SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 2002 Commission File No. 1-13696
AK STEEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1401455
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
703 Curtis Street, Middletown, Ohio 45043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 425-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
107,894,590 shares of common stock
----------------------------------
(as of July 29, 2002)
AK STEEL HOLDING CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three- and Six-Month Periods Ended June 30, 2001 and 2002 1
Condensed Consolidated Balance Sheets -
December 31, 2001 and June 30, 2002 2
Condensed Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 2001 and 2002 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of the
Consolidated Financial Statements 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
---- ---- ----- ----
Net sales $ 984.2 $1,141.5 $1,940.0 $2,109.2
Cost of products sold (exclusive of items shown below) 827.1 975.6 1,651.4 1,854.7
Selling and administrative expenses 62.7 64.3 124.2 129.8
Depreciation 58.0 55.6 116.0 113.0
Insurance settlement (Note 5) -- (23.9) -- (23.9)
-------- -------- -------- --------
Total operating costs 947.8 1,071.6 1,891.6 2,073.6
Operating profit 36.4 69.9 48.4 35.6
Interest expense 33.1 34.7 67.5 66.5
Gain on sale of Anthem stock (Note 6) -- -- -- 24.1
Other income 1.9 2.1 3.7 2.6
-------- -------- -------- --------
Income (loss) before income taxes 5.2 37.3 (15.4) (4.2)
Income tax provision (benefit) 1.9 13.8 (5.7) (1.6)
-------- -------- -------- --------
Income (loss) from continuing operations 3.3 23.5 (9.7) (2.6)
Loss from discontinued operations, net of tax (Note 11) 0.6 1.0 0.4 0.5
Loss on sale of Sawhill Tubular, net of tax (Note 11) -- 6.3 -- 6.3
-------- -------- -------- --------
Net income (loss) $ 2.7 $ 16.2 $ (10.1) $ (9.4)
======== ======== ======== ========
Earnings per share: (Note 2) Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.03 $ 0.22 $ (0.10) $ (0.03)
Loss from discontinued operations 0.01 0.01 -- --
Loss on sale of Sawhill Tubular -- 0.06 -- 0.06
-------- ------- -------- --------
Net income (loss) $ 0.02 $ 0.15 $ (0.10) $ (0.09)
======== ======= ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.03 $ 0.22 $ (0.10) $ (0.03)
Loss from discontinued operations 0.01 0.01 -- --
Loss on sale of Sawhill Tubular -- 0.06 -- 0.06
-------- ------- -------- --------
Net income (loss) $ 0.02 $ 0.15 $ (0.10) $ (0.09)
======== ======= ======== ========
Cash dividends per common share $0 .0625 $ -- $ 0.125 $ --
Common shares and common share equivalents outstanding (weighted average in
millions):
For basic earnings per share 107.8 107.9 107.8 107.9
For diluted earnings per share 108.0 108.2 107.8 107.9
-----------
See notes to consolidated financial statements
-1-
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions)
ASSETS December 31, June 30,
2001 2002
---------------- ----------------
Current Assets:
Cash and cash equivalents (Note 12) $ 101.0 $ 843.9
Accounts receivable 388.0 514.2
Inventories (Note 3) 904.6 824.7
Deferred tax asset (Note 7) 76.6 62.5
Current assets held for sale (Note 11) 60.6 --
Other current assets 17.0 26.6
--------- ---------
Total Current Assets 1,547.8 2,271.9
--------- ---------
Property, Plant and Equipment 4,742.9 4,796.0
Less accumulated depreciation (1,974.6) (2,087.5)
--------- ---------
Property, plant and equipment, net 2,768.3 2,708.5
--------- ---------
Other Assets:
Investment in AFSG Holdings, Inc. 55.6 55.6
Other investments (Note 6) 154.3 86.4
Goodwill (Note 4) 109.7 109.7
Other intangible assets (Note 4) 111.9 111.6
Deferred tax asset (Note 7) 393.5 358.1
Noncurrent assets held for sale (Note 11) 24.4 --
Other assets 60.3 66.8
--------- ---------
TOTAL ASSETS $ 5,225.8 $5,768.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 537.6 $ 492.6
Accrued liabilities 270.5 261.9
Current portion of long-term debt (Note 12) 78.0 627.6
Current portion of pension and other postretirement benefit obligations 68.3 67.2
--------- ---------
Total Current Liabilities 954.4 1,449.3
--------- ---------
Noncurrent Liabilities:
Long-term debt (Note 12) 1,324.5 1,322.2
Pension and other postretirement benefit obligations 1,740.1 1,788.5
Other liabilities 173.5 170.3
--------- ---------
Total Noncurrent Liabilities 3,238.1 3,281.0
--------- ---------
TOTAL LIABILITIES 4,192.5 4,730.3
--------- ---------
Stockholders' Equity:
Preferred stock 12.5 12.5
Common stock, authorized 200,000,000 shares of $.01 par value each;
issued 2001, 115,987,777 shares, 2002, 116,285,376 shares;
outstanding 2001, 107,713,329 shares, 2002, 107,891,942 shares 1.2 1.2
Additional paid-in capital 1,807.2 1,809.7
Treasury stock, common shares at cost, 2001, 8,274,448 shares;
2002, 8,393,434 shares (120.4) (122.0)
Accumulated deficit (479.9) (489.3)
Accumulated other comprehensive loss (Note 8) (187.3) (173.8)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,033.3 1,038.3
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,225.8 $ 5,768.6
========= =========
----------
See notes to consolidated financial statements.
-2-
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Six months Ended
June 30,
-------------------------
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10.1) $ (9.4)
Depreciation 116.0 113.0
Amortization 8.1 5.0
Deferred income taxes (5.4) 44.9
Working capital (28.6) (70.8)
Other (42.5) 38.7
------- ------
Net cash flows from operating activities of continuing operations 37.5 121.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (45.6) (53.1)
Proceeds from sale of investments 31.6 82.0
Proceeds from sale of business -- 62.8
Other (5.4) (10.2)
------- ------
Net cash flows from investing activities of continuing operation (19.4) 81.5
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing long-term debt -- 538.1
Principal payments on long-term debt (0.3) (0.4)
Common stock dividends paid (13.5) --
Preferred stock dividends paid (0.5) --
Other (0.9) (0.8)
------- ------
Net cash flows from financing activities of continuing operations (15.2) 536.9
Cash flows from discontinued operations 15.8 3.1
------- ------
Net increase in cash and cash equivalents 18.7 742.9
Cash and cash equivalents, beginning of period 86.8 101.0
------- ------
Cash and cash equivalents, end of period $ 105.5 $843.9
======= ======
Supplemental disclosure of cash flow information:
Net cash paid (received) during the period for:
Interest, net of capitalized interest $ 76.0 $ 61.9
Income taxes 0.1 (45.4)
Supplemental disclosure of non-cash investing and financing activities
Issuance of restricted stock $ 0.3 $ 3.3
----------
See notes to consolidated financial statements.
