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AKS > SEC Filings for AKS > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for AK STEEL HOLDING CORP

Form 10-Q for AK STEEL HOLDING CORP


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollars in millions, except per share and per ton data or as otherwise specifically noted)

Results of Operations

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

Overview

Despite higher revenue and a higher average selling price per ton, the Company's first quarter 2014 results compared unfavorably to the results of the same quarter in 2013. The benefits of the higher sales revenue and higher average selling price per ton were more than offset by several negative factors, including higher energy costs of approximately $30.0 related to extreme cold weather conditions in the United States during the quarter, pretax charges of approximately $18.0 for the previously disclosed unplanned outage at the Company's Ashland Works blast furnace, planned maintenance outage costs of approximately $29.4 and a $5.8 pretax charge for the tentative settlement of certain class action antitrust claims. See Note 7 to the condensed consolidated financial statements for more information relating to this settlement.

Driven principally by these factors, the Company reported a net loss of $86.1, or $0.63 per diluted share of common stock, in the first quarter of 2014, as compared to a net loss of $9.9, or $0.07 per diluted share, in the first quarter of 2013.

Net sales in the first quarter of 2014 increased by approximately 1% compared to the first quarter of 2013. The Company's average selling price for the first quarter of 2014 increased 3% from the first quarter of 2013 as a result of a richer product mix and increases in selling prices for spot market shipments. This benefit was partially offset by a 2% reduction in shipments primarily as a result of the effects of the unplanned outage at the Company's Ashland Works blast furnace. It also reflects a decline in shipments of carbon steel to the spot market and of electrical steel. Those declines were partially offset by an increase in shipments to the automotive market.

In March 2014, AK Steel entered into a new $1.1 billion asset-backed revolving credit facility ("Credit Facility") with a group of lenders. The Credit Facility, which expires in March 2019, replaced AK Steel's prior $1.1 billion asset-backed revolving credit facility. The Credit Facility provides the Company with enhanced liquidity at a lower interest rate and greater financial and strategic flexibility.

Steel Shipments

Total shipments were 1,262,100 tons and 1,289,800 tons for the three months ended March 31, 2014 and 2013, respectively. The 2% decrease in total shipments in the first quarter of 2014 compared to the prior year was attributable principally to the effects of the unplanned outage at the Company's Ashland Works blast furnace. It also reflects a decline in shipments of carbon steel to the spot market and in shipments of electrical steel, partially offset by higher automotive shipments.

For the three months ended March 31, 2014, value-added products comprised 89.1% of total shipments, compared to 84.5% of total shipments in the three months ended March 31, 2013. The Company continued to focus on maximizing profitability through product mix adjustments based on current and projected market demands-both domestically and internationally. The following table presents net shipments by product line:

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                                        Three Months Ended March 31,
                                           2014              2013
Value-added Shipments                       (tons in thousands)
Stainless/electrical                    206.2  16.3 %     204.4  15.8 %
Coated                                  600.8  47.6 %     577.1  44.8 %
Cold-rolled                             286.5  22.7 %     277.4  21.5 %
Tubular                                  30.9   2.5 %      31.5   2.4 %
Subtotal value-added shipments        1,124.4  89.1 %   1,090.4  84.5 %
Non Value-added Shipments
Hot-rolled                              108.5   8.6 %     172.3  13.4 %
Secondary                                29.2   2.3 %      27.1   2.1 %
Subtotal non value-added shipments      137.7  10.9 %     199.4  15.5 %
Total shipments                       1,262.1 100.0 %   1,289.8 100.0 %

Sales

Net sales increased by approximately 1% compared to the first quarter of 2013, and the Company's average selling price for the first quarter of 2014 was $1,096 per ton, a 3% increase from the Company's average selling price of $1,062 per ton for the first quarter of 2013. Year-over-year, the Company continued to experience improved demand for steel sold to the automotive market. Compared to the prior year, North American light vehicle production continued to improve and the Company's total sales and shipments to that market also increased. In addition, housing starts in the United States showed continued improvement compared to the prior year.

