U.S. Steel Hunkers Down

To read Scott Rothbort's preview of the U.S. Steel conference call, click here.

U.S. Steel (X - commentary - Cramer's Take) opened for trading down rather hard -- about 8% in the hole. You can attribute that selling to the poor quarter as well as arbs that were jumping ahead of the convertible issuance to hedge positions they would acquire in the offering. However, that loss was cut in half after a few hours of trading.

I do not believe that X is in as dire a condition as one might imply from the actions taken today. Rather, I believe that the company was jut trying to hunker down for what could be a protracted downturn in the steel industry and provide enough liquidity to survive with little damage. The company's Z-Score dropped slightly to 2.61, which is still strong. However, that could decay if conditions go from bad to worse.

Unless and until construction and the automobile industries improve, X will remain in steely purgatory.

Results:

U.S. Steel surprised market participants when it reported its quarterly results and made a series of announcements a day before scheduled. Furthermore, the quarterly conference call was moved from 3 p.m. to 7:30 a.m. today.

The company reported a first-quarter loss of $478 million or $3.78 per share on net sales of $2.75 billion. Included in these results were a pretax gain of $97 million on the sale of a railway company and an $86 million pretax charge for the voluntary early retirement program. These results were dramatically worse than expected.

In addition, the company set forth a series of action to enhance its liquidity. These moves were as follows:

• The quarterly dividend was slashed to 5 cents from 30 cents, saving about $116 million per year.
• 2009 full-year capex was cut by $330 million to $410 million vs. $735 million expended in 2008.
• Agreed with the United Steelworkers to defer $170 million in benefits.
• Consent from lenders to eliminate certain covenants and replace them with a fixed charge coverage ratio. In addition, a $500 million receivable purchase agreement was revised.
• X will issue 18 million common shares and $300 million of convertible securities. The proceeds will be used to repay term loans and for general corporate purposes.
• Executive base compensation will be reduced by 10% or more.

Flat-rolled operating metrics:

• The flat-rolled segment operated at 38% of capacity vs. 45% in the fourth quarter of 2008.
• Lower natural gas usage resulted in a $50 million charge for nat-gas commitments.
• Shipments decreased to 2.1 million tons.
• Average realized price declined 11% to $715 per ton.

In the tubular segment, X suffered from a sharp decline in shipments and prices. Inventory levels remain high. China's trade and subsidy policies also negatively affected X tubular operations during the quarter.

Cash flow from operations was $309 million. Working capital management contributed another $790 million. The railway sale resulted in $300 million in cash proceeds.

Guidance was qualitative rather than quantitative. The economic environment remains difficult. The order book remains at low levels, and X expects a loss in the second quarter. Short lead times make forecasting difficult. Flat-rolled prices are expected to improve slightly on a sequential basis, while shipments should remain in line versus the first quarter. Tubular is expected to post an operating loss in the second quarter.

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Know What You Own: U.S. Steel operates in the metal fabrication industry, and some of the other stocks in the field include Precision Castparts (PCP - commentary - Cramer's Take), Reliance Steel & Aluminum (RS - commentary - Cramer's Take), Valmont Industries (VMI - commentary - Cramer's Take), Matthews International (MATW - commentary - Cramer's Take), Mueller Industries (MLI - commentary - Cramer's Take) and Mobile Mini (MIMI - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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At the time of publication, Rothbort had no positions in stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.