UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
☒ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019
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)
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| 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, including zip code)
Registrant’s telephone number, including area code: (513) 425-5000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Stock $0.01 Par Value | AKS | The 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, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ | | Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
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, 2019: $743,645,887
There were 316,909,268 shares of common stock outstanding as of February 18, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
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 “2020 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, 2019.None.
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K (the “Amendment”) amends the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 originally filed on February 20, 2020 (the “Original Filing”) by AK Steel Holding Corporation, a Delaware corporation (“AK Steel,” the “Company,” “we,” or “us”). We are filing the Amendment to present the information required by Part III of Form 10-K as we will not file our definitive proxy statement within 120 days of the end of our year ended December 31, 2019. The reference on the cover page of the 2019 Form 10-K to the incorporation by reference of portions of AK Steel Holding Corporation’s definitive proxy statement into Part III of the 2019 Form 10-K is hereby deleted. Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events that may have occurred at a date subsequent to the date of the Original Filing.
AK Steel Holding Corporation
Table of Contents
(Dollars in millions, except per share and per ton amounts or as otherwise specifically noted)
PART IIII
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Item 1.10. | Business.Directors, Executive Officers and Corporate Governance. |
Overview
AK Steel Holding Corporation (“AK Holding”) was formed under the laws of Delaware in 1993. Through its wholly owned subsidiary, AK Steel Corporation (“AK Steel”), itSet forth below is a leading producersummary of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets. Other subsidiaries also provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. AK Steel is the successor to Armco Inc. and has built upon Armco’s rich history of creating leading-edge steel innovations since its formation in 1899. Unless the context indicates otherwise, references to “we,” “us” and “our” refer to AK Holding and its subsidiaries.
Our mission is to create innovative, high-quality steel solutions for our customers and our key values of safety, quality, productivity and innovation, along with environmental responsibility and sustainability, are its foundation. We have approximately 9,300 employees in North America and Europe, as well as manufacturing operations across seven states in the eastern U.S., Canada and Mexico.
Our corporate strategy is comprised of three pillars:
commercializing our innovative new products and services;
transforming our operations to significantly improve our competitive position; and
driving future growth into new markets and downstream businesses.
On December 2, 2019, we entered into an Agreement of Plan of Merger (as it may be amended from time to time, the “Merger Agreement”) among us, Cleveland-Cliffs Inc. (“Cliffs”) and Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs (“Merger Sub”), pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Cliffs will acquire AK Holding by way of the merger of Merger Sub with and into AK Holding (the “Merger”), with AK Holding surviving such Merger as a wholly owned subsidiary of Cliffs. Under the terms of the Merger Agreement, at the effective time of the Merger, AK Holding stockholders will be entitled to receive 0.40 Cliffs common sharesrelevant biographical information for each outstanding share of AK Holding common stock they own at the effective time. Upon completion of the proposed Merger, it is expected that AK Holding stockholders will own approximately 32% and Cliffs shareholders will own approximately 68% of the combined company on a fully diluted basis. We expect to complete the Merger in the first quarter of 2020, subject to the receipt of customary regulatory and stockholder approvals and the satisfaction or (to the extent permissible) waiver of the other closing conditions under the Merger Agreement. See the discussion under Cleveland-Cliffs Acquisition in Item 7 for additional information.
Customers and Markets
We target customers who require comprehensive steel solutions that involve the most technically demanding, highest-quality steel products, “just-in-time” delivery, technical support and product development leadership. Our research and engineering expertise, robust 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 our customer markets. Our strategy is to focus on markets for our steel solutions that deliver higher margins, where possible, and reduce amounts sold into the typically lower-margin commodity spot markets, which have experienced substantial volatility in pricing over the past several years primarily as a result of shifting international trade environments and related effects on the domestic markets we serve.
We sell our products to customers in three broad market categories: (i) automotive; (ii) infrastructure and manufacturing, which includes electrical power; and (iii) distributors and converters. The following table presents the percentage of our net sales to each of these markets:Directors.
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| Market | | 2019 | | 2018 | | 2017 |
| Automotive | | 66 | % | | 63 | % | | 65 | % |
| Infrastructure and Manufacturing | | 16 | % | | 15 | % | | 16 | % |
| Distributors and Converters | | 18 | % | | 22 | % | | 19 | % |
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Dennis C. Cuneo | Director Since: January 21, 2008 Age: 70 Current Principal Occupation: Partner, Washington DC office, Fisher & Phillips LLP; President, DC Strategic Advisors, LLC Current AK Steel Board Committees: • Corporate Sustainability (Chair) • Nominating & Governance | Other Public Company Boards:* Current • BorgWarner Inc. (2009 - present) Prior - None Education: • Bachelor of Science in Business Administration degree from Gannon College • Master of Business Administration degree from Kent State University • Juris Doctor degree from Loyola University |
We sold approximately 70% of our flat-rolled steel shipments in 2019 under fixed base price contracts. These contracts are typically one year in duration and expire at various times throughout the year. Some of these contracts have a surcharge mechanism that passes |
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| Prior Significant Positions Held: | Senior Vice President of Toyota Motor North America, Inc. from 2000 to 2006; Corporate Secretary and Chief Environmental Officer of Toyota Motor North America, Inc. from 2004 to 2006; and Senior Vice President of Toyota Motor Manufacturing North America from 2001 to 2006. |
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| Other Information: | Serves as the Vice Chair for the Board of Trustees of Loyola University in New Orleans. Served as Board Chairman of the Cincinnati Branch of the Federal Reserve from 2003 to 2004. Former member of the executive committee and chair of the human resources group of the National Association of Manufacturers. Previous gubernatorial appointments in California, Kentucky and Mississippi. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Cuneo brings a wealth of experience in, and a deep understanding of, the automotive industry, our most significant product market and a focus of our corporate strategy, and in government affairs, which has been particularly relevant in the steel industry in recent years. Mr. Cuneo is a former senior executive and officer at Toyota Motor North America, Inc. and Toyota Motor Manufacturing North America. Mr. Cuneo’s Toyota career spanned more than 22 years, during which he was responsible for government relations, environmental affairs, administration, public relations, investor relations, corporate advertising, legal affairs, philanthropy, planning, research, and Toyota’s Latin America Research Group. As one of Toyota’s earliest American manufacturing executives, he was instrumental in the launch of the company’s manufacturing operations in North America, and led Toyota’s site selection team for North America for over ten years. He continues to consult in the automotive industry, and sits on the Boards of BorgWarner Inc., a publicly-traded automotive supplier, and the Center for Automotive Research, a leading auto industry think tank. Thus, he not only brings to the Board his knowledge of the automotive industry and its trends, he also contributes significantly to its expertise and experience in a broad range of Board oversight areas. Mr. Cuneo also is a licensed attorney and has significant experience in trade and government relations, so he is able to provide valuable perspectives on issues facing the Board and our company, particularly with respect to corporate governance, regulatory matters and trade. |
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| * | Included in this section for Mr. Cuneo, and similarly for all other Directors, are all directorships at public companies and registered investment companies held currently or at any time since January 1, 2015. |
through certain changes in input costs. We sold the remainder of our flat-rolled steel shipments in 2019 into the spot market at prevailing market prices or under contracts that involve variable pricing that is tied to an independently published steel index.
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Sheri H. Edison | Director Since: August 1, 2014 Age: 63 Current Principal Occupation: Executive Vice President and General Counsel, AMCOR PLC Current AK Steel Board Committees: • Management Development & Compensation • Nominating & Governance | Other Public Company Boards: Current - None Prior - None Education: • Bachelor of Arts degree in History and Journalism from the University of Southern California • Juris Doctor degree from Northwestern University School of Law |
The automotive industry is our core market, and we aim to address the principal needs of major automotive manufacturers and their suppliers. We specialize in manufacturing difficult-to-produce, high-quality steel products, combined with demanding delivery performance, customer technical support and collaborative relationships, to develop breakthrough steel solutions that help our customers meet their product requirements. In addition, many of our competitors do not have the capability to supply the full portfolio of products that we make for our automotive customers, such as steel for exposed automotive applications, the most sophisticated grades of advanced high-strength steels (“AHSS”) and value-added stainless steel products. The exacting requirements for servicing the automotive market generally enable us to justify higher selling prices for products sold to that market than for the commodity types of carbon and stainless steels sold to other markets.
In light of the automotive market’s importance to us, North American light vehicle production has a significant impact on our total sales and shipments. North American light vehicle production for 2019 declined 4% to approximately 16.3 million units from the prior year, due in part to a strike at General Motors (“GM”) that halted its vehicle production for over one month. We currently expect a slight increase in North American light vehicle production in 2020. Furthermore, consumer demand for SUVs, trucks, crossovers and larger vehicles continued to increase while demand for smaller sedans and compact cars declined. We benefit from intentionally targeting larger vehicle platforms to take advantage of consumer preferences, and we have focused on and have been successful in getting sourced on numerous SUV, truck, crossover and larger vehicle platforms. As a result, more than three-quarters of the carbon automotive steel that we sell is used to produce these popular larger vehicles. In addition to benefiting from our exposure to consumers’ strong demand for larger vehicles, these vehicles also typically contain a higher volume of steel than smaller sedans and compact cars, providing us the opportunity to sell a greater proportion of our steel products to our automotive customers. Ford Motor Company (“Ford”) accounted for 11% of our net sales in both 2019 and 2018, and FCA (an affiliate of Fiat Chrysler Automobiles N.V.) accounted for 11% and 10% of our net sales in 2019 and 2018. No other customer represented more than 10% of our net sales in either year. |
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| Prior Significant Positions Held: | Chief Legal Officer of Bemis Company from 2010 to 2019;Senior Vice President, Chief Administrative Officer and Assistant Secretary of Hill-Rom, Inc. from 2007 to 2010; Vice President, Global Quality System, General Counsel, and Secretary of Hill-Rom, Inc. from 2006 to 2007; Vice President, General Counsel and Secretary of Hill-Rom, Inc. from 2003 to 2007; Vice President and General Counsel and Secretary of Batesville Casket Company, Inc. from 2002 to 2003; Assistant General Counsel of LTV Steel Company from 1999 to 2002. |
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| Other Information: | Member of Board of Directors of American Family Insurance Mutual Holding Company, Member, National Association of Corporate Directors (NACD) and NACD Fellow; Member of Board of Directors of Fox Valley Community Foundation; Alumnae, DirectWomen Board Institute; Member of Board of Directors of the Waisman Center, University of Wisconsin, Madison. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Ms. Edison brings valuable knowledge and insight to the Board as a current executive officer of a large, publicly-traded manufacturer, as well as by virtue of her prior steel industry experience. As Executive Vice President and General Counsel of AMCOR PLC, she is able to share with the Board her experience and acumen dealing with the contemporary, evolving issues present in a complex, global manufacturer. In addition, Ms. Edison’s service at Amcor and her prior roles in the legal department of other large manufacturing companies enables her to contribute a broad and deep understanding of the dynamic environment with respect to the legal, regulatory, enterprise risk and corporate governance issues that we regularly face. Ms. Edison also brings direct knowledge and experience from the steel industry, having previously served in a senior management position with LTV Steel Company. |
Automotive manufacturers are under pressure to achieve heightened federally mandated fuel economy standards through 2025 (the Corporate Average Fuel Economy, or “CAFE,” standards). The CAFE standards generally require automobile manufacturers to meet an average fuel economy goal, which is approximately 50 miles per gallon across the fleet of vehicles they produce by the year 2025, with certain milestones to be met in interim periods. The United States Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration have proposed rolling back the fuel economy goal under the CAFE standards to average fuel economy requirements that would be closer to 37 miles per gallon across the fleet of vehicles they produce by the year 2025. However, California and other states continue to maintain the more stringent emissions standards, and the EPA’s Science Advisory Board and certain auto makers have expressed differing preferences for approaches to regulation aimed at improving fuel efficiencies. As a result, our automotive customers continue to explore various avenues for achieving the standards, including lightweighting components and developing more fuel-efficient engines. Lightweighting efforts include the use of alternatives to traditional carbon steels, such as AHSS and other materials. While this could reduce the aggregate volume of steel consumed by the automotive industry, we expect that demand will increase for current and next-generation AHSS and that our AHSS and other innovative steels will command higher margins. We are collaborating with our automotive customers and their suppliers to develop innovative solutions using our developments in lightweighting, efficiency, and material strength and formability across our extensive product portfolio, in combination with our automotive stamping and tube-making capabilities. We are also working with our customers to develop steels with greater heat resistance for exhaust systems that support new, fuel-efficient engines that run at higher temperatures.
Among our innovative solutions for automotive customers are our press-hardenable steel (“PHS”) products for hot-stamping applications. Our ULTRALUME® PHS is an aluminized Type 1 heat-treatable boron steel. Our customers depend on ULTRALUME PHS when they require high-strength parts with complex geometries. These steels enable automotive manufacturers to reduce vehicle weight while continuing to keep pace with critical safety requirements. In October 2019, we entered a licensing agreement with ArcelorMittal that provides us, as the sole North American licensee, the right to have ULTRALUME PHS hot-stamped parts manufactured by both us and our customers in the U.S., Canada and Mexico. This licensing agreement resolves a long-standing dispute regarding alleged patent infringement, and we believe that it will result in expanded adoption of this product going forward and growth in our sales over the next several years.
Automotive manufacturers have also been increasing their development of hybrid/electric vehicles (“H/EVs”) in order to meet the CAFE standards and growing customer adoption of H/EVs. Many motors used in H/EVs being sold in the U.S. today are imported from foreign suppliers, but more local sourcing and manufacturing of motors is expected to occur in the future. As the only North American producer of high-efficiency non-oriented electrical steel (“NOES”), which is a critical component of H/EV motors, we are positioned to potentially benefit from the growth of H/EVs going forward. We believe our strong foundation in electrical steels and long-standing relationships with automotive manufacturers and their suppliers will provide us with an advantage in this market as it
continues to grow and mature. Likewise, the growing customer adoption of H/EVs may also increase demand for improvements in the electric grid to support higher demand for more extensive battery charging, which our grain-oriented electrical steels (“GOES”) could support.
Infrastructure and Manufacturing Market
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Mark G. Essig | Director Since: November 1, 2013 Age: 62 Current Principal Occupation: President and Chief Executive Officer, Phoenix Services LLC Current AK Steel Board Committees: • Finance (Chair) • Audit | Other Public Company Boards: Current - None Prior - None Education: • Bachelor degree from Loyola University • Master of Business Administration degree from the University of Illinois |
The infrastructure and manufacturing market primarily represents sales to manufacturers of heating, ventilation and air conditioning equipment, appliances, and power transmission and distribution transformers, who produce equipment for the electrical grid. Domestic construction activity and the replacement of aging infrastructure directly affects sales of our carbon, stainless and electrical steel products, particularly for GOES. In 2019, housing starts in the U.S. increased slightly from the prior year, and our domestic GOES customers continue to experience steady demand consistent with the construction and electrical transformer replacement markets. We also believe that the market growth of H/EVs may require upgrades to the U.S. electrical grid infrastructure to support increased demand for electricity, and thus increased demand for our GOES products in the coming years.
Over the past couple of years, electrical steel pricing declined substantially in many international markets, which contributed to GOES imports into the U.S. doubling in the first quarter of 2018 from 2017 before declining since that point. We believe that foreign competitors are continuing to circumvent existing trade laws, primarily by increasing imports of downstream electrical products not currently covered by the Section 232 steel tariff, which include electrical transformer cores and core assemblies, electrical transformers, and even laminations, which are simply cut pieces of electrical steel. To avoid the Section 232 steel tariff, producers have either increased their imports of foreign-made downstream electrical goods or moved some of their domestic production outside the United States, which adversely affects our electrical steel business. These actions have suppressed domestic electrical steel pricing through 2018 and 2019. In the absence of a remedy against these actions to circumvent the Section 232 steel tariff on electrical steel, these actions are likely to continue and increase over time, significantly pressuring our electrical steel business. We continue to work proactively to mitigate or eliminate this potential avenue for avoiding and circumventing the steel tariff, including by communicating our concerns to the U.S. government and requesting appropriate action to address this issue. |
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| Prior Significant Positions Held: | Chief Executive Officer of FKI Security Group from 2012 to 2018. Chief Executive Officer of RathGibson LLC from 2011 to 2012; President and CEO of Sangamon Industries LLC from 2008 to 2011; Chief Executive Officer of Aviation, Power & Marine, Inc. from 2009 to 2010; President and CEO of Barjan LLC from 2002 to 2008; Chief Executive Officer, President and Chairman of the Board of GS Industries from 1998 to 2002; held several positions at AK Steel, including Executive Vice President-Operations and Sales from 1997 to January 1998, Executive Vice President-Sales 1994 to 1997, Vice President-Sales and Marketing from 1992 to 1994 and Assistant to CEO and Vice President-Human Resources in 1992; Chief Financial Officer of Washington Steel Corporation from 1990 to 1992 and Vice President-Finance and Administration from 1988 to 1990. |
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| Other Information: | Serves on the Board of Directors of Phoenix Services LLC. Served on the Board of Directors of Steel Technologies from 2002 to 2008. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | As a current and former chief executive of several companies, Mr. Essig brings to the Board the perspective of a leader facing a dynamic business environment on a daily basis. As President and CEO of Phoenix Services, a leading international supplier of various services to steel companies around the world, Mr. Essig has an in-depth understanding of the domestic and global steel industry and the key trends shaping the business. He is an accomplished senior operating executive with a wealth of finance, sales and management experience in a number of diverse industries, including significant experience with manufacturing businesses. In addition to his current leadership role at Phoenix Services, he previously served as an executive officer of AK Steel and Washington Steel, and therefore brings to the Board a deep understanding of the industry and its challenges and opportunities. Mr. Essig is one of the Board’s “audit committee financial experts.” Mr. Essig also has experience heading various portfolio companies of private equity firms, where he maintained a keen focus on operational efficiency and maximizing shareholder value. |
Distributors and Converters Market
Steel distributors and converters typically source from the commodity carbon, stainless and electrical spot markets. Demand and pricing can be highly dependent on a variety of factors outside our control, including global and domestic commodity steel production capacity, the relative health of countries’ economies and whether they are consuming or exporting excess steel capacity, the provisions of international trade agreements and fluctuations in international currencies and, therefore, are subject to a high degree of volatility. Because of this volatility and our strategy to focus on value-added products, we have taken deliberate actions to reduce our exposure to these commodity markets.
Geographic Presence
We sell our carbon steel products principally to customers in North America, and we sell our electrical and stainless steel products primarily in North America and Europe. Our customer base is geographically diverse and there is no single country outside the U.S. where our sales are material compared to our total net sales. For the vast majority of international sales, we are not the importer of record and do not bear the responsibility for paying any applicable tariffs.
Research, Innovation and Operations
Rapidly evolving and highly competitive markets require our customers to seek new, comprehensive steel solutions, and we believe we are well positioned to deliver the most robust solutions through our broad portfolio of offerings. In addition to our flat-rolled steels, this includes carbon and stainless tubular products, sophisticated tool and die designs, and lightweight, complex, hard-to-manufacture components and assemblies for the automotive market. Collaboration across our steel, tube-making, stamping and materials research groups generates innovative and comprehensive solutions for our customers, which we believe enhances our competitive advantage.
Creating innovative products and breakthrough solutions is a strategic priority, as we believe differentiation through producing higher value steels to meet challenging requirements enables us to maintain and enhance our margins. We conduct a broad range of research and development activities aimed at improving existing products and processes and developing new ones. Our tradition of steel innovation has produced a highly diversified flat-rolled steel product portfolio. As part of our underlying strategy to focus on higher-value materials and minimize exposure to commodity products, we have invested in research and innovation totaling $30.7, $29.4 and $28.1 in 2019, 2018 and 2017. Our on-going efforts at our state-of-the-art Research and Innovation Center in Middletown, Ohio, to enhance technical collaboration have increased the introduction of new steel solutions to the marketplace.
Research and Innovation Awards
The Office of Energy Efficiency and Renewable Energy under the U.S. Department of Energy (“DOE”) continues to grant AK Steel awards for innovative steel research. In March 2019, we received an award to leverage high performance computing from the Lawrence Livermore National Laboratory to conduct hot rolling research. Researchers from AK Steel are working in collaboration with scientists from the Computational Engineering Division to build a “Fast Acting Reduced Ordered Model” to predict the properties of a finished steel coil after hot rolling in order to improve product consistency, provide immediate feedback on product quality, and to save time, money and energy by reducing the need for expensive industrial trials. This research also will complement current artificial intelligence models used in the manufacture of AK Steel’s portfolio of innovative steel products.
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William K. Gerber | Director Since: January 1, 2007 Age: 66 Current Principal Occupation: Managing Director, Cabrillo Point Capital LLC Current AK Steel Board Committees: • Audit (Chair) • Finance | Other Public Company Boards: Current • Wolverine World Wide, Inc. (2008 - present) Prior • Kaydon Corporation (2007 - 2013) Education: • Bachelor of Science in Economics degree from the Wharton School at the University of Pennsylvania • Master of Business Administration from the Harvard Graduate School of Business Administration |
We are currently in the second year of a three-year project that was announced in October 2018, when the DOE selected us to receive an award of up to $1.2 under the Office of Energy Efficiency and Renewable Energy’s Advanced Manufacturing Office program to investigate novel low-density steels. The project is being conducted in collaboration with the DOE, Oak Ridge National Laboratory Materials Science and Technology Division, and the Advanced Steel Processing and Products Research Center at the Colorado School of Mines. The objective of the project is to conduct alloy design, laboratory validation, and testing of low-density steels that are alternatives to currently available advanced high strength steels and other lightweight metals. These low-density steels are expected to generate energy savings by bringing efficiencies in manufacturing and lifetime savings in automotive structural applications. We have begun mathematical modeling and laboratory scale investigations for the program.
We are also in the third year of a project that the DOE awarded to us in May 2017 to develop the next generation of advanced NOES for motors used in a wide variety of industrial and automotive applications. Laboratory proof of concept for this project has been successfully completed and industrial scale trials have been conducted. |
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| Prior Significant Positions Held: | Executive Vice President and Chief Financial Officer of Kelly Services, Inc. from 1998 to 2007; Vice President-Finance from 1993 to 1998 and Vice President-Corporate Controller from 1987 to 1993 of L Brands Inc. (f/k/a The Limited Brands Inc.) |
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| Other Information: | Member, National Association of Corporate Directors (NACD); served on the Board of Directors of Brylane, L.P. from 1993 to 1997. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Gerber brings an impressive background in corporate finance and accounting to AK Steel’s Board. Mr. Gerber currently is Managing Director of Cabrillo Point Capital LLC, a private investment fund. Prior to that, he was Executive Vice President and Chief Financial Officer of Kelly Services, Inc., a global staffing solutions company. Prior to joining Kelly Services, Mr. Gerber held senior management positions in corporate finance for The Limited, Inc. By virtue of these and other positions, Mr. Gerber is one of the Board’s “audit committee financial experts.” He thus contributes a broad and keen understanding of complex financial and accounting matters to the Board and its Audit Committee, which he chairs. The Board also benefits from Mr. Gerber’s membership on the audit committee of Wolverine World Wide, Inc., as he is able to share best practices and ideas learned and developed during his service on that committee. |
These three awards underscore our track record of innovation and our commitment to being a leader in next generation steel product and process development.
In November 2019, the Auto/Steel Partnership recognized members of AK Steel’s Advanced Engineering team as part of the partnership’s 2019 Excellence Awards. The partnership is an automotive material consortium comprised of North American automotive original equipment manufacturing (“OEM”) companies and steel producers from the American Iron and Steel Institute’s Automotive Applications Council who leverage shared research in a pre-competitive environment. Project teams within the partnership conduct studies in vehicle design applications using steel. Along with other award recipients, we were recognized for collaboration and technical expertise in finding solutions to industry problems. This included the use of new stamping technologies to facilitate potential applications of Next-Generation AHSS in future automotive body structures. AK Steel received an award in the Individual Category for providing exceptional leadership to the partnership. In addition, AK Steel’s Advanced Engineering group and other members of the partnership Stamping Team were recognized for excellence in the Project Team category.
Carbon Steel
We direct most of our research and innovation efforts on carbon steel towards applications for automotive manufacturers and their suppliers. We are particularly focused on AHSS for the automotive market, and we produce virtually every AHSS grade currently used by our customers. Our AHSS grades, such as Dual Phase 590, 780 and 980, have been adopted by our customers for both stamped and roll-formed parts, and our NEXMET® 1000 and 1200 products have demonstrated enhanced strength, formability and opportunities for automotive lightweighting in cold-stamped applications. We are also pursuing application of NEXMET 440EX and NEXMET 490EX in surface-critical, exposed auto body panels as an alternative to aluminum.
Third-Generation Advanced High-Strength Steel
Our third generation NEXMET 1000 and NEXMET 1200 AHSS products enable our customers to achieve significant lightweighting in the unexposed structural components of their vehicles. NEXMET 1200, for example, offers superior formability similar to conventional Dual Phase 600 steel, but at twice the strength level. We have expanded the application of the NEXMET technology to our tubular products from AK Tube LLC (“AK Tube”) and stamped components from PPHC Holdings, LLC (“Precision Partners”). These AHSS products allow automotive engineers to design lightweight parts that meet rigorous service and safety requirements. The NEXMET family of steels helps our customers achieve vehicle weight savings for ambitious fuel efficiency standards while avoiding significant capital costs required to re-design production facilities to use alternative materials.
Both galvanized and cold-rolled NEXMET 1000 and NEXMET 1200 AHSS are progressing through product qualification with several OEM customers, and the first automotive production parts manufactured from NEXMET material will appear on a new vehicle platform that is planned to launch in late 2020. A number of stamping and component assembly trials have been completed successfully, with more planned and underway. Because the timing of automotive design and production cycles spans several years, widespread automotive customer adoption of revolutionary new material such as NEXMET AHSS may also extend over several years.
We expect that other automotive vehicle platforms will incorporate NEXMET AHSS in their designs and that NEXMET AHSS will become a strong differentiator for AK Steel going forward.
Specialty Stainless and Electrical Steel
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Gregory B. Kenny | Director Since: January 1, 2016 Age: 67 Current Principal Occupation: Retired Chief Executive Officer and President of General Cable Corporation Current AK Steel Board Committees: • Finance • Management Development and Compensation | Other Public Company Boards: Current • Cardinal Health, Inc. (2007 - present) • Ingredion Incorporated (2005 - present) Prior • General Cable Corporation (1997 - 2015) Education: • Bachelor of Science, Business Administration degree from Georgetown University • Master of Business Administration degree from The George Washington University • Master of Public Administration from Harvard University |
We continue to develop new and improved specialty stainless and electrical steels for a variety of applications in the automotive, infrastructure and manufacturing, and other markets. For example, we are working with our automotive customers and their exhaust system suppliers to develop new stainless steels for exhaust systems that can withstand higher exhaust gas temperatures associated with future engine designs to achieve increased fuel economy. These steels exhibit improved resistance to thermal fatigue and corrosion over currently available materials. We are also developing stainless steels with unique cosmetic appearances (specialized finishes and colors) for use in architectural and appliance applications.
We are a global leader in producing the highest-quality electrical steel products, which are iron-silicon alloys with unique magnetic properties, and our electrical steels are among the most energy efficient in the world. We sell GOES primarily to manufacturers of power transmission and distribution transformers and NOES to manufacturers of electric motors and generators in both the infrastructure and manufacturing and automotive market. Our GOES customers require high-quality steels with low core losses and high magnetic permeability for the production of efficient electrical transformers, which help to lower costs of electricity generation, transmission and distribution. Although we produce both GOES and NOES products, our primary focus remains on the higher-efficiency GOES products, as these are more challenging to produce and typically command higher selling prices and margins than NOES products. |
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| Prior Significant Positions Held: | Chief Executive Officer and President of General Cable Corporation from 2001 to 2015, President and Chief Operating Officer of General Cable from 1999 to 2001, and Executive Vice President and Chief Operating Officer of General Cable from March 1997 to May 1999. Previously held executive level positions at Penn Central Corporation and began his career as a Foreign Service officer with the United States Department of State. |
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| Other Information: | Served on the Board of Directors of IDEX Corporation from 2002 to 2007; Director of The Federal Reserve Bank of Cleveland, Cincinnati branch, from 2009 to 2014; Former Member of the Board of Governors of the National Electrical Manufacturers Association, Former Member of the Board of Directors of the Cincinnati Museum Center and Former Member of the Board of Big Brothers / Big Sisters of Greater Cincinnati. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Kenny is the retired Chief Executive Officer and President of General Cable Corporation, a global manufacturer and distributor of wire and cable products (which itself was publicly-traded prior to being acquired by Prysmian Group in 2018). Having run a large, complex, publicly-traded manufacturing company whose business is similar in many ways to our own, Mr. Kenny provides the Board with a deep and broad understanding of the most significant factors affecting AK Steel’s business. His leadership experience at General Cable also enables him to share unique insights on key trends and emerging issues to help enhance our focus on driving shareholder value. In addition, Mr. Kenny serves as Non-Executive Chair of two other public company boards: Cardinal Health, Inc., a Fortune 20 global healthcare services and products company, and Ingredion Incorporated, a Fortune 500 global ingredients solutions company. Mr. Kenny’s leadership of and experience on the boards of directors of other large, sophisticated international businesses allow him to share best practices on matters including strategic transactions, corporate governance, management succession, executive compensation, risk management and other key areas of Board oversight. |
Downstream Steel Applications
Our portfolio of steel solutions includes the operations of Precision Partners, which provides advanced-engineered solutions, tool design and build, hot- and cold-stamped components and complex assemblies for the automotive market. In addition to Precision Partners, our downstream operations include AK Tube, which manufactures advanced tubular products for automotive and other applications using carbon and stainless steels, and Combined Metals of Chicago, LLC, a premier processor and distributor of flat-rolled stainless steel products. We believe that collaboration among our steelmaking operations and our downstream businesses can accelerate the adoption of our innovative steel products by automotive manufacturers and their Tier 1 suppliers.
Our research and technical experts, along with engineers from Precision Partners and AK Tube, have undertaken numerous collaborative projects that are generating robust solutions for our customers. Precision Partners’ expertise in tool design and stamping capabilities has allowed us to create prototype components using AK Steel’s innovative new materials and present customers with new potential steel solutions. This approach has and will continue to demonstrate to customers that they can significantly lightweight automotive parts on an accelerated timeline and in a cost-effective manner by using our highly formable grades of AHSS in place of traditional material types.
In addition, our collaborative projects are enhancing our collective knowledge and experience in the stamping of new, advanced grades of steel, advanced-engineered solutions, and tool design and build. For example, Precision Partners specializes in hot-stamping PHS for automotive applications. AK Steel’s experience as a leader in PHS and Precision Partners’ expertise in hot-stamping has enabled these teams to have greater insight into these high-growth areas and has accelerated product development and customer adoption of these automotive lightweighting solutions. Likewise, collaboration with AK Tube strategically advances our mission to innovate in AHSS for the automotive industry, as AK Tube has been at the forefront of producing tubular products from third-generation AHSS. We believe the combination of Precision Partners’ stamping and advanced die-making capabilities, AK Tube’s leading tubemaking capabilities and AK Steel’s breakthrough material introductions will enhance our ability to deliver innovative, steel solutions to our customers.
Precision Partners has recently been awarded contracts from two major automotive manufacturers to supply single-piece hot-stamped door rings and complex assemblies. Taken together, the awards are expected to represent approximately $50.0 of projected annual stamping and assembly revenue beginning in late 2020 or early 2021, in addition to revenue from a large, one-time tooling award. In winning these contracts, Precision Partners has been able to leverage its hot-stamping tooling leadership, in addition to its innovative hot-stamping process, to capture new strategic opportunities and demonstrate that it is one of the few companies in North America that has the technical capabilities to produce a major complex assembly and stamping work of this nature.
Sustainability
We are committed to operating in a sustainable manner. Beyond ensuring that we are acting responsibly to serve our communities and the environment, sustainably operating our company also opens opportunities to grow our business, increase customer collaboration and loyalty, differentiate us from our competition, and attract, retain and motivate employees. Steel is the most recycled material on
the planet—more than aluminum, plastic, paper and glass combined each year—which establishes a strong foundation for our sustainability initiatives.
In December 2019, AK Steel was named to Newsweek’s “America’s Most Responsible Companies 2020” list. Newsweek published its first ranking of 300 companies from more than 2,000 of the largest U.S. public companies by revenue to determine “which firms were tops when it comes to doing good.” This list focused on performance in the environmental, social and corporate governance areas. AK Steel was the only integrated steel mill included in the Newsweek 2020 list.
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Ralph S. Michael, III | Director Since: July 20, 2007 Age: 65 Current Principal Occupation: Chairman, Fifth Third Bank, Greater Cincinnati Region; Non-Executive Chairman of our Board of Directors Current AK Steel Board Committees: • Management Development & Compensation (Chair) • Nominating and Governance | Other Public Company Boards: Current • Arlington Asset Investment Corporation (2006 - present) Prior • Key Energy Services Inc. (2003 - 2016) Education: • Bachelor of Arts degree in economics from Stanford University • Master of Business Administration degree from the University of California at Los Angeles (UCLA) Graduate School of Management |
In April 2019, we issued our Sustainability Report for 2018 that highlights our corporate-wide sustainability efforts and our efforts to support our employees, encourage diversity and inclusion, contribute to our communities, and demonstrate our commitment to the environment, among other initiatives. We also disclose our steelmaking operations’ energy and water usage, air emissions, waste generation and targets for reducing our environmental footprint. In addition, our Sustainability Report includes our scope 1 greenhouse gas emissions, which are generally direct emissions from owned or controlled sources, and reduction targets for those emissions. Our Sustainability Report (which is not incorporated into this Annual Report) can be found in the “Corporate Citizenship” section of our website at www.aksteel.com.
Employee Safety |
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| Prior Significant Positions Held: | President and Chief Operating Officer of the Ohio Casualty Insurance Company from 2005 until its sale in 2007; Executive Vice President and Manager of West Commercial Banking for U.S. Bank, National Association, and Executive Vice President and Manager of Private Asset Management for U.S. Bank, from 2004 to 2005; President of U.S. Bank Oregon from 2003 to 2005; Executive Vice President and Group Executive of PNC Financial Services Group, with responsibility for PNC Advisors, PNC Capital Markets and PNC Leasing, from 2001 to 2002; Executive Vice President and Chief Executive Officer of PNC Corporate Banking from 1996 to 2001. |
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| Other Information: | Serves as Vice Chairman for the Cincinnati Center City Development Corporation. Serves on the board of directors of The Cincinnati Bengals, Inc., CSAA Insurance Exchange and AAA Auto Club Alliance. Serves as Vice Chair of the Board of Trustees of Xavier (OH) University. Serves as Vice Chairman of the Board of Trustees of TriHealth, Inc. and on the board of trustees of the Cincinnati Chapter of The American Red Cross. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Michael brings a strong business, banking and financial background to the Board. Mr. Michael has held executive level positions with several companies in the insurance and financial sectors, including in his current capacity as Chairman, Fifth Third Bank, Greater Cincinnati Region. Previously, Mr. Michael held various executive and management positions with Fifth Third Bank, Ohio Casualty Insurance Company, U.S. Bank and PNC Financial Services Group. His experience and background also enable him to provide valuable insights on a variety of Board oversight matters, including complex banking and financial issues. In addition, the Board and Management benefit from the experience and knowledge Mr. Michael provides from service on other public company boards. These include capital markets and finance matters as a former director for FBR & Co. and energy-related issues as a former member of the board and former Lead Director of Key Energy Services, Inc. |
Our employees and their safety are of paramount importance to us. Our occupational health and safety policies and programs are the cornerstone of our operating philosophy and are integrated into all of our daily operations and activities. We rigorously manage, control and focus on eliminating or minimizing potential exposure to the hazards associated with making and working around steel. Our low recordable injury rate, based on U.S. Occupational Safety and Health Administration (“OSHA”) criteria, reflects our effectiveness in protecting our employees. In 2019, one of our facilities operated with zero OSHA DART (days away, restricted, or job transfer) injuries for the entire year. During the fourth quarter of 2019, three of our facilities operated with zero OSHA recordable injuries, while six facilities operated with zero OSHA DART injuries. Our full-year 2019 performance at our steelmaking facilities, measured as the number of OSHA recordable injuries per 200,000 labor hours, was 0.46, which was nearly three times better than the industry average (year-to-date through the third quarter, which is the latest industry information currently available).
We consistently lead the U.S. steel industry in safety, outperforming the steel industry average injury frequencies for each of the last ten years, and we have received numerous awards recognizing our safety performance. In May 2019, AK Steel’s Middletown Works received the Max Eward Safety Award for 2018 from the American Coke and Coal Chemicals Institute (“ACCCI”), a leading industry trade organization. The award recognizes Middletown Works for operating one of the safest cokemaking facilities in America and operating all of 2018 without a single OSHA recordable injury. This ACCCI recognition marks the 18th time in the last 22 years that one or more AK Steel coke plants have received the Max Eward Safety Award. In May 2019, our Coshocton Works and Zanesville Works were recognized for outstanding safety performance by the Ohio Bureau of Workers’ Compensation, Division of Safety and Hygiene. We continue to focus on safety in all we do, driving safety results that lead our industry.
Environmental Responsibility
We maintain an unwavering commitment to responsible environmental performance throughout our operations. In 2019, we experienced another year of outstanding overall environmental performance. In addition, to emphasize and reinforce the importance of sustainability and environmental responsibility at the company and to continue to drive improved performance in these areas, since January 2018 our Board of Directors has incorporated an environmental performance component into our annual management incentive plan. After assessing a variety of potential performance categories to incorporate, including an evaluation of areas most ripe for improvement, the Board chose to include air permit deviation events as a category for measuring performance under our annual management incentive plan for 2018 and again in 2019. An air permit deviation event occurs when an event at our steelmaking operations results in noncompliance under the Title V air permits that govern those facilities. In 2019, we had our best performance in the past six years in terms of air permit deviation events, recording our lowest annual total during that period.
We believe that our strong environmental performance is a direct result of the proactive approach we take to environmental management and the close collaborative efforts that we employ across the company. We target sustainable performance in all aspects of our operations, including continuous improvement in operations that include air, water and waste management. Our comprehensive environmental policy provides that we will:
commit the necessary resources to comply with all applicable environmental laws, regulations, permits and agreements applicable to us;
reduce environmental risks through operating practices and emergency preparedness programs;
encourage recycling, recovery and reuse of residual materials, as well as the reduction and prevention of emissions and releases when feasible;
participate in efforts to develop and implement environmental laws and regulations;
continually evaluate compliance with applicable environmental laws and regulations; and
strive to continually improve the effectiveness of our environmental management efforts.
Certain production units in our operations are inherently water-intensive. However, we continuously seek opportunities to reduce water usage and increase water reuse at our steelmaking plants. In addition, our steelmaking facilities are located near abundant sources of water and we do not believe that any of those operations are located in regions that experience high water stress.
The International Organization for Standardization (“ISO”) has certified all of our steelmaking plants with ISO 14001 environmental management certification, and our environmental affairs professionals oversee environmental compliance throughout our organization. We also invest heavily in equipment to help meet our environmental objectives. For example, in 2019, we spent $141.3 to operate and maintain our environmental controls and invested $23.0 in environmental projects. During 2019, we completed a $6.0 project at our Rockport Works to install a more modern, environmentally friendly and lower-cost pickling process.
Strategic Opportunities Related to Climate Change
Our strategy of creating new innovative steel solutions and improving existing products enables us to contribute to carbon reduction efforts and the achievement of sustainability goals throughout the product supply chain. Innovative products in each of the carbon, stainless, electrical, tubular, and stamped steel component families further the sustainability goals of many of our customers. For example, in the automotive market our customers are benefiting from our carbon lightweighting solutions to meet their heightened fuel economy targets under the CAFE standards. We are also providing customers with stainless steel and tubular solutions that allow for greater heat resistance in vehicle exhaust systems, enabling exhaust systems to handle the higher engine exhaust temperatures needed for increased fuel economy. In addition, we continue to develop higher-efficiency NOES products for use in future H/EVs and GOES products for their required infrastructure, a market that we anticipate will grow over time. Our steels also contribute to sustainability goals beyond the automotive market. For instance, our GOES products are among the highest-efficiency electrical steels in the world. These GOES products provide low core loss and high magnetic permeability to transmit electricity across electrical grids in the U.S. and around the world more efficiently through better-performing electrical transformers.
While greenhouse gas emissions are a natural byproduct of steel manufacturing today, we continue to take steps to increase energy efficiency while remaining competitive in the global steel marketplace. For example, through the American Iron and Steel Institute (“AISI”), we participate in the DOE’s Climate VISION agreement. This program assists domestic steelmakers in their continued efforts to lead the global steel sector in voluntary emissions reductions. We are also a member of the federal ENERGY STAR program, which identifies and promotes energy-efficient products to help reduce greenhouse gas emissions. ENERGY STAR is a joint program of the EPA and the DOE, helping businesses and consumers save money and protect the environment through energy-efficient products and practices. As with other companies engaged in the production of steel, certain aspects of our production process are carbon-intensive and current technology does not currently afford us the ability to dramatically lower our direct greenhouse gas emissions without significantly reducing the scope of our operations. However, we and other steel producers in the United States are actively participating in research and development to develop technology, processes and approaches to reduce emissions during the steelmaking processes, but these developments are likely to occur over the longer term.
In addition, the production phase of steelmaking is less carbon-intensive than the processes for producing certain other competing materials, such as aluminum. Thus, while the CAFE standards have motivated the use of alternative materials in some vehicles to help achieve lightweighting goals, we intend to continue to educate governments, the automotive industry and other key stakeholders that steel is the most sustainable metal to reduce greenhouse gas emissions across the entire life cycle of a vehicle. These benefits are made even greater when utilizing our advanced steel products for vehicle lightweighting.
Our Sustainability Report issued in April 2019 includes targeted emissions reductions and an inventory of our scope 1 greenhouse gas emissions at our steelmaking plants, along with time-bound, quantitative targets for reducing scope 1 greenhouse gas emissions at those plants. Over time, we also plan to expand our efforts to scope 2 greenhouse gas emissions, which generally are indirect emissions from purchased energy sources, as we develop our internal systems for tracking and targeting scope 1 greenhouse gas reductions.
Production Resources
Employees
Approximately 5,600 of our 9,300 employees are represented by labor unions. The labor contracts covering these represented employees expire between 2020 and 2023. See the discussion under Labor Agreements in Item 7 for additional information on these agreements. |
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Roger K. Newport | Director Since: January 1, 2016 Age: 55 Current Principal Occupation: Chief Executive Officer of AK Steel Holding Corporation Current AK Steel Board Committees: • None | Other Public Company Boards: Current • Alliant Energy (2018 - present)
Prior - None Education: • Bachelor of Science degree in accounting from the University of Cincinnati • Master of Business Administration degree from Xavier University |
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| Prior Significant Positions Held: | Executive Vice President, Finance and Chief Financial Executive Officer from May 2015 to December 2015; Senior Vice President, Finance and Chief Financial Officer since 2014; Vice President, Finance and Chief Financial Officer since 2012. Prior to that, Mr. Newport served in a variety of other capacities since joining us in 1985, including Vice President-Business Planning and Development, Controller and Chief Accounting Officer, Assistant Treasurer, Investor Relations, Manager-Financial Planning and Analysis, Product Manager, Senior Product Specialist and Senior Auditor. |
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| Other Information: | Serves as a member of the University of Cincinnati Lindner College of Business Advisory Council, as Chairman of the Board of Directors of the American Iron and Steel Institute, as a member of the Executive Board of the World Steel Association, and as a member of the Steel Market Development Institute CEO Group. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Newport is our Chief Executive Officer. He began his career with us in 1985 in the accounting department and quickly advanced through a number of increasingly responsible finance, sales and marketing roles at the corporate headquarters and at Middletown Works. He has broad and deep experience with our business, serving in a variety of officer-level roles. These roles began with Mr. Newport being elected Controller, then progressed to Chief Accounting Officer. Later, Mr. Newport was named Vice President, Business Planning and Development, and Vice President, Finance and Chief Financial Officer. In 2014, he was named Senior Vice President, Finance and Chief Financial Officer, and Executive Vice President, Finance and Chief Financial Officer in 2015. His long and varied tenure with us provides him with comprehensive knowledge of our business and the steel industry generally. In addition, Mr. Newport provides insight into the broader industry as Chairman and member of the Board of Directors of the American Iron and Steel Institute and the World Steel Association, and member of the Steel Market Development Institute CEO Group. As the only Director on the Board who is also a member of Management, he is able to provide the Board with an “insider’s view” of all facets of our business. Mr. Newport constantly engages with employees at multiple levels, and through his communication, experience and leadership skills provides the Board with valuable input and acumen. |
Raw Materials and Other Inputs
Our steel manufacturing operations require carbon and stainless steel scrap, coal, coke, chrome, iron ore, nickel and zinc as primary raw materials. We also consume natural gas, electricity, graphite electrodes and industrial gases. 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 of our iron ore from Cliffs under multi-year contracts. We typically purchase most of our metallurgical coal under annual fixed-price agreements, but we also obtain approximately 15% of our metallurgical coal needs from our own mine at AK Coal Resources, Inc. (“AK Coal”). 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. Additionally, we may hedge portions of our energy and raw materials purchases to reduce volatility and risk, which is discussed in more detail in Quantitative and Qualitative Disclosures about Market Risk in Item 7A. |
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Dwayne A. Wilson | Director Since: January 9, 2017 Age: 61 Current Principal Occupation: Retired, Senior Vice President, Fluor Corporation Current AK Steel Board Committees: • Nominating & Governance • Corporate Sustainability | Other Public Company Boards: Current • Ingredion Incorporated (2010 - present)
Prior - None Education: • Bachelor of Science degree in Civil Engineering from Loyola Marymount University, Los Angeles, CA |
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 sufficient supply to satisfy our key raw material needs. When multi-year contracts are not available, or are not available on acceptable terms, we purchase the remainder of our raw materials needs under annual contracts or conduct spot purchases. We also regularly evaluate 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 2020.
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| Prior Significant Positions Held: | Senior Vice President of Fluor Corporation from 2014 to 2016; President and Chief Executive Officer of Savannah River Nuclear Solutions, LLC from 2011 to 2014; Group President, Fluor Industrial from 2007 to 2011; President, Fluor Mining & Minerals from 2003 to 2007; President, Fluor Commercial and Industrial Institutional from 2002 to 2003. |
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| Other Information: | Serves as a trustee of the Fluor Foundation and serves on the Board of Trustees of the Greenville (SC) Health System; serves as a Fellow for the National Association of Corporate Directors; past director of the Urban League of Upstate South Carolina; served as Chairman of the Engineering and Construction Contracting Association from 2002 to 2006. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Mr. Wilson is a retired Senior Vice President of Fluor Corporation. He gained a wide array of experience with different industries and in varied global geographies during his distinguished 35-year career with Fluor, an international, publicly-traded professional services company providing engineering, construction, commissioning, project management and other services to companies around the world. Much of Mr. Wilson’s experience at Fluor was serving manufacturing and raw materials companies with businesses facing similar issues, risks and opportunities to AK Steel. He also served as President and Chief Executive Officer of Savannah River Nuclear Solutions, LLC, the managing and operating contractor of the U.S. Department of Energy’s Savannah River Site, including the Savannah River National Laboratory. In this position, Mr. Wilson gained multi-faceted experience, including navigating complex government regulations and managing a significant workforce in challenging circumstances. He is also a civil engineer, which enables him to provide the Board and Management with a unique, valuable perspective on operational matters. |
Competition
We principally compete with domestic and foreign producers of flat-rolled carbon, stainless and electrical steel, carbon and stainless tubular products, aluminum, carbon fiber, concrete and other materials that may be used as a substitute for flat-rolled steels in manufactured products. Precision Partners and AK Tube both compete against other niche companies in highly fragmented markets.
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 face 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 are developing AHSS grades that we believe provide weight savings similar to aluminum, while being stronger, less costly, more sustainable, easier to repair and more environmentally friendly. Aluminum penetration has been primarily limited to specific automotive applications, such as outer panels and closures, rather than entire body designs. In addition, our automotive customers who continue to use steel, as opposed to aluminum and other alternative materials, are able to avoid the significant capital expenditures required to re-tool their manufacturing processes to accommodate the use of non-steel materials.
Mini-mills (producers using electric arc furnaces) typically have competitive cost advantages as a result of their different production processes and lower labor costs associated with what are often non-union workforces. Their primary raw materials are scrap metal and increasingly pig iron, which blast furnaces produce. Mini-mills generally offer a narrower range of products than integrated steel mills, but the increasing use of pig iron, direct reduced iron and compacted hot briquetted iron have enabled them to expand their product capabilities in recent years. However, mini-mills do not have the equipment capabilities to produce the product range that we offer, nor do they possess our depth of customer service, technical support and research and innovation. Recent new or restarted steelmaking capacity in mini-mills has been primarily intended to service markets other than automotive, thus capping negative impacts to our revenues.
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 U.S. at prices substantially lower than domestic producers. Depending on the country of origin, these reasons may include 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. Since late 2017, import levels of carbon and stainless flat-rolled products into the United States have shown a gradual and steady decline and have recently been more reflective of historical levels before the unprecedented surges that began in 2014. However, import levels for GOES products are much higher than their historical levels. These may not be in the form of master coils or slit coils, but rather in the form of cut laminations or assembled transformer cores—which are imported under different tariff codes not subject to the current Section 232 tariffs. Import levels are affected to varying degrees by the relative level of steel production in China and other countries, the strength of demand for steel outside the U.S. and the relative strength or weakness of the U.S. dollar against various foreign currencies. Imports of finished steel into the United States accounted for approximately 19%, 23% and 27% of domestic steel market consumption in 2019, 2018 and 2017.
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 and foreign steel producers 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, lowering retiree benefit costs for salaried employees, and transferring pension obligations to highly rated insurance companies. These actions have not only reduced some of the risks associated with our pension fund obligations, but more importantly have reduced our risk exposure to performance of the financial markets, which are a principal driver of pension funding requirements. We continue to actively seek opportunities to reduce pension and healthcare benefits costs.
Information about our Executive Officers
The following table provides the name, age and principal position of each of our executive officers as of February 18, 2020:
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Vicente Wright | Director Since: November 1, 2013 Age: 67 Current Principal Occupation: Retired President and Chief Executive Officer of California Steel Industries Current AK Steel Board Committees: • Audit • Corporate Sustainability | Other Public Company Boards: Current - None Prior - None Education: • Bachelor degree in marketing from Marquette University |
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Name | | Age | | Position |
Roger K. Newport | | 55 | | Chief Executive Officer |
Kirk W. Reich | | 51 | Prior Significant Positions Held: | President and Chief OperatingExecutive Officer of California Steel Industries from 2008 to 2012; director of iron ore and pellet sales for VALE SA from 2007 to 2008; President and CEO of Rio Doce America Inc. and Rio Doce Limited, subsidiaries of VALE SA, from 2004 to 2006; President and CEO of California Steel Industries from 2003 to 2004, and Executive Vice President, Finance and CFO from 1998 to 2003. |
Joseph C. Alter | |
42Other Information: | Former Chairman and former member of the board of directors for Children’s Fund; former member of the board of directors of American Iron and Steel Institute; former Chairman of California Steel Industries; former board member of Acominas steel mill in Brazil; former board member of CSN steel mill in Brazil; former Chairman and board member of Nova Era Silicon ferro silicon mill in Brazil; and former board member of SEAS ferro manganese mill in France. |
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Vice President, General CounselNarrative Description of Experience, Qualifications, Attributes and Corporate Secretary |
Brian K. BishopSkills: | | 48 | | Vice President, Carbon Steel Operations |
Stephanie S. Bisselberg | | 49 | | Vice President, Human Resources |
Renee S. Filiatraut | | 56 | | Vice President, Litigation, LaborMr. Wright’s extensive experience in the steel, iron ore and External Affairs |
Gregory A. Hoffbauer | | 53 | | Vice President, Controllerrelated industries enables him to contribute a wealth of strategic and operational knowledge with respect to key issues affecting us. As a former Chief AccountingExecutive Officer |
Michael A. Kercsmar | | 48 | | Vice President, Specialty Steel Operations |
Scott M. Lauschke | | 50 | | Vice President, Sales of another major steel company, he is able to provide valuable insights into the current challenges and Customer Service |
Maurice A. Reed | | 57 | | Vice President, Strategic Planningopportunities for our business. In addition, by virtue of his experience working for one of the world’s largest iron ore producers, he is able to provide guidance with respect to significant trends and Business Development |
Christopher J. Ross | | 52 | | Vice President, Treasureremerging issues pertaining to one of our most significant raw materials. Having served as an executive for several large international metals and Interim Chief Financial Officermining companies, he brings to the Board a global and diverse perspective to our business. Mr. Wright is one of the Board’s “audit committee financial experts.” Mr. Wright also is multi-lingual and has worked in various regions of the world throughout his distinguished career. |
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, and as Vice President, Finance and Chief Financial Officer since May 2012. Prior to that, Mr. Newport served in a variety of other capacities since joining us in 1985, including Vice President—Business Planning and Development, 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, and as Vice President, Procurement and Supply Chain Management since May 2012. Prior to that, Mr. Reich served in a variety of other capacities since joining us in 1989, including Vice President—Specialty Steel Operations, 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. Since joining us in 2009, Mr. Alter served as Corporate Counsel and Chief Compliance Officer and as Corporate Counsel. Prior to joining us, Mr. Alter was Corporate Counsel at Convergys Corporation and 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. Since joining us in 1995, Mr. Bishop progressed through a number of positions, including General Manager—Middletown Works, 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. She also served as Assistant General Counsel—Labor, 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.
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 2011, Ms. Filiatraut was a Partner with Thompson Hine LLP.
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 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. |
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Arlene M. Yocum | Director Since: January 9, 2017 Age: 62 Current Principal Occupation: Retired, Executive Vice President and Managing Executive of Client Service, PNC Asset Management Current AK Steel Board Committees: • Audit • Finance • Management Development & Compensation | Other Public Company Boards: Current - None
Prior • Key Energy Services, Inc. (2007 - 2016) Education: • Bachelor of Arts degree in Economics and Political Science from Dickinson College • Juris Doctor degree from Villanova School of Law |
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. Mr. Kercsmar served in a number of roles since joining us in 1997, including General Manager—Mansfield Works, Manager—Occupational Safety and Health at Middletown Works, Department Manager—South Coating, and Shift Manager in the cold strip mill at Middletown Works.
Scott M. Lauschke has served as Vice President, Sales and Customer Service since joining us in 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, including General Sales Manager.
Maurice A. Reed has served as Vice President, Strategic Planning and Business Development since August 2018. Prior to that, he served as Vice President, Engineering, Raw Materials and Energy since May 2012. Prior to that, Mr. Reed served in a variety of other capacities since joining us in 1996, including Director—Engineering and Raw Materials, Director—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.
Christopher J. Ross has served as Vice President, Treasurer and Interim Chief Financial Officer since November 2019. Prior to that, Mr. Ross was Vice President and Treasurer since January 2018, Treasurer since February 2016 and General Manager, Cash Management and Finance since August 2012. Mr. Ross served in a number of roles since joining us in 1997, including General Manager—Strategic Planning and Financial Analysis, General Manager—Investor Relations and Diversified Business Group, Assistant Treasurer, Manager—Investor Relations, Product Manager—Hot Dip Galvanized and Electrogalvanized, Senior Accountant—Financial Planning and Analysis and Cost Accountant at Middletown Works.
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.
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Item 1A.Prior Significant Positions Held: | Risk Factors.Executive Vice President and Managing Executive of Client Service, PNC Asset Management from 2003 to 2016; Executive Vice President of the Institutional Investment Group, PNC Asset Management from 1998 to 2003; Director, PNC Private Bank from 1995 to 1998. |
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| Other Information: | Serves on the board of Glenmede Trust Company; serves on the board of the Community College of Philadelphia Foundation; served on the board of LaSalle College High School; previously served as trustee of Pierce College and the Philadelphia Bar Foundation; Member, National Association of Corporate Directors (NACD) and Vice Chair of NACD Philadelphia Chapter. |
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Narrative Description of Experience, Qualifications, Attributes and Skills: | Ms. Yocum brings extensive business and management experience to the Board, drawing from her distinguished career in the financial services industry and from her prior service on several other public company boards. As a former executive at PNC Bank, including heading the bank’s Client Sales and Service for PNC’s Asset Management Group, she contributes expertise in a variety of investment and finance areas. Ms. Yocum has also served on, and assumed leadership roles with, multiple other public company boards of directors, including chairing audit committees and a special committee overseeing a complex government investigation. Our Board benefits from this deep and varied board and committee experience, as she is able to share best practices and lesson-learned from other companies. Ms. Yocum is one of the Board’s “audit committee financial experts.” In addition, Ms. Yocum has former board experience with an energy services company, through which she acquired and shares with the Board a broad understanding of the energy industry, which is important in light of the fact that energy is and will always be a vital input and significant expense for our business. |
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 shifting domestic and international political priorities, an uncertain global trade landscape, and intense competition from domestic and foreign competitors producing steel and substitute products. 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 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 decreases in either or both could adversely impact our sales, financial results and cash flows. 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
Audit Committee
The Audit Committee currently has four members consisting of domesticMessrs. Gerber (chair), Essig and global steel overcapacity. Significant global steel capacityWright and new or expanded production capacity in North America in recent years has caused and continues to cause capacity to exceed demand globally, as well as in our primary markets in North America. In fact, significant increases in new production capacity and a restartMs. Yocum. At its March 2019 meeting, the Board of previously idled capacity in the U.S. by our competitors has occurred in recent periods, as new carbon and stainless steelmaking and finishing facilities have begun or may soon begin 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, have slowed relative to recent historical norms, resulting in an increased volume of steel productsDirectors determined that cannot be consumed by industries in those foreign steel producers’ own countries. Although import levels of carbon and stainless flat-rolled products into the United States have shown a gradual and steady decline over the past two years, imports of other steel products remain at historic highs and the risk remains of even greater levels of imports, depending upon foreign market and economic conditions, changes in trade agreements and treaties, laws, regulations or government policies affecting trade, 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.
Risks related to U.S. government actions on trade agreements and treaties, laws, regulations or policies affecting trade. Under the Trump Administration, the U.S. government has altered its approach to international trade policy, both generally and with respect to the matters directly and indirectly affecting the steel industry. In recent years, the U.S. government undertook certain unilateral actions affecting trade and also renegotiated existing bilateral or multi-lateral trade agreements or entered into new agreements or treaties with foreign countries. For example, in March 2018, President Trump signed a proclamation pursuant to Section 232 imposing a 25 percent tariff on imported steel. In retaliation against the Section 232 tariffs, the European Union subsequently imposed its own tariffs against certain steel products and other goods imported from the U.S. If the Section 232 tariffs are removed or substantially lessened, whether through legal challenge, legislation or otherwise, imports of foreign steel would likely increase and steel prices in the U.S. would likely fall, which would materially adversely affect our sales, financial results and cash flows. In addition, on December 10, 2019, representatives of the U.S., Mexico and Canada signed a revision to the United States-Mexico-Canada Trade Agreement (“USMCA”), which was proposed to replace the existing North American Free Trade Agreement (“NAFTA”) among those countries. On January 29, 2020, President Trump signed the USMCA Implementation Act on behalf of the U.S. Because all of our manufacturing facilities are located in North America and our principal market is automotive manufacturing in North America, we believe that the USMCA has the potential to positively impact our business by incentivizing automakers and other manufacturers to increase manufacturing production in North America and to use North American steel. However, it is difficult to predict the short- and long-term implications of changes in trade policy and, therefore, whether USMCA or other new or renegotiated trade agreements, treaties, laws, regulations or policies will have a beneficial or detrimental impact on our business and our customers’ and suppliers’ business. Adverse effects could occur directly from a disruption to trade and commercial transactions and/or indirectly by adversely affecting the U.S. economy or certain sectors thereof, thereby impacting demand for our customers’ products, and in turn negatively affecting demand for our products. Key links of the supply chain for some of our key customers, including automotive manufacturers, could be negatively impacted by USMCA or other new or renegotiated trade agreements, treaties, laws, regulations of policies. Any of these actions and their direct and indirect impacts could materially adversely affect our sales, financial results and cash flows.
