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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File No. 1-13696.
AK STEEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1401455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Curtis Street, Middletown, Ohio 45043
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (513) 425-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- ------------------------------------------
Common Stock $.01 Par Value New York Stock Exchange
10 3/4% Senior Notes Due 2004 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES NO X .
Aggregate market value of the registrant's voting stock held by non-
affiliates at January 22, 1999: $1,092,324,676.
At January 22, 1999 there were 59,046,316 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the annual meeting of stockholders
to be held May 20, 1999, (the "1999 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, 1998.
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AK Steel Holding Corporation
Table of Contents
Page
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 4
Item 3. Legal Proceedings................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.............. 5
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................................. 7
Item 6. Selected Financial Data.......................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk....... 13
Item 8. Financial Statements and Supplementary Data...................... 14
Item 9. Changes in and Disagreements with Accountants.................... 32
Item 10. Directors and Executive Officers of the Registrant............... 32
Item 11. Executive Compensation........................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management... 32
Item 13. Certain Relationships and Related Transactions................... 32
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K. 32
i
PART I
Item 1. Business.
General
AK Steel Holding Corporation, through its wholly-owned subsidiary, AK Steel
Corporation (collectively, the "Company"), is a fully-integrated producer of
flat rolled carbon steel. The Company concentrates on the production of
premium quality coated, cold rolled and hot rolled carbon steel primarily for
sale to the automotive, appliance, construction and manufacturing markets. The
Company also cold rolls and aluminum coats stainless steel for automotive
industry customers. During 1998, the Company's shipments totalled 4,601,600
tons, of which 3,131,600 tons, or approximately 68%, up from 62% the prior
year, consisted of value-added coated and cold rolled carbon steel products,
reflecting the increasing benefits of the Company's Rockport Works facility.
The Company has earned a reputation, particularly among high-end customers,
for consistent product quality and superior service, receiving numerous
customer quality awards. The Company is registered under the ISO 9002
international quality standard and certified under the QS 9000 quality
assurance program used by domestic automotive manufacturers.
Operations
The Company conducts operations at its Middletown Works in Middletown, Ohio,
its Ashland Works in Ashland, Kentucky and its Rockport Works near Rockport,
Indiana. The Rockport Works, a state-of-the-art finishing facility currently
completing construction on a 1,700 acre site in Spencer County, Indiana, began
operating a hot-dip galvanizing and galvannealing line on June 16, 1998 and a
continuous cold rolling mill on September 12, 1998. For further information
with respect to these facilities, see Item 2. Properties.
Customers
The Company's principal customers are in the automotive, appliance,
construction and manufacturing markets. The Company also sells its products to
distributors and convertors.
The Company's marketing efforts are principally directed toward those
customers who require on-time delivery, technical support and the highest
quality coated and cold rolled products. The Company believes that its
enhanced product quality and delivery capabilities, and its emphasis on
customer technical support and product planning, are critical factors in its
ability to serve this segment of the market. The following table sets forth
the percentage of the Company's net sales attributable to various markets:
Years Ended
December 31,
--------------
1996 1997 1998
---- ---- ----
Automotive.................................................... 55% 56% 60%
Appliance, Construction and Manufacturing..................... 15% 16% 17%
Distributors and Convertors................................... 30% 28% 23%
Consistent with management's strategy of concentrating on the high-end of
the flat rolled carbon steel market, shipments to the automotive market have
increased steadily in recent years. A major factor contributing to this
increase has been the growth in the number of U.S.-based plants of foreign
automotive manufacturers. The Company supplies coated, cold rolled and hot
rolled steel to nearly all of these producers and is a major supplier to
General Motors, Ford Motor Company and DaimlerChrysler AG. Shipments to
General Motors, the
1
Company's largest customer, accounted for approximately 17%, 18% and 19% of
net sales in 1996, 1997 and 1998, respectively. Shipments to Ford accounted
for approximately 13% of net sales in 1998. No other customer accounted for
more than 10% of net sales for any of these years.
The appliance, construction and manufacturing markets consist principally of
the home appliance market, heating, ventilation and air conditioning market
and the lighting industry. Distributors and convertors, the third category of
the Company's primary markets, purchase primarily hot rolled and cold rolled
products and may process these further or sell them directly to third parties.
On December 10, 1998, the Company and two divisions of Mexican steel
producer Hylsamex, completed definitive agreements that will enable them to
jointly market their respective products to serve customers in the United
States, Mexico and Central and South America.
Raw Materials
The principal raw materials and commodities required in the Company's
manufacturing operations are coal, iron ore, electricity, natural gas, oxygen,
scrap metal, zinc, limestone and other commodity materials, all of which are
purchased at competitive or prevailing market prices. Adequate sources of
supply exist for all of the Company's raw material requirements.
Employees
As of December 31, 1998, the Company had approximately 5,800 active
employees, of whom approximately 54% were represented by the Armco Employees
Independent Federation, Inc. (the "AEIF"), 17% by the United Steelworkers of
America (the "USWA") and 6% by the Oil, Chemical and Atomic Workers Union (the
"OCAW"). The AEIF represents all hourly employees and certain nonexempt
salaried employees at the Middletown Works. The USWA represents hourly
steelmaking employees and certain nonexempt salaried employees at the Ashland
Works. The OCAW represents hourly employees at the Ashland Works coke
manufacturing facility.
The Company's existing labor contracts are scheduled to expire as follows:
AEIF--February 29, 2000, USWA--September 1, 2000, and OCAW--April 1, 2001.
Competition
The Company competes with domestic and foreign flat rolled carbon steel
producers and producers of plastics, aluminum and other materials that can be
used in place of flat rolled carbon steel in manufactured products. Price,
service, delivery and quality are the primary competitive factors faced by the
Company, and vary in importance according to the category of product and
customer requirements.
Domestic steel producers face significant competition from foreign producers
who typically have lower labor costs. In addition, many foreign steel
producers are owned, controlled or subsidized by their governments and their
decisions with respect to production and sales may be influenced more by
political and economic policy considerations than by prevailing market
conditions.
On September 30, 1998, complaints were filed with the U.S. International
Trade Commission ("ITC") by several U.S. steel companies and the USWA that hot
rolled carbon steel was being dumped in the U.S. Market at below fair market
prices. On November 13, 1998 the ITC voted affirmatively in the preliminary
determination of question of injury and on November 23, 1998 the Department of
Commerce announced an affirmative finding of critical circumstances on the
Japanese and Russian cases. A finding that unfairly traded imports have caused
injury to domestic producers could result in tariffs that may slow imports.
2
Environmental Matters
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
The Company has expended the following for environmental related capital
investments and environmental compliance:
Years Ended
December 31,
-----------------
1996 1997 1998
----- ----- -----
(in millions)
Environmental related capital investments................. $ 6.1 $ 4.3 $18.8
Environmental compliance costs............................ 53.6 52.9 65.2
The Company does not anticipate any material impact on its future recurring
operating costs or profitability as a result of its compliance with current
environmental regulations. Moreover, the Company believes that since all
domestic steel producers operate under the same set of environmental
regulations, the Company is under no competitive disadvantage resulting from
compliance with such regulations.
Environmental Remediation
The Company and its predecessors have been conducting steel manufacturing
and related operations for over 90 years. Although the Company believes that
its predecessors utilized operating practices that were standard in the
industry at the time, hazardous materials may have been released in or under
currently or previously operated sites. Although the Company does not have
sufficient information to estimate its potential liability in connection with
any potential future remediation, it believes that if any such remediation is
required, it will occur over an extended period of time.
Pursuant to the Resource Conservation and Recovery Act ("RCRA"), which
governs the treatment, handling and disposal of hazardous waste, the United
States Environmental Protection Agency ("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 order the facilities to take corrective
action to remediate such releases. The Middletown Works and the Ashland Works
are subject to RCRA inspections by environmental regulators. While the Company
cannot predict the future actions of these regulators, the potential exists
for required corrective action at these facilities.
Under the authority of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), EPA and state environmental
authorities have conducted site investigations at certain of the Company's
facilities, portions of which previously had been used for disposal of
currently regulated materials. While the results of these investigations are
still pending, the Company could, in the future, be directed to incur costs
for remedial activities at the former disposal areas. Given the uncertain
status of these investigations, however, the Company currently is unable to
predict if and when such costs might arise or, if they should arise, their
magnitude.
Environmental Proceedings
In 1991, the Ohio Environmental Protection Agency notified the Company that
it had referred to the Ohio Attorney General for potential enforcement action
certain alleged violations of Ohio's water discharge and hazardous waste
regulations at the Middletown Works. Although the Company believes it has a
strong basis for contesting the alleged violations, it is in the process of
negotiating a consent order with the Ohio Attorney General that will address
the state's concerns.
Subsequent to a multi-media inspection of Middletown Works during the fall
of 1996, U.S. EPA Region V has notified the Company that legal proceedings
have been initiated alleging violations of clean air and clean
3
water act regulations. The Company is having discussions with Region V and the
Department of Justice concerning these matters.
In addition to the foregoing matters, the Company is or may be involved in
legal proceedings with various regulatory authorities that may require the
Company to pay fines relating to violations of environmental laws and
regulations, comply with more rigorous standards or other requirements, and
incur capital and operating expenses to meet such obligations.
The Company does not believe that the ultimate disposition of the foregoing
proceedings, individually or in the aggregate, will have a material adverse
effect on its financial condition, results of operations or cash flows.
Item 2. Properties.
The Company's corporate headquarters is located in Middletown, Ohio. The
Company conducts operations at its Middletown Works in Middletown, Ohio, its
Ashland Works in Ashland, Kentucky and its Rockport Works in Spencer County,
Indiana. Coke manufacturing plants, blast furnaces, basic oxygen furnaces and
continuous casters are located at Ashland and Middletown. The Company has a
hot rolling mill, cold rolling mill, pickling lines, annealing facilities and
temper mills as well as four of its coating lines located at the Middletown
Works, and one additional coating line located at the Ashland Works. All of
these facilities are owned and together comprise approximately 5,400 acres of
land.
The Rockport Works, currently completing construction, is located on a 1,700
acre site in Spencer County, Indiana near the Ohio river community of
Rockport. The facility consists of a state-of-the-art continuous cold rolling
mill, a hot dip galvanizing and galvannealing line, a continuous carbon and
stainless steel pickling line, a stainless steel annealing and pickling line,
hydrogen annealing facilities and a temper mill. The first production
component, the hot dip galvanizing and galvannealing line began operations on
June 16, 1998. The continuous cold rolling mill began operations on September
12, 1998. The remaining facilities are scheduled to begin operations in a
staggered fashion during 1999.
Item 3. Legal Proceedings.
