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Steel Dynamics Posts Solid Results in Difficult Market Environment in 1Q13

04/22/2013 - As it reported its first quarter earnings results, Steel Dynamics Inc. said the quarter was challenging from a market perspective, as customer confidence and buying patterns continued to be impacted by global economic uncertainty,

Steel Dynamics, Inc. announced first quarter 2013 net income of US$48 million on net sales of US$1.8 billion. By comparison, prior year first quarter net income was US$46 million on net sales of US$2.0 billion; and sequential fourth quarter 2012 net income was US$61 million on net sales of US$1.7 billion. 
"The first quarter remained challenging from a market perspective, as customer confidence and buying patterns continued to be impacted by global economic uncertainty;" said president and chief executive officer, Mark Millett, "but the team did a great job. We hit several production records, and did so safely, as safety records improved from levels already better than industry standards. We are pleased the first quarter financial performance was at the upper range of our March guidance. Operating income improved slightly to US$96 million compared to last quarter's results.  
"Compared to the fourth quarter, operating income from our steel operations improved 4% to US$122 million, as increased long product volumes more than offset weaker sheet steel shipments and somewhat lower overall metal spreads," stated Millett. "An oversupplied northeastern U.S. galvanized sheet market pressured first quarter shipments from The Techs. However, increased shipments of wide flange beams, rail and engineered bar products more than offset the decrease. Despite the slow growth of the commercial construction market, we have seen increased wide flange beam shipments for several consecutive quarters, albeit still very low in relative historical terms, and our fabrication business continues to be profitable.         
"Operating income from our metals recycling operations decreased 3% to US$25 million when compared to the fourth quarter, as increased volumes were more than offset by decreased ferrous and nonferrous margins," said Millett. "We noted in our fourth quarter 2012 earnings release that we were anticipating potential challenges in the metals recycling market during the first quarter 2013. Due to ongoing slow U.S. growth and inclement weather, the availability of unprocessed scrap was limited, particularly in the Midwest and along the northeastern corridor, resulting in increased costs to purchase unprocessed material.
"The company's continued 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.
First Quarter Review
First quarter shipments were higher across the company's operating segments when compared to the fourth quarter of 2012, and to the prior year first quarter, aside from metals recycling which decreased year over year. Operating income increased slightly when compared to the fourth quarter of last year, but declined 20% from prior year's first quarter, primarily due to reduced steel metal spreads, as steel product pricing decreased more than scrap raw material costs.
 The company's steel mill utilization rate improved to 89% in the first quarter from 80% in the fourth quarter of 2012. There was a shift toward higher valued-added products in the company's steel shipments during the first quarter of 2013, when compared to the fourth quarter of 2012. This change helped offset decreased metal spread, resulting in increased operating income of US$4 million. The average selling price per ton shipped increased US$5 to US$789 in the first quarter, and the average ferrous scrap cost per ton melted increased US$8 per ton.   Operating income attributable to the company's long product operations increased 16% when compared to the sequential quarter, while earnings from sheet operations decreased four percent.
The impact of losses from the company's Minnesota operations on first quarter 2013 consolidated net income was approximately US$14 million which included a unique loss of US$2 million (after taxes) related to the sale of excess iron concentrate reserves purchased from third parties. In addition, despite achieving record production levels, the use of higher cost iron concentrate during the quarter also resulted in increased operating losses. Comparatively, the impact of losses on fourth quarter 2012 earnings was US$10 million. As previously indicated and according to plan, the installation of additional oxygen-burners and other equipment modifications will be made at the iron nugget facility in April. These modifications are expected to further improve production volumes.
Production at the company's iron concentrate facility continues to proceed well, and the plant is operating at a cash-cost of less than US$50 per metric ton, which is substantially less than current market prices in excess of US$135 per metric ton. As iron concentrate is the primary raw material for the iron nugget facility, this is a pivotal achievement in lowering the raw material input cost of iron nuggets.
The company plans to start solely using its lower-cost iron concentrate for nugget production in May. However, due to costs related to the outage, the company still anticipates second quarter 2013 losses associated with the Minnesota operations to be similar to those recorded in the fourth quarter of 2012.     
During the first quarter the company issued US$400 million of new 5.25% senior notes due in 2023 and offered to repay US$500 million of its existing 6¾% senior notes due in 2015. At 31 March 2013, the company had repaid US$302 million of the existing senior notes, repaying the remaining amount of US$198 million on April 9, 2013. After giving effect to the April repayment, total debt decreased US$100 million and liquidity remained strong with US$1.4 billion in unrestricted cash and available funding under the revolving credit facility. These transactions, along with the resulting repayment of debt with available cash, not only extended the company's overall debt maturity profile, but should also provide an estimated annual interest savings of approximately US$13 million.
Outlook
"Demand for high-quality steel products has not abated," Millett said. "We remain optimistic. The team is on track to complete the organic growth projects scheduled to start at the end of this year, including the engineered special-bar-quality capacity expansion and the premium rail product addition. The automotive market remains strong, and we believe there is potential for manufactured goods to continue to build momentum in 2013.   Housing start data also suggests an increasingly higher potential for a recovery in residential construction. We continue to be cautiously optimistic about the nonresidential construction market in 2013, as market indices continue to trend higher. We also view the increase in our long product and fabrication sales as a positive sign, even though they are improving from historically low levels. We are confident that with our exceptional team, and our superior, low-cost operating culture, we are uniquely prepared to capitalize on the opportunities ahead."
Summary First 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 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, engineered special-bar-quality steel, rebar, rail, and specialty shapes.
 

First Quarter

Sequential

2013

2012

4Q12
Total Sales

$1,142,075

$1,254,464

$1,126,438
External Sales

1,061,312

1,186,720

1,061,419
Operating Income

121,589

139,740

117,097
Total Shipments (Tons)

1,469,802

1,450,123

1,457,053
Avg. External Sales Price Per Ton

789

875

784
Avg. Ferrous Scrap Cost Per Ton

351

417

343
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.
Metals Recycling & Ferrous Resources
 

First Quarter

Sequential

 

2013

2012

4Q12
Total Sales

$914,568

$1,112,340

798,163
External Sales

621,128

699,600

530,258
Operating Income (Loss)

(4,039)

10,399

507
Metals Recycling (Standalone)
 

First Quarter

Sequential

 

2013

2012

4Q12
Total Sales

$835,039

$1,057,173

$741,342
External Sales

609,918

699,342

520,931
Operating Income

24,965

25,004

25,818
Unrealized Hedging Gains

691

2,003

9,820
Ferrous Shipments (Gross Tons)

1,342,929

1,582,840

1,238,143
% Shipments to SDI Steel Mills

41%

48%

46%
Nonferrous Shipments (thousand pounds)

279,656

291,636

251,080
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

2013

2012

4Q12
Total Sales

$94,375

$74,896

$98,301
Operating Income (Loss)

1,530

(2,668)

1,448
Total Shipments (Tons)

77,583

60,183

76,870
Avg. External Sales Price Per Ton

$1,214

$1,244

$1,278
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 US$7.3 billion in 2012, over 6,600 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 70 metals recycling locations and six steel fabrication plants).