UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
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)
Delaware
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31-1401455
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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9227 Centre Pointe Drive, West Chester, Ohio
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45069
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(Address of principal executive offices)
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(Zip Code)
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(513) 425-5000
(Registrant’s telephone number, including area code)
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 filing requirements for the past 90 days. Yes T No £
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” (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
|
T
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|
Accelerated filer
|
£
|
|
|
|
|
|
Non-accelerated filer
|
£
|
|
Smaller reporting company
|
£
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
109,984,622 shares of common stock
(as of July 28, 2010)
AK STEEL HOLDING CORPORATION
AK STEEL HOLDING CORPORATION
|
|
|
|
|
|
(dollars in millions, except per share data)
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(unaudited)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,596.1 |
|
|
$ |
793.6 |
|
|
$ |
3,001.8 |
|
|
$ |
1,715.8 |
|
Cost of products sold (exclusive of items shown below)
|
|
|
1,428.0 |
|
|
|
766.6 |
|
|
|
2,671.6 |
|
|
|
1,689.6 |
|
Selling and administrative expenses
|
|
|
52.6 |
|
|
|
47.9 |
|
|
|
106.8 |
|
|
|
95.7 |
|
Depreciation
|
|
|
49.9 |
|
|
|
51.6 |
|
|
|
100.2 |
|
|
|
102.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
1,530.5 |
|
|
|
866.1 |
|
|
|
2,878.6 |
|
|
|
1,888.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
65.6 |
|
|
|
(72.5 |
) |
|
|
123.2 |
|
|
|
(172.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
11.1 |
|
|
|
9.2 |
|
|
|
20.0 |
|
|
|
19.4 |
|
Other income (expense)
|
|
|
(9.2 |
) |
|
|
3.4 |
|
|
|
(13.8 |
) |
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|
5.7 |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
45.3 |
|
|
|
(78.3 |
) |
|
|
89.4 |
|
|
|
(186.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision due to tax law change
|
|
|
— |
|
|
|
— |
|
|
|
25.3 |
|
|
|
— |
|
Income tax provision (benefit)
|
|
|
18.9 |
|
|
|
(30.3 |
) |
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|
36.3 |
|
|
|
(64.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total income tax provision (benefit)
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|
|
18.9 |
|
|
|
(30.3 |
) |
|
|
61.6 |
|
|
|
(64.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
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|
|
26.4 |
|
|
|
(48.0 |
) |
|
|
27.8 |
|
|
|
(121.6 |
) |
Less: Net loss attributable to noncontrolling interests
|
|
|
(0.3 |
) |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(1.0 |
) |
Net income (loss) attributable to AK Steel Holding Corporation
|
|
$ |
26.7 |
|
|
$ |
(47.2 |
) |
|
$ |
28.6 |
|
|
$ |
(120.6 |
) |
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to AK Steel Holding Corporation common stockholders
|
|
$ |
0.24 |
|
|
$ |
(0.43 |
) |
|
$ |
0.26 |
|
|
$ |
(1.10 |
) |
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|
|
|
|
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Common shares and common share equivalents outstanding (weighted average in millions):
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Basic
|
|
|
109.5 |
|
|
|
108.7 |
|
|
|
109.5 |
|
|
|
109.3 |
|
Diluted
|
|
|
109.9 |
|
|
|
108.7 |
|
|
|
109.9 |
|
|
|
109.3 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Dividends declared and paid per share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
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See notes to condensed consolidated financial statements.
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AK STEEL HOLDING CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
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|
(dollars in millions)
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|
|
|
June 30,
|
|
|
December 31,
|
|
(unaudited)
|
|
2010
|
|
|
2009
|
|
ASSETS
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Current Assets:
|
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|
|
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|
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Cash and cash equivalents
|
|
$ |
129.5 |
|
|
$ |
461.7 |
|
Accounts receivable, net
|
|
|
649.5 |
|
|
|
463.1 |
|
Inventory, net
|
|
|
724.5 |
|
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|
416.7 |
|
Deferred tax asset, current
|
|
|
238.6 |
|
|
|
223.9 |
|
Other current assets
|
|
|
27.4 |
|
|
|
64.7 |
|
Total Current Assets
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|
|
1,769.5 |
|
|
|
1,630.1 |
|
Property, Plant and Equipment
|
|
|
5,479.6 |
|
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|
5,385.1 |
|
Accumulated depreciation
|
|
|
(3,509.0 |
) |
|
|
(3,409.1 |
) |
Property, Plant and Equipment, net
|
|
|
1,970.6 |
|
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|
1,976.0 |
|
Other Assets:
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|
|
|
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|
|
Investment in AFSG Holdings, Inc.
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|
|
55.6 |
|
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|
55.6 |
|
Other investments
|
|
|
51.5 |
|
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|
52.1 |
|
Goodwill
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|
|
37.1 |
|
|
|
37.1 |
|
Other intangible assets
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|
|
0.2 |
|
|
|
0.2 |
|
Deferred tax asset, non-current
|
|
|
458.6 |
|
|
|
514.7 |
|
Other non-current assets
|
|
|
16.9 |
|
|
|
8.9 |
|
Total Non-current Assets
|
|
|
619.9 |
|
|
|
668.6 |
|
TOTAL ASSETS
|
|
$ |
4,360.0 |
|
|
$ |
4,274.7 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
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|
|
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|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
792.0 |
|
|
$ |
438.9 |
|
Accrued liabilities
|
|
|
167.4 |
|
|
|
157.0 |
|
Current portion of long-term debt
|
|
|
0.7 |
|
|
|
0.7 |
|
Current portion of pension and other postretirement benefit obligations
|
|
|
140.6 |
|
|
|
144.1 |
|
Total Current Liabilities
|
|
|
1,100.7 |
|
|
|
740.7 |
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
501.9 |
|
|
|
605.8 |
|
Pension and other postretirement benefit obligations
|
|
|
1,662.4 |
|
|
|
1,856.2 |
|
Other non-current liabilities
|
|
|
225.8 |
|
|
|
191.9 |
|
Total Non-current Liabilities
|
|
|
2,390.1 |
|
|
|
2,653.9 |
|
TOTAL LIABILITIES
|
|
|
3,490.8 |
|
|
|
3,394.6 |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, authorized 25,000,000 shares
|
|
|
— |
|
|
|
— |
|
Common stock, authorized 200,000,000 shares of $.01 par value each; issued 2010, 122,797,017 shares, 2009, 121,881,816 shares; outstanding 2010, 109,977,430 shares, 2009, 109,394,455 shares
|
|
|
1.2 |
|
|
|
1.2 |
|
Additional paid-in capital
|
|
|
1,926.0 |
|
|
|
1,911.4 |
|
Treasury stock, common shares at cost, 2010, 12,819,587 shares; 2009, 12,487,361 shares
|
|
|
(169.8 |
) |
|
|
(162.2 |
) |
Accumulated deficit
|
|
|
(1,019.9 |
) |
|
|
(1,037.5 |
) |
Accumulated other comprehensive income
|
|
|
133.7 |
|
|
|
167.9 |
|
Total AK Steel Holding Corporation Stockholders’ Equity
|
|
|
871.2 |
|
|
|
880.8 |
|
Noncontrolling interest
|
|
|
(2.0 |
) |
|
|
(0.7 |
) |
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
869.2 |
|
|
|
880.1 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
4,360.0 |
|
|
$ |
4,274.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
|
AK STEEL HOLDING CORPORATION
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(dollars in millions)
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(unaudited)
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
27.8 |
|
|
$ |
(121.6 |
) |
Depreciation
|
|
|
100.2 |
|
|
|
102.9 |
|
Amortization
|
|
|
11.0 |
|
|
|
6.6 |
|
Deferred income taxes
|
|
|
63.6 |
|
|
|
(37.4 |
) |
Contributions to pension trust
|
|
|
(110.0 |
) |
|
|
(100.0 |
) |
Contributions to Middletown retirees VEBA
|
|
|
(65.0 |
) |
|
|
(65.0 |
) |
Pension and other postretirement benefit payments greater than expense
|
|
|
(54.0 |
) |
|
|
(31.3 |
) |
Working capital
|
|
|
(160.6 |
) |
|
|
162.6 |
|
Working capital – Middletown Coke
|
|
|
15.0 |
|
|
|
3.9 |
|
Other operating items, net
|
|
|
17.7 |
|
|
|
26.7 |
|
Net cash flows from operating activities
|
|
|
(154.3 |
) |
|
|
(52.6 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
(35.0 |
) |
|
|
(76.8 |
) |
Capital investments – Middletown Coke
|
|
|
(48.9 |
) |
|
|
(18.8 |
) |
Other investing items, net
|
|
|
1.0 |
|
|
|
0.3 |
|
Net cash flows from investing activities
|
|
|
(82.9 |
) |
|
|
(95.3 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
400.0 |
|
|
|
— |
|
Redemption of long-term debt
|
|
|
(505.9 |
) |
|
|
(23.1 |
) |
Debt issuance costs |
|
|
(8.7 |
) |
|
|
— |
|
Proceeds from exercise of stock options
|
|
|
1.3 |
|
|
|
— |
|
Purchase of treasury stock
|
|
|
(7.5 |
) |
|
|
(11.4 |
) |
Common stock dividends paid
|
|
|
(11.0 |
) |
|
|
(11.0 |
) |
Advances from noncontrolling interest owner to Middletown Coke
|
|
|
35.0 |
|
|
|
15.5 |
|
Other financing items, net
|
|
|
1.8 |
|
|
|
1.0 |
|
Net cash flows from financing activities
|
|
|
(95.0 |
) |
|
|
(29.0 |
) |
Net decrease in cash and cash equivalents
|
|
|
(332.2 |
) |
|
|
(176.9 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
461.7 |
|
|
|
562.7 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
129.5 |
|
|
$ |
385.8 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Net cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest
|
|
$ |
13.9 |
|
|
$ |
28.4 |
|
Income taxes
|
|
|
(20.4 |
) |
|
|
(25.7 |
) |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities —
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock and restricted stock units
|
|
$ |
6.4 |
|
|
$ |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
|
AK STEEL HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(dollars in millions, except per share data, unless otherwise indicated)
|
NOTE 1 - Basis of Presentation
|
In the opinion of the management of AK Steel Holding Corporation (“AK Holding”) and AK Steel Corporation (“AK Steel”, and together with AK Holding, the “Company”), the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2010, the results of its operations for the three- and six-month periods ended June 30, 2010 and 2009, respectively, and its cash flows for the six-month periods ended June 30, 2010 and 2009, respectively. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2009.
NOTE 2 - Earnings and Dividends Per Share
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income (loss) attributable to AK Holding
|
|
$ |
26.7 |
|
|
$ |
(47.2 |
) |
|
$ |
28.6 |
|
|
$ |
(120.6 |
) |
Less: Distributed earnings to common stockholders and holders of certain stock compensation awards
|
|
|
5.5 |
|
|
|
— |
|
|
|
11.0 |
|
|
|
— |
|
Undistributed earnings (losses)
|
|
$ |
21.2 |
|
|
$ |
(47.2 |
) |
|
$ |
17.6 |
|
|
$ |
(120.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders earnings – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to common stockholders
|
|
$ |
5.5 |
|
|
$ |
— |
|
|
$ |
11.0 |
|
|
$ |
— |
|
Undistributed earnings (losses) to common stockholders
|
|
|
21.1 |
|
|
|
(47.2 |
) |
|
|
17.5 |
|
|
|
(120.6 |
) |
Common stockholders earnings (losses) – basic
|
|
$ |
26.6 |
|
|
$ |
(47.2 |
) |
|
$ |
28.5 |
|
|
$ |
(120.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding (weighted average in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic earnings per share
|
|
|
109.5 |
|
|
|
108.7 |
|
|
|
109.5 |
|
|
|
109.3 |
|
Effect of dilutive stock-based compensation
|
|
|
0.4 |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
Common shares outstanding for diluted earnings per share
|
|
|
109.9 |
|
|
|
108.7 |
|
|
|
109.9 |
|
|
|
109.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings
|
|
$ |
0.05 |
|
|
$ |
— |
|
|
$ |
0.10 |
|
|
$ |
— |
|
Undistributed earnings (losses)
|
|
|
0.19 |
|
|
|
(0.43 |
) |
|
|
0.16 |
|
|
|
(1.10 |
) |
Basic earnings (losses) per share
|
|
$ |
0.24 |
|
|
$ |
(0.43 |
) |
|
$ |
0.26 |
|
|
$ |
(1.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially issuable common shares (in millions) excluded from earnings per share calculation due to anti-dilutive effect
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
0.3 |
|
|
|
1.1 |
|
Earnings per share (“EPS”) is calculated utilizing the “two-class” method by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding during the period. In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities. The restricted stock granted by AK Holding is entitled to dividends and meets the criteria of a participating security.
The following table lists the dates thus far in 2010 on which the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share of common stock, the record dates for determining stockholders of record, and the payment dates for the quarterly cash dividend.
2010 COMMON STOCK DIVIDENDS
|
|
|
|
Announcement Date
|
|
Record Date
|
|
Payment Date
|
|
Per Share
|
|
January 25, 2010
|
|
February 12, 2010
|
|
March 10, 2010
|
|
$ |
0.05 |
|
April 20, 2010
|
|
May 14, 2010
|
|
June 10, 2010
|
|
$ |
0.05 |
|
July 27, 2010
|
|
August 13, 2010
|
|
September 10, 2010
|
|
$ |
0.05 |
|
Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured on the last in, first out (LIFO) method. Other inventories are measured principally at average cost.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Finished and semi-finished
|
|
$ |
886.1 |
|
|
$ |
617.6 |
|
Raw materials
|
|
|
292.8 |
|
|
|
204.3 |
|
Total cost
|
|
|
1,178.9 |
|
|
|
821.9 |
|
Adjustment to state inventories at LIFO value
|
|
|
(454.4 |
) |
|
|
(405.2 |
) |
Net inventories
|
|
$ |
724.5 |
|
|
$ |
416.7 |
|
Inventory values include a value attributable to iron ore. The global benchmark price of iron ore for 2010 has not yet been established. That benchmark price will impact the price paid by the Company for iron ore in 2010 under contracts with its existing principal iron ore suppliers. For purposes of the inventory valuations above, the Company has assumed an increase in the 2010 benchmark price for iron ore of 65%. The price ultimately paid by the Company for iron ore in 2010 may differ from this assumption.
NOTE 4 - Pension and Other Postretirement Benefits
|
The Company provides noncontributory pension and various healthcare and life insurance benefits to most employees and retirees. The pension plan is not fully funded. Through the first six months of 2010 the Company has contributed $110.0 to the qualified pension plan trust, which satisfies the Company’s minimum required contribution for 2010. Of this total, $75.0 was contributed in the first quarter of 2010 and $35.0 was contributed in the second quarter of 2010. During 2009, the Company made $210.0 in aggregate contributions to the qualified pension plan trust.
