Sales
The
Company set an all-time record for net sales in 2008 of $7,644.3, up 9% from the
2007 then-record sales of $7,003.0. The year-to-year increase was
driven by a record 2008 average annual selling price of $1,303 per ton
compared
to $1,081 per ton in 2007. Several factors helped drive this
improvement. First, the Company benefited from an increase in pricing
related to its contract business, with approximately 50% of its total shipments
for the year being made subject to such pricing. Second, with respect
to the Company’s spot market sales, prices increased as a result of strong
demand during the first nine month of the year, before retreating significantly
during the fourth quarter. Third, over the course of the last several years, the
Company has focused on optimizing its product mix to focus on growing its niche
markets where its profit margins are strongest. Lastly, as a result
of volatile raw material and energy costs, the Company has negotiated variable
pricing mechanisms with most of its contract customers, which enable the Company
to pass on rising or falling commodity and energy costs during the life of the
contract. The Company had such variable pricing mechanisms with
respect to approximately 75% of its contract shipments in 2008.
Net
sales to customers outside the United States were $1,267.9, or 17% or total
steel sales, for 2008, and $925.1, or 13% of total steel sales, for
2007. A substantial majority of the revenue outside of the United
States is associated with electrical and stainless steel products.
The
Company’s direct automotive sales declined to approximately 32% of the Company’s
total sales in 2008, compared to 40% in 2007. The relative decline in
automotive sales is principally the result of significantly reduced light
vehicle production in North America due to the downturn in the economy, which
led to reduced orders from the Company’s automotive customers, particularly in
the fourth quarter of 2008. It also is attributable to an increased
volume of sales into the spot market of hot rolled products to non-automotive
customers. Also contributing to the decline in the percentage of
direct automotive sales was an increase in the Company’s revenues from 2007 to
2008 attributable to electrical steel products which are included below in the
infrastructure and manufacturing markets for the Company’s
products. The increase in revenue for electrical steel products was
the result of both higher prices and increased shipments, particularly with
respect to high-end, grain-oriented electrical steel products. The
Company’s infrastructure and manufacturing market sales increased to 29% of the
Company’s total sales in 2008, compared to 26% in 2007. This increase
is principally the result of the increased electrical steel sales and reduced
direct automotive sales. The Company’s distributor and converter
sales increased to 39% from 34% in 2007. The principal reason for
this percentage increase also was the decline in direct automotive
sales. The following table sets forth the percentage of the Company’s
net sales attributable to various markets:
Operating Profit and Adjusted
Operating Profit
The
Company reported an operating profit for 2008 of $28.0, compared to an operating
profit of $624.4 for 2007. Included in 2008 and 2007 annual results were
pre-tax, primarily non-cash corridor charges, which are described more fully
below. The exclusion of those charges results in record adjusted
operating profit for 2008 of $727.5 compared to $664.2 for 2007.
Exclusion
of the non-cash charges, discussed below, from the operating results is
presented in order to clarify the effects of those charges on the Company’s
operating results and to more clearly reflect the operating performance of the
Company on a comparative basis for 2008 and 2007. The excluded
charges consist of a pension corridor charge in 2008 and pension curtailment
charges in 2008 and 2007.
The
Company incurred a corridor charge in 2008 of $660.1 related to its pension
obligations. There were no corridor charges in 2007. A
corridor charge, if required after a re-measurement of the Company's pension and
other postretirement obligations, historically has been recorded in the fourth
quarter of the year in accordance with the method of accounting for pension and
other postretirement benefits which the Company adopted as a result of its
merger with Armco Inc. in 1999. Since 2001, the Company has recorded
approximately $2.5 billion in non-cash pre-tax corridor charges as a result of
this accounting treatment. These corridor charges have had a
significant negative impact on the Company’s financial statements including a
substantial reduction in the Company’s accumulated
deficit. Additional information concerning these corridor charges is
contained in the “Pension
& Other Postretirement Employee Benefit Charges” section
below. Though these corridor charges have been required in seven of
the last eight years, it is impossible to reliably forecast or predict whether
they will occur in future years or, if they do, what the magnitude will
be. They 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.
The
2008 curtailment charge was a result of salaried workforce cost reductions
implemented by the Company. A defined benefit plan covering all
salaried employees was “locked and frozen” and was replaced with a fixed percent
contribution to a defined contribution pension plan. As a result, the
Company was required to recognize in the fourth quarter of 2008 the past service
pension expense that previously would have been amortized. Additional
information concerning this charge is contained in the “Pension & Other Postretirement
Employee Benefit Charges” section below.
The
2007 curtailment charge was a result of new labor agreements that the Company
entered into with the represented employees at the Company’s Middletown Works
and Mansfield Works. Under these agreements, the existing defined
benefit pension plan was “locked and frozen” in 2007, with subsequent Company
contributions being made to multiemployer pension trusts. As a
result, the Company was required to recognize in 2007 the past service pension
expense that previously would have been amortized. These new labor
agreements extend until 2011 and no further curtailment or other charges are
anticipated to occur for the duration of the agreements. Additional
information concerning these charges is contained in the “Pension & Other Postretirement
Employee Benefit Charges” section below.
Management
believes that reporting adjusted operating profit (as a total and on a per-ton
basis), which is not a financial measure under generally accepted accounting
principles (“GAAP”), more clearly reflects the Company’s current operating
results and provides investors with a better understanding of the Company’s
overall financial performance. In addition, the adjusted operating
results facilitate the ability to compare the Company’s financial results to
those of our competitors. Management views the reported results of
adjusted operating profit as an important operating performance measure and, as
such, believes that the GAAP financial measure most directly comparable to it is
operating profit. Adjusted operating profit is used by management as
a supplemental financial measure to evaluate the performance of the
business. Management believes that the non-GAAP measure, when
analyzed in conjunction with the Company’s GAAP results and the accompanying
reconciliations, provides additional insight into the financial trends of the
Company’s business versus the GAAP results alone. Management also
believes that investors and potential investors in the Company’s securities
should not rely on adjusted operating profit as a substitute for any GAAP
financial measure and the Company encourages investors and potential investors
to review the reconciliations of adjusted operating profit to the comparable
GAAP financial measure. While management believes that the non-GAAP
measures allow for comparability to competitors, the most significant limitation
on that comparison is that the Company immediately recognizes the pension and
other postretirement benefit corridor charges, if required, after a
re-measurement of the liability, historically, in the fourth quarter of the
year. The Company’s competitors do not recognize these pension and
other postretirement costs immediately, but instead, amortize these costs over
future years. Management compensates for the limitations of this
non-GAAP financial measure by recommending that this non-GAAP measure be
evaluated in conjunction with the GAAP financial measure.
The
following table reflects the reconciliation of non-GAAP financial measures for
the full year 2008 and 2007 results:
Reconciliation
of Operating Profit to Adjusted Operating Profit
Reconciliation
of Operating Profit Per Ton to Adjusted Operating Profit Per Ton
Reconciliation
of Pre-Tax Income (Loss) to Adjusted Pre-Tax Income
Operating
Costs
Operating
costs in 2008 and 2007 were $7,616.3 and $6,378.6,
respectively. Operating costs for 2008 were negatively affected by
higher steelmaking input costs, principally with respect to certain raw
materials and energy costs. Total 2008 costs for various raw
materials, including iron ore, alloys, zinc, aluminum, and purchased slabs,
increased by over $780. As a result of the progressively increasing
costs during both years, the Company recorded LIFO charges in 2008 and 2007 of
$283.3 and $31.2, respectively. In 2008, the Company benefited from
the lower costs associated with lower retiree healthcare benefits resulting from
the settlement in the first quarter of 2008 with a group of retirees from its
Middletown Works. Operating costs were higher in 2007 as the result
of an unplanned outage at its Ashland Works blast furnace during the third and
fourth quarters of 2007.
Selling
and Administrative Expense
The
Company’s selling and administrative expense increased slightly to $223.6 in
2008 from $223.5 in 2007.
Depreciation
Expense
Depreciation
expense increased to $202.1 in 2008 from $196.3 in 2007, in line with the
increases in the Company’s capital investments in recent years.
Goodwill
Impairment
The
Company is required to review its goodwill for possible impairment at least
annually. The 2008 and 2007 annual reviews did not result in any
goodwill impairment for the Company.
Pension
& Other Postretirement Employee Benefit Charges
The
Company adopted its method of accounting for pension and other postretirement
benefit plans at the time of its merger with Armco Inc. in
1999. Under such method, the Company incurred a non-cash, pre-tax
corridor charge in 2008 of $660.1 with respect to its pension benefit
plans. Pursuant to this method of accounting, the Company is required
to recognize into its results of operations, as a non-cash “corridor”
adjustment, any unrecognized actuarial net gains or losses that exceed 10% of
the larger of projected benefit obligations or plan assets. Prior to
January 31, 2009, amounts inside this 10% corridor were amortized over the
average remaining service life of active plan participants. Beginning
January 31, 2009, the date of the “lock and freeze” of a defined benefit pension
plan covering all salaried employees, the actuarial gains and losses will be
amortized over the plan participants’ life expectancy. Actuarial net
gains and losses occur when actual experience differs from any of the many
assumptions used to value the benefit plans, or when the assumptions change, as
they may each year when a valuation is performed. The effect of
prevailing interest rates on the discount rate used to value projected plan
obligations as of the December 31 measurement date is one of the more important
factors used to determine the Company’s year-end liability, corridor adjustment
and subsequent year’s expense for these benefit plans. The 2008
corridor charge of $660.1 was caused principally by actuarial losses on the
investment performance of pension assets. The Company did not
incur an other postretirement employee benefit corridor charge in
2008. There were no corridor charges incurred in 2007.
ASC
Topic 715, “Compensation-Retirement Benefits” provides guidance for accounting
for pensions and other postretirement benefit plans. This guidance
requires companies to recognize on their balance sheet the overfunded or
underfunded position of their plans with a corresponding adjustment to
accumulated other comprehensive income, net of tax. The Company
changed its measurement date from October 31 to December 31 during 2008 to meet
the requirements of ASC Subparagraph 715-20-65-1. The change in the
measurement data resulted in an increase in the deferred tax asset of $5.6, an
increase to pension and other postretirement benefit liabilities of $15.8, a
decrease to retained earnings of $7.4 and a decrease to accumulated other
comprehensive income of $2.8.
In
the fourth quarter of 2008, the Company recognized a curtailment charge of $39.4
as a result of the Company’s decision to “lock and freeze”, as of January 31,
2009, the accruals for a defined benefit pension plan covering all salaried
employees. The defined benefit pension accruals were replaced by a
fixed percent contribution to a defined contribution pension plan. As
a result, the Company was required to recognize in the fourth quarter of 2008
the past service pension expense that previously would have been
amortized.
In
2007, the Company recognized curtailment charges associated with new labor
agreements at the Company’s Mansfield Works and Middletown Works of $15.1 and
$24.7, respectively. Under these agreements, the existing defined
benefit pension plan at each facility was “locked and frozen” with subsequent
Company contributions being made to multiemployer pension trusts. As
a result, the Company was required to recognize in 2007 the past service pension
expense that previously would have been amortized. On balance, the
Company expects the future benefits associated with the new labor agreement,
including the locking and freezing of the defined benefit plans will outweigh
the one-time curtailment charges and the ongoing contributions to the
multiemployer pension trusts.
Interest
Expense
The
Company’s interest expense for 2008 was $46.5, which was $21.8 lower than in
2007. This decrease was due primarily to the Company’s early
redemption during 2007 of the entire $450.0 of outstanding 7 7/8% senior notes
due in 2009. While the Company experienced some of the benefit of
that reduction in interest expense during 2007, it experienced the full benefit
for the first time in 2008.
Interest
Income
The
Company’s interest income for 2008 was $10.5, which was $21.7 lower than in
2007. This decrease was due primarily to the fact that the Company
received $12.5 of interest in 2007 as a result of the recapitalization of
Combined Metals of Chicago, LLC, a private stainless steel processing company in
which the Company holds a 40% equity interest. The reduction also is
attributable to lower levels of cash and cash equivalents, as well as lower
returns earned on that cash and cash equivalents in 2008 compared to
2007.
Other
Income
The
Company’s other income for 2008 was $1.6, which was $2.1 lower than in
2007. This decrease was due primarily to foreign exchange losses
partially offset by gains associated with the repurchase of $19.6 par value of
the Company’s $550.0 outstanding 7 3/4% senior notes due in 2012.
Income
Taxes
In
2008, the Company had an income tax benefit of $10.9, compared to an income tax
provision of $203.6 in 2007, which included a benefit of $11.4 due to state tax
law changes. This reduction was due primarily to a significantly
lower level of pre-tax income in 2008.
Net
Income Attributable to AK Steel Holding Corporation
The
Company’s net income in 2008 was $4.0, or $0.04 per diluted share. In
2007, the Company reported net income of $387.7, or $3.46 per diluted share. The
reduction in 2008 compared to 2007 was principally a result of the negative
impact of the pre-tax pension corridor and curtailment charges incurred in 2008,
which was partially offset by the beneficial impact of significantly increased
sales. In 2008, the Company’s pre-tax curtailment charge and
pension corridor charge totaled $699.5. In 2007, the Company recorded
pension curtailment charges of $39.8 and incurred no corridor
charges. The Company had record sales of $7,644.3 for 2008 compared
to $7,003.0 in 2007. This record sales performance was driven by a
record 2008 average selling price of approximately $1,303 per ton compared to
$1,081 per ton in 2007. The benefit of the record 2008 sales was
partially offset by higher raw material costs, a higher LIFO charge and higher
operating costs associated with the reduction in production levels in the fourth
quarter of 2008 as a result of the significant decline in economic conditions
which severely impacted the steel industry.
Outlook
All
of the statements in this Outlook section are subject
to, and qualified by, the information in the Forward Looking Statements>
section below.
The
Company currently expects first quarter 2010 shipments to be essentially flat
compared to the fourth quarter of 2009 shipments of approximately 1.4 million
tons. As is typically the case, we expect the first quarter to be our
lowest
shipment
quarter of the year. We expect our average selling price to rise
approximately 4% to 5% over the previous quarter level, driven by both an
increase in the demand for steel products due to improving economic conditions
and the passing through, where possible, of rising input costs. The
Company anticipates lower operating and maintenance costs compared to the fourth
quarter of 2009 due to improved operating rates and a continuous improvement in
all areas of our business. In addition, the Company expects
maintenance outage costs in the first quarter of 2010 to be approximately $18.0
lower than in the fourth quarter of 2009. Conversely, while the
Company recorded a significant LIFO credit in the fourth quarter of 2009, it
expects to incur a LIFO charge in the first quarter of 2010, driven by higher
costs for raw materials. Netting the positive and negative factors,
the Company expects to report an operating profit of approximately $35 per ton
for the first quarter of 2010. For the remainder of the year, the
Company currently anticipates higher quarterly shipment levels and higher
average selling prices than during the first quarter of 2010.
Other
factors relevant to the Company’s full-year 2010 outlook include the
following:
There
are many factors which could significantly impact this outlook. In
the current economic environment, it is extremely difficult to provide reliable
financial forecasts, even on a quarterly basis. The foregoing outlook
thus is subject to change depending on developments in the economy, in the
Company’s business, and in the businesses of the Company’s
customers. For example, although electrical steel sales have
increased from 2009 levels, the market for electrical steel products is
recovering more slowly than had been originally anticipated and, if this
continues, it could adversely impact the Company's total electrical steel sales
for 2010. With respect to carbon steel products, there is a risk that the
current recalls of certain Toyota vehicles could have a negative impact on North
American vehicle production by Toyota and, because Toyota is an important
customer of AK Steel, on demand for the Company’s steel products. To date,
however, there has been minimal adverse impact on the Company’s sales to Toyota
and Toyota has publicly announced that it has identified fixes to the problems
that caused the recalls. It is a developing situation, however, and
the Company continues to monitor it closely. Even if the impact of
the recalls on Toyota’s North American vehicle sales becomes greater than is
presently anticipated, the Company has no reason to believe that it will
significantly reduce overall demand for vehicles in North America. Under such
circumstances, because the Company sells its steel to all major automotive
manufacturers in North America, any reduction in the Company’s sales to Toyota
likely would be substantially offset by an increase in sales to other automotive
manufacturers.
Liquidity
and Capital Resources
At
December 31, 2009, the Company had $461.7 of cash and cash equivalents and
$600.4 of availability under the Company’s $850.0 five-year revolving credit
facility for total liquidity of $1,062.1. At December 31, 2009, there
were no outstanding borrowings under the credit facility; however, the
availability reflects the reduction of $136.9 associated with 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, totaled $737.3 as of December 31, 2009. The
Company has no significant scheduled debt payments due until June 2012 when its
7 3/4% senior notes are due. In addition, the Company’s credit
facility expires in February 2012.
During
2009, cash generated by operating activities totaled $58.8, due primarily to
lower inventories, which was partially offset by a contribution to the
Middletown Works retirees VEBA Trust and contributions to the pension
trust. The Company generated $138.7 of cash from managing the level
of accounts receivable, inventories, accounts payable and current liabilities
due primarily to the lower level of inventories mentioned
above. Management believes that the Company’s receivables and current
liability levels are reflective of the current business
environment.
During
2009, the Company made pension contributions totaling
$210.0. Contributions of $50.0 were made in the first and second
quarters. The third quarter pension contribution of $110.0 was double
the $55.0 that was required for the
balance
of 2009 and reduced the Company’s 2010 contribution obligation to approximately
$105.0. A $75.0 contribution toward that total was made in the first
quarter of 2010. The most recent contribution increased the Company’s
total pension contributions since 2005 to over $1.1 billion. The
Company estimates annual required pension contributions for the years 2011 and
2012 to be approximately $275.0 each year. 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 interest rate used to discount future
benefits to their present value. Because of the variability of factors
underlying these assumptions, including the possibility of changes to pension
legislation in the future, the reliability of estimated future pension
contributions decreases as the length of time until the contributions must be
made increases. For a more detailed discussion of the pension
contribution estimates, see Employee Benefit Obligations
below.
Cash
used by investing activities in 2009 totaled $133.4. This includes
$109.5 of capital investments and $24.0 related to the investment by Middletown
Coke Company, Inc. in capital equipment for the coke plant being constructed in
Middletown, Ohio, as discussed above in the “Operations Overview” section of
this Item 6 and as further discussed below. The Middletown Coke
capital investment is funded by its parent SunCoke and is reflected as a payable
from Middletown Coke to SunCoke.
The
Company entered into a 20-year supply contract in 2008 with Middletown Coke 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. 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 ASC
Topic 810, “Consolidation”. At December 31, 2009, Middletown Coke had
approximately $71.9 in assets comprised mainly of construction in
progress. Additionally, Middletown Coke had approximately $74.8 in
liabilities, comprised mainly of payables to its parent, SunCoke.
Cash
used by financing activities in 2009 totaled $26.4. This includes
$23.5 to repurchase 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
$22.0. The collective amount of these uses was offset by $29.0 in
advances from noncontrolling interest owner SunCoke to Middletown Coke, and $0.5
in proceeds resulting from the exercise by recipients of the Company’s stock
options.
In
July 2008, the Company announced a $21.0 capital investment to further expand
the Company’s production capabilities for high-end, 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. In addition to enhancing production capacity for higher
quality grades of electrical steels, the project also will help improve the
Company’s product mix flexibility. The Company currently expects the
project to be completed in 2010. This capital investment is a part of
a previously-announced project currently underway at the Company’s Butler and
Zanesville Works which is the Company’s fourth project since 2005 to expand
production of electrical steels.
During
2009, the Company repurchased $26.4 of the original $550.0 par value of its 7
3/4% senior notes due in 2012, with cash payments totaling $22.8. In
connection with these repurchases, the Company incurred non-cash, pre-tax gains
of approximately $3.6 in 2009. The repurchases were funded from the
Company’s existing cash balances. In 2010, the Company from time to
time may continue to make cash repurchases of its outstanding senior notes
though 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.
During
2009, the Company repurchased $11.4 of its common stock. In 2010, the
Company from time to time may continue to purchase stock in accordance with the
Company’s share repurchase program.
The
Company believes that its current liquidity will be adequate to meet its
obligations for the foreseeable future. With respect to short-term
sources of cash, the Company’s primary sources are cash generated by operations,
and if necessary, borrowings from its revolving credit
facility. Despite the downturn in the global economic markets which
commenced in the latter part of 2008 and continued through 2009, in 2009 the
Company made pension payments of $210.0, contributions to the Middletown Works
retirees VEBA trust of $65.0, and funded postretirement benefit obligation costs
of $108.5. Even taking into account the above mentioned cash
outflows, the Company generated $58.8 of cash flow from operations in
2009.
Other
primary uses of cash include capital expenditures, repayment and repurchase of
debt and related interest, repurchase of common shares and dividends on common
stock. In 2009, 2008 and 2007 the Company made capital expenditures
of $109.5, $166.8 and $104.4, respectively. In 2009, 2008 and
2007 the Company made total debt repayments and repurchases of $23.5, $26.9 and
$450.0, respectively. While the 2009 and 2008 debt-related payments
were primarily for the repurchase of senior notes due in 2012, the full 2007
amount was used to redeem all of the Company’s outstanding senior notes due in
2009.
As
to longer-term obligations, the Company has significant debt maturities and
other obligations that come due after 2010, including estimated cash
contributions to its qualified pension plans, based on current legislation and
actuarial assumptions. For further information, see the Tabular Disclosure of Contractual
Obligations> section below. The Company’s $850.0 revolving
credit facility expiring in 2012 is secured by the Company’s product inventory
and accounts receivable and contains restrictions on, among other things,
distributions and dividends, acquisitions and investments, indebtedness, liens
and affiliated transactions. The facility requires maintenance of a
minimum fixed charge coverage ratio of 1 to 1 if availability under the facility
falls below $125.0. The Company is in compliance with its credit
facility covenants and, absent the occurrence of unexpected adverse events,
expects that it will remain in compliance for the foreseeable
future. At December 31, 2009, the Company had no outstanding
borrowings under the credit facility; however, availability was reduced by
$136.9 due to outstanding letters of credit. In addition,
availability under the facility can fluctuate monthly as a result of changes in
the amount of eligible collateral, such as the Company’s inventory and accounts
receivable. As of December 31, 2009, the Company’s eligible
collateral, after application of applicable advance rates, totaled
$737.3.
The
instruments governing the Company’s outstanding 7-3/4% senior notes due in 2012
include a minimum interest coverage ratio of at least 2.5 to 1 for the
incurrence of debt. As discussed below, failure to meet this covenant
limits to $100.0 the amount of debt that the Company can incur in addition to
the aggregate amount outstanding under the senior notes and the availability at
the time under the credit facility. At December 31, 2009, the ratio
fell below the 2.5 to 1 incurrence test.
Notwithstanding
the current limit on its ability to incur additional debt, as discussed in the
preceding paragraph, the Company believes that it will be able to meet its cash
requirements for the foreseeable future in light of its cash generated from
operations, significant availability under its revolving credit facility, and
ability to access the capital markets to refinance and/or repay debt and other
obligations as they come due. Uncertainties related to the global and
U.S. economies and financial markets, however, could restrict the Company’s
flexibility with respect to its available liquidity sources, such as preventing
the Company from refinancing those liabilities at more favorable rates than
those currently available.
Dividends
The
payment of cash dividends is subject to a restrictive covenant contained in the
instruments governing 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. From 2001
through the first half of 2007, the Company was not permitted under that formula
to pay a cash dividend on its common stock as a result of cumulative losses
recorded over several years. During the third quarter 2007, the
cumulative losses calculated under the formula were eliminated due to the
improved financial performance of the Company. Accordingly, a cash
dividend has been permissible since that time under the Company’s senior debt
covenants. 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 are not
restricted unless availability falls below $150.0, at which point dividends
would be limited to $12.0 annually. Currently, the availability under
the credit facility significantly exceeds $150.0. Accordingly, there
currently are no covenant restrictions on the Company’s ability to declare and
pay a dividend to its shareholders.
The
Company established an initial quarterly common stock dividend rate of $0.05 per
share effective with the March 2008 dividend payment. Information
concerning the amount and frequency of dividends declared and paid in 2009 is as
follows:
On
January 25, 2010, the Company announced that its Board of Directors had declared
a quarterly cash dividend of $0.05 per share of common stock, payable on March
10, 2010, to shareholders of record on February 12, 2010.
Financial
Covenants
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:
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. None of these restrictions affect
or limit the Company’s ability to conduct its business in the ordinary
course. 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.
Capital
Investments
The
Company anticipates 2010 capital investments of approximately $200.0, which the
Company expects to be funded from cash generated from operations. In
addition, with respect to prior capital investments, the Commonwealth of
Kentucky has provided the Company the ability to receive tax incentives in the
form of payroll tax and other withholdings over a 10-year period to help defray
the costs for the installation of a vacuum degasser and caster modifications at
its Ashland Works under the Kentucky Industrial Revitalization Act Tax Credit
Program. These tax incentives are based on certain employment levels
and thus may vary if employment levels are below the designated minimum
levels. Through December 31, 2009, the Company has accumulated $14.7
in such withholdings, which amount is included as a reduction of property, plant
and equipment in the consolidated financial statements.
To
meet the anticipated long-term growth in demand for energy efficient products
used in power generation and distribution transformers, the Company previously
announced that it is expanding its production capacity for high-end,
grain-oriented electrical steels. The Company has announced capital
investments totaling $268.0 to achieve this increased electrical steel
capacity. At December 31, 2009, spending for these future capital
investments totaled
approximately
$186.0. Included in the estimate of 2010 capital investments is
approximately $87.5 related to the projects to increase electrical steel
capacity which slightly exceeds the originally announced amount.
Employee Benefit
Obligations
Under
its method of accounting for pension and other postretirement benefit plans, the
Company recognizes, as of the Company’s measurement date of December 31, any
unrecognized actuarial gains and losses that exceed 10% of the larger of
projected benefit obligations or plan assets (the “corridor”). The
Company incurred no corridor charges in 2009. In 2008, the
unrecognized losses attributable to the Company’s qualified pension plans
exceeded the corridor by $660.1, primarily as a result of poor pension asset
investment returns. Accordingly, the Company incurred a pre-tax
corridor charge of $660.1 in the fourth quarter of 2008. There was no
corridor charge in 2008 associated with the Company’s other postretirement
benefit plans.
The
Company changed its measurement date from October 31 to December 31 during 2008
to meet the requirements of ASC Subparagraph 715-20-65-1. The change
in the measurement data resulted in an increase in the deferred tax asset of
$5.6, an increase to pension and other postretirement benefit liabilities of
$15.8, a decrease to retained earnings of $7.4 and a decrease to accumulated
other comprehensive income of $2.8.
Based
on current assumptions, the Company anticipates that its required pension
funding contributions during 2010 will total approximately $105.0. A
$75.0 contribution toward that total was made in the first quarter of
2010. The amount and timing of future required contributions to the
pension trust depend on 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 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 contribution must be made increases. Currently, the
Company’s major pension plans are significantly underfunded. As a
result, absent major increases in long-term interest rates, above average
returns on pension plan assets and/or changes in legislated funding
requirements, the Company will be required to make contributions to its pension
trusts of varying amounts in the long-term. Some of these
contributions could be substantial. Currently, the Company estimates annual
required contributions for 2011 and 2012 to average approximately $275.0 in each
year.
The
Company provides healthcare benefits to most of its employees and
retirees. Based on the assumptions used to value other postretirement
benefits, primarily retiree healthcare and life insurance benefits, annual cash
payments for these benefits are expected to be in a range of $16.1 to $80.0 for
each of the next 30 years. These payments do not include the two
remaining $65.0 contributions to the VEBA Trust which are required as part of
the Settlement of the Middletown Works Retiree Healthcare Benefit
Litigation. For a more detailed description of the Settlement, see
the discussion below and in the “Legal Contingencies” section
of Note 9 to the Consolidated Financial Statements in Item 7
below. The total projected future benefit obligation of the Company
with respect to payments for healthcare benefits is included in “Pension and
other postretirement benefit obligations” in the Company’s consolidated
financial statements. The net amount recognized by the Company as of
the end of 2009 for future payment of such healthcare benefit obligations was
$875.6.
Accounting
for retiree healthcare benefits requires the use of actuarial methods and
assumptions, including assumptions about current employees’ future retirement
dates, the anticipated mortality rate of retirees, anticipated future increases
in healthcare costs and the obligation of the Company under future collective
bargaining agreements with respect to healthcare benefits for
retirees. Changing any of these assumptions could have a material
impact on the calculation of the Company’s total obligation for future
healthcare benefits. For example, the Company’s calculation of its
future retiree healthcare benefit obligation as of the end of 2009 assumed that
the Company would continue to provide healthcare benefits to current and future
retirees. If this assumption is altered, it could have a material
effect on the calculation of the Company’s total future retiree healthcare
benefit obligation. This assumption could be altered as a result of
one or more of the following developments or other unforeseen
events.
First,
retirees could consent to a change in the current level of healthcare benefits
provided to them. Second, in certain instances, the union which
represented a particular group of retirees when they were employed by the
Company could, in the course of negotiations with the Company, accept such a
change. Third, in certain instances, at or following the expiration
of a collective bargaining agreement which affects the Company’s obligation to
provide healthcare benefits to retired employees, the Company could take action
to modify or terminate the benefits provided to those retirees without the
agreement of those retirees or the union, subject to the right of the union
subsequently to bargain to alter or reverse such action by the
Company. The precise circumstances under which retiree healthcare
benefits may be altered unilaterally or by agreement with a particular union
vary depending on the terms of the relevant collective bargaining
agreement. Some of these developments already have occurred and
either already have impacted, or may
impact
in the future, the Company’s retiree healthcare benefit
obligation. The most significant of these developments are summarized
below.
In
December 2008, the Company announced that all salaried employees accruing
service in a defined benefit pension plan would have their benefit “locked and
frozen” as of January 31, 2009. The accruals for the defined benefit
plan have been replaced by a fixed percent contribution to a defined
contribution pension plan. This action required the Company to
recognize the past service pension expense that previously would have been
amortized as a curtailment charge in 2008 of $39.4.
Since
late 2003, the Company has negotiated new labor agreements with the various
unions at all of its represented facilities. In addition, during this
time period the new labor contracts and the Company’s overall actions to reduce
employment costs have resulted in a significant reduction in the Company’s other
postretirement benefit (“OPEB”) liability. Under GAAP, the Company
may not recognize this benefit immediately. Rather, it is required to
amortize the net benefits of this reduction into future years. The
Company thus will be able to recognize the benefit of this net reduction
annually through its earnings in the future as a reduction in its other
postretirement benefit costs.
In
October 2007, the Company announced that it had reached a settlement (the
“Settlement”) of the claims in litigation filed against the Company by retirees
of its Middletown Works relating to their retiree health and welfare
benefits. The Settlement was approved by the federal district court
on February 21, 2008 and, subject to a pending appeal, reduced the Company’s
total OPEB liability of approximately $2.0 billion as of September 30, 2007 by
approximately $1.0 billion. 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. AK Steel has timely made the first of these
three annual cash contributions of $65.0, leaving it obligated to make two more
annual cash contributions of $65.0 each in March of 2010 and 2011,
respectively. For a more detailed description of the Settlement, see
the discussion in the “Legal
Contingencies” section of Note 9 to the Consolidated Financial Statements
in Item 7 below.
Labor
Agreements
At
December 31, 2009, the Company’s operations included approximately 6,500
employees, of which approximately 4,900 are represented by labor unions under
various contracts that will expire in the years 2010 through 2013.
The
labor contract for approximately 340 hourly employees represented by the United
Autoworkers Local 3462 at the Company’s Coshocton, Ohio plant was scheduled to
expire on March 31, 2010. In December 2009, the members of that union
ratified an extension of the existing contract through March 31,
2013.
An
agreement with the United Steelworkers of America Local 1865, which represents
approximately 750 hourly employees at the Company’s Ashland, Kentucky, West
Works is scheduled to expire on September 1, 2010.
The
labor contract for approximately 100 hourly production and maintenance employees
represented by United Steelworkers of America Local 1915 at the Walbridge, Ohio
facility of AK Tube, LLC, a wholly-owned subsidiary of the Company, was
scheduled to expire on January 25, 2009. In January 2009, the members
of that union ratified a new three-year labor agreement which will expire on
January 22, 2012.
Energy
and Raw Material Hedging
The
Company enters into derivative transactions in the ordinary course of business
to hedge the cost of natural gas and certain raw materials. At
December 31, 2009, the consolidated balance sheets included other current assets
of $1.9, other non-current assets of $0.1 and accrued liabilities of $5.8 for
the fair value of these derivatives. Changes in the prices paid for
the related commodities are expected to offset the effect on cash of settling
these amounts.
Off
Balance Sheet Arrangements
There
were no off balance sheet arrangements as of December 31, 2009.
Potential
Impact of Climate Change Legislation
At
this time the Company is unable to determine whether any of the pending
legislative bills in Congress relating to climate change are reasonably likely
to become law. Even in the event that any of the pending bills are
enacted, the Company cannot anticipate the final form of such laws, or the
extent to which they will be applicable to the Company
and
its operations. As a result, the Company currently has no reasonable
basis on which it can reliably predict or estimate the specific effects any
eventually enacted laws may have on the Company or how the Company may be able
to mitigate any negative impacts on its business and operations.
There
exists the possibility, however, that limitations on greenhouse gas emissions
may be imposed in the United States at some point in the future through some
form of federally enacted regulation or legislation. For example, the U.S.
EPA has proposed to regulate carbon emissions under the federal Clean Air
Act. In addition, bills recently introduced in the United
States Congress aim to limit carbon emissions over long periods of time from
facilities which emit significant amounts of greenhouse
gases. Such bills, if enacted, would apply to the steel
industry, in general, and to the Company, in particular, because the process of
producing steel from elemental iron results in the creation of carbon dioxide,
one of the targeted greenhouse gases. Although the Company and other
steel producers in the United States are actively participating in research and
development efforts to develop breakthrough technology for low- or zero-emission
steelmaking processes, the development of such technologies will take time and
their potential for success cannot be accurately determined. To
address this need for the development of new technologies, not just in the steel
industry but elsewhere, some of the proposed legislative bills include a system
of carbon emission credits, which would be available to certain companies for a
period of time, similar to the European Union’s existing “cap and trade”
system. Each of these bills is likely to be altered substantially as
it moves through the legislative process, making it virtually impossible at this
time to forecast the provisions of any final legislation and the resulting
effects on the Company.
If
regulation or legislation regulating carbon emissions is enacted, however, it is
reasonable to assume that the net financial impact on the Company will be
negative, despite some potential beneficial aspects discussed
below. On balance, such regulation or legislation likely would cause
the Company to incur increased energy, environmental and other costs in order to
comply with the limitations that would be imposed on greenhouse gas
emissions. For example, the Company likely would incur the direct cost of
purchasing carbon emissions credits for its own
operations. Similarly, to the extent that the Company’s raw material
and/or energy suppliers likewise would have to purchase such credits, they may
pass their own increased costs on to the Company through price
hikes. The Company likely also would incur increased capital
costs as a result of cap and trade legislation. Such costs could take
the form of new or retrofitted equipment, or the development of new technologies
(e.g., sequestration),
to try to control or reduce greenhouse gas emissions. In addition, if
similar cap and trade requirements were not imposed globally, the domestic
legislation could negatively impact the Company’s ability to compete with
foreign steel companies not subject to similar requirements.
The
enactment of climate control legislation or regulation also could have some
beneficial impact on the Company, which may somewhat mitigate the adverse
effects noted above. For example, to the extent that climate change
legislation provides incentives for energy efficiency, the Company could benefit
from increased sales of its grain-oriented electrical steel products, which are
among the most energy efficient in the world. The Company sells its
electrical steels, which are iron-silicon alloys with unique magnetic
properties, primarily to manufacturers of power transmission and distribution
transformers and electrical motors and generators. The sale of such
products may be enhanced by climate control legislation in different
ways. For instance, to the extent that the legislation may
promote the use of renewable energy technology, such as wind or solar
technology, it could increase demand for the Company’s high-efficiency
electrical steel products used in power transformers, which are needed to
connect these new sources to the electricity grid. In addition,
effective January 1, 2010, the U.S. Department of Energy adopted higher
efficiency standards for certain types of power distribution transformers and
these new standards are usually achieved through the use of more, and more
highly efficient, electrical steels. Implementation of even higher
efficiency standards for the future is being studied.
