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AK Steel Corp. suffers $78.2 second quarter loss

By Craig J. Heimbuch

Coinciding with an announcement Friday of a $78.2 million net loss in its second quarter, AK Steel Corp. executives talked again of shutting down the hot side of Middletown Works during a conference call with industry analysts.

The loss, which amounts to 72 cents per share and was based on $1.02 billion in sales on 1.3 million tons of steel shipments, reflected lower flat-rolled steel selling prices, higher raw material, energy and maintenance costs and several one-time charges, said James Wainscott, AK’s senior vice president and chief financial officer.

Shipments were about 7 percent lower than the second quarter of 2002, which Wainscott said was partly the result of AK’s decision to cut shipments to price-depressed spot markets.

AK’s stock was hit exceptionally hard Friday, closing at $2.64, down 49 cents from Thursday. And Moody’s Investors Service lowered its rating for the company — but also changed its rating outlook to stable.

“These are tough times for AK Steel and our industry,” Chairman and Chief Executive Richard Wardrop said in the conference call.

Wardrop said the company is investigating “several options” to control costs, but the only one he spoke to Friday was closing down the Middletown blast furnace and out-sourcing iron and steel slab production.

“It’s fair to say that we are looking at ways to reduce costs to remain competitive,” Wardrop said.

Wainscott said 10-year outlooks at iron and steel slab production reveal up to a $1 billion investment for AK — which produces little by way of return.

Being an integrated steelmaker “doesn’t get you anything but a continuous supply” of steel slabs, Wardrop said. “De-integration (represents) a significant long-term benefit.”

No decision has been made about shutting down the Middletown hot end, he said. The company will continue to explore options over the next year, he said.

Wardrop cited rising raw material, energy and legacy costs as reasons for declining revenue.

But he added: “We make no apologies,” standing behind the company’s management and place within the industry.

Among one-time costs, Wainscott said AK lost $11.4 million in a maintenance outage on the Middletown blast furnace. The shut-down of the sinter ore recycling plant resulted in a $4.1 million write-off. And the company switched to a more cost-effective fluxed iron ore pellet in the Middletown blast furnace, eliminating the need for the recycling facility.

At AK’s Ashland, Ky., plant, work was performed to resume coke making on a battery placed on “hot idle” status in 2001, company leaders said. While the additional capacity will result in a $3 million annual savings on coke costs, preparing the Ashland facility for use required $2.4 million in spending.

Another one-time cost was nearly $5 million spent in the failed attempt to acquire National Steel.

Wainscott estimates third quarter costs to drop by $15 per ton, mostly because the one-time costs will not be necessary. But with the automotive industry on July shut-down preparing for the new model year, the company estimates a $5 decrease per ton in selling price.

“That results in a $10 per ton improvement,” Vice President of Public Affairs Alan McCoy said.

While a short-term turnaround is expected, AK executives are looking to the long-term future of the company. New environmental standards enacted by the federal government could end up costing AK $80 million for capital investment on the hot side of the Middletown Works, McCoy said, and another $100 million is anticipated in long run capital improvements to the furnace not related to the new standards.

With the outlook of a possible $180 million investment, McCoy said the company is looking at other ways to maintain productivity, while keeping costs down.

“All that $180 million does is allow us to continue to do what we already do,” McCoy said.

Wainscott said the company’s liquidity position is “still solid,” but could double with the establishment of an inventory credit line by the end of this month.

“This is something that most of our competitors already do,” McCoy said. “But there’s a cost involved with it.”

While company leaders believe AK is poised for a rebound, some financial analysts sounded concerned. Legacy costs — pension and health care benefits — seemed to be of particular concern. When asked if the company would consider bankruptcy to ease the strains of legacy costs, Wardrop said the answer was simple.

“No,” he said. “We’re not any bleeding heart liberals around here, but we do feel a responsibility to our people.”

Wardrop sounded confident that AK would pull through the economic downfall and overcrowded market in the future.

“We’re weathering a really tough storm right now,” Wardrop said. “And we will weather it and come out just fine.”

published 07/19/03

 

   


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