<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, 1999 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 (I.R.S.Employer Identification No.)
of incorporation or organization)
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.
103,056,837 shares of common stock
----------------------------------
(as of November 9, 1999)
<PAGE>
AK STEEL HOLDING CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statements of Income -
Three-Month and Nine-Month Periods Ended September 30, 1998 and 1999 2
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 1998 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of the
Condensed Consolidated Financial Statements 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 959.7 $ 1,055.5 $3,012.4 $3,193.3
Cost of products sold 780.9 845.9 2,436.6 2,554.5
Selling and administrative expenses 72.4 77.2 206.1 228.7
Depreciation 42.1 54.9 116.8 155.3
Special charge (Note 2) - 42.0 - 42.0
--------- --------- -------- --------
Total operating costs 895.4 1,020.0 2,759.5 2,980.5
Operating profit 64.3 35.5 252.9 212.8
Interest expense 20.2 29.2 62.2 89.2
Other income 4.7 7.4 19.1 14.0
--------- --------- -------- --------
Income before income taxes 48.8 13.7 209.8 137.6
Income tax provision (Note 9) 16.7 12.5 71.6 53.3
Minority interest (Note 2) 2.0 2.7 6.0 6.7
--------- --------- -------- --------
Income (loss) from continuing operations 30.1 (1.5) 132.2 77.6
Discontinued operations (Note 6) - - - 7.5
Income (loss) before extraordinary item and
cumulative effect of a change in accounting 30.1 (1.5) 132.2 85.1
Extraordinary item (Note 7) - - - (13.4)
Cumulative effect of a change in accounting (Note 5) -
- - 133.9 -
--------- --------- -------- --------
Net income (loss) $ 30.1 $ (1.5) $ 266.1 $ 71.7
========= ========= ======== ========
Earnings per share: (Note 4)
Basic earnings per share:
Income (loss) from continuing operations $ 0.28 $ (0.04) $ 1.24 $ 0.70
Discontinued operations - - - 0.07
Extraordinary item - - - (0.13)
Cumulative effect of a change in accounting - - 1.33 -
Net income (loss) 0.28 (0.04) 2.57 0.64
Diluted earnings per share:
Income (loss) from continuing operations $ 0.28 $ (0.04) $ 1.22 $ 0.69
Discontinued operations - - - 0.07
Extraordinary item - - - (0.13)
Cumulative effect of a change in accounting - - 1.24 -
Net income (loss) 0.28 (0.04) 2.46 0.63
Cash dividends per common share (Based on historical
outstanding shares, not adjusted for the merger) $ .125 $ .125 $ .375 $ .375
Common shares and common share equivalents
outstanding (weighted average in millions):
For basic earnings per share 100.4 101.2 100.7 101.0
For diluted earnings per share 107.6 101.8 108.0 101.6
</TABLE>
- -----------
See notes to condensed consolidated financial statements
-2-
<PAGE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 346.7 $ 129.3
Short-term liquid investments 7.0 73.6
Accounts receivable, net 441.1 572.2
Total Inventories, net (Note 3) 680.9 704.2
Deferred tax asset 11.5 76.0
Other current assets 9.9 12.4
--------- --------
Total Current Assets 1,497.1 1,567.7
--------- --------
Property, Plant and Equipment 4,268.9 4,515.8
Less accumulated depreciation (1,395.9) (1,546.1)
--------- --------
Property, plant and equipment, net 2,873.0 2,969.7
--------- --------
Other Assets
AFSG (Note 8) 85.6 85.6
Other investments 53.6 51.0
Goodwill 128.6 124.0
Prepaid pension 106.5 113.6
Deferred tax asset 405.2 333.9
Other 73.0 47.9
--------- --------
TOTAL ASSETS $ 5,222.6 $ 5,293.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ - $ 38.0
Accounts payable 441.1 437.4
Other accruals 299.1 342.7
Current portion of long-term debt (Note 7) 116.9 229.7
Current portion of postretirement benefit obligation 63.9 63.9
--------- --------
Total Current Liabilities 921.0 1,111.7
--------- --------
Noncurrent Liabilities:
Long-term debt (Note 7) 1,395.7 1,303.8
Postretirement benefit obligation 1,385.8 1,393.1
Other liabilities 258.4 219.1
--------- --------
Total Noncurrent Liabilities 3,039.9 2,916.0
--------- --------
TOTAL LIABILITIES 3,960.9 4,027.7
--------- --------
Stockholders' Equity: (Note 2)
Preferred stock 130.4 130.4
Common stock, authorized 200,000,000 shares of
$.01 par value each; issued 1998, 105,186,208
shares, 1999, 106,113,584 shares; outstanding
1998, 100,340,709 shares, 1999, 101,705,182 shares 1.1 1.1
Additional paid-in capital 1,691.9 1,642.2
Treasury stock, common shares at cost,
1998, 4,845,499, 1999, 4,408,402 shares (87.8) (80.2)
Accumulated deficit (473.6) (424.6)
Accumulated other comprehensive income (loss) (Note 10) (0.3) (3.2)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 1,261.7 1,265.7
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,222.6 $ 5,293.4
========= =========
</TABLE>
- ----------
See notes to condensed consolidated financial statements.
