The leading steel manufacturer in the U.S. and the fifth largest in the world, United States Steel Corp. (X), delivered adjusted earnings per share (EPS) of 45 cents in its second quarter ended June 30, 2010, which fell short of the Zacks Consensus Estimate of 63 cents. EPS in the quarter was in stark contrast to the adjusted loss of $3.23 in the year-ago quarter. Revenues and shipments more than doubled, leading to the year-over-year improvement.
The EPS of 45 cents, however, excluded a foreign currency loss of 62 cents per share. More specifically, the loss was due to the impact of weakening of the euro against the U.S. dollar on the accounting remeasurement of a $1.4 billion U.S. dollar-denominated intercompany loan to a European subsidiary, partially offset by gains on euro-U.S. dollar derivatives activity.
Including the above, United Steel’s results came down to a loss of 17 cents per share, the sixth consecutive quarter that the company has reported a loss. The adjusted loss of $3.23 in the year ago quarter excluded a 39 cents foreign currency gain. Loss per share in the year ago quarter was $2.92 by netting of this gain.
United Steel’s revenues of $4.7 billion, however, outpaced the Zacks Consensus Estimate of $4.6 billion. On a year-over-year basis, revenues increased a whopping 120%. Shipments doubled compared with the year-ago quarter levels to 5.9 billion.
United Steel posted income from operations of $198 million, a reversal from a loss from operations of $465 million in the year-ago quarter helped by substantial growth in shipments and revenues.
In dollar terms, cost of sales increased 79% year over year to $4.2 billion in the quarter but as a percentage of revenues, it declined to 89% from 110% in the year-ago quarter. Selling, general, administrative and engineering expenses dipped 1% year over year to $152 million and as a percentage of sales dipped 400 basis points to 3.2%.
Segment Performance
Flat-Rolled Products was the star performer, posting the highest income from operations of $98 million and delivered the highest turnaround compared with the year-ago loss of $362 million. The improved performance was driven by a 3% increase in average realized prices (ARP), a 124% surge in shipments, lower energy costs and increased production volumes, partially offset by a hike in facility repair and maintenance costs particularly at its Lake Erie Works and raw material costs.
The Tubular Products segment followed with income from operations of $96 million, compared with a loss of $88 million in the year-ago quarter, driven by a robust 371% increase in shipments.
The U.S. Steel Europe (USSE) segment posted income from operations of $19 million compared with a loss of $53 million in the year-ago quarter attributable to a 34% increase in shipments and a 14% increase in ARP.
The Other Businesses segment posted income from operations of $28 million compared with a loss of $7 million in the year-ago period.
Financial Position
United Steel had cash and cash equivalents of $947 million as of June 30 2010, down from $1.4 billion as of March 30, 2010.
As of June 30, 2010, debt-to-capitalization ratio was 45.1% compared to 44.6% as of March 31, 2010 and 41.8% as of December 31, 2009.
Overall Third Quarter Outlook
United Steel remains hopeful that it will be able to report profit in the third quarter driven by a gradual recovery in the U.S. and European economies. Operating results are expected to be below second quarter levels, mainly due to a decrease in shipping and production volumes for the Flat-rolled segment, reflecting slower order rates, primarily from spot market customers so far in the quarter.
Segment Outlook for the Third Quarter
The Flat-Rolled Products segment is expected to be near break-even levels due to lower shipments and production volumes, and hike in raw material and energy costs. The favorable effect of the absence of repair and maintenance costs pertaining to Lake Erie Works will be offset by increased costs for planned maintenance work on several blast furnaces and repairs of the transportation system used to deliver raw materials to Gary Works' blast furnaces.
ARP is expected to be in line with the second quarter as the benefits of a higher value-added mix of shipments and increased prices for both index-based contracts and recently negotiated contracts offset decreases in spot market prices.
Results at the Tubular Products segment are expected to improve from the second quarter levels as benefits of higher ARP and decreased costs for steel substrate are expected to be partially offset by the impact of lower carbon oil country tubular goods (OCTG) and welded line pipe shipments.
USSE results are expected to be comparable to the second quarter as benefits of higher euro-based transaction prices are offset by increased raw materials costs. Shipments are guided to be lower due to reduced order rates from spot market customers and normal seasonal variations.
The Other Businesses segment results are projected to be lower in the third quarter, mainly due to the second quarter impact of a land sale by the company’s real estate operations.
