AK STEEL HOLDING CORP - 10-K405 - 20020318 - PART_I
PART I
Item 1. Business.
Operations
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. 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 ("Steel Operations").
In addition to its Steel Operations, the Company owns and operates a Snow
and Ice Control Products company as well as pipe and tubing businesses and an
industrial park. Information about the Company's Steel Operations, Snow and Ice
Control Products segment and Other 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.
The Company's Steel Operations consist of seven steelmaking and finishing
plants located 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. The Steel Operations also
include European trading companies that buy and sell steel and steel products.
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. In addition, AK Steel has received a number of awards for
safety and, in 2001, its Ashland Works became the first steel plant in the
United States to receive ISO 14001 environmental certification.
The Company's Snow and Ice Control Products segment consists of Douglas
Dynamics, L.L.C., the largest North American manufacturer of snowplows, and
salt and sand spreaders for four-wheel drive light trucks. From three plants,
its products are sold under the brand names Western and Fisher through
independent distributors in the United States and Canada.
The Company's Other Operations consist of AK Tube L.L.C., Sawhill Tubular
Products and Greens Port Industrial Park. On July 27, 2001, the Company
acquired substantially all of the assets at the fabricating plant of Alpha Tube
Corporation, which it renamed AK Tube L.L.C. AK Tube is a manufacturer and
distributor of welded steel tubing used in the automotive, large truck and
construction markets. Sawhill Tubular, with three fabricating plants,
manufactures a wide range of steel pipe and tubing products for the
construction, industrial, plumbing and heating markets. The Greens Port
Industrial Park 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.
On December 18, 2001, the Company announced that it had signed a letter of
intent to sell the assets of Sawhill Tubular to John Maneely Company. The
Company expects to complete this sale in the first half of 2002.
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 coated carbon
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.
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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 just-in-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,
-------------
1999 2000 2001
---- ---- ----
Automotive..................................................... 55% 52% 57%
Appliance, Industrial Machinery and Equipment, and Construction 25% 24% 25%
Distributors, Service Centers and Convertors................... 20% 24% 18%
The Steel Operations segment is a major supplier to the domestic automotive
industry, including those foreign manufacturers with plants in the United
States. Shipments to General Motors Corporation, AK Steel's largest customer,
accounted for approximately 15%, 15% and 18% of Steel Operations net sales in
1999, 2000 and 2001, respectively. No other customer accounted for more than
10% of net sales for any of these years.
AK Steel is a party to contracts with all of its major automotive and most
appliance industry customers with terms that range from one to three years.
These contracts, 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 certain stainless steel agreements, which permit increased costs for
nickel and chrome to be passed on to the customer, these contracts do not
permit price adjustments to reflect changes in prevailing market conditions or
energy and raw material costs. Approximately 73% of AK Steel's shipments of
flat-rolled steel products in 2001 were made to contract customers with the
balance being made in the spot market at prevailing prices at the time of sale.
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 routinely purchases between
10% and 15% of its carbon steel slab requirements from other steel producers,
located primarily outside the United States, to supplement the production from
its own steelmaking facilities. Most purchases of coal, iron ore and limestone,
as well as transportation services, are made at negotiated prices under annual
and 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. AK Steel believes that adequate sources of supply exist for all of its
raw material and energy requirements.
Employees
As of December 31, 2001, the Company had approximately 11,300 employees.
Approximately 7,900 employees at nine of AK Steel's fourteen plants are
represented by international or independent labor unions, under contracts with
expiration dates extending through 2006. Two labor contracts covering
approximately 100 employees at AK Steel's Butler Works expire in 2002.
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
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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, bargaining between
the Company and the union has continued while salaried employees and temporary
replacement workers have operated the Mansfield Works.
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, quality, delivery and service 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.
On October 22, 2001, the U. S. International Trade Commission ("ITC")
determined that increased imports of various carbon and alloy flat-rolled steel
products, slabs, long and tubular steel products and certain stainless and tool
products are a substantial cause of serious injury to a domestic industry
defined to include U.S. producers of these products. On December 19, 2001, the
ITC submitted its findings and remedy recommendations to the President of the
United States. On March 5, 2002, the President announced his decision to impose
temporary safeguard remedies on the steel products which were the subject of
the ITC recommendations. Those remedies included a tariff rate quota on
imported steel slabs, which are purchased by the Company to supplement its own
production, and tariffs on various imported finished steel products, some of
which are sold in competition with products manufactured and sold by the
Company. At this time, it does not appear that the net effect of the total
remedies imposed by the President will be material to the Company's results of
operations.
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,
-----------------
1999 2000 2001
----- ----- -----
(in millions)
Environmental related capital investments $ 7.2 $10.1 $18.8
Environmental compliance costs........... 85.9 93.5 99.5
Except as expressly noted below, 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.
Environmental Remediation
AK Steel and its predecessors have been conducting steel manufacturing and
related operations for more than 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 in the past at one or
more operating sites,
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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 may 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, AK Steel could be directed to expend funds
for remedial activities at the former disposal areas. Because of the uncertain
status of these investigations, however, management cannot predict whether or
when such expenditures might be required or their magnitude.
On July 27, 2001, AK Steel received a Special Notice Letter from the EPA
requesting that AK Steel agree to conduct a Remedial Investigation/Feasibility
Study ("RI/FS") and enter into an administrative order on consent pursuant to
Section 122 of CERCLA regarding the former Hamilton Plant of Armco located in
New Miami, Ohio. The Hamilton Plant is no longer an operating steel mill,
having ceased operations in 1990, and all of its former structures have been
demolished and removed. While AK Steel does not agree that a site-wide RI/FS is
necessary or appropriate at this time, AK Steel has offered to negotiate with
the EPA concerning the specific terms and conditions under which it would
conduct such a study. If an agreement with the EPA cannot be reached on the
specific terms and conditions of the proposed RI/FS, AK Steel intends to
contest this matter vigorously.
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 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.
In addition, AK Steel is negotiating with the EPA for an order concerning these
same waste management issues.
On June 29, 2000, the United States filed a complaint on behalf of the EPA
against AK Steel in the U. S. District Court for the Southern District of Ohio
(the "Federal Action") 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 (the
"State Action") against the
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State of Ohio and the OEPA seeking a declaration that, among other things, (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 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 Federal Action.
On March 29, 2001, the U.S. District Court ruled that the State of Ohio could
conditionally intervene in the Federal Action. Subsequently, Ohio filed a
conditional complaint, which included various environmental claims, including
seven air pollution claims. On May 9, 2001, AK Steel moved to dismiss all of
Ohio's claims in the Federal Action. On July 27, 2001, the Court of Common
Pleas in the State Action declared null and void two Notices of Violation
issued by the OEPA upon which certain of the air pollution claims of the EPA
and Ohio in the Federal Action were predicated. Subsequently, the court held
that that effectively concludes the State Action. AK Steel has appealed that
holding to the 12/th District Court of Appeals in Butler County, Ohio. On
October 17, 2001, the OEPA issued a similar new Notice of Violation, but moved
to amend its conditional complaint in the Federal Action to withdraw four of
its air pollution claims, which were predicated on the two original Notices of
Violation that were declared null and void. On September 27, 2001, the U.S.
District Court dismissed with prejudice the EPA's air pollution claim, which
had been predicated on the two voided Notices of Violation letters. In
addition, on December 19, 2001, the U.S. District Court stayed the remaining
three air pollution claims of the OEPA in the Federal Action pending resolution
of a related administrative appeal to the Ohio Environmental Review Appeals
Commission addressing the newly issued OEPA Notice of Violation. AK Steel's
motion to dismiss the OEPA claims not yet dismissed in the Federal Action
remains pending. No trial date has yet been set in the Federal Action. AK Steel
is vigorously contesting all of the remaining claims. If OEPA and/or the EPA
are completely successful in obtaining the relief they seek in the Federal
Action with respect to their air pollution claims, it could result in
significant penalties and require a substantial capital investment to install
interim pollution control equipment on the blast furnace and basic oxygen
furnaces at the Middletown Works under current federal pollution control
regulations before certain proposed new federal regulations are made final.
Once those proposed new federal regulations become final, AK Steel could be
required to make another substantial capital investment to replace the interim
pollution control equipment. Under those circumstances, the Company may
conclude that it is more cost-effective to purchase slabs than to make them at
the Middletown Works and may elect to shut down the hot end facilities of the
Middletown Works. If the EPA and OEPA are completely successful in obtaining
the relief they seek in the Federal Action with respect to their water and/or
RCRA claims, it could result in substantial penalties and an order requiring AK
Steel to investigate and remediate alleged polychlorinated biphenyl and
polycyclic aromatic hydrocarbon contamination in Monroe Ditch and Dick's Creek,
which are located on and adjacent to the Middletown Works. At this time, the
Company is unable to estimate the cost of an adverse outcome related to the air
pollution, water pollution or RCRA claims or the potential cost of a shutdown
of the hot end of the Middletown Works. /
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring it to develop a plan for investigation of eight areas of
the Mansfield Works that allegedly could be sources of contamination. A site
investigation began in November 2000 and is continuing.
On June 27, 2000, the EPA issued an Emergency Order pursuant to the Safe
Drinking Water Act to AK Steel's Butler Works located in Butler, Pennsylvania
concerning discharge of nitrate/nitrite compounds to the Connoquenessing Creek,
an occasional water source for the Borough of Zelienople. On March 2, 2001, AK
Steel entered in an agreed administrative order with the EPA calling for, among
other things, a decrease in the levels of nitrates and nitrites in the treated
water discharged to waters of the Commonwealth of Pennsylvania by AK Steel's
Butler Works and for the provision of emergency drinking water for Zelienople
during certain times when it must draw drinking water from the Connoquenessing
Creek. AK Steel has taken and is continuing to take the measures necessary to
comply with that order.
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. Except to the
limited extent
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noted above with respect to the claims in the Federal Action, 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 located
in Indiana, Kentucky, Ohio and Pennsylvania. Seven fabricating plants are
located in Pennsylvania, Ohio, Wisconsin, Maine and Tennessee, and an
industrial park is located in Texas. All of these facilities, except for a
leased tubing facility, are owned by the Company.
Coke manufacturing plants, blast furnaces, basic oxygen furnaces and
continuous casters for the production of carbon steel 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 in Indiana consists of a state-of-the-art continuous cold
rolling mill, a continuous hot-dip galvanizing and galvannealing line, a
continuous carbon and stainless steel pickling line, a continuous 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.
The Butler Works in Pennsylvania, which is situated on 1,300 acres with 3.5
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 570,000
square-foot stainless steel finishing plant, containing three Sendzimer mills
and two Z-high mills for cold reduction, four annealing and pickling lines, ten
bell 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
1.6 million square-foot facility on a 548-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 four-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.
Douglas Dynamics manufactures snow and ice control products at three plants
located in Maine, Tennessee and Wisconsin. The plants are equipped to machine,
fabricate, weld, finish and assemble components for snowplows, and salt and
sand spreaders.
Sawhill Tubular has three fabricating plants located in Ohio and
Pennsylvania, which include a stretch reduction mill, continuous welding mills
and finishing and galvanizing facilities.
AK Tube located in Ohio operates five electric resistance weld tube mills,
two slitters, two cut-to-length machines and various other processing equipment
housed in a 330,000 square foot leased facility.
Greens Port Industrial Park, located on approximately 650 acres on the
Houston, Texas ship channel, consists of land, buildings, rail car storage
facilities and a deep water loading dock.
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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, patent, employee benefits and other matters arising in
the ordinary course of business. Except to the limited extent noted above with
respect to the claims in the Federal Action, in management's opinion, the
ultimate liability resulting from all of these claims, individually and in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
On July 13, 2001, Orinoco Iron, C.A. ("Orinoco") filed an action against AK
Steel in the United States District Court for the Southern District of Ohio,
Case No. C-1-01-461. Orinoco and AK Steel are parties to a contract whereby
Orinoco supplies AK Steel with a form of iron ore referred to as hot briquetted
iron ("HBI"). Orinoco asserts claims for breach of contract, repudiation of
contract and breach of a covenant of good faith and fair dealing with respect
to that HBI supply contract and is seeking damages in excess of $60 million. AK
Steel has filed a response to the Complaint in which it denies Orinoco's claims
and asks the court to reform the HBI supply contract to reflect the original
intent of the parties that the price paid by AK Steel under that contract would
more closely track the world price for HBI. Discovery is underway. Trial is
tentatively scheduled for April 2003. AK Steel intends to contest Orinoco's
claims vigorously.
In April 2000, a class action was filed in the United States District Court
for the Southern District of Ohio by Bernard Fidel and others 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 are vigorously defending this
action. AK Steel has filed a motion to dismiss the action, which currently is
pending. Discovery is stayed pending resolution of the motion to dismiss. No
trial date has been scheduled.
A number of lawsuits alleging asbestos exposure are pending and continue to
be filed against AK Steel. The majority of these lawsuits have been filed in
Texas and relate to the former Houston Works facility. Such cases typically
involve a large number of plaintiffs claiming against a large number of
defendants. AK Steel is normally named as a defendant by a small percentage of
the plaintiffs who typically were frequenters (independent contractors,
delivery personnel, etc.) claiming that they were exposed to asbestos while
they were on the premises. AK Steel is actively and vigorously defending these
cases.
On January 2, 2002, John D. West, a former employee, filed a purported class
action in the United States District Court for the Southern District of Ohio
against the AK Steel Corporation Retirement Accumulation Pension Plan (the "AK
RAPP") and the AK Steel Corporation Benefit Plans Administrative Committee (the
"AK BPAC") claiming that the method used under the AK RAPP to determine lump
sum distributions is improper and that, as a result, the benefits previously
paid to plaintiff and putative class members from the AK RAPP were understated
in violation of the Employment Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986. The AK RAPP is the cash balance plan component
of the AK Steel Noncontributory Pension Plan (the "AK NCPP"). The AK NCPP
provides that the Company will indemnify members of AK BPAC from any liability
and expense incurred by reason of serving as a member of AK BPAC. Because the
action was only recently filed, the defendants have not yet responded to the
Complaint and no discovery has yet commenced. The defendants intend to contest
this matter vigorously.
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 2001.
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Executive Officers
The following table sets forth the name, age and principal position with the
Company of each of its executive officers as of March 13, 2002:
Name Age Positions with the Company
---- --- --------------------------
Richard M. Wardrop, Jr. 56 Chairman, Chief Executive Officer and President
John G. Hritz.......... 47 Executive Vice President
James L. Wainscott..... 44 Senior Vice President and Chief Financial Officer
Michael T. Adams....... 44 Vice President, Sales and Marketing
James M. Banker........ 45 Vice President, Operations
Michael P. Christy..... 45 Vice President, Purchasing and Transportation
Thomas C. Graham, Jr... 47 Vice President, Research and Engineering
Brenda S. Harmon....... 50 Vice President, Human Resources and Secretary
J. Theodore Holmes..... 57 Vice President, Customer Service
David C. Horn.......... 50 Vice President and General Counsel
Alan H. McCoy.......... 50 Vice President, Public Affairs
Ernest E. Rummler...... 51 Vice President, Manufacturing Planning & Steel Sourcing
James W. Stanley....... 57 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. On February 8, 2002, he was again elected to also serve as
President of the Company effective March 2, 2002.
