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The Credit Facility?s current availability significantly exceeds $150.0. Availability is calculated as the lesser of the total commitments under the Credit Facility or eligible collateral after advance rates, less outstanding revolver borrowings and letters of credit. We secure our Credit Facility obligations with our inventory and accounts receivable, and the Credit Facility?s availability fluctuates monthly based on the varying levels of eligible collateral.0.1080.0000.1080.0830.0500.083750.076250.076250.08752023-07-152019-11-152022-04-152020-05-152021-10-012028-06-012020-06-012022-03-312020-03-312021-09-302023-07-152017-03-312017-05-142017-09-302019-07-142019-03-312020-05-142019-09-302021-07-142018-03-312018-05-142018-09-302020-07-142020-04-012019-04-012019-10-012021-07-152016-05-152018-04-012018-05-152018-10-012020-07-152017-04-012017-05-152017-10-012019-07-150.652.860.030.000.000.000.652.860.030However, our Credit Facility restricts dividend payments. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2016
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    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  

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    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    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.  

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
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  

Aggregate market value of the registrant’s voting stock held by non-affiliates at June 30, 2016: $1,102,982,730
There were 314,789,404 shares of common stock outstanding as of February 15, 2017.

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 “2017 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, 2016.

 
 
 
 
 



AK Steel Holding Corporation
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-i-

Table of Contents

(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”). AK Steel is the successor through merger in 1999 to Armco Inc., which was formed in 1900. Unless the context indicates otherwise, references to “we,” “us” and “our” refer to AK Holding and its subsidiaries.

We are the only steelmaker in the United States that can produce a combination of flat-rolled carbon, stainless and electrical steels. In addition, we are the only steelmaker in the United States operating both blast furnaces and electric arc furnaces, which provides us operational flexibility and the opportunity to innovate across markets and within our product portfolios. Our primary operations include eight steelmaking and finishing plants, two coke plants and two tube manufacturing plants across six states—Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia—and a tube manufacturing plant in Mexico. These operations produce flat-rolled carbon, specialty stainless and electrical steels that we sell in sheet and strip form, and carbon and stainless steel that we finish into welded steel tubing. We also produce metallurgical coal through our AK Coal Resources, Inc. (“AK Coal”) subsidiary. In addition, we operate trading companies in Mexico and Europe that buy and sell steel and steel products and other materials.

In 2014, we acquired Severstal Dearborn, LLC (“Dearborn”). The assets acquired include the integrated steelmaking assets located in Dearborn, Michigan (“Dearborn Works”), the Mountain State Carbon, LLC (“Mountain State Carbon”) cokemaking facility located in Follansbee, West Virginia, and interests in joint ventures that process flat-rolled steel products.

Customers and Markets

Carbon steels

We sell flat-rolled carbon steel products, consisting of premium-quality coated, cold-rolled, and hot-rolled carbon steel products, primarily to automotive manufacturers and their suppliers, as well as to customers in the infrastructure and manufacturing market. The infrastructure and manufacturing market primarily includes electrical transmission, heating, ventilation and air conditioning equipment, and appliances. We also sell carbon steel products to distributors, service centers and converters, who may further process these products before reselling them. Our goal is to carry appropriate inventory levels that will meet our customers’ needs, particularly for the “just-in-time” delivery requirements necessary to service the demanding automotive market. Our strategy is to target markets for our steel products that deliver higher margins, where possible, and reduce amounts sold into the lower margin steel spot markets, which has experienced substantial volatility in pricing over the past several years primarily as a result of the impact of low-priced imports of foreign steel. In late 2015, we temporarily idled the blast furnace and steelmaking operations (the “Hot End”) at our Ashland Works in Kentucky. The Ashland Works Hot End remains temporarily idled due to continuing uncertainty of steel market conditions (including the longer-term outlook for import levels) and our ability to earn an appropriate return on its operations. In 2016, we increased capacity utilization of our carbon steelmaking operations at our Middletown Works in Ohio (“Middletown Works”) and Dearborn Works, and we reduced our production of commodity carbon, electrical and stainless steel products. Also in 2016, we enhanced asset and resource utilization to reduce operating costs and modified production capacity for higher margin carbon, electrical and stainless steel grades at all locations. See Automotive Market and Carbon Steel Spot Market for more information.

Stainless steels

We sell our 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. For stainless steels, as well as carbon steels, we target customers who require the highest quality flat-rolled steel with precise “just-in-time” delivery and technical support. Our enhanced product quality and delivery capabilities, as well as our emphasis on collaborative customer technical support and product planning, are critical factors in our ability to serve these markets. See the Specialty Stainless Steel Market section for more information.

Electrical steels

We sell our electrical steel products in the infrastructure and manufacturing market, primarily to manufacturers of power transmission and distribution transformers, both for new and replacement installation. We also sell electrical steel products to manufacturers of

- 1-

Table of Contents

electrical motors and generators. We target our electrical steel products to customers who desire the highest quality iron-silicon alloys that provide low core loss and high permeability required for more efficient and economical electrical transformers. Our electrical steels are among the most energy efficient in the world. As with customers of our other steel products, we provide our electrical steel customers outstanding technical support and product development assistance. See Electrical Steel Market section for more information.

Markets

For our carbon steel, stainless steel and electrical steel products, we intentionally limit our participation in the commodity portions of those markets, where attributes such as high quality, technical support and innovation are less valued and where selling prices and product margins are generally lower.

Because of our focus on shipments to the automotive industry and our decision to ship fewer tons to the spot market, Ford Motor Company and FCA US LLC accounted for 12% and 11% of our net sales in 2016, and 12% and 11% of our net sales in 2015. No customer accounted for more than 10% of our net sales in 2014. The following table presents the percentage of our net sales to each of our primary markets:
Market
 
2016
 
2015
 
2014
Automotive
 
66
%
 
60
%
 
53
%
Infrastructure and Manufacturing
 
16
%
 
16
%
 
18
%
Distributors and Converters
 
18
%
 
24
%
 
29
%

We sell our carbon steel products principally to customers in the United States. We sell our electrical and stainless steel products both domestically and internationally. Our customer base is geographically diverse and there is no single country outside the United States where our sales are material compared to our total net sales. We do not have any material long-lived assets located outside the United States. The following shows net sales by geographic area and as a percentage of worldwide net sales:
 
 
2016
 
2015
 
2014
Geographic Area
 
Net Sales
 
%
 
Net Sales
 
%
 
Net Sales
 
%
United States
 
$
5,226.9

 
89
%
 
$
5,837.2

 
87
%
 
$
5,750.3

 
88
%
Foreign countries
 
655.6

 
11
%
 
855.7

 
13
%
 
755.4

 
12
%
Total
 
$
5,882.5

 
100
%
 
$
6,692.9

 
100
%
 
$
6,505.7

 
100
%

We sold approximately 70% of our flat-rolled steel shipments in 2016 under fixed base price contracts. Some of these contracts have a surcharge mechanism that passes through certain changes in input costs. These contracts are typically for one year and expire at various times throughout the year. We sold the remainder of our shipments in 2016 into the spot market at market prices or under contracts that have pricing typically linked to a steel index that triggers a price adjustment based on the previous monthly or quarterly reference point.

The automotive market is an important element of our business and growth strategy and, therefore, North American light vehicle production has a significant impact on our total sales and shipments. In 2016, North American automotive manufacturers experienced a record year with light vehicle production of approximately 17.8 million units, representing a 2% increase from the prior year. The improvement in the automotive market and our increased share of that market resulted in higher sales and shipments of our steel to the automotive market in 2016. Most automotive manufacturers are currently predicting a slight decline in total North American light vehicle production volumes for 2017 compared to 2016, though this level of production would still be considered robust compared to historical volumes.

In 2016, housing starts in the United States improved approximately 5% over 2015, which generally increased the demand for products from power transmission and distribution transformer manufacturers, to whom we sell electrical steels. To a lesser extent, we also experienced higher demand for stainless and carbon steels from appliance manufacturers, manufacturers of heating and air conditioning equipment and others. We saw improvements in higher value electrical steel pricing and demand during 2016, but this was partly offset by lower prices in and lower shipments to the electrical steel spot markets as a result of a high level of commodity steel imports into the United States. Electrical steel sales and shipments to customers in foreign countries also have been negatively affected by excess global production capacity and what we believe to be preferential trade practices by certain countries that make our products more expensive to sell in those countries.


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Raw Materials and Other Inputs

Our steel manufacturing operations require iron ore, coal, coke, chrome, nickel, zinc, carbon steel scrap and stainless steel scrap as primary raw materials. We also use large volumes of natural gas, electricity and industrial gases. In past years we have purchased carbon steel slabs from other steel producers to supplement our production from our own steelmaking facilities, but we did not purchase carbon steel slabs in 2016.

We typically purchase carbon and stainless steel scrap, natural gas, a substantial portion of our electricity and most other raw materials at prevailing market prices, which may fluctuate with market supply and demand. However, we make most of our purchases of iron ore, coke, industrial gases and a portion of our electricity at negotiated prices under annual or multi-year agreements with periodic price adjustments. We purchase substantially all our iron ore from one supplier under multi-year contracts. We typically purchase coal under annual fixed-price agreements. Additionally, we may hedge portions of our energy and raw materials purchases to reduce volatility. During late 2016, we terminated our iron ore pellet offtake agreement with Magnetation LLC (“Magnetation”), which caused our iron ore derivatives to no longer meet the accounting criteria for hedge accounting treatment. As a result, we now account for those derivatives on a mark-to-market basis with immediate recognition of changes in the fair value of the derivative contracts in earnings when the change occurs, instead of when we recognize the underlying cost of iron ore, thus potentially increasing the volatility of our results of operations. This volatility does not affect the ultimate gains or losses on the derivative contracts we will recognize in the financial statements, but only the timing of recognition.

We also attempt to reduce the risk of future supply shortages and price volatility in other ways. If multi-year contracts are available in the marketplace, we may use these contracts to secure enough supply to satisfy our key raw material needs. When multi-year contracts are not available, or are not available on acceptable terms, we enter into annual contracts or make spot purchases to meet the remainder of our raw materials needs. We also regularly evaluate using alternative sources and substitute materials.

We believe that we have secured, or will be able to secure, adequate supply sources for our raw materials and energy requirements for 2017 and for at least the next three to five years. However, our raw material suppliers may experience production disruptions, which could create shortages of raw materials in 2017 or later.