-3-
<PAGE>
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Nine Months Ended
September 30,
-----------------
1998 1999
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $100.8 $199.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (648.0) (253.4)
Change in short-term investments 170.5 (66.7)
Other 29.4 7.1
------ ------
NET CASH FLOWS FROM INVESTING ACTIVITIES (448.1) (313.0)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1.0 5.6
Proceeds from sale of common stock, held in treasury - 8.0
Proceeds from issuance of long-term debt 147.5 460.0
Increase in notes payable - 38.0
Conversion of preferred stock - (117.9)
Principal payments on long-term debt (34.4) (441.1)
Common stock dividends paid (22.4) (22.3)
Preferred stock dividends paid (7.3) (7.3)
Purchase of common stock, held in treasury (39.6) (1.5)
Underwriting discount and fees (0.2) (11.0)
Debt prepayment premium - (13.1)
Other (0.4) (1.2)
------ ------
NET CASH FLOWS FROM FINANCING ACTIVITIES 44.2 (103.8)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (303.1) (217.4)
Cash and cash equivalents, beginning of period 538.1 346.7
------ ------
Cash and cash equivalents, end of period $ 235.0 $ 129.3
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 77.7 $ 94.2
Interest capitalized (46.0) (21.0)
Income taxes 21.2 6.3
Supplemental schedule of non-cash
investing and financing activities
Issuance of restricted stock $ 3.8 $ 3.4
- -------------
See notes to condensed consolidated financial statements.
-4-
<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 with AK
Holding, 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, 1999, and the results of its operations for the
three-month and nine-month periods ended September 30, 1998 and 1999. The
results of operations for the nine-month period ended September 30, 1999 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1999. These condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements of
AK Holding and Armco Inc. ("Armco") for the years ended December 31, 1997
and 1998.
As described more fully in Note 2, the Company completed a transaction on
September 30, 1999, whereby Armco merged with and into AK Steel, and AK
Steel became the surviving company. The transaction is accounted for as a
pooling of interests and, therefore, the consolidated financial statements
presented herein reflect the combined financial position, results of
operations and cash flows of Armco and the Company as if they had been
combined for all periods presented. Prior to September 30, 1999, AK Steel
and Armco, in the normal course of business, entered into certain
transactions for the purchase and conversion of material. These intercompany
transactions have been eliminated in the accompanying financial statements.
There is no summarized financial information included for AK Steel because
there is no substantial difference in the operations of AK Steel and AK
Holding and because the debt of AK Steel is fully and unconditionally
guaranteed by AK Holding. AK Holding has no independent operations.