John G. Hritz was elected Executive Vice President in January 1999. He also
served as General Counsel from August 1996 until April 2001, a Senior Vice
President from May 1998, and as a Vice President from August 1996 and as
Corporate Secretary from that date until January 1999.
James L. Wainscott has been the Company's Chief Financial Officer since July
1998 and served as its Treasurer from April 1995 until April 2001. Mr.
Wainscott was elected Senior Vice President in January 2000, having previously
served as a Vice President from April 1995.
Michael T. Adams was elected Vice President, Sales and Marketing in December
2000. Mr. Adams had been Vice President, Manufacturing from July 1998 until
that date. From October 1995 until July 1998, he served as General Manager,
Manufacturing of the Company's Middletown Works.
James M. Banker was elected 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.
Thomas C. Graham, Jr. has been Vice President, Research and Engineering
since June 1996.
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.
J. Theodore Holmes was elected 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; General Manager, Manufacturing Planning from July 1997 to
August 1998; and General Manager, Customer Service from November 1992 to July
1997.
David C. Horn was elected Vice President and General Counsel in April 2001.
Before joining AK Steel as Assistant General Counsel in December 2000, Mr. Horn
was a partner in the Cincinnati-based law firm now known as Frost Brown Todd
LLC.
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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 elected 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.
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 sales prices of the common stock:
2000 High Low
---- -------- -------
First Quarter.. $20.1250 $7.8750
Second Quarter. $12.0000 $8.0000
Third Quarter.. $11.4375 $8.5625
Fourth Quarter. $10.1875 $7.5000
2001 High Low
---- -------- -------
First Quarter.. $ 10.50 $ 8.43
Second Quarter. $ 15.00 $ 9.40
Third Quarter.. $ 14.03 $ 7.50
Fourth Quarter. $ 12.70 $ 8.30
As of March 13, 2002 there were 107,927,301 shares of common stock
outstanding and held of record by 17,396 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 also has outstanding 259,481 shares of a class of cumulative
convertible preferred stock that, as of March 13, 2002, is convertible into an
aggregate of 673,629 shares of common stock. Holders of the preferred stock are
entitled to quarterly dividends, at the annual rate of $3.625 per share, when
and as declared by the board of directors before any dividends may be paid to
holders of the common stock.
The payment of cash dividends on both the common and preferred stock is
subject to a restrictive covenant contained in the instruments governing the
Company's outstanding senior debt. Due primarily to the expenditure of
substantial sums for dividend payments and share repurchases in 2000 and prior
years, and the net losses incurred in 2001, the amount available for the
payment of dividends became limited by this covenant beginning in the second
quarter. A quarterly common stock dividend of $0.0625 (half the amount paid in
each quarter of 2000) was paid in each of the first two quarters of 2001 but no
further dividends on the common stock were declared or paid thereafter. In
addition, beginning in the fourth quarter of 2001, AK Holding suspended the
payment of dividends on its outstanding preferred stock. As of December 31,
2001, the restrictive covenant precluded the payment of any dividends on either
the preferred or common stock.
In April 2000, the Board of Directors authorized the Company to repurchase,
from time to time, up to $100.0 million of its outstanding equity securities.
During 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. No shares of stock were purchased in 2001. The
Company's ability to purchase shares under this authorization is subject to the
same covenant that currently restricts dividend payments.
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, 2001 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,
--------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(dollars in millions, except per share data)
Statement of Operations Data: (1)
Net sales.............................................. $4,249.7 $4,101.0 $4,368.3 $4,611.5 $3,994.1
Cost of products sold.................................. 3,436.4 3,297.8 3,503.3 3,773.7 3,373.6
Selling and administrative expenses.................... 288.0 278.0 309.8 267.6 265.3
Depreciation........................................... 141.0 161.2 210.7 232.0 230.7
Special charges and unusual items:
Costs related to the merger with Armco Inc. (2)..... -- -- 99.7 -- --
Pension charge (3).................................. -- -- -- -- 194.0
Stock received in insurance demutualization (4)..... -- -- -- -- (49.9)
-------- -------- -------- -------- --------
Total operating costs.................................. 3,865.4 3,737.0 4,123.5 4,273.3 4,013.7
-------- -------- -------- -------- --------
Operating profit (loss) (5)............................ 384.3 364.0 244.8 338.2 (19.6)
Interest expense....................................... 111.7 84.9 123.7 136.1 133.1
Other income........................................... 48.4 30.3 20.8 8.0 6.0
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority interest 321.0 309.4 141.9 210.1 (146.7)
Income taxes provision (benefit)....................... 127.5 105.5 63.9 77.7 (54.3)
Minority interest...................................... 8.1 8.1 6.7 -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations............... 185.4 195.8 71.3 132.4 (92.4)
Income from discontinued operations.................... 1.6 -- 7.5 -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and cumulative.
effect of an accounting change......................... 187.0 195.8 78.8 132.4 (92.4)
Extraordinary loss on retirement of debt............... 1.9 -- 13.4 -- --
Cumulative effect of a change in accounting (6)........ -- 133.9 -- -- --
-------- -------- -------- -------- --------
Net income (loss)...................................... $ 185.1 $ 329.7 $ 65.4 $ 132.4 $ (92.4)
======== ======== ======== ======== ========
Basic earnings per share:
Income (loss) from continuing operations............ $ 1.75 $ 1.86 $ 0.62 $ 1.20 $ (0.87)
Discontinued operations............................. 0.02 -- 0.07 -- --
Extraordinary losses................................ 0.02 -- 0.13 -- --
Cumulative effect of an accounting change........... -- 1.33 -- -- --
-------- -------- -------- -------- --------
Net income (loss)................................... $ 1.75 $ 3.19 $ 0.56 $ 1.20 $ (0.87)
Diluted earnings per share:
Income (loss) from continuing operations............ $ 1.68 $ 1.82 $ 0.62 $ 1.20 $ (0.87)
Discontinued operations............................. 0.01 -- 0.07 -- --
Extraordinary losses................................ 0.02 -- 0.13 -- --
Cumulative effect of an accounting change........... -- 1.24 -- -- --
-------- -------- -------- -------- --------
Net income (loss)................................... $ 1.67 $ 3.06 $ 0.56 $ 1.20 $ (0.87)
Cash dividends per common share........................ $ 0.425 $ 0.50 $ 0.50 $ 0.50 $ 0.125
10
As of December 31,
--------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
Balance Sheet Data: (1)
Cash, cash equivalents and short-term investments.... $ 801.0 $ 353.7 $ 54.4 $ 86.8 $ 101.0
Working capital...................................... 930.6 576.1 564.5 631.5 593.4
Total assets......................................... 5,074.4 5,279.2 5,227.1 5,239.8 5,225.8
Current portion of long-term debt.................... 40.8 116.9 5.9 63.2 78.0
Long-term debt (excluding current portion)........... 1,301.8 1,395.7 1,451.0 1,387.6 1,324.5
Current portion of pension and postretirement benefit
obligations........................................ 68.0 65.5 68.8 66.6 68.3
Long-term pension and postretirement benefit
obligations (excluding current portion)............ 1,560.7 1,416.5 1,416.3 1,420.2 1,740.1
Stockholders' equity................................. 1,005.3 1,262.7 1,277.8 1,319.3 1,033.3
(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. See
Management's Discussion & Analysis ("MD&A") and Note 2 to the consolidated
financial statements.
(2) The 1999 special charge relates to expenses incurred as a result of the
merger with Armco. See MD&A and Note 10 to the consolidated financial
statements.
(3) Under its method of accounting for pensions, the Company recorded a fourth
quarter charge in 2001. See MD&A and Note 1 to the consolidated financial
statements.
(4) In the fourth quarter of 2001, the Company received a distribution of
shares from its primary health insurance provider upon the demutualization
of that company. See MD&A and Note 10 to the consolidated financial
statements.
(5) Excluding the unusual items in (3) and (4) above, 2001 pro forma operating
profit would have been $124.5.
(6) The 1998 cumulative effect of a change in accounting relates to a change in
the Company's accounting for pensions and other postretirement benefits.
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
As a result of the merger of Armco into AK Steel in September of 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 a galvanizing plant in Dover, Ohio.
Approximately $54.0 of the $99.7 required the outlay of cash in 1999 and
additional payments of approximately $7.0 and $0.5 were made in 2000 and 2001,
respectively. Cash outlays as a result of these special charges are expected to
be minimal, if any, in 2002. 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,
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 Snow
and Ice Control Products segment consists of the operations of Douglas
Dynamics, L.L.C., the largest North American
11
manufacturer of snowplows and salt and sand spreaders for four-wheel drive
light trucks. The Company's other operations include AK Tube L.L.C., a
manufacturer of welded steel tubing; Sawhill Tubular Products, a manufacturer
of a wide range of steel pipe and tubing products; and Greens Port Industrial
Park on the Houston, Texas ship channel.
2001 Compared to 2000
Total steel shipments during 2001, inclusive of tubular products, declined
9% to 5,894,300 tons from 6,492,600 tons shipped in 2000. Although, demand from
automotive and appliance contract customers increased late in 2001, shipments
for virtually all product lines were equal to or lower than in 2000. Due to
severely depressed steel pricing, the Company chose to forego some spot market
sales during 2001. Value-added steel products represented 93% of 2001 total
shipments, compared to 90% in 2000, while commodity hot-rolled product
shipments declined to 2% of total shipments in 2001, compared to 6% in 2000.
Steel Operations shipments totaled 5,586,500 tons in 2001 compared to 6,171,200
tons in 2000.
During 2001, net sales decreased 13% to $3,994.1 from the $4,611.5 reported
for 2000. Steel Operations contributed $3,653.6 to total net sales in 2001,
compared to $4,277.3 in 2000, a decrease of 15%. These declines were due
primarily to lower prices in both the contract and spot markets, which were
partially offset, however, by a richer product and market mix. Approximately
73% of AK Steel's shipments of flat-rolled steel products during 2001 were made
pursuant to annual and multi-year contracts, with the balance being made in the
spot market at prevailing prices at the time of sale.
Sales by the Snow and Ice Control Products business are strongly dependent
on weather conditions in its market area and the level of light trucks sales.
Strong truck sales due to aggressive marketing by automotive companies, as well
as higher snowfalls during the winter of 2000/2001 contributed to sales
increasing to $138.8 in 2001 from $112.3 in 2000.
The following presents, on a pro forma basis, operating profit before and
after two unusual items recorded in the fourth quarter of 2001.
2000 2001
------ ------
Operating profit (loss) as reported........ $338.2 $(19.6)
Pension charge............................. -- 194.0
Stock received in insurance demutualization -- (49.9)
------ ------
Pro forma operating profit................. $338.2 $124.5
====== ======
The Company recorded an operating loss in 2001 of $19.6, including an
operating loss of $68.9 in the Steel Operations. Both losses included the
effects of two unusual items described below. Snow and Ice Control Products
posted an increase in operating profit to $41.0 in 2001 from $30.5 in 2000,
primarily due to the higher sales volumes.
Under its method of accounting for pension and other postretirement benefit
plans, the Company recognizes into income, as a fourth quarter adjustment, any
unrecognized actuarial net gains or losses that exceed 10% of the larger of
benefit obligations or plan assets. Amounts inside this 10% corridor are
amortized over the average remaining service life of active plan participants.
Actuarial net gains and losses occur when actual experience differs from any of
the many assumptions used to value the benefit plans, or when the assumptions
change, as they may each year when a valuation is performed. During 2001, the
combination of a 6% loss on its pension plan assets, and a decrease in the
discount rate from 8% to 7.25%, caused the Company to recognize, in the fourth
quarter of 2001, a non-cash pre-tax pension charge of $194.0. In addition,
because the decline in asset value also led to the pension plans becoming
underfunded, the Company recorded a non-cash after-tax reduction in equity of
approximately $163.4.
12
In the fourth quarter of 2001, Anthem Inc., the Company's primary health
insurance provider, converted from a mutual insurance company to a corporation,
issuing shares of its common stock to certain of its long-time policyholders.
As a major policyholder, AK Steel received approximately 1.5 million shares of
Anthem common stock as a result of this demutualization, recording an unusual
pre-tax benefit of $49.9. The benefit was net of a liability established to
provide compensation to Company employees and retirees who paid a small portion
of the premiums for the applicable plans of the insurance provider. At December
31, 2001, the fair value of the stock, net of the fair value of the liability,
had risen to $68.6 and the increase, net of tax, was recorded in other
comprehensive income.
Excluding the $194.0 pension charge and the $49.9 insurance company
demutualization benefit, the Company would have realized an operating profit of
$124.5, or $21 per ton shipped, in 2001 compared to an operating profit of
$338.2, or $52 per ton shipped, in 2000. The significant decrease in 2001 was
primarily due to lower contract pricing and severely depressed spot market
pricing, which lowered average selling prices by $38 per ton, and the 9%
reduction in shipping volume, partially offset by company-wide cost savings.
Cost savings were derived from lower market prices for purchased slabs and
scrap, which saved over $50.0 in 2001, as well as overtime cost savings of
approximately $30.0, partially offset by approximately $50.0 in higher natural
gas costs.
During 2001, the Company recorded an income tax benefit of $54.3 on a
pre-tax loss of $146.7, using a book tax rate of 37%. In 2000, the Company
recorded $77.7 of income tax expense on pre-tax income of $210.1.
The Company recorded a net loss in 2001 of $92.4, or $0.87 per share,
compared to net income of $132.4, or $1.20 per share, for 2000. Excluding the
two unusual items, net of tax, discussed above, the Company would have recorded
a loss of $1.6, or $0.02 per share, in 2001.
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 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 and a temporary decline in
the percentage of sales made to the higher priced contract market.
Total steel shipments during 2000, inclusive of tubular products, declined
slightly to 6,492,600 tons from the 6,541,300 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
6,171,200 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 adjusted 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.
To a lesser extent, operating profit fell due 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.
Operating profit for the Snow and Ice Control Products segment declined to
$30.5 in 2000 from $36.1 in 1999 on 2000 sales of $112.3 and 1999 sales of
$118.7. While light truck sales remained strong in 2000, plow sales were
adversely affected by below average snowfall in the Company's market area.
