SDI Impacted by Winter Weather, but Confident in Broad Economic Recovery
04/17/2014 - Steel Dyanamics Inc.announced its first quarter results which were affected by uncharacteristically severe and prolonged winter weather conditions that resulted in increased energy costs, reduced production, diminished availability of transportation and lower shipments.
Steel Dynamics Inc. announced first quarter net income of US$39 million, or US$0.17 per diluted share, on net sales of US$1.8 billion. By comparison, prior year first quarter net income was US$48 million, or US$0.21 per diluted share, on net sales of US$1.8 billion, and sequential fourth quarter 2013 net income was US$55 million, or US$0.24 per diluted share, on net sales of US$1.9 billion.
First quarter 2014 earnings include a benefit of approximately US$0.01 per diluted share related to a recent change in Indiana's corporate income tax rate which resulted in the reduction of the company's deferred income tax liability.
"The first quarter 2014 was one of the most severe winter periods in recent history across much of the United States, especially in the Midwest where a majority of our operations are located," said chief executive officer, Mark Millett. "The uncharacteristically severe and prolonged winter weather conditions resulted in increased energy costs, reduced production, diminished availability of transportation and lower shipments. This environment was a major driver of the 25% decline in our consolidated operating income for the first quarter 2014, as compared to the sequential fourth quarter of 2013.
"Essentially all of our businesses were negatively impacted in some way; however, our Midwest steel operations were especially impacted. Operating income for our steel operations declined US$47 million for the first quarter 2014, as compared to the sequential quarter. Most impactful, sheet steel volumes decreased 12% and metal spread also declined, as transportation issues delayed shipments; meaningfully higher energy costs were incurred; and the average quarterly product price improvement did not outpace the higher cost of scrap that was consumed earlier in the quarter. As weather conditions improved, demand also strengthened with increased order activity throughout our steel operations.
"We achieved two important goals during the quarter," stated Millett. "We shipped our first premium rail and the first product from our new smaller-diameter engineered bar rolling mill. We anticipate continued growth in demand for these products throughout 2014 and into 2015."
The company's fabrication business continues to improve, based on increased market share, and more importantly, increased construction demand. Both order inquiries and bookings are strong, supporting the premise of a nonresidential construction market recovery. While first quarter 2014 shipments were seasonally lower on a sequential basis, operating income improved meaningfully compared to both the sequential and prior year quarter.
First Quarter Review
First quarter shipments across the company's operating platforms were generally lower, when compared to the fourth quarter 2013. As a result of higher energy costs at our Midwest steel operations resulting from the severe weather and reduced metal spread at the Flat Roll Division, first quarter 2014 operating income for the company's steel operations decreased 31% to US$108 million, as compared to the fourth quarter 2013, despite only a 3% decline in net sales. Although overall steel metal margin increased in the first quarter 2014, metal margin for steel sheet decreased as improved product pricing was more than offset by early-quarter scrap costs. The average selling price per ton for the company's total steel operations increased US$30 sequentially to US$835 in the first quarter 2014, while the average ferrous scrap cost per ton melted increased US$24 per ton.
First quarter 2014 operating income attributable to the company's sheet steel operations decreased 28% when compared to the sequential quarter, and operating income from long product operations decreased 34%. The company's steel mill production utilization rate decreased slightly to 86% in the first quarter 2014, compared to 88% in the fourth quarter 2013, unrelated to demand dynamics but rather due to production interruptions related to power company curtailments.
Operating income from the company's metals recycling operations was US$10 million for the first quarter 2014, compared to US$12 million for the fourth quarter 2013. The US$2 million reduction in profitability was directly related to costs associated with building damage related to excessive snow accumulation. Operationally, external ferrous volumes and overall metal spreads were somewhat lower as transportation was hindered, while nonferrous volumes and metal spreads were somewhat improved.
During the first quarter 2014, the company initiated a two week outage at the nugget production facility in February, due to significantly higher natural gas prices related to weather conditions. The impact of losses from the company's Minnesota operations for first quarter 2014 consolidated net income was US$8.9 million, or US$0.04 per diluted share, as compared to US$8.1 million, or US$0.03 per diluted share in the fourth quarter 2013. Despite the outage, the increased loss was directly related to the higher natural gas costs. As referenced in the company's fourth quarter 2013 earnings release, certain meaningful adjunct trials related to product yield and the cost of production were scheduled to be completed during the first quarter 2014. Due to the unanticipated severe weather, not all of the trials were able to be completed; however, meaningful progress was made. The remaining trials are expected to be completed before the end of the second quarter 2014. Given the increased cost of production while testing continues, current expectations concerning losses associated with the Minnesota operations for the second quarter of 2014 are anticipated to be similar to those recorded in the first quarter.