In addition to the items discussed below, the Company is also involved in
routine litigation, environmental proceedings, and claims pending with respect
to matters arising out of the normal conduct of the business. In management's
opinion, the ultimate liability resulting from all claims, individually or in
the aggregate, will not materially affect the Company's consolidated financial
position, results of operations or cash flows.
Under the authority of CERCLA, the Kentucky Department of Environmental
Protection conducted a comprehensive review of the waste management control
systems and handling practices at the Ashland Works coke department and
steelmaking facility in July, August and September 1991. As a result of this
inspection, the Kentucky Natural Resources and Environmental Protection
Cabinet instituted an administrative proceeding against the Company in
November 1993, alleging certain regulatory violations. The Company has entered
into non-binding mediation with the Kentucky Cabinet for Natural Resources and
Environmental Protection.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewaters prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits at the Middletown Works, the Company, through the Middletown POTW,
petitioned the EPA for "removal credits," a type of compliance exemption,
based on the Middletown POTW's satisfactory treatment of the Company's
wastewater for ammonia and phenol. The EPA declined to review the Company's
application on the grounds that it had not yet promulgated new sludge
management rules. The Company thereupon sought and obtained from the Federal
District Court for the Southern District of Ohio an injunction prohibiting the
EPA from instituting enforcement action against the Company for noncompliance
with the pretreatment limitations, pending the EPA's promulgation of the
applicable sludge management regulations. Although the Company is unable to
4
predict the outcome of this matter, if the EPA eventually refuses to grant the
Company's request for removal credits, the Company could incur additional
costs to construct pretreatment facilities at the Middletown Works.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the Company's
Middletown Works and all hourly employees of independent contractors working
at the facility since June 1992. The complaint has twice been amended to add
additional named plaintiffs. The plaintiffs allege negligence and intentional
tort and seek compensatory and punitive damages in an unspecified amount for
alleged dangerous working conditions at the Company's Middletown Works. In
March 1997, the Court granted plaintiffs' motion to certify a class. The
Company's appeal of this decision to the Ohio Supreme Court was denied on July
29, 1998. The Court of Common Pleas has set a new discovery schedule and a
trial date of March 2000. On November 2, 1998, the Company filed motions in
the trial court for an order vacating class certification and for partial
summary judgment on the grounds of federal preemption. Both motions are
pending.
In April 1996, an action was filed in the United States District Court,
Southern District of Ohio, by a number of former employees of the Company
seeking certain pension and postretirement benefits which they allege were
wrongly denied them when the Company outsourced their positions. On June 18,
1998, the magistrate judge issued a report and recommendation to the court
granting in part and denying in part the Company's motion for summary
judgment. On September 18, 1998, the court adopted the magistrate judge's
report and recommendation, and referred the parties to mediation. Mediation is
in progress. Trial is scheduled for March 1999.
On January 20, 1998, judgment was entered by the United States District
Court, Southern District of Ohio, against the Company in the amount of $6.5
million following a jury trial in a disability discrimination lawsuit brought
by a former employee. On January 30, 1998, the Company moved for judgment in
its favor as a matter of law, reduction of the damages and a new trial. On
August 7, 1998, the court temporarily stayed all post-trial motions pending
mediation, which is in progress.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Company
The following table sets forth the name, age and principal position with the
Company of each of its executive officers as of January 22, 1999:
Name Age Positions with the Company
---- --- --------------------------
Richard M. Wardrop, Jr.. 53 Chairman of the Board and Chief Executive Officer
James L. Wareham........ 59 President
Richard E. Newsted...... 41 Executive Vice President, Commercial
John G. Hritz........... 44 Executive Vice President, General Counsel and Secretary
Michael T. Adams........ 42 Vice President, Manufacturing
Michael P. Christy...... 42 Vice President, Purchasing and Transportation
Thomas C. Graham, Jr.... 44 Vice President, Research and Engineering
Brenda S. Harmon........ 47 Vice President, Human Resources
Alan H. McCoy........... 47 Vice President, Public Affairs
James W. Stanley........ 54 Vice President, Safety and Health
James L. Wainscott...... 41 Vice President, Treasurer and Chief Financial Officer
James F. Walsh.......... 45 Vice President, Corporate Development
Donald B. Korade........ 56 Controller
5
Richard M. Wardrop, Jr. has been Chairman of the Board of the Company since
January 1997. He has been a director since March 1995 and Chief Executive
Officer since May 1995. Mr. Wardrop also served as President of the Company
from April 1994 until March 1997. From June 1992 to April 1994, Mr. Wardrop
served as Vice President, Manufacturing of the Company's predecessor, Armco
Steel Company, L.P.
James L. Wareham has been President since March 1997. Prior to joining the
Company, Mr. Wareham was Chairman, President and Chief Executive Officer of
Wheeling Pittsburgh Steel Corporation as well as President of WHX Corporation,
the parent company of Wheeling Pittsburgh Steel Corporation.
Richard E. Newsted was named Executive Vice President, Commercial in July
1998. From May 1997 until that date, Mr. Newsted had been Executive Vice
President, Chief Financial Officer of the Company. He had been Senior Vice
President, Chief Financial Officer of the Company from August 1994 to May 1997
and was Treasurer from August 1994 through March 1995. From January 1993 until
June 1994, Mr. Newsted was Vice President, Chief Financial Officer and
Secretary of National Steel Corporation.
John G. Hritz was named Executive Vice President, General Counsel and
Secretary in January 1999. From May 1998 until that date, Mr. Hritz had been
Senior Vice President, General Counsel and Secretary of the Company. Prior to
that Mr. Hritz had been Vice President, General Counsel and Secretary of the
Company since August 1996. Mr. Hritz joined the Company in 1989 as Counsel in
the Law Department, and was named Assistant General Counsel in 1993 and
Assistant Secretary in 1994. Since June 1996, Mr. Hritz also has had
responsibility for the Company's employee and labor relations and
environmental affairs. In January 1999 Mr. Hritz assumed responsibility for
the Company's research and engineering.
Michael T. Adams was named Vice President, Manufacturing in July 1998. From
October 1995 until that date, Mr. Adams served as General Manager,
Manufacturing of the Company's Middletown Works facility. Prior to that Mr.
Adams held various manufacturing and engineering positions within the Company.
Michael P. Christy has been Vice President, Purchasing and Transportation
since November 1998. From January 1998 until that date, Mr. Christy had been
Vice President, Purchasing and Financial Analysis. Mr. Christy was named
Director, Purchasing and Financial Analysis in May 1997 after having served as
Director, Financial Planning and Analysis since June 1996. Prior to that Mr.
Christy held various positions in finance, planning and operations at National
Steel Corporation.
Thomas C. Graham, Jr. has been Vice President, Research and Engineering
since June 1996. From early 1994 until that date, he was General Manager
Sales, Construction for National Steel Corporation, having previously held
various positions in Project Engineering, Process and Technology, and
Operations Management at that company.
Brenda S. Harmon has been Vice President, Human Resources since January
1998. Mrs. Harmon had been General Manager, Human Resources since September
1996, after having been named Corporate Manager, Human Resources in March
1995. Prior to that Mrs. Harmon held various positions within the Company's
Human Resources Department.
Alan H. McCoy has been Vice President, Public Affairs since January 1997.
From March 1994 until that date, Mr. McCoy served as General Manager, Public
Relations. Prior to that Mr. McCoy held various positions within the Company's
Public Relations Department.
James W. Stanley has been Vice President, Safety and Health since January
1996. Prior to joining the Company, Mr. Stanley held various management
positions with the U.S. Department of Labor's Occupational Safety and Health
Administration since its inception in 1971.
James L. Wainscott was named Vice President, Treasurer and Chief Financial
Officer in July 1998. From April 1995 until that date, Mr. Wainscott had been
Vice President and Treasurer of the Company. For more than ten years prior to
joining the Company, Mr. Wainscott held various financial positions with
National Steel Corporation.
6
James F. Walsh was named Vice President, Corporate Development in July 1998.
From January 1996 until that date, Mr. Walsh had been Vice President,
Manufacturing of the Company. Mr. Walsh joined the Company in January 1993 as
Manager, Maintenance Technology, and in April 1994 was named General Manager,
Middletown Works. He was elected Vice President, Research and Design
Engineering in August 1995.
Donald B. Korade has been Controller since September 1995. Mr. Korade was
Assistant Controller, Financial Accounting from June 1989 until September
1995. Prior to that date, Mr. Korade held various positions within the
Company's Finance organization.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been listed on the New York Stock Exchange
since April 5, 1995 (symbol: AKS). In October 1997, the Company's Board of
Directors authorized a two-for-one stock split of its outstanding Common Stock
effective November 17, 1997. The number of shares, share prices, earnings per
share and dividends per share have been restated for the two-for-one Common
Stock split. The table below sets forth, for the calendar quarters indicated,
the reported high and low sale prices of the Common Stock.
1997 High Low
---- -------- ---------
First Quarter.......................................... $20 11/16 $17 1/2
Second Quarter......................................... 22 3/16 17 3/4
Third Quarter.......................................... 24 1/32 20 9/16
Fourth Quarter......................................... 22 5/8 16 1/8
1998 High Low
---- -------- ---------
First Quarter.......................................... $21 5/8 $16 1/16
Second Quarter......................................... 22 3/16 16 11/16
Third Quarter.......................................... 18 7/8 13 5/8
Fourth Quarter......................................... 23 3/4 14 1/2
As of January 22, 1999, there were 59,046,316 shares of Common Stock
outstanding and held of record by 301 stockholders. Because many of these
shares were held by depositories, brokers and other nominees, the number of
record holders is not representative of the number of beneficial holders.
On May 15, 1996, the Board of Directors approved a plan to repurchase, from
time-to-time, up to $100.0 million of the Company's outstanding equity
securities. The following table is a summary of the purchases under that plan:
Number
Year of shares* Amount Per Share*
---- -------------- ---------- --------------
(dollars in millions, except per share amounts)
Common Stock............... 1997 1,409,050 $26.7 $18.96
1998 2,121,500 38.4 18.12
Preferred Stock............ 1996 625,195 12.8 20.50
1997 163,799 3.1 19.12
-------------- ----------
Total Program.............. 4,319,544 $81.0
============== ==========
- --------
*On a post-split basis.
In addition, on October 16, 1997, the Company redeemed its remaining
outstanding 4,750,774 Shared Appreciation Income Linked Securities ("SAILS"),
in exchange for the issuance of 8,191,284 shares of Common Stock on a post-
split basis.
7
The Company has paid quarterly dividends on its Common Stock since November
15, 1995. In 1997, dividends at the rate of $0.10 per share were paid on
February 15, May 15, August 15 and a dividend of $0.125 per share was paid on
November 17 after the Company's Board of Directors authorized a 25% increase
in the annual dividend rate. In 1998, a dividend of $0.125 per share was paid
on February 17, May 15, August 17 and November 16. The declaration and payment
of cash dividends is subject to restrictions imposed by the instruments
governing its senior debt. At December 31, 1998, the Company had adequate
amounts available for the payment of cash dividends.
Item 6. Selected Financial Data.
The following selected historical consolidated financial data for each of
the five years in the period ended December 31, 1998 have been derived from
the Company's audited consolidated financial statements. The selected
historical consolidated financial data presented herein are qualified in their
entirety by, and should be read in conjunction with, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Years Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(dollars in millions, except per share data)
Statement of Operations Data: (1)
Net sales........................ $2,016.6 $2,257.3 $2,301.8 $2,440.5 $2,393.6
Cost of products sold............ 1,655.2 1,768.1 1,846.5 1,964.5 1,963.4
Selling and administrative
expenses........................ 113.7 116.5 114.7 114.8 118.8
Depreciation..................... 70.7 74.6 76.1 79.8 97.8
Special charges and unusual items
(2)............................. (15.9) -- -- -- --
-------- -------- -------- -------- --------
Total operating costs............ 1,823.7 1,959.2 2,037.3 2,159.1 2,180.0
-------- -------- -------- -------- --------
Operating profit (2)............. 192.9 298.1 264.5 281.4 213.6
Interest expense................. 48.2 35.6 39.8 76.3 56.0
Other income..................... 7.3 19.0 12.3 36.4 18.6
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item.............. 152.0 281.5 237.0 241.5 176.2
Provision (benefit) for income
taxes (3)....................... (120.5) 12.9 91.1 90.6 61.7
-------- -------- -------- -------- --------
Income before extraordinary item. 272.5 268.6 145.9 150.9 114.5
Extraordinary item (4)........... (14.9) -- -- -- --
-------- -------- -------- -------- --------
Net income....................... $ 257.6 $ 268.6 $ 145.9 $ 150.9 $ 114.5
======== ======== ======== ======== ========
Basic earnings per share:
Income before extraordinary
items......................... $5.13 $4.82 $2.57 $2.59 $1.93
Extraordinary items............ (0.28) -- -- -- --
Net income..................... 4.85 4.82 2.57 2.59 1.93
Diluted earnings per share:
Income before extraordinary
items......................... 4.17 4.09 2.35 2.43 1.92
Extraordinary items............ (0.23) -- -- -- --
Net income..................... 3.94 4.09 2.35 2.43 1.92
Cash dividend per common share... n/a .075 .325 .425 .50
8
Years Ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Balance Sheet Data: (1)
Cash, cash equivalents and short-
term investments................. $ 261.8 $ 312.8 $ 739.3 $ 606.1 $ 83.0
Working capital................... 443.5 489.8 1,005.1 658.2 276.1
Total assets...................... 1,933.2 2,115.5 2,650.8 3,084.3 3,306.3
Current portion of long-term debt. -- -- -- -- --
Long-term debt (excluding current
portion)......................... 330.0 325.0 875.0 997.5 1,145.0
Current portion of pension and
postretirement benefit
obligations...................... 110.3 0.1 0.1 0.1 0.1
Long-term pension and
postretirement benefit
obligations (excluding current
portion)......................... 638.3 655.7 564.9 554.1 572.6
Stockholders' equity (5).......... 449.0 674.2 777.0 879.6 929.5
- --------
(1) AK Steel Holding and AK Steel were formed effective March 29, 1994, as a
result of a recapitalization of Armco Steel Company, L.P. which was a
joint venture of Armco Inc. and Kawasaki Steel Corporation.
(2) The operating profit for 1994 includes a gain of $15.9 million from the
sale of the Company's equity interests in Southwestern Ohio Steel, L.P.
and Nova Steel Processing.
(3) Includes a tax benefit of $120.3 million in 1994 associated with
recognition of the deferred tax asset related to postretirement benefits.
(4) The extraordinary item of $14.9 million in 1994 consists of charges
associated with the prepayment of certain outstanding debt.
(5) Stockholders' equity at December 31, 1994, reflects reductions to equity
of $39.3 million (net of tax) related to the establishment of an
additional pension plan liability. As of December 31, 1995, the Company
had fully funded its pension plan liability on an accumulated benefit
obligation basis and eliminated the reduction to stockholders' equity.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The Company concentrates on the production of premium quality coated, cold
rolled and hot rolled carbon steel primarily for sale to the automotive,
appliance, construction and manufacturing markets. The Company also cold rolls
and aluminum coats stainless steel for automotive industry customers.
1998 Compared to 1997
Net sales for 1998 totalled $2,393.6 million versus $2,440.5 million for
1997. The Company continues to shift product mix to coated and cold rolled
products which accounted for nearly 80% of net sales and 68% of shipments in
1998. This improvement in sales of value added product is expected to continue
in 1999 as the Company's Rockport Works increases its output and completes
construction of the remaining facilities. The following table sets forth the
percentage of the Company's net sales attributable to various markets for the
years indicated:
Years Ended
December 31,
--------------
1996 1997 1998
---- ---- ----
Automotive.................................................... 55% 56% 60%
Appliance, Construction and Manufacturing..................... 15% 16% 17%
Distributors and Convertors................................... 30% 28% 23%
In 1998, the Company's shipments to automotive customers were a record 2.3
million tons, surpassing by 11% the Company's 1997 record automotive
shipments.
Operating profit in 1998 totalled $213.6 million or $46 per ton shipped
compared to $281.4 million or $61 per ton shipped in 1997. Operating results
were negatively impacted by the General Motors work stoppage, a
9
planned twenty day Blast Furnace outage at the Company's Middletown Works, and
lower realized selling prices particularly in the hot rolled product market.
Record levels of imported hot rolled steel eroded the market price for non-
contract spot steel sales.
Interest expense totalled $56.0 million for 1998, $20.3 million lower than
1997 primarily related to increased capitalization of interest associated with
the construction of the Rockport Works facility. Capitalized interest
increased by $38.4 million from 1997.
The total income tax provision was $61.7 million, the components of which
are described in Note 3 to the Consolidated Financial Statements herein. The
effective book tax rate was 37.5% and 35% for 1997 and 1998, respectively.
Net income for 1998 totalled $114.5 million compared to $150.9 million for
1997. Diluted earnings per share for 1998 was $1.92 compared to $2.43 in 1997.
Year 2000 issue
The year 2000 issue arises from the design of computer operating systems and
computer software programs which recognize only two digits in the date field
and, as a result, may interpret "00" incorrectly as the year 1900 instead of
as the year 2000. Such incorrect recognition has the potential to disrupt both
business systems and process control systems, of which the latter could
directly impact the manufacturing process.
The Company has assessed and essentially completed all necessary
modifications and upgrades to its business systems to be year 2000 compliant.
Additionally, with the assistance of outside consultants, the Company has
assessed and essentially completed all necessary modifications and upgrades to
its process control systems to be year 2000 compliant. The Company plans to
complete testing of its business systems and process control systems by
September 1999.
In addition, the Company has responded to numerous customer inquiries on the
year 2000 issue. Inquiries have also been made of the Company's major
suppliers as to their year 2000 readiness. Electronic data interchange testing
with customers and suppliers is expected to be completed by September 30,
1999.
The Company currently estimates its expenditures for year 2000 compliance
will approximate $5.0 million. Additional expenditures, if any, beyond this
amount could be required based on the nature and extent of required
modifications or upgrades identified during testing.
Numerous factors could cause the expected cost and completion dates to
differ from the above estimates. Contingency plans, if needed, will be in
place prior to January 1, 2000. However, the Company currently believes that
the year 2000 issues will not have a material adverse impact on the Company's
financial condition, results of operations or cash flow.
1997 Compared to 1996
Net sales increased 6% in 1997 over 1996 with coated and cold rolled
shipments accounting for 75% of total product sales. The Company continues to
focus on the automotive market with record shipments and sales during 1997.
The following table sets forth the percentage of the Company's net sales
attributable to various markets for the years indicated:
Years Ended
December 31,
--------------
1995 1996 1997
---- ---- ----
Automotive.................................................... 50% 55% 56%
Appliance, Construction and Manufacturing..................... 16% 15% 16%
Distributors and Convertors................................... 34% 30% 28%
10
Operating profit in 1997 totalled $281.4 million, or $61 per ton shipped,
compared to $264.5 million or $60 per ton shipped in 1996. Reductions in
selling prices and increases in raw materials and energy costs were offset as
the Company continues to emphasize productivity gains and quality enhancements
as the primary components of its cost reduction efforts. Manhours per net ton
shipped continued to improve, declining to 2.83 for the year of 1997 from 3.02
for 1996.
Interest expense, net of capitalized interest of $20.9 million, totalled
$76.3 million in 1997 compared to $39.8 million in 1996. The increase in
interest expense is attributable primarily to the issuance in December 1996 of
$550.0 million of 9 1/8% Senior Notes Due 2006 (the "9 1/8% Notes") as well as
the issuance in June and September 1997 of $92.5 million and $20.0 million,
respectively, of Senior Secured Notes Due 2004 (the "Secured Notes"). Other
income, consisting primarily of interest income, increased to $36.4 million in
1997 from $12.3 million in 1996.
The total income tax provision was $90.6 million, the components of which
are described in Note 3 to the Consolidated Financial Statements herein. The
tax rate was 38.4% and 37.5% for 1996 and 1997, respectively.
Net income for 1997 totalled $150.9 million compared to $145.9 million for
1996. Diluted earnings per share have been calculated in compliance with the
adoption of SFAS No. 128 and adjusted for the two-for-one Common Stock split.
Diluted earnings per share for 1997 totalled $2.43 compared to $2.35 for 1996.
Liquidity and Capital Resources
Year Ended December 31, 1998
At December 31, 1998, the Company had $83.0 million in cash, cash
equivalents and short-term investments and $99.7 million of financing
available under its $125.0 million accounts receivable purchase credit
facility. In January 1999, the Company's credit facility was increased from
$125.0 million to $200.0 million and the expiration date extended to December
31, 2003. During 1998, cash flow from operations generated $143.1 million.
Operating cash flows were attributed primarily to net income and noncash
charges for depreciation and taxes, offset by the impact of working capital
items.
Cash flows used in investing totalled $488.0 million. Capital investments
used $772.6 million in cash which was partially offset by sales of short term
investments which generated $257.9 million.
Cash flows from financing activities generated $79.7 million. In January
1998, the Company issued an aggregate of $137.5 million of Senior Secured
Notes Due 2004, of which $130.0 million bear interest at 8.48% and $7.5
million bear interest at 8.98%. In February 1998, the City of Rockport,
Indiana, issued $10.0 million in Variable Rate Demand Revenue Bonds with a 30-
year term maturing December 1, 2028, priced at an initial rate of 3.20% which
are secured by the Company's letter of credit. Interest is at a variable rate
which is reset weekly and paid monthly. The Company paid $29.7 million in
dividends and utilized $39.6 million for open market purchases of its Common
Stock.
Anticipated Debt Service
The Company's long-term debt at December 31, 1998, totalled $1,145.0 million
and consisted of $325.0 million principal amount of its 10 3/4% Senior Notes
Due 2004 and $550.0 million principal amount of its 9 1/8% Senior Notes Due
2006, none of which is subject to amortization prior to maturity. In addition,
the Company has $250.0 million of Senior Secured Notes repayable in four
successive annual installments of $62.5 million commencing in December 2001.
The remaining $20.0 million consists of tax exempt revenue bonds due $10.0
million each on December 1, 2027 and 2028. Interest expense for 1998, net of
capitalized interest of $59.3 million, totalled $56.0 million.
11
Capital Investments
The Company anticipates annual capital investments of approximately $125.0
million to maintain the competitiveness and efficiency of its existing
facilities and to assure its compliance with applicable safety and
environmental standards. Capital investments including Rockport Works totalled
$772.6 million, including capitalized interest, during 1998. At December 31,
1998, commitments for future capital investments, including Rockport Works and
those to ensure environmental compliance, totalled approximately $104.8
million, all of which will be funded in 1999.
Employee Benefit Obligations
The Company's pension plans are fully funded on an accumulated benefit
obligation basis in accordance with generally accepted accounting principles
as of December 31, 1998. Funding levels in the near term (three to five years)
are expected to be minimal. The Company also has available a pension funding
credit balance of $298.1 million that can be used to meet future funding
requirements.
At December 31, 1998, the Company's liability for postretirement benefits
other than pensions totalled $572.6 million. The Company has established a
health care trust as a means of prefunding this liability. The balance of the
trust, including the earnings on the trust investments, as of December 31,
1998, was $210.4 million, which was equivalent to over two years of active and
retiree health care payments.
Other
On December 10, 1998, the Company and two divisions of Mexican steel
producer Hylsamex completed definitive agreements that will enable them to
jointly market their respective products to serve customers in the United
States, Mexico and Central and South America.
Year Ended December 31, 1997
At December 31, 1997, the Company had $606.1 million in cash, cash
equivalents and short term investments and $109.4 million of financing
available under its $125.0 million accounts receivable purchase credit
facility. During 1997, cash flow from operations generated $472.0 million.
Operating cash flows were attributed primarily to net income, the impact of
working capital items and noncash charges for depreciation and taxes.
Cash flows used in investing activities totalled $706.3 million of which
$508.4 million was associated with the Rockport Works. Remaining capital
investments totalled $128.1 million and purchases of short-term investments
were $41.7 million.
Cash flows from financing activities generated $59.4 million. In 1997 the
Company issued an aggregate of $112.5 million of its Secured Notes with a
weighted average interest rate of 8.99%, an additional $137.5 million of the
Secured Notes were issued in January 1998 with a weighted average interest
rate of 8.51%. The Company paid $34.1 million in dividends and utilized $29.8
million for open market purchases of its equity securities during 1997.
Other
On October 8, 1997, the Company's Board of Directors authorized a two-for-
one Common Stock split that became effective November 17, 1997. Following the
stock split, approximately 62.0 million common shares were outstanding.
On October 16, 1997, the Company redeemed its then outstanding 4,750,774
SAILS in exchange for the issuance of 8,191,284 shares (on a post-split basis)
of Common Stock. The redemption did not dilute the interests of common
shareholders because per share earnings from the date of issuance of the SAILS
had been calculated
12
on a diluted basis that gave effect to the mandatory conversion feature of the
SAILS. Cash requirements for the redemption were minimal, relating only to
payment for fractional shares. Redemption of the SAILS resulted in net annual
dividend cash flow savings of $6.1 million.
In October 1997, the Board of Directors also approved a 25% increase in the
Company's Common Stock dividend to an annual indicated rate of $.50 per share
on a post-split basis. A post-split quarterly dividend of $.125 per share was
paid on November 17, 1997 to shareholders of record on October 21, 1997.
Year Ended December 31, 1996
On December 17, 1996, the Company completed arrangements for $800.0 million
of debt financing for the construction of Rockport Works. On that date the
Company issued $550.0 million of 9 1/8% Notes and entered into definitive
agreements for the private sale beginning in June of 1997 of an aggregate of
$250.0 million of Secured Notes, which will be collateralized by the hot-dip
galvanizing and galvannealing line and the continuous cold mill at the
Rockport Works. Pending completion of these facilities, the Company is
prohibited from granting liens on its inventories.
At December 31, 1996, the Company had $739.3 million in cash, cash
equivalents and short term investments and $119.4 million of financing
available under its $125.0 million accounts receivable purchase credit
facility. During 1996 cash flow from operations generated $86.3 million. Cash
flows from net income were partially offset as the Company contributed a total
of $100.0 million to a trust established to prefund health care benefits for
both active and retired employees, contributed $25.0 million to its pension
trust and paid profit sharing bonuses of $34.6 million.
Cash flows used in investing activities totalled $185.1 million of which
$53.6 million was associated with the Rockport Works.
Cash flows from financing activities generated $484.9 million as the net
proceeds from the issuance of $550.0 million of the 9 1/8% Notes were
partially offset as the Company paid cash dividends of $28.7 million and
utilized $39.2 million for open market purchases of its equity securities
during 1996.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
In the ordinary course of business, the Company's market risk is limited to
changes in interest rates. The Company manages interest rate risk through
strategies utilized in current operations and issuing substantially all fixed
rate debt as a source for financing operations. The fair value of this debt as
of December 31, 1998 is $1,164.6 million. A change in the prevailing interest
rates of 10% would result in a change in the total fair value of long term
debt by approximately $116.5 million. Fair values were determined from quoted
market prices or discounted future cash flows.
13
Item 8. Financial Statements and Supplementary Data.
AK Steel Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report.............................................. 15
Consolidated Statements of Income for the Years Ended December 31, 1996,
1997 and 1998............................................................ 16
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. 17
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998...................................................... 18
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998......................................... 19
Notes to Consolidated Financial Statements................................ 20
14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
AK Steel Holding Corporation:
We have audited the accompanying consolidated balance sheets of AK Steel
Holding Corporation and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 20, 1999
15
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1996, 1997 and 1998
(dollars in millions, except per share data)
1996 1997 1998
-------- -------- --------
Net sales (Note 7)................................. $2,301.8 $2,440.5 $2,393.6
Operating costs:
Cost of products sold (Notes 1 and 7)............ 1,846.5 1,964.5 1,963.4
Selling and administrative expenses.............. 114.7 114.8 118.8
Depreciation (Note 1)............................ 76.1 79.8 97.8
-------- -------- --------
Total Operating costs.......................... 2,037.3 2,159.1 2,180.0
-------- -------- --------
Operating profit................................... 264.5 281.4 213.6
Interest expense (Note 4).......................... 39.8 76.3 56.0
Other income....................................... 12.3 36.4 18.6
-------- -------- --------
Income before income taxes......................... 237.0 241.5 176.2
Current income tax provision (Note 3).............. 3.8 46.3 31.2
Deferred income tax provision (Note 3)............. 87.3 44.3 30.5
-------- -------- --------
Net income......................................... 145.9 150.9 114.5
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising
during period................................. -- 2.1 (0.5)
Less: reclassification adjustment for
gains/(losses) included in net income......... -- 0.2 1.0
-------- -------- --------
Comprehensive income............................... $ 145.9 $ 152.8 $ 113.0
======== ======== ========
Earnings per share: (Note 2)*
Basic earnings per share......................... $ 2.57 $ 2.59 $ 1.93
Diluted earnings per share....................... 2.35 2.43 1.92
Cash dividends per common share.................. .325 .425 .50
- --------
* Restated for two-for-one Common Stock split effective November 17, 1997.
See notes to consolidated financial statements.
16
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(dollars in millions)
1997 1998
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents (Note 1)........................ $ 348.2 $ 83.0
Short-term investments.................................... 257.9 --
Accounts receivable, net (Notes 1 and 4).................. 241.5 286.8
Inventories, net (Note 1)................................. 365.2 431.9
Other..................................................... 8.8 5.8
-------- --------
Total Current Assets..................................... 1,221.6 807.5
-------- --------
Property, plant and equipment (Note 1):
Land, land improvements and leaseholds.................... 47.8 90.7
Buildings................................................. 81.8 155.2
Machinery and equipment................................... 1,396.4 2,050.8
Construction in progress.................................. 693.2 635.8
-------- --------
Total.................................................... 2,219.2 2,932.5
Less accumulated depreciation............................. (626.5) (681.6)
-------- --------
Property, plant and equipment, net........................ 1,592.7 2,250.9
Prepaid pension (Note 6).................................... 159.2 170.3
Other (Note 6).............................................. 110.8 77.6
-------- --------
Total Assets............................................. $3,084.3 $3,306.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 375.6 $ 322.9
Accrued salary and wages.................................. 66.1 58.0
Other accruals (Notes 2 and 3)............................ 91.9 126.5
Current portion of deferred taxes (Note 3)................ 29.7 23.9
Current portion of long-term debt (Note 4)................ -- --
Current portion of pension obligation (Note 6)............ 0.1 0.1
Current portion of postretirement benefit obligation (Note
6)....................................................... -- --
-------- --------
Total Current Liabilities................................ 563.4 531.4
-------- --------
Noncurrent Liabilities:
Long-term debt (Note 4)................................... 997.5 1,145.0
Pension obligation (Note 6)............................... -- --
Postretirement benefit obligation (Note 6)................ 554.1 572.6
Deferred taxes (Note 3)................................... 30.3 68.0
Other liabilities......................................... 59.4 59.8
Commitments and contingencies (Notes 4, 8 and 9).......... -- --
-------- --------
Total Noncurrent Liabilities............................. 1,641.3 1,845.4
-------- --------
Total Liabilities........................................ 2,204.7 2,376.8
-------- --------
Stockholders' Equity:
Common Stock, Authorized 200,000,000 shares of $.01 par
value each; issued, 1997, 63,503,718 shares; 1998,
63,868,087 shares; outstanding, 1997, 60,808,922 shares;
1998, 59,022,588 shares (Note 2)......................... 0.6 0.6
Additional paid-in capital................................ 716.8 722.0
Treasury stock, common shares at cost, 1997, 2,694,796
shares; 1998, 4,845,499 (Note 2)......................... (48.2) (87.8)
Retained earnings......................................... 208.3 293.1
Accumulated other comprehensive income.................... 2.1 1.6
-------- --------
Total Stockholders' Equity.................................. 879.6 929.5
-------- --------
Total Liabilities and Stockholders' Equity.................. $3,084.3 $3,306.3
======== ========
See notes to consolidated financial statements.
