<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 September 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.
58,959,922 shares of common stock
---------------------------------
(as of October 26, 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 Nine-Month Periods Ended
September 30, 1997 and 1998 2
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 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 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
- 1-
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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 Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $598.6 $557.0 $1,820.0 $1,757.2
Cost of products sold 482.3 476.8 1,463.9 1,463.4
Selling and administrative
expenses 28.1 30.7 84.8 89.4
Depreciation 19.8 26.3 59.7 68.7
----- ------ ------- -------
Total operating costs 530.2 533.8 1,608.4 1,621.5
Operating profit 68.4 23.2 211.6 135.7
Interest expense 18.7 13.2 59.8 40.5
Other income 9.9 3.7 27.2 16.6
----- ------ ------- -------
Income before income taxes 59.6 13.7 179.0 111.8
Current income tax provision 11.7 2.6 35.8 25.2
Deferred income tax provision 10.9 1.8 32.7 15.5
----- ------ ------- -------
Net income 37.0 9.3 110.5 71.1
Other comprehensive income,
net of tax:
Unrealized gains/(losses)
on securities:
Unrealized holding gains/
(losses) arising during
period 2.1 (2.5) 2.1 (1.9)
Less: reclassification
adjustment for gains/(losses)
included in net income - 0.7 - 0.8
----- ------ ------- ------
Comprehensive income $39.1 $ 6.1 $ 112.6 $ 68.4
----- ------ ------- ------
----- ------ ------- ------
Earnings per share: (Note 2)
Basic earnings per share $ .64 $ .16 $ 1.92 $ 1.20
Diluted earnings per share $ .59 $ .16 $ 1.78 $ 1.19
Cash dividends per common $ .10 $ .125 $ .30 $ .375
share
Common shares and common stock
options outstanding (weighted
average in millions):
For basic earnings per share 53.5 59.1 53.5 59.4
For diluted earnings per
share 62.3 59.3 62.1 59.7
<FN>
- -----------------------
See notes to condensed consolidated financial statements.
1997 restated for a two-for-one common stock spilt effective November
17, 1997.
</TABLE>
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<TABLE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<CAPTION>
ASSETS December 31, September 30,
1997 1998
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 348.2 $ 123.9
Short-term investments 257.9 79.8
Accounts receivable, net (Note 4) 241.5 251.2
Inventories: (Note 3)
Finished and semi-finished 216.5 245.8
Raw materials 148.7 177.9
------- -------
Total inventories, net 365.2 423.7
Other current assets 8.8 9.2
------- -------
Total Current Assets 1,221.6 887.8
-------- -------
Property, Plant and Equipment 2,219.2 2,804.0
Less accumulated depreciation (626.5) (651.0)
-------- -------
Property, plant and equipment, net 1,592.7 2,153.0
------- -------
Prepaid Pension 159.2 167.5
Other 110.8 72.2
------- -------
TOTAL ASSETS $3,084.3 $3,280.5
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 375.6 $ 320.0
Other accruals 158.0 216.1
Current portion of deferred taxes 29.7 19.6
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 563.4 555.8
------- -------
Noncurrent Liabilities:
Long-term debt (Note 4) 997.5 1,145.0
Pension obligation - -
Postretirement benefit obligation 554.1 573.1
Deferred taxes 30.3 56.4
Other liabilities 59.4 60.1
------- -------
Total Noncurrent Liabilities 1,641.3 1,834.6
------- -------
TOTAL LIABILITIES 2,204.7 2,390.4
------- -------
Stockholders' Equity:
Common stock, authorized 200,000,000
shares of $.01 par value each, issued
1997, 63,503,718 shares, 1998, 63,805,421
shares; outstanding 1997, 60,808,922
shares, 1998, 58,959,922 shares 0.6 0.6
Additional paid-in capital 716.8 720.0
Treasury Stock, common shares at cost,
1997, 2,694,796 shares, 1998, 4,845,499
shares (48.2) (87.8)
Retained earnings 208.3 257.2
Accumulated other comprehensive income 2.1 0.1
------- -------
TOTAL STOCKHOLDERS' EQUITY 879.6 890.1
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,084.3 $3,280.5
-------- -------
-------- -------
<FN>
- --------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1998
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $366.4 $118.8
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (365.8) (629.0)
Change in short-term investments (81.3) 178.1
Other (17.3) 21.8
------ ------
NET CASH FLOWS FROM INVESTING ACTIVITIES (464.4) (429.1)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6.8 0.7
Proceeds from issuance of long-term debt 122.5 147.5
Preferred stock dividends paid (7.8) -
Common stock dividends paid (16.0) (22.4)
Purchase of common stock, held in treasury (9.5) (39.6)
Purchase of preferred stock, retired (3.1) -
Underwriting discount and fees (6.0) (0.2)
------ ------
NET CASH FLOWS FROM FINANCING ACTIVITIES 86.9 86.0
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (11.1) (224.3)
Cash and cash equivalents, beginning of period 523.1 348.2
------ ------
Cash and cash equivalents, end of period $512.0 $123.9
------ ------
------ ------
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the period for:
Interest $ 45.1 $ 55.2
Interest capitalized (11.9) (45.9)
Income taxes 32.0 19.2
<FN>
- --------------------
See notes to condensed consolidated financial statements.