Our Take
U.S. Steel incurred losses through 2009 as well as in the first quarter of 2010. Rising supplies from China, low demand from the automotive and residential sectors and rising labor costs are affecting its operations.
However, in the second quarter, adjusted EPS broke out from the loss territory and based on the turnaround at all of its segments we believe there is a glimmer of hope that the company will be able to meet its guidance in the third quarter.
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Including the above, United Steel’s results came down to a loss of 17 cents per share, the sixth consecutive quarter that the company has reported a loss. The adjusted loss of $3.23 in the year ago quarter excluded a 39 cents foreign currency gain. Loss per share in the year ago quarter was $2.92 by netting of this gain.
United Steel’s revenues of $4.7 billion, however, outpaced the Zacks Consensus Estimate of $4.6 billion. On a year-over-year basis, revenues increased a whopping 120%. Shipments doubled compared with the year-ago quarter levels to 5.9 billion.
United Steel posted income from operations of $198 million, a reversal from a loss from operations of $465 million in the year-ago quarter helped by substantial growth in shipments and revenues.
In dollar terms, cost of sales increased 79% year over year to $4.2 billion in the quarter but as a percentage of revenues, it declined to 89% from 110% in the year-ago quarter. Selling, general, administrative and engineering expenses dipped 1% year over year to $152 million and as a percentage of sales dipped 400 basis points to 3.2%.
Segment Performance
Flat-Rolled Products was the star performer, posting the highest income from operations of $98 million and delivered the highest turnaround compared with the year-ago loss of $362 million. The improved performance was driven by a 3% increase in average realized prices (ARP), a 124% surge in shipments, lower energy costs and increased production volumes, partially offset by a hike in facility repair and maintenance costs particularly at its Lake Erie Works and raw material costs.
The Tubular Products segment followed with income from operations of $96 million, compared with a loss of $88 million in the year-ago quarter, driven by a robust 371% increase in shipments.
The U.S. Steel Europe (USSE) segment posted income from operations of $19 million compared with a loss of $53 million in the year-ago quarter attributable to a 34% increase in shipments and a 14% increase in ARP.
The Other Businesses segment posted income from operations of $28 million compared with a loss of $7 million in the year-ago period.
Financial Position
United Steel had cash and cash equivalents of $947 million as of June 30 2010, down from $1.4 billion as of March 30, 2010.
As of June 30, 2010, debt-to-capitalization ratio was 45.1% compared to 44.6% as of March 31, 2010 and 41.8% as of December 31, 2009.
Overall Third Quarter Outlook
United Steel remains hopeful that it will be able to report profit in the third quarter driven by a gradual recovery in the U.S. and European economies. Operating results are expected to be below second quarter levels, mainly due to a decrease in shipping and production volumes for the Flat-rolled segment, reflecting slower order rates, primarily from spot market customers so far in the quarter.
Segment Outlook for the Third Quarter
The Flat-Rolled Products segment is expected to be near break-even levels due to lower shipments and production volumes, and hike in raw material and energy costs. The favorable effect of the absence of repair and maintenance costs pertaining to Lake Erie Works will be offset by increased costs for planned maintenance work on several blast furnaces and repairs of the transportation system used to deliver raw materials to Gary Works' blast furnaces.
ARP is expected to be in line with the second quarter as the benefits of a higher value-added mix of shipments and increased prices for both index-based contracts and recently negotiated contracts offset decreases in spot market prices.
Results at the Tubular Products segment are expected to improve from the second quarter levels as benefits of higher ARP and decreased costs for steel substrate are expected to be partially offset by the impact of lower carbon oil country tubular goods (OCTG) and welded line pipe shipments.
USSE results are expected to be comparable to the second quarter as benefits of higher euro-based transaction prices are offset by increased raw materials costs. Shipments are guided to be lower due to reduced order rates from spot market customers and normal seasonal variations.
The Other Businesses segment results are projected to be lower in the third quarter, mainly due to the second quarter impact of a land sale by the company’s real estate operations.
Our Take
U.S. Steel incurred losses through 2009 as well as in the first quarter of 2010. Rising supplies from China, low demand from the automotive and residential sectors and rising labor costs are affecting its operations.
However, in the second quarter, adjusted EPS broke out from the loss territory and based on the turnaround at all of its segments we believe there is a glimmer of hope that the company will be able to meet its guidance in the third quarter.
Read the full analyst report on "X"
Zacks Investment Research
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