Risk of changes in the cost of raw materials, supplies and energy. The price that we pay for energy, key supplies and raw materials, such as electricity, natural gas, industrial gases, graphite electrodes, iron ore, chrome, zinc 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 materials, supplies and energy costs. Global demand and supply, particularly Chinese demand and supply, for certain raw materials can have a significant influence on our costs for those raw materials, especially iron ore and coal, as well as supplies for production whose prices are impacted by raw material prices, such as graphite electrodes and refractory materials. However, our sales prices are generally driven by North American demand, which can result in a compression in our margins in cases where raw material costs increase and our sales prices do not move enough to cover those increases. The majority of our shipments are sold under contracts that do not allow us to pass through all increases in raw materials, supplies and energy costs. Some of our shipments to contract customers include variable-pricing mechanisms allowing us to adjust the total sales price based upon changes in specified raw materials, supplies and energy costs. Those adjustments, however, rarely reflect all of our underlying raw materials, supplies and energy cost changes. The scope of the adjustment may also be limited by the terms of the negotiated language, including limitations on when the adjustment occurs. For shipments we make 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, supplies or energy costs. In such circumstances, a significant increase in raw material, supplies 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 when the price for certain raw materials, supplies or energy declines. For example, 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 prices of raw materials or supplies. New inventory may not be purchased until some portionmembers of the existing inventoryAudit Committee are financially literate and that Ms. Yocum and each of Messrs. Essig, Gerber and Wright is consumed. The impact of this riskan “audit committee financial expert,” as that term 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 maintaining supply agreements where the IODEX, the global iron ore price index, is only one factor affecting our price of iron ore pellets. Significant changes in raw material costs may also
increase the potential for inventory value write-downs in the event of a reduction in selling prices and our inability to realize the cost of the inventory.
Risk from our significant amount of debt and other obligations. On December 31, 2019, we had $1,997.3 of indebtedness outstanding. We also had pension and other postretirement benefit obligations totaling $758.8. We anticipate making approximately $45.0 of required annual pension contributions in 2020. Based on current funding projections, we expect to make contributions to the master pension trust of approximately $45.0 for 2021 and $35.0 for 2022, though funding projections for 2021 and beyond could be materially 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. Furthermore, actions to reduce our pension obligations, such as transferring retiree obligations to insurance companies through purchased annuity contracts could accelerate the timing or increase the amount of contributions that we are required to make to the master pension trust. We also have the ability to borrow additional amounts under our $1,500.0 revolving credit facility (the “Credit Facility”). At December 31, 2019, we had $450.0 of outstanding borrowings under the Credit Facility with outstanding letters of credit of $72.5, resulting in maximum remaining availability of $977.5 under the Credit Facility, subject to customary borrowing conditions, including a borrowing base, which is determined by the value of eligible collateral less outstanding borrowings and letters of credit. At December 31, 2019, borrowing availability under the Credit Facility was $804.6 based on eligible collateral at that time. Our debt and pension obligations, along with other financial obligations, could have important consequences. For example, they 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 (“JVs”) or general corporate purposes; limit our ability to obtain future additional financing; reduce our planning flexibility for, 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 or JVs. 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 also negatively impact our financial results and cash flows. In addition, some 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 or JVs may face such circumstances in the future. Also, we purchase all of our iron ore from Cliffs 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. 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 2019, approximately 66% of our sales were to the automotive market. In addition to the size of our exposure to the automotive industry, we face risks related to our relative concentration of sales to certain specific automotive manufacturers. In 2019, two customers each accounted for 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 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. Additionally, the trend toward lightweighting in the automotive industry, which requires lighter gauges of steel at higher strengths, could result in a lower volume of steel required by that industry over time. Moreover, competition for automotive business has intensified in recent years, 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 the government-mandated CAFE standards, which require increasing fuel economy for automobiles in the future. Automotive manufacturers have 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. For example, one major automotive company has begun substituting aluminum for carbon steel in the body of some of its vehicles. 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 was 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 that 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. 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.
Risk of supply chain disruptions or poor quality of raw materials or supplies. Our sales, financial results and cash flows could be adversely affected by transportation, raw material, energy or other key supply disruptions, or poor quality of raw materials, particularly scrap, coal, coke, iron ore and alloys. In addition, we may experience supply chain disruptions or increased costs from transportation-related challenges due to new or enhanced regulation, changes to providers’ operations, labor shortages or other factors. 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. 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. We have implemented a strategy to target markets for our products that deliver higher margins, where possible, and reduce amounts sold into the typically 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 at facilities we own or at our joint ventures could be caused by unanticipated plant outages or equipment failures, a lack of redundancy for key production assets, or lack of adequate raw materials, energy or other supplies, particularly under circumstances where we lack adequate redundant facilities. Production disruptions could result in significant costs and potential liability to us, as well as negative publicity and damage to our reputation with current or potential customers. 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 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 lower 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 laws governing pensions 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 when it occurs, although its immediate recognition reduces the impact of unrealized gains or losses on future periods. 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 underfunded obligations or we choose to stop participating in the plan. For example, in 2019 the trustees for the IAM National Pension Fund (the “Fund”) voluntarily elected to place the Fund in the Red Zone for 2019 and implement a rehabilitation plan, which requires both an increase in employer contributions and reduction of certain employee pension benefits. Depending on negotiations with one of our affected unions, our contributions to the Fund could increase approximately $2.0 in 2020, with gradually increasing requirements through 2031.
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 2020 and July 2023. One of those contracts is scheduled to expire in 2020. The labor contract with the International Association of Machinists and Aerospace Workers, Local 1943, which governs approximately 1,750 production employees at Middletown Works, expires on March 15, 2020. We intend to negotiate with the union to reach a new, competitive labor agreement in advance of the current expiration date. We cannot predict, however, when a new, competitive labor agreement with the union will be reached or what the impact of such agreement will be on our operating costs, operating income and cash flows. There is the potential of a work stoppage at this location in 2020 and beyond if we cannot reach timely agreement in contract negotiations before the contract expiration. If a work stoppage occurs, it could have a material impact on our operations, financial results and cash flows. For labor contracts at other locations that expire after 2020, 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 11 to the consolidated financial statementsdefined in Item 8. For environmental issues, changes in application or scope407(d)(5) of laws or regulations applicable to us, or negative outcomes in pending or future litigation, could have significant adverse impacts, including requiring capital expenditures to ensure compliance with the laws, regulations, or court decisions, 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 regulations, 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 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. Complex foreign and U.S. laws and regulations apply to our domestic and international operations, including but not limited to the Foreign Corrupt Practices Act and other anti-bribery laws, regulations related to import/export controls, the Office of Foreign Assets Control sanctions program, anti-boycott provisions, the European Union’s General Data Protection Regulation (“GDPR”) and other U.S. and foreign privacy regulations, 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 emissions. Our business and operations, as well as the business and operations of our key suppliers and customers, may become subject to legislation or regulation intended to limit climate change or greenhouse gas emissions. It is possible that limitations on, or taxes or other assessments related to, greenhouse gas emissions may be imposed in the United States through 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 U.S. Congress has introduced from time to time legislation aimed at limiting carbon emissions from carbon-intensive business operations. The CAFE standards and other existing and future climate change-related legislation and regulation could also affect our customers, and in particular our automotive customers, as they may elect to use lower volumes of steel to achieve mandates related to emissions. Similarly, our suppliers may incur cost increases in order to comply with climate control legislation and regulation, which they could in turn attempt to pass through to us in the form of higher prices for critical goods and services. It is impossible 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 legislation or regulation, we could suffer negative financial impacts because of increased energy, operational, 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. Until all of the terms of such regulation and legislation are known, 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 banking markets at competitive rates. Currently, we believe we have adequate access to these markets to meet our reasonably anticipated business needs. We provide and receive normal trade financing to our customers and from our suppliers. If access to competitive financial, credit, capital and 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 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 may result in increased volatility in our reported earnings. For example, we immediately recognize changes in the fair value of our iron ore derivative contracts in earnings when the fair value changes, 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 on an ongoing basis, which includes evaluating each of our plants and operating units to assess their strategic benefits, competitiveness and viability. As part of these reviews, we may idle—whether temporarily or permanently—certain of our existing facilities in order to reduce or eliminate participation in markets where we determine that our returns are not acceptable. For example, in 2019 we permanently closed our Ashland Works plant. Our closure of Ashland Works resulted in the incurrence and acceleration of cash expenses, including those relating to labor benefit obligations, a multiemployer plan withdrawal liability, take-or-pay supply agreements and accelerated environmental remediation costs, as well as charges for impairment of those assets and the effects on pension and OPEB liabilities. Other risks associated with the closure of Ashland Works include, without limitation, our failure to achieve the projected savings and higher than expected closure costs. For operations other than Ashland Works, we could incur similar types of cash and non-cash costs if we elect to temporarily or permanently idle any of our other currently operating assets or facilities as part of our ongoing strategic reviews. We will generally endeavor to transition products produced at an affected operation to our other facilities, including joint ventures. Customers could respond negatively to this requested transition and take current or future business from us. Alternatively, we could fail to meet customer specifications at the facilities to which these products will be transitioned, resulting in customer dissatisfaction or claims, or face other unanticipated operational issues. If we elect to permanently idle other 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 greater value-added mix of products and developing new products that can command higher prices from customers. For example, we expect Precision Partners to continue to grow as it expands its operations and capabilities with revenues that can realize higher margins than our average business. Goodwill is a significant part
of Precision Partners’ assets and our inability to realize the benefits of the growth in its business model could result in an impairment of goodwill. As another example, we have recently undertaken several significant information technology (“IT”) projects, including new and upgraded enterprise systems that affect key areas of our business and operations. Although we anticipate that these IT projects will increase our efficiency, should these projects face unexpected challenges, whether during implementation, adoption or other stages, it could have adverse impacts on our business or operations. Generally, if one or more of these key cost-savings or margin enhancement projects are unsuccessful, are significantly less effective in achieving the level and timing of combined cost savings or margin enhancement than we anticipated, or do not achieve results as quickly as anticipated, our financial results and cash flows could be adversely impacted.
Risk of IT security threats, cybercrime and exposure of private information.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, and our vendors or suppliers may collect and store sensitive data about us in their information system environments. 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. Additionally, regulatory pressure has increased for companies to prevent security breaches and notify stakeholders if data is exposed. These IT security threats and increasingly sophisticated cybercrimes 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 compromise of confidential information, which in turn could adversely affect our reputation, competitive position, business and financial results.
Risks associated with changes in tax laws and regulations. We are a large corporation with operations in the U.S. and other jurisdictions. As such, we are subject to tax laws and regulations of the U.S. federal, state and local governments, as well as various foreign jurisdictions. We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Significant judgment is required in determining our tax provision for income taxes. Changes in tax laws or regulations may be enacted that could adversely affect our overall tax assets and liabilities. Any changes in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction, or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our financial condition and results of operations.
Risks related to the uncertain consideration our stockholders will receive in the Merger because the market price of Cliffs common shares will fluctuate. Subject to the terms and conditions set forth in the Merger Agreement, upon consummation of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (other than restricted shares and shares of our common stock owned by us, Cliffs or Merger Sub) will be converted into the right to receive 0.40 Cliffs common shares (as well as cash in lieu of any fractional Cliffs common shares and any dividends or distributions on the Cliffs common shares with a record date at or after the effective time of the Merger). The exchange ratio in the Merger is fixed, and there will be no adjustment to the consideration to be received by our stockholders in the Merger for changes in the market price of Cliffs common shares or our common stock prior to the completion of the Merger. The market value of Cliffs common shares may fluctuate prior to the closing of the transaction as a result of a variety of factors, including general market and economic conditions, changes in Cliffs’ business, operations and prospects and regulatory considerations. Such factors are difficult to predict and in many cases may be beyond our control or Cliff’s control. The actual value of the consideration to be received by our stockholders at the completion of the Merger will depend on the market value of the Cliffs common shares at that time. This market value may differ, possibly materially, from the market value of Cliffs common shares at the time the Merger Agreement was entered into or at any other time.
Risk that the Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed. The Merger Agreement contains a number of conditions that must be satisfied or waived in order to complete the Merger. Those conditions include, among others:
the adoption of the Merger Agreement by our stockholders;
the approval by Cliffs shareholders of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the issuance of Cliffs common shares in connection with the Merger;
the approval to list the Cliffs common shares issuable in connection with the Merger on the NYSE;
the expiration or termination of the antitrust waiting period applicable to the Merger and receipt of required regulatory approvals in Mexico;
the absence of any governmental order or law prohibiting the consummation of the Merger;
the accuracy of Cliffs’ and our respective representations and warrantiesS-K under the Merger Agreement (subject to the materiality standards set forth in the Merger Agreement);
Cliffs’ and our performance of their respective obligations under the Merger Agreement in all material respects;
the absence of a material adverse effect on Cliffs (as described in the Merger Agreement); and
our receipt of a written opinion of our tax counsel (or, if our tax counsel is unwilling or unable to deliver such tax opinion, Cliffs’ tax counsel, or, if Cliffs’ tax counsel does not deliver such an opinion, subject to our using reasonable best efforts to
obtain the tax opinion from another nationally recognized tax counsel reasonably acceptable to us) regarding the U.S. federal income tax treatment of the transaction.
These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed. In addition, if the Merger is not completed by June 30, 2020 (subject to our and Cliffs’ ability to extend the date to September 30, 2020 and then December 31, 2020 if required antitrust approvals have not yet been obtained or there is an impediment under any antitrust law), either Cliffs or we may choose not to proceed with the Merger. The parties can mutually decide to terminate the Merger Agreement at any time, before or after the receipt of our stockholder approval or Cliffs shareholder approval.
Risk that an adverse ruling in one or more lawsuits filed against AK Steel, its directors, Cliffs, its directors and Merger Sub in connection with the Merger may delay the completion of the Merger or prevent the Merger from being completed. Six actions, including one putative class action lawsuit, have been filed in federal court in Delaware, Michigan and New York by purported stockholders of ours in connection with the Merger: the Stein Action, Spuhler Action, Franchi Action, Raul Action, Ruiz Action and Rubin Action (collectively, the “AK Steel Stockholder Federal Actions”, each as defined and described in Note 11 to the consolidated financial statements in Item 8). A seventh action, the Pate Action (as defined and described in Note 11 to the consolidated financial statements), has been filed by a purported AK Steel stockholder as a putative class action in state court in Ohio (the Pate Action and the AK Steel Stockholder Federal Actions are collectively referred to as the “AK Steel Stockholder Actions.”). Each of the AK Steel Stockholder Actions names AK Steel and its directors as defendants, and the Franchi Action and Pate Action each name Cliffs and Merger Sub as additional defendants. An eighth action, the Nessim Action (as defined and described in Note 11 to the consolidated financial statements), has been filed in federal court in New York against Cliffs and its directors by a purported shareholder of Cliffs (the Nessim Action and the AK Steel Stockholder Federal Actions are collectively referred to as the “Federal Stockholder Actions,” and all eight actions are collectively referred to as the “Stockholder Actions.”). Each of the Federal Stockholder Actions alleges, among other things, that the registration statement on Form S-4 filed by Cliffs in connection with the Merger is false and misleading and/or omits material information concerning the transactions contemplated by the Merger Agreement in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),. The Board further determined that each member of the Audit Committee satisfies the independence requirements of the New York Stock Exchange (“NYSE”) Listed Company Manual Sections 303A.02, 303A.06 and 303A.07 and Rule 14a-9 promulgated under10A-3 of the Exchange Act. The Pate Action alleges breachAudit Committee and each of fiduciary duty claims against the AK Steel directors and aiding and abetting claims against AK Steel, Cliffs and Merger Sub in connection with the transactions contemplated by the Merger Agreement, including that the registration statement on Form S-4 filed by Cliffs in connection with the Merger is false and misleading and/or omits material information concerning the transactions contemplated by the Merger Agreement. The plaintiffs in the Stockholder Actions, amongits members also satisfy all other things, seek to enjoin the transactions contemplated by the Merger Agreement and an awardapplicable requirements of attorneys’ fees and expenses.those provisions.
Additional lawsuits related to the transactions contemplated by the Merger Agreement may be filedExecutive Officers
Information on our executive officers is shown in the future. Even if the lawsuits are without merit, these claims can result in substantial costs and divert management time and resources. There can be no assurance that anyItem 1 of the defendants will be successful in defending the pending or any potential future lawsuits. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin the completion of the Merger. An adverse judgment in any Stockholder Action could result in monetary damages, which could have a negative impact on Cliffs’ and AK Steel’s respective liquidity and financial condition.
Original Filing under Risk of negative impacts on the price of shares ofInformation about our common stock and our debt securities, our future business and financial results as a result of failing to complete the Merger. Executive OfficersIf the Merger is not completed for any reason, including the failure of either company’s stockholders to approve the requisite transactions, our business and financial results may be adversely affected, including as follows:
we may experience negative reactions from the financial markets, including negative impacts on the market price of our common stock and debt securities;
the manner in which customers, vendors, business partners and other third parties perceive us may be negatively impacted, which in turn could affect our ability to compete for new business or obtain renewals in the marketplace more broadly;
we may experience negative reactions from employees, which may adversely affect, among other things, productivity, employee turnover and occupational safety; and
we have and will continue to expend significant time and resources that could otherwise have been spent on our existing businesses and the pursuit of other opportunities that could have been beneficial to us, and our ongoing business and financial results may be adversely affected.
In addition to the above risks, if the Merger Agreement is terminated and our board seeks an alternative transaction, our stockholders cannot be certain that we will be able to find a party willing to engage in a transaction on more attractive terms than the Merger. If the Merger Agreement is terminated under specified circumstances, we also may be required to pay Cliffs a termination fee.
Risks associated with the Merger Agreement limiting our ability to pursue alternatives to the Merger. The Merger Agreement contains provisions that may discourage a third party from submitting an acquisition proposal to us that might result in greater value to
our stockholders than the Merger, or may result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay. These provisions include a general prohibition on our soliciting or, subject to certain exceptions relating to the exercise of fiduciary duties by our board, entering into discussions with any third party regarding any acquisition proposal or offer for a competing transaction, and a termination fee that is payable to Cliffs if we terminate the Merger Agreement to accept a superior acquisition proposal.
Risk of business uncertainties while the Merger is pending and related adverse effects on our business. Uncertainty about the effect of the Merger on employees, suppliers and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause suppliers, customers and others that deal with us to seek to change our existing business relationships. In addition, the Merger Agreement restricts us from entering into certain corporate transactions and taking other specified actions without the consent of Cliffs, and generally requires us to continue our operations in the ordinary course, until completion of the Merger. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger.
Risk of the significant transaction and Merger-related costs exceeding our expectations. We have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement, including, among others, fees paid to financial, legal and accounting advisors, employee retention costs, severance and benefit costs and filing fees. Many of these costs will be borne by us even if the Merger is not completed and could have an adverse effect on our financial condition and operating results.
Risk that uncertainties associated with the Merger cause a loss of management personnel and other employees, which could adversely affect our future business and operations. We are dependent on the experience and industry knowledge of our officers and other employees to execute our business plans. Our success depends in part upon our ability to retain management personnel and other employees. Our current and prospective employees may experience uncertainty about their roles within the combined company following the Merger, which may have an adverse effect on our ability to attract or retain management and other personnel while the transaction is pending.
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Item 1B. | Unresolved Staff Comments. |
None.
We lease our corporate headquarters in West Chester, Ohio, through 2029, with two five-year options to extend the lease. We own our Research and Innovation Center located in Middletown, Ohio.
Our operations consist primarily of seven steelmaking and finishing plants in the United States. We own all of our steelmaking and finishing facilities. In addition, we operate two coke plants, a metallurgical coal production facility, three tube manufacturing plants and ten tooling and stamping operations in the United States, Canada and Mexico.
Butler Works is located in Butler, Pennsylvania, and produces stainless, electrical and carbon steel. Melting takes place in an 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, an argon-oxygen decarburization unit, a ladle metallurgy furnace, a thin-slab continuous caster and a hot rolling mill.
Middletown Works is located in Middletown, Ohio, and melts carbon steel and processes carbon and stainless steel. It consists of a coke facility, a blast furnace, basic oxygen furnaces, a CAS-OB, a vacuum degasser and a 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, a subsidiary, owns a plant in Walbridge, Ohio, which operates six electric resistance welded tube mills. It also has a plant on leased land in Columbus, Indiana, which operates seven electric resistance welded tube mills, three high-speed cold saws. AK Tube’s leased plant in Queretaro, Mexico, operates one electric resistance welded tube mill and one high-speed cold saw.
AK Coal, a subsidiary, produces metallurgical coal from reserves in Somerset County, Pennsylvania.
Mountain State Carbon, LLC, a subsidiary, produces furnace and foundry coke from its cokemaking facility in Follansbee, West Virginia, which consists of four batteries.
Precision Partners, a subsidiary, provides advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies for the automotive market across ten plants in Ontario, Alabama and Kentucky. Its facilities feature seven large-bed, hot-stamping presses providing thirteen lines of production; 81 cold-stamping presses ranging from 200 tons to 3,000 tons of pressing capacity; 17 large-bed, high-tonnage tryout presses with prove-out capabilities for new tool builds; and 144 multi-axis welding assembly cells. Precision Partners owns one facility in Ontario and the remainder are leased.
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Item 3. | Legal Proceedings. |
Information for this item may be found in Note 11 to the consolidated financial statements in Item 8,, which is incorporated herein by reference.
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Item 4. | Mine Safety Disclosures. |
The operationsCompany has adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and Ethics for AK Steel Directors, Officers and Employees, and Code of Ethics for Principal Officers of AK Coal’s North Fork mine and coal wash plant (collectively, the “AK Coal Operations”)Steel, 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,posted 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.our website at www.aksteel.com.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
AK Holding’s common stock is listed on the New York Stock Exchange (symbol: AKS). As of February 18, 2020, there were 316,909,268 shares of common stock outstanding and held of record by 3,470 stockholders. Because depositories, brokers and other nominees hold 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, 2019.
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 2019 | | 414 |
| | $ | 2.43 |
| | — |
| | |
| November 2019 | | — |
| | — |
| | — |
| | |
| December 2019 | | — |
| | — |
| | — |
| | |
| Total | | 414 |
| | 2.43 |
| | — |
| | $ | 125.6 |
|
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(a) | Employees may have us withhold shares to pay federal, state and local taxes due upon the vesting of restricted stock or performance shares under the terms of the AK Steel Holding Corporation 2019 Omnibus Supplemental Incentive Plan. In this event, the withheld shares 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 closing price on the day we withhold the shares. |
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(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. We did not repurchase any of our equity securities under this authorization in 2019. |
The following graph compares cumulative total stockholder return on AK Holding’s common stock for the five-year period from January 1, 2015 through December 31, 2019, 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.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, | | December 31, |
| | 2015 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| AK Holding | $ | 100 |
| | $ | 38 |
| | $ | 172 |
| | $ | 95 |
| | $ | 38 |
| | $ | 55 |
|
| NYSE Arca Steel | 100 |
| | 56 |
| | 107 |
| | 130 |
| | 102 |
| | 111 |
|
| S&P 600 Small Cap | 100 |
| | 97 |
| | 121 |
| | 135 |
| | 122 |
| | 147 |
|
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Item 6.11. | Selected Financial Data.Executive Compensation. |
The following selected historical consolidated financial 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.
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (dollars in millions, except per share and per ton data) |
| Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 6,359.4 |
| | $ | 6,818.2 |
| | $ | 6,080.5 |
| | $ | 5,882.5 |
| | $ | 6,692.9 |
|
| Operating profit (loss) | 209.3 |
| | 364.4 |
| | 260.2 |
| | 217.6 |
| | (67.4 | ) |
| Net income (loss) attributable to AK Steel Holding Corporation (a) | 11.2 |
| | 186.0 |
| | 103.5 |
| | (16.8 | ) | | (652.3 | ) |
| Basic earnings (loss) per share | 0.04 |
| | 0.59 |
| | 0.33 |
| | (0.07 | ) | | (3.67 | ) |
| Diluted earnings (loss) per share (a) | 0.04 |
| | 0.59 |
| | 0.32 |
| | (0.07 | ) | | (3.67 | ) |
| Other Data: | | | | | | | | | |
| Total flat-rolled shipments (in thousands of tons) | 5,342.2 |
| | 5,683.4 |
| | 5,596.2 |
| | 5,936.4 |
| | 6,974.0 |
|
| Selling price per flat-rolled ton | $ | 1,078 |
| | $ | 1,091 |
| | $ | 1,022 |
| | $ | 955 |
| | $ | 929 |
|
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 31.0 |
| | $ | 48.6 |
| | $ | 38.0 |
| | $ | 173.2 |
| | $ | 56.6 |
|
| Working capital | 959.8 |
| | 1,072.7 |
| | 1,070.1 |
| | 1,077.1 |
| | 899.5 |
|
| Total assets (b) | 4,590.6 |
| | 4,515.7 |
| | 4,474.8 |
| | 4,101.7 |
| | 4,157.8 |
|
| Long-term debt | 1,968.8 |
| | 1,993.7 |
| | 2,110.1 |
| | 1,816.6 |
| | 2,354.1 |
|
| Current portion of pension and other postretirement benefit obligations | 41.0 |
| | 38.7 |
| | 40.1 |
| | 41.3 |
| | 77.7 |
|
| Pension and other postretirement benefit obligations (excluding current portion) | 717.8 |
| | 829.9 |
| | 894.2 |
| | 1,093.7 |
| | 1,146.9 |
|
| Total equity (deficit) | 477.3 |
| | 429.5 |
| | 300.6 |
| | 149.8 |
| | (528.4 | ) |
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(a) | In 2019, we recorded a charge of $69.3 ($0.22 per diluted share) to permanently close Ashland Works. In 2019, 2018 and 2016, we recorded pension settlement charges of $26.9 ($0.08 per diluted share), $14.5 ($0.05 per diluted share) and $25.0 ($0.11 per diluted share). In 2017, we recorded an asset impairment charge of $75.6 ($0.24 per diluted share) related to the Ashland Works blast furnace and steelmaking operations (“Ashland Works Hot End”COMPENSATION DISCUSSION AND ANALYSIS (“CD&A”) and a credit of $19.3 ($0.06 per diluted share) for the reversal of a liability for transportation costs. In 2016, we also recorded costs of $69.5 ($0.30 per diluted share) to terminate a pellet offtake agreement and for related transportation costs. Under our method of accounting for pensions and other postretirement benefits, we recorded pension corridor charges of $78.4 ($0.34 per diluted share) and $144.3 ($0.81 per diluted share) in 2016 and 2015, and OPEB corridor credits of $35.3 ($0.15 per diluted share) and $13.1 ($0.07 per diluted share) in 2016 and 2015. In 2015, we also recorded a charge for a temporary facility idling of $28.1 ($0.16 per diluted share) for the Ashland Works Hot End and impairments of our investments in our former Magnetation LLC joint venture of $256.3 ($1.44 per diluted share) and AFSG Holdings, Inc. of $41.6 ($0.23 per diluted share). |
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(b) | We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), as of January 1, 2019 through the modified retrospective method and recorded additional lease assets and liabilities of $291.1 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting treatment.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Executive Overview
We are a leading producerSummary of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets. Our downstream businesses also provide customer solutions with carbon and stainless steel tubing products, high-end stainless steel finishing, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies.2019 Pay-For-Performance Executive Compensation Program
Pay-for-performance is the foundational principle of our executive compensation program. Our mission isBoard of Directors and its Management Development and Compensation Committee (“Committee”) evaluate each major executive compensation decision as to whether it incentivizes executive management to create innovative, high-quality steel solutionslong-term value for our customers and our key values of safety, quality, productivity and innovation, along with environmental responsibility and sustainability, are its foundation. We target customers who require the most technically demanding, highest-quality steel products, “just-in-time” delivery, technical support and product development assistance. Our robust 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 our customer markets. We focus on value-added steel solutions rather than sales into commodity steel markets.
2019 Financial Overview
In 2019, we made significant capital investments to strengthen the company for the long-run, including a major planned outage that willwe expect to lower our steelmaking costs at Dearborn Works and the construction of a new Precision Partners facility to grow our market position and capabilities in automotive stamping and complex assembly. While thosewe expect these investments will benefit the company in future years, we faced market headwinds in 2019 that impacted our financial results. Those headwinds included lower shipments resulting from challenging steel market conditions with softening spot market steel pricesproved challenging and a slight declinepressured our financial performance in automotive demand, including reduced shipments to General Motors as2019. We generated $92 million of net income under the terms of the Omnibus Management Incentive Plan (“OMIP). As a result, under our annual performance-based incentive plan (the “Annual Plan”), the Named Executive Officers (“NEOs”) earned awards at approximately 34% of target (approximately 17% of maximum) for 2019. This included the NEOs receiving 0% of the 40-day strike that halted its vehicle production. Our 2019 net income was $11.2, or $0.04 per diluted sharefinancial component of common stock, which reflected a charge for the Ashland Works closure of $69.3 (or $0.22 per diluted share), compared to 2018 net income of $186.0, or $0.59 per diluted share. Our 2019 results also reflected a pension settlement charge of $26.9, or $0.08 per diluted share, from a pension annuity transaction that we entered into in the fourth quarter of 2019 as part of our efforts to de-risk our balance sheet. Our 2018 results reflected a pension settlement charge of $14.5, or $0.05 per diluted share, for a separate pension annuity transaction that we entered into in 2018. Excluding the Ashland closure and pension settlement charges, 2019 adjusted net income was $107.4, or $0.34 per diluted share, compared to 2018 adjusted net income of $200.5, or $0.64 per diluted share. Our adjusted EBITDA (as defined in Non-GAAP Financial Measures) was $446.5, or 7.0% of net sales, for 2019, compared to adjusted EBITDA of $563.4, or 8.3% of net sales, for 2018.Annual Plan.
Our 2019 results reflected lower shipments of flat-rolled steel from a year ago, primarily due to a softening of salesUnder our long-term performance-based incentive plan (the “Long-Term Plan,” which reference is to the distributorsLong-Term Performance Plan for performance periods beginning prior to 2018 and converters market and reduced shipments to the automotive market. The average selling price per flat-rolled steel ton decreased by 1%OMIP for periods beginning in 2018 or after), our three-year cumulative adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 to 2019 from 2018, primarily dueperformance cycle of $1,466 million exceeded the target goal, but fell short of the maximum goal, as the NEOs earned awards under the Long-Term Plan at approximately 122% of target (approximately 61% of maximum). During this three-year period, Management stabilized the company and undertook strategic actions to lower selling prices for carbon spot market sales. These impacts were partially offset by higher selling prices toenhance margins and improve our financial performance through the automotive market and lower costs for scrap, alloys and energy. Maintenance outage costs in 2019 were $81.0, compared to $91.1 in 2018. We recorded mark-to-market unrealized gains on iron ore derivatives of $49.6 in 2019, as compared to unrealized gains of $0.2 in 2018.cycle.
In January 2019, we announcedthe Committee proactively incorporated the following significant pay-for-performance enhancements to further strengthen management’s alignment with our intent to close Ashland Works, including the previously idled blast furnace and steelmaking operations (“Ashland Works Hot End”), and the hot dip galvanizing coating line that had remained operational. During 2019, we transitioned products to our other, lower cost U.S. coating lines and in November 2019 ceased operations at the Ashland Works coating line. We recorded a charge of $69.3, or $0.22 per diluted share, during 2019 for termination of certain take-or-pay agreements, supplemental unemployment and other employee benefit costs, estimated multiemployer plan withdrawal liability, and other costs. See discussion below and in Note 3 to the consolidated financial statements.stockholders by:
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| ○ | reducing all NEO equity grant values for 2019 by 30% to 35%, depending on the particular NEO; |
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| ○ | further increasing the stock component of the Long-Term Plan to 50% stock from 30%; |
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| ○ | applying the aforementioned 30% to 35% reduction in 2019 NEO equity grant values to the 50% stock-denominated portion of the Long-Term Plan, thereby reducing the value of this component of NEO compensation; and |
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| ○ | not increasing base salaries or target cash compensation for most NEOs in 2019, including the Chief Executive Officer (“CEO”) and the President and Chief Operating Officer (“COO”). |
DuringIn addition, (i) nearly all outstanding stock options were “underwater” (i.e., below the respective option exercise prices) as of December 31, 2019, we transferred $615.6 of pension obligations to a highly-rated insurance company for approximately 4,250 retirees or their beneficiaries. Since mid-2016, we have transferred a total of $1.1 billion in pension trust assets to purchase four non-participating annuity contracts that require highly-rated insurance companies to pay the transferred pension obligations to approximately 20,000 pension participants. The settlement charges related to these transactions represent the recognition of unrealized actuarial losses that were being recognized over the future estimated remaining livesand (ii) none of the affected pension participants.performance share grants for the 2017 - 2019 performance period were earned based on the stock price as of the end of the three-year performance period on December 31, 2019.
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| I. | Overview of AK Steel Executive Compensation Program |
2019 Compared to 2018Key Executive Compensation Program Elements
Steel Shipmentsbase salary;
Flat-rolled steel shipmentsLong-Term Plan awards under the OMIP (which replaced the Long-Term Performance Plan in 2019 were 5,342,200 tons, a 6% decrease compared to 2018 shipments2017 for three-year performance periods beginning in 2018);
awards of 5,683,400 tons. The decrease was a resultstock options, restricted stock and performance shares under our Stock Incentive Plan (“Stock Plan”); and
certain employee benefits and post-employment benefits.
Named Executive Officers
For purposes of lower shipmentsthis CD&A, the term “NEOs” refers to the distributorsfollowing in reference to 2019:
Roger K. Newport - CEO
Kirk W. Reich - President and converters marketCOO
Christopher J. Ross - Vice President, Finance, Treasurer and a 6% decline in shipments to the automotive market, due in part to the 40-day strike atInterim Chief Financial Officer (“CFO”)
Joseph C. Alter - Vice President, General Motors. Shipments of flat-rolled steel by product category for 2019Counsel and 2018, as a percent of total flat-rolled steel shipments, were as follows:
Flat-Rolled Steel Shipments by Product CategoryScott M. Lauschke - Vice President, Sales and Customer Service
|
| | | | | | | | |
| II. | | | | | | | | Discussion and Analysis of Executive Compensation Program |
Net Sales
The following table presents information on net sales:
|
| | | | | | | | | | | |
| | | 2019 | | 2018 | | Increase (Decrease) |
| Net sales | | $ | 6,359.4 |
| | $ | 6,818.2 |
| | (7 | )% |
| Average net selling price per ton | | 1,078 |
| | 1,091 |
| | (1 | )% |
| Net sales outside the United States | | 569.4 |
| | 634.8 |
| | |
| Net sales outside the United States as a percent of net sales | | 9 | % | | 9 | % | | |
The decrease in net sales was driven primarily by lower shipments and lower spot market steel pricing, which includes the effect of surcharges, partly offset by higher selling prices for automotive shipments. The decrease in average net selling price per ton was primarily driven by reduced selling prices in the carbon spot market.
The following table presents the percentage of net sales to eachSet forth below is a more detailed description of our markets:executive compensation program, organized in a question-and-answer format.
Who has the direct responsibility for determining executive compensation? |
| | | | | | |
| Market | | 2019 | | 2018 |
| Automotive | | 66 | % | | 63 | % |
| Infrastructure and Manufacturing | | 16 | % | | 15 | % |
| Distributors and Converters | | 18 | % | | 22 | % |
Cost of Products Sold
Cost of products sold in 2019 of $5,606.3, or 88.2% of net sales, decreased from 2018 cost of products sold of $5,911.0, or 86.7% of net sales.Discussion: The decrease was largely due to a lower volume of shipments and lower costsCommittee has the direct responsibility for scrap, alloys and energy, which were partially offset by higher costs for iron ore, coal and coke. Cost of products sold in 2019 included total outage costs of $81.0, compared to total outage costs in 2018 of $91.1, which included unplanned outage costs at our Middletown Works totaling $50.9. We had $18.9 of insurance recoveries in 2019, compared to insurance recoveries totaling $15.1 in 2018. We recorded mark-to-market gains of $49.6 and $0.2 for 2019 and 2018 from iron ore derivatives that do not qualify as cash flow hedges for accounting purposes.
Selling and Administrative Expense
Selling and administrative expense decreased to $295.2 in 2019 from $322.6 in 2018. The decrease was primarily a result of lower variabledetermining the compensation expense compared to the prior year.
Depreciation Expense
Depreciation expense decreased to $192.6 in 2019 from $220.2 in 2018. The decline was primarily a result of a significant amount of fixed assets related to the initial construction of our Rockport Works facility becoming fully depreciatedExecutive Officers and is also responsible for overseeing our policies and programs for succession planning and the development of other senior Management personnel. When the Committee deems it appropriate, it may, in its discretion, seek ratification of its determinations by the Board. The Committee also is responsible for establishing, and periodically reviewing, our executive compensation philosophy and policies and, as of December 31, 2018, partly offset by higher depreciation at SunCoke Middletown.
Ashland Works Closure
As a result of the decision to permanently close Ashland Works discussed in Note 3 to the consolidated financial statements, we recorded a charge in 2019 of $69.3, which included $18.5 for termination of certain take-or-pay supply agreements, $20.1 for supplemental unemployment and other employee benefit costs, pension and other postretirement employee benefit (“OPEB”) termination benefits of $13.3 (recorded in pension and OPEB (income) expense), an estimated multiemployer plan withdrawal liability of $10.0, and $7.4 for other costs.
Operating Profit
Operating profit for 2019 of $209.3 was lower than 2018 operating profit of $364.4. Included in operating profit was SunCoke Middletown’s operating profit of $52.2 and $58.4 for 2019 and 2018.
Interest Expense
Interest expense for 2019 decreased to $146.6 from $151.6 in 2018, primarily as a result of lower average borrowings under the Credit Facility in 2019.
Pension and OPEB (Income) Expense
Pension and OPEB expense was $12.0 in 2019, compared to income of $19.2 in 2018. The change from income to expense in 2019 was primarily due to pension and OPEB termination benefits of $13.3 recognized in 2019 associated with the Ashland Works closure and a lower expected return on plan assets, partially offset by a greater amount of amortization of unrealized gains. We also recorded settlement losses of $26.9 and $14.5 in 2019 and 2018 as a result of purchases of non-participating annuity contracts for certain retirees and lump sum payouts to new retirees.
Other (Income) Expense
Other (income) expense was income of $18.5 in 2019 and income of $5.9 in 2018. Included in 2019 was a gain of $11.6 related to the sale of electrical transmission assets at our Dearborn Works.
Income Tax Expense (Benefit)
We recorded income tax expense of $6.2 in 2019, compared to an income tax benefit of $6.2 in 2018. Included in 2018 is an income tax benefit of $5.3 as a result of a reduction in our valuation allowance caused byappropriate, will recommend changes to the tax net operating loss carryover rulesBoard.
Committee Membership
The Committee is comprised entirely of Directors who have been determined by the Board of Directors to meet the independence standards of the Securities and Exchange Commission (“SEC”) and the NYSE. Each member of the Committee currently is also an “outside” Director for purposes of Section 162(m) of the Internal Revenue Code. There currently are four members of the Committee. They are Mmes. Edison and Yocum and Messrs. Kenny and Michael, who is Chair of the Committee and also serves as our Non-Executive Chair of the Board.
Committee Charter and Responsibilities
The general function of the Committee is to oversee our policies and program with respect to executive compensation, succession planning and the development of senior Management personnel. The Committee operates under a written charter reviewed and approved by our full Board of Directors. The Committee’s Charter describes its specific responsibilities and is available at www.aksteel.com.
Committee Support and Use of Independent Executive Compensation Consultant
In discharging its responsibilities, the Committee is empowered to inquire into any matter that it considers appropriate to carry out its responsibilities. The Committee has the power to retain outside counsel and compensation consultants or other advisors to assist it in carrying out its responsibilities. We are required to, and do, provide adequate resources to support the Committee’s activities, including compensation of the Committee’s counsel, compensation consultant and other advisors. The Committee has the sole authority to retain, compensate, direct, oversee and terminate such counsel, compensation consultants, and other advisors hired to assist the Committee and all such advisors are ultimately accountable to the Committee.
The Committee engages an independent executive compensation consultant who reports directly to the Committee to assist it in designing the executive compensation program, as well as determining executive compensation for any given year. In connection with the 2019 executive compensation program, the Committee retained Frederic W. Cook & Co. (“FW Cook”) as its independent consultant for executive compensation matters. As appropriate, the Committee’s consultant also works with Management on behalf of the Committee, in particular with Ms. Stephanie S. Bisselberg, our Vice President, Human Resources, to develop internal compensation data and to implement compensation policies, plans and programs. The consultant, at the Committee’s request, also works with the CEO to assist him in developing his recommendations to the Committee for non-CEO Executive Officer compensation packages. The consultant provides analytical assistance and data to the Committee on the design, implementation and evaluation of our compensation program for Executive Officers. This includes providing assistance to the Committee in identifying similarly-situated companies to be included in a peer group to be used to develop competitive data. That data is used as one reference point of many in the Tax Cutsannual determination of base salary and Jobs Actcash- and equity-based incentives. The consultant also periodically compiles relevant market data to supplement the peer group data. The consultant further assists the Committee in developing, evaluating and administering incentive plans, agreements addressing post-termination benefits, and other ongoing compensation-related arrangements or benefits. On request, the consultant also provides services to the Board and the Nominating and Governance Committee on Director compensation matters. Except as described above, the consultant does not provide any other services to us.
The Committee annually assesses the performance and independence of 2017its compensation consultant. For 2019, the Committee determined that allowFW Cook is independent and that its engagement does not present any conflicts of interest, having considered various factors, including, without limitation, the following: (1) the amount of fees received by FW Cook from us is less than 1% of FW Cook’s total revenue; (2) FW Cook has adopted policies and procedures which appear to use certain indefinite-lived deferred tax liabilitiesbe reasonably and effectively designed to prevent conflicts of interest; (3) neither FW Cook nor any member of its consulting team serving us owns any of our stock or an equity derivative thereof; (4) FW Cook does not provide any services to us other than as described in this Annual Report on Form 10-K/A in its capacity as an independent advisor with respect to Executive Officer and Director compensation; and (5) after reasonable and appropriate inquiry, we have not identified any business or personal relationships between FW Cook and any of our Executive Officers or any member of the Committee. After reviewing these and other factors. FW Cook also separately determined, and affirmed in a sourcewritten statement delivered to the Chair of future income to realize deferred tax assets.
Net Incomethe Committee, that it is independent and Adjusted Net Income Attributable to AK Steel Holding Corporation
Net income attributable to AK Holding in 2019 was $11.2, or $0.04 per diluted share. Net income in 2019 included a charge for the Ashland Works closurethat its engagement does not present any conflicts of $69.3, or $0.22 per diluted share, and a pension settlement loss of $26.9, or $0.08 per diluted share. Excluding these items, we reported adjusted net income attributable to AK Holding of $107.4, or $0.34 per diluted share, for 2019.
Net income attributable to AK Holding in 2018 was $186.0, or $0.59 per diluted share. Net income in 2018 reflected a pension settlement charge of $14.5, or $0.05 per diluted share. Excluding this item, we reported adjusted net income attributable to AK Holding of $200.5, or $0.64 per diluted share, for 2018.
Adjusted EBITDA
Adjusted EBITDA was $446.5, or 7.0% of net sales, for 2019, as compared to $563.4, or 8.3% of net sales, for 2018.
ForWhat is our compensation philosophy?
Discussion: The Committee believes that a comparisonwell-designed executive compensation program includes both annual and long-term performance incentives. While annual incentive awards are an important factor in motivating executives for the short-term, the Committee believes that long-term incentives reduce the impact of volatility in business conditions on the performance-related components of the year ended December 31, 2018executive compensation program and also establish a stronger link between the executives’ earnings opportunity and our long-term financial performance and growth. Consistent with these principal objectives, a significant portion of the overall compensation package for each of our NEOs and other Executive Officers includes components that link the executive’s compensation to our performance.
The Committee designs our compensation program to reward superior performance and to provide financial consequences for falling short of targeted performance. Consistent with that design objective, and the goal of attracting, motivating and retaining executives of high caliber and ability who will drive our success, the Committee attempts to establish a fair and reasonable target compensation level for each NEO and other Executive Officer that reflects not only individual performance, but also is competitive relative to the year ended December 31, 2017, referExecutive Officer’s internal and external individual peers. The percentage of total compensation that is performance-based generally increases with the level of seniority and/or responsibility of the executive. There is no set formula or policy, however, regarding the allocation between performance-based and non-performance-based compensation. Nor is there any set formula or policy for the allocation between cash and non-cash compensation. In general, the Committee aims to set annual target total direct compensation levels at or near the market median for similarly-situated executive officers at peer group and/or other comparable companies. However, individual Executive Officer positioning may be above or below the median depending on Executive Officer-specific factors, such as performance, tenure, criticality to the Company and other relevant items.
Did the Committee make any significant structural changes to the executive compensation program?2018 Compared to 2017
, which is incorporated herein by reference, of Management’s Discussion and Analysis of Financial Condition and Results of OperationsDiscussion: in Item 7Yes. During each year, the Committee periodically reviews the effectiveness and competitiveness of our Annual Report on Form 10-K forexecutive compensation program. The Committee engages in this review with the year ended December 31, 2018.
Non-GAAP Financial Measures
In certainhelp of FW Cook, who provides data that enables the Committee to compare our program, as well as the specific compensation packages of each of our disclosures, we have reported adjusted EBITDA, adjusted EBITDA marginExecutive Officers, to our peers and adjusted net income attributable to AK Holding that excludeother relevant benchmarking and market data. In addition, every three years the effectsCommittee periodically engages in a more comprehensive “deep dive” review of noncontrolling interests, costs associated with the closureprogram. With the assistance of Ashland Works, pension settlement charges and a credit for adjustment to a liability for transportation costs. We believe that reporting adjusted net income 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 understandingFW Cook, the Committee reviews the design of each of our overall financial performance. Adjustments to net income attributable to AK Holding do not result in an income tax effect as any gross income tax effects are offset by a corresponding changeincentive and retirement plans for our NEOs, other Executive Officers and other members of senior Management, evaluates them in the deferred income tax valuation allowance.
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 the adjustments to EBITDA noted in the preceding paragraph. 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 thosecontext of our competitorspeer group, market data and recent executive compensation trends as provided by FW Cook, and considers the views, perspectives and policies of our largest stockholders, proxy advisory firms and other significant third party stakeholders. At its January 2019 meeting, the Committee evaluated our executive compensation program and assessed additional changes to the program (with the approval of or ratification from the Board, as applicable) aimed at increasing Management’s alignment with our prior financial performance by excluding items that otherwise would distortstockholders’ interests. The Committee implemented two significant changes to the comparison. Adjusted EBITDA, adjusted EBITDA margin and adjusted net income are not, however, intended as alternative measures of operating results or cash flow from operations as determinedprogram in accordance with GAAP and are not necessarily comparable to similarly titled measures used by other companies.
Neither current stockholders nor potential investors in our securities should rely on adjusted EBITDA, adjusted EBITDA margin or adjusted net income 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.
Reconciliation of Adjusted EBITDA
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Net income attributable to AK Holding | | $ | 11.2 |
| | $ | 186.0 |
| | $ | 103.5 |
|
| Net income attributable to noncontrolling interests | | 51.8 |
| | 58.1 |
| | 61.4 |
|
| Income tax expense (benefit) | | 6.2 |
| | (6.2 | ) | | (2.2 | ) |
| Interest expense, net | | 145.7 |
| | 150.7 |
| | 150.9 |
|
| Depreciation and amortization | | 209.8 |
| | 237.0 |
| | 236.3 |
|
| EBITDA | | 424.7 |
| | 625.6 |
| | 549.9 |
|
| Less: EBITDA of noncontrolling interests (a) | | 74.4 |
| | 76.7 |
| | 77.7 |
|
| Ashland Works closure | | 69.3 |
| | — |
| | — |
|
| Pension settlement charges | | 26.9 |
| | 14.5 |
| | — |
|
| Credit for adjustment of liability for transportation costs | | — |
| | — |
| | (19.3 | ) |
| Asset impairment charge | | — |
| | — |
| | 75.6 |
|
| Adjusted EBITDA | | $ | 446.5 |
| | $ | 563.4 |
| | $ | 528.5 |
|
| Adjusted EBITDA margin | | 7.0 | % | | 8.3 | % | | 8.7 | % |
| |
(a)• | Further bolstering the stock component of the long-term incentive plan - In order to further align Management and stockholder interests in creating value over the long run, the Committee increased the equity component for Executive Officers’ long-term incentive compensation to 50% denominated in AK Steel stock and 50% denominated in cash. |
| |
| • | Dramatically reducing the value of 2019 equity awards to Executive Officers - The reconciliationCommittee reduced the 2019 equity grant values to all Executive Officers, including the NEOs, by 30% to 35%, depending on the particular officer. This 30% to 35% reduction in 2019 NEO equity grant values also applied to the 50% stock denominated portion of net income attributable to noncontrolling interests to EBITDAthe Long-Term Plan, thereby reducing the value of noncontrolling interests is as follows:this component of NEO compensation. |
Finally, although not a change to the compensation program’s design per se, the Committee elected not to increase the 2019 base salaries or target cash compensation for most NEOs, including the CEO and the President and COO. |
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Net income attributable to noncontrolling interests | | $ | 51.8 |
| | $ | 58.1 |
| | $ | 61.4 |
|
| Depreciation | | 22.6 |
| | 18.6 |
| | 16.3 |
|
| EBITDA of noncontrolling interests | | $ | 74.4 |
| | $ | 76.7 |
| | $ | 77.7 |
|
We have long had a practice of not re-pricing or replacing stock options when our stock is at a price below which such options are exercisable. We first formalized this practice into a policy in January 2012. The policy was incorporated at that time in our Corporate Governance Guidelines. Those guidelines are available on our website at www.aksteel.com. Our stockholders have approved our Stock Plan, which also explicitly prohibits, in the absence of stockholder approval, the re-pricing or replacing of outstanding options.
Compensation Clawback Policy
The Board has adopted a compensation clawback policy, which provides that we may recoup cash and equity of performance-based incentive compensation from officers covered by the policy if the Board determines that the officer has engaged in knowing or intentional fraudulent or illegal conduct that resulted in the achievement of financial results or the satisfaction of performance metrics that increased the amount of such compensation.
ReconciliationStockholder Approval of Adjusted Net IncomeCertain Severance Agreements with Senior Executives
The Board also has adopted a policy concerning stockholder approval of certain severance agreements with our senior executives, including our NEOs. That policy provides that the Board should seek stockholder approval or ratification of severance agreements with our senior executives if such agreements require payment of benefits attributable to severance in an amount exceeding 2.99 times the sum of the senior executive’s annual base salary plus annual and long-term incentive awards payable for the then-current calendar year. For purposes of this policy, the term “severance agreement” means an employment agreement, retirement agreement or change-of-control agreement which contains a provision for payment of benefits upon severance of employment with us, as well as renewals, modifications or extensions of such agreements. The term “senior executive” means the CEO, President and COO, CFO, principal accounting officer and any of our Vice Presidents. The term “benefits” means lump-sum cash payments (including cash payments in lieu of medical benefits) and the estimated present value of future periodic cash payments to be paid to a senior executive in excess of what he or she otherwise would be entitled to receive under the terms of any qualified or non-qualified pension or employee benefit plan.
Stock Retention Guidelines for Executive Officers
In January 2017, the Board, at the recommendation of the Committee, adopted enhanced stock retention guidelines for Executive Officers to replace the prior guidelines. The adoption of the stock retention guidelines was principally motivated by the desire to implement a more modern design that provides some additional flexibility to the Executive Officers while maintaining the linkage between their interests and those of stockholders by requiring a minimum level of stock ownership. The stock retention guidelines require each Executive Officer to retain 50% of the “Net Profit Shares” (as defined below) resulting from stock option exercises and/or vesting of other stock-based awards until they reach their required stock ownership level. “Net Profit Shares” are the shares remaining after payment of the option exercise price and taxes owed upon exercise of stock options, vesting of restricted stock, and vesting of performance shares. Each Executive Officer’s compliance with the Policy is determined as of December 31 of each year by comparing (i) the required stock ownership level, which is equal to the Executive Officer’s base salary multiple as of December 31, multiplied by the Officer’s annual base salary as of December 31; and (ii) the Executive Officer’s year-end stock ownership level, which is the stock they owned as of December 31, multiplied by our average month-end closing stock price for the twelve months of that year. The stock ownership levels, expressed as a multiple of annual base salary, are as follows:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Reconciliation to Net Income Attributable to AK Holding | | | | | | |
| Net income attributable to AK Holding, as reported | | $ | 11.2 |
| | $ | 186.0 |
| | $ | 103.5 |
|
| Ashland Works closure | | 69.3 |
| | — |
| | — |
|
| Pension settlement charges | | 26.9 |
| | 14.5 |
| | — |
|
| Credit for adjustment of liability for transportation costs | | — |
| | — |
| | (19.3 | ) |
| Asset impairment charge | | — |
| | — |
| | 75.6 |
|
| Adjusted net income attributable to AK Holding | | $ | 107.4 |
| | $ | 200.5 |
| | $ | 159.8 |
|
| | | | | | | |
| Reconciliation to Diluted Earnings per Share | | | | | | |
| Diluted earnings per share, as reported | | $ | 0.04 |
| | $ | 0.59 |
| | $ | 0.32 |
|
| Ashland Works closure | | 0.22 |
| | — |
| | — |
|
| Pension settlement charges | | 0.08 |
| | 0.05 |
| | — |
|
| Credit for adjustment of liability for transportation costs | | — |
| | — |
| | (0.06 | ) |
| Asset impairment charge | | — |
| | — |
| | 0.24 |
|
| Adjusted diluted earnings per share | | $ | 0.34 |
| | $ | 0.64 |
| | $ | 0.50 |
|
|
| | |
Position | | Stock Ownership Level |
| CEO | | 3x |
| President and COO | | 2x |
| CFO | | 1.5x |
| Other Executive Officers | | 1x |
LiquidityPolicy Prohibiting Insider Trading, Hedging Transactions and Capital Resources
We have long had a revolving credit facility (the “Credit Facility”)formal policy that expiresprohibits all Directors and employees, including the Executive Officers, who have material, non-public information about us from trading in September 2022our securities. The policy also explicitly prohibits all employees from engaging in hedging or monetization transactions, pledging our securities as collateral for loans, holding our securities in margin accounts and engaging in short sales. In March 2018, we revised our Insider Trading and Anti-Hedging Policy to expressly include knowledge of a major cybersecurity event as a potential item of material non-public information that would preclude trading in AK Steel securities.
How does the Committee determine executive compensation?
Discussion:
Use of Competitive Data in the Compensation Determination Process
Each year, the Committee’s executive compensation consultant develops competitive compensation data based upon publicly available information from a peer group of comparable companies, as well as other general industry survey data. The Committee relies upon and considers this information as a factor in its determination, and although the Committee generally targets the median compensation for its NEOs and Executive Officers with individuals with similar roles and responsibilities at peer group companies, it does not have a $1,500.0 commitment. At December 31, 2019, we had total liquiditypolicy or practice of $835.4, consistingutilizing a particular market compensation percentile as a benchmark for purposes of $30.8 of cash and cash equivalents and $804.6 of availability under the Credit Facility. Our obligations under the Credit Facility are secured by inventory and accounts receivable. Availability under the Credit Facility fluctuates monthly based on our varyingdetermining compensation levels of eligible collateral. Our eligible collateral was $1,327.1 at December 31, 2019, after application of applicable advance rates. At December 31, 2019, we had $450.0 of outstanding borrowings under the Credit Facility, and $72.5 of outstanding letters of credit that further reduced availability. During the year ended December 31, 2019, our borrowings from the Credit Facility ranged from $285.0 to $475.0, with outstanding borrowings averaging $356.0 per day.
We believe that our current sources of liquidity will be adequate to meet our obligations for the foreseeable future. We expectvarious components of executive pay. The Committee principally uses this competitive data as one factor for assessing the reasonableness of any compensation package the Committee is considering for an Executive Officer. In addition, this peer group data enables the Committee to fund future liquidity requirements for items such as capital investments, employeebetter understand what competitors or other potential employers may pay to entice away an existing Executive Officer and retiree benefit obligations, scheduled debt maturitieswhat we must pay to attract and debt redemptionsretain new Executive Officers, thereby assisting the Committee with internally generated cashits goal of attracting and other financing sources. As partretaining executives of our effortshigh caliber to improve our capital structure, we regularly evaluate accessing the capital markets as a source of liquidity if we view conditions as favorable. We may use the Credit Facility as necessary to fund requirements for working capital, capital investments and other general corporate purposes. We are focused on reducing debt through free cash flow generation. Our Credit Facility is scheduled to expire in September 2022 and any amounts outstanding under it at the time of expiration would need to be repaid or refinanced.
From time to time, we may repurchase, as we have done previously, outstanding notes in the open market on an unsolicited basis, by tender offer, through privately negotiated transactions or otherwise. Our forward-looking statements on liquidity are based on currently available information and expectations and, if the information or expectations are inaccurate or conditions deteriorate, there could be a material adverse effect on our liquidity.
We have significant debt maturities and other obligations that will be due in future periods, including possible required cash contributions to our qualified pension plan. For further information, see the Contractual Obligations section.
Cash from operating activities totaled $265.9 for 2019, which includes $68.6 that was generated by and can only be used by SunCoke Middletown for its operations or for distribution to its equity owners. Cash generated from a $60.2 decrease in accounts receivable, a $73.7 decrease in inventory and a $75.0 decrease in other assets was partially offset by cash used for a $172.8 decrease in accounts payable and other current liabilities. During the year, we made required annual pension contributions of $43.5 and payments for other pension and OPEB benefits of $27.7. The remaining cash from operations was generated from normal business activities for the year.
Investing and Financing Activities
During 2019, net cash used for investing activities totaled $188.2, primarily for capital investments, including $14.0 of capital investments made by SunCoke Middletown. Cash used for capital investments, excluding SunCoke Middletown, totaled $180.8 in 2019. Our increase in 2019 from 2018 was primarily due to significant capital investments to strengthen thedrive strong company for the long-run,performance.
including a major planned outage that will lower our steelmaking costs at Dearborn Works and the construction of a new Precision Partners facility to grow our market position and capabilities in automotive stamping and complex assembly.
