Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

For the transition period from              to             

Commission File No. 1-13696

AK STEEL HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

(513) 425-5000

(Registrant’s telephone number, including area code)

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 filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

108,746,650 shares of common stock

(as of November 4, 2004)

Table of Contents

AK STEEL HOLDING CORPORATION

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AK STEEL HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in millions, except per share data)

See notes to consolidated financial statements.

-1-

Table of Contents

AK STEEL HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

See notes to consolidated financial statements.

-2-

Table of Contents

AK STEEL HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

See notes to consolidated financial statements.

-3-

Table of Contents

AK STEEL HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in millions, except per share data)

In the opinion of the management of AK Steel Holding Corporation (“AK Holding”) and AK Steel Corporation (“AK Steel”, and together with AK Holding, the “Company”), the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2004, the results of its operations for the three and nine-month periods ended September 30, 2004 and 2003, and cash flows for the nine-month periods ended September 30, 2004 and 2003. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2003.

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.

-4-

Table of Contents

Net periodic benefit costs for pension and other postretirement benefits were as follows:

The increase in pension net periodic benefit cost for the nine months ended September 30, 2004 was due primarily to recognition of settlement, curtailment and actuarial losses related to the early retirement of participants in the Company’s non-qualified pension plan. As previously reported, the Company expects the total contribution to be approximately $45.0 and $146.0 for its pension plans and other postretirement plans, respectively, in 2004.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a federal subsidy to sponsors of retiree healthcare benefit plans that include a qualified prescription drug benefit. The Company sponsors such a plan. Because its benefit plan’s measurement date preceded the effective date of the Act, the Company was not permitted to recognize the effects of the Act until February 8, 2004. The Company expects that savings in per capita prescription claim costs due to the impact of the Act will result in a reduction in the Company’s accumulated postretirement benefit obligation of approximately $140.0. These savings are included in unrecognized actuarial net gains and losses and will be recognized into income over future periods. In 2004, the Company expects to recognize a reduction in net periodic benefit costs related to these savings of approximately $17.0, excluding any possible fourth quarter corridor adjustment.

Under its method of accounting for pension and other postretirement benefit plans, the Company recognizes into income (loss), as a fourth quarter adjustment, any unrecognized actuarial gains and losses that exceed 10% of the larger of projected benefit obligations or plan assets (the “corridor”). Prevailing interest rates on the fourth quarter measurement date are one of the factors used to determine the Company’s year-end liability, fourth quarter corridor charge and subsequent year’s expense for these benefit plans. Based on current assumptions for prevailing interest rates and on other relevant assumptions made by the Company, the pre-tax effect of a 2004 fourth quarter non-cash pension charge would be approximately $190.0. In addition, the pre-tax effect of a 2004 fourth quarter non-cash charge related to other postretirement benefit plans would be approximately $176.0. Also, the Company anticipates a credit to equity of approximately $14.0 as part of the adjustments necessary to recognize the minimum pension liability as required under current accounting rules. However, at this time, because factors influencing the determination of plan liabilities and expenses may change, the Company cannot reasonably determine with certainty the actual amount of these fourth quarter charges. Under current assumptions, the Company is not required to make any pension contributions until 2006, when it estimates approximately $300.0 would need to be contributed during the year. The amount of the 2006 contribution, if one is necessary, will depend on, among other things, the investment performance of the pension funds and any potential legislative changes to existing funding requirements. The Company intends to contribute $150.0 million to the pension fund during the first quarter of 2005, thus reducing the amount of the 2006 estimated contribution by approximately 50%.

The Company provides healthcare benefits to most of its employees and retirees. The total projected future benefit obligation of the Company with respect to payments for healthcare benefits is accounted for as “Other Benefits” in the Company’s consolidated financial statements. The net amount recognized by the Company as of the end of 2003 for future payment of such “Other Benefits” was approximately $1.9 billion.

