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U.S. Steel Reports 2011 Second Quarter Results
07/26/2011 - United States Steel reported net income of $222 million on net sales of $5.12 billion for the second quarter, and net income of $136 million on net sales of $9.98 billion for the first six months of 2011.
United States Steel Corp. reported net income of $222 million on net sales of $5.12 billion for the second quarter, and net income of $136 million on net sales of $9.98 billion for the first six months of 2011.
Second Quarter Results — The $222 million net income ($1.33 per diluted share) compares to a net loss of $86 million, or $0.60 per diluted share in the previous quarter (1Q2011), and a net loss of $25 million ($0.17 per diluted share) for the year-ago second quarter.
Income from operations was $300 million, compared to a loss from operations of $91 million in the previous quarter (1Q2011) and income from operations of $198 million in the year-ago second quarter.
Commenting on results, U. S. Steel Chairman and CEO John P. Surma said, "Our operating results improved significantly from the first quarter, driven primarily by higher average realized prices and stable raw materials costs in our Flat-rolled segment. U. S. Steel Europe segment results were slightly lower, reflecting significantly lower shipments and capacity utilization and increased raw materials costs, partially offset by higher average realized prices. Tubular segment results were in line with the first quarter of 2011."
Postretirement benefit expenses increased in 2011 as compared to 2010, reflecting higher amortization of unrecognized losses and lower asset returns, both of which relate to a lower market-related value of assets caused by the recognition of remaining deferred 2008 investment losses.
Net interest and other financial costs included a foreign currency gain that increased net income by $37 million (21 cents per share). The net gain primarily resulted from the accounting remeasurement of a $1.7 billion dollar U.S. dollar-denominated intercompany loan partially offset by losses on euro-U.S. dollar derivatives activity. This compares to a foreign currency gain that increased net income by $81 million (56 cents per diluted share) in the previous quarter (1Q2011) and a foreign currency loss that decreased net income by $96 million (62 cents per diluted share) in the year-ago second quarter.
For the first six months, the company recorded an $81 million tax provision on pre-tax income of $217 million. The tax provision does not reflect any tax benefit for pre-tax losses in Canada and Serbia, where a full valuation allowance has been recorded on deferred tax assets, and also does not reflect any tax provision for foreign currency remeasurement gains that are not recognized in any jurisdiction.
As of June 30, 2011, U. S. Steel had $393 million of cash and $1.8 billion of total liquidity as compared to $421 million of cash and $2.0 billion of total liquidity at March 31, 2011. The company amended its domestic credit facilities in July 2011, resulting in a $225 million increase in these facilities.
Change in Reporting Methodology — The company has changed its segment allocation methodology for postretirement benefit expenses, which consists of pensions, retiree health care and life insurance. Under the revised allocation methodology, active service cost and amortization of prior service costs, which represent the cost of providing these benefits to active employees, continue to be attributed to the company’s segments. Interest cost, expected return on plan assets and amortization of actuarial gains and losses are included in postretirement benefit expenses and are no longer allocated to segments. The company has revised prior-period segment information to conform to the current period presentation.
The change resulted in an increase in U. S. Steel's reportable segments and Other Businesses income from operations with an equal and offsetting increase to postretirement benefit expenses of $24 million and $14 million for the first quarter of 2011 and second quarter of 2010, respectively. The change did not affect consolidated income from operations or net income.
The company made the change in allocation methodology in order to focus on the recurring costs of the operating segments without the volatility of the financing and interest components of net periodic benefit cost and to improve the ability to compare U. S. Steel's segment results to peer companies.
Reportable Segments and Other Businesses — U. S. Steel's reportable segments and Other Businesses reported segment income from operations of $396 million ($72 per ton) in the second quarter of 2011, which compares with income of $4 million ($1 per ton) in the previous quarter and income of $255 million ($43 per ton) in the year-ago second quarter.
Income from operations for the company’s Flat-rolled Segment improved significantly from the previous quarter 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, reflecting the company’s iron ore, coal and coke positions.
While the company continues to operate Hamilton Works' coke batteries, the iron and steelmaking and finishing facilities remained idled throughout the quarter due to an ongoing labor dispute. The company incurred approximately $40 million in idle facility carrying costs in both the first and second quarters of 2011. Second quarter raw steel capability utilization rate was 81% for the Flat-rolled segment, or 90% excluding Hamilton Works.
Second quarter 2011 results for USSE were lower than the previous quarter as shipments decreased by 21% to 1.1 million tons. The decrease in shipments was offset by an improvement in average euro-based transaction prices 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 the company’s raw steel capability utilization rate decreased to 78%. The company recorded lower of cost or market charges of approximately $10 million in the second quarter. Raw materials costs increased during the second quarter, reflecting higher coal and iron ore costs.
The company noted that it continues to face challenges in Serbia, including complete reliance on purchased coke, a less favorable product mix, a slower recovery in the Balkan region and an increase in lower-priced imports.
Results for the company’s Tubular Segment 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 the company’s Flat-rolled segment, and purchased rounds.
Outlook — Commenting on U.S. Steel's outlook for the third quarter, Surma said, "The United States and Europe continue to face an uneven economic recovery. The continuing fiscal uncertainty in the U.S. and Europe is not helping the situation. Reflecting the effects of a slowing economy, we expect to report an overall lower operating profit in the third quarter; however, we expect significant improvement in our Tubular operating income compared to the second quarter 2011."
“Flat-rolled results for the third quarter are expected to decline compared to the second quarter 2011, reflecting lower average realized prices on our monthly index-based contracts and our spot market business as increasing capacity and imports have placed pressure on current transaction prices,” continued Surma. “Raw materials costs are expected to remain relatively stable, reflecting our iron ore, coke and coal positions. Shipments and raw steel utilization are expected to be in line with the second quarter.
“We expect the third quarter results for our European segment to be in line with the second quarter 2011,” said Surma. “Although we expect an overall decline in average realized prices, we expect seasonal effects 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 compared to the second quarter, driven by both increased shipments and improved average realized prices,” continued Surma. “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 our Flat-rolled segment, are expected to be lower throughout the quarter.”
United States Steel Corp., headquartered in Pittsburgh, Pa., is an integrated steel producer with major production operations in the United States, Canada and Central Europe and an annual raw steelmaking capability of 31.7 million net tons. The company manufactures a wide range of value-added steel sheet and tubular products for the automotive, appliance, container, industrial machinery, construction, and oil and gas industries.