Research and Innovation

Research and innovation is deeply ingrained in our history and is one of the key focus areas of our company. Differentiating ourselves by providing new, innovative products is a strategic priority, as we believe such differentiation in higher value carbon, stainless and electrical steels to meet challenging applications enables us to maintain and enhance our margins by providing customers with breakthrough solutions. We conduct a broad range of research and development activities aimed at improving existing products and manufacturing processes and developing new products and processes. In recent years, we have increased our focus and spending on new product innovation. In the carbon steel market, we are particularly focused on advanced high-strength steels (“AHSS”) for the automotive market. We produce virtually every grade of AHSS that our customers currently need, but our goal is to develop the next generation of AHSS with even greater formability. In the electrical steel market, our research efforts are aimed at developing the highest-efficiency steels in the world for use in power transmission and distribution transformers. In addition, we are focused on achieving new breakthroughs in electrical motors and generators for use in the next generations of hybrid and electric vehicles. In the stainless steel market, we are developing more high-temperature, corrosion-resistant steels for a variety of applications, including vehicle exhaust systems that can accommodate hotter-burning engines for increased fuel efficiency.

Developing new steel products and steel processes has been our legacy and we have recently reinvigorated our focus on research and innovation. At the end of 2016, we moved into our new Research and Innovation Center in Middletown, Ohio. The facility includes pilot lines and features new operational simulators that replicate critical steel manufacturing operations to allow our researchers, scientists and engineers to continue their leading-edge research, applications engineering, advanced engineering, product development and customer technical services.

Also during 2016, we implemented new process technology to produce both coated and cold-rolled Next-Generation AHSS (NEXMET™ AHSS) on the hot-dip galvanizing line at Dearborn Works. Our goal is to provide NEXMET AHSS trial material to our customers in early 2017 for evaluation and qualification. Looking beyond, we continue to push our innovation efforts toward groundbreaking steel technologies, including advances in Third-Generation AHSS (see Innovation and Product Development in Item 7). We have significantly increased our investment in research and innovation during the past three years from $17.5 in 2014 to $28.3 in 2016 for normal ongoing activities, in addition to our new Research and Innovation Center.


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Employees

At December 31, 2016, we employed approximately 8,500 people, of which approximately 6,100 are represented by labor unions. The labor contracts covering these represented employees expire between 2017 and 2019. See the discussion under Labor Agreements in Item 7 for additional information on these agreements.

Competition

We compete with domestic and foreign flat-rolled carbon, stainless and electrical steel and tubular product producers (both integrated steel producers and mini-mill producers) and producers of plastics, aluminum and other materials that may be used as a substitute for flat-rolled steels in manufactured products. Mini-mills generally offer a narrower range of products than integrated steel mills, but have been expanding their product capabilities in recent years. In addition, mini-mills have some competitive cost advantages as a result of their different production processes and lower labor costs associated with what are often non-union workforces. Price, quality, on-time delivery, customer service and product innovation are the primary competitive factors in the steel industry and vary in importance according to the product category and customer requirements.

Steel producers that sell to the automotive market are facing increasing competition from aluminum manufacturers (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. To address automotive manufacturers’ lightweighting needs that the aluminum industry is targeting, we and others in the steel industry continue to develop grades of AHSS that we believe provide similar weight savings, require minimal capital investments by customers, and are stronger, less costly, more sustainable, easier to repair and more environmentally friendly than aluminum.

Domestic steel producers, including us, face significant competition from foreign producers. For many reasons, these foreign producers often are able to sell products in the United States at prices substantially lower than domestic producers. Depending on the country of production, these reasons may include generous government subsidies; lower labor, raw material, energy and regulatory costs; less stringent environmental regulations; less stringent safety requirements; the maintenance of artificially low exchange rates against the U.S. dollar; and preferential trade practices in their home countries. In recent years, the annual level of imports of foreign steel into the United States has increased over historical levels and is affected to varying degrees by the relative level of overcapacity of steel production in those countries, 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.

In 2014 and 2015, the combination of overcapacity and slowing domestic demand in countries such as China resulted in imports of low-priced foreign steel into the United States at levels significantly higher than recent historical periods. This caused increased downward pressure on the price of flat-rolled steels in the American marketplace. Imports of finished steel into the United States accounted for approximately 26%, 29% and 28% of domestic steel market consumption in 2016, 2015 and 2014, levels that are higher than the historic norm. During 2016, we successfully concluded the anti-dumping (“AD”) and countervailing duty (“CVD”) cases that we and other major domestic steel producers initiated over a year ago against imports of corrosion-resistant, cold-rolled and hot-rolled carbon steel products from multiple foreign countries. Also during 2016, the International Trade Commission (“ITC”) issued the last of its final determinations that the domestic steel industry has been materially injured by imports of these steel products from the countries named in the petitions. As a result, the final duties determined by the United States Department of Commerce (“Commerce Department”), which in some cases exceed 400% for combined AD and CVD duties, will remain in effect for a minimum of five years. Following those determinations, in September 2016, we and other domestic producers made filings with the Commerce Department asserting that Chinese steel producers are attempting to circumvent the AD and CVD duties against corrosion-resistant and cold-rolled carbon steel by transshipping Chinese steel through Vietnam for minor processing before importing final steel products into the U.S. market. Our filings request that the Commerce Department find that imports of Vietnamese corrosion-resistant and cold-rolled steel that originated in China be subjected to the same AD and CVD duties of shipments of those steel products imported directly from China. The Commerce Department announced the initiation of these investigations in November 2016. See Trade Cases in Note 10 to the consolidated financial statements for more information.

We continue to provide pension and healthcare benefits to a great number of our retirees, resulting in a competitive disadvantage compared to certain other domestic integrated steel companies and mini-mills that do not provide such benefits to any or most of their retirees. However, we have taken a number of actions to reduce pension and healthcare benefits costs, including negotiating progressive labor agreements that have significantly reduced total employment costs at all of our union-represented facilities, transferring all responsibility for healthcare benefits for various groups of retirees to Voluntary Employee Benefits Association trusts, offering voluntary lump-sum settlements to pension plan participants and lowering retiree benefit costs for salaried employees. During 2016, we purchased two non-participating annuity contracts from a highly rated insurance company and transferred to it pension obligations of $210.3 for certain retirees or their beneficiaries receiving pension payments. In total, we transferred the obligations for approximately 10,000 retirees or their beneficiaries to the insurance company in exchange for a similar amount of pension trust assets.

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These actions have increased our ability to compete in the highly competitive global steel market over the long term and we continue to seek opportunities to reduce pension and healthcare benefits costs.

Environmental

Information about our environmental compliance, remediation and proceedings is included in the Environmental Contingencies section of Note 10 to the consolidated financial statements in Item 8 and is incorporated herein by reference.

Executive Officers of the Registrant

The following table provides the name, age and principal position of each of our executive officers as of February 15, 2017:
Name
 
Age
 
Position
Roger K. Newport
 
52
 
Chief Executive Officer
Kirk W. Reich
 
48
 
President and Chief Operating Officer
Joseph C. Alter
 
39
 
Vice President, General Counsel and Corporate Secretary
Brian K. Bishop
 
45
 
Vice President, Carbon Steel Operations
Stephanie S. Bisselberg
 
46
 
Vice President, Human Resources
Renee S. Filiatraut
 
53
 
Vice President, Litigation, Labor and External Affairs
Gregory A. Hoffbauer
 
50
 
Vice President, Controller and Chief Accounting Officer
Michael A. Kercsmar
 
45
 
Vice President, Specialty Steel Operations
Scott M. Lauschke
 
47
 
Vice President, Sales and Customer Service
Eric S. Petersen
 
47
 
Vice President, Research and Innovation
Maurice A. Reed
 
54
 
Vice President, Engineering, Raw Materials and Energy
Jaime Vasquez
 
54
 
Vice President, Finance and Chief Financial Officer

Roger K. Newport has served as Chief Executive Officer since January 2016. Prior to that, Mr. Newport served as Executive Vice President, Finance and Chief Financial Officer since May 2015. Prior to that, Mr. Newport served as Senior Vice President, Finance and Chief Financial Officer since May 2014, as Vice President, Finance and Chief Financial Officer since May 2012 and as Vice President, Business Planning and Development since June 2010. Prior to that, Mr. Newport served in a variety of other capacities since joining us in 1985, including Controller and Chief Accounting Officer, Assistant Treasurer, Investor Relations, Manager—Financial Planning and Analysis, Product Manager, Senior Product Specialist and Senior Auditor.

Kirk W. Reich has served as President and Chief Operating Officer since January 2016. Prior to that, Mr. Reich served as Executive Vice President, Manufacturing since May 2015. Before assuming that role, Mr. Reich served as Senior Vice President, Manufacturing since May 2014, as Vice President, Procurement and Supply Chain Management since May 2012 and as Vice President, Specialty Steel Operations since June 2010. Prior to that, Mr. Reich served in a variety of other capacities since joining us in 1989, including General Manager—Middletown Works, Manager—Mobile Maintenance/Maintenance Technology, General Manager—Mansfield Works, Manager—Processing and Shipping, Technical Manager, Process Manager and Civil Engineer.

Joseph C. Alter has served as Vice President, General Counsel and Corporate Secretary since May 2015. Prior to that, Mr. Alter served as Vice President, General Counsel and Chief Compliance Officer since May 2014 and Assistant General Counsel, Corporate and Chief Compliance Officer since December 2012. Mr. Alter became Corporate Counsel and Chief Compliance Officer in May 2011. Before joining us as Corporate Counsel in August 2009, Mr. Alter was Corporate Counsel at Convergys Corporation and, before that, an attorney with the law firm of Keating Muething & Klekamp PLL.

Brian K. Bishop has served as Vice President, Carbon Steel Operations since March 2016. Prior to that, Mr. Bishop served as Director, Carbon Steel Operations since July 2015 and General Manager, Dearborn Works since September 2014. Prior to that, Mr. Bishop was General Manager—Maintenance, Repair and Operations Purchasing since May 2013 and General Manager, Middletown Works since June 2010. Since joining us in 1995, Mr. Bishop progressed through a number of positions, including General Manager—Mansfield Works, Manager—Occupational Safety and Health and Shift Manager at Middletown Works.

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 and Assistant Labor Counsel since joining us in 2004. Prior to joining us, Ms. Bisselberg was an attorney with the law firm of Taft, Stettinius and Hollister LLP.


