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United States Steel Corporation (X) reported third-quarter 2011 adjusted net income of $118 million or 72 cents per share, exceeding the Zacks Consensus Estimate of 55 cents per share.

The net income excluded $96 million or 57 cents per share of net foreign currency losses, primarily related to the accounting remeasurement of the inter company loans. Including this net income came in at $22 million, or 15 cents per diluted share versus net loss of $51 million or loss of 35 cents per diluted share.

Operational Performance

Revenue in the quarter improved 13% year over year to $5.1 billion from $4.5 billion, in line with the Zacks Consensus Estimate of $5.1 billion.

U. S. Steel's reportable segments and Other Businesses reported income of $295 million, or $54 per ton, in the third quarter of 2011 compared with an income of $396 million, or $72 per ton, in the second quarter of 2011 and a loss of $65 million, or $12 per ton, in the third quarter of 2010.  Results continue to reflect the difficult economic situation in Europe, particularly in Southern Europe

Shipments totaled 5.5 million tons, and were down by 0.8% year over year.

Retiree benefit expenses increased in the third quarter of 2011 due to a decline in the market-related value of pension plan assets and higher amortization of unrecognized losses, both of which relate to pension plan asset losses experienced in 2008.

Segmental performance

The Flat-rolled product segment income from operations declined significantly from the second quarter of 2011 to $53 per ton, driven largely by lower average realized prices due to weaker spot market prices and volume.  Steel shipments in the quarter amounted to 3.8 million tons versus 3.9 million tons in the sequential quarter and 3.8 million tons in the year-ago quarter.

Costs for raw materials remained stable and the company incurred approximately $40 million in idle facility carrying costs in the third quarter of 2011.  The raw steel capability utilization rate in the third quarter was 74%, a decrease of 7% from the second quarter.  

Excluding Hamilton Works, where the iron and steelmaking and finishing facilities remained idled throughout the quarter due to the labor dispute that was resolved in October 2011, the raw steel capability utilization was 81% in the reported quarter. The Flat-rolled segment faced certain challenges due to less than robust economy in North America

The U. S. Steel Europe segment results were lower than the second quarter of 2011 due to lower average realized prices as a result of a weaker spot market caused by the difficult economic conditions in Europe, particularly Southern Europe. Shipments decreased to 1.2 million tons in the reported quarter versus 1.1 million tons in the previous quarter and $1.3 million tons in the year-ago quarter.

Due to reduced spot market prices and weak demand, a blast furnace in Serbia remained idled throughout the third quarter and the company’s European raw steel capability, utilization rate decreased to 71%.  

Average realized prices for the Tubular segment increased by 9% over the previous quarter to $1,699 per ton and shipments increased by 13% sequentially to 481 thousand tons as demand for energy-related tubular products rose during the quarter, primarily due to the continued strength of horizontal oil-directed drilling.  The improved results also reflected lower substrate costs in the form of hot-rolled bands supplied by the company’s Flat-rolled segment.

The Other Business segment posted income from operations of $8 million compared with an income of $9 million, in the second quarter of 2011.

Financial Performance

As of September 30, 2011, U. S. Steel had $270 million of cash and $1.9 billion of total liquidity compared with $393 million of cash and $1.8 billion of total liquidity as of June 30, 2011.  

Long-term debt after deducting unamortized discount came in at $3.6 billion versus $3.5 billion as of December 31, 2010 end.

Fourth Quarter 2011 Outlook

U.S. Steel expects Flat-rolled to decline sequentially, reflecting lower average realized prices on index-based contracts and spot market business. With the ratification of a new three-year labor agreement at Hamilton Works on October 15, 2011, U.S. Steel expects to restart the steel finishing facilities in a staged process late in the fourth quarter.  

In addition to the idled facility carrying costs, the company expects to incur approximately $30 million in costs related to the ratification of the Hamilton Works labor agreement and associated facility restart costs. Shipments are also expected to decline due to cautious purchasing patterns created by the uncertain economic outlook and increasing domestic supply.

United Steel expects European segment results to be below the third quarter level. Shipments and average realized prices are expected to decline as market demand softens in response to the uncertain economic conditions in Europe, particularly Southern Europe.

Operating costs are expected to decrease compared to the third quarter, reflecting lower spending and lower raw materials costs.  The idled blast furnace at U. S. Steel Serbia is not expected to operate during the fourth quarter.  

Average realized prices for the Tubular segment are expected to be comparable to the third quarter and shipments are expected to be slightly lower as distributors actively control their inventory levels during year end, particularly for non- oil country tubular goods (OCTG) products.  

Our Take

U.S. Steel is an integrated steel producer of flat-rolled and tubular products with major production in North America and Europe. It competes with international steel giants like ArcelorMittal (MT), BaoSteel, Posco (PKX), Nippon Steel and ThyssenKrupp.

We maintain our Neutral recommendation on United Steel with its quantitative Zacks #4 Rank (short-term Sell rating).

 
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