Net sales to customers outside the United States for the three months ended March 31, 2014 totaled $165.8, compared to $186.6 for the three months ended March 31, 2013. This decline was primarily the result of continued weak global economic conditions and excess capacity, which have primarily affected the Company's international sales of electrical steel.

Cost of Products Sold

The extreme cold weather conditions in the United States during the first quarter of 2014 caused severe spikes in energy costs. As a result, the Company's costs for natural gas and electricity were approximately $30.0 higher than they were for the first quarter of 2013. In addition, the Company also experienced higher iron ore and carbon scrap costs in the first quarter of 2014 compared to the first quarter of 2013.

As previously disclosed, in late February the Company's Ashland Works blast furnace experienced an incident that resulted in a temporary unplanned outage of that furnace. The Company immediately began repairs and the blast furnace resumed operations in early March. The Company incurred $18.0 in costs during the first quarter of 2014 as a result of this unplanned outage.

In addition, the Company incurred $29.4 for planned maintenance outage costs during the first quarter of 2014, compared to $1.0 in the year-ago first quarter. The higher planned maintenance outage costs in the first quarter of 2014 include the acceleration of the majority of a previously disclosed planned maintenance outage at Ashland Works that had been originally scheduled for the second quarter of 2014. That planned maintenance outage was accelerated in part to address issues resulting from the unplanned outage that occurred earlier in the first quarter. The Company does not have any significant outages planned for the remainder of 2014. The 2014 first quarter results also included a LIFO credit of $1.5, compared to a LIFO credit of $6.0 in the first quarter of 2013.

Selling and Administrative Expenses

Selling and administrative expenses for the three months ended March 31, 2014 were $60.2, compared to $51.6 for the three months ended March 31, 2013. A majority of the increase related to a charge of $5.8 for a tentative settlement of certain class action antitrust claims, as discussed in Note 7 to the condensed consolidated financial statements.

Depreciation

Depreciation expense for the three months ended March 31, 2014 was $48.7, compared to $48.6 for the corresponding period in 2013.

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Pension and Other Postretirement Employee Benefit ("OPEB") Expense (Income)

The Company recorded pension and OPEB income of $25.7 for the three months ended March 31, 2014, compared to $15.9 for the corresponding period in 2013. The increase in income for the three months ended March 31, 2014 compared to the prior year was largely a result of an increase in the expected return on a greater amount of plan assets and amortization of unrealized gains.

Operating Profit (Loss)

The Company reported an operating loss of $35.3 in the three months ended March 31, 2014, compared to operating income of $33.2 in the three months ended March 31, 2013. For the three months ended March 31, 2014, the Company experienced year-over-year increases in costs for energy, iron ore and carbon scrap compared to the same period in 2013. Further, for the three months ended March 31, 2014, the Company experienced unplanned outage costs of $18.0 and higher planned maintenance outage costs than the prior year period. Included in operating profit (loss) was operating profit related to SunCoke Middletown of $15.0 for the three months ended March 31, 2014, compared to $16.9 for the corresponding period in 2013.

Interest Expense

Interest expense for the three months ended March 31, 2014 was $32.2, compared to $31.0 for the same period in 2013. The increase over 2013 was primarily related to higher balances outstanding under the Credit Facility.

Other Income (Expense)

Other income (expense) was $(1.9) for the three months ended March 31, 2014, compared to other income (expense) of $1.8 for the three months ended March 31, 2013. Other income (expense) is primarily related to foreign exchange gains and losses and the Company's share of income (loss) related to Magnetation. Included in other income (expense) was the Company's share of income (loss) related to Magnetation of $(1.3) for the three months ended March 31, 2014, and $2.3 for the corresponding period in 2013. The decrease in the Company's share of income from Magnetation from the prior year period was due primarily to uncapitalized interest expense incurred on debt raised for the purpose of constructing Magnetation's pellet plant and additional iron ore concentrate capacity and to lower sales volumes of concentrate.