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Renee S. Filiatraut has served as Vice President, Litigation, Labor and External Affairs since May 2014. Prior to that, Ms. Filiatraut served as Assistant General Counsel, Litigation since December 2012. Before joining us as Litigation Counsel in March 2011, Ms. Filiatraut was a Partner with Thompson Hine LLP from January 1998.

Gregory A. Hoffbauer has served as Vice President, Controller and Chief Accounting Officer since January 2016. Prior to that, Mr. Hoffbauer served as Controller and Chief Accounting Officer since February 2013. Before joining us as Assistant Controller in January 2011, Mr. Hoffbauer was Director of Accounting with NewPage Corporation. Mr. Hoffbauer also was Controller for Day International, Inc. and served in a number of increasingly responsible accounting and auditing positions for Deloitte & Touche LLP, including Audit Senior Manager.

Michael A. Kercsmar has served as Vice President, Specialty Steel Operations since March 2016. Prior to that, Mr. Kercsmar served as Director, Specialty Steel Operations since July 2015 and General Manager, Coshocton Works and Zanesville Works since June 2013. Prior to that, Mr. Kercsmar served as General Manager, Mansfield Works since June 2010. Mr. Kercsmar served in a number of roles since joining us in 1997, including Manager—Occupational Safety and Health at Middletown Works, Department Manager—South Coating, and Shift Manager in the cold strip mill at Middletown Works .

Scott Lauschke has served as Vice President, Sales and Customer Service since February 2015. Before joining us, Mr. Lauschke was Vice President and General Manager of AFGlobal Corporation from July 2013 through November 2014. Before that, Mr. Lauschke served in various roles of increasing responsibility at The Timken Company from October 1997, including General Sales Manager from May 2009 through April 2013.

Eric S. Petersen has served as Vice President, Research and Innovation since February 2015. Prior to that, Mr. Petersen was Vice President, Sales and Customer Service since July 2013, Director, Specialty and International Sales since November 2012 and Director, Research and Innovation since June 2010. Prior to that, Mr. Petersen served in a variety of other capacities since joining us in 1991, including Director, Customer Technical Services and Research; 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 us in 1996, including Director of Engineering and Energy, General Manager—Engineering, Operations Support and Primary Process Research and General Manager—Engineering. Before joining us, Mr. Reed held a number of increasingly responsible engineering technology positions for National Steel Corporation.

Jaime Vasquez has served as Vice President, Finance and Chief Financial Officer since January 2016. Before joining us in September 2014 as Director, Finance, Mr. Vasquez held several positions with Carpenter Technology Corporation, including Vice President, Chief Financial Officer for the Performance Engineered Products Group from October 2013; Vice President, Corporate Development from July 2011; President, Asia Pacific; and Vice President, Treasurer and Investor Relations.

Available Information

We maintain a website at www.aksteel.com. Information about us is available on the website free of charge, including our annual reports 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. Such information is posted to the website as soon as reasonably practicable after submission to the Securities and Exchange Commission. Information on our website is not incorporated by reference into this report.

Item 1A.
Risk Factors.

We caution readers that our business activities involve risks and uncertainties that could cause actual results to differ materially from those we currently expect. While the items listed below represent the most significant risks to us, we regularly monitor and report risks to the Board of Directors through a formal Total Enterprise Risk Management program.

Risk of reduced selling prices, shipments and profits associated with a highly competitive and cyclical industry. The competitive landscape in the steel industry reflects an improved domestic economy; shifting domestic and international political priorities; an uncertain global trade landscape; continued intense competition from domestic steel competitors; and foreign steel competition, both domestically (much of which we believe has been through unfair trade practices) and abroad. These conditions directly impact our pricing. It is impossible to predict whether the domestic and/or global economies or industry sectors of those economies that are key to our sales will continue to improve and generate enough demand to absorb some of the existing excess

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capacity in the steel industry, as well as new or expanded capacity. Also, we cannot know how customers or competitors will react to these and other factors and how their actions could affect market dynamics and sales of, and prices for, our products. Market price and demand for steel are very hard to predict and we could be hurt by decreases in either. In addition, our direct sales to the automotive industry generate approximately 66% of our revenue and we make additional sales to distributors and converters whom, we believe, ultimately resell some of that volume to the automotive market. If automotive demand should decline substantially or we lose market share to competitors, our sales, financial results and cash flows could be severely impacted.

Risk of domestic and global steel overcapacity.  Significant global steel capacity and new or expanded production capacity in the United States in recent years has caused and continues to cause capacity to exceed demand globally, as well as in our primary markets in North America, which has and may continue to result in lower prices and shipments of our products. In fact, significant increases in production capacity in the United States by our competitors already have occurred in recent years as new carbon and stainless steelmaking and finishing facilities have begun production. In addition, foreign competitors have substantially increased their production capacity in the last few years and, in some instances appear to have targeted the U.S. market for imports. Also, some foreign economies, such as China, seem to be slowing relative to recent historical norms, resulting in an increased volume of steel products that cannot be consumed by industries in those foreign steel producers’ own countries. These and other factors have contributed to a high level of imports of foreign steel into the United States in recent years compared to historical levels 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 our control. A significant further increase in domestic capacity or foreign imports could adversely affect our sales, financial results and cash flows.

Risk of changes in the cost of raw materials and energy.  The price that we pay for energy and key raw materials, such as electricity, natural gas, industrial gases, iron ore and coal, can fluctuate significantly based on market factors. In some cases the prices at which we sell steel will not change in tandem with changes in our raw material and energy costs. Global demand, particularly Chinese demand, for certain raw materials can have a significant influence on our costs for those raw materials, especially iron ore and coal. However, our sales prices are generally driven by North American demand, which can compress our margins in cases where raw material costs increase and our sales prices do not move in a similar manner. The majority of our shipments are sold under contracts that do not allow us to pass through all increases in raw material and energy costs. Some of our shipments to contract customers are under contracts with variable-pricing mechanisms allowing us to adjust the total sales price based upon changes in specified raw material and energy costs. Those adjustments, however, rarely reflect all of our underlying raw material and energy cost changes. The scope of the adjustment may be limited by the terms of the negotiated language including limitations on when the adjustment occurs. For shipments made to the spot market, market conditions or timing of sales may not allow us to recover the full amount of an increase in raw material or energy costs. In such circumstances, a significant increase in raw material or energy costs likely would adversely impact our financial results and cash flows. Conversely, in certain circumstances, we may not realize all of the benefits from raw material price declines. This can occur when we lock in the price of a raw material over a set period and the spot market price for the material declines during that period. Our need to consume existing inventories may also delay the impact of a change in raw materials prices. New inventory may not be purchased until some portion of the existing inventory is consumed. The impact of this risk is particularly significant for iron ore and coke because of the volumes held in inventory. We manage our exposure to the risk of iron ore price increases by hedging a portion of our annual iron ore supply and by entering supply agreements where the IODEX, the global iron ore price index, is only one factor affecting our price of iron ore pellets. The impact of significant fluctuations in the price we pay for raw materials can be increased by our “last-in, first-out” (“LIFO”) accounting method for valuing inventories. Using the LIFO method means that we treat the last coil of steel completed as the first one sold, which means that our inventory value can reflect earlier input costs that do not reflect current input costs. The impact of LIFO accounting may be particularly significant in period-to-period comparisons.

Risk from our significant amount of debt and other obligations.  On December 31, 2016, we had $1,845.1 of indebtedness (excluding unamortized discount/premium and debt issuance costs and the capital lease for our Research and Innovation Center) and additional obligations outstanding. We also had pension and other postretirement benefit obligations totaling $1,135.0. We have approximately $45.0 of required annual pension contributions for 2017. Based on current funding projections, we expect to make contributions to the master pension trust of approximately $60.0 for 2018 and $75.0 for 2019, though funding projections in 2018 and beyond could be affected by differences between expected and actual returns on plan assets, actuarial data and assumptions relating to plan participants, the discount rate used to measure the pension obligations and changes to regulatory funding requirements. We can borrow additional amounts under our $1,500.0 revolving credit facility. At December 31, 2016, we had no outstanding borrowings under this credit facility with outstanding letters of credit of $70.7, resulting in maximum remaining availability of $1,429.3 under the credit facility (subject to customary borrowing conditions, including a borrowing base). Borrowing capacity under the credit facility is determined by the value of eligible collateral less outstanding borrowings and letters of credit. At December 31, 2016, borrowing availability under the credit facility was $1,186.4 based on eligible collateral at that time. Our debt and pension obligations, along with other financial obligations, could have important consequences. For example, it could increase our vulnerability to general adverse economic and industry conditions; require a substantial portion of our cash flows to be dedicated to interest payments and debt service, reducing the amount of cash flows available for other purposes, such as working capital, capital expenditures, acquisitions, joint ventures or general corporate purposes; limit our ability to obtain future additional financing; reduce our planning flexibility for,

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or ability to react to, changes in our business and the industry; and place us 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 our major customers or key suppliers.  Sales and operations of a majority of our customers are sensitive to general economic conditions, especially as they affect the North American automotive and housing industries. If there is a significant weakening of current economic conditions, whether because of secular or cyclical issues, it could lead to financial difficulties or even bankruptcy filings by our customers. The concentration of customers in a specific industry, such as the automotive industry, may increase our risk because of the likelihood that circumstances may affect multiple customers at the same time. The nature of that impact would likely include lost sales or losses associated with the potential inability to collect all outstanding accounts receivable. Such an event could negatively impact our financial results and cash flows. In addition, many of our key suppliers, particularly those who supply us with critical raw materials for the steelmaking process, have recently faced severe financial challenges or bankruptcy and other suppliers may face such circumstances in the future. For example, the significant decline in commodity prices during 2015 led to increased economic distress and even bankruptcy filings for several of the domestic sources of metallurgical coal, as well as one of our iron ore suppliers. Also, we purchase substantially all of our iron ore from one supplier under two multi-year contracts. This reliance on a single supplier for a primary raw material may increase our risk of increased costs from substitute suppliers or supply chain disruptions in the event of their financial hardship or bankruptcy. Key suppliers facing financial hardship or operating in bankruptcy could experience operational disruption or even face liquidation, which could result in our inability to secure replacement raw materials on a timely basis, or at all, or cause us to incur increased costs to do so. Such events could adversely impact our operations, financial results and cash flows.

