Steel Dynamics Reports 4th-Quarter Loss, Full-Year Income
01/27/2009 - Steel Dynamics reports a net loss of $83 million on net sales of $1.2 billion for the fourth quarter, and record net income of $463 million on record net sales of $8.1 billion for the full year of 2008.
Steel Dynamics, Inc. announced a net loss of $83 million on net sales of $1.2 billion for the fourth quarter, and record net income of $463 million on record net sales of $8.1 billion for the full year of 2008.
Fourth Quarter Results—The $83 million net loss ($0.45 per diluted share) compares to net income of $193 million ($0.98 per diluted share) in the third quarter of 2008, and net income of $98 million ($0.50 per diluted share) in the fourth quarter of 2007.
Sales of $1.2 billion reflect a 53% decline compared to sales of $2.6 billion in the third quarter, and a 17% decline compare to sales of $1.5 billion in the year-ago quarter. Sales results reflect lower volumes combined with declining prices for all business segments.
Although the company’s steel operations achieved operating income in the fourth quarter, this income represented a significant decline from recent quarters due to slower operating rates and shipping volumes, declining steel selling prices, and higher input costs as lower production volumes led to a slower-than-anticipated depletion of ferrous raw materials that had been purchased at higher prices. Steel fabrication operations also generated an operating profit for the quarter despite lower volumes.
Fourth Quarter results reflect a non-cash, unrealized hedging loss of $35 million related to valuing certain non-ferrous financial contracts at fair market value. The company’s steel and metals recycling operations recorded losses of approximately $26 million and $10 million, respectively, due to necessary reductions in ending inventory values for lower of cost or market requirements. After making these adjustments and having consumed much of the older, higher-cost raw materials, the company’s steel and metals recycling operations are beginning 2009 with lower scrap costs that are more typical of recent market values.
Full Year Results—Despite the weak sales and net loss of the fourth quarter, the company reported another strong year of growth ending with record full-year results. Record net income of $463 million ($2.38 per diluted share) reflects a 17% increase (18% increase in earnings per diluted share) from $395 million ($2.01 per diluted share) in 2007.
Record net sales of $8.1 billion reflect an 84% increase compared to net sales of $4.4 billion in 2007. The company said the increase resulted primarily from the acquisition of OmniSource Corp. in October 2007 and additional metals recycling operations in mid-2008. Sales also were boosted by significantly higher average selling prices for steel and recycled metals during 2008.
Net cash flow from operating activities for 2008 was $775 million, which compares to $428 million in 2007.
Very strong performance for the company’s steel and metals recycling segments through the first three quarters was followed by significant weakening in order activity. The rapid decline was first experienced in late September by the company’s Flat Roll Division and in metals recycling, eventually broadening to other steel operations as the fourth quarter progressed. Compared to the third quarter, fourth-quarter 2008 steel shipments (942,000 tons) were down 34%, ferrous metals shipments (898,000 net tons) were down 49%, and non-ferrous metals shipments (177 million pounds) were down 27%.
Management Comments—"It is strange to be reporting the best year in the company's history and at the same time the company's worst quarter," said Keith Busse, Chairman and CEO. "The steel industry took it on the chin in the fourth quarter as orders dried up, and Steel Dynamics was not exempted. The combination of weaker demand, inventory reductions in both distribution and at the OEM level, and the commercial paralysis brought about by tight credit markets led to very slow order activity. This resulted in fourth-quarter production curtailments at our mills and metals-recycling facilities.
“We have started the new year with somewhat better activity,” continued Busse, “but we cannot be certain how long it will take the steel and scrap markets to return to more normal demand patterns. All of our SDI facilities are currently operating well below capacity. However, the company is prepared to ramp up very quickly with any pick-up in business activity.
"We believe that SDI is well positioned with our low, variable cost structure and state-of-the-art facilities that are capable of cost-effectively producing excellent, high-quality products. We are optimistic that, even if we continue to encounter lackluster demand for steel and scrap for several quarters, we will return to profitability in the first quarter and remain profitable in 2009, assuming no recurrence of dramatic price swings such as those experienced in the second half of 2008.