-3-
AK STEEL HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
--------------------------------------------------------------------------------
1. Basis of Presentation
In the opinion of the management of AK Steel Holding Corporation ("AK
Holding") and AK Steel Corporation ("AK Steel", and together with AK
Holding, the "Company"), the accompanying condensed consolidated financial
statements contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of the
Company as of June 30, 2002, the results of its operations for the three
and six-month periods ended June 30, 2001 and 2002, and cash flows for the
six-month periods ended June 30, 2001 and 2002. The results of operations
for the six months ended June 30, 2002 are not necessarily indicative of
the results to be expected for the year ending December 31, 2002. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements of AK Holding for the
year ended December 31, 2001.
As more fully described in Note 11, the Company sold the assets of Sawhill
Tubular Division on April 19, 2002. In accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which the Company adopted on January 1,
2002, the results of this business and the assets sold have been
reclassified in these condensed consolidated financial statements to
discontinued operations and assets held for sale for all periods presented.
2. Earnings Per Share
Preferred stock dividends are cumulative and, while not declared in the
three and six months ended June 30, 2002, are included in the following
calculation.
Three Months Ended Six Months Ended
June 30, June 30,
---------- ----------
2001 2002 2001 2002
---- ---- ---- ----
Income (loss) for calculation of basic earnings per share:
Income (loss) from continuing operations $ 3.3 $ 23.5 $ (9.7) $ (2.6)
Less: Preferred stock dividends 0.3 0.3 0.5 0.5
------ ------ ------ -------
Income (loss) from continuing operations
available to common stockholders 3.0 23.2 (10.2) (3.1)
Loss from discontinued operations 0.6 1.0 0.4 0.5
Loss on sale of Sawhill Tubular -- 6.3 -- 6.3
------ ------ ------- -------
Net income (loss) available to common stockholders $ 2.4 $ 15.9 $ (10.6) $ (9.9)
====== ====== ======= =======
Weighted average common shares (in millions) 107.8 107.9 107.8 107.9
====== ====== ======= =======
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.03 $ 0.22 $ (0.10) $ (0.03)
Loss from discontinued operations 0.01 0.01 -- --
Loss on sale of Sawhill Tubular -- 0.06 -- 0.06
------ ------ ------- -------
Net income (loss) $ 0.02 $ 0.15 $ (0.10) $ (0.09)
====== ====== ======= =======
Income (loss) for calculation of diluted earnings per share:
Income (loss) from continuing operations $ 3.3 $ 23.5 $ (9.7) $ (2.6)
Less: Preferred stock dividends 0.3 0.3 0.5 0.5
------ ------ ------- -------
Income (loss) from continuing operations
available to common stockholders 3.0 23.2 (10.2) (3.1)
Loss from discontinued operations 0.6 1.0 0.4 0.5
Loss on sale of Sawhill Tubular -- 6.3 -- 6.3
------ ------ ------- -------
Net income (loss) available to common stockholders $ 2.4 $ 15.9 $ (10.6) $ (9.9)
====== ====== ======= =======
Weighted average common shares (in millions) 107.8 107.9 107.8 107.9
Common stock options outstanding 0.2 0.3 -- --
------ ------ ------- ------
Common shares outstanding as adjusted 108.0 108.2 107.8 107.9
====== ====== ======= =======
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.03 $ 0.22 $ (0.10) $ (0.03)
Loss from discontinued operations 0.01 0.01 -- --
Loss on sale of Sawhill Tubular -- 0.06 -- 0.06
------ ------- ------- -------
Net income (loss) $ 0.02 $ 0.15 $ (0.10) $ (0.09)
====== ====== ======= =======
-4-
3. Inventories
Inventories are valued at the lower of cost or market. The cost of the
majority of inventories is measured on the last in, first out (LIFO)
method. Other inventories are measured principally at average cost.
December 31, June 30,
2001 2002
------------ --------
Finished and semi-finished $734.9 $677.7
Raw materials 179.4 152.9
------ ------
Total cost 914.3 830.6
Adjustment to state inventories at LIFO value (9.7) (5.9)
------ ------
Net inventories $904.6 $824.7
====== ======
4. Accounting for Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002. Statement
No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed annually for impairment. During the second quarter, the
Company, with the assistance of a third party consultant, completed this
review as of January 1, 2002 and determined that no impairment was
necessary.
As of December 31, 2001 and June 30, 2002, goodwill on the consolidated
balance sheets was $109.7, of which $107.3 related to Steel Operations and
$2.4 related to Snow and Ice Control Products. On the December 31, 2001 and
June 30, 2002 consolidated balance sheets were other intangible assets of
$111.9 and $111.6, respectively. As of both dates, a $108.2 intangible
asset was necessary to record a minimum pension liability, of which $105.2
related to the Steel Operations and $3.0 related Snow and Ice Control
Products. The remaining intangible assets as of these dates related to Snow
and Ice Control Product assets with an original value of $9.7, which are
subject to amortization over a period of up to seventeen years. Had the
Company adopted Statement No. 142 at the beginning of 2001, net income
(loss) in the indicated periods of that year would have been adjusted as
follows.
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------------ ----------------
Net income (loss), as reported $2.7 $(10.1)
Goodwill amortization, net of tax 0.7 1.3
---- ------
Adjusted net income (loss) $3.4 $ (8.8)
==== ======
5. Insurance Settlement
In the second quarter of 2002, the Company recorded a pretax benefit of
$23.9 arising from insurance settlements entered into by the Company with
certain of its insurance carriers. The benefit is net of legal fees and
increases to environmental liabilities. The agreements cover certain past
and future environmental and asbestos claims and/or liabilities. Of the
total settlement amount, $8.0 was received in the second quarter with the
net balance due to be received in the second half of 2002. Several
insurance policies have been commuted as a result of these settlement
agreements.