</TABLE>
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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 September 30, 1998, and the results of its operations for
the three-month and nine-month periods ended September 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 nine-month period ended September 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share
Net income $37.0 $ 9.3 $110.5 $ 71.1
Less preferred stock dividends
paid 2.5 - 7.7 -
----- ----- ------ ------
Net income applicable to common
shareholders $34.5 $ 9.3 $102.8 $ 71.1
----- ----- ------ ------
----- ----- ------ ------
Number of common shares
outstanding
(weighted average in millions) 53.5 59.1 53.5 59.4
----- ----- ----- -----
----- ----- ----- -----
Basic earnings per share $ .64 $ .16 $1.92 $1.20
----- ----- ----- -----
----- ----- ----- -----
Diluted earnings per share:
Net income $37.0 $ 9.3 $110.5 $ 71.1
----- ----- ----- -----
----- ----- ----- -----
Shares (weighted average in
millions):
Number of common shares
outstanding 53.5 59.1 53.5 59.4
Number of common stock options
outstanding .6 .2 .4 .3
Assuming conversion of preferred
stock 8.2 - 8.2 -
----- ----- ------ ------
Number of common shares
outstanding as adjusted 62.3 59.3 62.1 59.7
----- ----- ------ ------
----- ----- ------ ------
Diluted earnings per share $ .59 $ .16 $1.78 $1.19
----- ----- ----- -----
----- ----- ----- -----
</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 September 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.
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<PAGE>
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. Third quarter shipments
totalled 1,067,000 tons, approximately 100,000 tons lower than second
quarter shipments. Product mix continues to improve as coated and cold
rolled products increased to 73% of total shipments. Operating results
in the third quarter of 1998 were negatively impacted by the General
Motors work stoppage, a 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 severely eroded the market price for non-
contract spot steel sales.
For the year, shipments of higher margin coated and cold rolled products
increased to 69% of shipments compared to 62% for the same period of the
previous year, continuing the Company's emphasis on increasing the mix
of value added products. On September 12, 1998, the Company's Rockport
Works continuous carbon/stainless cold mill began operations. The hot-
dip galvanizing and galvannealing line began operations on June 16,
1998.
The following table sets forth the Company's percent of sales to various
markets for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------ Year
1997 1998 1997
---- ---- ----
<S> <C> <C> <C>
Automotive 55% 60% 56%
Appliance, Construction and
Manufacturing 16% 17% 16%
Distributors and Convertors 29% 23% 28%
</TABLE>
The Company recorded an operating profit of $135.7 million or $41 per
ton for the first nine months of 1998, a decrease of $20 per ton from
the first nine months of 1997 due primarily to lower realized selling
prices and higher raw material and labor costs.
Interest expense totalled $40.5 million for the first nine months of
1998, $19.3 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 $34.0 million from the prior year period.
Net income for the first nine months of 1998 totalled $71.1 million
compared to $110.5 million for the same period of 1997. Diluted
earnings per share in the first nine months of 1998 equalled $1.19
versus $1.78 for the comparable prior year period.
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 is modifying or upgrading its business
systems to be Year 2000 compliant. The Company, with the assistance of
outside consultants, is currently assessing and will modify or upgrade,
as necessary, its process control systems to be Year 2000 compliant.
The Company plans to achieve Year 2000 compliance with respect to its
business systems and process control systems, including testing, by
September 30, 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 million. Additional expenditures, if
any, beyond this amount could be required based on the nature and extent
of required modifications or upgrades to process control systems, the
evaluation of which is underway.
- 6 -
<PAGE>
Numerous factors could cause the expected cost and completion dates to
differ from the above estimates. Contingency plans, if needed, would be
developed prior to January 1, 2000. However, the Company currently
believes that the Year 2000 issue will not have a material adverse
impact on the Company's financial condition or results of operations.
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 September 30, 1998, the Company had $203.7
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.
Cash flow from operations was a usage of $19.8 million in the third
quarter of 1998. For the nine months ended September 30, 1998, cash
provided from operating activities amounted to $118.8 million which was
primarily attributable to $71.1 million of net income, noncash charges
for depreciation and health care trust activities and the impact of
working capital items. Capital investments for the third quarter of
1998 totalled $214.9 million, of which $142.8 million was associated
with Rockport Works. Year to date capital investments total $629.0
million with Rockport Works totalling $468.4 million of this amount.
Net cash flows used in financing totalled $11.4 million in the third
quarter of 1998 as the Company paid $7.5 million of dividend payments
and used $4.1 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 September 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 September 30, 1998, the Company's liability for postretirement
benefits other than pensions totalled $573.1 million. The Company has
established a health care trust as a means of prefunding this liability.
The balance of the trust as of September 30, 1998, is equivalent to over
two years of active and retiree health care payments.
Other
- -----
On October 12, 1998, the Company and two divisions of Mexican steel
producer Hylsamex have signed letters of intent that would assist the
Company in supplying, marketing and distributing its products in Mexico.
The letters of intent also enable Hylsamex and the Company to jointly
market their respective products to their mutual customer base.
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. 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.
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. Trial is scheduled for February 1999.
- 7 -
<PAGE>
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 set for
October 23, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - None
B. Form 8-K
Earnings Release July 21, 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 October 26, 1998 /s/ James L. Wainscott
---------------- ----------------------------
James L. Wainscott
Vice President, Treasurer and
Chief Financial Officer
Date October 26, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 124
<SECURITIES> 80
<RECEIVABLES> 251
<ALLOWANCES> 0
<INVENTORY> 424
<CURRENT-ASSETS> 888
<PP&E> 2,804
<DEPRECIATION> 651
<TOTAL-ASSETS> 3,281
<CURRENT-LIABILITIES> 556
<BONDS> 1,145
<COMMON> 1
0
0
<OTHER-SE> 889
<TOTAL-LIABILITY-AND-EQUITY> 3,281
<SALES> 1,757
<TOTAL-REVENUES> 1,757
<CGS> 1,463
<TOTAL-COSTS> 1,622
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 112
<INCOME-TAX> 41
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
</TABLE>
