AK Steel reported a net loss of $17.1 million, or $0.13 per diluted share of common stock, for the second quarter of 2014, compared to a net loss of $40.4 million, or $0.30 per diluted share, for the second quarter of 2013 and net loss of $86.1 million, or $0.63 per diluted share, for the first quarter of 2014. Excluding the unrealized mark-to-market loss on commodity derivatives discussed below, the company reported adjusted net income of $2.9 million, or $0.02 per diluted share. The company reported adjusted EBITDA (as defined in the "Non-GAAP Financial Measures" section below) of $64.5 million, or $46 per ton, for the second quarter of 2014 compared to adjusted EBITDA of $47.5 million, or $36 per ton, for the year-ago second quarter and an adjusted EBITDA loss of $2.8 million, or $2 per ton, for the first quarter of 2014.
"We experienced meaningful improvements in virtually every aspect of our business in the second quarter as compared to the first quarter of 2014," said James L. Wainscott, Chairman, President and CEO of AK Steel. "Despite facing some significant challenges in the second quarter, on an adjusted basis, we earned net income and we are well-positioned for a much better third quarter and second-half of 2014", he added.
Net sales for the second quarter of 2014 were $1.53 billion on shipments of 1,397,500 tons, compared to net sales of $1.40 billion on shipments of 1,323,700 tons for the year-ago second quarter and net sales of $1.38 billion on shipments of 1,262,100 tons for the first quarter of 2014. The increase in shipments in the second quarter of 2014 compared to the first quarter of 2014 was primarily a result of the recovery from the planned and unplanned outages at the Ashland Works blast furnace in the first quarter, partially offset by the effects of the extreme winter weather conditions which reduced the availability of iron ore pellets.
The company said its average selling price for the second quarter of 2014 was $1,095 per ton, essentially flat with the first quarter of 2014. Improved selling prices in the second quarter for many of the company's products were offset by a change in mix, as more shipments of lower value-added products were made to the carbon spot market. The company also said its average selling price for the second quarter of 2014 increased 3% from the second quarter of 2013, primarily as a result of higher spot market prices for carbon steel products.
Costs of products sold increased in the second quarter of 2014 due to the continued adverse effects of the extreme cold weather conditions the company experienced in the first quarter. Those conditions resulted in an extraordinarily high level of ice coverage on the Great Lakes, which delayed the start of the 2014 shipping season on the Great Lakes and slowed the movement of iron ore. As a result, the available supply of iron ore to the steel industry in the second quarter was less than had been anticipated, and the company was forced to reduce the production rate at its blast furnaces to match production levels to the available supply of iron ore. The company also experienced higher transportation costs for the iron ore pellets it received in the second quarter. The company incurred additional costs for these issues in the second quarter of 2014 of approximately $15.0 million, or $0.11 per diluted share.
The company incurred $2.5 million of costs for planned outages during the second quarter of 2014, compared to $21.6 million in the year-ago second quarter and $29.4 million in the first quarter of 2014.
The 2014 second quarter results included a LIFO credit of $3.3 million, compared to a LIFO credit of $12.4 million for the second quarter of 2013 and a LIFO credit of $1.5 million for the first quarter of 2014.
The company ended the second quarter of 2014 with total liquidity of $538.9 million consisting of cash and cash equivalents and $502.5 million of availability under the company's revolving credit facility. Consistent with prior seasonal patterns, working capital was a use of $149.0 million of cash in the second quarter of 2014, primarily as a result of an increase in accounts receivable from strong June sales and interest payments. The company anticipates that working capital will continue to be a use of cash in the third quarter and a significant source of cash in the fourth quarter of 2014.
Six-Month Results:
For the first six months of 2014, the company reported a net loss of $103.2 million, or $0.76 per diluted share. For the corresponding six months of 2013, the company reported a net loss of $50.3 million, or $0.37 per diluted share. Sales for the first six months of 2014 were $2.91 billion compared to sales of $2.77 billion in the first half of 2013. Shipments for the first half of 2014 were 2,659,600 tons compared to 2,613,500 tons in the first half of 2013.
Extreme winter weather conditions in early 2014 resulted in extra costs of approximately $45.0 million for the first six months of 2014. Energy costs were higher in the first quarter of 2014, primarily for electricity and natural gas. The extreme winter weather conditions also affected the delivery of iron ore pellets in the second quarter of 2014 with the company incurring additional costs for transportation and operations. The first six months of 2014 also included $23.4 million in mark-to-market losses on derivatives (discussed below) and a $5.8 million charge relating to a tentative settlement of certain class action antitrust claims.
An incident at the company's Ashland (KY) Works blast furnace in February 2014 resulted in unplanned outage costs of approximately $18.0 million in the first six months of 2014. In June 2013, an incident at the company's Middletown (OH) Works blast furnace resulted in unplanned outage costs of approximately $6.2 million in the first six months of 2013.
The company recorded expenses of $31.9 million during the first six months of 2014 for planned outages, compared to expenses of $22.6 million during the first six months of 2013.
Hedging :
AK Steel uses various derivatives to hedge the price of certain commodities, primarily iron ore and energy. For some of these derivatives, the company is unable to or does not use hedge accounting treatment under U.S. generally accepted accounting principles, but instead records changes in the values of the derivatives in the statement of operations using mark-to-market accounting. As a result, unrealized gains and losses are recognized prior to the periods that the underlying exposures being hedged are recognized. The results for the first six months of 2014 include $23.4 million, or $0.18 per diluted share, for unrealized mark-to-market losses on derivatives, primarily in costs of products sold, with $20.0 million, or $0.15 per diluted share, of that amount coming in the second quarter of the year. However, the company expects that either its cost for purchasing iron ore and other commodities associated with the hedging strategies will be reduced by a similar amount in future periods, or an offsetting unrealized gain will be recognized if the mark-to-market loss on the derivative reverses before settlement. Therefore, the company anticipates that the mark-to-market losses included in its results for the first six months of 2014 are primarily a matter of timing and will be substantially offset in the remainder of 2014.
