A Message from Roger K. Newport

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AK Steel 2016 Annual Report

2016 was an exciting year for AK Steel, as we made substantial progress in executing our long-term strategy. 

Our results during the year demonstrated the success of the entire AK Steel team in executing our strategy and implementing one of our guiding principles of: “We Can and We Will” control items within our control. Throughout the year, we continued to enhance the financial strength of our company through improved profitability and various capital market transactions. We also made great strides in research and innovation to further strengthen our foundation. 

Strengthening Financial Position

Our financial results reflected our strategy to reduce our exposure to commodity products. As a result, a very difficult decision was announced in late 2015 to temporarily idle our Ashland Works blast furnace and melt shop operations. This enabled us to make important progress to enhance our sales portfolio and operations.

The actions of our team generated improved results and a stronger AK Steel. Our work to optimize our footprint, relentlessly focus on costs, and reduce exposure to commodity spot markets generated improved margins. This, along with the successful completion of several capital market transactions, allowed us to significantly strengthen our balance sheet. These actions position us well for the future. 

As a result, for the full-year 2016, our revenues were approximately $5.88 billion on shipments of about 6.05 million tons, resulting in an average selling price of $969 per ton.

I am pleased with the progress we made in strengthening the financial position of our company. We successfully executed two capital market transactions which resulted in $600 million in cash proceeds that were utilized to lower our debt levels and cash interest costs. This also resulted in nearly doubling our liquidity and cash position from $0.7 billion at the end of 2015 to $1.35 billion at the end of 2016.

In addition, we completed the refinancing of $380 million of our senior secured notes, which lowered our cash interest costs and extended our debt maturity profile. And, we were able to de-risk our balance sheet by transferring about $210 million of pension assets and liabilities to a third party insurance company. These actions will reduce our exposure to volatility in the financial markets that can impact our pension investment position. 

All of these transactions resulted in a stronger balance sheet and an improved capital structure. This also enhances our financial flexibility, which will allow us to continue to execute our long-term strategy.

Trade Action Progress

After extensive investigations, the Department of Commerce and the International Trade Commission announced positive final determinations in the carbon steel trade cases for hot-rolled, cold-rolled and corrosion-resistant products. In addition, in March 2017, these agencies made final positive determinations in our trade case covering stainless steel products. Anti-dumping and countervailing duties were assessed against foreign producers engaging in illegal trade practices.

While this was good progress, we were disappointed that our appeal of the 2013 Grain Oriented Electrical Steel trade case was denied in November 2016. We are evaluating the best action forward to ensure fair trade of these products.

The carbon steel and stainless steel rulings have helped level the playing field and counteract injury being caused by dumped and subsidized imports. We will continue to monitor and vigilantly address circumstances that arise when imports are dumped here in the U.S. In addition, we will work with the administration to identify long-term solutions to address unfair trade and global steel overcapacity, which is driven primarily by China. 

Safety and Social Responsibility

Safety is and always will be the foundation of all that we do. We are proud of our performance which shows that all of our employees continue to take safety seriously each and every day.

AK Steel remains an industry leader in safety results, with a safety record in 2016 that was 4.3 times better than the industry average. In addition to our longstanding industry-leading results, we were still able to improve our safety performance by 16% over the levels achieved in 2015.

Eight of our facilities—Ashland, Butler, Coshocton, Mansfield, Rockport and Zanesville Works, AK Tube and AK Coal—had zero OSHA recordable cases during the fourth quarter. And for all of December, our 8,500 employees worked with zero OSHA recordable events.

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AK Steel’s Zanesville Works and Coshocton Works were recognized for outstanding safety performance.

Zanesville Works and Coshocton Works were recognized in 2016 for outstanding safety performance by the Ohio Bureau of Workers Compensation. Both sites earned the 100% Award for Safety for operating the entire year of 2015 without any lost-time injuries or illnesses.

Dearborn Works was recognized in 2016 by the American Metal Market’s Awards for Steel Excellence for “Best Operational Improvement” for safety, quality, reliability and environmental progress.

From an environmental standpoint, 2016 was also an excellent year. The company set multiple annual water and air records, in addition to working on several air emission and waste reduction projects. 