6. Sale of Anthem Inc. Stock
During the six months ended June 30, 2002, the Company liquidated all of
the nearly 1.5 million shares of Anthem Inc. stock it had received in 2001
upon the demutualization of its primary healthcare insurance provider. In
the first quarter of 2002, the Company recorded a gain on the sale of
Anthem shares of $24.1. The stock was sold for a total of $80.2. At June
30, 2002, accrued liabilities on the Company's balance sheet included $6.3
for the portion of the proceeds deemed to be healthcare plan assets.
7. Income Tax Refund
On March 9, 2002, President Bush signed into law the Job Creation and
Worker Assistance Act. One of the provisions of the Act increases the net
operating loss (NOL) carryback period to five years from two years for
losses generated in tax years 2001 and 2002 and allows an NOL deduction
arising in these tax years to offset 100% of alternative minimum taxable
income during the carryback period. Application of this provision allowed
the Company to claim a $46.7 refund of previously paid income taxes. The
refund, received in the second quarter of 2002, reduced the Company's
deferred tax asset but will not affect current or future reported net
income or loss.
-5-
8. Comprehensive Income (Loss)
Comprehensive income (loss), net of tax, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss) $ 2.7 $16.2 $(10.1) $ (9.4)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (0.7) 0.9 0.1 0.6
Derivative instrument hedges, mark to market:
Cumulative effect adjustment -- -- 27.5 --
Gains (losses) arising in period (28.1) (2.7) (42.8) 5.8
Reclass of losses (gains) included in net loss (0.7) 5.5 (10.3) 19.2
Unrealized gains/losses on securities:
Unrealized holding losses arising in period (0.4) (0.4) (0.5) (0.8)
Reclass of gains included in net income/loss (0.1) -- (1.0) (11.3)
---- ----- ------ ------
Comprehensive income (loss) $(27.3) $19.5 $(37.1) $ 4.1
====== ===== ====== ======
A 40% deferred tax rate is applied to derivative instrument hedges and
unrealized gains and losses.
Accumulated other comprehensive loss is as follows:
December 31, June 30,
2001 2002
------------ -------
Foreign currency translation $ (2.1) $ (1.5)
Derivative instrument hedges (28.9) (3.9)
Unrealized gains (losses) on securities 8.3 (3.8)
Minimum pension liability (164.6) (164.6)
------ -------
Accumulated other comprehensive loss $(187.3) $(173.8)
======= =======
9. Segment Information
The Company's Steel Operations primarily consist of the production,
finishing and sale of flat-rolled carbon, stainless and electrical steels
and steel tubing products. AK Tube LLC, a plant that further finishes
flat-rolled carbon steels into tubular products, has been reclassified to
Steel Operations from Other Operations. AK Tube was acquired in the third
quarter of 2001. The Company also owns a Snow and Ice Control Products
business, which manufactures snowplows and salt and sand spreaders for
four-wheel drive light trucks. The Company's Other Operations consist of an
industrial park. The following presents the results of the Company's
segments.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
---- ---- ---- ----
Net sales:
Steel Operations $948.1 $1,102.3 $1,885.1 $2,055.1
Snow and Ice Control Products 32.9 36.0 48.8 47.5
Other Operations 3.2 3.2 6.1 6.6
------ --------- -------- --------
Total net sales $984.2 $ 1,141.5 $1,940.0 $2,109.2
====== ========= ======== ========
Operating profit:
Steel Operations $ 25.2 $ 56.7 $ 33.7 $ 20.9
Snow and Ice Control Products 9.3 11.2 11.0 10.6
Other Operations 1.9 2.0 3.7 4.1
------ --------- -------- --------
Total operating profit $ 36.4 $ 69.9 $ 48.4 $ 35.6
====== ========= ======== ========
10. Dividends
As of June 30, 2002, the Company could not declare or pay dividends to
holders of its common or preferred stock because of a restrictive covenant
contained in the instruments governing its outstanding debt. The preferred
stock dividends are cumulative and, as such, holders of the preferred stock
are entitled to payment of all accrued, but unpaid dividends, before
payment of dividends to the holders of common stock. As of June 30, 2002,
dividends on the preferred stock are in arrears for a period of three
quarters for an aggregate amount of $0.7, or $2.71875 per share.
11. Sale of Sawhill Tubular Division
On April 19, 2002, the Company completed the sale of its Sawhill Tubular
Division for $68.5 in cash, of which $62.8, was received at the time of
sale. The Company retained approximately $20.5 in current liabilities of
Sawhill Tubular. The Company recorded a pretax loss of $10.5 ($6.3 after
tax or $0.06 per share) in the second quarter of 2002, reflecting when the
Company's Board of Directors approved the plan of sale. Sawhill Tubular was
previously included in Other Operations in the Company's segment report.
-6-
The results of Sawhill Tubular have been classified as discontinued
operations in the statements of income. The assets disposed of in the sale
transaction, consisting primarily of trade receivables, inventories and
property, plant and equipment with book values of $21.3, $36.5 and $23.1,
respectively, have been classified as current and noncurrent assets held
for sale in the December 31, 2001 consolidated balance sheet. There were no
material liabilities transferred in the transaction. Results of
discontinued operations, prior to the date of sale included the following
for Sawhill Tubular:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2001 2002 2001 2002
---- ---- ---- ----
Net sales $38.1 $8.6 $81.0 $42.4
Pretax loss 0.8 1.7 0.5 0.8
Net loss 0.6 1.0 0.4 0.5
12. Long-Term Debt
On June 11, 2002, the Company issued and sold $550.0 of 7-3/4% Senior Notes
Due 2012. Net of a discount and fees, the sale generated $538.1 of cash. On
July 11, 2002, these proceeds, along with cash on hand, were used to retire
the Company's $550.0, 9-1/8% Senior Notes Due 2006 at a total cost of
$578.7, which included a redemption premium of $25.1 and accrued interest.
