<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 1998 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
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
59,207,671 shares of common stock
---------------------------------
(as of July 20, 1998)
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AK STEEL HOLDING CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three-Month and Six-Month Periods Ended
June 30, 1997 and 1998 2
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 1997 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of the
Condensed Consolidated Financial Statements 6
PART II.OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
- 1 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $622.6 $612.0 $1,221.4 $1,200.2
Cost of products sold 500.7 503.0 981.6 986.6
Selling and administrative
expenses 28.3 29.5 56.7 58.7
Depreciation 19.9 21.2 39.9 42.4
------ ------ -------- --------
Total operating costs 548.9 553.7 1,078.2 1,087.7
Operating profit 73.7 58.3 143.2 112.5
Interest expense 19.4 11.6 41.1 27.3
Other income 9.0 6.0 17.3 12.9
------- ------ -------- --------
Income before income taxes 63.3 52.7 119.4 98.1
Current income tax provision
(Note 5) 13.8 12.7 24.1 22.6
Deferred income tax provision
(Note 5) 10.5 6.6 21.8 13.7
------ ------- -------- --------
Net income 39.0 33.4 73.5 61.8
Other comprehensive income,
net of tax:
Unrealized gains on securities:
Unrealized holding gains
arising during period -- (0.1) -- 0.6
Less: reclassification
adjustment for gains
included in net income -- 0.1 -- 0.1
------ ------ -------- --------
Comprehensive income $39.0 $ 33.2 $ 73.5 $ 62.3
------ ------ -------- --------
------ ------ -------- --------
Earnings per share: (Note 2)
Basic earnings per share $ .68 $ .56 $ 1.28 $ 1.04
Diluted earnings per share $ .63 $ .56 $ 1.18 $ 1.03
Cash dividends per common
share $ .10 $ .125 $ .20 $ .25
Common shares and common stock
options outstanding (weighted
average in millions):
For basic earnings per
share 53.4 59.2 53.4 59.6
For diluted earnings per
share 62.0 59.6 62.1 59.9
<FN>
- -----------------------
See notes to condensed consolidated financial statements.
1997 restated for a two-for-one common stock split effective
November 17, 1997.
</TABLE>
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<PAGE>
<TABLE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<CAPTION>
ASSETS December 31, June 30,
1997 1998
--------- --------
S> <C> <C>
Current Assets:
Cash and cash equivalents $ 348.2 $ 338.6
Short-term investments 257.9 94.8
Accounts receivable, net (Note 4) 241.5 213.5
Inventories: (Note 3)
Finished and semi-finished 216.5 237.4
Raw materials 148.7 149.4
-------- -------
Total inventories, net 365.2 386.8
Other current assets 8.8 8.7
-------- -------
Total Current Assets 1,221.6 1,042.4
------- -------
Property, Plant and Equipment 2,219.2 2,594.6
Less accumulated depreciation (626.5) (630.2)
------- -------
Property, plant and equipment,
net 1,592.7 1,964.4
------- -------
Prepaid Pension 159.2 164.7
Other 110.8 100.3
------- -------
TOTAL ASSETS $3,084.3 $3,271.8
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 375.6 $ 341.4
Other accruals 158.0 188.3
Current portion of deferred taxes 29.7 28.9
Current portion of long-term debt
(Note 4) -- --
Current portion of pension obligation 0.1 0.1
Current portion of postretirement
benefit obligation -- --
------- -------
Total Current Liabilities 563.4 558.7
------- -------
Noncurrent Liabilities:
Long-term debt (Note 4) 997.5 1,145.0
Pension obligation -- --
Postretirement benefit obligation 554.1 566.8
Deferred taxes 30.3 46.4
Other liabilities 59.4 61.1
------- -------
Total Noncurrent Liabilities 1,641.3 1,819.3
------- -------
TOTAL LIABILITIES 2,204.7 2,378.0
------- -------
Stockholders' Equity:
Common stock, authorized 200,000,000
shares of $.01 par value each;
issued 1997, 63,503,718 shares,
1998, 63,787,421 shares; outstanding
1997, 60,808,922 shares, 1998,
59,198,511 shares 0.6 0.6
Additional paid-in capital 716.8 718.9
Treasury stock, common shares at cost,
1997, 2,694,796 shares, 1998,
4,588,910 shares (48.2) (83.7)
Retained earnings 208.3 255.3
Accumulated other comprehensive income 2.1 2.7
