10-K 1 form10-k2013.htm 10-K Form 10-K 2013

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
T    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013
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
 
31-1401455
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
9227 Centre Pointe Drive, West Chester, Ohio
 
45069
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (513) 425-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class 
 
Name of Each Exchange on Which Registered
Common Stock $0.01 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  T  No  £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  £ No  T

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  T  No  £

Indicate by check mark 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
£
Accelerated filer
T
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 Securities Exchange Act of 1934.  Yes  £  No  T

Aggregate market value of the registrant’s voting stock held by non-affiliates at June 30, 2013: $408,782,178
There were 136,684,433 shares of common stock outstanding as of February 19, 2014.

DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form 10-K will be set forth in, and incorporated by reference from, the registrant’s definitive proxy statement for the annual meeting of stockholders (the “2014 Proxy Statement”), which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 2013.



 
 
 
 
 



AK Steel Holding Corporation
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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(Dollars in millions, except per share and per ton amounts or as otherwise specifically noted)

PART I

Item 1.
Business.

Operations Overview

AK Steel Holding Corporation (“AK Holding”) is a corporation formed under the laws of Delaware in 1993 and is an integrated producer of flat-rolled carbon, stainless and electrical steels and tubular products through its wholly-owned subsidiary, AK Steel Corporation (“AK Steel” and, together with AK Holding, the “Company”).  AK Steel is the successor through merger in 1999 to Armco Inc., which was formed in 1900.

The Company’s operations consist primarily of nine steelmaking and finishing plants and tubular production facilities located in Indiana, Kentucky, Ohio and Pennsylvania. The Company’s operations produce flat-rolled value-added carbon steels, including premium-quality coated, cold-rolled and hot-rolled carbon steel products, and specialty stainless and electrical steels that are sold in sheet and strip form, as well as carbon and stainless steel that is finished into welded steel tubing.  In addition, the Company’s operations include European trading companies that buy and sell steel and steel products and other materials, AK Coal Resources, Inc. (“AK Coal”), which produces metallurgical coal from reserves in Pennsylvania, and a 49.9% equity interest in Magnetation LLC (“Magnetation”), a joint venture that produces iron ore concentrate from previously-mined ore reserves and that is expected to begin producing iron ore pellets in the fourth quarter of 2014 or sooner.

Customers and Markets

For carbon and stainless steels, the Company principally directs its marketing efforts toward those customers who require the highest quality flat-rolled steel with precise “just-in-time” delivery and technical support. The Company’s enhanced product quality and delivery capabilities, as well as its emphasis on customer technical support and product planning, are critical factors in its ability to serve this segment of the market.  For electrical steels, the Company focuses its efforts on customers who desire the highest quality iron-silicon alloys that provide the low core loss and high permeability attributes required for more efficient and economical electrical transformers.  The Company’s iron-silicon alloys are among the most energy efficient in the world.  As with customers of its other steel products, the Company also ensures that its electrical steel customers have outstanding technical support and product development assistance.  The Company’s standards of excellence in each of its product categories have been embraced by a wide array of diverse customers and, accordingly, no single customer accounted for more than 10% of net sales of the Company during 2013, 2012 or 2011.

The Company’s flat-rolled carbon steel products are sold primarily to automotive manufacturers and to customers in the infrastructure and manufacturing market.  The infrastructure and manufacturing market includes electrical transmission, heating, ventilation and air conditioning equipment, and appliances.  The Company also sells coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers and converters who may further process these products prior to reselling them.  To the extent it believes necessary, the Company carries increased inventory levels to meet the requirements of certain of its customers for “just-in-time” delivery.

The Company sells its stainless steel products to manufacturers and their suppliers in the automotive industry, to manufacturers of food handling, chemical processing, pollution control, medical and health equipment, and to distributors and service centers.

The Company sells its electrical steel products in the infrastructure and manufacturing market.  These products are sold primarily to manufacturers of power transmission and distribution transformers, both for new and replacement installation. The Company also sells electrical steel products for use in the manufacture of electrical motors and generators.

The following table sets forth the percentage of the Company’s net sales attributable to each of its markets:
Market
 
2013
 
2012
 
2011
Automotive
 
51
%
 
45
%
 
36
%
Infrastructure and Manufacturing
 
20
%
 
23
%
 
24
%
Distributors and Converters
 
29
%
 
32
%
 
40
%

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, though non-NAFTA sales have declined in recent years, principally as a result of excess global capacity servicing the international electrical and stainless steel markets.  The Company’s customer base is geographically diverse and there is no single country outside of the United States for which sales are material relative to the Company’s net sales.  The Company

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attributes revenue from foreign countries based upon the destination of physical shipment of a product.  Net sales by geographic area and as a percentage of net sales in 2013, 2012 and 2011 were as follows:
 
 
2013
 
2012
 
2011
Geographic Area
 
Net Sales
 
%
 
Net Sales
 
%
 
Net Sales
 
%
United States
 
$
4,862.4

 
87
%
 
$
5,077.0

 
86
%
 
$
5,521.6

 
85
%
Foreign countries
 
708.0

 
13
%
 
856.7

 
14
%
 
946.4

 
15
%
Total
 
$
5,570.4

 
100
%
 
$
5,933.7

 
100
%
 
$
6,468.0

 
100
%

The Company does not have any material long-lived assets located outside of the United States.

Approximately 73% of the Company’s shipments of flat-rolled steel products in 2013 were made to contract customers, with the balance to customers in the spot market at prevailing prices at the time of sale. The Company is a party to contracts with all of its major automotive and most of its infrastructure and manufacturing market customers. These contracts set forth prices to be paid for each product during their term.  Approximately 91% of the Company’s shipments to contract customers permit price adjustments during the term of the contract, although to the extent those adjustments are triggered by changes in raw material pricing, an adjustment is not made in certain circumstances until the price of a particular raw material is outside of certain agreed-upon parameters. In most instances, the term of the contract is one year or less.

The Company’s sales to businesses in the housing industry have been adversely affected by the lingering effects of the severe recession in the domestic and global economies that started in the fall of 2008. Housing starts have increased in recent years, and further growth is expected, but the housing market continues to be weak compared to historical norms. These conditions adversely affect production by the manufacturers of power transmission and distribution transformers, to which the Company sells its electrical steels, and production by the manufacturers of appliances, to which the Company sells its stainless and carbon steels. To the extent that domestic housing starts continue to grow slowly, it is likely that the Company’s electrical and stainless steel sales and shipments will exhibit slow increases as well. Electrical steel sales and shipments, particularly to customers in foreign countries, also have been negatively affected by excess global production capacity and preferential trade practices by certain countries.

Raw Materials and Other Inputs

The principal raw materials required for the Company’s steel manufacturing operations are iron ore, coal, coke, chrome, nickel, silicon, manganese, zinc, limestone, and carbon and stainless steel scrap.  The Company also uses large volumes of natural gas, electricity and industrial gases in its steel manufacturing operations.  In addition, the Company historically has purchased carbon steel slabs from other steel producers to supplement the production from its own steelmaking facilities and it purchased 3,400 tons of carbon steel slabs in 2013.

The Company typically purchases carbon steel slabs, carbon and stainless steel scrap, natural gas, a substantial portion of its electricity, and most other raw materials at prevailing market prices, which are subject to price fluctuations in accordance with supply and demand.  The Company, however, makes most of its purchases of coke and industrial gases and a portion of its electricity at negotiated prices under annual and multi-year agreements with periodic price adjustments.  The Company also purchases iron ore and coal under similar agreements. However, in 2011 the Company made strategic investments with respect to iron ore and coal that, over time, are expected to enable the Company to acquire approximately one half of its annual iron ore and coal needs at prices that are less exposed to market fluctuations and are below market prices. During 2013, the Company’s coal business began production and the Company expects it to continue to ramp up its operations throughout 2014. Also during 2013, Magnetation, the joint venture in which the Company invested to help address its iron ore needs, began construction of an iron ore pellet plant. That plant is expected to begin production in the fourth quarter of 2014 or sooner, and to ramp up its operations throughout the rest of 2014. The Company also enters into financial instruments from time to time to hedge portions of its purchases of energy and certain raw materials, the prices of which may be subject to volatile fluctuations.

The Company is a party to long-term supply contracts with Middletown Coke Company, LLC (“SunCoke Middletown”) and Haverhill North Coke Company (“SunCoke Haverhill”), affiliates of SunCoke Energy, Inc. (“SunCoke”), to provide the Company with about 1,100,000 tons annually of metallurgical-grade lump coke and electricity co-generated from their facilities.

In addition, the Company attempts to reduce the risk of future supply shortages and price volatility through other means. To the extent that multi-year contracts are available in the marketplace, the Company has used such contracts to secure adequate sources of supply to satisfy key raw material needs for the next three to five years.  Where multi-year contracts are not available, or are not available on terms acceptable to the Company, the Company seeks to secure the remainder of its raw materials needs through annual contracts or spot purchases.  The Company also regularly evaluates the use of alternative sources and substitute materials.


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The Company currently believes that it either has secured, or will be able to secure, adequate sources of supply for its raw materials and energy requirements for 2014 and for at least the next three to five years.  There exists, however, the potential for disruptions in production by the Company’s raw material suppliers, which could create shortages of raw materials in 2014 or beyond.  If such a disruption were to occur, it could have a material impact on the Company’s financial condition, operations and cash flows.

Research and Development

The Company conducts a broad range of research and development activities aimed at improving existing products and manufacturing processes and developing new products and processes.  The Company currently produces virtually every grade of coated advanced high-strength steel used today and is working on development of the next generation of advanced high-strength steels with even greater strength and formability. Research and development costs incurred in 2013, 2012 and 2011 were $13.2, $12.5 and $13.2, respectively.

Employees

At December 31, 2013, the Company employed approximately 6,400 employees, of which approximately 4,700 are represented by labor unions under various contracts that expire between 2014 and 2017.  See the discussion under Labor Agreements in Item 7 for additional information on these agreements.

Competition

The Company competes with domestic and foreign flat-rolled carbon, stainless and electrical steel producers (both integrated steel producers and mini-mill producers) and producers of plastics, aluminum and other materials that can be used in lieu of flat-rolled steels in manufactured products.  Mini-mills generally offer a narrower range of products than integrated steel mills, but can have some competitive cost advantages as a result of their different production processes and typically non-union work forces.  Price, quality, on-time delivery and customer service are the primary competitive factors in the steel industry and vary in relative importance according to the category of product and customer requirements.

Steel producers that sell to the automotive market are facing increasing competition from the manufacturers of aluminum (and, to a lesser extent, other materials) as automotive manufacturers attempt to develop vehicles that will enable them to satisfy more stringent government-imposed fuel efficiency standards. While there has been much media coverage about the threat of aluminum, in particular, to the use of steel in automotive manufacturing, the steel industry has developed, and is continuing to develop, advanced high strength steels that meet the strength requirements and weight reductions needed by the automotive industry and are less costly, easier to repair and more environmentally friendly than aluminum.

Domestic steel producers, including the Company, face significant competition from foreign producers.  For a variety of reasons, these foreign producers often are able to sell products in the United States at prices substantially lower than domestic producers. These reasons include lower labor, raw material, energy and regulatory costs, as well as significant government subsidies, the maintenance of artificially low exchange rates against the U.S. dollar and preferential trade practices in their home countries.  The annual level of imports of foreign steel into the United States also is affected to varying degrees by the strength of demand for steel outside the United States and the relative strength or weakness of the U.S. dollar against various foreign currencies.  U.S. imports of finished steel accounted for approximately 23%, 24% and 22% of domestic steel market sales in 2013, 2012 and 2011, respectively.

The Company continues to provide pension and healthcare benefits to a significant portion of its retirees, resulting in a competitive disadvantage compared to certain other domestic integrated steel companies and the mini-mills that do not provide such benefits to any or most of their retirees.  Over the course of the last several years, however, the Company has negotiated progressive labor agreements that have significantly reduced total employment costs at all of its union-represented facilities.  In addition, the Company has entered into agreements with various groups of retirees to transfer all responsibility for their healthcare benefits from the Company to Voluntary Employee Benefits Association (“VEBA”) trusts funded by the Company. The Company has also lowered and continues to lower retiree benefit costs related to its salaried employees. These actions have increased the Company’s ability to compete in the highly competitive global steel market.

The Company also is facing competition from foreign-based and domestic steel producers who have expanded or restarted shutdown steel production and/or finishing facilities in the United States.

Environmental

Information with respect to the Company’s environmental compliance, remediation and proceedings is included in Note 9 to the consolidated financial statements in Item 8 and is incorporated herein by reference.


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Executive Officers of the Registrant

The following table sets forth the name, age and principal position with the Company of each of its executive officers as of February 19, 2014:
Name
 
Age
 
Positions with the Company
James L. Wainscott
 
56
 
Chairman of the Board, President and Chief Executive Officer
David C. Horn
 
62
 
Executive Vice President, General Counsel and Secretary
Stephanie S. Bisselberg
 
43
 
Vice President, Human Resources
Keith J. Howell
 
48
 
Vice President, Operations
Roger K. Newport
 
49
 
Vice President, Finance and Chief Financial Officer
Eric S. Petersen
 
44
 
Vice President, Sales and Customer Service
Maurice A. Reed
 
51
 
Vice President, Engineering, Raw Materials and Energy
Kirk W. Reich
 
45
 
Vice President, Procurement and Supply Chain Management

James L. Wainscott has served as Chairman of the Board of Directors of the Company since January 2006 and President and Chief Executive Officer since October 2003.  Previously, Mr. Wainscott had been the Company’s Chief Financial Officer and had served as Treasurer upon joining the Company in 1995.  Before joining the Company, Mr. Wainscott held a number of increasingly responsible financial positions for National Steel Corporation.

David C. Horn has served as Executive Vice President, General Counsel and Secretary since June 2010.  Prior to that, Mr. Horn served as Senior Vice President, General Counsel and Secretary since January 2005.  Mr. Horn became Vice President and General Counsel in April 2001 and assumed the additional position of Secretary in August 2003.  Before joining the Company as Assistant General Counsel in December 2000, Mr. Horn was a partner in the Cincinnati-based law firm now known as Frost Brown Todd LLC.

Stephanie S. Bisselberg has served as Vice President, Human Resources since April 2013.  Prior to that, Ms. Bisselberg served as Assistant General Counsel, Labor from October 2010. She also served as Labor Counsel from January 2005 and Assistant Labor Counsel since joining the Company in 2004. Prior to joining the Company, Ms. Bisselberg was an attorney in the Labor and Employment department of the Cincinnati law firm Taft, Stettinius and Hollister LLP.

Keith J. Howell has served as Vice President, Operations since May 2012. Prior to that, Mr. Howell was Vice President, Carbon Steel Operations from June 2010.  Mr. Howell served as Director, Engineering and Raw Materials from March 2009.  He was named General Manager, Butler Works in August 2005.  Prior to that, Mr. Howell served in a variety of other capacities since joining the Company in 1997, including General Manager at Middletown Works and Ashland Works and Manager—Aluminized and Manager—Steelmaking at Middletown Works.

Roger K. Newport has served as Vice President, Finance and Chief Financial Officer since May 2012. Prior to that, Mr. Newport was Vice President, Business Planning and Development from June 2010.  Mr. Newport was named Controller and Chief Accounting Officer in July 2004 and Controller in September 2001.  Prior to that, Mr. Newport served in a variety of other capacities since joining the Company in 1985, including Assistant Treasurer, Investor Relations, Manager—Financial Planning and Analysis, Product Manager, Senior Product Specialist and Senior Auditor.

Eric S. Petersen has served as Vice President, Sales and Customer Service since July 2013. Prior to that, Mr. Petersen was Director, Specialty and International Sales from November 2012 and Director, Research and Innovation from June 2010 until then. He was named Director, Customer Technical Services and Research in March 2007. Prior to that, Mr. Petersen served in a variety of other capacities since joining the Company in 1991, including General Manager, Quality Assurance; General Manager, Carbon Steel Technology; General Manager, Rockport Works; Manager of various departments at Rockport Works, and Middletown Works; Quality Control and Operations Management positions and Associate Process Engineer, Associate Metallurgist and Assistant Metallurgist at Middletown Works.

Maurice A. Reed has served as Vice President, Engineering, Raw Materials and Energy since May 2012.  Prior to that, Mr. Reed was Director, Engineering and Raw Materials from March 2011. Prior to that, Mr. Reed served in a variety of other capacities since joining the Company in 1996, including Director of Engineering and Energy from June 2010, General Manager—Engineering, Operations Support and Primary Process Research from March 2009 and General Manager—Engineering from May 2006. Before joining the Company, Mr. Reed held a number of increasingly responsible engineering technology positions for National Steel Corporation.

Kirk W. Reich has served as Vice President, Procurement and Supply Chain Management since May 2012. Prior to that, Mr. Reich was Vice President, Specialty Steel Operations from June 2010.  Mr. Reich was named General Manager, Middletown Works in October 2006.  Prior to that, Mr. Reich served in a variety of other capacities since joining the Company in 1989 including Manager—Mobile

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Maintenance/Maintenance Technology, General Manager—Mansfield Works, Manager—Processing and Shipping, Technical Manager, Process Manager and Civil Engineer.

Available Information

The Company maintains a website at www.aksteel.com.  Information about the Company is available on the website free of charge, including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after submission to the Securities and Exchange Commission.  Information on the Company’s website is not incorporated by reference into this report.

Item 1A.
Risk Factors.