Income Taxes

Income taxes recorded through March 31, 2014, were estimated using the discrete method, which was based on the actual year-to-date pre-tax loss through March 31, 2014, as well as the related change in the valuation allowance on deferred tax assets. The Company was unable to estimate pre-tax income for the remainder of 2014 with sufficient precision for purposes of the effective tax rate method, which requires consideration of a projection of full-year income and the expected change in the valuation allowance. The estimated annual effective tax rate method is not reliable due to its sensitivity to small changes to forecasted annual pre-tax earnings and the effect of the Company's valuation allowance, which create results with significant variations in the customary relationship between income tax expense and pre-tax income for the interim periods. As a result, the Company determined that the use of the discrete method is more appropriate than the annual effective tax rate method. The Company has estimated the change in valuation allowances required based on the year-to-date pre-tax loss and the change in value of the identified tax-planning strategy, which is determined based on year-to-date LIFO income. Income tax expense (benefit) for the three months ended March 31, 2014 and 2013, includes a non-cash charge of $31.7 and $1.1, respectively, for the change in the valuation allowance on the Company's deferred tax assets, which offsets the income tax benefit related to the Company's pre-tax loss.

Net Income (Loss)

As a result of the various factors and conditions described above, the Company reported a net loss attributable to AK Holding in the three months ended March 31, 2014, of $86.1, or $0.63 per diluted share, compared to a net loss of $9.9, or $0.07 per diluted share, in the three months ended March 31, 2013.

Adjusted EBITDA

Adjusted EBITDA (as defined below under Non-GAAP Financial Measures) was a loss of $2.8, or $2 per ton, for the first quarter of 2014, compared to adjusted EBITDA of $66.8, or $52 per ton, for the first quarter of 2013. This decline was the result of the various factors and conditions described above.

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Non-GAAP Financial Measures

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It is a metric that is sometimes used to compare the results of different companies by removing the effects of different factors that might otherwise make comparisons inaccurate or inappropriate. For purposes of this report, the Company has made an adjustment to EBITDA in order to exclude the effect of noncontrolling interests. The adjusted results, although not financial measures under U.S. generally accepted accounting principles ("GAAP") and not identically applied by other companies, facilitate the ability to analyze the Company's financial results in relation to those of its competitors and to the Company's prior financial performance by excluding items that otherwise would distort the comparison. Adjusted EBITDA is not, however, intended as an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP and is not necessarily comparable to similarly titled measures used by other companies.

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

                                                         Three Months Ended
                                                             March 31,
                                                          2014          2013
Net income (loss) attributable to AK Holding          $    (86.1 )    $ (9.9 )
Net income attributable to noncontrolling interests         14.9        16.7
Income tax expense (benefit)                                 1.8        (2.8 )
Interest expense                                            32.2        31.0
Interest income                                                -        (0.7 )
Depreciation                                                48.7        48.6
Amortization                                                 4.2         4.1
EBITDA                                                      15.7        87.0
Less: EBITDA of noncontrolling interests (a)                18.5        20.2
Adjusted EBITDA                                       $     (2.8 )    $ 66.8

(a) The reconciliation of EBITDA of noncontrolling interests to net income attributable to noncontrolling interests is as follows:

                                                           Three Months Ended
                                                               March 31,
                                                             2014           2013
Net income attributable to noncontrolling interests   $     14.9           $ 16.7
Depreciation                                                 3.6              3.5
EBITDA of noncontrolling interests                    $     18.5           $ 20.2