17
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998
(dollars in millions)
1996 1997 1998
------- ------- -------
Cash flows from operating activities:
Net income........................................ $ 145.9 $ 150.9 $ 114.5
------- ------- -------
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation..................................... 76.1 79.8 97.8
Deferred income taxes............................ 87.3 44.3 30.5
Other, net....................................... 3.5 12.8 13.2
Changes in Assets and Liabilities:
Accounts and notes receivable.................. (42.4) 19.0 (44.8)
Inventories.................................... (20.2) (4.3) (66.7)
Current liabilities............................ (36.2) 179.0 (23.5)
Other assets................................... (19.1) 7.7 14.2
Pension obligation............................. (14.4) (5.9) (11.1)
Postretirement benefit obligation.............. (90.8) (10.8) 18.5
Other liabilities.............................. (3.4) (0.5) 0.5
------- ------- -------
Total Adjustments............................ (59.6) 321.1 28.6
------- ------- -------
Net cash flows from operating activities....... 86.3 472.0 143.1
------- ------- -------
Cash flows from investing activities:
Capital investments............................... (141.6) (636.5) (772.6)
Net (purchase)/sale of short-term investments..... (40.4) (41.7) 257.9
Purchase of long-term investments................. -- (26.4) (0.1)
Proceeds from the sale of long-term investments... -- 0.4 24.5
Proceeds from sale of property, plant and
equipment........................................ 0.3 0.9 8.4
Advances to investees............................. (5.4) (3.0) (6.1)
Proceeds, asset sales............................. 2.0 -- --
------- ------- -------
Net cash flows from investing activities....... (185.1) (706.3) (488.0)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock............ 16.6 7.0 1.7
Proceeds from issuance of long-term debt. ........ 550.0 122.5 147.5
Purchase of treasury stock........................ -- (26.7) (39.6)
Purchase of preferred stock....................... (39.2) (3.1) --
Preferred stock dividends paid.................... (11.7) (10.3) --
Common Stock dividends paid....................... (17.0) (23.8) (29.7)
Underwriting discount and stock issuance expense.. (13.8) (6.1) (0.2)
Other, net........................................ -- (0.1) --
------- ------- -------
Net cash flows from financing activities....... 484.9 59.4 79.7
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 386.1 (174.9) (265.2)
Cash and cash equivalents, beginning of period.... 137.0 523.1 348.2
------- ------- -------
Cash and cash equivalents, end of period.......... $ 523.1 $ 348.2 $ 83.0
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 38.0 $ 93.0 $ 109.5
Interest capitalized............................. (1.7) (20.9) (59.3)
Income taxes..................................... 5.8 42.6 23.2
See notes to consolidated financial statements.
18
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
Additional
Preferred Common Paid-In- Treasury Retained
Stock Stock Capital Stock Earnings Total
--------- ------ ---------- -------- -------- ------
Balance, December 31,
1995.................... $0.1 $0.3 $715.0 $(21.5) $(19.7) $674.2
Net income............... 145.9 145.9
Stock options exercised.. 16.6 16.6
Tax benefit from exercise
of stock options (Note
3)...................... 4.1 4.1
Tax benefit from vesting
of restricted stock..... 0.3 0.3
Purchase of stock........ (30.3) (8.9) (39.2)
Cash dividend:
Preferred stock $.538
cash dividend per
quarter............... (11.1) (11.1)
Common Stock $.075 cash
dividend per quarter,
$.10 in fourth
quarter*.............. (17.0) (17.0)
Issuance of restricted
stock, net.............. 4.3 4.3
Unamortized restricted
stock (Note 2).......... (1.1) (1.1)
---- ---- ------ ------ ------ ------
Balance, December 31,
1996.................... 0.1 0.3 708.9 (21.5) 89.2 777.0
Net income............... 150.9 150.9
Unrealized gain on
marketable securities... 2.1 2.1
Stock options exercised.. 7.0 7.0
Two-for-one Common Stock
split................... 0.3 (0.3)
Tax benefit from exercise
of stock options (Note
3)...................... 1.2 1.2
Tax benefit from vesting
of restricted stock..... 0.1 0.1
Purchase of stock........ (2.8) (26.7) (0.3) (29.8)
Redemption of preferred
stock................... (0.1) (0.1) (0.2)
Cash dividend:
Preferred stock $.538
cash dividend per
quarter............... (7.7) (7.7)
Common Stock $.10 cash
dividend per quarter,
$.125 in fourth
quarter*.............. (23.8) (23.8)
Issuance of restricted
stock, net.............. 6.2 6.2
Unamortized restricted
stock (Note 2).......... (3.4) (3.4)
---- ---- ------ ------ ------ ------
Balance, December 31,
1997.................... -- 0.6 716.8 (48.2) 210.4 879.6
Net income............... 114.5 114.5
Unrealized gain on
marketable securities... (0.5) (0.5)
Stock options exercised.. 1.7 1.7
Tax benefit from exercise
of stock options (Note
3)...................... 0.2 0.2
Tax benefit from vesting
of restricted stock..... 0.2 0.2
Purchase of stock........ (39.6) (39.6)
Common Stock $.125 cash
dividend per quarter.... (29.7) (29.7)
Issuance of restricted
stock, net.............. 4.6 4.6
Unamortized restricted
stock (Note 2).......... (1.5) (1.5)
---- ---- ------ ------ ------ ------
Balance, December 31,
1998.................... $-- $0.6 $722.0 $(87.8) $294.7 $929.5
==== ==== ====== ====== ====== ======
- --------
* Restated for two-for-one Common Stock split effective November 17, 1997
See notes to consolidated financial statements.
19
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation: AK Steel Holding Corporation ("AK Holding") and its
wholly-owned subsidiary AK Steel Corporation ("AK Steel," collectively the
"Company") were formed effective March 29, 1994 as a result of the
recapitalization of Armco Steel Company, L.P.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates.
Actual results could differ from those estimates.
The results of operations and financial position of AK Steel approximates
the results of operations and financial position of AK Holding.
For comparison purposes certain 1996 and 1997 items have been reclassified
to conform with 1998 classifications. All references to the number of common
shares and per share amounts have given effect to the two-for-one Common Stock
split effective November 17, 1997.
The Company consists of the operations and accounts of the Middletown Works,
Ashland Works, Rockport Works, Headquarters, AKSR Investments Inc. ("AKR") and
AKS Investments, Inc. and its group of wholly-owned subsidiaries, (the "AKSII
Group"). The Company is an integrated steel producer of carbon flat rolled
steel for the automotive, appliance, manufacturing and other markets. The
Company has one major customer that accounted for 17%, 18%, and 19% of its net
sales in 1996, 1997 and 1998, respectively and another customer that accounted
for 13% in 1998.
Employees: As of December 31, 1998, the Company had approximately 5,800
active employees, of whom approximately 54% were represented by the Armco
Employees Independent Federation, Inc. (the "AEIF"), 17% by the United
Steelworkers of America (the "USWA") and 6% by the Oil, Chemical and Atomic
Workers Union (the "OCAW"). The AEIF represents all hourly employees and
certain nonexempt salaried employees at the Middletown Works. The USWA
represents hourly steelmaking employees and certain nonexempt salaried
employees at the Ashland Works. The OCAW represents hourly employees at the
Ashland Works coke manufacturing facility.
The Company's existing labor contracts are scheduled to expire as follows:
AEIF--February 29, 2000, USWA--September 1, 2000, and OCAW--April 1, 2001.
Cash Equivalents: Cash equivalents include short-term, highly liquid
investments that are readily convertible to known amounts of cash and are of
an original maturity of three months or less.
Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments does not differ materially from their estimated fair
value (quoted market prices) in 1997 and 1998 with the exception of the 10
3/4% Senior Notes Due 2004 whose fair value approximates $347.3 and $340.4 at
December 31, 1997 and 1998, respectively, and the 9 1/8% Senior Notes Due 2006
("9 1/8% Notes") whose fair market value approximates $569.5 and $573.4 at
December 31, 1997 and 1998, respectively.
20
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Accounts Receivable: The allowance for doubtful accounts was $1.5 at
December 31, 1997 and 1998.
Inventories: Inventories are valued at the lower of cost or market. The cost
of the majority of inventories is measured on the last in, first out ("LIFO")
method. Other inventories are measured principally at average cost.
1997 1998
------ ------
Inventories on LIFO:
Finished and semifinished.................................. $235.5 $269.1
Raw materials and supplies................................. 154.2 168.4
Adjustment to state inventories at LIFO value.............. (31.6) (13.1)
------ ------
Total.................................................... 358.1 424.4
Other inventories............................................ 7.1 7.5
------ ------
Total inventories........................................ $365.2 $431.9
====== ======
There was no liquidation of LIFO inventory layers in 1996 or 1998.
Investments: The Company has investments in associated companies (joint
ventures and an entity that the Company does not control). These investments
are accounted for under the equity method. Because these companies are
directly integrated in the basic steelmaking facilities, the Company includes
its proportionate share of the income (loss) of these associated companies in
cost of products sold.
Through November 1996, Virginia Horn Taconite Company ("Virginia Horn"), a
member of the AKSII Group, owned a 56% equity interest in Eveleth Expansion
Company ("Eveleth"), a partnership that produced iron ore pellets, which
equated to a 35% interest in Eveleth Mines. In December 1996, under a
restructuring of Eveleth Mines, Virginia Horn increased its ownership interest
in Eveleth Mines LLC ("EVTAC"), a newly formed Minnesota limited liability
company, to 40%. In connection with such investment, Virginia Horn has certain
commitments to EVTAC. The Company's proportionate share of the gains/(losses)
of Eveleth was $5.4 in 1996 and of EVTAC was ($1.9) and ($0.9) in 1997 and
1998, respectively.
Property, Plant and Equipment: Plant and equipment are depreciated under the
straight line method over their estimated lives ranging from 2 to 40 years.
Accounting Policies: In 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 132,
"Employers' Disclosure About Pensions and Other Postretirement Benefits." This
statement, which is effective for years beginning after December 15, 1997,
expands or modifies disclosures and, accordingly, had no impact on the
Company's financial position, results of operations or cash flows.
The Company has not completed the process of evaluating the impact that will
result from adopting SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Company is therefore unable to disclose the impact
that adopting SFAS No. 133 will have on its financial position and results of
operations when such statement is adopted.