------- -------
TOTAL STOCKHOLDERS' EQUITY 879.6 893.8
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,084.3 $3,271.8
------- -------
------- -------
<FN>
- --------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Six Months Ended
June 30,
----------------
1997 1998
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $207.9 $138.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (190.6) (414.1)
Change in short-term investments (93.2) 163.0
Other (17.5) 5.6
------ ------
NET CASH FLOWS FROM INVESTING ACTIVITIES (301.3) (245.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4.5 0.6
Proceeds from issuance of long-term debt 102.5 147.5
Preferred stock dividends paid (5.2) --
Common stock dividends paid (10.7) (14.9)
Purchase of common stock, held in treasury (5.9) (35.5)
Purchase of preferred stock, retired (3.1) --
Underwriting discount and fees -- (0.3)
------ ------
NET CASH FLOWS FROM FINANCING ACTIVITIES 82.1 97.4
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (11.3) (9.6)
Cash and cash equivalents, beginning of period 523.1 348.2
------ ------
Cash and cash equivalents, end of period $511.8 $338.6
------ ------
------ ------
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the period for:
Interest $ 44.3 $ 54.4
Interest capitalized (5.4) (30.3)
Income taxes 20.6 9.8
<FN>
- --------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE>
AK STEEL HOLDING CORPORATION
- ----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
- ----------------------------------------------------
1. Basis of Presentation
In the opinion of the management of AK Steel Holding
Corporation ("AK Holding") and AK Steel Corporation ("AK Steel",
collectively, the "Company"), the accompanying condensed
consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present
fairly the financial position of the Company as of June 30, 1998,
and the results of its operations for the three-month and six-month
periods ended June 30, 1997 and 1998. The results of operations and
financial position of AK Steel approximate the results and
financial position of AK Holding. The results of operations for
the six-month period ended June 30, 1998 are not necessarily
indicative of the results to be expected for the year ending
December 31, 1998. These condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements for the years ended December
31, 1996 and 1997.
2. Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $39.0 $33.4 $73.5 $61.8
Less preferred stock dividends
paid 2.6 -- 5.2 --
----- ----- ----- -----
Net income applicable to common
shareholders $36.4 $33.4 $68.3 $61.8
----- ----- ----- -----
----- ----- ----- -----
Number of common shares
outstanding
(weighted average in millions) 53.4 59.2 53.4 59.6
----- ----- ------ -----
----- ----- ------ -----
Basic earnings per share $.68 $.56 $1.28 $1.04
----- ----- ----- -----
----- ----- ----- -----
Diluted earnings per share:
Net income $39.0 $33.4 $73.5 $61.8
----- ----- ----- -----
----- ----- ----- -----
Shares (weighted average in
millions):
Number of common shares
outstanding 53.4 59.2 53.4 59.6
Number of common stock
options outstanding .4 .4 .4 .3
Assuming conversion of
preferred stock 8.2 -- 8.3 --
----- ----- ----- -----
Number of common shares
outstanding as adjusted 62.0 59.6 62.1 59.9
----- ----- ----- -----
----- ----- ----- -----
Diluted earnings per share $.63 $.56 $1.18 $1.03
----- ------ ------ -----
----- ------ ------ -----
</TABLE>
3. 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. As of June 30, 1998, AK Steel Receivables, Inc. ("AKR") had
not sold accounts receivable to any participating banks under its
Receivables Purchase and Servicing Agreement although $25.7
letters of credit had been issued. AKR had a sufficient pool of
eligible receivables that could be sold to utilize the available
capacity of the participating banks' commitments.
On January 7, 1998, the Company completed its final issuance
of an aggregate of $137.5 of Senior Secured Notes Due 2004, 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.
- 5 -
<PAGE>
5. The book tax rate for 1998 is estimated at 37.0% compared
to 38.4% recorded in the six-month period ended June 30, 1997.
