Steel Dynamics Reports 3rd Quarter Earnings
10/17/2007 - Steel Dynamics announces earnings of $101 million on revenues of $1.2 billion for the third quarter and net income of $297 million on revenues of $2.9 billion for the first nine months of 2007.
Steel Dynamics, Inc. announced earnings of $101 million (after purchase-accounting adjustments for the recent acquisition of The Techs) on revenues of $1.2 billion for the third quarter, and net income of $297 million on revenues of $2.9 billion for the first nine months of 2007.
Third-Quarter Results—The $101 million earnings ($1.06 per diluted share) reflect purchase accounting adjustments of approximately $0.01 per diluted share related to the company's recent acquisition of The Techs. Diluted earnings per share increased 12% sequentially from $0.95 in the second quarter of 2007, but were 2% lower than $1.09 in the third quarter of 2006.
Revenues of $1.2 billion are 27% higher than both the year-ago quarter and the second quarter of 2007. Consolidated shipments of 1.6 million tons reflect a 26% increase as compared to the year-ago quarter. According to SDI, the approximately 27% sequential volume increase (+336,000 tons) from the second quarter was due primarily to increased shipments of 335,000 tons from the company's steel operations—231,000 tons from The Techs and 110,000 tons from increased shipments by the Flat Roll Division.
Operating income was $111 per ton shipped with an operating margin of 15%, which compares with second-quarter operating income of $136 per ton shipped and an operating margin of 18%. Average consolidated selling price per ton decreased to $737 from $739 in the second quarter of 2007 but increased $4 from the year-ago quarter. The average scrap cost per net ton charged decreased $21 compared to the second quarter, which had seen an increase of $44 from the first quarter.
Nine Month Results—Net income grew to $297 million on revenues of $2.9 billion in the first nine months of 2007. Diluted earnings per share were $3.02, 11% ahead of last year. Consolidated shipments grew 15% to 4.1 million tons, compared to 3.5 million tons in the first nine months of 2006. The company's steel operations showed increased year-over-year nine-month shipments of nearly 513,000 tons, or 14%.
Management Comments—"Overall, Steel Dynamics is experiencing another strong year," said Keith Busse, Chairman and CEO. "From an operating standpoint, we saw sequential improvement from the second quarter, in spite of continued softness in flat- rolled steels and some spotty slowness in merchant and specialty bar steels.
"The integration of The Techs is proceeding well. The Techs represents an increase in steel operating revenues and volumes. The product mix sold by The Techs generally elicits higher average selling values, but the resulting operating margins are somewhat lower than traditionally experienced at SDI as The Techs do not currently produce their own substrate as does our Flat Roll Division. Consequently, as the operations exist, consolidating The Techs operating results will generally increase cost of goods sold as a percentage of net sales; however, we hope to internally provide The Techs with more substrate at some point. At this time we expect The Techs acquisition to be accretive for the fourth quarter of 2007."
Outlook—"The outlook for the fourth quarter is positive," Busse said. "The costs of ferrous resources have trended down and we expect them to remain relatively stable going into winter. We expect selling prices to remain steady or increase slightly. Market demand for flat-rolled steel should improve in the fourth quarter due to inventory de-stocking and limited imports. We expect continued strength in our long products mills, particularly structural steel that is used in the non-residential construction markets. We currently expect fourth quarter earnings will be in a range of $1.02 to $1.07 per diluted share, excluding any impact from the planned acquisition of OmniSource Corporation. This early guidance closely parallels our third quarter, as improved market conditions will be offset by scheduled outages for upgrades at three of our five mills. We will provide updated guidance to reflect the effect of the acquisition of OmniSource, which we believe could be accretive, after the transaction closes in early November.
"During the third quarter, we made two important announcements that have strong implications for our future," Busse continued. "The acquisition of OmniSource helps anchor our supply of domestic ferrous scrap resources and the commencement of the Mesabi Nugget project develops future self-sufficiency in pig-iron supply, both of which are critical steps in providing a strong platform for future growth initiatives.
"The acquisition of OmniSource creates an environment that allows us to capture margins at every step of the value chain. We believe that scrap resources in the future could become scarce at times due to increasing global demand and a softer U.S. dollar. Given these assumptions, we anticipate scrap margins could increase in the future and we hope to continue to grow this arm of our business. OmniSource can, at times, provide SDI with a more dependable, nearby supply of high-quality steel scrap and affords SDI a measure of protection from supply chain shortages under certain market conditions.
"Our plan to develop iron resources on the Mesabi Range in Minnesota promises to provide a consistent future supply of high-quality, lower-cost iron nuggets (i.e., pig iron) for use in our minimills. We expect ultimately to control the entire process from mining, concentrating, and then direct reduction of the concentrate into pig iron. We believe that the economics of production will make these resources attractive compared to imported pig iron today and even more attractive as global demand grows and the cost of iron units continues to increase. We have demonstrated that the use of these resources in our electric-arc furnaces result in numerous operating advantages, including better management of residuals, lower electrode utilization, improved yields, and increased output by reducing tap-to-tap times."
During the third quarter, the company continued its share repurchase program. A total of 4.9 million shares were repurchased during the quarter for approximately $198 million. At the end of the quarter, the company had 5.0 million shares authorized for repurchase. At September 30, 2007, the company had approximately 87.2 million shares of common stock outstanding.