Net cash used for financing activities in 2019 was $95.3, primarily for payments to retire the aggregate principal amount of $148.5 of our Exchangeable Notes, partly offset by from borrowings on the Credit Facility. The total cash used for financing activities also includes $55.6 of payments from SunCoke Middletown to SunCoke.
Restrictions Under Debt Agreements
The indentures governing our senior indebtednesscompetitive data used by the Committee include compensation data from a peer group of industrial companies with sales, size and tax-exempt fixed-rate industrial revenue bonds (“IRBs”) (collectively, the “Notes”) and Credit Facility contain restrictions and covenants that may limit our operating flexibility. The Credit Facility contains customary restrictions, including limitations on, amongscope reasonably comparable to us, as well as other things, distributions and dividends, acquisitions and investments, dispositions, indebtedness, liens and affiliate transactions. 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. The Credit Facility requires us to maintain a minimum fixed charge coverage ratio of one to one if availability under the Credit Facility is less than $150.0. We are in compliance with restrictions and covenants under our Credit Facility and Notes and,large publicly-owned, United States-based companies in the absencesteel industry. Among other factors, the members of any significant and sustained material adverse events, expect thatthis peer group are selected because we will remain in compliancedirectly or indirectly compete with them for the foreseeable future.
The indentures governing the Notes include customary restrictions on (a) the incurrence of additional debt by certain of our subsidiaries, (b) the incurrence of certain liens, (c) the amount of sale/leaseback transactions, and (d) our ability to merge employees, business, capital and/or consolidate with other entities or to sell, lease or transfer all or substantially all of our assets to another entity. The Notes also contain customary events of default. In addition, the indenture governing the 7.50% Senior Secured Notes due July 2023 includes covenants with customary restrictions on the use of proceeds from the sale of collateral.
We do not expect any of these restrictions to affect or limit our ability to conduct our business in the ordinary course. During 2019, we were in compliance with all the terms and conditions of our debt agreements.
Employee Benefit Obligations
In recent years, we have taken multiple steps in reducing and de-risking our pension obligations, including freezing all benefits under our major pension plan, closing our pension plans to new participants, and providing lump sum distributions to eligible participants. During 2019, we transferred $615.6 of pension obligations to an insurance company for approximately 4,250 retirees or their beneficiaries. Since mid-2016, we have transferred a total of $1.1 billion in pension trust assets to purchase four non-participating annuity contracts that require highly-rated insurance companies to pay the transferred pension obligations to approximately 20,000 pension participants. These actions greatly reduce our exposure to financial market volatility and the risk of significant increases in future required pension contributionsinvestors, whether as a result of the peer company’s status as an industry competitor or as a manufacturing company with a similar range of market capitalization, geographic location, manner of operations, and/or other relevant characteristics.
The Committee periodically reviews and discusses our peer group in detail, with the assistance of FW Cook, to evaluate whether it remains reasonable and appropriate. The Committee used this volatility. We intendpeer group in January 2019 for purposes of determining 2019 target compensation levels. It consisted of the following companies:
|
| |
| Alcoa Inc. | Reliance Steel & Aluminum Co. |
| Allegheny Technologies Incorporated | Schnitzer Steel Industries, Inc. |
| Carpenter Technologies Inc. | Steel Dynamics, Inc. |
| Cleveland-Cliffs Inc. | The Timken Company |
| Commercial Metals Company | Trinity Industries Inc. |
| Huntsman Corporation | United States Steel Corporation |
| Meritor Inc. | Worthington Industries, Inc. |
| Nucor Corporation | |
Use of Tally Sheets
The Committee utilizes a presentation similar to actively seek optionstally sheets to further de-riskreview the amounts payable under each element of an NEO’s compensation, as well as the aggregate value of such compensation, in the event of a circumstance that would trigger payment of post-termination compensation in connection with a change-of-control of the company. This presentation is prepared by our pensionexecutive compensation consultant, with the assistance of our independent outside actuary.
Key Factors Considered by the Committee During the 2019 Compensation Process
As part of its normal deliberative process for the compensation of each of the Executive Officers, including the CEO and OPEB obligations.other NEOs, the Committee considered a number of factors in establishing 2019 base salaries, selecting performance-based incentives, and determining target total direct compensation. Some of the principal factors evaluated by the Committee were the following:
Our pensionthe need to retain and OPEB obligations recorded onmotivate Executive Management to maximize long-term shareholder value, deliver improved financial results and compete effectively;
the Board’s evaluation of each Executive Officer’s individual experience and performance and his or her relative contribution to the Company’s performance;
the performance of our consolidated balance sheets declined by $109.8common stock and other publicly-traded securities in recent periods;
our financial performance in 2018, projected financial performance in 2019 primarily due to contributing $43.5 to the pension trust and achieving favorable investment returns from pension plan assets. We will be required to make contributions to our plan’s pension trustprojections of varying amounts until it is fully funded, and some of these contributions could be substantial. We are required to make approximately $45.0 of pension contributions in 2020. Based on current actuarial assumptions, we expect to make required annual pension contributions of approximately $45.0 for 2021 and $35.0 for 2022. The amount and timing of future required contributions to the pension trust depend on assumptions about future events. The most significant of these assumptions are the future investmentfinancial performance of the pension funds, actuarial data about plan participants and the interest rate we use to discount benefits to their present value. In addition, the amount and timing of future contributions may be affected by future activities we may take to reduce and de-risk our pension obligations. Because of the variability of factors underlying these assumptions, including the possibility of future pension legislation or increased pension insurance premiums, the reliability of estimated future pension contributions decreases as the length of time until we must make the contribution increases. Effective January 1, 2020, we changed our assumption for future expected returns on plan assets to 7.50% from 6.75% in response to a change in asset allocation.
We provide healthcare benefits to a significant portion of our employees and retirees. OPEB benefits have been either eliminated for new employees or are subject to caps on the share of benefits we pay. Based on the assumptions used to value other postretirement benefits, primarily retiree healthcare and life insurance benefits, annual cash payments for these benefits are expected to be in a range that trends down from $35.6 in 2020 to $7.6 over the next 30 years.several years;
the highly competitive nature of the steel industry; quantitative and qualitative data as to the target total direct compensation and mix of compensation components for individuals with the same or similar roles and responsibilities at peer group companies and other similarly situated companies;
the level of compensation of each Executive Officer in relation to the others;
the extent to which performance goals incentivize appropriate conduct and do not encourage inappropriate or excessive risk that would not be in our or our stakeholders’ best interests; and
executive compensation best practices for public companies of a similar size, business and/or nature, including peer group companies.
Management’s Role in the Compensation Process
After consulting with the Committee’s executive compensation consultant, our CEO, Mr. Newport, made recommendations to the Committee regarding the 2019 annual compensation packages for all of the Executive Officers. The Committee discussed Mr. Newport’s recommendations with him and the Committee’s executive compensation consultant before it made the final determination
Ashland Works Closureof the non-CEO executive compensation packages. Mr. Newport was not involved in the process for determining any component of his own compensation package.
InCommittee Conclusion and Actions on 2019 Compensation Packages
Following its compensation analysis process and its evaluation of the factors set forth above and other relevant considerations, the Committee designed 2019 compensation packages for each of the NEOs and our other Executive Officers that were consistent with our pay-for-performance compensation philosophy and were determined to be reasonable, competitive and appropriate, both individually and taken as a whole.
Ultimately, the Committee’s decisions on 2019 compensation packages for the NEOs and other Executive Officers were primarily founded upon the Committee’s recognition of the level of performance by each Executive Officer and the Committee’s confidence that the compensation packages provide proper incentive for these Executive Officers to continue to focus on serving the company’s and our stockholders’ best interests while remaining employed with us. The Committee further concluded that these packages provided appropriate incentives to motivate our Executive Management team to work diligently and collaboratively, to think differently and creatively, and to execute our strategy in order to maximize long-term value for our stockholders through strong financial performance.
The Committee approved the 2019 compensation packages for the NEOs, which are reflected in the Summary Compensation Table in this Annual Report on Form 10-K/A.
What actions did the Committee take in 2019 regarding the key elements of our executive compensation program for the NEOs and what were the principal reasons for those actions?
Discussion:
2019 Target Total Direct Compensation Packages for the CEO and Other NEOs
The components of the CEO’s and other NEOs’ respective target total direct compensation packages that the Committee classifies as performance-based compensation include the following: (i) target annual incentive payments for 2019; (ii) target long-term incentive payments for the three-year performance period from 2019 through 2021; (iii) the grant date fair value of stock option awards made in 2019; and (iv) the grant date fair value of performance share awards for the three-year performance period from 2019 through 2021. The components of the CEO’s and other NEOs’ respective compensation packages that the Committee does not classify as performance-based compensation include the following: (1) base salary for 2019; and (2) the grant date value of restricted stock awards made in 2019.
Non-Performance Based Cash Compensation
Base Salary
The salary level for an Executive Officer is assigned initially based upon, among other factors, experience, expertise, job responsibilities, and peer group and market data provided by the Committee’s executive compensation consultant. The individual performance of each Executive Officer was reviewed by the Committee with Mr. Newport in executive session without other members of Management present. The Committee also reviewed the base salary levels of Mr. Newport, the other NEOs and other Executive Officers for internal consistency and equity relative to each other. The principal factors considered by the Committee in determining whether to increase, maintain, or decrease an annual base salary for an NEO are individual performance, our business performance, changes in job responsibility, and competitive market compensation data and trends, including at our peer group companies. Although the Committee generally targets the median level for compensation for individuals with similar roles and responsibilities at peer group companies, the Committee does not rely on any specific formula, nor does it assign specific weights to the various factors when determining base salaries. Strong individual performance and strong performance by our business would generally result in above-market increases. Below-market increases, no increases, or even decreases may occur in years when either individual performance or our business performance has been below expectations. The amounts of the base salaries for the NEOs are reflected in the Summary Compensation Table in this Annual Report on Form 10-K/A. Most NEO base salaries were held flat in January 2019, our Board of Directors approved and we announced the planned closure of our Ashland Works, including the previously idled Ashland Works Hot Endbase salaries of the CEO and the hot dip galvanizing coating line that continued to operate. Factors that influenced our decision to close Ashland Works included an uncertain global trade landscape influenced by shifting domesticPresident and international political priorities, Ashland Works’ high costCOO. The Committee increased the base salary of production, and continued intense competition from domestic and foreign steel competitors. These conditions directly impacted our pricing, which in turn directly impacted our assessmentMr. Ross as of the demand forecasts for the markets we serve. Despite several favorable trade actions, carbon steel imports remained at a high level, driven by global overcapacity, particularly in China. We expected global overcapacity to be exacerbated by several domestic steel companies that had restarted or planned new capacity additions in the United States. In addition, we concluded that we had sufficient coating capacity to meet our customers’ needs without using our coating operations at Ashland Works. We have transitioned products to our other, lower cost U.S. coating lines and closed the Ashland Works coating line in November 2019.
By transitioning production to our other, lower cost operations in the United States that have available capacity, we have increased those operations’ utilization rates. Once fully implemented, these actions are projected to result in annual savings of over $40.0, primarily from switching production to lower-cost operations, reducing the costs for ongoing maintenance, utilities and supplier obligations at Ashland Works, and lowering transportation costs by being able to process steel closer to the end customer and eliminate additional product movement between our facilities. These savings, which began in 2019, and the positive impact of the Administration’s policies to address unfair trade practices will help facilitate our longer-term growth plans by helping us maintain and enhance our more cost-effective steelmaking facilities and further driving growth and innovation.
For the year ended December 31, 2019, we have recorded a charge of $69.3, which included $18.5 for termination of take-or-pay supply agreements, $20.1 for supplemental unemployment and other employee benefit costs, pension and OPEB termination benefits of $13.3 (recorded in pension and OPEB (income) expense), an estimated multiemployer plan withdrawal liability of $10.0 (after a fourth quarter 2019 credit of $8.0 to adjust the estimate), and $7.4 for other costs. We made cash payments of $8.8 in 2019 related to the 2019 charge and expect to make cash payments of approximately $25.0 in 2020 and the remaining amount over several years thereafter. The supplemental unemployment and other employee benefit costs are expected to be paid primarily in 2020 and 2021. The actual multiemployer plan withdrawal liability will not be known until a future date and is expected to be paid over a number of years. Ongoing costs to maintain the equipment and utilities and meet supplier obligations related to the idled Ashland Works Hot End were $12.6, $20.0 and $21.2 for the years ended December 31, 2019, 2018 and 2017. These cash costs related to closing the facility will decline in future years. We recorded $4.0 of accelerated depreciation related to the coating line fixed assets for the year ended December 31,1, 2019, to fully depreciate them.
Off-Balance Sheet Arrangements
There were no material off-balance sheet arrangementsreflect his greater responsibilities as of December 31, 2019.
Selected Factors that Affect Our Operating Results
Automotive Market
We sell a significant portion of our carbon and stainless steel flat-rolled and tubular products directly to automotive manufacturers and their Tier 1 suppliers, as well as to distributors, service centers and converters who in some cases resell the products to the automotive industry. Because the automotive market is an important element of our business and growth strategy, North American light vehicle production has a significant impact on our total sales and shipments. In 2019, North American light vehicle production declined to approximately 16.3 million units from the prior year, due in part to the 40-day strike at GM that halted its vehicle production. As a result of these factors, our flat-rolled steel shipments to the automotive industry declined 6%. Substantially all of Precision Partners’ revenue is from the automotive market and new vehicle platforms in its hot-stamping and cold-stamping business drove a higher level of revenue in 2019 than in 2018.
In May 2019, GM and Ford each presented us with prestigious supplier awards. At the GM 27th Annual Supplier of the Year Awards, GM recognized its best suppliers that have consistently exceeded GM’s expectations, created outstanding value or introduced innovations to GM. AK Steel was awarded as a Supplier of the Year for Non-Fabricated Steel, the second consecutive year that we received the award. In addition, at Ford’s 21st Annual Ford World Excellence Awards, Ford recognized AK Steel as a top-performing global supplier and presented us with its Smart Brand Pillar award in recognition of demonstrated leadership in Ford’s primary brand pillars. Further, AK Tube was one of just three suppliers to receive a Supplier of the Year award from Kirchhoff Automotive in 2019.
Carbon Steel Spot MarketPerformance-Based Compensation - Cash and Equity
Since 2016,We provide annual cash performance awards to our employees, including our NEOs, under our Annual Plan. This component of an NEO’s compensation is intended to motivate the NEO to focus on performance-based goals that directly impact stockholders through annual financial and non-financial objectives that will drive our long-term value. Under the terms of the Annual Plan, a participant can earn a performance award based upon our annual performance against goals established for performance at a threshold, target and maximum level. The four performance metrics used are financial, quality, safety and sustainability. Under the terms of the Annual Plan, the Committee weights each performance factor as a percentage of the whole.
For 2019, Mr. Newport’s target level for a performance award under the Annual Plan was an amount equal to 125% of base salary, providing him significant incentive to continue to improve the business. For the other NEOs, depending upon their title and position, a performance award under the Annual Plan at the target level for 2019 would be paid in an amount equal to between 55% and 100% of base salary. Maximum awards were set at two times the target amount. Awards that are earned between the threshold and the target level are determined by a straight-line interpolation between those two levels, starting from a base of zero at the threshold level. A maximum award can only be earned through financial performance. Thus, while a target award is weighted among the performance components as 50% financial, 25% quality, 20% safety and 5% sustainability, any award above target is earned solely through financial performance. As further discussed below, in 2019 the actual weighting of the Annual Plan payment earned at approximately 34% of target by the NEOs was allocated among the four performance components as follows:
Financial: 0%
Quality: 21%
Safety: 8%
Sustainability: 5%
For the 2019 financial performance component of the Annual Plan, net income was the metric utilized to measure performance. For purposes of calculating net income under the Annual Plan, the Committee is permitted to and did exclude, in accordance with the terms of the plan, special, unusual and extraordinary items. The Committee selected net income as the metric because it is a widely recognized and accepted measure of a company’s financial performance and the Committee believes it aligns the interests of Management with our stockholders, as net income is typically perceived as a key driver of stock performance. The net income threshold goal typically is set at a level that would represent a minimum acceptable performance in the context of the business conditions and other challenges and opportunities that we have intentionally and substantially reduced our sales and shipmentsmay face or from which we may benefit. The target goal typically is set at a level that would represent performance that is demanding, but still reasonably attainable. The maximum goal is set at a level which would represent very strong performance under the circumstances foreseeable to the commodity carbon steel spot marketCommittee at the time the goals are established.
At its March 2019 meeting, the Committee carefully evaluated a number of factors in selecting maximum, target and implemented a strategy to focus our product mix on value-added steel products. Generally, sales into the carbon steel spot market are at prevailing market prices, which are highly volatile, and are subject to intense competition from both low-cost domestic producers and cheap, unfairly traded foreign imports. Fluctuations in spot market prices have a direct effect on our results and are driven by factors mostly outside our control. In addition, the spot market price fluctuations do not always directly correlate with our raw material and energy costs and, consequently, we have limited ability to pass through increases in costs to customers absent increases in the market price. We reduced shipments of our commodity carbon steels in 2019 compared to 2018, primarily due to declining carbon spot market prices.
Specialty Stainless and Electrical Steel Markets
We are a leading manufacturer of value-added stainless steel, primarilythreshold net income performance goals for the automotive market. Stainless steel is typically priced2019 Annual Plan of $254 million, $174 million and $94 million, respectively. Each of these annual financial performance goals represented increases over the prior year’s financial objectives. As the Committee does each year, it determined the target performance goal primarily with reference to our annual Business Plan for 2019. Our 2019 Business Plan (like prior years’ annual business plans) was formulated through a fixed base pricerigorous, months’ long process that included comprehensive “bottom up” and surcharges“top down” evaluations. As such, the 2019 Business Plan reflected a variety of significant market-related, macroeconomic and company-specific assumptions. The 2019 Business Plan also included $51 million of unidentified “stretch” that Management would be required to reflect changes inovercome to meet the cost of certain raw materials. Thus, while we expect changes in revenues will generally offset changes in costs, there may be a timing lag from the change in costs in one period to the change in revenue in a different period.
We are also a leading manufacturer of GOES and other electrical steels, which we sell to customers primarily in North America and Europe. We have experienced a notable decline in shipments to international markets due to global overcapacity and both direct and indirect effects of European and Chinese trade actions. Our domestic electrical steel sales have also declined due to increased imports of laminations (cut sheets of steel) and transformer cores (which includes both stacked and wound laminations).
Trade Matters
Section 232 Investigation of Imported Foreign Steel
On April 19, 2017, the Commerce Department initiated an investigation pursuant to Section 232 of the Trade Expansion Act, as amendedtarget goal set by the Trade ActCommittee. Our Finance Committee also oversees the annual Business Plan process, adding yet another layer of 1974 (“Section 232”), into whether importsreview and rigor, before it is ultimately evaluated and approved by the Board. The Management Development and Compensation Committee, after reviewing the 2019 Business Plan and weighing a significant number of foreign steel intouncertainties and assumptions reflected in that Plan, concluded that the U.S. posed a threat to U.S. national security. On March 8, 2018, President Trump signed a proclamation pursuant to Section 232 imposing a 25 percent tariff on imported steel. Followingtarget level of performance was challenging but reasonable under the proclamation, the U.S. government announced various agreements for exemptions from the Section 232 steel tariff for certain countries, including Argentina, Australia, Brazil and South Korea. Some of these countries, such as South Korea and Brazil, have agreed to a quota system that limits their annual imports of steel into the U.S. In addition, although steel products from the European Union, Canada and Mexico were initially exempted from the tariff, on June 1, 2018, those exemptions expired and the Section 232 tariff was applied to steel imports from these countries as well.
In retaliation against2019, we achieved net income of $92 million (excluding special, unusual and extraordinary items approved by the Section 232 tariffs,Committee), which represented performance below the European Union, Mexico and Canada subsequently imposed their own tariffs against certain steel products and other goods imported fromthreshold level set by the U.S. The Mexican retaliatory tariffs went into effect on June 5, 2018, the European Union’s tariffs began to apply on June 22, 2018, and Canadian tariffs became effective on July 1, 2018. We ship steel products into Canada, Mexico and the European Union and have been required to pay tariffs on certain of our shipments. On May 17, 2019, the United States announced an agreement with Canada and Mexico to remove the Section 232 tariffs for steel and aluminum imports from those countries and for the removal of all retaliatory tariffs imposed on American goods by those countries. The agreement provides for aggressive monitoring and a mechanism to prevent surges in imports of steel and aluminum. If surges in imports of specific steel products occur, the United States may re-impose Section 232 tariffs on those products. Any retaliation by Canada and Mexico, however, would then be limited to steel products. The Section 232 steel and related retaliatory tariffs still remain in place with the European Union, and negotiations between the U.S. and European Union are ongoing. In addition to the ongoing country-by-country negotiations in which the U.S. government is engaged, the Commerce Department has also implemented a system for petitioning the U.S. government to exempt specific products (for instance, a certain grade of steel) from the tariff and a process for challenging these exemption requests. The possibility exists that, despite our objections, the Commerce Department may grant exemption requests for imported steel products that would have a significant adverse impact on our business.
The Section 232 steel tariffs originally only applied to certain steel products, including flat-rolled carbon, stainless and electrical steel products, but not to certain downstream goods that may contain these steels. On January 24, 2020, President Trump signed a proclamation expanding the scope of the duties to a limited number of steel and aluminum derivative products including nails, staples, electrical wires and body stampings for motor vehicles and tractors. Those countries that are currently exempt or subject to a quota are excluded from this action. Downstream electrical steel products were not included.Committee. As a result, some third parties or customers may attemptManagement earned none of the financial portion of the Annual Plan, illustrating the compensation program’s design of providing financial consequences for falling short of targeted performance.
In 2019, the quality component of the Annual Plan was comprised of five metrics: internal rejections, internal retreats, process loss, slab loss and external customer claims. The Committee selected these metrics because we utilize them on a daily basis in our operations to substitute purchases ofmeasure both internal and external quality performance. Our intense focus on quality performance has taken on greater importance in recent years, as our flat-rolled steel with imports of downstream goods containing foreign steel product inputs that are not subjectsales to the tariff or trade cases. These actions would circumvent the purposeautomotive industry-which is known for requiring nearly flawless quality performance-have grown, both in absolute terms and intentas a strategic goal for expanding margins. Consistent with this focus, we have increased production of more technically challenging advanced high-strength steel products for automotive customers and other applications. Although our leading edge, innovative steels in this category are an area of targeted strategic growth, these products are very difficult to manufacture, particularly in light of the Section 232 steel tariffs. The effects of the limited scope of the steel tariff are particularly salientongoing requirement to meet automotive customers’ high quality specifications. Our best-in-class quality has been and will continue to be critical to our electrical steel business. Importsefforts to distinguish our innovative products from competitors and to capture a greater share of downstream electrical goods not currently covered by the tariff include electrical transformer cores and core assemblies, electrical transformers, and evenhigher margin business, thereby making it a key area in which to incentivize our employees’ performance. In addition, strong quality
laminations,performance is a component of another one of our strategic goals, which are simply cut piecesis lowering our steelmaking costs of electrical steel. To avoidproduction. Our quality performance has direct and indirect impacts on our production costs, so incentivizing employees to produce steel that meets the Section 232 steel tariff, producers have continued to increase their importshighest standards also supports this component of foreign-made downstream electrical goods or moved someour long-term strategy.
For the quality component of their domestic production outside the United States, which adversely affectsAnnual Plan, in January 2019 the Committee established a target level goal of no more than 0.596% for the internal rejection rate, 1.091% for the internal retreat rate, 0.276% for the process loss rate, 3.320% for the slab loss rate, and 0.174% for the customer claim rate. Each of these metrics was set taking into account our electrical steel business. Inprojected product mix for 2019. Therefore, although not every quality target in 2019 was lower (i.e., better) than the absencelevel set by the Committee for the prior year, each target goal required continuous improvement across our operations in light of a remedy againstmore difficult-to-make mix of products anticipated for 2019, and thus set a higher bar for performance. The threshold goals for each of those metrics were set at 125% of the target goals (for both the quality and safety annual performance objectives, a higher number reflects less successful performance). The Committee selected these actionsquality goals because they represented challenging, but achievable goals that, if attained, would reflect a significant improvement and continue our recognized industry-leading quality performance.
In 2019, our performance in terms of quality was mixed, as our operations performed relatively well in some areas and faced challenges in others. We delivered better than target level performance goals for the internal reject and internal retreat rates. However, reflecting the challenging nature of the objectives, we met threshold performance but fell short of target level performance for slab loss, process loss and customer claims.
For the 2019 safety performance objective, the Committee again selected Days Away, Restricted and Transfer (“DART”) cases as the applicable metric. A DART case occurs when an employee misses work or is reassigned or transferred from normal work duties due to circumventa workplace injury. The Committee selected this metric because the Section 232 steel tariff on electrical steel, these actionssafety of our employees continues to be our highest priority and DART cases are likelya standard, objective metric reported to increase overa federal government agency. In addition, DART cases or variations thereof (such as “lost time pressuring our electrical steel business. We continue to proactively work to mitigate or eliminate this potential avenue for avoidinginjuries,” which is a narrower category and circumventingdoes not capture as many safety issues as DART) are commonly used in the steel tariff, including by communicatingindustry as a measure of safety performance.
At its January 2019 meeting, the Committee established a target level goal of no more than 21 DART cases on a company-wide basis, and a threshold level goal equal to 125% of that target goal. (As with the quality component, the threshold goal in this instance is higher than the target goal because it reflects more injuries and therefore less successful performance.) The Committee selected a difficult but achievable goal that required improvement from the prior year’s performance and target objective, while also expecting the 2019 target to represent industry-leading performance.
In 2019, our concernssafety performance fell short of our very high expectations. We failed to meet our target objective, as we experienced 24 DART cases. Thus, for the U.S. governmentyear we performed better than the threshold level but did not meet target level performance for safety under the Annual Plan.
For the 2019 sustainability component, the Committee again selected air permit deviation events as the applicable metric. An air permit deviation event occurs when an event at our operations results in noncompliance under the Title V air permits that govern our facilities. The Committee chose air permit deviation events in order to emphasize the importance of environmental responsibility and requesting appropriate action to address this issue. In the absence of decisive action by the U.S. government or a meaningful change in business or market conditions, we expect our electrical steel business to continue to face material downward pressure. We believedrive improved performance through our plants’ compliance with their air permits, which is a key area of emphasis for our sustainability program. At its January 2019 meeting, the United States’ electrical infrastructure is criticalCommittee established a target level goal of no more than 36 air permit deviation events, and a threshold level goal equal to national security and125% of that additional actions are necessary and should be undertakentarget goal. The Committee selected a goal that was challenging, but possible to achieve, with a target objective that was more difficult to attain than the target objective for the prior year. For 2019, we met our target level performance by experiencing fewer than 23 air permit deviation events. As such, the U.S. government to preserve its short- and long-term integrity.
Memberssustainability portion of the U.S. Congress have introduced legislation to restrictAnnual Plan was earned in full.
In January 2020, the President’s power to implement tariffs on national security grounds. SomeCommittee approved the payment of performance awards at a level of approximately 34% of the proposed legislation has included provisions that would require Congressional approvaltarget (approximately 17% of maximum) award for the 2019 performance period to the participants in the Annual Plan. The amount of the current Section 232 proclamations or they would terminate. If such legislation is passed by both the House of Representatives and Senate, President Trump would have the abilityAnnual Plan performance awards to veto it, which would then require a two-thirds majority vote in each of the branches of Congress to override the presidential veto. In addition, there are pending challenges to the President’s authority and actions under Section 232NEOs for 2019 is included in the U.S. court systemSummary Compensation Table in this Annual Report on Form 10-K/A.
Long-Term Incentive Awards - Cash and before international bodies.Equity
United States-Mexico-Canada Trade Agreement (“USMCA”)
On December 10, 2019, representativesalign the interests of Management more closely with the interests of the U.S., Mexico and Canada signed a revision to the USMCA, which was proposed to replace the existing North American Free Trade Agreement (“NAFTA”) among those countries. Among other requirements, the USMCA, as proposed, includes revised “rules of origin” that encourage automobiles and other products manufactured in North America to contain higher levels of North American-made content and that require an increased percentage of work on North American-made automobiles be performed by workers earning at least $16 per hourstockholders in order to be exempt from tariffs. The proposed terms of the USMCA also include provisions that incentivize the use of North American steel. Because all of our manufacturing facilities are located in North America and our principal market is automotive, we believe that the USMCA has the potential to positively impact our business by incentivizing automakers and other manufacturers to increase manufacturing production in North America and to use North American steel. For the proposed USMCA to take effect, legislative bodies for all the countries must approve and ratify the agreement. The U.S. and Mexico have ratified the revised agreement. Canada still has to ratify it and that is expected to occur in 2020. At this time, the USMCA does not alter or affect the terms of Section 232 tariffs on imported steel or related retaliatory tariffs, which continue to remain in effect.maximize long-term stockholder value;
Raw Materials
Iron ore is one of the principal raw materials required for our steel manufacturing operations. We purchased approximately 5.8 million tons of iron ore pellets in 2019 and expect to purchase approximately 6.5 million tons in 2020. We make most of our purchases of iron ore at negotiated prices under multi-year agreements. For 2020, we expect to purchase all of our iron ore from Cliffs. The price we pay for iron ore is affected by a variety of factors under the terms of our contracts, including measures of general industrial inflation and steel prices and a variable-price mechanism that adjusts the annual average price we pay for iron ore based on reference to an iron ore index referred to as the IODEX. A change in one of more of the factors upon which our iron ore price is determined (whether that may be the IODEX, inflation, steel prices or other indices) typically affects to varying degrees the price we pay for iron ore. Accordingly, the actual impact on us from a change in these factors will vary depending on the percentage of the total iron ore we purchase and how much each factor is weighted for pricing under related contracts. In addition, the total net cost we pay for iron ore is affected by our hedging activities, which are described below. Thus, for example, althoughlink a significant event could directly or indirectly result in an portion of Management’s total compensation to our performance;
increase in the IODEX, a material impactfocus of Management on our iron ore costs would be tempered because (i) the IODEX is only one componentlong-term performance by establishing performance goals that support long-term strategies; and,
assist us in recruiting, retaining and motivating a highly talented group of managers who will successfully deliver long-term benefit to our price for iron ore, (ii) our iron ore contracts contain a fixed pellet premium, and (iii) we hedge a substantial portion of our 2020 IODEX exposure.
In addition to integrated risk strategies, we employ derivative financial instruments to manage iron ore price risk that we cannot mitigate through our customer contracts. Although we use derivative instruments to reduce our exposure if iron ore costs increase, these instruments may also reduce potential benefits should iron ore costs decline. We employ a systematic approach in our hedging strategy to mitigate iron ore exposure. We hedge a higher proportion of our near-term iron ore exposure and a lower proportion for our longer-term exposure through a combination of swaps and options. As of December 31, 2019, we have hedged the IODEX component for a portion of our iron ore purchases for 2020 and 2021 through the use of iron ore derivatives with notional amounts of 1,215,000 tons and 280,000 tons, which represents a substantial portion of our 2020 IODEX exposure. Our hedging activities further reduce our exposure to changes in the IODEX on the total cost we pay for iron ore. Our iron ore derivatives do not meet the accounting criteria for hedge accounting treatment. As a result, the changes in fair value for those derivatives are immediately recognized in earnings, 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.stockholders.
Pursuant to the terms of the Long-Term Plan, in the first quarter of each three-year performance period the Committee establishes threshold, target and maximum goals for cumulative adjusted EBITDA to be achieved in the performance period. In determining the Long-Term Plan goals, the Committee attempts to establish a target goal that will be challenging to achieve and that is not likely to be satisfied in every three-year performance period. As with the Annual Plan goals, the threshold goal under the Long-Term goal is set at a level that represents the minimum acceptable performance and the maximum goal is set at a level that represents very strong performance under the circumstances. The threshold goal must be met before any payout is earned. Precision Partners
On August 4, 2017, we acquiredMr. Newport’s target level for a performance award under the Long-Term Plan for 2019 was an amount equal to 125% of his base salary. For the other NEOs, and depending upon the NEO’s title and position, a performance award under the Long-Term Plan at the target level for 2019 would be paid in an amount equal to between 55% and 100% of base salary. If the threshold performance goal is achieved, then each participant would receive a performance award equal to one half of the target amount and maximum performance would earn twice the payout of target. There is a straight-line interpolation of the payout for achievement of cumulative EBITDA between the threshold, target and maximum payout goals. For the 2017 - 2019 performance period, payouts earned were paid in cash. As further discussed below, however, the Committee has since changed the Long-Term Plan to be denominated and settled 50% in cash and 50% in stock.
At the Committee’s January 2017 meeting, it established the following Long-Term Plan goals for the three-year period ending December 31, 2019: cumulative adjusted EBITDA of $1.7 billion to earn payment at the maximum level, $1.4 billion to earn payment at the target level and $1.1 billion as the threshold level to earn any incentive payment. Each of these goals was higher than the objectives for the prior performance period ending December 31, 2018, thereby requiring continued improvement of our long-term financial results. For the three-year period ending in 2019, we earned cumulative adjusted EBITDA of $1.466 billion (excluding, in accordance with the terms of the plan, special, extraordinary and unusual items1). As a result, participants in the Long-Term Plan, including the NEOs, earned an incentive payment in an amount equal to approximately 122% of the target award (approximately 61% of the maximum award) for the 2017 - 2019 performance period. The notes to the Summary Compensation Table in the Annual Report on Form 10-K/A include the amounts paid to the NEOs under the Long-Term Plan.
In January 2019, the Committee continued to consider the level to which Management is incentivized to maximize long-term value for stockholders and evaluated alternatives to further align Management’s long-term interests with those of our stockholders. The Committee sought to take additional, proactive measures in order to ensure that Management has the opportunity to be rewarded when the price of our shares increases, while suffering financial consequences if the price falls. Thus, at its January 2019 meeting, the Committee further bolstered the stock component of the Long-Term Plan, as awards were denominated 50% in AK Steel stock and 50% in cash for the 2019 - 2021 performance period, versus the 70% stock and 30% cash division applicable to the awards for the 2018 - 2020 period.
2019 Equity Grants to NEOs
The Committee engaged FW Cook to provide assistance in determining appropriate 2019 equity awards to the NEOs and other Executive Officers. In January 2019, FW Cook developed and provided to the Committee competitive compensation data based upon publicly available information from our peer group, as well as other market data. The Committee considered this information as a factor in its determination of equity grants, but it did not utilize a particular compensation percentile as a benchmark for purposes of determining such grants. Rather, this competitive data was used by the Committee to help it assess the reasonableness of the grant awards under consideration by the Committee for each NEO and the other Executive Officers.
In January 2019, the Committee evaluated its approach to equity grants to the NEOs and Executive Officers, principally driven by dissatisfaction among members of the Board and the Executive Officers with regard to the performance of our common stock in 2018.
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1Consistent with the terms of the Long-Term Plan, the Committee discussed in detail and determined to adjust our EBITDA for the 2017 - 2019 performance period for items classified as special, unusual and/or extraordinary. From our three-year cumulative adjusted EBITDA total of $1.259 billion (comprised of annual EBITDA for 2017, 2018 and 2019, as reported in our Annual Report on Form 10-K for the respective year), the Committee (i) with respect to 2017, deducted/debited a $19 million benefit related to adjustment of a liability for transportation costs and added/credited $4 million of net gains on settled iron ore derivatives, $6 million of acquisition costs associated with our purchase of Precision Partners, which provides advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies for the automotive market. Founded$21 million of costs incurred in 1955, Precision Partners is headquartered in Ontario, Canada, and has more than 1,000 employees, including approximately 300 engineers and skilled tool makers, across ten plants in Ontario, Alabama and Kentucky. Precision Partners specializes in manufacturing lightweight, complex components and assemblies, and it offers a broad portfolio of highly-engineered solutions. Among other benefits, we believe Precision Partners:
complements our core focus on product innovation, accelerating the development and introduction of existing and new AHSS and PHS to the high-growth automotive lightweighting space;
provides a fully integrated downstream platform that further strengthens our close collaborationconnection with our automotive customersrefinancing of senior notes, and their Tier 1 suppliers; and
leverages our expertise in metals forming with Precision Partners’ expertise in tool design and advanced product design-engineering capabilities in hot and cold stamping.
Precision Partners complements our reputation as a well-respected supplier$76 million impairment charge related to our core automotive portfolio. Importantly, we believe that Precision Partners has accelerated our efforts to drive adoptionidling of our innovative steel products by automotive manufacturers and their Tier 1 suppliers. Our steelmaking experts and Precision Partners’ engineers have undertaken numerous collaboration projects aimed at achieving this goal. Precision Partners’ expertise in tool design and stamping capabilities has allowed us to deliver to customers fully formed prototypes of automotive components utilizing our innovative steel products. As such, we are now able to provide solutions through prototype automotive components. This approach has and will continue to demonstrate to customers that they can significantly lightweight automotive parts on an accelerated timeline by using our high-strength, highly formable grades of steel in place of traditional lower-strength grades or alternative materials. In addition, these collaborative projects are enhancing Precision Partners’ knowledge and experience in tool design and build, and stamping of new, advanced grades of steel, enabling it to provide expert solutions to automotive customers now and in the future.
Labor Agreements
At December 31, 2019, we employed approximately 9,300 people, of which approximately 5,600 are represented by labor unions under various contracts that expire between 2020 and 2023.
In April 2019, we and the United Steelworkers, Local 1865, which represents production employees at Ashland Works reached an agreementblast furnace and steelmaking operations; (ii) with respect to revise2018, added/credited $22 million of net gains on settled iron ore derivatives and extend$14 million of pension and OPEB corridor and settlement charges; and (iii) with respect to 2019, the collective bargaining agreement. The new agreement includes terms governingCommittee deducted/debited $13 million for net unrealized gains on iron ore derivatives and added/credited $27 million of pension settlement charges and $69 million of costs related to the permanent closure of Ashland Works. These adjustments resulted in cumulative three-year adjusted EBITDA of $1.466 billion for the facility,2017 - 2019 performance period for purposes of the Long-Term Plan. After closely evaluating these items, the Committee classified them as special, unusual and/or extraordinary because, among other reasons, they involved actions that the Committee believe create long-term value that, therefore, should not be discouraged by including benefits to employees who are terminated or transition to other AK Steel plants.their impact in Long-Term Plan performance calculation for the relevant period.
In May 2019,After discussion among the members of the United Steelworkers, Local 1190, ratifiedCommittee, the Committee determined to materially decrease the amount of equity granted to the NEOs and other Executive Officers as part of their respective 2019 compensation packages. As such, at its January 2019 meeting the Committee determined the number of stock options, restricted shares and performance shares for each NEO and other Executive Officer by dividing the intended grant value by the accounting cost of each award assuming a $4.00 stock price-which was substantially higher than the closing stock price of $2.62 on the January 23, 2019 grant date, representing a 30-35% reduction in the value of equity granted relative to the typical intended grant value. While the Committee undertook this action principally in response to our stock price performance in 2018, the Committee also adopted this approach (1) to maintain reasonable share usage and overhang levels, (2) to avoid rapid depletion of the share reserve in our Stock Plan, and (3) because the Committee and Board believed that the then-current stock price understated the long-term intrinsic value of the Company. The Committee’s decision to utilize an elevated $4.00 per share stock price for determining equity award values also had the effect of reducing the CEO’s and other NEOs’ target total direct compensation.
Provided below in turn are summaries of the Committee’s considerations as to each of the components of the 2019 equity awards to the NEOs: performance shares, stock options and restricted stock.
Performance Share Awards - Equity
Performance share grants are an important element of an NEO’s annual compensation package because they closely align the long-term interests of the NEOs and our stockholders by directly linking the performance of our common stock over a three-year labor agreement covering approximately 220 production employees at Mountain State Carbon, LLC.performance period to the number of shares, if any, ultimately earned by an NEO. Each grant of a performance share award is expressed as a target number of shares of our common stock. The new agreementnumber of shares of common stock, if any, actually earned by and issued to the_NEOs under a performance share award will be in effect through April 30, 2022.
In May 2019, membersbased upon our performance over the applicable performance period. Depending upon our performance during the period, an NEO ultimately may earn from 0% to 150% of the United Auto Workers, Local 4104,target number of shares granted. The performance categories used to determine how many performance shares for the three-year performance period ending December 31, 2019, were:
Relative Total Stockholder Return (“Relative TSR”), defined as share price appreciation plus reinvested dividends, if any, during the performance period relative to the total stockholder return during that same period of the companies in the VanEck Vectors Steel ETF; and
Stock Price Growth Rate (“CAGR”), defined as the compounded annual growth rate of the price of our common stock over the performance period, using as the base the average closing price of our common stock for the last 20 trading days of the year immediately preceding the start of the performance period, then comparing that base price with the average closing price of our common stock for the last 20 trading days of the final year of the performance period.
One-half of the total target number of shares awarded may be earned based on the Relative TSR performance and the other half may be earned based on the CAGR performance. The Committee chose the Relative TSR metric because it facilitates a comparison between the growth rate of our common stock over time and a broad-based market index, the VanEck Vectors Steel ETF, which governs approximately 100 production employees at Zanesville Works, ratifiedis reflective of our peers’ and industry performance. The Committee chose the CAGR metric as an objective measure of the value created for stockholders over time. The Committee determined that the collective use of the Relative TSR and CAGR as performance metrics balanced the two absolute and relative metrics, both being recognized measures that are aligned to create stockholder value.
For each performance category, the Committee established threshold, target and maximum payout levels, as follows:
|
| | |
Payout (Stated as a % of Category’s Target Shares) | Total Stockholder Return | Annual Stock Price Growth Rate |
| Threshold (50%) | 25th percentile | 5.0% |
| Target (100%) | 50th percentile | 7.5% |
| Maximum (150%) | 75th percentile | 10.0% |
If the threshold performance level is not achieved in a new three-year labor agreement. The new agreementperformance category, then none of the target shares related to that category will be earned. Straight-line interpolation applies for performance between the threshold/target and target/maximum performance levels for each category.
For 2019, the NEOs did not earn any performance shares for the 2017-2019 performance period, as we failed to meet the threshold level of performance under both the Relative TSR and CAGR components.
Stock Option Awards
The Committee considers stock option awards to constitute performance-based compensation, as options generally have a value to the grantee only if the market price of our stock increases above its price on the date the option was granted and the grantee remains in effect through May 31, 2022.
In July 2019, membersour employment for the period required for the option to become exercisable. This provides an incentive for the grantee to remain employed with us and to take actions that, over time, are intended to enhance the value of our stock. An exception to the requirement of continued employment is made in the event of death, disability, involuntary termination without cause or retirement. For each NEO, stock options are a part of the United Auto Workers, Local 3303, which governs approximately 1,100 production and maintenance employees at Butler Works, ratified a new three-year agreement. The new agreement will be in effect through June 15, 2022.
In September 2019, membersdetermination of the United Auto Workers, Local 3462, which governs approximately 310 production employees at Coshocton Works, ratified a new agreement. The new agreement will be in effect through July 31, 2023.
AgreementsNEO’s overall compensation package for that expire withinyear. All options granted to the next twelve months include an agreement with the International Association of Machinists and Aerospace Workers, Local 1943, which governs approximately 1,750 production employees at Middletown Works, scheduled to expire March 15, 2020, and an agreement with United Steelworkers, Local 1915, which governs approximately 100 production employees at AK Tube’s Walbridge plant, scheduled to expire January 22, 2021.
Potential Impact of Climate Change Legislation
On an ongoing basis we assess the potential impacts and implications of climate change and associated legislation and regulation on our business, operations, customers, suppliers, markets and other relevant areas. In 2010, the EPA issued a final “tailoring rule” providing new regulations governing major stationary sources of greenhouse gas emissions under the Clean Air Act. Generally, the tailoring rule requires that new or modified sources of high volumes of greenhouse gases must follow heightened permit standardsNEOs and
lower emissions thresholds. The EPA continues to work on further greenhouse gas emissions rules that would apply more broadly and to lower levels of emission sources. In 2014, the U.S. Supreme Court partially upheld and partially invalidated the tailoring rule. The decision’s impact will often require us to conductother employees must be exercised within a best available control technology analysis for greenhouse gases for new major projects. The tailoring rule will not materially adversely affect us in the near term and we cannot reliably estimate the regulation’s long-term impact. However, there are a number of factors that may affect us, including the EPA’s tailoring rule and other similar regulations, such as the EPA’s Clean Power Plant Rule established on August 3, 2015, implications from the Paris Climate Agreement arising from the 2015 United Nations Climate Change Conference or similar accords relating to climate change. These and other factors could cause us to suffer negative financial impacts over time from increased energy, environmental and other costs needed to comply with the limitations that our suppliers would impose on us directly or indirectly.
In 2017, the EPA announced its intention to repeal the Clean Power Plant Rule and the U.S. State Department gave formal notice of its intent to withdraw from the Paris Climate Agreement. The earliest date for the United States to completely withdraw from the Paris Agreement is November 4, 2020. Given these recent developments, we expect the near-term negative impacts to our business directly arising from climate change legislation to be low. However, we do not expect the potential challenges to our business arising from climate change to decline in the long term, and we do not expect our key customers in our principal markets to substantially reduce their focus on climate change-related issues. This is particularly true for our automotive manufacturer customers, who remain subject to CAFE standards and other regulations aimed at reducing vehicle emissions, as well as potential changes in global consumer demands for vehicles with lower impacts on the environment. In addition, automotive manufacturers typically design light vehicle platforms for multiple international markets, so other countries’ climate change legislation and regulations that govern the automotive manufacturers likely will continue to affect their approach for the U.S. market.
In addition, the possibility exists that some form of federally-enacted legislation or additional regulations in the U.S. may further impose limitations on greenhouse gas emissions. In the past, bills have been introduced in the United States Congress that aim to limit carbon emissions over long periods from facilities that emit significant amounts of greenhouse gases. Such bills, if enacted, would apply to the steel industry, in general, and to us, in particular, because producing steel from elemental iron creates carbon dioxide, one of the targeted greenhouse gases. Although we and other steel producers in the United States are actively participating in research and development to develop technology, processes and approaches for reducing greenhouse gas emissions, these developments will take time and it is impossible to predict when or to what degree these efforts will be successful. To address this need for developing new technologies, approaches and processes, not just in the steel industry but elsewhere, proposed legislation has been introduced in the past that included a system of carbon emission credits. Such credits would be available to certain companies for a period, similar to the European Union’s existing “cap and trade” system. However, it is virtually impossible to forecast the provisions of any such final legislation and its effects on us.
If regulation or legislation to address climate change or regulate carbon emissions is enacted, it is reasonable to assume that the net financial impact on us will be negative, despite some potential benefits discussed below. On balance, such regulation or legislation likely would cause us to incur increased energy, environmental and other costs to comply with the limitations that would be imposed on greenhouse gas emissions. For example, additional costs could take the form of new or retrofitted equipment or the development of new technologies (e.g., sequestration) to try to control or reduce greenhouse gas emissions.
The future enactment of climate control or greenhouse gas emissions legislation or regulation could produce benefits for us that would offset somewhat the adverse effects noted above. For example, if climate control legislation or regulation continues to drive automotive manufacturers to meet higher fuel efficiency targets, we could benefit from increased sales of our broad portfolio of products: NOES for H/EV motors, GOES for upgrading electrical grid infrastructure required to support more H/EVs, stainless steels needed for exhaust systems and other components for more efficient engines, and AHSS products to lightweight automobiles. Moreover, if climate change legislation provides further incentives for energy efficiency, up to certain levels, we could benefit from increased sales of our GOES products, which are already among the most energy-efficient electrical steels in the world. We sell our electrical steels primarily to manufacturers of power transmission and distribution transformers and electrical motors and generators, the demand for which could grow if energy efficiency standards increase. In addition, climate control legislation may enhance sales of our products in different ways. For instance, if the legislation promotes the use of renewable energy technology, such as wind or solar technology, it could increase demand for our high-efficiency electrical steel products used in power transformers, which are needed to connect these new sources to the electricity grid.
The ultimate impacts on us from any additional climate change or emissions reduction legislation or regulation would depend on the final terms of any such legislation or regulation. Presently, we are unable to predict with any reasonable degree of accuracy when or even if climate control legislation or regulation will be enacted, or if it is, what its terms and applicability to us will be. As a result, we currently have no reasonable basis to reliably predict or estimate the specific effects any eventually enacted laws may have on us or how we may be able to reduce any negative impacts on our business and operations. In the meantime, the items described above provide some indication of the potential mixed impact on us from climate control legislation or regulation generally.
Cleveland-Cliffs Acquisition
On December 2, 2019, we entered the Merger Agreement pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Cliffs will acquire AK Holding by way of the Merger. Under the terms of the Merger Agreement, at the effective time of the Merger, AK Holding stockholders will become entitled to receive 0.40 Cliffs common shares for each outstanding share of AK Holding common stock they own at the effective time. Upon completion of the proposed Merger, AK Holding stockholders are expected to own approximately 32% and Cliffs shareholders to own approximately 68% of the combined company on a fully diluted basis.
The completion of the Merger is subject to the receipt of antitrust clearance in the United States. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and the rules promulgated thereunder, the Merger may not be completed until we and Cliffs have each filed notification and report forms with the United States Federal Trade Commission (“FTC”), and the Antitrust Division of the United States Department of Justice (“DOJ”), and the applicable waiting period (or any extension thereof) has expired or been terminated. On January 22, 2020, we and Cliffs each received notification from the FTC of the early termination of the waiting period applicable to the Merger under the HSR Act. Each of our and Cliffs’ obligation to effect the Merger is also subject to obtaining regulatory approval from the antitrust authorities in Canada and Mexico. On February 12, 2020, we and Cliffs each received a “no-action” letter from the Canadian Competition Bureau, clearing the Merger under Canadian competition law. On January 6, 2020, we and Cliffs each submitted notifications and an application for Mexican Competition Commission (Comisión Federal de Competencia Económica) clearance of the Merger and that process is ongoing.
On February 4, 2020, the SEC declared effective the registration statement on Form S-4 that Cliffs had filed with the SEC in connection with the Merger and Cliffs filed a final prospectus with respect to the Cliffs common shares that will be issued to our stockholders in the Merger. We also filed our definitive joint proxy statement with the SEC on February 4, 2020, and we and Cliffs each commenced mailing the definitive joint proxy statement to our respective stockholders on February 5, 2020. The definitive joint proxy statement contains information relating to the Merger and also announced that each company will hold a special meeting of its respective stockholders on March 10, 2020, where the stockholders of each company will be asked to vote on matters related to the transaction, including for our stockholders to approve the adoption of the Merger Agreement and Cliffs shareholders to approve the Merger Agreement and related transactions, including the issuance of the Cliffs common shares to our stockholders in the Merger.
We expect to complete the Merger in the first quarter of 2020, subject to the receipt of customary regulatory and stockholder approvals and the satisfaction or (to the extent permissible) waiver of the other closing conditions under the Merger Agreement.
Critical Accounting Estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles permit choices among alternatives and require numerous estimates of financial matters. Accounting estimates are based on historical experience and information that is available to us about current events and actions we may take in the future. We believe the accounting principles chosen are appropriate under the circumstances, and that the estimates, judgments and assumptions involved in financial reporting are reasonable. There can be no assurance that actual results will not differ from these estimates. We believe the accounting estimates discussed below represent those accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results.
Asset Impairment
We have various assets that are subject to impairment testing, including property, plant and equipment, goodwill and equity method investments. If circumstances indicate that an asset has lost value below its carrying amount, we review the asset for impairment. We evaluate the effect of changes in operations and estimate future cash flows to measure fair value. We use assumptions, such as revenue growth rates, terminal growth rates, EBITDA margins and cost of capital, as part of these analyses and our selections of the assumptions to use can result in different conclusions. We believe the data and assumptions used are appropriate in the circumstances and consistent with internal projections. The most recent annual goodwill impairment tests indicated that the fair values of the relevant reporting units were in excess of their carrying value. However, while an improvement from the prior year, the estimated fair value of the Precision Partners reporting unit was still relatively close to its carrying amount. We believe that this result is reasonable as this reporting unit was acquired in August 2017. Changes in certain assumptions in the impairment tests could have resulted in various scenarios, including an increase in fair value or a decrease in fair value below the carrying amount of Precision Partners. We believe certain key assumptions, such as cost of capital and terminal growth rates, used in our assessment have an appropriate degree of conservatism. For the tubular reporting unit, AK Tube’s estimated fair value was substantially higher than its carrying amount. Our businesses operate in highly cyclical industries and the valuation of these businesses can fluctuate, which may lead to impairment charges in future periods. Fair value is determined using quoted market prices, estimates based on prices of similar assets, or anticipated cash flows discounted at a rate commensurate with risk.
We consider the need to evaluate long-lived assets for indicators of impairment at least quarterly to determine if events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. We evaluate long-lived assets associated with our steelmaking operations for impairment based on a collective asset grouping that includes the operations of all facilities. We manage these operations as part of an “integrated process” that allows us to route production to various facilities so that we can maximize financial results and cash flows. If the carrying value of a long-lived asset group exceeds its fair value, we determine that an impairment has occurred and we recognize a loss based on the amount that the carrying value exceeds the fair value, less cost to dispose, for assets we plan to sell or abandon.
Income Taxes
We recognize deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the enacted tax laws. We regularly evaluate the need for a valuation allowance against our deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future. We assess the need for a valuation allowance each reporting period, with any additions or adjustments reflected in earnings in the period of assessment. We have maintained a full valuation allowance against our net U.S. deferred tax assets since 2012, with appropriate consideration for the future reversal of our taxable temporary differences. At December 31, 2019, our deferred tax asset valuation allowance was $659.4.
In assessing the need for a valuation allowance, we have considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction. At December 31, 2019, we considered the existence of recent cumulative income from U.S. operations as a source of positive evidence. We generated losses from U.S. operations for several periods through 2016 and in 2019 and accordingly generated significant cumulative losses in those periods, which is a significant source of objective negative evidence. Despite income reported in 2017 and 2018 from U.S. operations, the following forms of negative evidence concerning our ability to realize our domestic deferred tax assets were considered:
we have historical evidence that the steel industry we operate within has business cycles of longer than a few years and therefore attribute significant weight to our cumulative losses over longer business cycles in evaluating our ability to generate future taxable income;
the global steel industry has been experiencing global overcapacity and periods of increased foreign steel imports into the U.S., which has created volatile economic conditions and uncertainty relative to predictions of future taxable income;
while we have changed our business model to de-emphasize sales of commodity business and believe that this model will generate improved financial results throughout an industry cycle, we have not experienced all parts of the cycle and therefore we do not know what results our business model will produce in those circumstances;
our U.S. operations have generated losses in 2019 and cumulatively significant losses in prior years and the competitive landscape in the steel industry reflects shifting domestic and international political priorities, an uncertain global trade landscape, and continued intense competition from domestic and foreign steel competitors, all of which present significant uncertainty regarding our ability to routinely generate U.S. income in the near term;
significant volatility in spot market selling prices for carbon steel; and
a substantial portion of our U.S. deferred tax assets are tax carryforwards with expiration dates that may prevent us from using them prior to expiration.
At December 31, 2019, we concluded that objective and subjective negative evidence outweighed positive evidence, and therefore it was not more likely than not that we would be able to realize our net deferred tax assets. As a result of the cyclical nature of our industry and to the extent that the improvement in our financial results is sustainable, there is the potential for different weighting of positive and negative factors in the future as facts and circumstances change. Accordingly, material changes in the valuation allowance may be recognized in future periods.
We evaluate uncertainty in our tax positions and only recognize benefits when the tax position is believed to be more likely than not to be sustained upon audit. We have tax filing requirements in many states and are subject to audit in these states, as well as at the federal level. Tax audits by their nature are often complex and can require several years to resolve. In the preparation of the consolidated financial statements, we exercise judgment in estimating the potential exposure of unresolved tax matters. While actual results could vary, we believe that we have adequately accrued the ultimate outcome of these unresolved tax matters.
Pension and OPEB Plans
Accounting for retiree pension and healthcare benefits requires the use of actuarial methods and assumptions, including assumptions about current employees’ future retirement dates, anticipated mortality rates, the benchmark interest rate used to discount benefits to their present value, anticipated future increases in healthcare costs and our obligations under collective bargaining agreements with respect to pension and healthcare benefits for retirees. Changing any of these assumptions could have a material effect on the calculation of our total obligation for future pension and healthcare benefits.
Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans or when the assumptions change, as they may each year when a valuation or remeasurement is performed. The major factors contributing to our actuarial gains and losses are changes in the discount rate used to value plan liabilities as of the measurement date and changes in the expected lives of plan participants. We believe the mortality assumptions selected for determining the expected lives of plan participants are most closely associated with the expected lives of our plan participants. However, selecting other available assumptions would likely increase the plan obligations. In addition, a major factor contributing to actuarial gains and losses for our pension plan is the difference between expected and actual returns on plan assets. For OPEB plans, differences in estimated versus actual healthcare costs and changes in assumed healthcare cost trend rates are additional factors generally contributing to actuarial gains and losses. However, we do not expect changes in these OPEB assumptions to have a material effect on us since most of our plans have caps on the share of benefits we pay. In addition to their effect on the funded status of the plans and their potential for corridor adjustments, these factors affect future net periodic benefit expenses. Changes in key assumptions can have a material effect on the amount of benefit obligation and annual expense we record. For example, a 25 basis point decrease in the discount rate would decrease the interest cost component of pension income in 2020 by $3.0. A 25 basis point decrease in the discount rate would have increased the pension obligation at December 31, 2019, by approximately $36.0 and the OPEB obligation by approximately $10.0. A 25 basis point decrease in the expected rate of return on pension plan assets would decrease the projected 2020 pension income by approximately $3.0.
Under our method of accounting for pension and OPEB plans, we recognize into income any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets as of the measurement date, defined as the corridor. Amounts inside the corridor are amortized over the plan participants’ life expectancy. Our method results in faster recognition of actuarial net gains and losses than the minimum amortization method permitted by prevailing accounting standards and used by the vast majority of companies in the United States. Faster recognition under this method also results in the potential for highly volatile and difficult to forecast corridor adjustments.
Environmental and Legal Contingencies
We are involved in a number of environmental and other legal proceedings. We record a liability when we determine that litigation has commenced or a claim or assessment has been asserted and, based on available information, it is probable that the outcome of the litigation, claim or assessment, whether by decision or settlement, will be unfavorable and the amount of the liability is reasonably estimable. We measure the liability using available information, including the extent of damage, similar historical situations, our allocable share of the liability and, in the case of environmental liabilities, the need to provide site investigation, remediation and future monitoring and maintenance. We record accruals for probable costs based on a combination of litigation and settlement strategies on a case-by-case basis and, where appropriate, supplement those with incurred-but-not-reported development reserves. However, amounts we record in the financial statements in accordance with accounting principles generally accepted in the United States exclude costs that are not probable or that may not be currently estimable. The ultimate costs of these environmental and legal proceedings may, therefore, be higher than those we have recorded on our financial statements. In addition, changes in assumptions or the effectiveness of our strategies can materially affect results of operations in future periods.
Contractual Obligations
In the ordinary course of business, we enter into agreements that obligate us to make legally enforceable future payments. These agreements include those for borrowing money, leasing equipment and purchasing goods and services. The following table summarizes by category expected future cash outflows associated with contractual obligations we have as of December 31, 2019.