13
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 non-cash 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, or $1.46 per share.
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.
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, or $1.46 per share. From this amount, income decreased 16% in 2000,
reflecting the lower adjusted operating income, higher interest expense and the
decline in other income.
Outlook
The Company expects its shipments to increase between 6% and 7% in 2002
compared to 2001 as a result of an expected increase in its share of the
automotive and appliance markets and slightly higher sales to the spot market.
Value-added products are expected to approach 94% of total shipments in 2002.
While the Company expects its sales to contract customers to increase as a
percentage of its total sales, overall pricing is expected to decline 1.5% to
2% across all steel product lines, primarily due to lower contract prices,
partially offset, however, by a richer product and market mix and slightly
improving spot market prices. AK Steel has initiated a $25 per ton spot market
increase for first quarter of 2002 shipments and will seek an additional $25
per ton increase beginning in the second quarter.
The price paid for the Company's 2002 natural gas purchases is expected to
be significantly lower compared to 2001, particularly after the first quarter.
Purchased slab prices are also expected to be lower in 2002 than in 2001. If
expected trends are realized, cost savings for natural gas, slabs and other raw
materials could exceed $100.0 in 2002 compared to 2001. However, the Company
expects to undertake a blast furnace maintenance outage in the first half of
2002, costing approximately $10.0, of which approximately $5.0 will be
recognized in each of the first two quarters.
14
Primarily because the Company's pension plans are now underfunded as a
result of the significant declines in the equities markets and in interest
rates in 2001, the Company expects pension expense in 2002 of approximately
$50.0, assuming no fourth quarter adjustment, compared to pension income of
$58.0 in 2001, excluding the unusual fourth quarter charge discussed above.
Under the Company's pension and other postretirement benefit accounting method,
the annual determination of a fourth quarter gain or loss, if any, is made as
of the plans' measurement date. However, no cash payments to the plans will be
required until at least 2003. Primarily due to higher medical costs, other
postretirement benefit expense is expected to increase by approximately $27.0
in 2002 versus 2001, assuming no fourth quarter adjustment. Since the current
balance of deferred losses for all major pension and other postretirement
benefit plans was at or near the edge of the 10% corridor at the end of 2001,
any additional net actuarial losses calculated in the fourth quarter of 2002
would likely result in another fourth quarter charge against income.
On December 18, 2001, the Company announced that it had signed a letter of
intent to sell the assets of Sawhill Tubular to John Maneely Company. The sale,
which is expected be completed in the first half of 2002, is contingent upon
approval by the boards of directors of both companies. In 2001, Sawhill Tubular
accounted for less than 5% of the Company's total net sales.
During the first quarter of 2002, the Company began selling the Anthem Inc.
stock it had received in the demutualization, setting aside some of the
proceeds for those employees and retirees that contributed a portion of the
premiums to the insurance provider.
Liquidity and Capital Resources
At December 31, 2001, the Company had $101.0 in cash and cash equivalents.
The Company's primary source of cash is funds generated by operations and, as
such, future operations could have a significant impact on the Company's cash
balances and liquidity.
In addition to cash on hand at December 31, 2001, the Company had $198.4 of
availability under its $300.0 accounts receivable purchase credit facility, net
of $101.6 used for letters of credit.
During 2001, cash flow from operations generated $168.1, primarily
attributable to $153.0 of income excluding non-cash charges for depreciation
and amortization. Other non-cash items in the 2001 net loss included the $194.0
pension charge, the $49.9 benefit from the receipt of the Anthem shares, $44.2
of net pension and other postretirement benefit income and $53.5 of deferred
tax credits. During 2001, $16.8 of cash was generated by working capital as
reductions in accounts receivable were partially offset by inventory increases.
The decrease in accounts receivable reflected the lower sales levels in the
year, while the increase in inventories consisted largely of higher slab
purchases made in anticipation of a blast furnace maintenance outage scheduled
for the first half of 2002. Finally, $41.0 was used to settle a key management
deferred compensation plan liability.
Cash flows used in investing totaled $75.9. Capital investments were $108.7
and the Company used $41.3 to acquire Alpha Tube and purchase other long-term
investments. The Company liquidated a key management deferred compensation plan
trust, generating $31.6, sold its ownership interest in North American
Stainless for $12.5 and, in the fourth quarter of 2001, received $30.0 from
AFSG Holdings, Inc., the holding company for its discontinued insurance and
finance leasing businesses. During 2002, cash balances may be positively
affected by proceeds from further sales of Anthem stock and the sale of
Sawhill, though the timing of such sales is not assured.
Cash flows from financing activities resulted in a net use of $78.0,
including $14.2 for dividends on common and preferred stock and $63.2 for
scheduled debt repayments.
Dividend Reduction
Prior to 2001, AK Holding had paid quarterly dividends on its common stock
since November 15, 1995 and had paid dividends on its $3.625 cumulative
convertible preferred stock since it was issued in the fourth quarter of 1999.
The declaration and payment of cash dividends are subject to a restrictive
covenant contained in the instruments governing the Company's senior debt.
Primarily due to dividend payments and substantial share
15
repurchases made in 2000 and prior years, and the impact of net losses recorded
in 2001, the amount available under this covenant was insufficient to permit
the payment of dividends on either the common or preferred stock for more than
a portion of the year. In 2001, common stock dividends were reduced to $0.0625
per quarter in the first two quarters and suspended in the last two quarters.
Preferred stock dividends were paid in the first three quarters of the year and
were suspended in the fourth quarter. As of December 31, 2001, the restrictive
covenant precluded the payment of any dividends on either of the preferred or
common stock. The preferred stock dividends are cumulative and, as such,
holders of the $3.625 preferred stock are entitled to payment of all accrued,
but unpaid dividends, before payment of dividends to the holders of common
stock may resume.
Anticipated Debt Service
At December 31, 2001, the Company's long-term debt, including the current
portion, totaled $1,402.5, 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 principal of the Company's Senior Secured Notes Due
2004 is repayable in four successive annual installments of $62.5, which
commenced in December 2001. The Company's obligation to make principal payments
in each of the next five years is as follows: $78.0 in 2002, $62.5 in 2003,
$62.5 in 2004, zero in 2005 and $550.0 in 2006. Interest expense for 2001, net
of capitalized interest of $2.8, totaled $133.1.
Capital Investments
The Company anticipates 2002 capital investments of approximately $125.0,
all of which are expected to be funded from available cash and cash generated
from operations. At December 31, 2001, commitments for future capital
investments totaled approximately $46.7.
Employee Benefit Obligations
As of December 31, 2001, the Company's pension plans were 88% funded in
accordance with generally accepted accounting principles. However, no cash
contributions to the pension plans are required until at least 2003.
At December 31, 2001, the Company's liability for postretirement benefits
other than pensions totaled $1,474.0 The Company has established a health care
trust as a means of prefunding a portion of this liability. The balance in the
trust, including the earnings on trust investments, as of December 31, 2001,
was $87.0.
Energy and Raw Material Hedging
The Company enters into derivative transactions in the ordinary course of
business to hedge the price of natural gas and certain raw materials. As of
December 31, 2001, current and noncurrent liabilities on the Company's
consolidated balance sheet include $33.8 and $6.0, respectively, for the fair
value of these derivatives. The effect on cash of settling these liabilities is
expected to be offset by lower prices paid for the related commodities.
Critical Accounting Policies and Estimates
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States. These principles permit
choices among alternatives and require numerous estimates of financial matters.
The Company believes the accounting principles chosen are appropriate under the
circumstances, and that the estimates, judgments and assumptions involved in
its financial reporting are reasonable.
Revenue from sales of products is recognized at the time title and the risks
and rewards of ownership passes. This normally is when the products are shipped
to the customer, the sales price is fixed and determinable, and collection is
reasonably assured.
16
Accounting estimates are based on historical experience and information that
is available to management about current events and actions the Company may
take in the future. Significant items subject to estimates and assumptions
include the carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets; legal and
environmental liabilities; and assets and obligations related to employee
benefit plans. There can be no assurance that actual results will not differ
from these estimates.
The Company maintains an allowance for doubtful accounts for losses
resulting from the potential that some customers may be unable to make
payments. While, based on the Company's experience, losses due to credit
failures have been low, if in the future the financial condition of some
customers deteriorates affecting their ability to pay, additional allowances
may be needed. Approximately 35% of trade receivables outstanding at December
31, 2001 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.
The Company records a valuation allowance to reduce its deferred tax assets
to an amount that is more likely than not to be realized. In estimating levels
of future taxable income, the Company has considered historical results of
operations in recent years and would, if necessary, consider the implementation
of prudent and feasible tax planning strategies to generate future taxable
income. If future taxable income is less than the amount that has been assumed
in determining the deferred tax asset, then an increase in the valuation
reserve will be required, with a corresponding charge against income. On the
other hand, if future taxable income exceeds the level that has been assumed in
calculating the deferred tax asset, the valuation reserve could be reduced,
with a corresponding credit to income. The Company's ability to utilize Armco's
net operating loss, capital loss, and tax credit carryforwards as of the date
of the merger will be limited by Section 382 of the Internal Revenue Code. The
Company has recorded a valuation reserve for those carryforward amounts that
are expected to expire prior to being used as a result of the limits imposed by
Section 382.
The Company is involved in a number of environmental and legal proceedings.
Accruals of probable costs have been made based on a combination of litigation
and settlement strategies. It is possible that results of operations in any
future period could be materially affected by changes in assumptions or by the
effectiveness of these strategies.
As discussed earlier in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, under the heading, "2001
Compared to 2000," the Company's method of accounting for pensions and other
postretirement benefit plans required the recognition of a pre-tax charge of
$194.0 in the fourth quarter of 2001. Under its method of accounting for
pension and other postretirement benefit plans, the Company recognizes into
income, as a fourth quarter adjustment, any unrecognized actuarial net gains or
losses that exceed 10% of the larger of benefit obligations or plan assets.
Amounts inside this 10% corridor are amortized over the average remaining
service life of active plan participants. The Company believes this method
results in faster recognition of actuarial net gains and losses than the
minimum amortization method permitted by prevailing accounting standards and
used by the vast majority of companies in the United States. Faster recognition
limits the amounts by which balance sheet assets and liabilities differ from
economic net assets or obligations related to the plans. However, faster
recognition under this method also results in the potential for highly volatile
and hard to forecast fourth quarter adjustments, similar to the one just
recognized.
Under the applicable accounting standards, actuarial net gains and losses
occur when actual experience differs from any of the many assumptions used to
value the benefit plans or when the assumptions change, as they may each year
when a valuation is performed. The usual major sources of actuarial gains and
losses for pension plans are the differences between expected and actual
returns on plan assets and changes in the discount rate used to value pension
liabilities as of the measurement date. For other postretirement benefit plans,
differences in estimated versus actual health care costs, changes in assumed
health care cost trend rates or a change in the difference between the discount
rate and the health care trend rate are major sources of actuarial gains and
losses. In addition to the potential for fourth quarter adjustments, these
changes affect future quarterly net periodic benefit expense.
17
The Company's financial statements consolidate the operations and accounts
of the Company and all subsidiaries in which the Company has a controlling
interest. The Company also has investments in associated companies that are
accounted for under the equity method and, because the operations of these
companies are integrated with the Company's basic steelmaking operations, its
proportionate share of their income (loss) is reflected in the Company's cost
of products sold in the consolidated statements of income. The Company has a
subordinated note receivable of $35.0 due from one of these associated
companies, which is recorded in other investments on the consolidated balance
sheets. In the first quarter of 2002, the Company provided a $4.0 letter of
credit to support a portion of that company's bank indebtedness proportionate
to the Company's investment in that company. The Company does not guarantee the
debt of any other unconsolidated companies, has no "off balance sheet debt" and
does not have any so called "special purpose entities" that are not included in
its consolidated financial statements.
The Company's investment in AFSG Holdings, Inc. represents the carrying
value of its discontinued insurance and finance leasing businesses, which have
been largely liquidated. The activities of the remaining operating companies
are in "runoff" mode and the group is accounted for as a discontinued operation
under the liquidation basis of accounting, whereby future cash inflows and
outflows are considered. The Company is under no obligation to support the
operations or liabilities of this group.
The Company is a party to derivative instruments that are designated and
qualify as hedges under Statement of Financial Accounting Standards
("Statement") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and related pronouncements. The Company's objective in using such
instruments is to protect its earnings and cash flows from fluctuations in the
fair value of selected commodities and currencies. For example, in the ordinary
course of business, the Company uses cash settled commodity price swaps, with a
duration of up to three years, to hedge the price of a portion of its natural
gas, nickel, aluminum and zinc requirements. The Company designates these swaps
as cash flow hedges and the resulting changes in their fair value are recorded
in other comprehensive income. Subsequent gains and losses are recognized into
income in the same period as the underlying physical transaction. As of
December 31, 2001, currently valued outstanding commodity hedges would result
in the reclassification into earnings of $20.0 in net-of-tax losses within the
next twelve months. The Company is not party to any derivative instruments that
do not qualify as hedges. Based on such reviews as it deems reasonable and
appropriate, the Company believes that all counterparties to its outstanding
derivative instruments are entities with substantial creditworthiness.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed annually for impairment. The Company adopted Statement No. 142 as of
January 1, 2002 and has begun the transition process of identifying its
reporting units, allocating goodwill and determining fair values. The Statement
allows the Company until June 30, 2002 to complete this initial stage and until
the end of the year to determine the final effect adoption will have on its
financial statements. At December 31, 2001, the Company had $109.7 of goodwill
included on its balance sheet, but currently does not know if an impairment
will be necessary.
In June 2001, the FASB also issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to establish liabilities for
legal obligations associated with the retirement of tangible long-lived assets.
The Company will adopt the Statement in 2003, but has yet to determine what
effect, if any, adoption will have on its financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for impairment of long-lived assets to be held and
used, and of long-lived assets and components of an entity to be disposed of.
The Company adopted the Statement effective as of January 1, 2002, as required,
but does not expect the Statement will have a material effect on its financial
statements. Statement No. 144 supercedes Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
18
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 (but are not limited to) statements in the foregoing
paragraphs entitled, Raw Materials, Competition, Environmental Matters, Legal
Proceedings, Outlook, Liquidity and Capital Resources, Critical Accounting
Policies and Estimates, and New Accounting Pronouncements. In addition, these
include statements in Item 7A, Quantitative and Qualitative Disclosure About
Market Risk and in the Notes to Consolidated Financial Statements in the
paragraphs entitled, Property Plant and Equipment, Goodwill and Other
Intangible Assets, Pension and Other Postretirement Benefits Accounting,
Concentrations of Credit Risk, Financial Instruments, 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 continuing recessionary conditions in the general economy and
in the cyclical steel industry;
. reduced domestic automotive production;
. changes in demand for the Company's products, including the possible
need to shift shipments to the spot market from the contract market;
. unanticipated plant outages, equipment failures or labor difficulties;
. actions by the Company's domestic and foreign competitors, their
employees and labor unions;
. interest rate volatility and declining prices in the securities markets,
which may affect invested pension plan assets and the calculation of
pension and other postretirement benefit obligations and expenses;
. unanticipated increases in the prices for, or disruptions in the supply
of, raw materials and energy, particularly natural gas;
. unexpected outcomes of major litigation, environmental matters and other
contingencies;
. changes in application or scope of environmental regulations applicable
to the Company.
