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AK Steel's Profit Dips, Outlook Uncertain

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As anticipated, AK Steel Holding Corporation (AKS - Free Report) posted net loss of $59.2 million or 54 cents per share in the third quarter of 2010 in contrast to a net income of $6.2 million or 6 cents in the year-ago quarter. Reported losses were higher than the Zacks Consensus loss of 34 cents.

Higher raw material (iron-ore) prices and weak steel selling prices are eroding profits. Iron ore 2010 benchmark price is an increase of 98.65% over the 2009 benchmark, and is higher than a 65% increase that AK Steel had forecasted for the first half and third quarter of 2010.


Quarterly revenues soared 51% to $1.6 billion, surpassing the Zacks Consensus Estimate of $1.5 billion, primarily driven by higher shipments. Steel shipments jumped 40% to 1.5 million tons from last year’s 1 million tons. Average selling price of $1,075 per ton for the reported quarter increased 8% year over year, but inched down 2% from the previous quarter.

Steel Shipments

Stainless/Electrical products’ shipments were up 27% to 226.9 million tons, while coated and cold-rolled product shipments spiked 25% and 66% to 624 million tons and 322.5 million tons, respectively. Hot-rolled steel products shipments shot up 80% to 213.6 million tons while Secondary steel product shipments went up 25% to 45.2 million tons.

Costs and Operating Income

Higher raw material (iron ore) costs resulted in a 64% increase in operating costs. The company reported an operating loss of $102.5 million, or $70 per ton in the third quarter, compared with an operating profit of $15.3 million, or $15 per ton, for the third quarter of 2009. Excluding the effect of the change in the price of iron ore, the company's operating loss in the third quarter was approximately $26.5 million or $18 per ton.

Balance Sheet

AK Steel has total debt of $502.5 million as of September 30, 2010. The company ended the third quarter of 2010 with $80.5 million of cash and cash equivalent, down significantly from $461.7 million.


AK Steel expects average selling price per ton to decline 4% in the fourth quarter of 2010. Shipments are expected in the range of 1,300,000 to 1,350,000 tons.Fourth-quarter maintenance costs are expected to decline by approximately $20 million from the reported quarter.

The company expects to incur an operating loss of about $80 per ton for the fourth quarter of 2010 due to lower shipments and selling prices as well as high iron ore and other raw material costs.

Zacks Recommendation

AK Steel Holding Corporation has a more diverse product portfolio than its peers. The company is focusing on markets and products that have greater potential in the long term.

However, average selling prices are lower, as the U.S. and global markets are on a gradual recovery. The ongoing slowdown has marred prospects in the housing and construction sectors. We expect AK Steel to report weak fourth quarter with rising iron ore costs and moderating steel prices.

Currently, AK Steel has a short-term Zacks #4 Rank (Sell), but a long-term Neutral recommendation.

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