Item 2. Management's Discussion and Analysis of the
Condensed Consolidated Financial Statements
Results of Operations
- ---------------------
The Company's principal customers are in the automotive, appliance,
construction and manufacturing markets. The Company also sells its
products to distributors and convertors. Demand in the first half of
1998 for flat rolled products, especially coated and cold rolled
products, continued at strong levels with shipments of 2,260,000 tons
compared to 2,320,000 tons in the first half of 1997. Shipments to
automotive customers, 607,000 tons in the second quarter, were the
second highest on record, and just slightly lower than the Company's
record automotive shipments of 616,000 tons in the first quarter of
1998. Shipments of higher margin coated and cold rolled products for
six months of 1998 increased to 67% of sales compared to 61% for the
same period of the previous year, continuing the Company's emphasis on
sales of value added products.
Year to date sales revenue totalled $1,200.2 million down from $1,221.4
million in the first half of 1997. Most of this reduction occurred in
sales to the distributors and convertors markets as the Company did not
purchase any slabs in the first quarter of 1998 and, thus, produced less
hot rolled product than the year earlier period.
The following table sets forth the Company's percent of sales to
various markets for the periods indicated:
<TABLE>
<CAPTION>
First Half Year First Half
1998 1997 1997
------- ---- -------
<S> <C> <C> <C>
Automotive 63% 56% 56%
Appliance, Construction and
Manufacturing 15% 16% 16%
Distributors and Convertors 22% 28% 28%
</TABLE>
The Company recorded an operating profit of $112.5 million or $50
per ton for the first half of 1998, a decrease of $12 per ton
from the first half of 1997 due primarily to lower realized selling
prices and higher raw material and labor cost.
Interest expense totalled $27.3 million for the first half of
1998, $13.8 million lower than the same prior year period, primarily
related to the increased capitalization of interest associated with the
construction of the Rockport Works facility. Capitalized interest
increased by $24.9 million from the prior year period.
Net income for the first half of 1998 totalled $61.8 million compared to
$73.5 million for the same period of 1997. The Company's tax rate for
the first half of 1998 was 37.0% as compared with 38.4% for the first
half of 1997. Diluted earnings per share in the first quarter of 1998
equalled $1.03 versus $1.18 for the comparable prior year period.
Operations at the Company's Rockport Works began June 16, 1998 with the
start of the hot-dip galvanizing, galvannealing operations.
Many businesses and process control systems used in the current business
environment were designed to use only two digits in the date field and,
thus, may not function properly in the year 2000. Over the past several
years, the Company has been assessing and modifying its own business
systems to be year 2000 compliant. The Company has a plan to achieve
year 2000 compliance with respect to its own business systems, including
systems and user training and does not expect costs associated with that
plan to be material. The Company continues to assess its process
control systems, as well as data interchange with customers and
suppliers for year 2000 compliance and intends to make the necessary
modifications to prevent disruption. The Company is unable at this time
to estimate the costs of such modifications.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs are primarily for capital investments,
working capital requirements, employee benefit obligations and interest
on its indebtedness. At June 30, 1998 the Company had $433.4 million of
cash, cash equivalents and short-term investments and also had $99.3
million of financing available under its $125.0 million Accounts
Receivable Purchase Credit Facility.
- 6 -
<PAGE>
Due to continued strong operating performance, cash flow from operations
generated $81.8 million in the second quarter of 1998. For the six
months ended June 30, 1998, cash provided from operating activities
amounted to $138.5 million which was primarily attributable to $61.8
million of net income, the impact of working capital items, and noncash
charges for depreciation and health care trust activities. Capital
investments for the second quarter of 1998 totalled $216.8 million, of
which $185.7 million was associated with Rockport Works. Year to date
capital investments total $414.1 million with Rockport Works amounting
to $353.5 million of this amount. Net cash flows used in financing
totalled $12.8 million in the second quarter of 1998 as the Company paid
$7.4 million of dividend payments and used $5.4 million for open market
purchases of equity securities.
The Company's pension plans are fully funded on an accumulated benefit
obligation basis in accordance with generally accepted accounting
principles as of June 30, 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 June 30, 1998 the Company's liability for postretirement
benefits other than pensions totalled $566.8 million. The Company
has established a health care trust as a means of prefunding this
liability. The balance of the trust as of June 30, 1998 is
equivalent to over two and one-half years of active and retiree
health care payments.