The Company cautions readers that its business activities involve risks and uncertainties that could cause actual results to differ materially from those currently expected by the Company.  The most significant of those risks are:

Risk of reduced selling prices, shipments and profits associated with a highly competitive industry with excess capacity. An increase in global capacity and new or expanded production capacity in the United States in recent years has resulted in capacity in excess of demand globally, as well as in the Company’s primary markets in North America. The competitive landscape reflects improving, but uncertain, domestic and global economies; an uneven recovery within certain sectors of the domestic and global economies; continued high costs for many raw materials and continued intense competition from both foreign and domestic steel competitors. These conditions directly impact the pricing for AK Steel’s products. At this time it is impossible to determine whether the domestic and/or global economies or industry sectors of those economies that are key to AK Steel’s sales will continue to improve and generate demand that will utilize more of the existing excess capacity in the steel industry. Furthermore, it is unknown how competitors will react to these and other factors and how their actions could affect market dynamics and AK Steel’s sales of and prices for its products. Thus, there is a risk of continued adverse effects on demand for AK Steel’s products, the prices for those products, and AK Steel’s sales and shipments of those products, which could negatively affect AK Steel’s business, financial results and cash flows.
Risk of changes in the cost of raw materials and energy.  The price that AK Steel pays for energy and key raw materials, such as electricity, natural gas, industrial gases, iron ore, coal and scrap, can fluctuate significantly based on market factors. The prices at which AK Steel sells steel will not necessarily change in tandem with changes in its raw material and energy costs. A portion of AK Steel’s shipments are in the spot market, and pricing for these products fluctuates based on prevailing market conditions.  The remainder of AK Steel’s shipments are pursuant to contracts typically having durations of one year or less.  A portion of those contracts contain fixed prices that do not allow AK Steel to pass through changes in the event of increases or decreases in raw material and energy costs. However, a significant majority of AK Steel’s shipments to contract customers are pursuant to contracts with variable-pricing mechanisms that allow AK Steel to adjust the price or to impose a surcharge based upon changes in certain raw material and energy costs. Those adjustments, however, do not always reflect all of AK Steel’s underlying raw material and energy cost changes. The scope of the adjustment may be limited by the terms of the negotiated language or by the timing of when the adjustment is effective relative to a cost increase. For shipments made to the spot market, market conditions or timing of sales may not allow AK Steel to recover the full amount of an increase in raw material or energy costs. As a result of the factors set forth above with respect to spot market sales and contract sales, AK Steel is not always able to recover through the price of its steel the full amount of cost increases associated with its purchase of energy or key raw materials. In such circumstances a significant increase in raw material or energy costs likely would adversely impact AK Steel’s financial results and cash flows. Conversely, in certain circumstances, AK Steel’s financial results and cash flows also can be adversely affected when raw material prices decline. This can occur when the Company locks in the price of a raw material over a period of time and the spot market price for the material declines during that period. Because there often is a correlation between the price of finished steel and the raw materials of which it is comprised, a decline in raw material prices may coincide with lower steel prices, compressing the Company’s margins. The impact of a change in raw materials prices also may be delayed by the need to consume existing inventories. New inventory may not be purchased until some portion of the existing inventory purchased earlier is consumed. The impact of this risk is particularly significant with respect to iron ore and scrap because of the volume used by operations and the associated costs. The exposure of the Company to the risk of price increases with respect to iron ore and coal has been reduced by virtue of its recent investments in an iron ore joint venture and in the acquisition of coal reserves. These investments are expected over time to enable the Company to acquire approximately one half of its annual iron ore and coal needs at prices that are less exposed to market fluctuations and are below current market prices, but there is a risk that the volume of iron ore and coal acquired by the Company through these investments will be less than that in the event of delays in development or otherwise, or that the cost of raw materials from these operations will be higher than expected or above market prices. To the extent that the Company must acquire its iron ore and coal at market prices, these prices are sensitive to global demand and thus have been volatile in recent years. Future cost increases could be significant again with respect to iron ore and coal, as well as certain other raw materials, such as scrap. The impact of significant fluctuations in the price AK Steel pays for its raw materials can be exacerbated by AK Steel’s “last in, first out” (“LIFO”) method for valuing inventories when there are changes in the cost of raw materials or energy or in AK Steel’s raw material inventory levels as well as AK Steel’s finished and semi-finished inventory levels. The impact of LIFO accounting may be particularly significant with respect to period-to-period comparisons.

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Risk related to the Company’s significant amount of debt and other obligations.  As of December 31, 2013, AK Steel had outstanding $1,540.1 of indebtedness (excluding unamortized discount) and additional obligations, as well as pension and other postretirement benefit obligations totaling $1,051.3. The Company currently expects to contribute approximately $205.0 to its pension plans in 2014, as well as approximately $105.0 and $65.0 to its pension plans in 2015 and 2016, respectively. The Company also from time to time has additional contractual commitments, including the commitment to contribute $100.0 to Magnetation in 2014 prior to the commencement of its pellet plant’s operations. AK Steel has the ability to borrow additional amounts under its credit facility. At December 31, 2013, AK Steel had outstanding borrowings of $90.0 and outstanding letters of credit of $67.1 under its credit facility, resulting in remaining availability of $815.0 under its credit facility (subject to customary borrowing conditions, including a borrowing base). The amount of AK Steel’s indebtedness and other financial obligations could have important consequences. For example, it could increase AK Steel’s vulnerability to general adverse economic and industry conditions; require a substantial portion of the Company’s cash flows to be dedicated to debt service payments, reducing the amount of cash flows available for other purposes, such as working capital, capital expenditures, acquisitions, joint ventures or general corporate purposes; limit AK Steel’s ability to obtain additional financing in the future to be used for such other purposes; reduce AK Steel’s planning flexibility for, or ability to react to, changes in the Company’s business and the industry; and place AK Steel at a competitive disadvantage with competitors who may have less indebtedness and other obligations or greater access to financing.
Risk of severe financial hardship or bankruptcy of one or more of the Company’s major customers.  Sales and operations of a majority of the Company’s customers are sensitive to general economic conditions, especially as they affect the North American automotive and housing industries.  In the event of a significant weakening of current economic conditions, whether as a result of secular or cyclical issues, it could lead to financial difficulties or even bankruptcy filings by customers of AK Steel. The concentration of customers in a specific industry, such as the automotive industry, may increase the risk to AK Steel because of the likelihood that circumstances may affect multiple customers at the same time. AK Steel could be adversely impacted by such financial hardships or bankruptcies. The nature of that impact would likely include lost sales or losses associated with the potential inability to collect all outstanding accounts receivables. Such an event could negatively impact AK Steel’s financial results and cash flows.
Risk of reduced demand in key product markets due to competition from alternatives to steel or other factors.  The automotive and housing markets are important elements of AK Steel’s business. Automotive manufacturers are under pressure to achieve increasing government-mandated fuel economy standards by 2025, and they are currently investigating alternatives to carbon steels, including aluminum. If demand from one or more of AK Steel’s major automotive customers were to significantly decline as a result of increased use of competing materials in substitution for steel, reduced consumer demand, or other causes, it likely would negatively affect AK Steel’s sales, financial results and cash flows. Similarly, if demand for AK Steel’s products sold to the housing market were to be reduced significantly, it could negatively affect AK Steel’s sales, financial results and cash flows.
Risk of increased global steel production and imports.  Actions by AK Steel’s domestic or foreign competitors to increase production in and/or exports to the United States could result in an increased supply of steel in the United States, which could result in lower prices and shipments of AK Steel’s products. In fact, significant increases in production capacity in the United States by competitors of AK Steel already have occurred in recent years as new carbon and stainless steelmaking and finishing facilities have begun production. In addition, foreign competitors, especially those in China, have substantially increased their production capacity in the last few years, and in some instances have seemingly targeted the U.S. market for imports of certain higher value products, including electrical steels. These and other factors have contributed to a high level of imports of foreign steel into the United States in recent years and create a risk of even greater levels of imports, depending upon foreign market and economic conditions, the value of the U.S. dollar relative to other currencies, and other variables beyond AK Steel’s control. A significant further increase in domestic capacity or foreign imports could adversely affect AK Steel’s sales, financial results and cash flows.
Risks of excess inventory of raw materials.  AK Steel has certain raw material supply contracts, particularly with respect to iron ore and coke, which have terms providing for minimum annual purchases, subject to exceptions for force majeure and other circumstances. If AK Steel’s need for a particular raw material is reduced for an extended period significantly below what was projected at the contract’s inception, or what was projected at the time an annual nomination was made under that contract, AK Steel could be required to purchase quantities of raw materials, particularly iron ore and coke, which exceed its anticipated annual needs. If that circumstance was to occur, and if AK Steel was not successful in reaching agreement with a particular raw material supplier to reduce the quantity of raw materials it purchases from that supplier, then AK Steel would likely be required to purchase more of a particular raw material in a given year than it needs, negatively affecting its financial results and cash flows. The impact on financial results could be exacerbated by AK Steel’s LIFO method for valuing inventories, which could be affected by changes in AK Steel’s raw material inventory levels, as well as AK Steel’s finished and semi-finished inventory levels. The impact of LIFO accounting may be particularly significant with respect to period-to-period comparisons.
Risk of supply chain disruptions or poor quality of raw materials. The Company’s sales, financial results and cash flows could be adversely affected by transportation, raw material or energy supply disruptions, or poor quality of raw materials, particularly scrap, coal, coke, iron ore, alloys and purchased carbon steel slabs. For example, extreme cold weather conditions in the United States and Canada impact shipping on the Great Lakes and could disrupt the delivery of iron ore to the Company and/or increase the Company’s costs related to iron ore. Such disruptions or quality issues, whether the result of severe financial hardships or bankruptcies of suppliers, natural or

- 6-


man-made disasters or other adverse weather events, or other unforeseen circumstances or events, could reduce production or increase costs at one or more of AK Steel’s plants and potentially adversely affect customers or markets to which AK Steel sells its products. Any such significant disruption or quality issue would adversely affect AK Steel’s sales, financial results and cash flows.
Risk of production disruption or reduced production levels.  When business conditions permit, AK Steel operates its facilities at production levels at or near capacity. High levels of production are important to AK Steel’s financial results because they enable AK Steel to spread its fixed costs over a greater number of tons. Production disruptions could be caused by the idling of facilities due to reduced demand, such as resulting from economic downturns, or from excess capacity. Such production disruptions also could be caused by unanticipated plant outages or equipment failures, particularly under circumstances where AK Steel lacks adequate redundant facilities, such as with respect to its Middletown Works hot mill. In addition, the occurrence of natural or man-made disasters, adverse weather conditions, or similar events or circumstances could significantly disrupt AK Steel’s operations, negatively impact the operations of other companies or contractors AK Steel depends upon in its operations, or adversely affect customers or markets to which AK Steel sells its products. Any such significant disruption or reduced level of production would adversely affect AK Steel’s sales, financial results and cash flows.
Risks associated with the Company’s healthcare obligations.  AK Steel provides healthcare coverage to its active employees and to a significant portion of its retirees, as well as to certain members of their families. AK Steel is self-insured with respect to substantially all of its healthcare coverage. While AK Steel has substantially mitigated its exposure to rising healthcare costs through cost sharing, healthcare cost caps and the establishment of VEBA trusts, the cost of providing such healthcare coverage may be greater on a relative basis for AK Steel than for other steel companies against which AK Steel competes because such competitors either provide a lesser level of benefits, require that their participants pay more for the benefits they receive, or do not provide coverage to as broad a group of participants (e.g., they do not provide retiree healthcare benefits). In addition, existing or new federal healthcare legislation could adversely affect AK Steel’s financial condition through increased costs in the future.
Risks associated with the Company’s pension obligations.  AK Steel’s pension trust is currently underfunded to meet its long-term obligations. The extent of underfunding is directly affected by changes in interest rates and asset returns in the securities markets. It also is affected by the rate and age of employee retirements, along with actual experience compared to actuarial projections. These items affect pension plan assets and the calculation of pension obligations and expenses. Such changes could increase the cost to AK Steel of those obligations, which could have a material adverse effect on AK Steel’s results and its ability to meet those obligations. In addition, changes in the law, rules, or governmental regulations with respect to pension funding could also materially and adversely affect the cash flow of AK Steel and its ability to meet its pension obligations. Also, under the method of accounting used by AK Steel with respect to its pension obligations, AK Steel recognizes into its results of operations, as a “corridor” adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. These corridor adjustments are driven mainly by changes in assumptions and by events and circumstances beyond AK Steel’s control, primarily changes in interest rates, performance of the financial markets, and mortality and retirement projections. A corridor adjustment, if required after a re-measurement of AK Steel’s pension obligations, historically has been recorded in the fourth quarter of the fiscal year. In certain past years, corridor adjustments have had a significant negative impact on AK Steel’s financial statements in the year in which a charge was recorded, although the immediate recognition of the charge in that year has the beneficial effect of reducing its impact on future years. The recognition of a corridor charge does not have any immediate impact on the Company’s cash flows.
Risk of not reaching new labor agreements on a timely basis.  Most of AK Steel’s hourly employees are represented by various labor unions and are covered by collective bargaining agreements with expiration dates between March 2014 and September 2017. Two of those contracts are scheduled to expire in 2014. The labor contract with the United Steelworkers, Local 169, which represents approximately 280 hourly employees at the Company’s Mansfield Works located in Mansfield, Ohio, expires on March 31, 2014. The labor agreement with the International Associations of Machinists and Aerospace Workers, Local 1943, which represents approximately 1,650 hourly employees at the Company’s Middletown Works located in Middletown, Ohio, expires on September 15, 2014.  The Company intends to negotiate with these unions to reach new, competitive labor agreements in advance of the current expiration dates.  The Company cannot predict at this time, however, when new, competitive labor agreements with the unions at the Mansfield Works and Middletown Works will be reached or what the impact of such agreements will be on the Company’s operating costs, operating income and cash flow. There is the potential of a work stoppage at these locations in 2014 as their collective bargaining agreements expire if the Company and the unions cannot reach a timely agreement in contract negotiations.  If there was to be a work stoppage, it could have a material impact on the Company’s operations, financial results and cash flows. To the extent that the Company has labor contracts with unions at other locations which expire after 2014, a similar risk applies.
Risks associated with major litigation, arbitrations, environmental issues and other contingencies.  The Company has described several significant legal and environmental proceedings in Note 9 to the consolidated financial statements in Item 8.  With respect to environmental issues, changes in application or scope of regulations applicable to AK Steel could have significant adverse impacts, including requiring capital expenditures to ensure compliance with the regulations, increased difficulty in obtaining future permits, incurring costs for emission allowances, restriction of production, and higher prices for certain raw materials. One or more of these adverse developments could negatively impact the Company’s operations, financial results and cash flows. With respect to litigation, arbitrations and other legal proceedings, it is not possible to predict with certainty the outcome of such matters and the Company could

- 7-


in the future incur judgments, fines or penalties or enter into settlements of lawsuits, arbitrations and claims that could have an adverse effect on its business, results of operations and financial condition.  In addition, while the Company maintains insurance coverage with respect to certain claims, it may not be able to obtain such insurance on acceptable terms in the future and, to the extent it obtains such insurance, it may not provide adequate coverage against all claims. The Company establishes reserves based on its assessment of contingencies, including contingencies related to claims asserted against it in connection with litigation, arbitrations and environmental issues.  Adverse developments in litigation, arbitrations or other legal proceedings may affect the Company’s assessment and estimates of the loss contingency recorded as a reserve and require the Company to make payments in excess of its reserves, which could negatively affect its operations, financial results and cash flows.
Risk associated with regulatory compliance and changes. AK Steel’s business and the businesses of its customers and suppliers are subject to a wide variety of government oversight and regulation. The regulations promulgated or adopted by various government agencies, and the interpretations and application of such regulations, are dynamic and constantly evolving. To the extent new regulations arise, the application of existing regulations expands, or the interpretation of applicable regulations changes, AK Steel may incur additional costs for compliance, including capital expenditures. AK Steel may also be indirectly affected through regulatory changes impacting its customers or suppliers. Such changes could reduce the competitiveness or even the viability of AK Steel products to AK Steel customers or cause AK Steel suppliers to pass their increased costs of compliance through to AK Steel in the form of higher prices for their goods or services.
Risks associated with climate change and greenhouse gas emission limitations. The United States has not ratified the 1997 Kyoto Protocol Treaty (the “Kyoto Protocol”) and AK Steel does not produce steel in a country that has ratified that treaty. Negotiations for a treaty that would succeed the Kyoto Protocol are ongoing and it is not known yet what the terms of that successor treaty ultimately will be or if the United States will ratify it. It is possible, however, that limitations on greenhouse gas emissions may be imposed in the United States at some point in the future through federally-enacted legislation or regulation. The EPA has issued and/or proposed regulations addressing greenhouse gas emissions, including regulations that will require reporting of greenhouse gas emissions from large sources and suppliers in the United States. Legislation previously has been introduced in the United States Congress aimed at limiting carbon emissions from companies that conduct business that is carbon-intensive. Among other potential material items, such bills could include a system of carbon emission credits issued to certain companies, similar to the European Union’s existing “cap and trade” system. It is impossible at this time, however, to forecast what the final regulations and legislation, if any, will look like and the resulting effects on AK Steel. Depending upon the terms of any such regulations or legislation, however, AK Steel could suffer negative financial impacts as a result of increased energy, environmental and other costs in order to comply with the limitations that would be imposed on greenhouse gas emissions. In addition, depending upon whether similar limitations are imposed globally, the regulations and/or legislation could negatively impact AK Steel’s ability to compete with foreign steel companies situated in areas not subject to such limitations. Unless and until all of the terms of such regulation and legislation are known, however, AK Steel cannot reasonably or reliably estimate their impact on its financial condition, operating performance or ability to compete.
Risks associated with financial, credit, capital and banking markets.  In the ordinary course of business, AK Steel seeks to access competitive financial, credit, capital and/or banking markets. Currently, AK Steel believes it has adequate access to these markets to meet its reasonably anticipated business needs. AK Steel both provides and receives normal trade financing to and from its customers and suppliers. To the extent, if at all, access to competitive financial, credit, capital and/or banking markets by AK Steel, or its customers or suppliers, was to be impaired, AK Steel’s operations, financial results and cash flows could be adversely impacted.
Risk associated with the Company’s use of derivative contracts to hedge commodity pricing volatility. The Company uses cash-settled commodity price swaps and options to hedge the market risk for a portion of its raw material and energy purchases and the market risk associated with the sale of certain of its commodity steel products (hot roll carbon steel coils) to mitigate the risk of pricing volatility. For example, in the event the price of an underlying commodity falls below the price at which the Company has hedged such commodity, the Company will benefit from the lower market price for the commodity purchased, but will not realize the full benefit of the lower commodity price because of the amount that it has hedged. In certain circumstances the Company also could be required to provide collateral for its potential derivative liability or close its hedging transaction for the commodity. Additionally, there may be a lag in timing (particularly with respect to iron ore) between a decline in the price of a commodity underlying a derivative contract, which could cause the Company to make payments in the short-term to provide collateral or settle its relevant hedging transaction, and the period in which the Company experiences the benefits of the lower cost input through its direct purchases of the commodity. Each of these risks related to the Company's hedging transactions could adversely affect the Company's financial results and cash flows.
Risk associated with the value of the Company’s net deferred tax assets.  U.S. internal revenue laws and regulations and similar state laws applicable to the Company and the rates at which it is taxed have a significant effect on its financial results.  For instance, the Company has recorded deferred tax assets, including loss carryforwards and tax credit carryforwards, on its Consolidated Balance Sheets to reflect the economic benefit of tax positions that become deductible in future tax periods at the tax rate that is expected when they will be taken.  Changes in tax laws or rates can materially affect the future deductible amounts related to deferred tax assets.  For example, a reduction in the tax rate would decrease the amount of tax benefit to be realized in the future and result in a charge to the income statement, which has the effect of reducing the Company’s income at the time the tax rate change is enacted. The Company has established a valuation allowance for its deferred tax assets. In determining the appropriate amount of the valuation allowance, the accounting standards