13. Supplemental Guarantor Information (Unaudited)
AK Holding and Douglas Dynamics LLC (the "Guarantor Subsidiary") fully and
unconditionally, joint and severally guarantee the interest, principal and
premium, if any, payments of AK Steel's 9% Senior Notes Due 2007, 8-7/8%
Senior Notes Due 2008, 7-7/8% Senior Notes Due 2009 and 7-3/4% Senior Notes
Due 2012. The Company has determined that full financial statements and
other disclosures concerning AK Holding and the Guarantor Subsidiary would
not be material to investors and such financial statements are not
presented. Because AK Holding has no operations that are independent of AK
Steel, AK Holding's results are combined with AK Steel. The following
supplemental condensed consolidating financial statements present
information about AK Steel, the Guarantor Subsidiary and the Other
Subsidiaries. The Other Subsidiaries do not guarantee the above notes.
-7-
Statements of Income
For the Three Months Ended June 30, 2001
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Net sales $ 946.9 $32.9 $81.2 $ (76.8) $984.2
Cost of products sold 807.8 17.6 18.8 (17.1) 827.1
Selling and administrative expenses 103.8 5.3 2.7 (49.1) 62.7
Depreciation 57.3 0.7 -- -- 58.0
-------- ----- ----- ------- ------
Total operating costs 968.9 23.6 21.5 (66.2) 947.8
Operating profit (loss) (22.0) 9.3 59.7 (10.6) 36.4
Interest expense 32.9 -- 8.5 (8.3) 33.1
Other income (4.5) 0.1 4.0 2.3 1.9
-------- ------ ------ ------- -----
Income (loss) before income taxes (59.4) 9.4 55.2 -- 5.2
Income tax provision (benefit) 1.3 0.1 0.5 -- 1.9
-------- ------ ------ ------- -----
Income (loss) from continuing operations (60.7) 9.3 54.7 -- 3.3
Loss from discontinued operations 0.6 -- -- -- 0.6
--------- ------ ------ ------- -----
Net income (loss) $ (61.3) $ 9.3 $54.7 $ -- $ 2.7
======== ====== ===== ======= ======
Statements of Income
For the Three Months Ended June 30, 2002
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Net sales $ 1,091.4 $36.0 $84.1 $(70.0) $1,141.5
Cost of products sold 947.7 18.4 33.1 (23.6) 975.6
Selling and administrative expenses 89.8 5.5 4.7 (35.7) 64.3
Depreciation 54.0 0.9 0.7 -- 55.6
Insurance settlement (23.9) -- -- -- (23.9)
---------- ------ ----- ------- --------
Total operating costs 1,067.6 24.8 38.5 (59.3) 1,071.6
Operating profit (loss) 23.8 11.2 45.6 (10.7) 69.9
Interest expense 34.5 -- 5.3 (5.1) 34.7
Other income (4.8) -- 2.3 4.6 2.1
---------- ------ ----- ----- -------
Income (loss) before income taxes (15.5) 11.2 42.6 (1.0) 37.3
Income tax provision (benefit) 13.1 -- 0.7 -- 13.8
---------- ------ ----- ----- -------
Income (loss) from continuing operations (28.6) 11.2 41.9 (1.0) 23.5
Loss from discontinued operations 1.0 -- -- -- 1.0
Loss on sale of Sawhill Tubular 6.3 -- -- -- 6.3
---------- ------ ----- ----- -------
Net income (loss) $ (35.9) $11.2 $41.9 $(1.0) $ 16.2
========== ===== ===== ======= =======
-8-
Statements of Income
For the Six Months Ended June 30, 2001
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Net sales $ 1,905.5 $48.8 $155.4 $(169.7) $1,940.0
Cost of products sold 1,643.2 25.8 31.1 (48.7) 1,651.4
Selling and administrative expenses 206.0 10.5 5.1 (97.4) 124.2
Depreciation 114.5 1.5 -- -- 116.0
-------- ----- ------ ------- --------
Total operating costs 1,963.7 37.8 36.2 (146.1) 1,891.6
Operating profit (loss) (58.2) 11.0 119.2 (23.6) 48.4
Interest expense 67.0 -- 18.4 (17.9) 67.5
Other income (9.8) 0.1 8.1 5.3 3.7
-------- ----- ------ ------ --------
Income (loss) before income taxes (135.0) 11.1 108.9 (0.4) (15.4)
Income tax provision (benefit) (6.7) 0.2 0.8 -- (5.7)
-------- ----- ------ ------ --------
Income (loss) from continuing operations (128.3) 10.9 108.1 (0.4) (9.7)
Loss from discontinued operations 0.4 -- -- -- 0.4
-------- ----- ------ ------ --------
Net income (loss) $ (128.7) $10.9 $108.1 $ (0.4) $ (10.1)
======== ===== ====== ====== ========
Statements of Income
For the Six Months Ended June 30, 2002
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Net sales $ 2,035.2 $47.5 $142.0 $(115.5) $2,109.2
Cost of products sold 1,814.6 24.0 60.6 (44.5) 1,854.7
Selling and administrative expenses 161.7 11.1 8.6 (51.6) 129.8
Depreciation 109.8 1.8 1.4 -- 113.0
Insurance settlement (23.9) -- -- -- (23.9)
-------- ----- ------ ------ --------
Total operating costs 2,062.2 36.9 70.6 (96.1) 2,073.6
Operating profit (loss) (27.0) 10.6 71.4 (19.4) 35.6
Interest expense 65.9 -- 10.2 (9.6) 66.5
Loss from discontinued operations 24.1 -- -- -- 24.1
Other income (10.3) 0.1 4.5 8.3 2.6
-------- ----- ------ ----- --------
Income (loss) before income taxes (79.1) 10.7 65.7 (1.5) (4.2)
Income tax provision (benefit) (3.1) -- 1.5 -- (1.6)
-------- ----- ------ ----- --------
Income (loss) from continuing operations (76.0) 10.7 64.2 (1.5) (2.6)
Loss from discontinued operations 0.5 -- -- -- 0.5
Loss on sale of Sawhill Tubular 6.3 -- -- -- 6.3
-------- ----- ------ ----- --------
Net income (loss) $ (82.8) $10.7 $ 64.2 $(1.5) $ (9.4)
======== ===== ====== ======= ========
-9-
Balance Sheets
As of December 31, 2001
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 97.2 $ 0.1 $ 3.7 $ -- $ 101.0
Accounts receivable 11.8 23.8 352.4 -- 388.0
Inventories (Note 3) 844.4 15.9 41.4 2.9 904.6
Deferred tax asset 76.6 -- -- -- 76.6
Current assets held for sale 60.6 -- -- -- 60.6
Other current assets 16.2 0.5 0.3 -- 17.0
-------- ------ ------ ----- ---------
Total Current Assets 1,106.8 40.3 397.8 2.9 1,547.8
-------- ------ ------ ----- ---------
Property, Plant and Equipment 4,665.3 46.3 31.3 -- 4,742.9