. changes in United States trade policy and governmental actions with
respect to imports, particularly the possible impact of restrictions or
tariffs on the importation of carbon slabs; and
. timely completion of business or asset purchases and sales, including
receipt of regulatory agency approvals;
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 of its debt securities on a fixed rate
basis. The fair value of this debt as of December 31, 2001 is $1,409.7 million.
A reduction in prevailing interest rates of 1% would result in an increase in
the total fair value of the Company's long-term debt of approximately $64.5
million. The fair value is 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 outstanding debt securities at prevailing market prices.
19
In the ordinary course of business, the Company is exposed to fluctuations
in the price of certain commodities. Since approximately 73% of AK Steel's
flat-rolled steel shipments in 2001 were generally made under long-term
contracts where selling prices cannot be adjusted in response to changes in the
costs of 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, in the case of stainless steel, increased costs
for nickel can usually be recovered through price surcharges to customers. The
Company uses cash settled commodity price swaps 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 in accumulated
other comprehensive income (loss) on the consolidated balance sheet and
recognized into income in the same period as the underlying physical
transaction. At December 31, 2001, accumulated other comprehensive income
(loss) includes $23.6 million in unrealized net-of-tax losses for the fair
value of these derivatives. Based on the swaps outstanding at December 31,
2001, the following table presents the negative effect 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.
Because these swaps are structured and used solely as hedges, virtually all
of the losses realized from decreasing market prices would be offset by the
benefit of lower prices paid for the physical commodity used in the normal
production cycle. The Company currently does not enter into contracts for
trading purposes.
The Company is also subject to risks of exchange rate fluctuations on a
small portion of its receivables, which are denominated in foreign currencies.
Forward currency contracts are used to manage exposures to certain of these
currency price fluctuations. At December 31, 2001, the Company had outstanding,
forward currency contracts with a total notional value of $26.3 million for the
sale of euros. Based on the contracts outstanding at the end of 2001, a 10%
increase in the euro to dollar rate would result in a $2.7 million loss in
value, which would offset the income benefit of a more favorable translation
rate.
Item 8. Financial Statements and Supplementary Data.
AK Steel Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Management's Responsibility for Financial Statements....................................... 21
Independent Auditors' Report............................................................... 21
Consolidated Statements of Income for the Years Ended December 31, 1999, 2000 and 2001..... 22
Consolidated Balance Sheets as of December 31, 2000 and 2001............................... 23
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001. 24
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 2000
and 2001................................................................................. 25
Notes to Consolidated Financial Statements................................................. 26
20
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States. These principles permit
choices among alternatives and require numerous estimates of financial matters.
The Company believes the accounting principles chosen are appropriate under the
circumstances, and that the estimates, judgments and assumptions involved in
its financial reporting are reasonable.
The Company's management is responsible for the integrity and objectivity of
the financial information presented in its financial statements. It maintains a
system of internal accounting controls designed to provide reasonable assurance
that Company employees comply with stated policies and procedures, that the
Company's assets are safeguarded and that its financial reports are fairly
presented. On a regular basis, the Company's financial management discusses
internal accounting controls and financial reporting matters with its
independent auditors and its Audit Committee, composed solely of independent
outside directors. The independent auditors and the Audit Committee also meet
privately to discuss and assess the Company's accounting controls and financial
reporting.
RICHARD M. WARDROP, JR.
Chairman, Chief Executive Officer and President
JAMES L. WAINSCOTT
Senior Vice President and Chief Financial Officer
(and principal accounting officer)
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, 2000 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. 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,
2000 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 30, 2002
21
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 2000 and 2001
(dollars in millions, except per share data)
1999 2000 2001
-------- -------- --------
Net sales........................................................ $4,368.3 $4,611.5 $3,994.1
Cost of products sold (exclusive of items shown separately below) 3,503.3 3,773.7 3,373.6
Selling and administrative expenses.............................. 309.8 267.6 265.3
Depreciation (Note 1)............................................ 210.7 232.0 230.7
Special charges and unusual items:
Costs related to the merger with Armco Inc. (Note 10)......... 99.7 -- --
Pension charge (Note 1)....................................... -- -- 194.0
Stock received in insurance demutualization (Note 10)......... -- -- (49.9)
-------- -------- --------
Total operating costs............................................ 4,123.5 4,273.3 4,013.7
-------- -------- --------
Operating profit (loss).......................................... 244.8 338.2 (19.6)
Interest expense................................................. 123.7 136.1 133.1
Other income..................................................... 20.8 8.0 6.0
-------- -------- --------
Income (loss) before income taxes and minority interest.......... 141.9 210.1 (146.7)
Income tax provision (benefit) (Note 5).......................... 63.9 77.7 (54.3)
Minority interest (Note 2)....................................... 6.7 -- --
-------- -------- --------
Income (loss) from continuing operations......................... 71.3 132.4 (92.4)
Income from discontinued operations (Note 13).................... 7.5 -- --
-------- -------- --------
Income before extraordinary item................................. 78.8 132.4 (92.4)
Extraordinary loss on retirement of debt, net of tax (Note 6).... 13.4 -- --
-------- -------- --------
Net income (loss)................................................ 65.4 132.4 (92.4)
Other comprehensive income (loss), net of tax (Note 1):
Foreign currency translation adjustment....................... (1.4) (2.1) 0.6
Derivative instrument hedges, mark to market:
Cumulative effect adjustment.............................. -- -- 27.5
Losses arising in period.................................. -- -- (67.6)
Reclass gains included in net income...................... -- -- 11.2
Unrealized gains on securities:
Unrealized holding gains arising during period............ 0.7 0.1 10.2
Reclass gains included in net income...................... (1.9) (1.4) (0.9)
Minimum pension liability adjustment.......................... 1.2 0.2 (163.4)
-------- -------- --------
Comprehensive income (loss)...................................... $ 64.0 $ 129.2 $ (274.8)
======== ======== ========
Earnings per share: (Note 1)
Basic earnings per share:
Income (loss) from continuing operations.................. $ 0.62 $ 1.20 $ (0.87)
Discontinued operations................................... 0.07 -- --
Extraordinary loss on retirement of debt.................. 0.13 -- --
-------- -------- --------
Net income (loss)...................................... $ 0.56 $ 1.20 $ (0.87)
======== ======== ========
Diluted earnings per share:
Income (loss) from continuing operations.................. $ 0.62 $ 1.20 $ (0.87)
Discontinued operations................................... 0.07 -- --
Extraordinary loss on retirement of debt.................. 0.13 -- --
-------- -------- --------
Net income (loss)...................................... $ 0.56 $ 1.20 $ (0.87)
======== ======== ========
See notes to consolidated financial statements.
22
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(dollars in millions, except per share amounts)
2000 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 86.8 $ 101.0
Accounts receivable, net (Note 1)................................................ 517.7 410.0
Inventories, net (Note 1)........................................................ 848.4 943.2
Deferred tax asset (Note 5)...................................................... 54.7 76.6
Other current assets............................................................. 14.2 17.0
--------- ---------
Total Current Assets......................................................... 1,521.8 1,547.8
--------- ---------
Property, Plant and Equipment (Note 1).............................................. 4,682.4 4,805.7
Less accumulated depreciation.................................................... (1,796.7) (2,013.0)
--------- ---------
Property, plant and equipment, net............................................... 2,885.7 2,792.7
--------- ---------
Other Assets:
Investment in AFSG (Note 1)...................................................... 85.6 55.6
Other investments................................................................ 114.0 154.3
Goodwill (Note 1)................................................................ 111.7 109.7
Other intangible assets (Note 8)................................................. 7.4 111.9
Prepaid pension (Note 8)......................................................... 206.5 1.4
Deferred tax asset (Note 5)...................................................... 242.2 393.5
Other............................................................................ 64.9 58.9
--------- ---------
Total Assets................................................................. $ 5,239.8 $ 5,225.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................. $ 498.3 $ 537.6
Accrued liabilities.............................................................. 262.2 270.5
Current portion of long-term debt (Note 6)....................................... 63.2 78.0
Current portion of pension and other postretirement benefit obligations (Note 8). 66.6 68.3
--------- ---------
Total Current Liabilities.................................................... 890.3 954.4
--------- ---------
Noncurrent Liabilities:
Long-term debt (Note 6).......................................................... 1,387.6 1,324.5
Pension and other postretirement benefit obligations (Note 8).................... 1,420.2 1,740.1
Other liabilities................................................................ 222.4 173.5
--------- ---------
Total Noncurrent Liabilities................................................. 3,030.2 3,238.1
--------- ---------
Total Liabilities............................................................ 3,920.5 4,192.5
--------- ---------
Stockholders' Equity: (Note 3)
Preferred stock, aggregate liquidation preference over par $12.7................. 12.5 12.5
Common stock, authorized 200,000,000 shares of $.01 par value each; issued 2000,
115,832,859 shares, 2001, 115,987,777 shares; outstanding 2000, 107,650,372
shares; 2001, 107,713,329 shares............................................... 1.2 1.2
Additional paid-in capital....................................................... 1,803.2 1,807.2
Treasury stock, common shares at cost, 2000, 8,182,487; 2001, 8,274,448 shares... (119.4) (120.4)
Accumulated deficit.............................................................. (373.3) (479.9)
Accumulated other comprehensive income (loss) (Note 1)........................... (4.9) (187.3)
--------- ---------
Total Stockholders' Equity.......................................................... 1,319.3 1,033.3
--------- ---------
Total Liabilities and Stockholders' Equity.......................................... $ 5,239.8 $ 5,225.8
========= =========
See notes to consolidated financial statements.
23
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 2000 and 2001
(dollars in millions)
1999 2000 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss)............................................................ $ 65.4 $ 132.4 $ (92.4)
------- ------- -------
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation............................................................. 210.7 232.0 230.7
Amortization............................................................. 16.4 16.0 14.7
Deferred income taxes.................................................... 57.7 91.4 (53.5)
Costs related to the merger with Armco Inc............................... 99.7 -- --
Pension charge........................................................... -- -- 194.0
Stock received in insurance demutualization.............................. -- -- (49.9)
Income from discontinued operations...................................... (7.5) -- --
Extraordinary loss on retirement of debt................................. 13.4 -- --
Other items, net......................................................... (2.4) 1.4 6.3
Changes in assets and liabilities:
Accounts and notes receivable......................................... (74.8) (11.2) 107.1
Inventories........................................................... (127.4) (50.9) (93.2)
Current liabilities................................................... 19.4 (31.6) 2.9
Other assets.......................................................... (0.9) (2.7) 0.6
Pension asset and obligation.......................................... (19.0) (55.6) (63.9)
Postretirement benefit obligation..................................... 0.5 (0.3) 19.7
Other liabilities..................................................... (1.9) 9.0 (55.0)
------- ------- -------
Total adjustments................................................. 183.9 197.5 260.5
------- ------- -------
Net cash flows from operating activities.............................. 249.3 329.9 168.1
------- ------- -------
Cash flows from investing activities:
Capital investments.......................................................... (337.2) (137.7) (108.7)
Net sale of short-term investments........................................... 6.8 -- --
Purchase of long-term investments............................................ (0.2) (66.4) (12.0)
Purchase of a business....................................................... -- -- (29.3)
Distribution from investees.................................................. -- -- 30.2
Proceeds from the sale of investments........................................ 4.6 3.2 44.1
Proceeds from sale of property, plant and equipment.......................... 2.1 6.2 0.1
Other items, net............................................................. 0.8 0.9 (0.3)
------- ------- -------
Net cash flows from investing activities.............................. (323.1) (193.8) (75.9)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................... 24.7 1.6 --
Proceeds from issuance of long-term debt..................................... 460.0 -- --
Principal payments on long-term debt......................................... (530.8) (6.0) (63.2)
Purchase of treasury stock................................................... (1.5) (39.2) (1.0)
Purchase of preferred stock.................................................. (115.8) (2.2) --
Preferred stock dividends paid............................................... (7.6) (1.0) (0.7)
Common stock dividends paid.................................................. (35.1) (54.9) (13.5)
Underwriting discount and stock issuance expense............................. (10.8) -- --
Other items, net............................................................. (1.6) (2.0) 0.4
------- ------- -------
Net cash flows from financing activities.............................. (218.5) (103.7) (78.0)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............................ (292.3) 32.4 14.2
Cash and cash equivalents, beginning of year................................. 346.7 54.4 86.8
------- ------- -------
Cash and cash equivalents, end of year....................................... $ 54.4 $ 86.8 $ 101.0
======= ======= =======
See notes to consolidated financial statements.
24
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
Other
Compre-
Additional Accum- hensive
Preferred Common Paid-In- Treasury ulated Income/
Stock Stock Capital Stock Deficit (Loss) Total
--------- ------ ---------- -------- ------- ------- --------
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 common stock compensation....... 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)
Foreign currency 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 common stock compensation....... (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)
Foreign currency 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
Net loss......................................... (92.4) (92.4)
Unrealized gain on marketable securities......... 9.3 9.3
Tax benefit from common stock compensation....... (0.9) (0.9)
Purchase of treasury stock....................... (1.0) (1.0)
Preferred stock $.90625 cash dividend per quarter
(first, second and third quarters only)........ (0.7) (0.7)
Common stock $.0625 cash dividend per quarter
(first and second quarters only)............... (13.5) (13.5)
Derivative instrument hedges..................... (28.9) (28.9)
Foreign currency translation adjustment.......... 0.6 0.6
Minimum pension liability........................ (163.4) (163.4)
Issuance of restricted stock, net................ 0.1 0.1
Unamortized restricted stock..................... 4.8 4.8
------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2001....................... $ 12.5 $1.2 $1,807.2 $(120.4) $(479.9) $(187.3) $1,033.3
======= ==== ======== ======= ======= ======= ========
See notes to consolidated financial statements.
25
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 was 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 United States requires the
use of management estimates and assumptions that affect the amounts reported.
These estimates are based on historical experience and information that is
available to management about current events and actions the Company may take
in the future. Significant items subject to estimates and assumptions include
the carrying value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; legal and environmental
liabilities; and assets and obligations related to employee benefit plans.
There can be no assurance that actual results will not differ from these
estimates.