2. Stockholders' Equity
Preferred Stock: In October 1994, the Company issued 7,479,674 shares of
Convertible Preferred Stock, Shared Appreciation Income Linked Securities
("SAILS") which constituted a series of the Company's Preferred Stock and
ranked prior to the Common Stock as to payment of dividends and distribution
of assets
21
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
upon liquidation. The SAILS were entitled to cumulative dividends, payable
quarterly in arrears, at a rate of 7% per annum of their stated value of
$30.75 per share. Between October, 1995 and May, 1997, 2,728,900 SAILS were
repurchased and retired under the Company's share repurchase programs. On
October 16, 1997, the Company redeemed the 4,750,774 SAILS then remaining
outstanding in exchange for 8,191,284 shares of Common Stock on a post-split
basis.
Common Stock: On November 17, 1997 the Company implemented a two-for-one
stock split of its outstanding Common Stock in the form of a 100% stock
dividend, issuing approximately 30.6 million shares pursuant thereto. The
holders of Common Stock are entitled to receive dividends when and as declared
by the Board of Directors out of funds legally available and therefore, have
one vote per share in respect of all matters and are not entitled to
preemptive rights.
Dividends: The Company has paid quarterly dividends on its Common Stock
since November 15, 1995. In 1997, dividends at the post-split rate of $0.10
per share were paid on February 15, May 15, August 15 and a dividend of $.125
per share was paid on November 17, after the Company's Board of Directors
authorized a 25% increase in the annual dividend rate. In 1998, a dividend of
$.125 per share was paid on February 17, May 15, August 17, and November 16.
The declaration and payment of cash dividends is subject to restrictions
imposed by the instruments governing its senior debt. At December 31, 1998,
the Company had adequate amounts available for the payment of cash dividends.
Stock Repurchase Plan: On May 15, 1996, the Board of Directors approved a
plan to repurchase, from time to time, up to $100.0 of the Company's
outstanding equity securities. The following table is a summary of the
purchases under that plan:
Number
Year of shares* Amount Per Share*
---------- --------------- ----------- --------------
(dollars in millions, except per share amounts)
Common Stock......... 1997 1,409,050 $ 26.7 18.96
1998 2,121,500 38.4 18.12
Preferred Stock...... 1996 625,195 12.8 20.50
1997 163,799 3.1 19.12
--------------- -----------
Total Program........ 4,319,544 $ 81.0
=============== ===========
- --------
* On a post-split basis.
Stockholder Rights Plan: On January 23, 1996, the Board of Directors adopted
a Stockholder Rights Plan pursuant to which it has issued one Preferred Share
Purchase Right (collectively, the "Rights") for each share of Common Stock
outstanding. The Rights are generally not exercisable unless, and no sooner
than 10 business days after, any person or group acquires beneficial ownership
of 20% or more of the Company's voting stock or announces a tender offer that
could result in the acquisition of 30% or more of such voting stock. In
addition, as adjusted to reflect the two-for-one Common Stock split, each
Right entitles the holder, upon occurrence of certain specified events, to
purchase 1/200th of a share of Series A Junior Preferred Stock ("Junior
Preferred Stock") at an exercise price of $65 per share. Each share of Junior
Preferred Stock, if and when issued, will entitle the holder to 200 votes in
respect of all matters submitted to a vote of the holders of Common Stock.
Upon the occurrence of certain events, holders of the Rights would be entitled
to purchase either shares of the Company or an acquiring entity at half of
market value. The Rights are redeemable, under certain circumstances, at any
time prior to their expiration on January 23, 2006.
Common Stock Options and Restricted Stock Awards: AK Steel Holding
Corporation Stock Incentive Plan (the "SIP") permits the granting of
nonqualified stock options and restricted stock awards to directors, officers
and key management employees of the Company.
22
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
These nonqualified option and restricted stock awards may be granted with
respect to an aggregate maximum of 11.0 million shares through the period
ending December 31, 2007. The exercise price of each option may not be less
than the market price of the Company's Common Stock on the date of the grant.
Stock options have a maximum term of 10 years and may not be exercised earlier
than six months following the date of grant (or such other term as may be
specified in the award agreement). Generally, 25% of the shares covered by a
restricted stock award vest two years after the date of the award and an
additional 25% vest on the third, fourth and fifth anniversaries of the date
of the award. The nonqualified stock options vest at the rate of 33% per year
over three years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
the SIP. The compensation cost that has been charged against income for the
restricted stock awards issued under the SIP was $3.2, $2.7 and $3.0 for 1996,
1997 and 1998, respectively. The Company adopted the pro forma disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", in
1996. Had compensation cost for the Company's SIP been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method of SFAS No. 123, the Company's net income and earnings per share
("EPS") for 1996, 1997 and 1998 would have been reduced to the pro forma
amounts indicated below:
1996 1997 1998
------ ------ ------
Net income................................. As reported $145.9 $150.9 $114.5
Pro forma 144.1 149.5 113.0
Basic earnings per share................... As reported 2.57 2.59 1.93
Pro forma 2.54 2.57 1.91
Diluted earnings per share................. As reported 2.35 2.43 1.92
Pro forma 2.32 2.41 1.90
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations is as follows:
1996 1997 1998
------ ------ ------
Net Income for Diluted EPS............................. $145.9 $150.9 $114.5
Preferred Dividends.................................. 11.1 7.7 --
------ ------ ------
Net Income for Basic EPS............................... $134.8 $143.2 $114.5
====== ====== ======
Shares for Basic EPS................................... 52.4 55.2 59.3
Dilutive Effect of Stock Options..................... 0.8 0.4 0.3
Dilutive Effect of Preferred Stock................... 8.9 6.4 --
------ ------ ------
Shares for Diluted EPS................................. $ 62.1 $ 62.0 $ 59.6
====== ====== ======
Basic EPS.............................................. $ 2.57 $ 2.59 $ 1.93
Diluted EPS............................................ $ 2.35 $ 2.43 $ 1.92
The fair value of the options is estimated on the grant date using a Black-
Scholes option pricing model considering the appropriate dividend rates along
with the following weighted average assumptions:
1997 1998
-------- --------
Expected volatility........................................ 21.0% 20.1%
Risk free interest rates................................... 6.40% 5.67%
Expected lives............................................. 5.0 yrs. 5.0 yrs.
23
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
A summary of the status of stock options and restricted stock awards under
the SIP as of December 31, 1996, 1997 and 1998 and changes during each of
those years is presented below:
1996 1997 1998
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ------------------------ --------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 2,877,984 $12.58 2,210,654 $15.34 2,214,320 $16.78
Granted................. 718,000 19.86 554,000 19.70 392,500 18.96
Exercised............... 1,385,330 11.96 490,334 14.21 118,332 14.42
Forfeited............... -- -- 60,000 11.75 84,000 18.37
--------- ---------
Outstanding at end of
year................... 2,210,654 15.34 2,214,320 16.78 2,404,488 17.19
========= ========= =========
Options exercisable at
year end............... 796,012 13.97 1,187,024 14.98 1,514,702 15.91
Weighted average fair
value of options
granted during the
year................... 718,000 5.37 554,000 5.01 392,500 4.23
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Restricted Stock Awards Shares Price Shares Price Shares Price
- ----------------------- --------- -------- --------- -------- --------- --------
Granted during year..... 323,244 $19.95 332,884 $19.55 310,149 $18.68
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$11.45 to $13.74...... 355,994 5.2 yrs. $11.95 355,994 $11.95
$13.75 to $16.03...... 560,662 4.7 yrs. 14.19 560,662 14.19
$16.04 to $18.32...... 126,332 8.2 yrs. 17.44 40,666 17.50
$18.33 to $20.62...... 1,220,500 7.6 yrs. 19.55 490,022 19.82
$20.63 to $22.91...... 141,000 8.1 yrs. 21.72 67,358 21.68
24
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
3. Income Taxes
The Company and its subsidiaries file a consolidated federal tax return.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997 and 1998 are as follows:
1997 1998
------- -------
Deferred tax assets:
Net operating loss and tax credit carryovers............ $ 30.0 $ 42.7
Postretirement reserves................................. 206.0 217.4
Other reserves.......................................... 39.4 54.1
Valuation reserve....................................... (13.2) (10.7)
------- -------
Total deferred assets................................. 262.2 303.5
------- -------
Deferred tax liabilities:
Depreciable assets...................................... (223.1) (277.1)
Inventories............................................. (33.2) (44.2)
Pension assets.......................................... (65.9) (74.1)
------- -------
Total deferred liabilities............................ (322.2) (395.4)
------- -------
Net liability......................................... $ (60.0) $ (91.9)
======= =======
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the consolidated financial statements in different years than
recognized in the tax returns. The postretirement benefit difference includes
amounts expensed in the consolidated financial statements for health care,
life insurance and other postretirement benefits which become deductible in
the tax return upon payment or funding in qualified trusts. Other temporary
differences represent principally various expenses accrued for financial
reporting purposes which are not deductible for tax reporting purposes until
paid. The depreciable assets temporary difference generally represents tax
depreciation in excess of financial statement depreciation. The inventory
difference relates primarily to differences in the LIFO reserve, reduced by
tax overhead capitalized in excess of book amounts. At December 31, 1997, the
Company had a regular tax net operating loss carryforward of $37.4. At
December 31, 1998 the Company had a regular tax net operating loss carryover
of $37.1 which will expire in the years 2006 through 2008 unless previously
utilized. In addition, at December 31, 1998, the Company had unused
Alternative Minimum Tax ("AMT") credit carryovers of $29.7, which may be used
to offset future regular income tax liabilities. At December 31, 1997, the AMT
credit carryovers were $16.5. These credits can be carried forward
indefinitely.
Significant components of the provision for income taxes are as follows:
1996 1997 1998
----- ----- -----
Current:
Federal.................................................. $ 3.8 $45.1 $28.5
State.................................................... -- 1.2 2.7
Deferred:
Federal.................................................. 77.9 35.7 24.9
State.................................................... 9.4 8.6 5.6
----- ----- -----
Total tax provision.................................... $91.1 $90.6 $61.7
===== ===== =====
25
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
1996 1997 1998
----- ----- -----
Income at statutory rate................................ $83.0 $84.5 $61.6
State tax provision..................................... 9.4 9.8 8.3
Reduction in deferred tax asset valuation reserve....... (2.2) -- (2.5)
Tax exempt state/local interest income.................. (0.7) (4.6) (2.8)
Other permanent differences............................. 1.6 0.9 (2.9)
----- ----- -----
Tax provision......................................... $91.1 $90.6 $61.7
===== ===== =====
4. Long-Term Debt and Other Financing
On December 17, 1996, the Company completed arrangements for $800.0 of debt
financing for the construction of its Rockport Works. The Company issued
$550.0 of 9 1/8% Notes and entered into definitive agreements for the issuance
beginning in June of 1997 of an aggregate of $250.0 of Senior Secured Notes
Due 2004 ("Secured Notes"), which will be collateralized by the hot dip
galvanizing and galvannealing line and the continuous cold mill. Pending
completion of the mortgage on these facilities, the Company is prohibited from
granting liens on its inventories.