2. The Merger
On September 30, 1999, the Company consummated the merger of Armco with and
into AK Steel pursuant to an Agreement and Plan of Merger dated May 20,
1999. Upon the effectiveness of the merger, each outstanding share of Armco
common stock was converted into the right to receive .3829 shares of AK
Holding common stock. In addition, the outstanding shares of one of Armco's
three series of convertible preferred stock were converted into the right to
receive a like number of shares of a substantially identical new series of
cumulative convertible preferred stock of AK Holding with an annual dividend
rate of $3.625 per share. Lastly, the outstanding shares of the two
remaining series of Armco's convertible preferred stock were converted into
the right to receive cash in an amount equal to their redemption value plus
accrued dividends, subject to the right of holders to convert the same into
shares of common stock. On September 30, 1999, the Company deposited $117.9
with its paying agent for distribution to holders of these two series of
preferred stock pursuant to the terms of the merger agreement. Of this
amount, $2.3 was returned to the Company in the fourth quarter, since some
preferred holders elected to convert their shares to common stock in lieu of
receiving cash. Minority interest in the Condensed Consolidated Statements
of Income represents historical dividends of the latter two preferred stock
issues.
In the third quarter of 1999, the Company recognized a $42.0 special charge
for merger related costs, including $26.0 for expenses incurred for banking,
legal, accounting and other transaction fees and $16.0 for certain required
payments under the change-of-control provisions contained in Armco's benefit
plans. Of these expenses, approximately $4.7 was paid in cash, with the
remainder expected to be paid in the fourth quarter of 1999.
3. 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.
December 31, September 30,
1998 1999
------------ -------------
Finished and semi-finished $537.6 $549.7
Raw materials 198.2 200.2
------ ------
Total cost 735.8 749.9
Adjustment to state inventories at LIFO value (54.9) (45.7)
------ ------
Net inventories $680.9 $704.2
====== ======
-5-
<PAGE>
4. Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
Income (loss) for calculation of
basic earnings per share:
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ 30.1 $ (1.5) $132.2 $ 77.6
Less: Preferred stock dividends 2.4 2.4 7.3 7.3
---- ---- ---- ----
Income (loss) from continuing operations
available to common stockholders 27.7 (3.9) 124.9 70.3
Discontinued operations - - - 7.5
Extraordinary item - - - (13.4)
Cumulative effect of a change in accounting - - 133.9 -
---- ---- ---- ----
Net income (loss) available to common stockholders $ 27.7 $ (3.9) $258.8 $ 64.4
====== ====== ====== ======
Common shares outstanding
(weighted average in millions) 100.4 101.2 100.7 101.0
====== ====== ====== ======
Basic earnings per share:
Income (loss) from continuing operations $ .28 $ (.04) $ 1.24 $ .70
Discontinued operations - - - .07
Extraordinary item - - - (.13)
Cumulative effect of a change in accounting - - 1.33 -
---- ---- ---- ----
Net income (loss) $ .28 $ (.04) $ 2.57 $ .64
====== ====== ====== ======
Income (loss) for calculation of
diluted earnings per share:
Income (loss) from continuing operations $ 30.1 $ (1.5) $132.2 $ 77.6
Less: Preferred stock dividends - 2.4 - 7.3
---- ---- ---- ----
Income (loss) from continuing operations
available to common stockholders 30.1 (3.9) 132.2 70.3
Discontinued operations - - - 7.5
Extraordinary item - - - (13.4)
Cumulative effect of a change in accounting - - 133.9 -
---- ---- ---- ----
Net income (loss) available to common stockholders $ 30.1 $ (3.9) $266.1 $ 64.4
====== ====== ====== ======
Shares (weighted average in millions):
Common shares outstanding 100.4 101.2 100.7 101.0
Assumed conversion of preferred stock 7.0 - 7.0 -
Common stock options outstanding 0.2 0.6 0.3 0.6
---- ---- ---- ----
Common shares outstanding as adjusted 107.6 101.8 108.0 101.6
====== ====== ====== ======
Diluted earnings per share:
Income (loss) from continuing operations $ .28 $ (.04) $ 1.22 $ .69
Discontinued operations - - - .07
Extraordinary item - - - (.13)
Cumulative effect of a change in accounting - - 1.24 -
---- ---- ---- ----
Net income (loss) $ .28 $ (.04) $ 2.46 $ .63
====== ====== ====== ======
</TABLE>
5. Conformed Accounting Method for Pensions and Other Postretirement Benefits
Effective January 1, 1998, the Company conformed the AK Steel and Armco
methods of amortizing unrecognized net gains and losses related to its
obligations for pensions and other postretirement benefits, including
conforming the measurement date of the actuarial valuation. Under the
conformed method, the Company recognizes immediately into income
unrecognized net gains and losses which exceed 10% of the larger of benefit
obligations or plan assets (the "corridor"), and amortizes amounts inside
the 10% corridor over the average remaining service life of active
participants, approximately 15 years.