- 8-


allow the Company to consider the timing of future reversal of its taxable temporary differences and available tax strategies that, if implemented, would result in the realization of deferred tax assets. The use of a tax planning strategy involving LIFO inventory accounting will result in changes in the valuation allowance on the deferred tax assets in relation to the amount of LIFO income or expense the Company records and could materially affect reported financial results. For more detail concerning the Company’s net deferred tax assets, see the discussion in the Critical Accounting Estimates section in Item 7 and in Note 4 to the consolidated financial statements in Item 8. Thus, changes in certain tax laws, a reduction in tax rates or a reduction in the realizable value of the deferred tax assets could have a material adverse effect on the Company’s financial results and financial condition.
Risk of inability to fully realize benefits of long-term cost savings and margin enhancement initiatives. In recent years the Company has undertaken several significant projects in an effort to lower its costs and enhance its margins. These include efforts to lower its costs and increase its control over certain key raw materials through a strategy of vertically integrating into approximately one half of its annual supply of such key raw materials. AK Steel intends to implement this strategy with respect to iron ore through its investment in Magnetation and with respect to coal through its ramp-up of AK Coal’s mining operations. Other strategic initiatives to lower AK Steel’s costs include increasing the utilization, yield and productivity of its facilities, implementing strategic purchasing procurement improvements, controlling maintenance spending, producing lower cost metallic burdens and reducing transportation costs. The Company also has identified several other areas for enhancing its profitability, including increasing its percentage of contract sales (and lowering spot market sales), producing and selling a higher-value mix of products and developing new products that can command higher prices from customers. To the extent that one or more of the Company’s significant cost-savings or margin enhancement projects is unsuccessful, or that several projects are significantly less effective in achieving the level of combined cost-savings or margin enhancement than the Company is anticipating, or that the Company does not achieve such results as quickly as anticipated, the Company’s financial results and cash flows could be adversely impacted.
Risk of lower quantities, quality or yield of estimated coal reserves of AK Coal. AK Steel has based estimated reserve information of its wholly-owned subsidiary, AK Coal, on engineering, economic and geological data assembled and analyzed by third-party engineers and geologists, with involvement of and review by Company employees. There are numerous uncertainties inherent in estimating yields from, quantities and qualities of, and costs to mine recoverable reserves, including many factors beyond AK Coal’s control. Estimates of economically-recoverable coal reserves necessarily depend upon a number of variables and assumptions, such as geological and mining conditions that may not be fully identified by available exploration data or that may differ from experience in current operations, historical production from the area compared with production from other similar producing areas, the assumed effects of regulation and taxes by governmental agencies, and assumptions concerning coal prices, operating costs, development costs and reclamation costs, all of which may vary considerably from actual results. As a result, actual coal tonnage recovered from AK Coal’s properties and the related costs may vary materially from AK Steel’s estimates. In addition, actual or alleged defects in title in or the boundaries of the property that AK Coal owns or its loss of any material leasehold interests could limit or eliminate its ability to mine these properties, which may reduce the estimated reserves controlled by AK Coal or result in significant unanticipated costs to obtain the property rights to mine such reserves.
Risk of increased governmental regulation of mining activities. AK Steel’s ability to realize fully the expected benefits from AK Coal and Magnetation could be materially adversely affected by increased governmental regulation of mining and related activities, including difficulties or delays in or their failure to receive, maintain or modify environmental permits required for their operations. With respect to AK Coal, the coal mining industry is subject to numerous and extensive federal, state and local environmental laws and regulations, including laws and regulations pertaining to permitting and licensing requirements, air quality standards, plant and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, the storage, treatment and disposal of wastes, surface subsidence from underground mining and the effects of mining on groundwater quality and availability. With respect to Magnetation, although the construction and operation of its iron ore concentrate plants require limited environmental permits, Magnetation will be required to seek new and amended permits with respect to the additional iron ore concentrate capacity that it intends to build and operate that is necessary to feed its iron ore pellet plant. Furthermore, when Magnetation’s pellet plant commences operation, it will be subject to most, if not all, of the federal, state and local environmental laws and regulations previously mentioned in regards to AK Coal. The costs, liabilities and requirements associated with these laws and regulations are significant and may increase the costs of AK Coal’s mining activities and Magnetation’s pellet plant operations and could delay, or even preclude, the commencement of Magnetation’s proposed additional iron ore concentrate capacity and the opening of additional mines by AK Coal beyond its currently operational North Fork mine.
Risk of inability to hire or retain skilled labor and experienced manufacturing and mining managers. Modern steel-making and mining uses specialized techniques and advanced equipment and requires experienced managers and skilled laborers. The manufacturing and mining industries in the United States are in the midst of a shortage of experienced managers and skilled laborers. This shortage is due in large part to demographic changes, as such laborers and managers are retiring at a faster rate than replacements are entering the workforce or achieving a comparable level of experience. If AK Steel or AK Coal are unable to hire or contract sufficient experienced managers and skilled laborers, there could be an adverse impact on the productivity of these operations and the ultimate benefits to AK Steel.
Risk of IT security threats and sophisticated cybercrime. The Company relies upon IT systems and networks in connection with a variety of business activities. In addition, the Company collects and stores sensitive data.  The Company has taken, and intends to continue

- 9-


to take, what it believes are appropriate and reasonable steps to prevent security breaches in its systems and networks. In recent years, however, there appears to have been an increase in both the number and sophistication of IT security threats and cybercrimes. These IT security threats and increasingly sophisticated computer crimes, including advanced persistent threats, pose a risk to the security of AK Steel’s systems and networks and the confidentiality, availability and integrity of its data.  A failure of or breach in security could expose the Company to risks of production downtimes and operations disruptions, misuse of information or systems, or the compromising of confidential information, which in turn could adversely affect the Company’s reputation, competitive position, business and financial results.
While the previously listed items represent the most significant risks to the Company, the Company regularly monitors and reports risks to Management and the Board of Directors by means of a formal Total Enterprise Risk Management program.

Item 1B.
Unresolved Staff Comments.

The Company has no unresolved Securities and Exchange Commission staff comments.

Item 2.
Properties.

The Company leases a building in West Chester, Ohio, for use as its corporate headquarters.  The initial term of the lease for the building expires in 2019 and there are two five-year options to extend the lease.  The Company owns its research building located in Middletown, Ohio.  Steelmaking, finishing and tubing operations are conducted at nine facilities located in Indiana, Kentucky, Ohio and Pennsylvania. All of these facilities are owned by the Company, either directly or through wholly-owned subsidiaries.

Ashland Works is located in Ashland, Kentucky, and produces carbon steel. It consists of a blast furnace, basic oxygen furnaces and continuous caster for the production of carbon steel and a coating line that helps to complete the finishing operation of material processed at Middletown Works.

Butler Works is located in Butler, Pennsylvania, and produces stainless, electrical and carbon steel.  Melting takes place in a highly-efficient electric arc furnace that feeds an argon-oxygen decarburization unit for the specialty steels. A ladle metallurgy furnace feeds two double-strand continuous casters.  The Butler Works also includes a hot rolling mill, annealing and pickling units and two fully automated tandem cold rolling mills. It also has various intermediate and finishing operations for both stainless and electrical steels.

Coshocton Works is located in Coshocton, Ohio, and consists of a stainless steel finishing plant containing two Sendzimer mills and two Z-high mills for cold reduction, four annealing and pickling lines, nine bell annealing furnaces, four hydrogen annealing furnaces, two bright annealing lines and other processing equipment, including temper rolling, slitting and packaging facilities.

Mansfield Works is located in Mansfield, Ohio, and produces stainless steel. Operations include a melt shop with two electric arc furnaces, a ladle metallurgy furnace, an argon-oxygen decarburization unit, a thin-slab continuous caster and a hot rolling mill.

Middletown Works is located in Middletown, Ohio. It melts carbon and processes carbon and stainless steel. It consists of a coke facility, blast furnace, basic oxygen furnaces and continuous caster for the production of carbon steel.  Also located at the Middletown site are a hot rolling mill, cold rolling mill, two pickling lines, four annealing facilities, two temper mills and three coating lines for finishing the product.

Rockport Works is located near Rockport, Indiana, and consists of a continuous cold rolling mill, a continuous hot-dip galvanizing and galvannealing line, a continuous carbon and stainless steel pickling line, a continuous stainless steel annealing and pickling line, hydrogen annealing facilities and a temper mill.

Zanesville Works is located in Zanesville, Ohio, and consists of a finishing plant for some of the stainless and electrical steel produced at Butler Works and Mansfield Works and has a Sendzimer cold rolling mill, annealing and pickling lines, high temperature box anneal and other decarburization and coating units.

AK Tube LLC (“AK Tube”), a Company subsidiary, has a plant in Walbridge, Ohio, which operates six electric resistance welder tube mills and a slitter.  AK Tube also has a plant in Columbus, Indiana, which operates eight electric resistance welder and two laser welder tube mills.

AK Coal, another Company subsidiary, produces metallurgical coal from reserves in Somerset County, Pennsylvania. The Company currently estimates that AK Coal owns or leases existing proven and probable coal reserves of approximately 33 million tons of low-volatile metallurgical coal. Another Company subsidiary, Coal Innovations, LLC (“Coal Innovations”), operates a coal wash plant in Somerset County, Pennsylvania close to AK Coal’s reserves.


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Item 3.
Legal Proceedings.

Information with respect to this item may be found in Note 9 to the consolidated financial statements in Item 8, which is incorporated herein by reference.

Item 4.
Mine Safety Disclosures.

The operation of AK Coal’s North Fork Mine and Coal Innovations’s coal wash plant (collectively, the “AK Coal Operations”) are subject to regulation by the Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977, as amended (“Mine Act”). MSHA inspects mining and processing operations, such as the AK Coal Operations, on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Exhibit 95.1 to this Annual Report sets forth citations and orders from MSHA and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act or otherwise under this Item 4.


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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

AK Holding’s common stock has been listed on the New York Stock Exchange since April 5, 1995 (symbol: AKS).  The table below sets forth for the calendar quarters indicated the reported high and low sales prices of the common stock:
 
2013
 
2012
 
High
 
Low
 
High
 
Low
First Quarter
$
4.94

 
$
3.25

 
$
10.33

 
$
6.80

Second Quarter
3.80

 
2.76

 
7.85

 
4.59

Third Quarter
4.65

 
2.92

 
6.73

 
4.44

Fourth Quarter
8.47

 
3.73

 
5.90

 
3.42


As of February 19, 2014, there were 136,684,433 shares of common stock outstanding and held of record by 4,266 stockholders.  The closing stock price on February 19, 2014 was $6.50 per share.  Because depositories, brokers and other nominees held many of these shares, the number of record holders is not representative of the number of beneficial holders. There were no unregistered sales of equity securities in the quarter or year ended December 31, 2013.

The Company’s Credit Facility contains certain restrictive covenants with respect to the Company’s payment of dividends. Under these covenants, dividends are permitted providing (i) availability exceeds $247.5 or (ii) availability exceeds $192.5 and the Company meets a fixed charge coverage ratio of one to one as of the most recently ended fiscal quarter. If the Company cannot meet either of these thresholds, dividends would be limited to $12.0 annually. Currently, the availability under the Credit Facility significantly exceeds $247.5. In July 2012, the Company elected to suspend its dividend program in order to enhance the Company’s financial flexibility and further support capital needs of the business. Accordingly, although the Company has elected to suspend its dividend program, there currently are no covenant restrictions that would restrict the Company’s ability to declare and pay a dividend to its stockholders.

No cash dividends were paid in 2013. Cash dividends paid in 2012 by the Company to its shareholders were determined to be a return of capital under the United States Internal Revenue Code. Information concerning the amount and frequency of dividends declared and paid in 2012 is as follows:
2012 COMMON STOCK DIVIDENDS
 
Record Date
 
Payment Date
 
Per Share
February 10, 2012
 
March 9, 2012
 
$
0.05

May 15, 2012
 
June 8, 2012
 
0.05



ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total
Number of
Shares
Purchased (a)
 
Average Price Paid Per
Share (a)
 
Total Number of
Shares (or Units)
Purchased as 
Part of Publicly
Announced Plans
or Programs (b)
 
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs (b)
October 2013
 
1,176

 
$
4.14

 

 
 
November 2013
 

 

 

 
 
December 2013
 
452

 
8.27

 

 
 
Total
 
1,628

 
5.29

 

 
$
125.6


(a)
During the quarter, the Company repurchased common stock owned by participants in its restricted stock awards program under the terms of the AK Steel Holding Corporation Stock Incentive Plan.  In order to satisfy the requirement that an amount be withheld that is sufficient to pay federal, state and local taxes due upon the vesting of the restricted stock, employees are permitted to have the Company withhold shares having a fair market value equal to the minimum statutory withholding rate that could be imposed on the transaction.  The Company repurchases the withheld shares at the quoted average of the reported high and low sales prices on the day the shares are withheld.
(b)
On October 21, 2008, the Company announced that its Board of Directors had authorized the Company to repurchase, from time to time, up to $150.0 of its outstanding equity securities.  There is no expiration date specified in the Board of Directors’ authorization.

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The following graph compares cumulative total stockholder return on AK Holding’s common stock for the five-year period from January 1, 2009 through December 31, 2013, with the cumulative total return for the same period of (i) the Standard & Poor’s 500 Stock Index and (ii) Standard & Poor’s 500 Metals & Mining Index.  The S&P 500 Metals & Mining Index is made up of Alcoa Inc., Allegheny Technologies Inc., Cliffs Natural Resources, Inc., Freeport-McMoRan Copper & Gold Inc., Newmont Mining Corporation, Nucor Corporation and United States Steel Corporation.  These comparisons assume an investment of $100 at the commencement of the period and reinvestment of dividends.

 
January 1,
 
December 31,
 
2009
 
2009
 
2010
 
2011
 
2012
 
2013
AK Holding
$
100

 
$
232

 
$
181

 
$
93

 
$
53

 
$
94

S&P 500 Metals & Mining
100

 
161

 
207

 
153

 
138

 
139

S&P 500
100

 
126

 
145

 
148

 
172

 
228



- 13-


Item 6.
Selected Financial Data.

The following selected historical consolidated financial data for each of the five years in the period ended December 31, 2013 have been derived from the audited consolidated financial statements. The selected historical consolidated financial data presented herein are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements set forth in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7.
 
2013
 
2012
 
2011
 
2010
 
2009
 
(dollars in millions, except per share and per ton data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
5,570.4

 
$
5,933.7

 
$
6,468.0

 
$
5,968.3

 
$
4,076.8

Operating profit (loss) (a)(b)
135.8

 
(128.1
)
 
(201.3
)
 
(133.9
)
 
(70.1
)
Net income (loss) attributable to AK Steel Holding Corporation (c)
(46.8
)
 
(1,027.3
)
 
(155.6
)
 
(128.9
)
 
(74.6
)
Basic and diluted earnings (loss) per share (c)
(0.34
)
 
(9.06
)
 
(1.41
)
 
(1.17
)
 
(0.68
)
Other Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$

 
$
0.10

 
$
0.20

 
$
0.20

 
$
0.20

Total shipments (in thousands of tons)
5,275.9

 
5,431.3

 
5,698.8

 
5,660.9

 
3,935.5

Selling price per ton
$
1,056

 
$
1,092

 
$
1,131

 
$
1,054

 
$
1,036

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
45.3

 
$
227.0

 
$
42.0

 
$
216.8

 
$
461.7

Working capital
441.8

 
630.3

 
137.3

 
559.6

 
889.4

Total assets
3,605.7

 
3,903.1

 
4,449.9

 
4,188.6

 
4,274.7

Current portion of long-term debt (d)
0.8

 
0.7

 
250.7

 
0.7

 
0.7

Long-term debt (excluding current portion)
1,506.2

 
1,411.2

 
650.0

 
650.6

 
605.8

Current portion of pension and other postretirement benefit obligations
85.9

 
108.6

 
130.0

 
145.7

 
144.1

Pension and other postretirement benefit obligations (excluding current portion)
965.4

 
1,661.7

 
1,744.8

 
1,706.0

 
1,856.2

Total equity (deficit) (e)
192.7

 
(91.0
)
 
377.2

 
641.1

 
880.1


(a)
In 2010, the Company recorded $63.7 related to the announced shutdown of the Company’s Ashland coke plant.
(b)
Under its method of accounting for pensions and other postretirement benefits, the Company recorded pension corridor charges of $157.3 and $268.1 in 2012 and 2011, respectively.
(c)
Included in net income (loss) attributable to AK Steel Holding Corporation for 2012 was a charge to income tax expense of $865.5, or $7.63 per diluted share, for an increase in the valuation allowance on deferred tax assets.
(d)
Includes borrowings under the Company’s revolving credit facility classified as short-term.
(e)
As of December 31, 2012, the advances to SunCoke Middletown were classified as noncontrolling interests as a result of financing activities performed by its parent, SunCoke Energy, Inc. This was included in other non-current liabilities in prior periods.

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

Operations Overview

The Company’s operations consist primarily of nine steelmaking and finishing plants and tubular production facilities located in Indiana, Kentucky, Ohio and Pennsylvania. The Company’s operations produce flat-rolled value-added carbon steels, including premium-quality coated, cold-rolled and hot-rolled carbon steel products, and specialty stainless and electrical steels that are sold in sheet and strip form, as well as carbon and stainless steel that is finished into welded steel tubing.  These products are sold to the automotive, infrastructure and manufacturing, and distributors and converters markets.  The Company sells its carbon products principally to domestic customers.  The Company’s electrical and stainless steel products are sold both domestically and internationally.  The Company also produces carbon and stainless steel that is finished into welded steel tubing used in the automotive, large truck, industrial and construction markets. The Company’s operations include European trading companies that buy and sell steel and steel products and other materials, AK Coal, which produces metallurgical coal from reserves in Pennsylvania, and a 49.9% equity interest in Magnetation, a joint venture that produces iron ore concentrate from previously-mined ore reserves and that is expected to begin producing iron ore pellets in the fourth quarter of 2014 or sooner.


- 14-


Safety, quality and productivity are the focal points of AK Steel’s operations and the hallmarks of its success.  In 2013, the Company experienced another year of outstanding safety performance, tying its best year ever with respect to OSHA-recordable safety injuries. In 2013, the Company continued to lead the steel industry in OSHA-recordable safety performance by a wide margin. The Company also continued to perform extremely well with respect to quality, establishing several all-time company best records for internal quality performances. With respect to productivity, the Company set new yield records at several operating units and plant locations in 2013. Although the Company’s average capacity utilization across all of its plants remained steady at approximately 80% in 2013 compared to approximately 81% in 2012, AK Steel continued to focus its capacity on the production of value-added steels, which increased from approximately 83% of sales in 2012 to almost 86% in 2013.

2013 Financial Results Overview

An increase in global capacity and new or expanded production capacity in the United States in recent years has resulted in capacity in excess of demand globally, as well as in the Company’s primary markets in North America. This excess capacity, as well as continued challenging domestic and global economic conditions, had a negative impact on the Company’s financial performance. In addition, the Company’s results for 2013 were also adversely affected by the unplanned outage at its Middletown Works blast furnace.