Net periodic benefit costs for pension and other postretirement benefits were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
0.9 |
|
|
$ |
0.8 |
|
|
$ |
1.7 |
|
|
$ |
2.0 |
|
Interest cost
|
|
|
47.9 |
|
|
|
52.5 |
|
|
|
95.8 |
|
|
|
104.9 |
|
Expected return on assets
|
|
|
(49.0 |
) |
|
|
(44.7 |
) |
|
|
(97.9 |
) |
|
|
(89.3 |
) |
Amortization of prior service cost
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
1.6 |
|
|
|
1.6 |
|
Amortization of loss
|
|
|
4.3 |
|
|
|
4.5 |
|
|
|
8.6 |
|
|
|
9.0 |
|
Net periodic benefit cost
|
|
$ |
4.7 |
|
|
$ |
13.7 |
|
|
$ |
9.8 |
|
|
$ |
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
1.1 |
|
|
$ |
1.0 |
|
|
$ |
2.1 |
|
|
$ |
2.0 |
|
Interest cost
|
|
|
10.7 |
|
|
|
13.8 |
|
|
|
21.5 |
|
|
|
27.6 |
|
Amortization of prior service credit
|
|
|
(19.7 |
) |
|
|
(19.8 |
) |
|
|
(39.4 |
) |
|
|
(39.5 |
) |
Amortization of gain
|
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
(1.3 |
) |
|
|
(1.7 |
) |
Net periodic benefit cost (income)
|
|
$ |
(8.5 |
) |
|
$ |
(5.8 |
) |
|
$ |
(17.1 |
) |
|
$ |
(11.6 |
) |
The decrease in “Net periodic benefit cost” for Pension Benefits for the three and six months ended June 30, 2010 was principally caused by a reduction in interest cost and an increased return on assets because of a higher base. The reduction in interest cost was principally the result of lower discount rates. The increased return on assets was principally due to a higher market value of assets at December 31, 2009 compared to December 31, 2008.
The increase in “Net periodic benefit income” for Other Postretirement Benefits for the three and six months ended June 30, 2010, was principally caused by a reduction in interest cost as a result of a lower discount rate and lower other postretirement benefit obligations.
The “Amortization of gain” for Other Postretirement Benefits was decreased by $0.4 and $0.8, respectively, in the three and six month periods ended June 30, 2010, as a result of a preliminary injunction issued on January 29, 2010, in a case filed by three former hourly workers retired from the Company’s Butler Works. The preliminary injunction bars the Company from effecting any further benefit reductions or new healthcare charges for Butler Works retirees pending final judgment in the case. A further discussion of the case and the injunction can be found in Note 9.
The total projected future benefit obligation of the Company with respect to payments for healthcare benefits to the Company’s retirees is accounted for as “Pension and other postretirement benefit obligations” on the Company’s Condensed Consolidated Balance Sheets. The net amount of the liability recognized by the Company, as of June 30, 2010, for future payment of such benefit obligations was approximately $0.8 billion, compared to approximately $0.9 billion at December 31, 2009.
As a result of the enactment of the Patient Protection and Affordable Care Act and the subsequent enactment of the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Care Acts”), the Company recorded a non-cash charge of $25.3 in the first quarter of 2010. The charge was due to a reduction in the value of the Company’s deferred tax asset as a result of a change to the tax treatment associated with Medicare Part D reimbursements. The Company expects to continue to receive Medicare Part D reimbursements notwithstanding passage of the Health Care Acts.
NOTE 5 - Share-based Compensation
|
AK Holding’s Stock Incentive Plan (the “SIP”) permits the granting of nonqualified stock option, restricted stock, performance share and restricted stock unit awards to Directors, officers and other employees of the Company. At AK Holding’s 2010 Annual Meeting of Stockholders (the “Annual Meeting”), the stockholders approved, among other items, an increase of three million shares in the aggregate maximum number of shares issuable under the SIP to a total of 19 million shares and an extension of the period during which equity grants may be made under the SIP through December 31, 2019. The shares that are issued as the result of these grants will be newly issued shares. At the Annual Meeting, the stockholders also re-approved the material terms of the performance goals under the SIP, thereby enabling AK Holding to maintain the tax deductibility of performance-based equity compensation pursuant to Section 162(m) of the Internal Revenue Code.
With respect to stock options, the exercise price of each option may not be less than the market price of the Company’s common stock on the date of the grant. The Company has not had, and does not have, a policy or practice of repricing stock options to lower the price at which such option is exercisable. Stock options have a maximum term of ten years and may not be exercised earlier than six months following the date of grant or such other term as may be specified in the award agreement. Stock options granted to officers and key managers vest and become exercisable in three equal installments on the first, second and third anniversary of the grant date. Stock options formerly were granted to Directors. Those options vested and became exercisable after one year. On July 16, 2009, the Board of AK Holding, upon the recommendation of its outside compensation consultant, approved a change to the Director compensation program. This change replaced the grants of stock options which non-employee Directors previously received upon election to the Board and at five-year intervals thereafter with ongoing quarterly awards of restricted stock units (“RSUs”) in the total annualized amount of thirty-five thousand dollars. This change did not affect the vesting of stock options granted to Directors prior to July 16, 2009.
Performance shares vest after a three-year period. Though a target number of performance shares is awarded on the grant date, the total number of performance shares issued to the participant upon vesting is based on two equally-rated metrics: (i) the Company’s share performance compared to a prescribed compounded annual growth rate and (ii) the Company’s total share return compared to Standard and Poor’s MidCap 400 index.
Restricted stock awards granted to officers and key managers on or prior to December 31, 2006, were awarded on terms pursuant to which 25% of the shares covered by the award vest two years after the date of the award and an additional 25% vest on the third, fourth and fifth anniversaries of the date of the award. Restricted stock awards granted to officers and key managers after December 31, 2006, ordinarily are awarded on terms pursuant to which the shares covered by the award vest ratably on the first, second and third anniversaries of the grant. However, in connection with the promotion of three existing Named Executive Officers, on May 26, 2010, the Company granted restricted stock to each of them that will fully vest on the third anniversary of the grant date. The reason for the change from the normal three-year step vesting of one third of the shares each year to “cliff” vesting of all of the shares at the end of a three-year period was to encourage the long term employment with the Company of each of these Named Executive Officers.
Until October 16, 2008, Directors were granted restricted stock as the equity component of their compensation. On October 16, 2008, the Board of Directors amended the SIP to allow RSUs to be granted to non-employee Directors in lieu of restricted shares of common stock as the equity component of a Director’s compensation. In addition, the Board of Directors permitted each Director a one-time election to convert all of his or her existing restricted stock to RSUs. To the extent not so converted, restricted stock issued to a Director prior to October 16, 2008, vested at the end of the Director’s full tenure on the Board. New grants of RSUs vest immediately upon grant, but are not settled (i.e., paid out) until one year after the date of the grant, unless deferred settlement is elected as described below.
RSUs resulting from restricted stock converted by Directors vested and were settled as of the date of the AK Holding 2009 Annual Meeting of Stockholders, subject also to a deferred settlement election. Directors have the option to defer settlement of their RSUs until six months following termination of their service on the Board. If a Director elects this deferral option, he or she also may elect to take distribution of the shares upon settlement in a single distribution or in annual installments not to exceed fifteen years.
The Company’s estimate of fair value of options granted under the Company’s SIP is calculated as of the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2010
|
|
2009 (a)
|
|
2010
|
|
2009
|
Expected volatility
|
70.9% – 77.7%
|
|
—
|
|
61.8% – 77.7%
|
|
81.1% – 90.8%
|
Weighted-average volatility
|
73.80%
|
|
—
|
|
65.88%
|
|
82.56%
|
Expected term (in years)
|
2.8 – 4.8
|
|
—
|
|
2.8 – 6.3
|
|
2.8 – 6.3
|
Risk-free interest rate
|
1.18% – 1.97%
|
|
—
|
|
1.18% – 2.89%
|
|
1.05% – 1.84%
|
Dividend yield
|
1.34%
|
|
—
|
|
0.91%
|
|
2.19%
|
|
|
|
|
|
|
|
|
(a) No grants in the period
|
|
|
|
|
|
|
|
The Company uses a straight-line method for amortizing the value of the share-based payments. The Company uses historical data regarding stock option exercise behaviors to estimate the expected life of options granted based on the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatility for a period equal to the stock option’s expected life. The expected dividend yield is based on the Company’s historical dividend payments. The Company’s estimate assumes that 5% of the options issued will be forfeited.
A summary of option activity under the Company’s SIP for the six months ended June 30, 2010, is presented below:
Stock Options
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2009
|
|
|
1,044,171 |
|
|
$ |
14.54 |
|
|
|
|
|
Granted
|
|
|
209,458 |
|
|
|
22.31 |
|
|
|
|
|
Exercised
|
|
|
(154,157 |
) |
|
|
8.29 |
|
|
|
|
|
Cancelled
|
|
|
(9,375 |
) |
|
|
19.45 |
|
|
|
|
|
Outstanding at June 30, 2010
|
|
|
1,090,097 |
|
|
$ |
16.87 |
|
7.4 yrs
|
|
$ |
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at June 30, 2010
|
|
|
445,237 |
|
|
$ |
17.08 |
|
8.8 yrs
|
|
$ |
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
|
621,427 |
|
|
$ |
16.72 |
|
6.4 yrs
|
|
$ |
3.4 |
|
The following table summarizes information about stock option value for the relevant periods:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Weighted-average grant-date fair value per share of options granted
|
|
$ |
7.48 |
|
|
(a)
|
|
|
$ |
11.32 |
|
|
$ |
5.08 |
|
Total intrinsic value of options exercised (c)
|
|
(b)
|
|
|
$ |
0.1 |
|
|
$ |
1.7 |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) No options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) No options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Based upon the average market price during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding and exercisable at June 30, 2010:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$ |
3.05 |
|
to
|
|
$ |
9.19 |
|
|
|
104,333 |
|
5.4 yrs.
|
|
$ |
7.38 |
|
|
|
96,833 |
|
|
$ |
7.36 |
|
$ |
9.20 |
|
to
|
|
$ |
13.64 |
|
|
|
325,445 |
|
8.1 yrs.
|
|
|
9.28 |
|
|
|
106,615 |
|
|
|
9.41 |
|
$ |
13.65 |
|
to
|
|
$ |
16.65 |
|
|
|
126,501 |
|
5.9 yrs.
|
|
|
14.82 |
|
|
|
109,401 |
|
|
|
14.80 |
|
$ |
16.66 |
|
to
|
|
$ |
18.07 |
|
|
|
214,335 |
|
6.3 yrs.
|
|
|
16.76 |
|
|
|
214,335 |
|
|
|
16.76 |
|
$ |
18.08 |
|
to
|
|
$ |
68.47 |
|
|
|
319,483 |
|
8.6 yrs.
|
|
|
28.59 |
|
|
|
94,243 |
|
|
|
36.75 |
|
The following table lists performance shares granted by the Company in the relevant periods:
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
Performance shares granted
|
|
279,420
|
|
543,089
|
Three-year performance period end date
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
Share-based compensation expense includes expense for both nonqualified stock options and performance shares granted from the SIP. The following table summarizes information about share-based compensation expense which the Company has estimated will be $8.7 for 2010:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
Pre-tax share-based compensation expense
|
|
$ |
2.0 |
|
|
$ |
4.7 |
|
After-tax share-based compensation expense
|
|
|
1.2 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
A summary of the activity for non-vested restricted stock awards as of June 30, 2010, and changes during the six-month period is presented below:
Restricted Stock Awards
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at December 31, 2009
|
|
|
682,526 |
|
|
$ |
13.40 |
|
Granted
|
|
|
293,153 |
|
|
|
21.03 |
|
Vested
|
|
|
(496,343 |
) |
|
|
15.14 |
|
Cancelled
|
|
|
(9,063 |
) |
|
|
15.89 |
|
Outstanding at June 30, 2010
|
|
|
470,273 |
|
|
$ |
16.27 |
|
The following table summarizes information on common stock compensation expense related to restricted stock awards granted under the Company’s SIP and stock compensation expense related to RSUs awarded to Directors for the relevant periods:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Common stock compensation expense related to restricted stock awards granted under the Company’s SIP
|
|
$ |
1.0 |
|
|
$ |
1.2 |
|
|
$ |
4.4 |
|
|
$ |
2.4 |
|
Common stock compensation expense related to restricted stock awards granted under the Company’s SIP after tax
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
2.7 |
|
|
|
1.5 |
|
Stock compensation expense related to RSUs awarded to Directors
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.3 |
|
Stock compensation expense related to RSUs awarded to Directors after tax
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there were $5.9 of total unrecognized compensation costs related to non-vested share-based compensation awards granted under the SIP, which costs are expected to be recognized over a weighted average period of 2.0 years.
NOTE 6 - Long-term Debt and Other Financing
|
On May 11, 2010, AK Steel issued $400.0 of 7 5/8% Senior Notes due 2020 (the “2020 Notes”). The issuance generated net proceeds of $392.0 after underwriting fees. AK Holding, of which AK Steel is a wholly-owned subsidiary, fully and unconditionally, jointly and severally, guarantees the payment of interest, principal and premium, if any, on the 2020 Notes. In April 2010, AK Steel commenced a cash tender offer and consent solicitation (the “Tender Offer”) for all of the approximately $504.0 in aggregate principal amount of outstanding 7 3/4% Senior Notes due 2012 (the “Old Notes”). At the expiration of the Tender Offer on May 21, 2010, AK Steel accepted $321.2 in aggregate principal amount of Old Notes tendered by holders. The aggregate amount paid by the Company to consummate the Tender Offer for the Old Notes was approximately $332.8, an amount equal to 100% of the principal amount of the tendered Old Notes, plus interest accrued to the Tender Offer's expiration and a redemption premium of approximately $1.5 associated with the tendering noteholders’ acceptance of the accompanying consent solicitation. The redemption premium was recorded in other income (expense) on the Company’s Condensed Consolidated Statements of Operations.
In addition, on May 12, 2010, pursuant to the terms of the indenture governing the Old Notes, AK Steel called for redemption all of the approximately $182.8 in aggregate principal amount of Old Notes that remained outstanding after the expiration of the Tender Offer. The aggregate redemption price for the Old Notes was approximately $189.9,
an amount equal to 100% of the principal amount of the outstanding Old Notes, plus interest accrued to the redemption date, June 15, 2010. The proceeds from the issuance of the 2020 Notes along with cash on hand were used to retire the Old Notes.
As a result of the Tender Offer and redemption transactions, on June 15, 2010, AK Steel and the guarantors (which are discussed in the immediately following paragraph) of the Old Notes retired all of the approximately $504.0 in aggregate principal amount of Old Notes outstanding and satisfied and discharged their obligations under the indentures that governed the Old Notes.
In connection with the issuance of the 2020 Notes, AK Steel and AK Holding entered into new indentures governing the 2020 Notes. Under the terms of the prior indentures governing the Old Notes, AK Steel’s parent company, AK Holding, as well as AKS Investments, Inc. and AK Tube LLC, which are direct and indirect wholly-owned subsidiaries, respectively, of AK Steel, had fully and unconditionally, jointly and severally, guaranteed the payment of interest, principal and premium, if any, on the Old Notes. Under the terms of the new indentures, AK Holding currently is the sole guarantor of the 2020 Notes.