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| | | | | | | | | | | | | | | | | | | | |
| | | Payment due by period |
| Contractual Obligations | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total |
| Long-term debt | | $ | 7.3 |
| | $ | 856.2 |
| | $ | 442.0 |
| | $ | 691.8 |
| | $ | 1,997.3 |
|
| Interest on debt (a) | | 124.2 |
| | 205.6 |
| | 113.0 |
| | 81.4 |
| | 524.2 |
|
| Operating lease obligations | | 67.8 |
| | 97.9 |
| | 67.0 |
| | 144.5 |
| | 377.2 |
|
| Purchase obligations and commitments | | 2,006.2 |
| | 2,334.7 |
| | 1,070.6 |
| | 1,512.7 |
| | 6,924.2 |
|
| Pension and OPEB obligations (b) | | 41.0 |
| | 78.2 |
| | 74.2 |
| | 565.4 |
| | 758.8 |
|
| Other non-current liabilities (c) | | — |
| | 51.8 |
| | 23.5 |
| | 78.8 |
| | 154.1 |
|
| Total | | $ | 2,246.5 |
| | $ | 3,624.4 |
| | $ | 1,790.3 |
| | $ | 3,074.6 |
| | $ | 10,735.8 |
|
| |
(a) | Amounts include contractual interest payments using the interest rates as of December 31, 2019 applicable to our variable-rate debt and stated fixed interest rates for fixed-rate debt. |
| |
(b) | Future cash contributions to our qualified pension trust are not included in the table above. We have approximately $45.0 of required contributions for 2020. Based on current actuarial assumptions, the estimates for our contributions are approximately $45.0 for 2021 and $35.0 for 2022. Estimates of cash contributions to the pension trust to be made after 2020 are uncertain since several variable factors impact defined benefit pension plan contributions and required contributions are significantly affected by asset returns. Because we expect the pension trust to make pension benefit payments beyond the next five years, the net pension liability is included in the More than 5 years column. We estimate other postretirement benefit payments, after receipt of Medicare subsidy reimbursements, will be $35.6 for 2020 and we expect them to trend down to $7.6 over the next 30 years. For a more detailed description of these obligations, see Note 8 to the consolidated financial statements. |
| |
(c) | Excludes the long-term portion of operating lease obligations. |
In calculating the amounts for purchase obligations, we identified contracts where we have a legally enforceable obligation to purchase products or services from the vendor or make payments to the vendor for an identifiable period. For each identified contract, we determined our best estimate of payments to be made under the contract assuming (1) the continued operation of existing production facilities, (2) normal business levels, (3) both parties would adhere to the contract in good faith throughout its term, and (4) prices in the contract. Because of changes in the markets we serve, changes in business decisions regarding production levels or unforeseen events, the actual amounts paid under these contracts could differ significantly from the amounts presented above. For example, circumstances could arise which create exceptions to minimum purchase obligations in the contracts. We calculated the purchase obligations in the table above without considering such exceptions.
A number of our purchase contracts specify a minimum volume or price for the products or services covered by the contract. If we were to purchase only the minimums specified, the payments in the table would be reduced. Under “requirements contracts” the quantities of goods or services we are required to purchase may vary depending on our needs, which are dependent on production levels and market conditions at the time. If our business deteriorates or increases, the amount we are required to purchase under such a contract would likely change. Many of our agreements for the purchase of goods and services allow us to terminate the contract without penalty if we give 30 to 90 days’ notice. Any such termination could reduce the projected payments.
Our consolidated balance sheets contain liabilities for pension and OPEB and other long-term obligations. We calculate the benefit plan liabilities using actuarial assumptions that we believe are reasonable under the circumstances. However, because changes in circumstances can have a significant effect on the liabilities and expenses associated with these plans including, in the case of pensions, pending or future legislation, we cannot reasonably and accurately project payments into the future. While we do include information about these plans in the above table, we also discuss these benefits elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the notes to the consolidated financial statements.
The other long-term liabilities on our consolidated balance sheets include accruals for environmental and legal issues, employment-related benefits and insurance, liabilities established for uncertain tax positions, and other obligations. These amounts generally do not arise from contractual negotiations with the parties receiving payment in exchange for goods and services. The ultimate amount and timing of payments are uncertain and, in many cases, depend on future events occurring, such as the filing of a claim or completion of due diligence investigations, settlement negotiations, audit and examinations by taxing authorities, documentation or legal proceedings.
New Accounting Pronouncements
The information called for by this section is incorporated herein by reference to the Adoption of New Accounting Principles section of Note 1 of the consolidated financial statements.
Forward-Looking Statements
Certain statements we make or incorporate by reference in this Form 10-K, or make in other documents we furnish to or file with the Securities Exchange Commission, as well as in press releases or in presentations made by our employees, reflect our estimates and beliefs and are intended to be, and are hereby identified as “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “estimates” and other similar references to future periods typically identify such forward-looking statements. We caution readers that forward-looking statements reflect our current beliefs and judgments, but are not guarantees of future performance or outcomes. They are based on a number of assumptions and estimates that are inherently subject to economic, competitive, regulatory, and operational risks, uncertainties and contingencies that are beyond our control, and upon assumptions about future business decisions and conditions that may change. In particular, these include, but are not limited to, statements in the Liquidity and Capital Resources section and Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
We caution readers that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those currently expected. See Item 1A, Risk Factors for more information on certain of these risks and uncertainties.
Any forward-looking statement made in this document speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
| |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Our primary areas of market risk include changes in (a) interest rates, (b) commodity prices and (c) foreign currency exchange rates.
Interest Rate Risk
We manage interest rate risk in our capital structure by issuing variable- and fixed-rate debt. Our outstanding long-term indebtedness (excluding unamortized debt discount and issuance costs) was $1,997.3 and $2,035.4 at December 31, 2019 and 2018. The amount outstanding at December 31, 2019, consisted of $1,521.3 of fixed-rate debt, $26.0 of variable-rate IRBs and $450.0 of variable-rate borrowings from our Credit Facility. An increase in prevailing interest rates would increase interest expense and interest paid for the variable-rate debt, including any outstanding borrowings from the Credit Facility. For example, a 100 basis point increase in interest rates would increase annual interest expense by approximately $4.8 on our outstanding debt at December 31, 2019.
Commodity Price Risk
Commodity prices for certain carbon, stainless and electrical steels and raw material and energy inputs represent a source of market risk. Prices for certain raw materials and energy have been volatile over the last several years, with chrome, iron ore, natural gas, zinc, and scrap being especially volatile. We attempt to mitigate commodity price risk by aligning fixed and variable components in the following commitments:
customer pricing contracts;
supplier purchasing agreements; and
derivative financial instruments.
Some customer contracts have fixed-pricing terms, which increase our exposure to fluctuations in raw material and energy costs. To reduce our exposure, we enter annual, fixed-price agreements for certain raw materials. Some of our existing multi-year raw material supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows.
In many cases, our customer contracts do not include variable-pricing mechanisms that adjust selling prices in response to changes in the costs of certain raw materials and energy, though some of our customer contracts include such mechanisms. We may enter multi-year purchase agreements for certain raw materials with similar variable-price mechanisms, allowing us to achieve natural hedges between the customer pricing contracts and supplier purchasing agreements. Therefore, in some cases price fluctuations for energy (particularly natural gas and electricity), raw materials (such as scrap, chrome, zinc and nickel) or other commodities may be, in part, passed on to customers rather than absorbed solely by us. There is a risk, however, that the variable-price mechanisms in the sales contracts may not necessarily change in tandem with the variable-price mechanisms in our purchase agreements, negatively affecting our results of operations and cash flows.
If we are unable to align fixed and variable components between customer pricing contracts and supplier purchasing agreements, we use cash-settled commodity price swaps and options to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. We routinely use these derivative instruments to hedge a portion of our natural gas, iron ore, zinc and electricity requirements. Our hedging strategy is designed to protect us from excessive pricing volatility. However, since we do not typically hedge 100% of our exposure, abnormal price increases in any of these commodity markets might still negatively affect operating costs.
For derivatives designated in cash flow hedging relationships, we record the gains and losses from the use of these instruments in accumulated other comprehensive income (loss) on the consolidated balance sheets and subsequently recognize the accumulated gains and losses into cost of goods sold in the same period when the associated underlying transactions occur. At December 31, 2019, accumulated other comprehensive income (loss) included $25.0 in unrealized pre-tax losses for these derivative instruments. All other commodity price swaps and options are marked-to-market and recognized into cost of products sold with the offset recognized as an asset or accrued liability. See Note 18 of the consolidated financial statements for further information on our outstanding derivatives.
The following table presents the negative effect on pre-tax income of a hypothetical change in the fair value of derivative instruments outstanding at December 31, 2019, due to an assumed 10% and 25% decrease in the market price of each of the indicated commodities:
|
| | | | | | | | |
| | | Negative Effect on Pre-tax Income |
| Commodity Derivative | | 10% Decrease | | 25% Decrease |
| Natural gas | | $ | 8.7 |
| | $ | 21.8 |
|
| Nickel | | (0.1 | ) | | (0.2 | ) |
| Zinc | | 2.7 |
| | 6.6 |
|
| Electricity | | 4.5 |
| | 11.2 |
|
| Iron ore | | 12.5 |
| | 20.7 |
|
Because we structure and use these instruments as hedges, the benefit of lower prices paid for the physical commodity used in the normal production cycle or higher prices received on the sale of product would offset these hypothetical losses. We do not enter into derivative contracts for trading purposes.
Foreign Currency Exchange Rate Risk
Exchange rate fluctuations affect our accounts receivable that are denominated in euros and our operating costs that are denominated in Canadian dollars, and we use forward currency contracts to reduce our exposure to certain of these currency price fluctuations. At December 31, 2019 and 2018, we had outstanding forward currency contracts with a total contract value of $1.7 and $4.6 for the sale of euros. Based on the contracts outstanding at December 31, 2019, a 10% change in the dollar-to-euro exchange rate would result in a pre-tax impact of $0.2 on the fair value of these contracts, which would offset the effect of a change in the exchange rate on the underlying receivable. At December 31, 2019 and 2018, we had outstanding forward currency contracts with a total contract value of $55.9 and $86.9 for the purchase of Canadian dollars. Based on the contracts outstanding at December 31, 2019, a 10% change in the U.S. dollar-to-Canadian dollar exchange rate would result in a pre-tax impact of $5.6 on the fair value of these contracts, which would offset the effect of a change in the exchange rate on the underlying operating costs. See Note 18 of the consolidated financial statements for further information on our outstanding forward contracts.
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Item 8. | Financial Statements and Supplementary Data. |
AK Steel Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements
MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles permit choices among alternatives and require numerous estimates of financial matters. We believe the accounting principles chosen are appropriate under the circumstances, and that the estimates, judgments and assumptions involved in our financial reporting are reasonable.
We are responsible for the integrity and objectivity of the financial information presented in our consolidated financial statements. We maintain a system of internal accounting controls designed to provide reasonable assurance that employees comply with stated policies and procedures, that assets are safeguarded and that financial reports are fairly presented. On a regular basis, financial management discusses internal accounting controls and financial reporting matters with our independent registered public accounting firm and our Audit Committee, composed solely of independent outside directors. The independent registered public accounting firm and the Audit Committee also meet privately to discuss and assess our accounting controls and financial reporting.
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| | | |
Dated: | February 20, 2020 | | /s/ Roger K. Newport |
| | | Roger K. Newport |
| | | Chief Executive Officer and Director |
| | | |
| | | |
Dated: | February 20, 2020 | | /s/ Christopher J. Ross |
| | | Christopher J. Ross |
| | | Vice President, Treasurer and Interim Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of AK Steel Holding Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AK Steel Holding Corporation (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 20, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in the paragraph under the caption “Adoption of New Accounting Principles” described in Note 1 to the consolidated financial statements, effective January 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
| |
| Realizability of Deferred Tax Assets |
Description of the Matter | As more fully described in Note 6, at December 31, 2019, the Company had gross deferred tax assets on deductible temporary differences and carryforwards of $833.9 million reduced by a valuation allowance of $659.4 million, both primarily related to the U.S. Deferred tax assets must be reduced by a valuation allowance if, based upon the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
Auditing management’s analysis of the realizability of its U.S. deferred tax assets was complex and highly judgmental due to the weighting of positive and negative evidence with respect to future reversals of taxable U.S. temporary differences and future U.S. taxable income exclusive of reversing temporary differences and carryforwards.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls relating to the realizability of deferred tax assets. Our audit procedures included testing controls over management’s projections of future reversals of existing taxable temporary differences and future taxable income (exclusive of reversing temporary differences and carryforwards) and testing the completeness and accuracy of the underlying data used by the Company.
To test the realizability of the Company’s deferred tax assets, we performed audit procedures which included, among others, assessing the positive and negative evidence related to the likelihood of realization of the U.S. deferred tax assets. We tested the Company’s scheduling of the reversal of existing temporary taxable differences used as a source of taxable income were of the appropriate character to realize existing deferred tax assets. We assessed the historical accuracy of management’s forecasted U.S. taxable income, exclusive of reversing temporary differences and carryforwards, and compared the forecasts to current industry and economic trends. We involved tax professionals to evaluate the application of jurisdictional tax laws and regulations used in the Company’s assumptions and calculations.
|
|
| |
| Precision Partners’ Reporting Unit Goodwill |
Description of the Matter | At December 31, 2019, goodwill was $255.5 million, and included $222.7 million related to the Precision Partners’ reporting unit. As discussed in Note 1 to the consolidated financial statements, goodwill is reviewed for potential impairment at the reporting unit level at least annually on October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred.
Auditing management’s annual goodwill impairment assessment for the Precision Partners’ reporting unit was complex due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as revenue growth rates, the terminal growth rate, EBITDA margin, and the weighted average cost of capital, which are affected by expectations about future market or economic conditions.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over management’s review of the significant judgmental assumptions, including revenue growth rates, the terminal growth rate, EBITDA margin, and the weighted average cost of capital.
To test the Company’s annual goodwill impairment assessment for the Precision Partners’ reporting unit, we performed audit procedures that included, among others, evaluating the estimated fair value of the Precision Partners’ reporting unit, including evaluating methodologies used. We involved our specialists in the evaluation of the significant assumptions described above and testing the underlying data used by the Company in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance and other factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions.
|
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2013.
Cincinnati, Ohio
February 20, 2020
|
| | | | | | | | | | | | |
| AK STEEL HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| Years Ended December 31, 2019, 2018 and 2017 |
| (dollars in millions, except per share data) |
| | | 2019 | | 2018 | | 2017 |
| Net sales | | $ | 6,359.4 |
| | $ | 6,818.2 |
| | $ | 6,080.5 |
|
| | | | | | | |
| Cost of products sold (exclusive of items shown separately below) | | 5,606.3 |
| | 5,911.0 |
| | 5,253.1 |
|
| Selling and administrative expenses | | 295.2 |
| | 322.6 |
| | 284.9 |
|
| Depreciation | | 192.6 |
| | 220.2 |
| | 226.0 |
|
| Ashland Works closure | | 56.0 |
| | — |
| | — |
|
| Credit for adjustment of liability for transportation costs | | — |
| | — |
| | (19.3 | ) |
| Asset impairment charge | | — |
| | — |
| | 75.6 |
|
| Total operating costs | | 6,150.1 |
| | 6,453.8 |
| | 5,820.3 |
|
| Operating profit | | 209.3 |
| | 364.4 |
| | 260.2 |
|
| Interest expense | | 146.6 |
| | 151.6 |
| | 152.3 |
|
| Pension and OPEB (income) expense | | 12.0 |
| | (19.2 | ) | | (71.9 | ) |
| Other (income) expense | | (18.5 | ) | | (5.9 | ) | | 17.1 |
|
| Income before income taxes | | 69.2 |
| | 237.9 |
| | 162.7 |
|
| Income tax expense (benefit) | | 6.2 |
| | (6.2 | ) | | (2.2 | ) |
| Net income | | 63.0 |
| | 244.1 |
| | 164.9 |
|
| Less: Net income attributable to noncontrolling interests | | 51.8 |
| | 58.1 |
| | 61.4 |
|
| Net income attributable to AK Steel Holding Corporation | | $ | 11.2 |
| | $ | 186.0 |
| | $ | 103.5 |
|
| Net income per share attributable to AK Steel Holding Corporation common stockholders: | | | | | | |
| Basic | | $ | 0.04 |
| | $ | 0.59 |
| | $ | 0.33 |
|
| Diluted | | $ | 0.04 |
| | $ | 0.59 |
| | $ | 0.32 |
|
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| AK STEEL HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| Years Ended December 31, 2019, 2018 and 2017 |
| (dollars in millions) |
| | | 2019 | | 2018 | | 2017 |
| Net income | | $ | 63.0 |
| | $ | 244.1 |
| | $ | 164.9 |
|
| Other comprehensive income, before tax: | | | | | | |
| Foreign currency translation gain (loss) | | (0.6 | ) | | (1.7 | ) | | 4.7 |
|
| Cash flow hedges: | | | | | | |
| Gains (losses) arising in period | | (31.5 | ) | | (5.6 | ) | | (11.5 | ) |
| Reclassification of losses (gains) to net income | | 8.9 |
| | (10.3 | ) | | (6.1 | ) |
| Pension and OPEB plans: | | | | | | |
| Prior service credit (cost) arising in period | | — |
| | 11.1 |
| | 4.7 |
|
| Gains (losses) arising in period | | 50.5 |
| | (63.6 | ) | | 94.2 |
|
| Reclassification of prior service cost (credits) included in net income | | (9.6 | ) | | (9.8 | ) | | (53.8 | ) |
| Reclassification of losses (gains) included in net income | | 15.7 |
| | 29.3 |
| | 6.3 |
|
| Other comprehensive income (loss), before tax | | 33.4 |
| | (50.6 | ) | | 38.5 |
|
| Income tax expense in other comprehensive income | | 1.4 |
| | — |
| | — |
|
| Other comprehensive income (loss) | | 32.0 |
| | (50.6 | ) | | 38.5 |
|
| Comprehensive income | | 95.0 |
| | 193.5 |
| | 203.4 |
|
| Less: Comprehensive income attributable to noncontrolling interests | | 51.8 |
| | 58.1 |
| | 61.4 |
|
| Comprehensive income attributable to AK Steel Holding Corporation | | $ | 43.2 |
| | $ | 135.4 |
| | $ | 142.0 |
|
See notes to consolidated financial statements.
|
| | | | | | | | |
| AK STEEL HOLDING CORPORATION |
| CONSOLIDATED BALANCE SHEETS |
| December 31, 2019 and 2018 |
| (dollars in millions, except per share data) |
| | | 2019 | | 2018 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 31.0 |
| | $ | 48.6 |
|
| Accounts receivable, net | | 577.9 |
| | 635.8 |
|
| Inventory | | 1,346.2 |
| | 1,419.9 |
|
| Other current assets | | 65.2 |
| | 97.0 |
|
| Total current assets | | 2,020.3 |
| | 2,201.3 |
|
| Property, plant and equipment | | 7,168.9 |
| | 6,969.2 |
|
| Accumulated depreciation | | (5,237.0 | ) | | (5,057.6 | ) |
| Property, plant and equipment, net | | 1,931.9 |
| | 1,911.6 |
|
| Other non-current assets: | | | | |
| Goodwill and intangible assets | | 293.4 |
| | 298.9 |
|
| Other non-current assets | | 345.0 |
| | 103.9 |
|
| TOTAL ASSETS | | $ | 4,590.6 |
| | $ | 4,515.7 |
|
| LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
| Accounts payable | | $ | 705.1 |
| | $ | 801.0 |
|
| Accrued liabilities | | 314.4 |
| | 288.9 |
|
| Current portion of pension and other postretirement benefit obligations | | 41.0 |
| | 38.7 |
|
| Total current liabilities | | 1,060.5 |
| | 1,128.6 |
|
| Non-current liabilities: | | | | |
| Long-term debt | | 1,968.8 |
| | 1,993.7 |
|
| Pension and other postretirement benefit obligations | | 717.8 |
| | 829.9 |
|
| Other non-current liabilities | | 366.2 |
| | 134.0 |
|
| TOTAL LIABILITIES | | 4,113.3 |
| | 4,086.2 |
|
| Equity: | | | | |
| Common stock, authorized 450,000,000 shares of $.01 par value each; issued 317,768,621 and 316,595,613 shares in 2019 and 2018; outstanding 316,401,478 and 315,535,765 shares in 2019 and 2018 | | 3.2 |
| | 3.2 |
|
| Additional paid-in capital | | 2,904.2 |
| | 2,894.9 |
|
| Treasury stock, common shares at cost, 1,367,143 and 1,059,848 shares in 2019 and 2018 | | (7.3 | ) | | (6.4 | ) |
| Accumulated deficit | | (2,680.6 | ) | | (2,691.8 | ) |
| Accumulated other comprehensive loss | | (68.0 | ) | | (100.0 | ) |
| Total stockholders’ equity | | 151.5 |
| | 99.9 |
|
| Noncontrolling interests | | 325.8 |
| | 329.6 |
|
| TOTAL EQUITY | | 477.3 |
| | 429.5 |
|
| TOTAL LIABILITIES AND EQUITY | | $ | 4,590.6 |
| | $ | 4,515.7 |
|
The consolidated balance sheets as of December 31, 2019 and 2018, include the following amounts for consolidated variable interest entities, before intercompany eliminations. See Note 16 for more information concerning variable interest entities.
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Middletown Coke Company, LLC (“SunCoke Middletown”) | | | | |
| Cash and cash equivalents | | $ | 0.1 |
| | $ | 1.1 |
|
| Inventory | | 24.1 |
| | 21.1 |
|
| Property, plant and equipment | | 446.1 |
| | 427.8 |
|
| Accumulated depreciation | | (127.7 | ) | | (106.9 | ) |
| Accounts payable | | 19.2 |
| | 13.7 |
|
| Other assets (liabilities), net | | 1.5 |
| | (1.2 | ) |
| Noncontrolling interests | | 324.9 |
| | 328.2 |
|
| | | | | |
| Other variable interest entities | | | | |
| Cash and cash equivalents | | $ | 0.1 |
| | $ | 0.5 |
|
| Property, plant and equipment | | 11.7 |
| | 11.7 |
|
| Accumulated depreciation | | (10.0 | ) | | (9.8 | ) |
| Other assets (liabilities), net | | 0.1 |
| | 0.5 |
|
| Noncontrolling interests | | 0.9 |
| | 1.4 |
|
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| AK STEEL HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Years Ended December 31, 2019, 2018 and 2017 |
| (dollars in millions) |
| | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 63.0 |
| | $ | 244.1 |
| | $ | 164.9 |
|
| Adjustments to reconcile net income to cash flows from operating activities: | | | | | | |
| Depreciation | | 169.9 |
| | 201.6 |
| | 209.8 |
|
| Depreciation—SunCoke Middletown | | 22.7 |
| | 18.6 |
| | 16.2 |
|
| Amortization | | 32.7 |
| | 32.0 |
| | 24.1 |
|
| Ashland Works closure | | 56.0 |
| | — |
| | — |
|
| Asset impairment charge—Ashland Works Hot End | | — |
| | — |
| | 75.6 |
|
| Credit for adjustment of liability for transportation costs | | — |
| | — |
| | (19.3 | ) |
| Deferred income taxes | | (1.0 | ) | | (8.0 | ) | | (9.0 | ) |
| Contributions to pension trust | | (43.5 | ) | | (49.9 | ) | | (44.1 | ) |
| Pension and OPEB (income) expense | | 17.8 |
| | (11.6 | ) | | (64.4 | ) |
| (Gains) losses on retirement of debt | | (0.8 | ) | | (2.0 | ) | | 21.3 |
|
| Mark-to-market (gains) losses on derivative contracts | | (44.0 | ) | | (8.9 | ) | | (45.7 | ) |
| Other operating items, net | | (7.6 | ) | | 2.4 |
| | 20.1 |
|
| Changes in assets and liabilities, net of effect of acquired business: | | | | | | |
| Accounts receivable | | 60.2 |
| | (125.0 | ) | | (34.4 | ) |
| Inventory | | 73.7 |
| | (34.8 | ) | | (116.7 | ) |
| Accounts payable and other current liabilities | | (172.8 | ) | | 119.6 |
| | 46.2 |
|
| Other assets | | 75.0 |
| | 52.9 |
| | (6.5 | ) |
| Other pension payments | | (0.9 | ) | | (1.0 | ) | | (1.1 | ) |
| OPEB payments | | (26.8 | ) | | (35.6 | ) | | (39.6 | ) |
| Other liabilities | | (7.7 | ) | | (29.7 | ) | | 1.4 |
|
| Net cash flows from operating activities | | 265.9 |
| | 364.7 |
| | 198.8 |
|
Cash flows from investing activities: | | | | | | |
| Capital investments | | (180.8 | ) | | (150.1 | ) | | (149.6 | ) |
| Capital investments—SunCoke Middletown | | (14.0 | ) | | (1.9 | ) | | (2.9 | ) |
| Investment in acquired business, net of cash acquired | | — |
| | — |
| | (360.4 | ) |
| Other investing items, net | | 6.6 |
| | 0.1 |
| | 4.2 |
|
| Net cash flows from investing activities | | (188.2 | ) | | (151.9 | ) | | (508.7 | ) |
| Cash flows from financing activities: | | | | | | |
| Net borrowings (repayments) under credit facility | | 115.0 |
| | (115.0 | ) | | 450.0 |
|
| Proceeds from issuance of long-term debt | | — |
| | — |
| | 680.0 |
|
| Redemption of long-term debt | | (152.3 | ) | | (12.6 | ) | | (848.4 | ) |
| Debt issuance costs | | — |
| | — |
| | (25.3 | ) |
| SunCoke Middletown distributions to noncontrolling interest owners | | (55.6 | ) | | (73.7 | ) | | (79.1 | ) |
| Other financing items, net | | (2.4 | ) | | (0.9 | ) | | (2.5 | ) |
| Net cash flows from financing activities | | (95.3 | ) | | (202.2 | ) | | 174.7 |
|
| Net increase (decrease) in cash and cash equivalents | | (17.6 | ) | | 10.6 |
| | (135.2 | ) |
| Cash and cash equivalents, beginning of year | | 48.6 |
| | 38.0 |
| | 173.2 |
|
| Cash and cash equivalents, end of year | | $ | 31.0 |
| | $ | 48.6 |
| | $ | 38.0 |
|
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| AK STEEL HOLDING CORPORATION |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| Years Ended December 31, 2019, 2018 and 2017 |
| (dollars in millions) |
| | | 2019 | | 2018 | | 2017 |
| Common stock | | | | | | |
| Balance at beginning of period | | $ | 3.2 |
| | $ | 3.2 |
| | $ | 3.1 |
|
| Share-based compensation | | — |
| | — |
| | 0.1 |
|
| Balance at end of period | | 3.2 |
| | 3.2 |
| | 3.2 |
|
| Additional paid-in capital | | | | | | |
| Balance at beginning of period | | 2,894.9 |
| | 2,884.8 |
| | 2,855.4 |
|
| Share-based compensation | | 9.2 |
| | 9.2 |
| | 7.6 |
|
| Stock options exercised | | 0.1 |
| | 0.9 |
| | 0.5 |
|
| Exchangeable notes exchange feature | | — |
| | — |
| | 21.3 |
|
| Balance at end of period | | 2,904.2 |
| | 2,894.9 |
| | 2,884.8 |
|
| Treasury stock | | | | | | |
| Balance at beginning of period | | (6.4 | ) | | (5.4 | ) | | (2.4 | ) |
| Purchase of treasury stock | | (0.9 | ) | | (1.0 | ) | | (3.0 | ) |
| Balance at end of period | | (7.3 | ) | | (6.4 | ) | | (5.4 | ) |
| Accumulated deficit | | | | | | |
| Balance at beginning of period | | (2,691.8 | ) | | (2,877.0 | ) | | (2,980.5 | ) |
| Cumulative effect of adopting new hedging standard | | — |
| | (0.8 | ) | | — |
|
| Net income attributable to AK Steel Holding Corporation | | 11.2 |
| | 186.0 |
| | 103.5 |
|
| Balance at end of period | | (2,680.6 | ) | | (2,691.8 | ) | | (2,877.0 | ) |
| Accumulated other comprehensive loss | | | | | | |
| Balance at beginning of period | | (100.0 | ) | | (50.2 | ) | | (88.7 | ) |
| Cumulative effect of adopting new hedging standard | | — |
| | 0.8 |
| | — |
|
| Change in accumulated other comprehensive loss | | 32.0 |
| | (50.6 | ) | | 38.5 |
|
| Balance at end of period | | (68.0 | ) | | (100.0 | ) | | (50.2 | ) |
| Noncontrolling interests | | | | | | |
| Balance at beginning of period | | 329.6 |
| | 345.2 |
| | 362.9 |
|
| Net income attributable to noncontrolling interests | | 51.8 |
| | 58.1 |
| | 61.4 |
|
| Net distributions to noncontrolling interests | | (55.6 | ) | | (73.7 | ) | | (79.1 | ) |
| Balance at end of period | | 325.8 |
| | 329.6 |
| | 345.2 |
|
| Total equity | | $ | 477.3 |
| | $ | 429.5 |
| | $ | 300.6 |
|
See notes to consolidated financial statements.
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts or as otherwise specifically noted)
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation—These financial statements consolidate the operations and accounts of AK Steel Holding Corporation (“AK Holding”), its wholly owned subsidiary AK Steel Corporation (“AK Steel”), all subsidiaries in which AK Holding has a controlling interest, and two variable interest entities for which AK Steel is the primary beneficiary. Unless the context indicates otherwise, references to “we,” “us” and “our” refer to AK Holding and its subsidiaries. We also operate Mexican and European trading companies that buy and sell steel and steel products and other materials. We manage operations on a consolidated, integrated basis so that we can use the most appropriate equipment and facilities for the production of a product, regardless of product line. Therefore, we conclude that we operate in a single business segment. All intercompany transactions and balances have been eliminated.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported. We base these estimates on historical experience and information available to us about current events and actions we may take in the future. Estimates and assumptions affect significant items that include the carrying value of long-lived assets, including investments and goodwill; valuation allowances for receivables, inventories and deferred income tax assets; legal and environmental liabilities; workers compensation and asbestos liabilities; share-based compensation; and assets and obligations of employee benefit plans. There can be no assurance that actual results will not differ from these estimates.
Revenue Recognition—We generate our revenue through product sales, and shipping terms generally indicate when we have fulfilled our performance obligations and passed control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. We have contracts with a substantial portion of our customers. These contracts usually define the mechanism for determining the sales price, but the contracts do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. We recognize revenue when we have fulfilled a performance obligation, which is typically when we have shipped products at the customer’s instructions. For sales with shipping terms that transfer title and control at the destination point, we recognize revenue when the customer receives the goods and our performance obligation is complete. For sales with shipping terms that transfer title and control at the shipping point with us bearing responsibility for freight costs to the destination, we determine that we have fulfilled a single performance obligation and recognize revenue when we ship the goods. For our tooling solutions, we record progress payments that we receive from a customer as accrued liabilities until we recognize the revenue when the customer provides written acceptance that our performance obligation has been fulfilled.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.
We recognize an allowance for credit loss at the time a receivable is recorded based on our estimate of expected credit losses and adjust this estimate over the life of the receivable as needed. We evaluate the aggregation and risk characteristics of receivable pools and develop loss rates that reflect historical collections, current forecasts of future economic conditions over the time horizon we are exposed to credit risk, and payment terms or conditions that may materially affect future forecasts. We expect credit losses associated with major auto companies to be lower than other customer pools.
Cost of Products Sold—Cost of products sold consists primarily of raw materials, energy costs, supplies consumed in the manufacturing process, manufacturing labor, contract labor and direct overhead expense necessary to manufacture the finished steel product, as well as distribution and warehousing costs. Our share of the income (loss) of investments in associated companies accounted for under the equity method is included in costs of products sold since these operations are integrated with our overall steelmaking operations.
Share-Based Compensation—Compensation costs for stock awards are recognized over their vesting period using the straight-line method. We estimate stock award forfeitures expected to occur to determine the compensation cost we recognize each period.
Legal Fees—Legal fees associated with litigation and similar proceedings that are not expected to provide a benefit in future periods are expensed as incurred. Legal fees associated with activities that are expected to provide a benefit in future periods, such as costs associated with the issuance of debt, are capitalized as incurred.
Income Taxes—Interest and penalties from uncertain tax positions are included in income tax expense.
Cash Equivalents—Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less.
Inventory—Inventories are valued at the lower of cost or net realizable value. We measure the cost of inventories using the average cost method.
Property, Plant and Equipment—Plant and equipment are depreciated under the straight-line method over their estimated lives. Estimated lives are as follows: land improvements over 20 years, leaseholds over the life of the related operating lease term, buildings over 40 years and machinery and equipment over two to 20 years. The estimated weighted-average life of our machinery and equipment is 13 years at the end of 2019. Amortization expense for assets recorded under finance leases is included in depreciation expense. Costs incurred to develop coal mines are capitalized when incurred. We use the units-of-production method utilizing only proven and probable reserves in the depletion base to compute the depletion of coal reserves and mine development costs. We expense costs for major maintenance activities at our operating facilities when the activities occur.
We review the carrying value of long-lived assets to be held and used and long-lived assets to be disposed of when events and circumstances warrant such a review. If the carrying value of a long-lived asset exceeds its fair value, an impairment has occurred and a loss is recognized based on the amount by which the carrying value exceeds the fair value, less cost to dispose, for assets to be sold or abandoned. We determine fair value by using quoted market prices, estimates based on prices of similar assets or anticipated cash flows discounted at a rate commensurate with risk.
Goodwill and Intangible Assets—Goodwill relates to our AK Tube LLC (“AK Tube”) and PPHC Holdings, LLC (“Precision Partners”) businesses. Intangible assets are recorded at cost, and those with finite lives are amortized over their estimated useful lives. We review goodwill for potential impairment at least annually on October 1 each year and whenever events or circumstances make it more likely than not that impairment may have occurred. Considering operating results and the estimated fair value of the businesses, the most recent annual goodwill impairment tests indicated that the fair value of each of our business reporting units was in excess of its carrying value. No goodwill impairment was recorded as a result of the annual impairment tests in the past three years.
Leases—We determine if an arrangement contains a lease at inception. We recognize right-of-use assets and liabilities associated with leases based on the present value of the future minimum lease payments over the lease term at the later of the commencement date of the lease or January 1, 2019 (the implementation date of Accounting Standards Update No. 2016-02, Leases (Topic 842)). We use our incremental borrowing rate at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Lease terms reflect options to extend or terminate the lease when it is reasonably certain that the option will be exercised. For leases that include residual value guarantees or payments for terminating the lease, we include these costs in the lease liability when it is probable that we will incur them. Right-of-use assets and obligations for short-term leases (leases with an initial term of 12 months or less) are not recognized in the consolidated balance sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. We have agreements that contain lease and non-lease components. In assessing whether an agreement includes a lease component, we consider the nature of the assets included under the agreement and our right to direct their use. We allocate the costs of the agreement to the separate components based on the relative standalone prices of the components. Where observable standalone prices are not readily available, we estimate the standalone price based on the most observable information available. For leases of real estate and certain light equipment, such as vehicles and mobile equipment, and for certain contracts that contain assets, such as production support, natural gas, electricity and industrial gas agreements, we account for the lease and non-lease components in the contracts as a single lease component.
Investments—Investments in associated companies are accounted for under the equity method. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary.
Debt Issuance Costs—Debt issuance costs for the revolving credit facility are included in other non-current assets and all other debt issuance costs reduce the carrying amount of long-term debt.
Pension and Other Postretirement Benefits—We recognize into income, as of a measurement date, any unrecognized actuarial net gains or losses that exceed 10% of the larger of the projected benefit obligations or the plan assets, defined as the “corridor.” Amounts inside the corridor are amortized over the plan participants’ life expectancy. We determine the expected return on assets using the fair value of plan assets.
Concentrations of Credit Risk—We are primarily a producer of carbon, stainless and electrical steels and steel products, which are sold to a number of markets, including automotive, infrastructure and manufacturing, and distributors and converters. We had 2 customers that accounted for 11% and 11% of net sales in 2019, 2 customers that accounted for 11% and 10% of net sales in 2018, and 1 customer that accounted for 12% of net sales in 2017. Approximately 62% and 52% of accounts receivable outstanding at December 31, 2019 and 2018, are due from businesses associated with the U.S. automotive industry, including 15% of receivables due from 1 automotive customer as of December 31, 2019, and 13% due from 1 automotive customer as of December 31, 2018.
Labor Agreements—At December 31, 2019, we employed approximately 9,300 people, of which approximately 5,600 are represented by labor unions under various agreements that expire between 2020 and 2023. In April 2019, we and the United Steelworkers, Local 1865, which represents production employees at Ashland Works, reached an agreement to revise and extend the collective bargaining agreement. The new agreement includes terms governing the permanent closure of the facility, including benefits to employees who are terminated or transition to other AK Steel plants. In May 2019, members of the United Steelworkers, Local 1190, ratified a three-year labor agreement covering approximately 220 production employees at Mountain State Carbon, LLC. The new agreement will be in effect through April 30, 2022. In May 2019, members of the United Auto Workers, Local 4104, which governs approximately 100 production employees at Zanesville Works, ratified a new three-year labor agreement. The new agreement will be in effect through May 31, 2022. In July 2019, members of the United Auto Workers, Local 3303, which governs approximately 1,100 production and maintenance employees at Butler Works, ratified a new three-year agreement. The new agreement will be in effect through June 15, 2022. In September 2019, members of the United Auto Workers, Local 3462, which governs approximately 310 production employees at Coshocton Works, ratified a new agreement. The new agreement will be in effect through July 31, 2023. Other agreements that expire within the next twelve months include an agreement with the International Association of Machinists and Aerospace Workers, Local 1943, which governs approximately 1,750 production employees at Middletown Works, scheduled to expire March 15, 2020, and an agreement with United Steelworkers, Local 1915, which governs approximately 100 production employees at AK Tube’s Walbridge plant, scheduled to expire January 22, 2021.
Financial Instruments—We are a party to derivative instruments that are designated and qualify as hedges for accounting purposes. We may also use derivative instruments to which we do not apply hedge accounting treatment. Our objective in using these instruments is to limit operating cash flow exposure to fluctuations in the fair value of selected commodities and currencies.
Fluctuations in the price of certain commodities we use in production processes may affect our income and cash flows. We have implemented raw material and energy surcharges for some contract customers. For certain commodities where such exposure exists, we may use cash-settled commodity price swaps, collars and purchase options, with a duration of up to two years, to hedge the price of a portion of our natural gas, iron ore, electricity, zinc and nickel requirements. We may designate some of these instruments as cash flow hedges and changes in their fair value and settlements are recorded in accumulated other comprehensive income. We subsequently reclassify gains and losses from accumulated other comprehensive income to cost of products sold in the same period we recognize the earnings associated with the underlying transaction. The change in fair value for other instruments is immediately recorded in cost of products sold with the offset recorded as assets or liabilities.
Exchange rate fluctuations affect a portion of revenues and operating costs that are denominated in foreign currencies, and we use currency forwards and options to reduce our exposure to these currency price fluctuations. These derivative contracts have durations up to three years. Contracts that sell euros have not been designated as hedges for accounting purposes and gains or losses are reported in earnings immediately in other income (expense). Contracts that purchase Canadian dollars are designated as hedges for accounting purposes, which requires us to record the gains and losses for the derivatives in accumulated other comprehensive income and reclassify them into cost of products sold in the same period we recognize costs for the associated underlying operations.
We formally document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions. In this documentation, we specifically identify the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item, and state how the hedging instrument is expected to hedge the risks from that item. We formally measure effectiveness of hedging relationships both at the hedge inception and on an ongoing basis. We discontinue hedge accounting prospectively when we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; when the derivative expires or is sold, terminated or exercised; when it is probable that the forecasted transaction will not occur; when a hedged firm commitment no longer meets the definition of a firm commitment; or when we determine that designation of the derivative as a hedge instrument is no longer appropriate. Our derivative contracts may contain collateral funding requirements. We have master netting arrangements with counterparties, giving us the right to offset amounts owed under the derivative instruments and the collateral. We do not offset derivative assets and liabilities or collateral on our consolidated balance sheets. Cash flows associated with purchasing and settling derivative contracts are classified as operating cash flows.
Asbestos and Environmental Accruals—For a number of years, we have been remediating sites where hazardous materials may have been released, including sites no longer owned by us. In addition, a number of lawsuits alleging asbestos exposure have been filed and
continue to be filed against us. We have established accruals for estimated probable costs from asbestos claim settlements and environmental investigation, monitoring and remediation. If the accruals are not adequate to meet future claims, operating results and cash flows may be negatively affected. Our accruals do not consider the potential for insurance recoveries. We have partial insurance coverage for some future asbestos claims. In addition, some existing insurance policies covering asbestos and environmental contingencies may serve to partially reduce future covered expenditures.
Adoption of New Accounting Principles—We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), as subsequently amended, as of January 1, 2019 through the modified retrospective method applied to those contracts that were not completed as of January 1, 2019. Topic 842 requires entities to recognize lease assets and lease liabilities and disclose key information about leasing arrangements for certain leases. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting treatment. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. Adoption of the new standard resulted in recording additional lease assets and liabilities of $291.1 as of January 1, 2019. The adoption of the standard did not materially impact our consolidated net earnings or cash flows.
We adopted Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as subsequently amended, as of December 31, 2019. The standard requires entities to recognize credit losses at the time financial assets, including receivables, are recorded by estimating lifetime expected credit losses. The effect of adoption of the new guidance was not material to our consolidated financial statements.
NOTE 2 - Proposed Cleveland-Cliffs Acquisition
On December 2, 2019, we entered into an Agreement of Plan of Merger (as it may be amended from time to time, the “Merger Agreement”) among us, Cleveland-Cliffs Inc. (“Cliffs”) and Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs (“Merger Sub”) pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Cliffs will acquire AK Holding by way of the merger of Merger Sub with and into AK Holding (the “Merger”), with AK Holding surviving such Merger as a wholly owned subsidiary of Cliffs. Under the terms of the Merger Agreement, at the effective time of the Merger, AK Holding stockholders will become entitled to receive 0.40 Cliffs common shares for each outstanding share of AK Holding common stock they own at the effective time. Upon completion of the proposed Merger, it is expected that, AK Holding stockholders will own approximately 32% of the combined company and Cliffs shareholders will own approximately 68% of the combined company on a fully diluted basis. We expect to complete the Merger in the first quarter of 2020, subject to the receipt of customary regulatory and stockholder approvals and the satisfaction or (to the extent permissible) waiver of the other closing conditions under the Merger Agreement.
On January 14, 2020, Cliffs commenced consent solicitations and offers to exchange any and all outstanding 6.375% Senior Notes due 2025 (“2025 Notes”) and 7.00% Senior Notes due 2027 (“2027 Notes”) issued by AK Steel for the same aggregate principal amount of new notes to be issued by Cliffs, subject to completion of the Merger and the satisfaction of certain other conditions. On January 28, 2020, we received the requisite consents to adopt the proposed amendments to amend the respective indentures governing the 2025 Notes (“2025 Notes Indenture”) and the 2027 Notes (“2027 Notes Indenture”). Those amendments deleted certain covenants from the indentures, as set forth in a Form 8-K that we filed with the SEC on January 29, 2020. On January 29, 2020, we and U.S. Bank National Association, as trustee (the “Trustee”) entered into the Ninth Supplemental Indenture with respect to the 2027 Notes Indenture (the “Ninth Supplemental Indenture”) and the Tenth Supplemental Indenture with respect to the 2025 Notes Indenture (the “Tenth Supplemental Indenture” and, together with the Ninth Supplemental Indenture, the “Supplemental Indentures”) giving effect to the proposed amendments. The Supplemental Indentures will become operative as to the 2025 Notes and 2027 Notes only upon completion of the Merger and the satisfaction of certain other conditions.
NOTE 3 - Supplementary Financial Statement Information
Revenue
Net sales by market are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Automotive | $ | 4,172.2 |
| | $ | 4,284.7 |
| | $ | 3,951.5 |
|
| Infrastructure and Manufacturing | 1,006.0 |
| | 1,049.1 |
| | 948.0 |
|
| Distributors and Converters | 1,181.2 |
| | 1,484.4 |
| | 1,181.0 |
|
| Total | $ | 6,359.4 |
| | $ | 6,818.2 |
| | $ | 6,080.5 |
|
Net sales by product line are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Carbon steel | $ | 4,143.6 |
| | $ | 4,409.1 |
| | $ | 4,034.5 |
|
| Stainless and electrical steel | 1,617.5 |
| | 1,793.8 |
| | 1,687.6 |
|
| Tubular products, components and other | 598.3 |
| | 615.3 |
| | 358.4 |
|
| Total | $ | 6,359.4 |
| | $ | 6,818.2 |
| | $ | 6,080.5 |
|
We sell domestically to customers located primarily in the Midwestern and Eastern United States and to foreign customers located primarily in Canada, Mexico and Western Europe. Net sales to customers located outside the United States totaled $569.4, $634.8 and $627.1 for 2019, 2018 and 2017.
Research and Development Costs
We conduct a broad range of research and development activities aimed at improving existing products and manufacturing processes and developing new products and processes. Research and development costs, which are recorded as selling and administrative expenses when incurred, totaled $30.7, $29.4 and $28.1 in 2019, 2018 and 2017.
Allowance for Credit Losses
Changes in the allowance for credit losses for the years ended December 31, 2019, 2018 and 2017, are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 6.6 |
| | $ | 6.8 |
| | $ | 7.8 |
|
| Increase (decrease) in allowance | (1.6 | ) | | 0.3 |
| | (1.0 | ) |
| Receivables written off | (0.7 | ) | | (0.5 | ) | | — |
|
| Balance at end of year | $ | 4.3 |
| | $ | 6.6 |
| | $ | 6.8 |
|
Inventory
Inventories as of December 31, 2019 and 2018, consist of:
|
| | | | | | | |
| | 2019 | | 2018 |
| Finished and semi-finished | $ | 971.4 |
| | $ | 1,054.4 |
|
| Raw materials | 374.8 |
| | 365.5 |
|
| Inventory | $ | 1,346.2 |
| | $ | 1,419.9 |
|
Property, Plant and Equipment
Property, plant and equipment as of December 31, 2019 and 2018, consist of:
|
| | | | | | | |
| | 2019 | | 2018 |
| Land, land improvements and leaseholds | $ | 271.2 |
| | $ | 272.1 |
|
| Buildings | 514.8 |
| | 509.7 |
|
| Machinery and equipment | 6,213.6 |
| | 6,061.6 |
|
| Construction in progress | 169.3 |
| | 125.8 |
|
| Total | 7,168.9 |
| | 6,969.2 |
|
| Less accumulated depreciation | (5,237.0 | ) | | (5,057.6 | ) |
| Property, plant and equipment, net | $ | 1,931.9 |
| | $ | 1,911.6 |
|
Interest on capital projects capitalized in 2019, 2018 and 2017 was $3.1, $1.6 and $1.9. Asset retirement obligations were $10.6 and $8.5 at December 31, 2019 and 2018.
Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2019, 2018 and 2017 are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 255.0 |
| | $ | 253.8 |
| | $ | 32.8 |
|
| Acquisition | 0.5 |
| | 1.2 |
| | 221.0 |
|
| Balance at end of year | $ | 255.5 |
| | $ | 255.0 |
| | $ | 253.8 |
|
At December 31, 2019, goodwill consisted of $222.7 related to our Precision Partners business and $32.8 related to our AK Tube business.
Intangible assets at December 31, 2019 and 2018, consist of:
|
| | | | | | | | | | | |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
| As of December 31, 2019 | | | | | |
| Customer relationships | $ | 36.6 |
| | $ | (12.5 | ) | | $ | 24.1 |
|
| Technology | 23.0 |
| | (9.2 | ) | | 13.8 |
|
| Intangible assets | $ | 59.6 |
| | $ | (21.7 | ) | | $ | 37.9 |
|
| | | | | | |
| As of December 31, 2018 | | | | | |
| Customer relationships | $ | 36.6 |
| | $ | (7.4 | ) | | $ | 29.2 |
|
| Technology | 19.3 |
| | (4.6 | ) | | 14.7 |
|
| Intangible assets | $ | 55.9 |
| | $ | (12.0 | ) | | $ | 43.9 |
|
Amortization expense related to intangible assets was $9.7, $9.0 and $4.0 in 2019, 2018 and 2017. Amortization expense is included in costs of products sold. The remaining average life of our intangible assets is 4.6 years for customer relationships and 3.6 years for technology. Estimated annual amortization expense for intangible assets over the next five years is $10.6 for 2020, $8.4 for 2021, $8.4 for 2022, $7.1 for 2023 and $3.4 in 2024.
Other Non-current Assets
Other non-current assets as of December 31, 2019 and 2018, consist of:
|
| | | | | | | |
| | 2019 | | 2018 |
| Operating lease assets | $ | 244.5 |
| | $ | — |
|
| Investments in affiliates | 79.5 |
| | 80.5 |
|
| Other | 21.0 |
| | 23.4 |
|
| Other non-current assets | $ | 345.0 |
| | $ | 103.9 |
|
Accrued Liabilities
Accrued liabilities as of December 31, 2019 and 2018, consist of:
|
| | | | | | | |
| | 2019 | | 2018 |
| Salaries, wages and benefits | $ | 83.0 |
| | $ | 127.8 |
|
| Current portion of operating lease liabilities | 49.6 |
| | — |
|
| Interest | 33.8 |
| | 34.8 |
|
| Other | 148.0 |
| | 126.3 |
|
| Accrued liabilities | $ | 314.4 |
| | $ | 288.9 |
|
Ashland Works Closure
In January 2019, our Board of Directors approved and we announced the planned closure of our Ashland Works, including the previously idled blast furnace and steelmaking operations (“Ashland Works Hot End”) and the hot dip galvanizing coating line that had continued to operate. Factors that influenced our decision to close Ashland Works included an uncertain global trade landscape influenced by shifting domestic and international political priorities, Ashland Works’ high cost of production, and continued intense competition from domestic and foreign steel competitors. These conditions directly impacted our pricing, which in turn directly impacted our assessment of the demand forecasts for the markets we serve. Despite several favorable trade actions, carbon steel imports remained at a high level, driven by global overcapacity, particularly in China. We expected global overcapacity to be exacerbated by several domestic steel companies that had restarted or planned new capacity additions in the United States. In addition, we concluded that we had sufficient coating capacity to meet our customers’ needs without using our coating operations at Ashland Works. We transitioned products to our other, lower cost coating lines in the U.S. and closed the Ashland Works coating line in November 2019.
For the year ended December 31, 2019, we recorded a charge of $69.3, which included $18.5 for termination of take-or-pay supply agreements, $20.1 for supplemental unemployment and other employee benefit costs, pension and other postretirement benefit (“OPEB”) termination benefits of $13.3 (recorded in pension and OPEB (income) expense), an estimated multiemployer plan withdrawal liability of $10.0, and $7.4 for other costs. The supplemental unemployment and other employee benefit costs are expected to be paid primarily in 2020 and 2021. The actual multiemployer plan withdrawal liability will not be known until a future date and is expected to be paid over a number of years. Ongoing costs to maintain the equipment and utilities and meet supplier obligations related to the idled Ashland Works Hot End were $12.6, $20.0 and $21.2 for the years ended December 31, 2019, 2018 and 2017. These cash costs related to closing the facility will decline in future years. We recorded $4.0 of accelerated depreciation related to the coating line fixed assets for the year ended December 31, 2019 to fully depreciate them.
The supplemental unemployment and other employee benefit costs were recorded as accrued and other non-current liabilities, and the activity for the year ended December 31, 2019, was as follows:
|
| | | | |
| | | 2019 |
| Charge for supplemental unemployment and other employee benefit costs | | $ | 20.1 |
|
| Payments | | (1.0 | ) |
| Balance at end of year | | $ | 19.1 |
|
In the fourth quarter of 2015, we temporarily idled the Ashland Works Hot End. We incurred charges in the fourth quarter of 2015 for supplemental unemployment and other employee benefit costs that were recorded as accrued liabilities, and the activity for the years ended December 31, 2018, and 2017 was as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 1.5 |
| | $ | 6.2 |
|
| Payments | | (1.5 | ) | | (5.3 | ) |
| Additions to the reserve | | — |
| | 0.6 |
|
| Balance at end of year | | $ | — |
| | $ | 1.5 |
|
During 2017, we recognized a non-cash asset impairment charge of $75.6, primarily related to the long-lived assets associated with the Ashland Works Hot End.
NOTE 4 - Acquisition of Precision Partners
In August 2017, we acquired Precision Partners, which provides advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies for the automotive market. Precision Partners is headquartered in Ontario, Canada, and operates 10 plants in Ontario, Alabama and Kentucky. We acquired Precision Partners to advance our core focus on the high-growth automotive lightweighting market and our prominent position in advanced high strength steels, further strengthen our close collaboration with automotive market customers, and leverage both companies’ research and innovation in metals forming. The consolidated financial statements reflect the effects of the acquisition and Precision Partner’s financial results subsequent to the acquisition. For the year ended December 31, 2017, we incurred acquisition costs of $6.2, primarily for transaction fees and direct costs, including legal, finance, consulting and other professional fees. These costs are included in selling and administrative expenses in the consolidated statements of operations.
NOTE 5 - Investments in Affiliates
We have investments in several businesses accounted for using the equity method of accounting. Investees and equity ownership percentages are presented below:
|
| | |
| | Equity Ownership % |
Combined Metals of Chicago, LLC | | 40.0% |
Delaco Processing, LLC | | 49.0% |
Rockport Roll Shop LLC | | 50.0% |
Spartan Steel Coating, LLC | | 48.0% |
Cost of products sold includes $5.1, $6.6 and $7.0 in 2019, 2018 and 2017 for our share of income of equity investees. As of December 31, 2019, our carrying cost of our investment in Spartan Steel exceeded our share of the underlying equity in net assets by $7.7. This difference is being amortized and the amortization expense is included in cost of products sold.
Summarized financial statement data for all investees is presented below:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Revenue | | $ | 330.2 |
| | $ | 329.8 |
| | $ | 292.7 |
|
| Gross profit | | 94.6 |
| | 91.0 |
| | 88.9 |
|
| Net income (loss) | | 15.5 |
| | 19.4 |
| | 20.7 |
|
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Current assets | | $ | 114.2 |
| | $ | 123.6 |
|
| Noncurrent assets | | 80.3 |
| | 74.4 |
|
| Current liabilities | | 18.8 |
| | 16.9 |
|
| Noncurrent liabilities | | 96.1 |
| | 54.2 |
|
We regularly transact business with these equity investees. Transactions with all equity investees for the years indicated are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Sales to equity investees | $ | 67.6 |
| | $ | 104.4 |
| | $ | 80.6 |
|
| Purchases from equity investees | 42.3 |
| | 31.2 |
| | 33.0 |
|
Outstanding receivables and payables with all equity investees as of the end of the year indicated are presented below:
|
| | | | | | | |
| | 2019 | | 2018 |
| Accounts receivable from equity investees | $ | 1.5 |
| | $ | 1.9 |
|
| Accounts payable to equity investees | 3.9 |
| | 6.4 |
|
In 2016, we terminated our iron ore pellet offtake agreement with Magnetation LLC, ceased purchasing iron ore pellets from them, and recorded a liability for obligations under contracts with other third parties to transport pellets to our facilities. In 2017, we recorded a credit of $19.3 to reduce the liability when we reached an agreement for transportation services to begin using rail cars that we idled after the termination of the pellet supply agreement.
NOTE 6 - Income Taxes
We and our subsidiaries file a consolidated federal income tax return that includes all domestic companies owned 80% or more by us and the proportionate share of our interest in equity method investments. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to us and our domestic subsidiaries.
Components of income (loss) before income taxes for the years ended December 31, 2019, 2018 and 2017, are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| United States | $ | (9.3 | ) | | $ | 168.3 |
| | $ | 91.6 |
|
| Foreign | 26.7 |
| | 11.5 |
| | 9.7 |
|
| Noncontrolling interests | 51.8 |
| | 58.1 |
| | 61.4 |
|
| Income before income taxes | $ | 69.2 |
| | $ | 237.9 |
| | $ | 162.7 |
|
Significant components of deferred tax assets and liabilities at December 31, 2019 and 2018 are presented below:
|
| | | | | | | |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Net operating and capital loss and tax credit carryforwards | $ | 496.2 |
| | $ | 516.7 |
|
| Postretirement benefits | 87.9 |
| | 81.8 |
|
| Pension benefits | 84.2 |
| | 114.1 |
|
| Leases | 63.3 |
| | — |
|
| Inventories | 23.4 |
| | 38.5 |
|
| Other assets | 78.9 |
| | 65.1 |
|
| Valuation allowance | (659.4 | ) | | (693.5 | ) |
| Total deferred tax assets | 174.5 |
| | 122.7 |
|
| Deferred tax liabilities: | |
| | |
|
| Depreciable assets | (106.3 | ) | | (108.3 | ) |
| Leases | (60.0 | ) | | — |
|
| Other liabilities | (27.9 | ) | | (33.4 | ) |
| Total deferred tax liabilities | (194.2 | ) | | (141.7 | ) |
| Net deferred tax liabilities | $ | (19.7 | ) | | $ | (19.0 | ) |
We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize future deferred tax assets. We assess the valuation allowance each reporting period and reflect any additions or adjustments in earnings in the same period. At December 31, 2019, we considered the existence of recent cumulative income from U.S. operations as a source of positive evidence. We have generated losses from U.S. operations for several of our recent periods through 2016 and for
2019 and accordingly have generated significant cumulative losses in those periods, which is a significant source of objective negative evidence. Despite the recent income reported in 2017 and 2018 from U.S. operations, the following forms of negative evidence concerning our ability to realize our domestic deferred tax assets were considered:
we have historical evidence that the steel industry we operate within has business cycles of longer than a few years and therefore attribute significant weight to our cumulative losses over longer business cycles in evaluating our ability to generate future taxable income;
the global steel industry has been experiencing global overcapacity and periods of increased foreign steel imports into the U.S., which have created volatile economic conditions and uncertainty relative to predictions of future income;
while we have changed our business model to de-emphasize sales of commodity products and believe that this model will generate improved financial results throughout an industry cycle, we have not experienced all parts of the cycle since we made these changes and therefore we do not know what results our business model will produce in all circumstances;
our U.S. operations have generated significant losses in prior years and the competitive landscape in the steel industry reflects shifting domestic and international political priorities, an uncertain global trade landscape, and continued intense competition from domestic and foreign steel competitors, all of which present significant uncertainty regarding our ability to routinely generate U.S. income in the near term;
there has been significant recent volatility in spot market selling prices for carbon and stainless steel; and
a substantial portion of our U.S. deferred tax assets consists of tax carryforwards with expiration dates that may prevent us from using them prior to expiration.
As of December 31, 2019 and 2018, we concluded that the negative evidence outweighed the positive evidence and we maintained a valuation allowance for our net deferred tax assets in the U.S. To determine the appropriate valuation allowance, we considered the timing of future reversal of our taxable temporary differences that supports realizing a portion of our federal and state deferred tax assets. This accounting treatment has no effect on our ability to use the loss carryforwards and tax credits to reduce future cash tax payments.
