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U.S. Steel Reports Profitable Third Quarter
10/30/2012 - The United States Steel Corporation reported positive third quarter earnings as its tubular segment posted solid results despite declining rig activity, pricing pressure and elevated import levels; its flat-rolled and European segments were also profitable but continue to be challenged by difficult economic conditions.
United States Steel Corporation reported third quarter 2012 net income of $44 million compared to second quarter 2012 net income of $101 million and third quarter 2011 net income of $22 million. Net income for the third quarter 2012 included a $22 million after-tax charge for employee lump sum payments as provided in the new labor agreement. Net income for the second quarter 2012 included an $11 million after-tax early redemption premium on its $300 million 5.65% Senior Notes due 2013. Net income for the third quarter 2011 included $96 million of net foreign currency losses, primarily related to the accounting remeasurement of a U.S. dollar denominated intercompany loan to a European entity.
Commenting on results, U. S. Steel Chairman and CEO John P. Surma said, "Third quarter operating results were positive for all three reportable segments in an economic environment that was more challenging than the second quarter. Our Tubular segment once again had solid results despite declining rig activity and pricing pressure caused by rising oil country tubular goods inventory and continued high levels of imports. Our Flat-rolled and European segments were profitable but continue to be challenged by difficult global economic conditions. In addition, our Flat-rolled segment continued to be adversely affected by increased import levels."
The company reported third quarter 2012 reportable segment and Other Businesses income from operations of $171 million, or $32 per ton, compared with income of $330 million, or $61 per ton, in the second quarter of 2012 and income of $295 million, or $54 per ton, in the third quarter of 2011.
Other items not allocated to segments in the third quarter of 2012 consisted of a $35 million pre-tax charge for employee lump sum payments as provided in the new labor agreement.
For the third quarter 2012, the company recorded a tax benefit of $27 million on its pre-tax income of $17 million. The third quarter 2012 tax benefit includes $20 million of favorable effects associated with the settlement of prior years' income tax audits and $26 million of a tax benefit to adjust its estimated 2011 federal income tax liability to its actual tax liability reflected in its tax return as filed in the third quarter. The tax benefit does not reflect any tax benefit for pre-tax losses in Canada, which is a jurisdiction where U. S. Steel has recorded a full valuation allowance on deferred tax assets.
As of 30 September 2012, U. S. Steel had $536 million of cash and $2.4 billion of total liquidity.
Reportable Segments and Other Businesses
Flat-rolled third quarter results decreased from the second quarter primarily due to a $31 per ton decrease in average realized prices, as significant price decreases for domestic scrap and globally traded steelmaking raw materials placed downward pressure on spot and index-based pricing mechanisms in North America in the third quarter. The spot market continues to be pressured by high import volumes, which for sheet products have increased 13 percent year over year through the first nine months of 2012. Proceeds from steel substrate sales to our Tubular segment have also decreased. Shipments and operating costs for our Flat-rolled segment were comparable to the second quarter.
Despite the continued economic challenges, third quarter results remained positive for our European segment. Results were lower than the second quarter as average realized prices decreased compared to the second quarter due to weaker spot market prices. Shipments were also lower in the third quarter as a result of the continued conservative buying pattern by service centers and distributors, reduced automotive production schedules and the normal summer holiday outages. Operating costs decreased compared to the second quarter due to lower raw materials prices and good operating cost performance.
Third quarter results for its Tubular segment were in line with the second quarter. Shipments decreased as end users adjusted their drilling plans and curtailed spending due to economic uncertainty and concern over energy prices. Average realized prices declined slightly as import levels remained high resulting in pricing pressure from increased supply. Operating costs decreased compared to the second quarter due to lower substrate costs.
Outlook
Commenting on U. S. Steel's outlook for the fourth quarter, Surma said, "Our results are expected to reflect continued weakness in the European and emerging market economies, as well as economic uncertainty in North America. We expect total reportable segment and Other Businesses operating results to be around breakeven for the fourth quarter with decreased results in all reportable segments."
U. S. Steel expects a loss for its Flat-rolled segment due to slightly lower average realized prices, as well as lower shipments and higher operating costs. Average realized prices and shipments are expected to be lower compared to the third quarter as a result of cautious purchasing patterns early in the quarter created by the uncertain global economic outlook; however, market conditions have recently begun improving in North America, and the company believes that it is already beyond the spot price trough of the fourth quarter. New spot orders are being transacted at higher prices for delivery later this quarter. Operating costs are expected to increase due to scheduled blast furnace and other maintenance projects.
The company expects its European segment results to be around breakeven. Average realized prices are expected to decrease reflecting lower spot market and quarterly contract pricing. Shipments are projected to decrease compared to the third quarter due to lower consumption in automotive and other end user industries. Operating costs are expected to decrease compared to the third quarter primarily due to lower raw materials costs.
U. S. Steel expects fourth quarter results for its Tubular segment to remain profitable but well below third quarter results. Average realized prices are expected to be lower and shipments are projected to be significantly lower than the third quarter as imports continue at high levels despite end users decreasing drilling activity in order to operate within their 2012 capital budgets. Inventory management by its customers may also be a considerable factor as year-end approaches. Operating costs are expected to increase due to operating inefficiencies caused by lower production volumes.
The company expects a minimal tax provision/benefit in the fourth quarter primarily due to the full valuation allowance on deferred tax assets in Canada.