Accounting for retiree healthcare benefits requires the use of actuarial methods and assumptions, including assumptions about current employees’ future retirement dates, the anticipated mortality rate of retirees,

-5-

Table of Contents

anticipated future increases in healthcare costs and the obligations of the Company under future collective bargaining agreements with respect to healthcare benefits for retirees. Changing any of these assumptions could have a material impact on the calculation of the Company’s total obligation for future healthcare benefits. For example, the Company’s calculation of its future retiree healthcare benefit obligation as of the end of 2003 assumed that the Company would continue to provide healthcare benefits to current and future retirees at approximately the same level of such benefits as are currently being provided to retirees. If this assumption is altered, it could have a material effect on the calculation of the Company’s total future retiree healthcare benefit obligation. This assumption could be altered as a result of one or more developments.

First, retirees could consent to a change in the current level of healthcare benefits provided to them. Second, in certain instances, the union which represented a particular group of retirees when they were employed by the Company could in the course of negotiations with the Company accept such a change. Third, in certain instances, at or following the expiration of a collective bargaining agreement which affects the Company’s obligation to provide healthcare benefits to retired employees, the Company could take action to modify or terminate the benefits provided to those retirees without the agreement of those retirees or the union, subject to the right of the union subsequently to bargain to alter or reverse such action by the Company. The precise circumstances under which retiree healthcare benefits may be altered unilaterally or by agreement with a particular union vary depending on the terms of the relevant collective bargaining agreement.

The Company is unable to estimate at this time the likely favorable impact that potential changes to the nature and/or scope of its obligation to provide healthcare benefits may have on the calculation of its total future healthcare benefit obligations. Any attempt to make such a calculation would involve significant assumptions and would be subject to substantial uncertainties. That would include (1) changes in the assumptions which underlie the calculations, such as assumptions about current employees’ future retirement dates, the anticipated mortality rate of retirees, and future increases in health care costs, (2) uncertainties as to the extent to which retirees will consent to changes to their healthcare benefits, or that the unions will agree to, or not take action to oppose, such changes in the course of negotiations of new collective bargaining agreements, and (3) uncertainties as to the outcome of arbitrations or litigation that might be initiated by retirees or their unions over this issue.

Common stock compensation expense related to restricted stock awards granted under the Company’s Stock Incentive Plan (“SIP”) was $0.7 and $1.2 for the three-month periods ended September 30, 2004 and 2003, respectively, and $5.8 and $4.1 for the nine-month periods ended September 30, 2004 and 2003, respectively. The Company uses the intrinsic value method to account for nonqualified stock options granted under the SIP. Had compensation expense for the Company’s stock option plans been determined based on the fair value method, the Company’s net income (loss) and basic and diluted income (loss) per share would have been adjusted as follows:

On May 21, 2004, the Company completed the early redemption of the remaining $62.5 principal amount of its Senior Secured Notes due December 2004. In the nine months ended September 30, 2004, the Company recognized a $2.9 charge, which was included in income (loss) from continuing operations, related to the early redemption.

On May 27, 2004, a subsidiary of the Company entered into a $300.0, three-year revolving credit facility with a syndicate of lenders expiring on May 27, 2007. The facility is secured by trade receivables, which the

-6-

Table of Contents

subsidiary purchases from AK Steel. The new facility also includes an option of two one-year renewals and replaces an existing accounts receivable credit facility that was to expire on September 30, 2004.

On June 17, 2004, the Company completed a $62.0 industrial revenue bond offering issued through the Ohio Air Quality Development Authority. The bonds have a floating interest rate, 1.78% at September 30, 2004, and will mature on June 1, 2024. Proceeds from the offering will be used to finance construction of emission control equipment for the Middletown Works’ blast furnace and basic oxygen furnaces. The equipment is necessary to comply with recently established standards under the Clean Air Act, which will become effective in May 2006. The net proceeds of $61.7 from the bond offering were placed in a restricted fund and are drawn as the Company makes qualifying expenditures. As of September 30, 2004, the Company has drawn $9.2 from the trust and the remaining proceeds of $52.5 are included in other noncurrent assets.