Risk related to our significant proportion of sales to the automotive market. In 2016, approximately 66% of our sales were to the automotive market. North American light vehicle production was approximately 17.8 million units in 2016, representing an all-time high. In addition to the size of our exposure to the automotive industry generally, we face risks related to our relative concentration of sales to certain specific automotive manufacturers. In 2016, Ford Motor Company and FCA US LLC accounted for 12% and 11% of our net sales. Automotive production and sales are cyclical and sensitive to general economic conditions and other factors, including interest rates, consumer credit, and consumer spending and preferences. If automotive production and sales decline, our sales and shipments to the automotive market are likely to decline in a similarly corresponding manner. Adverse impacts that we may sustain as a result include, without limitation, lower margins because of the need to sell our steel to less profitable customers and markets, higher fixed costs from lower steel production if we are unable to sell the same amount of steel to other customers and markets, and/or lower sales, shipments and margins generally as our competitors face similar challenges and compete vigorously in other markets. These adverse impacts would negatively affect our sales, financial results and cash flows. Moreover, competition for automotive business has intensified in recent periods, as steel producers and companies producing alternative materials have focused their efforts on capturing and/or expanding their market share of automotive business because of less favorable conditions in other markets for steel and other metals, including commodity products and steel for use in the oil and gas markets. As a result, the potential exists that we may lose market share to existing or new entrants or that automotive manufacturers will take advantage of the intense competition among potential suppliers to pressure our pricing and margins in order to maintain or expand our market share with them, which could negatively affect our sales, financial results and cash flows.

Risk of reduced demand in key product markets due to competition from aluminum and other alternatives to steel.  The automotive market is important to our business, both in terms of volume and margins. Automotive manufacturers are under pressure to meet increasing government-mandated fuel economy standards through 2025. One major automotive company previously elected to substitute aluminum for carbon steel in the body of some of its vehicles, and may increase using aluminum in others. Other automotive manufacturers have, to a lesser degree, begun to incorporate aluminum and other alternative materials into their vehicles and continue to investigate the potential risks and benefits of expanding the use of non-steel materials. Although automotive manufacturers have incorporated aluminum and other competing materials at a much slower rate than some experts previously expected, if demand for steel from one or more of our major automotive customers were to significantly decline because of increased use of aluminum or other competing materials in substitution for steel, it likely would negatively affect our sales, financial results and cash flows.

Risks of excess inventory of raw materials.  We have certain raw material supply contracts which include minimum annual purchases, subject to exceptions for force majeure and other circumstances. If our need for a particular raw material is reduced for an extended period significantly below what we projected at the contract’s inception, or what we projected at the time an annual nomination was made under certain contracts, we could be required to purchase quantities of raw materials that exceed our anticipated annual needs. Our decision to temporarily idle the Ashland Works Hot End increases this risk, as those operations are a major consumer of several key raw materials for which we have take-or-pay obligations, including coke. If our existing supply contracts require us to purchase raw materials in quantities beyond our needs, and if we do not succeed in reaching an agreement with a particular raw material supplier to reduce the quantity of raw materials we purchase from that supplier, then we would likely be required to purchase more of a particular raw material in a given year than we need, negatively affecting our financial results, liquidity and cash flows. Changes in our raw material, finished and semi-finished inventory levels and our LIFO method for valuing inventories could increase the negative impact on our financial results.

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Risk of supply chain disruptions or poor quality of raw materials. Our 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 and alloys. For example, extreme cold weather conditions in the United States and Canada can impact shipping on the Great Lakes and could disrupt the delivery of iron ore to us and/or increase our costs for iron ore. Such disruptions or quality issues, whether the result of severe financial hardships or bankruptcies of suppliers, natural or man-made disasters, other adverse weather events, or other unforeseen events, could reduce production or increase costs at one or more of our plants and potentially adversely affect customers or markets to which we sell our products. In addition, in January 2017 we transitioned from our long-time third party logistics (“3PL”) provider to a new 3PL supplier. The ongoing transition is a complex endeavor, as it involves the majority of our trucking services, as well as some rail transportation. Any significant disruption or quality issue in any of the areas addressed above would adversely affect our sales, financial results and cash flows.

Risk of production disruption or reduced production levels.  When business conditions permit, we attempt to operate our facilities at production levels that are at or near capacity. High production levels are important to our financial results because they enable us to spread fixed costs over a greater number of production tons. In 2015, we began to implement a strategy to target markets for our products that deliver higher margins, where possible, and reduce amounts sold into the lower margin spot markets. This ongoing strategy relies on our ability to sell higher margin products that overcome the effects of lower production volumes on our fixed costs. If we are unable to sustain this strategy successfully, it would adversely affect our sales, financial results and cash flows. Production disruptions could be caused by unanticipated plant outages or equipment failures, particularly under circumstances where we lack adequate redundant facilities. In addition, the occurrence of natural or man-made disasters, adverse weather conditions or similar events could significantly disrupt our operations, negatively impact the operations of other companies or contractors we depend upon, or adversely affect customers or markets who buy our products. Any such significant disruption or reduced level of production would adversely affect our sales, financial results and cash flows.

Risks associated with our healthcare obligations.  We provide healthcare coverage to our active employees and to a significant portion of our retirees, as well as certain members of their families. We are self-insured for substantially all of our healthcare coverage. While we have reduced our exposure to rising healthcare costs to a significant degree through cost sharing, cost caps and VEBA trusts, the cost of providing such healthcare coverage may be greater on a relative basis for us than for our competitors because they either provide a lesser level of benefits, require that their participants pay more for their benefits, or do not provide coverage to as broad a group of participants (e.g., they do not provide retiree healthcare benefits). In addition, our costs for retiree healthcare obligations could be affected by fluctuations in interest rates or by federal healthcare legislation.

Risks associated with our pension obligations.  We have a substantial pension obligation that, along with the related pension expense (income) and funding requirements, is directly affected by various changes in assumptions, including the selection of appropriate mortality assumptions and discount rates. These items also are affected by the rate and timing of employee retirements, actual experience compared to actuarial projections and asset returns in the securities markets. Such changes could increase our cost for those obligations, which could have a material adverse effect on our results and ability to meet those obligations. In addition, changes in the law for pension funding could also materially adversely affect our costs and ability to meet our pension obligations. Also, under the method of accounting we use for pension obligation reporting, we recognize into our 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 our 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 our pension obligations, historically has been recorded in the fourth quarter of the year, though one may be recorded at any time if an interim remeasurement occurs. A corridor adjustment can have a significant impact on our financial statements in the period it is recorded, although the immediate recognition of the adjustment in that period reduces the impact of unrealized gains or losses on future periods. The recognition of a corridor charge does not have any immediate impact on our cash flows. We also contribute to multiemployer pension plans according to collective bargaining agreements that cover certain union-represented employees. Participating in these multiemployer plans exposes us to potential liabilities if the multiemployer plan is unable to pay its unfunded obligations or we choose to stop participating in the plan.

Risk of not reaching new labor agreements on a timely basis.  Most of our hourly employees are represented by various labor unions and are covered by collective bargaining agreements with expiration dates between March 2017 and September 2019. Three of those contracts are scheduled to expire in 2017. The labor contract with the United Steel Workers, Local 169, which represents approximately 310 hourly employees at our Mansfield Works located in Mansfield, Ohio, expires on March 31, 2017. The labor contract with the United Auto Workers, Local 600, which represents approximately 1,160 hourly employees at our Dearborn Works located in Dearborn, Michigan, also expires on March 31, 2017. An agreement with the United Auto Workers, Local 3044, which represents approximately 190 production employees at our Rockport Works located in Rockport, Indiana, is scheduled to expire on September 30, 2017. As of January 1, 2016, approximately 140 hourly Rockport Works maintenance employees transferred to our employment from an independent contractor. We have been negotiating with the United Auto Workers for the terms for these employees to be added to the union. We intend to negotiate with these unions to reach new, competitive labor agreements in advance

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of the current expiration dates. We cannot predict, however, when new, competitive labor agreements with the unions will be reached or what the impact of such agreements will be on our operating costs, operating income and cash flows. There is the potential of work stoppages at these locations in 2017 if we cannot reach timely agreements in contract negotiations before the contract expirations. If work stoppages occur, they could have a material impact on our operations, financial results and cash flows. For labor contracts at other locations which expire after 2017, a similar risk applies.

Risks associated with major litigation, arbitrations, environmental issues and other contingencies.  We have described several significant legal and environmental proceedings in Note 10 to the consolidated financial statements in Item 8. For environmental issues, changes in application or scope of regulations applicable to us could have significant adverse impacts, including requiring capital expenditures to ensure compliance with the regulations, increased difficulty in obtaining future permits or meeting future permit requirements, 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 our operations, financial results and cash flows. For litigation, arbitrations and other legal proceedings, it is not possible to predict with certainty the outcome of such matters and we could incur future judgments, fines or penalties or enter into settlements of lawsuits, arbitrations and claims that could have an adverse effect on our business, results of operations and financial condition. In addition, while we maintain insurance coverage for certain claims, we may not be able to obtain insurance on acceptable terms in the future and, if we obtain such insurance, it may not provide adequate coverage against all claims. We establish reserves based on our assessment of contingencies, including contingencies for claims asserted against us in connection with litigation, arbitrations and environmental issues. Adverse developments in litigation, arbitrations, environmental issues or other legal proceedings may affect our assessment and estimates of the loss contingency recorded as a reserve and require us to make payments in excess of our reserves, which could negatively affect our operations, financial results and cash flows.