In the nine months ended September 30, 1998, the Company recognized income
of $133.9 (net of tax), or $1.24 per diluted share, for the cumulative
effect of this accounting change. Conforming accounting methods increased
income from continuing operations for the nine months ended September 30,
1998 by $12.8 and decreased income from continuing operations for the nine
months ended September 30, 1999 by $9.6.
6. Discontinued Operations
Certain of Armco's former businesses included operations in foreign
countries. At the time of their sale or closure, some of these operations
had outstanding tax issues in those countries. Following consultation with
local country advisors, Armco determined that it had resolved most of these
issues and, in the nine
-6-
<PAGE>
months ended September 30, 1999, reversed a majority of the related
reserves, recognizing income of $7.5, or $0.07 per share on a diluted basis,
in discontinued operations.
7. Long-Term Debt
On January 7, 1999, the city of Rockport, Indiana issued $10.0 in Variable
Rate Demand Revenue Bonds maturing on June 1, 2029, which are secured by the
Company's letter of credit. Interest is at a variable rate which is reset
weekly and paid monthly.
On January 14, 1999, using the proceeds of the fourth quarter 1998 issue of
its 8 7/8% Senior Notes Due 2008 and other available funds, Armco redeemed
the entire $111.0 outstanding principal amount of its 9 3/8% Senior Notes
Due 2000 at a price of 101.75% of their principal amount. The redemption
resulted in an extraordinary loss of $2.8 ($1.4 after taxes, or
approximately $0.01 per share on a diluted basis).
On February 10, 1999, AK Steel issued $450.0 principal amount of its 7 7/8%
Senior Notes Due 2009 with interest payable semiannually commencing on
August 15, 1999. The Notes were sold at 99.623% of their principal amount.
On April 1, 1999, AK Steel used $338.1 of the net proceeds from the sale of
these notes to finance the redemption of its 10 3/4% Senior Notes Due 2004
at a price of 104.031% of their principal amount. The redemption resulted in
an extraordinary loss of $19.3 ($12.0 after taxes, or approximately $0.12
per share on a diluted basis).
8. Investment in AFSG
In March 1997, North Atlantic Insurance Company, a group of international
insurance companies previously affiliated with Armco Financial Services
Group ("AFSG") but sold in 1991, filed an application for voluntary
liquidation in the United Kingdom. As a result, certain claims have been
asserted against Northwestern National Insurance Company ("NNIC"), a runoff
company of AFSG, by insureds of North Atlantic. NNIC is defending these
claims as well as pursuing related claims against third parties and North
Atlantic.
Effective September 30, 1999, the Wisconsin Office of the Commissioner of
Insurance ordered NNIC to enter into a restructuring agreement with Armco
Financial Services Corporation (AFSC) and Armco Insurance Group, Inc.
(AIGI). AIGI is the parent company of NNIC. AFSC is the parent company of
AIGI and a subsidiary of AFSG Holdings, Inc. Pursuant to the restructuring
agreement, AFSC and AIGI prepaid notes owed to NNIC and contributed certain
collateral to NNIC in exchange for the termination and release of their
obligations to NNIC. This order and restructuring agreement releases all of
the NNIC parent companies from any further obligation to provide support to
NNIC.
9. Taxes
The book tax rate for 1999 is estimated at 39%. The deferred income tax
provision includes a credit of $11.6 related to prior years for a recycling
tax credit from the Commonwealth of Kentucky recognized in the first quarter
of 1999.
10. Comprehensive Income
For the three and nine months ended September 30, 1998 and 1999,
comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $30.1 $(1.5) $266.1 $71.7
Other comprehensive income, net of tax:
Foreign currency translation adjustment 0.1 - (0.4) (1.3)
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during period (2.5) (1.4) 2.1 (1.6)
Less: reclassification for gains included in net income 0.7 1.4 - 1.9
---- ---- ---- ----
Comprehensive income (loss) $28.4 $(1.5) $267.8 $70.7
===== ====== ====== =====
</TABLE>
11. Segment Information
The Company's Steel Operations consist of the production, finishing and
sale of flat-rolled carbon, stainless and electrical steels. Assets
employed in Steel Operations totaled $5,077.4 at September 30, 1999. The
Company's other operations include an industrial park, the production and
sale of snowplow and ice control products, and the production and sale of
steel pipe and tubular products. The following presents the results of the
Company's Steel Operations and other operations.
-7-
<PAGE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
---- ---- ---- ----
Sales:
Steel Operations $877.1 $ 967.7 $2,799.6 $2,971.0
Other 82.6 87.8 212.8 222.3
------ ------- ------- -------
Total sales $959.7 $1,055.5 $3,012.4 $3,193.3
====== ======= ======= =======
Operating profit:
Steel Operations $ 49.7 $ 18.2 $ 228.7 $ 181.3
Other 14.6 17.3 24.2 31.5
---- ---- ----- -----
Total operating profit $ 64.3 $ 35.5 $ 252.9 $ 212.8
==== ==== ===== =====
Steel Operations income for the three and nine months ended September 30,
1999 is net of a $42.0 special charge for merger related expenses and a $9.6
charge necessary to conform accounting methods of the combining companies.
Item 2. Management's Discussion and Analysis of the Condensed Consolidated
Financial Statements (dollars in millions, except per share and per ton
data)
Merger with Armco Inc.
- ----------------------
On September 30, 1999, the Company consummated the merger of Armco with and into
AK Steel pursuant to an Agreement and Plan of Merger dated May 20, 1999. Upon
the effectiveness of the merger, each outstanding share of Armco common stock
was converted into the right to receive .3829 shares of AK Holding common stock.
In addition, the outstanding shares of one of Armco's three series of
convertible preferred stock were converted into the right to receive a like
number of shares of a substantially identical new series of cumulative
convertible preferred stock of AK Holding with an annual dividend rate of $3.625
per share. Lastly, the outstanding shares of the two remaining series of
Armco's convertible preferred stock were converted into the right to receive
cash in an amount equal to their redemption value plus accrued dividends,
subject to the right of holders to convert the same into shares of common stock.
On September 30, 1999, the Company deposited $117.9 with its paying agent for
distribution to holders of these two series of preferred stock pursuant to the
terms of the merger agreement. Of this amount, $2.3 was returned to the Company
in the fourth quarter, since some preferred holders elected to convert their
shares to common stock in lieu of receiving cash. Minority interest in the
Condensed Consolidated Statements of Income represents historical dividends of
the latter two preferred stock issues.
In the third quarter of 1999, the Company recognized a $42.0 special charge for
merger related costs, including $26.0 for expenses incurred for banking, legal,
accounting and other transaction fees and $16.0 for certain required payments
under the change-of-control provisions contained in Armco's benefit plans. Of
these expenses, approximately $4.7 was paid in cash, with the remainder expected
to be paid in the fourth quarter of 1999.
As a result of the merger, the Company estimates it will incur additional one-
time charges that could range from $100.0 to $125.0. These charges relate to
the potential closure of duplicate facilities, force reductions and further
change-of-control costs. The Company is still developing its plan for combining
the operations and will record the special charges once the appropriate
accounting criteria are met.
Results of Operations
- ---------------------
The Company's Steel Operations produce and finish flat-rolled carbon, stainless
and electrical steels for sale principally to the automotive, appliance,
construction and manufacturing markets. The Company also sells these products
to distributors and converters. Shipments for the third quarter of 1999 totaled
1,500,000 tons, 164,000 tons lower than in the second quarter of 1999, but
surpassing third quarter 1998 shipments by 151,000 tons. Year-to-date 1999
shipments of 4,730,000 tons exceeded shipments for the comparable period in 1998
by 496,000 tons.
Steel Operations net sales for the third quarter of 1999 totaled $967.7, a
decrease of 7% from the previous quarter, but a 10% increase over the third
quarter of 1998. Year-to-date net sales for 1999 exceeded those for the
comparable 1998 period by 6%.