Revenue Recognition: Revenue from sales of products is recognized at the
time title and the risks and rewards of ownership passes. This normally is when
the products are shipped to the customer, the sales price is fixed and
determinable, and collection is reasonably assured.
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:
1999 2000 2001
------ ------ ------
Cash paid (received) during the period for:
Interest (net of interest capitalized).. $114.3 $127.1 $139.7
Income taxes............................ 6.2 (9.0) (1.1)
Supplemental Cash Flow Information Regarding Non-Cash Investing and
Financing Activities: The Company granted to certain employees shares of its
common stock with values, net of cancellations, of $10.8, $7.6 and $0.1 in
1999, 2000 and 2001, respectively, under its restricted stock award programs
(Note 4). During
26
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
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).
In the fourth quarter of 2001, the Company received a distribution of shares
from Anthem Inc., its primary health insurance provider upon the
demutualization of that company. The shares had a fair value at the date
of receipt of $49.9, net of a liability established to provide compensation to
Company employees and retirees who contributed a small portion of the premiums
paid to the applicable insurance plans.
Accounts Receivable: The allowance for doubtful accounts was $5.0 and $8.4
at December 31, 2000 and 2001.
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.
2000 2001
------ ------
Inventories on LIFO:
Finished and semifinished..................... $704.1 $750.2
Raw materials and supplies.................... 161.5 162.6
Adjustment to state inventories at LIFO value. (42.1) (4.2)
------ ------
Total..................................... 823.5 908.6
Other inventories................................ 24.9 34.6
------ ------
Total inventories......................... $848.4 $943.2
====== ======
During 2001, liquidation of LIFO layers generated income of $5.1.
Property, Plant and Equipment: Plant and equipment are depreciated under
the straight line method over their estimated lives ranging from 2 to 39 years.
The Company's property, plant and equipment balances as of December 31, 2000
and 2001 are as follows:
2000 2001
--------- ---------
Land, land improvements and leaseholds $ 133.6 $ 136.5
Buildings............................. 330.3 350.5
Machinery and equipment............... 4,108.8 4,210.1
Construction in progress.............. 109.7 108.6
--------- ---------
Total.............................. 4,682.4 4,805.7
Less accumulated depreciation......... (1,796.7) (2,013.0)
--------- ---------
Property, plant and equipment, net.... $ 2,885.7 $ 2,792.7
========= =========
The Company periodically reviews the carrying value of long-lived assets to
be held and used and long-lived assets to be disposed of when events and
circumstances warrant such a review. If the carrying value of a long-lived
asset is considered impaired, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value less cost to dispose for
assets to be sold or abandoned. Fair market value is determined primarily using
the anticipated cash flows discounted at a rate commensurate with the risk
involved.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 143, "Accounting
for Asset Retirement Obligations," which requires entities to establish
liabilities for legal obligations associated with the retirement of tangible
long-lived assets. The Company will adopt the Statement in 2003, but has yet to
determine what effect, if any, adoption will have on its financial statements.
27
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for impairment of long-lived assets to be held and
used, and of long-lived assets and components of an entity to be disposed of.
The Company adopted the Statement as of January 1, 2002, as required, but does
not expect the Statement will have a material effect on its financial
statements.
Investments: The Company has investments in associated companies that are
accounted for under the equity method. Because the operations of these
companies are integrated with its basic steelmaking operations, the Company
includes its proportionate share of the income (loss) of these associated
companies in cost of products sold in its consolidated statements of income.
The Company has a note receivable of $35.0 due from an entity in which it
holds an indirect equity interest, Combined Metals of Chicago LLC. The note is
subordinate to outstanding bank indebtedness of the entity. In the first
quarter of 2002, the Company provided a $4.0 letter of credit to support a
portion of the entity's bank indebtedness proportionate to the company's
indirect equity investment.
The Company's investment in AFSG Holdings, Inc. represents the carrying
value of its discontinued insurance and finance leasing businesses, which have
been largely liquidated. The activities of the remaining operating companies
are being "runoff" and the group is accounted for as a discontinued operation
under the liquidation basis of accounting, whereby future cash inflows and
outflows are considered. In the fourth quarter of 2001, AFSG Holdings
distributed $30.0 of excess funds to the Company, which reduced the Company's
carrying value of its AFSG investment. The Company is under no obligation to
support the operations or liabilities of this group.
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. Goodwill and other intangible
assets were also 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 for
both goodwill and other intangible assets was $6.1 in each of the years 1999
and 2000, and $5.5 in 2001. At December 31, 2000 and 2001, accumulated
amortization of goodwill and other intangible assets was $54.8 and $39.5,
respectively.
The Company assesses whether its goodwill and other intangible assets are
impaired as required by Statement 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. Statement No. 144
supercedes Statement No. 121 effective January 1, 2002.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed annually for impairment. The
Company adopted Statement No. 142 as of January 1, 2002 and has begun the
transition process of identifying its reporting units, allocating goodwill and
determining fair values. The Statement allows the Company until June 30, 2002
to complete this initial stage, which determines whether impairment exists, and
until the end of the year to determine the final effect adoption will have on
its financial statements. The Company currently does not know if an impairment
will be necessary. In 2001, $4.0 of the above amortization expense was related
to goodwill.
Pension and Other Postretirement Benefits Accounting: Under its method of
accounting for pension and other postretirement benefit plans, the Company
recognizes into income, as a fourth quarter adjustment, any
28
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
unrecognized actuarial net gains or losses that exceed 10% of the larger of
benefit obligations or plan assets. Amounts inside this 10% corridor are
amortized over the average remaining service life of active plan participants.
Actuarial net gains and losses occur when actual experience differs from any of
the many assumptions used to value the plans. Differences between the expected
and actual returns on plan assets and changes in interest rates, which affect
the discount rates used, can have a significant impact on the calculation of
pension net gains and losses from year to year. For other postretirement
benefit plans, increases in healthcare trend rates that outpace discount rates
could cause unrecognized net losses to increase to the point that an
outside-the-corridor charge would be necessary. By immediately recognizing net
gains and losses outside the corridor, the Company's accounting method limits
the amounts by which balance sheet assets and liabilities differ from economic
net assets or obligations related to the plans. During 2001, the combination of
a 6% loss on its pension plan assets, and a decrease in the discount rate from
8% to 7.25%, caused the Company to recognize, in the fourth quarter of 2001, a
non-cash pre-tax pension charge of $194.0. In addition, because the decline in
asset value also led to the pension plans becoming underfunded, the Company
recorded a non-cash after-tax reduction in equity of approximately $163.4.
Earnings Per Share: Reconciliation of numerators and denominators for basic
and diluted EPS computations is as follows:
1999 2000 2001
------ ------ ------
Income (loss) for calculation of basic earnings per share:
Income (loss) from continuing operations.................................. $ 71.3 $132.4 $(92.4)
Less: Preferred stock dividends........................................... 7.6 1.0 0.9
------ ------ ------
Income (loss) from continuing operations available to common stockholders. 63.7 131.4 (93.3)
Income from discontinued operations....................................... 7.5 -- --
Extraordinary loss on retirement of debt.................................. 13.4 -- --
------ ------ ------
Net income (loss) available to common stockholders........................ $ 57.8 $131.4 $(93.3)
------ ------ ------
Common shares outstanding (weighted average in millions)..................... 102.4 109.5 107.7
====== ====== ======
Basic earnings per share:
Income (loss) from continuing operations.................................. $ 0.62 $ 1.20 $(0.87)
Discontinued operations................................................... 0.07 -- --
Extraordinary loss on retirement of debt.................................. 0.13 -- --
------ ------ ------
Net income (loss)......................................................... $ 0.56 $ 1.20 $(0.87)
====== ====== ======
Income (loss) for calculation of diluted earnings per share:
Income (loss) from continuing operations.................................. $ 71.3 $132.4 $(92.4)
Less: Preferred stock dividends........................................... 7.6 1.0 0.9
------ ------ ------
Income (loss) from continuing operations available to common stockholders. 63.7 131.4 (93.3)
Income from discontinued operations....................................... 7.5 -- --
Extraordinary loss on retirement of debt.................................. 13.4 -- --
------ ------ ------
Net income (loss) available to common stockholders........................ $ 57.8 $131.4 $(93.3)
====== ====== ======
Shares (weighted average in millions):
Common shares outstanding................................................. 102.4 109.5 107.7
Common stock options outstanding.......................................... 0.5 0.1 --
------ ------ ------
Common shares outstanding as adjusted..................................... 102.9 109.6 107.7
====== ====== ======
Diluted earnings per share:
Income (loss) from continuing operations.................................. $ 0.62 $ 1.20 $(0.87)
Discontinued operations................................................... 0.07 -- --
Extraordinary loss on retirement of debt.................................. 0.13 -- --
------ ------ ------
Net income (loss)......................................................... $ 0.56 $ 1.20 $(0.87)
====== ====== ======
29
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
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 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.
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 1999, 2000 and 2001 were $16.8, $15.3 and $13.9,
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. During 2001, 18% of
the Steel Operations' net sales were to General Motors Corporation. The Company
sells domestically to customers primarily in the Midwestern and Eastern United
States, while approximately 11% of sales are to foreign customers, primarily in
Canada, Mexico and Western Europe. Approximately 35% of trade receivables
outstanding at December 31, 2001 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.
Financial Instruments: Investments in debt securities are classified as
held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Investments in equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in other comprehensive
income. Realized gains and losses on sales of available-for-sale securities are
computed based upon initial cost adjusted for any other than temporary declines
in fair value. The Company has no investments that are considered to be trading
securities.
The carrying value of the Company's financial instruments does not differ
materially from their estimated fair value (primarily based on quoted market
prices) at the end of 2000 and 2001 with the exception of the Company's
long-term debt. At December 31, 2001, the fair value of the Company's long-term
debt, including current maturities, was approximately $1,409.7. This amount was
determined primarily from quoted market prices. The fair value estimate was
based on pertinent information available to management as of December 31, 2001.
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, 2000 was approximately $1,358.3.
The Company is a party to derivative instruments that are designated and
qualify as hedges under Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and related pronouncements. The Company's
objective in using such instruments is to protect its earnings and cash flows
from fluctuations in the fair value of selected commodities and currencies. The
Company has not entered into derivative instruments that do not qualify as
hedges.
30
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
In the ordinary course of business, the Company's income and cash flows may
be affected by fluctuations in the price of certain commodities used in its
production processes. The Company generally cannot recover higher energy and
raw material costs in its selling prices. For certain commodities where such
exposure exists, the Company uses cash settled commodity price swaps, with a
duration of up to three years, to hedge the price of a portion of its natural
gas, nickel, aluminum and zinc requirements. The Company designates these swaps
as cash flow hedges and the resulting changes in their fair value are recorded
in other comprehensive income. Subsequent gains and losses are recognized into
income in the same period as the underlying physical transaction. As of
December 31, 2001, currently valued outstanding commodity hedges would result
in the reclassification into earnings of $20.0 in net-of-tax losses within the
next twelve months.
In addition, in the ordinary course of business, the Company is subject to
risks associated with exchange rate fluctuations on monies received from its
European subsidiaries and other customers invoiced in European currencies. In
order to mitigate this risk, the Company has entered into a series of
agreements for the forward sale of euros at fixed dollar rates. The forward
contracts are entered into with durations of up to a year. A typical contract
is used as a cash flow hedge for the period from when an order is taken to when
a sale is recognized, at which time it converts into a fair value hedge of a
euro-denominated receivable. As a fair value hedge, the changes in the fair
value of the derivative and the gains or losses on the foreign-denominated
receivables are recorded currently in other income and provide an offset to one
another.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset, liability, firm commitment or forecasted
transaction that has been designated as a hedged item and states how the
hedging instrument is expected to hedge the risks related to that item. The
Company formally measures effectiveness of its hedging relationships both at
the hedge inception and on an ongoing basis. The Company discontinues hedge
accounting prospectively when it determines that the derivative is no longer
effective in offsetting changes in the fair value or cash flows of a hedged
item; when the derivative expires or is sold, terminated or exercised; when it
is probable that the forecasted transaction will not occur; when a hedged firm
commitment no longer meets the definition of a firm commitment; or when
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
Accumulated Other Comprehensive Income: The components of accumulated other
comprehensive income (loss) at December 31 are as follows:
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.
31
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Effective with the merger, the Company paid cash and issued shares of its
common stock to convert the outstanding shares of two series of Armco's
convertible preferred stock. In 1999, accrued dividends of $6.7 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 $17.5 for the first six months of 1999.
The following presents a reconciliation of previously reported results of AK
Holding and Armco to the results of the merged Company for the six months ended
June 30, 1999. 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
$210.0 of cumulative credits for revaluation of the deferred tax asset.
AK
Holding Armco Eliminations/Other Total
-------- ------ ------------------ --------
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 cumulative convertible 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 $50.3625 per share until October 15, 2002,
after which, the redemption price is reduced to $50 per share. 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, 2000 and 2001, there were
authorized, issuable and outstanding 259,481 shares of $3.625 preferred stock
with a $1 per share par value.
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.
Dividends: A common stock dividend of $0.125 per share was paid in each
quarter of 2000. In each of the first two quarters of 2001, the Company paid a
common stock dividend of $0.0625 per share before suspending common stock
dividends for the final two quarters. In addition, from the fourth quarter of
1999 through the third quarter of 2001, the Company paid regular quarterly
dividends of $0.90625 per share on its $3.625 preferred stock. In the fourth
quarter of 2001, the Company suspended the regular preferred stock dividend.
The declaration and payment of cash dividends on common and preferred stock is
subject to restrictions imposed by a covenant contained in the instruments
governing its outstanding senior debt. Common and preferred dividends were
reduced and ultimately suspended in 2001 because of the restrictions imposed by
this covenant. As of December 31, 2001, this covenant continues to preclude the
payment of any dividends.
32
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
The preferred stock dividends are cumulative and, as such, holders of the
$3.625 preferred stock are entitled to payment of all accrued, but unpaid
dividends, before payment of dividends to the holders of common stock. At
December 31, 2001, preferred stock dividends are in arrears $0.2 in the
aggregate or $0.90625 per share.
At its January 17, 2002 meeting, the Board of Directors did not declare a
quarterly dividend on either of its common or preferred stock because of the
covenant restriction described above.
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). The nonqualified stock options vest at the rate of 33%
per year over three years. Generally, 25% of the shares covered by a restricted
stock award vest two years after the date of the award and an additional 25%
vest on the third, fourth and fifth anniversaries of the date of the award.
