AK Steel's Third Quarter Earnings Impacted by Unplanned Blast Furnace Outage
3rd Quarter 2013 Performance Summary
Shipments of 1,242,400 tons
Sales of US$1.3 billion with an average selling price of US$1,071 per ton
Net after tax loss of US$31.7 million, or US$0.23 per diluted share, including a pre-tax loss of US$0.09 per diluted share related to an unplanned blast furnace outage
Adjusted EBITDA of US$53.5 million
Strong liquidity in excess of US$800 million
AK Steel reported a net loss of US$31.7 million, or US$0.23 per diluted share of common stock, for the third quarter ended 30 September 2013, compared to a net loss of US$60.9 million, or US$0.55 per diluted share, for the third quarter of 2012 and a net loss of US$40.4 million, or US$0.30 per diluted share, for the second quarter of 2013. The company reported adjusted EBITDA (as defined in the "Non-GAAP Financial Measures" section below) of US$53.5 million, or US$43 per ton, for the third quarter of 2013 compared to adjusted EBITDA of US$27.2 million, or US$20 per ton, for the year-ago third quarter and adjusted EBITDA of US$47.5 million, or US$36 per ton, for the second quarter of 2013.
Net sales for the third quarter of 2013 were US$1.33 billion on shipments of 1,242,400 tons, compared to net sales of US$1.46 billion on shipments of 1,363,500 tons for the year-ago third quarter and net sales of US$1.40 billion on shipments of 1,323,700 tons for the second quarter of 2013. The reduction in shipments for the third quarter of 2013 was primarily due to the effects of the previously disclosed unplanned outage at the company's Middletown Works blast furnace and to a seasonal reduction in shipments to the automotive market. As a result of the unplanned outage, the company's melt production during the quarter was reduced, resulting in a delay of shipments to some carbon spot market customers and an overall reduction in shipments during the quarter.
The company said its average selling price for the third quarter of 2013 was US$1,071 per ton, a slight decrease from the third quarter of 2012 and an increase of 1% from the second quarter of 2013. The average selling price for the third quarter of 2013 improved over the prior quarter due to a more favorable mix of value-added products, the benefit of which was largely offset by lower raw material surcharges and the effect of delayed shipments to customers resulting from the unplanned outage. The company has continued to honor its commitments to customers for lower-priced orders placed prior to the unplanned outage of its Middletown Works blast furnace for carbon spot market shipments and, as a result of the limitations on its capacity for shipments caused by the outage, the company was unable to realize the full benefit of price increases in the carbon spot market that occurred during the third quarter. Further, the company continued to experience a decline in electrical steel spot market pricing during the quarter, particularly with regard to international sales as a result of weak global economic conditions.
The company recorded expenses of US$4.2 million during the third quarter of 2013 for planned outages, compared to US$28.5 million in the third quarter of 2012 and US$21.6 million in the second quarter of 2013. The 2013 third quarter results also include expenses of approximately US$11.8 million, or pre-tax US$0.09 per diluted share, for costs related to the unplanned blast furnace outage at the company's Middletown Works, as discussed below.
The 2013 third quarter results include a LIFO credit of US$15.8 million, compared to a LIFO credit of US$27.5 million in the third quarter of 2012 and a LIFO credit of US$12.4 million for the second quarter of 2013.
"At AK Steel, we met our challenges head-on during the third quarter of 2013, and we continue to make solid progress on several fronts," said James L. Wainscott, chairman, president and CEO of AK Steel. "By remaining focused on all of the items within our control, we have positioned the company for an improved fourth quarter."
The company ended the third quarter of 2013 with total liquidity of US$811.9 million, consisting of cash and cash equivalents and US$760.4 million of availability under the company's revolving credit facility. There were US$185.0 million of outstanding borrowings under the company's revolving credit facility as of 30 September 2013. Working capital was a use of US$29.0 million of cash in the third quarter of 2013, primarily as the result of normal seasonal fluctuations and the unplanned Middletown Works blast furnace outage. The company anticipates that working capital will be a source of cash in the fourth quarter and for the full year.
For the first nine months of 2013, the company reported a net loss of US$82.0 million, or US$0.60 per diluted share. For the corresponding nine months of 2012, the company reported a net loss of US$796.9 million, or US$7.21 per diluted share. The results for the first nine months of 2012 include a non-cash income tax charge of US$768.7 million, or US$6.96 per diluted share, as a result of a change in a deferred tax asset valuation allowance in the second quarter.
Sales for the first nine months of 2013 were US$4.11 billion compared to US$4.51 billion in the first nine months of 2012. Shipments for the first nine months of 2013 were 3,855,900 tons compared to 4,025,200 tons for the same period in 2012. The company recorded expenses of US$26.8 million during the first nine months of 2013 for planned outages, compared to expenses of US$30.1 million during the first nine months of 2012. In addition, the company incurred expenses of US$18.0 million, or pre-tax US$0.13 per diluted share, for the first nine months of 2013 for the unplanned blast furnace outage.
The company reported adjusted EBITDA of US$167.8 million, or US$44 per ton, for the first nine months of 2013, compared to US$164.4 million, or US$41 per ton, for the same period in 2012.
Middletown Works Unplanned Blast Furnace Outage
As previously disclosed, the company's blast furnace at its Middletown Works experienced an unexpected mechanical failure in the charging apparatus internal to the furnace on 22 June 2013. The company completed repairs and restarted the blast furnace on 12 July 2013.
The company maintains property damage and business interruption insurance, and it currently expects that the retained portion of the losses, including margins on lost sales opportunities, will be between approximately US$20.0 million and US$23.0 million before taxes. The company's results for the three and nine months ended 30 September 2013, include recognized pre-tax losses for the unplanned outage, after partial insurance recoveries, of US$11.8 million, or US$0.09 per diluted share, and US$18.0 million, or US$0.13 per diluted share, respectively.
Fourth Quarter 2013 Outlook
Consistent with its current practice, the company said that it will provide detailed guidance for its fourth quarter results in December. However, the company indicated that it expects an improved fourth quarter compared to its third quarter.
The balance of the insurance recoveries from the unplanned blast furnace outage, including recovery of lost margins, is expected to be recognized in the fourth quarter of 2013. The extent and timing of the impact on the fourth quarter financial results will depend on whether an agreement with the insurance underwriters on the insured portion of the loss is reached and, if so, when such an agreement is reached. Further, the timing and amount of any insurance recovery cannot be accurately predicted at this time and could occur after the fourth quarter, thus resulting in a mismatch of expenses and insurance recovery.
Under its method of accounting for pension and other postretirement benefit plans, the company recognizes into income, as a fourth quarter adjustment, any unrecognized actuarial gains and losses that exceed 10% of the larger of projected benefit obligations or plan assets (the "corridor"). These corridor charges are driven by assumptions and by events and circumstances beyond the company's control, primarily changes in interest rates, performance of the financial markets, healthcare cost trends and mortality and retirement experience. It thus is impossible to reliably forecast or predict whether the company will incur corridor charges in any given year or, if it does, what the magnitude of those charges will be. Based upon currently available information and reasonable projections, however, the company does not anticipate a fourth quarter 2013 corridor charge related to its pension or other postretirement benefit plans. Although the company, at this time, does not believe there will be corridor charges, it is possible that a corridor charge could occur depending on year-end interest rates and pension plan asset values.