U.S. Steel: Long-term profitability comes at a big cost

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U.S. Steel works to restore long-term profitability

U.S. Steel Corp. (X) is working to strengthen its balance sheet with intense focus on increasing cash flows, improving operational efficiency, optimizing supply chains, and right-sizing its operations. Previously, we discussed three strategic moves made by U.S. Steel (X). What is the financial impact of these actions on the company’s 3Q14 earnings?

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U.S. Steel incurs restructuring-related charges

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U.S. Steel (X) incurred restructuring-related charges of $577 million in 3Q14. The above chart shows a breakdown of these charges. As you can see, deconsolidation of Canadian operations had the biggest impact. U.S. Steel incurred a charge of $384 million on account of this move. Impairment of the carbon alloy facility at Gary Works led to a charge of $163 million.

Why U.S. Steel investors shouldn’t worry about these charges

U.S. Steel’s restructuring activities are aimed at restoring the company’s long-term profitability. Like any restructuring activity, these actions will have a short-term negative impact. What investors should watch for is whether these actions will help achieve long-term benefits.

Consider the example of U.S. Steel’s Canadian operations. U.S. Steel Canada has posted losses in the past five years. The aggregate losses are a whopping $2.4 billion. This represents a combined loss of $16 per share for U.S. Steel shareholders. Deconsolidating the Canadian operations will have a positive impact on the financial performance of U.S. Steel (X). The company expects its pro forma net income to increase by $0.16 per diluted share for the first half of 2014 as a result of this move. The positive impact of these moves will be visible in the coming quarters.

The next article will discuss the performance of various business segments of U.S. Steel. Please note that we are analyzing the 3Q14 results of U.S. Steel. Currently, the company is part of State Street Global Advisors (or SPDR) Standard & Poors (or S&P) metals and mining exchange-traded fund (or ETF) (or XME). ArcelorMittal (MT), Nucor (NUE), and Steel Dynamics (STLD) are the other major steel players in the United States.

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