The
likelihood of such legislation or regulation is uncertain, and any effect on the
Company would depend on the final terms of such legislation or
regulation. Presently, the Company is unable to predict with any
reasonable degree of accuracy when or even if climate control legislation or
regulation will be enacted, or if so, what will be their terms and applicability
to the Company. In the meantime, the items described above
provide some indication of the potential impact on the Company of climate
control legislation or regulation generally. The Company will
continue to monitor the progress of such legislation and/or regulation
closely.
Tabular
Disclosure of Contractual Obligations
In
the ordinary course of business, the Company enters into agreements under which
it is obligated to make legally enforceable future payments. These
agreements include those related to borrowing money, leasing equipment and
purchasing goods and services. The following table summarizes by
category expected future cash outflows associated with contractual obligations
in effect as of December 31, 2009.
In
calculating the amounts for purchase obligations, the Company first identified
all contracts under which the Company has a legally enforceable obligation to
purchase products or services from the vendor and/or make payments to the vendor
for an identifiable period of time. Then for each identified
contract, the Company determined its best estimate of payments to be made under
the contract assuming (1) the continued operation of existing production
facilities, (2) normal business levels, (3) the contract would be adhered to in
good faith by both parties throughout its term and (4) prices are as set forth
in the contract. Because of changes in the markets it serves, changes
in business decisions regarding production levels or unforeseen events, the
actual amounts paid under these contracts could differ significantly from the
numbers presented above. For example, as is the case currently with
the contracts entered into with certain of the Company’s raw material suppliers,
circumstances could arise which create exceptions to minimum purchase
obligations that are set forth in the contracts. The purchase
obligations set forth in the table above have been calculated without regard to
such exceptions.
A
number of the Company’s purchase contracts specify a minimum volume or price for
the products or services covered by the contract. If the Company were
to purchase only the minimums specified, the payments set forth in the table
would be reduced. Under “requirements contracts” the quantities of
goods or services the Company is required to purchase may vary depending on its
needs, which are dependent on production levels and market conditions at the
time. If the Company’s business deteriorates or increases, the amount
it is required to purchase under such a contract would likely
change. Many of the Company’s agreements for the purchase of goods
and services allow the Company to terminate the contract without penalty upon 30
to 90 days’ prior notice. Any such termination could reduce the
projected payments.
The
Company’s consolidated balance sheets contain reserves for pension and other
postretirement benefits and other long-term liabilities. The benefit
plan liabilities are calculated using actuarial assumptions that the Company
believes are reasonable under the circumstances. However, because
changes in circumstances can have a significant effect on the liabilities and
expenses associated with these plans including, in the case of pensions, pending
or future legislation, the Company cannot reasonably and accurately project
payments into the future. While the Company does include information
about these plans in the above table, it also discusses these benefits elsewhere
in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations and in the notes to its consolidated financial statements, set
forth in Item 7.
The other
long-term liabilities on the Company’s consolidated balance sheets include
reserves for environmental and legal issues, employment-related benefits and
insurance, liabilities established pursuant to ASC Topic 740, “Income Taxes”
with regard to uncertain tax positions, and other reserves. These
amounts generally do not arise from contractual negotiations with the parties
receiving payment in exchange for goods and services. The ultimate
amount and timing of payments are subject to significant uncertainty and, in
many cases, are contingent on the occurrence of
future
events, such as the filing of a claim or completion of due diligence
investigations, settlement negotiations, audit and examinations by taxing
authorities, documentation or legal proceedings.
Critical
Accounting Policies and Estimates
The
Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. These
principles permit choices among alternatives and require numerous estimates of
financial matters. The Company believes the accounting principles
chosen are appropriate under the circumstances, and that the estimates,
judgments and assumptions involved in its financial reporting are
reasonable.
Revenue
Recognition
Revenue
from sales of products is recognized at the time title and the risks and rewards
of ownership pass. This occurs when the products are shipped per customers’
instructions, the sales price is fixed and determinable, and collection is
reasonably assured.
Inventory
Costing
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. The LIFO method allocates the most recent costs to cost of
products sold and, therefore, recognizes into operating results fluctuations in
raw material, energy and other inventoriable costs more quickly than other
methods. Other inventories, consisting mostly of foreign inventories
and certain raw materials, are measured principally at average
cost.
Use
of Estimates
Accounting
estimates are based on historical experience and information that is available
to management about current events and actions the Company may take in the
future. Significant items subject to estimates and assumptions
include the carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets; environmental and legal
liabilities; and assets and obligations related to employee benefit
plans. There can be no assurance that actual results will not differ
from these estimates.
The
Company maintains an allowance for doubtful accounts as a reserve for the loss
that would be incurred if a customer is unable to pay amounts due to the
Company. The Company determines this based on various factors,
including the customer’s financial condition. While losses due to
customer defaults have been low, if in the future the financial condition of
some customers deteriorates to an extent that may affect their ability to pay,
additional allowances may be needed. Approximately 29% of the
Company’s trade receivables outstanding at December 31, 2009 are due from
businesses associated with the U.S. automotive industry, including General
Motors, Chrysler and Ford. Except in a few situations where the risk
warrants it, collateral is not required on trade receivables. In
light, however, of the current economic conditions which have had a particularly
detrimental impact on the automotive industry, the Company is monitoring its
trade receivables position even more closely than normal. While the
Company currently still believes the trade receivables recorded on its balance
sheet will be collected, in the event of default in payment of a trade
receivable, the Company would follow normal collection procedures.
The
Company records a valuation allowance to reduce its deferred tax asset to an
amount that is more likely than not to be realized. In estimating
levels of future taxable income needed to realize the deferred tax asset, the
Company has considered historical results of operations and the cyclical nature
of the steel business and would, if necessary, consider the implementation of
prudent and feasible tax planning strategies to generate future taxable
income. If future taxable income is less than the amount that has
been assumed in determining the deferred tax asset, then an increase in the
valuation allowance will be required, with a corresponding charge against
income. On the other hand, if future taxable income exceeds the level
that has been assumed in calculating the deferred tax asset, the valuation
allowance could be reduced, with a corresponding credit to
income. In the current year, there was an increase in the
valuation allowance related to state deferred tax assets for loss carryforwards
and tax credits in certain states. These states have limited
carryforward periods and limits on how much loss carryforward can be used to
offset estimated future taxable income annually. These factors caused
an increase in the Company’s valuation allowance for 2009. A
valuation allowance has not been recorded on the Company’s temporary
differences, nor its federal net operating loss carryforwards, which do not
begin to expire until 2028, as the Company believes that the estimated levels of
future taxable income is sufficient such that it is more likely than not that it
will realize these deferred tax assets.
The
Company is involved in a number of environmental and other legal
proceedings. The Company records a liability when it has determined
that litigation has commenced or a claim or assessment has been asserted and,
based on available information, it is probable that the outcome of such
litigation, claim or assessment, whether by decision or settlement, will be
unfavorable and the amount of the liability is reasonably
estimable. The Company measures the liability using available
information, including the extent of damage, similar historical situations, its
allocable share of the liability and, in the case of environmental liabilities,
the need to provide site investigation, remediation and future monitoring and
maintenance. Accruals of probable costs have been made based on a
combination of litigation and settlement strategies on a case-by-case basis and,
where appropriate, are supplemented with incurred but not reported development
reserves. However, 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 and legal
proceedings may, therefore, be higher than those currently recorded on the
Company’s financial statements. In addition, results of operations in
any future period could be materially affected by changes in assumptions or by
the effectiveness of the Company’s strategies.
