Charges Make AK Steel Bleed in 2Q

AK Steel Holding Corporation ( AKS - Analyst Report ) has slid into a loss in second-quarter 2012, bludgeoned by a sizable tax-related charge. The Ohio-based leading producer of flat-rolled carbon, stainless, electrical steel and tubular products also saw a decline in sales and shipments in the quarter.

AK Steel posted a net loss of $724.2 million (or $6.55 a share) in the quarter compared with a profit of $33.1 million (or 30 cents a share) a year ago. The company was hit by a non-cash charge of $736 million associated with a valuation allowance for its deferred tax assets. Excluding the impact, AK Steel earned 10 cents a share in the second quarter, which beat the Zacks Consensus Estimate of 6 cents.

Revenue

Revenues slipped 14% year over year to $1,538.4 million on lower shipments, narrowly missing the Zacks Consensus Estimate of $1,539 million. Shipments fell roughly 11% year over year to 1,335,800 tons. Average selling price dropped 3% year over year to $1,152 per ton while edging up 1% sequentially. The company noted that weak global economic conditions affected volume and steel pricing in the quarter.

Cost and Margins

Consolidated operating costs fell 14% year over year to $1,481.7 million. Operating profit dipped 17% year over year to $56.7 million as lower revenues more than offset a decline in operating costs.

Financial Position

AK Steel exited the quarter with cash and cash equivalents of $37.4 million, down roughly 18% year over year. Long-term debt climbed 46% year over year to $950.4 million.

Outlook and Recommendation

The company said that it expects to record a loss in the third quarter. However, it has not divulged any specific guidance for the quarter given the volatile economic conditions across the U.S. and overseas markets. AK Steel plans to provide more color on that later.

The company said that it expects to record roughly $28 million in maintenance outage charges in the third quarter, mostly related to a blast furnace outage at its Ashland Works facility. Separately, AK Steel said that it has decided to suspend its dividends, a move which is expected to save roughly $22 million a year.

While AK Steel is expected to benefit from the strength in the automotive market, we are concerned about the challenging operating environment in overseas markets, softness in the construction market and weaker international electrical steel prices.

AK Steel and other major players in the steel space such as Nucor Corporation ( NUE - Analyst Report ) and U.S. Steel Corp. ( X - Analyst Report ) are contending with weak steel demand, oversupply in the industry and pricing pressure.

AK Steel currently holds a short-term Zacks #3 Rank (Hold). We have a long-term Underperform recommendation on the stock.