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Friday, October 3, 2003

Crunch time for AK Steel?

Speculation increases that company might go into Chapter 11

By Mike Boyer
The Cincinnati Enquirer

Despite AK Steel's assurances that it doesn't plan to seek bankruptcy protection, steel analysts Thursday said the clock is ticking on the future of the Middletown steel maker.

AK cautioned late Wednesday that it expects a third-quarter loss of as much as $2.61 a share versus loss of 3 cents a share a year ago. It "has to be able to turn a profit in six to nine months," independent steel analyst Charles Bradford said.

There's been increased speculation that the company, which employs 4,100 in Middletown, might go into Chapter 11 bankruptcy reorganization, particularly since chairman and CEO Richard Wardrop and president John Hritz resigned unexpectedly last month.

Wardrop, a veteran steel executive, repeatedly opposed bankruptcy protection as a strategy to get out from under huge pension and retiree health-care liabilities. The strategy has been used by some of AK's leading U.S. competitors.

AK says it has liquidity of about $500 million, mainly through new financing arranged last month. It also said it could sell noncore assets valued at about $300 million to reduce debt.

Analysts said the company doesn't face an immediate debt crunch. It has a $62.5 million debt payment due in December and other $62.5 million debt payment due in December next year.

But Bradford cautioned: "They can't go into 2005 with Wall Street estimates of losing $1 a share."

Company officials have acknowledged as much.

In disclosing the wider third-quarter loss, acting CEO James L. Wainscott said the company will soon "outline an approach that is designed to return us to a sustainable level of profitability.''

Thursday, AK Steel's shares fell 9 percent, closing at $1.91, off 19 cents after the company said a less profitable product mix and higher energy and raw material costs will result in an operating loss later this month of 82 to 86 cents a share.

The consensus among analysts had been for an operating loss of 59 cents a share.

In addition, the company said it is studying noncash charges for goodwill and deferred tax assets of about $190 million, after tax, or $1.75 per share.

Leo Larkin, an industry analyst for Standard & Poor's, said it is imperative that the flat-rolled carbon, stainless and electrical steel maker negotiate agreements with its labor unions as soon as possible to put its costs on par with larger competitors such as Cleveland-based International Steel Group and U.S. Steel Corp.

This summer, the company approached the leadership of the independent union representing hourly workers in Middletown to discuss future plant operations. Those talks have been delayed by completion of a company-requested confidentiality agreement. The union, Armco Employees Independent Federation, also completed officer elections Thursday.

Chris Olin, analyst with Longbow Research in Cleveland, said AK Steel still faces hurdles.

"They've lost market share in the auto industry,'' he said. And, "they have to get a labor agreement to get their costs down.''

Among the noncore assets AK could be looking to sell are Douglas Dynamics LLC, a maker of ice and snow removal plows it acquired in its 1999 acquisition of Armco Inc., and an industrial park it owns in Houston.

But Larkin said AK still needs the same type of labor concessions that privately held International Steel Group was able to negotiate with the United Steelworkers of America in acquiring assets of Bethlehem and LTV Steel out of bankruptcy.

"Without labor contract concessions, they can't survive,'' he said.

Even with that, he said, the company may eventually have to seek a buyer for all or part of its business.

Analysts such as Bradford say AK Steel's crisis has been aggravated by the President Bush's tariffs on imported steel, which are up for renewal.

The industry's problem is too much capacity, Bradford said. The tariffs have acted as a subsidy for that excess capacity and weakened the market for all suppliers, he said.

AK Steel, which buys imported steel slabs for finishing, has opposed the import tariffs, which are backed by other steel makers and the steelworkers' union.


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