Less accumulated depreciation (1,953.3) (19.7) (1.6) -- (1,974.6)
------- ------ ------- ------ ---------
Property, plant and equipment, net 2,712.0 26.6 29.7 -- 2,768.3
-------- ------ ------- ------ ---------
Other Assets:
Investment in AFSG Holdings, Inc. -- -- 55.6 -- 55.6
Intercompany accounts 303.6 146.3 (167.0) (282.9) --
Other investments 100.9 -- 53.4 -- 154.3
Goodwill 101.2 2.4 6.1 -- 109.7
Other intangible assets (Note 4) 108.2 3.7 -- -- 111.9
Deferred tax asset 393.5 -- -- -- 393.5
Noncurrent assets held for sale 24.4 -- -- -- 24.4
Other assets 58.8 1.4 0.1 -- 60.3
------- ------ ------- ------- --------
TOTAL ASSETS $4,909.4 $220.7 $375.7 $(280.0) $5,225.8
======== ====== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 522.0 $6.3 $9.3 $ -- $ 537.6
Accrued liabilities 258.6 7.6 4.3 -- 270.5
Current portion of long-term debt 63.3 -- 14.7 -- 78.0
Current portion of pension and OPEBs 68.2 0.1 -- -- 68.3
------- ------ ------- ------- --------
Total Current Liabilities 912.1 14.0 28.3 -- 954.4
------- ------ ------- ------- --------
Noncurrent Liabilities:
Long-term debt 1,324.5 -- -- -- 1,324.5
Pension and OPEBs 1,736.1 4.0 -- -- 1,740.1
Other liabilities 167.8 3.8 1.9 -- 173.5
------- ------ ------- ------- --------
Total Noncurrent Liabilities 3,228.4 7.8 1.9 -- 3,238.1
------- ------ ------- ------- --------
TOTAL LIABILITIES 4,140.5 21.8 30.2 -- 4,192.5
------- ------ ------- ------- --------
TOTAL STOCKHOLDERS' EQUITY 768.9 198.9 345.5 (280.0) 1,033.3
------- ------ ------- ------- --------
TOTAL LIABILITIES AND EQUITY $4,909.4 $ 220.7 $375.7 $(280.0) $5,225.8
======== ======== ====== ======= ========
-10-
Balance Sheets
As of June 30, 2002
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
-------- ---------- ------------ ------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 836.7 $ -- $ 7.2 $ -- $ 843.9
Accounts receivable 39.4 29.4 445.4 -- 514.2
Inventories (Note 3) 760.1 24.5 44.0 (3.9) 824.7
Deferred tax asset 62.2 -- 0.3 -- 62.5
Other current assets 25.0 0.9 0.7 -- 26.6
-------- ------- ------ -------- --------
Total Current Assets 1,723.4 54.8 497.6 (3.9) 2,271.9
-------- ------- ------ -------- --------
Property, Plant and Equipment 4,713.9 50.0 32.1 -- 4,796.0
Less accumulated depreciation (2,063.0) (21.5) (3.0) -- (2087.5)
-------- ------- ------ -------- --------
Property, plant and equipment, net 2,650.9 28.5 29.1 -- 2,708.5
-------- ------- ------ -------- --------
Other Assets:
Investment in AFSG Holdings, Inc. -- -- 55.6 -- 55.6
Intercompany accounts 350.3 139.0 (296.8) (192.5) --
Other investments 33.8 -- 52.6 -- 86.4
Goodwill 101.2 2.4 6.1 -- 109.7
Other intangible assets (Note 4) 108.2 3.4 -- -- 111.6
Deferred tax asset 358.1 -- -- -- 358.1
Other assets 59.0 1.4 6.4 -- 66.8
-------- ------- ------ -------- --------
TOTAL ASSETS $5,384.9 $ 229.5 $350.6 $(196.4) $5,768.6
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 475.7 $5.7 $11.2 $ -- $ 492.6
Accrued liabilities 251.8 6.4 3.7 -- 261.9
Current portion of long-term debt 612.9 -- 14.7 -- 627.6
Current portion of pension and OPEBs 67.2 -- -- -- 67.2
-------- ----- ------ ------ --------
Total Current Liabilities 1,407.6 12.1 29.6 -- 1,449.3
------------ ----- ------ ------ --------
Noncurrent Liabilities:
Long-term debt 1,322.2 -- -- -- 1,322.2
Pension and OPEBs 1,784.4 4.1 -- -- 1,788.5
Other liabilities 164.6 3.6 2.1 -- 170.3
-------- ------ ------ ------ --------
Total Noncurrent Liabilities 3,271.2 7.7 2.1 -- 3,281.0
-------- ------ ------ ------ --------
TOTAL LIABILITIES 4,678.8 19.8 31.7 -- 4,730.3
-------- ------ ------ ------- --------
TOTAL STOCKHOLDERS' EQUITY 706.1 209.7 318.9 (196.4) 1,038.3
-------- ------ ------ ------ --------
TOTAL LIABILITIES AND EQUITY $5,384.9 $229.5 $350.6 $(196.4) $5,768.6
======== ======= ====== ======= ========
-11-
Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2001
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Total from operating activities of
continuing operations $(63.4) $(1.9) $ 105.6 $ (2.8) $ 37.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (44.5) (1.1) -- -- (45.6)
Proceeds from sale of investments 31.6 -- -- -- 31.6
Other (4.9) -- (0.5) -- (5.4)
------ ------ ------- ------ -------
Total from investing activities of
continuing operations (17.8) (1.1) (0.5) -- (19.4)
------ ------ ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (0.3) -- -- -- (0.3)
Common stock dividends paid (13.5) -- -- -- (13.5)
Preferred stock dividends paid (0.5) -- -- -- (0.5)
Intercompany activity 101.1 1.6 (105.5) 2.8 --
Other (0.9) -- -- -- (0.9)
------ ------ ------- ------ -------
Total from financing activities of
continuing operations 85.9 1.6 (105.5) 2.8 (15.2)
Cash flow from discontinued operations 15.8 -- -- -- 15.8
------ ------ ------- ------ -------
Net increase (decrease) 20.5 (1.4) (0.4) -- 18.7
Cash and equivalents, beginning of period 80.1 1.4 5.3 -- 86.8
------- ------ -------- ------ -------
Cash and equivalents, end of period $ 100.6 $ -- $ 4.9 $ -- $ 105.5
======= ====== ======== ====== =======
Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2002
AK Guarantor Other Elimi- Consolidated
Steel Subsidiary Subsidiaries nations Company
---------- ---------- ------------ ------- ------------
Total from operating activities of
continuing operations $154.2 $(3.6) $ (34.5) $ 5.3 $ 121.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments (48.6) (3.8) (0.7) -- (53.1)
Proceeds from sale of investments 82.0 -- -- -- 82.0
Proceeds from sale of business 62.8 -- -- -- 62.8