Changes in the valuation allowance for the years ended December 31, 2019, 2018 and 2017, are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 693.5 |
| | $ | 735.7 |
| | $ | 1,189.7 |
|
| Change in valuation allowance: | | | | | |
| Included in income tax expense (benefit) | (26.2 | ) | | (52.8 | ) | | (62.3 | ) |
| Change in deferred assets in other comprehensive income | (7.9 | ) | | 10.6 |
| | 8.5 |
|
| Effect of tax rate changes | — |
| | — |
| | (400.2 | ) |
| Balance at end of year | $ | 659.4 |
| | $ | 693.5 |
| | $ | 735.7 |
|
At December 31, 2019, we had $2,081.6 in federal regular net operating loss carryforwards, which will expire between 2030 and 2037. Our net operating loss carryovers were generated in years prior to 2018, retain the original 20-year carryover periods, and can be used to offset future taxable income without limitation. At December 31, 2019, we had research and development (“R&D”) credit carryforwards of $1.2 that we may use to offset future income tax liabilities. The R&D credits expire between 2027 and 2028. At December 31, 2019, we had $76.3 in deferred tax assets for state net operating loss carryforwards and tax credit carryforwards, before considering valuation allowances, which will expire between 2020 and 2039.
Significant components of income tax expense (benefit) are presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 0.2 |
| | $ | (0.5 | ) | | $ | (4.5 | ) |
| State | (0.1 | ) | | (0.3 | ) | | 0.3 |
|
| Foreign | 5.1 |
| | 2.1 |
| | 2.4 |
|
| Deferred: | |
| | |
| | |
|
| Federal | (0.1 | ) | | (5.3 | ) | | 0.7 |
|
| State | — |
| | — |
| | 0.1 |
|
| Foreign | 2.5 |
| | (2.2 | ) | | (0.4 | ) |
| Amount allocated to other comprehensive income | (1.4 | ) | | — |
| | — |
|
| Change in valuation allowance on beginning-of-the-year deferred tax assets | — |
| | — |
| | (0.8 | ) |
| Income tax expense (benefit) | $ | 6.2 |
| | $ | (6.2 | ) | | $ | (2.2 | ) |
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), signed into law on December 22, 2017, reduced the corporate income tax rate to 21% beginning in 2018, among other provisions. We recognized the effects of changes in tax rates and laws on deferred tax balances in 2017, the period in which the legislation was enacted. At December 31, 2017, we remeasured our deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, which is generally 21% at the U.S. federal level. As a result, our income tax expense for the fourth quarter of 2017 included a non-cash credit of $4.3 for the decrease in the value of our net deferred tax liabilities.
The Tax Act also introduced a one-time transition tax on the cumulative undistributed earnings of our foreign subsidiaries as of December 31, 2017. As a result, our taxable income for 2017 included $24.3 as our gross transition tax obligation. We did not incur a cash tax liability for the transition tax due to the availability of existing net operating loss carryforwards. At December 31, 2019 we had $11.4 of accumulated undistributed earnings of our foreign subsidiaries that has not been subject to U.S. income tax as they are considered indefinitely reinvested. Substantially all of the earnings as of December 31, 2017 were subject to U.S. taxation as a result of the transition tax inclusion provided for by the Tax Act. The Tax Act also establishes a broad exemption from U.S. taxation for dividends paid from our foreign affiliates after 2017. Consequently, there will generally be no incremental U.S. taxable income generated if we repatriate these foreign earnings in the future. However, foreign withholding taxes on dividend distributions could apply, unless they are eliminated by a treaty between the United States and the country where our foreign affiliate is located. Since we consider these earnings to be permanently invested in our foreign subsidiaries, we did not record any withholding taxes that would be assessed if the earnings were repatriated by payment of a dividend. If we repatriated the earnings, we estimate that the withholding tax liability would not be material at December 31, 2019.
Staff Accounting Bulletin No. 118 established a one-yearten-year period from the date of enactment in which to account for the impact of the Tax Act. During 2018, we reduced our valuation allowance and recorded an income tax benefit of $5.3 as a result of changes to the tax net operating carryover rules included in the Tax Act that allow us to use certain indefinite-lived deferred tax liabilities as a source of future income to realize deferred tax assets. As of December 31, 2018, we had accounted for the material aspects of the Tax Act.
The reconciliation of income tax on income before income taxes computed at the U.S. federal statutory tax rates to actual income tax expense is presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Income tax expense at U.S. federal statutory rate | $ | 14.5 |
| | $ | 50.0 |
| | $ | 57.2 |
|
| Income tax expense calculated on noncontrolling interests | (10.9 | ) | | (12.2 | ) | | (21.5 | ) |
| State and foreign tax expense, net of federal tax | 12.9 |
| | (2.3 | ) | | 6.3 |
|
| Increase (decrease) in deferred tax asset valuation allowance | (26.2 | ) | | (52.8 | ) | | (51.8 | ) |
| Amount allocated to other comprehensive income | (1.4 | ) | | — |
| | — |
|
| Remeasurement of deferred taxes for U.S. tax legislation | — |
| | — |
| | (4.3 | ) |
| Transition tax on foreign earnings | — |
| | — |
| | 7.9 |
|
| Non-deductible compensation | 4.7 |
| | 8.1 |
| | — |
|
| Other permanent differences | 7.3 |
| | 2.3 |
| | 2.4 |
|
| Other differences | 5.3 |
| | 0.7 |
| | 1.6 |
|
| Income tax expense (benefit) | $ | 6.2 |
| | $ | (6.2 | ) | | $ | (2.2 | ) |
Our federal, state and local tax returns are subject to examination by various taxing authorities. Federal returns and most state returns for periods beginning in 2016 are open for examination, while certain state and local returns are open for examination for periods beginning in 2015. However, taxing authorities have the ability to adjust net operating loss carryforwards generated in years before these periods. We have not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on income tax returns until taxing authorities review them. We have established appropriate income tax accruals, and believe that the outcomes of future federal examinations, as well as ongoing and future state and local examinations, will not have a material adverse impact on our financial position, results of operations or cash flows. When statutes of limitations expire or taxing authorities resolve uncertain tax positions, we will adjust income tax expense for the unrecognized tax benefits. We have 0 tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within twelve months of December 31, 2019.
A reconciliation of the change in unrecognized tax benefits for 2019, 2018 and 2017 is presented below:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 87.2 |
| | $ | 89.4 |
| | $ | 124.2 |
|
| Decreases for prior year tax positions | (12.2 | ) | | (2.2 | ) | | (0.5 | ) |
| Increases (decreases) for current year tax positions | 0.3 |
| | — |
| | 0.3 |
|
| Increases (decreases) related to tax rate changes (a) | — |
| | — |
| | (34.6 | ) |
| Balance at end of year | $ | 75.3 |
| | $ | 87.2 |
| | $ | 89.4 |
|
| |
(a) | As a result of the Tax Act, the value of unrecognized tax benefits associated with net operating loss carryforwards and other temporary differences was reduced to reflect the lower tax rates that will apply if the uncertainties related to these deferred tax assets materialize in the future. |
Included in the balance of unrecognized tax benefits at December 31, 2019 and 2018, are $72.3 and $72.8 of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2019 and 2018, are $3.0 and $14.5 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
NOTE 7 - Long-term Debt and Other Financing
Debt balances at December 31, 2019 and 2018, are presented below: |
| | | | | | | |
| | 2019 | | 2018 |
| Credit Facility | $ | 450.0 |
| | $ | 335.0 |
|
| 7.50% Senior Secured Notes due July 2023 (effective rate of 8.3%) | 380.0 |
| | 380.0 |
|
| 7.625% Senior Notes due October 2021 | 406.2 |
| | 406.2 |
|
| 6.375% Senior Notes due October 2025 (effective rate of 7.1%) | 270.2 |
| | 274.8 |
|
| 7.00% Senior Notes due March 2027 | 391.6 |
| | 391.6 |
|
| Industrial Revenue Bonds due 2020 through 2028 | 99.3 |
| | 99.3 |
|
| 5.00% Exchangeable Senior Notes due November 2019 (effective rate of 10.8%) | — |
| | 148.5 |
|
| Unamortized debt discount and issuance costs | (28.5 | ) | | (41.7 | ) |
| Total long-term debt | $ | 1,968.8 |
| | $ | 1,993.7 |
|
During 2019, we were in compliance with all the terms and conditions of our debt agreements.
Maturities of long-term debt for the next five years, at December 31, 2019, are presented below:
|
| | | | | |
| Year | | | Debt Maturities |
| 2020 | (a) | | $ | 7.3 |
|
| 2021 | | | 406.2 |
|
| 2022 | | | 450.0 |
|
| 2023 | | | 380.0 |
|
| 2024 | | | 62.0 |
|
| |
(a) | Amounts maturing in 2020 are classified as long-term based on our ability and intent to refinance on a long-term basis. |
Credit Facility
We have a $1,500.0 revolving credit facility (the “Credit Facility”) that expires in September 2022 and is guaranteed by AK Steel’s parent company, AK Holding, and by AK Tube, AK Steel Properties, Inc. and Mountain State Carbon LLC, three 100%-owned subsidiaries of AK Steel (referred to together as the “Subsidiary Guarantors”). The Credit Facility contains customary restrictions, including limitations on, among other things, distributions and dividends, acquisitions and investments, dispositions, indebtedness, liens and affiliate transactions. The Credit Facility requires that we maintain a minimum fixed charge coverage ratio of one to one if availability under the Credit Facility is less than $150.0. The Credit Facility’s current availability significantly exceeds $150.0. Availability is calculated as the lesser of the Credit Facility commitments 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. We do not expect any of these
restrictions to affect or limit our ability to conduct business in the ordinary course. The Credit Facility includes a “first-in, last-out” or “FILO” tranche, which allows us to use a portion of our eligible collateral at higher advance rates.
At December 31, 2019, our aggregate borrowing base, after application of applicable advance rates, was $1,327.1. As of December 31, 2019, we had $450.0 in outstanding borrowings. Availability as of December 31, 2019 was further reduced by $72.5 for outstanding letters of credit, resulting in remaining availability of $804.6. The weighted-average interest rate on the outstanding borrowings at December 31, 2019 was 3.32%.
Senior Secured Notes
AK Steel has outstanding 7.50% Senior Secured Notes due July 2023 (the “Secured Notes”). The Secured Notes are fully and unconditionally guaranteed by AK Holding and the Subsidiary Guarantors. The Secured Notes are secured by first priority liens on the plant, property and equipment (other than certain excluded property, and subject to permitted liens) of AK Steel and the Subsidiary Guarantors and any proceeds from them. The book value of the collateral as of December 31, 2019 was approximately $1.4 billion. The indenture governing the Secured Notes includes covenants with customary restrictions on (a) the incurrence of additional debt by certain subsidiaries, (b) the incurrence of certain liens, (c) the incurrence of sale/leaseback transactions, (d) the use of proceeds from the sale of collateral, and (e) our ability to merge or consolidate with other entities or to sell, lease or transfer all or substantially all of our assets to another entity. The Secured Notes also contain customary events of default. We may redeem the Secured Notes at 103.750% until July 15, 2020, 101.875% until July 15, 2021, and 100.000% thereafter, together with all accrued and unpaid interest to the date of redemption.
Senior Unsecured Notes
AK Steel has outstanding 7.625% Senior Notes due October 2021 (the “2021 Notes”). We may redeem the 2021 Notes at 100.0%, together with all accrued and unpaid interest to the date of redemption.
AK Steel has outstanding 6.375% Senior Unsecured Notes due October 2025 (the “2025 Notes”). Before October 15, 2020, we may redeem the 2025 Notes at a price equal to par plus a make-whole premium and all accrued and unpaid interest to the date of redemption. After that date, we may redeem them at 103.188% until October 15, 2021, 101.594% thereafter until October 15, 2022, and 100.000% thereafter, together with all accrued and unpaid interest to the date of redemption. In 2017, we recognized other expense of $8.4 related to the issuance of the 2025 Notes. During 2019 and 2018, we repurchased an aggregate principal amount of $4.6 and $5.2 of the 2025 Notes in private, open market transactions. We recognized a net gain on the repurchases totaling $0.6 and $0.7 for the years ended December 31, 2019 and 2018, which is included in other (income) expense.
AK Steel has outstanding 7.00% Senior Unsecured Notes due March 2027 (the “2027 Notes”). Before March 15, 2022, we may redeem the 2027 Notes at a price equal to par plus a make-whole premium and all accrued and unpaid interest to the date of redemption. After that date, we may redeem them at 103.500% until March 15, 2023, 102.333% thereafter until March 15, 2024, 101.167% thereafter until March 15, 2025, and 100.000% thereafter, together with all accrued and unpaid interest to the date of redemption. In 2017, we recognized other expense of $13.1 related to the issuance of the 2027 Notes. During 2018, we repurchased an aggregate principal amount of $8.4 of the 2027 Notes in private, open market transactions. We recognized a net gain on the repurchases totaling $1.3 for the year ended December 31, 2018, which is included in other (income) expense.
The 2021 Notes, the 2025 Notes, the 2027 Notes and the unsecured industrial revenue bonds (“IRBs”) discussed below (collectively, the “Senior Unsecured Notes”) are equal in right of payment. AK Holding and the Subsidiary Guarantors each, fully and unconditionally, jointly and severally, guarantees the payment of interest, principal and premium, if any, on the Senior Unsecured Notes. The indentures governing the 2021 Notes, the 2025 Notes, the 2027 Notes and the unsecured IRBs include covenants with customary restrictions on (a) the incurrence of additional debt by certain subsidiaries, (b) the incurrence of certain liens, (c) the amount of sale/leaseback transactions, and (d) our ability to merge or consolidate with other entities or to sell, lease or transfer all or substantially all of our assets to another entity. The indentures governing the Senior Unsecured Notes also contain customary events of default. The Senior Unsecured Notes rank junior in priority to the Secured Notes to the extent of the value of the assets securing the Secured Notes.
Industrial Revenue Bonds
AK Steel has outstanding $73.3 aggregate principal amount of fixed-rate, tax-exempt IRBs (the “unsecured IRBs”) at December 31, 2019. The weighted-average fixed interest rate of the unsecured IRBs is 6.8%. The unsecured IRBs are unsecured senior debt obligations of AK Steel that are equal in ranking with the other Senior Unsecured Notes. In addition, AK Steel has outstanding $26.0 aggregate principal amount of variable-rate taxable IRBs at December 31, 2019, that are backed by letters of credit.
Exchangeable Notes
AK Steel’s 5.0% Exchangeable Senior Notes due November 2019 (the “Exchangeable Notes”) were redeemed at their maturity date. Although the Exchangeable Notes were issued at par, for accounting purposes the proceeds received from the issuance of the notes were allocated between debt and equity to reflect the fair value of the exchange option embedded in the notes and the fair value of similar debt without the exchange option. Therefore, we recorded $38.7 of the gross proceeds of the Exchangeable Notes as an increase in additional paid-in capital with the offsetting amount recorded as a debt discount. We amortized the debt discount and issuance costs over the term of the Exchangeable Notes using the effective interest method. As of December 31, 2018, the net carrying amount of the Exchangeable Notes was $141.4.
NOTE 8 - Pension and Other Postretirement Benefits
Summary
We provide noncontributory pension and various healthcare and life insurance benefits to a significant portion of our employees and retirees. Benefits are provided through defined benefit and defined contribution plans that we sponsor, as well as multiemployer plans for certain union members. Our defined benefit pension plans are not fully funded. We will be required to make pension contributions of approximately $45.0 for 2020. Based on current actuarial assumptions, we expect to make required pension contributions of approximately $45.0 for 2021 and $35.0 for 2022. Factors that affect future funding projections include 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 expect to make OPEB payments, after receipt of Medicare subsidy reimbursements, of approximately $35.6 in 2020.
Defined Benefit Plans
Plan Obligations
Amounts presented below are calculated based on benefit obligation and asset valuation measurement dates of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Change in benefit obligations: | | | | | | | |
| Benefit obligations at beginning of year | $ | 2,210.0 |
| | $ | 2,808.0 |
| | $ | 398.2 |
| | $ | 448.5 |
|
| Service cost | 2.5 |
| | 3.2 |
| | 3.5 |
| | 4.5 |
|
| Interest cost | 85.9 |
| | 94.5 |
| | 16.4 |
| | 15.6 |
|
| Plan participants’ contributions | — |
| | — |
| | 24.3 |
| | 24.7 |
|
| Actuarial loss (gain) | 206.5 |
| | (148.8 | ) | | 16.2 |
| | (23.7 | ) |
| Amendments | — |
| | — |
| | — |
| | (11.1 | ) |
| Benefits paid | (211.3 | ) | | (268.1 | ) | | (53.2 | ) | | (62.6 | ) |
| Annuity settlement | (615.6 | ) | | (278.8 | ) | | — |
| | — |
|
| Termination benefits—Ashland Works | 9.7 |
| | — |
| | 3.6 |
| | — |
|
| Medicare subsidy reimbursement received | — |
| | — |
| | 2.1 |
| | 2.3 |
|
| Benefit obligations at end of year | $ | 1,687.7 |
| | $ | 2,210.0 |
| | $ | 411.1 |
| | $ | 398.2 |
|
| | | | | | | | |
| Change in plan assets: | |
| | |
| | |
| | |
|
| Fair value of plan assets at beginning of year | $ | 1,739.6 |
| | $ | 2,322.2 |
| | $ | — |
| | $ | — |
|
| Actual gain (loss) on plan assets | 382.5 |
| | (87.0 | ) | | — |
| | — |
|
| Employer contributions | 44.8 |
| | 51.3 |
| | 26.8 |
| | 35.6 |
|
| Plan participants’ contributions | — |
| | — |
| | 24.3 |
| | 24.7 |
|
| Benefits paid | (211.3 | ) | | (268.1 | ) | | (53.2 | ) | | (62.6 | ) |
| Annuity settlement | (615.6 | ) | | (278.8 | ) | | — |
| | — |
|
| Medicare subsidy reimbursement received | — |
| | — |
| | 2.1 |
| | 2.3 |
|
| Fair value of plan assets at end of year | $ | 1,340.0 |
| | $ | 1,739.6 |
| | $ | — |
| | $ | — |
|
| Funded status | $ | (347.7 | ) | | $ | (470.4 | ) | | $ | (411.1 | ) | | $ | (398.2 | ) |
| | | | | | | | |
| Amounts recognized in the consolidated balance sheets: | |
| | |
| | |
| | |
|
| Current liabilities | $ | (5.4 | ) | | $ | (1.2 | ) | | $ | (35.6 | ) | | $ | (37.5 | ) |
| Noncurrent liabilities | (342.3 | ) | | (469.2 | ) | | (375.5 | ) | | (360.7 | ) |
| Total | $ | (347.7 | ) | | $ | (470.4 | ) | | $ | (411.1 | ) | | $ | (398.2 | ) |
| | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss, before taxes: | |
| | |
| | |
| | |
|
| Actuarial loss (gain) | $ | 48.5 |
| | $ | 134.1 |
| | $ | (15.5 | ) | | $ | (35.4 | ) |
| Prior service cost (credit) | 15.9 |
| | 19.4 |
| | (69.2 | ) | | (82.4 | ) |
| Total | $ | 64.4 |
| | $ | 153.5 |
| | $ | (84.7 | ) | | $ | (117.8 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $1,675.8 and $2,188.6 at December 31, 2019 and 2018. All our defined benefit pension plans have an accumulated benefit obligation in excess of plan assets. The amounts included in current liabilities represent only the amounts of our unfunded pension and OPEB benefit plans that we expect to pay in the next year.
During the fourth quarter of 2019, we transferred to a highly rated insurance company $615.6 of pension obligations for approximately 4,250 retirees or their beneficiaries. As part of this transaction, we transferred a similar amount of pension trust assets to purchase a non-participating annuity contract that requires the insurance company to pay the transferred pension obligations to the
pension participants. As a result of the transfer of pension assets in November 2019, we recorded a settlement loss of $26.9 in the fourth quarter of 2019 to recognize the portion of the unrealized actuarial loss associated with the transferred obligations.
During the fourth quarter of 2018, we transferred to a highly rated insurance company $278.8 of pension obligations for approximately 5,400 retirees or their beneficiaries. As part of this transaction, we transferred a similar amount of pension trust assets to purchase a non-participating annuity contract. As a result of the transfer of pension assets in October 2018, we recorded a settlement loss of $14.5 in the fourth quarter of 2018.
During 2019, we recognized pension and OPEB termination benefits of $13.3 related to the Ashland Works closure.
The 2019 change in the actuarial loss (gain) for the pension plans in the table above primarily consisted of gains of $272.8 for actual pension asset return greater than expected and changes in demographic assumptions, partially offset by a loss of $182.4 for the decrease in discount rate used to value the benefit obligations and a loss of $31.0 for changes in mortality tables. The 2019 change in the actuarial loss (gain) for the OPEB plan in the table above primarily consisted of a loss of $33.7 for the decrease in discount rate used to value the benefit obligations, partly offset by gains related to changes in demographic assumptions and lower than expected benefit payments.
Assumptions used to value benefit obligations and determine pension and OPEB (income) expense are presented below:
|
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Assumptions used to determine benefit obligations at December 31: | | | | | | | | | | | |
| Discount rate | 3.29 | % | | 4.22 | % | | 3.54 | % | | 3.33 | % | | 4.27 | % | | 3.59 | % |
| Rate of compensation increase | 4.00 | % | | 4.00 | % | | 4.00 | % | | | | | | |
| Interest crediting rate | 3.80 | % | | 3.80 | % | | 3.80 | % | | | | | | |
| Subsequent year healthcare cost trend rate | | | | | | | 6.17 | % | | 6.50 | % | | 6.65 | % |
| Ultimate healthcare cost trend rate | | | | | | | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year ultimate healthcare cost trend rate begins | | | | | | | 2025 |
| | 2025 |
| | 2025 |
|
| | | | | | | | | | | | |
| Assumptions used to determine pension and OPEB (income) expense for the year ended December 31: | | | | | | | | | | | |
| Discount rate | 4.14 | % | | 3.69 | % | | 3.93 | % | | 4.27 | % | | 3.59 | % | | 4.04 | % |
| Expected return on plan assets | 6.75 | % | | 7.00 | % | | 7.25 | % | | | | | | |
| Rate of compensation increase | 4.00 | % | | 4.00 | % | | 4.00 | % | | | | | | |
| Interest crediting rate | 3.80 | % | | 3.80 | % | | 3.80 | % | | | | | | |
We determine the discount rate at each remeasurement by finding a hypothetical portfolio of individual high-quality corporate bonds available at the measurement date with coupon and principal payments that could satisfy the plans’ expected future benefit payments that we use to calculate the projected benefit obligation. The discount rate is the single rate that is equivalent to the average yield on that hypothetical portfolio of bonds. We changed our assumption for future expected returns on pension plan assets to 7.50% from 6.75%, effective January 1, 2020 in response to a change in asset allocation.
Estimated future benefit payments to beneficiaries are presented below:
|
| | | | | | | |
| | Pension Plans | | Other Benefits |
| 2020 | $ | 142.6 |
| | $ | 35.6 |
|
| 2021 | 134.7 |
| | 34.7 |
|
| 2022 | 137.2 |
| | 34.0 |
|
| 2023 | 125.4 |
| | 32.1 |
|
| 2024 | 130.7 |
| | 30.4 |
|
| 2025 through 2029 | 592.7 |
| | 129.4 |
|
Plan Assets
Our investments in the master pension trust primarily include indexed and actively-managed funds. A fiduciary committee sets the target asset mix and monitors asset performance. We determine the master pension trust’s projected long-term rate of return based on the asset allocation, the trust’s investment policy statement and our long-term capital market return assumptions for the master trust.
We have developed an investment policy that considers liquidity requirements, expected investment return, funded status and expected asset risk, as well as standard industry practices. The investment policy also dictates a target allocation based primarily on the funded status of the plan. The target asset allocation for the master pension trust at December 31, 2019 was 60% equity and 40% fixed income. Equity investments consist of individual securities, equity mutual funds and common/collective trusts with equity investment strategies, which are diversified across multiple industry sectors, company market capitalizations and geographical investment strategies. The equity mutual funds and common/collective trusts have no unfunded commitments or significant redemption restrictions. Fixed-income investments consist of individual securities and common/collective trusts, which invest primarily in investment-grade and high-yield corporate bonds and U.S. Treasury securities. The fixed-income investments are diversified by ratings, maturities, industries and other factors. Plan assets contain no significant concentrations of risk from individual securities or industry sectors. The master pension trust has no direct investments in our common stock or fixed-income securities.
Master pension trust investments measured at fair value on a recurring basis at December 31, 2019 and 2018 are presented below, with certain assets presented by level within the fair value hierarchy. As a practical expedient, we estimate the value of common/collective trusts and equity mutual funds by using the net asset value (“NAV”) per share multiplied by the number of shares of the trust investment held as of the measurement date. If we have the ability to redeem our investment in the respective alternative investment at the NAV with no significant restrictions on the redemption at the consolidated balance sheet date, excluding equity mutual funds, we categorized the alternative investment as a reconciliation of pension investments reported in the fair value hierarchy to the master pension trust’s balance. See Note 17 for more information on the determination of fair value.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | | | |
| | | (Level 1) | | (Level 2) | | Total |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Investments in fair value hierarchy | | | | | | | | | | | | |
| Equity investments: | | | | | | | | | | | | |
| U.S. securities | | $ | 39.1 |
| | $ | 35.4 |
| | $ | — |
| | $ | — |
| | $ | 39.1 |
| | $ | 35.4 |
|
| Global securities | | — |
| | — |
| | 140.2 |
| | 131.4 |
| | 140.2 |
| | 131.4 |
|
| Fixed-income investments: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| High-yield U.S. securities | | — |
| | — |
| | 87.2 |
| | 84.5 |
| | 87.2 |
| | 84.5 |
|
| Other U.S. securities | | — |
| | — |
| | 318.2 |
| | 700.8 |
| | 318.2 |
| | 700.8 |
|
| Global securities | | — |
| | — |
| | 66.1 |
| | 82.8 |
| | 66.1 |
| | 82.8 |
|
| Other investments | | — |
| | — |
| | 79.1 |
| | 78.0 |
| | 79.1 |
| | 78.0 |
|
| Total pension investments in fair value hierarchy | | $ | 39.1 |
| | $ | 35.4 |
| | $ | 690.8 |
| | $ | 1,077.5 |
| | $ | 729.9 |
| | $ | 1,112.9 |
|
| | | | | | | | | | | | | |
| Investments with fair values measured at net asset value | | |
| | |
| | |
| | |
| | |
| | |
|
| Common/collective trusts: | | | | | | | | | | | | |
| U.S. equity securities (a) | | | | | | | | | | 367.2 |
| | 355.8 |
|
| Global equity securities (a) | | | | | | | | | | 196.9 |
| | 178.2 |
|
| Global fixed-income securities (b) | | | | | | | | | | 46.0 |
| | 92.7 |
|
| Total pension assets at fair value | | | | | | | | | | $ | 1,340.0 |
| | $ | 1,739.6 |
|
| |
(a) | Investments may include common stocks, options and futures. |
| |
(b) | Investments may include investment-grade and high-yield corporate bonds, interest rate swaps, options and futures. |
Periodic Benefit Costs
Components of pension and OPEB (income) expense for the years 2019, 2018 and 2017 are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Components of pension and OPEB (income) expense: | | | | | | | | | | | |
| Service cost | $ | 2.5 |
| | $ | 3.2 |
| | $ | 2.8 |
| | $ | 3.5 |
| | $ | 4.5 |
| | $ | 4.7 |
|
| Interest cost | 85.9 |
| | 94.5 |
| | 108.2 |
| | 16.4 |
| | 15.6 |
| | 17.3 |
|
| Expected return on plan assets | (109.7 | ) | | (148.8 | ) | | (149.9 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service cost (credit) | 3.6 |
| | 3.8 |
| | 4.7 |
| | (13.2 | ) | | (13.6 | ) | | (58.5 | ) |
| Recognized net actuarial loss (gain): | | | | | | | | | | | |
| Annual amortization | (7.6 | ) | | 16.1 |
| | 10.5 |
| | (3.6 | ) | | (1.3 | ) | | (4.2 | ) |
| Settlement loss | 26.9 |
| | 14.5 |
| | — |
| | — |
| | — |
| | — |
|
| Termination benefits—Ashland Works | 9.7 |
| | — |
| | — |
| | 3.6 |
| | — |
| | — |
|
| Pension and OPEB (income) expense | $ | 11.3 |
| | $ | (16.7 | ) | | $ | (23.7 | ) | | $ | 6.7 |
| | $ | 5.2 |
| | $ | (40.7 | ) |
Defined Contribution Plans
All employees are eligible to participate in various defined contribution plans. Certain of these plans have features with matching contributions or other company contributions based on our financial results. Total expense from these plans was $29.0, $31.1 and $24.9 in 2019, 2018 and 2017.
Multiemployer Pension Plans
We contribute to multiemployer pension plans according to collective bargaining agreements that cover certain union-represented employees. The following risks of participating in these multiemployer plans differ from single employer pension plan risks:
Employer contributions to a multiemployer plan may be used to provide benefits to employees of other participating employers.
If a participating employer stops contributing to a multiemployer plan, the remaining participating employers may need to assume the unfunded obligations of the plan.
If the multiemployer plan becomes significantly underfunded or is unable to pay its benefits, we may be required to contribute additional amounts in excess of the rate required by the collective bargaining agreements.
If we choose to stop participating in a multiemployer plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
We are a party to a collective bargaining agreement at Ashland Works that requires contributions to the Steelworkers Pension Trust multiemployer pension plan. We recorded an estimated withdrawal liability of $10.0 in 2019 as a result of the closure of that facility. The actual withdrawal liability will not be known until a future year and is expected to be paid over a number of years. See Note 3 for further information.
In April 2019, the trustees for the IAM National Pension Fund (the “Fund”) voluntarily elected to place the Fund in the Red Zone for 2019 and implement a rehabilitation plan. The rehabilitation plan provides two options for a new schedule to be adopted by employers and their covered bargaining employees to both increase employer contributions and reduce certain employee pension benefits. Depending on the schedule selected, our contributions to the Fund could increase approximately $2.0 in 2020, with gradually increasing requirements through 2031.
Our participation in these multiemployer plans for the years ended December 31, 2019, 2018 and 2017, is presented below. We do not provide more than five percent of the total contributions to any multiemployer plan. Forms 5500 are not yet available for plan years ending in 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Fund | | EIN/Pension Plan Number | | Pension Protection Act Zone Status (a) | | FIP/RP Status Pending/Implemented (b) | | Contributions | | Surcharge Imposed (c) | | Expiration Date of Collective Bargaining Agreement |
| | | | | 2019 | | 2018 | | | | 2019 | | 2018 | | 2017 | | | | |
| Steelworkers Pension Trust | | 23-6648508/499 | | Green | | Green | | No | | $ | 3.9 |
| | $ | 4.2 |
| | $ | 6.3 |
| | No | | 1/22/2021 to 5/14/2021 (d) |
| IAM National Pension Fund’s National Pension Plan | | 51-6031295/002 | | Red | | Green | | Yes | | 18.9 |
| | 17.7 |
| | 18.4 |
| | Yes | | 3/15/2020 to 6/15/2022 (e) |
| | | | | | | | | | | $ | 22.8 |
| | $ | 21.9 |
| | $ | 24.7 |
| | | | |
| |
(a) | The most recent Pension Protection Act zone status available in 2019 and 2018 is for each plan’s year-end at December 31, 2018 and 2017, except that the IAM National Pension Fund’s National Pension Plan reflects the election by the Fund to place the Fund in Red Zone in April 2019. The plan’s actuary certifies the zone status. Generally, plans in the red zone are less than 65% funded, plans in the yellow zone are between 65% and 80% funded, and plans in the green zone are at least 80% funded. The Steelworkers Pension Trust and IAM National Pension Fund’s National Pension Plan elected funding relief under section 431(b)(8) of the Internal Revenue Code and section 304(b)(8) of the Employment Retirement Income Security Act of 1974 (ERISA). This election allows those plans’ investment losses for the plan year ended December 31, 2008, to be amortized over 29 years for funding purposes. |
| |
(b) | The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented, as defined by ERISA. |
| |
(c) | The surcharge represents an additional required contribution due as a result of the critical funding status of the plan. |
| |
(d) | We are a party to three collective bargaining agreements at our Ashland Works, Mansfield Works and at the AK Tube Walbridge plant that require contributions to the Steelworkers Pension Trust. The labor contract for approximately 100 hourly employees at the AK Tube Walbridge plant expires January 22, 2021. The labor contract for approximately 300 hourly employees at Mansfield Works expires on March 31, 2021. The labor contract for approximately 10 active hourly employees at the Ashland Works currently expires May 14, 2021. |
| |
(e) | We are a party to three collective bargaining agreements at our Butler Works, Middletown Works and Zanesville Works that require contributions to the IAM National Pension Fund’s National Pension Plan. The labor contract for approximately 1,750 hourly employees at Middletown Works expires on March 15, 2020. The labor contract for approximately 100 hourly employees at Zanesville Works expires on May 31, 2022. The labor contract for approximately 1,100 hourly employees at Butler Works expires on June 15, 2022. |
NOTE 9 - Leases
We have leases primarily for offices, production buildings and equipment. Our leases have remaining contractual lease terms of up to 20 years. Certain leases include options to extend the lease terms, and those extensions are for periods from 1 to 32 years depending on the particular lease. Some leases may also include options to terminate the leases. Certain leases include variable lease payments based on production, usage or independent factors such as changes in published producer price indices.
Lease costs are presented below: |
| | | | |
| | | 2019 |
| Operating leases | | $ | 67.7 |
|
| Short-term leases | | 45.7 |
|
| Variable lease costs | | 73.0 |
|
| Total | | $ | 186.4 |
|
Rental expense was $48.1 and $43.1 for 2018 and 2017.
Other information related to leases was as follows: |
| | | |
| | 2019 |
| Cash paid for operating leases within cash flows from operating activities | $ | 74.4 |
|
| Right-of-use assets obtained in exchange for operating lease liabilities | 28.9 |
|
| Weighted-average remaining lease term of operating leases (in years) | 8.2 |
|
| Weighted-average discount rate for operating leases | 8.5 | % |
Future minimum lease payments under noncancelable operating leases as of December 31, 2019, were as follows:
|
| | | |
| Year ending December 31: | |
| 2020 | $ | 67.8 |
|
| 2021 | 54.1 |
|
| 2022 | 43.8 |
|
| 2023 | 37.2 |
|
| 2024 | 29.8 |
|
| Thereafter | 144.5 |
|
| Total future minimum operating lease payments | 377.2 |
|
| Less imputed interest | 115.5 |
|
| Total operating lease liabilities | 261.7 |
|
| Less current portion of operating lease liabilities (included in Accrued liabilities) | 49.6 |
|
| Long-term operating lease liabilities (included in Other non-current liabilities) | $ | 212.1 |
|
We purchase substantial portions of the principal raw materials required for our steel manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. We also use large volumes of natural gas, electricity and industrial gases in our steel manufacturing operations. We negotiate most of our purchases of chrome, coke, industrial gases, iron ore and a portion of our electricity under multi-year agreements. The iron ore agreements typically have a variable-price mechanism that adjusts the price of iron ore periodically, based on reference to an iron ore index and other market-based factors. We typically purchase coal under annual fixed-price agreements. We also purchase certain transportation services under multi-year contracts with minimum quantity requirements.
Commitments for future capital investments at December 31, 2019, totaled approximately $65.2, all of which we expect to incur in 2020.
NOTE 11 - Environmental and Legal Contingencies
Environmental Contingencies
Domestic steel producers, including us, must follow stringent federal, state and local laws and regulations designed to protect human health and the environment. We have spent the following amounts over the past three years for environmental-related capital investments and environmental compliance:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Environmental-related capital investments | $ | 23.0 |
| | $ | 7.1 |
| | $ | 6.8 |
|
| Environmental compliance costs | 141.3 |
| | 126.3 |
| | 129.5 |
|
We and our predecessors have been involved in steel manufacturing and related operations since 1900. Although we believe our operating practices have been consistent with prevailing industry standards, hazardous materials may have been released at operating sites or third-party sites in the past, including operating sites that we no longer own. If we reasonably can, we have estimated potential remediation expenditures for those sites where future remediation efforts are probable based on identified conditions, regulatory requirements or contractual obligations arising from the sale of a business or facility. For sites involving government-required investigations, we typically make an estimate of potential remediation expenditures only after the investigation is complete and when we better understand the nature and scope of the remediation. In general, the material factors in these estimates include the costs associated with investigations, delineations, risk assessments, remedial work, governmental response and oversight, site monitoring, and preparation of reports to the appropriate environmental agencies. We have recorded the following liabilities for environmental matters on our consolidated balance sheets:
|
| | | | | | | |
| | 2019 | | 2018 |
| Accrued liabilities | $ | 6.1 |
| | $ | 8.0 |
|
| Other non-current liabilities | 32.6 |
| | 31.2 |
|
We cannot predict the ultimate costs for each site with certainty because of the evolving nature of the investigation and remediation process. Rather, to estimate the probable costs, we must make certain assumptions. The most significant of these assumptions is for the nature and scope of the work that will be necessary to investigate and remediate a particular site and the cost of that work. Other significant assumptions include the cleanup technology that will be used, whether and to what extent any other parties will participate in paying the investigation and remediation costs, reimbursement of past response and future oversight costs by governmental agencies, and the reaction of the governing environmental agencies to the proposed work plans. Costs for future investigation and remediation are not discounted to their present value. To the extent that we have been able to reasonably estimate future liabilities, we do not believe that there is a reasonable possibility that we will incur a loss or losses that exceed the amounts we accrued for the environmental matters discussed below that would, either individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, since we recognize amounts in the consolidated financial statements in accordance with accounting principles generally accepted in the United States that exclude potential losses that are not probable or that may not be currently estimable, the ultimate costs of these environmental proceedings may be higher than the liabilities we currently have recorded in our consolidated financial statements.
Except as we expressly note below, we do not currently anticipate any material effect on our consolidated financial position, results of operations or cash flows as a result of compliance with current environmental regulations. Moreover, because all domestic steel producers operate under the same federal environmental regulations, we do not believe that we are more disadvantaged than our domestic competitors by our need to comply with these regulations. Some foreign competitors may benefit from less stringent environmental requirements in the countries where they produce, resulting in lower compliance costs for them and providing those foreign competitors with a cost advantage on their products.
According to the Resource Conservation and Recovery Act (“RCRA”), which governs the treatment, handling and disposal of hazardous waste, the EPA and authorized state environmental agencies may conduct inspections of RCRA-regulated facilities to identify areas where there have been releases of hazardous waste or hazardous constituents into the environment and may order the facilities to take corrective action to remediate such releases. Environmental regulators may inspect our major steelmaking facilities. While we cannot predict the future actions of these regulators, it is possible that they may identify conditions in future inspections of these facilities which they believe require corrective action.
Under authority from the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the EPA and state environmental authorities have conducted site investigations at certain of our facilities and other third-party facilities, portions of which previously may have been used for disposal of materials that are currently regulated. The results of these investigations are still pending, and we could be directed to spend funds for remedial activities at the former disposal areas. Because of the uncertain status of these investigations, however, we cannot reliably predict whether or when such spending might be required or its magnitude.
As previously noted, on April 29, 2002, we entered a mutually agreed-upon administrative order on consent with the EPA pursuant to Section 122 of CERCLA to perform a Remedial Investigation/Feasibility Study (“RI/FS”) of the former Hamilton Plant site located in New Miami, Ohio. The plant ceased operations in 1990 and all of its former structures have been demolished. We submitted the investigation portion of the RI/FS and completed supplemental studies. We currently have accrued $0.7 for the remaining cost of the RI/FS. Until the RI/FS is complete, we cannot reliably estimate the additional costs, if any, we may incur for potentially required remediation of the site or when we may incur them.
As previously reported, on September 30, 1998, our predecessor, Armco Inc., received an order from the EPA under Section 3013 of RCRA requiring it to develop a plan for investigation of eight areas of our Mansfield Works that allegedly could be sources of contamination. A site investigation began in November 2000 and is continuing. We cannot reliably estimate how long it will take to complete this site investigation. We currently have accrued $0.5 for the projected cost of the remaining investigation and corrective measures study. Until the site investigation and study are complete, we cannot reliably estimate the additional costs, if any, we may incur for potentially required remediation of the site or when we may incur them.
As previously noted, on September 26, 2012, the EPA issued an order under Section 3013 of RCRA requiring us to develop a plan for investigation of four areas at our former Ashland Works coke plant. The Ashland Works coke plant ceased operations in 2011 and all of its former structures have been demolished and removed. In 1981, we acquired the plant from Honeywell International Corporation (as successor to Allied Corporation), who had managed the coking operations there for approximately 60 years. In connection with the sale of the coke plant, Honeywell agreed to indemnify us from certain claims and obligations that could arise from the investigation and we intend to pursue such indemnification from Honeywell, if necessary. We cannot reliably estimate how long it will take to complete the site investigation. On March 10, 2016, the EPA invited us to participate in settlement discussions regarding an enforcement action. Settlement discussions between the parties are ongoing, though whether the parties will reach agreement and any such agreement’s terms are uncertain. We currently have accrued $1.4 for the projected cost of the investigation and known remediation. Until the site investigation is complete, we cannot reliably estimate the costs, if any, we may incur for potential additional required remediation of the site or when we may incur them.
As previously reported, on July 15, 2009, we and the Pennsylvania Department of Environmental Protection (“PADEP”) entered a Consent Order and Agreement (the “Consent Order”) to resolve an alleged unpermitted discharge of wastewater from the closed Hillside Landfill at our former Ambridge Works. Under the terms of the Consent Order, we paid a penalty and also agreed to implement various corrective actions, including an investigation of the area where landfill activities occurred, submission of a plan to collect and treat surface waters and seep discharges, and upon approval from PADEP, implementation of that plan. We have accrued $4.8 for the remedial work required under the approved plan and Consent Order. A National Pollution Discharge Elimination System (“NPDES”) permit was issued in 2019 that includes a compliance schedule. We currently estimate that the remaining work will be completed in accordance with the schedule in 2022.
As previously reported, on June 29, 2000, the United States filed a complaint on behalf of the EPA against us in the U.S. District Court for the Southern District of Ohio, Case No. C-1-00530, alleging violations of the Clean Air Act, the Clean Water Act and RCRA at our Middletown Works. Subsequently, the State of Ohio, the Sierra Club and the National Resources Defense Council intervened. On May 15, 2006, the court entered a Consent Decree in Partial Resolution of Pending Claims (the “Consent Decree”). Under the Consent Decree, we agreed to undertake a comprehensive RCRA facility investigation at Middletown Works and, as appropriate, complete a corrective measures study. The Consent Decree also required us to implement certain RCRA corrective action interim measures. We have completed the remedial activity at Dicks Creek, but continue to work on the RCRA facility investigation and certain interim measures. We have accrued $13.1 for the cost of known remediation and other work required under the Consent Decree.
As previously reported, on May 12, 2014, the Michigan Department of Environment, Great Lakes, and Energy (“EGLE”) (previously the Michigan Department of Environmental Quality) issued to our Dearborn Works an Air Permit to Install No. 182-05C (the “PTI”) to increase the emission limits for the blast furnace and other emission sources. The PTI was issued as a correction to a prior permit to install that did not include certain information during the prior permitting process. On July 10, 2014, the South Dearborn Environmental Improvement Association (“SDEIA”), Detroiters Working for Environmental Justice, Original United Citizens of Southwest Detroit and the Sierra Club filed a Claim of Appeal of the PTI in the State of Michigan, Wayne County Circuit, Case No. 14-008887-AA. The appellants and EGLE required the intervention of Severstal Dearborn, LLC (“Dearborn”) (now owned by us) in this action as an additional appellee. The appellants allege multiple deficiencies with the PTI and the permitting process. On July 2, 2019, the Circuit Court dismissed the PTI appeal and ruled that EGLE appropriately issued the permit modification. The appellants have appealed that decision. Until the appeal is resolved, we cannot determine what the ultimate permit limits will be. Until the permit limits are determined and final, we cannot reliably estimate the costs we may incur, if any, or when we may incur them.
As previously reported, on August 21, 2014, the SDEIA filed a Complaint under the Michigan Environmental Protection Act in the State of Michigan, Wayne County Circuit Case No. 14-010875-CE. The plaintiffs allege that the air emissions from our Dearborn Works are impacting the air, water and other natural resources, as well as the public trust in such resources. The plaintiffs are requesting, among other requested relief, that the court assess and determine the sufficiency of the PTI’s limitations. On October 15, 2014, the court ordered a stay of the proceedings until a final order is issued in Wayne County Circuit Court Case No. 14-008887-AA (discussed above). When the proceedings resume, we will vigorously contest these claims. Until the claims in this Complaint are resolved, we cannot reliably estimate the costs we may incur, if any, or when we may incur them.
As previously reported, on April 27, 2000, EGLE issued RCRA Corrective Action Order No. 111-04-00-07E to Rouge Steel Company and Ford Motor Company for the property that includes our Dearborn Works. The Corrective Action Order has been amended five
times. We are a party to the Corrective Action Order as the successor-in-interest to Dearborn, which was the successor-in-interest to Rouge Steel Company. The Corrective Action Order requires the site-wide investigation, and where appropriate, remediation of the facility. The site investigation and remediation are ongoing. We cannot reliably estimate how long it will take to complete this site investigation and remediation. To date, Ford Motor Company has incurred most of the costs of the investigation and remediation due to its prior ownership of the steelmaking operations at Dearborn Works. Until the site investigation is complete, we cannot reliably estimate the additional costs we may incur, if any, for any potentially required remediation of the site or when we may incur them.
As previously reported, we received an order in October 2002 from the EPA under Section 3013 of RCRA requiring us to investigate several areas of Zanesville Works that allegedly could be sources of contamination. A site investigation began in 2003 and was approved by EPA in November 2012. On October 28, 2016, the EPA requested that we conduct a corrective measures study and implement these measures as necessary. We subsequently agreed to proceed with a voluntary corrective measures study and have accrued $0.8 for the study. Until the study is complete, we cannot reliably estimate the costs, if any, we may incur for potential required remediation of the site or when we may incur them.
On November 18, 2019 and November 26, 2019, EGLE issued Notices of Violations (“NOVs”) with respect to the basic oxygen furnace at Dearborn Works alleging violations of manganese and lead limits. We are investigating these claims and will work with EGLE to attempt to resolve them. We will vigorously contest any claims that cannot be resolved through a settlement. Until a settlement is reached with EGLE or the claims of the NOVs are otherwise resolved, we cannot reliably estimate the costs, if any, associated with any potentially required work.
In addition to the foregoing matters, we are or may be involved in proceedings with various regulatory authorities that may require us to pay fines, comply with more rigorous standards or other requirements or incur capital and operating expenses for environmental compliance. We believe that the ultimate disposition of the proceedings will not have, individually or in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Legal Contingencies
As previously reported, since 1990 we have been named as a defendant in numerous lawsuits alleging personal injury as a result of exposure to asbestos. The great majority of these lawsuits have been filed on behalf of people who claim to have been exposed to asbestos while visiting the premises of one of our current or former facilities. The majority of asbestos cases pending in which we are a defendant do not include a specific dollar claim for damages. In the cases that do include specific dollar claims for damages, the complaint typically includes a monetary claim for compensatory damages and a separate monetary claim in an equal amount for punitive damages, but does not attempt to allocate the total monetary claim among the various defendants.
The number of asbestos cases pending at December 31, 2019, is presented below:
|
| | |
| Asbestos Cases Pending at |
| December 31, 2019 |
Cases with specific dollar claims for damages: | |
Claims up to $0.2 | 183 |
Claims above $0.2 to $5.0 | 4 |
Claims above $5.0 to $20.0 | 3 |
Total claims with specific dollar claims for damages (a) | 190 |
Cases without a specific dollar claim for damages | 177 |
Total asbestos cases pending | 367 |
| |
(a) | Involve a total of 2,265 plaintiffs and 21,406 defendants |
In each case, the amount described is per plaintiff against all of the defendants, collectively. Thus, it usually is not possible at the outset of a case to determine the specific dollar amount of a claim against us. In fact, it usually is not even possible at the outset to determine which of the plaintiffs actually will pursue a claim against us. Typically, that can only be determined through written interrogatories or other discovery after a case has been filed. Therefore, in a case involving multiple plaintiffs and multiple defendants, we initially only account for the lawsuit as one claim. After we have determined through discovery whether a particular plaintiff will pursue a claim, we make an appropriate adjustment to statistically account for that specific claim. It has been our experience that only a small percentage of asbestos plaintiffs ultimately identify us as a target defendant from whom they actually seek damages and most of these claims ultimately are either dismissed or settled for a small fraction of the damages initially claimed. We maintain appropriate reserves within a range of possible outcomes for asbestos claims. Asbestos-related claims information in 2019, 2018 and 2017, is presented below:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| New Claims Filed | | 64 |
| | 68 |
| | 58 |
|
| Pending Claims Disposed Of | | 40 |
| | 61 |
| | 61 |
|
| Total Amount Paid in Settlements | | $ | 3.5 |
| | $ | 1.4 |
| | $ | 1.2 |
|
Since the onset of asbestos claims against us in 1990, six asbestos claims against us proceeded to trial in five separate cases. Five out of six claims concluded with a verdict in our favor. On June 14, 2019, judgment was entered on a jury verdict in an asbestos case in state court in Oklahoma against a party that was indemnified by us and another unrelated defendant. The judgment amount was $8.1 against both defendants jointly and severally. We are appealing that judgment and intend to contest the matter vigorously, which may include asserting contribution claims against the other defendant. We continue to vigorously defend all asbestos claims. Based upon present knowledge, and the factors above, we believe it is unlikely that the resolution in the aggregate of the asbestos claims against us will have a materially adverse effect on our consolidated results of operations, cash flows or financial condition. However, predictions about the outcome of pending litigation, particularly claims alleging asbestos exposure, are subject to substantial uncertainties. These uncertainties include (1) the significantly variable rate at which new claims may be filed, (2) the effect of bankruptcies of other companies currently or historically defending asbestos claims, (3) the litigation process from jurisdiction to jurisdiction and from case to case, (4) the type and severity of the disease each claimant is alleged to suffer, and (5) the potential for enactment of legislation affecting asbestos litigation.
Six actions, including one putative class action lawsuit, have been filed in federal court in Delaware, Michigan and New York by purported AK Steel stockholders in connection with the Merger: Stein v. AK Steel Holding Corp., et al., Case No. 1:20-cv-00054 (D. Del., filed January 14, 2020) (the “Stein Action”); Spuhler v. AK Steel Holding Corp., et al., Case No. 1:20-cv-00444 (S.D.N.Y., filed January 16, 2020) (the “Spuhler Action”); Franchi v. AK Steel Holding Corp., et al., Case No. 1:20-cv-00078 (D. Del., filed January 17, 2020) (the “Franchi Action”); Raul v. AK Steel Holding Corp., et al., No. 1:20-cv-00611 (S.D.N.Y., filed January 23, 2020) (the “Raul Action”); Ruiz v. AK Steel Holding Corp., et al., No. 1:20-cv-00620 (E.D.N.Y., filed February 4, 2020) (the “Ruiz Action”); and Rubin v. AK Steel Holding Corp., et al., No. 2:20-cv-10379-BAF-DRG (E.D. Mich., filed February 12, 2020) (the “Rubin Action”). The Stein Action, Spuhler Action, Franchi Action, Raul Action, Ruiz Action and Rubin Action are collectively referred to as the “AK Steel Stockholder Federal Actions.” A seventh action, Pate v. AK Steel Holding Corp., et al., Case No. CV 2020 01 0196 (Ohio Common Pleas, Butler County, filed January 28, 2020) (the “Pate Action”), has been filed by a purported AK Steel stockholder as a putative class action in state court in Ohio. The Pate Action and the AK Steel Stockholder Federal Actions are collectively referred to as the “AK Steel Stockholder Actions.” Each of the AK Steel Stockholder Actions names AK Steel and its directors as defendants, and the Franchi Action and Pate Action name Cliffs and Merger Sub as additional defendants. An eighth action, Nessim v. Cleveland-Cliffs Inc., et al., Case No. 1:20-cv-00850 (S.D.N.Y., filed January 31, 2020) (the “Nessim Action”), has been filed in federal court in New York against Cliffs and its directors by a purported shareholder of Cliffs. The Nessim Action and the AK Steel Stockholder Federal Actions are collectively referred to as the “Federal Stockholder Actions,” and all eight actions are collectively referred to as the “Stockholder Actions.” Each of the Federal Stockholder Actions alleges, among other things, that the registration statement on Form S-4 filed by Cliffs in connection with the Merger is false and misleading and/or omits material information concerning the transactions contemplated by the Merger Agreement in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act. The Pate Action alleges breach of fiduciary duty claims against the AK Steel directors and aiding and abetting claims against AK Steel, Cliffs and Merger Sub in connection with the transactions contemplated by the Merger Agreement, including that the registration statement on Form S-4 filed by Cliffs in connection with the Merger is false and misleading and/or omits material information concerning the transactions contemplated by the Merger Agreement. The plaintiffs in the Stockholder Actions, among other things, seek to enjoin the transactions contemplated by the Merger Agreement and an award of attorneys’ fees and expenses. We believe that the allegations in each of these complaints lack merit and plan to contest the matters vigorously.
Other Contingencies
In addition to the matters discussed above, there are various pending and potential claims against us and our subsidiaries involving product liability, commercial, employee benefits and other matters arising in the ordinary course of business. Because of the considerable uncertainties which exist for any claim, it is difficult to reliably or accurately estimate what the amount of a loss would be if a claimant prevails. If material assumptions or factual understandings we rely on to evaluate exposure for these contingencies prove to be inaccurate or otherwise change, we may be required to record a liability for an adverse outcome. If, however, we have reasonably evaluated potential future liabilities for all of these contingencies, including those described more specifically above, it is our opinion, unless we otherwise noted, that the ultimate liability from these contingencies, individually and in the aggregate, should not have a material effect on our consolidated financial position, results of operations or cash flows.
NOTE 12 - Stockholders’ Equity
Common Stock
Our common stockholders may receive dividends when and as declared by the Board of Directors out of funds legally available for distribution. The holders have one vote per share in respect of all matters and are not entitled to preemptive rights.
Preferred Stock
There are 25,000,000 shares of preferred stock authorized; no shares are issued or outstanding.
Dividends
The instruments governing our outstanding senior debt allow dividend payments. However, our Credit Facility restricts dividend payments under certain conditions. Dividends are permitted if no default or event of default exists under the terms of the Credit Facility and (i) availability under the Credit Facility exceeds 20% of the lesser of the Credit Facility commitment or eligible collateral after advance rates or (ii) availability exceeds 15% of the lesser of the Credit Facility commitment or eligible collateral after advance rates and we meet a fixed charge coverage ratio of one to one as of the most recently ended fiscal quarter. At December 31, 2019, availability under the Credit Facility significantly exceeds these amounts. If we cannot meet either of these thresholds, annual dividends would be limited to the greater of $18.0 or 0.5% of consolidated total assets, with additional dividends permitted equal to the greater of $25.0 or 0.7% of consolidated total assets in aggregate over the life of the Credit Facility.
Share Repurchase Program
In October 2008, the Board of Directors authorized us to repurchase, from time to time, up to $150.0 of our outstanding common stock. We have not made any common stock repurchases under this program in the last three years. As of December 31, 2019, we had remaining $125.6 for repurchase under the Board of Directors’ authorization.
NOTE 13 - Share-based Compensation
In May 2019, our stockholders approved the 2019 Omnibus Supplemental Incentive Plan (“OSIP”), which authorizes granting an aggregate maximum of 14.4 million shares under the OSIP through May 31, 2029. The OSIP permits and the prior Stock Incentive Plan permitted the granting of nonqualified stock option, restricted stock, performance shares and restricted stock unit awards to our directors, officers and other employees. Under the OSIP, any dividends on unvested awards are subject to the same restrictions as the underlying award. Approximately 14 million shares were available for future grant as of December 31, 2019.
Share-based compensation expense for the years ended December 31, 2019, 2018 and 2017, is presented below:
|
| | | | | | | | | | | | |
| Share-based Compensation Expense | | 2019 | | 2018 | | 2017 |
| Stock options | | $ | 2.5 |
| | $ | 2.5 |
| | $ | 2.1 |
|
| Restricted stock | | 2.3 |
| | 3.1 |
| | 2.9 |
|
| Restricted stock units issued to Directors | | 1.1 |
| | 1.2 |
| | 1.2 |
|
| Performance shares | | 2.3 |
| | 2.0 |
| | 1.5 |
|
| Equity-based long-term performance plan | | 1.0 |
| | 0.4 |
| | — |
|
| Share-based compensation expense | | $ | 9.2 |
| | $ | 9.2 |
| | $ | 7.7 |
|
Stock Options
Stock options have a maximum term of ten years and holders may not exercise them earlier than six months after the grant date or another term the award agreement may specify. Stock options granted to officers and other employeestypically vest and become exercisable in three equal installments on the first, second and third anniversaries of the grant date. The
Under the terms of the Stock Plan, the exercise price of each option must equal or exceed the market pricefor a share of our common stock underlying an option may not be less than the fair market value of our stock on the date on which such option was granted. It has been the uniform practice of the Committee to establish an option exercise price equal to the fair market value of the underlying common stock. It is both the policy and practice of the Committee only to grant date.options as of the date of the meeting at which the grants were made. This typically occurs at the Committee’s regularly-scheduled January meeting. Generally, the Committee only grants options at a meeting other than the January meeting when an employee is being promoted (e.g., to a new officer position) or is first hired. We have not had, and pursuantdo not have, a practice of backdating stock options. Neither the selection of Committee meeting dates nor option grant dates is timed in any way to try to maximize gain or manipulate the price of an option.
Non-Performance Based Equity Compensation
Restricted Stock Awards
Restricted stock generally has a value for an NEO only if the NEO remains in our employment for the period required for the stock to vest, thus providing an incentive for the NEO to remain employed with us. However, an exception to the requirement of continued employment occurs with respect to death, disability or retirement. Vesting occurs immediately upon death or disability. Upon qualification for retirement, the restricted stock will continue to vest in the normal course after the date of retirement.
Restrictions on grants of common stock to our employees, including our NEOs, typically will lapse in three equal installments on the first, second and third anniversaries of the date of the award. All of the restricted stock grants to the NEOs occurred in January 2019 and vest in accordance with this typical schedule.
What pension, post-termination and other benefits are provided to Executive Officers?
Discussion:
Pension and Other Retirement Benefits
Non-Contributory Pension Plan
Prior to January 31, 2009, our full-time, non-represented salaried employees, including our then-employed NEOs, participated in a qualified benefit plan known as the Non-Contributory Pension Plan. Effective January 31, 2009, however, no new participants were allowed to enter the Non-Contributory Pension Plan and all benefit accruals under the plan for existing participants were frozen. For those who entered the Non-Contributory Pension Plan prior to January 31, 2009, retirement benefits are calculated using one of two formulas: (i) a cash balance formula, or (ii) a final average pay formula. Eligibility for coverage under a particular formula is typically determined by the date on which a participant commenced employment with us. The compensation taken into account in determining benefits under either formula is subject to the compensation limits imposed by the Internal Revenue Code. A description of the terms of our plans may not, reprice stock optionsthe Non-Contributory Pension Plan, including the formulas used to lowercalculate a participant’s retirement benefits, is set forth in footnote (1) to the exercise price.Pension Benefits Table in this Annual Report on Form 10-K/A.