The unplanned outage of the Company’s Middletown Works blast furnace was due to a mechanical failure in the charging apparatus internal to the furnace which occurred on June 22, 2013. The Company completed repairs and restarted the blast furnace on July 12, 2013. Initially, it appeared that the blast furnace had returned to full production, but lingering problems arose that delayed the furnace from consistently performing at that level. The Company took a short outage of the blast furnace in October 2013 to address the problems that were preventing the furnace from returning to its planned production level. The furnace was back to full production in the fourth quarter. The Company maintains property damage and business interruption insurance, which covered a significant portion of the losses associated with this unplanned outage. In 2013 the Company recognized $22.3 of net losses associated with the unplanned outage after partial insurance recovery of $14.6. No significant losses related to the unplanned outage are expected to be recognized in 2014.

The challenging conditions that affected the Company’s results included a slow and uneven economic recovery in the United States and in other parts of the world, continued weakness and greater uncertainty with regard to the economies of Western Europe caused by currency, debt and austerity issues, and a significant global oversupply of steel relative to demand. As a result of this excess capacity, there was increased competition in the United States from imports and from domestic producers. These conditions had the effect of suppressing pricing for most of the Company’s steel products, particularly early in the year. Despite this suppressed pricing for finished steel products, input costs remained disproportionately high for certain raw materials due to strong demand from China. Toward the end of the second quarter, the Company began to see some increases in carbon steel spot market pricing and this continued in the second half of the year. However, the Company was not able to realize the full benefit of this increase in pricing because of the effects of the unplanned outage at its Middletown Works blast furnace. That outage caused limitations on the Company’s capacity for shipments and delays in meeting customer orders during the second half of the year. After the Middletown Works blast furnace was returned to service, the Company honored its commitments to customers for lower-priced orders placed prior to the unplanned outage and, as a result, a portion of its shipments were at prices lower than the then-prevailing market price. The Company also continued to experience a decline in electrical steel pricing during the year, particularly with regard to international sales, as a result of the weak global economic conditions and increased global production capacity.
 
Reflecting this business environment and the now-overcome operational challenges, the Company’s net sales declined by approximately 6% from 2012. This was principally attributable to a decline in average selling prices compared to 2012, combined with an approximate 3% decline in shipments. The Company’s average selling price for 2013 was $1,056 per ton, a decrease of approximately 3% from the Company’s average selling price of $1,092 per ton for 2012. However, the Company benefited from lower raw material costs, primarily for carbon scrap, iron ore, coal and coke. The benefit of the lower raw material costs, however, could not overcome the negative effect of the overall economic, business and tax conditions faced by the Company in 2013.

As a result of the aggregate effect of the challenging business conditions and the unplanned blast furnace outage, the Company reported a net loss of $46.8, or $0.34 per diluted share of common stock, in 2013. The Company also reported adjusted EBITDA of $255.0, or $48 per ton.  Reconciliations for the non-GAAP financial measures presented in this paragraph are provided in the Non-GAAP Financial Measures section of this report.

There were some bright spots in 2013. Year-over-year, the Company experienced improved demand for steel sold to the automotive market. North American light vehicle production, which has been on an upward trend, continued to improve compared to prior year periods and the Company’s total sales and shipments to that market also increased compared to the prior year. In addition, housing starts in the United States showed improvement compared to prior year periods. Both of these key markets for the Company appear poised for further gains in 2014. With respect to raw materials, the Company saw substantial progress in its strategic investments in Magnetation and AK Coal. AK Coal began its mining activities in mid-2013 and started ramping up production. Magnetation received the permits to begin construction of its pellet plant and made significant progress with that construction. Although the Company is reporting a net loss in 2013, the 2013 financial results were substantially improved over the Company’s 2012 results. In addition, during 2013, the

- 15-


Company’s pension and other postretirement benefit obligations declined by $719.0 as a result of cash payments of $285.3 from the Company for benefit payments and as contributions to the pension and VEBA trusts, strong asset returns on pension assets and higher interest rates used to determine the present value of the obligations. The Company believes that these positive developments in 2013, which contributed to a profitable fourth quarter, have laid the foundation for continued improvement by the Company in 2014 compared to 2013.

2013 Compared to 2012

Steel Shipments

Steel shipments in 2013 were 5,275,900 tons, down approximately 3% from shipments of 5,431,300 tons in 2012.  The reduction in overall shipments in 2013 compared to 2012 was principally the result of excess global steel capacity and the effect of the unplanned outage at the Middletown Works blast furnace.  As spot market pricing declined in early 2013, the Company took steps to reduce its spot market sales of non value-added steel. These factors resulted in an increase in the Company’s value-added shipments as a percent of total volume shipped to 85.9% in 2013 compared to 83.4% in 2012.  Tons shipped by product category for 2013 and 2012, and as a percent of total shipments, were as follows:
 
 
2013
 
2012
Value-added Shipments
 
(tons in thousands)
Stainless/electrical
 
822.1
 
15.6
%
 
849.1
 
15.6
%
Coated
 
2,469.6
 
46.8
%
 
2,409.4
 
44.4
%
Cold-rolled
 
1,115.9
 
21.2
%
 
1,138.7
 
21.0
%
Tubular
 
122.2
 
2.3
%
 
132.0
 
2.4
%
Subtotal value-added shipments
 
4,529.8
 
85.9
%
 
4,529.2
 
83.4
%
Non Value-added Shipments
 
 
 
 
 
 
 
 
Hot-rolled
 
643.5
 
12.2
%
 
767.6
 
14.1
%
Secondary
 
102.6
 
1.9
%
 
134.5
 
2.5
%
Subtotal non value-added shipments
 
746.1
 
14.1
%
 
902.1
 
16.6
%
 
 
 
 
 
 
 
 
 
Total shipments
 
5,275.9
 
100.0
%
 
5,431.3
 
100.0
%

Net Sales

Net sales in 2013 were $5,570.4, down 6% from net sales of $5,933.7 in 2012.  The decrease resulted primarily from lower selling prices in 2013 compared to 2012 and a lower volume of shipments.  The average selling price was $1,056 per net ton in 2013, a decrease of 3% compared to $1,092 per net ton in 2012.  The Company has variable-pricing mechanisms with most of its contract customers, under which price adjustments are permitted during the term of the contract. However, to the extent such pricing adjustments are triggered by changes in raw material costs, an adjustment is not permitted in some cases until the raw material price is outside pre-agreed parameters.  The Company had such variable-pricing mechanisms with respect to approximately 91% of its contract shipments in 2013, compared to 94% in 2012.

Net sales to customers outside the United States were $708.0, or 13% of total sales, for 2013, compared to $856.7, or 14% of total sales, for 2012.  A majority of the revenue from sales outside the United States is associated with electrical and stainless steel products.

The following table sets forth the percentage of the Company’s net sales attributable to each of its markets:
Market
 
2013
 
2012
Automotive
 
51
%
 
45
%
Infrastructure and Manufacturing
 
20
%
 
23
%
Distributors and Converters
 
29
%
 
32
%

Cost of Products Sold

Cost of products sold in 2013 and 2012 was $5,107.8 and $5,539.1, respectively.  Cost of products sold for 2013 was lower primarily as a result of lower shipments and lower costs for carbon scrap, iron ore, coal, coke and energy. The benefit of these lower raw materials costs was partially offset by higher outage and operating costs associated with the unplanned Middletown Works blast furnace outage. Also, the Company recorded a LIFO credit of $38.5 in 2013 compared to a LIFO credit of $89.0 in 2012. As noted above, the results for 2013 also include expenses of $22.3 for costs related to the unplanned blast furnace outage. Expenses for planned outages were $28.3 and $31.1 in 2013 and 2012, respectively.

- 16-



Selling and Administrative Expense

The Company’s selling and administrative expense decreased to $205.3 in 2013 from $208.7 in 2012.  The decrease was primarily the result of lower stock compensation costs.

Depreciation Expense

Depreciation expense was $190.1 in 2013 and $192.0 in 2012.

Pension and Other Postretirement Employee Benefit (“OPEB”) Expense (Income)

The Company recorded pension and OPEB income of $68.6 in 2013 compared to income of $35.3 in 2012. The increase in income in 2013 was largely a result of a decrease in the interest cost on the Company’s pension and OPEB obligations.

The Company recognizes into its results of operations, as a “corridor” adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets.  Amounts inside this 10% corridor are amortized over the plan participants’ life expectancy.  The effect of prevailing interest rates on the discount rate used to value projected plan obligations as of the December 31 measurement date and actual return on plan assets compared to the expected return are two of the more important factors used to determine the Company’s year-end liability, corridor adjustment and subsequent year’s expense for these benefit plans.  Under the Company’s method of accounting for pension and other postretirement benefit plans, it incurred a pre-tax pension corridor charge of $157.3 in 2012, but did not incur a corridor charge in 2013. Although ultimately the pension and OPEB obligations will be settled in cash, there was no cash requirement during the period in which the charge was recorded.

Operating Profit (Loss)

The Company reported operating profit for 2013 of $135.8, compared to an operating loss of $128.1 for 2012. Included in the 2012 loss was a pre-tax pension corridor charge of $157.3. Also included was operating profit related to SunCoke Middletown of $64.3 and $46.0 for 2013 and 2012, respectively.

Interest Expense

The Company’s interest expense for 2013 and 2012 was $127.4 and $86.7, respectively.  The year-over-year increase was primarily related to the late 2012 issuance of indebtedness with interest rates higher than the interest rate on the revolver borrowings outstanding prior to the issuance.

Other Income (Expense)

The Company reported other expense of $(1.4) for 2013 and other income of $6.2 for 2012.  Included in other income (expense) was the Company’s share of income (loss) related to Magnetation of $(4.9) and $7.7 for 2013 and 2012, respectively. The remaining balance of other income (expense) is principally attributable to foreign exchange gains or losses. The decrease in the Company’s share of income from Magnetation from the prior year period was due primarily to uncapitalized interest expense incurred on debt raised by Magnetation, principally for the purpose of constructing its pellet plant and additional iron ore concentrate capacity, and to mark-to-market losses on iron ore derivative contracts that Magnetation entered into to partially hedge its cash flows to support the debt service during the construction phase of the pellet plant.

Income Taxes

In 2013, the Company recorded an income tax benefit of $10.4 compared to income tax expense of $790.0 in 2012. Included in the income tax benefit for 2013 are non-cash charges of $14.4 for changes in the valuation allowance on the Company’s deferred tax assets. The Company recorded a non-cash charge of $865.5 in 2012 for an adjustment of the valuation allowance because of the change in judgment about the realizability of the deferred tax assets. While accounting rules specify that the deferred tax assets must be written down to the amount supported by a tax-planning strategy and the future reversal of the Company’s deferred tax liabilities, this accounting treatment has no effect on the ability of the Company to use the loss carryforwards and tax credits in the future to reduce cash tax payments. For a more detailed discussion on the valuation allowance, see Note 4 to the consolidated financial statements.

In the first quarter of 2013, SunCoke completed an initial public offering of an affiliate, SunCoke Energy Partners, L.P., a master limited partnership. As a result of a change in the legal structure of the SunCoke entities that own SunCoke Middletown made in connection with the offering, income taxes are no longer allocated to net income attributable to SunCoke Middletown beginning in the first quarter of 2013. Thus, effective January 1, 2013, the Company’s income tax provision no longer includes the effect of that allocation. However,

- 17-


for 2012, the consolidated income tax provision included $17.6 associated with SunCoke Middletown. Neither the former tax allocation nor the January 1, 2013 change eliminating that allocation had any effect on the net income (loss) attributable to AK Holding in any period.

Net Income (Loss) and Adjusted Net Income (Loss)

The Company’s net loss attributable to AK Holding in 2013 was $46.8, or $0.34 per diluted share, compared to $1,027.3, or $9.06 per diluted share, in 2012. The net loss in 2012 included a pre-tax pension corridor charge of $157.3, or $0.86 per diluted share. Included in the net loss attributable to AK Holding for 2013 and 2012, was $14.4, or $0.10 per diluted share, and $865.5, or $7.63 per diluted share, respectively, for the non-cash charge attributable to the change in the valuation allowance on the Company’s deferred tax assets referred to in Income Taxes above. Excluding the pension corridor charge in 2012 and the non-cash income tax charges, the Company had an adjusted net loss of $32.4, or $0.24 per diluted share, for 2013 compared to an adjusted net loss of $64.4, or $0.57 per diluted share, for 2012.

Adjusted EBITDA

Adjusted EBITDA (as defined below under Non-GAAP Financial Measures) was $255.0, or $48 per ton, and $181.2, or $33 per ton, for 2013 and 2012, respectively.

Non-GAAP Financial Measures

In certain of its disclosures, the Company has reported adjusted EBITDA and adjusted net income (loss) that exclude the effects of a pension corridor charge and a deferred tax asset valuation allowance charge. Management believes that reporting adjusted net income (loss) attributable to AK Holding (as a total and on a per share basis) with these items excluded more clearly reflects the Company’s current operating results and provides investors with a better understanding of the Company’s overall financial performance.

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It is a metric that is sometimes used to compare the results of different companies by removing the effects of different factors that might otherwise make comparisons inaccurate or inappropriate. For purposes of this report, the Company has made adjustments to EBITDA in order to exclude the effect of noncontrolling interests and pension corridor accounting charges. The adjusted results, although not financial measures under generally accepted accounting principles in the United States (“GAAP”) and not identically applied by other companies, facilitate the ability to analyze the Company’s financial results in relation to those of its competitors and to the Company’s prior financial performance by excluding items that otherwise would distort the comparison.  Adjusted EBITDA and adjusted net income (loss) are not, however, intended as alternative measures of operating results or cash flow from operations as determined in accordance with GAAP and are not necessarily comparable to similarly titled measures used by other companies. Also, with respect to the deferred tax valuation allowance charge, this was a non-cash charge related to the reduction in the amount of deferred tax assets deemed realizable by accounting standards and has no effect on the ability of the Company to use the loss carryforwards and tax credits in the future to reduce cash tax payments.

The Company recognizes in its results of operations, as a corridor adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. Amounts inside this 10% corridor are amortized over the plan participants’ life expectancy. The need for a corridor charge is considered at any remeasurement date, but has historically only been recorded in the fourth quarter at the time of the annual remeasurement. After excluding the corridor charge, the remaining pension expense included in the non-GAAP measure is comparable to the accounting for pension expense on a GAAP basis in the first three quarters of the year and Management believes this is useful to investors in analyzing the Company’s results on a quarter-to-quarter basis, as well as analyzing the Company’s results on a year-to-year basis. As a result of the Company’s corridor method of accounting, the Company’s subsequent financial results on both a GAAP and a non-GAAP basis do not contain any amortization of prior period actuarial gains or losses that exceeded the corridor threshold because those amounts were immediately recognized as a corridor adjustment in the period incurred. Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans, or when the assumptions change, as they may each year when a valuation is performed. The two most significant of those assumptions are the discount rate used to value projected plan obligations and the rate of return on plan assets. In addition, changes in other actuarial assumptions and the degree by which the unrealized gains or losses are within the corridor threshold prior to remeasurement will affect the calculation of the corridor adjustment. The effect of prevailing interest rates on the discount rate as of the December 31 measurement date and actual return on plan assets compared to the expected return will have a significant impact on the determination of the Company’s year-end liability, corridor adjustment and subsequent year’s expense for these benefit plans. For example, the corridor charge for 2012 was driven by actuarial losses caused primarily by (i) a decrease in the discount rate assumption used to determine the current year pension liabilities from 4.74% at December 31, 2011 to 3.85% at December 31, 2012 (an actuarial loss of approximately $280.0) and (ii) changes in mortality assumptions partially offset by (iii) the net effect of the difference between the expected return on assets of 8.0% ($188.3) and the actual return on assets of 14.8% ($347.8) (netting to an actuarial gain of $159.5). The Company believes that the corridor method of accounting for pension and other postretirement obligations is rarely used by other publicly traded companies. However, because different approaches are used in recognizing actuarial gains and losses, the Company’s resulting pension expense on a GAAP basis or a

- 18-


non-GAAP basis may not be comparable to other companies’ pension expense on a GAAP basis. Although the corridor charge reduces reported operating and net income, it does not affect the Company’s cash flows in the current period. However, the pension obligation will be ultimately settled in cash.

Neither current shareholders nor potential investors in the Company’s securities should rely on adjusted EBITDA or adjusted net income (loss) as a substitute for any GAAP financial measure and the Company encourages investors and potential investors to review the following reconciliations of net income (loss) attributable to AK Holding to adjusted EBITDA and adjusted net income (loss).