Risk associated with regulatory compliance and changes. Our business and the businesses of our customers and suppliers are subject to a wide variety of government oversight and regulation, including those relating to environmental permitting requirements. The regulations promulgated or adopted by various government agencies, and the interpretations and application of such regulations, are dynamic and constantly evolving. If new regulations arise, the application of existing regulations expands, or the interpretation of applicable regulations changes, we may incur additional costs for compliance, including capital expenditures. For example, the United States Environmental Protection Agency (“EPA”) is required to routinely reassess the National Ambient Air Quality Standards (“NAAQS”) for criteria pollutants like nitrogen dioxide, sulfur dioxide, lead, ozone and particulate matter. These standards are frequently subject to litigation and revision. Revisions to the NAAQS could require us to make significant capital expenditures to ensure compliance and could make it more difficult for us to obtain required permits in the future. These risks are higher for our facilities that are located in non-attainment areas. For AK Coal, the coal mining industry is subject to numerous and extensive federal, state and local environmental laws and regulations, including laws and regulations related 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. Complex foreign and U.S. laws and regulations apply to our international operations, including but not limited to the Foreign Corrupt Practices Act, regulations related to import/export controls, the Office of Foreign Assets Control sanctions program, anti-boycott provisions and transportation and logistics regulations. These laws and regulations and changes in these laws and regulations may increase our cost of doing business in international jurisdictions and expose our operations and our employees to elevated risk. We have implemented policies and processes designed to comply with these laws and regulations, but failure by our employees, contractors or agents to comply with these laws and regulations could result in possible administrative, civil or criminal liability and reputational harm to us and our employees. We may also be indirectly affected through regulatory changes that impact our customers or suppliers. Regulatory changes that impact our customers could reduce the quantity of our products they demand or the price of our products that they are willing to pay. Regulatory changes that impact our suppliers could decrease the supply of products or availability of services they sell to us or could increase the price they demand for products or services they sell to us.

Risks associated with climate change and greenhouse gas emission limitations. Our operations may become subject to legislation intended to limit climate change or greenhouse gas emissions. It is possible that limitations on greenhouse gas emissions may be imposed in the United States through federally-enacted legislation or regulation. For example, the EPA has issued and/or proposed regulations addressing greenhouse gas emissions, including regulations that will require large sources and suppliers in the United States to report greenhouse gas emissions. In addition, the United States Congress has introduced from time to time legislation aimed at limiting carbon emissions from carbon-intensive business operations. 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, however, to forecast the terms of the final regulations and legislation, if any, and the resulting effects on us. Depending upon the terms of any such regulations or legislation, however, we could suffer negative financial impacts because of increased energy, environmental and other costs 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 our ability to compete with foreign steel companies situated in areas not subject to such limitations. Unless and until all of the terms of such

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regulation and legislation are known, however, we cannot reasonably or reliably estimate their impact on our financial condition, operating performance or ability to compete.

Risks associated with financial, credit, capital and banking markets.  In the ordinary course of business, we seek to access financial, credit, capital and/or banking markets at competitive rates. Currently, we believe we have adequate access to these markets to meet our reasonably anticipated business needs. We both provide to our customers and receive from our suppliers normal trade financing. If access to competitive financial, credit, capital and/or banking markets by us, or our customers or suppliers, is impaired, our operations, financial results and cash flows could be adversely impacted.

Risk associated with derivative contracts to hedge commodity pricing volatility. We use cash-settled commodity price swaps and options to reduce pricing volatility for a portion of our raw material, energy and other commodity purchases. We employ a systematic approach in order to mitigate the risk of potential volatile price movements of certain commodities. This approach is intended to protect us against a sharp rise in the price of commodities. However, engaging in the use of swaps, options and similar agreements for hedging entails a variety of risks. For example, if the price of an underlying commodity falls below the price at which we hedged the commodity, we will benefit from the lower market price for the commodity purchased, but may not realize the full benefit of the lower commodity price because of the hedged transaction. In certain circumstances we also could be required to provide collateral for a potential derivative liability or close our hedging transaction for the commodity. Additionally, there may be a timing lag (particularly for iron ore) between a decline in the price of a commodity underlying a derivative contract, which could require us to make payments in the short-term to provide collateral or settle the relevant hedging transaction, and the period when we experience the benefits of the lower cost input through physical purchases of the commodity the hedge covers. Further, for derivatives designated as cash flow hedges, we initially record the effective gains and losses in accumulated other comprehensive income (loss) and reclassify them to earnings in the same period we recognize the effect of the associated hedged transaction. We record all derivative gains or losses for which hedge accounting treatment has not been elected or from hedge ineffectiveness to earnings in the period the gain or loss occurs. Changes in the fair value of derivatives for which hedge accounting treatment has not been elected or greater hedge ineffectiveness than we anticipated on cash flow hedges may result in increased volatility in our reported earnings. The termination in 2016 of the pellet offtake agreement with Magnetation affects the accounting treatment of our existing iron ore derivatives contracts. As a result of the termination, we discontinued designating those derivatives contracts as hedging instruments and immediately recognize changes in the fair value of the derivative contracts in earnings when the change occurs, instead of when we recognize the underlying cost of iron ore, thus potentially increasing the volatility of our results of operations. Each of these risks related to our hedging transactions could adversely affect our financial results and cash flows.

Risks related to the potential permanent idling of facilities. We perform strategic reviews of our business, which may include evaluating each of our plants and operating units to assess their viability and strategic benefits. As part of these reviews, we may idle—whether temporarily or permanently—certain of our existing facilities in order to reduce participation in markets where we determine that our returns are not acceptable. For example, in December 2015 we temporarily idled the Ashland Works Hot End to mitigate our exposure to the carbon steel spot market. If we decide to permanently idle the Ashland Works Hot End or any other facility or assets, we are likely to incur significant cash expenses, including those relating to labor benefit obligations, take-or-pay supply agreements and accelerated environmental remediation costs, as well as substantial non-cash charges for impairment of those assets and the effects on pension and OPEB liabilities. If we elect to permanently idle material facilities or assets, it could adversely affect our operations, financial results and cash flows.

Risk of inability to fully realize benefits of margin enhancement initiatives. In recent years we have undertaken several significant projects in an effort to lower costs and enhance margins. These projects and initiatives include efforts to focus production and sales on higher margin products, increase our operating rates and lower our costs. We identified a number of areas for enhancing profitability, including increasing our percentage of contract sales, producing and selling a higher-margin mix of products (including lowering our sales to the carbon steel spot market, which drove our decision to temporarily idle the Ashland Works Hot End) and developing new products that can command higher prices from customers. If one or more of these key cost-savings or margin enhancement projects are unsuccessful, or are significantly less effective in achieving the level and timing of combined cost savings or margin enhancement than we anticipated, or if we do not achieve results as quickly as anticipated, our financial results and cash flows could be adversely impacted.

Risk of information technology (“IT”) security threats and cybercrime. We rely on IT systems and networks in almost every aspect of our business activities. In addition, we and certain of our third-party data processing providers collect and store sensitive data. We have taken, and intend to continue to take, what we believe are appropriate and reasonable steps to prevent security breaches in our systems and networks. In recent years, however, both the number and sophistication of IT security threats and cybercrimes have increased. These IT security threats and increasingly sophisticated cybercrimes, including advanced persistent attacks, pose a risk to system security and the confidentiality, availability and integrity of our data. A breach in security could expose us 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 our reputation, competitive position, business and financial results.


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Item 1B.
Unresolved Staff Comments.

None.

Item 2.
Properties.

We lease a building in West Chester, Ohio, which we use as our corporate headquarters. The initial term of the building lease expires in 2019 and there are two five-year options to extend the lease. We lease a building for our new Research and Innovation Center located in Middletown, Ohio, for an initial term expiring in 2034. We also lease an administration building located in Dearborn, Michigan.

Our operations consist primarily of eight steelmaking and finishing plants, two coke plants and two tube manufacturing plants across six states—Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia—and a tube manufacturing plant in Mexico. We own all of the domestic facilities and lease the Mexican tube manufacturing plant.

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. In December 2015, we temporarily idled the Hot End, which includes the blast furnace, basic oxygen furnaces and continuous caster, in response to excess global supply and the increase in low-priced imports into the United States. The Ashland Works Hot End remains temporarily idled. We elected not to idle the coating line at Ashland Works, which principally finishes steel for the automotive market.

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. Butler Works also includes a hot rolling mill, annealing and pickling units and two 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.

Dearborn Works is located in Dearborn, Michigan and its operations include carbon steel melting, casting, hot and cold rolling and finishing operations for carbon steel. It consists of a blast furnace, basic oxygen furnaces, two ladle metallurgy furnaces, a vacuum degasser and two slab casters. Dearborn Works also has a hot rolling mill, a pickle line/tandem cold mill, batch anneal shops, a temper mill and a hot-dip galvanizing line for finishing products.

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. Middletown Works also has a hot rolling mill, cold rolling mill, two pickling lines, four annealing facilities, two temper mills and three coating lines for finishing products.

Rockport Works is located near Rockport, Indiana, and consists of a carbon and stainless steel finishing plant containing 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 subsidiary, has a plant in Walbridge, Ohio, which operates six electric resistance welder tube mills and a slitter. It also has a plant on leased property in Columbus, Indiana, which operates seven electric resistance welder and one laser welder tube mill. A leased facility in Franklin, Indiana operates a high-capacity, high-speed cold saw and six nick-and-shear cutting machines. AK Tube’s leased plant in Queretaro, Mexico operates an electric resistance welder tube mill.

AK Coal produces metallurgical coal from reserves in Somerset County, Pennsylvania.


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Mountain State Carbon produces furnace and foundry coke from its cokemaking facility in Follansbee, West Virginia, which consists of four batteries.

Item 3.
Legal Proceedings.

Information for this item may be found in Note 10 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, LLC 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 presents 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.


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 reported high and low sales prices of the common stock for each quarter are presented below:
 
2016
 
2015
 
High
 
Low
 
High
 
Low
First Quarter
$
4.48

 
$
1.64

 
$
6.17

 
$
3.62

Second Quarter
5.50

 
3.31

 
5.93

 
3.81

Third Quarter
7.09

 
3.87

 
3.93

 
2.05

Fourth Quarter
11.39

 
4.42

 
3.25

 
1.99


As of February 15, 2017, there were 314,789,404 shares of common stock outstanding and held of record by 3,785 stockholders. The closing stock price on February 15, 2017, was $8.49 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 year ended December 31, 2016.

Although we have elected to suspend our dividend program, no covenant restrictions currently would restrict our ability to declare and pay a dividend to our stockholders. Our $1,500.0 asset-backed revolving credit facility (the “Credit Facility”) contains certain restrictive covenants which could, under certain circumstances, restrict the dividend payments, but none of those circumstances currently apply. Under these covenants, dividends are permitted as long as (i) availability exceeds $337.5 or (ii) availability exceeds $262.5 and we meet a fixed charge coverage ratio of one to one as of the most recently ended fiscal quarter. If we cannot meet either of these thresholds, dividend payments would be limited to $12.0 annually. At December 31, 2016, the availability under the Credit Facility significantly exceeded $337.5.

