AK Steel ends 2010 with $900 million liquidity, extended maturities

By Paul Deckelman

New York, Jan. 25 - AK Steel Corp. ended the 2010 fourth quarter and fiscal year in what its chief financial officer called "a strong financial position" and with ample liquidity of more than $900 million, the company said on Tuesday.

The West Chester, Ohio-based producer of steel alloys for the automotive, appliance, electrical and other industrial markets finished the quarter and year ended Dec. 31 with a cash balance of $217 million, chief financial officer Albert E. Ferrara, Jr. told analysts on the conference call following the release of the results, although that was down from its year-earlier balance of cash and equivalents of nearly $462 million. He also noted that the company had $693 million available under its revolving credit facility.

Bond deals extend maturities

Long-term debt at Dec. 31 stood at $650 million, most of it in junk bonds, versus $605 million a year earlier, although its maturity profile was considerably improved year over year.

Ferrara, who doubles as AK's senior vice president of finance, noted that during the quarter, the company completed a $150 million add-on offering to its 7 5/8% notes due 2020. Those notes priced on Dec. 6 at 99.375 to yield 7.718%, with the proceeds slated for general corporate purposes.

The add-on deal brought the total amount of the issue up to $550 million. AK priced the original $400 million of the '20s at par on April 27, with the company then using the proceeds plus some cash on hand to fund its retirement of $400 million of 7¾% notes due 2012. Holders tendered $321.3 million of the latter bonds in a tender offer which concluded on May 21, and the company called the remaining bonds for redemption on June 15.

Ferrara also said that AK had "generated a significant amount of working capital by focusing strongly on such items as management of our inventory."

He added that AK's "ongoing focus on the balance sheet allowed us to maintain a strong financial position, even while reinvesting in the company." The $117 million of 2010 capital investments largely went for the construction of a new electric-arc furnace at the company's plant in Butler, Pa., which is scheduled to come online next month.

Cutting legacy costs a key

Another area of balance-sheet improvement was in AK's pension and post-retirement benefit obligations. While the current portion of those remained steady at about $145 million, long-term obligations declined to about $1.7 billion at Dec. 31, about a $150 million reduction from a year earlier.

Ferrara noted that in 2010, AK had contributed $110 million to the pension plan. He said that "looking forward, the funding requirements for our pension plan continue to be very manageable" - no small feat for a company trying to operate successfully in an industry which saw many historic and once-formidable names like Bethlehem Steel, Republic Steel, National Steel and LTV, to name just a few, disappear forever over the past decade or two, killed off at least in part by their inability to meet such legacy costs.

Ferrara said AK's 2011 pension plan obligations total $170 million, of which $30 million was paid earlier this month, with the remaining $140 million expected to be paid by mid-year.

He also pointed out that AK has made, and is continuing to make, payments into several VEBA (voluntary employees' beneficiary association) trusts which will eventually take over the healthcare costs of certain groups of its retired employees, reducing the company's overall retiree healthcare liabilities going forward. Ferrara said that the company's OPEB (other post-employment benefits) obligations have been dropping by about $80 million per year over the last several years, largely a function of structured caps kicking in.

"To the extent that these transactions [short-term OPEB spending in order to decrease longer-term costs] are available, we have the financial flexibility to pull them off. We'll continue to pull these [costs] down, but I certainly think the trend is our friend in this area, and will continue to be so going forward."

AK's chairman, president and chief executive officer, James L. Wainscott, said on the call that "we're delighted that we've been able - unlike a number of other steel companies - to meet those obligations."

AK in the red - but beats The Street

In assessing AK's performance for the quarter and for 2010, Wainscott called the past year "one of the most challenging years in the 111-year history of our company."

AK posted a net loss for the quarter of $98.3 million, or 89 cents per diluted share of common stock, versus year-earlier net income of $39.8 million, or 36 cents per share, even though net sales rose to $1.39 billion in the latest quarter from about $1.32 billion previously. Results were impacted by charges related to the previously announced shutdown of the company's coke plant in Ashland, Ky., and the VEBA settlement covering retirees at the Butler plant. Excluding charges and special items, the adjusted after-tax loss was $54.5 million, or 49 cents per share, which Ferrara noted was better than Wall Street's expectations of a loss of around 60 to 63 cents per share.

For the full year, AK had a net loss of $128.9 million, or $1.17 per share, wider than its fiscal 2009 red ink of $74.6 million, or 68 cents per share, even though sales grew to $5.968 billion from $4.076 billion. Excluding unusual items, the adjusted 2010 full-year after-tax loss was $59.8 million, or 54 cents per share.

Wainscott noted that the results for the quarter and the year were greatly impacted by lower-than-expected shipments and pricing due to the still-unsteady pace of economic recovery, as well as a near-doubling in the price of iron-ore pellets, a key raw materials component. Despite that, he said, AK exceeded its own fourth-quarter guidance. He continued that while "no one around here is pleased [with the losses], least of all me," he said that the company came through the quarter and the year "with our heads held high, having done a good job on those items that were within our control," such as reduced spending and lower operating costs.

AK said it expects shipments for the 2011 first quarter of about 1.45 million tons, or a nearly 7% sequential increase over the 2010 fourth quarter, while average per-ton selling prices will be up around 8% versus the fourth quarter. Despite expectations of continued higher raw materials costs, the company expects to break even on an operating basis during the quarter, a "substantial improvement" over the $60 per ton adjusted operating loss it recorded in the fourth quarter.

One of the analysts on the call told the company executives that she was "knocked out" by that guidance, adding that "in the kind of business and market conditions we're in right now, a breakeven at the operating level is very impressive."

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