We usehave two active supplemental retirement plans for our Executive Officers and a new supplemental thrift plan (“Enhanced Supplemental Thrift Plan”) enacted by the Black-Scholes option valuation modelCommittee and approved by the Board in January 2018 (though this new plan has no participants yet). The Committee has determined that the supplemental retirement plans provide a retirement benefit that is a key competitive element of the overall compensation package and, therefore, important to valuerecruiting and retaining key management members. Certain of our existing Executive Officers, including two of our NEOs, are eligible to participate in the Supplemental Executive Retirement Plan (“SERP”), which is an unfunded nonqualified stock options. We use historical datadefined benefit plan. In March 2014, at the Committee’s recommendation, the Board closed the SERP to new participants and replaced it for future Executive Officers with the Executive Retirement Income Plan (“ERIP”), which is similar to the SERP but provides significantly reduced benefits to participants. In January 2018, at the Committee’s recommendation, the Board closed the ERIP to new participants and replaced it with the Enhanced Supplemental Thrift Plan for future Executive Officers with even further reduced benefits. The terms of stock option exercise behaviorsthe SERP, ERIP and the Enhanced Supplemental Thrift Plan are described below.
SERP (locked as of March 2014)
Two of the NEOs—Messrs. Newport and Reich—are participants in the SERP. The SERP provides (1) a “make up” of qualified plan benefits that were denied as a result of limitations imposed by the Internal Revenue Code, and (2) supplemental benefits to estimatevested participants. As part of its annual review of retirement benefits provided to Executive Officers, including the expected lifeNEOs, the Committee has determined that granted optionsthe retirement benefit provided by the SERP continues to be a key element of a competitive compensation package for the Executive Officers who are participants in the plan and, therefore, important to retaining those individuals.
The benefits for participants in the SERP, including the NEOs, vest under a form of graded vesting. More specifically, a participant will be outstanding. The risk-free interest rate is based on thevest in 50% of his or her accrued benefit after a minimum requirement of five years of service as an officer with us and as a participant
Daily Treasury Yield Curve publishedin the SERP, and in an additional 10% of such benefit for each year of service as our employee in addition to such five years, up to 100% vesting after ten years of total service. Vesting also will occur upon the effective date of a change of control (as defined in the SERP). In addition, vesting occurs upon the participant’s death or disability with respect to a participant who has completed at least five years of service with us. The form of payment is a lump sum payment to be made within 30 days after the later of attainment of age 55 or termination of employment, subject to a six-month delay for specified employees, including the NEOs. A participant whose employment with us terminates after his or her benefit has vested, but before the participant reaches the age of 60, is entitled to an early retirement benefit, reduced to its actuarial equivalent based on the participant’s age, unless the termination occurs in connection with a change in control, in which case the reduction is not applicable.
Benefits paid under the SERP are subject to an offset for any benefit received under our qualified defined benefit plan, as well as the actuarial equivalent of certain company-provided vested benefits accumulated under the Thrift Plan. A participant’s benefit under the SERP, prior to giving effect to such offset, is equal to the greater of: (1) 50% of his or her average covered compensation (base salary and incentive awards under the Annual Plan) during the employee’s highest three calculation years of eligible earnings over the participant’s last ten years of consecutive service, or (2) the participant’s benefit under the applicable qualified plan in which he or she participates, without regard to the limitations imposed by the U.S. Treasury on the grant date.Internal Revenue Code. The expected volatility is determined by using a blendpresent value of historical and implied volatility. We do not expect to pay dividends over the termaccumulated benefits for each of the optionsNEOs under the SERP is set forth in the Pension Benefits Table in this Annual Report on Form 10-K/A.
ERIP (locked as of January 2018)
Three of the NEOs—Messrs. Alter, Lauschke and Ross—are participants in the ERIP. While Mr. Vasquez was a participant in the ERIP prior to his retirement, Mr. Vasquez retired from his position before vesting in any portion of the ERIP. The ERIP is also designed to provide a competitive element of the overall compensation package to attract and retain key management members, though at a lower level of benefits than the SERP. The plan provides (1) a “make up” of qualified plan benefits that were denied as a result of limitations imposed by the Internal Revenue Code, and (2) supplemental benefits to vested participants.
The vesting and payment terms for participants in the ERIP are substantially the same as those described above for the SERP.
The benefits paid under the ERIP are similar to, but significantly lower than, those provided under the SERP. Thus, a participant’s benefit under the ERIP, prior to giving effect to such offset, is equal to the greater of: (1) 40% of his or her average annual base salary during the employee’s last three years of consecutive service, plus the annual average of any incentive awards earned by the participant for the last ten consecutive annual performance periods under the Annual Plan; or (2) the participant’s benefit under the qualified plan in which he or she participates, without regard to the limitations imposed by the Internal Revenue Code.
In January 2018, the Committee locked the ERIP to new participants. Our future Executive Officers will be eligible to be named to participate in the Enhanced Supplemental Thrift Plan recommended by the Committee and approved by the Board in January 2018.
Enhanced Supplemental Thrift Plan (for new Executive Officers)
In January 2018, the Board approved the Enhanced Supplemental Thrift Plan for future Executive Officers. This plan does not yet have any participants. The provisions of the new supplemental thrift plan were implemented by inserting those provisions into our already-existing Supplemental Thrift Plan.
The benefits for participants in the Enhanced Supplemental Thrift Plan will vest under a form of graded vesting. A participant will vest in 50% of his or her accrued benefit after a minimum requirement of three years of service as an Executive Officer with us and as a participant in the plan, and in an additional 10% of such benefit for each year of service as an employee of ours in addition to such three years, up to 100% vesting after eight years of total service. Vesting also will occur upon the effective date of a change of control (as defined in the Supplemental Thrift Plan). In addition, vesting occurs with respect to a participant who has completed at least five years of service with us upon the participant’s death or disability.
A participant in the Enhanced Supplemental Thrift Plan will receive an annual supplemental retirement contribution from us equal to up to 10% of the sum of (i) the participant’s annual base salary and (ii) the total annual and long-term incentive awards earned by the participant for the subject year.
The Committee recommended the Enhanced Supplemental Thrift Plan to replace the ERIP based on ourits determination, with input from its executive compensation consultant, that the Enhanced Supplemental Thrift Plan is more in line with current dividend policy. Weexecutive compensation market practices for supplemental retirement benefits. The Committee also estimatebelieves that option holdersthe structure of the Enhanced Supplemental Thrift Plan will forfeitbe more effective than the ERIP for retaining Executive Officers.
Thrift Plan and Supplemental Thrift Plan
The Thrift Plan is a qualified retirement plan under Section 401(k) of the Internal Revenue Code. It provides for matching contributions for employee contributions up to 5% of base salary and additional company contributions, a portion of which are guaranteed and a portion of which are performance-based and dependent upon our net income. At the options.
The following weighted-average assumptions are usedtime that we locked and froze our Non-Contributory Pension Plan (see discussion above), we amended our Thrift Plan to add an automatic contribution by us to a participant’s account in the Black-Scholes option pricing modelThrift Plan. Effective January 31, 2009, the Thrift Plan provides for us to estimatemake a contribution to the fair valueaccount of granted options as of the grant date:
|
| | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Expected volatility | | 63.6% – 65.3% | | 58.8% – 61.6% | | 61.5% – 64.0% |
| Weighted-average volatility | | 64.5% | | 59.5% | | 62.5% |
| Expected term (in years) | | 3.5 – 6.6 | | 3.4 – 6.6 | | 3.3 – 6.5 |
| Risk-free interest rate | | 2.6% – 2.7% | | 2.3% – 2.6% | | 1.6% – 2.2% |
| Weighted-average grant-date fair value per share of granted options | | $1.52 | | $3.51 | | $5.33 |
Option activity for the year ended December 31, 2019, is presented below:
|
| | | | | | | | | | | | | | |
| Stock Options | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2018 | | 3,403,862 |
| | $ | 6.90 |
| | | | |
| Granted | | 1,199,415 |
| | 2.66 |
| | | | |
| Exercised | | (43,167 | ) | | 1.74 |
| | | | |
| Forfeited and expired | | (428,701 | ) | | 11.38 |
| | | | |
| Outstanding at December 31, 2019 | | 4,131,409 |
| | 5.26 |
| | 6.9 | | $ | 1.6 |
|
| | | | | | | | | |
| Exercisable at December 31, 2019 | | 2,215,816 |
| | 6.01 |
| | 5.3 | | 0.8 |
|
| | | | | | | | | |
| Unvested at December 31, 2019 | | 1,915,593 |
| | 4.39 |
| | 8.4 | | 0.7 |
|
| | | | | | | | | |
| Unvested at December 31, 2019 expected to vest | | 1,819,813 |
| | 4.39 |
| | 8.4 | | 0.7 |
|
The total intrinsic value of stock option awards that holders exercised during the years ended December 31, 2019, 2018, and 2017 was $0.1, $0.3 and $0.2. Each exercised option’s intrinsic value is the quoted average of the reported high and low sales price on the exercise date. As of December 31, 2019, total unrecognized compensation costs for non-vested stock options were $0.8, which we expect to recognize over a weighted-average period of 1.6 years.
Restricted Stock
Restricted stock awards granted to officers and other employees ordinarily vest ratably on the first, second and third anniversaries of the grant. Non-vested restricted stock awards activity for the year ended December 31, 2019, is presented below:
|
| | | | | | |
| Restricted Stock Awards | Restricted Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding at December 31, 2018 | 506,703 |
| | $ | 6.45 |
|
| Granted | 772,054 |
| | 2.65 |
|
| Vested/restrictions lapsed | (745,001 | ) | | 3.98 |
|
| Canceled | (93,651 | ) | | 4.32 |
|
| Outstanding at December 31, 2019 | 440,105 |
| | 4.42 |
|
The weighted-average grant date fair value of restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017, was $2.65, $6.56 and $9.78 per share. The total intrinsic value of restricted stock awards that vested (i.e., restrictions lapsed) during the years ended December 31, 2019, 2018 and 2017, was $2.0, $3.2 and $4.1. As of December 31, 2019, total unrecognizedeach
compensation costs for non-vested restricted stock awards were $0.9, which we expectparticipant in the Thrift Plan equal to recognize over a weighted-average period3% of 1.6 years.
Restricted Stock Units
Restricted stock units (“RSUs”) represent equity-based compensation granted to Directors. RSU grants vest immediately, but we dothe participant’s base salary, whether or not settle them (i.e., issue the underlying shares of stock) until one year after the grant date, unless a Director elects to defer the settlement to six months after his or her Board service is terminated. They may elect to take settlement in a single distribution or in annual installments up to fifteen years.
Performance Shares
Performance shares are granted to executive officers and other employees. They earn the awards by meeting performance measures over a three-year period. Though a target number of performance shares are awarded on the grant date, for 2019 and 2018 grants the total number of performance shares that will actually be issuedparticipant makes an elective contribution to the participant, if any,Thrift Plan. This 3% contribution is in addition to the matching contributions described above with respect to the participant’s elective contributions and the potential performance-based supplemental contributions that we may make in the event that we achieve the threshold level of net income for the quarter, as discussed below. All such contributions are subject to the compensation limits imposed by the Internal Revenue Code.
The Thrift Plan also provides for potential performance-based supplemental contributions by us. These supplemental contributions are available to employees generally, including the NEOs. Employees who contribute at least 5% of their gross income to the expirationThrift Plan (the “Basic Contribution”) are eligible for the full amount of the performance period will beperformance-based supplemental contributions. Whether these contributions are made and the quantum of the contribution are based on our total share return comparedquarterly net income. During 2019, the level of quarterly net income to earn each level of contribution was increased beginning with the VanEck Vectors Steel ETF. For 2017, the total numberthird quarter of performance shares that will be issued to the participant, if any, at the expiration2019. The amount of the performance period for those grants will be based on two equally-rated metrics: (i) our share performance compared tosupplemental contribution, expressed as a prescribed compounded annual growth rate and (ii) our total share return compared to the VanEck Vectors Steel ETF.
The following weighted-average assumptions are used in a Monte Carlo simulation model to estimate the fair value of performance shares granted:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Company expected volatility | | 62.3 | % | | 67.3 | % | | 68.0 | % |
| VanEck Vectors Steel ETF expected volatility | | 45.3 | % | | 52.2 | % | | 48.9 | % |
| Risk-free interest rate | | 2.6 | % | | 2.2 | % | | 1.5 | % |
| Weighted-average grant-date fair value per performance share granted | | $ | 3.09 |
| | $ | 8.05 |
| | $ | 10.78 |
|
Non-vested performance share awards activity for the year ended December 31, 2019, is presented below:
|
| | | | | | |
| Performance Share Awards | Performance Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding at December 31, 2018 | 614,800 |
| | $ | 9.19 |
|
| Granted | 595,733 |
| | 3.09 |
|
| Earned | — |
| | — |
|
| Expired or forfeited | (338,058 | ) | | 9.38 |
|
| Outstanding at December 31, 2019 | 872,475 |
| | 4.95 |
|
As of December 31, 2019, total unrecognized compensation costs for non-vested performance share awards were $2.1, which we expect to recognize over a weighted-average period of 1.6 years.
Equity-based Long-term Performance Plan
During 2018, in order to further align our management and stockholder interests, the Board of Directors changed the structure of long-term incentive compensation for executive officers. For performance periods beginning in 2019, 50%percentage of the long-term incentive plan compensation earned by executive officers will now be denominatedBasic Contribution, before and after the changes made in stock insteadthe third quarter of the 30% denominated in stock for the performance period that began in 2018. In addition, beginning in 2019, 30% of the compensation earned by other non-executive officer participants under the long-term incentive plan will now be paid in stock. The remaining portion of the long-term incentive plan for all participants will be settled in cash. As a result, the equity-based portion of the long-term incentive plan is treatedvaries as share-based compensation with a performance condition.
Non-vested long-term performance plan share awards activity for the year ended December 31, 2019, is presented below:
|
| | | | | | |
| Long-Term Performance Plan Share Awards | Long-Term Performance Plan Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding at December 31, 2018 | 250,400 |
| | $ | 5.04 |
|
| Granted | 678,714 |
| | 2.66 |
|
| Expired or forfeited | (70,900 | ) | | 3.39 |
|
| Outstanding at December 31, 2019 | 858,214 |
| | 3.24 |
|
As of December 31, 2019, total unrecognized compensation costs for non-vested long-term performance share awards were $1.6, which we expect to recognize over a weighted-average period of 1.8 years.
NOTE 14 - Comprehensive Income (Loss)
Other comprehensive income (loss), net of tax, information is presented below: |
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Foreign currency translation | | | | | | |
| Balance at beginning of period | | $ | (0.6 | ) | | $ | 1.1 |
| | $ | (3.6 | ) |
| Other comprehensive income (loss)—foreign currency translation gain (loss) | | (0.6 | ) | | (1.7 | ) | | 4.7 |
|
| Balance at end of period | | $ | (1.2 | ) | | $ | (0.6 | ) | | $ | 1.1 |
|
| Cash flow hedges | | | | | | |
| Balance at beginning of period | | $ | 7.2 |
| | $ | 22.3 |
| | $ | 39.9 |
|
| Cumulative effect of adopting new hedging standard | | — |
| | 0.8 |
| | — |
|
| Other comprehensive income (loss): | | | | | | |
| Gains (losses) arising in period | | (31.5 | ) | | (5.6 | ) | | (11.5 | ) |
| Income tax expense (benefit) | | (1.1 | ) | | — |
| | — |
|
| Gains (losses) arising in period, net of tax | | (30.4 | ) | | (5.6 | ) | | (11.5 | ) |
| Reclassification of losses (gains) to net income (loss): | | | | | | |
| Recorded in cost of products sold | | 8.9 |
| | (10.3 | ) | | (6.1 | ) |
| Income tax (expense) benefit (b) | | 0.3 |
| | — |
| | — |
|
| Net amount of reclassification of losses (gains) to net income (loss), net of tax | | 8.6 |
| | (10.3 | ) | | (6.1 | ) |
| Total other comprehensive income (loss), net of tax | | (21.8 | ) | | (15.9 | ) | | (17.6 | ) |
| Balance at end of period | | $ | (14.6 | ) | | $ | 7.2 |
| | $ | 22.3 |
|
| Pension and OPEB plans | | | | | | |
| Balance at beginning of period | | $ | (106.6 | ) | | $ | (73.6 | ) | | $ | (125.0 | ) |
| Other comprehensive income (loss): | | | | | | |
| Prior service credit (cost) arising in period | | — |
| | 11.1 |
| | 4.7 |
|
| Gains (losses) arising in period | | 50.5 |
| | (63.6 | ) | | 94.2 |
|
| Subtotal | | 50.5 |
| | (52.5 | ) | | 98.9 |
|
| Income tax expense (benefit) | | 2.0 |
| | — |
| | — |
|
| Gains (losses) arising in period, net of tax | | 48.5 |
| | (52.5 | ) | | 98.9 |
|
| Reclassification to net income (loss): | | | | | | |
| Prior service costs (credits) (a) | | (9.6 | ) | | (9.8 | ) | | (53.8 | ) |
| Actuarial (gains) losses (a) | | 15.7 |
| | 29.3 |
| | 6.3 |
|
| Subtotal | | 6.1 |
| | 19.5 |
| | (47.5 | ) |
| Income tax (expense) benefit (b) | | 0.2 |
| | — |
| | — |
|
| Amount of reclassification to net income (loss), net of tax | | 5.9 |
| | 19.5 |
| | (47.5 | ) |
| Total other comprehensive income (loss), net of tax | | 54.4 |
| | (33.0 | ) | | 51.4 |
|
| Balance at end of period | | $ | (52.2 | ) | | $ | (106.6 | ) | | $ | (73.6 | ) |
| |
(a) | Included in pension and OPEB (income) expense |
| |
(b) | Included in income tax expense (benefit) |
NOTE 15 - Earnings per Sharefollows:
|
| | | | |
Quarterly Net Income | | Amount of AK Steel Supplemental Contribution |
| Before Changes | | After Changes | |
| $5 million | | $10 million | | 10% of Basic Contribution |
| $10 million | | $20 million | | 20% of Basic Contribution |
| $15 million | | $30 million | | 30% of Basic Contribution |
| $20 million | | $40 million | | 40% of Basic Contribution |
| $25 million | | $50 million | | 50% of Basic Contribution |
ReconciliationIn addition, if our quarterly net income is greater than $30 million (changed to $60 million in 2019), an additional 1% of eligible earnings will be contributed for each incremental $30 million of quarterly net income. The maximum performance-based supplemental contribution in any quarter is 100% of the numeratorsBasic Contribution.
During 2019, we achieved net income and denominators for basicmade supplemental contributions to eligible employees, including the NEOs, in the first, second and diluted EPS computations is presented below:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Net income attributable to AK Steel Holding Corporation | | $ | 11.2 |
| | $ | 186.0 |
| | $ | 103.5 |
|
| | | | | | | |
| Common shares outstanding (weighted-average shares in millions): | | | | | | |
| Common shares outstanding for basic earnings per share | | 315.8 |
| | 314.8 |
| | 314.3 |
|
| Effect of exchangeable debt | | — |
| | — |
| | 4.5 |
|
| Effect of dilutive stock-based compensation | | 0.8 |
| | 0.8 |
| | 0.9 |
|
| Common shares outstanding for diluted earnings per share | | 316.6 |
| | 315.6 |
| | 319.7 |
|
| | | | | | | |
| Basic earnings per share | | $ | 0.04 |
| | $ | 0.59 |
| | $ | 0.33 |
|
| Diluted earnings per share | | $ | 0.04 |
| | $ | 0.59 |
| | $ | 0.32 |
|
| | | | | | | |
| Potentially issuable common shares (in millions) excluded from earnings per share calculation due to anti-dilutive effect | | 3.6 |
| | 2.4 |
| | 1.4 |
|
NOTE 16 - Variable Interest Entities
SunCoke Middletown
third quarters. We purchase alldid not make supplemental contributions in the coke and electrical power generated from SunCoke Middletown’s plant under long-term supply agreements. SunCoke Middletown isfourth quarter of 2019 as a variable interest entity because we have committed to purchase all the expected production from the facility through at least 2031 and we are the primary beneficiary. Therefore, we consolidate SunCoke Middletown’s financial results withresult of our financial results even though we have 0 ownership interest in SunCoke Middletown. SunCoke Middletown had income before income taxes of $52.2, $58.4 and $61.7 for the years ended December 31, 2019, 2018 and 2017 that was includedquarter. The total amounts of these performance-based supplemental contributions are set forth in our consolidated income before income taxes.
Vicksmetal/Armco Associates
We own a 50% interest in Vicksmetal/Armco Associates (“VAA”), a joint venture with Vicksmetal Company. VAA slits electrical steel primarily for AK Steel, though also for third parties. VAA is a variable interest entity and we are the primary beneficiary. Therefore, we consolidate VAA’s financial results with our financial results.
NOTE 17 - Fair Value Measurements
We measure certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we use various valuation approaches. The hierarchy of those valuation approaches is in three levels based on the reliability of inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significantnotes to the fair value measurement. BelowSummary Compensation Table.
The Supplemental Thrift Plan is an unfunded, nonqualified retirement plan. It provides for matching contributions with respect to base salary that may not be taken into account under the Thrift Plan due to limits on earnings imposed by the Internal Revenue Code. The Supplemental Thrift Plan thus provides a summaryvehicle to maximize matching contributions that otherwise would not be eligible for the Thrift Plan due to the Internal Revenue Code’s compensation limits.
Any member of our Management, including an NEO, is eligible for participation in the Thrift Plan, but participants in the Supplemental Thrift Plan must be selected by the Committee. For 2019, the participants in the Supplemental Thrift Plan included all of the hierarchy levels:
Level 1 inputsNEOs. The contributions under these plans for 2019 are quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs are inputs, other than quoted prices, that are directly or indirectly observable for the asset or liability. Level 2 inputs include model-generated values that rely on inputs either directly observed or readily derived from available market data sources, such as Bloomberg or other news and data vendors. They include quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlying financial instrument, as well as other relevant economic factors. As a practical expedient, we estimate the value of money market mutual funds by using a $1.00 per share multiplied by the number of sharesset forth in the fund as of the measurement date. We generate fair values for our commodity derivative contracts and foreign currency forward contracts from observable futures prices for the
respective commodity or currency, from sources such as the New York Mercantile Exchange (NYMEX) or the London Metal Exchange (LME).in this Annual Report on Form 10-K/A. In cases where the derivative is an option contract (including caps, floors and collars), we adjust our valuations to reflect the counterparty’s valuation assumptions. After validating that the counterparty’s assumptions for implied volatilities reflect independent source’s assumptions, we discount these model-generated future values with discount factors that reflect the counterparty’s credit quality. We apply different discount rates to different contracts since the maturities and counterparties differ. As of December 31, 2019, a spread over benchmark rates of less than 1.4% was used for derivatives valued as assets and less than 4.0% for derivatives valued as liabilities. We have estimated the fair value of long-term debt based upon quoted market prices for the same or similar issues or on the current interest rates available to us for debt on similar terms and with similar maturities.
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. This level of categorization is not applicable to our valuations on a normal recurring basis.
Assets and liabilities measured at fair value on a recurring basis are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Assets measured at fair value | | | | | | | | | | | |
| Cash and cash equivalents | $ | 31.0 |
| | $ | — |
| | $ | 31.0 |
| | $ | 48.6 |
| | $ | — |
| | $ | 48.6 |
|
| Other current assets: | | | | | | | | | | | |
| Foreign exchange contracts | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
| Commodity hedge contracts | — |
| | 12.9 |
| | 12.9 |
| | — |
| | 13.0 |
| | 13.0 |
|
| Other non-current assets: | | | | | | | | | | | |
| Foreign exchange contracts | — |
| | 0.1 |
| | 0.1 |
| | — |
| | 0.4 |
| | 0.4 |
|
| Commodity hedge contracts | — |
| | 2.7 |
| | 2.7 |
| | — |
| | 2.9 |
| | 2.9 |
|
| Assets measured at fair value | $ | 31.0 |
| | $ | 15.7 |
| | $ | 46.7 |
| | $ | 48.6 |
| | $ | 16.4 |
| | $ | 65.0 |
|
| | | | | | | | | | | | |
| Liabilities measured at fair value | | | | | | | | | | | |
| Accrued liabilities: | | | | | | | | | | | |
| Foreign exchange contracts | $ | — |
| | $ | (0.5 | ) | | $ | (0.5 | ) | | $ | — |
| | $ | (1.2 | ) | | $ | (1.2 | ) |
| Commodity hedge contracts | — |
| | (16.5 | ) | | (16.5 | ) | | — |
| | (5.9 | ) | | (5.9 | ) |
| Other non-current liabilities: | | | | | | | | | | | |
| Foreign exchange contracts | — |
| | (0.2 | ) | | (0.2 | ) | | — |
| | (1.5 | ) | | (1.5 | ) |
| Commodity hedge contracts | — |
| | (1.9 | ) | | (1.9 | ) | | — |
| | (1.6 | ) | | (1.6 | ) |
| Liabilities measured at fair value | $ | — |
| | $ | (19.1 | ) | | $ | (19.1 | ) | | $ | — |
| | $ | (10.2 | ) | | $ | (10.2 | ) |
| | | | | | | | | | | | |
| Liabilities measured at other than fair value | | | | | | | | | | | |
| Long-term debt, including current portions: | | | | | | | | | | | |
| Fair value | $ | — |
| | $ | (2,023.5 | ) | | $ | (2,023.5 | ) | | $ | — |
| | $ | (1,852.4 | ) | | $ | (1,852.4 | ) |
| Carrying amount | — |
| | (1,968.8 | ) | | (1,968.8 | ) | | — |
| | (1,993.7 | ) | | (1,993.7 | ) |
See Note 8 for information on the fair value of pension plan assets. The carrying amounts of our other financial instruments do not differ materially from their estimated fair values at December 31, 2019 and 2018.
NOTE 18 - Derivative Instruments and Hedging Activities
Exchange rate fluctuations affect a portion of revenuesour contributions to these plans were fixed contributions and operating coststhe remainder were performance-based contributions.
Executive Deferred Compensation Plan
We have an Executive Deferred Compensation Plan (the “Deferred Plan”). The Deferred Plan is an unfunded nonqualified deferred compensation arrangement. In 2019, none of the NEOs chose to participate in the Deferred Plan.
Post-termination Benefits
Severance and Change-of-Control Agreements
We have entered into severance agreements and change-of-control agreements with each of the NEOs that provide certain post-termination benefits. The descriptions of those agreements in this Proxy Statement are denominatedqualified in foreign currencies,all respects by reference to the forms of those documents filed with the SEC. The current forms of the severance agreement and we use forward currencythe change-of-control agreement were filed as exhibits 10.8 and currency option contracts10.9, respectively, to reduce our exposure2016 Annual Report on Form 10-K filed with the SEC on February 17, 2017. No NEO has executed a new form of change-of-control or severance agreement since that time.
Each of the NEOs initial severance and change-of-control agreements had or have a five-year term (the remaining term depends how long ago each NEO was appointed as an Officer), and renew automatically thereafter on a year-to-year basis, unless written notice of non-renewal is given by either party at least 90 days prior to certainthe expiration of these currency price fluctuations. Contracts to sell euros have not been designated as cash flow hedges for accounting purposes, and gains or losses are reported in earnings immediately in other (income) expense. Contracts to purchase Canadian dollars are designated as cash flow hedges for accounting purposes, and we record the gains and losses for the derivatives and premiums paid for option contracts in accumulated other comprehensive income (loss) until we reclassify them into cost of products sold when we recognize the associated underlying operating costs.
We enter into severance agreements with our NEOs because they promote our and our stockholders’ interests by, among other things:
Encouraging a release of claims by the terminated NEO and thereby avoiding the risk and financial exposure of employment litigation.
Ensuring that for one year after termination of employment, the NEO:
| |
| ○ | will not compete against us; |
| |
| ○ | will not solicit any of our employees to resign his or her employment; and |
| |
| ○ | will cooperate with respect to various matters in which the NEO was personally involved prior to the NEO’s employment termination. |
Securing an agreement by the NEO to arbitrate all legally arbitrable claims arising not only from the severance agreement, but also from the NEO’s employment relationship with us.
We enter change-of-control agreements with our NEOs because they align our and our stockholders’ interests by, among other things:
Obtaining the same covenants and commitments as described above in our severance agreements.
Mitigating an NEO’s concerns about personal job security and financial well-being in the event of a change-of-control, thereby eliminating consequences that might prevent the NEO from providing objective advice and information to the Board and stockholders regarding a proposed change-of-control, and helping to ensure that Management stays intact before and during a proposed change-of-control transaction.
The Committee annually reviews the terms of our severance and change-of-control agreements to evaluate whether they continue to promote our interests as noted above, are exposed to fluctuations in market pricesappropriate and competitive under the then-existing circumstances and reflect best practices for our industry and large public companies generally.
Severance Agreements - Overview of raw materials and energy sources. We may use cash-settled commodity price swaps and options to hedgeTerms
Under our severance agreement with the market riskNEOs, an NEO who voluntarily terminates employment or whose employment is terminated involuntarily for cause would not receive any severance benefits associated with such termination. An NEO who is terminated involuntarily without cause would receive at a minimum a lump sum payment equal to the purchase of certain of our raw materials and energy requirements. For input commodities, these derivatives are typically usedNEO’s base salary for a period of six months. In addition, if the NEO executes an agreement releasing us from any liability for claims relating to the NEO’s employment with us, the NEO also is entitled to receive:
an additional lump sum severance payment equal to 12 months of base salary;
a lump sum payment based upon the NEO’s assigned target amount under our Annual Plan and a pro-rated payment of any Annual Plan award actually earned for the year in which the termination occurs; and
continuing coverage under our benefit plans, including life, health and other insurance benefits, for 18 months.
Change-of-Control Agreements - Overview of Terms
Each NEO typically is entitled to severance payments and other benefits under the NEO’s change-of-control agreement if, within 24 months following a change-of-control, the NEO’s employment with us is involuntarily terminated without cause or the NEO voluntarily terminates employment with us for “good reason.”
For each NEO, the base severance benefit is a lump sum payment equal to the NEO’s base salary for a period of six months. In addition, if the NEO executes an agreement releasing us from any liability for claims relating to employment with us, the NEO is entitled to receive:
an additional lump sum severance payment, equal to 18 months of base salary;
a lump sum payment based upon the NEO’s awards under our Annual Plan equal to two times the greatest of (1) the NEO’s assigned Annual Plan target amount for the calendar year in which the termination occurs, (2) the actual Annual Plan payout for the calendar year immediately preceding the calendar year in which the termination occurs, or (3) the average of the Annual Plan payouts for the three calendar years immediately preceding the calendar year of termination, reduced in each instance by any amount otherwise paid or payable under the Annual Plan with respect to the preceding calendar year, plus a prorated Annual Plan payout at the maximum level for the portion of the then-current calendar year prior to date of termination;
a lump sum payment based upon the NEO’s awards under our electricity, iron ore, natural gas, nickel and zinc requirements. Our hedging strategy isLong-Term Plan equal to reduce the effect on earnings frombonus payment for any completed performance period under the price volatility of these various commodity exposures, including timing differences between when we incur raw material commodity costs and when we receive sales surcharges from our customers based on those raw materials. Independent of any hedging activities, price changes in any of these commodity markets could negatively affect operating costs.
All commodity derivatives are recognized as an asset or liability at fair value. We record the gains and losses and premiums paid for option contracts for commodity derivatives designated as cash flow hedges of forecasted purchases of raw materials and energy sources in accumulated other comprehensive income (loss) and reclassify them into cost of products sold when we recognize earnings for the associated underlying transaction. We record all gains or losses from commodity derivatives for which hedge accounting treatmentLong-Term Plan that has not been elected to earnings immediately in cost of products sold. We routinely use iron ore derivatives to reduce the volatilitypaid as of the costdate of our iron ore purchases. These derivatives dotermination (which amount shall not qualifybe less than it would be if calculated at the assigned target amount under the Long-Term Plan), plus a prorated Long-Term Plan payment at the target level for hedge accounting treatment. We have 0 collateral deposited with counterparties under collateral funding arrangementsall incomplete performance periods as of December 31, 2019.the date of termination;
Outstanding derivative contractscontinuing coverage under our benefit plans, including life, health and the period over which we are hedging our exposure to the volatility in future cash flows are presented below:
|
| | | | | | | | | |
| Hedge Contracts | Settlement Dates | | 2019 | | 2018 |
| Commodity contracts: | | | | | |
| Nickel (in lbs) | January 2020 to June 2020 | | 150,000 |
| | — |
|
| Natural gas (in MMBTUs) | January 2020 to December 2021 | | 37,708,000 |
| | 39,868,000 |
|
| Zinc (in lbs) | January 2020 to December 2021 | | 35,550,000 |
| | 52,150,000 |
|
| Iron ore (in metric tons) | January 2020 to June 2021 | | 1,495,000 |
| | 2,125,000 |
|
| Electricity (in MWHs) | January 2020 to August 2021 | | 1,683,000 |
| | 1,461,000 |
|
| Foreign exchange contracts: | | | | | |
| Euros (in millions) | January 2020 to January 2020 | | € | 1.5 |
| | € | 4.0 |
|
| Canadian dollars (in millions) | January 2020 to December 2021 | | C$ | 72.6 |
| | C$ | 118.6 |
|
The fair value of derivative instruments as of December 31, 2019 and 2018, is presented below:
|
| | | | | | | | |
| Asset (liability) | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | |
| Other current assets—commodity contracts | | $ | 0.1 |
| | $ | 3.4 |
|
| Other non-current assets: | | | | |
| Commodity contracts | | — |
| | 1.0 |
|
| Foreign exchange contracts | | 0.1 |
| | 0.4 |
|
| Accrued liabilities: | | | | |
| Commodity contracts | | (16.5 | ) | | (4.7 | ) |
| Foreign exchange contracts | | (0.5 | ) | | (1.2 | ) |
| Other non-current liabilities: | | | | |
| Commodity contracts | | (1.9 | ) | | (1.2 | ) |
| Foreign exchange contracts | | (0.2 | ) | | (1.5 | ) |
| Derivatives not designated as hedging instruments: | | | | |
| Other current assets: | | | | |
| Commodity contracts | | 12.8 |
| | 9.6 |
|
| Foreign exchange contracts | | — |
| | 0.1 |
|
| Other non-current assets—commodity contracts | | 2.7 |
| | 1.9 |
|
| Accrued liabilities—commodity contracts | | — |
| | (1.2 | ) |
| Other non-current liabilities—commodity contracts | | — |
| | (0.4 | ) |
Gains (losses)additional service credits toward retiree medical coverage (ranging from two to three years);
the immediate vesting of all restricted stock awards to the NEO under our Stock Plan and the lapse of all restrictions on derivative instrumentssuch awards; and,
the right, for a period of three years, to exercise all stock options awarded to the NEO under the Stock Plan without regard to any vesting period required by the Stock Plan (but subject to expiration of the original ten-year period for the option to be exercised).
Specific Payments and Benefits under Severance and Change-of-Control Agreements
Each of the NEO’s change-of-control agreements contains a “double trigger”, which provides that the NEO is entitled to the payments and benefits under the agreement if, within 24 months following our change-of-control, the Executive Officer’s employment with us is involuntarily terminated without “cause” or the Executive Officer voluntarily terminates employment with us for “good reason.”
None of the severance or change-of control agreements include a “gross-up” provision that would require a payment to the NEO if the NEO becomes subject to the federal excise tax on “parachute payments.”
The specific circumstances that would trigger the payments and other benefits under the severance agreements, the estimated payments and benefits that would be provided in each covered circumstance for each NEO, how the payments and benefits are determined under such circumstances and all material conditions and obligations applicable to the receipt of the payments and benefits are set forth in the Potential Payments Upon Termination or Change-of-Control discussion of this Annual Report on Form 10-K/A.
Limited Perquisites and Other Personal Benefits
Each of the NEOs receives a limited number of perquisites and other personal benefits that are customary for Executive Officers of similarly situated companies and provide a competitive overall compensation package. These consist principally of reimbursement for tax planning services, financial planning services, and mandatory physical evaluations. Neither the CEO nor any of the other NEOs is permitted personal use of our airplane. The limited perquisites and personal benefits provided to each NEO are disclosed in the “All Other Compensation” column of the Summary Compensation Table. The NEOs pay all taxes associated with these perquisites and other personal benefits and their compensation is not “grossed up” to cover such taxes.
Other Employee Benefit Plans
Each of the NEOs also participates, or is eligible to participate, in various employee benefit plans generally available to all employees on the same terms and conditions. These include the normal and customary programs for death and disability benefits, life insurance, health insurance, prescription drug insurance, dental insurance, vision insurance, health savings accounts (including variable performance-based supplemental contributions by the company if we exceed the applicable annual net income threshold), short- and long-term disability insurance, pension benefits (for certain NEOs), educational assistance and matching gifts for charitable contributions from the AK Steel Foundation.
What is our Policy on Deductibility of Executive Compensation?
Discussion: Section 162(m) of the Internal Revenue Code generally places a $1,000,000 limit on the deductibility for federal income tax purposes of the annual compensation paid to a company’s CEO and each of its other three most highly compensated Executive Officers (excluding the CFO prior to 2018). However, prior to 2018 (before changes to the applicable tax laws and regulations discussed further below), “qualified performance-based compensation” under Section 162(m) was exempt from this deductibility limitation. Qualified performance-based compensation was compensation paid based solely upon the achievement of objective performance goals, the material terms of which were approved by the stockholders of the paying corporation.
Prior to 2018, although the Committee’s principal motivation in structuring executive compensation was (and remains) aligning the interests of Management with those of the stockholders, the Committee also considered the anticipated tax treatment when determining executive compensation. Thus, the Committee routinely sought to structure our executive compensation program in a way that preserved the deductibility of compensation payments and benefits. That said, in order to maintain the flexibility to compensate NEOs in a manner designed to promote the compensation program’s primary objectives, the Committee did not follow any strict policy that all executive compensation must be deductible under Section 162(m).
The 2017 Tax Cuts and Jobs Act (“Tax Reform Law”) repealed the exception to Section 162(m) for performance-based compensation for tax years endedbeginning after December 31, 2019, 20182017, subject to certain transition and 2017, are presented below:
|
| | | | | | | | | | | | |
| Gain (loss) | | 2019 | | 2018 | | 2017 |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity contracts: | | | | | | |
| Recognized in accumulated other comprehensive income that were included in the assessment of effectiveness | | $ | (32.3 | ) | | $ | (0.2 | ) | | $ | (11.5 | ) |
| Reclassified from accumulated other comprehensive income into cost of products sold | | (7.2 | ) | | 11.2 |
| | 6.1 |
|
| Foreign exchange contract: | | | | | | |
| Recognized in accumulated other comprehensive income that were included in the assessment of effectiveness | | 0.8 |
| | (5.4 | ) | | — |
|
| Reclassified from accumulated other comprehensive income into cost of products sold | | (1.7 | ) | | (0.9 | ) | | — |
|
| Derivatives not designated as hedging instruments: | | | | | | |
| Commodity contracts—recognized in cost of products sold | | 52.2 |
| | (2.4 | ) | | 31.6 |
|
| Foreign exchange contracts—recognized in other (income) expense | | — |
| | 0.1 |
| | (1.6 | ) |
Gains (losses) before tax expected tograndfathering rules. In addition, the rules provide, among other things, that the CFO will be reclassified into cost of products sold withinincluded as a “covered employee”. Despite the next twelve months for our existing commodity contracts that qualify for hedge accounting are presented below:
|
| | | | | |
| Hedge | | | Gains (losses) |
| Natural gas | | | $ | (10.5 | ) |
| Electricity | | | (5.8 | ) |
| Zinc | | | (3.1 | ) |
| Canadian dollars | | | (1.3 | ) |
NOTE 19 - Supplementary Cash Flow Information
Net cash paid (received) during the period for interest, net of capitalized interest, and income taxes are presented below:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Net cash paid (received) during the period for: | | | | | | |
| Interest, net of capitalized interest | | $ | 137.5 |
| | $ | 136.3 |
| | $ | 130.5 |
|
| Income taxes | | (9.5 | ) | | (5.5 | ) | | 0.1 |
|
Included in net cash flows from operations was cash provided by SunCoke Middletown of $68.6, $76.6 and $77.1 for the years ended December 31, 2019, 2018 and 2017. Consolidated cash and cash equivalents at December 31, 2019, and 2018, include SunCoke Middletown’s cash and cash equivalents of $0.1 and $1.1. SunCoke Middletown’s cash and cash equivalents have no compensating balance arrangements or legal restrictions, but are not available for our use.
We had capital investments during the years ended December 31, 2019, 2018 and 2017, that had not been paid asloosening of the endguidelines under Section 162(m), the Committee continues to believe that most of our NEOs and Executive Officers’ compensation should be performance-based and incentivize the respective period. These amounts are included in accounts payable and accrued liabilities and have been excluded fromcreation of long-term shareholder value. As such, the consolidated statements of cash flows until paid. We also granted restricted stockchanges to certain employees and restricted stock units to directorsSection 162(m) under the OSIP and prior Stock Incentive Plan. Non-cash investing and financing activities forTax Reform Law did not significantly impact the years ended December 31, 2019, 2018 and 2017, are presented below:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Capital investments | | $ | 50.9 |
| | $ | 33.4 |
| | $ | 37.3 |
|
| Issuance of restricted stock and restricted stock units | | 2.8 |
| | 4.5 |
| | 4.6 |
|
NOTE 20 - Quarterly Information (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
| Net sales | $ | 1,697.7 |
| | $ | 1,680.5 |
| | $ | 1,535.5 |
| | $ | 1,445.7 |
| | $ | 6,359.4 |
|
| Operating profit | 41.2 |
| | 106.6 |
| | 51.1 |
| | 10.4 |
| | 209.3 |
|
| Net income (loss) attributable to AK Holding | (4.5 | ) | | 66.8 |
| | 2.8 |
| | (53.9 | ) | | 11.2 |
|
| Basic and diluted earnings (loss) per share | $ | (0.01 | ) | | $ | 0.21 |
| | $ | 0.01 |
| | $ | (0.17 | ) | | $ | 0.04 |
|
| | | | | | | | | | |
| | 2018 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
| Net sales | $ | 1,658.9 |
| | $ | 1,746.6 |
| | $ | 1,735.6 |
| | $ | 1,677.1 |
| | $ | 6,818.2 |
|
| Operating profit | 63.6 |
| | 99.5 |
| | 114.8 |
| | 86.5 |
| | 364.4 |
|
| Net income (loss) attributable to AK Holding | 28.7 |
| | 56.6 |
| | 67.2 |
| | 33.5 |
| | 186.0 |
|
| Basic and diluted earnings (loss) per share | $ | 0.09 |
| | $ | 0.18 |
| | $ | 0.21 |
| | $ | 0.11 |
| | $ | 0.59 |
|
Included in net income (loss) attributable to AK Holding in the first quarter, fourth quarter and full year of 2019 was a charge of $77.4, a credit of $8.1 and a charge of $69.3, respectively, for the Ashland Works closure. Also included in net income (loss) attributable to AK Holding in the fourth quarter and full year of 2019 was a pension settlement charge of $26.9. Included in net income (loss) attributable to AK Holding in the fourth quarter and full year of 2018 was a pension settlement charge of $14.5.
NOTE 21 - Supplementary Guarantor Information
AK Steel’s Secured Notes, 2021 Notes, 2025 Notes and 2027 Notes (collectively, the “Senior Notes”) are governed by indentures entered into by AK Holding and its 100%-owned subsidiary, AK Steel. Under the terms of the indentures, AK Holding and the Subsidiary Guarantors each fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on each of the notes included in the Senior Notes.
We present all investments in subsidiaries in the supplementary guarantor information using the equity method of accounting. Therefore, the net income (loss) of the subsidiaries accounted for using the equity method is in their parents’ investment accounts. The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions. The following supplementary condensed consolidating financial statements present information about AK Holding, AK Steel, the Subsidiary Guarantors and the other non-guarantor subsidiaries.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Comprehensive Income (Loss) |
| Year Ended December 31, 2019 |
| |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net sales | $ | — |
| | $ | 5,784.3 |
| | $ | 304.1 |
| | $ | 751.5 |
| | $ | (480.5 | ) | | $ | 6,359.4 |
|
| Cost of products sold (exclusive of items shown separately below) | — |
| | 5,228.5 |
| | 212.9 |
| | 598.5 |
| | (433.6 | ) | | 5,606.3 |
|
| Selling and administrative expenses | 4.3 |
| | 283.0 |
| | 13.8 |
| | 40.0 |
| | (45.9 | ) | | 295.2 |
|
| Depreciation | — |
| | 142.1 |
| | 8.5 |
| | 42.0 |
| | — |
| | 192.6 |
|
| Ashland Works closure | — |
| | 56.0 |
| | — |
| | — |
| | — |
| | 56.0 |
|
| Total operating costs | 4.3 |
| | 5,709.6 |
| | 235.2 |
| | 680.5 |
| | (479.5 | ) | | 6,150.1 |
|
| Operating profit (loss) | (4.3 | ) | | 74.7 |
| | 68.9 |
| | 71.0 |
| | (1.0 | ) | | 209.3 |
|
| Interest expense | — |
| | 139.3 |
| | — |
| | 7.3 |
| | — |
| | 146.6 |
|
| Pension and OPEB (income) expense | — |
| | 12.0 |
| | — |
| | — |
| | — |
| | 12.0 |
|
| Other (income) expense | — |
| | 2.6 |
| | (23.2 | ) | | (4.1 | ) | | 6.2 |
| | (18.5 | ) |
| Income (loss) before income taxes | (4.3 | ) | | (79.2 | ) | | 92.1 |
| | 67.8 |
| | (7.2 | ) | | 69.2 |
|
| Income tax expense (benefit) | — |
| | (25.4 | ) | | 23.0 |
| | 10.5 |
| | (1.9 | ) | | 6.2 |
|
| Equity in net income (loss) of subsidiaries | 15.5 |
| | 69.3 |
| | — |
| | 1.9 |
| | (86.7 | ) | | — |
|
| Net income (loss) | 11.2 |
| | 15.5 |
| | 69.1 |
| | 59.2 |
| | (92.0 | ) | | 63.0 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | 51.8 |
| | — |
| | 51.8 |
|
| Net income (loss) attributable to AK Steel Holding Corporation | 11.2 |
| | 15.5 |
| | 69.1 |
| | 7.4 |
| | (92.0 | ) | | 11.2 |
|
| Other comprehensive income (loss) | 32.0 |
| | 32.0 |
| | — |
| | (0.6 | ) | | (31.4 | ) | | 32.0 |
|
| Comprehensive income (loss) attributable to AK Steel Holding Corporation | $ | 43.2 |
| | $ | 47.5 |
| | $ | 69.1 |
| | $ | 6.8 |
| | $ | (123.4 | ) | | $ | 43.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Comprehensive Income (Loss) |
| Year Ended December 31, 2018 |
| |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net sales | $ | — |
| | $ | 6,244.7 |
| | $ | 320.8 |
| | $ | 752.8 |
| | $ | (500.1 | ) | | $ | 6,818.2 |
|
| Cost of products sold (exclusive of items shown separately below) | — |
| | 5,519.8 |
| | 221.4 |
| | 620.9 |
| | (451.1 | ) | | 5,911.0 |
|
| Selling and administrative expenses | 3.5 |
| | 320.0 |
| | 14.5 |
| | 34.2 |
| | (49.6 | ) | | 322.6 |
|
| Depreciation | — |
| | 171.5 |
| | 8.0 |
| | 40.7 |
| | — |
| | 220.2 |
|
| Total operating costs | 3.5 |
| | 6,011.3 |
| | 243.9 |
| | 695.8 |
| | (500.7 | ) | | 6,453.8 |
|
| Operating profit (loss) | (3.5 | ) | | 233.4 |
| | 76.9 |
| | 57.0 |
| | 0.6 |
| | 364.4 |
|
| Interest expense | — |
| | 145.9 |
| | — |
| | 5.7 |
| | — |
| | 151.6 |
|
| Pension and OPEB (income) expense | — |
| | (19.2 | ) | | — |
| | — |
| | — |
| | (19.2 | ) |
| Other (income) expense | — |
| | 8.7 |
| | (16.4 | ) | | (2.9 | ) | | 4.7 |
| | (5.9 | ) |
| Income (loss) before income taxes | (3.5 | ) | | 98.0 |
| | 93.3 |
| | 54.2 |
| | (4.1 | ) | | 237.9 |
|
| Income tax expense (benefit) | — |
| | (26.5 | ) | | 23.3 |
| | (2.0 | ) | | (1.0 | ) | | (6.2 | ) |
| Equity in net income (loss) of subsidiaries | 189.5 |
| | 65.0 |
| | — |
| | 0.7 |
| | (255.2 | ) | | — |
|
| Net income (loss) | 186.0 |
| | 189.5 |
| | 70.0 |
| | 56.9 |
| | (258.3 | ) | | 244.1 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | 58.1 |
| | — |
| | 58.1 |
|
| Net income (loss) attributable to AK Steel Holding Corporation | 186.0 |
| | 189.5 |
| | 70.0 |
| | (1.2 | ) | | (258.3 | ) | | 186.0 |
|
| Other comprehensive income (loss) | (50.6 | ) | | (50.6 | ) | | — |
| | (1.7 | ) | | 52.3 |
| | (50.6 | ) |
| Comprehensive income (loss) attributable to AK Steel Holding Corporation | $ | 135.4 |
| | $ | 138.9 |
| | $ | 70.0 |
| | $ | (2.9 | ) | | $ | (206.0 | ) | | $ | 135.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Comprehensive Income (Loss) |
| Year Ended December 31, 2017 |
| |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net sales | $ | — |
| | $ | 5,755.1 |
| | $ | 285.9 |
| | $ | 496.3 |
| | $ | (456.8 | ) | | $ | 6,080.5 |
|
| Cost of products sold (exclusive of items shown separately below) | — |
| | 5,082.0 |
| | 197.7 |
| | 387.2 |
| | (413.8 | ) | | 5,253.1 |
|
| Selling and administrative expenses | 3.7 |
| | 285.5 |
| | 13.5 |
| | 26.9 |
| | (44.7 | ) | | 284.9 |
|
| Depreciation | — |
| | 189.3 |
| | 7.5 |
| | 29.2 |
| | — |
| | 226.0 |
|
| Asset impairment charge | — |
| | 75.6 |
| | — |
| | — |
| | — |
| | 75.6 |
|
| Credit for adjustment of liability for transportation costs | — |
| | (19.3 | ) | | — |
| | — |
| | — |
| | (19.3 | ) |
| Total operating costs | 3.7 |
| | 5,613.1 |
| | 218.7 |
| | 443.3 |
| | (458.5 | ) | | 5,820.3 |
|
| Operating profit (loss) | (3.7 | ) | | 142.0 |
| | 67.2 |
| | 53.0 |
| | 1.7 |
| | 260.2 |
|
| Interest expense | — |
| | 150.3 |
| | — |
| | 2.0 |
| | — |
| | 152.3 |
|
| Pension and OPEB (income) expense | — |
| | (71.9 | ) | | — |
| | — |
| | — |
| | (71.9 | ) |
| Other (income) expense | — |
| | 30.1 |
| | (11.4 | ) | | (5.4 | ) | | 3.8 |
| | 17.1 |
|
| Income (loss) before income taxes | (3.7 | ) | | 33.5 |
| | 78.6 |
| | 56.4 |
| | (2.1 | ) | | 162.7 |
|
| Income tax expense (benefit) | — |
| | (29.4 | ) | | 29.9 |
| | (1.8 | ) | | (0.9 | ) | | (2.2 | ) |
| Equity in net income (loss) of subsidiaries | 107.2 |
| | 44.3 |
| | — |
| | — |
| | (151.5 | ) | | — |
|
| Net income (loss) | 103.5 |
| | 107.2 |
| | 48.7 |
| | 58.2 |
| | (152.7 | ) | | 164.9 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | 61.4 |
| | — |
| | 61.4 |
|
| Net income (loss) attributable to AK Steel Holding Corporation | 103.5 |
| | 107.2 |
| | 48.7 |
| | (3.2 | ) | | (152.7 | ) | | 103.5 |
|
| Other comprehensive income (loss) | 38.5 |
| | 38.5 |
| | — |
| | 4.7 |
| | (43.2 | ) | | 38.5 |
|
| Comprehensive income (loss) attributable to AK Steel Holding Corporation | $ | 142.0 |
| | $ | 145.7 |
| | $ | 48.7 |
| | $ | 1.5 |
| | $ | (195.9 | ) | | $ | 142.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Balance Sheets |
| December 31, 2019 |
| | | | | | | | | | | | |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| ASSETS | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 11.8 |
| | $ | 0.1 |
| | $ | 19.1 |
| | $ | — |
| | $ | 31.0 |
|
| Accounts receivable, net | — |
| | 437.4 |
| | 25.7 |
| | 124.1 |
| | (9.3 | ) | | 577.9 |
|
| Inventory | — |
| | 1,214.9 |
| | 56.0 |
| | 85.5 |
| | (10.2 | ) | | 1,346.2 |
|
| Other current assets | — |
| | 59.1 |
| | 0.2 |
| | 5.9 |
| | — |
| | 65.2 |
|
| Total current assets | — |
| | 1,723.2 |
| | 82.0 |
| | 234.6 |
| | (19.5 | ) | | 2,020.3 |
|
| Property, plant and equipment | — |
| | 6,234.4 |
| | 199.5 |
| | 735.0 |
| | — |
| | 7,168.9 |
|
| Accumulated depreciation | — |
| | (4,917.2 | ) | | (111.3 | ) | | (208.5 | ) | | — |
| | (5,237.0 | ) |
| Property, plant and equipment, net | — |
| | 1,317.2 |
| | 88.2 |
| | 526.5 |
| | — |
| | 1,931.9 |
|
| Other non-current assets: | | | | | | | | | | | |
| Investment in subsidiaries | (3,108.8 | ) | | 2,023.7 |
| | — |
| | 72.0 |
| | 1,013.1 |
| | — |
|
| Inter-company accounts | 3,260.3 |
| | — |
| | 1,734.6 |
| | — |
| | (4,994.9 | ) | | — |
|
| Goodwill and intangible assets | — |
| | — |
| | 32.8 |
| | 260.6 |
| | — |
| | 293.4 |
|
| Other non-current assets | — |
| | 248.6 |
| | 2.8 |
| | 93.6 |
| | — |
| | 345.0 |
|
| TOTAL ASSETS | $ | 151.5 |
| | $ | 5,312.7 |
| | $ | 1,940.4 |
| | $ | 1,187.3 |
| | $ | (4,001.3 | ) | | $ | 4,590.6 |
|
| LIABILITIES AND EQUITY (DEFICIT) | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 614.2 |
| | $ | 25.4 |
| | $ | 70.1 |
| | $ | (4.6 | ) | | $ | 705.1 |
|
| Accrued liabilities | — |
| | 276.0 |
| | 8.8 |
| | 29.6 |
| | — |
| | 314.4 |
|
| Current portion of pension and other postretirement benefit obligations | — |
| | 40.7 |
| | — |
| | 0.3 |
| | — |
| | 41.0 |
|
| Total current liabilities | — |
| | 930.9 |
| | 34.2 |
| | 100.0 |
| | (4.6 | ) | | 1,060.5 |
|
| Non-current liabilities: | | | | | | | | | | | |
| Long-term debt | — |
| | 1,968.8 |
| | — |
| | — |
| | — |
| | 1,968.8 |
|
| Pension and other postretirement benefit obligations | — |
| | 714.8 |
| | — |
| | 3.0 |
| | — |
| | 717.8 |
|
| Inter-company accounts | — |
| | 4,513.6 |
| | — |
| | 558.6 |
| | (5,072.2 | ) | | — |
|
| Other non-current liabilities | — |
| | 293.4 |
| | 2.1 |
| | 70.7 |
| | — |
| | 366.2 |
|
| TOTAL LIABILITIES | — |
| | 8,421.5 |
| | 36.3 |
| | 732.3 |
| | (5,076.8 | ) | | 4,113.3 |
|
| Equity (deficit): | | | | | | | | | | | |
| Total stockholders’ equity (deficit) | 151.5 |
| | (3,108.8 | ) | | 1,904.1 |
| | 129.2 |
| | 1,075.5 |
| | 151.5 |
|
| Noncontrolling interests | — |
| | — |
| | — |
| | 325.8 |
| | — |
| | 325.8 |
|
| TOTAL EQUITY (DEFICIT) | 151.5 |
| | (3,108.8 | ) | | 1,904.1 |
| | 455.0 |
| | 1,075.5 |
| | 477.3 |
|
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 151.5 |
| | $ | 5,312.7 |
| | $ | 1,940.4 |
| | $ | 1,187.3 |
| | $ | (4,001.3 | ) | | $ | 4,590.6 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Balance Sheets |
| December 31, 2018 |
| | | | | | | | | | | | |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| ASSETS | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 22.1 |
| | $ | 8.2 |
| | $ | 18.3 |
| | $ | — |
| | $ | 48.6 |
|
| Accounts receivable, net | — |
| | 515.4 |
| | 34.0 |
| | 95.3 |
| | (8.9 | ) | | 635.8 |
|
| Inventory | — |
| | 1,299.6 |
| | 53.9 |
| | 75.6 |
| | (9.2 | ) | | 1,419.9 |
|
| Other current assets | — |
| | 85.5 |
| | 0.1 |
| | 11.4 |
| | — |
| | 97.0 |
|
| Total current assets | — |
| | 1,922.6 |
| | 96.2 |
| | 200.6 |
| | (18.1 | ) | | 2,201.3 |
|
| Property, plant and equipment | — |
| | 6,111.1 |
| | 189.7 |
| | 668.4 |
| | — |
| | 6,969.2 |
|
| Accumulated depreciation | — |
| | (4,785.5 | ) | | (102.8 | ) | | (169.3 | ) | | — |
| | (5,057.6 | ) |
| Property, plant and equipment, net | — |
| | 1,325.6 |
| | 86.9 |
| | 499.1 |
| | — |
| | 1,911.6 |
|
| Other non-current assets: | | | | | | | | | | | |
| Investment in subsidiaries | (3,017.4 | ) | | 1,931.1 |
| | — |
| | 68.2 |
| | 1,018.1 |
| | — |
|
| Inter-company accounts | 3,117.3 |
| | — |
| | 1,630.7 |
| | — |
| | (4,748.0 | ) | | — |
|
| Goodwill and intangible assets | — |
| | — |
| | 32.9 |
| | 266.0 |
| | — |
| | 298.9 |
|
| Other non-current assets | — |
| | 54.3 |
| | — |
| | 49.6 |
| | — |
| | 103.9 |
|
| TOTAL ASSETS | $ | 99.9 |
| | $ | 5,233.6 |
| | $ | 1,846.7 |
| | $ | 1,083.5 |
| | $ | (3,748.0 | ) | | $ | 4,515.7 |
|
| LIABILITIES AND EQUITY (DEFICIT) | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 722.5 |
| | $ | 26.2 |
| | $ | 55.5 |
| | $ | (3.2 | ) | | $ | 801.0 |
|
| Accrued liabilities | — |
| | 251.5 |
| | 8.7 |
| | 28.7 |
| | — |
| | 288.9 |
|
| Current portion of pension and other postretirement benefit obligations | — |
| | 38.4 |
| | — |
| | 0.3 |
| | — |
| | 38.7 |
|
| Total current liabilities | — |
| | 1,012.4 |
| | 34.9 |
| | 84.5 |
| | (3.2 | ) | | 1,128.6 |
|
| Non-current liabilities: | | | | | | | | | | | |
| Long-term debt | — |
| | 1,993.7 |
| | — |
| | — |
| | — |
| | 1,993.7 |
|
| Pension and other postretirement benefit obligations | — |
| | 827.0 |
| | — |
| | 2.9 |
| | — |
| | 829.9 |
|
| Inter-company accounts | — |
| | 4,312.3 |
| | — |
| | 511.2 |
| | (4,823.5 | ) | | — |
|
| Other non-current liabilities | — |
| | 105.6 |
| | 0.2 |
| | 28.2 |
| | — |
| | 134.0 |
|
| TOTAL LIABILITIES | — |
| | 8,251.0 |
| | 35.1 |
| | 626.8 |
| | (4,826.7 | ) | | 4,086.2 |
|
| Equity (deficit): | | | | | | | | | | | |
| Total stockholders’ equity (deficit) | 99.9 |
| | (3,017.4 | ) | | 1,811.6 |
| | 127.1 |
| | 1,078.7 |
| | 99.9 |
|
| Noncontrolling interests | — |
| | — |
| | — |
| | 329.6 |
| | — |
| | 329.6 |
|
| TOTAL EQUITY (DEFICIT) | 99.9 |
| | (3,017.4 | ) | | 1,811.6 |
| | 456.7 |
| | 1,078.7 |
| | 429.5 |
|
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 99.9 |
| | $ | 5,233.6 |
| | $ | 1,846.7 |
| | $ | 1,083.5 |
| | $ | (3,748.0 | ) | | $ | 4,515.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Cash Flows |
| Year Ended December 31, 2019 |
| | | | | | | | | | | | |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net cash flows from operating activities | $ | (3.2 | ) | | $ | 114.6 |
| | $ | 76.2 |
| | $ | 83.6 |
| | $ | (5.3 | ) | | $ | 265.9 |
|
| Cash flows from investing activities: | | | | | | | | | | | |
| Capital investments | — |
| | (133.5 | ) | | (3.8 | ) | | (57.5 | ) | | — |
| | (194.8 | ) |
| Other investing items, net | — |
| | 6.6 |
| | — |
| | — |
| | — |
| | 6.6 |
|
| Net cash flows from investing activities | — |
| | (126.9 | ) | | (3.8 | ) | | (57.5 | ) | | — |
| | (188.2 | ) |
| Cash flows from financing activities: | | | | | | | | | | | |
| Net borrowings (repayments) under credit facility | — |
| | 115.0 |
| | — |
| | — |
| | — |
| | 115.0 |
|
| Redemption of long-term debt | — |
| | (152.3 | ) | | — |
| | — |
| | — |
| | (152.3 | ) |
| Inter-company activity | 3.9 |
| | 41.0 |
| | (80.5 | ) | | 30.3 |
| | 5.3 |
| | — |
|
| SunCoke Middletown distributions to noncontrolling interest owners | — |
| | — |
| | — |
| | (55.6 | ) | | — |
| | (55.6 | ) |
| Other financing items, net | (0.7 | ) | | (1.7 | ) | | — |
| | — |
| | — |
| | (2.4 | ) |
| Net cash flows from financing activities | 3.2 |
| | 2.0 |
| | (80.5 | ) | | (25.3 | ) | | 5.3 |
| | (95.3 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | (10.3 | ) | | (8.1 | ) | | 0.8 |
| | — |
| | (17.6 | ) |
| Cash and equivalents, beginning of year | — |
| | 22.1 |
| | 8.2 |
| | 18.3 |
| | — |
| | 48.6 |
|
| Cash and equivalents, end of year | $ | — |
| | $ | 11.8 |
| | $ | 0.1 |
| | $ | 19.1 |
| | $ | — |
| | $ | 31.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Cash Flows |
| Year Ended December 31, 2018 |
| | | | | | | | | | | | |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net cash flows from operating activities | $ | (2.3 | ) | | $ | 209.7 |
| | $ | 83.1 |
| | $ | 83.8 |
| | $ | (9.6 | ) | | $ | 364.7 |
|
| Cash flows from investing activities: | | | | | | | | | | | |
| Capital investments | — |
| | (122.9 | ) | | (8.1 | ) | | (21.0 | ) | | — |
| | (152.0 | ) |
| Other investing items, net | — |
| | 0.8 |
| | — |
| | (0.7 | ) | | — |
| | 0.1 |
|
| Net cash flows from investing activities | — |
| | (122.1 | ) | | (8.1 | ) | | (21.7 | ) | | — |
| | (151.9 | ) |
| Cash flows from financing activities: | | | | | | | | | | | |
| Net borrowings (repayments) under credit facility | — |
| | (115.0 | ) | | — |
| | — |
| | — |
| | (115.0 | ) |
| Redemption of long-term debt | — |
| | (12.6 | ) | | — |
| | — |
| | — |
| | (12.6 | ) |
| Inter-company activity | 2.5 |
| | 48.3 |
| | (74.0 | ) | | 13.6 |
| | 9.6 |
| | — |
|
| SunCoke Middletown distributions to noncontrolling interest owners | — |
| | — |
| | — |
| | (73.7 | ) | | — |
| | (73.7 | ) |
| Other financing items, net | (0.2 | ) | | (0.7 | ) | | — |
| | — |
| | — |
| | (0.9 | ) |
| Net cash flows from financing activities | 2.3 |
| | (80.0 | ) | | (74.0 | ) | | (60.1 | ) | | 9.6 |
| | (202.2 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | 7.6 |
| | 1.0 |
| | 2.0 |
| | — |
| | 10.6 |
|
| Cash and equivalents, beginning of year | — |
| | 14.5 |
| | 7.2 |
| | 16.3 |
| | — |
| | 38.0 |
|
| Cash and equivalents, end of year | $ | — |
| | $ | 22.1 |
| | $ | 8.2 |
| | $ | 18.3 |
| | $ | — |
| | $ | 48.6 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Cash Flows |
| Year Ended December 31, 2017 |
| | | | | | | | | | | | |
| | AK Holding | | AK Steel | | Guarantor Subsidiaries | | Other Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Company |
| Net cash flows from operating activities | $ | (2.5 | ) | | $ | 67.3 |
| | $ | 73.3 |
| | $ | 61.7 |
| | $ | (1.0 | ) | | $ | 198.8 |
|
| Cash flows from investing activities: | | | | | | | | | | | |
| Capital investments | — |
| | (131.8 | ) | | (5.6 | ) | | (15.1 | ) | | — |
| | (152.5 | ) |
| Investment in acquired business, net of cash acquired | — |
| | (360.4 | ) | | — |
| | — |
| | — |
| | (360.4 | ) |
| Other investing items, net | — |
| | 4.0 |
| | — |
| | 0.2 |
| | — |
| | 4.2 |
|
| Net cash flows from investing activities | — |
| | (488.2 | ) | | (5.6 | ) | | (14.9 | ) | | — |
| | (508.7 | ) |
| Cash flows from financing activities: | | | | | | | | | | | |
| Net borrowings (repayments) under credit facility | — |
| | 450.0 |
| | — |
| | — |
| | — |
| | 450.0 |
|
| Proceeds from issuance of long-term debt | — |
| | 680.0 |
| | — |
| | — |
| | — |
| | 680.0 |
|
| Redemption of long-term debt | — |
| | (848.4 | ) | | — |
| | — |
| | — |
| | (848.4 | ) |
| Debt issuance costs | — |
| | (25.3 | ) | | — |
| | — |
| | — |
| | (25.3 | ) |
| Inter-company activity | 5.0 |
| | 31.2 |
| | (64.9 | ) | | 27.7 |
| | 1.0 |
| | — |
|
| SunCoke Middletown distributions to noncontrolling interest owners | — |
| | — |
| | — |
| | (79.1 | ) | | — |
| | (79.1 | ) |
| Other financing items, net | (2.5 | ) | | — |
| | — |
| | — |
| | — |
| | (2.5 | ) |
| Net cash flows from financing activities | 2.5 |
| | 287.5 |
| | (64.9 | ) | | (51.4 | ) | | 1.0 |
| | 174.7 |
|
| Net increase (decrease) in cash and cash equivalents | — |
| | (133.4 | ) | | 2.8 |
| | (4.6 | ) | | — |
| | (135.2 | ) |
| Cash and equivalents, beginning of year | — |
| | 147.9 |
| | 4.4 |
| | 20.9 |
| | — |
| | 173.2 |
|
| Cash and equivalents, end of year | $ | — |
| | $ | 14.5 |
| | $ | 7.2 |
| | $ | 16.3 |
| | $ | — |
| | $ | 38.0 |
|
| |
Item 9.III. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Consideration of Stockholder “Say-on-Pay” Voting Results |
None.At our 2018 Annual Meeting of Stockholders, our stockholders agreed with the Board’s recommendation to continue our advisory, non-binding vote on NEO compensation on an annual basis. At that same Annual Meeting in May 2018, approximately 95% of the shares cast were in favor of the resolution to approve the compensation of the NEOs as disclosed in our 2018 Proxy Statement. During the Committee’s meeting in January 2019, at which it established the 2019 compensation packages for the NEOs, the Committee discussed and considered the results of the voting by stockholders on our 2018 say-on-pay proposal, as well as the feedback it received through our stockholder engagement program. On an ongoing basis, the Committee also considers the policies and recommendations on executive compensation of our largest stockholders, proxy advisory firms, and key third-party stakeholders, such as the Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers.