On June 17, 1997, the Company made its initial issuance of an aggregate of
$92.5 of the Secured Notes, of which $80.0 bear interest at 8.98% per annum
and $12.5 bear interest at 9.05% per annum. On September 16, 1997, the Company
made its second issuance of $20.0 which bear interest at 8.98% per annum. The
remaining $137.5 of Secured Notes were issued on January 7, 1998, of which
$130.0 bear interest at 8.48% per annum and $7.5 bear interest at 8.98% per
annum.
On February 10, 1998, the City of Rockport, Indiana, issued $10.0 in
Variable Rate Demand Revenue Bonds with a 30-year term maturing December 1,
2028, priced at an initial rate of 3.20% which are secured by the Company's
letter of credit. Interest is at a variable rate which is reset weekly and
paid monthly.
On December 1, 1994, the Company entered into a Receivables Purchase
Agreement with AK Steel Receivables Ltd. ("AKR Ltd."). On the same date, AKR
Ltd. entered into a Receivables Purchase and Servicing Agreement (the
"Purchase Agreement") with a group of six banks. Under the Purchase Agreement,
the total commitment of the banks at December 31, 1998 was $125.0. The Company
sold substantially all of its accounts receivable to AKR Ltd. and sells
additional receivables to AKR Ltd. as they are generated. AKR Ltd. funds its
purchase of receivables from cash collections on the purchased receivables and
proceeds from selling interests in the receivables to the participating banks.
The Company acts as servicer of the receivables sold and will make billings
and collections in the ordinary course of business.
As of December 31, 1998, no amounts were outstanding under the Purchase
Agreement, although $25.7 in letters of credit had been issued. At December
31, 1998, AKR Ltd. had a sufficient pool of eligible receivables that could be
sold to utilize the available capacity of the participating banks'
commitments. In January, 1999, the Company's Purchase Agreement was increased
from $125.0 to $200.0 and the expiration extended to December 31, 2003.
26
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
At December 31, 1997 and 1998, the Company's long-term debt, less current
maturities, was as follows:
1997 1998
------ --------
Senior Notes Due 2004....................................... $325.0 $ 325.0
Senior Notes Due 2006....................................... 550.0 550.0
Senior Secured Notes Due 2004............................... 112.5 250.0
Tax Exempt Financing Due 2027............................... 10.0 10.0
Tax Exempt Financing Due 2028............................... -- 10.0
------ --------
Total..................................................... $997.5 $1,145.0
====== ========
At December 31, 1998, the maturities of long-term debt are as follows:
1999................................................................ $ --
2000................................................................ --
2001................................................................ 62.5
2002................................................................ 62.5
2003................................................................ 62.5
2004 and thereafter................................................. 957.5
--------
Total............................................................. $1,145.0
========
The Company has not purchased and is not holding any derivative financial
instruments.
The Company capitalized interest on projects under construction of $1.7,
$20.9 and $59.3 during 1996, 1997 and 1998, respectively.
5. Operating Leases
Rental expense was $12.6, $13.3 and $14.6 for 1996, 1997 and 1998,
respectively.
At December 31, 1998, obligations to make future minimum lease payments were
as follows:
1999................................................................... $0.6
2000................................................................... 0.4
2001................................................................... 0.1
2002................................................................... --
2003................................................................... --
----
Total lease obligations.............................................. $1.1
====
27
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
6. Employee and Retiree Benefit Plans
Pension Benefits Other Benefits
------------------ ----------------
1997 1998 1997 1998
-------- -------- ------- -------
Change in benefits obligation:
Benefit obligation at beginning of
year................................. $1,210.9 $1,271.9 $ 629.8 $ 664.1
Service cost.......................... 13.6 16.4 4.8 5.4
Interest cost......................... 93.1 91.8 48.8 48.2
Plan participants' contributions...... -- -- 0.5 0.5
Amendments............................ 1.8 -- -- --
Actuarial loss/(gain)................. 49.5 100.6 23.4 30.3
Benefits paid......................... (98.3) (107.9) (43.2) (44.8)
Settlements........................... 1.3 -- -- --
-------- -------- ------- -------
Benefit obligations at end of year.. $1,271.9 $1,372.8 $ 664.1 $ 703.7
======== ======== ======= =======
Change in plan assets:
Fair value of plan assets at beginning
of year.............................. $1,255.7 $1,422.4 $ 136.9 $ 187.0
Actual return on plan assets.......... 262.8 88.1 26.8 14.0
Employer contributions................ 2.2 0.8 66.0 16.2
Plan participants' contributions...... -- -- 0.5 0.5
Benefits paid......................... (98.3) (107.9) (43.2) (44.8)
-------- -------- ------- -------
Fair value of plan assets at end of
year............................... $1,422.4 $1,403.4 $ 187.0 $ 172.9
======== ======== ======= =======
Funded status........................... $ 150.5 $ 30.6 $(477.1) $(530.8)
Unrecognized net actuarial loss/(gain).. (48.1) 89.6 (51.9) (20.6)
Unrecognized prior service cost......... 56.7 50.0 (25.1) (21.2)
-------- -------- ------- -------
Net amount recognized................. $ 159.1 $ 170.2 $(554.1) $(572.6)
======== ======== ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost.................. $ 167.1 $ 184.5 $ -- $ --
Accrued benefit liability............. (8.0) (14.3) (554.1) (572.6)
Intangible asset...................... -- -- -- --
Accumulated other comprehensive
income............................... -- -- -- --
-------- -------- ------- -------
Net amount recognized............... $ 159.1 $ 170.2 $(554.1) $(572.6)
======== ======== ======= =======
Pension Benefits Other Benefits
----------------- -----------------
1996 1997 1998 1996 1997 1998
----- ----- ----- ----- ----- -----
Weighted average assumptions at year end:
Discount rate............................ 8.00% 7.50% 7.00% 8.00% 7.50% 7.00%
Expected return on plan assets........... 9.75% 9.25% 8.75% 9.75% 9.25% 8.75%
Rate of compensation increase............ 4.00% 4.03% 4.04% 4.00% 4.00% 4.00%
For measurement purposes, health care costs are assumed to increase 4.50% in
1999 and 4.0% per annum for all future years for pre-65 benefits and 4.0% in
1999 and all future years for post-65 benefits.
28
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Pension Benefits Other Benefits
------------------------- ---------------------
1996 1997 1998 1996 1997 1998
------- ------- ------- ----- ------ ------
Components of net periodic
benefit cost:
Service cost............... $ 16.2 $ 13.6 $ 16.4 $ 5.1 $ 4.8 $ 5.4
Interest cost.............. 90.1 93.1 91.8 44.8 48.8 48.2
Expected return on plan
assets.................... (107.4) (117.8) (127.2) (6.5) (11.0) (14.9)
Amortization of prior
service cost.............. 6.6 6.6 6.8 (3.9) (3.9) (3.9)
Recognized net actuarial
loss/(gain)............... 6.7 0.5 2.0 -- -- --
Settlement loss/(gain)..... -- 0.4 -- -- -- --
Amortization of
unrecognized net
obligation................ 0.9 -- -- -- -- --
------- ------- ------- ----- ------ ------
Net periodic benefit
cost.................... $ 13.1 $ (3.6) $ (10.2) $39.5 $ 38.7 $ 34.8
======= ======= ======= ===== ====== ======
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $1,355.6, $1,293.6 and $1,403.4 respectively,
for 1998 and $1,258.7, $1,205.4 and $1,422.4, respectively, for 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
One-Percentage-Point
---------------------
Increase Decrease
---------- ----------
Effect on total service cost and interest cost
components........................................ $ 6.0 $ (5.3)
Effect on postretirement benefit obligation........ 73.3 (64.7)
7. Related Party Transactions
The Company, in the ordinary course of business, sells steel to and
purchases scrap from National Material Limited Partnership, of which a
director of the Company is President and Chief Executive Officer. During 1996,
1997 and 1998 sales amounted to $21.8, $21.5 and $6.5 and purchases amounted
to $0.6, $1.1 and $2.3, respectively.
8. Commitments
The principal raw materials and commodities required in the Company's
manufacturing operations are coal, iron ore, electricity, natural gas, oxygen,
scrap metal, zinc, limestone and other commodity materials, all of which are
purchased at competitive or prevailing market prices. Adequate sources of
supply exist for all of the Company's raw material requirements.
At December 31, 1998, commitments for future capital investments, including
Rockport Works and those made to assure environmental compliance, totalled
approximately $104.8, all of which will be funded in 1999.
9. Legal, Environmental Matters and Contingencies
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
29
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
The Company has expended the following for environmental related capital
investments and environmental compliance:
1996 1997 1998
----- ----- -----
Environmental related capital investments................. $ 6.1 $ 4.3 $18.8
Environmental compliance costs............................ 53.6 52.9 65.2
In addition to the items discussed below, the Company is also involved in
routine litigation, environmental proceedings, and claims pending with respect
to matters arising out of the normal conduct of the business. In management's
opinion, the ultimate liability resulting from all claims, individually or in
the aggregate, will not materially affect the Company's consolidated financial
position, results of operations or cash flows.
Under the authority of CERCLA, the Kentucky Department of Environmental
Protection conducted a comprehensive review of the waste management control
systems and handling practices at the Ashland Works coke department and
steelmaking facility in July, August and September 1991. As a result of this
inspection, the Kentucky Natural Resources and Environmental Protection
Cabinet instituted an administrative proceeding against the Company in
November 1993, alleging certain regulatory violations. The Company has entered
into non-binding mediation with the Kentucky Cabinet for Natural Resources and
Environmental Protection.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewaters prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits at the Middletown Works, the Company, through the Middletown POTW,
petitioned the EPA for "removal credits," a type of compliance exemption,
based on the Middletown POTW's satisfactory treatment of the Company's
wastewater for ammonia and phenol. The EPA declined to review the Company's
application on the grounds that it had not yet promulgated new sludge
management rules. The Company thereupon sought and obtained from the Federal
District Court for the Southern District of Ohio an injunction prohibiting the
EPA from instituting enforcement action against the Company for noncompliance
with the pretreatment limitations, pending the EPA's promulgation of the
applicable sludge management regulations. Although the Company is unable to
predict the outcome of this matter, if the EPA eventually refuses to grant the
Company's request for removal credits, the Company could incur additional
costs to construct pretreatment facilities at the Middletown Works.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the Company's
Middletown Works and all hourly employees of independent contractors working
at the facility since June 1992. The complaint has twice been amended to add
additional named plaintiffs. The plaintiffs allege negligence and intentional
tort and seek compensatory and punitive damages in an unspecified amount for
alleged dangerous working conditions at the Company's Middletown Works. In
March 1997, the Court granted plaintiffs' motion to certify a class. The
Company's appeal of this decision to the Ohio Supreme Court was denied on July
29, 1998. The Court of Common Pleas has set a new discovery schedule and a
trial date of March 2000. On November 2, 1998, the Company filed motions in
the trial court for an order vacating class certification and for partial
summary judgment on the grounds of federal preemption. Both motions are
pending.
