Molten Numbers at Ipsco

The steelmaker beats targets and maintains guidance despite a margin squeeze.
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Steelmaker Ipsco (IPS) said fourth-quarter profit fell as margins were pressured by rising energy costs, but the company beat targets and maintained first-quarter guidance.

The Lisle, Ill., maker of steel tubes made $170 million, or $3.52 a share, down from the year-ago $199 million, or $3.91 a share. Revenue rose 6% from a year ago to $852 million. The latest quarter included a raft of charges and tax changes that netted out to a gain of 43 cents. Analysts surveyed by Thomson First Call were looking for a $2.81-a-share profit on sales of $780 million.

Gross margin fell to 30.3% from 35.5% due to higher costs for alloys, energy and consumables. In addition, sales, general and administration expenses for the quarter were $10 million higher than a year ago primarily due to the increased value and number of stock based compensation units, increased expenses related to Ipsco's SOX 404 compliance effort and increased charitable contributions.

Compared to the prior quarter, increased earnings were driven by a 12% increase in shipments to a new record of 953,000 tons. Average pricing improved 4% to $894 per ton but margins were down slightly due to increased scrap and alloy costs. Late in the fourth quarter Ipsco received a favorable legal settlement related to the construction of the Mobile Steelworks. Approximately $10 million ($0.15 per diluted share) of this settlement was recorded as income to offset legal fees expensed in previous periods.

Changes in the foreign exchange rate resulted in a foreign exchange loss for the quarter of $9.8 million ($0.15 per diluted share) vs. a gain in the prior quarter of $18.1 million ($0.24 per diluted share). Early debt retirement expense impacted earnings by $5.5 million or $0.09 per share. The effective tax rate for the quarter was 25% compared to 38% in the prior quarter and the 36% rate assumed in guidance for the fourth quarter. Compared to the prior quarter and the effective tax rate assumed in the guidance, the fourth-quarter rate favorably impacted results by $0.62 and $0.52 per diluted share, respectively.

Operating income per ton shipped for the year was $259, compared to $186 in 2004. Operating income per ton in the fourth quarter was $244 compared to $300 per ton in the fourth quarter of 2004 and $238 per ton in the prior quarter.

During the fourth quarter, new records were established in numerous areas for the company. Total fourth-quarter shipments were 953,000 tons, an increase of 58,000 tons compared to last year and 106,000 tons higher than the prior quarter. Energy tubular shipments increased 18% and 1% respectively over last year and prior quarter. Ipsco's average fourth-quarter product price was $894 per ton, inclusive of surcharge, the same as a year ago and up from $856 in the prior quarter.

"We anticipate that higher costs of steel making inputs in the first quarter will result in some margin compression in our product lines," Ipsco said. "Excluding foreign exchange gains or losses and assuming a significantly higher effective tax rate of 39%, we forecast first quarter 2006 earnings to be in the range of $2.70 to $2.90 per diluted share." Analysts were looking for $2.70.