At any time prior to May 15, 2015, AK Steel may redeem the 2020 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium calculated in accordance with the indentures governing the 2020 Notes and accrued and unpaid interest. In addition, AK Steel may redeem the 2020 Notes, in whole or in part, at any time on or after May 15, 2015, at the redemption price for such notes, set forth below as a percentage of the face amount, plus accrued and unpaid interest to the redemption date, if redeemed during the twelve-month period commencing on May 15 of the years indicated below:
Year
|
|
Redemption Price
|
|
2015
|
|
|
103.813 |
% |
2016
|
|
|
102.542 |
% |
2017
|
|
|
101.271 |
% |
2018 or thereafter
|
|
|
100.000 |
% |
During 2009, and prior to the Tender Offer and redemption transactions described above, the Company repurchased $26.4 in aggregate principal amount of the Old Notes with cash payments totaling $22.8. In connection with these repurchases, the Company recorded non-cash, pre-tax gains of approximately $3.6. The repurchases were funded from the Company’s existing cash balances. There were no repurchases in the first or second quarters of 2010.
The following table summarizes the fair value of the Company’s long-term debt, including current maturities for the relevant periods:
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Fair value of long-term debt, including current maturities
|
|
$ |
492.1 |
|
|
$ |
609.6 |
|
|
|
|
|
|
|
|
|
|
The fair value estimate was based on financial market information available to management at the measurement date. Management is not aware of any significant factors that would materially alter this estimate since that date. The carrying value of the Company’s financial instruments does not differ materially from their estimated fair value at June 30, 2010, and the end of 2009.
The 2020 Notes’ indentures include restrictive covenants, but these covenants are significantly less restrictive than the covenants contained in the indentures for the Old Notes. The covenants relating to the 2020 Notes include customary restrictions on (a) the incurrence of additional debt by certain AK Steel subsidiaries, (b) the incurrence of liens by AK Steel and AK Holding’s other subsidiaries, (c) the amount of sale/leaseback transactions, and (d) the ability of AK Steel and AK Holding to merge or consolidate with other entities and to sell, lease or transfer all or substantially all of the assets of the AK Steel and AK Holding to another entity. The 2020 Notes also contain customary events of default.
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. The Credit Facility expires in February 2012. The Company does not
expect any of these restrictions to affect or limit its ability to conduct its business in the ordinary course. In addition, the facility requires maintenance of a minimum fixed charge coverage ratio of one to one if availability under the facility is less than $125.0.
As of the filing date of this Quarterly Report, the Company is in compliance with all of the 2020 Notes’ covenants and the Credit Facility covenants.
Income taxes recorded through June 30, 2010, have been estimated based on year-to-date income and projected results for the full year. The amounts recorded reflect the provisions of ASC Topic 740, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes standards for the recognition and measurement of tax positions taken or expected to be taken on a tax return.
As a result of the enactment of the Patient Protection and Affordable Care Act and the subsequent enactment of the Health Care and Education Reconciliation Act of 2010, the Company recorded a non-cash charge of $25.3 in the first quarter of 2010. The charge was due to a reduction in the value of the Company’s deferred tax asset as a result of a change to the tax treatment associated with Medicare Part D reimbursements.
NOTE 8 - Comprehensive Income (Loss)
|
Comprehensive income (loss), net of tax, is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income (loss) attributable to AK Holding
|
|
$ |
26.7 |
|
|
$ |
(47.2 |
) |
|
$ |
28.6 |
|
|
$ |
(120.6 |
) |
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
— |
|
|
|
2.3 |
|
|
|
(2.1 |
) |
|
|
0.9 |
|
Derivative instrument hedges, mark to market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) arising in period
|
|
|
7.7 |
|
|
|
(0.3 |
) |
|
|
(14.9 |
) |
|
|
(21.9 |
) |
Less: Reclassification of (gain) loss included in net income
|
|
|
(1.9 |
) |
|
|
9.5 |
|
|
|
2.9 |
|
|
|
13.7 |
|
Unrealized holding gains (losses) on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
|
(1.2 |
) |
|
|
1.6 |
|
|
|
(0.7 |
) |
|
|
0.2 |
|
Less: Reclassification of losses included in net income
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
Pension and OPEB adjustment
|
|
|
(10.3 |
) |
|
|
(9.1 |
) |
|
|
(19.5 |
) |
|
|
(18.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
21.0 |
|
|
$ |
(43.2 |
) |
|
$ |
(5.6 |
) |
|
$ |
(145.8 |
) |
A deferred tax rate of approximately 38.0% was applied to derivative instrument hedges, unrealized gains and losses and the pension and OPEB adjustment.
Accumulated other comprehensive income, net of tax, is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Foreign currency translation
|
|
$ |
2.2 |
|
|
$ |
4.3 |
|
Derivative instrument hedges
|
|
|
(13.3 |
) |
|
|
(1.3 |
) |
Unrealized loss on investments
|
|
|
(2.2 |
) |
|
|
(1.6 |
) |
Employee benefit liability
|
|
|
147.0 |
|
|
|
166.5 |
|
Accumulated other comprehensive income
|
|
$ |
133.7 |
|
|
$ |
167.9 |
|
NOTE 9 - Environmental and Legal Contingencies
|
Environmental Contingencies: Domestic steel producers, including AK Steel, are subject to stringent federal, state and local laws and regulations relating to the protection of human health and the environment. Over the past fiscal three years, the Company has expended the following for environmental-related capital investments and environmental compliance:
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Environmental-related capital investments
|
|
$ |
1.0 |
|
|
$ |
1.8 |
|
|
$ |
2.4 |
|
Environmental compliance costs
|
|
|
106.6 |
|
|
|
126.5 |
|
|
|
122.8 |
|
AK Steel and its predecessors have been conducting steel manufacturing and related operations since the year 1900. Although the Company believes its operating practices have been consistent with prevailing industry standards during this time, hazardous materials may have been released in the past at one or more operating sites or third-party sites, including operating sites that the Company no longer owns. The Company has estimated potential remediation expenditures for those sites where future remediation efforts are probable based on identified conditions, regulatory requirements or contractual obligations arising from the sale of a business or facility. The table below summarizes liabilities recorded on the Company’s Condensed Consolidated Balance Sheets for estimated probable costs relating to environmental matters:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Accrued liabilities
|
|
$ |
17.0 |
|
|
$ |
17.0 |
|
Other non-current liabilities
|
|
|
41.1 |
|
|
|
40.6 |
|
In general, the material components of these accruals include the costs associated with investigations, delineations, risk assessments, remedial work, governmental response and oversight costs, site monitoring, and preparation of reports to the appropriate environmental agencies.
The ultimate costs to the Company with respect to each site cannot be predicted with certainty because of the evolving nature of the investigation and remediation process. Rather, to develop the estimates of the probable costs, the Company must make certain assumptions. The most significant of these assumptions relate to the nature and scope of the work which will be necessary to investigate and remediate a particular site and the cost of that work. Other significant assumptions include the cleanup technology which will be used, whether and to what extent any other parties will participate in paying the investigation and remediation costs, reimbursement of governmental agency past response and future oversight costs, and the reaction of the governing environmental agencies to the proposed work plans. Costs of future expenditures are not discounted to their present value. The Company does not believe that there is a reasonable possibility that a loss or losses exceeding the amounts accrued will be incurred in connection with the environmental matters discussed below that would, either individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. However, since amounts recognized in the financial statements in accordance with accounting principles generally accepted in the United States exclude costs that are not probable or that may not be currently estimable, the ultimate costs of these environmental proceedings may be higher than those currently recorded in the Company’s consolidated financial statements.
Environmental compliance costs decreased in 2009 from 2008 due primarily to the three-month outage during 2009 at the Middletown Works blast furnace and a reduction in steam costs during 2009 because of lower natural gas costs at all plants. Except as expressly noted below, management does not currently anticipate any material impact on the Company’s recurring operating costs or future profitability as a result of its compliance with current environmental regulations. Moreover, because all domestic steel producers operate under the same set of federal environmental regulations, management believes that the Company is not disadvantaged relative to its domestic competitors by its need to comply with these regulations. However, some foreign competitors may benefit from less stringent environmental requirements in the countries in which they produce, resulting in lower compliance costs and providing those foreign competitors with a cost advantage on their products.
Pursuant to the Resource Conservation and Recovery Act (“RCRA”), which governs the treatment, handling and disposal of hazardous waste, the EPA and authorized state environmental agencies may conduct inspections of RCRA regulated facilities to identify areas where there have been releases of hazardous waste or hazardous constituents into the environment and may order the facilities to take corrective action to remediate such releases. AK Steel’s major steelmaking facilities are subject to RCRA inspections by environmental regulators. While the Company cannot predict the future actions of these regulators, it is possible that they may identify conditions in future inspections of these facilities which they believe require corrective action.
Under authority conferred by the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the EPA and state environmental authorities have conducted site investigations at certain of AK Steel’s facilities and other third-party facilities, portions of which previously may have been used for disposal of materials that are currently subject to regulation. The results of these investigations are still pending, and AK Steel could be directed to expend funds for remedial activities at the former disposal areas. Because of the uncertain status of these investigations, however, the Company cannot reliably predict whether or when such expenditures might be required, their magnitude or the timeframe during which these potential costs would be incurred.
As previously reported, on July 27, 2001, AK Steel received a Special Notice Letter from the EPA requesting that AK Steel agree to conduct a Remedial Investigation/Feasibility Study (“RI/FS”) and enter into an administrative order on consent pursuant to Section 122 of CERCLA regarding the former Hamilton Plant located in New Miami, Ohio. The Hamilton Plant ceased operations in 1990, and all of its former structures have been demolished and removed. Although AK Steel did not believe that a site-wide RI/FS was necessary or appropriate, in April 2002, it entered into a mutually agreed-upon administrative order on consent to perform such an investigation and study of the Hamilton Plant site. The site-wide investigation portion of the RI/FS has been submitted. The study portion is projected to be completed in 2011 pending approval of the investigation results. AK Steel currently has accrued $0.7 for the remaining cost of the RI/FS. Until the RI/FS is completed, AK Steel cannot reliably estimate the additional costs, if any, associated with any potentially required remediation of the site or the timeframe during which these potential costs would be incurred.
On September 30, 1998, AK Steel’s predecessor, Armco, Inc., received an order from the EPA under Section 3013 of RCRA requiring it to develop a plan for investigation of eight areas of Mansfield Works that allegedly could be sources of contamination. A site investigation began in November 2000 and is continuing. AK Steel cannot reliably estimate at this time how long it will take to complete this site investigation. AK Steel currently has accrued approximately $2.1 for the projected cost of the study at Mansfield Works. Until the site investigation is completed, AK Steel cannot reliably estimate the additional costs, if any, associated with any potentially required remediation of the site or the timeframe during which these potential costs would be incurred.
On October 9, 2002, AK Steel received an order from the EPA under Section 3013 of RCRA requiring it to develop a plan for investigation of several areas of Zanesville Works that allegedly could be sources of contamination. A site investigation began in early 2003 and is continuing. AK Steel estimates that it will take approximately one more year to complete this site investigation. AK Steel currently has accrued approximately $1.0 for the projected cost of the study and remediation at Zanesville Works. Until the site investigation is completed, AK Steel cannot reliably estimate the additional costs, if any, associated with any potentially required remediation of the site or the timeframe during which these potential costs would be incurred.
On November 26, 2004, Ohio EPA issued a Notice of Violation (“NOV”) for alleged waste violations associated with an acid leak at AK Steel’s Coshocton Works. In November 2007, Ohio EPA and AK Steel reached an agreement to resolve this NOV. Pursuant to that agreement, AK Steel implemented an inspection program, initiated an investigation of the area where the acid leak occurred, submitted a closure plan and upon approval from Ohio EPA, will implement that closure plan. Also, as part of the agreement, AK Steel paid a civil penalty of twenty-eight thousand dollars and funded a supplemental environmental project in the amount of seven thousand dollars. Until the investigation is completed and a closure plan is approved, AK Steel cannot reliably estimate the costs associated with closure or the timeframe during which the closure costs will be incurred.
On December 20, 2006, Ohio EPA issued an NOV with respect to two electric arc furnaces at AK Steel’s Mansfield Works alleging failure of the Title V stack tests with respect to several air pollutants. The Company has worked with Ohio EPA in an attempt to resolve this NOV. In that regard, Ohio EPA has issued to the Mansfield Works a new air permit that addresses the issues identified in the NOV. The Company cannot be certain, however, that Ohio EPA will not seek further remedies. If further remedies are sought, the Company will evaluate the underlying claims at that time
and will either seek to resolve them through settlement or will contest them. The Company cannot reliably estimate at this time whether any such additional remedies will be sought or, if they are sought, whether it will seek to settle them or contest them.
On July 23, 2007, and on December 9, 2008, the EPA issued NOVs with respect to the Coke Plant at AK Steel’s Ashland Works alleging violations of pushing and combustion stack limits. The Company is investigating these claims and is working with the EPA to attempt to resolve them through the negotiation of a Consent Decree. AK Steel believes it will reach a settlement in this matter, but it cannot be certain that a settlement will be reached and cannot reliably estimate at this time how long it will take to reach a settlement or what its terms might be. Until it has reached a settlement with the EPA or the claims that are the subject of the NOV are otherwise resolved, AK Steel cannot reliably estimate the costs, if any, associated with any potentially required operational changes at the batteries or the timeframe over which any potential costs would be incurred. AK Steel will vigorously contest any claims which cannot be resolved through a settlement.
AK Steel previously reported that it has been negotiating with the Pennsylvania Department of Environmental Protection (“PADEP”) to resolve an alleged unpermitted discharge of wastewater from the closed Hillside Landfill at the former Ambridge Works. AK Steel now has reached a settlement in this matter and on July 15, 2009, the parties entered into a Consent Order and Agreement (the “Consent Order”) to memorialize that settlement. Under the terms of the Consent Order, AK Steel will implement various corrective actions, including an investigation of the area where activities were conducted regarding the landfill, submission of a plan to collect and treat surface waters and seep discharges, and upon approval from PADEP, implementation of that plan. Also, as part of the Consent Order, AK Steel paid a civil penalty of five hundred twenty-five thousand dollars. AK Steel anticipates that the cost associated with this matter will be approximately $2.9 in capital costs and $0.9 in expenses. The Company has accrued the $0.9 for anticipated expenses associated with this matter.