In April 1996, an action was filed in the United States District Court,
Southern District of Ohio, by a number of former employees of the Company
seeking certain pension and postretirement benefits which they allege were
wrongly denied them when the Company outsourced their positions. On June 18,
1998, the magistrate judge issued a report and recommendation to the court
granting in part and denying in part the Company's motion for summary
judgment. On September 18, 1998, the court adopted the magistrate judge's
report and recommendation, and referred the parties to mediation. Mediation is
in progress. Trial is scheduled for March 1999.
30
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
On January 20, 1998, judgment was entered by the United States District
Court, Southern District of Ohio, against the Company in the amount of $6.5
following a jury trial in a disability discrimination lawsuit brought by a
former employee. On January 30, 1998, the Company moved for judgment in its
favor as a matter of law, reduction of the damages and a new trial. On August
7, 1998, the court temporarily stayed all post-trial motions pending
mediation, which is in progress.
10. Consolidated Quarterly Sales and Earnings (Unaudited)
Earnings per share for each quarter and the year are calculated individually
and may not add to the total for the year. The historical per share amounts
have been restated for a two-for-one Common Stock split effective November 17,
1997.
1997
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales........................... $598.8 $622.6 $598.6 $620.5 $2,440.5
Gross profit........................ 117.9 121.9 116.3 119.9 476.0
Net income.......................... 34.5 39.0 37.0 40.4 150.9
Basic earnings per share............ .60 .68 .64 .67 2.59
Diluted earnings per share.......... .56 .63 .59 .66 2.43
1998
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales........................... $588.2 $612.0 $557.0 $636.4 $2,393.6
Gross profit........................ 104.6 109.0 80.2 136.4 430.2
Net income.......................... 28.4 33.4 9.3 43.4 114.5
Basic earnings per share............ .47 .56 .16 .74 1.93
Diluted earnings per share.......... .47 .56 .16 .73 1.92
31
Item 9. Changes in and Disagreements with Accountants.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the Company's 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
Directors of the Company will be set forth under the caption "Election of
Directors" in the Company's proxy statement (the "1999 Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by
the Company's Board of Directors for use at the Annual Meeting of Stockholders
to be held on May 20, 1999, and 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 will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the 1999 Proxy Statement,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this item will be set
forth under the caption "Stock Ownership," in the 1999 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to this item will be set
forth under the captions "Certain Relationships and Transactions" in the 1999
Proxy Statement, and is incorporated herein by reference. See also Note 7 of
the Notes to Consolidated Financial Statements included in Item 8 hereof.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.
(a) The list of financial statements filed as part of this report is
submitted as a separate section, the index to which is located on page 14.
(b) Reports on Form 8-K filed during the fourth quarter of 1998 were:
Earnings Release............................................. October 9, 1998
Letters of Intent for Commercial Agreement................... October 12, 1998
(c) Exhibits:
List of exhibits begins on next page.
32
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Company, filed with the Secretary
of State of the State of Delaware on December 20, 1993, as amended
(incorporated herein by reference to Exhibit 3.1.1 to the Company's
Current Report on Form 8-K dated May 27, 1998.
3.2 By-laws of the Company (incorporated herein by reference to Exhibit
3.2 to Registration No.
33-74432).
3.3 Certificate of Designations, Preferences, Rights and Limitations of
Series A Junior Preferred Stock (included in Exhibit 10.19).
4.1 Indenture, dated as of December 17, 1996, relating to the Company's 9-
1/8% Senior Notes Due 2006 (the "1996 Indenture") (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-4 (No. 333-19781) ("Registration No. 333-19781")).
4.2 Indenture, dated as of April 1, 1994, relating to the Company's 10-
3/4% Senior Notes Due 2004 (the "1994 Indenture") (incorporated herein
by reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1, No. 33-83792 ("Registration No. 33-83792")).
4.3 Supplemental Indenture, dated as of September 21, 1994, to the 1994
Indenture (incorporated herein by reference to Exhibit 4.4 to
Registration No. 33-83792).
4.4 Supplemental Indenture, dated as of December 11, 1996, to the 1994
Indenture (incorporated herein by reference to Exhibit 4.4 to
Registration No. 333-19781).
4.5 Form of Note Purchase Agreement, dated as of December 17, 1996, with
respect to the Company's Senior Secured Notes Due 2004 (incorporated
herein by reference to Exhibit 4.5 to Registration No. 333-19781).
10.4 Form of Executive Officer Severance Agreement (incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.5 Form of Executive Officer Severance Agreement--Richard M. Wardrop, Jr.
(incorporated herein by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.6 Form of Executive Officer Severance Agreement--James L. Wareham
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.7 Annual Management Incentive Plan (filed herewith).
10.8 Stock Incentive Plan (filed herewith).
10.9 Executive Minimum and Supplemental Retirement Plan (incorporated
herein by reference to Exhibit 10.17 to Registration No. 33-83792).
10.10 Registration Rights Agreement, dated as of April 7, 1994, among the
Company and certain subsidiaries of Kawasaki (incorporated herein by
reference to Exhibit 10.19 to Registration No. 33-83792).
10.11 Receivables Purchase Agreement, dated as of December 1, 1994, by and
between AK Steel and AK Acquisition Receivables Ltd., as successor to
AK Steel Receivables, Inc. (incorporated herein by reference to
Exhibit 10.23 to Registration No. 33-86678).
10.12 Purchase and Servicing Agreement, dated as of December 1, 1994, among
AK Acquisition Receivables Ltd., as successor to AK Steel Receivables,
Inc., AK Steel, the institutions from time to time party thereto and
PNC Bank, Ohio, National Association (incorporated herein by reference
to Exhibit 10.24 to Registration No. 33-86678).
33
Exhibit
Number Description
------- -----------
10.13 Amendment No. 1 to the Purchase and Servicing Agreement, dated as of
November 17, 1995, among AK Steel, AK Acquisition Receivables Ltd., as
successor to AK Steel Receivables, Inc., the purchasers party thereto
and PNC Bank, Ohio, National Association (incorporated herein by
reference to Exhibit 10.11(a) to Registration No. 333-19781).
10.14 Consent, Amendment and Assumption Agreement, dated as of December 31,
1996, to the Receivables Purchase Agreement and the Purchase and
Servicing Agreement, among the Company, AK Steel Receivables Inc., AK
Acquisition Receivables Ltd., AKSR Investments, Inc., the purchasers
party thereto and PNC Bank, Ohio, National Association (incorporated
herein by reference to Exhibit 10.11(b) to Registration No. 333-
19781).
10.15 Amendment, dated July 10, 1997, to the Receivables Purchase Agreement
and the Purchase and Servicing Agreement.
10.16 Letter Agreement dated July 31, 1995, between the Company and Kawasaki
(incorporated herein by reference to Exhibit 10 to Post-Effective
Amendment No. 2 on Form S-3 to the Company's Registration Statement on
Form S-1, Registration No. 33-86678).
10.17 Deferred Compensation Plan for Management (incorporated herein by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.18 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.19 Rights Agreement, dated as of January 23, 1996, between the Company
and The Bank of New York as predecessor to The Fifth Third Bank, as
Rights Agent, with respect to the Company's Stockholder Rights Plan
(incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A under the Securities Exchange Act of 1934, as
filed with the Commission on February 5, 1996).
10.20 Substitution of The Fifth Third Bank as Successor Rights Agent and
Amendment No. 1, dated September 15, 1997, to Rights Agreement dated
as of January 23, 1996 (incorporated herein by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K, dated September 15,
1997).
10.21 Instrument of Resignation, Appointment and Acceptance, dated as of
September 15, 1997, with respect to resignation of The Bank of New
York as Trustee and appointment of The Fifth Third Bank as Successor
Trustee under the 1994 Indenture (incorporated herein by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K dated
September 15, 1997).
10.22 Instrument of Resignation, Appointment and Acceptance, dated as of
September 15, 1997, with respect to resignation of The Bank of New
York as Trustee and the appointment of The Fifth Third Bank as
Successor Trustee under the 1996 Indenture (incorporated herein by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K,
dated September 15, 1997).
10.23 Long Term Performance Plan (filed herewith).
10.25 First Amendment, dated July 17, 1997, to Executive Minimum and
Supplemental Retirement Plan (incorporated herein by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.26 Second Amendment, dated September 18, 1997, to Executive Minimum and
Supplemental Retirement Plan (incorporated herein by reference to
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
11.0 Statement re Computation of Per Share Earnings.
23.1 Independent Auditors' consent.
27. Financial Data Schedule.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Middletown, State of
Ohio, on January 25, 1999.
AK Steel Holding Corporation
By: /s/ James L. Wainscott
----------------------------------
James L. Wainscott
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Signature Title Date
/s/ Richard M. Wardrop, Jr. Chairman of the January 25, 1999
- ----------------------------------- Board and Chief
Richard M. Wardrop, Jr. Executive Officer
/s/ James L. Wareham President January 25, 1999
- -----------------------------------
James L. Wareham
/s/ James L. Wainscott Vice President, January 25, 1999
- ----------------------------------- Treasurer and Chief
James L. Wainscott Financial Officer
/s/ Donald B. Korade Controller January 25, 1999
- -----------------------------------
Donald B. Korade
/s/ Allen Born Director January 25, 1999
- -----------------------------------
Allen Born
/s/ John A. Georges Director January 25, 1999
- -----------------------------------
John A. Georges
/s/ Dr. Bonnie G. Hill Director January 25, 1999
- -----------------------------------
Dr. Bonnie G. Hill
/s/ Robert H. Jenkins Director January 25, 1999
- -----------------------------------
Robert H. Jenkins
/s/ Lawrence A. Leser Director January 25, 1999
- -----------------------------------
Lawrence A. Leser
/s/ Robert E. Northam Director January 25, 1999
- -----------------------------------
Robert E. Northam
/s/ Cyrus Tang Director January 25, 1999
- -----------------------------------
Cyrus Tang
/s/ Dr. James A. Thomson Director January 25, 1999
- -----------------------------------
Dr. James A. Thomson
35