IV. Assessment of Compensation-Related Risk
At its January 2019 meeting, the Committee reviewed the various design elements of our compensation program to determine whether any of its aspects encourage excessive or inappropriate risk-taking. The scope of this review included aspects of executive compensation, as well as consideration of the items of our compensation policies and practices that affect all employees. The Committee’s independent compensation consultant, FW Cook, also assisted the Committee with this assessment. In general, the process used by the Committee to complete its risk evaluation was as follows:
the Committee identified the most significant risks facing us;
the Committee identified the material design elements of our compensation policies and practices with respect to all employees; and
| |
Item 9A.• | Controlsthe Committee then evaluated whether there is a relationship between any of those design elements and Procedures.any of our most significant risks, specifically considering whether any of the design elements of our compensation policies and practices encourage our employees to take excessive or inappropriate risks that are reasonably likely to have a material adverse impact on us. |
We maintainThe result of the Committee’s evaluation was a system of disclosure controlsconclusion that our compensation policies and procedurespractices do not create risks that are reasonably likely to have a material adverse effect on us. More specifically, the Committee concluded that our compensation program is designed to provideencourage employees to take actions and pursue strategies that support the best interests of our stockholders over the long run, without promoting excessive or inappropriate risk.
The design elements of our program do not include unusual or problematic compensatory components that have been linked to excessive risk-taking in the financial and other industries. Furthermore, the design elements of our compensation program that directly tie compensatory rewards to our performance include various counter-balances designed to offset potentially excessive or inappropriate risk-taking. For example, there is a balance between the fixed components of the program and the performance-based components. Similarly, the performance-based components are balanced between annual and longer-term incentives. Thus, the overall program is not too heavily weighted towards incentive compensation, in general, or short-term incentive compensation, in particular. The financial incentives are not based upon revenue. Rather, they are tied to performance metrics such as net income, EBITDA , and total shareholder return, which more closely align the interests of Management with the interests of our stockholders. The performance metrics for incentive payments are established annually (either for the then-current year or for a three-year performance period beginning with the then-current year) and reflect goals that are difficult, but not so challenging that they require performance outside of what the Committee believes is reasonable assurance that information is disclosed and accumulated and communicatedfor us or could motivate Management to managementtake actions in which we assume unreasonable levels of risk. In addition, there are caps on how much performance-based compensation may be earned in a timely fashion. An evaluationparticular performance period and the Board of Directors has adopted a policy for clawback of performance-based compensation that was paid out as a result of fraudulent or illegal conduct on the part of the effectivenessemployee who received it. The Committee also maintains an ongoing dialogue with our Management to track progress on performance-based goals in order to foresee and avoid any excessive or inappropriate risk-taking that may otherwise be driven by a desire to maximize performance-based compensation.
COMPENSATION COMMITTEE REPORT
The Management Development and Compensation Committee of the designCompany has reviewed and operationdiscussed the Compensation Discussion and Analysis required by Item 402(b) of our disclosure controlsRegulation S-K with Management and, procedures (as definedbased upon such review and discussion, the Management Development and Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.Annual Report on Form 10-K/A.
THE MANAGEMENT DEVELOPMENT
AND COMPENSATION COMMITTEE
There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Ralph S. Michael, III, Chair
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are presented on the following pages.Sheri H. Edison
Gregory B. Kenny
Arlene M. Yocum
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGIn August 2015, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the SEC adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer (“PEO”). Our PEO is Mr. Newport, our CEO. The stated purpose of the disclosure is to provide a measure of the equitability of pay within the organization. We believe our compensation philosophy and process yield an equitable result and the Management Development and Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated underOur calculation of the Securities Exchange Actpay ratio may be different than the pay ratio of 1934. Those rules define internal control over financial reportingother public companies as a process designedresult of different methodologies used to provide reasonable assurance regardingdetermine the reliability of financial reporting andpay ratios. As a result, we would discourage the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that:
| |
a) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets; |
| |
b) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and |
| |
c) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, we used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework).ratios reported above as a basis for any comparison between companies.
Based on our assessment and those criteria, we have determined that, as of December 31, 2019, our internal control over financial reporting was effective.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which appears on the following page.
|
| | | |
Dated: | February 20, 2020 | | /s/ Roger K. Newport |
| | | Roger K. Newport |
| | | Chief Executive Officer and Director |
| | | |
| | | |
Dated: | February 20, 2020 | | /s/ Christopher J. Ross |
| | | Christopher J. Ross |
| | | Vice President, Treasurer and Interim Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMSUMMARY COMPENSATION TABLE
ToThe table below summarizes the Stockholders and Board of Directors of AK Steel Holding Corporation
Opinion on Internal Control over Financial Reporting
We have audited AK Steel Holding Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issuedtotal compensation paid to or earned by each Named Executive Officer (“NEO”) for the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AK Steel Holding Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, 2018, and the related notes and our report dated February 20, 2020 expressed an unqualified opinion thereon.2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary ($) | | Stock Awards ($)(1) | | Option Awards ($)(2) | | Non- Equity Incentive Plan Compen- sation ($)(3) | | Change in Pension Value and Nonqualified Deferred Compen- sation Earnings ($)(4) | | All Other Compen- sation ($)(5) | | SEC Total ($) | | Total Not Including Change in Pension Value ($)(6) |
Roger K. Newport Chief Executive Officer | | 2019 | | $ | 950,000 |
| | $ | 1,681,212 |
| | $ | 631,072 |
| | $ | 1,856,538 |
| | $ | 11,297,486 |
| | $ | 75,633 |
| | $ | 16,491,941 |
| | $ | 5,194,455 |
|
| | | 2018 | | 950,000 |
| | 2,337,269 |
| | 1,010,944 |
| | 4,204,637 |
| | 3,729,492 |
| | 86,932 |
| | 12,319,274 |
| | 8,589,782 |
|
| | | 2017 | | 950,000 |
| | 1,973,013 |
| | 950,139 |
| | 2,255,131 |
| | 7,746,598 |
| | 65,212 |
| | 13,940,093 |
| | 6,193,495 |
|
| | | | | | | | | | | | | | | | | | | |
Kirk W. Reich President and Chief Operating Officer | | 2019 | | 750,000 |
| | 706,834 |
| | 217,087 |
| | 1,172,550 |
| | 6,940,807 |
| | 53,639 |
| | 9,840,917 |
| | 2,900,110 |
|
| | | 2018 | | 750,000 |
| | 920,455 |
| | 347,871 |
| | 2,714,336 |
| | 1,808,660 |
| | 63,203 |
| | 6,604,525 |
| | 4,795,865 |
|
| | | 2017 | | 750,000 |
| | 716,756 |
| | 345,157 |
| | 1,496,292 |
| | 5,071,598 |
| | 47,873 |
| | 8,427,676 |
| | 3,356,078 |
|
| | | | | | | | | | | | | | | | | | | |
Christopher J. Ross (7) Vice President, Treasurer and Interim Chief Financial Officer | | 2019 | | 241,667 |
| | 107,272 |
| | 32,562 |
| | 168,590 |
| | 436,140 |
| | 29,876 |
| | 1,016,107 |
| | 579,967 |
|
| | | | | | | | | | | | | | | | | | | |
Joseph C. Alter Vice President, General Counsel and Corporate Secretary | | 2019 | | 400,000 |
| | 234,153 |
| | 69,468 |
| | 416,381 |
| | 1,069,064 |
| | 31,675 |
| | 2,220,741 |
| | 1,151,677 |
|
| | | 2018 | | 400,000 |
| | 301,787 |
| | 111,290 |
| | 974,168 |
| | 19,811 |
| | 43,979 |
| | 1,851,035 |
| | 1,831,224 |
|
| | | 2017 | | 375,000 |
| | 199,964 |
| | 96,819 |
| | 564,610 |
| | 704,250 |
| | 32,330 |
| | 1,972,973 |
| | 1,268,723 |
|
| | | | | | | | | | | | | | | | | | | |
Scott M. Lauschke Vice President, Sales and Customer Service | | 2019 | | 335,000 |
| | 167,153 |
| | 46,674 |
| | 332,493 |
| | 1,301,983 |
| | 41,572 |
| | 2,224,875 |
| | 922,892 |
|
| | | 2018 | | 325,000 |
| | 199,466 |
| | 69,646 |
| | 764,538 |
| | 0 | | 43,382 |
| | 1,402,032 |
| | 1,402,032 |
|
| | | 2017 | | 325,000 |
| | 141,531 |
| | 67,828 |
| | 467,545 |
| | 1,278,434 |
| | 41,473 |
| | 2,321,811 |
| | 1,043,377 |
|
| | | | | | | | | | | | | | | | | | | |
Jaime Vasquez (8) Former Vice President, Finance and Chief Financial Officer | | 2019 | | 435,417 |
| | 435,048 |
| | 151,960 |
| | 118,992 |
| | 0 |
| | 1,827,200 |
| | 2,968,617 |
| | 2,968,617 |
|
| | | 2018 | | 475,000 |
| | 590,543 |
| | 243,402 |
| | 1,328,733 |
| | 840,419 |
| | 41,764 |
| | 3,519,861 |
| | 2,679,442 |
|
| | | 2017 | | 450,000 |
| | 451,215 |
| | 217,159 |
| | 746,965 |
| | 2,151,138 |
| | 37,429 |
| | 4,053,906 |
| | 1,902,768 |
|
Basis for Opinion________________________
| |
| (1) | The amounts in this column reflect the aggregate grant date fair value of awards computed in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC Topic 718”), for awards of restricted stock, performance shares and the equity portion of the Long-Term Plan pursuant to the Stock Plan. The amounts for 2018 and 2019 include the grant date fair value for the equity portion of the award under the Long-Term Plan for the amount of the award denominated in stock (50% in 2019 and 30% in 2018). A discussion of the assumptions used to calculate the value of the stock awards reported in this column is located in Note 13 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K filed on February 20, 2020. The following table sets forth the values for the performance share awards and the equity portion of the Long-Term Plan, as of their respective grant dates, assuming the performance conditions of such awards are achieved at their maximum potential levels: |
|
| | | | | | | | | | | | | | | |
| | | Maximum Award Value (a) |
| | | Long-Term Plan Shares | | Performance Shares |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2017 |
| Roger K. Newport | | 796,500 |
| | 719,550 |
| | 959,681 |
| | 1,512,998 |
| | 1,483,718 |
|
| Kirk W. Reich | | 531,000 |
| | 479,700 |
| | 330,128 |
| | 520,433 |
| | 538,211 |
|
| Christopher J. Ross | | 82,140 |
| | (b) |
| | 49,520 |
| | (b) |
| | (b) |
|
| Joseph C. Alter | | 185,850 |
| | 167,700 |
| | 105,641 |
| | 166,635 |
| | 150,311 |
|
| Scott M. Lauschke | | 144,533 |
| | 126,750 |
| | 70,976 |
| | 103,845 |
| | 106,673 |
|
| Jaime Vasquez | | 252,225 |
| | 228,150 |
| | 231,092 |
| | 364,665 |
| | 339,413 |
|
| |
| (a) | The maximum award values for Long-Term Plan share grants in this table are calculated by multiplying the grant date fair value of Long-Term Plan share grants from the Grants of Plan-Based Awards Table by 2. The maximum award values for |
performance share grants in this table are calculated by multiplying the grant date fair value of performance share grants from the Grants of Plan-Based Awards Table by 1.5.
| |
| (b) | Since Mr. Ross was not an NEO during 2017 and 2018, award values are not included for those years. |
| |
| (2) | The amounts in this column reflect the aggregate grant date fair value computed in accordance with ASC Topic 718 for awards of stock options pursuant to the Stock Plan. A discussion of the assumptions used to calculate the value of the stock options reported in this column is located in Note 13 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K filed on February 20, 2020. |
| |
| (3) | The table below summarizes the actual payments to each NEO under our Annual Plan and Long-Term Plan for the years ended December 31, 2019, 2018, and 2017, respectively. |
|
| | | | | | | | | | | | | | |
| Non-Equity Incentive Plan Compensation |
| Name | | Year | | Annual Incentive Plan ($) | | Long-Term Plan ($) | | Total ($) |
| Roger K. Newport | | 2019 | | $ | 406,363 |
| | $ | 1,450,175 |
| | $ | 1,856,538 |
|
| | | 2018 | | 1,971,149 |
| | 2,233,488 |
| | 4,204,637 |
|
| | | 2017 | | 1,591,879 |
| | 663,252 |
| | 2,255,131 |
|
| | | | | | | | | |
| Kirk W. Reich | | 2019 | | 256,650 |
| | 915,900 |
| | 1,172,550 |
|
| | | 2018 | | 1,244,936 |
| | 1,469,400 |
| | 2,714,336 |
|
| | | 2017 | | 1,005,398 |
| | 490,894 |
| | 1,496,292 |
|
| | | | | | | | | |
| Christopher J. Ross | | 2019 | | 45,493 |
| | 123,097 |
| | 168,590 |
|
| | | | | | | | | |
| Joseph C. Alter | | 2019 | | 95,816 |
| | 320,565 |
| | 416,381 |
|
| | | 2018 | | 464,776 |
| | 509,392 |
| | 974,168 |
|
| | | 2017 | | 351,889 |
| | 212,721 |
| | 564,610 |
|
| | | | | | | | | |
| Scott M. Lauschke | | 2019 | | 74,514 |
| | 257,979 |
| | 332,493 |
|
| | | 2018 | | 350,657 |
| | 413,881 |
| | 764,538 |
|
| | | 2017 | | 283,187 |
| | 184,358 |
| | 467,545 |
|
| | | | | | | | | |
| Jaime Vasquez | | 2019 | | 118,992 |
| | 0 |
| | 118,992 |
|
| | | 2018 | | 630,768 |
| | 697,965 |
| | 1,328,733 |
|
| | | 2017 | | 452,429 |
| | 294,536 |
| | 746,965 |
|
| |
| (4) | The amounts reported in this column represent the change in pension value for each NEO. In any case where an NEO’s change in pension value was negative, the value is reported as $0 in the Summary Compensation Table in accordance with the applicable disclosure regulations. The actual negative change in pension value in 2019 for Mr. Vasquez was $(4,467,268) as a result of the forfeiture of his unvested pension benefits upon his retirement from the Company. The actual negative change in pension value in 2018 for Mr. Lauschke was $(89,094). No NEO received preferential or above-market earnings on deferred compensation. The change in pension value for each NEO principally was the result of three factors: (i) a change in the ordinary course of the qualified earnings of each NEO used to calculate pension values; (ii) a change in the calculation of the interest component as a result of each NEO’s change in age relative to the NEO’s assumed retirement date; and (iii) a change in the discount rates used to determine the lump sum pension benefit as of the NEO’s assumed future payout date following his retirement and then to calculate the present value of the lump sum pension benefit to the reporting date. Another factor that impacts the actuarial increase in pension value is the change in the value of the benefits to which an NEO is entitled under a qualified plan. See footnotes to Pension Benefits Table, below, for further explanation of the methodology used to calculate the present value of accumulated pension benefits for each NEO. |
| |
| (5) | The compensation shown in this column includes matching contributions made by us to a qualified defined contribution plan and a nonqualified supplemental thrift plan, imputed income on company-sponsored life insurance, contributions to health savings accounts, and perquisites. A summary of the amounts included in this column is provided in the table below. Perquisites included in this column and provided to the NEOs include: reimbursement for tax planning services, financial planning services, mandatory physical evaluations, and our contributions to health savings accounts. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary of All Other Compensation |
| Name | | Year | | Company Fixed Contribution to the Qualified Plan | | Company Match to the Qualified Plan | | Company Variable Match to the Qualified Plan | | Company
Match
to the
Non-
Qualified
Plan | | Company Variable Match to the Non-Qualified Plan | | Imputed
Income
on Life
Insurance | | HSA Company Contribution | | Perquisites(a) | | Severance | | Total |
| Roger K. Newport | | 2019 | | $ | 8,400 |
| | $ | 7,000 |
| | $ | — |
| | $ | 16,750 |
| | $ | 20,189 |
| | $ | 9,546 |
| | $ | 1,500 |
| | $ | 12,248 |
| | $ | — |
| | $ | 75,633 |
|
| | | 2018 | | 8,250 |
| | 5,917 |
| | 6,892 |
| | 16,874 |
| | 21,375 |
| | 5,106 |
| | 3,675 |
| | 18,843 |
| | — |
| | 86,932 |
|
| | | 2017 | | 8,100 |
| | 6,750 |
| | 6,913 |
| | 16,292 |
| | 9,312 |
| | 5,114 |
| | 4,350 |
| | 8,381 |
| | — |
| | 65,212 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kirk W. Reich | | 2019 | | 8,400 |
| | 7,000 |
| | 3,150 |
| | 11,750 |
| | 12,787 |
| | 4,002 |
| | 1,000 |
| | 5,550 |
| | — |
| | 53,639 |
|
| | | 2018 | | 8,250 |
| | 6,875 |
| | 12,500 |
| | 11,878 |
| | 10,938 |
| | 4,002 |
| | 3,175 |
| | 5,585 |
| | — |
| | 63,203 |
|
| | | 2017 | | 8,100 |
| | 6,750 |
| | 10,275 |
| | 12,000 |
| | 937 |
| | 2,611 |
| | 1,375 |
| | 5,825 |
| | — |
| | 47,873 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Christopher J. Ross | | 2019 | | 7,250 |
| | 6,042 |
| | 6,750 |
| | — |
| | — |
| | 1,196 |
| | 1,500 |
| | 7,138 |
| | — |
| | 29,876 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Joseph C. Alter | | 2019 | | 8,400 |
| | 7,000 |
| | 8,250 |
| | 3,000 |
| | 1,500 |
| | 900 |
| | 1,500 |
| | 1,125 |
| | — |
| | 31,675 |
|
| | | 2018 | | 8,250 |
| | 6,875 |
| | 12,500 |
| | 3,124 |
| | 1,125 |
| | 843 |
| | 3,675 |
| | 7,587 |
| | — |
| | 43,979 |
|
| | | 2017 | | 8,100 |
| | 6,750 |
| | 9,263 |
| | 2,625 |
| | 112 |
| | 843 |
| | 1,500 |
| | 3,137 |
| | — |
| | 32,330 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Scott M. Lauschke | | 2019 | | 8,400 |
| | 7,000 |
| | 8,712 |
| | 1,375 |
| | — |
| | 1,707 |
| | 1,500 |
| | 12,878 |
| | — |
| | 41,572 |
|
| | | 2018 | | 8,250 |
| | 6,875 |
| | 10,156 |
| | 1,250 |
| | — |
| | 1,080 |
| | 3,675 |
| | 12,096 |
| | — |
| | 43,382 |
|
| | | 2017 | | 8,100 |
| | 6,750 |
| | 9,313 |
| | 1,375 |
| | — |
| | 1,085 |
| | 4,350 |
| | 10,500 |
| | — |
| | 41,473 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Jaime Vasquez | | 2019 | | 8,700 |
| | 7,000 |
| | 4,156 |
| | 3,885 |
| | 5,937 |
| | 4,257 |
| | 1500 |
| | 1,300 |
| | 1,790,465 |
| | 1,827,200 |
|
| | | 2018 | | 5,938 |
| | 4,948 |
| | 4,156 |
| | 5,002 |
| | 10,688 |
| | 4,644 |
| | 3675 |
| | 2,713 |
| | — |
| | 41,764 |
|
| | | 2017 | | 7,875 |
| | 6,188 |
| | 3,937 |
| | 5,061 |
| | 5,624 |
| | 4,394 |
| | 4350 |
| | — |
| | — |
| | 37,429 |
|
| |
| (a) | The limited perquisites provided are described in the “Limited Perquisites and Other Personal Benefits” section of the CD&A. |
| |
| (6) | This column shows total compensation without pension value changes. The amounts reported in this column are not a substitute for the amounts reported in the “SEC Total” column. The amounts reported in this column are solely intended to facilitate a stockholder’s understanding of how changes in pension value impact the total compensation reported in this Summary Compensation Table in any given year. The amounts reported in this column are calculated by subtracting the value reported in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column from the amounts reported in the “SEC Total” column. The calculation of the pension values and the causes of the year-over-year changes in pension value are explained in footnote 4, above. |
| |
| (7) | Mr. Ross was named Interim Chief Financial Officer upon the retirement of Mr. Vasquez as Chief Financial Officer on November 30, 2019. |
| |
| (8) | Mr. Vasquez retired from the Company on November 30, 2019. All Other Compensation includes all payments made in connection with Mr. Vasquez’s departure from the Company, as disclosed in the Potential Payments Upon Termination or Change-of-Control Table. |
GRANTS OF PLAN-BASED AWARDS TABLE
The Company’s management is responsible for maintaining effective internal control over financial reportingtable below summarizes equity and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respectnon-equity grants to the Company in accordance withNEOs during the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.fiscal year ended December 31, 2019:
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | | | Estimated Future Payments Under Non-Equity Incentive Plan Awards | | Estimated Future Payouts Under Equity Incentive Plan Awards (3) | | All Other Stock Awards: Number of Shares or Units (#)(4) | | All Other Option Awards: Number of Securities Underlying Options (#)(5)(6) | | Exercise Or Base Price of Option Awards ($/Sh)(6) | | Grant Date Fair Value of Awards ($)(7) |
Grant Date | | Threshold ($) | | Target ($) | | Maximum ($) | | Threshold (#) | | Target (#) | | Maximum (#) | |
| Roger K. Newport | | (1 | ) | | $ | — |
| | $ | 1,187,500 |
| | $ | 2,375,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | — |
| | $ | — |
|
| | | (2 | ) | | 300,000 |
| | 600,000 |
| | 1,200,000 |
| | 75,000 |
| | 150,000 |
| | 300,000 |
| | — |
| | — |
| | — |
| | 398,250 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 103,526 |
| | 207,051 |
| | 310,577 |
| | — |
| | — |
| | — |
| | 639,788 |
|
| | | 1/23/2019 |
| | | | | | | | | | | | | | 242,250 |
| | | | | | 643,174 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 407,143 |
| | 2.655 |
| | 631,072 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kirk W. Reich | | (1 | ) | | — |
| | 750,000 |
| | 1,500,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | (2 | ) | | 200,000 |
| | 400,000 |
| | 800,000 |
| | 50,000 |
| | 100,000 |
| | 200,000 |
| | — |
| | — |
| | — |
| | 265,500 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 35,613 |
| | 71,225 |
| | 106,838 |
| | — |
| | — |
| | — |
| | 220,085 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83,333 |
| | — |
| | — |
| | 221,249 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 140,056 |
| | 2.655 |
| | 217,087 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Christopher J. Ross | | (1 | ) | | — |
| | 132,917 |
| | 265,834 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | (2 | ) | | 30,938 |
| | 61,875 |
| | 123,750 |
| | 7,735 |
| | 15,469 |
| | 30,938 |
| | — |
| | — |
| | — |
| | 41,070 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 5,342 |
| | 10,684 |
| | 16,026 |
| | — |
| | — |
| | — |
| | 33,014 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,500 |
| | — |
| | — |
| | 33,188 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21,008 |
| | 2.655 |
| | 32,562 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Joseph C. Alter | | (1 | ) | | — |
| | 280,000 |
| | 560,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | (2 | ) | | 70,000 |
| | 140,000 |
| | 280,000 |
| | 17,500 |
| | 35,000 |
| | 70,000 |
| | — |
| | — |
| | — |
| | 92,925 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 11,396 |
| | 22,792 |
| | 34,188 |
| | — |
| | — |
| | — |
| | 70,427 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 26,667 |
| | — |
| | — |
| | 70,801 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,818 |
| | 2.655 |
| | 69,468 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Scott M. Lauschke | | (1 | ) | | — |
| | 217,750 |
| | 435,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | (2 | ) | | 54,438 |
| | 108,875 |
| | 217,750 |
| | 13,610 |
| | 27,219 |
| | 54,438 |
| | — |
| | — |
| | — |
| | 72,266 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 7,657 |
| | 15,313 |
| | 22,970 |
| | — |
| | — |
| | — |
| | 47,317 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,917 |
| | — |
| | — |
| | 47,570 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30,112 |
| | 2.655 |
| | 46,674 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Jaime Vasquez | | (1 | ) | | — |
| | 348,334 |
| | 696,668 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | (2 | ) | | 95,000 |
| | 190,000 |
| | 380,000 |
| | 23,750 |
| | 47,500 |
| | 95,000 |
| | — |
| | — |
| | — |
| | 126,113 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | 24,929 |
| | 49,858 |
| | 74,787 |
| | — |
| | — |
| | — |
| | 154,061 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 58,333 |
| | — |
| | — |
| | 154,874 |
|
| | | 1/23/2019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 98,039 |
| | 2.655 |
| | 151,960 |
|
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.________________________
| |
| (1) | The amounts reported in this row represent the range of potential awards under the threshold, target and maximum performance objectives established in March 2019 for the 2019 performance period under the Annual Plan, as described in the Performance-Based Compensation - Cash and Equity— Annual Incentive Awards section of the CD&A. The estimate is based on the NEO’s base pay on January 1, 2019. The amounts actually paid to each NEO for 2019 are set forth in the Summary Compensation Table. |
| |
| (2) | The amounts reported in this row represent the range of potential awards under the threshold, target and maximum performance objectives established in March 2019 for the 2019 - 2021 performance period under the Long-Term Plan, as described in the Performance-Based Compensation - Cash and Equity— Long-Term Incentive Awards section of the CD&A. The estimate is based on the NEO’s base pay on January 1, 2019. For the 2019 - 2021 performance period, the potential award is denominated 50% in AK Steel stock and 50% in cash. The amounts actually paid to each NEO for 2019 for the three-year performance period ending in 2019 are set forth in the Summary Compensation Table. |
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
February 20, 2020
| |
| (3) | The amounts reported in these columns represent the range of the potential number of performance shares and the equity portion of awards made under the Long-Term Plan representing a right to receive shares of our common stock that may be issued to each NEO for the 2019 - 2021 performance period under the Stock Plan. Terms applicable to the award grants reported in this column are described in the Performance-Based Compensation - Cash and Equity— Equity Awards section of the CD&A. |
| |
Item 9B.(4) | The amounts reported in this column represent the number of shares of restricted stock granted under the Stock Plan to each NEO in 2019. The restrictions on the transfer of the restricted stock grants reported in this column made on January 23, 2019 will lapse in equal installments on one-third of the shares granted on each of the first three anniversaries of the grant. Other Information.terms applicable to the restricted stock grants reported in this column are described in the Performance-Based Compensation - Cash and Equity— Equity Awards section of the CD&A. |
None.
| |
| (5) | The amounts reported in this column represent the number of nonqualified stock options granted to each NEO under the Stock Plan in 2019. Each option represents a right to purchase a share of our common stock at a price established in an option award agreement at the time of the grant. The stock options reported in this column will vest in equal installments of one-third of the options granted on each of the first three anniversaries of the grant. Other terms applicable to the stock options granted under the Stock Plan are described in the Performance-Based Compensation - Cash and Equity— Equity Awards section of the CD&A. |
| |
| (6) | The exercise price for options granted under the Stock Plan equals the Market Price (as defined below) for our common stock on the grant date. If there were no sales of our common stock on the grant date, then the exercise price equals the Market Price for our common stock on the nearest preceding trading day on which there were sales of our common stock. Under the Stock Incentive Plan, the market price was the average of the high and low selling price of our common stock on the grant date. After the adoption of the 2019 Omnibus Supplemental Incentive Plan in May 2019, the market price for grants thereafter became the closing price of our common stock on the grant date (under the terms of the applicable plan, the “Market Price”). |
| |
| (7) | The grant date fair value of restricted stock awards is calculated by multiplying the total number of shares granted times the fair market value of those shares. The fair market value of restricted stock is the Market Price of a share of our common stock on the grant date. The grant date fair value of stock options and performance shares are valued in accordance with ASC Topic 718. A discussion of the assumptions used to calculate the grant date value of stock options and performance shares reported in this column is located in Note 13 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K filed on February 20, 2020. The grant date fair value of the equity portion of the awards made under the Long-Term Plan is calculated by multiplying the total number of shares granted times the fair market value of those shares. The fair market value of the Long-Term Plan shares is the Market Price of a share of our common stock on the grant date. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The table below provides information as to all outstanding stock option, restricted stock, performance share and the equity portion of Long-Term Plan awards held by the NEOs as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Option Award Grant Date | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Option (#) | | Option Exercise Prices ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#)(4) | | Market Value of Shares or Units of Stock That Have Not Vested ($)(5) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(6) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(5) |
| Roger K. Newport | | 1/20/2010 | | 4,125 |
| | — |
| | $ | 22.965 |
| | 1/20/2020 | | 264,740 |
| | $ | 870,995 |
| | 556,151 |
| | $ | 1,829,737 |
|
| | | 1/19/2011 | | 8,700 |
| | — |
| | 14.570 |
| | 1/19/2021 | | | | | | | | |
| | | 1/18/2012 | | 14,100 |
| | — |
| | 9.110 |
| | 1/18/2022 | | | | | | | | |
| | | 1/23/2013 | | 16,900 |
| | — |
| | 4.590 |
| | 1/23/2023 | | | | | | | | |
| | | 1/22/2014 | | 20,000 |
| | — |
| | 6.720 |
| | 1/22/2024 | | | | | | | | |
| | | 5/29/2014 | | 36,500 |
| | — |
| | 6.205 |
| | 5/29/2024 | | | | | | | | |
| | | 1/21/2015 | | 31,700 |
| | — |
| | 3.975 |
| | 1/21/2025 | | | | | | | | |
| | | 5/28/2015 | | 47,900 |
| | — |
| | 5.150 |
| | 5/28/2025 | | | | | | | | |
| | | 1/20/2016 | | 199,300 |
| | — |
| | 1.740 |
| | 1/20/2026 | | | | | | | | |
| | | 1/18/2017 | | 115,800 |
| | 57,900 |
| (1 | ) | 9.780 |
| | 1/18/2027 | | | | | | | | |
| | | 1/17/2018 | | 93,866 |
| | 187,734 |
| (2 | ) | 6.555 |
| | 1/17/2028 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 407,143 |
| (3 | ) | 2.655 |
| | 1/23/2029 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Kirk W. Reich | | 1/20/2010 | | 3,625 |
| | — |
| | 22.965 |
| | 1/20/2020 | | 91,332 |
| | 300,482 |
| | 263,525 |
| | 866,997 |
|
| | | 1/19/2011 | | 8,300 |
| | — |
| | 14.570 |
| | 1/19/2021 | | | | | | | | |
| | | 1/18/2012 | | 14,100 |
| | — |
| | 9.110 |
| | 1/18/2022 | | | | | | | | |
| | | 1/23/2013 | | 14,100 |
| | — |
| | 4.590 |
| | 1/23/2023 | | | | | | | | |
| | | 1/22/2014 | | 16,000 |
| | — |
| | 6.720 |
| | 1/22/2024 | | | | | | | | |
| | | 5/29/2014 | | 29,000 |
| | — |
| | 6.205 |
| | 5/29/2024 | | | | | | | | |
| | | 1/21/2015 | | 25,300 |
| | — |
| | 3.975 |
| | 1/21/2025 | | | | | | | | |
| | | 5/28/2015 | | 39,900 |
| | — |
| | 5.150 |
| | 5/28/2025 | | | | | | | | |
| | | 1/20/2016 | | 60,500 |
| | — |
| | 1.740 |
| | 1/20/2026 | | | | | | | | |
| | | 1/18/2017 | | 42,066 |
| | 21,034 |
| (1 | ) | 9.780 |
| | 1/18/2027 | | | | | | | | |
| | | 1/17/2018 | | 32,300 |
| | 64,600 |
| (2 | ) | 6.555 |
| | 1/17/2028 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 140,056 |
| (3 | ) | 2.655 |
| | 1/23/2029 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Christopher J. Ross | | 3/18/2010 | | 2,000 |
| | — |
| | 22.940 |
| | 3/18/2020 | | 18,767 |
| | 61,743 |
| | 40,253 |
| | 132,432 |
|
| | | 1/19/2011 | | 3,106 |
| | — |
| | 14.570 |
| | 1/19/2021 | | | | | | | | |
| | | 1/18/2012 | | 5,500 |
| | — |
| | 9.110 |
| | 1/18/2022 | | | | | | | | |
| | | 1/23/2013 | | 5,500 |
| | — |
| | 4.590 |
| | 1/23/2023 | | | | | | | | |
| | | 1/22/2014 | | 4,100 |
| | — |
| | 6.720 |
| | 1/22/2024 | | | | | | | | |
| | | 1/21/2015 | | 9,900 |
| | — |
| | 3.975 |
| | 1/21/2025 | | | | | | | | |
| | | 1/20/2016 | | 8,200 |
| | — |
| | 1.740 |
| | 1/20/2026 | | | | | | | | |
| | | 1/18/2017 | | 4,666 |
| | 2,334 |
| (1 | ) | 9.780 |
| | 1/18/2027 | | | | | | | | |
| | | 1/17/2018 | | 4,833 |
| | 9,667 |
| (2 | ) | 6.555 |
| | 1/17/2028 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 21,008 |
| (3 | ) | 2.655 |
| | 1/23/2029 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Joseph C. Alter | | 1/23/2013 | | 4,100 |
| | — |
| | 4.590 |
| | 1/23/2023 | | 40,934 |
| | 134,673 |
| | 88,792 |
| | 292,126 |
|
| | | 1/22/2014 | | 5,500 |
| | — |
| | 6.720 |
| | 1/22/2024 | | | | | | | | |
| | | 5/29/2014 | | 14,500 |
| | — |
| | 6.205 |
| | 5/29/2024 | | | | | | | | |
| | | 1/21/2015 | | 15,600 |
| | — |
| | 3.975 |
| | 1/21/2025 | | | | | | | | |
| | | 1/20/2016 | | 21,200 |
| | — |
| | 1.740 |
| | 1/20/2026 | | | | | | | | |
| | | 1/18/2017 | | 11,800 |
| | 5,900 |
| (1 | ) | 9.780 |
| | 1/18/2027 | | | | | | | | |
| | | 1/17/2018 | | 10,333 |
| | 20,667 |
| (2 | ) | 6.555 |
| | 1/17/2028 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 44,818 |
| (3 | ) | 2.655 |
| | 1/23/2029 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Scott M. Lauschke | | 2/23/2015 | | 10,000 |
| | 0 |
| | 4.555 |
| | 2/23/2025 | | 27,117 |
| | 89,215 |
| | 64,132 |
| | 210,995 |
|
| | | 1/20/2016 | | 18,200 |
| | — |
| | 1.740 |
| | 1/20/2026 | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Option Award Grant Date | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Option (#) | | Option Exercise Prices ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#)(4) | | Market Value of Shares or Units of Stock That Have Not Vested ($)(5) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(6) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(5) |
| | | 1/18/2017 | | 8,266 |
| | 4,134 |
| (1 | ) | 9.780 |
| | 1/18/2027 | | | | | | | | |
| | | 1/17/2018 | | 6,466 |
| | 12,934 |
| (2 | ) | 6.555 |
| | 1/17/2028 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 30,112 |
| (3 | ) | 2.655 |
| | 1/23/2029 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Jaime Vasquez(7) | | 10/15/2014 | | 2,760 |
| | — |
| | 5.415 |
| | 11/30/2022 | | 89,734 |
| | 295,225 |
| | 150,958 |
| | 496,652 |
|
| | | 1/21/2015 | | 9,900 |
| | — |
| | 3.975 |
| | 11/30/2022 | | | | | | | | |
| | | 1/18/2017 | | 26,466 |
| | 13,234 |
| (1 | ) | 9.780 |
| | 11/30/2022 | | | | | | | | |
| | | 1/17/2018 | | 22,600 |
| | 45,200 |
| (2 | ) | 6.555 |
| | 11/30/2022 | | | | | | | | |
| | | 1/23/2019 | | — |
| | 98,039 |
| (3 | ) | 2.655 |
| | 11/30/2022 | | | | | | | | |
_____________
| |
Item 10.(1) | Directors, Executive OfficersThese options became fully exercisable on January 18, 2020. |
| |
| (2) | These options became, or will become, exercisable as follows: one-half on January 17, 2020, one-half on January 17, 2021. |
| |
| (3) | These options became, or will become, exercisable as follows: one-third on January 23, 2020, one-third on January 23, 2021 and Corporate Governance.one-third on January 23, 2022. |
| |
| (4) | The restricted stock awards that had not vested as of December 31, 2019 have vesting dates as follows: |
Information with respect to our Executive Officers is set forth in Part I of this Annual Report pursuant to General Instruction G of Form 10-K. The information required to be furnished pursuant to this item with respect to our Directors will be set forth under the caption “Election of Directors” in our proxy statement (the “2020 Proxy Statement”) to be furnished to stockholders in connection with the solicitation of proxies by our Board of Directors for use at the 2020 Annual Meeting of Stockholders, and such information under that caption is incorporated herein by reference.
The information required to be furnished pursuant to this item with respect to compliance with Section 16(a) of the Exchange Act, if any, will be set forth under the caption “Delinquent Section 16(a) Reports” in the 2020 Proxy Statement and is incorporated herein by reference.
The information required to be furnished pursuant to this item with respect to the Audit Committee and the Audit Committee financial expert will be set forth under the caption “Committees of the Board of Directors” in the 2020 Proxy Statement and is incorporated herein by reference.
Information required to be furnished pursuant to this item with respect to any material changes to the process by which security holders may recommend nominees to the Board of Directors will be set forth under the caption “Stockholder Proposals for the 2021 Annual Meeting and Nominations of Directors” in the 2020 Proxy Statement and is incorporated herein by reference.
We have adopted a Code of Ethics for Principal Officers covering our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other persons performing a similar function; a Code of Conduct for Directors, Officers and employees; and Corporate Governance Guidelines. These documents, along with charters of our Audit, Corporate Sustainability, Finance, Management Development and Compensation, and Nominating and Governance Committees, are posted on our website at www.aksteel.com. Any required disclosure of amendments to or waivers of the provisions of the Code of Ethics for Principal Officers or Code of Conduct also will be posted on our website.
|
| | | | | | | | | | | | | | | | | | |
| | | Mr. Newport | | Mr. Reich | | Mr. Ross | | Mr. Alter | | Mr. Lauschke | | Mr. Vasquez |
| 1/17/2020 | | 35,232 |
| | 11,630 |
| | 2,533 |
| | 5,433 |
| | 3,400 |
| | — |
|
| 1/18/2020 | | 21,918 |
| | 8,363 |
| | 1,200 |
| | 3,400 |
| | 2,400 |
| | — |
|
| 1/23/2020 | | 57,453 |
| | 19,902 |
| | 4,166 |
| | 8,889 |
| | 5,972 |
| | — |
|
| 1/17/2021 | | 35,233 |
| | 11,631 |
| | 2,534 |
| | 5,434 |
| | 3,400 |
| | — |
|
| 1/23/2021 | | 57,452 |
| | 19,903 |
| | 4,167 |
| | 8,889 |
| | 5,972 |
| | — |
|
| 1/23/2022 | | 57,452 |
| | 19,903 |
| | 4,167 |
| | 8,889 |
| | 5,973 |
| | — |
|
| Total: | | 264,740 |
| | 91,332 |
| | 18,767 |
| | 40,934 |
| | 27,117 |
| | — |
|
| |
Item 11.(5) | Executive Compensation.The dollar value shown in the column is calculated by multiplying the closing market price of our common stock as of December 31, 2019 ($3.29 per share) by the number of shares set forth in the preceding column. |
| |
| (6) | The performance period end dates and vesting dates for unearned performance shares are as follows: |
|
| | | | | | | | | | | | | | | | | | |
| | | Mr. Newport | | Mr. Reich |
| | Mr. Ross | | Mr. Alter | | Mr. Lauschke |
| | Mr. Vasquez |
| 12/31/2020 | | 125,300 |
| | 43,100 |
| | 6,500 |
| | 13,800 |
| | 8,600 |
| | — |
|
| 12/31/2021 | | 207,051 |
| | 71,225 |
| | 10,684 |
| | 22,792 |
| | 15,313 |
| | — |
|
| Total: | | 332,351 |
| | 114,325 |
| | 17,184 |
| | 36,592 |
| | 23,913 |
| | — |
|
The performance period end dates and vesting dates for unearned shares under the Long-Term Plan are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Mr. Newport | | Mr. Reich |
| | Mr. Ross | | Mr. Alter | | Mr. Lauschke |
| | Mr. Vasquez |
| 12/31/2020 | | 73,800 |
| | 49,200 |
| | 7,600 |
| | 17,200 |
| | 13,000 |
| | — |
|
| 12/31/2021 | | 150,000 |
| | 100,000 |
| | 15,469 |
| | 35,000 |
| | 27,219 |
| | — |
|
| Total: | | 223,800 |
| | 149,200 |
| | 23,069 |
| | 52,200 |
| | 40,219 |
| | — |
|
(7) Mr. Vasquez retired from the Company on November 30, 2019.
OPTION EXERCISES AND STOCK VESTED TABLE
The table below provides information related to each stock grant that vested during the fiscal year ended December 31, 2019:
|
| | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares Acquired on Exercise (#) | | Value Realized on Exercise ($)(1) | | Number of Shares Acquired on Vesting (#)(2) | | Value Realized on Vesting ($)(2)(3) |
| Roger K. Newport | | — |
| | $ | — |
| | 130,366 |
| | $ | 733,663 |
|
| Kirk W. Reich | | — |
| | — |
| | 43,599 |
| | 100,932 |
|
| Christopher J. Ross | | — |
| | — |
| | 6,533 |
| | 17,877 |
|
| Joseph C. Alter | | — |
| | — |
| | 13,899 |
| | 38,032 |
|
| Scott M. Lauschke | | — |
| | — |
| | 10,133 |
| | 27,747 |
|
| Jaime Vasquez(4) | | 34,900 |
| | $ | 61,773 |
| | 27,866 |
| | 76,216 |
|
________________________
| |
| (1) | Value realized on exercise is calculated for stock options by multiplying (i) the number of shares acquired upon exercise by (ii) the Market Price of our common stock on the exercise date and (iii) subtracting the exercise price of the stock option from the product of (i) and (ii). |
| |
| (2) | The amounts in these columns reflect the gross number of shares acquired upon vesting and the corresponding gross value realized, based upon such gross number of shares. The table below summarizes the net number of shares acquired on vesting and the corresponding net value realized by each NEO from this net number of shares. The net number of shares acquired on vesting has been calculated by subtracting (i) the actual number of shares that were withheld for tax purposes from (ii) the gross number of shares. The net value realized has been calculated by multiplying (a) the net number of shares acquired upon vesting by (b) for restricted stock, the Market Price for our common stock on the respective vesting dates for each award of restricted stock that vested during the fiscal year ended December 31, 2019. The NEOs did not earn any shares from the performance share grants for the 2017 - 2019 performance period. |
|
| | | | | | | |
| | | Stock Awards |
| Name | | Net Number of Shares Acquired on Vesting (#) | | Net Value Realized on Vesting ($) |
| Roger K. Newport | | 88,979 |
| | $ | 500,686 |
|
| Kirk W. Reich | | 29,887 |
| | 69,188 |
|
| Christopher J. Ross | | 4,366 |
| | 11,947 |
|
| Joseph C. Alter | | 9,289 |
| | 25,418 |
|
| Scott M. Lauschke | | 6,772 |
| | 18,543 |
|
| Jaime Vasquez | | 18,627 |
| | 50,947 |
|
| |
| (3) | Value realized on vesting is calculated by multiplying (i) the number of shares acquired upon vesting of restricted stock by (ii) the Market Price for our common stock on the vesting date. |
| |
| (4) | Mr. Vasquez retired from the Company on November 30, 2019. |
PENSION BENEFITS TABLE
The information requiredtable below provides the benefit plan name, the number of years of creditable service and the present value of accumulated benefits as of December 31, 2019, and the payments, if any, made to each NEO during the last fiscal year:
|
| | | | | | | | | | | | |
| Name | | Plan Name | | Number of Years of Credited Service (#) | | Present Value of Accumulated Benefits ($)(4) | | Payments During Last Fiscal Year ($) |
| Roger K. Newport | | AK Steel Corporation Non-Contributory Pension Plan(1) | | 34.78 |
| | $ | 1,277,636 |
| | — |
|
| | | AK Steel Corporation Executive Minimum and Supplemental Retirement Plan | | (2 | ) | | 27,076,624 |
| | — |
|
| Kirk W. Reich | | AK Steel Corporation Non-Contributory Pension Plan(1) | | 30.99 |
| | 866,299 |
| | — |
|
| | | AK Steel Corporation Executive Minimum and Supplemental Retirement Plan | | (2 | ) | | 16,976,930 |
| | — |
|
| Christopher J. Ross | | AK Steel Corporation Non-Contributory Pension Plan(1) | | 21.76 |
| | 4,016 |
| | — |
|
| | | AK Steel Corporation Executive Retirement Income Plan | | (3 | ) | | 3,087,693 |
| | — |
|
| Joseph C. Alter | | AK Steel Corporation Executive Retirement Income Plan | | (3 | ) | | 2,866,469 |
| | — |
|
| Scott M. Lauschke | | AK Steel Corporation Executive Retirement Income Plan | | (3 | ) | | 4,207,446 |
| | — |
|
| Jaime Vasquez (5) | | AK Steel Corporation Executive Retirement Income Plan | | (3 | ) | | — |
| | — |
|
______________
| |
| (1) | Our full-time, non-represented salaried employees, including three of our NEOs, Messrs. Newport, Reich and Ross, who were hired prior to January 31, 2009, are eligible for retirement benefits under a qualified benefit plan known as the Non-Contributory Pension Plan (the “NCPP”). Retirement benefits are calculated under the NCPP using one of two formulas: (i) a cash balance formula (the “Cash Balance Formula”) or (ii) a final average pay formula (the “Final Average Pay Formula”). Eligibility for coverage under a particular formula typically is determined by the date on which a participant commenced employment with us. The NCPP was closed to new entrants and benefit accruals were frozen as of January 31, 2009. All of the participants in the NCPP are vested. The compensation taken into account in determining benefits under either formula is subject to the compensation limits imposed by the Internal Revenue Code. |
| |
| Under the Cash Balance Formula, a participant’s account is credited monthly with (i) a service credit based on the participant’s years of service and eligible compensation for that month (service credits ceased after January 31, 2009, when we froze NCPP benefits), and (ii) an interest credit based on the participant’s account balance as of the beginning of the year and an interest rate as determined and defined in the Cash Balance Formula. For purposes of the Cash Balance Formula, eligible compensation generally includes the participant’s base salary and incentive compensation. NCPP benefits for Mr. Ross are determined under the Cash Balance Formula. |
| |
| NCPP benefits for Messrs. Newport and Reich are determined under the Final Average Pay Formula. Under the Final Average Pay Formula, a participant’s retirement benefits are calculated on the basis of his or her (i) number of years of credited service and (ii) average earnings which include base pay, annual bonuses, long-term incentives, and overtime during the 60 consecutive months out of the last 120 months of service that yield the highest annual compensation, all determined as of January 31, 2009. Mr. Newport has obtained retirement eligibility and his annual benefit accrued to January 31, 2009, is $60,002 to age 62 and $72,540 after age 62. Mr. Reich has obtained retirement eligibility and his annual benefit accrued to January 31, 2009, is $39,915 to age 62 and $47,158 after age 62. |
| |
| (2) | Credited service is not a component of the calculation of benefits under the Executive Minimum and Supplemental Retirement Plan (the “SERP”). It is, however, a component of vesting. The SERP uses a form of “graded vesting” under which a participant vests in 50% of his or her accrued benefit after a minimum requirement of five years of service as an Officer and as an employee, and vests in a further 10% of such benefit for each additional year of service as an employee in addition to such five years of service, up to 100% vesting after ten years of total service. Under these criteria, Messrs. Newport and Reich are 100% vested. A discussion of the SERP is included in the “Pension and Other Retirement Benefits” section of the CD&A. As discussed in the CD&A, at its March 2014 meeting the Management Development and Compensation Committee locked participation in the SERP to then-existing participants and replaced it for Officers elected thereafter with the ERIP, which provides a reduced level of benefits (which itself was in turn replaced with a new supplemental thrift plan that is expected to provide a lower level of benefits than the ERIP). |
| |
| (3) | As is the case with the SERP, under the ERIP credited service is a component of vesting but is not a component of the calculation of benefits. The ERIP uses a form of “graded vesting” under which a participant vests in 50% of his or her accrued benefit after a minimum requirement of five years of service as an Executive Officer and as an employee, and vests in an additional 10% of such benefit for each year of service as an employee in addition to such five years of service, up to 100% vesting after ten years of total service. Messrs. Lauschke and Ross and are not yet vested in the ERIP. Pursuant to the graded vesting schedule described above and given his total company service, Mr. Alter became 100% vested in his benefit in 2019. Pursuant to the graded vesting schedule described above and given his total company service, Mr. Lauschke will become 50% vested in his benefit upon five years of service as an Executive Officer (in 2020), and vest an additional 10% of such benefit for each year of service thereafter, achieving 100% vesting upon ten years of total service in 2025. Mr. Ross will become 100% vested in his benefit in 2021). As discussed in the CD&A, at its January 2019 meeting the Management Development and Compensation Committee locked participation in the ERIP to then-existing participants and replaced it for Executive Officers elected thereafter with a new supplemental thrift plan that is expected to provide a lower level of benefits than the ERIP. |
| |
| (4) | The calculation of the present value of accumulated benefits begins with a calculation of the lump sum that would be payable upon the later of age 60 or the full vesting date. This lump sum has been calculated using a discount rate of 0.92% for lump sums paid in 2020, and ranging from 0.52% to 0.80% from 2021 to 2025 and the years after. The lump sums were calculated using the IRS 2021 Unisex Mortality Table. The lump sum determined on these assumptions was then discounted back to December 31, 2019, at a discount rate of 3.53%. The valuation method and all material assumptions applied in quantifying the present value of the current accrued benefit can be found in Note 8 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K. |
| |
| (5) | Mr. Vasquez retired from the Company on November 30, 2019 without meeting his vesting requirement. |
NONQUALIFIED DEFERRED COMPENSATION TABLE
Our Supplemental Thrift Plan (the “STP”) is a nonqualified retirement plan that provides for matching contributions by us with respect to base salary that are not permitted to be furnished pursuanttaken into account under our Thrift Plan due to this itemlimits on earnings imposed by the Internal Revenue Code. We also have an Executive Deferred Compensation Plan, though none of the NEOs participate in that plan. The table below provides information regarding the contributions, aggregate earnings and the total account balance in the STP for each NEO as of December 31, 2019. The STP and the Executive Deferred Compensation Plan are described in more detail in the “Performance-Based Compensation - Cash and Equity—Pension and Other Retirement Benefits section of the CD&A.
|
| | | | | | | | | | | | | | | | | |
| Name | | Plan | | Executive Contributions in Last Fiscal Year ($) | | Registrant Contributions In Last Fiscal Year ($) | | Aggregate Earnings in Last Fiscal Year ($)(1) | | Aggregate Balance in Last Fiscal Year End ($) |
| Roger K. Newport | | STP | | — |
| | $ | 36,939 |
| | $ | 2,989 |
| | $ | 154,026 |
|
| Kirk W. Reich | | STP | | — |
| | 24,537 |
| | 1,739 |
| | 92,588 |
|
| Christopher J. Ross | | STP | | — |
| | — |
| | — |
| | — |
|
| Joseph C. Alter | | STP | | — |
| | 4,500 |
| | 282 |
| | 16,324 |
|
| Scott M. Lauschke | | STP | | — |
| | 1,375 |
| | 105 |
| | 5,871 |
|
| Jaime Vasquez | | STP | | — |
| | 9,822 |
| | 813 |
| | 42,830 |
|
________________________
| |
| (1) | For the STP, the amount shown in this column is calculated based upon assumed earnings on each NEO’s account balance using an investment option within the company-sponsored Thrift Plan known as the Fixed Income Fund. |
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-OF-CONTROL
The potential payments and benefits provided to an NEO upon his termination from, or a change-of-control of, AK Steel will vary depending upon the circumstances and the bases for the payments and benefits. The various bases for payments and benefits and circumstances that will impact the determination of post-termination or change-of-control payments and benefits are described below.