Prior to the merger, Armco maintained plans under which stock options and
restricted stock awards were granted. Effective with the merger, Armco's stock
options were converted into options to purchase the Company's common stock,
adjusting the option price and number of shares by the same .3829 ratio used to
convert outstanding shares of Armco common stock at the time of the merger. In
addition, all unvested options vested. Other provisions of these options were
similar to those of the Company and did not change. All outstanding restricted
stock awards of Armco vested upon the effectiveness of the merger and the
shares were converted into the Company's common stock.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
the SIP and Armco's award program. The compensation cost that has been charged
against income for the restricted stock awards issued under the SIP was $8.1,
$5.9 and $5.0 for 1999, 2000 and 2001, respectively. The Company adopted the
pro forma disclosure requirements of Statement No. 123, "Accounting for
Stock-Based Compensation." Had compensation cost for the Company's stock
compensation plans been determined based on fair value at the grant dates for
awards under these plans
33
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
consistent with the methodology of Statement No. 123, the Company's net income
(loss) and earnings per share for each year would have been reduced to the pro
forma amounts indicated below:
1999 2000 2001
----- ------ -------
Net income (loss)................ As reported $65.4 $132.4 $(92.4)
Pro forma 62.6 129.8 (94.2)
Basic earnings (loss) per share.. As reported 0.56 1.20 (0.87)
Pro forma 0.54 1.18 (0.88)
Diluted earnings (loss) per share As reported 0.56 1.20 (0.87)
Pro forma 0.53 1.18 (0.88)
The fair value of options to purchase shares of AK Holding common stock is
estimated on the grant date using a Black-Scholes option pricing model
considering the appropriate dividend rates along with the following weighted
average assumptions:
Assumptions used for the calculation of the fair value of the options to
purchase Armco stock issued in 1999 included an expected volatility of 40%, a
risk free interest rate of 4.7%, an expected life of five years and the
expectation that no dividends would be paid.
A summary of the status of stock options under the SIP and Armco's plan as
of December 31, 1999, 2000 and 2001 and changes during each of those years is
presented below:
1999 2000 2001
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
------------- --------- -------- --------- -------- --------- --------
Outstanding at beginning of year 4,067,517 $16.27 2,883,471 $17.90 3,405,519 $17.88
Granted......................... 943,254 18.58 789,000 16.15 580,500 9.37
Exercised....................... 1,702,851 14.34 252,952 13.02 -- --
Forfeited....................... 391,658 16.97 14,000 19.27 558,000 17.51
Expired......................... 32,791 31.60 -- -- -- --
--------- --------- ---------
Outstanding at end of year...... 2,883,471 17.90 3,405,519 17.88 3,428,019 16.50
========= ========= =========
Options exercisable at year end. 1,956,169 15.68 2,156,047 17.60 2,215,881 18.01
The weighted average fair value per share of options granted during 1999,
2000 and 2001 were $5.68, $4.59 and $3.27, respectively.
34
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
$8.23 to $10.98..... 747,000 8.9 yrs. $ 9.48 68,010 $10.23
$10.99 to $13.72.... 392,724 3.2 yrs. 11.94 355,224 11.94
$13.73 to $16.46.... 167,332 3.4 yrs. 13.84 167,332 13.84
$16.47 to $19.21.... 1,164,307 6.9 yrs. 18.49 814,646 18.60
$19.22 to $21.95.... 513,656 4.8 yrs. 20.39 511,990 20.39
$21.96 to $24.69.... 418,000 7.3 yrs. 23.51 282,010 23.50
$24.70 to $27.44.... 25,000 7.3 yrs. 26.64 16,669 26.64
During 1999, 2000 and 2001, the Company issued to certain employees 650,973,
476,641 and 285,994 shares of common stock, subject to restrictions, with
weighted average grant-date fair values of $18.39, $12.68 and $9.26 per share,
respectively.
5. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. This return includes all domestic companies 80% or more owned by the
Company and the proportionate share of the Company's interest in partnership
investments. State tax returns are filed on a consolidated, combined or
separate basis depending on the applicable laws relating to the Company and its
domestic subsidiaries.
The United States and foreign components of income (loss) before income
taxes consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the consolidated financial statements in different years than
recognized in the tax returns. The postretirement benefit difference includes
amounts expensed in the consolidated financial statements for health care, life
insurance and other postretirement benefits, which become deductible in the tax
return upon payment or funding in qualified trusts. Other temporary differences
represent principally various expenses accrued for financial reporting purposes
which are not deductible for tax reporting purposes until paid. The depreciable
assets temporary difference represents generally tax depreciation in excess of
financial statement depreciation. The inventory difference relates primarily to
differences in the LIFO reserve, reduced by tax overhead capitalized in excess
of book amounts.
At December 31, 2001, the Company had regular tax net operating loss
carryforwards for federal tax purposes expiring as follows:
At December 31, 2001 the Company had Alternative Minimum Tax ("AMT") net
operating loss carryforwards of $717.7 which, unless utilized, will expire in
the years 2002 through 2021. In addition, at December 31, 2001, the Company had
unused AMT credit carryforwards of $70.5, which may be used to offset future
regular income tax liabilities. These credits can be carried forward
indefinitely.
The Company records a valuation allowance to reduce its deferred tax assets
to an amount that is more likely than not to be realized. In estimating levels
of future taxable income, the Company has considered historical results of
operations in recent years and would, if necessary, consider the implementation
of prudent and feasible tax planning strategies to generate future taxable
income. If future taxable income is less than the amount that has been assumed
in determining the deferred tax asset, then an increase in the valuation
reserve will be required, with a corresponding charge against income. On the
other hand, if future taxable income exceeds the level that has been assumed in
calculating the deferred tax asset, the valuation reserve could be reduced,
with a corresponding credit to income. The Company's ability to utilize Armco's
net operating loss, capital loss, and tax credit carryforwards as of the date
of the merger will be limited by Section 382 of the Internal Revenue Code. The
Company has recorded a valuation reserve for those carryforward amounts that
are expected to expire prior to being used as a result of the limits imposed by
Section 382.
36
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Significant components of the provision (benefit) for income taxes are as
follows:
The reconciliation of income tax on continuing operations computed at the
U.S. federal statutory tax rates to actual income tax expense (benefit) is as
follows:
1999 2000 2001
----- ------ ------
Income (loss) at statutory rate........................... $49.0 $ 72.9 $(52.6)
State and foreign tax provisions.......................... 0.8 16.2 0.8
Reduction in deferred tax asset valuation reserve......... (0.2) (84.7) 2.2
Expired net operating and capital loss carryovers......... -- 73.9 --
Non-deductible severance and merger expenses.............. 14.5 -- --
Other permanent differences............................... (0.2) (0.6) (4.7)
----- ------ ------
Total tax provision (benefit) on continuing operations. $63.9 $ 77.7 $(54.3)
===== ====== ======
The Company and the Internal Revenue Service have concluded the examinations
of federal income tax returns filed for the years 1994 through 1998. The
Company's 1999 and 2000 returns are currently under examination. In addition,
in the normal course of business, the state and local tax returns of the
Company and its subsidiaries are routinely subjected to examination by various
taxing jurisdictions. However, the Company believes that the outcomes of these
examinations will not have any material adverse impact on the Company's
financial position, results of operations or cash flows.
The statute of limitations has lapsed with respect to Armco's federal income
tax returns for 1997 and prior years, and as a result these returns are closed
to assessments of additional tax. However, the NOL carryforwards from these
years remain open to adjustment. Armco was in a cumulative NOL carryforward
position from 1983 through the date of the merger with the Company in September
1999. In addition, at the time of the merger, Armco had loss carryforwards that
were substantially in excess of the amounts that are expected to be used each
year after the merger, because of the limits on the loss utilization imposed by
Section 382. Consequently, the Company believes that any IRS audit adjustments
to the loss carryforwards would not be sufficient to reduce the carryovers
below the amounts for which a deferred tax benefit has been provided.
37
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
6. Long-Term Debt and Other Financing
At December 31, 2000 and 2001, the Company's long-term debt balances were as
follows:
2000 2001
-------- --------
Senior Secured Notes Due 2004 (interest rates of 8.48% to 9.05%) $ 250.0 $ 187.5
9 1/8% Senior Notes Due 2006.................................... 550.0 550.0
9% Senior Notes Due 2007........................................ 117.4 117.4
8 7/8% Senior Notes Due 2008.................................... 33.5 33.5
7 7/8% Senior Notes Due 2009.................................... 450.0 450.0
Tax Exempt Financing Due 2008 through 2029
(variable rates of 1.3% to 5.1% in 2001)...................... 50.9 50.2
Other, including unamortized discount........................... (1.0) 13.9
-------- --------
Total debt................................................... 1,450.8 1,402.5
Less: current maturities........................................ 63.2 78.0
-------- --------
Total long-term debt......................................... $1,387.6 $1,324.5
======== ========
At December 31, 2001, the maturities of long-term debt are as follows:
The proceeds of the Senior Secured Notes Due 2004 were used for the
construction of the Rockport Works and the notes are collateralized by
Rockport's hot-dip galvanizing and galvannealing line and its continuous cold
mill. In addition, at December 31, 2000 and 2001, $1.5 and $15.5, respectively,
of long-term debt, including current maturities, represents financing used to
construct certain other fixed assets, which are pledged as collateral.
On January 14, 1999, Armco redeemed the entire $111.0 outstanding principal
amount of its 9 3/8% Senior Notes Due 2000 at a price of 101.75% of their
principal amount. The redemption resulted in an extraordinary loss of $2.8
($1.7 after taxes, or $0.02 per share).
On February 10, 1999, AK Steel issued $450.0 principal amount of 7 7/8%
Senior Notes Due 2009 at 99.623% of their principal amount. On April 1, 1999,
AK Steel used $338.1 of the net proceeds from the sale of these notes to
finance the redemption of its 10 3/4% Senior Notes Due 2004 at a price of
104.031% of their principal amount. The redemption resulted in an extraordinary
loss of $19.3 ($11.7 after taxes, or $0.11 per share).
At December 31, 2001, the Company had $198.4 of availability under its
$300.0 accounts receivable purchase credit facility, which expires September
30, 2004, net of $101.6 used for letters of credit.
38
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
7. Operating Leases
Rental expense was $25.2, $25.7 and $19.9 for 1999, 2000 and 2001,
respectively.
At December 31, 2002, obligations to make future minimum lease payments were
as follows:
2002 $2.1
2003 1.7
2004 1.4
2005 1.0
2006 0.8
8. Pension and Other Postretirement Benefit Plans
The Company provides noncontributory pension benefits to most employees and
provides various health care and life insurance benefits to most retirees.
While the major pension plans are not fully funded, the Company would not be
obligated to make minimum funding contributions until at least 2003. Although
most retiree health and life insurance benefits are funded as claims are paid,
the Company has established a health care trust as a means of prefunding a
portion of these benefits.
Pension Benefits Other Benefits
------------------ --------------------
2000 2001 2000 2001
-------- -------- --------- ---------
Change in benefit obligations:
Benefit obligations at beginning of year......... $3,229.8 $3,136.7 $ 1,412.0 $ 1,476.5
Service cost..................................... 33.9 33.3 8.3 8.7
Interest cost.................................... 239.7 239.2 105.2 113.6
Plan participants' contributions................. -- -- 13.4 15.4
Actuarial loss/(gain)............................ (72.0) 244.1 58.7 192.4
Amendments....................................... 22.8 11.9 0.4 --
Benefits paid.................................... (317.5) (323.8) (121.5) (134.2)
-------- -------- --------- ---------
Benefit obligations at end of year............... $3,136.7 $3,341.4 $ 1,476.5 $ 1,672.4
======== ======== ========= =========
Change in plan assets:
Fair value of plan assets at beginning of year... $3,521.5 $3,472.4 $ 167.9 $ 161.6
Actual return on plan assets..................... 261.1 (212.8) 11.8 (8.3)
Employer contributions........................... 7.3 5.9 90.0 70.1
Plan participants' contributions................. -- -- 13.4 15.4
Benefits paid.................................... (317.5) (323.8) (121.5) (134.2)
-------- -------- --------- ---------
Fair value of plan assets at end of year..... $3,472.4 $2,941.7 $ 161.6 $ 104.6
======== ======== ========= =========
Funded status....................................... $ 335.7 $ (399.7) $(1,314.9) $(1,567.8)
Unrecognized net actuarial loss/(gain).............. (280.9) 331.5 (52.4) 166.5
Unrecognized prior service cost..................... 114.4 113.7 (87.0) (72.7)
Unrecognized initial net benefit obligation......... 8.2 1.9 -- --
-------- -------- --------- ---------
Net amount recognized........................ $ 177.4 $ 47.4 $(1,454.3) $(1,474.0)
======== ======== ========= =========
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost............................. $ 206.5 $ 1.4 $ -- $ --
Accrued benefit liability........................ (32.5) (334.4) (1,454.3) (1,474.0)
Intangible asset................................. 2.2 108.2 -- --
Accumulated other comprehensive income........... 1.2 272.2 -- --
-------- -------- --------- ---------
Net amount recognized........................ $ 177.4 $ 47.4 $(1,454.3) $(1,474.0)
======== ======== ========= =========
39
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Weighted average assumptions at year end for the consolidated Company are as
follows:
For measurement purposes, health care costs are assumed to increase 8%
during 2002, and thereafter this rate decreases 1% per year until reaching the
ultimate trend rate of 4.25% in 2006.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $42.1, $28.4 and $1.6, respectively, for 2000,
and $3,331.4, $3,262.8 and $2,931.5, respectively for 2001.
The components of net periodic benefit costs for the years 1999, 2000 and
2001 are as follows:
The fourth quarter pension charge was recorded to recognize a net actuarial
loss outside the 10% corridor under the Company's accounting for pensions and
other postretirement benefits as described in Note 1.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
One-Percentage-
Point
----------------
Increase Decrease
-------- --------
Effect on total service cost and interest cost components $ 12.2 $ (10.9)
Effect on postretirement benefit obligation.............. 139.7 (124.9)
40
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
In addition to defined benefit pension plans, most employees are eligible to
participate in various defined contribution plans. Total expense related to
these plans was $11.5 in 1999, $12.6 in 2000 and $2.2 in 2001. The 2001 expense
was significantly lower because no variable matching contribution was payable
to non-represented employees for the year.
9. Segment Information
The Company's Steel Operations currently consist of steel production and
finishing plants in Butler, Pennsylvania; Ashland, Kentucky; Coshocton,
Mansfield, Middletown, and Zanesville, Ohio; and Rockport, Indiana that produce
flat-rolled steels, including premium quality coated, cold-rolled and
hot-rolled carbon steel, and specialty stainless and electrical steels produced
in slab, hot band, sheet and strip form. Steel products are primarily for sale
to the domestic automotive, appliance, industrial machinery and equipment, and
construction markets. Steel Operations also include European trading companies
that buy and sell steel and manufactured steel products. At the beginning of
2000, a redundant galvanizing line in Dover, Ohio was shut down (Note 10).