Excluding the $42.0 special charge for merger-related expenses and a $9.6 charge
to conform pension and other postretirement benefit accounting practices, the
Steel Operations recorded an operating profit of $69.8, or $47 per ton, for the
third quarter of 1999, versus $50 per ton in the second quarter and $37 per ton
in the 1998 third quarter. The increase in operating profit year over year is
due to improved product mix and lower unit costs.
Interest expense totaled $29.2 for the third quarter of 1999, a decrease of $0.3
from the second quarter, but $9.0 higher than the third quarter of 1998. The
increase in third quarter 1999 over third quarter 1998 as well as a $27.0
increase in interest expense in the first nine months of 1999 compared to the
same period in 1998 is due, in part, to
-8-
<PAGE>
lower capitalized interest related to the substantial completion of construction
at the Rockport Works. In addition, since the Company could not redeem its 10
3/4% Senior Notes until April 1, 1999, both the 7 7/8% Senior Notes and 10 3/4%
Senior Notes remained outstanding for a period of 50 days which increased
interest expense by approximately $5.0 during the first quarter of 1999.
In the first quarter of 1999, the Company recorded a deferred income tax credit
of $11.6 related to prior years for the Commonwealth of Kentucky recycling
credit.
Excluding $38.8 of merger-related expenses (net of tax) in 1999, income from
continuing operations totaled $37.3 and $30.1 for the third quarter of 1999 and
1998, respectively, and is $116.4 for the year, compared to $132.2 for the
comparable prior year period. The decrease in year-to-date income was primarily
due to higher interest expense.
In the first nine months of 1999, the Company recorded an extraordinary loss of
$22.1 ($13.4 after taxes), or $0.13 per share on a diluted basis, due to the
early redemption of AK Steel's 10 3/4% Senior Notes Due 2004 and Armco's 9 3/8%
Senior Notes Due 2000.
Mansfield Labor Dispute
- -----------------------
On September 1, 1999, the labor contract with represented workers at Armco's
Mansfield facility expired and Armco informed the union that it would lock out
represented employees until a new labor agreement could be reached. In early
September, the Mansfield facility began using salaried employees and replacement
workers. As a result of lower production in September at the Mansfield
facility, shipments of semi-finished stainless steels have been reduced. The
Mansfield labor dispute is estimated to have reduced operating income by
approximately $4.0 in the third quarter and, if it continues through the end of
the year, is expected to reduce operating income by $12.0 in the fourth quarter.
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, 1999, the Company had $202.9 of cash, cash
equivalents and short-term liquid investments, as well as $82.0 available under
its $200.0 Accounts Receivable Purchase Credit Facility. On October 1, 1999,
coincident with the merger, the facility was increased to $300.0 and the term
extended to September 30, 2004. On that date, available borrowing capacity
under the modified facility was $213.6.
Cash flow from operations generated $199.4 for the nine months ended September
30, 1999. Net income excluding depreciation, amortization and other noncash
items of $243.7 was partially offset by a net increase in working capital.
Cash used in investing activities totaled $313.0. Capital investments amounted
to $253.4, including $21.0 in capitalized interest. In addition, the Company
had net purchases of short-term liquid investments of $66.7. Remaining capital
investments for 1999 are expected to total $75.0, which will be paid out of
existing cash balances and cash generated from operations.
Cash flows from financing activities used $103.8. On January 14, 1999, Armco
used approximately $113.0 to redeem its 9 3/8% Senior Notes Due 2000. On
February 10, 1999, AK Steel issued $450.0 of its 7 7/8% Senior Notes Due 2009.
The net proceeds from the sale of these notes were approximately $442.1 after
deduction of the discount to initial purchasers and other offering expenses. AK
Steel used $338.1 of the net proceeds to redeem its 10 3/4% Senior Notes Due
2004 on April 1, 1999 and the remaining $104.0 was used for general corporate
purposes. In addition, upon the effectiveness of the merger on September 30,
1999, the Company deposited with its paying agent $117.9 for distribution to
holders of two series of convertible preferred stock of Armco pursuant to the
merger agreement. Of this amount, $2.3 was returned to the Company because
certain of those holders elected to convert their shares to common stock in lieu
of receiving cash. The Company also generated $13.6 of cash from the sale of
common stock, including 500,000 treasury shares that were sold in order to
facilitate the treatment of the Armco merger as a "pooling of interest" for
accounting purposes.