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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 2016
 
4,193

 
$
4.91

 

 
 
November 2016
 
2,180

 
5.78

 

 
 
December 2016
 

 

 

 
 
Total
 
6,373

 
5.21

 

 
$
125.6


(a)
During the quarter, we repurchased common stock owned by participants under the terms of the AK Steel Holding Corporation Stock Incentive Plan. To pay federal, state and local taxes due upon the vesting of restricted stock or performance shares, employees may have us withhold shares that have a fair market value equal to the minimum statutory withholding rate that tax authorities could impose on the transaction. We repurchase the withheld shares at the quoted average of the reported high and low sales prices on the day we withhold the shares.
(b)
On October 21, 2008, the Board of Directors authorized us to repurchase, from time to time, up to $150.0 of our outstanding equity securities. The Board of Directors’ authorization specified no expiration date.



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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, 2012 through December 31, 2016, with the cumulative total return for the same period of (i) the Standard & Poor’s Small Cap 600 Stock Index, and (ii) the New York Stock Exchange Arca Steel Index. These comparisons assume an investment of $100 at the beginning of the period and reinvestment of dividends.


aks2016cumulativetotalreturn.jpg
 
January 1,
 
December 31,
 
2012
 
2012
 
2013
 
2014
 
2015
 
2016
AK Holding
$
100

 
$
56

 
$
99

 
$
72

 
$
27

 
$
124

NYSE Arca Steel
100

 
102

 
104

 
75

 
42

 
80

S&P 600 Small Cap
100

 
115

 
160

 
167

 
162

 
202



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Item 6.
Selected Financial Data.

The following selected historical consolidated financial data for each of the five years in the period ended December 31, 2016 are from the audited consolidated financial statements. This data should be read along with the consolidated financial statements presented in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in Item 7.
 
2016
 
2015
 
2014
 
2013
 
2012
 
(dollars in millions, except per share and per ton data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
5,882.5

 
$
6,692.9

 
$
6,505.7

 
$
5,570.4

 
$
5,933.7

Pension and OPEB net corridor charge
43.1

 
131.2

 
2.0

 

 
157.3

Operating profit (loss) (a)
230.2

 
86.7

 
139.4

 
135.8

 
(128.1
)
Net income (loss) attributable to AK Steel Holding Corporation (b)
(7.8
)
 
(509.0
)
 
(96.9
)
 
(46.8
)
 
(1,027.3
)
Basic and diluted earnings (loss) per share (b)
(0.03
)
 
(2.86
)
 
(0.65
)
 
(0.34
)
 
(9.06
)
Other Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$

 
$

 
$

 
$

 
$
0.10

Total shipments (in thousands of tons)
6,051.8

 
7,089.2

 
6,132.7

 
5,275.9

 
5,431.3

Selling price per ton
$
969

 
$
942

 
$
1,058

 
$
1,056

 
$
1,092

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
173.2

 
$
56.6

 
$
70.2

 
$
45.3

 
$
227.0

Working capital
958.4

 
763.6

 
832.8

 
372.2

 
557.1

Total assets
4,036.0

 
4,084.4

 
4,828.0

 
3,579.1

 
3,873.7

Current portion of long-term debt

 

 

 
0.8

 
0.7

Long-term debt (excluding current portion)
1,816.6

 
2,354.1

 
2,422.0

 
1,479.6

 
1,381.8

Current portion of pension and other postretirement benefit obligations
41.3

 
77.7

 
55.6

 
85.9

 
108.6

Pension and other postretirement benefit obligations (excluding current portion)
1,093.7

 
1,146.9

 
1,225.3

 
965.4

 
1,661.7

Total equity (deficit)
90.7

 
(595.6
)
 
(77.0
)
 
192.7

 
(91.0
)

(a)
Under our method of accounting for pensions and other postretirement benefits, we recorded pension corridor charges of $78.4, $144.3, $2.0, and $157.3 in 2016, 2015, 2014 and 2012, and OPEB corridor credits of $35.3 and $13.1 in 2016 and 2015. In 2016, we also recorded pension settlement charges of $25.0 and costs of $69.5 to terminate a pellet offtake agreement and for related transportation costs. In 2015, we also recorded a charge for a temporary facility idling of $28.1.
(b)
Included in net income (loss) attributable to AK Steel Holding Corporation for 2015 were charges for the impairments of our investments in Magnetation of $256.3, or $1.44 per diluted share, and AFSG Holdings, Inc. (“AFSG”) of $41.6, or $0.23 per diluted share; and 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.

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

Operations Overview

We are the only steelmaker in the United States that can produce in all three major categories of flat-rolled steels— carbon, stainless and electrical. In addition, we are the only domestic producer operating both blast furnaces and electric arc furnaces, which provides us operational flexibility and the opportunity to innovate across markets and within our product portfolios. We operate eight steelmaking and finishing plants, two coke plants and two tube manufacturing plants across six states—Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia—and a tube manufacturing plant in Mexico. These operations produce flat-rolled carbon steels, including premium-quality coated, cold-rolled and hot-rolled carbon steel products, and specialty stainless and electrical steels that we sell in sheet and strip form, as well as carbon and stainless steel that we finish into welded steel tubing. We sell these products to our customers in three markets: (i) automotive; (ii) infrastructure and manufacturing; and (iii) distributors and converters markets. We sell carbon steel products principally to North American customers and electrical and stainless steel products both domestically and internationally. We also produce carbon and stainless steel that we finish into welded steel tubing used in the automotive, large truck, industrial and construction markets. In addition, we operate Mexican and European trading companies that buy and sell steel and steel products and other materials.


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We remain committed to safely operating our facilities and manufacturing the highest quality steels in an environmentally responsible manner. We experienced another year of outstanding safety performance in 2016 and continued to lead the steel industry in OSHA-recordable safety performance by a wide margin. Our focus on producing steels of the highest quality also continued, as we established several all-time company best records for quality performances. We also maintain an unwavering commitment to responsible environmental performance throughout our operations and good corporate citizenship in our communities. During 2016, we experienced a record year of environmental performance overall, as well as setting records at several of our individual facilities.

2016 Financial Results Overview

In 2016, we implemented a strategy to improve our product mix, strengthen our balance sheet and operate more efficiently and effectively to improve our profitability. We began a process to deemphasize commodity products and enhanced our operational footprint to maximize asset utilization. To reinforce our focus on value-added products, we continued our investments in research and innovation, including completing our new Research and Innovation Center in late 2016 and increasing the number of research engineers and scientists by approximately 30% over the last several years. Our focus on margin-enhancing activities, including better mix management, process improvements and a relentless focus on costs, significantly enhanced our margins. Consequently, our results in 2016 improved dramatically from 2015.

We completed 2016 with a net loss of $7.8, or $0.03 per diluted share of common stock, which compares favorably to our 2015 net loss of $509.0, or $2.86 per diluted share. Our 2016 adjusted net income (as defined in Non-GAAP Financial Measures) of $129.8, or $0.56 per diluted share, was a significant improvement from our 2015 adjusted net loss of $51.8, or $0.29 per diluted share. The financial results for 2016 include unrealized gains on iron ore derivatives of $45.6, or $0.20 per diluted share.

Our strategic decision to reduce exposure to the commodity markets resulted in 2016 net sales of $5.88 billion on shipments of 6,051,800 tons, a decrease from 2015 net sales of $6.69 billion on 7,089,200 tons. The reduction in shipments was primarily the result of lower levels of commodity carbon steel sold into the distributors and converters market, which declined by 41% in 2016 compared to 2015, as well as reduced shipments to the infrastructure and manufacturing market. These declines were partially offset by increased carbon and stainless steel shipments to the automotive industry. Reducing our shipments to commodity spot markets resulted in a higher average selling price for 2016, which increased 3% to $969 per ton from 2015.

Improving our product mix, optimizing our operational footprint, pursuing cost efficiencies and realizing lower costs for raw materials improved our adjusted EBITDA (as defined in Non-GAAP Financial Measures) to $501.9, or 8.5% of net sales, in 2016, from $393.4, or 5.9% of net sales, in 2015. We took various actions to implement these strategies, including temporarily idling our Ashland Works Hot End at the end of 2015 and increasing our operating rates at Middletown Works and Dearborn Works. Additional actions taken at all locations included efforts such as enhancing asset and resource utilization to reduce operating costs and modifying production capacity and operations for higher margin steel grades. Costs for natural gas and raw materials, especially iron ore pellets, coke and scrap, were favorable in 2016 compared to 2015. We recorded LIFO credits of $23.3 in 2016, compared to LIFO credits of $195.3 for 2015.

We also made substantial progress in strengthening our balance sheet during 2016. We nearly doubled our total liquidity at the end of 2016 to $1,353.8 from $700.2 at December 31, 2015. We refinanced $380.0 of debt to extend the maturity date and reduce the coupon rate and raised $600.4 in net proceeds from two equity offerings in 2016 that were used to reduce debt and for general corporate purposes. The proceeds from these equity offerings, along with cash generated from operations, considerably improved our balance sheet. Year-end 2016 liquidity of $1,353.8 consisted of cash and cash equivalents and $1,186.4 of availability under the company’s revolving credit facility.

Dearborn Acquisition

On September 16, 2014, we acquired Dearborn for a cash purchase price of $690.3, net of cash acquired. The acquisition included the Dearborn Works, the Mountain State Carbon cokemaking facility and interests in joint ventures that process flat-rolled steel products. Our financial results include the effects of the acquisition and Dearborn Works operations for periods after September 16, 2014, affecting comparability to prior periods.


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2016 Compared to 2015

Steel Shipments

Steel shipments in 2016 were 6,051,800 tons, a 15% decrease from 2015 shipments of 7,089,200 tons. The decrease in overall shipments was principally driven by our strategic decision to reduce commodity steel sales to the distributors and converters market, which declined by 41% from 2015. Shipments by product category for 2016 and 2015 as a percent of total shipments, were as follows:

Shipments by Product Category
aks2016shipmentsbycategory.jpg aks2015pyshipmentsbycategory.jpg
 
 
 
 
 
 
 
 
 
Net Sales

Net sales in 2016 were $5,882.5, a 12% decrease from 2015 net sales of $6,692.9. Our average selling price was $969 per net ton in 2016, a 3% increase from the 2015 average selling price of $942 per net ton. We received lower pricing in our automotive contracts in 2016, but the impact of better market conditions, reducing our participation in the commodity steel markets and capturing higher spot market pricing offset the automotive contract pricing declines. Net sales to customers outside the United States were $655.6, or 11% of total sales, for 2016, compared to $855.7, or 13% of total sales, for 2015, primarily due to lower electrical steel shipments.