Pension
and Other Postretirement Benefit Plans
Under
its method of accounting for pension and other postretirement benefit plans, the
Company recognizes into income, as of the Company’s measurement date, any
unrecognized actuarial net gains or losses that exceed 10% of the larger of
projected benefit obligations or plan assets, defined as the
corridor. This method results in faster recognition of actuarial net
gains and losses than the minimum amortization method permitted by prevailing
accounting standards and used by the vast majority of companies in the United
States. Faster recognition under this method also results in the
potential for highly volatile and difficult to forecast corridor adjustments,
similar to those recognized by the Company in recent years. Prior to
January 31, 2009, amounts inside this 10% corridor were amortized over the
average remaining service life of active plan participants. Beginning
January 31, 2009, the date of the “lock and freeze” of a defined benefit pension
plan covering all salaried employees, the actuarial gains and losses will be
amortized over the plan participants’ life expectancy.
ASC
Topic 715 requires the Company to fully recognize and disclose an asset or
liability for the overfunded or underfunded status of its benefit plans in
financial statements. The Company changed its measurement date from
October 31 to December 31 during 2008 to meet the requirements of ASC
Subparagraph 715-20-65-1. The change in the measurement data resulted
in an increase in the deferred tax asset of $5.6, an increase to pension and
other postretirement benefit liabilities of $15.8, a decrease to retained
earnings of $7.4 and a decrease to accumulated other comprehensive income of
$2.8.
Under
the applicable accounting standards, actuarial net gains and losses occur when
actual experience differs from any of the many assumptions used to value the
benefit plans or when the assumptions change, as they may each year when a
valuation is performed. The major factors contributing to actuarial
gains and losses for pension plans are the differences between expected and
actual returns on plan assets and changes in the discount rate used to value
pension liabilities as of the measurement date. For other
postretirement benefit plans, differences in estimated versus actual healthcare
costs, changes in assumed healthcare cost trend rates or a change in the
difference between the discount rate and the healthcare trend rate are major
factors contributing to actuarial gains and losses. In addition to
the potential for corridor adjustments, these factors affect future net periodic
benefit expenses. Changes in key assumptions can have a material
effect on the amount of annual expense recognized. For example, a
one-percentage-point decrease in the expected rate of return on pension plan
assets would increase the projected 2010 pension expense by approximately $23.7
before tax. Based on the Company’s liability as of December 31, 2009,
a one-percentage-point increase in the assumed healthcare trend rate would
increase the projected 2010 other postretirement benefit expense by
approximately $0.6 before tax. The discount rate used to value
liabilities and assets affects both pensions and other postretirement benefit
calculations. Similarly, a one-quarter-percentage-point decrease in
this rate would decrease pension expense by less than $0.1 and decrease the
other postretirement credit by $0.1. These estimates exclude any
potential corridor adjustments.
Property,
Plant and Equipment
The
total weighted average useful life of the Company’s machinery and equipment is
18.3 years based on the depreciable life of the assets. The Company
recognizes costs associated with major maintenance activities at its operating
facilities in the period in which they occur.
Investments
The
Company’s financial statements consolidate the operations and accounts of the
Company and all subsidiaries in which the Company has a controlling
interest. The Company also has investments in associated companies
that are accounted for under the equity method and, because the operations of
these companies are integrated with the Company’s basic steelmaking operations,
its proportionate share of their income (loss) is reflected in the Company’s
cost of products sold in the consolidated statements of
operations. In addition, the Company holds investments in debt
securities and minor holdings in equity securities, which are accounted for as
available-for-sale or held-to-maturity cost investments. At December
31, 2009, the Company had no investments that it accounted for as trading
securities. Each of the Company’s investments is subject to a review
for impairment, if and when, circumstances indicate that a loss in value below
its carrying amount is other than temporary. Under these
circumstances, the Company would write the investment down to its fair value,
which would become its new carrying amount.
The
Company’s investment in AFSG Holdings, Inc. represents the carrying value of its
discontinued insurance and finance leasing businesses, which have been largely
liquidated. The activities of the remaining operating companies are
being classified as “runoff” and the companies are accounted for, collectively,
as a discontinued operation under the liquidation basis of accounting, whereby
future cash inflows and outflows are considered. The Company is under
no obligation to support the operations or liabilities of these
companies.
Financial
Instruments
The
Company is a party to derivative instruments that are designated and qualify as
hedges under ASC Topic 815, “Derivatives and Hedging”. The Company’s
objective in using such instruments is to protect its earnings and cash flows
from fluctuations in the fair value of selected commodities and
currencies. For example, in the ordinary course of business, the
Company uses cash settled commodity price swaps, with a duration of up to three
years, to hedge the price of a portion of its natural gas, nickel, aluminum and
zinc requirements. The Company designates the natural gas swaps as
cash flow hedges and the changes in their fair value, excluding the ineffective
portion, are recorded in other comprehensive income. Subsequent gains
and losses are recognized into cost of products sold in the same period as the
underlying physical transaction. Other commodity swaps are marked to
market recognizing gains or losses into earnings. The pre-tax net
loss recognized in earnings during 2009 for natural gas hedges representing the
component of the derivative instruments’ current effectiveness and excluded from
the assessment of hedge effectiveness was $9.4 and was recorded in cost of
products sold. At December 31, 2009, currently valued outstanding
commodity hedges would result in the reclassification into earnings of $1.3 in
net-of-tax losses within the next twelve months. Based on such
reviews as it deems reasonable and appropriate, the Company believes that all
counterparties to its outstanding derivative instruments are entities with
substantial credit worthiness.
Goodwill
At
December 31, 2009 and 2008, the Company’s assets included $37.1 of goodwill,
which is less than 1% of the Company’s assets. Each year, as required
by ASC Subtopic 350-20, “Goodwill”, the Company performs an evaluation of
goodwill to test this balance for possible impairment. Management
judgment is used to evaluate the impact of changes in operations and to estimate
future cash flows to measure fair value. Assumptions such as
forecasted growth rates and cost of capital are consistent with internal
projections. The evaluation requires that the reporting unit
underlying the goodwill be measured at fair value and, if this value is less
than the carrying value of the unit, a second test must be
performed. Under the second test, the current fair value of the
reporting unit is allocated to the assets and liabilities of the unit including
an amount for “implied” goodwill. If implied goodwill is less than
the net carrying amount of goodwill, the difference becomes the amount of the
impairment that must be recorded in that year. The Company’s
businesses operate in highly cyclical industries and the valuation of these
businesses can be expected to fluctuate, which may lead to further impairment
charges in future operating costs. The 2009 annual review did not result in any
goodwill impairment for the Company.
New
Accounting Pronouncements
Certain
amounts in prior year financial statements have been reclassified to reflect the
reporting requirements of ASC Subparagraph 810-10-65-1, “Transition Related to
FASB Statements No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51, and No. 164, Not-for-Profit Entities:
Mergers and Acquisitions”.
ASC
Topic 810, “Consolidation”, as amended, 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. The
amendment
to ASC Topic 810 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
and Vicksmetal/Armco Associates.