In addition to the foregoing matters, AK Steel is or may be involved in proceedings with various regulatory authorities that may require AK Steel to pay fines, comply with more rigorous standards or other requirements or incur capital and operating expenses for environmental compliance. Management believes that the ultimate disposition of the foregoing proceedings will not have, individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
Legal Contingencies: In addition to the environmental matters discussed above and the items addressed below, there are various claims pending against AK Steel and its subsidiaries involving product liability, commercial, employee benefits and other matters arising in the ordinary course of business. Unless otherwise noted, in management’s opinion, the ultimate liability resulting from all of these claims, individually and in the aggregate, should not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
As previously reported, on June 29, 2000, the United States filed a complaint on behalf of the EPA against AK Steel in the U.S. District Court for the Southern District of Ohio (the “Court”), Case No. C-1-00530, for alleged violations of the Clean Air Act, the Clean Water Act and the RCRA at the Middletown Works. Subsequently, the State of Ohio, the Sierra Club and the National Resources Defense Council intervened. On April 3, 2006, a proposed Consent Decree in Partial Resolution of Pending Claims (the “Consent Decree”), executed by all parties, was lodged with the Court. After a 30-day notice period, the Consent Decree was entered by the Court on May 15, 2006. In accordance with the Consent Decree, the Company is in the process of implementing certain RCRA corrective action interim measures to address polychlorinated biphenyls (“PCBs”) in sediments and soils relating to Dicks Creek and certain other specified surface waters, adjacent floodplain areas, and other previously identified geographic areas. The Company also will undertake a comprehensive RCRA facility investigation at its Middletown Works and, as appropriate, complete a corrective measures study. Under the Consent Decree, the Company paid a civil penalty of $0.46 and agreed to perform a supplemental environmental project to remove ozone-depleting refrigerants from certain equipment at an estimated cost of $0.85. The Company has completed performance of the supplemental environmental project, and the project has been approved by the EPA. The Company anticipates that the cost of the remaining remedial work required under the Consent Decree will be approximately $18.0, consisting of approximately $3.2 in capital investments and $14.8 in expenses. The Company has accrued the $14.8 for anticipated expenses associated with this project. Additional work will be performed to more definitively delineate the soils and sediments which will need to be removed under the Consent Decree. Until that process is complete, the Company cannot reliably determine whether the actual cost of the work required under the Consent Decree will exceed the amount presently accrued. If there are additional costs, the Company does not anticipate at this time that they will have a material financial impact on the
Company. The Company cannot reliably estimate at this time the timeframe during which the accrued or potential additional costs would be incurred.
As previously reported, since 1990, AK Steel (or its predecessor, Armco Inc.) has been named as a defendant in numerous lawsuits alleging personal injury as a result of exposure to asbestos. As of December 31, 2009, there were approximately 426 such lawsuits pending against AK Steel. The great majority of these lawsuits have been filed on behalf of people who claim to have been exposed to asbestos while visiting the premises of a current or former AK Steel facility. Approximately 40% of these premises suits arise out of claims of exposure at a facility in Houston, Texas that has been closed since 1984. When such an asbestos lawsuit initially is filed, the complaint typically does not include a specific dollar claim for damages. Only 130 of the 426 cases pending at December 31, 2009, in which AK Steel is a defendant include specific dollar claims for damages in the filed complaints. Those 130 cases involve a total of 2,489 plaintiffs and 17,089 defendants. In these cases, the complaint typically includes a monetary claim for compensatory damages and a separate monetary claim in an equal amount for punitive damages, and does not attempt to allocate the total monetary claim among the various defendants. For example, 119 of the 130 cases involve claims of $0.2 or less, six involve claims of between $0.2 and $5.0, two involve claims of between $5.0 and $15.0, and three involve claims of $20.0. In each case, the amount described is per plaintiff against all of the defendants, collectively. Thus, it usually is not possible at the outset of a case to determine the specific dollar amount of a claim against AK Steel. In fact, it usually is not even possible at the outset to determine which of the plaintiffs actually will pursue a claim against AK Steel. Typically, that can only be determined through written interrogatories or other discovery after a case has been filed. Thus, in a case involving multiple plaintiffs and multiple defendants, AK Steel initially only accounts for the lawsuit as one claim against it. After AK Steel has determined through discovery whether a particular plaintiff will pursue a claim against it, it makes an appropriate adjustment to statistically account for that specific claim. It has been AK Steel’s experience to date that only a small percentage of asbestos plaintiffs ultimately identify AK Steel as a target defendant from whom they actually seek damages and most of these claims ultimately are either dismissed or settled for a small fraction of the damages initially claimed. Set forth below is a chart showing the number of new claims filed (accounted for as described above), the number of pending claims disposed of (i.e., settled or otherwise dismissed), and the approximate net amount of dollars paid on behalf of AK Steel in settlement of asbestos-related claims in 2009 and 2008.
|
|
2009
|
|
|
2008
|
|
New Claims Filed
|
|
|
252 |
|
|
|
41 |
|
Pending Claims Disposed Of
|
|
|
179 |
|
|
|
39 |
|
Total Amount Paid in Settlements
|
|
$ |
0.7 |
|
|
$ |
0.7 |
|
Since the onset of asbestos claims against AK Steel in 1990, five asbestos claims against it have proceeded to trial in four separate cases. All five concluded with a verdict in favor of AK Steel. AK Steel intends to continue its practice of vigorously defending the asbestos claims asserted against it. Based upon its present knowledge, and the factors set forth above, AK Steel believes it is unlikely that the resolution in the aggregate of the asbestos claims against AK Steel will have a materially adverse effect on the Company’s consolidated results of operations, cash flows or financial condition. However, predictions as to the outcome of pending litigation, particularly claims alleging asbestos exposure, are subject to substantial uncertainties. These uncertainties include (1) the significantly variable rate at which new claims may be filed, (2) the impact of bankruptcies of other companies currently or historically defending asbestos claims, (3) the uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, (4) the type and severity of the disease alleged to be suffered by each claimant, and (5) the potential for enactment of legislation affecting asbestos litigation.
As previously reported, on January 2, 2002, John D. West, a former employee, filed a class action in the United States District Court for the Southern District of Ohio against the AK Steel Corporation Retirement Accumulation Pension Plan, or AK RAPP, and the AK Steel Corporation Benefit Plans Administrative Committee. Mr. West claimed that the method used under the AK RAPP to determine lump sum distributions does not comply with the Employment Retirement Income Security Act of 1974 (“ERISA”) and resulted in underpayment of benefits to him and the other class members. The District Court ruled in favor of the plaintiff class and on March 29, 2006, entered an amended final judgment against the defendants in the amount of $37.6 in damages and $7.3 in prejudgment interest, for a total of approximately $44.9, with post judgment interest accruing at the rate of 4.7% per annum until paid. The defendants appealed, but their appeals ultimately were unsuccessful. Pursuant to an agreed order, on April 1, 2009, defendants paid the sum of approximately $51.5 into a court-approved interest bearing account. The funds used to make this payment were from the AK Steel Master Pension Trust. The payment ended defendants’ liability to the class members pursuant to the judgment in this matter, including with respect to interest which accrues on the judgment. It did not,
however, resolve defendants’ liability with respect to a claim for attorneys’ fees by plaintiffs’ counsel. On August 31, 2009, the court granted a motion filed by plaintiffs’ counsel for a statutory award of fees, awarding fees in the approximate amount of $1.4. The court denied a motion that sought a separate award of fees in the amount of 28% of the funds already paid into the court. On September 15, 2009, plaintiffs’ counsel filed a motion to amend the order granting an award of attorneys’ fees. On November 18, 2009, the Court issued an order directing distribution to the class members in the amount of approximately $51.3. This amount is part of the approximately $51.5 previously paid from the AK Steel Master Pension Trust to a court-approved interest bearing account (the difference between the amounts representing Court-approved payments to the Fund Administrator). On December 16, 2009, the Court denied plaintiffs’ motion to amend the order granting an award of attorneys’ fees, leaving intact the August 31, 2009 award of approximately $1.4. No appeal of the December 16 order was filed and in January 2010 the approximately $1.4 in attorneys’ fees were paid to class counsel, concluding the Company’s obligations with respect to this litigation. On June 22, 2010, the Court issued an order directing funds paid from the AK Steel Master Pension Trust be returned to the Trust because such funds had not been claimed by class members. Pursuant to the order, on July 9, 2010, $0.2 was returned to the Trust. Additional litigation has been filed, however, on behalf of other retirees who were excluded from the class based upon prior releases provided to the Company. See discussion of Schumacher litigation filed on October 20, 2009, in the next paragraph.
As previously reported, on October 20, 2009, William Schumacher filed a purported class action against the AK Steel Corporation Retirement Accumulation Pension Plan, or AK RAPP, and the AK Steel Corporation Benefit Plans Administrative Committee in the United States District Court for the Southern District of Ohio, Case No. 1:09cv794. The complaint alleges that the method used under the AK RAPP to determine lump sum distributions does not comply with ERISA and the Internal Revenue Code and resulted in underpayment of benefits to him and the other class members. Plaintiff and the other purportedly similarly situated individuals on whose behalf plaintiff filed suit were excluded by the Court in 2005 from the West litigation (discussed in the paragraph immediately above) based on previous releases of claims they had executed in favor of the Company. On January 11, 2010, the defendants filed a motion to dismiss the Complaint based upon a statute of limitations ground. That motion was denied on March 8, 2010, and defendants filed their answer to the complaint on March 22, 2010. No trial date has yet been set. The defendants intend to contest this matter vigorously.
As previously reported, on October 20, 2005, two individuals filed a purported class action against AK Steel and the AK Steel Corporation Benefit Plans Administrative Committee in the United States District Court for the Southern District of Ohio, Case No. 1:05-cv-681. The complaint alleges that the defendants incorrectly calculated the amount of surviving spouse benefits due to be paid to the plaintiffs under the applicable pension plan. On December 19, 2005, the defendants filed their answer to the complaint. The parties subsequently filed cross-motions for summary judgment on the issue of whether the applicable plan language had been properly interpreted. On September 28, 2007, the United States Magistrate Judge assigned to the case issued a Report and Recommendation in which he recommended that the plaintiffs’ motion for partial summary judgment be granted and that the defendants’ motion be denied. The defendants filed timely objections to the Magistrate’s Report and Recommendation. On March 31, 2008, the court issued an order adopting the Magistrate’s recommendation and granting partial summary judgment to the plaintiffs on the issue of plan interpretation. The plaintiffs’ motion for class certification was granted by the Court on October 27, 2008. The case is proceeding with respect to discovery on the issue of damages. No trial date has been set. The defendants intend to contest this matter vigorously.
As previously reported, in September and October, 2008, several companies filed purported class actions in the United States District Court for the Northern District of Illinois, against nine steel manufacturers, including AK Holding. The case numbers for these actions are 08CV5214, 08CV5371, 08CV5468, 08CV5633, 08CV5700, 08CV5942 and 08CV6197. An additional action, case number 10CV04236, was filed on July 8, 2010. The plaintiffs are companies which claim to have purchased steel products, directly or indirectly, from one or more of the defendants and they purport to file the actions on behalf of all persons and entities who purchased steel products for delivery or pickup in the United States from any of the named defendants at any time from at least as early as January 2005 to the present. The complaints allege that the defendant steel producers have conspired to restrict output and to fix, raise, stabilize and maintain artificially high prices with respect to steel products in the United States. On January 2, 2009, the defendants filed motions to dismiss all of the claims set forth in the Complaints. On June 12, 2009, the court issued an Order denying the defendants’ motions to dismiss. Discovery has commenced. No trial date has been set. AK Holding intends to contest this matter vigorously.
As previously reported, on January 28, 2009, the City of Monroe, Ohio (“Monroe”) filed an action in the United States District Court for the Southern District of Ohio against Middletown Coke Company, Inc. and SunCoke Energy, Inc.,
Case No. 1-09-CV-63. The complaint purported to be filed pursuant to Section 304(a)(3) of the Clean Air Act (“CAA”), 42 U.S.C. § 7604(a)(3), and sought injunctive relief, civil penalties, attorney fees, and other relief to prevent the construction of a new cokemaking facility on property adjacent to the Company’s Middletown Works. The coke produced by the facility would be used by the Middletown Works. See discussion of SunCoke contract in Note 12. The Complaint alleged that the new facility will be a stationary source of air pollution without a permit issued under the New Source Review program of the CAA, including its Prevention of Significant Deterioration and Nonattainment New Source Review requirements. On February 27, 2009, the defendants filed a motion to dismiss, or in the alternative to stay, the action pending final resolution of appeals (the “First ERAC Appeal”) to the Ohio Environmental Review Appeals Commission (“ERAC”) by Monroe and others of a Permit to Install the cokemaking facility issued by the Ohio Environmental Protection Agency (“OEPA”), Case Nos. 096256, 096265 and 096268-096285, consolidated. In March 2009, AK Steel became a party to both the pending federal action and the First ERAC Appeal for the purpose of supporting the issuance of the permit to install and opposing the efforts by Monroe and others to prevent construction of the facility. On August 20, 2009, the Court in the federal action granted defendants’ motion to dismiss. On September 16, 2009, Monroe filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit from the order dismissing the federal action. On April 20, 2010, the Sixth Circuit dismissed the appeal as moot, vacated the District Court’s order, and remanded the case to the District Court for further proceedings, including dismissal of the litigation as moot. On February 9, 2010, the OEPA issued a final air permit-to-install for the new facility under the New Source Review program of the CAA, including its Prevention of Significant Deterioration and Nonattainment New Source Review requirements (the “NSR Permit”). In February and March 2010, Monroe and other interested parties filed Notices of Appeal to the ERAC of the permit-to-install issued under the New Source Review program (the “Second ERAC Appeal”). This Second ERAC Appeal has been scheduled for a final hearing on January 17, 2012. On June 30, 2010, the First ERAC Appeal was dismissed as moot. On July 8, 2010, Monroe filed a motion for partial summary judgment in the Second ERAC Appeal. As of the filing of this quarterly report, no response to that motion was due or had been filed, but defendants intend to vigorously oppose the motion. On July 9, 2010, Monroe filed a motion for expedited clarification in the First ERAC Appeal asking the ERAC to specify that the initial permit to install issued by OEPA would not be reinstated if the NSR Permit is vacated. On July 19, 2010, the defendants filed a memorandum in opposition to the Monroe motion for expedited clarification. AK Steel intends to continue to contest this matter vigorously.
As previously reported, on June 1, 2009, the Chinese Ministry of Commerce (“MOFCOM”) initiated antidumping and countervailing duty investigations of imports of grain oriented electrical steel (“GOES”) from Russia and the United States. China initiated the investigations based on a petition filed by two Chinese steelmakers. These two steelmakers allege that AK Steel and Allegheny Technologies Inc. of the United States and Novolipetsk Steel of Russia exported GOES to China at less than fair value, and that the production of GOES in the United States has been subsidized by the government. On December 9, 2009, MOFCOM issued its preliminary determination that GOES producers in the United States and Russia had been dumping in the China market and that GOES producers in the United States had received subsidies from the United States government. The Chinese authorities imposed provisional additional duties on future imports of GOES from Russia and/or the United States to China. The duties do not apply to past imports. On or about April 10, 2010, MOFCOM issued a final determination of dumping and subsidizing against GOES producers in the United States and Russia. AK Steel strongly disagrees with MOFCOM’s final determination as it relates to AK Steel and plans to vigorously contest the final determination through seeking an appeal to the World Trade Organization and/or other legal action.