The Company's Snow and Ice Control Products segment consists of Douglas
Dynamics, L.L.C., the largest North American manufacturer of snowplows, and
salt and sand spreaders for four-wheel drive light trucks.
In addition, the Company owns and operates Sawhill Tubular Products, a
manufacturer of a wide range of steel pipe and tubing products, and an
industrial park on the Houston, Texas ship channel. In 2001, the Company
acquired AK Tube L.L.C., a manufacturer of welded steel tubing. These
businesses are included in Other Operations, below.
On December 18, 2001, the Company announced that it had signed a letter of
intent to sell the assets of Sawhill Tubular to John Maneely Company. The sale,
which is expected to be completed in the first half of 2002, is contingent upon
approval by the boards of directors of both companies.
Accounting policies for the segments are the same as those described in the
summary of significant accounting policies in Note 1. Management evaluates the
performance of these segments based on their operating profit. All corporate
expenses and assets are included in the Steel Operations segment.
41
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Information regarding the Company's operating segments is as follows:
1999 2000 2001
-------- -------- --------
Net Sales:
Steel Operations.............. $4,055.3 $4,277.3 $3,653.6
Snow and Ice Control Products. 118.7 112.3 138.8
Other Operations.............. 194.3 221.9 201.7
-------- -------- --------
Total..................... $4,368.3 $4,611.5 $3,994.1
======== ======== ========
Operating Profit (Loss):
Steel Operations.............. $ 201.7 $ 300.7 $ (68.9)
Snow and Ice Control Products. 36.1 30.5 41.0
Other Operations.............. 7.0 7.0 8.3
-------- -------- --------
Total..................... $ 244.8 $ 338.2 $ (19.6)
======== ======== ========
Depreciation:
Steel Operations.............. $ 202.7 $ 223.8 $ 221.0
Snow and Ice Control Products. 2.9 2.7 2.9
Other Operations.............. 5.1 5.5 6.8
-------- -------- --------
Total..................... $ 210.7 $ 232.0 $ 230.7
======== ======== ========
Capital Investments:
Steel Operations.............. $ 314.5 $ 127.2 $ 101.4
Snow and Ice Control Products. 7.5 5.0 3.0
Other Operations.............. 15.2 5.5 4.3
-------- -------- --------
Total..................... $ 337.2 $ 137.7 $ 108.7
======== ======== ========
Total Assets:
Steel Operations.............. $5,042.1 $5,044.0 $4,990.8
Snow and Ice Control Products. 72.6 71.0 74.5
Other Operations.............. 112.4 124.8 160.5
-------- -------- --------
Total..................... $5,227.1 $5,239.8 $5,225.8
======== ======== ========
As a result of continued growth in the Snow and Ice Control Products
business, its operations were reclassified from Other Operations in 2001. All
prior periods were restated to reflect this change.
Steel Operations net sales to General Motors Corporation, the Company's
largest customer, accounted for approximately 15%, 15% and 18% of the segment's
net sales in 1999, 2000 and 2001, respectively. No other customer accounted for
more than 10% of segment net sales for any of these years.
Steel Operations net sales to customers located outside the United States
totaled $263.1, $332.0 and $407.1 for 1999, 2000 and 2001, respectively.
Steel Operations operating profit (loss) in 1999 includes $99.7 of special
charges and in 2001 includes $49.9 in an unusual gain and $192.2 of the fourth
quarter pension charge (Note 10). Steel Operations operating profit (loss) also
includes income (loss) from equity companies of $2.1, $(1.4) and $0.8 for 1999,
2000 and 2001, respectively.
42
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
10. Special Charges and Unusual Items
In 1999, the Company recognized $99.7 in special charges for costs related
to the merger with Armco, including $28.5 of expenses incurred for 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 the closure of a redundant
facility. Approximately $54.0 of the $99.7 required the outlay of cash in 1999,
with additional cash payments of approximately $7.0 made in 2000 and $0.5 made
in 2001. With the exception of certain employee benefits 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.
The charge for closure of the redundant facility relates to the shutdown of
the carbon steel galvanizing plant in Dover, Ohio. The plant ceased production
on December 17, 1999. The announced closure, effective January 29, 2000,
resulted in the termination of 120 employees, the majority of which were
represented hourly production workers. The following provides details of that
portion of the special charge relating to the closure:
In the fourth quarter of 2001, the Company's primary health insurance
provider converted from a mutual insurance company to a corporation, issuing
shares of its common stock to certain of its long-time policyholders. As a
major policyholder, AK Steel received shares of common stock, recording a
benefit of $49.9. This benefit is net of a liability established to provide
compensation to Company employees and retirees who contributed a small portion
of the premiums for the applicable plans of the insurance provider.
As more fully explained in Note 1 in the paragraph entitled Pension and
Other Postretirement Benefits Accounting, under its method of accounting for
pension and other postretirement benefit plans, the Company recognized, as a
fourth quarter 2001 unusual item, a non-cash pension charge of $194.0.
11. Commitments
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 annual and
multi-year agreements. Most purchases of carbon steel slabs, carbon and
stainless steel scrap, natural gas and other raw materials are made at
prevailing market prices, which are subject to fluctuation in accordance with
supply and demand. AK Steel believes that adequate sources of supply exist for
all of its energy and raw material requirements.
The Company has entered into derivative transactions to hedge the price of
natural gas and certain raw materials. As of December 31, 2001, current and
noncurrent liabilities on the consolidated balance sheets include $33.8 and
$6.0, respectively, for the fair value of these derivatives. The effect on cash
of settling these liabilities is expected to be offset by lower prices paid for
the related commodities.
At December 31, 2001, commitments for future capital investments totaled
approximately $46.7, all of which will be funded in 2002.
43
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
12. Legal, Environmental Matters and Contingencies
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
The Company has expended the following for environmental-related capital
investments and environmental compliance:
1999 2000 2001
----- ----- -----
Environmental related capital investments $ 7.1 $10.1 $18.8
Environmental compliance costs........... 85.9 93.5 99.5
In addition to the items discussed below, the Company is involved in routine
litigation, environmental proceedings, and claims pending with respect to
matters arising out of the normal conduct of the business. Except to the
limited extent noted below with respect to the claims in the Federal Action,
management believes that the ultimate disposition of the following 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.
AK Steel and its predecessors have been conducting steel manufacturing and
related operations for more than 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 in the past 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 may 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, AK Steel could be directed to expend funds
for remedial activities at the former disposal areas. Because of the uncertain
status of these investigations, however, management cannot predict whether or
when such expenditures might be required or their magnitude.
On July 27, 2001, AK Steel received a Special Notice Letter from the EPA
requesting that AK Steel agree to conduct a Remedial Investigation/Feasibility
Study ("RI/FS") and enter into an administrative order on consent pursuant to
Section 122 of CERCLA regarding the former Hamilton Plant of Armco located in
New Miami, Ohio. The Hamilton Plant is no longer an operating steel mill,
having ceased operations in 1990, and all of its former structures have been
demolished and removed. While AK Steel does not agree that a site-wide RI/FS is
necessary or appropriate at this time, AK Steel has offered to negotiate with
the EPA concerning the specific terms and conditions under which it would
conduct such a study. If an agreement with the EPA cannot be reached on the
specific terms and conditions of the proposed RI/FS, AK Steel intends to
contest this matter vigorously.
44
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
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 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.
In addition, AK Steel is negotiating with the EPA for an order concerning these
same waste management issues.
On June 29, 2000, the United States filed a complaint on behalf of the EPA
against AK Steel in the U. S. District Court for the Southern District of Ohio
(the "Federal Action") 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 (the "State Action") against the State of Ohio and the OEPA
seeking a declaration that, among other things, (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 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 Federal Action. On March 29, 2001, the
U.S. District Court ruled that the State of Ohio could conditionally intervene
in the Federal Action. Subsequently, Ohio filed a conditional complaint, which
included various environmental claims, including seven air pollution claims. On
May 9, 2001, AK Steel moved to dismiss all of Ohio's claims in the Federal
Action. On July 27, 2001, the Court of Common Pleas in the State Action
declared null and void two Notices of Violation issued by the OEPA upon which
certain of the air pollution claims of the EPA and Ohio in the Federal Action
were predicated. Subsequently, the court held that that effectively concludes
the State Action. AK Steel has appealed that holding to the 12/th District
Court of Appeals in Butler County, Ohio. On October 17, 2001, the OEPA issued a
similar new Notice of Violation, but moved to amend its conditional complaint
in the Federal Action to withdraw four of its air pollution claims, which were
predicated on the two original Notices of Violation that were declared null and
void. On September 27, 2001, the U.S. District Court dismissed with prejudice
the EPA's air pollution claim, which had been predicated on the two voided
Notices of Violation letters. In addition, on December 19, 2001, the U.S.
District Court stayed the remaining three air pollution claims of the OEPA in
the Federal Action pending resolution of a related administrative appeal to the
Ohio Environmental Review Appeals Commission addressing the newly issued OEPA
Notice of Violation. AK Steel's motion to dismiss the OEPA claims not yet
dismissed in the Federal Action remains pending. No trial date has yet been set
in the Federal Action. AK Steel is vigorously contesting all of the remaining
claims. If OEPA and/or the EPA are completely successful in obtaining the
relief they seek in the Federal Action with respect to their air pollution
claims, it could result in significant penalties and require a substantial
capital investment to install interim pollution control equipment on the blast
furnace and basic oxygen furnaces at the Middletown Works /
45
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
under current federal pollution control regulations before certain proposed new
federal regulations are made final. Once those proposed new federal regulations
become final, AK Steel could be required to make another substantial capital
investment to replace the interim pollution control equipment. Under those
circumstances, the Company may conclude that it is more cost-effective to
purchase slabs than to make them at the Middletown Works and may elect to shut
down the hot end facilities of the Middletown Works. If the EPA and OEPA are
completely successful in obtaining the relief they seek in the Federal Action
with respect to their water and/or RCRA claims, it could result in substantial
penalties and an order requiring AK Steel to investigate and remediate alleged
polychlorinated biphenyl and polycyclic aromatic hydrocarbon contamination in
Monroe Ditch and Dick's Creek, which are located on and adjacent to the
Middletown Works. At this time, the Company is unable to estimate the cost of
an adverse outcome related to the air pollution, water pollution or RCRA claims
or the potential cost of a shutdown of the hot end of the Middletown Works.
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring it to develop a plan for investigation of eight areas of
the Mansfield Works that allegedly could be sources of contamination. A site
investigation began in November 2000 and is continuing.
On June 27, 2000, the EPA issued an Emergency Order pursuant to the Safe
Drinking Water Act to AK Steel's Butler Works located in Butler, Pennsylvania
concerning discharge of nitrate/nitrite compounds to the Connoquenessing Creek,
an occasional water source for the Borough of Zelienople. On March 2, 2001, AK
Steel entered in an agreed administrative order with the EPA calling for, among
other things, a decrease in the levels of nitrates and nitrites in the treated
water discharged to waters of the Commonwealth of Pennsylvania by AK Steel's
Butler Works and for the provision of emergency drinking water for Zelienople
during certain times when it must draw drinking water from the Connoquenessing
Creek. AK Steel has taken and is continuing to take the measures necessary to
comply with that order.
On July 13, 2001, Orinoco Iron, C.A. ("Orinoco") filed an action against AK
Steel in the United States District Court for the Southern District of Ohio,
Case No. C-1-01-461. Orinoco and AK Steel are parties to a contract whereby
Orinoco supplies AK Steel with a form of iron ore referred to as hot briquetted
iron ("HBI"). Orinoco asserts claims for breach of contract, repudiation of
contract and breach of a covenant of good faith and fair dealing with respect
to that HBI supply contract and is seeking damages in excess of $60.0. AK Steel
has filed a response to the Complaint in which it denies Orinoco's claims and
asks the court to reform the HBI supply contract to reflect the original intent
of the parties that the price paid by AK Steel under that contract would more
closely track the world price for HBI. Discovery is underway. Trial is
tentatively scheduled for April 2003. AK Steel intends to contest Orinoco's
claims vigorously.
In April 2000, a class action was filed in the United States District Court
for the Southern District of Ohio by Bernard Fidel and others 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 are vigorously defending this
action. AK Steel has filed a motion to dismiss the action, which currently is
pending. Discovery is stayed pending resolution of the motion to dismiss. No
trial date has been scheduled.
A number of lawsuits alleging asbestos exposure are pending and continue to
be filed against AK Steel. The majority of these lawsuits have been filed in
Texas and relate to the former Houston Works facility. Such cases typically
involve a large number of plaintiffs claiming against a large number of
defendants. AK Steel is normally named as a defendant by a small percentage of
the plaintiffs who typically were frequenters (independent contractors,
delivery personnel, etc.) claiming that they were exposed to asbestos while
they were on the premises. AK Steel is actively and vigorously defending these
cases.
46
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
On January 2, 2002, John D. West, a former employee, filed a purported class
action in the United States District Court for the Southern District of Ohio
against the AK Steel Corporation Retirement Accumulation Pension Plan (the "AK
RAPP") and the AK Steel Corporation Benefit Plans Administrative Committee (the
"AK BPAC") claiming that the method used under the AK RAPP to determine lump
sum distributions is improper and that, as a result, the benefits previously
paid to plaintiff and putative class members from the AK RAPP were understated
in violation of the Employment Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986. The AK RAPP is the cash balance plan component
of the AK Steel Noncontributory Pension Plan (the "AK NCPP"). The AK NCPP
provides that the Company will indemnify members of AK BPAC from any liability
and expense incurred by reason of serving as a member of AK BPAC. Because the
action was only recently filed, the defendants have not yet responded to the
Complaint and no discovery has yet commenced. The defendants intend to contest
this matter vigorously.
At December 31, 2001, the Company had recorded $12.3 in current accrued
liabilities and $36.7 in noncurrent other liabilities on its consolidated
balance sheets for estimated probable costs relating to environmental matters.
13. Discontinued Operations
Certain of Armco's former businesses included operations in foreign
countries. At the time of their sale or closure, some of these operations had
unresolved tax issues in those countries. Following consultation with local
country advisors in 1999, Armco determined that it had resolved most of these
issues and reversed a majority of the related reserves, recognizing income of
$7.5, or $0.07 per share, in discontinued operations.
14. Consolidated Quarterly Sales and Earnings (Unaudited)
Earnings per share for each quarter and the year are calculated individually
and may not add to the total for the year.