Outlook

Consistent with its current practice, AK Steel expects to provide detailed guidance for the Company's second quarter results in June. However, in advance of that guidance, the Company notes that it expects a substantially improved second quarter of 2014 compared to the first quarter of 2014. The outlook for the second quarter is improved as a result of a variety of factors, including an expected decline in energy costs from the high costs incurred during the extreme cold weather conditions in the first quarter, the anticipated absence of any major planned or unplanned outages, and the expected lack of any significant litigation charges in the second quarter. These benefits in the second quarter compared to the first quarter will be partially offset by the ongoing effects of the extreme cold weather conditions. Those weather conditions resulted in an extraordinarily high level of ice coverage on the Great Lakes, which has delayed the start of the 2014 shipping season for Canadian iron ore. As a result, the Company expects to experience higher transportation costs for iron ore pellets in the second quarter and, at least early in the quarter, has reduced the production rate at its blast furnaces to match production levels to the available supply of iron ore. While the Company has been working to get the iron ore it needs, iron ore supplies will continue to be a concern until the ice on the Great Lakes thaws sufficiently to allow normal iron ore shipping and the shipping companies are able to catch up on their scheduled deliveries.

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Liquidity and Capital Resources

In March 2014, AK Steel entered into its new $1.1 billion Credit Facility with a group of lenders. The Credit Facility, which expires in March 2019, replaced AK Steel's prior $1.1 billion asset-backed revolving credit facility (the "Replaced Credit Facility"), which was set to expire in April 2016, and is secured by the same classes of assets as the Replaced Credit Facility. The Credit Facility contains common restrictions similar to the Replaced Credit Facility, including limitations on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliate transactions. Availability is calculated as the lesser of the Credit Facility commitments or the Company's eligible collateral after advance rates, less outstanding revolver borrowings and letters of credit. The Company's obligations under the Credit Facility are secured by its inventory and accounts receivable, and availability under the Credit Facility fluctuates monthly based on the varying levels of eligible collateral. The Credit Facility provides the Company with enhanced liquidity and greater financial and strategic flexibility. The Credit Facility includes a separate "first-in, last-out", or "FILO" tranche, which allows the Company to maximize its eligible collateral at higher advance rates. The Credit Facility requires maintenance of a minimum fixed charge coverage ratio of one to one if availability under the Credit Facility is less than $110.0. The Company intends to use the Credit Facility for working capital and general corporate purposes and does not expect the Credit Facility's restrictions to affect or limit its ability to conduct its business in the ordinary course. At March 31, 2014, AK Holding was the sole guarantor of the Credit Facility. At March 31, 2014, the Company's eligible collateral, after application of applicable advance rates, was $1,064.5. As of March 31, 2014, there were outstanding Credit Facility borrowings of $240.0. Availability as of March 31, 2014 was further reduced by $67.5 of outstanding letters of credit, resulting in remaining availability of $757.0. During the three-month period ended March 31, 2014, utilization of the Replaced Credit Facility and the Credit Facility ranged from $90.0 to $285.0, with outstanding borrowings averaging $222.2 per day. In April 2014, in order to provide additional collateral to the borrowing base and increase the Company's availability under the Credit Facility, thereby enhancing its liquidity, the Company added AK Tube LLC and AK Steel Properties, Inc., both 100%-owned subsidiaries, as guarantors under the Credit Facility. The additional eligible collateral is expected to provide additional availability under the Credit Facility of approximately $30.0 in the second quarter of 2014.

Cash used by operations totaled $125.0 for the three months ended March 31, 2014. This total included cash generated by SunCoke Middletown of $14.0, which can only be used by SunCoke Middletown for its operations or distributed to SunCoke. Primary uses of cash were $41.3 for pension contributions, $18.6 for OPEB payments (net of Medicare subsidy reimbursements), an increase in working capital of $14.1, with the remainder used to fund normal business activities. The increase in working capital primarily was the result of seasonal fluctuations. An increase in accounts payable due to higher inventory levels partially offset this use of cash.

The Company believes that its current sources of liquidity will be adequate to meet its obligations for the foreseeable future. Future liquidity requirements for employee benefit plan contributions, scheduled debt maturities, debt redemptions and capital investments are expected to be funded by internally-generated cash and other financing sources. To the extent, if at all, that the Company would need to fund any of its working capital or planned capital investments other than through internally-generated cash, the Company has available its Credit Facility. The Company also could seek to access the capital markets if and when it perceives conditions are favorable. The Company has no significant scheduled debt maturities until December 2018, when its $380.0 of Senior Secured Notes are due. In addition, the Company's Credit Facility expires in March 2019 and any amounts outstanding under it at that time would need to be repaid or refinanced. The Company's forward-looking statements on liquidity are based on currently available information and expectations and, to the extent the information or expectations are inaccurate or conditions deteriorate, there could be a material adverse effect on the Company's liquidity.