Other (10.0) -- (0.2) -- (10.2)
------ ----- ------ ------ -------
Total from investing activities of
continuing operations 86.2 (3.8) (0.9) -- 81.5
------ ----- ------ ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing long-term debt 538.1 -- -- -- 538.1
Principal payments on long-term debt (0.4) -- -- -- (0.4)
Intercompany activity (40.3) 7.3 38.3 (5.3) --
Other (1.4) -- 0.6 -- (0.8)
------ ----- ------ ---- -------
Total from financing activities of
continuing operations 496.0 7.3 38.9 (5.3) 536.9
Cash flow from discontinued operations 3.1 -- -- -- 3.1
------ ----- ------ ------ -------
Net increase (decrease) 739.5 (0.1) 3.5 -- 742.9
Cash and equivalents, beginning of period 97.2 0.1 3.7 -- 101.0
------ ------ ------ ------ -------
Cash and equivalents, end of period $836.7 $ -- $ 7.2 $ -- $ 843.9
====== ====== ====== ====== =======
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(dollars in millions, except per share and per ton data)
Results of Operations
The Company's principal business focus is its Steel Operations, which consists
of eight steelmaking and finishing facilities that produce flat-rolled carbon,
stainless and electrical steels and steel tubing products. These products are
sold primarily to the automotive, appliance, industrial machinery and equipment,
and construction markets, as well as to distributors, service centers and
converters. The Company also owns a Snow and Ice Control Products business,
which manufactures snowplows and salt and sand spreaders for four-wheel drive
light trucks, and operates an industrial park on the Houston, Texas ship
channel. In the second quarter of 2002, the Company completed the sale of its
Sawhill Tubular Division. For all periods presented, the Company has classified
the results of Sawhill Tubular as discontinued operations.
Total steel shipments, inclusive of steel tubing products, for the three months
ended June 30, 2002 and 2001 were 1,504,500 tons and 1,439,600 tons,
respectively. Total steel shipments during the six months ended June 30, 2002
increased to 2,940,200 tons from 2,877,400 tons shipped in the first half of
2001. Both increases were due in part to record automotive shipments and the
addition of AK Tube, which was acquired in the third quarter of 2001. For the
six months ended June 30, 2002, value-added products comprised approximately 94%
of total shipments, compared to 92% for the corresponding period of 2001.
For the quarter ended June 30, 2002, net sales were $1,141.5, a 16% increase
over the $984.2 reported for the corresponding period in 2001. Steel Operations
contributed $1,102.3 to total net sales in the second quarter of 2002, compared
to $948.1 for the 2001 period. Steel Operations' sales per ton increased $50 to
$708 per ton in the second quarter of 2002 compared to the prior year second
quarter, primarily as a result of increased shipments to the automotive sector
and higher spot market prices, partially offset by lower current year contract
pricing. Total net sales for the first half of 2002 and 2001 were $2,109.2 and
$1,940.0, respectively, and Steel Operations sales for the same periods were
$2,055.1 and $1,885.1, respectively. Each of these period-to-period increases
reflects the strong sales volumes and improved spot-market pricing experienced
in the current year, as price increases announced earlier in the year were
achieved.
Second quarter 2002 operating profit was $69.9 compared to $36.4 for the
corresponding period in 2001. The current year quarter included a pretax benefit
of $23.9 arising from insurance settlements entered into by the Company with
certain of its insurance carriers. The benefit is net of legal fees and
increases to environmental liabilities. The agreements cover certain past and
future environmental and asbestos claims and/or liabilities. Of the total
settlement amount, $8.0 was received in the second quarter with the net balance
due to be received in the second half of 2002. Several insurance policies have
been commuted as a result of these settlement agreements. While employee benefit
expenses were substantially higher in the second quarter 2002 than in the year
ago quarter, results in this period benefited from an improved product mix,
strong automotive shipments, better pricing and lower natural gas costs. The
operating profit for the six months ended June 30, 2002, totaled $35.6,
including the pretax insurance benefit, compared to $48.4 for the same period in
2001. The unfavorable variance for the six-month periods was primarily due to
higher costs, including approximately $68.0 in increased pension and other
postretirement benefit expenses. In addition, the six-month operating profit in
2002 includes a scheduled maintenance outage at the Middletown Works blast
furnace and other planned and unplanned maintenance work totaling approximately
$20.0, which occurred primarily in the first quarter. The higher costs were
partially offset by lower natural gas costs, higher volumes, improved product
mix and higher spot market pricing.
For the three and six months ended June 30, 2002, Snow and Ice Control Products
recorded operating profits of $11.2 and $10.6 on sales of $36.0 and $47.5,
respectively. For the three and six months ended June 30, 2001, this segment
recorded operating profits of $9.4 and $11.1 on sales of $32.9 and $48.8,
respectively. The favorable variance in the quarter-to-quarter comparison is the
result of strong pre-season shipments, while the unfavorable variance in the
year-to-date numbers reflects lower shipments due to the very mild winter.
