U.S. Steel bends to slumping market

| Friday, Oct. 18, 2013, 10:02 p.m.

U.S. Steel Corp. said Friday that its third-quarter results will include a $1.8 billion charge to reflect the falling value of its flat-rolled and Texas tubular operations, an accounting move that likely will have significant impact on the company's bottom line.

The Pittsburgh-based steelmaker, which plans to report its earnings for the July-September period on Tuesday, said the non-cash charge will not affect its liquidity or debt agreements.

Steel analyst Charles Bradford in New York said the action is one of several difficult decisions that CEO Mario Longhi must make to turn around the nation's second-largest steelmaker, whose earnings and stock price have been in a slump.

Longhi replaced longtime CEO John P. Surma on Sept. 1. Surma, 58, became executive chairman and will retire by the end of the year. Longhi, 59, was tapped in April, when he held the title of president, to lead “Project Carnegie,” the steelmaker's initiative to improve and maximize results. He is viewed by analysts as having the background to help reverse the company's slide.

U.S. Steel shares closed at $23.98, up 32 cents. The stock has gained about $6 a share since Longhi took over on Sept. 1.

Bradford said the two operations affected by the writedown came from U.S. Steel's 2007 acquisitions of Canadian steelmaker Stelco Inc. for $1.1 billion and its $2.1 billion acquisition of Lone Star Technologies Inc.

The Lake Erie Works plant in Nanticoke, Ontario, is the newest integrated steel plant in North America, but has been mired in labor disputes. On Aug. 30, members of the United Steelworkers union approved a labor agreement after being locked out by the company since April 28, the second lockout in four years.

U.S. Steel has alternately said the flat-rolled plant is one of its most cost-competitive, but during the labor dispute said it was losing money and concessions were needed. Flat-rolled steel is used in automobiles and appliances.

The steelmaker also bought Lone Star, which Surma said at the time, “represents a compelling strategic opportunity for U.S. Steel to strengthen our position as a supplier to the robust oil and natural gas sector.”

On Friday, the company said the $1.8 billion writedown was necessary because the flat-rolled operations are affected by the long economic recovery and excess capacity, and tubular business is the victim of oversupply, high levels of imports, and manufacturing capacity being built by other steelmakers.

U.S. Steel said the flat-rolled segment has $1 billion in goodwill, and Texas Operations $800 million. Goodwill is the price, or premium, that is paid for an asset above its true value.

“The writeoff is more than I would have thought,” Bradford said. “But once you start losing money at these operations, you've got to write them down.”

In July, U.S. Steel reported a second-quarter loss of $78 million, blaming costs from the Lake Erie Works labor dispute, slower economic growth and increased repair and maintenance costs. Sales for the three-month period fell to $4.43 billion versus $5.02 billion a year earlier.

Bradford said he forecasts a 17 cents a share loss for the third-quarter, which he said is better than most other analysts estimates.

The writedown is the second significant move taken by the company since Longhi took over as CEO, Bradford said. The first was a series of management changes that included replacing the chief financial officer, general counsel and a number of other high-level managers.

Bradford believes U.S. Steel must still decide the fate of its Fairfield, Ala., plant that produces both flat-rolled and tubular products. The plant has one blast furnace that supplies both products, and Longhi must decide whether to invest $100 million to reline the furnace to better serve both products, or shut it down and install an electric arc furnace that would serve one product line or the other, amid mounting competition. The steelmaker also faces decisions on aging coke batteries at its Gary, Ind., works, he said.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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