Pension- and Retiree Healthcare Benefit-related Matters

The Company expects to contribute $196.5 to the master pension trust during 2014. Of this total, $41.3 was made in the three months ended March 31, 2014 and $71.1 was made in April 2014, leaving $84.1 to be made during the third quarter of 2014. Based on current actuarial assumptions, the Company estimates that its required annual pension contributions will be approximately $100.0 in 2015 and $50.0 in 2016. This is a cumulative reduction of approximately $30.0 compared to previously disclosed estimates of pension contributions for the three-year period of 2014 through 2016. These estimates are subject to changes in assumptions, primarily related to future investment performance of the pension funds, actuarial data relating to plan participants and the interest rate used to discount benefits to their present value.

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Investing and Financing Activities

During the three months ended March 31, 2014, net cash used by investing activities totaled $7.0, primarily for capital investments of $13.8.

The Company anticipates 2014 capital and strategic investments of approximately $160.0. This includes a $100.0 capital contribution to Magnetation that is AK Steel's final required capital contribution, as discussed in the Strategic Investments-Magnetation section. The Company expects to fund these investments from cash generated from operations and from borrowings under its Credit Facility.

During the three months ended March 31, 2014, cash generated by financing activities totaled $117.8. This consisted primarily of credit facility borrowings of $150.0, partially offset by distributions from SunCoke Middletown to its noncontrolling interest owners of $27.8.

Dividends

The Company's Credit Facility contains certain restrictive covenants with respect to the Company's payment of dividends. Under these covenants, dividends are permitted provided (i) availability under the Credit Facility exceeds $247.5 or (ii) availability exceeds $192.5 and the Company meets a fixed charge coverage ratio of one to one as of the most recently ended fiscal quarter. If the Company cannot meet either of these thresholds, dividends would be limited to $12.0 annually. At March 31, 2014, the availability under the Credit Facility significantly exceeded $247.5. Accordingly, although the Company has elected to suspend its dividend program, there currently are no covenants that would restrict the Company's ability to declare and pay a dividend to its stockholders.

Restrictions under Debt Agreements

The Credit Facility and indentures governing the Company's senior indebtedness and tax-exempt fixed-rate Industrial Revenue Bonds (collectively, the "Notes") contain restrictions and covenants that may limit the Company's operating flexibility.

The indentures governing the Notes, other than the 5.00% Exchangeable Senior Notes due November 2019 (the "Exchangeable Notes"), include customary restrictions on (a) the incurrence of additional debt by certain AK Steel subsidiaries, (b) the incurrence of liens by AK Steel and AK Holding's other subsidiaries, (c) the amount of sale/leaseback transactions, and (d) the ability of AK Steel and AK Holding to merge or consolidate with other entities or to sell, lease or transfer all or substantially all of the assets of AK Steel and AK Holding to another entity. They also contain customary events of default. In addition, the indenture governing the Secured Notes includes covenants with customary restrictions on the use of proceeds from the sale of collateral. The indenture governing the Exchangeable Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or its subsidiaries.

The Credit Facility contains restrictions, including limitations on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliate transactions. In addition, the Credit Facility requires maintenance of a minimum fixed charge coverage ratio of one to one if availability under the Credit Facility is less than $110.0 as of the most recently ended fiscal quarter. The Company does not expect any of these restrictions to affect or limit its ability to conduct its business in the ordinary course.

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

Strategic Investments

Magnetation

The Magnetation joint venture utilizes advanced magnetic separation technology to recover iron ore from existing stockpiles of previously-mined material, such as tailings basins, and avoid the necessity of traditional expensive extraction methods. Magnetation controls substantial volumes of these existing stockpiles, . . .

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