During the six months ended June 30, 2002, the Company liquidated all of the
nearly 1.5 million shares of Anthem Inc. stock it had received last year upon
the demutualization of its primary healthcare insurance provider. In the first
quarter of 2002, the Company recorded a gain on the sale of Anthem shares of
$24.1. The gain was net of changes to the liability established for the portion
of the proceeds deemed to be healthcare assets.
On April 19, 2002, the Company completed the sale of Sawhill Tubular Division
for approximately $68.5, of which $62.8 was received at the time of sale. The
Company retained approximately $20.5 of Sawhill Tubular's current operating
liabilities, which it is settling in due course. The Company recorded a pretax
loss on the sale of $10.5 ($6.3 after tax or $0.06 per share) in the second
quarter of 2002, reflecting when the Company's Board of Directors approved the
plan of sale. In the three and six months ended June 30, 2002, this business
generated after-tax losses of $1.0 and $0.5, respectively, compared to losses of
$0.6 and $0.4 in the respective periods of 2001.
-13-
The Company's net income in the three months ended June 30, 2002 of $16.2, or
$0.15 per share, included the benefit from the insurance settlement and a
net-of-tax loss of $6.3 on the sale of Sawhill Tubular. Excluding these items
net income would have been $7.5, or $0.07 per share. Compared to second quarter
of 2001 net income of $2.7, or $0.02 per share, the favorable variance reflected
the improved product mix, better pricing and lower natural gas costs, partially
offset by higher income tax expense in the quarter. The Company recorded a net
loss for the six months ended June 30, 2002 of $9.4, or $0.09 per share,
compared to a net loss of $10.1, or $0.10 per share, reported for the first half
of 2001. On a pro forma basis, excluding the net-of-tax gain on the sale of
Anthem Inc. shares, the benefit from the insurance settlement and the loss on
the sale of Sawhill, the six-month 2002 loss would have been $33.3, or $0.31 per
share. The unfavorable variance was primarily due to the increase in first
quarter maintenance expenditures and substantially higher pension and healthcare
costs.
Outlook
The Company anticipates that total third quarter shipments will decline
approximately 5% from second quarter levels due to new model year retooling and
seasonal maintenance at the major automotive companies, partially offset by
increased sales to the spot market. However, pricing is expected to continue to
rise in the spot market, with some increase expected in contract sales as
negotiations continue regarding supply agreements with many of the Company's
major customers. Value-added shipments should remain near 94% during the next
quarter, with strong volumes shipped to appliance and construction customers.
Snow and Ice Control Product sales and income for the next quarter are expected
to be lower compared to the second quarter of this year due to the stronger than
expected second quarter sales and some softening of orders caused by the very
mild winter and slow economy.
The Company expects higher costs in the third quarter in a similar magnitude to
the increase in pricing, primarily related to the strong product mix, increasing
scrap prices and slightly lower 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 and losses that exceed 10% of the larger of
benefit obligations or plan assets. Poor year-to-date performance by the
financial markets, if not reversed during the remainder of the year, is likely
to cause actuarial net losses for the Company's pension plans in the current
year. In addition, other postretirement benefit plans could incur actuarial net
losses resulting from rising healthcare costs. The Company expects that most of
the actuarial net losses generated in the current year would be recognized in a
fourth quarter 2002 charge against operating profit (loss). The amount of this
non-cash charge could be substantial.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for capital investments, working
capital, employee benefit obligations and debt service. At June 30, 2002, the
Company had $843.9 of cash and cash equivalents, which included $538.1 of net
proceeds from the sale of a new debt issue in the quarter. In addition, the
Company had $182.9 available for borrowings under its $300.0 accounts receivable
purchase credit facility. At that date, there were no outstanding borrowings
under the credit facility and availability was reduced primarily by outstanding
letters of credit.
Cash generated by operations totaled $121.4 for the six months ended June 30,
2002. The Company's reported loss of $9.4, after excluding depreciation of
$113.0, amortization expense of $5.0 and a non-cash income tax benefit of $1.7,
generated $106.9 in cash. In addition, as a result of a change in the tax law
brought about by the Job Creation and Worker Assistance Act signed in the first
quarter of 2002, the Company was able to apply for, and receive in the second
quarter of 2002, a $46.7 tax refund. The refund reduced the Company's deferred
tax asset but did not affect reported net income or loss. Working capital
utilized $70.8 during the period, including a $126.2 increase in accounts
receivables, reflecting higher sales in June 2002 compared to December 2001, and
a decrease in accounts payable, primarily related to payments for slabs
purchased in the fourth quarter in preparation for the blast furnace outage at
its Middletown Works. Inventories decreased $79.9 as the Company consumed
material acquired in late 2001 in anticipation of the maintenance outage at the
Middletown Works and reduced raw materials.
During the six months ended June 30, 2002, cash generated by investing
activities totaled $81.5, including $62.8 of cash from the sale of Sawhill
Tubular. In the first half of the year, the Company liquidated the Anthem Inc.
stock it had received from Anthem's demutualization, generating $80.2 of cash.
At June 30, 2002, accrued liabilities on the Company's balance sheet included
$6.3 for a liability established for the portion of the Anthem proceeds deemed
to be healthcare plan assets. Capital investments were $53.1 in the first six
months, with total capital investments for 2002 expected to approximate $125.0,
which will be funded by existing cash balances and cash generated from
operations.
During the six months ended June 30, 2002, cash flows from financing activities
generated $536.9, including the sale of $550.0 of 7-3/4% Senior Notes Due 2012.
The new debt issue generated $538.1 of cash, net of a discount and fees. On July
11, 2002, the proceeds along with cash on hand were used, to redeem the
Company's $550.0, 9-1/8% Senior Notes Due 2006 at a total cost of $578.7, which
includes a redemption premium of $25.1 and accrued interest.
-14-
Dividends
As of June 30, 2002, the Company could not declare or pay dividends to holders
of its common or preferred stock because of a restrictive covenant contained in
the instruments governing its outstanding debt. The preferred stock dividends
are cumulative and, therefore, holders are entitled to payment of all accrued,
but unpaid dividends, before payment of dividends to the holders of common
stock. As of June 30, 2002, dividends on the preferred stock are in arrears for
a period of three quarters for an aggregate amount of $0.7, or $2.71875 per
share.
New Accounting Pronouncement
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002. Statement No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed annually for impairment. During the second quarter, the Company, with
the assistance of a third party consultant, completed this review as of January
1, 2002 and determined that no impairment was necessary.
Forward-Looking Statements
Certain statements in this Form 10-Q, particularly those in the paragraph
entitled "Outlook," 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. As discussed in its Form 10-K for the year ended December 31, 2001, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, 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 were parties to a
multi-year contract whereby Orinoco supplied AK Steel with a form of iron ore
referred to as hot briquetted iron ("HBI"). The action arose out of a dispute
between Orinoco and AK Steel with respect to the pricing formula under the
supply contract. Orinoco alleged that the pricing formula in the supply contract
was appropriate as stated in the contract and sought damages for the failure of
AK Steel to pay for HBI in accordance with that pricing formula. AK Steel
alleged that the pricing formula no longer reflected the original intent of the
parties and sought an order from the court reforming the contract to include a
different pricing formula. In June 2002, AK Steel and Orinoco mutually agreed to
terminate their existing supply contract, enter into a new five-year supply
contract with a revised pricing formula, and to settle their claims against each
other. Pursuant to their settlement agreement, the pending litigation between AK
Steel and Orinoco was dismissed on or about July 15, 2002.
On June 26, 2002, seventeen individuals filed a purported class action against
AK Steel in the United States District Court for the Southern District of Ohio,
Case No. C-1-02-467. The complaint alleges that the company discriminates
against African-Americans in its hiring practices and that the company
discriminates against all of its employees by preventing its employees from
working in a racially integrated environment free from racial discrimination.
The complaint seeks various forms of declaratory, injunctive and monetary relief
(including back pay, front pay, lost benefits, lost seniority and punitive
damages) for themselves and the other members of their alleged class. Because
the action was only recently filed, AK Steel has not yet responded to the
Complaint. The Company intends to contest this matter vigorously.
On June 13, 2002, oral arguments were presented on the Objections to the Special
Master's Recommendations in the case of AK Steel Corporation v. Sollac, S.A., et
al., Case No. C-1-98-690,-804, United States District Court for the Southern
District of Ohio (the "Patent Case"). The Patent Case involves issues of
infringement, validity and enforceability of six U.S. patents owned by AK Steel
that relate to aluminized stainless steel. AK Steel is seeking injunctive relief
and monetary damages for infringement of the aluminized stainless steel patents.
The Special Master recommended that the Court find certain claims of the patents
were valid and that the Defendants did not infringe upon these valid claims. The
Special Master also recommended that certain claims of the patents were not
valid for lack of enablement. On July 30, 2002, the Trial Court adopted the
Special Master's Recommendation in the Patent Case. The Company plans to seek
appellate review of the Trial Court's ruling in the Court of Appeals for the
Federal Circuit. There are two additional cases in which the Defendants in the
Patent Case are asserting antitrust claims against the Company. Those cases are
Sollac, S.A., et al., v. AK Steel Corporation, Case No. C-1-00-619, United
States District Court for the Southern District of Ohio (the "U.S. Case") and
Ugine, S.A., et al. v. AK Steel Corporation, Case No. T-1385-01, Federal Court
of Canada (the "Canadian Case"). The Canadian case presents issues of
infringement, validity and disparagement related to three Canadian patents owned
by AK Steel. The Plaintiffs in the U.S. Case allege that AK Steel has unlawfully
monopolized the aluminized stainless steel market. Discovery is underway and
trial is currently scheduled to begin on July 7, 2003 in the U.S. Case. No trial
date yet has been set in the other cases. The Company continues to vigorously
contest all of these claims.
-15-
During the quarter ended June 30, 2002, AK Steel entered into settlement
agreements with certain of its insurance carriers covering certain past and
future environmental and asbestos claims and/or liabilities in an amount, net of
legal fees and increases to environmental liabilities of approximately $23.9
million. Of the total settlement amount, $8 million was received in the second
quarter. The net balance is due to be received in the second half of 2002.
Several insurance policies have been commuted as a result of these settlement
agreements. One of the settlements with a former insurer, however, provides AK
Steel with continued partial coverage for defense and indemnity costs arising
from non-employee asbestos claims.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 14, 2002. The sole
item of business at the meeting was the election of directors. All nine nominees
were elected. The following sets forth the voting results:
For Vote Withheld
--- -------------
Richard A. Abdoo 92,603,698 343,900
Allen Born 91,852,130 1,095,468
Donald V. Fites 92,590,211 357,387
Dr. Bonnie G. Hill 92,531,629 415,969
Robert H. Jenkins 92,586,069 361,529
Lawrence A. Leser 91,857,094 1,090,504
Daniel J. Meyer 91,878,933 1,068,665
Dr. James A. Thomson 91,872,662 1,074,936
Richard M. Wardrop, Jr. 92,472,493 475,105
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits. None.
--------
B. Reports on Form 8-K.
---------------------
Item Reported Date
------------- ----
Sale of Sawhill Tubular Division April 22, 2002
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on behalf of the registrant by the following duly authorized
persons.
AK Steel Holding Corporation
--------------------------------------------------
(Registrant)
Date August 2, 2002 /s/ James L. Wainscott
------------------- --------------------------------------------------
James L. Wainscott
Senior Vice President and Chief Financial Officer
(and principal accounting officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Richard M. Wardrop, Jr., Chairman, Chief Executive Officer and President of
AK Steel Holding Corporation (the "Company"), do hereby certify in accordance
with 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge the foregoing Quarterly Report of the Company:
(1) fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, 15 U.S.C. 78 m or 78o(d), and,
(2) the information contained in the periodic report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: August 2, 2002 /s/ Richard M. Wardrop, Jr.
------------------ --------------------------------------------------
Richard M. Wardrop, Jr.,
Chairman, Chief Executive Officer and President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James L. Wainscott, Senior Vice President and Chief Financial Officer of AK
Steel Holding Corporation (the "Company"), do hereby certify in accordance with
18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge the foregoing Quarterly Report of the Company:
(1) fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, 15 U.S.C. 78 m or 78o(d), and,
(2) the information contained in the periodic report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: August 2, 2002 /s/ James L. Wainscott
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James L. Wainscott,
Senior Vice President and Chief Financial Officer
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