U.S. Steel Reports Substantial Net Loss Due To Goodwill Impairment And Lower Prices

-11.73%
Downside
40.78
Market
36.00
Trefis
X: United States Steel logo
X
United States Steel

U.S. Steel (NYSE:X) announced its third quarter results on October 28 and reported a quarterly loss of $1.79 billion compared to the previous year’s profit of $44 million for the same quarter. The bulk of the loss was due to a goodwill impairment charge of $1.8 billion in the third quarter. Steel shipments and revenues declined from last year. Average realized prices for tubular products were lower due to industry overcapacity and higher imports.

Demand from the automotive sector is expected to be stable going ahead. The company is focusing on producing value-added products for its customers in this segment, which will help them achieve fuel efficiency in order to meet regulatory requirements. Demand for its products in the tubular segment is expected to remain strong as well given the heavy drilling activity going on in the U.S. for shale gas. However, growth in imports in this segment could spoil the party for U.S. Steel. The company, along with other major producers, has filed a trade case for the imposition of duties on the import of oil and tubular goods from countries selling them at unfairly low prices.

We have a price estimate of $18 for U.S. Steel, which represents 29% downside to the market price. This will be updated shortly now that the third quarter earnings results are out.

Relevant Articles
  1. Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?
  2. What’s Happening With U.S. Steel Stock?
  3. Will U.S. Steel Stock Continue To Outperform Despite Economic Headwinds?
  4. Is U.S. Steel Set For Tough Q3 Results?
  5. Why We Are Cutting Our Price Estimate For U.S. Steel Stock
  6. How Will U.S. Steel Stock Fare In An Uncertain Economy?

See Full Analysis of U.S. Steel Here

Operational Performance

U.S. Steel reported revenues of $4.13 billion this quarter compared to $4.65 billion in Q3 2012.

  • In the flat-rolled division, the company incurred a profit from operations of $82 million in the second quarter as compared to an income of $29 million in Q3 2012. The increase in profits was due to lower repairs and maintenance and other operating costs. Profits in this segment would have been higher if not for lower shipment volumes, idle capacity at the Lake Erie Works plant due to labor dispute, and higher energy and natural gas costs.
  • In the European segment, the loss from operations was $32 million in the third quarter compared to a profit of $27 million last year. The decrease resulted mainly from lower average realized prices, increased repairs and maintenance and other operating costs. The impact due to these factors was offset to some extent by lower raw material costs and weakening of the U.S. dollar versus the euro.
  • In the tubular goods division, income from operations for the quarter stood at $49 million, compared to a profit of $102 million last year. The decrease came about primarily due to lower average realized prices and a decrease in shipment volumes. These decreased were offset partially by lower substrate costs and decreased repairs and maintenance and other operating costs.
  • Average realized price per tonne increased from $741/tonne to $752/tonne in the flat-rolled division. However, it decreased from $731/tonne to $714/tonne in the European segment and $1,676/tonne to $1,543/tonne in the tubular segment. Flat-rolled prices increased marginally due to higher spot prices, while rising imports and overcapacity led to a reduction in tubular steel prices. [1]

Imports Are A Major Concern

The rising tide of imports into the U.S. has led U.S. Steel and other major producers to ask for duties on imported oil and tubular country goods (OCTG) which are supposedly being sold at unfairly low prices. This has prompted the U.S. Commerce Department to launch an investigation into alleged unfair trade practices being followed by exporting countries. In December, the Department of Commerce is likely to determine preliminary countervailing duties on the countries under investigation. Preliminary anti-dumping duties are expected to be imposed in February 2014.

Imports of OCTG steel from the nine countries under investigation (India, Vietnam, Philippines, Thailand, Taiwan, Turkey, Saudi Arabia and Ukraine) totaled $1.8 billion in 2012. The quantity has more than doubled since 2010, owing to rising U.S. oil and natural gas production which is increasing demand for OCTG steel. Given the high price realizations from OCTG grades of steel and the fact that they account for 15% of its revenues, U.S. Steel has a significant stake in ensuring a favorable outcome from the investigation. [2]

Until the time the investigation concludes, U.S. Steel’s OCTG business is likely to continue facing challenging business conditions from imported products.

Outlook

In the fourth quarter, U.S. steel expects higher average spot and market-based contract prices but still expects average realized prices in the flat-rolled division to be comparable to the prices in the third quarter. This is due to expectations of a higher percentage of hot rolled shipments in the fourth quarter. Shipments in this segment are expected to increase slightly quarter-over-quarter due to resolution of the Lake Erie Works plant dispute. In the European segment, U.S. Steel expects to return to profitability due to higher shipments and lower facility repairs and maintenance costs. In the tubular division, results are expected to be comparable to the third quarter as the benefits of lower operating costs will be offset by lower average realized prices and shipments. Prices and shipments are expected to decrease because oil and gas companies are likely to reduce drilling activity in order to stay within their capital budgets for the year. [3]

Update On Project Carnegie

In the second quarter earnings conference call, U.S. Steel had announced the launch of a profitability and value enhancement initiative called Project Carnegie. The objective is to evaluate the business and come up with sustainable measures to reduce costs and enhance revenues. The specific areas of focus are rationalization of raw material usage that accounts for about two-thirds of the company’s product cost structure, and reduction of conversion costs and fixed costs across all facilities. ((U.S. Steel Q2 2013 Earnings Conference Call, Seeking Alpha))

U.S. Steel communicated that the initiative is progressing very well but declined to give out any hard numbers or declare any quantitative targets. It said that it would prefer the effort to reflect in the company’s financial numbers going ahead, rather than spending time and energy on communication about the project itself. Therefore, we don’t have much clarity at this point on the quantitative implications of Project Carnegie for U.S. Steel’s forthcoming results. The company did disclose that under the project, it is permanently shutting down iron and steel making operations at its Hamilton Steel Works plant in Canada and will record a related non-cash charge of $225 million in the next quarter. However, it eventually expects annual savings of $50 million on account of the closure. The shutdown will have no impact on future shipment figures as steel manufacturing here had already been idled in 2010. [4]

Understand on Trefis how a company’s products impact its stock price

Notes:
  1. U.S. Steel Q3 2013 10-Q, SEC []
  2. US to probe steel pipes from Turkey, 8 others, Daily News []
  3. U.S. Steel Q3 2013 Earnings Conference Call, Seeking Alpha []
  4. U.S. Steel to partially shut Ontario mill, Reuters []