The following table shows the percentage of our net sales to each of our markets:
Market
 
2016
 
2015
Automotive
 
66
%
 
60
%
Infrastructure and Manufacturing
 
16
%
 
16
%
Distributors and Converters
 
18
%
 
24
%

Cost of Products Sold

Cost of products sold in 2016 was $5,064.7, or 86.1% of net sales, and declined from 2015 cost of products sold of $6,032.0, or 90.1% of net sales, largely as a result of our decision to reduce shipments to the commodity spot markets. To generate these results, we optimized our operational footprint, pursued cost efficiencies and benefited from lower costs for raw materials. We also recorded unrealized gains of $45.6 from iron ore derivatives that no longer qualify for hedge accounting treatment after the termination of the pellet offtake agreement with Magnetation. Cost of products sold included outage costs of $62.1 in 2016, compared to $50.6 in 2015. In addition, LIFO credits were $23.3 in 2016, compared to LIFO credits of $195.3 in 2015. Costs for equipment maintenance, utilities and supplier obligations related to the temporarily idled facility were $22.1 in 2016.

Selling and Administrative Expense

Selling and administrative expense increased to $277.2 in 2016 from $261.9 in 2015. The increase was due primarily to an increase for employee incentive compensation as a result of meeting objectives under annual and long-term performance-based compensation plans, partially offset by cost reduction efforts achieved throughout 2016.


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Depreciation Expense

Depreciation expense increased slightly to $216.6 in 2016 from $216.0 in 2015.

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

Pension and OPEB income of $43.8 in 2016 decreased from income of $63.0 in 2015. The decrease in income was principally a result of lower pension assets and related expected returns on assets.

We incurred a pension corridor charge of $78.4 and an OPEB corridor credit of $35.3 in 2016, and a pension corridor charge of $144.3 and an OPEB corridor credit of $13.1 in 2015. Although the corridor charges and credits affect reported operating and net income, they do not affect our cash flows in the current period. However, we expect to ultimately settle the pension and OPEB obligations in cash. See Critical Accounting Estimates for information on our policy for measurement and recognition of corridor charges (credits). We also recorded settlement losses of $25.0 in 2016 as a result of the purchase of non-participating annuity contracts for certain retirees and lump sum payouts to new retirees.

Charges for Termination of Pellet Agreement and Transportation Costs

In the fourth quarter of 2016, the United States Bankruptcy Court for the District of Minnesota approved a settlement agreement with certain third parties to terminate our long-term iron ore pellet offtake agreement with Magnetation and to wind down Magnetation’s business. In connection with that approval, we recognized charges of $69.5 in the fourth quarter of 2016 that covered both a $36.6 payment we made to the bankruptcy estate in the quarter and additional charges of $32.9 for remaining obligations under contracts with other third parties to transport pellets to our facilities for the next 12 years. We are actively working to mitigate these third-party transportation costs, though our ability to reduce them in whole or in part is uncertain. See Magnetation and Note 4 to the consolidated financial statements for further information.

Charge for Facility Idling

In the fourth quarter of 2015, we temporarily idled the Ashland Works Hot End. We incurred a $28.1 charge in 2015 for supplemental unemployment and other employee benefit costs and equipment idling costs. Costs for equipment maintenance, utilities and supplier obligations related to the temporarily idled facility were $22.1 in 2016, which were included in cost of products sold and are expected to be at a similar level in 2017. Although we continue to maintain the facility in a manner that retains our ability to restart the Ashland Works Hot End if and when we deem such action to be advisable, we do not intend to restart the facility in the absence of market conditions and other factors that we determine will support the long-term profitability of the plant and its operations.

Operating Profit

Operating profit for 2016 of $230.2 was higher than 2015 operating profit of $86.7. Included in the 2016 operating profit was the net pension/OPEB corridor charge of $43.1, the pension settlement charges of $25.0 and charges for the termination of the Magnetation pellet offtake agreement and related transportation costs of $69.5. Included in the 2015 operating profit was the $28.1 charge to temporarily idle the Ashland Works Hot End and a net pension/OPEB corridor charge of $131.2. Also included in operating profit was SunCoke Middletown’s operating profit of $66.0 and $62.6 for 2016 and 2015.

Interest Expense

Interest expense for 2016 decreased to $163.9 from $173.0 in 2015. The decrease was primarily as a result of lower average Credit Facility borrowings outstanding during 2016 as compared to 2015 due to the two successful equity offerings completed during 2016.

Impairment of Magnetation Investment

We recognized a non-cash impairment charge of $256.3 in 2015 related to our investment in Magnetation. For further discussion, see Magnetation and Note 4 to the consolidated financial statements.

Impairment of AFSG Investment

During the fourth quarter of 2015, AK Steel received a cash distribution of $14.0 from AFSG, the holding company of our former insurance operations. After this distribution, we determined that our remaining investment in AFSG was impaired and we recognized a non-cash charge of $41.6 to write off the remaining investment in AFSG.


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Other Income (Expense)

Other income (expense) was $4.9 of other expense for 2016 and other income of $1.4 for 2015. During 2016, we repurchased the $380.0 of senior secured notes due 2018 and an aggregate principal amount of $10.4 of senior notes due 2022. These 2016 debt transactions generated $9.4 of losses in other income (expense). During 2015, we repurchased an aggregate principal amount of $23.8 of senior notes due 2021 in private, open market transactions and recognized related gains of $9.4. See Note 6 to the consolidated financial statements for further information on long-term debt financing. Other income (expense) included our share of Magnetation losses of $16.3 for 2015.

Income Taxes

We recorded an income tax expense of $3.2 in 2016, compared to income tax expense of $63.4 in 2015. We adjust our tax valuation allowance on our deferred tax assets for changes in our LIFO reserve, significantly affecting our income tax provision. Therefore, the income tax expense was lower in 2016 from 2015 principally due to a significant decline in LIFO credits. In addition, the 2016 income tax expense included a non-cash income tax benefit of $4.5 from allocating income tax expense to other comprehensive income, compared to $13.2 in 2015.

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

Net loss attributable to AK Holding in 2016 was $7.8, or $0.03 per diluted share. The net loss in 2016 included a pension corridor charge of $78.4, an OPEB corridor credit of $35.3 and pension settlement charges of $25.0, netting to $68.1, or $0.29 per diluted share. Additionally, the net loss in 2016 included charges to terminate the Magnetation pellet offtake agreement and related transportation costs of $69.5, or $0.30 per diluted share. Excluding the above charges, we reported adjusted net income of $129.8, or $0.56 per diluted share, for 2016.

Net loss attributable to AK Holding in 2015 was $509.0, or $2.86 per diluted share. The net loss in 2015 included a pension corridor charge of $144.3 and an OPEB corridor credit of $13.1, netting to $131.2, or $0.74 per diluted share. Additionally, the net loss in 2015 included an impairment charge for the Magnetation investment of $256.3, or $1.44 per diluted share, and an impairment charge for the AFSG investment of $41.6, or $0.23 per diluted share, and a charge to temporarily idle the Ashland Works Hot End of $28.1, or $0.16 per diluted share. Excluding these charges, we had an adjusted net loss of $51.8, or $0.29 per diluted share, for 2015.

Adjusted EBITDA

Adjusted EBITDA improved to $501.9, or 8.5% of net sales, in 2016, from $393.4, or 5.9% of net sales, in 2015.

2015 Compared to 2014

Steel Shipments

Steel shipments in 2015 were 7,089,200 tons, a 16% increase from 2014 shipments of 6,132,700 tons. The increase in overall shipments in 2015 compared to 2014 was principally from the addition of shipments from Dearborn Works following the September 2014 acquisition. As a result of the high level of imports in 2015, we targeted shipments to the automotive market and elected to reduce shipments to the carbon steel spot market. Primarily as a result of a relatively higher proportion of carbon spot market shipments in the Dearborn Works product mix compared to our historical mix, our higher-margin value-added shipments as a percent of total volume shipped decreased from 82.1% in 2014 to 79.3% in 2015. Shipments by product category for 2015 and 2014 as a percent of total shipments, were as follows:


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Shipments by Product Category
aks2015shipmentsbycategory.jpgaks2014shipmentsbycategory.jpg
 
 
 
 
 
 
 
 
 
Net Sales

Net sales in 2015 were $6,692.9, a 3% increase from 2014 net sales of $6,505.7. The increase in net sales is primarily due to the addition of net sales from Dearborn Works following the September 2014 acquisition. However, net sales did not increase as much as shipments did from 2014 to 2015, primarily due to sharply reduced market prices driven by global overcapacity and unfairly-traded, lower-priced foreign steel imports that flooded the domestic market in 2015. Our average selling price was $942 per net ton in 2015, an 11% decrease from the 2014 average selling price of $1,058 per net ton. Net sales to customers outside the United States were $855.7, or 13% of total sales, for 2015, compared to $755.4, or 12% of total sales, for 2014.    

The following table shows the percentage of our net sales attributable to each of our markets:
Market
 
2015
 
2014
Automotive
 
60
%
 
53
%
Infrastructure and Manufacturing
 
16
%
 
18
%
Distributors and Converters
 
24
%
 
29
%

Cost of Products Sold

Cost of products sold in 2015 was $6,032.0 and remained flat compared to 2014 cost of products sold of $6,007.7. Shipments from Dearborn Works following the September 2014 acquisition increased cost of products sold in 2015. These costs were largely offset by:

Lower raw material costs for carbon scrap, iron ore pellets, coke and energy in 2015
Planned outages costs were $50.6 in 2015, significantly lower than planned outages costs of $74.9 in 2014
LIFO credits were $195.3 in 2015, compared to LIFO credits of $21.0 in 2014
Extreme winter weather conditions early in 2014 and unplanned maintenance outage costs of $41.2 for incidents at our Ashland Works blast furnace during 2014 negatively affected cost of products sold in 2014

Selling and Administrative Expense

Selling and administrative expense increased to $261.9 in 2015 from $247.2 in 2014. The increase was primarily from Dearborn Works selling and administrative costs after the September 2014 acquisition.

Depreciation Expense

Depreciation expense increased to $216.0 in 2015 from $201.9 in 2014, primarily because of the additional Dearborn Works depreciation.