PART II. OTHER INFORMATION
- ----------------------------
Item 1. 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.
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. The Company has filed
motions to dismiss the suit in whole and in part. No rulings have been
rendered to date on these motions. In March 1997, the Court granted
plaintiffs' motion to certify a class. The Company's appeal of this
decision was denied by the appellate court in June 1997. The Company
has further appealed this decision to the Ohio Supreme Court and a
decision is pending. In April 1997, the Company commenced a separate
lawsuit in the United States District Court, Southern District of Ohio,
seeking a permanent injunction staying the state court case and seeking
a declaration that the state court case is preempted by federal law. On
August 21, 1997, the federal court denied the motion for an injunction
and ordered the parties to brief the question of its jurisdiction to
hear the case. On June 2, 1998, the federal court ruled that it did not
have jurisdiction, stating that the Company can more appropriately
pursue its actions in the state court proceeding.
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. All parties have filed
objections and motions to review the magistrate judge's report and
recommendation.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 21, 1998. In
connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on
proposals considered and voted upon at the meeting as described in the
proxy statement.
- 7 -
<PAGE>
All nine nominees for Director listed in the proxy statement were
elected.
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Allen Born 52,964,167 305,279
John A. Georges 52,963,013 306,433
Dr. Bonnie Guiton Hill 52,961,269 308,177
Robert H. Jenkins 52,963,667 305,779
Lawrence A. Leser 52,963,487 305,959
Robert E. Northam 52,962,102 307,344
Cyrus Tang 52,964,667 304,779
Dr. James A. Thomson 52,964,307 305,139
Richard M. Wardrop, Jr. 52,964,587 304,859
</TABLE>
A proposal to amend the Corporation's Stock Incentive Plan (i) to
increase (to a total of 11,000,000 shares) the number of shares with
respect to which options and restricted stock awards may be granted
thereunder and (ii) to extend the term of the plan for an additional
four years (to December 31, 2007) was approved by the affirmative vote
of the holders of 37,684,467 shares. An aggregate of 8,809,383 shares
voted against the proposal, 37,702 shares abstained, and 6,737,895
shares were the subject of broker non-votes.
A proposal to approve the material terms of the Corporation's Annual
Management Incentive Plan was approved by the affirmative vote of the
holders of 52,528,161 shares. An aggregate of 702,441 shares voted
against the proposal and 38,845 shares abstained.
A proposal to approve the material terms of the Corporation's Long-Term
Performance Plan was approved by the affirmative vote of the holders of
52,093,403 shares. An aggregate of 1,138,372 shares voted against the
proposal and 37,671 shares abstained.
A proposal to amend the Certificate of Incorporation of the Corporation
to increase the number of shares of common stock authorized for issuance
was approved by the affirmative vote of the holders of 32,760,276
shares. An aggregate of 20,478,622 shares were voted against the
proposal and 30,549 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - None
B. Form 8-K
Earnings Release April 8, 1998
Certificate of Amendment of
Certificate of Incorporation May 27, 1998
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on behalf of the registrant by
the following duly authorized persons.
AK Steel Holding Corporation
----------------------------
(Registrant)
Date July 20, 1998 /s/ James L. Wainscott
-------------- --------------------------------
Vice President, Treasurer and
Chief Financial Officer
Date July 20, 1998 /s/ Donald B. Korade
-------------- --------------------------------
Donald B. Korade
Controller
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM AK STEEL HOLDING
CORPORATION'S QUARTERLY REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 339
<SECURITIES> 95
<RECEIVABLES> 214
<ALLOWANCES> 0
<INVENTORY> 387
<CURRENT-ASSETS> 1,042
<PP&E> 2,595
<DEPRECIATION> 630
<TOTAL-ASSETS> 3,272
<CURRENT-LIABILITIES> 559
<BONDS> 1,145
<COMMON> 1
0
0
<OTHER-SE> 893
<TOTAL-LIABILITY-AND-EQUITY> 3,272
<SALES> 1,200
<TOTAL-REVENUES> 1,200
<CGS> 987
<TOTAL-COSTS> 1,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 98
<INCOME-TAX> 36
<INCOME-CONTINUING> 62
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
</TABLE>
