Steel Dynamics Reports Second Quarter Results
07/24/2007 - Steel Dynamics reports earnings of $94 million on net sales of $911 million for the second quarter, and net income of $196 million on net sales of $1.8 billion for the first half of 2007.
Steel Dynamics, Inc. announced earnings of $94 million on net sales of $911 million for the second quarter, and net income of $196 million on net sales of $1.8 billion for the first half of 2007.
Second Quarter Results—The $94-million earnings ($0.95 per diluted share) reflects a 7% increase compared to $0.89 per diluted share in the second quarter of 2006. Diluted earnings per share decreased 6% from the first quarter of 2007, principally due to bond refinancing costs.
Revenues of $911 million were 11% higher than the year-ago quarter and 5% higher than the first quarter of 2007. Second quarter consolidated shipments of 1.2 million tons were approximately the same as shipments in the second quarter of 2006 and slightly less than the first quarter of 2007.
Second quarter earnings per diluted share were reduced approximately $0.07 by the redemption of the company's 91/2% Senior Unsecured Notes and termination of a related fixed-to-floating interest-rate swap. Excluding the impact of these expenses, second quarter earnings per diluted share would have been comparable to the company's first quarter earnings of $1.01 per diluted share.
Six-Month Results—The $196-million net income reflects a 13% increase compared to $173 million in last year's first half. Net sales of $1.8 billion were 19% higher than the first half of 2006. Consolidated shipments of 2.5 million tons were 9% higher than last year's first half. Average sales price per ton for consolidated sales increased to $714 per ton, an increase of 9% compared to last year's first half. SDI's first-half cost for steel scrap increased 10% per net ton charged from the first half of 2006.
Management Comments—"Second-quarter operating income was relatively flat versus the first quarter due to lower shipping volumes for flat-rolled and bar steels," said Keith Busse, Chairman and CEO of Steel Dynamics. "Our Structural & Rail Division achieved record shipments and record operating profit during the second quarter. Despite lower shipping volumes, our bar mills achieved strong operating results. Demand for flat-rolled steel turned out to be weaker than initially expected, reducing our shipping volume for sheet steels and resulting in more moderate price increases than anticipated for flat-rolled products."
Operating results—Higher-priced scrap purchased in the latter part of the first quarter and melted in the second quarter resulted in higher second quarter costs, due to SDI’s use of the FIFO method of inventory accounting. The second quarter's average scrap cost per net ton charged increased $44 compared to the first quarter. Declining prices for steel scrap purchased during the second quarter helped to improve margins toward the end of the quarter, and are expected to have a stronger positive effect on third quarter profit margins.
Operating margin for the second quarter was 18%, compared to 20% in the first quarter of 2007. Second-quarter operating profit per ton shipped was $136, unchanged from the first quarter of 2007. The second quarter's average consolidated selling price increased to $739 per ton shipped, compared to $689 in the first quarter. The increase in average selling price was principally due to the strength in long-products pricing.
"During the second quarter, Steel Dynamics continued its growth plans by announcing two strategic acquisitions," Busse said. "In June we announced the acquisition of The Techs, a respected, well-run flat-roll steel galvanizing company in Pittsburgh, Pa., which expands our presence in the flat-roll-steel coating business. That acquisition closed on July 2. Also, in April we purchased a privately owned company that operates two metal-processing scrap yards in eastern Tennessee. The acquisition of these yards, which will provide an increased internal supply of steel scrap to our steel mill at Roanoke, Va., is part of our strategy to increase the proportion of ferrous resources we are able to self-supply to our mills. An additional scrap collection and processing facility is under development in Indianapolis, Ind., and is scheduled to open in the second half of 2007.
Outlook—"Our outlook for the third quarter is very positive," Busse said. "The cost of ferrous resources for delivery mid-to-late second quarter has trended down and third-quarter scrap prices appear to be stable. We expect selling prices to remain relatively steady or improve somewhat, setting the stage for an expected improvement in profit margins for the third quarter. All of SDI's long products divisions are experiencing solid order books, strong shipping rates, and strong selling values. For the first half of 2007, our long products mills accounted for 53% of the company's steel shipments.
"We expect market demand for flat-rolled steel to improve in the third quarter, following several months of inventory liquidation, which would provide the possibility of a higher third-quarter volume of shipments and improved profit margins for sheet products. Combined with continued strong results for long products, we expect higher third-quarter earnings in the range of $1.10 to $1.15 per diluted share, subject to certain purchase accounting adjustments related to our acquisition of The Techs. We are in the process of determining purchase price allocations and cannot yet ascertain the impact to third quarter earnings. We expect to have a better assessment by the end of August and, we will determine the necessity of updating our third-quarter guidance at that time," Busse said.
During the third quarter of 2007, the company anticipates signing an operating agreement with its Mesabi Nugget project partners, subject to the resolution of certain remaining issues. The agreements contemplate the commercialization of the first ITmK3(R) nugget manufacturing facility. In connection with the plant construction, the company also anticipates purchasing and/or leasing land on the Minnesota iron-range for the purpose of mining its own iron ore concentrate for use at the nugget facility.
During the second quarter, Steel Dynamics repurchased 2.9 million shares of its common stock for approximately $132.4 million. At June 30, 2007, the company had approximately 92 million shares of common stock outstanding. In June, the company's Board of Directors authorized the repurchase of an additional 5 million shares.