“Our very preliminary estimate is that we could achieve earnings of $0.05 to $0.15 per diluted share in the first quarter,” commented Busse. “If needed, further guidance will follow later in the quarter as visibility improves. We continue to believe that earnings for the full year 2009 could, under somewhat improved circumstances, be comparable to those achieved in 2008. We are focusing on cash management and controlling costs tightly, utilizing free cash flow to continue to pay down debt on our revolving line of credit and continue funding capital expenditures for critical projects that are underway," Busse said.
Financial Position—The company reduced total debt by $226 million during the fourth quarter of 2008 and continues to focus on further reductions in leverage, while maintaining and closely monitoring appropriate capital investment plans for future long-term growth.
“We significantly increased our liquidity position during the quarter, resulting in availability of funds of over $500 million at the end of the year,” noted Busse.
The company's first meaningful debt amortization does not occur until 2012. For its use of available cash during 2009, the company has placed top priority reducing leverage. The company’s second priority for cash use is to provide for critical capital investments and any modest strategic initiatives, and its third priority is to provide for continued cash dividends to shareholders.
The company’s Steel Operations segment’s operations represented some 63% of the company’s fourth quarter net sales and 57% of company sales for the full year 2008. The segment includes five electric-arc-furnace (EAF) steel mills and related steel finishing and processing facilities that produce flat-rolled steel, structural steel, merchant bars, special-bar-quality steel, and other specialty shapes.
Steel operations net sales were $860 million in the fourth quarter on shipments of 942,000 tons (including intra-company shipments). Steel operations net sales were $5.5 billion for the year 2008 on shipments of 5.6 million tons (including intra-company shipments).
Based on tons shipped for the full year 2008, including steel shipments made by The Techs, flat-rolled products accounted for 56% of 2008 shipments for the segment. Structural steel shipments represented 20%, engineered bars, 10%, merchant bars, 9%, and shipments by the company’s Steel of West Virginia subsidiary accounted for the remaining 5%. Segment operating income for the fourth quarter was $2 million ($2 per ton shipped0, which compares to operating income of $200 per ton in the third quarter. Operating income for the year was $861 million ($153 per ton shipped). Results exclude profit-sharing costs and amortization related to the segment's intangible assets.
Average selling price per ton for fourth quarter steel operations was $913, a decrease of $273 per ton from $1,186 in the third quarter of 2008, but an increase of $203 per ton from the year-ago quarter. The average ferrous scrap cost per net ton charged decreased by $209 compared to the third quarter and was $72 higher than the fourth quarter of 2007. For the year 2008, the average selling price per ton was $973, an increase of $284 from 2007. The average scrap cost per ton in 2008 increased $164 from 2007.
The company’s Metals Recycling and Ferrous Resources segment includes ferrous and non-ferrous metals processing and trading by OmniSource Corp. and SDI's Iron Dynamics scrap-substitute operation, which produces pig iron for use by the Flat Roll Division. The segment also includes expenses related to the Mesabi Nugget project, which is currently under construction.
This segment's reported net sales of $389 million (including intra-company sales) for the quarter, representing some 28% of the company’s fourth quarter net sales. Full-year net sales were $3.7 billion, representing 38% of company sales. The segment’s fourth-quarter operating loss was $118 million, and its full-year 2008 operating income was $123 million, excluding profit-sharing costs and amortization related to the segment's intangible assets.
Total fourth-quarter ferrous shipments (including shipments to SDI's steel operations) were 898,000 tons, while non-ferrous metals shipments were 177 million pounds. The company's metals recycling operations supplied 439,000 tons of ferrous scrap to SDI's steel operations during the fourth quarter, representing approximately 42% of the tonnage of ferrous scrap purchased by the company’s mills during the quarter. For 2008, metals recycling operations supplied 2.3 million tons of ferrous scrap to SDI's steel operations, representing approximately 41% of the tonnage of ferrous scrap purchased by the company’s mills.
The company’s Steel fabrication operations includes New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings. Fourth quarter net sales were $93 million, representing some 7% of the company's fourth quarter net sales, while full-year net sales were $376 million, representing some 4% of company sales for 2008. The segment’s fourth quarter operating income was $5 million ($84 per ton shipped), and its full-year operating income was $18 million ($63 per ton shipped), excluding profit-sharing costs. Fourth quarter shipments totaled 64,000 tons at an average selling price of $1,461 per ton.