2000
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Net sales..................... $1,162.0 $1,249.7 $1,140.0 $1,059.8 $4,611.5
Gross profit.................. 203.3 243.7 221.3 169.5 837.8
Net income.................... 26.5 49.1 41.3 15.5 132.4
Basic earnings per share... 0.24 0.44 0.38 0.14 1.20
Diluted earnings per share. 0.24 0.44 0.38 0.14 1.20
2001
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- -------- -------- ------- --------
Net sales..................... $998.8 $1,022.2 $1,000.1 $973.0 $3,994.1
Gross profit.................. 135.1 159.4 143.7 182.3 620.5
Net income (loss)............. (12.8) 2.7 (5.9) (76.4) (92.4)
Basic earnings per share... (0.12) 0.02 (0.06) (0.71) (0.87)
Diluted earnings per share. (0.12) 0.02 (0.06) (0.71) (0.87)
Included in the net loss for the fourth quarter and full year of 2001 was a
pension charge of $194.0 ($122.2 net of tax) and a benefit of $49.9 ($31.4 net
of tax) for the shares received in the insurance provider's demutualization
(Note 10).
47
Item 9. Changes in and Disagreements with Accountants.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the Company's Executive Officers is set forth in
Part I of this Annual Report pursuant to General Instruction G of Form 10-K.
The information required to be furnished pursuant to this item with respect to
Directors of the Company will be set forth under the caption "Election of
Directors" in the Company's proxy statement (the "2002 Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by the
Company's Board of Directors for use at the Annual Meeting of Stockholders, and
is incorporated herein by reference.
The information required to be furnished pursuant to this item with respect
to compliance with Section 16(a) of the Exchange Act will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the 2002 Proxy Statement,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this item will be set
forth under the caption "Stock Ownership," in the 2002 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to this item will be set
forth under the captions "Certain Relationships and Transactions" in the 2002
Proxy Statement, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.
(a) The list of financial statements filed as part of this report is
submitted as a separate section, the index to which is located on page 16.
Financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the information is set
forth in the financial statements or notes thereto.
(b) Reports on Form 8-K filed during the fourth quarter of 2001 were:
Item Reported Date
------------- ----
Judge Dismisses Pollution Claim Against Company............................ October 10, 2001
Supplemental Financial Information and Earnings Release.................... October 24, 2001
Non-binding Letter of Intent to Sell Sawhill Tubular Division Assets Signed December 18, 2001
(c) Exhibits:
List of exhibits begins on next page.
48
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on December 20, 1993, as amended (incorporated herein by reference to Exhibit 3.1.1 to
the Company's Current Report on Form 8-K, as filed with the Commission on May 27, 1998).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-74432), as filed with the Commission on
January 26, 1994).
3.3 Certificate of Designations, Preferences, Rights and Limitations of Series A Junior Preferred Stock
(included in Exhibit 10.16).
3.4 Certificate of Designations of Series B $3.625 Cumulative Convertible Preferred Stock (incorporated
herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
4.1 Indenture, dated as of October 1, 1992, relating to the Company's 9% Senior Notes Due 2007 (the
"1992 Indenture") (incorporated herein by reference to Exhibit 4 to the Registration Statement of
Armco Inc. on Form S-3 (Registration No. 33-51806), as filed with the Commission on September 9,
1992).
4.2 Supplemental Indenture No. 2, dated as of September 1, 1997, to the 1992 Indenture (incorporated
herein by reference to Exhibit 4.4 to the Registration Statement of Armco Inc. on Form S-4
(Registration No. 333-36691), as filed with the Commission on September 30, 1997).
4.3 Supplemental Indenture No. 3, dated as of July 30, 1999, to the 1992 Indenture (incorporated herein
by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.4 Supplemental Indenture No. 4, dated as of September 30, 1999, to the 1992 Indenture (incorporated
herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.5 Supplemental Indenture No. 5, dated as of October 1, 1999, to the 1992 Indenture (incorporated
herein by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.6 Indenture, dated as of November 1, 1993, relating to the Company's 8-7/8% Senior Notes Due 2008
(the "1993 Indenture") (incorporated herein by reference to Exhibit 4 to the Registration Statement of
Armco Inc. on Form S-3 (Registration No. 33-50205), as filed with the Commission on September 9,
1993).
4.7 Supplemental Indenture No. 2, dated as of December 15, 1998, to the 1993 Indenture (incorporated
herein by reference to Exhibit 4.3 to the Registration Statement of Armco Inc. on Form S-4
(Registration No. 333-71203), as filed with the Commission on January 26, 1999).
4.8 Supplemental Indenture No. 3, dated as of July 30, 1999, to the 1993 Indenture (incorporated herein
by reference to Exhibit 4.8 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.9 Supplemental Indenture No. 4, dated as of September 30, 1999, to the 1993 Indenture (incorporated
herein by reference to Exhibit 4.9 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.10 Supplemental Indenture No. 5, dated as of October 1, 1999, to the 1993 Indenture (incorporated
herein by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
49
Exhibit
Number Description
------ -----------
4.11 Indenture, dated as of December 17, 1996, relating to the Company's 9-1/8% Senior Notes Due 2006
(the "1996 Indenture") (incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-19781), as filed with the Commission on
January 14, 1997).
4.12 First Supplemental Indenture, dated as of August 6, 1999, to the 1996 Indenture (incorporated herein
by reference to Exhibit 4.11 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.13 Second Supplemental Indenture, dated as of October 1, 1999, to the 1996 Indenture (incorporated
herein by reference to Exhibit 4.12 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.14 Indenture, dated as of February 10, 1999, relating to the Company's 7-7/8% Senior Notes Due 2009
(the "1999 Indenture") (incorporated herein by reference to Exhibit 1 to the Company's Current
Report on Form 8-K, as filed with the Commission on February 17, 1999).
4.15 First Supplemental Indenture, dated as of August 6, 1999, to the 1999 Indenture (incorporated herein
by reference to Exhibit 4.13 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.16 Second Supplemental Indenture, dated as of October 1, 1999, to the 1999 Indenture (incorporated
herein by reference to Exhibit 4.14 to the Company's Current Report on Form 8-K, as filed with the
Commission on October 21, 1999).
4.17 Form of Note Purchase Agreement, dated as of December 17, 1996, relating to the Company's
Senior Secured Notes, Series A-E, Due 2004 (incorporated herein by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-4 (Registration No. 333-19781), as filed with the
Commission on January 14, 1997).
4.18 Supplemental Agreement, dated as of July 28, 1999, amending the Note Purchase Agreements, dated
as of December 17, 1996, relating to the Company's Senior Secured Notes, Series A-E, Due 2004
(incorporated herein by reference to Exhibit 4.15 to the Company's Current Report on Form 8-K, as
filed with the Commission on October 21, 1999).
4.19 Guarantee Agreement, dated as of September 30, 1999, by Douglas Dynamics, L.L.C. pursuant to the
Note Purchase Agreements, dated as of December 17, 1996, as amended, relating to the Company's
Senior Secured Notes, Series A-E, Due 2004 (incorporated herein by reference to Exhibit 4.16 to the
Company's Current Report on Form 8-K, as filed with the Commission on October 21, 1999).
10.1 Form of Executive Officer (Other Than CEO) Severance Agreement, as amended and restated
through March, 2000. (incorporated herein by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000).
10.2 Form of Executive Officer Severance Agreement--Richard M. Wardrop, Jr. (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.3 Form of Executive Officer Severance Agreement--James L. Wareham (incorporated herein by
reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.4 Annual Management Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998).
10.5 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
50
Exhibit
Number Description
------ -----------
10.6 Executive Minimum and Supplemental Retirement Plan. (incorporated herein by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000).
10.7 Amended and Restated Receivables Purchase Agreement, dated as of October 1, 1999, between AK
Steel and AK Steel Receivables Ltd. (incorporated herein by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000).
10.8 Amended and Restated Purchase and Servicing Agreement, dated as of October 1, 1999, among AK
Steel Receivables Ltd., AK Steel, the institutions from time to time party thereto and PNC Bank,
National Association. (incorporated herein by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000).
10.9 First Consent and Amendment Agreement, dated as of December 21, 1999, to the Purchase and
Servicing Agreement, dated as of October 1, 1999, among AK Steel Receivables Ltd., AK Steel, the
institutions from time to time party thereto and PNC Bank, National Association. (incorporated
herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000).
10.10 Deferred Compensation Plan for Management (incorporated herein by reference to Exhibit 10.29 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
10.11 Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
10.12 Rights Agreement, dated as of January 23, 1996, between the Company and the Bank of New York
as predecessor to Fifth Third Bank, as Rights Agent, with respect to the Company's Stockholder
Rights Plan (incorporated by reference to Exhibit 1 to the Company's Registration Statement on
Form 8-A under the Securities Exchange Act of 1934, as filed with the Commission on February 5,
1996).
10.13 Substitution of The Fifth Third Bank as Successor Rights Agent and Amendment No. 1, dated
September 15, 1997, to Rights Agreement dated as of January 23, 1996 (incorporated herein by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, as filed with the
Commission on September 15, 1997).
10.14 Instrument of Resignation, Appointment and Acceptance, dated as of September 15, 1997, with
respect to resignation of The Bank of New York as Trustee and the appointment of The Fifth Third
Bank as Successor Trustee under the 1996 Indenture (incorporated herein by reference to Exhibit 4.3
to the Company's Current Report on Form 8-K, dated September 15, 1997).
10.15 Long Term Performance Plan (incorporated herein by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.26 First Amendment, dated July 17, 1997, to Executive Minimum and Supplemental Retirement Plan
(incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.27 Second Amendment, dated September 18, 1997, to Executive Minimum and Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
*11 Statement re: Computation of Per Share Earnings.
*12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of the Company.
*23 Independent Auditors' consent.
* Filed herewith
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Middletown, State of
Ohio, on March 15, 2002.
AK STEEL HOLDING CORPORATION
/S/ JAMES L. WAINSCOTT
By:________________________________
James L. Wainscott
Senior Vice President and
Chief Financial Officer
(and principal accounting officer)
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Signature Title Date
/S/ RICHARD M. WARDROP, JR. Chairman, Chief Executive March 15, 2002
----------------------------- Officer & President
Richard M. Wardrop, Jr.
/S/ JAMES L. WAINSCOTT Senior Vice President and March 15, 2002
----------------------------- Chief Financial Officer
James L. Wainscott (and principal accounting
officer)
/S/ RICHARD A. ABDOO Director March 15, 2002
-----------------------------
Richard A. Abdoo
/S/ ALLEN BORN Director March 15, 2002
-----------------------------
Allen Born
/S/ DONALD V. FITES Director March 15, 2002
-----------------------------
Donald V. Fites
/S/ DR. BONNIE G. HILL Director March 15, 2002
-----------------------------
Dr. Bonnie G. Hill
/S/ ROBERT H. JENKINS Director March 15, 2002
-----------------------------
Robert H. Jenkins
/S/ LAWRENCE A. LESER Director March 15, 2002
-----------------------------
Lawrence A. Leser
/S/ DANIEL J. MEYER Director March 15, 2002
-----------------------------
Daniel J. Meyer
/S/ DR. JAMES A. THOMSON Director March 15, 2002
-----------------------------
Dr. James A. Thomson
52
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
See Notes 1 and 14 of the accompanying Notes to Consolidated Financial
Statements included in Item 8.
EXHIBIT 12
AK STEEL HOLDING CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
(dollars in millions)
-------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Pretax Income (Loss) $321.0 $309.4 $141.9 $210.1 $(146.7)
Interest expense 111.7 84.9 123.7 136.1 133.1
Interest factor in rent expense 2.6 2.5 3.0 3.0 2.4
Undistributed income from equity companies 0.9 1.5 (1.4) 1.4 (1.0)
--------------------------------------------------------------
Total earnings $436.2 $398.3 $267.2 $350.6 $ (12.2)
Total combined fixed charges $177.8 $173.8 $173.9 $143.2 $ 139.7
Ratio of earnings to combined fixed charges 2.5 2.3 1.5 2.4 NM*
Combined fixed charges:
Preferred dividends $42.3 $27.0 $25.8 $ 1.6 $ 1.4
Interest expense 111.7 84.9 123.7 136.1 133.1
Capitalized interest credit 21.2 59.4 21.4 2.5 2.8
Interest factor in rent expense 2.6 2.5 3.0 3.0 2.4
--------------------------------------------------------------
Total combined fixed charges $177.8 $173.8 $173.9 $142.6 $ 139.7
* In 2001, earnings were $151.9 less than fixed charges.
EXHIBIT 21
AK STEEL HOLDING CORPORATION SUBSIDIARIES
State/Country of
Name Incorporation
---- -------------
Advanced Materials Processing Inc. Delaware
AFSG Holdings, Inc. Delaware
AH Management, Inc. Delaware
AH (UK) Inc. Delaware
AJV Investments Corporation Delaware
AK Asset Management Company Delaware
AK Steel Properties, Inc. Delaware
AK Steel Receivables Ltd. Ohio
AK Steel Corporation Delaware
AK Steel Foreign Sales Corporation Barbados
AK Tube, L.L.C. Delaware
AKS Coating Inc. Ohio
AKS Hydroform Ohio
AKS Investments, Inc. Ohio
AKS Processing, Inc. Ohio
AKSR Investments, Inc. Ohio
Armco Advanced Materials, Inc. Delaware
Armco BV Holland Netherlands
Armco Europe Limited United Kingdom
Armco Financial Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco GMBH Germany
Armco Grundstucksverwaltungs GMBH Germany
Armco Insurance Group Inc. Delaware
Armco Investment Management, Inc. Delaware
Armco Limited United Kingdom
Armco Merchandising SA Belgium Belgium
Armco Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Armco SA Spain
Armco S.A.R.L. France
Armco SMM SRL Italy Italy
Armco Steel Corporation Ohio
Combined Metals Holding, Inc. Nevada
Combined Metals of Chicago, LLC Illinois
Compass Insurance Company New York
DDI Holding, Inc. Delaware
Douglas Dynamics, L.L.C. Delaware
Eveleth Mines L.L.C. (EVTAC) Minnesota
Everest International, Inc. Ohio
Feralloy/Armco Specialty Processing Company Delaware
First Stainless, Inc. Delaware
First Taconite Company Delaware
FSA Services Corp. Delaware
Materials Insurance Company Cayman Islands
Northwestern National Insurance Company of Milwaukee, Wisconsin Wisconsin
Rockport Inc. Ohio
Rockport Roll Shop L.L.C. Delaware
Strata Energy Ohio
Vicksmetal/Armco Associates Delaware
Virginia Horn Taconite Company Minnesota
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-60151, Post-Effective Amendment No. 2 to Registration Statement No.
333-04505, and Post-Effective Amendment No. 5 to Registration Statement No.
33-84578 of AK Steel Holding Corporation on Forms S-8 of our report dated
January 30, 2002, appearing in this Annual Report on Form 10-K of AK Steel
Holding Corporation for the year ended December 31, 2001.
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