Outlook
"We are optimistic," said Millett. "Rather than a structural change in growth during the first quarter, we believe weather conditions impacted the economy. We have confidence that the broader U.S. economy will continue to improve and that the non-service sector portion of domestic GDP has the ability to grow at a higher rate than overall GDP, driven by strengthened asset values, domestic energy investment and increased infrastructure spending. Steel consuming industries, such as manufacturing, automotive, heavy machinery and the construction market continue to grow, indicative of underlying strength in steel demand. We are poised to be the beneficiaries. We believe our broad range of quality products, our differentiated customer value, combined with the strength of our exceptional employees and historically low-cost operating platforms, uniquely position us to capitalize on the imminent opportunities."
Summary Operating Information
The following tables highlight operating results for each of the company's primary operating platforms. References to operating income in the following paragraphs exclude profit-sharing expenses and amortization pertaining to intangible assets. Dollar amounts are in thousands, except for per ton data.
Steel Operations
This segment includes five electric-arc-furnace steel mills and related steel finishing and processing facilities, including The Techs. The company's steel operations produce flat-rolled steel, structural steel, merchant bars, special-bar-quality steel, rebar, rail, and specialty shapes.
Metals Recycling and Ferrous Resources Operations
This segment principally includes the company's metals recycling operations (OmniSource Corporation), a liquid pig iron production facility (Iron Dynamics), and the company's Minnesota operations.
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings.
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers inthe United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 6,800 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
First quarter 2014 earnings include a benefit of approximately US$0.01 per diluted share related to a recent change in Indiana's corporate income tax rate which resulted in the reduction of the company's deferred income tax liability.
"The first quarter 2014 was one of the most severe winter periods in recent history across much of the United States, especially in the Midwest where a majority of our operations are located," said chief executive officer, Mark Millett. "The uncharacteristically severe and prolonged winter weather conditions resulted in increased energy costs, reduced production, diminished availability of transportation and lower shipments. This environment was a major driver of the 25% decline in our consolidated operating income for the first quarter 2014, as compared to the sequential fourth quarter of 2013.
"Essentially all of our businesses were negatively impacted in some way; however, our Midwest steel operations were especially impacted. Operating income for our steel operations declined US$47 million for the first quarter 2014, as compared to the sequential quarter. Most impactful, sheet steel volumes decreased 12% and metal spread also declined, as transportation issues delayed shipments; meaningfully higher energy costs were incurred; and the average quarterly product price improvement did not outpace the higher cost of scrap that was consumed earlier in the quarter. As weather conditions improved, demand also strengthened with increased order activity throughout our steel operations.
"We achieved two important goals during the quarter," stated Millett. "We shipped our first premium rail and the first product from our new smaller-diameter engineered bar rolling mill. We anticipate continued growth in demand for these products throughout 2014 and into 2015."
The company's fabrication business continues to improve, based on increased market share, and more importantly, increased construction demand. Both order inquiries and bookings are strong, supporting the premise of a nonresidential construction market recovery. While first quarter 2014 shipments were seasonally lower on a sequential basis, operating income improved meaningfully compared to both the sequential and prior year quarter.
First Quarter Review
First quarter shipments across the company's operating platforms were generally lower, when compared to the fourth quarter 2013. As a result of higher energy costs at our Midwest steel operations resulting from the severe weather and reduced metal spread at the Flat Roll Division, first quarter 2014 operating income for the company's steel operations decreased 31% to US$108 million, as compared to the fourth quarter 2013, despite only a 3% decline in net sales. Although overall steel metal margin increased in the first quarter 2014, metal margin for steel sheet decreased as improved product pricing was more than offset by early-quarter scrap costs. The average selling price per ton for the company's total steel operations increased US$30 sequentially to US$835 in the first quarter 2014, while the average ferrous scrap cost per ton melted increased US$24 per ton.
First quarter 2014 operating income attributable to the company's sheet steel operations decreased 28% when compared to the sequential quarter, and operating income from long product operations decreased 34%. The company's steel mill production utilization rate decreased slightly to 86% in the first quarter 2014, compared to 88% in the fourth quarter 2013, unrelated to demand dynamics but rather due to production interruptions related to power company curtailments.
Operating income from the company's metals recycling operations was US$10 million for the first quarter 2014, compared to US$12 million for the fourth quarter 2013. The US$2 million reduction in profitability was directly related to costs associated with building damage related to excessive snow accumulation. Operationally, external ferrous volumes and overall metal spreads were somewhat lower as transportation was hindered, while nonferrous volumes and metal spreads were somewhat improved.
