SDI Optimistic As It Announces Q3 Results
10/21/2014 - Steel Dynamics Inc. announced its results for the third quarter of 2014, including a short-term outlook.
Steel Dynamics Inc. announced third quarter 2014 net sales of US$2.3 billion and net income of US$91 million, or US$0.38 per diluted share, which includes the negative impact of approximately US$0.09 per diluted share related to acquisition costs, financing fees, and the effect of purchase accounting adjustments for the Severstal Columbus LLC acquisition that occurred mid-September. The acquisition and financing costs are reflected in the company's consolidated income statement as other expense and the purchase accounting adjustments are reflected as additional costs of goods sold. Excluding these charges, the company's third quarter 2014 earnings would have been US$0.47 per diluted share.
Comparatively, prior year third quarter net income was US$57 million, or US$0.25 per diluted share, on net sales of US$1.9 billion; and sequential second quarter 2014 net income was US$72 million, or US$0.31 per diluted share, on net sales ofUS$2.1 billion.
"We are very pleased with our operational and financial performance," said CEO Mark Millett. "Our consolidated operating income increased 43% to US$189 million for the third quarter 2014, as compared to the second quarter. During the third quarter, we achieved record volumes in fabrication and steel, even before including the results from our recent acquisition. Despite the continued elevated levels of steel imports into the U.S., the strength of underlying demand, coupled with our market diversification and customer focus supported our record shipments, and we remain optimistic heading toward the end of the year.
"We also successfully completed the acquisition of the Columbus flat roll steel mill mid-September, adding one of the most technologically advanced steel mills in the U.S. to our portfolio. The acquisition of Columbus represents a significant step in the continuation of our growth strategy. It leverages our core strengths, further increasing value-added product and market diversification. Once again, we enthusiastically welcome the Columbus employees and customers into the Steel Dynamics family, and look forward to working with them to drive future growth and success."
Compared to the second quarter, operating income from the company's steel operations increased 28% toUS$202 million for the third quarter 2014, driven by record quarterly shipments and improved metal spread. Strong demand in automotive, manufacturing and energy markets supported volumes. Growth in the nonresidential construction market also improved, as evidenced by record shipments of both structural and joist steel during the quarter. Operating income from the company's fabrication operations increased to US$19 million in the third quarter 2014, more than double the amount achieved in the second quarter of this year.
For the company's metals recycling operations, operating income decreased to US$13 million in the third quarter 2014, as compared to US$18 million in the sequential quarter. Profitability was negatively impacted by lower nonferrous metals margins, which more than offset the increase in overall shipments. Ferrous scrap availability and volumes improved sequentially.
Third Quarter Review
Third quarter 2014 shipments increased across all of the company's operating platforms, as compared to the sequential quarter. Operating income for the company's steel operations increased 28%, as compared to the sequential quarter. Excluding Columbus purchase accounting adjustments, operating income from steel operations increased approximately 37%, based on improved metal spreads and record total shipments. The Structural and Rail and Engineered Bar Divisions each achieved record quarterly shipments, with an increase of 8% in structural steel beams, 12% in rail, and 16% in engineered steel. The average product selling price for the company's steel operations increased US$7 to US$840 per ton. The average ferrous scrap cost per ton melted decreased US$8 to US$356 per ton.
Third quarter operating income attributable to the company's sheet steel operations increased 11% when compared to the sequential quarter, and operating income from long product operations increased 52%. The company's steel mill production utilization rate was 90% in the third quarter 2014, compared to 95% in the sequential quarter. The decrease in rate was a function of increased estimated capacity attributable to the SBQ expansion and the 4-day scheduled maintenance outage at the Butler Flat Roll Division, excluding the impact from these items utilization would have been consistent with the second quarter production rate.
Third quarter operating income from the company's metals recycling operations decreased 29%, as the significant decrease in nonferrous metal spread more than offset the 13% increase in shipments, as compared to the sequential quarter.
Operating income for the company's fabrication operations more than doubled, increasing from US$8 million in the second quarter 2014 to US$19 million for the third quarter, driven by record quarterly shipments based on both market share gain and overall demand improvement. Through August 2014, domestic steel joist shipments have increased 21% year-over-year, as reported by the Steel Joist Institute. Order inquiries and project bookings remain strong, supporting the positive trend in the nonresidential construction market.