On July 29, 2004, the Commonwealth of Kentucky provided the Company with the ability to receive tax incentives of up to $40.0 over a ten-year period for the installation of a vacuum degasser and caster modifications at its Ashland Works facility under the Kentucky Industrial Revitalization Act Tax Credit Program (KIRA). Under KIRA, a portion of employee payroll tax withholdings for Kentucky and local taxes are kept by the Company rather than submitted to the taxing authorities. Through September 30, 2004, the Company has accumulated $0.3 in withholdings, which is included as a reduction of plant, property and equipment in the consolidated financial statements.

During the fourth quarter of 2004, the Company intends to redeem its remaining 9% Senior Notes due September 2007, having a principal amount of approximately $117.4 and its remaining 8-7/8% Senior Notes due December 2008, having a principal amount of approximately $33.5. This redemption will result in a one-time fourth quarter charge of approximately $5.5 related to the call premium and certain unamortized costs associated with the original issuance of this debt. The Company will realize annual savings, starting in 2005, of approximately $14.0 for reduced interest expense. After the redemption, the Company will have no scheduled material debt maturities until 2009.

During the quarter ended September 30, 2004, the Company’s forecasted 2004 taxable income increased over the amounts previously estimated in the second quarter of 2004, due primarily to ongoing improved financial performance in continuing operations. As a result, the Company expects to use net operating loss carryforwards that were previously expected to expire unused and had therefore been reduced by deferred tax valuation allowances, of which $87.3 was recorded in the three and nine months ended September 30, 2003.

At the end of the second quarter of 2004, based on the Company’s forecasted total taxable income, the incremental taxable income attributable to discontinued operations was totally offset with tax loss carryforwards that were subjected to a valuation allowance in prior years. In the third quarter of 2004, as a result of a greater than anticipated amount of total taxable income from continuing operations expected for 2004, the taxable income resulting from discontinued operations will be only partially offset with tax loss carryforwards that were subjected to a valuation allowance in prior years, with the remaining taxable income from these discontinued operations offset by tax loss carryforwards for which a deferred tax asset had been recorded in prior years. The lower than statutory tax rate for these discontinued operations results from the recognition of the benefit of reversing the deferred tax valuation allowance related to loss carryforwards.

As a result, an effective tax rate of approximately 16% has been applied to both the operating income from discontinued operations and the gain on the sales of Douglas Dynamics, LLC and Greens Port Industrial Park during the first nine months of 2004.

In addition, in the first nine months of 2004, the Company recorded an income tax benefit of $53.2 on income from continuing operations. Of this total benefit, approximately $75.0 is attributable to the utilization of net operating loss carryforwards for which a deferred tax valuation reserve had been recorded in prior years, partially offset by $21.8 of income tax expense.

Taxes on continuing and discontinued operations recorded through September 30, 2004 have been estimated based on year-to-date income and projected results for the fourth quarter of the year. The final effective tax rate to be applied to continuing and discontinued operations for 2004 will depend on the actual amount of taxable income generated by the Company for the full year and the amount of net operating loss carryforwards that ultimately will be utilized to offset the income from both continuing and discontinued operations.

-7-

Table of Contents

On March 31, 2004, the Company sold Douglas Dynamics, L.L.C. for $264.0, before fees and expenses, and recognized a pre-tax gain of $208.3 ($173.9, after tax, or $1.60 per share) in the first nine months of 2004. During the third quarter, the after tax gain decreased by $28.2 solely as a result of the higher tax rate (see Note 7). On April 9, 2004, the Company sold Greens Port Industrial Park for $75.0, before fees and expenses, and recognized a pre-tax gain of approximately $45.5 ($38.0, after tax, or $0.35 per share) in the first nine months of 2004. During the third quarter, the after tax gain decreased by $6.2 solely as a result of the higher tax rate applied to the gain (see Note 7). Both businesses were accounted for as discontinued operations. During the third quarter of 2004, the tax rate applied to book income and the gain on the sale of these discontinued operations was increased to approximately 16%, resulting in a decrease in the after tax gain and net income in the quarter related to discontinued operations. Operating results for these discontinued operations for the three and nine months ended September 30, 2004 and 2003 included the following:

Comprehensive income (loss), net of tax, is as follows: