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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
[X]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000.
OR
[_]Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File No. 1-13696.
AK STEEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1401455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Curtis Street, Middletown, Ohio 45043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 425-5000.
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock $.01 Par Value New York Stock Exchange
$3.625 Cumulative Convertible Preferred
Stock New York Stock Exchange
$1 Par Value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No X .
Aggregate market value of the registrant's voting stock held by non-
affiliates at February 16, 2001: $1,030,436,307.
At February 16, 2001 there were 107,895,589 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the annual meeting of
stockholders, (the "2001 Proxy Statement"), which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of
the fiscal year ended December 31, 2000.
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AK Steel Holding Corporation
Table of Contents
Page
----
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 5
Item 3. Legal Proceedings.............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders............ 6
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 8
Item 6. Selected Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
Item 8. Financial Statements and Supplementary Data.................... 16
Item 9. Changes in and Disagreements with Accountants.................. 41
Item 10. Directors and Executive Officers of the Registrant............. 41
Item 11. Executive Compensation......................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management. 41
Item 13. Certain Relationships and Related Transactions................. 41
Exhibits, Financial Statement Schedules and Reports on Form 10-
Item 14. K.............................................................. 41
i
PART I
Item 1. Business.
General
AK Steel Holding Corporation ("AK Holding"), through its wholly-owned
subsidiary, AK Steel Corporation ("AK Steel" and, together with AK Holding,
the "Company"), is a fully-integrated producer of flat-rolled carbon,
stainless and electrical steels. Its operations include those previously
conducted by Armco Inc. ("Armco"), which merged with and into AK Steel on
September 30, 1999 in a transaction accounted for as a pooling of interests.
The merger enhanced AK Steel's steel producing capability and market position
by allowing it to combine the distinct strengths of each company's individual
plants into a unified steelmaking operation. In addition to its flat-rolled
steel manufacturing and finishing operations ("Steel Operations"), the Company
owns and operates Sawhill Tubular Products, a manufacturer of a wide range of
steel pipe and tubing products; Douglas Dynamics, L.L.C., the largest North
American manufacturer of snowplows and ice control products for four-wheel
drive light trucks; and the Greens Port Industrial Park on the Houston, Texas
ship channel. During 2000, AK Steel's steel shipments, including both flat-
rolled and tubular products, totaled 6,493,000 tons, of which 90% consisted of
value-added coated and cold-rolled carbon steel products, stainless and
electrical steels and tubular products.
Operations
The Company's principal business focus is its Steel Operations. They consist
of seven steelmaking and finishing plants in Indiana, Kentucky, Ohio and
Pennsylvania that produce flat-rolled carbon steels, including premium quality
coated, cold-rolled and hot-rolled products, and specialty stainless and
electrical steels that are sold in slab, hot band, and sheet and strip form.
These products are sold primarily to the domestic automotive, appliance,
industrial machinery and equipment, and construction markets, as well as to
distributors, service centers and convertors. The Steel Operations also
include European trading companies that buy and sell steel and steel products.
In the fourth quarter of 2000, the Company acquired a 40% ownership interest
in a stainless and titanium processor. AK Steel is registered under the ISO
9002 international quality standard and certified under the QS 9000 quality
assurance program used by domestic automotive manufacturers and has received
numerous quality awards from many of its major customers. Additional
information about the Company's Steel Operations is set forth in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and in Note 9 to the Consolidated Financial Statements, which is
set forth in Item 8.
AK Steel's other operations consist of Sawhill Tubular Products, Douglas
Dynamics, L.L.C. and Greens Port Industrial Park. Sawhill Tubular, with three
plants located in Ohio and Pennsylvania, manufactures a wide range of steel
pipe and tubing products for the non-residential construction, industrial,
plumbing and heating markets. Douglas Dynamics manufactures snowplows and ice
control products for four-wheel drive light trucks at plants in Maine,
Tennessee and Wisconsin. Its products are sold under the brand names Western
and Fisher through independent distributors in the United States and Canada.
Greens Port Industrial Park, which consists of approximately 650 acres on the
Houston, Texas ship channel, leases land, buildings and rail car storage
facilities to third parties and operates a deep water loading dock on the
channel.
Customers
AK Steel's flat-rolled carbon steel products are sold primarily to
automotive manufacturers and to customers in the appliance, industrial
machinery and equipment, and construction markets, consisting principally of
manufacturers of home appliances, heating, ventilation and air conditioning
equipment and lighting products. Hot-rolled, cold-rolled and semi-finished
steel products are also sold to distributors, service centers and convertors
who may further process these products or resell them without further
processing.
AK Steel sells its stainless steel products primarily to customers in the
automotive industry, as well as to manufacturers of food handling, chemical
processing, pollution control and medical and health equipment.
1
Electrical steels, which are iron-silicon alloys with unique magnetic
properties, are sold primarily to manufacturers of power transmission and
distribution transformers, electrical motors and generators, and lighting
ballasts.
In conducting its Steel Operations, AK Steel's marketing efforts are
principally directed toward those customers, such as automotive manufacturers,
who require precise on-time delivery, technical support and the highest quality
flat-rolled steel. Management believes that AK Steel's enhanced product quality
and delivery capabilities, and its emphasis on customer technical support and
product planning, are critical factors in its ability to serve this segment of
the market. The following table sets forth the percentage of the Steel
Operations net sales attributable to various markets:
Years Ended
December 31,
----------------
1998 1999 2000
---- ---- ----
Automotive................................................... 54% 55% 52%
Appliance, Industrial Machinery and Equipment, and
Construction................................................ 25% 25% 24%
Distributors, Service Centers and Convertors................. 21% 20% 24%
Between 1999 and 2000, AK Steel's Steel Operations sales increased 5%. While
automotive market sales dollars remained flat between 1999 and 2000, they
declined as a percentage of total sales as sales to other markets continued to
increase. The Steel Operations segment is a major supplier to General Motors,
Ford Motor Company and DaimlerChrysler AG. Shipments to General Motors, AK
Steel's largest customer, accounted for approximately 12%, 15% and 15% of Steel
Operations net sales in 1998, 1999 and 2000, respectively. No other customer
accounted for more than 10% of net sales for any of these years.
AK Steel is party to agreements with all of its major automotive and most
appliance industry customers with terms that range from one to three years.
These agreements, which are typically finalized late in the year, set forth
prices to be paid for each product category during each year of their term.
Except for nickel and chrome, where surcharges may be passed on to the
customer, these agreements do not permit adjustment to reflect changes in
prevailing market conditions or raw material costs. During most periods,
approximately 75% of AK Steel's sales of flat-rolled steel products are made
pursuant to these agreements, with the balance being made in the spot market at
prevailing prices at the time of sale. However, due to a reduction in demand
from contract customers during the fourth quarter of 2000, contract sales in
the quarter were approximately 70% of total flat-rolled sales, resulting in a
higher percentage of shipments to the depressed spot market.
Raw Materials
The principal raw materials required for AK Steel's steel manufacturing
operations are carbon and stainless steel scrap, iron ore, coal, electricity,
natural gas, oxygen, chrome, nickel, silicon, molybdenum, zinc, limestone and
other commodity materials. In addition, AK Steel purchases carbon steel slabs
from other steel producers to supplement the production from its own
steelmaking facilities. Purchases of coal, iron ore and limestone, as well as
transportation services, are made at negotiated prices under multi-year
agreements. Purchases of carbon steel slabs, stainless steel scrap, natural gas
and other raw materials are made at prevailing market prices, which are subject
to price fluctuations in accordance with supply and demand. During 2000, AK
Steel incurred substantially higher costs for natural gas, as well as for steel
slabs and scrap. While prices for natural gas are likely to remain high and may
even increase further, AK Steel believes that adequate sources of supply exist
for all of its raw material and energy requirements.
Employees
As of December 31, 2000, the Company had approximately 11,500 employees.
Approximately 7,500 employees at seven of AK Steel's thirteen plants are
represented by international, national or independent unions,
2
under contracts with expiration dates extending through 2006. Labor contracts
covering employees at the following plant locations expire in 2001.
% of Total Contract
Location/Union Employees Expiration Date
-------------- ---------- ------------------
Ashland Works
-------------
Paper, Allied-Industrial, Chemical and
Energy Workers............................. 3% April 1, 2001
Butler Works
------------
Butler Armco Independent Union (Hourly)..... 20% September 30, 2001
AK Steel's Mansfield Works was one of the facilities owned and operated by
Armco prior to its merger with AK Steel on September 30, 1999. On September 1,
1999, the contract between Armco and the United Steelworkers of America
covering approximately 600 hourly workers, including 100 on layoff status, at
the Mansfield Works expired. Because of production slowdowns, vandalism and
threats of violence on the part of union members, Armco informed the union,
and the Company understood, that it would lock out represented employees while
it continued to bargain with the union. Since September 1999, the Mansfield
Works has been operated by salaried employees and temporary replacement
workers.
Competition
AK Steel competes with domestic and foreign flat-rolled carbon, stainless
and electrical steel producers and producers of plastics, aluminum and other
materials that can be used in lieu of flat-rolled steels in manufactured
products. Price, service, quality and delivery are the primary competitive
factors and vary in relative importance according to the category of product
and customer requirements.
Domestic steel producers face significant competition from foreign producers
who typically have lower labor costs. In addition, many foreign steel
producers are owned, controlled or subsidized by their governments and their
decisions with respect to production and sales may be influenced more by
political and economic policy considerations than by prevailing market
conditions.
Environmental Matters
Domestic steel producers, including AK Steel, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment. Over the past three years, AK Steel has
expended the following for environmental related capital investments and
environmental compliance costs:
Years Ended
December 31,
-----------------
1998 1999 2000
----- ----- -----
(in millions)
Environmental related capital investments................. $20.2 $ 7.2 $10.1
Environmental compliance costs............................ 87.9 85.9 93.5
Management does not anticipate any material impact on AK Steel's recurring
operating costs or future profitability as a result of its compliance with
current environmental regulations. Moreover, because all domestic steel
producers operate under the same set of federal environmental regulations,
management believes that AK Steel is not competitively disadvantaged by its
need to comply with these regulations.