The financial performance of the company's Minnesota operations improved in the third quarter 2014, resulting in the impact of losses on consolidated net income decreasing to US$5 million, or US$0.02 per diluted share, compared toUS$9 million, or US$0.04 per diluted share recorded in the second quarter of this year. Improvements in yield, volume and quality were achieved, and the company believes there will be further improvement, as the facilities continue to be operated on a consistent basis and further reductions in raw material costs are achieved.
In connection with the Columbus acquisition, during the third quarter 2014 the company issued US$1.2 billion senior unsecured notes, comprised of a US$700 million 5.125% seven-year tranche and US$500 million 5.500% ten-year tranche. The remainder of the US$1.6 billion purchase price was paid with a combination of available cash and borrowings on the company's revolving credit facility. "We are pleased with the successful execution of the recent financing related to the Columbus acquisition," stated CFO Theresa Wagler. "The team did a great job and accessed the high yield bond market at an opportune time, raising US$1.2 billion at an attractive long term average interest rate of 5.28%."
Year-to-Date Comparison
Year-to-date September 30, 2014, net income was US$202 million, or US$0.85 per diluted share, on net sales of US$6.2 billion, as compared to net income of US$135 million, or US$0.59 per diluted share, on net sales of US$5.5 billion for the prior year period. Consolidated net sales increased 13%, primarily as a result of higher average steel pricing and improved shipments across the company's operating platforms. As compared to the prior year period, consolidated operating income increased US$123 million, or 44%, primarily as a result of improved steel metal spread. The average selling price for the company's steel operations increased US$48 per ton. The average ferrous scrap cost per ton melted increased US$15 per ton.
Outlook
"Looking ahead, we remain optimistic," Millett said. "Despite recent broader global concerns, the U.S. economy is continuing to improve, inflation remains low and borrowing rates remain at historically attractive levels. We continue to be the beneficiaries of strong end markets, such as automotive, manufacturing, transportation and energy. We also believe growth in the construction market will continue as evidenced by the increased demand for our construction-related steel products. With the Columbus acquisition, we gain geographic and product diversification in higher-growth markets in the southern U.S. and Mexico. We believe our diversified offerings of value-added products delivered by our exceptional team, combined with our unique operating culture, provides us a compelling advantage as we capitalize on the opportunities ahead. Our organic growth projects and latent steel capacity, coupled with the acquisition of Columbus, and our belief that domestic steel consumption will continue to improve—all point toward meaningful growth opportunities for Steel Dynamics' employees, customers and shareholders," concluded Millett.
Summary Third Quarter Operating Segment 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, excluding per ton data.
Steel Operations
This segment includes six electric-arc-furnace steel mills and related steel finishing and processing facilities (with The Techs), which includes the results of the Columbus flat roll steel mill from the date of acquisition on 16 September 2014. The company's steel operations produce flat-roll steel, structural steel, merchant bars, engineered 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 iron producing operations.
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of nonresidential buildings.
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 7,600 employees, and manufacturing facilities primarily located throughout the United States (including six steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
Comparatively, prior year third quarter net income was US$57 million, or US$0.25 per diluted share, on net sales of US$1.9 billion; and sequential second quarter 2014 net income was US$72 million, or US$0.31 per diluted share, on net sales ofUS$2.1 billion.
"We are very pleased with our operational and financial performance," said CEO Mark Millett. "Our consolidated operating income increased 43% to US$189 million for the third quarter 2014, as compared to the second quarter. During the third quarter, we achieved record volumes in fabrication and steel, even before including the results from our recent acquisition. Despite the continued elevated levels of steel imports into the U.S., the strength of underlying demand, coupled with our market diversification and customer focus supported our record shipments, and we remain optimistic heading toward the end of the year.
"We also successfully completed the acquisition of the Columbus flat roll steel mill mid-September, adding one of the most technologically advanced steel mills in the U.S. to our portfolio. The acquisition of Columbus represents a significant step in the continuation of our growth strategy. It leverages our core strengths, further increasing value-added product and market diversification. Once again, we enthusiastically welcome the Columbus employees and customers into the Steel Dynamics family, and look forward to working with them to drive future growth and success."
