Income Taxes

Valuation Allowance Recorded for Deferred Tax Assets

In accordance with generally accepted accounting principles, the Company regularly assesses the need for a valuation allowance for its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, if it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether to record a valuation allowance, the applicable accounting standards deem that the existence of cumulative losses in recent years is a significant piece of objectively verifiable negative evidence that must be overcome by objectively verifiable positive evidence to avoid the need to record a valuation allowance. Prior to the start of the second quarter of 2012, the Company had concluded that positive evidence outweighed negative evidence, and no valuation allowance was necessary for the Company’s federal and most of its state deferred tax assets. At the end of the second quarter ended June 30, 2012, the Company concluded that, from an accounting perspective, the negative evidence outweighed the positive evidence as of June 30, 2012, as a result of developments during the second quarter. In accordance with that conclusion, the Company recorded a non-cash charge to income tax expense in the second quarter of 2012 in the amount of $736.0 by establishing a valuation allowance for its deferred tax assets. In determining the appropriate amount of the valuation allowance, the accounting standards 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 realization of deferred tax assets. Due to the negative evidence associated with developments that occurred in the quarter ended June 30, 2012 disclosed below, the Company was no longer allowed under those accounting standards to consider future income projections exclusive of the reversing temporary differences. Set forth below is a more-detailed explanation of the key factors that led to that second quarter accounting recognition.

Significant developments during the quarter ended June 30, 2012 that generally resulted in decreases in the positive factors and increases in the negative factors affecting the Company’s assessment of the need for a valuation allowance included the following:


•	an unforeseen, significant decrease in spot market selling prices for carbon steel near the end of the second quarter of 2012, resulting in greater pressure on margins of the Company;


•	increased competition in the United States from (a) imports (primarily from China, Korea and Russia) and (b) non-sustainable pricing practices by certain competitors in bankruptcy or with new or expanded production capacity in the United States, which was likely to continue the downward pressure on selling prices;


•	a longer-than-previously-expected time frame for U.S. economic recovery and heightened uncertainty with respect to the direction of the economy in the United States, as evidenced by weaker employment gains and/or increased unemployment claims;


•	greater widespread uncertainty and deterioration in the economies of Western Europe, which developed during the quarter ended June 30, 2012, caused chiefly by currency devaluations, high debt levels and reduced government and private sector spending;


•	decreases in scrap steel exports from the United States to Europe as a result of lower demand for steel and currency devaluations, resulting in greater scrap supply and lower scrap pricing in the United States; and,


•	the effects of a slowdown in the Chinese economy, including increases in exports of some categories of Chinese steel to the United States.

The aggregate effect of the deterioration in the economies of Western Europe and the slowdown in the Chinese economy had caused a significant oversupply of steel in foreign markets relative to demand. This factor and other general macroeconomic trends, such as a strengthening U.S. dollar compared to the euro and a relatively better U.S. economy than the European economy, have made the United States a more attractive market for foreign competitors and increased foreign imports into the United States. The resulting combination of increased imports, a slower-than-expected economic recovery in the United States, and non-sustainable pricing practices by certain competitors in bankruptcy or with new or expanded production capacity had caused significant downward pressure on spot market selling prices. Further, declines in scrap steel pricing benefited input costs for mini-mill steel producers more than integrated producers such as AK Steel. In addition, these factors contributed to the Company's expectation that it would incur a loss for the third quarter of 2012.

Considering these and other relevant factors, the Company concluded that the negative evidence outweighed the positive evidence and, accordingly, that as of June 30, 2012 it was unable to support for accounting purposes that it was more likely than not to realize all of its federal and state deferred tax assets. The Company considered potential tax-planning strategies that could support the realization of a portion of its federal and state deferred tax assets. It 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. In accordance with the applicable accounting standards, the Company is unable to use future income projections to support the realization of the deferred tax assets as a consequence of the above conclusion. In light of the foregoing conclusions and tax strategy, the Company recorded a non-cash charge to income tax expense in the amount of $736.0 in the second quarter of 2012 to record a valuation allowance for its deferred tax assets. There were no material changes to these factors and the resulting conclusions as of September 30, 2012.

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. Federal net operating loss carryforwards do not begin to expire until 2023 and over 90% of those loss carryforwards have more than 17 years remaining before expiration.

Interim Income Tax Provision

The interim income tax provision is determined by estimating the effective income tax rate expected to be applicable for the full fiscal year. The effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income earned in such jurisdictions. In determining the full year estimate, the Company has also estimated the full-year effect of the change in valuation allowances required based on the current year income (loss) projection and the change in value of the identified tax-planning strategy, which is determined based on the full-year estimate of LIFO income or expense. Included in income tax expense are non-cash charges of $33.1 and $769.1 in the three and nine months ended September 30, 2012, respectively, for changes in the valuation allowance on the Company’s deferred tax assets. As of September 30, 2012 and December 31, 2011, there was a valuation allowance of $791.4 and $22.3, respectively, for the deferred tax assets.

Income taxes recorded through September 30, 2011, were estimated using the discrete method, which was based on actual year-to-date pre-tax income through September 30, 2011. The Company was unable to estimate pre-tax income for the fourth quarter of 2011 with sufficient precision for purposes of the effective tax rate method, which requires consideration of a projection of full-year income.