During the first quarter 2014, the company initiated a two week outage at the nugget production facility in February, due to significantly higher natural gas prices related to weather conditions. The impact of losses from the company's Minnesota operations for first quarter 2014 consolidated net income was US$8.9 million, or US$0.04 per diluted share, as compared to US$8.1 million, or US$0.03 per diluted share in the fourth quarter 2013. Despite the outage, the increased loss was directly related to the higher natural gas costs. As referenced in the company's fourth quarter 2013 earnings release, certain meaningful adjunct trials related to product yield and the cost of production were scheduled to be completed during the first quarter 2014. Due to the unanticipated severe weather, not all of the trials were able to be completed; however, meaningful progress was made. The remaining trials are expected to be completed before the end of the second quarter 2014. Given the increased cost of production while testing continues, current expectations concerning losses associated with the Minnesota operations for the second quarter of 2014 are anticipated to be similar to those recorded in the first quarter.
Outlook
"We are optimistic," said Millett. "Rather than a structural change in growth during the first quarter, we believe weather conditions impacted the economy. We have confidence that the broader U.S. economy will continue to improve and that the non-service sector portion of domestic GDP has the ability to grow at a higher rate than overall GDP, driven by strengthened asset values, domestic energy investment and increased infrastructure spending. Steel consuming industries, such as manufacturing, automotive, heavy machinery and the construction market continue to grow, indicative of underlying strength in steel demand. We are poised to be the beneficiaries. We believe our broad range of quality products, our differentiated customer value, combined with the strength of our exceptional employees and historically low-cost operating platforms, uniquely position us to capitalize on the imminent opportunities."
Summary Operating Information
The following tables highlight operating results for each of the company's primary operating platforms. References to operating income in the following paragraphs exclude profit-sharing expenses and amortization pertaining to intangible assets. Dollar amounts are in thousands, except for per ton data.
Steel Operations
This segment includes five electric-arc-furnace steel mills and related steel finishing and processing facilities, including The Techs. The company's steel operations produce flat-rolled steel, structural steel, merchant bars, special-bar-quality steel, rebar, rail, and specialty shapes.
| First Quarter | Sequential | ||||||
| 2014 | 2013 | 4Q 2013 | |||||
| Total Sales | US$1,189,933 | US$1,142,075 | US$1,222,907 | ||||
| External Sales | 1,117,599 | 1,061,312 | 1,146,701 | ||||
| Operating Income | 107,776 | 121,589 | 155,107 | ||||
| Total Shipments (tons) | 1,450,732 | 1,469,802 | 1,542,289 | ||||
| External Shipments (tons) | 1,338,573 | 1,344,432 | 1,423,953 | ||||
| Production (tons) | 1,519,566 | 1,565,067 | 1,588,394 | ||||
| Average External Sales Price Per Ton | US$835 | US$789 | US$805 | ||||
| Average Ferrous Scrap Cost Per Ton | US$380 | US$351 | US$356 | ||||
Metals Recycling and Ferrous Resources Operations
This segment principally includes the company's metals recycling operations (OmniSource Corporation), a liquid pig iron production facility (Iron Dynamics), and the company's Minnesota operations.
| First Quarter | Sequential | |||||
| 2014 | 2013 | 4Q 2013 | ||||
| Metals Recycling & Ferrous Resources | ||||||
| Total Sales | US$ 993,505 | US$ 914,568 | US$ 907,668 | |||
| External Sales | 575,774 | 621,128 | 572,840 | |||
| Operating Income (Loss) | (10,981) | (4,309) | (13,020) | |||
| Unrealized Hedging Gain (Loss), Net | 4,066 | 2,354 | (2,626) | |||
| OmniSource Standalone | ||||||
| Total Sales | US$ 880,618 | US$ 835,039 | US$ 797,034 | |||
| External Sales | 523,124 | 609,918 | 535,549 | |||
| Operating Income | 9,549 | 24,965 | 11,667 | |||
| Unrealized Hedging Gain (Loss), Net | 2,730 | 691 | (1,707) | |||
| Ferrous Shipments (gross tons) | 1,364,533 | 1,342,929 | 1,356,258 | |||
| % Shipments to SDI Steel Mills | 52% | 43% | 47% | |||
| Nonferrous Shipments (pounds 000's) | 270,978 | 279,656 | 254,876 | |||
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings.
| First Quarter | Sequential | ||||||
| 2014 | 2013 | 4Q 2013 | |||||
| Total Sales | US$115,861 | US$ 94,375 | US$ 121,853 | ||||
| Operating Income (Loss) | 3,126 | 1,530 | (122) | ||||
| Total Shipments (tons) | 94,667 | 77,583 | 101,132 | ||||
| Average Sales Price Per Ton | US$1,224 | US$1,214 | US$1,205 | ||||
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers inthe United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 6,800 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
