U.S. Steel Posts Bigger Loss As Imports, Write-Down Hurt

U.S. Steel (X - Analyst Report) logged a wider loss in the second quarter of 2015, hurt by a sizable charge to write-down its retained interest in its Canadian unit – U. S. Steel Canada (“USSC”) – and lower prices due to a torrent of cheap steel imports.

U.S. Steel, once the country’s first billion-dollar corporation, continued to face significant challenges from a flood of unfairly traded steel imports. High levels of imports led to lower steel pricing and volumes in the company’s Flat-Rolled segment. Its tubular business also faced headwinds from lower oil prices. These impacts were partly offset by the company’s efforts to improve its cost structure.

U.S. Steel posted a net loss of $261 million or $1.79 per share in the quarter versus a loss of $18 million or 12 cents per share posted a year ago.

Barring one-time items, loss was 79 cents per share in the reported quarter, higher than the Zacks Consensus Estimate of a loss of 69 cents. One-time items include $136 million of write down charges related to USSC which has been under creditor protection since Sep 2014.

Revenues plummeted 34% year over year to $2,900 million, falling well behind the Zacks Consensus Estimate of $3,197 million.

U.S. Steel shares fell around 4% in extended trading yesterday.

Segment Highlights

Results from U.S. Steel’s Flat-Rolled segment were hurt by a surge of steel imports in the quarter, triggered by a strengthening U.S. dollar. The division posted a loss of $64 million versus a profit of $30 million in the year-ago quarter. Imports increased during the quarter, thereby reducing spot market prices of steel.

The U.S. Steel Europe (“USSE”) segment recorded a profit of $20 million in the reported quarter, down from last year’s profit of $38 million as well as $37 million in the previous quarter. Lower raw material costs and a modest increase in euro-based prices were more than offset by reduced shipments and higher repairs and maintenance costs due to planned maintenance outages.

U.S. Steel’s Tubular segment registered a loss of $66 million in the quarter versus a profit of $47 million a year ago and $1 million in the prior quarter. The sequential decline was due to reduced shipments resulting from lower drilling activity (due to lower oil prices) and significant volumes of tubular imports.

Financials
 
U.S. Steel exited the quarter with cash and cash equivalents of $1,210 million, down 18% year over year. Long-term debt declined around 13% year over year to $3,124 million. Cash provided by operating activities slid 84% year over year to $215 million in the first six months of 2015.  

Outlook

Looking forward, U.S. Steel expects market conditions to improve in the back half of 2015 compared with the first half as supply chain inventories continue to rebalance, especially in flat-rolled markets. CEO Mario Longhi said that the company has taken up aggressive actions to cope with the still challenging conditions in North America.

Factoring in higher benefits from its Carnegie Way program and its actions to cut operating costs, U.S. Steel sees adjusted earnings before interest and taxes (EBIT) to be within the guidance range of $115-$315 million for 2015. The company also expects adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) for 2015 to be within $700-$900 million. But if the current pace of commercial improvement across the company’s markets does not increase, then the results are expected to be near the bottom end of the guidance range.

High levels of steel imports and oversupply in the industry are pressurizing prices, thereby hurting margins of domestic steel producers including U.S. Steel, AK Steel (AKS - Analyst Report), Nucor (NUE - Analyst Report) and Steel Dynamics (STLD - Snapshot Report). Moreover, several energy companies are dialing back drilling plans in the wake of the oil price slump, thereby affecting demand for steel in the energy market.  

The combined impact of the oil meltdown and low-priced imports has forced U.S. Steel to take necessary actions including idling of a number of production facilities, resulting in the layoff of thousands of workers. The company has issued layoff notices to as much as 9,000 U.S. employees as a result of the idling of a number of facilities.

Nevertheless, U.S. Steel remains actively engaged in improving its cost structure through the Carnegie Way initiative, which is expected to continue to generate meaningful benefits in 2015 and allow the company to offset the operational challenges through the year.

U.S. Steel is a Zacks Rank #3 (Hold).