Reconciliation of Adjusted Net Income (Loss)
 
 
2013
 
2012
Reconciliation to Net Income (Loss) Attributable to AK Steel Holding
 
 
 
 
Adjusted net income (loss) attributable to AK Steel Holding Corporation
 
$
(32.4
)
 
$
(64.4
)
Pension corridor charge (net of tax)
 

 
(97.4
)
Non-cash income tax charge from change in deferred tax asset valuation allowance
 
(14.4
)
 
(865.5
)
Net income (loss) attributable to AK Steel Holding Corporation, as reported
 
$
(46.8
)
 
$
(1,027.3
)
 
 
 
 
 
Reconciliation to Basic and Diluted Earnings (Loss) per Share
 
 
 
 
Adjusted basic and diluted earnings (loss) per share
 
$
(0.24
)
 
$
(0.57
)
Pension corridor charge
 

 
(0.86
)
Non-cash income tax charge from change in deferred tax asset valuation allowance
 
(0.10
)
 
(7.63
)
Basic and diluted earnings (loss) per share, as reported
 
$
(0.34
)
 
$
(9.06
)


Reconciliation of Adjusted EBITDA
 
 
2013
 
2012
Net income (loss) attributable to AK Holding
 
$
(46.8
)
 
$
(1,027.3
)
Net income attributable to noncontrolling interests
 
64.2

 
28.7

Income tax expense (benefit)
 
(10.4
)
 
790.0

Interest expense
 
127.4

 
86.7

Interest income
 
(1.1
)
 
(0.4
)
Depreciation
 
190.1

 
192.0

Amortization
 
9.9

 
14.2

EBITDA
 
333.3

 
83.9

Less: EBITDA of noncontrolling interests (a)
 
78.3

 
60.0

Pension corridor charge
 

 
157.3

Adjusted EBITDA
 
$
255.0

 
$
181.2

Adjusted EBITDA per ton
 
$
48

 
$
33


(a)
The reconciliation of EBITDA of noncontrolling interests to net income attributable to noncontrolling interests is as follows:
 
 
2013
 
2012
Net income attributable to noncontrolling interests
 
$
64.2

 
$
28.7

Income tax expense
 

 
17.6

Depreciation
 
14.1

 
13.7

EBITDA of noncontrolling interests
 
$
78.3

 
$
60.0



- 19-


2012 Compared to 2011

Steel Shipments

Steel shipments in 2012 were 5,431,300 tons, down approximately 5% from shipments of 5,698,800 tons in 2011.  The reduction in overall shipments in 2012 compared to 2011 was principally the result of a decline in demand caused from general economic weakness and uncertainty.  As spot market pricing declined in 2012, the Company took steps to reduce its spot market sales of non value-added steel. This resulted in a slight increase in the Company’s value-added shipments as a percent of total volume shipped to 83.4% in 2012 compared to 82.1% in 2011.  Tons shipped by product category for 2012 and 2011, and as a percent of total shipments, were as follows:
 
 
2012
 
2011
Value-added Shipments
 
(tons in thousands)
Stainless/electrical
 
849.1
 
15.6
%
 
900.3
 
15.8
%
Coated
 
2,409.4
 
44.4
%
 
2,441.5
 
42.9
%
Cold-rolled
 
1,138.7
 
21.0
%
 
1,204.1
 
21.1
%
Tubular
 
132.0
 
2.4
%
 
130.1
 
2.3
%
Subtotal value-added shipments
 
4,529.2
 
83.4
%
 
4,676.0
 
82.1
%
Non Value-added Shipments
 
 
 
 
 
 
 
 
Hot-rolled
 
767.6
 
14.1
%
 
873.5
 
15.3
%
Secondary
 
134.5
 
2.5
%
 
149.3
 
2.6
%
Subtotal non value-added shipments
 
902.1
 
16.6
%
 
1,022.8
 
17.9
%
 
 
 
 
 
 
 
 
 
Total shipments
 
5,431.3
 
100.0
%
 
5,698.8
 
100.0
%

Net Sales

Net sales in 2012 were $5,933.7, down 8% from net sales of $6,468.0 in 2011.  The decrease resulted primarily from lower selling prices in 2012 compared to 2011 and a lower volume of shipments.  The average selling price was $1,092 per net ton in 2012, a decrease of 3% compared to $1,131 per net ton in 2011.  The Company has variable-pricing mechanisms with most of its contract customers, under which a portion of both rising and falling commodity costs are passed through to the customer or the prices are adjusted based on a published steel price index during the life of the contract.  The Company had such variable-pricing mechanisms with respect to approximately 94% of its contract shipments in 2012 compared to 93% in 2011.  

Net sales to customers outside the United States were $856.7, or 14% of total sales, for 2012, compared to $946.4, or 15% of total sales, for 2011.  A majority of the revenue from sales outside of the United States is associated with electrical and stainless steel products.  

The following table sets forth the percentage of the Company’s net sales attributable to each of its markets:
Market
 
2012
 
2011
Automotive
 
45
%
 
36
%
Infrastructure and Manufacturing
 
23
%
 
24
%
Distributors and Converters
 
32
%
 
40
%

Cost of Products Sold

Cost of products sold in 2012 and 2011 were $5,539.1 and $6,036.8, respectively.  Cost of products sold for 2012 was lower primarily as a result of lower shipments and lower costs for carbon scrap, iron ore and energy, partly offset by higher coke costs.  Also, the Company recorded a LIFO credit of $89.0 in 2012 compared to a LIFO charge of $9.8 in 2011.  

Selling and Administrative Expense

The Company’s selling and administrative expense decreased to $208.7 in 2012 from $215.4 in 2011.  The decrease was primarily the result of actions taken by the Company to reduce costs, including reduced spending for legal fees, outside consultants and outside services.


- 20-


Depreciation Expense

Depreciation expense increased to $192.0 in 2012 from $185.0 in 2011. The increase was the result of a full year of depreciation attributable to the SunCoke Middletown plant, which had started up in the fourth quarter of 2011, partially offset by a reduction in depreciation of certain older assets that had become fully depreciated during 2011. The year-over-year comparison also is affected by the impact of the shutdown of the Ashland coke plant in 2011, which reduced the Company’s depreciation expense in 2012.

Pension and Other Postretirement Employee Benefit (“OPEB”) Expense (Income)

The Company recorded pension and OPEB income of $35.3 in 2012 compared to income of $36.0 in 2011. This small reduction in income in 2012 was largely a result of a decrease in the interest cost on the Company’s pension and OPEB obligations, offset by an increase in the pension expense attributable to a decision by the Company to decrease its expected long-term rate of return on plan assets.

The Company recognizes into its results of operations, as a “corridor” adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets.  Amounts inside this 10% corridor are amortized over the plan participants’ life expectancy.  Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans, or when the assumptions change, as they may each year when a valuation is performed.  The effect of prevailing interest rates on the discount rate used to value projected plan obligations as of the December 31 measurement date and actual return on plan assets compared to the expected return are two of the more important factors used to determine the Company’s year-end liability, corridor adjustment and subsequent year’s expense for these benefit plans.  Under the Company’s method of accounting for pension and other postretirement benefit plans, it incurred pre-tax pension corridor charges of $157.3 and $268.1 in 2012 and 2011, respectively. Although ultimately the pension and OPEB obligations will be settled in cash, there was no cash requirement during the periods in which the charges were recorded.

Operating Profit (Loss)

The Company reported an operating loss for 2012 of $128.1, compared to an operating loss of $201.3 for 2011. Included in both the 2012 and 2011 losses were pre-tax pension corridor charges of $157.3 and $268.1, respectively. Also included was an operating profit (loss) related to SunCoke Middletown of $46.0 and $(7.8) for 2012 and 2011, respectively.

Interest Expense

The Company’s interest expense for 2012 and 2011 was $86.7 and $47.5, respectively.  The year-over-year increase was attributable to an increase in borrowings under the revolving credit agreement in 2012 versus 2011 and interest on the additional long-term debt issued in 2012.

Other Income (Expense)

The Company reported other income of $6.2 for 2012 and other expense of $(5.3) for 2011.  Included in other income (expense) was the Company’s share of income related to Magnetation of $7.7 for 2012. The balance of other income (expense) is principally attributable to foreign exchange gains or losses.

Income Taxes

In 2012, the Company had an income tax expense of $790.0 compared to income tax benefit of $94.0 in 2011. Included in income tax expense for 2012 are non-cash charges of $865.5 for changes in the valuation allowance on the Company’s deferred tax assets. While accounting rules specify that the deferred tax assets must be written down to the amount supported by a tax-planning strategy and the future reversal of the Company’s deferred tax liabilities, this accounting treatment has no effect on the ability of the Company to use the loss carryforwards and tax credits in the future to reduce cash tax payments. For a more detailed discussion on the valuation allowance, see Note 4 to the consolidated financial statements.

Net Income (Loss) and Adjusted Net Income (Loss)

The Company’s net loss attributable to AK Holding in 2012 was $1,027.3, or $9.06 per diluted share, compared to $155.6, or $1.41 per diluted share, in 2011. The net loss in 2012 included a pretax pension corridor charge of $157.3 or $0.86 per diluted share, compared to a pre-tax corridor charge of $268.1, or $1.50 per diluted share, in 2011. Included in the net loss attributable to AK Holding for 2012, was $865.5, or $7.63 per diluted share, for the non-cash charge attributable to the change in the valuation allowance on the Company’s deferred tax assets referred to in Income Taxes above. Excluding the pension corridor charge and the non-cash income tax charge, the Company had an adjusted net loss of $64.4, or $0.57 per diluted share, for 2012.


- 21-


Adjusted EBITDA

Adjusted EBITDA (as defined below under Non-GAAP Financial Measures) was $181.2, or $33 per ton, and $265.7, or $47 per ton, for 2012 and 2011, respectively.

Non-GAAP Financial Measures

In certain of its disclosures, the Company has reported adjusted EBITDA and adjusted net income (loss) that exclude the effects of a pension corridor charge and a deferred tax asset valuation allowance charge. Management believes that reporting adjusted net income (loss) attributable to AK Holding (as a total and on a per share basis) with these items excluded more clearly reflects the Company’s current operating results and provides investors with a better understanding of the Company’s overall financial performance.

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It is a metric that is sometimes used to compare the results of different companies by removing the effects of different factors that might otherwise make comparisons inaccurate or inappropriate. For purposes of this report, the Company has made adjustments to EBITDA in order to exclude the effect of noncontrolling interests and pension corridor accounting charges. The adjusted results, although not financial measures under GAAP and not identically applied by other companies, facilitate the ability to analyze the Company’s financial results in relation to those of its competitors and to the Company’s prior financial performance by excluding items that otherwise would distort the comparison.  Adjusted EBITDA and adjusted net income (loss) are not, however, intended as alternative measures of operating results or cash flow from operations as determined in accordance with GAAP and are not necessarily comparable to similarly titled measures used by other companies. Also, with respect to the deferred tax valuation allowance charge, this was a non-cash charge related to the reduction in the amount of deferred tax assets deemed realizable by accounting standards and has no effect on the ability of the Company to use the loss carryforwards and tax credits in the future to reduce cash tax payments.

The Company recognizes in its results of operations, as a corridor adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. Amounts inside this 10% corridor are amortized over the plan participants’ life expectancy. The need for a corridor charge is considered at any remeasurement date, but has historically only been recorded in the fourth quarter at the time of the annual remeasurement. After excluding the corridor charge, the remaining pension expense included in the non-GAAP measure is comparable to the accounting for pension expense on a GAAP basis in the first three quarters of the year and Management believes this is useful to investors in analyzing the Company’s results on a quarter-to-quarter basis, as well as analyzing the Company’s results on a year-to-year basis. As a result of the Company’s corridor method of accounting, the Company’s subsequent financial results on both a GAAP and a non-GAAP basis do not contain any amortization of prior period actuarial gains or losses that exceeded the corridor threshold because those amounts were immediately recognized as a corridor adjustment in the period incurred. Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans, or when the assumptions change, as they may each year when a valuation is performed. The two most significant of those assumptions are the discount rate used to value projected plan obligations and the rate of return on plan assets. In addition, changes in other actuarial assumptions and the degree by which the unrealized gains or losses are within the corridor threshold prior to remeasurement will affect the calculation of the corridor adjustment. The effect of prevailing interest rates on the discount rate as of the December 31 measurement date and actual return on plan assets compared to the expected return will have a significant impact on the determination of the Company’s year-end liability, corridor adjustment and subsequent year’s expense for these benefit plans. For example, the corridor charge for 2012 was driven by actuarial losses caused primarily by (i) a decrease in the discount rate assumption used to determine the current year pension liabilities from 4.74% at December 31, 2011 to 3.85% at December 31, 2012 (an actuarial loss of approximately $280.0) and (ii) changes in mortality assumptions partially offset by (iii) the net effect of the difference between the expected return on assets of 8.0% ($188.3) and the actual return on assets of 14.8% ($347.8) (netting to an actuarial gain of $159.5). The Company believes that the corridor method of accounting for pension and other postretirement obligations is rarely used by other publicly traded companies. However, because different approaches are used in recognizing actuarial gains and losses, the Company’s resulting pension expense on a GAAP basis or a non-GAAP basis may not be comparable to other companies’ pension expense on a GAAP basis. Although the corridor charge reduces reported operating and net income, it does not affect the Company’s cash flows in the current period. However, the pension obligation will be ultimately settled in cash.

Neither current shareholders nor potential investors in the Company’s securities should rely on adjusted EBITDA or adjusted net income (loss) as a substitute for any GAAP financial measure and the Company encourages investors and potential investors to review the following reconciliations of net income (loss) attributable to AK Holding to adjusted EBITDA and adjusted net income (loss).

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Reconciliation of Adjusted Net Income (Loss)
 
 
2012
Reconciliation to Net Income (Loss) Attributable to AK Steel Holding
 
 
Adjusted net income (loss) attributable to AK Steel Holding Corporation
 
$
(64.4
)
Pension corridor charge (net of tax)
 
(97.4
)
Non-cash income tax charge from change in deferred tax asset valuation allowance
 
(865.5
)
Net income (loss) attributable to AK Steel Holding Corporation, as reported
 
$
(1,027.3
)
 
 
 
Reconciliation to Basic and Diluted Earnings (Loss) per Share
 
 
Adjusted basic and diluted earnings (loss) per share
 
$
(0.57
)
Pension corridor charge
 
(0.86
)
Non-cash income tax charge from change in deferred tax asset valuation allowance
 
(7.63
)
Basic and diluted earnings (loss) per share, as reported
 
$
(9.06
)


Reconciliation of Adjusted EBITDA
 
 
2012
 
2011
Net income (loss) attributable to AK Holding
 
$
(1,027.3
)
 
$
(155.6
)
Net income (loss) attributable to noncontrolling interests
 
28.7

 
(4.5
)
Income tax expense (benefit)
 
790.0

 
(94.0
)
Interest expense
 
86.7

 
47.5

Interest income
 
(0.4
)
 
(0.5
)
Depreciation
 
192.0

 
185.0

Amortization
 
14.2

 
14.1

EBITDA
 
83.9

 
(8.0
)
Less: EBITDA of noncontrolling interests (a)
 
60.0

 
(5.6
)
Pension corridor charge
 
157.3

 
268.1

Adjusted EBITDA
 
$
181.2

 
$
265.7

Adjusted EBITDA per ton
 
$
33

 
$
47


(a)
The reconciliation of EBITDA of noncontrolling interests to net income (loss) attributable to noncontrolling interests is as follows:
 
 
2012
 
2011
Net income (loss) attributable to noncontrolling interests
 
$
28.7

 
$
(4.5
)
Income tax expense (benefit)
 
17.6

 
(2.7
)
Depreciation
 
13.7

 
1.6

EBITDA of noncontrolling interests
 
$
60.0

 
$
(5.6
)

Outlook

All of the statements in this Outlook section are subject to, and qualified by, the information in the Forward-Looking Statements section.

Consistent with its current practice, the Company is not providing detailed guidance for the Company’s first quarter 2014 results at this time. The Company expects to provide such detailed first quarter guidance later during the quarter.


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In advance of that guidance, however, the Company notes that, based upon current conditions, it can address certain factors relevant to the Company’s first quarter and full-year 2014 outlook. Those factors include the following:

1)
The Company expects its first quarter results to be adversely impacted by the extreme cold weather conditions in the United States in the first quarter of 2014, including an anticipated increase of approximately $20.0 to $25.0 in the cost of natural gas and electricity compared to such costs in the fourth quarter of 2013.
2)
The Company expects coal and coke costs to decline in 2014, starting in the second quarter. For the full year 2014, the Company expects a decline of roughly $70.0 in coke and coal costs compared to 2013.
3)
The Company estimates capital and strategic investments of approximately $160.0 in 2014, which includes the Company’s investments in AK Coal and its final required capital contribution of $100.0 to Magnetation.
4)
The Company expects pension and OPEB income of approximately $105.0 in 2014.
5)
The Company estimates that its cash taxes in 2014 will be minimal given its net operating loss carryforward positions.
6)
The Company intends to take a planned maintenance outage on the Ashland Works blast furnace in the first half of 2014, most likely in the second quarter.

The foregoing factors are subject to change based upon business conditions and other factors. There are many other factors that could significantly impact the Company’s 2014 outlook, including developments in the domestic and global economies, in the Company’s business, and in the businesses of the Company’s customers and suppliers. The Company’s outlook thus is subject to change arising from those and other factors.

Liquidity and Capital Resources

At December 31, 2013, the Company had total liquidity of $845.1, consisting of $30.1 of cash and cash equivalents of the Company and $815.0 of availability under the Company’s $1.1 billion asset-backed revolving credit facility (“Credit Facility”). Availability under the Credit Facility fluctuates monthly based on the varying levels of eligible collateral. At December 31, 2013, the Company’s eligible collateral, after application of applicable advance rates, was $972.1. The Credit Facility is secured by the Company’s inventory and accounts receivable. At December 31, 2013, there were outstanding borrowings of $90.0 under the Credit Facility, and availability was further reduced by $67.1 due to outstanding letters of credit. During the year ended December 31, 2013, utilization of the Credit Facility ranged from zero to $265.0, with outstanding borrowings averaging $104.1 per day. The Company expects to utilize the Credit Facility as it deems necessary to fund requirements for working capital, capital investments and other general corporate purposes. Consolidated cash and cash equivalents of $45.3 at December 31, 2013, includes $15.2 of cash and cash equivalents of consolidated variable interest entities, which is not available for the Company’s use.

In June 2013, AK Steel issued $30.0 of aggregate principal amount of its 8.75% Senior Secured Notes due 2018 at an issue price of 106.50%, as an add-on to its outstanding $350.0 aggregate principal amount of such notes (collectively, the “Secured Notes”). Net proceeds from this offering of $30.9 were used for general corporate purposes. Also during the second quarter of 2013, the Company repurchased an aggregate principal amount of $30.0 of its senior unsecured notes in private, open market transactions. The repurchases were comprised of $20.2 and $9.8 of aggregate principal amount of the Company’s 7.625% Senior Notes due May 2020 and the 8.375% Senior Notes due April 2022, respectively. These repurchases were unsolicited and completed at a discount to the senior unsecured notes’ par value. The Company recognized a gain on the repurchases of $2.9 for the year ended December 31, 2013. In the future the Company may, from time to time, repurchase additional outstanding indebtedness in open market transactions.

Cash used by operations totaled $110.2 for the year ended December 31, 2013. This total included cash generated by SunCoke Middletown of $82.6, which can only be used by SunCoke Middletown for its operations or for distribution to its equity owners. Significant uses of cash included pension contributions of $181.1, contributions of $30.8 to the VEBA Trusts established as part of the Butler and Zanesville retiree settlements, and pension and OPEB benefit payments of $73.4. In July 2013, the Company made payments to VEBA trusts pursuant to settlements of class actions filed on behalf of certain retirees from the Company’s Butler Works and Zanesville Works relating to the Company’s OPEB obligations to such retirees. For a more detailed discussion of the pension and VEBA contributions, see Employee Benefit Obligations. These and other cash uses during the year were partially offset by cash generated from normal business activities. Working capital was a slight source of cash for the year with higher sales activity at the end of the year causing an increase in accounts receivable, which was mostly offset by an increase in accounts payable.

Investing and Financing Activities

Cash used by investing activities in 2013 totaled $98.5. This total included $41.0 of normal, on-going capital investments and $69.0 for strategic investments in Magnetation and AK Coal.


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Cash generated by financing activities in 2013 totaled $27.0. This includes gross proceeds of $31.9 received from the add-on issuance of Secured Notes and $90.0 of borrowings under the Credit Facility. Payments included repayment of debt of $27.4 and debt issuance costs of $3.4. The total also includes $64.8 of payments from SunCoke Middletown to SunCoke.