As previously reported, on June 18, 2009, three former hourly members of the Butler Armco Independent Union filed a purported class action against AK Steel in the United States District Court for the Southern District of Ohio, Case No. 1-09CV00423 (the “2009 Retiree Action”), alleging that AK Steel did not have a right to make changes to their healthcare benefits. On June 29, 2009, the plaintiffs filed an amended complaint. The named plaintiffs in the 2009 Retiree Action seek, among other things, injunctive relief for themselves and the other members of a proposed class, including an order retroactively rescinding certain changes to retiree healthcare benefits negotiated by AK Steel with its unions. The proposed class the plaintiffs seek to represent would consist of all union-represented retirees of AK Steel other than those retirees who were included in the class covered by the Middletown Works Retiree Healthcare Benefits Litigation described immediately below. On August 21, 2009, the Company filed an answer to the amended complaint and filed a motion for summary judgment which, if granted in full, would end the litigation. On September 14, 2009, plaintiffs filed a motion for partial summary judgment and responded to defendant’s motion. On October 14, 2009, plaintiffs filed a motion for preliminary injunction, seeking to prevent certain scheduled January 2010 changes to retiree healthcare from taking effect. On November 25, 2009, AK Steel filed its opposition to the motion for a preliminary injunction, opposition to plaintiffs’ motion for partial summary judgment, and reply in support of its motion for summary judgment. A hearing on the pending motions was held on December 8, 2009. During the course
of the hearing, plaintiffs’ counsel notified the court that the pending motion for a preliminary injunction was limited to retirees from the Company’s Butler Works in Butler, Pennsylvania. On January 29, 2010, the trial court issued an opinion and order granting plaintiffs’ motion for a preliminary injunction and barring the Company from effecting any further benefit reductions or new healthcare charges for Butler Works retirees until final judgment in the case. On February 2, 2010, AK Steel filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit seeking a reversal of the decision to grant the preliminary injunction. That appeal remains pending. Discovery in the underlying case has commenced. If AK Steel is unable to obtain a reversal of the decision to impose the preliminary injunction, either in connection with the final judgment by the trial court or through appeal, then the negotiated changes to retiree healthcare for the Company’s Butler Works retirees would be rescinded and the Company’s other postretirement benefit obligation would increase by approximately $145.9 based upon current valuation assumptions. This amount reflects the current value of the estimated amount of the additional healthcare costs the Company will pay out with respect to the Butler retirees. A pro-rata portion of this amount, currently approximately ten percent, would be recognized as a one-time charge at the time of the final judgment and the rest would be amortized over a period of approximately ten years. AK Steel intends to contest this matter vigorously.
As previously reported, on August 26, 2009, Consolidation Coal Company (“Consolidation”) filed an action against AK Steel and Neville Coke LLC (“Neville”) in the Court of Common Pleas of Allegheny County, Pennsylvania, Case No. GD-09-14830. The complaint alleges that Consolidation and Neville entered into a contract whereby Consolidation would supply approximately 80,000 tons of metallurgical coal for use by Neville in its coke making operations. Consolidation asserts that Neville breached the alleged contract when it refused to purchase coal from Consolidation. The complaint also alleges that AK Steel tortiously interfered with the purported contractual and business relationship between Consolidation and Neville. Consolidation seeks monetary damages from AK Steel in an amount in excess of $30.0 and monetary damages from Neville in an amount in excess of $20.0. AK Steel tentatively has agreed to indemnify and defend Neville in this action pursuant to the terms of a contractual agreement between AK Steel and Neville. AK Steel is still investigating the facts underlying this matter, however, and has reserved its right to change its position should facts establish that it does not have an obligation to indemnify or defend Neville. On October 20, 2009, AK Steel filed preliminary objections to plaintiff’s complaint on behalf of itself and Neville, seeking to dismiss the action. In response to the preliminary objections, plaintiff filed an amended complaint on November 12, 2009, adding an additional count under the theory of promissory estoppel. On December 2, 2009, AK Steel and Neville filed preliminary objections to plaintiff’s amended complaint, again seeking to dismiss the action. The court overruled the preliminary objections, and on March 18, 2010, AK Steel and Neville filed their answers to the complaint. Discovery has commenced but no trial date has yet been set. AK Steel intends to contest this matter vigorously.
As previously reported, on December 31, 2009, Heritage Coal Company LLC, Patriot Coal Corporation, and Pine Ridge Coal Company (collectively, “Heritage Coal”) filed a third-party complaint against AK Steel in the Circuit Court of Boone County, West Virginia, naming AK Steel as a third-party defendant in 108 separate personal injury actions. Those actions have been consolidated for discovery and pretrial proceedings under Civil Action No. 09-C-212. The various plaintiffs in the underlying actions seek damages allegedly caused by ground water contamination arising out of certain coal mining operations in West Virginia. In its third-party complaint, Heritage Coal seeks a determination of its potential rights of contribution against AK Steel pursuant to a January 20, 1984 Asset Purchase Agreement between Heritage Coal’s predecessor-in-interest, Peabody Coal Company, as buyer, and AK Steel’s predecessor-in-interest, Armco Inc., as seller, for the sale of certain coal real estate and leasehold interests located in West Virginia, which Heritage alleges included property now the subject of the underlying civil actions. On March 28, 2010, AK Steel entered into a tentative settlement agreement with the plaintiffs and Heritage Coal, the specific terms of which are confidential, but which will not be material to the Company’s future financial results. The parties are in the process of documenting and obtaining formal approval of the settlement by all parties. Upon execution of the settlement documents by all parties, an application will need to be filed with the court to approve the terms of the settlement agreement. Subject to approval by the court, the settlement will resolve all of the claims raised by Heritage Coal in the third-party complaint.
Middletown Works Retiree Healthcare Benefits Litigation
As previously reported, on June 1, 2006, AK Steel notified approximately 4,600 of its current retirees (or their surviving spouses) who formerly were hourly and salaried members of the Armco Employees Independent Federation (“AEIF”) that AK Steel was terminating their existing healthcare insurance benefits plan and implementing a new plan more consistent with current steel industry practices which would require the retirees to contribute to the cost of their healthcare benefits, effective October 1, 2006. On July 18, 2006, a group of nine former hourly and salaried members
of the AEIF filed a class action (the “Retiree Action”) in the United States District Court for the Southern District of Ohio (the “Court”), Case No. 1-06CV0468, alleging that AK Steel did not have a right to make changes to their healthcare benefits. The named plaintiffs in the Retiree Action sought, among other things, injunctive relief (including an order retroactively rescinding the changes) for themselves and the other members of the class. On August 4, 2006, the plaintiffs in the Retiree Action filed a motion for a preliminary injunction seeking to prevent AK Steel from implementing the previously announced changes to healthcare benefits with respect to the AEIF-represented hourly employees. AK Steel opposed that motion, but on September 22, 2006, the trial court issued an order granting the motion. On October 8, 2007, the Company announced that it had reached a tentative settlement (the “Settlement”) of the claims of the retirees in the Retiree Action. The settlement was opposed by certain objecting class members, but their objections were rejected by the trial court and on appeal. After the appeal of the objecting participants was dismissed, the Settlement became final on July 6, 2009.
Under terms of the Settlement, AK Steel has transferred to a Voluntary Employees Beneficiary Association trust (the “VEBA Trust”) all postretirement benefit obligations (the “OPEB Obligations”) owed to the Class Members under the Company’s applicable health and welfare plans and will have no further liability for any claims incurred by the Class Members after the effective date of the Settlement relating to their OPEB Obligations. The VEBA Trust will be utilized to fund the future OPEB Obligations to the Class Members. Under the terms of the Settlement, AK Steel was obligated to initially fund the VEBA Trust with a contribution of $468.0 in cash within two business days of the effective date of the Settlement. AK Steel made this contribution on March 4, 2008. AK Steel further committed 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 two of these three annual cash contributions of $65.0, leaving AK Steel obligated to make one more cash contribution in March of 2011.
Prior to the Settlement, the Company’s total OPEB liability for all of its retirees was approximately $2.0 billion. Of that amount, approximately $1.0 billion was attributable to the Class Members. Immediately following the Judgment approving the Settlement, the Company’s total OPEB liability was reduced by approximately $339.1. This reduction in the Company’s OPEB liability is being treated as a negative plan amendment and amortized as a reduction to net periodic benefit cost over approximately eleven years. This negative plan amendment will result in an annual net periodic benefit cost reduction of approximately $30.0 in addition to the lower interest costs associated with the lower OPEB liability. Upon payment on March 4, 2008, of the initial $468.0 contribution by AK Steel to the VEBA Trust in accordance with the terms of the Settlement, the Company’s total OPEB liability was reduced further to approximately $1.1 billion. The Company’s total OPEB liability was further reduced by two $65.0 payments made by the Company, one in March 2009 and one in March 2010. The Company’s total OPEB liability will be reduced further after the remaining $65.0 payment due in March 2011 is made. In total, it is expected that the $663.0 Settlement with the Class Members ultimately will reduce the Company’s total OPEB liability by approximately $1.0 billion.
For accounting purposes, a settlement of the Company’s OPEB Obligations related to the Class Members will be deemed to have occurred when AK Steel makes the last $65.0 payment called for under the Settlement.
NOTE 10 - Fair Value Measurements
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The Company adopted provisions within ASC Topic 820, “Fair Value Measurements”, effective January 1, 2008. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. The hierarchy of those valuation approaches is broken down into three levels based on the reliability of inputs as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlying financial instrument, as well as other relevant economic factors. Market values of the Company’s natural gas, electric, nickel
and foreign currency forward contracts are generated from forward prices that are derived from observable futures prices relating to the respective commodity or currency from sources such as the New York Mercantile Exchange (NYMEX) or the London Metal Exchange (LME). The difference between these forward prices as of the end of the accounting period and the original forward contract price at its trade date represent the expected forward values of these contracts at their maturity date. The carrying values of these derivatives reflected in the financial statements are the fair values of these forward values. The discount rate used in these fair value calculations reflects the credit quality of the party of the derivative having the obligation to pay. While differing discount rates applied to different contracts as a function of differing maturities and different counterparties, for the period ended June 30, 2010, a spread over benchmark interest rates of less than three percent was used for contracts valued as liabilities, while the spread over benchmark rates of less than one percent was used for derivatives valued as assets.
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The following fair value table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010. There were no valuations using Level 3 inputs.
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June 30, 2010
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December 31, 2009
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Level 1
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Level 2
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Total
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Level 1
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Level 2
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Total
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Assets:
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Available for sale investments–
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Marketable equity securities (a)
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$ |
26.6 |
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|
$ |
— |
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$ |
26.6 |
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$ |
27.3 |
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$ |
— |
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$ |
27.3 |
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Foreign exchange contracts (b)
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— |
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2.2 |
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2.2 |
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— |
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0.9 |
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|
0.9 |
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Commodity hedge contracts (c)
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— |
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1.5 |
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|
1.5 |
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— |
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2.0 |
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2.0 |
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Assets measured at fair value
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$ |
26.6 |
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$ |
3.7 |
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$ |
30.3 |
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$ |
27.3 |
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$ |
2.9 |
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$ |
30.2 |
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Liabilities (d):
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Commodity hedge contracts
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— |
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15.0 |
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15.0 |
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— |
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5.8 |
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5.8 |
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Liabilities measured at fair value
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$ |
— |
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$ |
15.0 |
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$ |
15.0 |
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$ |
— |
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$ |
5.8 |
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$ |
5.8 |
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(a) Held in a trust and included in Other investments on the Condensed Consolidated Balance Sheets.
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(b) Included in Other current assets on the Condensed Consolidated Balance Sheets.
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(c) Included in Other current assets or Other non-current assets on the Condensed Consolidated Balance Sheets.
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(d) Included in Accrued liabilities on the Condensed Consolidated Balance Sheets.
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NOTE 11 - Investments in an Unrealized Loss Position
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The Company has investments for a nonqualified pension plan with fair values less than cost at June 30, 2010. The investments are in three mutual funds representing the Standard and Poor’s 500 index, the Russell 1000 Value index and the Europe, Australasia and Far East index. The investments in index funds represent broad asset categories designed to track macroeconomic conditions. The Company evaluated past periods of market declines and the related periods of recovery. The Company believes that the current economic environment is temporary and the investments will recover to levels higher than cost in a reasonable period of time. The Company has no short term cash requirements for these investments and currently does not intend to liquidate them resulting in the realization of a loss before a period of time sufficient for the markets to recover. Based on the market evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a recovery of fair value, the Company does not consider those investments to be other than temporarily impaired at June 30, 2010.
INVESTMENTS IN AN UNREALIZED LOSS POSITION
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At June 30, 2010
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Loss Position
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Loss Position
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Loss Position
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Less Than 12 Months
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Greater Than 12 Months
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Total
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Fair
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Unrealized
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Fair
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Unrealized
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Fair
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Unrealized
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Investment
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Value
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Loss
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Value
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Loss
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Value
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Loss
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Marketable Equity Securities
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— |
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— |
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$ |
15.2 |
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$ |
4.0 |
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$ |
15.2 |
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$ |
4.0 |
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NOTE 12 - Variable Interest Entity
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In the first quarter of 2008, the Company’s Board of Directors approved a 20-year supply contract with Middletown Coke Company, Inc. (“Middletown Coke”), an affiliate of SunCoke Energy, Inc. (“SunCoke”), to provide the Company with metallurgical-grade coke and electrical power. The coke and power will come from a new facility to be constructed, owned and operated by Middletown Coke adjacent to the Company’s Middletown Works. The proposed new facility is expected to produce about 550,000 tons of coke and approximately 50 megawatts of electrical power annually. The current anticipated cost to build the facility is approximately $380.0. Under the agreement, the Company will purchase all of the coke and electrical power generated from the new plant for at least 20 years, helping the Company achieve its goal of more fully integrating its raw material supply and providing about 25% of the power requirements of Middletown Works. The agreement was contingent upon, among other conditions, Middletown Coke receiving all necessary local, state and federal approvals and permits, as well as available economic incentives, to build and operate the proposed new facility. Those contingencies have been satisfied or waived. However, the issuance by the Ohio EPA of a Permit to Install for the facility is the subject of a legal challenge by the City of Monroe and others which is discussed in Note 9 above. 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. At June 30, 2010, Middletown Coke had approximately $121.2 in assets on the Company’s Condensed Consolidated Balance Sheets, comprised mainly of construction in progress. Additionally, Middletown Coke had approximately $125.2 in liabilities, comprised mainly of payables to its parent company, SunCoke, which is reflected in Other non-current liabilities on the Company’s Condensed Consolidated Balance Sheets.
Through a subsidiary, AK Steel owns a 50% interest in Vicksmetal/Armco Associates (“VAA”), a joint venture with Vicksmetal Corporation, which is owned by Sumitomo Corporation. VAA slits electrical steel primarily for AK Steel, though also for third parties. AK Steel has determined that VAA meets the definition of a variable interest entity under ASC Topic 810, “Consolidation”, and as a result, the financials of VAA are consolidated with the results of the Company.
NOTE 13 - Disclosures About Derivative Instruments and Hedging Activities
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In the ordinary course of business, the Company is exposed to market risk for price fluctuations of raw materials and energy sources. The Company is also subject to risks of exchange rate fluctuations on a portion of inter-company receivables that are denominated in foreign currencies. The Company occasionally uses forward currency contracts to manage exposures to certain of these currency price fluctuations. As of June 30, 2010, the Company had entered into forward currency contracts in the amount of 29,050,000 euros. These contracts have not been designated as hedges for accounting purposes.