Compared to the second quarter, operating income from the company's steel operations increased 28% toUS$202 million for the third quarter 2014, driven by record quarterly shipments and improved metal spread. Strong demand in automotive, manufacturing and energy markets supported volumes. Growth in the nonresidential construction market also improved, as evidenced by record shipments of both structural and joist steel during the quarter. Operating income from the company's fabrication operations increased to US$19 million in the third quarter 2014, more than double the amount achieved in the second quarter of this year.
For the company's metals recycling operations, operating income decreased to US$13 million in the third quarter 2014, as compared to US$18 million in the sequential quarter. Profitability was negatively impacted by lower nonferrous metals margins, which more than offset the increase in overall shipments. Ferrous scrap availability and volumes improved sequentially.
Third Quarter Review
Third quarter 2014 shipments increased across all of the company's operating platforms, as compared to the sequential quarter. Operating income for the company's steel operations increased 28%, as compared to the sequential quarter. Excluding Columbus purchase accounting adjustments, operating income from steel operations increased approximately 37%, based on improved metal spreads and record total shipments. The Structural and Rail and Engineered Bar Divisions each achieved record quarterly shipments, with an increase of 8% in structural steel beams, 12% in rail, and 16% in engineered steel. The average product selling price for the company's steel operations increased US$7 to US$840 per ton. The average ferrous scrap cost per ton melted decreased US$8 to US$356 per ton.
Third quarter operating income attributable to the company's sheet steel operations increased 11% when compared to the sequential quarter, and operating income from long product operations increased 52%. The company's steel mill production utilization rate was 90% in the third quarter 2014, compared to 95% in the sequential quarter. The decrease in rate was a function of increased estimated capacity attributable to the SBQ expansion and the 4-day scheduled maintenance outage at the Butler Flat Roll Division, excluding the impact from these items utilization would have been consistent with the second quarter production rate.
Third quarter operating income from the company's metals recycling operations decreased 29%, as the significant decrease in nonferrous metal spread more than offset the 13% increase in shipments, as compared to the sequential quarter.
Operating income for the company's fabrication operations more than doubled, increasing from US$8 million in the second quarter 2014 to US$19 million for the third quarter, driven by record quarterly shipments based on both market share gain and overall demand improvement. Through August 2014, domestic steel joist shipments have increased 21% year-over-year, as reported by the Steel Joist Institute. Order inquiries and project bookings remain strong, supporting the positive trend in the nonresidential construction market.
The financial performance of the company's Minnesota operations improved in the third quarter 2014, resulting in the impact of losses on consolidated net income decreasing to US$5 million, or US$0.02 per diluted share, compared toUS$9 million, or US$0.04 per diluted share recorded in the second quarter of this year. Improvements in yield, volume and quality were achieved, and the company believes there will be further improvement, as the facilities continue to be operated on a consistent basis and further reductions in raw material costs are achieved.
In connection with the Columbus acquisition, during the third quarter 2014 the company issued US$1.2 billion senior unsecured notes, comprised of a US$700 million 5.125% seven-year tranche and US$500 million 5.500% ten-year tranche. The remainder of the US$1.6 billion purchase price was paid with a combination of available cash and borrowings on the company's revolving credit facility. "We are pleased with the successful execution of the recent financing related to the Columbus acquisition," stated CFO Theresa Wagler. "The team did a great job and accessed the high yield bond market at an opportune time, raising US$1.2 billion at an attractive long term average interest rate of 5.28%."
Year-to-Date Comparison
Year-to-date September 30, 2014, net income was US$202 million, or US$0.85 per diluted share, on net sales of US$6.2 billion, as compared to net income of US$135 million, or US$0.59 per diluted share, on net sales of US$5.5 billion for the prior year period. Consolidated net sales increased 13%, primarily as a result of higher average steel pricing and improved shipments across the company's operating platforms. As compared to the prior year period, consolidated operating income increased US$123 million, or 44%, primarily as a result of improved steel metal spread. The average selling price for the company's steel operations increased US$48 per ton. The average ferrous scrap cost per ton melted increased US$15 per ton.
Outlook
"Looking ahead, we remain optimistic," Millett said. "Despite recent broader global concerns, the U.S. economy is continuing to improve, inflation remains low and borrowing rates remain at historically attractive levels. We continue to be the beneficiaries of strong end markets, such as automotive, manufacturing, transportation and energy. We also believe growth in the construction market will continue as evidenced by the increased demand for our construction-related steel products. With the Columbus acquisition, we gain geographic and product diversification in higher-growth markets in the southern U.S. and Mexico. We believe our diversified offerings of value-added products delivered by our exceptional team, combined with our unique operating culture, provides us a compelling advantage as we capitalize on the opportunities ahead. Our organic growth projects and latent steel capacity, coupled with the acquisition of Columbus, and our belief that domestic steel consumption will continue to improve—all point toward meaningful growth opportunities for Steel Dynamics' employees, customers and shareholders," concluded Millett.
Summary Third Quarter Operating Segment 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, excluding per ton data.
Steel Operations
This segment includes six electric-arc-furnace steel mills and related steel finishing and processing facilities (with The Techs), which includes the results of the Columbus flat roll steel mill from the date of acquisition on 16 September 2014. The company's steel operations produce flat-roll steel, structural steel, merchant bars, engineered special-bar-quality steel, rebar, rail, and specialty shapes.
| Third Quarter | Year to Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 2Q 2014 | ||||||
| Total Sales | US$ 1,564,112 | US$ 1,237,247 | US$ 4,125,040 | US$ 3,545,097 | US$ 1,370,995 | |||||
| External Sales | 1,451,211 | 1,162,429 | 3,833,914 | 3,314,756 | 1,265,104 | |||||
| Operating Income | 202,084 | 148,698 | 467,943 | 358,120 | 158,083 | |||||
| Total Shipments (tons) | 1,900,043 | 1,585,125 | 5,028,541 | 4,577,595 | 1,677,766 | |||||
| External Shipments (tons) | 1,728,023 | 1,463,867 | 4,585,478 | 4,204,679 | 1,518,882 | |||||
| Production (tons) | 1,885,299 | 1,612,824 | 5,113,117 | 4,678,115 | 1,708,252 | |||||
| Average External Sales Price Per Ton | US$ 840 | US$ 794 | US$ 836 | US$ 788 | US$ 833 | |||||
| Average Ferrous Scrap Cost Per Ton | US$ 356 | US$ 349 | US$ 366 | US$ 351 | US$ 364 | |||||
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 iron producing operations.
| Third Quarter | Year to Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 2Q 2014 | ||||||
| Metals Recycling & Ferrous Resources | ||||||||||
| Total Sales | US$ 1,111,300 | US$ 948,134 | US$ 3,118,966 | US$ 2,755,818 | US$ 1,014,161 | |||||
| External Sales | 672,397 | 605,381 | 1,893,387 | 1,812,001 | 645,216 | |||||
| Operating Loss | (798) | (11,695) | (13,296) | (17,815) | (1,517) | |||||
| Unrealized Hedging Gain (Loss), Net | 3,125 | (2,451) | 4,692 | (2,317) | (2,499) | |||||
| OmniSource Standalone | ||||||||||
| Total Sales | US$ 953,483 | US$ 848,043 | US$ 2,725,728 | US$ 2,477,832 | US$ 891,627 | |||||
| External Sales | 597,648 | 577,087 | 1,701,281 | 1,742,001 | 580,509 | |||||
| Operating Income | 13,021 | 11,166 | 40,968 | 51,905 | 18,398 | |||||
| Unrealized Hedging Gain (Loss), Net | 2,664 | (1,391) | 3,023 | (2,283) | (2,371) | |||||
| Ferrous Shipments (gross tons) | 1,453,671 | 1,472,418 | 4,240,901 | 4,149,737 | 1,422,697 | |||||
| % Shipments to SDI Steel Mills | 46% | 46% | 48% | 43% | 46% | |||||
| Nonferrous Shipments (pounds 000's) | 325,436 | 263,467 | 884,647 | 797,618 | 288,233 | |||||
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of nonresidential buildings.
| Third Quarter | Year to Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 2Q 2014 | ||||||
| Total Sales | US$ 190,036 | US$ 119,268 | US$ 440,749 | US$ 317,802 | US$ 134,852 | |||||
| Operating Income | 19,474 | 3,265 | 30,190 | 7,125 | 7,590 | |||||
| Total Shipments (tons) | 143,737 | 101,590 | 343,592 | 265,544 | 105,188 | |||||
| Average Sales Price Per Ton | US$ 1,322 | US$ 1,174 | US$ 1,283 | US$ 1,196 | US$ 1,282 | |||||
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 7,600 employees, and manufacturing facilities primarily located throughout the United States (including six steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