The Company believes that its current sources of liquidity will be adequate to meet its obligations for the foreseeable future. Future liquidity requirements for employee benefit plan contributions, scheduled debt maturities, debt redemptions and capital investments are expected to be funded by internally-generated cash and other financing sources. To the extent, if at all, that the Company would need to fund any of its working capital or planned capital investments other than through internally-generated cash, the Company has available its Credit Facility. The Company also could seek to access the capital markets if and when it perceives conditions are favorable. The Credit Facility currently is scheduled to expire in April 2016 and any amounts outstanding under it at the time of expiration would need to be repaid or refinanced.  Otherwise, the Company has no significant scheduled debt maturities until December 2018, when its Secured Notes are due. At December 31, 2013, the Company’s eligible collateral, after application of applicable advance rates, was $972.1. At December 31, 2013, there were $90.0 of outstanding borrowings under the Credit Facility and availability was reduced by $67.1 for outstanding letters of credit. The Company’s forward-looking statements on liquidity are based on currently available information and expectations and, to the extent the information or expectations are inaccurate or conditions deteriorate, there could be a material adverse effect on the Company’s liquidity.

As to longer-term obligations, the Company has significant debt maturities and other obligations that come due after 2013, including required cash contributions to its qualified pension plan. For further information, see the Contractual Obligations section.  The Company’s Credit Facility expiring in 2016 is secured by the Company’s product inventory and accounts receivable and contains restrictions on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliated transactions.  The Credit Facility requires maintenance of a minimum fixed charge coverage ratio of one to one if availability under the Credit Facility falls below $137.5.  Currently, the availability under the Credit Facility significantly exceeds $137.5. The Company is in compliance with its Credit Facility covenants and, absent the occurrence of unexpected adverse events, expects that it will remain in compliance for the foreseeable future.

Dividends

The Company’s Credit Facility contains certain restrictive covenants with respect to the Company’s payment of dividends. Under these covenants, dividends are permitted provided (i) availability under the Credit Facility exceeds $247.5 or (ii) availability exceeds $192.5 and the Company meets a fixed charge coverage ratio of one to one as of the most recently ended fiscal quarter. If the Company cannot meet either of these thresholds, dividends would be limited to $12.0 annually. Currently, the availability under the Credit Facility significantly exceeds $247.5. In July 2012, the Company elected to suspend its dividend program in order to enhance the Company’s financial flexibility and further support capital needs for the business. Accordingly, although the Company has elected to suspend its dividend program, there currently are no covenants that would restrict the Company’s ability to declare and pay a dividend to its stockholders. Cash dividends paid in 2012 by the Company to its shareholders were determined to be a return of capital under the United States Internal Revenue Code. The following table lists information related to the quarterly cash dividend prior to the suspension:
2012 COMMON STOCK DIVIDENDS
 
Record Date
 
Payment Date
 
Per Share
February 10, 2012
 
March 9, 2012
 
$
0.05

May 15, 2012
 
June 8, 2012
 
0.05


Restrictions Under Debt Agreements

The Credit Facility and indentures governing the Company’s senior indebtedness and tax-exempt fixed-rate IRBs (collectively, the “Notes”) contain restrictions and covenants that may limit the Company’s operating flexibility.

The indentures governing the Notes (other than the 5.00% Senior Notes due November 2019 (the “Exchangeable 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 or to sell, lease or transfer all or substantially all of the assets of the AK Steel and AK Holding to another entity. They also contain customary events of default. In addition, the indenture governing the Secured Notes includes covenants with customary restrictions on the use of proceeds from the sale of collateral. The indenture governing the Exchangeable Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or its subsidiaries.

The Credit Facility contains customary restrictions, including limitations on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliate transactions. In addition, the Credit Facility requires maintenance of a minimum fixed

- 25-


charge coverage ratio of one to one if availability under the Credit Facility is less than $137.5. The Company does not expect any of these restrictions to affect or limit its ability to conduct its business in the ordinary course.

During the period, the Company was in compliance with all the terms and conditions of its debt agreements.

Capital Investments

The Company anticipates 2014 capital and strategic investments of approximately $160.0, which includes additional investments in AK Coal and a $100.0 capital contribution to Magnetation, which is AK Steel’s final required capital contribution. For more information on investments in AK Coal and Magnetation, see the Strategic Investments section. In the near-term, the Company expects to fund these investments from cash generated from operations or from borrowings under its Credit Facility. The Company currently anticipates that its normal, ongoing maintenance capital investments (i.e., excluding strategic investments and non-routine maintenance investments, such as blast furnace re-lines) will be approximately $60.0 in 2014 and it will be somewhat higher over the next few years.

Employee Benefit Obligations

Under its method of accounting for pension and OPEB plans, the Company recognizes as of the measurement date any unrecognized actuarial gains and losses that exceed 10% of the larger of projected benefit obligations or plan assets (the “corridor”).  In 2013, the Company incurred no corridor adjustment. During 2013, the Company’s pension and other postretirement benefit obligations declined by $719.0 as a result of cash payments of $285.3 from the Company for benefit payments and contributions to the pension trust and VEBAs, strong asset returns on pension assets and higher interest rates used to determine the present value of the obligations. In 2012 and 2011, the unrecognized losses attributable to the Company’s qualified pension plans exceeded the corridor, primarily as a result of declines in the discount rate. Accordingly, the Company incurred pre-tax corridor charges of $157.3 in 2012 and $268.1 in 2011.

The Company made pension contributions of $181.1 during 2013 to satisfy the Company’s required annual pension contributions for 2013. These contributions increased the Company’s total pension fund contributions since 2005 to approximately $1.7 billion. Currently, the Company’s major pension plans are still significantly underfunded. As a result, the Company will be required to make contributions to its pension trusts of varying amounts until they are fully funded. Some of these contributions could be substantial. Based on current actuarial assumptions, the Company estimates that its required annual pension contributions are $205.0 for 2014 (of which $41.3 was contributed in January of 2014), approximately $105.0 for 2015 and approximately $65.0 for 2016. The amount and timing of future required contributions to the pension trust depend on assumptions concerning future events.  The most significant of these assumptions relate to future investment performance of the pension funds, actuarial data relating to plan participants and the interest rate used to discount benefits to their present value.  Because of the variability of factors underlying these assumptions, including the possibility of future pension legislation or increased pension insurance premiums, the reliability of estimated future pension contributions decreases as the length of time until the contribution must be made increases.

The Company provides healthcare benefits to a significant portion of its employees and retirees.  Based on the assumptions used to value other postretirement benefits, primarily retiree healthcare and life insurance benefits, annual cash payments for these benefits are expected to be in a range that trends down from $65.3 to $9.4 over the next 30 years.  These payments do not include payments to VEBA trusts as part of the Zanesville retiree settlement. In July 2013, the Company made payments to VEBA trusts of $30.8 pursuant to settlements of class actions filed on behalf of certain retirees from the Company’s Butler Works and Zanesville Works relating to the Company’s OPEB obligations to such retirees. This included the final payment to the Butler Works VEBA trust, and effective January 1, 2015, all future OPEB obligations for these Butler Works retirees will become the responsibility of the Butler VEBA trust. Remaining payments to the Zanesville Works VEBA trust will be $3.1 in each of July 2014 and July 2015 and effective January 1, 2016, all future OPEB obligations for the Zanesville Works retirees will become the responsibility of the Zanesville Works VEBA trust.  For a more detailed description of the settlements, see the discussions in Note 6 to the consolidated financial statements.

Accounting for retiree healthcare benefits requires the use of actuarial methods and assumptions, including assumptions about current employees’ future retirement dates, the anticipated mortality rate of retirees, the benchmark interest rate used to discount benefits to their present value, anticipated future increases in healthcare costs and the obligation of the Company under collective bargaining agreements with respect to healthcare benefits for retirees.  Changing any of these assumptions could have a material effect on the calculation of the Company’s total obligation for future healthcare benefits.  For example, the Company’s calculation of its future retiree healthcare benefit obligation as of the end of 2013 assumed that the Company would continue to provide healthcare benefits to current and future retirees.  If this assumption is altered, it could have a material effect on the calculation of the Company’s total future retiree healthcare benefit obligation.  This assumption could be altered as a result of one or more of the following developments or other unforeseen events.

First, retirees could consent to a change in the current level of healthcare benefits provided to them.  Second, in certain instances, the union that represented a particular group of retirees when they were employed by the Company could, in the course of negotiations with the Company, accept such a change.  Third, in certain instances, at or following the expiration of a collective bargaining agreement that affects the Company’s obligation to provide healthcare benefits to retired employees, the Company could take action to modify or terminate

- 26-


the benefits provided to those retirees without the agreement of those retirees or the union, subject to the right of the union subsequently to bargain to alter or reverse such action by the Company.  The precise circumstances under which retiree healthcare benefits may be altered unilaterally or by agreement with a particular union vary depending on the terms of the relevant collective bargaining agreement.  Some of these developments already have occurred and either already have affected, or may affect in the future, the Company’s retiree healthcare benefit obligation.

Energy and Commodity Hedging

The Company enters into derivative transactions in the ordinary course of business to hedge the cost of natural gas, electricity and certain raw materials, including iron ore, and, to a lesser extent, the market risk associated with the sale of certain of its commodity steel products (hot roll carbon steel coils).  Changes in the prices paid or received for the related commodities are expected to offset the effect on cash of settling these amounts.

Off-Balance Sheet Arrangements

See discussion of Magnetation under Strategic Investments for information about this equity investee. There were no other material off-balance sheet arrangements as of December 31, 2013.

Contractual Obligations

In the ordinary course of business, the Company enters into agreements under which it is obligated to make legally enforceable future payments.  These agreements include those related to borrowing money, leasing equipment and purchasing goods and services.  The following table summarizes by category expected future cash outflows associated with contractual obligations in effect as of December 31, 2013.
 
 
Payment due by period
Contractual Obligations
 
Less
than 1
year
 
1-3 years
 
3-5 years
 
More
than 5
years
 
Total
Long-term debt (including current portion)
 
$
0.8

 
$
90.0

 
$
380.0

 
$
1,069.3

 
$
1,540.1

Interest on debt (a)
 
112.5

 
223.9

 
218.1

 
174.5

 
729.0

Operating lease obligations (b)
 
8.9

 
12.1

 
9.0

 
7.3

 
37.3

Purchase obligations and commitments
 
2,185.1

 
3,747.4

 
3,048.4

 
12,714.2

 
21,695.1

Pension and OPEB obligations (c)
 
85.9

 
105.5

 
105.1

 
754.8

 
1,051.3

Magnetation investment
 
100.0

 

 

 

 
100.0

Other non-current liabilities
 

 
36.1

 
27.0

 
46.9

 
110.0

Total
 
$
2,493.2

 
$
4,215.0

 
$
3,787.6

 
$
14,767.0

 
$
25,262.8


(a)
Amounts include contractual interest payments using the interest rates as of December 31, 2013 applicable to the Company’s variable-rate debt and stated fixed interest rates for fixed-rate debt.
(b)
Subsequent to December 31, 2013, a wholly-owned subsidiary of the Company entered an operating lease to lease 675 rail cars to transport iron ore pellets from Magnetation’s Reynolds, Indiana pellet plant to the Company’s Middletown Works and Ashland Works blast furnaces. In connection with the transaction, AK Steel executed a guarantee of its subsidiary’s obligations under the lease agreement. The Company will make annual lease payments of $4.3 under the fifteen-year lease agreement.
(c)
Future cash contributions that the Company plans to make to its qualified pension trust are not included in the table above.  Based on current actuarial assumptions, the estimate for these contributions is approximately $205.0, $105.0 and $65.0 in 2014, 2015 and 2016, respectively.  Estimates of cash contributions to the pension trust to be made after 2016 are subject to more uncertainty at this time due to the number of variable factors that impact the calculation of defined benefit pension plan contributions.  Because pension benefit payments will be made from the pension trust for at least the next five years, the net pension liability is included in the More than 5 years column. Estimated benefit payments, after receipt of Medicare subsidy reimbursements, for 2014 are $65.3 and are expected to be in a range which trends down from $65.3 to $9.4 over the next 30 years.  The amounts in the table include the remaining payments pursuant to the Zanesville retiree settlement.  For a more detailed description of these obligations, see the discussion in Note 6 to the consolidated financial statements.

In calculating the amounts for purchase obligations, the Company identified contracts under which the Company has a legally enforceable obligation to purchase products or services from the vendor and/or make payments to the vendor for an identifiable period of time.  Then for each identified contract, the Company determined its best estimate of payments to be made under the contract assuming (1) the continued operation of existing production facilities, (2) normal business levels, (3) the contract would be adhered to in good faith by both parties throughout its term and (4) prices are as set forth in the contract.  Because of changes in the markets it serves, changes in business decisions regarding production levels or unforeseen events, the actual amounts paid under these contracts could differ significantly from the numbers presented above.  For example, circumstances could arise which create exceptions to minimum purchase obligations

- 27-


that are set forth in the contracts.  The purchase obligations set forth in the table above have been calculated without regard to such exceptions.

A number of the Company’s purchase contracts specify a minimum volume or price for the products or services covered by the contract.  If the Company was to purchase only the minimums specified, the payments set forth in the table would be reduced.  Under “requirements contracts” the quantities of goods or services the Company is required to purchase may vary depending on its needs, which are dependent on production levels and market conditions at the time.  If the Company’s business deteriorates or increases, the amount it is required to purchase under such a contract would likely change.  Many of the Company’s agreements for the purchase of goods and services allow the Company to terminate the contract without penalty upon 30 to 90 days’ prior notice.  Any such termination could reduce the projected payments.

The Company’s Consolidated Balance Sheets contain liabilities for pension and OPEB and other long-term obligations.  The benefit plan liabilities are calculated using actuarial assumptions that the Company believes are reasonable under the circumstances.  However, because changes in circumstances can have a significant effect on the liabilities and expenses associated with these plans including, in the case of pensions, pending or future legislation, the Company cannot reasonably and accurately project payments into the future.  While the Company does include information about these plans in the above table, it also discusses these benefits elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the notes to its consolidated financial statements.

The other long-term liabilities on the Company’s Consolidated Balance Sheets include accruals for environmental and legal issues, employment-related benefits and insurance, liabilities established with regard to uncertain tax positions, and other accruals.  These amounts generally do not arise from contractual negotiations with the parties receiving payment in exchange for goods and services.  The ultimate amount and timing of payments are subject to significant uncertainty and, in many cases, are contingent on the occurrence of future events, such as the filing of a claim or completion of due diligence investigations, settlement negotiations, audit and examinations by taxing authorities, documentation or legal proceedings.

Strategic Investments

Magnetation

The Magnetation joint venture utilizes advanced magnetic separation technology to recover iron ore from existing stockpiles of previously-mined material, such as tailings basins, and avoid the necessity of traditional expensive extraction methods. Magnetation controls substantial volumes of these existing stockpiles, as well as other resources with significant amounts of iron content that could allow it to eventually recover iron ore from traditional mining operations. However, traditional mining operations are not currently anticipated to be necessary for the foreseeable future, depending upon factors such as the recovery yield of Magnetation’s concentrate plants and future acquisitions of additional tailings basins and other iron-bearing resources. Magnetation loads iron ore concentrate onto railcars at its own loadout facility, which enables it to ship its iron ore concentrate in a controlled and cost-effective manner. These concentrate operations effectively already have the ability to provide AK Steel with a limited hedge to the global price of iron ore, as the Company will recognize its share of net income from the joint venture’s sale of its iron ore concentrate to third parties at pricing based on iron ore market prices. If the global price of iron ore increases, AK Steel will benefit from the higher Magnetation net income caused by that price increase, thereby partially offsetting AK Steel’s own higher raw material costs resulting from the higher iron ore prices. Even absent future iron ore price increases, Magnetation’s ability to produce iron ore concentrate at a relatively low cost is expected to permit it to generate net income on sales.

Magnetation currently operates two iron ore concentrate plants located in Minnesota, which together are able to produce a total of approximately 1.5 million short tons of iron ore concentrate annually. Completion of these two concentrate plants was Phase I of the Magnetation joint venture. Magnetation is constructing an iron ore pelletizing plant in Reynolds, Indiana with expected annual capacity of approximately 3.3 million short tons. The pellet plant is currently expected to commence operations in the fourth quarter of 2014 or sooner, substantially earlier than originally expected. This estimate is subject to change, however, because the timing will be driven by a number of variables, such as maintaining construction deadlines and timely deliveries of key equipment. The pellet plant will be fed by Magnetation’s concentrate plants. When the pellet plant is fully operational, the Company expects the pellet production from Magnetation eventually will satisfy about 50% of AK Steel’s current iron ore pellet requirements, at a net cost to AK Steel substantially below the current global market price. Through an offtake agreement, AK Steel will have the right to purchase all of the pellets produced by the pellet plant and an obligation to purchase a portion of those pellets. In addition to the direct financial benefits of purchasing pellets at a lower net cost, AK Steel also expects that its sourcing of pellets from the Magnetation pellet plant will provide AK Steel with significant working capital advantages and transportation cost savings for the foreseeable future.

Magnetation has also begun work on its third iron ore concentrate plant. Magnetation anticipates the third concentrate plant will begin operations during 2015, in time to ensure a consistent source of concentrate to feed the pellet plant at full capacity. Magnetation has secured the environmental permits required to construct this third plant, though additional permitting activity is continuing for those approvals necessary to its long-term operation. Although Magnetation expects to timely receive all necessary permits and has been

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successful in permitting its first two concentrate plants, there is no guarantee that Magnetation will receive its remaining necessary permits in a timely basis or at all. The pellet plant is expected to consume the majority of the joint venture’s concentrate production, with the balance going to third-party customers.

The construction and operation of the pellet plant and additional iron ore concentrate capacity to support its operations is Phase II of the joint venture. Phase II commenced during the second quarter of 2013, following Magnetation’s receipt of the environmental permits required to construct and operate the pellet plant and the permits to construct and operate additional iron ore concentrate capacity in northern Minnesota to produce more feedstock for the pellet plant. Upon the commencement of operations at the pellet plant and additional concentrate capacity, Phase II of the joint venture will be completed.