The Company uses cash settled commodity price swaps and/or options to hedge the market risk associated with the purchase of certain of its raw materials and energy requirements. Such hedges routinely are used with respect to a portion of the Company’s natural gas and nickel requirements and are sometimes used with respect to its aluminum, zinc and electricity 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 and electricity are deferred in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets and recognized into cost of products sold in the same period as the underlying transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. All other commodity price swaps and options are marked to market and recognized into cost of products sold with the offset recognized as other current assets, other non-current assets or other accrued liabilities.
Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with ASC Topic 815, “Derivatives and Hedging”, the Company designates commodity price swaps and options as cash flow hedges of forecasted purchases of raw materials and energy sources.
The following table summarizes information on the Company’s existing commodity hedges at June 30, 2010:
Commodity Hedge
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Settlement Dates
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Amount of existing gains (losses) expected to be reclassified into earnings
within the next twelve months
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Natural Gas
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July 2010 to December 2010
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$ |
(13.7 |
) |
Electricity
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July 2010 to September 2010
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0.4 |
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As of June 30, 2010 the Company had the following outstanding commodity price swaps and/or options that were entered into in order to hedge forecasted purchases:
Commodity
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Amount
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Unit
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Nickel
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761,386 |
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lbs
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Natural Gas
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|
|
13,150,000 |
|
MMBTUs
|
Electricity
|
|
|
206,400 |
|
MWHs
|
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30, 2010
|
|
|
as of December 31, 2009
|
|
|
Balance Sheet Location
|
|
Asset Fair Value
|
|
|
Liability Fair Value
|
|
|
Asset Fair Value
|
|
|
Liability Fair Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Accrued liabilities
|
|
$ |
— |
|
|
$ |
15.0 |
|
|
$ |
— |
|
|
$ |
5.8 |
|
Total derivatives designated as hedging instruments
|
|
|
$ |
— |
|
|
$ |
15.0 |
|
|
$ |
— |
|
|
$ |
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$ |
2.2 |
|
|
|
— |
|
|
$ |
0.9 |
|
|
|
— |
|
Commodity contracts
|
Other current assets
|
|
|
1.4 |
|
|
|
— |
|
|
|
1.9 |
|
|
|
— |
|
Commodity contracts
|
Other non-current assets
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
Total derivatives not designated as hedging instruments
|
|
|
$ |
3.7 |
|
|
$ |
— |
|
|
$ |
2.9 |
|
|
$ |
— |
|
Total derivatives
|
|
|
$ |
3.7 |
|
|
$ |
15.0 |
|
|
$ |
2.9 |
|
|
$ |
5.8 |
|
Table reflects derivative classification under ASC Topic 815.
|
|
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in Other Comprehensive Income (“OCI”)
|
|
$ |
7.7 |
|
|
$ |
(0.3 |
) |
|
$ |
(14.9 |
) |
|
$ |
(21.9 |
) |
Amount reclassified from accumulated OCI into cost of products sold (effective portion)
|
|
|
1.9 |
|
|
|
(9.5 |
) |
|
|
(2.9 |
) |
|
|
(13.7 |
) |
Amount recognized in cost of products sold (ineffective portion and amount excluded from effectiveness testing)
|
|
|
(0.7 |
) |
|
|
(1.3 |
) |
|
|
1.2 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in other income, net
|
|
|
1.4 |
|
|
|
(0.6 |
) |
|
|
1.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in cost of products sold
|
|
|
(2.7 |
) |
|
|
3.0 |
|
|
|
(0.8 |
) |
|
|
2.6 |
|
NOTE 14 - New Accounting Pronouncements
|
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 was effective for fiscal years beginning on or after November 15, 2009. The Company has completed the analysis required by ASC Topic 810 and has concluded that this guidance does not alter the accounting treatment previously accorded to the Company’s variable interest entities.
NOTE 15 - Subsequent Events
|
On July 9, 2010, members of the United Steelworkers Local 1865 union ratified a three-year extension to a labor agreement covering about 750 hourly production and maintenance steel operations employees at the Company’s Ashland (KY) Works. The new agreement extends the existing contract to September 1, 2013 and the terms were effective as of July 1, 2010. The existing contract was scheduled to expire September 1, 2010. Among other items, the contract extension contains new language which allows the Company flexibility in operating the Ashland Works to meet market conditions, while committing to significant capital investments of approximately $30.0 over the life of the contract in the steelmaking plant, in particular the blast furnace. The contract extension also provides for lump sum payments to each represented employee covered by the contract in 2010, 2011 and 2012 and a standard hourly wage rate increase in September of 2010.
NOTE 16 - Supplemental Guarantor Information
|
On May 11, 2010, AK Steel issued $400.0 of 7 5/8% Senior Notes due 2020 (the “2020 Notes”). The issuance generated net proceeds of $391.6 after underwriting fees. AK Holding, of which AK Steel is a wholly-owned subsidiary, fully and unconditionally, jointly and severally, guarantees the payment of interest, principal and premium, if any, on the 2020 Notes. In April 2010, AK Steel commenced a cash tender offer and consent solicitation (the “Tender Offer”) for all of the approximately $504.0 in aggregate principal amount of outstanding 7 3/4% Senior Notes due 2012 (the “Old Notes”). At the expiration of the Tender Offer on May 21, 2010, AK Steel accepted $321.2 in aggregate principal amount of Old Notes tendered by holders.
In addition, on May 12, 2010, pursuant to the terms of the indenture governing the Old Notes, AK Steel called for redemption all of the approximately $182.8 in aggregate principal amount of Old Notes that remained outstanding after the expiration of the Tender Offer. The proceeds from the issuance of the 2020 Notes along with cash on hand were used to retire the Old Notes.
As a result of the Tender Offer and redemption transactions, on June 15, 2010, AK Steel and the guarantors (which are discussed in the immediately following paragraph) of the Old Notes retired all of the approximately $504.0 in aggregate principal amount of Old Notes outstanding and satisfied and discharged their obligations under the indentures that governed the Old Notes.
In connection with the issuance of the 2020 Notes, AK Steel and AK Holding entered into new indentures governing the 2020 Notes. Under the terms of the prior indentures governing the Old Notes, AK Steel’s parent company, AK Holding, as well as AKS Investments, Inc. and AK Tube LLC, which are direct and indirect wholly-owned subsidiaries, respectively, of AK Steel, had fully and unconditionally, jointly and severally, guaranteed the payment of interest, principal and premium, if any, on the Old Notes. Under the terms of the new indentures, AK Holding currently is the sole guarantor.
The Company has determined that full financial statements and other disclosures concerning AK Holding and the other subsidiaries are not required to be presented. The presentation of the supplemental guarantor information reflects all investments in subsidiaries under the equity method. Net income (loss) of the subsidiaries accounted for under the equity method is therefore reflected in their parents’ investment accounts. The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions. The following supplemental condensed consolidating financial statements present information about AK Holding, AK Steel and the other subsidiaries.
Condensed Statements of Operations
|
|
For the Three Months Ended June 30, 2010
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net sales
|
|
$ |
— |
|
|
$ |
1,558.6 |
|
|
$ |
147.1 |
|
|
$ |
(109.6 |
) |
|
$ |
1,596.1 |
|
Cost of products sold (exclusive of items shown below)
|
|
|
— |
|
|
|
1,409.6 |
|
|
|
131.2 |
|
|
|
(112.8 |
) |
|
|
1,428.0 |
|
Selling and administrative expenses
|
|
|
1.1 |
|
|
|
56.8 |
|
|
|
(5.3 |
) |
|
|
— |
|
|
|
52.6 |
|
Depreciation
|
|
|
— |
|
|
|
48.1 |
|
|
|
1.8 |
|
|
|
— |
|
|
|
49.9 |
|
Total operating costs
|
|
|
1.1 |
|
|
|
1,514.5 |
|
|
|
127.7 |
|
|
|
(112.8 |
) |
|
|
1,530.5 |
|
Operating profit (loss)
|
|
|
(1.1 |
) |
|
|
44.1 |
|
|
|
19.4 |
|
|
|
3.2 |
|
|
|
65.6 |
|
Interest expense
|
|
|
— |
|
|
|
11.1 |
|
|
|
— |
|
|
|
— |
|
|
|
11.1 |
|
Other income (expense)
|
|
|
— |
|
|
|
(4.6 |
) |
|
|
(4.6 |
) |
|
|
— |
|
|
|
(9.2 |
) |
Income (loss) before income taxes
|
|
|
(1.1 |
) |
|
|
28.4 |
|
|
|
14.8 |
|
|
|
3.2 |
|
|
|
45.3 |
|
Income tax provision (benefit)
|
|
|
(0.4 |
) |
|
|
13.3 |
|
|
|
4.9 |
|
|
|
1.1 |
|
|
|
18.9 |
|
Net income (loss)
|
|
|
(0.7 |
) |
|
|
15.1 |
|
|
|
9.9 |
|
|
|
2.1 |
|
|
|
26.4 |
|
Less: net loss attributable to noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Net income (loss) attributable to AK Holding Corporation
|
|
|
(0.7 |
) |
|
|
15.1 |
|
|
|
10.2 |
|
|
|
2.1 |
|
|
|
26.7 |
|
Equity in net income of subsidiaries
|
|
|
27.4 |
|
|
|
12.3 |
|
|
|
— |
|
|
|
(39.7 |
) |
|
|
— |
|
Net income (loss) attributable to AK Holding Corporation
|
|
$ |
26.7 |
|
|
$ |
27.4 |
|
|
$ |
10.2 |
|
|
$ |
(37.6 |
) |
|
$ |
26.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Operations
|
|
For the Three Months Ended June 30, 2009
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net sales
|
|
$ |
— |
|
|
$ |
658.4 |
|
|
$ |
154.5 |
|
|
$ |
(19.3 |
) |
|
$ |
793.6 |
|
Cost of products sold (exclusive of items shown below)
|
|
|
— |
|
|
|
630.0 |
|
|
|
148.2 |
|
|
|
(11.6 |
) |
|
|
766.6 |
|
Selling and administrative expenses
|
|
|
0.9 |
|
|
|
45.9 |
|
|
|
7.0 |
|
|
|
(5.9 |
) |
|
|
47.9 |
|
Depreciation
|
|
|
— |
|
|
|
49.8 |
|
|
|
1.8 |
|
|
|
— |
|
|
|
51.6 |
|
Total operating costs
|
|
|
0.9 |
|
|
|
725.7 |
|
|
|
157.0 |
|
|
|
(17.5 |
) |
|
|
866.1 |
|
Operating loss
|
|
|
(0.9 |
) |
|
|
(67.3 |
) |
|
|
(2.5 |
) |
|
|
(1.8 |
) |
|
|
(72.5 |
) |
Interest expense
|
|
|
— |
|
|
|
9.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
9.2 |
|
Other income (expense)
|
|
|
— |
|
|
|
(1.2 |
) |
|
|
30.0 |
|
|
|
(25.4 |
) |
|
|
3.4 |
|
Income (loss) before income taxes
|
|
|
(0.9 |
) |
|
|
(77.6 |
) |
|
|
27.4 |
|
|
|
(27.2 |
) |
|
|
(78.3 |
) |
Income tax provision (benefit)
|
|
|
(0.3 |
) |
|
|
(35.8 |
) |
|
|
10.1 |
|
|
|
(4.3 |
) |
|
|
(30.3 |
) |
Net income (loss)
|
|
|
(0.6 |
) |
|
|
(41.8 |
) |
|
|
17.3 |
|
|
|
(22.9 |
) |
|
|
(48.0 |
) |
Less: net loss attributable to noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
(0.8 |
) |
Net income (loss) attributable to AK Holding Corporation
|
|
|
(0.6 |
) |
|
|
(41.8 |
) |
|
|
18.1 |
|
|
|
(22.9 |
) |
|
|
(47.2 |
) |
Equity in net income of subsidiaries
|
|
|
(46.6 |
) |
|
|
(4.8 |
) |
|
|
— |
|
|
|
51.4 |
|
|
|
— |
|
Net income (loss) attributable to AK Holding Corporation
|
|
$ |
(47.2 |
) |
|
$ |
(46.6 |
) |
|
$ |
18.1 |
|
|
$ |
28.5 |
|
|
$ |
(47.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Operations
|
|
For the Six Months Ended June 30, 2010
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net sales
|
|
$ |
— |
|
|
$ |
2,928.7 |
|
|
$ |
277.9 |
|
|
$ |
(204.8 |
) |
|
$ |
3,001.8 |
|
Cost of products sold (exclusive of items shown below)
|
|
|
— |
|
|
|
2,628.0 |
|
|
|
250.5 |
|
|
|
(206.9 |
) |
|
|
2,671.6 |
|
Selling and administrative expenses
|
|
|
2.4 |
|
|
|
112.6 |
|
|
|
(8.2 |
) |
|
|
— |
|
|
|
106.8 |
|
Depreciation
|
|
|
— |
|
|
|
96.7 |
|
|
|
3.5 |
|
|
|
— |
|
|
|
100.2 |
|
Total operating costs
|
|
|
2.4 |
|
|
|
2,837.3 |
|
|
|
245.8 |
|
|
|
(206.9 |
) |
|
|
2,878.6 |
|
Operating profit (loss)
|
|
|
(2.4 |
) |
|
|
91.4 |
|
|
|
32.1 |
|
|
|
2.1 |
|
|
|
123.2 |
|
Interest expense
|
|
|
— |
|
|
|
20.0 |
|
|
|
— |
|
|
|
— |
|
|
|
20.0 |
|
Other income (expense)
|
|
|
— |
|
|
|
(7.6 |
) |
|
|
(6.4 |
) |
|
|
0.2 |
|
|
|
(13.8 |
) |
Income (loss) before income taxes
|
|
|
(2.4 |
) |
|
|
63.8 |
|
|
|
25.7 |
|
|
|
2.3 |
|
|
|
89.4 |
|
Income tax provision due to tax law change
|
|
|
— |
|
|
|
25.3 |
|
|
|
— |
|
|
|
— |
|
|
|
25.3 |
|
Income tax provision (benefit)
|
|
|
(0.9 |
) |
|
|
28.5 |
|
|
|
7.9 |
|
|
|
0.8 |
|
|
|
36.3 |
|
Net income (loss)
|
|
|
(1.5 |
) |
|
|
10.0 |
|
|
|
17.8 |
|
|
|
1.5 |
|
|
|
27.8 |
|
Less: net loss attributable to noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
(0.8 |
) |
Net income (loss) attributable to AK Holding Corporation
|
|
|
(1.5 |
) |
|
|
10.0 |
|
|
|
18.6 |
|
|
|
1.5 |
|
|
|
28.6 |
|
Equity in net income of subsidiaries
|
|
|
30.1 |
|
|
|
20.1 |
|
|
|
— |
|
|
|
(50.2 |
) |
|
|
— |
|
Net income (loss) attributable to AK Holding Corporation
|
|
$ |
28.6 |
|
|
$ |
30.1 |
|
|
$ |
18.6 |
|
|
$ |
(48.7 |
) |
|
$ |
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Operations
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net sales
|
|
$ |
— |
|
|
$ |
1,482.2 |
|
|
$ |
277.0 |
|
|
$ |
(43.4 |
) |
|
$ |
1,715.8 |
|
Cost of products sold (exclusive of items shown below)
|
|
|
— |
|
|
|
1,457.0 |
|
|
|
259.8 |
|
|
|
(27.2 |
) |
|
|
1,689.6 |
|
Selling and administrative expenses
|
|
|
2.0 |
|
|
|
93.5 |
|
|
|
13.4 |
|
|
|
(13.2 |
) |
|
|
95.7 |
|
Depreciation
|
|
|
— |
|
|
|
99.3 |
|
|
|
3.6 |
|
|
|
— |
|
|
|
102.9 |
|
Total operating costs
|
|
|
2.0 |
|
|
|
1,649.8 |
|
|
|
276.8 |
|
|
|
(40.4 |
) |
|
|
1,888.2 |
|
Operating profit (loss)
|
|
|
(2.0 |
) |
|
|
(167.6 |
) |
|
|
0.2 |
|
|
|
(3.0 |
) |
|
|
(172.4 |
) |
Interest expense
|
|
|
— |
|
|
|
19.3 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
19.4 |
|
Other income (expense)
|
|
|
— |
|
|
|
— |
|
|
|
31.1 |
|
|
|
(25.4 |
) |
|
|
5.7 |
|
Income (loss) before income taxes
|
|
|
(2.0 |
) |
|
|
(186.9 |
) |
|
|
31.2 |
|
|
|
(28.4 |
) |
|
|
(186.1 |
) |
Income tax provision (benefit)
|
|
|
(0.7 |
) |
|
|
(71.1 |
) |
|
|
11.7 |
|
|
|
(4.4 |
) |
|
|
(64.5 |
) |
Net income (loss)
|
|
|
(1.3 |
) |
|
|
(115.8 |
) |
|
|
19.5 |
|
|
|
(24.0 |
) |
|
|
(121.6 |
) |
Less: net loss attributable to noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
— |
|
|
|
(1.0 |
) |
Net income (loss) attributable to AK Holding Corporation
|
|
|
(1.3 |
) |
|
|
(115.8 |
) |
|
|
20.5 |
|
|
|
(24.0 |
) |
|
|
(120.6 |
) |
Equity in net income of subsidiaries
|
|
|
(119.3 |
) |
|
|
(3.5 |
) |
|
|
— |
|
|
|
122.8 |
|
|
|
— |
|
Net income (loss) attributable to AK Holding Corporation
|
|
$ |
(120.6 |
) |
|
$ |
(119.3 |
) |
|
$ |
20.5 |
|
|
$ |
98.8 |
|
|
$ |
(120.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Balance Sheets
|
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
— |
|
|
$ |
113.8 |
|
|
$ |
15.7 |
|
|
$ |
— |
|
|
$ |
129.5 |
|
Accounts receivable, net
|
|
|
— |
|
|
|
700.6 |
|
|
|
78.5 |
|
|
|
(129.6 |
) |
|
|
649.5 |
|
Inventories, net
|
|
|
— |
|
|
|
630.2 |
|
|
|
116.2 |
|
|
|
(21.9 |
) |
|
|
724.5 |
|
Deferred tax asset
|
|
|
— |
|
|
|
238.6 |
|
|
|
— |
|
|
|
— |
|
|
|
238.6 |
|
Other current assets
|
|
|
0.2 |
|
|
|
26.2 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
27.4 |
|
Total Current Assets
|
|
|
0.2 |
|
|
|
1,709.4 |
|
|
|
211.4 |
|
|
|
(151.5 |
) |
|
|
1,769.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
— |
|
|
|
5,255.5 |
|
|
|
224.1 |
|
|
|
— |
|
|
|
5,479.6 |
|
Accumulated depreciation
|
|
|
— |
|
|
|
(3,448.5 |
) |
|
|
(60.5 |
) |
|
|
— |
|
|
|
(3,509.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
— |
|
|
|
1,807.0 |
|
|
|
163.6 |
|
|
|
— |
|
|
|
1,970.6 |
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in AFSG Holdings, Inc.