Upon the effectiveness of the merger, the Company assumed the long-term debt of
Armco, including its 8 7/8% Senior Notes Due 2008 and 9% Senior Notes Due 2007.
The indentures governing these notes provide that upon the occurrence of a
change of control, holders have the right to require the Company to purchase the
notes in whole or in part at 101% of their principal amount plus accrued
interest. The total principal amount of these two senior note issues is $225.0.
On October 28, 1999, the Company commenced change of control offers to the
holders of the notes to purchase their notes at 101% of their principal amount
in accordance with the provisions of the indentures. The change of control
offers will expire on December 7, 1999. In addition, the Company offered to pay
$20.00 and $17.50 per $1,000 principal amount of the 8 7/8% Senior Notes and 9%
Senior Notes, respectively, to holders of those notes who, on or before November
12, 1999, waive their right to require the purchase of their notes by the
Company. Cash to fund purchases of notes pursuant to the change of control
offers is expected to come from cash
-9-
<PAGE>
on hand, cash generated by operations and borrowings under the Company's
Accounts Receivable Purchase Credit Facility.
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, 1999. 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 $377.8 that can be used to meet future funding requirements.
At September 30, 1999 the Company's liability for postretirement benefits other
than pensions totaled $1,457.0. The Company has established a health care trust
as a means of prefunding this liability. The balance of the trust as of
September 30, 1999 is equivalent to almost a year of active and retiree health
care payments.
Year 2000 Readiness
- -------------------
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 substantially completed all necessary modifications, upgrades
and testing of its business systems to be year 2000 compliant. Additionally,
with the assistance of outside consultants, the Company has substantially
completed all necessary modifications and upgrades to its process control
systems to be year 2000 compliant.
In addition, the Company has responded to numerous customer inquiries on the
year 2000 issue. Inquiries and audits, in some cases, have been made of the
Company's major suppliers as to their year 2000 readiness. Electronic data
interchange testing has been completed.
The Company currently estimates its expenditures for year 2000 compliance will
approximate $20.0 ($5.0 from AK Steel and $15.0 from Armco), of which $19.0 has
been incurred through September 30, 1999. Costs are expensed as incurred and
paid from general corporate funds and approximate 20% of the information
technology budget. Additional expenditures beyond the current estimate could be
required, but are not expected.
Based upon internal assessments, formal communications with suppliers and
customers and work completed to date, the Company believes that year 2000 issues
should not pose significant operational problems or have a material impact on
the Company's consolidated financial position, results of operations or cash
flows. A failure of third party vendors or customers to be year 2000 ready,
however, could adversely affect these beliefs and is not quantifiable. Such
failure could have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flow in a given period, but
probably not over the long-term. The most reasonably likely worst case scenario
of failure by the Company or its suppliers or customers to resolve year 2000
problems would be a temporary slowdown or cessation of manufacturing operations
at one or more of the Company's facilities and a temporary inability on the part
of the Company to timely process orders and to deliver finished products to
customers. Delays in meeting customers' orders would affect the timing of
billings to and payments received from customers with respect to orders and
could result in other liabilities. Customers' year 2000 problems could also
delay the timing of payments to the Company for orders. The Company has
completed audits of its key suppliers as a safeguard against a worse case
scenario and is actively working to complete contingency plans should unplanned
situations arise on or immediately after January 1, 2000.
-10-
<PAGE>
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 its business. In management's
opinion, the ultimate liability resulting from all of these matters,
individually or in the aggregate, will not materially affect the Company's
consolidated financial position, results of operations or cash flows.
On September 30, 1998, Armco's Mansfield facility received an Order from the
United States Environmental Protection Agency under Section 3013 of the Resource
Conservation & Recovery Act requiring Armco to develop a plan for investigation
of eight areas of the facility which allegedly could be sources of
contamination. On October 30, 1998, Armco filed a complaint in the U.S.
District Court in Cleveland seeking pre-enforcement review. On April 1, 1999,
the court dismissed the complaint on the basis that the statute did not allow
pre-enforcement review of agency orders. Thereafter, Armco filed a motion for
reconsideration, which is still pending a decision by the Court, and
subsequently submitted an investigation plan for certain portions of the
Mansfield facility. No response has been received from the EPA in regard to the
proposed plan.