Bases for Determination of Payments upon Termination or Change-Of-Control
We have entered into severance and change-of-control agreements with each of our NEOs that provide post-termination and/or change-of-control benefits. The benefits provided under each of these agreements and the material terms of each, including the material conditions and obligations applicable to the receipt of payments and benefits under the agreements, are described in the “Post-Termination Benefits” section of the CD&A. In addition, the termination of an NEO’s employment and/or a change-of-control may trigger payments or benefits under our various compensation plans, each of which is also described in the CD&A.
Circumstances Impacting the Determination of Payments upon Termination or Change-Of-Control
There are various scenarios under which payments upon termination of employment or change-of-control are made. For purposes of the tables that follow, these scenarios are assumed to be as follows:
Normal Retirement
This scenario assumes that the NEO has terminated his employment with us as of December 31, 2019, and receives the normal retirement benefits to which he is entitled, if any, under the terms of the NCPP. The payments and benefits listed in the table below with respect to “Normal Retirement” represent payments and benefits beyond those to which the NEO is entitled under the NCPP. Payments to the NEOs under the NCPP that have vested as of December 31, 2019 are set forth above in the Pension Benefits Table. Messrs. Alter, Lauschke, and Ross were either not eligible to retire under the caption “Executive Compensation”terms of the NCPP as of December 31, 2019, or are not participants in the NCPP, and thus the “Normal Retirement” scenario is not applicable to them.
Involuntary Termination without Cause (No Change-of-Control)
This scenario assumes that we have involuntarily terminated the employment of the NEO without cause as of December 31, 2019. It also assumes that we have not experienced a change-of-control event.
Disability
This scenario assumes that the NEO became permanently and totally disabled, as provided under our long-term disability plan, as of December 31, 2019. Messrs. Newport and Reich were retirement eligible as of December 31, 2019, and would have been entitled to the respective benefits provided under the “Normal Retirement” scenario. As such, because Messrs. Newport and Reich would not have received any incremental value in the event of their disability as of December 31, 2019, beyond what is reflected in the “Normal Retirement” scenario, this “Disability” scenario is inapplicable to them because they would receive no incremental benefit relative to what they already are entitled to by virtue of being retirement eligible.
Death
This scenario assumes that the NEO died on December 31, 2019, while employed by us. Messrs. Newport and Reich were retirement eligible as of December 31, 2019, and would have been entitled to the respective benefits provided under the “Normal Retirement” scenario. As such, because Messrs. Newport and Reich would not have received any incremental value in the event of their death as of December 31, 2019, beyond what is reflected in the “Normal Retirement” scenario, this scenario is inapplicable to them because they would receive no incremental benefit relative to what they already are entitled to by virtue of being retirement eligible.
Change-of-Control
This scenario assumes that we experienced a change-of-control event and that within 24 months following the change-of-control (a) we involuntarily terminated the employment of the NEO without cause, or (b) the NEO voluntarily terminated his employment with us for “good reason.”
Under the terms of the change-of-control agreements entered into between us and each of the NEOs, “good reason” includes the assignment of duties inconsistent with the NEO’s qualifications, a demotion or diminution in job responsibilities, a reduction in annual base salary, a requirement that the NEO be based anywhere other than at our principal executive offices as they existed prior to the change-of-control, our failure to pay compensation due to the NEO, our failure to continue in effect any compensation plan in which the NEO participated at the time of the change-of-control, material reduction in benefits under the SERP or ERIP, our failure to obtain the agreement of any successor corporation to assume and agree to perform the change-of-control agreements, and our failure to give proper notice or otherwise comply with the procedural requirements for involuntary termination without cause.
The table below summarizes the potential payments resulting from the various scenarios set forth above for each of the NEOs:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Event | | Roger K. Newport | | Kirk W. Reich | | Christopher J. Ross | | Joseph C. Alter | | Scott M. Lauschke | | Jaime
Vasquez (20) |
| Normal Retirement | | | | | | | | | | | | |
| Unvested Stock Options (1) | | $ | 258,536 |
| | $ | 88,936 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Unvested Stock Awards (2) | | 870,995 |
| | 300,482 |
| | — |
| | — |
| | — |
| | — |
|
| Prorated Annual Plan (3) | | 406,363 |
| | 256,650 |
| | — |
| | — |
| | — |
| | — |
|
| Long-Term Plan (4) | | 2,993,488 |
| | 1,976,067 |
| | — |
| | — |
| | — |
| | — |
|
| Prorated Performance Shares at Target (5) | | 828,259 |
| | 390,221 |
| | — |
| | — |
| | — |
| | — |
|
| Total: | | $ | 5,357,641 |
| | $ | 3,012,356 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Involuntary Termination Without Cause (No Change-of-Control) | | | | | | | | | | | | |
| Unvested Stock Options (1) | | $ | — |
| | $ | — |
| | $ | 13,340 |
| | $ | 28,459 |
| | $ | 19,121 |
| | $ | — |
|
| Annual Plan (6) | | 1,187,500 |
| | 750,000 |
| | 224,243 |
| | 375,816 |
| | 292,264 |
| | — |
|
| Long-Term Plan (4) | | — |
| | — |
| | 299,077 |
| | 686,725 |
| | 548,881 |
| | — |
|
| Health and Welfare Benefits (7) | | 47,571 |
| | 39,801 |
| | 45,119 |
| | 45,413 |
| | 48,725 |
| | — |
|
| Cash Severance (8) | | 1,425,000 |
| | 1,125,000 |
| | 487,500 |
| | 600,000 |
| | 502,500 |
| | 1,790,465 |
|
| Total: | | $ | 2,660,071 |
| | $ | 1,914,801 |
| | $ | 1,069,279 |
| | $ | 1,736,413 |
| | $ | 1,411,491 |
| | $ | 1,790,465 |
|
| Death/Disability | | | | | | | | | | | | |
| Unvested Stock Options (1) | | $ | — |
| | $ | — |
| | $ | 13,340 |
| | $ | 28,459 |
| | $ | 19,121 |
| | $ | — |
|
| Unvested Stock Awards (9) | | — |
| | — |
| | $ | 61,743 |
| | $ | 134,673 |
| | $ | 89,215 |
| | $ | — |
|
| Prorated Annual Plan (3) | | — |
| | — |
| | 45,493 |
| | 95,816 |
| | 74,514 |
| | — |
|
| Long-Term Plan (4) | | — |
| | — |
| | 299,077 |
| | 686,725 |
| | 548,881 |
| | — |
|
| Prorated Performance Shares at Target (5) | | — |
| | — |
| | 59,607 |
| | 131,372 |
| | 94,019 |
| | — |
|
| Incremental SERP (10) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Incremental ERIP (11) | | — |
| | — |
| | 1,823,494 |
| | 849,695 |
| | — |
| | — |
|
| Total: | | $ | — |
| | $ | — |
| | $ | 2,302,754 |
| | $ | 1,926,740 |
| | $ | 825,750 |
| | $ | — |
|
| Change-of-Control | | | | | | | | | | | | |
| Unvested Stock Options (12) | | $ | — |
| | $ | — |
| | $ | 13,340 |
| | $ | 28,459 |
| | $ | 19,121 |
| | $ | — |
|
| Unvested Stock Awards (12) | | — |
| | — |
| | 61,743 |
| | 134,673 |
| | 89,215 |
| | — |
|
| Annual Plan (13) | | 3,939,786 |
| | 2,488,286 |
| | 562,915 |
| | 1,024,776 |
| | 786,157 |
| | — |
|
| Prorated Performance Shares at Target (14) | | — |
| | — |
| | 59,607 |
| | 131,372 |
| | 94,019 |
| | — |
|
| Prorated Long-Term Plan at Target (15) | | 2,210,175 |
| | 1,422,567 |
| | 201,764 |
| | 497,898 |
| | 392,979 |
| | — |
|
| Incremental SERP (16) | | 7,482,260 |
| | 6,901,081 |
| | — |
| | — |
| | — |
| | — |
|
| Incremental ERIP (17) | | — |
| | — |
| | 2,454,803 |
| | 2,425,095 |
| | 5,498,724 |
| | — |
|
| Health and Welfare Benefits (18) | | 63,428 |
| | 53,068 |
| | 60,158 |
| | 60,550 |
| | 64,966 |
| | — |
|
| Cash Severance (19) | | 1,900,000 |
| | 1,500,000 |
| | 650,000 |
| | 800,000 |
| | 670,000 |
| | — |
|
| Total: | | $ | 15,595,649 |
| | $ | 12,365,002 |
| | $ | 4,064,330 |
| | $ | 5,102,823 |
| | $ | 7,615,181 |
| | $ | — |
|
________________________
| |
| (1) | Under the terms of the Stock Incentive Plan and the Omnibus Supplemental Incentive Plan (each of which is referred to as the Stock Plan, as applicable), a participant ordinarily may only exercise stock options granted under the Stock Plan while still employed by us. If, however, a participant dies, becomes disabled, retires or is involuntarily terminated without cause, the participant (or, in the case of death, his or her beneficiary) has a period of three years after such triggering event to exercise stock options granted under the Stock Plan. The amounts reported in this row represent the value as of December 31, 2019, of the unexercised stock options granted to each NEO. These amounts assume that all of the respective NEOs’ unexercised stock options as of December 31, 2019, were exercised on December 31, 2019, and were calculated based on the closing market price of our common stock ($3.29) on the last day that stock traded (December 31, 2019) during our 2019 fiscal year, less the option exercise price per share. Stock options that had an exercise price above $3.29 as of December 31, 2019, are treated as having no value for purposes of the amounts reported in this row. Messrs. Newport and Reich were retirement eligible as of December 31, 2019, and, therefore, the NEO would not have received any incremental value in the event of the NEO’s death or disability as of that date beyond what is reflected in the “Normal Retirement” scenario. |
| |
| (2) | Under the terms of the Stock Plan, restrictions remaining with respect to restricted stock held by a participant as of the date of the participant’s retirement continue to lapse and vest after retirement as provided in the applicable award agreement governing the restricted stock grant to the participant. For purposes of this row, all shares of restricted stock outstanding as of December 31, |
2019, are treated as having vested on that day. Amounts were calculated based on the closing market price of our common stock ($3.29) on the last day that stock traded (December 31, 2019) during 2019.
| |
| (3) | Under the terms of the Annual Plan, if a participant dies, becomes disabled, or retires during a performance period, the participant (or, in the case of death, his or her beneficiary) is entitled to receive a prorated incentive award for that performance period based upon the portion of his or her participation during the period. For purposes of calculating the amounts reported in this row, the effective date of retirement, disability or death was assumed to have occurred on December 31, 2019. Using this assumption, to the extent that an incentive award was earned under the Annual Plan, the NEO would be entitled to the full amount of that award and no prorated calculation would be necessary. An incentive award was earned by and paid to each NEO for the 2019 performance period. The amount of that award is also reported in the Summary Compensation Table. |
| |
| (4) | Under the terms of the Long-Term Plan that governs the long-term incentive award for the 2017 - 2019 performance period (i.e. the Long-Term Performance Plan), if a participant dies, becomes disabled, retires or is involuntarily terminated without cause during a performance period, the participant (or, in the case of death, his or her beneficiary) is entitled to receive an amount equal to twice the amount already paid or to be paid to the participant on the performance award date occurring within that calendar year, less the amount of any performance award actually paid to the participant on the performance award date. Under the terms of the Long-Term Plan that governs the long-term incentive awards for the three-year performance periods ending December 31, 2020 and December 31, 2021 (i.e., the OMIP), if a participant dies, becomes disabled, retires, or is involuntarily terminated for any reason other than for cause during a performance period, the participant (or, in the case of death, his or her beneficiary) is entitled to receive a prorated incentive award for that performance period based upon the portion of his or her participation during the period. For purposes of calculating the amounts reported in this row, it was assumed that the effective date of death, disability, retirement, or involuntary termination without cause occurred on December 31, 2019, and that we will achieve the target performance level under the 2018 - 2020 and 2019 - 2021 performance periods. Under these assumptions, the amount reported is equal to twice the amount of the performance award paid to the NEO for the 2016-2018 performance period (which amount would have been paid in 2019), less the amount of the performance award for that period that we actually paid to the NEO in February 2019 pertaining to that performance period, plus a prorated portion (two-thirds for the 2018 - 2020 performance period and one-third for the 2019 - 2021 performance period) of the target payout for both performance periods. The performance level assumptions used to calculate the amounts reported in this row were selected merely to demonstrate the potential compensation that the NEOs could earn with respect to performance shares following certain triggering events and are not intended to provide any indication regarding our future performance. |
| |
| (5) | Under the terms of the Stock Plan, if a participant dies, becomes disabled, or retires while holding performance shares, each performance share held by the participant is deemed to be earned on a prorated basis. The shares will be issued to the NEO (or, in the case of death, his or her beneficiary) at the conclusion of the applicable performance period at the same time that shares are issued to other participants whose employment did not terminate before the end of the period and will be prorated on the basis of the number of months of service by the NEO during the performance period, with the normal adjustment based upon the achievement of the performance goals during the entire performance period. For purposes of calculating the amounts reported in this row, it was assumed that the effective date of retirement, disability or death occurred on December 31, 2019, and that we will achieve the target performance level under the 2018 - 2020 and 2019 - 2021 performance periods. Under these assumptions, each NEO would be entitled to receive a prorated portion (two-thirds for the 2018-2020 performance period and one-third for the 2019 - 2021 performance period) of the target payout for both performance periods. The performance level assumptions used to calculate the amounts reported in this row were selected merely to demonstrate the potential compensation that the NEOs could earn with respect to performance shares following certain triggering events and are not intended to provide any indication regarding our future performance. |
| |
| (6) | Under the terms of the severance agreements entered into between us and each NEO, in the event an NEO’s employment is terminated without cause and the NEO executes an agreement releasing us from any liability for claims relating to the NEO’s employment with us, that NEO is entitled to receive a lump sum payment separate from and in addition to his assigned target amount under the Annual Plan for the calendar year in which his date of termination occurs. In addition, each NEO is entitled to receive on a prorated basis the award, if any, under the Annual Plan to which such NEO would have been entitled with respect to the calendar year during which the termination occurred. The target amount assigned to each NEO under the Annual Plan for 2019, based on base pay on January 1, 2019, is reported in the Grants of Plan-Based Awards Table. The payment in this chart has been calculated using each NEO’s actual base pay for the twelve months ending December 31, 2019. Assuming a termination date of December 31, 2019, each of the NEOs would have been entitled under their severance agreements to a lump sum payment equal to their respective assigned target amount under the Annual Plan for the 2019 performance period. Each NEO would also have received an additional prorated Annual Plan award, which because the termination date is assumed to be December 31, 2019, would be equivalent to the award actually made for the 2019 performance period. Absent the application of the severance agreements, an NEO would not be entitled to any payment under the Annual Plan for the performance period in which he is terminated. |
| |
| (7) | Under the terms of the severance agreements entered into between us and each NEO, in the event an NEO’s employment is terminated without cause the NEO is entitled to continue to receive certain benefits for the duration of his “severance period.” The term “severance period” is either six or eighteen months for each NEO, depending upon whether they execute releases of all claims relating to their employment in our favor. The shorter term applies if the NEO does not execute a release of all claims in our favor |
relating to his employment and the longer term applies if he does execute such a release. If the NEO executes a release of claims in our favor relating to his employment, he is entitled to receive certain employment benefits for the duration of his severance period. The employee benefits reported in this row include an executive physical, tax preparation and financial planning, life insurance and annual cost of health insurance for the applicable severance period. For purposes of this table, the severance period is assumed to be the maximum period available to each NEO.
| |
| (8) | Under the terms of the severance agreements entered into between us and each NEO, an NEO who is involuntarily terminated without cause is entitled to receive cash severance benefits in an amount equal to the NEO’s base salary for a period of six months in a single, undiscounted lump sum. If the NEO executes an agreement releasing us from any liability for claims relating to the NEO’s employment with us, the NEO is also entitled to receive an additional lump sum severance payment in an amount equal to 12 months of base salary. The amounts calculated for this row assume that the termination occurred on December 31, 2019. |
| |
| (9) | Under the terms of the Stock Plan, if a participant dies or becomes disabled, then all outstanding restrictions on his or her unvested restricted stock immediately lapse. The amounts reported in this row represent the value of the unvested restricted stock granted to each NEO under the Stock Plan assuming death or disability occurred on December 31, 2019. Amounts were calculated based on the closing market price of our common stock ($3.29) on the last day that the stock traded (December 31, 2019) during 2019. Messrs. Newport and Reich were retirement eligible as of December 31, 2019, and, therefore, the NEO would not have received any incremental value in the event of the NEO’s death or disability as of that date beyond what is reflected in the “Normal Retirement” scenario. |
| |
| (10) | The amounts reported in this row represent the incremental value of the SERP benefit calculated for each NEO other than Messrs. Alter, Lauschke and Ross, who are not participants in the SERP, assuming death or disability on December 31, 2019, in excess of the vested amount payable due to retirement as of December 31, 2019. In other words, this row excludes any amounts to which the NEO would be entitled under the terms of the SERP if he left his employment with us as of December 31, 2019, without assuming death or disability. These amounts are based on the benefits underlying the present values in the Pension Benefits Table. The SERP benefit payments include an offset in the amounts payable equal to benefits attributable to certain non-elective contributions by us to a participant’s account in a tax-qualified defined contribution plan sponsored by us. For participants younger than age 55, the death benefit was reduced actuarially to account for immediate payment as of December 31, 2019, and a 0.95% discount rate was used to calculate the lump sum present value. |
| |
| (11) | The amounts reported in this row represent the incremental value of the ERIP benefit calculated for Messrs. Alter, Lauschke and Ross, who are participants in the ERIP, assuming death or disability on December 31, 2019, in excess of the vested amount payable due to retirement as of December 31, 2019. In other words, this row excludes any amounts to which Messrs. Alter, Lauschke or Ross would be entitled under the terms of the ERIP if they voluntarily ended their employment with us as of December 31, 2019, without assuming death or disability. These amounts are based on the benefits underlying the present values in the Pension Benefits Table. The ERIP benefit payments include an offset in the amounts payable equal to benefits attributable to certain non-elective contributions by us to a participant’s account in a tax-qualified defined contribution plan sponsored by us. For participants younger than age 55, the death benefit was reduced actuarially to account for immediate payment as of December 31, 2019, and a 0.95% discount rate was used to calculate the lump sum present value. |
| |
| (12) | Under the terms of the change-of-control agreements entered into between us and each NEO, upon a triggering event and the execution of a full release of claims in our favor, the NEO is entitled immediately to (a) exercise all stock options awarded to the NEO under the Stock Plan from the effective date of the release until the earlier of the third anniversary of the date of termination or the date the option expires under its own terms, and (b) unrestricted ownership of all shares of restricted stock granted to the NEO under the Stock Plan. Under the terms of the Stock Plan, as of the effective date of our change-of-control all outstanding stock options become immediately exercisable, all restrictions on the transfer of unvested restricted stock lapse, and all performance shares are deemed earned at the target amount assigned to each award, with payment prorated based upon the number of full months of the performance period with respect to each award that has lapsed as of the effective date of the change-of-control. Messrs. Newport and Reich were retirement eligible as of December 31, 2019, and would have been entitled to the respective benefits without the occurrence of our change-of-control. As such, because Messrs. Newport and Reich would not have received any incremental value in the event of a change-of-control as of December 31, 2019, beyond what is reflected in the “Normal Retirement” scenario, no additional value is reflected in this table. |
| |
| (13) | Under the terms of the change-of-control agreements entered into between us and each NEO, upon a triggering event and the execution of a full release of claims in our favor, the NEO is entitled to receive a lump sum payment equal to (a) two times the greater of (i) the NEO’s assigned target amount under the Annual Plan for the calendar year in which the termination occurs, (ii) the amount paid to the NEO under the Annual Plan for the calendar year immediately preceding the calendar year in which the date of termination occurs, or (iii) the average of the amounts paid or payable to the NEO under the Annual Plan for each of the three calendar years immediately preceding the calendar year in which the date of termination occurs, less (b) any amounts otherwise paid or payable to the NEO under the Annual Plan with respect to the calendar year immediately preceding the calendar year in which the date of termination occurs, plus (c) the NEO’s assigned maximum amount under the Annual Plan for the year in which the date of termination occurs, prorated based upon the employment period during such year. The amounts reported in this row assume that the termination occurred on December 31, 2019. Messrs. Newport and Reich are retirement eligible at December 31, |
2019, and would be entitled to receive the actual payment earned without a change-of-control. Therefore, the values provided for Messrs. Newport and Reich represent the payment to which the NEO would be entitled under the terms of his change-of-control agreement above and beyond the amount to which the NEO would already be entitled under the Annual Plan in the event of the NEO’s retirement.
| |
| (14) | Under the terms of the Stock Plan, if a change-of-control occurs and a participant has outstanding grants of performance shares, each grant held by the participant is deemed to be earned at the target amount assigned to the participant on a prorated basis based upon the number of full months of the performance period with respect to each award that has elapsed as of the effective date of the change-of-control. The prorated payment will be made to the NEO as soon as administratively feasible following the effective date of the change-of-control. The amounts reported in this row assume that the effective date of change-of-control occurred on December 31, 2019. Messrs. Newport and Reich are retirement eligible at December 31, 2019, and would be entitled to this provision without a change-of-control. Therefore, the value is excluded from this table. |
| |
| (15) | Under the terms of the change-of-control agreements entered into between us and each NEO, upon a triggering event and the execution of a full release of claims in our favor, the NEO is entitled to receive a lump sum payment equal to the incentive payment with respect to any completed performance period under the Long-Term Plan that has not been paid as of the date of the NEO’s termination (which amount shall not be less than it would be if calculated at the NEO’s assigned target amount under the Long-Term Plan), plus a prorated amount of the incentive award with respect to any incomplete performance period calculated at the NEO’s assigned target amount under the Long-Term Plan for each such performance period. The amounts reported in this row assume that the effective date of the change-of-control occurred on December 31, 2019. |
| |
| (16) | The amounts reported in this row represent the incremental value of the SERP calculated under the change-of-control agreement for Messrs. Newport and Reich in excess of the vested amount as of December 31, 2019. In other words, this row excludes any amounts to which the NEO would be entitled if he retired on December 31, 2019, regardless of whether a change-of-control had occurred on or before that date, which amounts are based on the benefits underlying the present values in the Pension Benefits Table, adjusted to reflect commencement at the earliest possible date on or after December 31, 2019. These adjustments include a payment date of December 31, 2019, or age 55, if later, a reduction in benefits to reflect commencement prior to age 60, and a 0.95% discount rate used to calculate the lump sum present value. Under the SERP, if a participant elects to commence payments early following his or her 55th birthday instead of after his or her 60th birthday, the payments will be reduced to the actuarial equivalent of the regular payments based upon the participant’s age and certain actuarial assumptions. However, in the event of a change-of-control, there would be no such actuarial reduction for commencement of a participant’s benefit before age 60. The SERP benefit payments include an offset in the amounts payable equal to benefits attributable to certain non-elective contributions by us to a participant’s account in a tax-qualified defined contribution plan sponsored by us. The amounts reported in this row assume that the effective date of the change-of-control occurred on December 31, 2019. |
| |
| (17) | The amounts reported in this row represent the incremental value of the ERIP calculated under the change-of-control agreement for Messrs. Alter, Lauschke and Ross, in excess of the vested amount as of December 31, 2019. In other words, this row excludes any amounts to which Messrs. Alter, Lauschke and Ross would be entitled if any of them retired on December 31, 2019, regardless of whether a change-of-control had occurred on or before that date, which amounts are based on the benefits underlying the present values in the Pension Benefits Table, adjusted to reflect commencement at the earliest possible date on or after December 31, 2019. These adjustments include a payment date of December 31, 2019, or age 55, if later, a reduction in benefits to reflect commencement prior to age 60, and a 0.95% discount rate used to calculate the lump sum present value. Under the ERIP, if a participant elects to commence payments early following his or her 55th birthday instead of after his or her 60th birthday, the payments will be reduced to the actuarial equivalent of the regular payments based upon the participant’s age and certain actuarial assumptions. However, in the event of a change-of-control, there would be no such actuarial reduction for commencement of a participant’s benefit before age 60. The ERIP benefit payments include an offset in the amounts payable equal to benefits attributable to certain non-elective contributions by us to a participant’s account in a tax-qualified defined contribution plan sponsored by us. The amounts reported in this row assume that the effective date of the change-of-control occurred on December 31, 2019. |
| |
| (18) | Under the terms of the change-of-control agreements entered into between us and each NEO, upon a triggering event the NEO is entitled to continue to receive certain benefits, if the NEO executes a full release of claims relating to his employment in our favor, for up to 24 months. The amounts calculated for this row assume that the effective date of the change-of-control and termination occurred on December 31, 2019. The employment benefits reported in this row include an annual executive physical, tax preparation and financial planning, life insurance and annual cost of health insurance for the applicable severance period. For purposes of this table, the severance period is assumed to be the maximum period available to each NEO. |
| |
| (19) | Under the terms of the change-of-control agreements entered into between us and each NEO, upon a triggering event the NEO is entitled to receive cash severance benefits in an amount equal to six months of the NEO’s base salary in a single, undiscounted lump sum payment. If the NEO executes a full release of claims relating to his employment in our favor, the NEO is entitled to receive additional cash severance in a single, undiscounted lump sum in an amount equal to 18 months of the NEO’s base salary. The amounts calculated for this row assume that the effective date of the change-of-control and termination occurred on December 31, 2019. |
| |
| (20) | Jaime Vasquez retired effective November 30, 2019. As such, only the actual payments made to Mr. Vasquez in 2019 in connection with his retirement are provided. |
DIRECTOR COMPENSATION
The Nominating and Governance Committee has oversight of Director compensation and evaluates its program no less than annually, conducting a detailed assessment at its regularly scheduled meeting each July. As part of this assessment, the Board engages in a comprehensive review of, among other things, the structure of the program and whether it addresses the principal goals of Board engagement, retention and alignment with stockholders and the company generally, the quantum and mix of components (i.e., cash and equity) of the compensation package, and whether the compensation of Directors is consistent with best practices and prevailing trends, including compared to our peer group (the same peer group of companies that is utilized and regularly reviewed by the Management Development and Compensation Committee for executive compensation purposes) and market practice generally for similarly situated companies. The Nominating and Governance Committee also utilizes an independent compensation consultant, FW Cook, to assist with this evaluation. As a result of the Nominating and Governance Committee’s 2019 assessment, on July 18, 2019, the Committee recommended, and the Board of Directors approved, a $2,500 increase to the retainer fee for the Nominating and Governance Committee Chair, currently Ms. Edison, from $10,000 to $12,500. In approving this increase, the Board and Nominating and Governance Committee considered, among other factors, the retainer amounts for similar committees of peer companies and other companies in market survey data, the workload and responsibilities of the Committee Chair, and the retainer levels for the Chairs of our other Committees.
Each non-employee Director receives an annual Board retainer fee for service on the Board in the amount of $225,000, of which $120,000 is paid in the form of RSUs and $105,000 is paid in the form of cash or, at the Director’s option, in the form of additional RSUs. Non-employee Directors no longer receive per meeting fees, other than when the Board determines that such fees are warranted in light of a significant number of additional required meetings in extraordinary cases (e.g., a special committee). Each member of the Audit Committee receives an incremental $7,500 cash retainer in recognition of that Committee’s additional number of regularly scheduled meetings and the resultant increased workload relative to the Board’s other Committees.
In 2019, the Management Development and Compensation Committee recommended, and the Board approved, the 2019 Omnibus Supplement Incentive Plan, which was subsequently approved by our stockholders at the 2019 Annual Stockholder Meeting. Among other changes, the 2019 Omnibus Supplement Incentive Plan, as approved by our stockholders, provides that no Director may receive more than $750,000 in total annual compensation, in any form. In 2019, the highest paid Director received significantly less compensation than this limitation. The Board has determined that such limitation is meaningful, reasonable and reflects good corporate governance practices.
At a Director’s option, the portion of the annual Board retainer fee for service paid in the form of cash may be paid in the form of additional RSUs. All RSUs granted to Directors vest immediately upon grant, but are not settled (i.e., paid out in the form of common stock) until one year after the date of the grant, unless a Director elects deferred settlement. As set forth in our 2019 Omnibus Supplement Incentive Plan and prior Stock Incentive Plan, Directors may elect to defer the settlement of their RSUs until six months following the date their service on the Board has ended. If a Director elects the deferral option, he or she also may elect to take distribution of the shares upon settlement in a single distribution or in annual installments not to exceed 15 years. Prior to settlement, the holder of an RSU is entitled to receive the value of all dividends and other distributions paid or made on our common stock in the form of additional RSUs, but does not otherwise have any of the rights of a stockholder, including the right to vote the shares underlying the RSUs. Our Non-Executive Chair, each Director who chairs a committee of the Board of Directors, and each member of the Audit Committee receives an additional annual retainer. These additional annual retainers are as follows:
|
| | |
| Chair Position | | Additional Annual Retainer |
Non-Executive Chair of the Board | | $75,000 |
Audit Committee | | $27,500(1) |
Corporate Sustainability Committee | | $10,000 |
Finance Committee | | $15,000 |
Management Development and Compensation Committee | | $20,000 |
Nominating and Governance Committee | | $12,500 |
________________________
| |
| (1) | Consists of $20,000 Chair retainer and additional $7,500 non-chair member cash retainer. |
Annual retainers for service as a committee chair or Audit Committee member are paid in cash or, at the Director’s option, in the form of additional RSUs. We reimburse all Directors for the expenses they incur in attending meetings.
Director compensation is paid quarterly. RSUs are issued quarterly at the time the cash compensation is paid and are settled one-for-one (i.e., one RSU equals one share of our common stock) on the settlement date.
Under the Director Deferred Compensation Plan, each year a Director may elect to defer any portion of his or her annual retainer or other director fees that are not paid in the form of RSUs. There are no preferential or above-market earnings in the Director Deferred Compensation TablePlan, and its accompanying narrativewe do not make any contributions under the plan.
An employee who serves as a Director receives no additional compensation for such service. Mr. Newport is currently the sole employee who also serves on the Board of Directors.
DIRECTOR COMPENSATION TABLE
The following table sets forth the total compensation paid to non-employee Directors during the fiscal year ended December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| Name(1) | | Fees Earned or Paid in Cash ($) | | Restricted Stock Unit Awards ($)(2) | | All Other Compensation ($)(3) | | Total ($) |
| Dennis C. Cuneo | | $ | 115,000 |
| | $ | 120,000 |
| | $ | 5,000 |
| | $ | 240,000 |
|
| Sheri H. Edison | | 112,739 |
| | 120,000 |
| | 2,500 |
| | 235,239 |
|
| Mark G. Essig | | 127,500 |
| | 120,000 |
| | 5,000 |
| | 252,500 |
|
| William K. Gerber | | 132,500 |
| | 120,000 |
| | 2,500 |
| | 255,000 |
|
| Gregory B. Kenny | | 105,000 |
| | 120,000 |
| | 2,500 |
| | 227,500 |
|
| Ralph S. Michael, III | | 174,488 |
| | 120,000 |
| | 2,500 |
| | 296,988 |
|
| Dr. James A. Thomson (4) | | 95,000 |
| | 60,000 |
| | 2,500 |
| | 157,500 |
|
| Dwayne A. Wilson | | 105,000 |
| | 120,000 |
| | — |
| | 225,000 |
|
| Vicente Wright | | 112,500 |
| | 120,000 |
| | 2,500 |
| | 235,000 |
|
| Arlene M. Yocum | | 112,500 |
| | 120,000 |
| | 2,386 |
| | 234,886 |
|
________________________
| |
| (1) | Mr. Newport, our Chief Executive Officer, is not included in this table because he is an employee and thus receives no compensation for his service as a Director. The compensation Mr. Newport received for his service as an employee is reported in the Summary Compensation Table. |
| |
| (2) | The amounts in this column reflect the aggregate grant date fair value of RSUs granted in 2019, computed in accordance with ASC Topic 718. The actual number of RSUs granted each quarter is calculated by dividing the quarterly annualized amount (e.g., $30,000) by the Market Price of our common stock on the grant date. For 2019, Messrs. Cuneo, Essig, Kenny and Wright elected to defer settlement of their RSUs until six months following the date they complete their service on the Board. As of December 31, 2019, non-employee Directors had the following aggregate number of RSUs outstanding (rounded to the nearest whole number): Mr. Cuneo, 203,459; Ms. Edison, 49,746; Mr. Essig, 155,025; Mr. Gerber, 49,746; Mr. Kenny, 153,522; Mr. Michael, 49,746; Mr. Wilson, 49,746; Mr. Wright, 86,538; and Ms. Yocum, 49,746. |
| |
| (3) | The amounts in this column constitute matching charitable gift donations made by the AK Steel Foundation pursuant to a matching gift program. Under this program, our employees and Directors are eligible for matching contributions by the Foundation of up to $2,500 per person per calendar year (up to $5,000 per calendar year for donations made prior to 2019) to qualifying charitable institutions. |
| |
| (4) | Dr. Thomson retired as of May 23, 2019. |
Compensation Committee Interlocks and Insider Participation
None of our executive officers has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity or insider participation in the 2020 Proxy Statement and is incorporated herein by reference.compensation decisions.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Equity Compensation Plan Information
The table below provides information, required to be furnished pursuant to this itemas of December 31, 2019, with respect to compensation plans under which our equity securities are authorized for issuance will be set forth underissuance. All such plans have been approved by security holders.
|
| | | | | | |
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) |
| Equity compensation plans approved by security holders | 4,131,409 |
| 5.26 |
| 14,547,748 |
|
Stock Ownership - Directors and Executive Officers
The table below provides stock ownership information as of February 29, 2020, with respect to the caption “Equity Compensation Plan Information”beneficial ownership of our common stock by: (i) each Named Executive Officer listed in the Summary Compensation Table, (ii) each current Director, and (iii) all of our current Directors and Executive Officers as a group.
|
| | | | | | | | | | | |
| Directors and Executive Officers | | Common Shares Owned
(1) | | Percentage of
Outstanding
Shares (2) | | Restricted
Stock
Units (3) | | Shares Owned Beneficially |
| Joseph C. Alter | | 222,571 |
| | * | | 0 |
| | 222,571 |
|
| Dennis C. Cuneo | | 15,712 |
| | * | | 213,106 |
| | 228,818 |
|
| Sheri H. Edison | | 117,243 |
| | * | | 46,377 |
| | 163,620 |
|
| Mark G. Essig | | 37,784 |
| | * | | 164,672 |
| | 202,456 |
|
| William K. Gerber | | 169,941 |
| | * | | 46,377 |
| | 216,318 |
|
| Gregory B. Kenny (4) | | 0 |
| | * | | 163,168 |
| | 163,168 |
|
| Scott M. Lauschke | | 143,778 |
| | * | | 0 |
| | 143,778 |
|
| Ralph S. Michael, III | | 205,596 |
| | * | | 46,377 |
| | 251,973 |
|
| Roger K. Newport | | 1,707,785 |
| | * | | 0 |
| | 1,707,785 |
|
| Kirk W. Reich | | 717,177 |
| | * | | 0 |
| | 717,177 |
|
| Christopher J. Ross | | 126,728 |
| | * | | 0 |
| | 126,728 |
|
| Jaime Vasquez (5) | | 183,198 |
| | * | | 0 |
| | 183,198 |
|
| Dwayne A. Wilson | | 54,464 |
| | * | | 46,377 |
| | 100,841 |
|
| Vicente Wright | | 104,269 |
| | * | | 96,185 |
| | 200,454 |
|
| Arlene M. Yocum | | 54,464 |
| | * | | 46,377 |
| | 100,841 |
|
| All current and nominee Directors and current Executive Officers as a group (21 persons) | | 4,893,163 |
| | 1.5% | | 903,274 |
| | 4,729,726 |
|
| |
| (1) | For Executive Officers, this column includes stock options to purchase shares of common stock exercisable before February 29, 2020, as follows: Mr. Alter, 114,205 shares; Mr. Lauschke, 63,570 shares; Mr. Newport, 872,247 shares; Mr. Reich, 381,585 shares; Mr. Ross, 61,974 shares; and Mr. Vasquez, 130,239 shares. All outstanding stock options exercisable before February 29, 2020, are included in these totals, regardless of whether their exercise price was above or below the price of our common stock as of February 29, 2020. |
| |
| (2) | An asterisk indicates ownership of less than 1%. |
| |
| (3) | A significant portion of the effective equity ownership by our Directors is in the form of RSUs, which do not satisfy the definition of “shares beneficially owned” for purposes of this table and therefore are not included in the Common Shares Owned column in this table. An RSU is a grant valued in terms of stock and vests immediately, but no actual shares of stock are issued at the time of the grant. The amount in this column reflects the aggregate number of RSUs held by each Director as of March 1, 2020. |
| |
| (4) | Mr. Kenny has elected to defer settlement of all RSUs granted to him thus far during his tenure as a Director. The shares underlying all of these RSUs vested immediately upon grant, but will be issued upon his retirement from the Board. |
| |
| (5) | Mr. Vasquez retired from the Company on November 30, 2019. |
Other Beneficial Owners
The table below provides information with respect to each person known by us as of February 29, 2020, Proxy Statementto own beneficially more than 5% of our outstanding common stock:
|
| | | |
| Name and Address of Beneficial Owner | Shares Owned Beneficially | Percentage of Outstanding Shares |
| BlackRock, Inc. | 49,061,498 (1) | 15.48 | % |
55 East 52nd Street | | |
|
| New York, NY 10022 | | |
|
| | |
| The Vanguard Group, Inc. | 33,367,383 (2) | 10.53 | % |
| 100 Vanguard Blvd. | | |
|
| Malvern, PA 19355 | | |
|
| | |
| State Street Corporation | 17,236,219 (3) | 5.44 | % |
| State Street Financial Center | | |
| One Lincoln Street | | |
| Boston, MA 02111 | | |
| |
| (1) | Based on information contained in a statement on Schedule 13G (Amendment No. 9) dated February 4, 2020, and filed February 4, 2020, BlackRock, Inc. has sole dispositive power over 49,061,498 shares and sole voting power over 48,295,580 shares of our outstanding common stock. |
| |
| (2) | Based on information contained in a statement on Schedule 13G (Amendment No. 12) dated February 12, 2020, and filed February 12, 2020, The Vanguard Group, Inc. has sole voting power over 451,161 shares, shared voting power over 52,700 shares, sole dispositive power over 33,367,383 shares, and shared dispositive power over 472,361 shares of our outstanding common stock. |
| |
| (3) | Based on information contained in a statement on Schedule 13G dated February 13, 2020, and filed February 13, 2020, State Street Corporation has shared dispositive power over 17,236,219 shares and shared voting power over 16,046,454 shares of our outstanding common stock. |
Cleveland-Cliffs Acquisition
Information on the proposed acquisition of the Company by Cleveland-Cliffs Inc. is shown in Item 7 of the Original Filing under Cleveland-Cliffs Acquisition, which is incorporated herein by reference.
Other information required to be furnished pursuant to this item will be set forth under the caption “Stock Ownership” in the 2020 Proxy Statement and is incorporated herein by reference.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Related Person Transactions
All related person transactions, as defined by Item 404(a) of Regulation S-K under the Exchange Act, must be reviewed and approved or ratified by the Board (or a committee of the Board to which such responsibility is delegated by the Board) for the purpose of determining whether such transactions are in, or not inconsistent with, our best interests and the interests of our stockholders. The process by which we determine whether any related person transactions exist is summarized below. For 2019, we had no related person transactions.
Based on information requiredsubmitted to us by Directors and Executive Officers on a quarterly and annual basis (and by Director nominees prior to their election or appointment), we develop a list of related persons, which we distribute to individuals internally who have, or who might reasonably be expected to have, responsibility for a transaction or proposed transaction between us and a related person. Directors, Director nominees and Executive Officers are expected to timely update the information they submit to us in the event of relevant changes or developments.
The recipients of the list must provide prior notice to our General Counsel of any plans or intentions for anyone within their respective business units, departments or areas of responsibility to enter into any agreement by or on our behalf with a related person. If the General Counsel determines that the proposed transaction is a related person transaction, the transaction will be submitted to the Nominating and Governance Committee for its consideration and approval at its next meeting.
The Nominating and Governance Committee considers all available and relevant facts and circumstances in determining whether to approve a related person transaction submitted for its review, including, if applicable:
the benefits of the transaction to us;
the impact on a Director’s independence in the event the related person is a Director, an immediate family member of a Director, or an entity in which a Director is a partner, stockholder or Executive Officer;
the availability of other sources for comparable products or services;
the specific terms of the transaction; and
the terms available to unrelated third parties or to employees generally for a comparable transaction.
The Nominating and Governance Committee approves only those related person transactions that it determines are in, or are not inconsistent with, our best interests and the interests of our stockholders.
In the event that we enter into a legally binding related person transaction before approval by the Nominating and Governance Committee, then the Nominating and Governance Committee will review the transaction at its next meeting unless it is subject to an exemption. The Nominating and Governance Committee will determine whether to ratify a related person transaction by applying the same procedures and standards that it would have used to determine whether to approve a related person transaction in advance. In the event that the Nominating and Governance Committee determines that it would not be appropriate to ratify the transaction, the Nominating and Governance Committee will identify the options available to us, including but not limited to rescission, amendment or termination of the related person transaction.
Board Independence
In accordance with the requirements of the NYSE, the Board maintains a policy requiring that at least a majority of its members shall be “independent,” as determined under applicable law and regulations, including without limitation Section 303A of the NYSE Listed Company Manual. Our Corporate Governance Guidelines include categorical standards for determining the independence of all non-employee Directors. Those standards are set forth in guidelines attached as Exhibit A to our Corporate Governance Guidelines, which are available on our website at www.aksteel.com. A Director who meets all of the categorical standards set forth in the Corporate Governance Guidelines shall be presumed to satisfy the NYSE’s definition of “independence” and thus be “independent” within the purview of the Board’s policy on Director independence.
At its March 2019 meeting, the Board of Directors reviewed the independence of all current non-employee Directors. In advance of that meeting, each incumbent Director was asked to provide the Board with detailed information regarding his or her business and other relationships with us and our affiliates, and with Executive Officers and their affiliates, to enable the Board to evaluate his or her independence.
Upon the recommendation of the Audit Committee regarding audit committee independence, the Management Development and Compensation Committee as to compensation committee independence, and the Nominating and Governance Committee with respect to all other aspects of Board independence, and after considering all relevant facts and circumstances with the assistance of legal counsel, the Board affirmatively determined that none of the current incumbent Directors, except for Mr. Newport, has a material relationship
with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us), other than being a Director, and all such incumbent Directors other than Mr. Newport meet the categorical standards of independence set forth in our Corporate Governance Guidelines and therefore are “independent” as that term is used and defined in Section 303A of the NYSE Listed Company Manual and in Rule 10A-3 under the Exchange Act. The Board further determined that each of the incumbent Directors other than Mr. Newport is a “Non-Employee Director,” as defined in Rule 16b-3(b)(3) promulgated under the Exchange Act, and that eight of our ten incumbent Directors (Messrs. Cuneo, Gerber, Kenny, Michael, Wilson and Wright, and Mmes. Edison and Yocum) are an “outside director” as that term is used in Section 162(m) of the Internal Revenue Code and the associated Treasury Regulations, 26 CFR § 1.162-27 et seq. While the 2017 Tax Cuts and Jobs Act repealed the exception to Section 162(m) regarding deductibility for performance-based compensation, certain transition and grandfathering rules exist for which compliance with Section 162(m) rules may continue to be furnished pursuantadvantageous, so the Board has continued to this item will be set forthdetermine which members of the Board qualify as an “outside director” under the captions “Related Person Transactions”associated rules and “Board Independence” inregulations.
Under our Corporate Governance Guidelines, Directors have an affirmative ongoing obligation to inform the 2020 Proxy StatementBoard of any material changes that might impact the foregoing determinations by the Board and, is incorporated herein by reference.under certain circumstances, to tender their resignation for consideration. This obligation includes all business relationships between the Director and/or an immediate family member, on the one hand, and us and/or our affiliates and/or Executive Officers, on the other.
| |
| Item 14. | Principal Accounting Fees and Services. |
The information requiredtable below provides the aggregate fees that we paid or accrued to be furnished pursuant to this item will be set forth underErnst & Young LLP for the caption “Principal Accounting Firm Fees” in the 2020 Proxy Statementyears ended December 31, 2019 and is incorporated herein by reference.2018:
|
| | | | | | | |
| (in thousands of dollars) | 2019 | | 2018 |
| Audit Fees (1) | $ | 3,580 |
| | $ | 3,520 |
|
| Audit-Related Fees (2) | 30 |
| | 45 |
|
| Total Audit and Audit-Related Fees | 3,610 |
| | 3,565 |
|
| Tax-Related Fees | — |
| | — |
|
| All Other Fees | — |
| | — |
|
| Total | $ | 3,610 |
| | $ | 3,565 |
|
___________________
| |
| (1) | Includes fees for the integrated audit of annual consolidated financial statements and reviews of unaudited quarterly consolidated financial statements, audits of internal control over financial reporting, and consents related to filings with the SEC. |
| |
| (2) | Includes fees for attest services related to financial reporting that is not required by statute or regulations. |
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The consolidated financial statements of AK Steel Holding Corporation filed as part of this Annual Report are included in Item 8.
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is contained in the applicable financial statements or notes thereto.
(a)(3) Exhibits
|
| | |
Exhibit Number | | Description |
| | Agreement and Plan of Merger, dated as of December 2, 2019, by and among AK Steel Holding Corporation, Cleveland-Cliffs Inc. and Pepper Merger Sub Inc. (incorporated herein by reference to Exhibit 2.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on December 4, 2019). |
| | |
| | Restated Certificate of Incorporation of AK Steel Holding Corporation (incorporated herein by reference to Exhibit 3.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, as filed with the Commission on October 25, 2016). |
| | |
| | By-laws of AK Steel Holding Corporation, as amended and restated as of December 2, 2019. |
| | |
| | Indenture, dated as of May 11, 2010, among AK Steel Corporation, as issuer, AK Steel Holding Corporation, as guarantor, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on May 11, 2010). |
| | |
| | Fifth Supplemental Indenture, dated as of September 16, 2014, among AK Steel Corporation, as issuer, AK Steel Holding Corporation, as parent guarantor, AK Steel Properties, Inc. and AK Tube LLC, as subsidiary guarantors, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on September 16, 2014). |
| | |
| | Sixth Supplemental Indenture, dated as of July 27, 2016, among AK Steel Corporation, as issuer, AK Steel Holding Corporation, as parent guarantor, Mountain State Carbon, LLC, as subsidiary guarantor, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.3 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Seventh Supplemental Indenture, dated as of March 23, 2017, among AK Steel Corporation, as issuer, the guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on March 23, 2017). |
| | |
| | Eighth Supplemental Indenture, dated as of August 9, 2017, among AK Steel Corporation, as issuer, the guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on August 9, 2017). |
| | |
| | Ninth Supplemental Indenture, dated January 29, 2020, between AK Steel Corporation and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on January 29, 2020). |
| | |
| | Tenth Supplemental Indenture, dated January 29, 2020, between AK Steel Corporation and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.2 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on January 29, 2020). |
| | |
|
| | |
Exhibit
Number
| | Description
|
| | Indenture, dated as of June 20, 2016, among AK Steel Corporation, as issuer, the guarantors named therein and U.S. Bank National Association, as trustee and collateral agent (incorporated herein by reference to Exhibit 4.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on June 20, 2016). |
| | |
| | First Supplemental Indenture dated as of July 27, 2016, among AK Steel Corporation, as issuer, Mountain State Carbon, LLC, as subsidiary guarantor and U.S. Bank National Association, as trustee and collateral agent (incorporated herein by reference to Exhibit 4.2 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Description of Securities. |
| | |
| | Executive Deferred Compensation Plan, as amended and restated as of October 18, 2007 (incorporated herein by reference to Exhibit 10.2 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as filed with the Commission on November 6, 2007). |
| | |
| | Directors’ Deferred Compensation Plan, as amended and restated as of October 18, 2007 (incorporated herein by reference to Exhibit 10.3 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as filed with the Commission on November 6, 2007). |
| | |
| | Policy Concerning Severance Agreements with Senior Executives (incorporated herein by reference to Exhibit 99.3 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003). |
| | |
| | Omnibus Management Incentive Plan, as of May 25, 2017 (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on May 26, 2017). |
| | |
| | Supplemental Thrift Plan, as amended and restated as of January 1, 2018 (incorporated by reference to Exhibit 10.5 to AK Steel Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Commission on February 15, 2018). |
| | |
| | Executive Minimum and Supplemental Retirement Plan, as amended and restated as of October 18, 2007 (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as filed with the Commission on November 6, 2007). |
| | |
| | First Amendment to the Executive Minimum and Supplemental Retirement Plan, as amended and restated as of October 18, 2007 (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, as filed with the Commission on November 4, 2008). |
| | |
| | Second Amendment to the Executive Minimum and Supplemental Retirement Plan, as amended and restated as of October 18, 2007 (incorporated herein by reference to Exhibit 10.4 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, as filed with the Commission on November 3, 2009). |
| | |
| | Executive Retirement Income Plan adopted March 20, 2014 (incorporated by reference to Exhibit 10.10 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, as filed with the Commission on May 2, 2014). |
| | |
| | Form of Executive Officer Severance Agreement (incorporated by reference to Exhibit 10.8 to AK Steel Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Commission on February 17, 2017). |
| | |
| | Form of Executive Officer Change of Control Agreement (incorporated by reference to Exhibit 10.9 to AK Steel Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Commission on February 17, 2017). |
| | |
|
| | |
Exhibit
Number
| | Description
|
| | AK Steel Holding Corporation Stock Incentive Plan, as amended and restated as of May 26, 2016 (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on May 27, 2016). |
| | |
| | Second Amended and Restated Loan and Security Agreement, dated as of September 13, 2017, among AK Steel Corporation, as Borrower, the guarantors named therein, certain financial institutions, as Lenders, and Bank of America, N.A., as agent for the Lenders (incorporated by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, as filed with the Commission on November 3, 2017). |
| | |
| | First Amendment to Second Amended and Restated Loan and Security Agreement, dated as of September 13, 2017, among AK Steel Corporation, as Borrower, the guarantors named therein, certain financial institutions, as Lenders, and Bank of America, N.A., as agent for the Lenders (incorporated by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, as filed with the Commission on April 29, 2019). |
| | |
| | Air Quality Facilities Loan Agreement dated as of February 1, 2012 between AK Steel Corporation and the Ohio Air Quality Development Authority – $36,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on February 7, 2012). |
| | |
| | Guaranty Agreement dated as of April 29, 2014, by AK Tube LLC and AK Steel Properties, Inc. to Wells Fargo Bank, National Association, as trustee, pertaining to the Ohio Air Quality Development Authority – $36,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated by reference to Exhibit 10.7 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, as filed with the Commission on May 2, 2014). |
| | |
| | Guaranty Agreement, dated as of July 27, 2016, by Mountain State Carbon, LLC to Wells Fargo Bank, National Association, as trustee, pertaining to the Ohio Air Quality Development Authority – $36,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.8 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Loan Agreement dated as of February 1, 2012 between AK Steel Corporation and the City of Rockport, Indiana – $30,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.2 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on February 7, 2012). |
| | |
| | Guaranty Agreement dated as of April 29, 2014, by AK Tube LLC and AK Steel Properties, Inc. to Wells Fargo Bank, National Association, as trustee, pertaining to City of Rockport, Indiana – $30,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated by reference to Exhibit 10.8 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, as filed with the Commission on May 2, 2014). |
| | |
| | Guaranty Agreement, dated as of July 27, 2016, by Mountain State Carbon, LLC to Wells Fargo Bank, National Association, as trustee, pertaining to City of Rockport, Indiana – $30,000,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.9 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Loan Agreement dated as of February 1, 2012 between AK Steel Corporation and the Butler County Industrial Development Authority – $7,300,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.3 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on February 7, 2012). |
| | |
| | Guaranty Agreement dated as of April 29, 2014, by AK Tube LLC and AK Steel Properties, Inc. to Wells Fargo Bank, National Association, as trustee, pertaining to Butler County Industrial Development Authority – $7,300,000 Revenue Refunding Bonds, Series 2012-A (incorporated by reference to Exhibit 10.9 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, as filed with the Commission on May 2, 2014). |
| | |
|
| | |
Exhibit
Number
| | Description
|
| | Guaranty Agreement, dated as of July 27, 2016, by Mountain State Carbon, LLC to Wells Fargo Bank, National Association, as trustee, pertaining to Butler County Industrial Development Authority – $7,300,000 Revenue Refunding Bonds, Series 2012-A (incorporated herein by reference to Exhibit 10.10 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Security Agreement, dated as of June 20, 2016, among the AK Steel Corporation and U.S. Bank National Association, as trustee and collateral agent (incorporated herein by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on June 20, 2016). |
| | |
| | Security Agreement Supplement, dated as of July 27, 2016, between Mountain State Carbon, LLC and U.S. Bank National Association, as collateral agent (incorporated herein by reference to Exhibit 10.6 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Collateral Trust Agreement dated as of November 20, 2012, among AK Steel and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 10.4 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on November 20, 2012). |
| | |
| | Supplement to Collateral Trust Agreement dated as of April 29, 2014, among AK Steel Corporation, AK Tube LLC, AK Steel Properties, Inc. and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 10.6 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, as filed with the Commission on May 2, 2014). |
| | |
| | Collateral Trust Agreement Joinder, dated as of June 20, 2016, among AK Steel Corporation and U.S. Bank National Association, as trustee and collateral agent (incorporated herein by reference to Exhibit 10.2 to AK Steel Holding Corporation’s Current Report on Form 8-K, as filed with the Commission on June 20, 2016). |
| | |
| | Supplement to Collateral Trust Agreement, dated as of July 27, 2016, among AK Steel Corporation, Mountain State Carbon, LLC and U.S. Bank National Association, as collateral agent (incorporated herein by reference to Exhibit 10.7 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed with the Commission on July 29, 2016). |
| | |
| | Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, as filed with the Commission on November 1, 2013). |
| | |
| | AK Steel Holding Corporation 2019 Omnibus Supplemental Incentive Plan (incorporated by reference to Exhibit 10.1 to AK Steel Holding Corporation’s Current Report on Form 8-K/A, as filed with the Commission on May 29, 2019). |
| | |
| | Subsidiaries of AK Steel Holding Corporation (incorporated by reference to Exhibit 21.1 to AK Steel Holding Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Commission on February 15, 2018). |
| | |
| | Consent of Ernst & Young LLP. |
| | | |
| | Section 302 Certification of Chief Executive Officer. |
| | | |
| | Section 302 Certification of Chief Financial Officer. |
| | | |
| | Section 906 Certification of Chief Executive Officer. |
| | |
| | Section 906 Certification of Chief Financial Officer. |
| | |
|
| | |
Exhibit
Number
| | Description
|
| | Mine Safety Disclosure. |
| | |
| 101.Ins | | XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
*101.Sch | | XBRL Taxonomy Extension Schema Document |
| | |
*101.Cal | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
*101.Def | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
*101.Lab | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
*101.Pre | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| | | |
| * Filed or furnished herewith, as applicable |
+ Management contract or compensatory plan or arrangement |
| |
Item 16. | Form 10-K Summary. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in West Chester, Ohio, on February 20,March 10, 2020.
|
| | | |
| | | | AK Steel Holding Corporation |
| | | | (Registrant) |
| | | | |
| | | | /s/ Christopher J. Ross |
| | | | Christopher J. Ross |
| | | | Vice President, Treasurer and Interim Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of February 20,March 10, 2020 by the following persons on behalf of the registrant and in the capacities indicated. |
| | |
| Signature & Title | | Signature & Title |
| | | |
| /s/ Ralph S. Michael, III | | /s/ Mark G. Essig |
| Ralph S. Michael, III | | Mark G. Essig |
| Chairman of the Board | | Director |
| | | |
| /s/ Roger K. Newport | | /s/ William K. Gerber |
| Roger K. Newport | | William K. Gerber |
| Chief Executive Officer and Director | | Director |
| | | |
| /s/ Christopher J. Ross | | /s/ Gregory B. Kenny |
| Christopher J. Ross | | Gregory B. Kenny |
| Vice President, Treasurer and Interim Chief Financial Officer | | Director |
| | | |
| /s/ Gregory A. Hoffbauer | | /s/ Dwayne A. Wilson |
| Gregory A. Hoffbauer | | Dwayne A. Wilson |
| Vice President, Controller and Chief Accounting Officer | | Director |
| | | |
| /s/ Dennis C. Cuneo | | /s/ Vicente Wright |
| Dennis C. Cuneo | | Vicente Wright |
| Director | | Director |
| | | |
| /s/ Sheri H. Edison | | /s/ Arlene M. Yocum |
| Sheri H. Edison | | Arlene M. Yocum |
| Director | | Director |
