Over the weekend, Barron’s ran
this chart with one of its writers’ columns:
In Over Their Heads
These
companies have pension liabilities that equal or exceed their market value.
Below, each firm's liability as a percentage of market cap.
AK Steel 917%
Unisys 562
Resolute Forest Products 516
United States Steel 439
Exelis 228
Navistar International 196
Alcoa 179
Goodyear Tire and Rubber 174
Huntington Ingalls Indus 174
General Motors 173
RR Donnelley & Sons 171
J.C. Penney 148
Northrop Grumman 142
Lockheed Martin 133
Delta Air Lines 132
Sears Holdings 118
Raytheon 116
Allegheny Technologies 105
Textron 100
Boeing 100
Market
capitalization data as of July 5, 2013. Liabilities data as of Fiscal Year End
2012. Sources: J.P. Morgan Asset Management, Bloomberg, company reports.
Struck by how large an outlier AK
Steel was, I thought it would be interesting to look into it some more.
First, I looked at its market cap
over time. Right now, AKS is a $3.25
stock. Five years ago, back in July
2008, however, it was a $50 stock; even
in Q2 2010, it was a $25 stock. At the
earlier point, it would have had a post-retirement-to-market-cap ratio below
1:1. At the later, it would have been
around 1:1. Now, however, it’s 9:1,
according to Barron’s. (All the other
facts in this post come from Bloomberg.com, AKS’s 10-K for 2012, its Q for
Q113, its year end press release and the May 2013 investor presentation on the
IR page of its website).
Second, I looked at what were being
counted as its pension liabilities.
AKS’s balance sheet shows an accumulated post-retirement obligation deficit
of about $1.77B. But its market cap, with
136MM shares outstanding, is about $440 million. That is not a 9:1 ratio, so the Barron’s
chart must be based on gross liabilities, ignoring the pension assets. That doesn’t make a lot of sense to me. So AKS’s ratio of net post-retirement obligations
to equity market cap is nowhere near 9:1 but more like 4:1, a very different
number.
Still, that's a lot of leverage and the $3.25 stock price signals the company has big
problems going on, so (third) I wondered
what the rest of its balance sheet looked like. And it wasn’t pretty. Here is a super-condensed version of the
12/31/12 b/s:
ASSETS
|
($ in millions)
|
LIABILITIES
|
($ in millions)
|
Cash
|
227
|
A/P & accrued liabs
|
703
|
A/R, net
|
474
|
Long-term Debt
|
1,412
|
Inventory,
net of LIFO reserve
|
609
|
Pension &
other post-retirement
|
1,770
|
PP&E
|
2,012
|
Other liabs
|
109
|
Investments
in JV’s etc
|
205
|
||
Deferred Tax
and other misc intangible assets
|
376
|
||
TOTAL
|
3,903
|
3,994
|
The super-condensed balance sheet suggests AK Steel is
“insolvent” on a “fair value” basis as such terms are defined in the Bankruptcy Code: it has total assets of $3.9B which include,
however, deferred tax assets and other similarly non-marketable assets equal to
roughly $0.4B It has liabilities that
would be difficult to dispute of almost $4B.. If we strip out the
non-marketable intangible assets and liabilities, there is a negative net worth
of about $0.5B. (And that assumes the investments are worth book but who knows?)
Looked at as an EV multiple of EBITDA, it still appears to
be balance-sheet insolvent. EBITDA for
2012 was only $181 million and for 2011, $266 million, neither of which will
support liabilities over $3B at a normal, let alone a steel industry,
multiple. EBITDA for the last quarter,
although up substantially y/y, was only $67 million. Things probably have not improved much in the
quarter just ended; although they won’t announce earnings for another couple of
weeks; their ASP will likely dip by 1% in 2Q13 to $1,055 per ton, the company
disclosed last month.
Fourth, I looked at its cash flow and liquidity. Again, not pretty.As you can see
from the following table, for the past three years, AK Steel has had increasing
negative cash flow from operations, and increasing incurrence of debt.
2010
|
2011
|
2012
|
3-YEAR TOTAL
|
|
Net Cash Flow
from Operations
|
(132.4)
|
(180.5)
|
(270.8)
|
(583.7)
|
Net Cash Flow
from Investing
|
(266.3)
|
(420.2)
|
(118.6)
|
(705.1)
|
Net Proceeds
from Debt Issuance[1]
|
183.2
|
449.9
|
467
|
1,100.1
|
Source: AK STEEL HOLDING CORPORATION CONSOLIDATED
STATEMENTS OF CASH FLOWS Years Ended December 31, 2012, 2011 and 2010 (dollars
in millions)
So it looks like they have burned over half a billion cash
on an operating basis in the past three years, while maintaining capital
investments at an average level of a quarter-billion a year, which I assume is
rational in their industry, but funding it all through debt – over $1.1B of
incremental debt. Since debt is now over
$1.4B, that means, since the start of ’10, they have quadrupled their long term
debt. It would be nice if they were
getting the full benefit of QE’s low interest rates, but in fact the coupons
are all north of 7.5%. Interest expense
last year was about $87 million and should be around $100 million this
year. On the bright side (and this is the only bright side I can find), there are no
maturities in the next three years.
The company’s investor communications lately emphasize
that they have over $1 billion of liquidity, taking into account over cash on
their balance sheet and about $872 million of undrawn availability under an
ABL. However, cash on the balance sheet
has dropped just $50 million in the first quarter, from $227 million to $171
million. Q2 will not show as much a
drop, but only because AKS issued $30 million of new debt in June. Also, I have not looked at the revolver to
see what, if any financial conditions there are to borrowing, and if there are,
whether AKS can satisfy them.
Regardless, it does seem AKS should be able to scrape through 2013 if it
can keep EBITDA in the $66 million /
quarter run rate. With $171 of beginning cash, plus 4X $67, of $268 of incoming EBITDA, they can cover $100 of interest expense and a capex run-rate of 250, if they're still capex-ing at that rate, for the next 12 months or so.
The only other glimmer of hope is that AKS’ very heavy pension funding burden
is projected to moderate by 2016 (when, btw, their ABL expires). In 2013-15, they
project to spend nearly $740 million in pension and OPEB payments At
least that is down from the last three years, which took about $860 million out of them. I believe those payments are already deducted
above the line in AKS’s EBITDA calculations.
So far the market is financing them and not
panicking. Their senior unsecured debt
is rated B1/BB-, so relatively high up on the high-yield credit ladder. The outlook is “solidly negative” however, in
S&P’s view, so a downgrade could come at some point, and, frankly, the rating
seems a little high to me for the
balance sheet. The unsecured debt is
quoted in the high 80’s, so not in distressed territory. Its equity cap of $440 million probably
reflects more of a long-term call option on the business if steel prices go up,
given the current negative book net worth, leveraging off the fact there are no debt
maturities for the next few years. But given the cash flow projection I estimated in the preceding paragraph, how long-term is that call option really? It might be as little as a year. My
guess is everyone is playing it a quarter or two at a time, hoping for steel
prices to turn up again (good luck, last week's Economist carries a story titled "Steel: An Inferno of Unprofitability"). If they don’t
do so by year-end, however, then sometime in 2014, notwithstanding the absence
of fixed debt maturities, AKS may find
itself with liquidity challenges that will force it to start to access its
revolver or find longer-term capital (at what will probably be a very steep
price), because revolver banks very much don't like revolvers being drawn to provide permanent capital. Otherwise they will face a restructuring or a sale to, likely, a foreign buyer sometime after 1H14..
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