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Pension and OPEB Expense (Income)

Pension and OPEB income of $63.0 in 2015 decreased from income of $92.5 in 2014. The decrease in income in 2015 was largely from an increase in the amount of amortization from unrealized actuarial losses.

We incurred a pension corridor charge of $144.3 and an OPEB corridor credit of $13.1 in 2015, and a pension corridor charge of $2.0 in 2014. Although the corridor charge reduces reported operating and net income, it does not affect our cash flows in the current period. However, we expect to ultimately settle the pension obligation in cash. See Critical Accounting Estimates for information on our policy for measurement and recognition of corridor charges (credits).

Charge for Facility Idling

In the fourth quarter of 2015, we temporarily idled the Ashland Works Hot End. We incurred a $28.1 charge during the quarter, which included $22.2 for supplemental unemployment and other employee benefit costs and $5.9 for equipment idling costs and other costs.

Operating Profit

Operating profit for 2015 of $86.7 was lower than 2014 operating profit of $139.4. Included in the 2015 operating profit was a $28.1 charge to temporarily idle the Ashland Works Hot End and the net pension/OPEB corridor charge of $131.2. Also included was operating profit from SunCoke Middletown of $62.6 and $63.0 for 2015 and 2014.

Interest Expense

Interest expense for 2015 increased to $173.0 from $144.7 in 2014. The year-over-year increase was primarily for indebtedness to finance a portion of the Dearborn purchase price and higher average Credit Facility borrowings outstanding during 2015 as compared to 2014.

Impairment of Magnetation Investment

We recognized a non-cash impairment charge of $256.3 for 2015 related to our investment in Magnetation. For further discussion, see the Magnetation section below and Note 4 to the consolidated financial statements.

Impairment of AFSG Investment

As part of our ongoing strategic review of our business and operations, in the fourth quarter of 2015 we reevaluated our investment in AFSG, the holding company of our former insurance operations. During the fourth quarter of 2015, AK Steel received a cash distribution of $14.0 from AFSG. After this distribution, we determined that our remaining investment in AFSG is impaired and we recognized a non-cash charge of $41.6 to write off the remaining investment in AFSG.

Other Income (Expense)

Other income (expense) was $1.4 of income for 2015 and other expense of $21.1 for 2014. Other income (expense) included our share of Magnetation losses of $16.3 for 2015 and $15.2 for 2014. The Magnetation loss shown is our share of its results of operations for the first quarter of 2015. The results of operations for periods after March 31, 2015, do not include any losses of Magnetation as the basis in the Magnetation investment had been reduced to zero as of March 31, 2015, and we have no further investment commitments to Magnetation. During 2015, we repurchased an aggregate principal amount of $23.8 of the 2021 Notes in private, open market transactions and recognized gains on the repurchases of $9.4. Also affecting the year-to-year change in other income (expense) were $12.6 of costs we incurred in 2014 for committed bridge financing that we arranged but did not use for the Dearborn acquisition.

Income Taxes

Income tax expense in 2015 was $63.4 compared to $7.7 in 2014. We adjust our tax valuation allowance on our deferred tax assets for changes in our LIFO reserve, significantly affecting our income tax expense. Therefore, income tax expense increased from 2015 to 2014 principally due to LIFO credits of $195.3 in 2015 as compared to LIFO credits of $21.0 in 2014. In addition, 2015 income tax expense included a non-cash income tax benefit of $13.2 from allocating income tax expense to other comprehensive income.

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

Net loss attributable to AK Holding in 2015 was $509.0, or $2.86 per share. The net loss in 2015 included a pension corridor charge of $144.3 and an OPEB corridor credit of $13.1 netting to $131.2, or $0.74 per diluted share. Additionally the net loss in 2015 included

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an impairment charge for the Magnetation investment of $256.3, or $1.44 per diluted share, and an impairment charge for the AFSG investment of $41.6, or $0.23 per diluted share, and a charge to temporarily idle the Ashland Works Hot End of $28.1, or $0.16 per diluted share. Excluding the above charges, we had an adjusted net loss of $51.8, or $0.29 per diluted share, for 2015.

Net loss attributable to AK Holding in 2014 was $96.9, or $0.65 per diluted share. The net loss in 2014 included a pension corridor charge and OPEB charge of $5.5, or $0.04 per diluted share, and net-of-tax acquisition-related expenses for the Dearborn acquisition of $31.7, or $0.21 per diluted share. Excluding these charges, we had an adjusted net loss of $59.7, or $0.40 per diluted share, for 2014.

Adjusted EBITDA

Adjusted EBITDA (as defined below under Non-GAAP Financial Measures) was $393.4, or $55 per ton, for 2015, and $280.2, or $46 per ton, for 2014.

Non-GAAP Financial Measures

In certain of our disclosures, we have reported adjusted EBITDA, adjusted EBITDA margin and adjusted net income (loss) that exclude the effects of noncontrolling interests, pension and OPEB net corridor and settlement charges, charges for the termination of a pellet offtake agreement and related transportation costs, impairment charges for our investments in Magnetation and AFSG and charges for temporarily idling facilities. We believe 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 our current operating results and provides investors with a better understanding of our 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, we have made adjustments to EBITDA to also exclude the effect of noncontrolling interests, pension and OPEB net corridor and settlement charges, charges for the termination of a pellet offtake agreement and related transportation costs, impairment charges for our investments in Magnetation and AFSG and charges for temporarily idling facilities. 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 our financial results in relation to those of our competitors and to our prior financial performance by excluding items that otherwise would distort the comparison. Adjusted EBITDA, adjusted EBITDA margin 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.

We recognize in our 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 generally only been recorded in the fourth quarter at the time of the annual remeasurement. After excluding the corridor charge, the remaining pension and OPEB expenses included in the non-GAAP measure are comparable to the accounting for pension and OPEB expenses on a GAAP basis in the first three quarters of the year and we believe this is useful to investors in analyzing our results on a quarter-to-quarter basis, as well as analyzing our results on a year-to-year basis. As a result of the corridor method of accounting, our 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 we perform a valuation. The two most significant of those assumptions are the discount rate we use 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 before remeasurement will affect the corridor adjustment calculation. The effect of prevailing interest rates on the discount rate as of a measurement date and actual return on plan assets compared to the expected return will have a significant impact on our liability, corridor adjustment and following year’s expense for these benefit plans. For example, actuarial assumptions we made to remeasure the funded status of our pension and OPEB obligations in the fourth quarter of 2016 affected actuarial losses and the related pension/OPEB net corridor charge. The net corridor charge reflected (i) a decrease in the discount rate assumption used to determine pension liabilities from 4.15% at December 31, 2015 to 3.35% at the October 2016 remeasurement (an actuarial loss of approximately $221.1), partially offset by (ii) gains from changes in pension and OPEB mortality assumptions, lower claims costs and other demographic factors (netting to a gain of approximately $76.4) and (iii) the net effect of the difference between the expected annualized return on assets of 7.25% ($129.4) and the actual annualized return on assets of 12.7% as of the October 2016 remeasurement ($228.8) (netting to a gain of $99.4). We believe that the corridor method of accounting for pension and OPEB obligations is rarely used by other publicly traded companies. However, because other companies use different approaches to recognize actuarial gains and losses, our resulting pension and OPEB expense on a GAAP basis or a non-GAAP basis may not be comparable to other companies’ pension and OPEB expense on a GAAP

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basis. Although the net corridor charge reduces reported operating and net income, it does not affect our cash flows in the current period. However, we expect to ultimately settle the pension and OPEB obligations in cash.

Neither current shareholders nor potential investors in our securities should rely on adjusted EBITDA, adjusted EBITDA margin or adjusted net income (loss) as a substitute for any GAAP financial measure and we encourage investors and potential investors to review the following reconciliations of adjusted EBITDA and adjusted net income (loss).

Reconciliation of Adjusted EBITDA
 
 
2016
 
2015
 
2014
Net income (loss) attributable to AK Holding
 
$
(7.8
)
 
$
(509.0
)
 
$
(96.9
)
Net income attributable to noncontrolling interests
 
66.0

 
62.8

 
62.8

Income tax expense
 
3.2

 
63.4

 
7.7

Interest expense
 
163.9

 
173.0

 
144.7

Interest income
 
(1.6
)
 
(1.3
)
 
(0.7
)
Depreciation
 
216.6

 
216.0

 
201.9

Amortization
 
4.8

 
8.4

 
9.1

EBITDA
 
445.1

 
13.3

 
328.6

Less: EBITDA of noncontrolling interests (a)
 
80.8

 
77.1

 
77.2

Pension and OPEB net corridor and settlement charges
 
68.1

 
131.2

 
5.5

Charges for termination of pellet agreement and related transportation costs
 
69.5

 

 

Impairment of Magnetation investment
 

 
256.3

 

Impairment of AFSG investment
 

 
41.6

 

Charge for facility idling
 

 
28.1

 

Acquisition-related expenses
 

 

 
23.3

Adjusted EBITDA (b)
 
$
501.9

 
$
393.4

 
$
280.2

Adjusted EBITDA margin
 
8.5
%
 
5.9
%
 
4.3
%

(a)
The reconciliation of EBITDA of noncontrolling interests to net income attributable to noncontrolling interests is as follows:
 
 
2016
 
2015
 
2014
Net income attributable to noncontrolling interests
 
$
66.0

 
$
62.8

 
$
62.8

Depreciation
 
14.8

 
14.3

 
14.4

EBITDA of noncontrolling interests
 
$
80.8

 
$
77.1

 
$
77.2


(b)
Included in adjusted EBITDA for the year ended December 31, 2016, was $45.6 of unrealized gains on iron ore derivatives. See Note 17 to the consolidated financial statements for additional information.


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Reconciliation of Adjusted Net Income (Loss)
 
 
2016
 
2015
 
2014
Reconciliation to Net Income (Loss) Attributable to AK Steel Holding
 
 
 
 
 
 
Net income (loss) attributable to AK Steel Holding Corporation, as reported
 
$
(7.8
)
 
$
(509.0
)
 
$
(96.9
)
Pension and OPEB net corridor and settlement charges
 
68.1

 
131.2

 
5.5

Charges for termination of pellet agreement and related transportation costs
 
69.5

 

 


Impairment of Magnetation investment
 

 
256.3

 

Impairment of AFSG investment