On September 25, 1999, a decision was issued by the permanent arbitrator in an
arbitration of a dispute between the Company and the United Steelworkers of
America regarding back pay owed to the Company's Ashland Works hourly employees
laid off between August 1993 and December 1997. The arbitrator ruled that the
affected employees are entitled to back pay for the period, as reduced by
specified offsets. The Company and the United Steelworkers are meeting to
calculate and implement the award. Though the amount of the award is presently
undetermined, the Company believes that it will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of AK Holding shareholders was held on September 29, 1999 to
approve the proposed issuance of common stock to consummate the merger with
Armco. The following are the results of the vote on the proposal:
For 49,050,761
Against 77,031
Abstentions 34,892
Broker Non-votes 0
Item 6. Exhibits and Reports on Form 8-K
A. The following is an index of the exhibits included in this
Form 10-Q:
Exhibit 18 Accountant's Preferability Letter
B. Form 8-K
Earnings Release July 20, 1999
Merger with Armco Inc. - August 31, 1999
Department of Justice completed antitrust review
Merger with Armco Inc. - September 23, 1999
Common stock exchange ratio increased to .3829
shares of AK Holding per Armco share
-11-
<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)
<TABLE>
<CAPTION>
<S> <C>
Date November 12, 1999 /s/ James L. Wainscott
------------------------ -------------------------------------------
James L. Wainscott
Vice President, Treasurer and Chief Financial Officer
Date November 12, 1999 /s/ Donald B. Korade
------------------------ --------------------------------------------
Donald B. Korade
Controller
</TABLE>
-12-
<PAGE>
Exhibit 18
[Deloitte & Touche Logo] 250 East Fifth Street Telephone: (513) 784-7100
P.O. Box 5340
Cincinnati, Ohio 45201-5340
November 4, 1999
AK Steel Holding Corporation
703 Curtis Street
Middletown, Ohio 45043
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
September 30, 1999, of the facts relating to a change in AK Steel Holding
Corporation's method of accounting for unrecognized net gains or losses related
to pension and other postretirement benefit plans from the minimum amortization
method as defined by Statement of Financial Accounting Standards Nos. 87 and
106, to a method whereby the Company will recognize immediately into income any
unrecognized net gains or losses outside a 10% corridor and will amortize into
income any unrecognized net gains or losses inside such corridor over the
average expected remaining service period of active plan participants. We
believe, on the basis of the facts so set forth and other information furnished
to us by appropriate officials of the Company, that the accounting change
described in your Form 10-Q is to an alternative accounting principle that is
preferable under the circumstances.
We have not audited any consolidated financial statements of AK Steel Holding
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to December 31, 1998. Therefore, we are unable to express, and we do
not express, an opinion on the facts set forth in the above-mentioned Form 10-Q,
on the related information furnished to us by officials of the Company, or on
the financial position, results of operations, or cash flows of AK Steel Holding
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to December 31, 1998.
Yours truly,
/s/ Deloitte & Touche LLP
- --------------------
Deloitte Touche
Tohmatsu
International
- --------------------
<TABLE> <S> <C>
<PAGE>
<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.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 129
<SECURITIES> 74
<RECEIVABLES> 572
<ALLOWANCES> 0
<INVENTORY> 704
<CURRENT-ASSETS> 1,568
<PP&E> 4,516
<DEPRECIATION> 1,546
<TOTAL-ASSETS> 5,293
<CURRENT-LIABILITIES> 1,112
<BONDS> 1,304
0
130
<COMMON> 1
<OTHER-SE> 1,135
<TOTAL-LIABILITY-AND-EQUITY> 5,293
<SALES> 3,193
<TOTAL-REVENUES> 3,193
<CGS> 2,555
<TOTAL-COSTS> 2,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 138
<INCOME-TAX> 53
<INCOME-CONTINUING> 78
<DISCONTINUED> 8
<EXTRAORDINARY> (13)
<CHANGES> 0
<NET-INCOME> 72
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.63
<F1>
<FN>
<F1>Earnings per share are after extraordinary loss of $0.13 per share.
</FN>
</TABLE>