|
|
|
— |
|
|
|
— |
|
|
|
55.6 |
|
|
|
— |
|
|
|
55.6 |
|
Investment in affiliates
|
|
|
(1,180.3 |
) |
|
|
1,180.3 |
|
|
|
1,124.1 |
|
|
|
(1,124.1 |
) |
|
|
— |
|
Inter-company accounts
|
|
|
2,051.3 |
|
|
|
(3,043.3 |
) |
|
|
(327.5 |
) |
|
|
1,319.5 |
|
|
|
— |
|
Other investments
|
|
|
— |
|
|
|
31.0 |
|
|
|
20.5 |
|
|
|
— |
|
|
|
51.5 |
|
Goodwill
|
|
|
— |
|
|
|
— |
|
|
|
37.1 |
|
|
|
— |
|
|
|
37.1 |
|
Other intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
0.2 |
|
Deferred tax asset
|
|
|
— |
|
|
|
458.4 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
458.6 |
|
Other non-current assets
|
|
|
— |
|
|
|
16.2 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
16.9 |
|
TOTAL ASSETS
|
|
$ |
871.2 |
|
|
$ |
2,159.0 |
|
|
$ |
1,285.9 |
|
|
$ |
43.9 |
|
|
$ |
4,360.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
— |
|
|
$ |
760.0 |
|
|
$ |
32.0 |
|
|
$ |
(0.1 |
) |
|
$ |
792.0 |
|
Accrued liabilities
|
|
|
— |
|
|
|
162.5 |
|
|
|
4.9 |
|
|
|
— |
|
|
|
167.4 |
|
Current portion of long-term debt
|
|
|
— |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
Current portion of pension and other postretirement benefit obligations
|
|
|
— |
|
|
|
140.2 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
140.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
— |
|
|
|
1,063.5 |
|
|
|
37.3 |
|
|
|
(0.1 |
) |
|
|
1,100.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
— |
|
|
|
501.9 |
|
|
|
— |
|
|
|
— |
|
|
|
501.9 |
|
Pension and other postretirement benefit obligations
|
|
|
— |
|
|
|
1,658.0 |
|
|
|
4.4 |
|
|
|
— |
|
|
|
1,662.4 |
|
Other non-current liabilities
|
|
|
— |
|
|
|
115.9 |
|
|
|
107.9 |
|
|
|
2.0 |
|
|
|
225.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Liabilities
|
|
|
— |
|
|
|
2,275.8 |
|
|
|
112.3 |
|
|
|
2.0 |
|
|
|
2,390.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
— |
|
|
|
3,339.3 |
|
|
|
149.6 |
|
|
|
1.9 |
|
|
|
3,490.8 |
|
TOTAL AK STEEL HOLDING CORPORATION STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
871.2 |
|
|
|
(1,180.3 |
) |
|
|
1,138.3 |
|
|
|
42.0 |
|
|
|
871.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
— |
|
|
|
— |
|
|
|
(2.0 |
) |
|
|
— |
|
|
|
(2.0 |
) |
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
871.2 |
|
|
|
(1,180.3 |
) |
|
|
1,136.3 |
|
|
|
42.0 |
|
|
|
869.2 |
|
TOTAL LIABILITIES AND EQUITY
|
|
$ |
871.2 |
|
|
$ |
2,159.0 |
|
|
$ |
1,285.9 |
|
|
$ |
43.9 |
|
|
$ |
4,360.0 |
|
Condensed Balance Sheets
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
— |
|
|
$ |
444.3 |
|
|
$ |
17.4 |
|
|
$ |
— |
|
|
$ |
461.7 |
|
Accounts receivable, net
|
|
|
— |
|
|
|
501.8 |
|
|
|
67.9 |
|
|
|
(106.6 |
) |
|
|
463.1 |
|
Inventories, net
|
|
|
— |
|
|
|
349.5 |
|
|
|
90.8 |
|
|
|
(23.6 |
) |
|
|
416.7 |
|
Deferred tax asset
|
|
|
— |
|
|
|
223.9 |
|
|
|
— |
|
|
|
— |
|
|
|
223.9 |
|
Other current assets
|
|
|
0.1 |
|
|
|
63.8 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
64.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
0.1 |
|
|
|
1,583.3 |
|
|
|
176.9 |
|
|
|
(130.2 |
) |
|
|
1,630.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
— |
|
|
|
5,210.4 |
|
|
|
174.7 |
|
|
|
— |
|
|
|
5,385.1 |
|
Less accumulated depreciation
|
|
|
— |
|
|
|
(3,351.8 |
) |
|
|
(57.3 |
) |
|
|
— |
|
|
|
(3,409.1 |
) |
Property, plant and equipment, net
|
|
|
— |
|
|
|
1,858.6 |
|
|
|
117.4 |
|
|
|
— |
|
|
|
1,976.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in AFSG Holdings, Inc.
|
|
|
— |
|
|
|
— |
|
|
|
55.6 |
|
|
|
— |
|
|
|
55.6 |
|
Investment in affiliates
|
|
|
(1,180.8 |
) |
|
|
1,180.8 |
|
|
|
1,038.7 |
|
|
|
(1,038.7 |
) |
|
|
— |
|
Inter-company accounts
|
|
|
2,061.5 |
|
|
|
(3,066.3 |
) |
|
|
(321.6 |
) |
|
|
1,326.4 |
|
|
|
— |
|
Other investments
|
|
|
— |
|
|
|
31.6 |
|
|
|
20.5 |
|
|
|
— |
|
|
|
52.1 |
|
Goodwill
|
|
|
— |
|
|
|
— |
|
|
|
37.1 |
|
|
|
— |
|
|
|
37.1 |
|
Other intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
0.2 |
|
Deferred tax asset
|
|
|
— |
|
|
|
514.4 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
514.7 |
|
Other non-current assets
|
|
|
— |
|
|
|
8.5 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
880.8 |
|
|
$ |
2,110.9 |
|
|
$ |
1,125.5 |
|
|
$ |
157.5 |
|
|
$ |
4,274.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
— |
|
|
$ |
423.8 |
|
|
$ |
15.2 |
|
|
$ |
(0.1 |
) |
|
$ |
438.9 |
|
Accrued liabilities
|
|
|
— |
|
|
|
149.8 |
|
|
|
8.7 |
|
|
|
(1.5 |
) |
|
|
157.0 |
|
Current portion of long-term debt
|
|
|
— |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
Pension and other postretirement benefit obligations
|
|
|
— |
|
|
|
143.6 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
144.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
— |
|
|
|
717.9 |
|
|
|
24.4 |
|
|
|
(1.6 |
) |
|
|
740.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
— |
|
|
|
605.8 |
|
|
|
— |
|
|
|
— |
|
|
|
605.8 |
|
Pension and other postretirement benefit obligations
|
|
|
— |
|
|
|
1,851.2 |
|
|
|
5.0 |
|
|
|
— |
|
|
|
1,856.2 |
|
Other non-current liabilities
|
|
|
— |
|
|
|
116.8 |
|
|
|
75.8 |
|
|
|
(0.7 |
) |
|
|
191.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Liabilities
|
|
|
— |
|
|
|
2,573.8 |
|
|
|
80.8 |
|
|
|
(0.7 |
) |
|
|
2,653.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
— |
|
|
|
3,291.7 |
|
|
|
105.2 |
|
|
|
(2.3 |
) |
|
|
3,394.6 |
|
TOTAL AK HOLDING STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
880.8 |
|
|
|
(1,180.8 |
) |
|
|
1,021.0 |
|
|
|
159.8 |
|
|
|
880.8 |
|
Noncontrolling interest
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
— |
|
|
|
(0.7 |
) |
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
880.8 |
|
|
|
(1,180.8 |
) |
|
|
1,020.3 |
|
|
|
159.8 |
|
|
|
880.1 |
|
TOTAL LIABILITIES AND EQUITY
|
|
$ |
880.8 |
|
|
$ |
2,110.9 |
|
|
$ |
1,125.5 |
|
|
$ |
157.5 |
|
|
$ |
4,274.7 |
|
Condensed Statements of Cash Flows
|
|
For the Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net cash flows from operating activities
|
|
$ |
(1.2 |
) |
|
$ |
(209.5 |
) |
|
$ |
29.4 |
|
|
$ |
27.0 |
|
|
$ |
(154.3 |
) |
Cash flows from investing activities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
— |
|
|
|
(34.8 |
) |
|
|
(49.1 |
) |
|
|
— |
|
|
|
(83.9 |
) |
Other investing items, net
|
|
|
— |
|
|
|
1.2 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
1.0 |
|
Net cash flows from investing activities
|
|
|
— |
|
|
|
(33.6 |
) |
|
|
(49.3 |
) |
|
|
— |
|
|
|
(82.9 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
— |
|
|
|
400.0 |
|
|
|
— |
|
|
|
— |
|
|
|
400.0 |
|
Redemption of long-term debt
|
|
|
— |
|
|
|
(505.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
(505.9 |
) |
Debt isuance costs |
|
|
— |
|
|
|
(8.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(8.7 |
) |
Proceeds from stock options
|
|
|
1.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.3 |
|
Purchase of treasury stock
|
|
|
(7.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7.5 |
) |
Common stock dividends paid
|
|
|
(11.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.0 |
) |
Inter-company activity
|
|
|
14.6 |
|
|
|
27.1 |
|
|
|
(14.7 |
) |
|
|
(27.0 |
) |
|
|
— |
|
Advances from minority interest owner
|
|
|
— |
|
|
|
— |
|
|
|
35.0 |
|
|
|
— |
|
|
|
35.0 |
|
Other financing items, net
|
|
|
3.8 |
|
|
|
0.1 |
|
|
|
(2.1 |
) |
|
|
— |
|
|
|
1.8 |
|
Net cash flows from financing activities
|
|
|
1.2 |
|
|
|
(87.4 |
) |
|
|
18.2 |
|
|
|
(27.0 |
) |
|
|
(95.0 |
) |
Net decrease in cash and cash equivalents
|
|
|
— |
|
|
|
(330.5 |
) |
|
|
(1.7 |
) |
|
|
— |
|
|
|
(332.2 |
) |
Cash and equivalents, beginning of period
|
|
|
— |
|
|
|
444.3 |
|
|
|
17.4 |
|
|
|
— |
|
|
|
461.7 |
|
Cash and equivalents, end of period
|
|
$ |
— |
|
|
$ |
113.8 |
|
|
$ |
15.7 |
|
|
$ |
— |
|
|
$ |
129.5 |
|
Condensed Statements of Cash Flows
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AK
Holding
|
|
|
AK
Steel
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated Company
|
|
Net cash flows from operating activities
|
|
$ |
(1.1 |
) |
|
$ |
(91.1 |
) |
|
$ |
50.7 |
|
|
$ |
(11.1 |
) |
|
$ |
(52.6 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
— |
|
|
|
(76.2 |
) |
|
|
(19.4 |
) |
|
|
— |
|
|
|
(95.6 |
) |
Other investing items, net
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.3 |
|
Net cash flows from investing activities
|
|
|
— |
|
|
|
(76.0 |
) |
|
|
(19.3 |
) |
|
|
— |
|
|
|
(95.3 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of long-term debt
|
|
|
— |
|
|
|
(23.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(23.1 |
) |
Purchase of treasury stock
|
|
|
(11.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.4 |
) |
Common stock dividends paid
|
|
|
(11.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.0 |
) |
Inter-company activity
|
|
|
23.4 |
|
|
|
(5.9 |
) |
|
|
(28.6 |
) |
|
|
11.1 |
|
|
|
— |
|
Advances from minority interest owner
|
|
|
— |
|
|
|
15.5 |
|
|
|
— |
|
|
|
— |
|
|
|
15.5 |
|
Other financing items, net
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
1.0 |
|
|
|
— |
|
|
|
1.0 |
|
Net cash flows from financing activities
|
|
|
1.1 |
|
|
|
(13.6 |
) |
|
|
(27.6 |
) |
|
|
11.1 |
|
|
|
(29.0 |
) |
Net increase (decrease) in cash and cash equivalents
|
|
|
— |
|
|
|
(180.7 |
) |
|
|
3.8 |
|
|
|
— |
|
|
|
(176.9 |
) |
Cash and equivalents, beginning of period
|
|
|
— |
|
|
|
548.6 |
|
|
|
14.1 |
|
|
|
— |
|
|
|
562.7 |
|
Cash and equivalents, end of period
|
|
$ |
— |
|
|
$ |
367.9 |
|
|
$ |
17.9 |
|
|
$ |
— |
|
|
$ |
385.8 |
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
|
(dollars in millions, except per share and per ton data)
|
Results of Operations
The Company’s operations consist of seven steelmaking and finishing plants located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon steels, including premium-quality coated, cold-rolled and hot-rolled products, and specialty stainless and electrical steels that are sold in hot band, sheet and strip form. These products are sold to the automotive, infrastructure and manufacturing, and distributors and converters markets. The Company sells its carbon products principally to customers in the United States. The Company’s electrical and stainless steel products are sold both domestically and internationally. The Company’s operations also include two plants operated by AK Tube LLC, where flat-rolled carbon and stainless steel is further finished into welded steel tubing used in the automotive, large truck and construction markets. In addition, the Company operates European trading companies that buy and sell steel and steel products and other materials.