Earnings
per share have been restated in prior periods in conformity with ASC
Subparagraph 260-10-65-2, “Transition Related to FSP EITF 03-6-1”.
Effective
with this Form 10-K, the Company has amended its disclosure relating to
postretirement benefit plan assets in compliance with ASC Subparagraph
715-20-65-2, “Transition related to FSP FAS 132(R)-1, Employers’ Disclosures
about Postretirement Benefit Plan Assets”. The disclosure now
includes 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 2009 fiscal
year has had or is expected to have a material impact on the Company’s
consolidated financial statements.
Forward-Looking
Statements
Certain
statements made or incorporated by reference in this Form 10-K, 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. In particular, these include (but are not limited to)
statements in the foregoing sections entitled Raw Materials, Employees,
Competition, Environmental, Risk Factors, Legal Proceedings, Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
Operations Overview, Key Factors Generally Impacting Financial Results, Outlook,
Liquidity and Capital Resources, Tabular Disclosure of Contractual
Obligations, Critical Accounting
Policies and Estimates, and New Accounting Pronouncements. In
addition, these include statements in Item 6A, Quantitative and Qualitative
Disclosure about Market Risk and in the Notes to Consolidated Financial
Statements in the paragraphs entitled, Property Plant and Equipment, Goodwill
and Other Intangible Assets, Pension and Other Postretirement Benefits
Accounting, Concentrations of Credit Risk, Union Contracts, Financial
Instruments, Income Taxes, Commitments, and Environmental and Legal
Contingencies.
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 Item 1A Risk Factors for more
information on certain of these risks and uncertainties.
Except
as required by law, the Company disclaims any obligation to update any
forward-looking statements to reflect future developments of
events.
In
the ordinary course of business, the Company’s primary areas of market risk
include changes in (a) interest rates, (b) the prices of raw materials and
energy sources, and (c) foreign currency exchange rates. The Company
manages interest rate risk by issuing variable- and fixed-rate debt, and
currently has $504.0 of fixed-rate debt and $103.0 of variable-rate debt
outstanding. The fair value of this debt as of December 31, 2009
was $609.6. A reduction in prevailing interest rates or improvement
in the Company’s credit rating could increase the fair value of this
debt. A reduction in the rate used to discount total future principal
and interest payments of 1% would result in an increase in the total fair value
of the Company’s long-term debt of approximately $38.8. An
unfavorable effect on the Company’s financial results and cash flows from
exposure to interest rate declines and a corresponding increase in the fair
value of its debt would result only if the Company elected to repurchase its
outstanding debt securities at prevailing market prices.
With
regard to raw materials and energy sources, natural gas prices, in particular,
have been highly volatile. At normal consumption levels, a one dollar
per MCF change in natural gas prices would result in an approximate $40.0 change
in annual pre-tax operating results, excluding the offsetting effects of any
then-existing hedging instruments. In addition, the cost of scrap
(which is purchased in the spot market and is not susceptible to hedging) and
the cost of iron ore both have been volatile over the course of the last several
years. Collectively, these and other raw material and energy cost
fluctuations have affected the Company’s margins and made it more difficult to
forecast because much of the Company’s revenue comes from annual or longer
contracts with its customers. To address such cost
volatility,
where competitively possible, the Company attempts to add a surcharge to the
price of steel it sells to the spot market and to negotiate a variable pricing
mechanism with its contract customers that allows the Company to adjust selling
prices in response to changes in the cost of certain raw materials and
energy. In addition, in the case of stainless steel, increased costs
for nickel, chrome and molybdenum can usually be recovered through established
price surcharges. Approximately 55% of the Company’s shipments in
2009 were made under contracts having durations of six months or
more. The Company anticipates that its percentage of contract sales
will be similar in 2010. Approximately 83% of the Company’s shipments
to contract customers in 2009 permitted an adjustment of selling prices in
response to changes in the cost of certain raw materials and
energy. Therefore, fluctuations in the price of energy (particularly
natural gas), raw materials (such as scrap, purchased slabs, coal, iron ore, and
zinc) or other commodities will be, in part, passed on to the Company’s
customers rather than absorbed solely by the Company.
In
addition, in order to further minimize its exposure to fluctuations in raw
material costs, and to secure an adequate supply of raw materials, the Company
has entered into multi-year purchase agreements for certain raw materials that
provide for fixed prices or only a limited variable price
mechanism. While enabling the Company to reduce its exposure to
fluctuations in raw material costs, this also exposes the Company to an element
of market risk relative to its sales contracts. Currently,
approximately 55% of the Company’s sales contracts have durations of six months
or more. Approximately 17% of those contracts have fixed price terms
and the other 83% have some form of variable pricing which does not necessarily
enable the Company to recoup the full amount of increases in its raw material
and energy costs. After new contracts are negotiated with the
Company’s customers, the average sales prices could increase or
decrease. If that average sales price decreases, the Company may not
be able to reduce its raw material costs to a corresponding degree due to the
multi-year term and fixed price nature of some of its raw material purchase
contracts. In addition, some of the Company’s existing multi-year
supply contracts, particularly with respect to iron ore, have required minimum
purchase quantities. Under adverse economic conditions, such as were
present in 2009, those minimums may exceed the Company’s
needs. Subject to exceptions for force majeure and other
circumstances impacting the legal enforceability of the contracts, such minimum
purchase requirements could require the Company to purchase quantities of raw
materials, particularly iron ore, which significantly exceed its anticipated
needs. Under such circumstances, the Company would attempt to
negotiate agreements for new purchase quantities. There is a risk,
however, that in one or more instances the Company would not be successful in
securing lower purchase quantities, either through negotiation or
litigation. In that event, the Company would likely need to purchase
more of a particular raw material in a particular year than it needs, negatively
impacting its cash flow.
The
Company uses cash settled commodity price swaps and/or options to hedge the
price of a portion of its natural gas, nickel, 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 loss on the consolidated balance sheets and recognized into cost
of products sold in the same period as the underlying physical
transaction. At December 31, 2009, accumulated other comprehensive
loss included $1.3 in unrealized net-of-tax losses for the fair value of these
derivative instruments. 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. At
December 31, 2009, other current assets of $1.9, other non-current assets of
$0.1 and accrued liabilities of $5.8 were included on the consolidated balance
sheets for the fair value of these commodity hedges. The following
table presents the negative effect on pre-tax income of a hypothetical change in
the fair value of derivative instruments outstanding at December 31, 2009 due to
an assumed 10% and 25% decrease in the market price of each of the indicated
commodities.
Because
these instruments are structured and used as hedges, these hypothetical losses
would be offset by the benefit of lower prices paid for the physical commodity
used in the normal production cycle. The Company currently does not
enter into swap or option contracts for trading purposes.
The
Company is also subject to risks of exchange rate fluctuations on a small
portion of intercompany receivables that are denominated in foreign
currencies. The Company occasionally uses forward currency contracts
to manage exposures to certain of these currency price
fluctuations. At December 31, 2009, the Company had outstanding
forward currency contracts with a total notional value of $23.3 for the sale of
euros. At December 31, 2009, the fair value of the Company’s
outstanding forward currency contracts was $0.9. Based on the
contracts outstanding at the end of 2009, a 10% increase in the dollar to euro
exchange rate would result in a $2.3 pre-tax loss in the value of those
contracts, which would offset the income benefit of a more favorable exchange
rate.
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