The Company estimates that Magnetation’s capital investment required to complete Phase II will total approximately $505.0. Of this total, the pellet plant is expected to require approximately $350.0, with the additional concentrate capacity requiring the remaining estimated $155.0. Magnetation has chosen to construct its third concentrate plant on a larger scale than previously anticipated because of expected benefits from economies of scale and other efficiencies, such as the plant’s geographic proximity to tailings and other iron-bearing resources. Currently, the construction of the pellet plant remains on budget and ahead of schedule for commencing operations in the fourth quarter of 2014 or sooner. Factors that may affect the cost of the pellet plant include, among other things, costs related to accelerate the construction of the facility, such as premiums for rush delivery of equipment and greater overtime by construction contractors. In addition, Magnetation is in the planning and engineering stages with respect to the additional concentrate capacity and, as such, the currently estimated cost of the facility is subject to change. Other companies’ investment costs for a pellet plant facility and related operations have in some cases been substantially higher than those expected for the Magnetation pellet plant and related operations. The lower costs expected for the Magnetation plants are due chiefly to the proprietary process used by Magnetation’s concentrate plants to produce refined feedstock for its pellet plant at a low capital intensity compared to traditional, expensive mining methods. The innovative process utilized by Magnetation’s concentrate plants enable it to avoid some of the other processes (and forego the related capital costs) that a traditional integrated mining and pellet plant facility typically requires, such as stripping, drilling, blasting, primary crushing, secondary crushing, tertiary crushing and primary grinding. As such, AK Steel anticipates that Magnetation’s capital costs to construct its pellet plant and related facilities will be substantially lower than the costs of constructing a traditional end-to-end iron ore mining, crushing, grinding, concentrating and pelletizing facility.

In May 2013, Magnetation completed a private offering of $325.0 aggregate principal amount of 11.00% Senior Secured Notes due 2018 (the “Magnetation Secured Notes”). Magnetation has and will continue to use the net proceeds of the offering principally for capital expenditures related to the construction of the pellet plant and additional concentrate capacity. Concurrently with the closing of the Magnetation Secured Notes offering, Magnetation also entered into a $50.0 senior secured revolving credit facility with a group of lenders (the “Magnetation Credit Facility”). Both the Magnetation Secured Notes and the Magnetation Credit Facility are non-recourse to AK Steel.

AK Steel has remaining a $100.0 capital commitment to Magnetation, which is the Company’s final required capital contribution. AK Steel expects to contribute the remaining $100.0 in 2014, prior to the commencement of operations at the pellet plant.

AK Coal

AK Coal, a wholly-owned subsidiary of AK Steel that controls (through ownership or lease) significant reserves of low-volatile metallurgical coal, received a permit to mine its North Fork mine in the second quarter of 2013. AK Coal began mining activities soon after the permit was issued, and during the third quarter ramped up its output of coal shipped to coking facilities for use in AK Steel’s blast furnaces.

AK Steel continues to anticipate that its investment in AK Coal will total approximately $96.0. Of this total, the Company has expended $63.5 through 2013. Although the Company believes that AK Coal will produce coal at a comparatively low cost, the Company has currently elected to defer some of its planned capital investment and delay opening additional mines in light of current and anticipated near-term coal prices. AK Steel currently estimates that AK Coal will continue its ramp up during 2014 and produce clean coal at an annualized rate of approximately 500,000 tons in 2015, although that may vary depending on market conditions for coal. The Company will assess the timing of its remaining capital investments based on future coal market conditions with reference to a variety of factors, including the Company’s capital deployment decisions and the then-market prices at which the Company may purchase third-party coal. AK Coal will continue to develop and refine its mine development plan, which will provide a long-term planned approach to mining coal in the area, and maintain its efforts to secure the environmental permits required for the operations contemplated in the mine plan. In so doing, AK Coal will be prepared to expand mining operations and increase production in a relatively short time period in the event that metallurgical coal prices rise to a level at which such increased production would be advantageous to the Company in lowering the cost of its future coal purchases. In the meantime, AK Steel will benefit from lower input costs as a result of buying third-party coal at suppressed prices while AK Coal continues to permit its second and third mines and to refine its operations, such that when the Company elects to increase its production levels it is able to continue to provide a low cost internal source of coal for the Company at a greater volume.

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Coal Innovations operates a permitted coal wash plant located in close proximity to the AK Coal mining operations. Through Coal Innovations, AK Coal is able to reduce cost and maximize its access to low cost clean coal through production at its own mine as well as through purchases of raw coal from local third-party coal companies. At present, Coal Innovations is washing coal that is being shipped to SunCoke Middletown, SunCoke Haverhill and the Company’s coke battery at its Middletown Works for conversion into coke to fuel AK Steel’s blast furnaces.

Other Margin Enhancement Initiatives

The Company is focusing on reducing its cost profile and enhancing its margins through various initiatives. The most significant of these initiatives are the vertical integrations projects at Magnetation and AK Coal. Other strategic initiatives to lower the Company’s costs include increasing the utilization, yield and productivity of its facilities, implementing strategic purchasing procurement improvements, controlling maintenance spending, producing lower cost metallic burdens, and reducing transportation costs. The Company also has identified several other areas for enhancing its profitability, including increasing its percentage of contract sales (and lowering spot market sales), producing and selling a higher-value mix of products and developing new products that can command higher prices from customers.

Iron Ore Pricing

Iron ore is one of the principal raw materials required for the Company’s steel manufacturing operations. The Company purchased approximately 4.8 million tons of iron ore pellets in 2013 and expects to purchase approximately 6.1 million tons in 2014. The Company makes most of its purchases of iron ore at negotiated prices under multi-year agreements. For 2014, the Company expects to purchase most of its iron ore from three suppliers, including Magnetation following the startup of its pellet plant, which is expected in the fourth quarter of 2014 or sooner. The Company’s iron ore agreements typically have a variable-price mechanism by which the price of iron ore is adjusted quarterly, based on reference to a historical iron ore index, referred to as the “IODEX”, and in certain agreements reference is also made to other indices. Some of the agreements utilize what is commonly referred to in the steel industry as “Vale model” pricing, which is based on the average IODEX for a three-month period ending one month prior to the start of the quarter to which the price is applied. For example, utilizing the Vale model for the fourth quarter of 2013, the price of iron ore was determined with reference to the IODEX price for the preceding June, July and August period.

The Company attempts to mitigate the effect of increases in raw material costs in the normal course of pricing its own products through increased prices in the spot market and the use of variable pricing with its contract customers that allows the Company to adjust selling prices in response to changes in the cost of certain raw materials and energy, including iron ore. It typically is unable, however, to recover 100% of its increased iron ore costs in this manner. There are a variety of factors that ultimately will affect how much of any increase in iron ore prices the Company is able to recover through its own steel price increases. These include the amount of the price increase for iron ore, the terms of the Company’s agreements with its contract customers, and the extent to which competitive pressures may prevent the Company from increasing the price of the steel it sells into the spot market to sufficiently cover the full amount of the iron ore price increase. It is because of this inability to control or fully pass through its iron ore costs that the Company may hedge a portion of its iron ore purchases from time to time. In addition, the Company’s investment in Magnetation has the ability to serve as a limited financial hedge in the short-term against increases in the price of iron ore and will provide a larger, more significant long-term hedge upon the completion of the planned iron ore pellet plant.

Automotive Market

The Company sells a significant portion of its flat-rolled carbon steel products and stainless steel products to automotive manufacturers and to distributors, service centers and converters who in some cases will resell the products to the automotive industry.

Because the automotive market is an important element of the Company’s business, North American light vehicle production affects the Company’s total sales and shipments. In 2013, the North American automotive industry returned to pre-recession production levels and completed its recovery from the economic recession that began in late 2008. The improvement in the automotive market and the Company’s larger share of that market had a positive impact on the Company’s sales and shipments in 2013.  A further increase in light vehicle production volumes is projected for 2014 and AK Steel intends to continue its efforts to increase automotive market share. There are, however, some potential challenges to increased sales to the automotive industry even if it continues to grow as projected. Automotive manufacturers are under pressure to achieve federally mandated fuel economy standards by 2025, and they are currently investigating alternatives to traditional carbon steels, including advanced high-strength steels, aluminum and other materials. This could reduce the aggregate volume of steel sold to the automotive industry, and impact the Company’s share of that volume. However, the Company currently produces virtually every grade of coated advanced high-strength steel used today and is working on development of the next generation of advanced high-strength steels with even greater strength and formability.


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Electrical Steel Market

The Company sells its electrical steel products, which are iron-silicon alloys with unique magnetic properties, primarily to manufacturers of power transmission and distribution transformers and electrical motors and generators in the infrastructure and manufacturing markets. The Company sells its electrical steel products both domestically and internationally.

During 2013, the Company continued to experience a decline in both its domestic and international sales of grain-oriented electrical steel (“GOES”) products, due primarily to weak market demand and excess global capacity. Internationally, this reduction was caused principally by a decline in spending for new electric power transmission and distribution transformers.

Although overall pricing for GOES continues to be soft, GOES shipments in the NAFTA market have improved in the last couple of years as power generation and distribution activities picked up. Housing starts in the United States continued to improve in 2013.  The Company’s electrical steel sales and shipments will continue to be affected by the number of domestic housing starts. Currently, the Company expects a gradual increase in domestic housing starts over the next several years, which is expected to have a positive effect on the Company’s domestic electrical steel sales and shipments, though the scope of that anticipated improvement will be affected by competition from domestic and foreign producers of electrical steel.

The Company continued to experience a decline in electrical steel pricing during 2013, particularly with regard to international sales, but also with respect to domestic sales as a result of imports that the Company believes are in violation of United States trade laws. In an effort to address the effects of these unfairly traded imports, the Company filed antidumping and countervailing duty petitions with the United States Department of Commerce and the United States International Trade Commission (“ITC”) in 2013 with respect to GOES and non-oriented electrical steel (“NOES”). In the fourth quarter of 2013, the ITC made unanimous preliminary determinations that both GOES and NOES produced in several foreign countries is causing injury to the Company. The preliminary injury determinations mean that cases against GOES and NOES producers in several countries will proceed. For a description of ongoing trade cases, see Note 9 to the consolidated financial statements.

Potential Impact of Climate Change Legislation

On May 13, 2010, the U.S. Environmental Protection Agency (“EPA”) issued a final “tailoring rule” providing new regulations governing major stationary sources of greenhouse gas emissions under the Clean Air Act.  Generally, the tailoring rule provides that new or modified sources of high volumes of greenhouse gases would be subject to heightened permit standards and lower emissions thresholds.  The EPA continues to work on further rules governing greenhouse gas emissions that would apply more broadly and to lower levels of emission sources.  Litigation has been filed to challenge the new regulations, but the outcome of that litigation cannot be reliably predicted.  In light of the pending litigation and the uncertainty concerning their future, the Company cannot reliably estimate the long-term impact of the new regulations.  The Company does not expect, however, the current tailoring rule provision to materially adversely affect it in the near term.  In the event the EPA’s tailoring rule or similar regulations are upheld, however, the Company likely will suffer negative financial impact over time as a result of increased energy, environmental and other costs in order to comply with the limitations that would be imposed on greenhouse gas emissions.

In addition, the possibility exists that further limitations on greenhouse gas emissions may be imposed in the United States in the future through some form of federally-enacted legislation or by additional regulations.  Bills have been introduced in the United States Congress in recent years that aim to limit carbon emissions over long periods of time from facilities that emit significant amounts of greenhouse gases.  Such bills, if enacted, would apply to the steel industry, in general, and to the Company, in particular, because the process of producing steel from elemental iron results in the creation of carbon dioxide, one of the targeted greenhouse gases.  Although the Company and other steel producers in the United States are actively participating in research and development efforts to develop breakthrough technology for low- or zero-emission steelmaking processes, the development of such technologies will take time and their potential for success cannot be accurately determined.  To address this need for the development of new technologies, not just in the steel industry but elsewhere, some of the proposed legislative bills include a system of carbon emission credits, which would be available to certain companies for a period of time, similar to the European Union’s existing “cap and trade” system.  Each of these bills is likely to be altered substantially if it moves through the legislative process, making it virtually impossible at this time to forecast the provisions of any final legislation and the resulting effects on the Company.

If regulation or legislation regulating carbon emissions is enacted, however, it is reasonable to assume that the net financial impact on the Company will be negative, despite some potential beneficial aspects discussed below.  On balance, such regulation or legislation likely would cause the Company to incur increased energy, environmental and other costs in order to comply with the limitations that would be imposed on greenhouse gas emissions.  For example, the Company likely would incur the direct cost of purchasing carbon emissions credits for its own operations.  Similarly, to the extent that the Company’s raw material and/or energy suppliers likewise would have to purchase such credits, they may pass their own increased costs on to the Company through price hikes.  The Company likely also would incur increased capital costs as a result of cap and trade legislation.  Such costs could take the form of new or retrofitted equipment, or the development of new technologies (e.g., sequestration), to try to control or reduce greenhouse gas emissions.  In addition, if similar

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cap and trade requirements were not imposed globally, the domestic legislation could negatively impact the Company’s ability to compete with foreign steel companies not subject to similar requirements.

The enactment of climate control legislation or regulation also could have some beneficial impact on the Company, which may somewhat mitigate the adverse effects noted above.  For example, to the extent that climate change legislation provides incentives for energy efficiency, up to certain levels, the Company could benefit from increased sales of its GOES products, which are among the most energy efficient in the world.  The Company sells its electrical steels, which are iron-silicon alloys with unique magnetic properties, primarily to manufacturers of power transmission and distribution transformers and electrical motors and generators.  The sale of such products may be enhanced by climate control legislation in different ways.  For instance, to the extent that the legislation may promote the use of renewable energy technology, such as wind or solar technology, it could increase demand for the Company’s high-efficiency electrical steel products used in power transformers, which are needed to connect these new sources to the electricity grid.

Any effect on the Company would depend on the final terms of any climate control legislation or regulation enacted.  Presently, the Company is unable to predict with any reasonable degree of accuracy when or even if climate control legislation or regulation will be enacted, or if it is, what its terms and applicability to the Company will be.  As a result, the Company currently has no reasonable basis on which it can reliably predict or estimate the specific effects any eventually enacted laws may have on the Company or how the Company may be able to mitigate any negative impacts on its business and operations. In the meantime, the items described above provide some indication of the potential impact on the Company of climate control legislation or regulation generally.  The Company will continue to monitor the progress of such legislation and/or regulation closely.

Labor Agreements

At December 31, 2013, the Company employed approximately 6,400 employees, of which approximately 4,700 are represented by labor unions under various contracts that expire between 2014 and 2017.

In March 2013, members of the United Auto Workers, Local 3462, ratified a new labor agreement covering approximately 320 employees at the Company’s Coshocton Works. The new agreement expires March 31, 2016. In August 2013, members of the United Steelworkers, Local 1865, ratified an 18-month labor agreement covering more than 800 hourly production and maintenance steel operations employees at the Company’s Ashland Works. The new agreement expires March 1, 2015. Also, in August 2013, members of the United Auto Workers, Local 3044, ratified a four-year labor agreement covering about 195 hourly production employees at the Company’s Rockport Works. The new agreement expires September 30, 2017.

An agreement with the United Steelworkers, Local 169, which represents approximately 280 employees at the Company’s Mansfield Works, is scheduled to expire on March 31, 2014. An agreement with the International Association of Machinists and Aerospace Workers, Local 1943, which represents approximately 1,650 employees at the Company’s Middletown Works, is scheduled to expire on September 15, 2014.

Critical Accounting Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America.  These principles permit choices among alternatives and require numerous estimates of financial matters.  Accounting estimates are based on historical experience and information that is available to management about current events and actions the Company may take in the future.  The Company believes the accounting principles chosen are appropriate under the circumstances, and that the estimates, judgments and assumptions involved in its financial reporting are reasonable. There can be no assurance that actual results will not differ from these estimates. Management believes the accounting estimates discussed below represent those accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results.

Inventory Costing

Inventories are valued at the lower of cost or market.  The cost of the majority of inventories is measured on the last in, first out (“LIFO”) method.  The LIFO method allocates the most recent costs to cost of products sold and, therefore, recognizes into operating results fluctuations in raw material, energy and other inventoriable costs more quickly than other methods.  Other inventories, consisting mostly of foreign inventories and certain raw materials, are measured principally at average cost. An actual valuation of the inventory under the LIFO method can only be made at the end of the year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on Management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond the Company’s control, annual LIFO expense or income may significantly differ from the estimated amounts calculated at interim dates.


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Deferred Tax Assets

The Company recognizes deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the enacted tax laws. Changes in tax laws or rates can materially affect the future deductible amounts related to deferred tax assets.  For example, a reduction in the tax rate would decrease the amount of tax benefit to be realized in the future and result in a charge to the income statement, which has the effect of reducing the Company’s income at the time the tax rate change is enacted. Furthermore, the Company evaluates uncertainty in its tax positions and only recognizes benefits when the tax position is believed to be more likely than not to be sustained upon audit. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has tax filing requirements in many states and is subject to audit in these states, as well as at the federal level in both the U.S. and in Europe. Tax audits by their nature are often complex and can require several years to resolve. In the preparation of the consolidated financial statements, the Company exercises judgments in estimating the potential exposure of unresolved tax matters. While actual results could vary, in Management’s judgment the Company has adequately accrued the ultimate outcome of these unresolved tax matters.

The Company regularly evaluates the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that it will realize the deferred tax assets in the future. A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment. In determining the appropriate amount of the valuation allowance, the Company considered the timing of future reversal of its taxable temporary differences and available tax strategies that, if implemented, would result in realization of deferred tax assets. The Company identified the potential change from the LIFO inventory accounting method as such a tax-planning strategy. The Company believes that this strategy is prudent and feasible in order to prevent certain federal and state tax loss carryforwards from expiring unused. In addition, the Company believes that the future reversal of its deferred tax liabilities serves as a source of taxable income supporting realization of a portion of its federal and state deferred tax assets. As a result of these periodic assessments and the cyclical nature of the Company’s operations, material changes in the valuation allowance may be recognized in the future.

Environmental and Legal Liabilities

The Company is involved in a number of environmental and other legal proceedings.  The Company records a liability when it has determined that litigation has commenced or a claim or assessment has been asserted and, based on available information, it is probable that the outcome of such litigation, claim or assessment, whether by decision or settlement, will be unfavorable and the amount of the liability is reasonably estimable.  The Company measures the liability using available information, including the extent of damage, similar historical situations, its allocable share of the liability and, in the case of environmental liabilities, the need to provide site investigation, remediation and future monitoring and maintenance.  Accruals of probable costs have been made based on a combination of litigation and settlement strategies on a case-by-case basis and, where appropriate, are supplemented with incurred but not reported development reserves.  However, amounts recorded in the financial statements in accordance with accounting principles generally accepted in the United States exclude costs that are not probable or that may not be currently estimable.  The ultimate costs of these environmental and legal proceedings may, therefore, be higher than those currently recorded on the Company’s financial statements.  In addition, results of operations in any future period could be materially affected by changes in assumptions or by the effectiveness of the Company’s strategies.

Pension and OPEB Plans

Under its method of accounting for pension and OPEB plans, the Company recognizes into income, as of the measurement date, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets, defined as the corridor.  Amounts inside the corridor are amortized over the plan participants’ life expectancy. The Company’s method results in faster recognition of actuarial net gains and losses than the minimum amortization method permitted by prevailing accounting standards and used by the vast majority of companies in the United States.  Faster recognition under this method also results in the potential for highly volatile and difficult to forecast corridor adjustments.

Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans or when the assumptions change, as they may each year when a valuation is performed.  The major factors contributing to actuarial gains and losses for benefit plans are the differences from changes in the discount rate used to value plan liabilities as of the measurement date and changes in the expected lives of plan participants.  The Company uses published mortality tables for determining the expected lives of its plan participants and believes that the tables selected are most closely associated with the expected lives of its plan participants. However, the selection of other available tables would likely result in an increase in the plan obligations. In addition, a major factor contributing to actuarial gains and losses for pension plans are the differences between expected and actual returns on plan assets. For OPEB plans, differences in estimated versus actual healthcare costs and changes in assumed healthcare cost trend rates are additional factors generally contributing to actuarial gains and losses. However, changes in these OPEB assumptions are not expected to have a material effect on the Company as a result of the existence of caps on the share of benefits that are paid by the Company.  In addition to their effect on the funded status of the plans and their potential for corridor adjustments, these factors affect future net periodic benefit expenses.  Changes in key assumptions can have a material effect on the amount of benefit obligation and annual expense recorded.  For example,

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a one-quarter-percentage-point decrease in the discount rate would decrease the interest cost component of pension income in 2014 by $5.0.  A one-quarter-percentage-point decrease in the discount rate would have increased the pension obligation at December 31, 2013 by approximately $73.0 and the OPEB obligation by approximately $9.0. A one-percentage-point decrease in the expected rate of return on pension plan assets would decrease the projected 2014 pension income by approximately $28.0.

Asset Impairment

The Company has various assets subject to possible impairment, including investments, property, plant and equipment, goodwill and other intangible assets. Each of these assets is subject to a review for impairment, if and when circumstances indicate that a loss in value below its carrying amount has occurred.  The Company evaluates the effect of changes in operations and estimates future cash flows to measure fair value.  Use of assumptions, such as forecasted growth rates and cost of capital, are generally considered as part of these analyses and based on Management’s judgment can result in different conclusions. The Company believes its use of such data to be appropriate and consistent with internal projections.  The most recent annual goodwill impairment test indicated that the fair value of its relevant reporting unit was substantially in excess of its carrying value. However, the Company’s businesses operate in highly cyclical industries and the valuation of these businesses can be expected to fluctuate, which may lead to impairment charges in future periods. Fair value is determined using quoted market prices, estimates based on prices of similar assets, or anticipated cash flows discounted at a rate commensurate with risk.

The Company considers the need to evaluate long-lived assets for indicators of impairment at least quarterly to determine if events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. The Company evaluates long-lived assets for impairment based on a collective asset grouping that includes the operations of all the Company’s facilities. The Company manages its operations as part of an “integrated process” that allows the Company to route production to various facilities in order to maximize financial results and cash flows. As a result of the integrated process and the organization of the entity, cash flows are not identifiable to asset groups at a level lower than the consolidated results. If the carrying value of a long-lived asset exceeds its fair value, an impairment has occurred and a loss is recognized based on the amount by which the carrying value exceeds the fair value, less cost to dispose, for assets to be sold or abandoned.

The Company’s investment in AFSG Holdings, Inc. represents the carrying value of its discontinued insurance and finance leasing businesses, which have been largely liquidated.  The activities of the remaining operating companies are classified as in “runoff” and the companies are accounted for, collectively, as a discontinued operation.  The Company is under no obligation to support the operations or liabilities of these companies.

New Accounting Pronouncements

No new accounting pronouncement issued or effective during 2013 has had or is expected to have a material effect on the Company’s consolidated financial statements.

Forward-Looking Statements

Certain statements made or incorporated by reference in this Form 10-K, or made in other documents furnished to or filed with the Securities Exchange Commission, as well as in press releases or in oral presentations made by Company employees, reflect management’s estimates and beliefs and are intended to be, and are hereby identified as “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “estimates” and other similar references to future periods typically identify such forward-looking statements.  These forward-looking statements reflect the current belief and judgment of the Company’s management, but are not guarantees of future performance or outcomes. They are based on a number of assumptions and estimates that are inherently subject to economic, competitive, regulatory, and operational risks, uncertainties and contingencies that are beyond the Company’s control, and upon assumptions with respect to future business decisions and conditions that are subject to change.  In particular, these include, but are not limited to, statements in the Outlook and Liquidity and Capital Resources sections and Item 7A, Quantitative and Qualitative Disclosure about Market Risk.

The Company cautions readers that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those currently expected by management.  See Item 1A, Risk Factors for more information on certain of these risks and uncertainties.

Any forward-looking statement made by the Company in this document speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


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Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.

The Company’s primary areas of market risk include changes in (a) interest rates, (b) the prices of raw materials and energy sources and, to a lesser extent, the selling price of certain commodity steel, and (c) foreign currency exchange rates. The Company manages interest rate risk in its capital structure by issuing variable- and fixed-rate debt and by utilizing its Credit Facility, which is subject to variable interest rates. The Company had total long-term indebtedness (excluding unamortized debt discount and premium) of $1,540.1 and $1,450.9 outstanding at December 31, 2013 and 2012, respectively. The amount outstanding at December 31, 2013, consisted of $1,424.1 of fixed-rate debt, $26.0 of variable-rate Industrial Revenue Bonds and $90.0 of borrowings under its Credit Facility that bears interest at variable interest rates. An increase in prevailing interest rates would increase interest expense and interest paid for the variable-rate debt, including any outstanding borrowings under the Credit Facility. For example, a 1% increase in interest rates would result in an increase in annual interest expense of approximately $1.2 on the Company’s outstanding debt at December 31, 2013.

With regard to raw materials and energy sources, the cost of iron ore, natural gas and scrap, in particular, have been volatile over the course of the last several years. To address such cost volatility, where competitively possible, the Company attempts to increase the price of steel it sells to the spot market and to negotiate a variable-pricing mechanism with its contract customers that allows the Company to adjust selling prices in response to changes in the cost of certain raw materials and energy. In addition, in the case of stainless steel, increased costs for nickel, chrome and molybdenum can usually be recovered through established price surcharges. Therefore, fluctuations in the price of energy (particularly natural gas and electricity), raw materials (such as scrap, purchased slabs, coal, iron ore, zinc and nickel) or other commodities will be, in part, passed on to the Company’s customers rather than absorbed solely by the Company.

In addition, in order to further minimize its exposure to fluctuations in raw material costs, and to secure an adequate supply of raw materials, the Company has entered into multi-year purchase agreements for certain raw materials that provide for fixed prices or only a limited variable-price mechanism. While enabling the Company to reduce its exposure to fluctuations in raw material costs, this also exposes the Company to an element of market risk relative to its sales contracts. After new contracts are negotiated with the Company’s customers, the average sales prices could increase or decrease. If that average sales price decreases, the Company may not be able to reduce its raw material costs to a corresponding degree due to the multi-year term and fixed-price nature of some of its raw material purchase contracts. In addition, some of the Company’s existing multi-year supply contracts, particularly with respect to iron ore and coke, have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed the Company’s needs. Subject to exceptions for force majeure and other circumstances affecting the legal enforceability of the contracts, such minimum purchase requirements could require the Company to purchase quantities of raw materials, particularly iron ore and coke, which significantly exceed its anticipated needs. Under such circumstances, the Company would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that in one or more instances the Company would not be successful in securing lower purchase quantities, either through negotiation or litigation. In that event, the Company would likely be required to purchase more of a particular raw material in a particular year than it needs, negatively affecting its results of operations and cash flows.

The Company uses cash-settled commodity price swaps and options (including collars) to hedge the market risk associated with the purchase of certain of its raw materials and energy requirements and the market risk associated with the sale of certain of its commodity steel (hot roll carbon steel coils). Such hedges routinely are used with respect to a portion of the Company’s natural gas and iron ore requirements and are sometimes used with respect to its aluminum, zinc, nickel, and electricity requirements. The Company’s hedging strategy is designed to protect it against excessive pricing volatility. However, abnormal price increases in any of these commodity markets might still negatively affect operating costs, as the Company does not typically hedge 100% of its exposure.

For derivatives designated in cash flow hedging relationships, the effective portion of the gains and losses from the use of these instruments are recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets and recognized into net sales or cost of products sold in the same period as the earnings recognition of the associated underlying transaction. At December 31, 2013, accumulated other comprehensive income (loss) included $2.6 in unrealized pre-tax gains for these derivative instruments. All other commodity price swaps and options are marked to market and recognized into net sales or cost of products sold with the offset recognized as an asset or accrued liability. At December 31, 2013, other current assets of $4.9, accrued liabilities of $0.4 and other noncurrent liabilities of $0.1 were included on the Consolidated Balance Sheets for the fair value of commodity derivatives. At December 31, 2012, other current assets of $25.5 and accrued liabilities of $1.3 were included on the Consolidated Balance Sheets for the fair value of commodity derivatives.

The following table presents the negative (positive) effect on pre-tax income of a hypothetical change in the fair value of derivative instruments outstanding at December 31, 2013, due to an assumed 10% and 25% decrease in the market price of each of the indicated commodities.

- 35-


 
 
Negative (Positive) Effect on Pre-tax Income
Commodity Derivative
 
10% Decrease
 
25% Decrease
Natural gas
 
$
1.2

 
$
3.0

Nickel
 
0.5

 
1.2

Zinc
 
1.1

 
2.8

Iron ore
 
2.3

 
5.8

Hot roll carbon steel coils
 
(4.7
)
 
(11.6
)

Because these instruments are structured and used as hedges, these hypothetical losses would be offset by the benefit of lower prices paid for the physical commodity used in the normal production cycle or higher prices received on the sale of product. The Company currently does not enter into swap or option contracts for trading purposes.

The Company also is subject to risks of exchange rate fluctuations on a small portion of intercompany receivables that are denominated in foreign currencies. The Company uses forward currency contracts to manage exposures to certain of these currency price fluctuations. At December 31, 2013 and 2012, the Company had outstanding forward currency contracts with a total contract value of $24.4 and $21.0, respectively, for the sale of euros. At December 31, 2013 and 2012, accrued liabilities of $0.7 and $0.2, respectively, were included on the Consolidated Balance Sheets for the fair value of these contracts. Based on the contracts outstanding at December 31, 2013, a 10% change in the dollar to euro exchange rate would result in an approximate $2.4 pre-tax impact on the value of these contracts on a mark-to-market basis, which would offset the effect of a change in the exchange rate on the underlying receivable.

- 36-


Item 8.
Financial Statements and Supplementary Data.

AK Steel Holding Corporation and Subsidiaries

Index to Consolidated Financial Statements

- 37-


MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.  These principles permit choices among alternatives and require numerous estimates of financial matters.  The Company believes the accounting principles chosen are appropriate under the circumstances, and that the estimates, judgments and assumptions involved in its financial reporting are reasonable.

The Company’s Management is responsible for the integrity and objectivity of the financial information presented in its consolidated financial statements.  It maintains a system of internal accounting controls designed to provide reasonable assurance that Company employees comply with stated policies and procedures, that the Company’s assets are safeguarded and that its financial reports are fairly presented.  On a regular basis, the Company’s financial Management discusses internal accounting controls and financial reporting matters with its independent registered public accounting firm and its Audit Committee, composed solely of independent outside directors.  The independent registered public accounting firm and the Audit Committee also meet privately to discuss and assess the Company’s accounting controls and financial reporting.

Dated:
February 21, 2014
 
/s/ James L. Wainscott
 
 
 
James L. Wainscott
 
 
 
Chairman of the Board, President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
February 21, 2014
 
/s/ Roger K. Newport
 
 
 
Roger K. Newport
 
 
 
Vice President, Finance and Chief Financial Officer
 
 
 
 


- 38-


REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
AK Steel Holding Corporation
West Chester, Ohio

We have audited the accompanying consolidated balance sheet of AK Steel Holding Corporation (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AK Steel Holding Corporation at December 31, 2013, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U. S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AK Steel Holding Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 21, 2014 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Cincinnati, Ohio
February 21, 2014

- 39-


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
AK Steel Holding Corporation
West Chester, Ohio

We have audited the accompanying consolidated balance sheet of AK Steel Holding Corporation and subsidiaries (the “Company”) as of December 31, 2012, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity (deficit) for each of the two years in the period ended December 31, 2012.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AK Steel Holding Corporation and subsidiaries at December 31, 2012, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Cincinnati, Ohio
February 28, 2013, except for Note 3, as to which the date is February 21, 2014

- 40-


AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2013, 2012 and 2011
(dollars in millions, except per share data)
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
Net sales
 
$
5,570.4

 
$
5,933.7

 
$
6,468.0

 
 
 
 
 
 
 
Cost of products sold (exclusive of items shown separately below)
 
5,107.8

 
5,539.1

 
6,036.8

Selling and administrative expenses (exclusive of items shown separately below)
 
205.3

 
208.7

 
215.4

Depreciation
 
190.1

 
192.0

 
185.0

Pension and OPEB expense (income) (exclusive of corridor charges shown below)
 
(68.6
)
 
(35.3
)
 
(36.0
)
Pension corridor charges
 

 
157.3

 
268.1

 
 
 
 
 
 
 
Total operating costs
 
5,434.6

 
6,061.8

 
6,669.3

 
 
 
 
 
 
 
Operating profit (loss)
 
135.8

 
(128.1
)
 
(201.3
)
 
 
 
 
 
 
 
Interest expense
 
127.4

 
86.7

 
47.5

Other income (expense)
 
(1.4
)
 
6.2

 
(5.3
)
 
 
 
 
 
 
 
Income (loss) before income taxes
 
7.0

 
(208.6
)
 
(254.1
)
 
 
 
 
 
 
 
Income tax expense (benefit)
 
(10.4
)
 
790.0

 
(94.0
)
 
 
 
 
 
 
 
Net income (loss)
 
17.4

 
(998.6
)
 
(160.1
)
Less: Net income (loss) attributable to noncontrolling interests
 
64.2

 
28.7

 
(4.5
)
 
 
 
 
 
 
 
Net income (loss) attributable to AK Steel Holding Corporation
 
$
(46.8
)
 
$
(1,027.3
)
 
$
(155.6
)
 
 
 
 
 
 
 
Basic and diluted earnings per share:
 
 
 
 
 
 
Net income (loss) attributable to AK Steel Holding Corporation common stockholders
 
$
(0.34
)
 
$
(9.06
)
 
$
(1.41
)

See notes to consolidated financial statements.

- 41-


AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2013, 2012 and 2011
(dollars in millions)
 
 
2013
 
2012
 
2011
Net income (loss)
 
$
17.4

 
$
(998.6
)
 
$
(160.1
)
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
1.2

 
0.7

 
(0.7
)
Cash flow hedges:
 
 
 
 
 
 
Gains (losses) arising in period
 
3.5

 
6.3

 
(21.0
)
Reclassification of losses (gains) to net income (loss)
 
(25.2
)
 
36.3

 
4.0

Unrealized holding gains (losses) on securities:
 
 
 
 
 
 
Unrealized holding gains (losses) arising in period
 
0.2

 
0.9

 
(0.5
)
Pension and OPEB plans:
 
 
 
 
 
 
Prior service credit (cost) arising in period
 
(6.1
)
 
83.9

 
(20.6
)
Gains (losses) arising in period
 
422.3

 
(240.4
)
 
(319.4
)
Reclassification of prior service cost (credits) included in net income (loss)
 
(76.2
)
 
(71.1
)
 
(58.5
)
Reclassification of losses (gains) included in net income (loss)
 
25.3

 
181.8

 
272.0

Other comprehensive income (loss), before tax
 
345.0

 
(1.6
)
 
(144.7
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
 
22.7

 

 
(54.8
)
Other comprehensive income (loss)
 
322.3

 
(1.6
)
 
(89.9
)
Comprehensive income (loss)
 
339.7

 
(1,000.2
)
 
(250.0
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
 
64.2

 
28.7

 
(4.5
)
Comprehensive income (loss) attributable to AK Steel Holding Corporation
 
$
275.5

 
$
(1,028.9
)
 
$
(245.5
)

See notes to consolidated financial statements.

- 42-


AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
(dollars in millions, except per share data)
 
 
2013
 
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
45.3

 
$
227.0

Accounts receivable, net
 
525.2

 
473.9

Inventory, net
 
586.6

 
609.2

Deferred tax assets, current
 
69.6

 
73.2

Other current assets
 
46.5

 
59.4

Total current assets
 
1,273.2

 
1,442.7

Property, plant and equipment
 
5,871.9

 
5,943.9

Accumulated depreciation
 
(3,991.8
)
 
(3,931.6
)
Property, plant and equipment, net
 
1,880.1

 
2,012.3

Other non-current assets:
 
 
 
 
Investment in Magnetation LLC
 
187.8

 
150.0

Other non-current assets
 
264.6

 
298.1

TOTAL ASSETS
 
$
3,605.7

 
$
3,903.1

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
601.8

 
$
538.3

Accrued liabilities
 
142.9

 
164.8

Current portion of long-term debt
 
0.8

 
0.7

Current portion of pension and other postretirement benefit obligations
 
85.9

 
108.6

Total current liabilities
 
831.4

 
812.4

Non-current liabilities:
 
 
 
 
Long-term debt
 
1,506.2

 
1,411.2

Pension and other postretirement benefit obligations
 
965.4

 
1,661.7

Other non-current liabilities
 
110.0

 
108.8

TOTAL LIABILITIES
 
3,413.0

 
3,994.1

Equity (deficit):
 
 
 
 
Common stock, authorized 200,000,000 shares of $.01 par value each; issued 149,691,388 and 149,094,571 shares in 2013 and 2012; outstanding 136,380,078 and 135,944,172 shares in 2013 and 2012
 
1.5

 
1.5

Additional paid-in capital
 
2,079.2

 
2,069.7

Treasury stock, common shares at cost, 13,311,310 and 13,150,399 shares in 2013 and 2012
 
(174.0
)
 
(173.3
)
Accumulated deficit
 
(2,451.1
)
 
(2,404.3
)
Accumulated other comprehensive income
 
323.4

 
1.1

Total stockholders’ equity (deficit)
 
(221.0
)
 
(505.3
)
Noncontrolling interests
 
413.7

 
414.3

TOTAL EQUITY (DEFICIT)
 
192.7

 
(91.0
)
TOTAL LIABILITIES AND EQUITY (DEFICIT)
 
$
3,605.7

 
$
3,903.1



- 43-


The Consolidated Balance Sheets as of December 31, 2013 and 2012, include the following amounts related to consolidated variable interest entities, prior to intercompany eliminations. See Note 14 for more information concerning variable interest entities.
 
 
2013
 
2012
SunCoke Middletown
 
 
 
 
Cash and cash equivalents
 
$
14.2

 
$

Accounts receivable, net
 

 
1.0

Inventory, net
 
22.1

 
28.3

Property, plant and equipment
 
418.5

 
414.5

Accumulated depreciation
 
(29.0
)
 
(15.0
)
Accounts payable
 
13.3

 
15.4