AK Steel Holding (AKS) Guides Q2 Profit Below Expectations

AK Steel Holding (NYSE: AKS) provided guidance for its second quarter 2014 financial results. AK Steel said it expects to report a net loss of $0.19 to $0.23 per diluted share of common stock, which is a substantial improvement over its first quarter results. Adjusted to exclude the loss of $0.17 per diluted share for mark-to-market losses on derivatives discussed below, the company's adjusted net loss for the second quarter would be $0.02 to $0.06 per diluted share. The company noted that, although it has generally experienced improved conditions in the steel markets it serves, its second quarter results will be negatively impacted by the lingering effects of the extreme winter weather conditions and by the adverse impact of mark-to-market hedging losses, which the company expects will be substantially offset in the second half of 2014 by lower costs for commodities or by gains in its hedging positions.

*** The Street is looking for EPS of $0.10.

Shipments

The company expects shipments of approximately 1,375,000 tons in the second quarter of 2014, an approximate 9% increase from 1,262,100 tons in the first quarter of 2014. Though improved, shipment levels for the second quarter reflect the effects of the extreme winter weather conditions discussed below and reduced production at the company's Ashland Works blast furnace due to recent operational issues.

Pricing

The company expects its average selling price for the second quarter of 2014 to remain flat compared to the first quarter of 2014. While spot prices for carbon steel products and many of the Company's specialty steel products have increased, the company's overall average selling price has not changed significantly due to a change in product mix. In particular, a higher percentage of the company's total product shipments in the second quarter have been to the carbon spot market.

Winter Weather Effects on Iron Ore Deliveries and Blast Furnace Production

The company expects to recognize higher costs in the second quarter as a result of the continued effects of the extreme cold weather conditions 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 and affected the movement of Canadian 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 had 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 estimates that the effect of these issues will result in additional costs of approximately $15 million, or pre-tax $0.11 per diluted share, in the second quarter.

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 the hedge accounting treatment allowed by U.S. generally accepted accounting principles, but instead must use mark-to-market accounting.

Under mark-to-market accounting, the company records the changes in the values of the derivatives to the statement of operations. As a result, unrealized gains and losses are recognized in the statement of operations during the period of the change in value of the derivative, which is prior to the periods that the underlying exposures being hedged are recognized. For example, the company's guidance reflects a current unrealized market-to-market loss on its derivatives of approximately $23 million, or pre-tax $0.17 per diluted share, in the second quarter of 2014. This loss has been estimated based upon current market prices and any fluctuations between now and the end of the second quarter in future market prices will affect the amount of the mark-to-market loss actually recorded in the second quarter. 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. Thus, the company believes that the mark-to-market losses estimated for purposes of this guidance, as well as the actual mark-to-market losses to be included in its second quarter results, are primarily a matter of timing and will be substantially offset in the second half of 2014.

Income Taxes

The company said that it expects to record income tax expense of approximately $2 million for the second quarter of 2014 using the discrete method of accounting for income taxes.

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