3
Environmental Remediation
AK Steel and its predecessors have been conducting steel manufacturing and
related operations for approximately 100 years. Although their operating
practices are believed to have been consistent with prevailing industry
standards during this time, hazardous materials may have been released at one
or more operating sites, including sites that are no longer owned by AK Steel.
Potential remediation expenditures have been estimated for those sites where
future remediation efforts are probable based on identified conditions,
regulatory requirements or contractual obligations arising from the sale of a
business.
Pursuant to the Resource Conservation and Recovery Act ("RCRA"), which
governs the treatment, handling and disposal of hazardous waste, the United
States Environmental Protection Agency ("EPA") and authorized state
environmental agencies may conduct inspections of RCRA regulated facilities to
identify areas where there have been releases of hazardous waste or hazardous
constituents into the environment and order the facilities to take corrective
action to remediate such releases. The Company's major steelmaking facilities
are subject to RCRA inspections by environmental regulators. While the Company
cannot predict the future actions of these regulators, the potential exists
for required corrective action at these facilities.
Under authority conferred by the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the EPA and state environmental
authorities have conducted site investigations at certain of AK Steel's
facilities, portions of which previously had been used for disposal of
materials that are currently subject to regulation. While the results of these
investigations are still pending, in the future AK Steel could be directed to
expend funds for remedial activities at the former disposal areas. Given the
uncertain status of these investigations, however, management is unable to
predict if and when such expenditures might be required or their magnitude.
Environmental Proceedings
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewater prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits in wastewater from the Middletown Works, AK Steel, through the
Middletown POTW, petitioned the EPA for "removal credits," a type of
compliance exemption, based on the Middletown POTW's satisfactory treatment of
the wastewater for ammonia and phenol. The EPA declined to review the petition
on the grounds that it had not yet promulgated new sludge management rules. AK
Steel thereupon sought and obtained from the United States District Court for
the Southern District of Ohio an injunction prohibiting the EPA from
instituting enforcement action against AK Steel for noncompliance with the
pretreatment limitations, pending the EPA's promulgation of the applicable
sludge management regulations. Management is unable to predict the outcome of
this matter. However, if the EPA eventually refuses to grant the petition for
removal credits, AK Steel could incur additional costs to construct
pretreatment facilities at the Middletown Works.
On February 27, 1995, the Ohio Environmental Protection Agency ("OEPA")
issued a Notice of Violation ("NOV") with respect to the Zanesville Works
alleging noncompliance with both a 1993 order and various state regulations
regarding hazardous waste management. AK Steel is continuing to work with the
OEPA and the Ohio Attorney General's Office to achieve final resolution of
this matter.
Subsequent to a multi-media inspection of Middletown Works during the fall
of 1996, the EPA Region V notified AK Steel that legal proceedings had been
initiated alleging violations of Clean Air Act and Clean Water Act
regulations. On June 29, 2000, the EPA filed a complaint against AK Steel in
the U. S. District Court for the Southern District of Ohio, for alleged
violations of the Clean Air Act, the Clean Water Act and the RCRA. On the same
date, AK Steel filed a Verified Complaint for Declaratory and Injunctive
Relief in the Court of Common Pleas for Butler County, Ohio against the State
of Ohio and the OEPA seeking a declaration that (a) AK Steel is in compliance
with its operating permits for the blast furnace and basic oxygen furnaces at
its Middletown Works, which would preclude the State of Ohio and the OEPA from
taking any action to order or enforce
4
obligations on AK Steel with respect to those facilities, and (b) that any
emissions from the Middletown Works do not cause, or otherwise contribute to, a
public nuisance. On June 30, 2000, the State of Ohio moved to intervene in the
EPA action. AK Steel intends to vigorously contest this matter.
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring Armco to develop a plan for investigation of eight areas
of the Mansfield Works that allegedly could be sources of contamination. On
October 30, 1998, Armco filed a complaint in the United States District Court
for the Northern District of Ohio 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 was denied on October 26, 2000. The site
investigation began in November 2000 and is continuing.
On June 7, 2000, the EPA Region III issued to AK Steel's Butler Works an
Emergency Order ("Order") pursuant to the Safe Drinking Water Act, concerning
discharge of nitrate/nitrite compounds to the Connoquenessing Creek, an
occasional water source for the Borough of Zelienople. The Order was issued
without any prior notice to AK Steel. On June 9, 2000, AK Steel filed a
Petition for Review and a Motion for Emergency Stay with the Sixth Circuit
Court of Appeals. On June 13, 2000, the Sixth Circuit issued an order denying
AK Steel's Motion for Emergency Stay. AK Steel and the EPA Region III are
currently engaged in discussions in an effort to reach a settlement of this
matter.
In addition to the foregoing matters, the Company is or may be involved in
proceedings with various regulatory authorities that may require the Company to
pay fines, comply with more rigorous standards or other requirements or incur
capital and operating expenses for environmental compliance. Management
believes that the ultimate disposition of the foregoing proceedings will not
have, individually or in the aggregate, a material adverse effect on the
Company's consolidated financial condition, results of operations or cash
flows.
Item 2. Properties.
The Company's corporate headquarters are located in Middletown, Ohio.
Steelmaking and finishing operations are conducted at seven facilities in
Indiana, Kentucky, Ohio and Pennsylvania. Fabricating plants are located in
Pennsylvania, Ohio, Wisconsin, Maine and Tennessee, and an industrial park is
located in Houston, Texas. All of these facilities are owned by the Company.
Coke manufacturing plants, blast furnaces, basic oxygen furnaces and
continuous casters are located at the Ashland Works in Kentucky and the
Middletown Works in Ohio. A hot rolling mill, cold rolling mill, pickling
lines, annealing facilities and temper mills as well as four coating lines are
located at the Middletown Works, and one additional coating line is located at
the Ashland Works. Together, these facilities are located on approximately
5,400 acres of land.
The Rockport Works consists of a state-of-the-art continuous cold rolling
mill, a hot-dip galvanizing and galvannealing line, a continuous carbon and
stainless steel pickling line, a stainless steel annealing and pickling line,
hydrogen annealing facilities and a temper mill. The 1.7 million square-foot
plant is located on a 1,700-acre site in Spencer County, Indiana.
The Butler Works in Pennsylvania, which is situated on 1,300 acres with 3.2
million square feet of buildings, produces stainless and electrical steel.
Melting takes place in three electric arc furnaces that feed an argon-oxygen
decarburization unit and a vacuum degassing unit for refining molten metal.
These units feed two double strand continuous casters. The Butler Works also
includes a hot rolling mill, annealing and pickling units and two fully-
automated tandem cold rolling mills. It also has various intermediate and
finishing operations for both stainless and electrical steels.
The Coshocton Works in Ohio, located on 650 acres, consists of a 600,000
square-foot plant, containing three Sendzimer mills and two Z-high mills for
cold reduction, four annealing and pickling lines, ten bell
5
annealing furnaces, three bright annealing lines and other processing
equipment, including temper rolling, slitting and packaging facilities.
The Mansfield Works in Ohio, which produces stainless steel, consists of a
1.4 million square-foot facility on a 445-acre site and includes a melt shop
with two electric arc furnaces, an argon-oxygen decarburization unit, a thin-
slab continuous caster, a six-stand hot rolling mill, a five-stand tandem cold
rolling mill and a pickling line.
The Zanesville Works in Ohio, with 508,000 square feet of buildings on 88
acres, is a finishing plant for some of the stainless and electrical steel
produced at the Butler Works and Mansfield Works and has a Sendzimer cold
rolling mill, annealing and pickling lines, high temperature box anneal and
other decarburization and coating units.
Item 3. Legal Proceedings.
In addition to the environmental matters discussed in Item 1 and the items
discussed below, there are various claims pending against the Company and its
subsidiaries involving product liability, reinsurance and insurance
arrangements, antitrust, employee benefits and other matters arising out of
the conduct of the business of the Company. 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.
On April 19, 2000, a purported class action was filed in the United States
District Court for the Southern District of Ohio by Bernard Fidel against AK
Steel Holding Corporation and certain of its directors and officers, alleging
material misstatements and omissions in the Company's public disclosure about
its business and operations. The defendants intend to vigorously defend this
action. AK Steel has filed a motion to dismiss the action, which currently is
pending.
A number of lawsuits regarding asbestos exposure are pending and continue
to be filed arising out of the operations of former Armco facilities. The
majority of these lawsuits are filed in Texas and arise out of Armco's former
Houston Works facility. Such cases typically involve a large number of
plaintiffs claiming against a large number of defendants. Armco is normally
named as a defendant by a small percentage of the overall plaintiffs who are
typically frequenters (independent contractors, delivery personnel, etc.)
claiming that Armco exposed them to asbestos while they were on the premises.
AK Steel is actively and vigorously defending these cases.
On January 20, 1998, judgment against AK Steel in the amount of $6.5 million
was entered by the United States District Court for the Southern District of
Ohio, following a jury trial in a disability discrimination lawsuit brought by
a former employee. On January 30, 1998, AK Steel moved for judgment in its
favor as a matter of law, reduction of the damages and a new trial. On January
20, 2000, the court reduced the jury verdict to $1.5 million. The Company
subsequently filed a motion for relief from that judgment, which was denied.
The Company and the former employee have filed cross-appeals in the U. S.
Court of Appeals for the Sixth Circuit, seeking to further reduce the verdict
and reinstate the original verdict, respectively.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
6
Executive Officers
The following table sets forth the name, age and principal position with the
Company of each of its executive officers as of February 19, 2001:
Name Age Positions with the Company
---- --- --------------------------
Richard M. Wardrop, Jr.. 55 Chairman of the Board and Chief Executive Officer
James L. Wareham........ 61 President
John G. Hritz........... 46 Executive Vice President and General Counsel
James L. Wainscott...... 43 Senior Vice President, Treasurer and Chief Financial Officer
Michael T. Adams........ 43 Vice President, Sales and Marketing
James M. Banker......... 44 Vice President, Operations
Michael P. Christy...... 44 Vice President, Purchasing and Transportation
Thomas C. Graham, Jr.... 46 Vice President, Research and Engineering
Brenda S. Harmon........ 49 Vice President, Human Resources and Secretary
J. Theodore Holmes...... 56 Vice President, Customer Service
Donald B. Korade........ 58 Vice President and Controller
Alan H. McCoy........... 49 Vice President, Public Affairs
Ernest E. Rummler....... 49 Vice President, Manufacturing Planning & Steel Sourcing
James W. Stanley........ 56 Vice President, Safety and Health
Richard M. Wardrop, Jr. has been Chairman of the Board since January 1997.
He has been a director since March 1995 and Chief Executive Officer since May
1995. Mr. Wardrop also served as President of the Company from April 1994
until March 1997.
James L. Wareham has been President since March 1997. Prior to joining the
Company, Mr. Wareham was Chairman, President and Chief Executive Officer of
Wheeling Pittsburgh Steel Corporation as well as President of WHX Corporation,
the parent company of Wheeling Pittsburgh Steel Corporation.
John G. Hritz was named Executive Vice President and General Counsel in
January 1999. From May 1998 until that date, Mr. Hritz was Senior Vice
President, General Counsel and Secretary of the Company, having previously
served as Vice President, General Counsel and Secretary from August 1996 until
May 1998. Mr. Hritz was named Assistant General Counsel in May 1993 and
Assistant Secretary in January 1994. Since June 1996, Mr. Hritz also has had
responsibility for the Company's employee and labor relations, and
environmental affairs.
James L. Wainscott has been the Company's Treasurer since April 1995 and its
Chief Financial Officer since July 1998. Mr. Wainscott was named Senior Vice
President in January 2000, having previously served as a Vice President from
April 1995.
Michael T. Adams was named Vice President, Sales and Marketing in December
2000. Mr. Adams had been Vice President, Manufacturing from July 1998 to that
date. From October 1995 until July 1998, he served as General Manager,
Manufacturing of the Company's Middletown Works.
James M. Banker was named Vice President, Operations in December 2000. From
May 1999 until that date he served as Vice President, Sales and Marketing.
From April 1992 to May 1999, Mr. Banker was General Manager, Sales for the
Company.
Michael P. Christy has been Vice President, Purchasing and Transportation
since November 1998. From January 1998 until that date, Mr. Christy had been
Vice President, Purchasing and Financial Analysis. Mr. Christy was named
Director, Purchasing and Financial Analysis in May 1997 after having served as
Director, Financial Planning and Analysis since June 1996. Prior to that Mr.
Christy held various positions in finance, planning and operations at National
Steel Corporation.
Thomas C. Graham, Jr. has been Vice President, Research and Engineering
since June 1996. From early 1994 until that date, he was General Manager
Sales, Construction for National Steel Corporation.
7
Brenda S. Harmon has been Vice President, Human Resources since January
1998. She assumed the additional responsibilities of Corporate Secretary in
March 1999. Mrs. Harmon had been General Manager, Human Resources since
September 1996, after having been named Corporate Manager, Human Resources in
March 1995.
J. Theodore Holmes was named Vice President, Customer Service in January
2000. From May 1999 until that date, Mr. Holmes was Director, Customer
Service. Mr. Holmes was Director, Customer Service & Product Administration
from August 1998 to May 1999. From July 1997 to August 1998, Mr. Holmes served
as General Manager, Manufacturing Planning. From November 1992 to July 1997,
Mr. Holmes was General Manager, Customer Service.
Donald B. Korade was named Vice President and Controller in November 1999.
From September 1995 until that date, Mr. Korade served as Controller of the
Company.
Alan H. McCoy has been Vice President, Public Affairs since January 1997.
From March 1994 until that date, Mr. McCoy served as General Manager, Public
Relations.
Ernest E. Rummler was named Vice President, Manufacturing Planning & Steel
Sourcing in January 2000. From August 1998 until that date, Mr. Rummler served
as Director, Manufacturing Planning & Steel Sourcing. From July 1997 until
August 1998, Mr. Rummler was General Manager, Customer Service, and from June
1992 until July 1997, he was General Manager, Manufacturing Planning.
James W. Stanley has been Vice President, Safety and Health since January
1996. Prior to joining the Company, Mr. Stanley held various management
positions with the U.S. Department of Labor's Occupational Safety and Health
Administration since its inception in 1971.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
AK Holding's common stock has been listed on the New York Stock Exchange
since April 5, 1995 (symbol: AKS). The table below sets forth, for the
calendar quarters indicated, the reported high and low sale prices of the
common stock:
1999 High Low
---- ---- ---
First Quarter........................................... $24 3/8 $19 11/16
Second Quarter.......................................... $29 5/8 $22 1/8
Third Quarter........................................... $24 1/2 $16 5/8
Fourth Quarter.......................................... $19 1/16 $13 3/4
2000 High Low
---- ---- ---
First Quarter........................................... $20 1/8 $7 7/8
Second Quarter.......................................... $12 $8
Third Quarter........................................... $11 7/16 $8 9/16
Fourth Quarter.......................................... $10 3/16 $7 1/2
As of February 16, 2001, there were 107,895,589 shares of common stock
outstanding and held of record by 17,545 stockholders. Because depositories,
brokers and other nominees held many of these shares, the number of record
holders is not representative of the number of beneficial holders.
AK Holding has paid quarterly dividends on its common stock since November
15, 1995. During 1999 and 2000, AK Holding paid a quarterly common stock
dividend of $0.125 per share. The declaration and payment of cash dividends is
subject to restrictions imposed by the instruments governing its senior debt.
At December 31, 2000, AK Holding had $27.2 million available for the payment
of cash dividends.
8
On January 18, 2001, the Board of Directors declared a reduced quarterly
common stock dividend of $0.0625 per share payable on February 28, 2001 to
shareholders of record on February 1, 2001. This 50% reduction was enacted in
light of currently depressed steel market conditions.
As more fully explained in Item 7 under the heading, "Merger with Armco," in
the fourth quarter of 1999, the Company issued shares of a new $3.625
convertible preferred stock to replace a substantially identical series of
Armco preferred stock. This stock, which is convertible into 2.6 shares of AK
Holding common stock, is listed on the New York Stock Exchange under the
symbol AKS pfB. During the fourth quarter of 1999, these preferred stock
shares traded at prices between a high of $54-7/16 and a low of $45-7/8. The
table below sets forth, for the calendar quarters indicated, the reported high
and low sale prices of the preferred stock during 2000:
High Low
---- ---
First Quarter.............................................. $57 1/8 $42 1/2
Second Quarter............................................. $47 $43 3/8
Third Quarter.............................................. $45 $42 1/2
Fourth Quarter............................................. $45 1/2 $38 1/8
Since the fourth quarter of 1999, AK Holding has paid a regular quarterly
dividend of $0.90625 per share on its $3.625 preferred stock. As of February
16, 2001, 259,481 shares of the preferred stock were outstanding. Declaration
and payment of preferred stock dividends are subject to the same restrictions
imposed by the senior debt issues on common stock dividends.
On April 25, 2000, the Company announced that its Board of Directors had
authorized the Company to repurchase, from time to time, up to $100.0 million
of its outstanding equity securities. Through December 31, 2000, the Company
expended $40.5 million to purchase 3,702,600 shares of its common stock and
48,450 shares of its $3.625 convertible preferred stock pursuant to this
authorization. To maximize liquidity in light of adverse steel industry
conditions, no shares were purchased in the fourth quarter of 2000.
9
Item 6. Selected Financial Data.
The following selected historical consolidated financial data for each of
the five years in the period ended December 31, 2000 have been derived from
the Company's audited consolidated financial statements after giving effect to
the merger of Armco with and into AK Steel (See Note 1 below). The selected
historical consolidated financial data presented herein are qualified in their
entirety by, and should be read in conjunction with, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Years Ended December 31,
--------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(dollars in millions, except per share data)
Statement of Operations Data: (1)
Net sales......................... $3,999.7 $4,249.7 $4,101.0 $4,368.3 $4,611.5
Cost of products sold............. 3,262.8 3,436.4 3,297.8 3,503.3 3,773.7
Selling and administrative
expenses......................... 278.1 288.0 278.0 309.8 267.6
Depreciation...................... 134.8 141.0 161.2 210.7 232.0
Special charges and unusual items
(2).............................. 8.8 -- -- 99.7 --
-------- -------- -------- -------- --------
Total operating costs............. 3,684.5 3,865.4 3,737.0 4,123.5 4,273.3
-------- -------- -------- -------- --------
Operating profit.................. 315.2 384.3 364.0 244.8 338.2
Interest expense.................. 76.1 111.7 84.9 123.7 136.1
Other income...................... 25.4 48.4 30.3 20.8 8.0
-------- -------- -------- -------- --------
Income before income taxes and
minority interest................ 264.5 321.0 309.4 141.9 210.1
Provision for income taxes........ 169.7 127.5 105.5 63.9 77.7
Minority interest................. 8.1 8.1 8.1 6.7 --
-------- -------- -------- -------- --------
Income from continuing operations. 86.7 185.4 195.8 71.3 132.4
Discontinued operations........... 4.1 1.6 -- 7.5 --
-------- -------- -------- -------- --------
Income before extraordinary item
and cumulative effect of an
accounting change................ 90.8 187.0 195.8 78.8 132.4
Extraordinary loss on retirement
of debt.......................... -- 1.9 -- 13.4 --
Cumulative effect of a change in
accounting (3)................... -- -- 133.9 -- --
-------- -------- -------- -------- --------
Net income........................ $ 90.8 $ 185.1 $ 329.7 $ 65.4 $ 132.4
======== ======== ======== ======== ========
Basic earnings per share:
Income from continuing
operations..................... $ 0.71 $ 1.75 $ 1.86 $ 0.62 $ 1.20
Discontinued operations......... 0.04 0.02 -- 0.07 --
Extraordinary losses............ -- 0.02 -- 0.13 --
Cumulative effect of an
accounting change.............. -- -- 1.33 -- --
-------- -------- -------- -------- --------
Net income...................... $ 0.75 $ 1.75 $ 3.19 $ 0.56 $ 1.20
Diluted earnings per share:
Income from continuing
operations..................... $ 0.70 $ 1.68 $ 1.82 $ 0.62 $ 1.20
Discontinued operations......... 0.04 0.01 -- 0.07 --
Extraordinary losses............ -- 0.02 -- 0.13 --
Cumulative effect of an
accounting change.............. -- -- 1.24 -- --
-------- -------- -------- -------- --------
Net income...................... $ 0.74 $ 1.67 $ 3.06 $ 0.56 $ 1.20
Cash dividend per common share
(not adjusted for merger)........ $ 0.325 $ 0.425 $ 0.50 $ 0.50 $ 0.50
10
As of December 31,
--------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data: (1)
Cash, cash equivalents and short-
term investments................. $ 908.5 $ 801.0 $ 353.7 $ 54.4 $ 86.8
Working capital................... 1,263.7 930.6 576.1 564.5 631.5
Total assets...................... 4,710.4 5,074.4 5,279.2 5,227.1 5,239.8
Current portion of long-term debt. 27.2 40.8 116.9 5.9 63.2
Long-term debt (excluding current
portion)......................... 1,219.3 1,301.8 1,395.7 1,451.0 1,387.6
Current portion of pension and
postretirement benefit
obligations...................... 65.8 68.0 65.5 68.8 66.6
Long-term pension and
postretirement benefit
obligations (excluding current
portion)......................... 1,596.2 1,560.7 1,416.5 1,416.3 1,420.2
Stockholders' equity.............. 877.7 1,005.3 1,262.7 1,277.8 1,319.3
- --------
(1) Armco was merged with and into AK Steel on September 30, 1999 in a
transaction accounted for as a pooling of interests. Accordingly, except
with respect to cash dividends per common share, these consolidated
financial data reflect the Company's results and financial position as if
Armco and AK Steel had been combined for all periods presented.
(2) The 1996 special charges relate to the divestiture of certain businesses
and product lines. The 1999 special charge relates to expenses incurred as
a result of the merger with Armco.
(3) In 1998, the Company changed its accounting for pensions and other
postretirement benefits, recognizing a cumulative effect of a change in
accounting.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(Dollars in millions, except per share and per ton amounts)
Merger with Armco
On September 30, 1999, Armco was merged with and into AK Steel. As a result
of the merger, in 1999, the Company recognized pre-tax special charges
totaling $99.7, including $28.5 of expenses incurred for investment banking,
legal, accounting and other transaction fees, $51.1 for employee severance and
certain required payments under the change-of-control provisions contained in
Armco's employee benefit plans and $20.1 for closure of the galvanizing plant
in Dover, Ohio. On November 6, 1999, the Company announced the closure of this
redundant facility effective January 29, 2000. On December 17, 1999,
production ceased at the plant. Approximately $54.0 of the $99.7 required the
outlay of cash in 1999 and additional payments of approximately $7.0 were made
in 2000. Cash outlays in 2001 are expected to be minimal. With the exception
of certain employee benefit and environmental expenditures that will be funded
over a long period of time, the remainder of the special charges do not
require the outlay of cash.
Operations Overview
AK Steel's principal business focus is its Steel Operations, which consist
of seven steelmaking and finishing plants that produce flat-rolled carbon
steels, including premium quality coated cold-rolled and hot-rolled products,
and specialty stainless and electrical steels that are sold in slab, hot band,
and sheet and strip form. These products are sold primarily to the domestic
automotive, appliance, industrial machinery and equipment, and construction
markets, as well as to distributors, service centers and convertors. The
Company's other operations include Sawhill Tubular Products, a manufacturer of
a wide range of steel pipe and tubing products; Douglas Dynamics, L.L.C., the
largest North American manufacturer of snowplows and ice control products for
four-wheel drive light trucks; and an industrial park on the Houston, Texas
ship channel.
2000 Compared to 1999
During 2000, net sales were $4,611.5, an increase of 6% from the $4,368.3
reported for 1999. Steel Operations contributed $4,277.3 to total net sales,
compared to $4,055.3 for 1999, an increase of 5%. These
11
increases were due primarily to continued growth in the percentage of total
shipments attributable to value-added products, consisting primarily of
stainless and electrical steels and coated and cold-rolled carbon steels. For
the year 2000, value-added products, including tubular products, comprised
approximately 90% of total shipments, compared to 82% for 1999. Partly
offsetting the improved product mix were significantly lower prices in the
spot market. During most periods, approximately 75% of AK Steel's sales of
flat-rolled steel products are made pursuant to multi-year sales contracts,
with the balance being made in the spot market at prevailing prices at the
time of sale. However, due to a reduction in demand from contract customers
during the fourth quarter of 2000, contract sales were approximately 70% of
total flat-rolled sales in that quarter, resulting in a higher percentage of
shipments to the depressed spot market.
Total steel shipments during 2000, inclusive of tubular products, declined
slightly to 6,493,000 tons from the 6,541,000 tons shipped in 1999, reflecting
the Company's closure, in January 2000, of a redundant galvanizing facility in
Dover, Ohio, which accounted for shipments of almost 200,000 tons in 1999.
During 2000, an 8% increase in value-added steel shipments was a result of the
Company's move toward a richer product mix. Steel Operations shipments of
6,171,000 in 2000 were 1% below 1999 shipments due to the Dover closure.
Operating profit in 2000 totaled $338.2, or $52 per ton shipped, compared to
the $244.8 reported for 1999. Excluding the $99.7 merger-related special
charges, 1999 operating profit was $344.5, or $53 per ton shipped. Steel
Operations operating profit was $300.7 in 2000 and $201.7 ($301.4 excluding
the special charge) in 1999. The slight decrease in operating profit in 2000
was due primarily to substantially higher costs in comparison to 1999 for
steel scrap, purchased carbon steel slabs and, most particularly, natural gas
and, to a lesser extent, to the significant decline in spot market prices and
the increase in the percentage of the Company's sales to the spot market
during the fourth quarter of 2000. These negative factors were partly offset
by increased shipments of value-added products, which carry higher margins,
higher than expected merger synergies and other cost savings achieved through
more efficient utilization of production facilities.
Interest expense increased in 2000 by $12.4 over the prior year, due
primarily to an $18.9 reduction in the amount of interest that the Company
capitalized as a result of the completion of construction of its Rockport
Works in the second half of 1999. This was partially offset by the retirement
of certain debt in connection with the Armco merger. Other income, consisting
primarily of interest earned on cash balances, declined in 2000 due to lower
average cash balances compared to 1999.
During 2000, the Company incurred $77.7 in income tax expense, a book tax
rate of 37%. This amount included a noncash deferred tax provision of $91.4,
primarily attributable to accelerated tax depreciation in excess of book, book
pension credits in excess of actual funding of the pension plans, utilization
or expiration of tax loss carryovers and related changes in the deferred tax
asset valuation reserve. Partially offsetting the deferred tax provision was a
credit for current taxes of $13.7, which included a $15.0 federal tax refund
that resulted from the carryback of a tax net operating loss generated in
1999. The income tax provision for 1999 is net of an $11.6 recycling tax
credit received from the Commonwealth of Kentucky in that year, but which
related to prior years.
Income from continuing operations for 2000 was $132.4, or $1.20 per share,
compared to $71.3, or $0.62 per share, reported for 1999. Excluding the
special charge, minority interest, and certain other merger-related
adjustments, net of tax, 1999 income from continuing operations was $157.6.
From this amount, income from continuing operations decreased 16% in 2000,
reflecting the lower adjusted operating income, higher interest expense and
the decline in other income.
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. Following consultation with advisors in those
countries in 1999, Armco determined that it had resolved most of these issues
and reversed a majority of the related reserves, recognizing income from
discontinued operations of $7.5, or $0.07 per share.
During 1999, the Company recorded a combined after-tax extraordinary loss of
$13.4, or $0.13 per share, 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.
12
Net income in 2000 was $132.4, or $1.20 per share, compared to the $65.4, or
$0.56 per share, reported for 1999. Excluding the special charge, minority
interest, and certain other merger-related adjustments, as well as the income
from discontinued operations and extraordinary loss, net of tax, 1999 income
was $157.6. From this amount, income decreased 16% in 2000, reflecting the
lower adjusted operating income, higher interest expense and the decline in
other income.
1999 Compared to 1998
Net sales totaled $4,368.3 in 1999 versus $4,101.0 in 1998. Shipments
totaling 6,541,000 tons in 1999 were 469,000 tons above 1998 levels. Steel
Operations contributed $4,055.3 and $3,808.7 to the Company's net sales in
1999 and 1998, respectively, and 6,254,000 tons and 5,777,000 tons of its
shipments in the same years. The year-to-year increases reflect stronger
demand for the Company's products, particularly from the automotive industry.
Shipments of value-added products, including tubular products, constituted 82%
of total 1999 shipments, compared to 75% in 1998.
Operating profit in 1999, excluding special charges, was $344.5, or $53 per
ton shipped, compared to operating profit of $364.0, or $60 per ton, in 1998.
Excluding the same special charges, Steel Operations contributed operating
profit of $301.4 and $333.8 in 1999 and 1998, respectively. The decrease in
1999 operating profit is primarily due to higher depreciation at the Rockport
Works and excess costs related to the Mansfield labor dispute, partially
offset by the improved product mix.
Interest expense totaled $123.7 in 1999, an increase of $38.8 over 1998. The
increase was due, for the most part, to a reduction in the amount of interest
that was capitalized as a result of the completion of construction of the
Rockport Works.
Following the merger of AK Steel and Armco, but effective as of January 1,
1998, the Company conformed the AK Steel and Armco methods of amortizing
unrecognized net gains and losses related to their obligations for pensions
and other postretirement benefits, including conforming the measurement dates
for actuarial valuations. Under the conformed method, the Company recognizes
immediately into income unrecognized net gains and losses that 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). This method accelerates
the recognition into income of events that have occurred and, therefore, may
increase the sensitivity of the Company's results of operations to external
market volatility. In 1998, the Company recognized net-of-tax income of
$133.9, or $1.33 per share ($1.24 per diluted share) for the cumulative effect
of this accounting change.
Net income for 1999 totaled $65.4, or $0.56 per share, compared to 1998 net
income of $329.7, or $3.19 per share ($3.06 per diluted share). Excluding the
1999 special charges and other merger-related items, discontinued operations
and extraordinary loss, net of tax, and the 1998 cumulative effect of an
accounting change, 1999 income of $157.6 was lower than 1998 income of $195.8,
primarily due to higher depreciation and interest charges partially offset by
a richer product mix and lower income tax provision.
Outlook
The Company expects 2001 shipments to be approximately 6,700,000 tons, in
spite of softening demand in the automotive and appliance markets. Value-added
products are expected to remain above 90% of total shipments for the year.
However, pricing under long-term contracts is expected to be 2% lower across
all steel product lines and spot market pricing is expected to remain
significantly depressed through at least the first quarter.
Steel scrap and slab prices are expected to be lower in 2001 than in 2000,
potentially reducing costs $40.0 in the year. While the prices paid for a
portion of the Company's 2001 natural gas purchases have been set, these costs
are expected to be at least $25.0 higher than in 2000. In addition, the
Company expects to undertake two outages for blast furnace maintenance in
2001, costing approximately $10.0 each.
13
Liquidity and Capital Resources
At December 31, 2000, the Company had $86.8 in cash and cash equivalents. In
addition, net of $75.3 used to support letters of credit, the Company had
$224.7 of availability under its $300.0 accounts receivable purchase credit
facility.
During 2000, cash flow from operations generated $329.9, attributed
primarily to $471.8 of income excluding noncash charges for depreciation,
amortization and deferred taxes, offset by the impact of working capital items
and a $55.6 improvement in the funded status of the Company's pension plans.
Working capital cash usage included $50.9 for inventories, primarily due to
increases in stainless steel required by the Rockport Works, growth of hold-
for-release inventory for contract sales, and higher than targeted slab
inventories. In addition, a $31.6 cash usage in current liabilities was
partially due to a reduction in incentive accruals.
Cash flows used in investing totaled $193.8. Capital investments totaled
$137.7, including $2.5 in capitalized interest. In addition, the Company used
$66.4 for the purchase of long-term investments.
Cash flows from financing activities resulted in a net use of $103.7,
including $55.9 for dividends on common and preferred stock and $41.4 for the
purchase of common and preferred stock.
Dividend Reduction
On January 18, 2001, the Board of Directors declared a reduced quarterly
common stock dividend of $0.0625 per share payable on February 28, 2001 to
shareholders of record on February 1, 2001. This 50% reduction was enacted in
light of currently depressed steel market conditions.
Anticipated Debt Service
At December 31, 2000, the Company's long-term debt, including the current
portion, totaled $1,450.8, consisting primarily of senior notes that mature in
the years 2006 through 2009 and that are not subject to amortization prior to
maturity. In addition, the Company's Senior Secured Notes Due 2004 are
repayable in four successive annual installments of $62.5 commencing in
December 2001. The Company's obligation to make principal payments in each of
the next five years is as follows: $63.2 in 2001, $63.3 in 2002, $62.5 in
2003, $62.5 in 2004 and zero in 2005. Interest expense for 2000, net of
capitalized interest of $2.5, totaled $136.1.
Capital Investments
The Company anticipates 2001 capital investments of approximately $125.0. At
December 31, 2000, commitments for future capital investments, including those
to ensure environmental compliance, totaled approximately $51.2, all of which
is expected to be funded in 2001 from available cash and cash generated from
operations.
Employee Benefit Obligations
As of December 31, 2000, the Company's major pension plans were fully funded
in accordance with accounting principles generally accepted in the U.S.
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
$434.6 that can be used to meet future funding requirements.
At December 31, 2000, the Company's liability for postretirement benefits
other than pensions totaled $1,454.3. The Company has established a health
care trust as a means of prefunding a portion of this liability. The balance
of the trust, including the earnings on trust investments, as of December 31,
2000, was $156.0, which was equivalent to less than one year of active and
retiree health care payments.
14
Share Repurchase Plan
On April 25, 2000, the Company announced that its Board of Directors had
authorized the Company to repurchase, from time to time, up to $100.0 of its
outstanding equity securities. Through December 31, 2000, the Company expended
$40.5 to purchase 3,702,600 shares of its common stock and 48,450 shares of
its $3.625 convertible preferred stock pursuant to this authorization. To
maximize liquidity in light of adverse steel industry conditions, no shares
were purchased in the fourth quarter of 2000. Purchases in 2000 were, and
future purchases will be, funded by existing cash balances and cash generated
from operations.
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires the Company to
mark-to-market its derivative instruments. The Company adopted the new
standard on January 1, 2001 and expects to record income of $27.5, net of tax,
in other comprehensive income. The Company is party to derivative contracts
that are designated and qualify as cash flow hedges under SFAS No. 133. They
include contracts for natural gas, nickel, zinc and aluminum, as well as for
the sale of euros. The Company does not enter into derivative contracts that
do not qualify for treatment as a hedge transaction.
Forward-Looking Statements
Certain statements made or incorporated by reference in this Form 10-K, or
made in press releases or in oral presentations made by Company employees,
reflect management's estimates and beliefs and are intended to be, and are
hereby identified as "forward-looking statements" for purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, these include statements in the forgoing paragraphs entitled, Raw
Materials, Competition, Environmental Matters, Legal Proceedings, Outlook,
Liquidity and Capital Resources, and New Accounting Standard. In addition,
these include statements in the paragraph entitled Quantitative and
Qualitative Disclosure About Market Risk and in the Notes to Consolidated
Financial Statements in the paragraphs entitled, Fair Value of Financial
Instruments, New Accounting Standards, Concentrations of Credit Risk, Income
Taxes, Commitments, and Legal, Environmental Matters and Contingencies.
The Company cautions readers that such forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those currently expected by management. In addition to those noted in the
statements themselves, these factors include, but are not limited to, the
following: risks of a downturn in the general economy or in the domestic
automotive industry, or continuing depressed conditions in the highly cyclical
steel industry; volatility in financial markets, which may affect invested
pension plan assets and the calculation of benefit plan liabilities and
expenses; changes in demand for the Company's products, including the possible
need to shift shipments to the spot market from the contract market; unplanned
plant outages, equipment failures or labor difficulties; actions by the
Company's foreign and domestic competitors; unexpected outcomes of major
litigation and contingencies; changes in United States trade policy and
actions with respect to imports; unanticipated increases in the prices for, or
disruptions in the supply of, energy, particularly natural gas, and raw
materials; adverse developments within the AFSG insurance companies and
resulting actions by insurance regulators; and changes in application or scope
of environmental regulations applicable to the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
In the ordinary course of business, the Company's market risk is limited to
changes in a) interest rates, b) the prices of raw materials and energy
sources, and c) foreign currency exchange rates. The Company manages interest
rate risk by issuing substantially all fixed rate debt as a source of
financing operations. The fair value of this debt as of December 31, 2000 is
$1,358.3 million. A reduction in prevailing interest rates of 1% would result
in an increase in the total fair value of long-term debt of approximately
$66.0 million. The fair value was
15
determined primarily from quoted prices. The increase in total fair value due
to an assumed decline in interest rates was calculated based on a change in
the rate used to discount total future principal and interest payments. An
unfavorable effect on the Company's results and cash flows from exposure to
interest rate declines and a corresponding increase in the fair value of its
debt would result only if the Company elected to repurchase its debt at market
prices.
In the ordinary course of business, the Company is exposed to fluctuations
in the price of certain commodities. Since 70% to 75% of steel sales are under
long-term contracts where the Company may not be able to change its selling
price in response to changes in the prices it pays for raw materials and
energy, a rise in the price of natural gas or other commodities is for, the
most part, absorbed by the Company rather than passed on to the customer.
However, except in a small number of transactions where stainless steel prices
assume a fixed nickel content value, nickel prices are recovered in price
surcharges passed on to customers. The Company uses cash settled commodity
futures contracts to hedge the price of a portion of its natural gas, nickel,
aluminum, and zinc requirements. The resulting gains and losses from the use
of these contracts are deferred and recognized in the same period as the
underlying physical transaction. Based on the futures contracts outstanding at
December 31, 2000, the following table presents the amount of a negative
affect on pre-tax income (in millions of dollars) of a hypothetical 10% and
25% decrease in the market price of each of the indicated commodities.
Commodity Derivative 10% Decrease 25% Decrease
-------------------- ------------ ------------
Natural Gas........................................ $7.9 $19.8
Nickel............................................. 0.6 1.0
Aluminum........................................... -- 0.1
Zinc............................................... 1.0 2.0
Since these derivatives are structured as hedges, virtually all of the
losses realized would be offset by the benefit of lower commodity prices. The
Company does not enter into derivatives for trading purposes.
The Company is also subject to risks of exchange rate fluctuations on
receivables denominated in foreign currencies and forward currency contracts
are used to manage exposures to certain of these currency price fluctuations.
The Company has outstanding, at December 31, 2000, forward currency contracts
with a total nominal value of $18.2 million for the sale of euros. Based on
the contracts outstanding at the end of 2000, a 10% increase in the euro to
dollar rate would result in a $1.9 million loss in value, which would offset
the income generated by translation of the receivables collected.
Item 8. Financial Statements and Supplementary Data.
AK Steel Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report........................................... 17
Consolidated Statements of Income for the Years Ended December 31,
1998, 1999 and 2000................................................... 18
Consolidated Balance Sheets as of December 31, 1999 and 2000........... 19
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000................................................... 20
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000...................................... 21
Notes to Consolidated Financial Statements............................. 22
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
AK Steel Holding Corporation:
We have audited the accompanying consolidated balance sheets of AK Steel
Holding Corporation and Subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, in 1998 the
Company changed its method of amortizing unrecognized net gains and losses
related to its obligations for pensions and other postretirement benefits.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 17, 2001
17
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1999 and 2000
(dollars in millions, except per share data)
1998 1999 2000
-------- -------- --------
Net sales........................................ $4,101.0 $4,368.3 $4,611.5
Cost of products sold............................ 3,297.8 3,503.3 3,773.7
Selling and administrative expenses.............. 278.0 309.8 267.6
Depreciation (Note 1)............................ 161.2 210.7 232.0
Special charges (Note 10)........................ -- 99.7 --
-------- -------- --------
Total operating costs............................ 3,737.0 4,123.5 4,273.3
-------- -------- --------
Operating profit................................. 364.0 244.8 338.2
Interest expense................................. 84.9 123.7 136.1
Other income..................................... 30.3 20.8 8.0
-------- -------- --------
Income from continuing operations before income
taxes and minority interest..................... 309.4 141.9 210.1
Income tax provision (Note 5).................... 105.5 63.9 77.7
Minority interest (Note 2)....................... 8.1 6.7 --
-------- -------- --------
Income from continuing operations................ 195.8 71.3 132.4
Discontinued operations (Note 13)................ -- 7.5 --
-------- -------- --------
Income before extraordinary item and cumulative
effect of a change in accounting................ 195.8 78.8 132.4
Extraordinary loss on retirement of debt, net of
tax (Note 6).................................... -- 13.4 --
Cumulative effect of a change in accounting, net
of tax (Note 8)................................. 133.9 -- --
-------- -------- --------
Net income....................................... 329.7 65.4 132.4
Other comprehensive income, net of tax:
Foreign currency translation adjustment........ 0.3 (1.4) (2.1)
Unrealized gains on securities:
Unrealized holding gains arising during
period...................................... 0.5 0.7 0.1
Less: reclassification for gains included in
net income.................................. (1.0) (1.9) (1.4)
Minimum pension liability adjustment........... (2.6) 1.2 0.2
-------- -------- --------
Comprehensive income............................. $ 326.9 $ 64.0 $ 129.2
======== ======== ========
Earnings per share: (Note 1)
Basic earnings per share:
Income from continuing operations............ $ 1.86 $ 0.62 $ 1.20
Discontinued operations...................... -- 0.07 --
Extraordinary loss on retirement of debt..... -- 0.13 --
Cumulative effect of a change in accounting.. 1.33 -- --
-------- -------- --------
Net income................................... $ 3.19 $ 0.56 $ 1.20
======== ======== ========
Diluted earnings per share:
Income from continuing operations............ $ 1.82 $ 0.62 $ 1.20
Discontinued operations...................... -- 0.07 --
Extraordinary loss on retirement of debt..... -- 0.13 --
Cumulative effect of a change in accounting.. 1.24 -- --
-------- -------- --------
Net income................................... $ 3.06 $ 0.56 $ 1.20
======== ======== ========
Cash dividends per common share (Based on actual
outstanding shares, not adjusted for the
merger)......................................... $ 0.50 $ 0.50 $ 0.50
See notes to consolidated financial statements.
18
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(dollars in millions)
1999 2000
----------- ----------
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 54.4 $ 86.8
Accounts receivable, net (Note 1)................... 507.2 517.7
Inventories, net (Note 1)........................... 797.6 848.4
Deferred tax asset (Note 5)......................... 64.5 54.7
Other current assets................................ 8.8 14.2
----------- ----------
Total Current Assets.............................. 1,432.5 1,521.8
----------- ----------
Property, Plant and Equipment (Note 1)................ 4,573.5 4,682.4
Less accumulated depreciation....................... (1,585.7) (1,796.7)
----------- ----------
Property, plant and equipment, net.................. 2,987.8 2,885.7
----------- ----------
Other Assets:
Investment in AFSG (Note 13)........................ 85.6 85.6
Other investments................................... 51.7 114.0
Goodwill and other intangible assets................ 121.3 119.1
Prepaid pension (Note 8)............................ 148.0 206.5
Deferred tax asset (Note 5)......................... 328.0 242.2
Other............................................... 72.2 64.9
----------- ----------
Total Assets...................................... $ 5,227.1 $ 5,239.8
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................... $ 496.0 $ 498.3
Accrued liabilities................................. 297.3 262.2
Current portion of long-term debt (Note 6).......... 5.9 63.2
Current portion of pension and other postretirement
benefit obligations (Note 8)....................... 68.8 66.6
----------- ----------
Total Current Liabilities......................... 868.0 890.3
----------- ----------
Noncurrent Liabilities:
Long-term debt (Note 6)............................. 1,451.0 1,387.6
Pension and other postretirement benefit obligations
(Note 8)........................................... 1,416.3 1,420.2
Other liabilities................................... 214.0 222.4
----------- ----------
Total Noncurrent Liabilities...................... 3,081.3 3,030.2
----------- ----------
Total Liabilities................................. 3,949.3 3,920.5
----------- ----------
Stockholders' Equity: (Note 3)
Preferred stock..................................... 14.9 12.5
Common stock, authorized 200,000,000 shares of $.01
par value each; issued 1999, 115,048,490 shares,
2000, 115,832,859 shares; outstanding 1999,
110,640,088 shares; 2000, 107,650,372 shares....... 1.2 1.2
Additional paid-in capital.......................... 1,793.6 1,803.2
Treasury stock, common shares at cost, 1999,
4,408,402; 2000, 8,182,487 shares.................. (80.2) (119.4)
Accumulated deficit................................. (450.0) (373.3)
Accumulated other comprehensive income (loss) (Note
1)................................................. (1.7) (4.9)
----------- ----------
Total Stockholders' Equity............................ 1,277.8 1,319.3
----------- ----------
Total Liabilities and Stockholders' Equity............ $ 5,227.1 $ 5,239.8
=========== ==========
See notes to consolidated financial statements.
19
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1999 and 2000
(dollars in millions)
1998 1999 2000
------ ------- ------
Cash flows from operating activities:
Net income.......................................... $329.7 $ 65.4 $132.4
------ ------- ------
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation...................................... 161.2 210.7 232.0
Amortization...................................... 16.1 16.4 16.0
Deferred income taxes............................. 71.8 57.7 91.4
Special charges................................... -- 99.7 --
Income from discontinued operations............... -- (7.5) --
Extraordinary loss on retirement of debt.......... -- 13.4 --
Cumulative effect of a change in accounting....... (133.9) -- --
Other items, net.................................. 5.5 (2.4) 1.4
Changes in assets and liabilities:
Accounts and notes receivable................... (47.6) (74.8) (11.2)
Inventories..................................... (48.9) (127.4) (50.9)
Current liabilities............................. (59.7) 19.4 (31.6)
Other assets.................................... 10.2 (0.9) (2.7)
Pension asset and obligation.................... (50.6) (19.0) (55.6)
Postretirement benefit obligation............... (7.4) 0.5 (0.3)
Other liabilities............................... (16.1) (1.9) 9.0
------ ------- ------
Total adjustments............................. (99.4) 183.9 197.5
------ ------- ------
Net cash flows from operating activities........ 230.3 249.3 329.9
------ ------- ------
Cash flows from investing activities:
Capital investments................................. (805.2) (337.2) (137.7)
Net sale of short-term investments.................. 255.9 6.8 --
Purchase of long-term investments................... (1.0) (0.2) (66.4)
Proceeds from the sale of investments............... 31.2 4.6 3.2
Proceeds from sale of property, plant and equipment. 10.1 2.1 6.2
Advances to investees............................... (6.1) -- --
Other items, net.................................... 0.3 0.8 0.9
------ ------- ------
Net cash flows from investing activities........ (514.8) (323.1) (193.8)
------ ------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 2.0 24.7 1.6
Proceeds from issuance of long-term debt............ 221.9 460.0 --
Principal payments on long-term debt................ (51.2) (530.8) (6.0)
Purchase of treasury stock.......................... (39.6) (1.5) (39.2)
Purchase of preferred stock......................... -- (115.8) (2.2)
Preferred stock dividends paid...................... (9.8) (7.6) (1.0)
Common stock dividends paid......................... (29.7) (35.1) (54.9)
Underwriting discount and stock issuance expense.... (0.2) (10.8) --
Other items, net.................................... (0.3) (1.6) (2.0)
------ ------- ------
Net cash flows from financing activities........ 93.1 (218.5) (103.7)
------ ------- ------
Net increase (decrease) in cash and cash equivalents.. (191.4) (292.3) 32.4
Cash and cash equivalents, beginning of period...... 538.1 346.7 54.4
------ ------- ------
Cash and cash equivalents, end of period............ $346.7 $ 54.4 $ 86.8
====== ======= ======
See notes to consolidated financial statements.
20
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
Additional Accum-
Preferred Common Paid-In- Treasury ulated
Stock Stock Capital Stock Deficit Other Total
--------- ------ ---------- -------- ------- ----- --------
Balance, December 31,
1997................... $ 130.4 $1.0 $1,682.5 $ (48.2) $(762.9) $ 2.5 $1,005.3
Net income.............. 329.7 329.7
Unrealized gain on
marketable securities.. (0.5) (0.5)
Stock options exercised. 2.0 2.0
Tax benefit from
exercise of stock
options................ 0.2 0.2
Tax benefit from vesting
of restricted stock.... 0.2 0.2
Purchase of stock....... (39.6) (39.6)
Preferred stock $.90625
cash dividend per
quarter................ (9.8) (9.8)
Common stock $.125 cash
dividend per quarter... (29.7) (29.7)
Translation adjustment.. 0.3 0.3
Minimum pension
liability.............. (2.6) (2.6)
Issuance of restricted
stock, net............. 0.1 8.5 8.6
Unamortized restricted
stock.................. (1.4) (1.4)
------- ---- -------- ------- ------- ----- --------
Balance, December 31,
1998................... 130.4 1.1 1,692.0 (87.8) (472.7) (0.3) 1,262.7
Net income.............. 65.4 65.4
Unrealized gain on
marketable securities.. (1.2) (1.2)
Stock options exercised. 31.7 31.7
Tax benefit from
exercise of stock
options................ 5.5 5.5
Purchase of treasury
stock.................. (1.5) (1.5)
Sale of treasury stock.. (1.1) 9.1 8.0
Conversion of preferred
stock to common stock.. (115.5) 0.1 115.4 --
Conversion of minority
interest preferred
stock.................. (62.3) (62.3)
Conversion of minority
interest to common
stock.................. 2.1 2.1
Preferred stock $.90625
cash dividend per
quarter................ (7.6) (7.6)
Common stock $.125 cash
dividend per quarter... (35.1) (35.1)
Translation adjustment.. (1.4) (1.4)
Minimum pension
liability.............. 1.2 1.2
Issuance of restricted
stock, net............. 10.8 10.8
Unamortized restricted
stock.................. (0.5) (0.5)
------- ---- -------- ------- ------- ----- --------
Balance, December 31,
1999................... 14.9 1.2 1,793.6 (80.2) (450.0) (1.7) 1,277.8
Net income.............. 132.4 132.4
Unrealized gain on
marketable securities.. (1.3) (1.3)
Stock options exercised. 4.2 4.2
Tax benefit from
exercise of stock
options................ (0.6) (0.6)
Purchase of treasury
stock.................. (39.2) (39.2)
Purchase of preferred
stock.................. (2.4) 0.2 (2.2)
Preferred stock $.90625
cash dividend per
quarter................ (1.0) (1.0)
Common stock $.125 cash
dividend per quarter... (54.9) (54.9)
Translation adjustment.. (2.1) (2.1)
Minimum pension
liability.............. 0.2 0.2
Issuance of restricted
stock, net............. 7.6 7.6
Unamortized restricted
stock.................. (1.6) (1.6)
------- ---- -------- ------- ------- ----- --------
Balance, December 31,
2000................... $ 12.5 $1.2 $1,803.2 $(119.4) $(373.3) $(4.9) $1,319.3
======= ==== ======== ======= ======= ===== ========
See notes to consolidated financial statements.
21
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation: AK Steel Holding Corporation ("AK Holding") and its
wholly-owned subsidiary AK Steel Corporation ("AK Steel," and together with AK
Holding, the "Company") were formed effective March 29, 1994 as a result of
the recapitalization of Armco Steel Company, L.P.
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 AK Steel's indebtedness for borrowed money is fully and
unconditionally guaranteed by AK Holding. AK Holding has no independent
operations.
As described more fully in Note 2, the Company completed a transaction on
September 30, 1999, whereby Armco Inc. ("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. All references to
the number of common shares outstanding and per share amounts, except
dividends per share, have given effect to the Armco merger.
These financial statements consolidate the operations and accounts of the
Company and all subsidiaries in which the Company has a controlling interest.
Further information about operating segments is included in Note 9.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires the use of
management estimates. Actual results could differ from those estimates.
Revenue Recognition: Revenue from sales of products is recognized at the
time products are shipped to the customer. Revenue from services performed is
recognized when the service is provided to the customer.
Cash Equivalents: Cash equivalents include short-term, highly liquid
investments that are readily convertible to known amounts of cash and are of
an original maturity of three months or less.
Supplemental Disclosure of Cash Flow Information:
1998 1999 2000
----- ------ ------
Cash paid (received) during the period for:
Interest (net of interest capitalized)................ $79.0 $114.3 $127.1
Income taxes.......................................... 25.7 6.2 (9.0)
Supplemental Cash Flow Information Regarding Noncash Investing and Financing
Activities: The Company granted to certain employees shares of its common
stock with values, net of cancellations, of $8.6, $10.8 and $7.6 in 1998, 1999
and 2000, respectively, under its restricted stock award programs (Note 4).
During 1999, holders of the Company's $3.625 cumulative convertible preferred
stock converted their shares with a total redemption value of $115.5 into
common stock and holders of Armco's other preferred stock issues converted
their shares with a redemption value of $2.1 into common stock (Note 2).
Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments does not differ materially from their estimated fair
value (primarily based on quoted market prices) in 1999 and 2000 with the
exception of the Company's long-term debt and certain derivative contracts. At
December 31, 2000, the fair
22
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
value of the Company's long-term debt, including current maturities, was
approximately $1,358.3. This amount was determined primarily from quoted
market prices, where possible. The fair value estimate was based on pertinent
information available to management as of December 31, 2000. Management is not
aware of any significant factors that would materially alter this estimate
since that date. The fair value of the Company's long-term debt, including
current maturities, at December 31, 1999 was approximately $1,445.2.
At December 31, 2000, the Company had an unrecorded receivable of $46.5
related to the fair value of cash settled commodity futures contracts used to
hedge the future price of natural gas. The Company also had unrecorded
payables of $0.2 each for derivative hedges of nickel and zinc, and a payable
of $0.5 for foreign exchange contracts for the sale of euros. These contracts
had notional principal values of $62.8 for natural gas, $3.3 for nickel, $6.5
for zinc and $18.2 for foreign exchange. The values of similar contracts at
the end of 1999 were negligible.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires the Company to
mark-to-market its derivative instruments. The Company adopted the new
standard on January 1, 2001 and expects to record income of $27.5, net of tax,
in other comprehensive income. The Company is a party to derivative forward
contracts that are designated and qualify as cash flow hedges under SFAS No.
133. They include contracts for natural gas, nickel, zinc and aluminum, as
well as for the sale of euros. The Company does not enter into derivative
contracts that do not qualify for treatment as a hedge transaction.
Accounts Receivable: The allowance for doubtful accounts was $4.5 and $5.0
at December 31, 1999 and 2000.
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 and consist
mostly of foreign inventories and certain raw materials.
1999 2000
------ ------
Inventories on LIFO:
Finished and semifinished.................................. $620.1 $704.1
Raw materials and supplies................................. 175.5 161.5
Adjustment to state inventories at LIFO value.............. (22.8) (42.1)
------ ------
Total.................................................... 772.8 823.5
Other inventories............................................ 24.8 24.9
------ ------
Total inventories........................................ $797.6 $848.4
====== ======
Investments: The Company has investments in associated companies (joint
ventures and an entity that the Company does not control). These investments
are accounted for under the equity method. Because these companies are
directly integrated in the basic steelmaking facilities, the Company includes
its proportionate share of the income (loss) of these associated companies in
cost of products sold.
23
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Property, Plant and Equipment: Plant and equipment are depreciated under the
straight line method over their estimated lives ranging from 2 to 40 years.
The Company's property, plant and equipment balances as of December 31, 1999
and 2000 are as follows:
1999 2000
--------- ---------
Land, land improvements and leaseholds................. $ 137.5 $ 133.6
Buildings.............................................. 333.8 330.3
Machinery and equipment................................ 3,965.7 4,108.8
Construction in progress............................... 136.5 109.7
--------- ---------
Total................................................ 4,573.5 4,682.4
Less accumulated depreciation.......................... (1,585.7) (1,796.7)
--------- ---------
Property, plant and equipment, net..................... $ 2,987.8 $ 2,885.7
========= =========
Goodwill and Other Intangible Assets: Goodwill and other intangible assets
primarily consist of goodwill recorded in connection with Armco's acquisition
of Cyclops Industries, Inc. on April 24, 1992. This goodwill is being
amortized using the straight-line method over 40 years. Also included are
goodwill and other intangible assets acquired in Armco's purchase of Douglas
Dynamics, L.L.C. on July 2, 1991. These assets are being amortized over their
estimated useful lives, the majority of which do not exceed 17 years.
Amortization expense was $6.1 in each of the years 1998, 1999 and 2000. At
December 31, 1999 and 2000, accumulated amortization of goodwill and other
intangible assets was $48.7 and $54.8, respectively.
The Company assesses whether its goodwill and other intangible assets are
impaired as required by Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," based on an evaluation of undiscounted projected cash flows
through the remaining amortization period. If an impairment exists, the amount
of such impairment is determined based on the estimated fair value of the
asset.
24
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Earnings Per Share: The reconciliation of the numerators and denominators of
the basic and diluted EPS computations is as follows:
1998 1999 2000
------ ----- ------
Income for calculation of basic earnings per share:
Income from continuing operations........................ $195.8 $71.3 $132.4
Less: Preferred stock dividends.......................... 9.8 7.6 1.0
------ ----- ------
Income from continuing operations available to common
stockholders............................................ 186.0 63.7 131.4
Income from discontinued operations...................... -- 7.5 --
Extraordinary loss on retirement of debt................. -- 13.4 --
Cumulative effect of a change in accounting.............. 133.9 -- --
------ ----- ------
Net income available to common stockholders.............. $319.9 $57.8 $131.4
====== ===== ======
Common shares outstanding (weighted average in millions)... 100.6 102.4 109.5
====== ===== ======
Basic earnings per share:
Income from continuing operations........................ $ 1.86 $0.62 $ 1.20
Discontinued operations.................................. -- 0.07 --
Extraordinary loss....................................... -- 0.13 --
Cumulative effect of a change in accounting.............. 1.33 -- --
------ ----- ------
Net income............................................... $ 3.19 $0.56 $ 1.20
====== ===== ======
Income for calculation of diluted earnings per share:
Income from continuing operations........................ $195.8 $71.3 $132.4
Less: Preferred stock dividends.......................... -- 7.6 1.0
------ ----- ------
Income from continuing operations available to common
stockholders............................................ 195.8 63.7 131.4
Discontinued operations.................................. -- 7.5 --
Extraordinary loss....................................... -- 13.4 --
Cumulative effect of a change in accounting.............. 133.9 -- --
------ ----- ------
Net income available to common stockholders.............. $329.7 $57.8 $131.4
====== ===== ======
Shares (weighted average in millions):
Common shares outstanding................................ 100.6 102.4 109.5
Assumed conversion of preferred stock.................... 7.0 -- --
Common stock options outstanding......................... 0.3 0.5 0.1
------ ----- ------
Common shares outstanding as adjusted.................... 107.9 102.9 109.6
====== ===== ======
Diluted earnings per share:
Income from continuing operations........................ $ 1.82 $0.62 $ 1.20
Discontinued operations.................................. -- 0.07 --
Extraordinary loss....................................... -- 0.13 --
Cumulative effect of a change in accounting.............. 1.24 -- --
------ ----- ------
Net income............................................... $ 3.06 $0.56 $ 1.20
====== ===== ======
At the end of each year, the Company had outstanding stock options and/or
convertible preferred stock whose exercise or conversion could, under certain
circumstances, further dilute earnings per share. The following
25
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
shares of potentially issuable common stock were not included in the above
weighted average shares outstanding because to do so would have had an
antidilutive effect on earnings per share for the years presented.
(Common shares in millions) 1998 1999 2000
- --------------------------- ---- ---- ----
Stock options.................................................... 2.4 0.6 3.3
$3.625 convertible preferred stock............................... -- 0.8 0.7
Research and Development Costs: The Company conducts a broad range of
research and development activities aimed at improving existing products and
manufacturing processes and developing new products and processes. Research
and development costs are recorded as expense when incurred. Research and
development costs incurred in 1998, 1999 and 2000 were $18.6, $16.8 and $15.3,
respectively.
Concentrations of Credit Risk: The Company is primarily a producer of flat-
rolled carbon, stainless and electrical steels and steel products, which are
sold to a number of markets, including automotive, industrial machinery and
equipment, construction, power distribution and appliances. The Company sells
domestically to customers primarily in the Midwestern and Eastern United
States, while approximately 8% of sales are to foreign customers, primarily in
Canada, Mexico and Western Europe. Approximately 36% of trade receivables
outstanding at December 31, 2000 are due from businesses associated with the
U.S. automotive industry. Except in a few situations where the risk warrants
it, collateral is not required on trade receivables; and while it believes its
trade receivables will be collected, the Company anticipates that in the event
of default it would follow normal collection procedures. Overall, credit risk
related to trade receivables is limited due to the large number of customers
in differing industries and geographic areas.
Accumulated Other Comprehensive Income: The components of accumulated other
comprehensive income (loss) at December 31 are as follows:
1998 1999 2000
----- ----- -----
Foreign currency translation........................... $ 0.8 $(0.6) $(2.7)
Unrealized gain/(loss) on investments.................. 1.5 0.3 (1.0)
Minimum pension liability.............................. (2.6) (1.4) (1.2)
----- ----- -----
Total.................................................. $(0.3) $(1.7) $(4.9)
===== ===== =====
Reclassifications: Certain amounts in the prior year financial statements
have been reclassified to conform to the 2000 presentation. In particular, the
Consolidated Statements of Income reflect the reclassification of freight
billed to customers as a component of net sales in accordance with Emerging
Issues Task Force Consensus 00-10, "Accounting for Shipping and Handling Fees
and Costs." Net sales and cost of products sold each increased over the
amounts previously reported by $71.3, $83.5 and $94.3 for the years 1998, 1999
and 2000, respectively.
2. Merger with Armco Inc.
On September 30, 1999, the Company consummated the merger of Armco with and
into AK Steel. Armco was a leading producer of stainless and electrical steels
and, in addition, owned and operated a manufacturer of steel pipe and tubing
products, a manufacturer of snowplows and ice control products for four-wheel
drive light trucks, and an industrial park on the Houston, Texas ship channel.
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. As a result, AK Holding issued 41,616,577 shares of 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
26
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
like number of shares of a substantially identical new series of cumulative
convertible preferred stock of AK Holding, which is described more fully in
Note 3.
Lastly, the Company paid cash of $116.5, including one month's dividends,
and issued 28,331 shares of its common stock to convert the outstanding shares
of the two remaining series of Armco's convertible preferred stock. For
periods prior to the merger, dividends on these two series of preferred stock
are reported as minority interest on the Consolidated Statements of Income.
Historically, Armco did not provide for federal income taxes at full
statutory rates. However, to reflect its book tax rate in income from
continuing operations on a combined basis, the Company accrued additional
income tax expense of $37.9 for 1998 and $17.5 for the first six months of
1999.
As more fully discussed in Note 8, 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. In 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.
The following presents a reconciliation of previously reported results of AK
Holding and Armco to the results of the merged Company. Eliminations/other
primarily reflects the elimination of intercompany transactions, the
additional accrual of income taxes, including taxes on extraordinary losses
and cumulative effect of the accounting change. The adjustment in
eliminations/other for stockholders' equity also includes cumulative credits
for revaluations of the deferred tax asset of $335.2 in 1998 and $210.0 in
1999.
AK Elimination/
Holding Armco Other Total
-------- -------- ------------ --------
For the year 1998
Revenues............................. $2,448.3 $1,723.1 $ (70.4) $4,101.0
Cumulative effect of an accounting
change.............................. -- 237.5 (103.6) 133.9
Net income........................... 114.5 347.1 (131.9) 329.7
Stockholders' equity................. 929.5 178.7 154.5 1,262.7
Six months ended June 30, 1999
Revenues............................. $1,348.1 $ 884.9 $ (53.1) $2,179.9
Extraordinary loss on retirement of
debt................................ 12.0 2.8 (1.4) 13.4
Net income........................... 35.5 63.7 (29.9) 69.3
Stockholders' equity................. 957.4 235.5 132.0 1,324.9
3. Stockholders' Equity
Preferred Stock: The Company's $3.625 preferred stock ranks senior to its
common stock with respect to dividends and upon liquidation. The holders of
this preferred stock are entitled to one vote per share with respect to all
matters to be voted upon by the stockholders of the Company. Each share may be
converted, at the holder's option, into 2.6 shares of the Company's common
stock. At the Company's option, each share of preferred stock may be redeemed
at a price of $50.725 until October 15, 2001. This price, then, is reduced at
twelve-month intervals until it reaches $50 per share on and after October 15,
2002. Upon dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, holders of the $3.625 preferred stock are entitled
to a payment of $50 per share plus accrued but unpaid dividends before
payments can be made to the holders of common stock. At December 31, 1999 and
2000, there were authorized and issuable 307,931 and 259,481 shares,
respectively, of $3.625 preferred stock with a $1 per share par value, all of
which were outstanding.
Common Stock: The holders of common stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
for distribution. The holders have one vote per share in respect of all
matters and are not entitled to preemptive rights.
27
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Dividends: The Company has paid quarterly dividends on its common stock
since November 15, 1995. A dividend of $0.125 per share was paid in each
quarter of 1999 and 2000. In addition, since December 31, 1999, the Company
has paid regular quarterly dividends of $0.90625 per share on its preferred
stock. The declaration and payment of cash dividends on common and preferred
stock is subject to restrictions imposed by instruments governing its senior
debt. At December 31, 2000, the Company had $27.2 available under these
instruments for the payment of cash dividends.
On January 18, 2001, the Board of Directors declared a reduced quarterly
common stock dividend of $0.0625 per share payable on February 28, 2001 to
shareholders of record on February 1, 2001.
Stockholder Rights Plan: On January 23, 1996, the Board of Directors adopted
a Stockholder Rights Plan pursuant to which it has issued one Preferred Share
Purchase Right (collectively, the "Rights") for each share of common stock
outstanding. The Rights are generally not exercisable unless, and no sooner
than 10 business days after, any person or group acquires beneficial ownership
of 20% or more of the Company's voting stock or announces a tender offer that
could result in the acquisition of 30% or more of such voting stock. In
addition, each Right entitles the holder, upon occurrence of certain specified
events, to purchase 1/200th of a share of Series A Junior Preferred Stock
("Junior Preferred Stock") at an exercise price of $65 per share. Each share
of Junior Preferred Stock, if and when issued, will entitle the holder to 200
votes in respect of all matters submitted to a vote of the holders of common
stock. Upon the occurrence of certain events, holders of the Rights would be
entitled to purchase either shares of the Company or an acquiring entity at
half of market value. The Rights are redeemable, under certain circumstances,
at any time prior to their expiration on January 23, 2006.
4. Common Stock Compensation
AK Steel Holding Corporation's Stock Incentive Plan (the "SIP") permits the
granting of nonqualified stock options and restricted stock awards to
directors, officers and key management employees of the Company. These
nonqualified option and restricted stock awards may be granted with respect to
an aggregate maximum of 11 million shares through the period ending December
31, 2007. The exercise price of each option may not be less than the market
price of the Company's common stock on the date of the grant. Stock options
have a maximum term of 10 years and may not be exercised earlier than six
months following the date of grant (or such other term as may be specified in
the award agreement). Generally, 25% of the shares covered by a restricted
stock award vest two year