Steel bellwether ArcelorMittal (MT – Analyst Report) blew past the earnings estimates in the second quarter of 2012, but difficult economic conditions and softness in the steel industry led it to issue a cautious outlook for the rest of the year.

The company’s adjusted earnings (excluding charges) of 64 cents a share comfortably beat the Zacks Consensus Estimate of 33 cents. Profit (as reported) plunged almost 38% to $959 million, or 56 cents per share, in the quarter from $1,535 million, or 93 cents, last year.

Revenues declined 10% year over year to $22,478 million, lagging the Zacks Consensus Estimate of $22,537 million. The decline was a result of lower steel shipments (down 2.25% year over year to 21.7 million metric tons), foreign exchange translation effects, and lower average selling price of steel.

In the first half of the year, the company had to negotiate with difficult conditions in its biggest markets. Its results were impacted by the sovereign debt crisis in Europe, where it shuttered some facilities, and steel industry oversupply in North America. All these factors led to a 28% year-over-year decline in earnings before interest, taxed, depreciation and amortization (EBITDA) to $2.5 billion.

A closer look at how the various segments performed will provide better visibility.

Segment Review

Flat Carbon Americas: Lower production in South America due to planned maintenance led to a 4.2% year-over-year decline in steel production to 6 million tonnes in the quarter. Average selling prices went down 8.3% to $881 per ton. These factors drove segment revenues down 3.7% from last year to $5,359 million, despite a 3.9% jump in steel shipments.

Flat Carbon Europe: The effects of the Eurozone turmoil left its mark on the segment’s performance. Revenues declined a massive 15.5% year over year to $7,223 million in the quarter. Steel production went down 9.2% from last year as the company closed down a few facilities and steel shipments dropped 5.5% due to falling demand and lower exports. Average selling prices of steel took a massive hit, going down almost 14% from last year.

Long Carbon Americas and Europe: Revenues from the segment dropped 14.5% to $5,698 million as steel production fell 8.2% and shipments dropped 5.3% from last year. Average selling prices fell 9% year over year.

Asia Africa and CIS (AACIS): A modest year-over-year growth in shipments (to 3.3 million tons) was the only positive takeaway from this region. Sales slipped 6.3% to $2,677 million. The decline in revenues also resulted from a 10.5% decline in average selling price of steel to $687 per ton.

Distribution Solutions: Revenues declined almost 14.5% year over year to $4,292 million as slightly lower shipments and an 11.5% drop in average selling prices weighed on the top-line.

Mining: Iron ore production increased 9.9% year over year to 14.4 million tons in the reported quarter due to higher production from Liberia and AMMC. Coal production remained flat both year over year and sequential basis at 2.1 million tons.

Balance Sheet

Cash and cash equivalents (including restricted cash and short-term investments) amounted to $4.5 billion as of June 30, 2012, compared with $3.2 billion as of June 30, 2011. The company’s net debt decreased by $3 billion to $22 billion as on June 30, 2012, versus $25 billion as on June 30, 2011. The decrease was led by increased cash flow from operations, foreign exchange gains (due to the effect of dollar appreciation on euro denominated debt) and inflow from the Skyline Steel divestment.

Divestment

ArcelorMittal is highly focused on divesting its non-core assets in an effort to reduce its net debt. The company sold its steel-foundation manufacturing and distribution subsidiary, Skyline Steel, to Nucor Corporation (NUE – Analyst Report) for roughly $605 million in June. Recently, it again took the same route by deciding to sell its 48.1% stake in engineering company, Paul Wurth Group to SMS GmbH for approximately $363 million.

Outlook and Recommendation

Management’s outlook was laced with caution and they expect the year’s second half to be in line with the first. ArcelorMittal is wary of the situation in Europe and the domino effect it might have on other markets. In such circumstances, the company is focused on improving its efficiency, control costs and reduce debt.

ArcelorMittal expects shipments in the second half of the year to be in accordance with the normal seasonal pattern. The company anticipates its own iron ore shipments to increase by approximately 10% in 2012, while capital expenditure is projected to be approximately $4.5 billion for the year. Also, the company expects EBITDA per ton in the second half of the year to be in line with the first half.

We currently have a long-term Underperform recommendation on ArcelorMittal. The company, which competes with U.S. Steel Corp. (X – Analyst Report) and Tata Steel Limited, maintains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating