SDI Optimistic for 2013 as it Reports Results for Challenging 2012
01/29/2013 - Despite a challenging fourth quarter and full-year 2012, Steel Dynamics Inc. is optimistic regarding the next year as demand for high-quality steel has not abated and market sectors continue to build momentum.
Steel Dynamics, Inc. announced fourth quarter 2012 net income of US$61 million on net sales of $1.7 billion. By comparison, prior year fourth quarter net income was $30 million on net sales of $1.9 billion, and sequential third quarter 2012 net income was $13 million on net sales of $1.7 billion. Full-year 2012 net income was $164 million on net sales of $7.3 billion, compared to prior year net income of $278 million on net sales of $8.0 billion.
Fourth quarter 2012 results included certain positive tax adjustments of $16 million which was slightly higher than the company's previous estimate for the adjustments. Excluding these adjustments the company's fourth quarter effective tax rate was 39.5%.
"Similar to the rest of 2012, the fourth quarter was challenging on a number of fronts," said president and CEO, Mark Millett, "but the team did a great job. We are pleased our fourth quarter financial performance was stronger than originally anticipated. On a sequential quarterly basis our operating income increased 31% to $95 million, primarily driven by improvements in our metals recycling and sheet steel operations.
"In our December guidance, we suggested that metals recycling was expected to deliver a stronger financial performance in the fourth quarter, and the team's execution was even better than anticipated," stated Millett. "Sequential quarterly operating income increased 56% to $26 million, as meaningful improvements in both ferrous and nonferrous metal spreads more than offset decreased volumes. Increased copper margins provided the most notable improvement, as global copper prices increased based in part on improved demand from China. We also took advantage of a strong December ferrous market environment, increasing our expected shipments, as it appeared the typical market strength of January was being challenged.
"Our steel operations also showed improvement with an increase in operating income of 7% to $117 million, as improvements in sheet steel volumes more than offset weaker long product shipments and lower overall steel metal spreads. Automotive and manufacturing provided improved sheet demand, while nonresidential construction remained weak. Despite the challenging construction market, we are also pleased that our fabrication business reported its third consecutive profitable quarter, as the changes the team implemented earlier in the year have continued to provide greater efficiencies and improved productivity.
"The company's solid performance in a difficult market environment is driven by our ongoing commitment to provide exceptional value to our customers, while taking advantage of our innovative, low-cost operating culture. We remain committed to leveraging the full complement of our competitive strengths to sustain and grow shareholder value," Millett concluded.
Fourth Quarter Review
Fourth quarter shipments were mixed across the company's operating segments when compared to the prior-year fourth quarter and the third quarter of 2012. However, with the exception of fabrication, pretax earnings improved for each business platform. The company's operating income increased 15% over prior-year performance and 31% in comparison to the third quarter of 2012. The increase in sequential quarterly operating income was primarily the result of increased volume coupled with reduced costs in sheet operations, and increased nonferrous margins coupled with reduced direct costs in metals recycling.
Fourth quarter shipments were mixed across the company's operating segments when compared to the prior-year fourth quarter and the third quarter of 2012. However, with the exception of fabrication, pretax earnings improved for each business platform. The company's operating income increased 15% over prior-year performance and 31% in comparison to the third quarter of 2012. The increase in sequential quarterly operating income was primarily the result of increased volume coupled with reduced costs in sheet operations, and increased nonferrous margins coupled with reduced direct costs in metals recycling.
The company's steel mill capacity utilization improved to 80% in the fourth quarter from 78% in the third quarter, while shipments increased 4%. Improved overall volume and product mix more than offset decreased steel margins, resulting in increased operating income of $8 million in the quarter. The average selling price per ton shipped decreased $25 to $784 in the fourth quarter, and the average ferrous scrap cost per ton melted decreased $9 per ton. Operating income attributable to the company's sheet operations increased 15% when compared to the sequential quarter, while earnings from long product operations decreased 3%.
Despite lower volumes, profitability from the company's metals recycling operations improved as ferrous metal spreads expanded 10% and nonferrous metal spreads improved 24% when compared to the third quarter of 2012.
The impact of losses from the company's Minnesota operations on fourth quarter 2012 consolidated net income was approximately $10 million. This compares to losses of $11 million in the third quarter of 2012. As previously indicated, a six week outage of the nugget facility began in mid-September 2012 to complete the groundwork necessary for the implementation of improvements expected to be made in the first half of 2013. These modifications are expected to improve both volume and product quality. As planned, operations resumed in November, and the restart has gone well with significant improvements to product quality already achieved.
Operations began at the company's iron concentrate facility in September 2012 and production has gone well. As the primary raw material for the company's iron nugget facility, this is a pivotal achievement in lowering the raw material input cost of iron nuggets, as the cost of internally-sourced iron concentrate is less than $50 per tonne compared to current market priced iron concentrate in excess of $140 per tonne. If pig iron prices remain steady, losses associated with the Minnesota operations for the first quarter of 2013 are anticipated to be similar to those recorded in the fourth quarter, as the plant depletes existing higher priced third-party iron concentrate in inventory.
The company's liquidity position remains strong with $1.5 billion in unrestricted cash, short term commercial paper, and available funding under the revolving credit facility at 31 December 2012. Total debt decreased $178 million during 2012, and the company's debt to equity capitalization rate improved from 50% at the end of 2011 to 47% at December 31, 2012.
Full-Year Review
The company's 2012 net sales decreased 9% when compared to 2011, while operating income decreased 33%. Decreased operating income was primarily driven by reduced operating margins in the company's sheet operations during the first half of 2012, as compared to the record metal spreads achieved in the first half of 2011. The average annual selling price per ton shipped for the company's steel operations in 2012 was $831, a decrease of $66 per ton compared to 2011. The 2012 average scrap cost per ton melted decreased $32. Operating income from the company's metals recycling operations also decreased 23% during 2012, as both volumes and metal margins compressed.
The company's 2012 net sales decreased 9% when compared to 2011, while operating income decreased 33%. Decreased operating income was primarily driven by reduced operating margins in the company's sheet operations during the first half of 2012, as compared to the record metal spreads achieved in the first half of 2011. The average annual selling price per ton shipped for the company's steel operations in 2012 was $831, a decrease of $66 per ton compared to 2011. The 2012 average scrap cost per ton melted decreased $32. Operating income from the company's metals recycling operations also decreased 23% during 2012, as both volumes and metal margins compressed.
Charges associated with the company's 2012 refinancing initiatives resulted in decreased pretax earnings of approximately $38 million. These initiatives significantly reduced the company's cost of debt, while extending the company's long term debt maturity profile.
Outlook
"We remain optimistic that the organic growth projects we identified in 2012 will position us to continue to build a strong enterprise," Millett said. "We believe there is potential for certain market sectors, such as automotive and manufacturing, to build momentum in 2013. Recent housing start data suggests potential improvements in residential construction, and there are areas across the U.S. indicating signs of strengthening in the nonresidential construction sector, although levels remain historically low. We look forward to executing our strategic growth plans. Demand for high-quality steel products has not abated, and we believe our current capital projects will deliver products that exceed customers' expectations. We remain confident that with our exceptional team, coupled with our superior, low-cost operating culture, we are uniquely prepared to capitalize on the opportunities ahead."
"We remain optimistic that the organic growth projects we identified in 2012 will position us to continue to build a strong enterprise," Millett said. "We believe there is potential for certain market sectors, such as automotive and manufacturing, to build momentum in 2013. Recent housing start data suggests potential improvements in residential construction, and there are areas across the U.S. indicating signs of strengthening in the nonresidential construction sector, although levels remain historically low. We look forward to executing our strategic growth plans. Demand for high-quality steel products has not abated, and we believe our current capital projects will deliver products that exceed customers' expectations. We remain confident that with our exceptional team, coupled with our superior, low-cost operating culture, we are uniquely prepared to capitalize on the opportunities ahead."
Steel Dynamics, Inc. is one of the largest domestic steel producers and metals recyclers in the U.S. based on estimated annual steelmaking and metals recycling capability, with annual sales of $7.3 billion in 2012, over 6,600 employees, and manufacturing facilities primarily located throughout the U.S. (including five steel mills, six steel processing facilities, two iron production facilities, over 70 metals recycling locations and six steel fabrication plants).
