U.S. Steel Corp. (X) reported second-quarter 2011 net operating profit of $1.33 per share versus a net operating loss of 17 cents in the year-ago quarter. Results also exceeded the Zacks Consensus Estimate of $1.26 per share.
Net income was $222 million in the quarter versus net loss of $25 million in the second quarter of 2010.
Operational Performance
Revenue in the quarter improved 9.4% year over year to $5.1 billion from $4.7 billion. Results were driven primarily by higher average realized prices and stable raw materials costs in Flat-rolled segment. However, results were below the Zacks Consensus Estimate of $5.5 billion.
Shipments totaled 5.5 million tons, down 6.5% year over year, primarily due to weaker demand in Europe that caused a 21% drop in shipments.
Retiree benefit expenses increased in the first 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 improved significantly from the first quarter of 2011 to $95 per ton, driven largely by an $83 per ton increase in average realized prices. Shipments were in line with the first quarter and costs for raw materials remained stable.
The U. S. Steel Europe segment results were lower than the first quarter of 2011. Shipments decreased by 21% to 1.1 million tons, while average euro-based transaction prices improved due to increased contract proceeds and higher spot market prices early in the quarter. Spot market prices and shipments trended lower during the quarter as low-priced imports were delivered into the European market. Due to reduced spot market prices and weaker demand, a blast furnace in Serbia that was idled for planned maintenance early in the quarter remained idled, and raw steel capability utilization rate for the second quarter decreased to 78%.
The Tubular segment results were in line with the first quarter of 2011. Average realized prices increased by 8% to $1,565 per ton as price increases took effect and product mix improved. Increases in average realized prices were primarily offset by higher costs for hot-rolled bands, supplied by Flat-rolled segment, and purchased rounds.
The Other Business segment posted income from operations of $396 million, or $72 per ton in the second quarter of 2011 compared with an income of $255 million, or $43 per ton in the second quarter of 2010.
Financial Performance
As of June 30, 2011, U. S. Steel had $393 million of cash and $1.8 billion of total liquidity compared with $421 million of cash and $2.0 billion of total liquidity as of March 31, 2011.
Long-term debt was $3.7 billion versus $3.5 billion as of December 31, 2010 end.
Cash flow from operating activities of United Steel in the second quarter of 2011 was $38 million compared with the outflow of $348 million in the prior-year quarter. Capital expenditure totaled $401 million compared with $242 million in the prior year.
Third Quarter 2011 Outlook
United Steel expects Flat-rolled to decline sequentially, reflecting lower average realized prices on monthly index-based contracts and spot market business as increasing capacity and imports have exerted pressure on current transaction prices. Raw materials costs are expected to remain relatively stable, reflecting iron ore, coke and coal positions. Shipments and raw steel utilization are expected to be in line with the second quarter.
United Steel expects European segment to be in line with the second quarter of 2011. Overall average realized prices are expected to decline, while seasonal effects are anticipated to result in increased demand late in the quarter. Raw materials costs are expected to be in line with the second quarter.
Tubular third-quarter results for 2011 are expected to improve significantly sequentially, driven by both increased shipments and improved average realized prices. Demand for energy-related tubular products is projected to increase during the third quarter, primarily due to the continued strength of horizontal and oil-directed drilling. In addition, substrate costs, in the form of hot-rolled bands supplied by Flat-rolled segment, are expected to be lower throughout the quarter.
Our Take
U.S. Steel is an integrated steel producer of flat-rolled and tubular products with major production taking place in North America and Europe. It is currently the tenth largest steel producer in the world with an annual raw steel production capability of 31.7 million tons. 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 # 3 Rank (short-term ‘Hold’ rating).
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