During the first half of 2010, the Company continued to face challenging economic conditions on the road to recovery following the dramatic decline in steel consumption in 2009 that resulted from the domestic and global recessions. Market conditions in the first quarter of 2010 continued the improvements experienced throughout 2009, with the Company experiencing significant increases in shipments and key financial metrics, particularly with respect to year-on-year quarterly comparisons. The second quarter of 2010 maintained this theme of continued improvement, as the Company’s shipments and financial results improved dramatically on a year-to-year basis and strengthened on a sequential basis as compared to the first quarter of 2010. The Company also continued its focus on cost and quality, as evidenced by record performance in internal quality metrics and external claims during the second quarter.
Steel Shipments
Total shipments for the three months ended June 30, 2010 and 2009, were 1,449,400 tons and 740,600 tons, respectively. For the three-month period ended June 30, 2010, value-added products comprised 84.3% of total shipments compared to 85.9% for the three-month period ended June 30, 2009. Total shipments for the six months ended June 30, 2010 and 2009 were 2,835,200 tons and 1,519,400 tons, respectively. For the six-month period ended June 30, 2010, value-added products comprised 83.9% of total shipments compared to 86.1% for the six-month period ended June 30, 2009. Total shipments for the three- and six-month periods ended June 30, 2010, were substantially higher than during the same period in 2009 due to increased steel demand, particularly in the spot and automotive markets. The higher market demand in the spot and automotive markets resulted in increases in coated and cold-rolled shipments. The improved demand in the automotive market also resulted in an increase in stainless shipments. Ongoing weakness in the domestic housing market and the global economy generally, however, continued to limit electrical shipments. The value-added shipments were slightly lower as a percentage of total shipments for each period in 2010 versus 2009 primarily because hot-rolled carbon shipments to the spot market increased as a percentage of total sales to a slightly greater extent than did coated, cold-rolled and specialty steel shipments. The increase in hot-rolled shipments was due to improved economic conditions which spurred increased service center shipments to end users.
Beyond the strides made in increasing top-line revenue through greater volumes of steel shipments, the Company continued its focus on maximizing profitability through product mix adjustments based on current and projected market demands – both domestically and internationally. The following presents net shipments by product line:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
(tons in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
VALUE-ADDED SHIPMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stainless/electrical
|
|
|
218.9 |
|
|
|
15.1 |
% |
|
|
148.5 |
|
|
|
20.1 |
% |
|
|
431.0 |
|
|
|
15.2 |
% |
|
|
307.6 |
|
|
|
20.2 |
% |
Coated
|
|
|
685.2 |
|
|
|
47.3 |
% |
|
|
322.4 |
|
|
|
43.5 |
% |
|
|
1,320.4 |
|
|
|
46.6 |
% |
|
|
672.8 |
|
|
|
44.3 |
% |
Cold-rolled
|
|
|
284.7 |
|
|
|
19.6 |
% |
|
|
148.8 |
|
|
|
20.1 |
% |
|
|
566.5 |
|
|
|
20.0 |
% |
|
|
293.0 |
|
|
|
19.3 |
% |
Tubular
|
|
|
32.6 |
|
|
|
2.3 |
% |
|
|
16.6 |
|
|
|
2.2 |
% |
|
|
61.3 |
|
|
|
2.1 |
% |
|
|
34.8 |
|
|
|
2.3 |
% |
Subtotal value-added shipments
|
|
|
1,221.4 |
|
|
|
84.3 |
% |
|
|
636.3 |
|
|
|
85.9 |
% |
|
|
2,379.2 |
|
|
|
83.9 |
% |
|
|
1,308.2 |
|
|
|
86.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON VALUE-ADDED SHIPMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hot-rolled
|
|
|
184.1 |
|
|
|
12.7 |
% |
|
|
64.9 |
|
|
|
8.8 |
% |
|
|
377.8 |
|
|
|
13.3 |
% |
|
|
140.4 |
|
|
|
9.2 |
% |
Secondary
|
|
|
43.9 |
|
|
|
3.0 |
% |
|
|
39.4 |
|
|
|
5.3 |
% |
|
|
78.2 |
|
|
|
2.8 |
% |
|
|
70.8 |
|
|
|
4.7 |
% |
Subtotal non value-added shipments
|
|
|
228.0 |
|
|
|
15.7 |
% |
|
|
104.3 |
|
|
|
14.1 |
% |
|
|
456.0 |
|
|
|
16.1 |
% |
|
|
211.2 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHIPMENTS
|
|
|
1,449.4 |
|
|
|
100.0 |
% |
|
|
740.6 |
|
|
|
100.0 |
% |
|
|
2,835.2 |
|
|
|
100.0 |
% |
|
|
1,519.4 |
|
|
|
100.0 |
% |
Sales
For the three months ended June 30, 2010, net sales were $1,596.1, more than twice the amount of second quarter 2009 net sales of $793.6 and an approximate 14% increase over first quarter 2010 net sales of $1,405.7. Net sales to customers outside the United States for the three- and six-month periods ended June 30, 2010 totaled $228.7 and $426.5, respectively, compared to the three- and six-month periods ended June 30, 2009 which totaled $190.7 and $370.9, respectively. A substantial portion of the revenue outside of the United States is associated with electrical steel and, to a lesser extent, stainless steel products. The Company’s average selling price for the second quarter of 2010 was $1,101 per ton, an approximate 3% increase from the Company’s second quarter 2009 average selling price of $1,072 per ton and an approximate 9% increase from the first quarter 2010 average selling price of $1,014 per ton. The increase in net sales over 2009 reflects increased demand for most steel products, particularly in the spot and automotive markets, as global economic conditions continued to improve from dramatically depressed levels. The increase in average selling prices in 2010 was primarily the result of generally increased demand versus the comparative prior periods.
Costs of Goods Sold
The Company has faced higher raw material and energy costs in 2010. This is due, in large part, to raw materials price increases, in particular with respect to iron ore. For further details concerning iron ore costs, see the discussion below under “Iron Ore Pricing.” The Company has also purchased greater amounts of raw materials and energy consistent with its significantly higher operating levels compared to 2009. Associated with the higher costs, the Company recorded a LIFO charge of $40.8 and $49.2, respectively, for the three and six months ended June 30, 2010, compared to a LIFO credit of $93.9 and $160.0, respectively, for the three and six months ended June 30, 2009.
The Company’s maintenance outage costs decreased in the three and six months ended June 30, 2010, to $7.8 and $10.1, respectively, compared to costs of $15.6 and $20.3 in the corresponding periods of 2009.
Selling and Administrative Expenses
Selling and administrative expenses for the three and six months ended June 30, 2010 were $52.6 and $106.8, respectively, compared to $47.9 and $95.7, respectively, for the corresponding periods in 2009. The increases for these periods were due primarily to a generally higher level of spending associated with the overall improvement in business conditions, including higher compensation costs. Depreciation expense for the three and six months ended June 30, 2010 was $49.9 and $100.2, respectively, compared to $51.6 and $102.9, respectively, for the corresponding periods in 2009.
Operating Profit
The Company reported operating profits of $65.6, or $45 per ton, and $123.2, or $43 per ton, in the three- and six month periods ended June 30, 2010. These results compare to operating losses of $72.5, or $98 per ton, and $172.4, or $113 per ton, in the three- and six-month periods ended June 30, 2009. The principal cause of this improvement in operating performance was significantly higher steel shipments driven by increased customer demand. In addition to providing increased revenue, the higher shipments enabled the Company to spread its operating costs over more tons, thereby improving its operating profit.
Interest Expense
Interest expense for the three and six months ended June 30, 2010 was $11.1 and $20.0, respectively, compared to $9.2 and $19.4, respectively, for the same periods in 2009. The increase was due primarily to the write-off of the unamortized debt discount and unamortized issuance costs related to the redemption of the Company’s remaining 7 3/4% Senior Notes due 2010 (“Old Notes”). For further details on the redemption and the related senior note issuance, tender offer and consent solicitation transactions, please see the “Senior Notes” discussion in the “Liquidity and Capital Resources” section below.
Other Income (Expense)
Other income (expense) for the three and six months ended June 30, 2010, was expense of $9.2 and $13.8, respectively, compared to income of $3.4 and $5.7, respectively, for the corresponding periods in 2009. The increase in expense for the three- and six-month periods was due primarily to additional foreign exchange losses. The increase in expense for the three-month period also was impacted by the loss on the redemption of the Old Notes. For further details on the redemption and the related senior note issuance, tender offer and consent solicitation transactions, please see the “Senior Notes” discussion in the “Liquidity and Capital Resources” section below.
Income Taxes
Income taxes recorded for the year 2010 have been estimated based on year-to-date income and projected financial results for the full year. The final effective tax rate to be applied to 2010 will depend, among other things, on the actual amount of taxable income generated by the Company for the full year. As a result of the first quarter 2010 enactment of the Patient Protection and Affordable Care Act and the subsequent enactment of the Health Care and Education Reconciliation Act of 2010, the Company recorded a non-cash tax charge of $25.3 in the first quarter of 2010. The charge is due to a reduction in the value of the Company’s deferred tax asset as a result of a change to the tax treatment associated with Medicare Part D reimbursements.
Net Income (Loss)
As a result of the various factors and conditions described above, the Company reported net income in the three months ended June 30, 2010, of $26.7, or $0.24 per diluted share, compared to a net loss of $47.2, or $0.43 per diluted share, in the three months ended June 30, 2009.
In the absence of a global benchmark price for 2010 iron ore purchases, the Company used an assumed 65% increase from the 2009 benchmark price for purposes of its second quarter 2010 financial results. For purposes of its first quarter 2010 financial results, the Company had assumed a 30% increase from the 2009 benchmark price. As a result, the Company’s second quarter 2010 results include the impact of higher iron ore costs versus the first quarter of 2010. In addition, the Company recognized as an expense in the second quarter the incremental amount of the assumed 65% benchmark price increase that is attributable to its first quarter results. This pre-tax “true-up” expense recognized in the second quarter was approximately $18.0. Excluding the effect of the first quarter true-up for iron ore costs in the second quarter, net income would have been approximately $37.4, or $0.34 per diluted share. For further details concerning iron ore costs, see the discussion below under "Iron Ore Pricing".
For the six months ended June 30, 2010, net income was $28.6, or $0.26 per diluted share. During the comparable six-month period in 2009, the Company reported a net loss of $120.6, or $1.10 per diluted share.
First-half of 2010 results include a non-cash charge in the first quarter of $25.3, or $0.23 per diluted share, related to federal healthcare legislation signed into law in March of 2010. Excluding the special charge related to healthcare legislation, net income for the first half of 2010 was $53.9, or $0.49 per diluted share.
|
|
Three Months Ended
|
|
|
|
June 30, 2010
|
|
Reconciliation to net income attributable to AK Steel Holding Corporation
|
|
|
|
Adjusted net income (excluding item below)
|
|
$ |
37.4 |
|
Iron ore true-up expense ($18.0 less tax of $7.3)
|
|
|
(10.7 |
) |
Net income attributable to AK Steel Holding Corporation
|
|
$ |
26.7 |
|
|
|
|
|
|
Reconciliation to basic and diluted earnings per share
|
|
|
|
|
Adjusted basic and diluted earnings per share (excluding item below)
|
|
$ |
0.34 |
|
Iron ore true-up expense (net of tax)
|
|
|
(0.10 |
) |
Basic and diluted earnings per share
|
|
$ |
0.24 |
|
|
|
|
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In April 2010, AK Steel commenced a cash tender offer and consent solicitation (the "Tender Offer") for all of the approximately $504.0 in aggregate principal amount of outstanding 7 3/4% Senior Notes due 2010 (the "Old Notes"). At the expiration of the Tender Offer on May 21, 2010, AK Steel accepted $321.2 in aggregate principal amount of Old Notes tendered by holders. The aggregate amount paid by the Company to consummate the Tender Offer for the Old Notes was approximately $332.8, an amount equal to 100% of the principal amount of the tendered Old Notes, plus interest accrued to Tender Offer's expiration and a redemption premium of approximately $1.5 associated with the tendering noteholders' acceptance of the accompanying consent solication. In May 2010, AK Steel called for redemption all of the approximately $182.8 in aggregate principal amount of Old Notes that remained outstanding after the expiration of the Tender Offer. The aggregate redemption price for the Old Notes was approximately $189.9, an amount equal to 100% of the principal amount of the outstanding Old Notes, plus interest accrued to the redemption date, June 15, 2010. Of this $189.9 used for the redemption, approximately $130.7 was cash on hand, while the remainder of the funds resulted from the $392.0 of net proceeds from the Company's issuance of $400.0 of new 7 5/8% Senior Notes due 2020. The use of existing cash for such redemption as opposed to using cash which could have been generated by issuing a greater amount of the new Senior Notes due 2020 was a strategic decision by the Company driven by the historically low interest rates currently being earned on cash deposits. By using existing cash to reduce the Company’s senior debt, the Company strengthened its balance sheet for the longer-term and reduced its ongoing annual interest expense by more than $8.5 per year. As a consequence, however, the Company will be operating with a cash position which is lower than it has been for several years. The Company may, from time to time, access its Credit Facility to fund short-term fluctuations in its working capital. For further details on the related tender offer and consent solicitation and redemption transactions, please see the “Senior Notes” discussion below.
As of the filing date of this Quarterly Report the Company is in compliance with all of the 2020 Notes' covenants and the Credit Facility covenants.
fluctuations in the price of energy (particularly natural gas and electricity), 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.