The company’s improved environmental performance surpassed our previous air compliance record by more than 75%. Mountain State Carbon coke plant operations improved their air and water compliance performance in 2016 by 95% with a record year in both categories. Middletown Works significantly out-performed their previous air compliance record set in 2012.

Additionally, multiple recycling projects are being developed in our company that reduce disposal needs for waste water and other materials.

In 2016, we continued to drive employee engagement. We launched a number of internal programs to drive a more open culture and work together to lead continuous improvement. Our employees are our most important assets, and our actions allowed us to make the most of their inspiring talent, energy and commitment. 

We also established our Great Ideas program to provide our employees and suppliers an additional platform to share their ideas about enhancing margins and driving innovation. 

We launched our AK CARES program to support and recognize our employees who donate their time and talents to participate in hundreds of nonprofit projects and organizations in their community each year.

AK Steel continued to match employee contributions to nonprofit charitable organizations through the company’s AK Steel Foundation. The AK Steel Foundation enables the company to make a positive difference in the lives of others, each year supporting nonprofit programs, scholarships and grants in communities where our employees live and work.

 

Research and Innovation Expansion

We increased our investment in research and innovation in terms of both people and facilities. 

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AK Steel’s Research and Innovation Center opened in November 2016, in Middletown, OH.

We expanded our innovation team from 2015 through 2016 by 30%. We increased the number of projects initiated each year to develop new products or processes. We more than tripled the number of projects we initiated in 2016 compared to 2014. We also invested $36 million in a new Research and Innovation Center. This facility is designed to drive expanded collaboration among our employees and with our customers and suppliers.

In 2016, we completed a major capital investment at our Dearborn Works hot-dipped galvanizing line. We will use this new equipment to introduce two new NEXMET advanced high strength steels in the first quarter of 2017—NEXMET 1000 and NEXMET 1200—and to develop additional grades of next generation advanced high strength steels.

We launched NEXMET 440EX, the first of our innovative NEXMET high strength steel products for use in automotive lightweighting, specifically designed to help our customers meet future Corporate Average Fuel Economy (CAFE) requirements. This new, exposed surface quality product is designed for use in applications where appearance and dent resistance are critical—for example, on the exposed panels of cars and trucks.

Our NEXMET 1000 and NEXMET 1200 next generation advanced high strength steels are expected to be available for customer qualifications in early 2017. 

We also announced a new third-generation steel, called NanoSteel® NXG 1200. We were recognized along with the NanoSteel® Company with a global award for “Breakthrough Solution of the Year” for this work. These new products will begin to enhance our foundation of new products for use in future vehicle platforms. 

We expanded our carbon and stainless tubular steel manufacturing operations into Mexico to meet the needs of our customers located there. This expansion helps secure steelmaking in America as we provide flat rolled steel to all of our AK Tube facilities. We are also making progress in driving new innovative tubular products and processes as part of our strategy to expand our downstream business.

At Butler Works, we completed a major expansion of our CARLITE line to produce more high efficiency electrical steels for use in the electrical transformer market.

 

Strategy Execution

In 2017, we will continue to execute our strategy—each part of which is designed to enhance the value of our company: 

  • We will be offering new products to our customers as the result of our investment in our galvanizing line at Dearborn Works completed in the fourth quarter of 2016.
  • Our Research and Innovation team will continue to develop new products and processes for carbon, stainless, electrical and tubular products with the objective of announcing new product offerings for our customers in 2017 and beyond.
  • We will continue our focus on enhancing margins throughout every aspect of our business.
  • And, we will work to identify downstream opportunities that will add value to our steel products to further expand our margins and provide even greater value to our customers.

Thank you

Our operating and financial performance in 2016 reflected the results of the collective efforts of the entire AK Steel team in making high quality products to serve the needs of our customers. I would like to thank our customers for their business. I would also like to thank our shareholders for their continued support. 

Our goal is to create value for our investors and customers. While we made great strides in 2016, we recognize that we still have a lot of work to do, and we will continue to move our company forward through the execution of our long-term strategy with the objective of enhancing shareholder value.

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Roger K. Newport

April 2017