Steel Dynamics Reports Strong Results for 2007
01/29/2008 - Steel Dynamics announces net income of $98 million on net sales of $1.5 billion for the fourth quarter, and net income of $395 million on record net sales of $4.4 billion for the full year of 2007.
Steel Dynamics, Inc. announced net income of $98 million on net sales of $1.5 billion for the fourth quarter, and net income of $395 million on record net sales of $4.4 billion for the full year of 2007.
Fourth Quarter Results—Net income of $98 million ($1.00 per diluted share) compares to net income of $105 million ($1.03 per diluted share) in the fourth quarter of 2006, and net income of $101 million ($1.06 per diluted share) in the third quarter of 2007.
Net sales of $1.5 billion were 73% higher than net sales in the fourth quarter of 2006 and 25% higher than net sales in the third quarter of 2007, with the increases driven primarily by the October 26, 2007, acquisition of OmniSource Corp. OmniSource was dilutive to fourth quarter earnings by approximately $0.07 per diluted share, as previously forecast. Of this amount, purchase accounting adjustments represented $0.01.
Excluding the OmniSource transaction, net income per share would have been $1.07, $0.01 higher than the third quarter's diluted earnings per share and $0.04 higher than the fourth quarter of 2006.
Full Year Results—Net income of $395 million was approximately the same as 2006's net income of $397 million, while record earnings per diluted share of $4.02 compares to earning of $3.77 per share in 2006. Per-share earnings increased despite a modest decrease in earnings due to a reduction in the number of shares outstanding as a result of the company's extensive share repurchases during the year.
Record net sales of $4.4 billion represent a 35% increase over 2006 net sales of $3.2 billion. Consolidated shipments increased 32% to 6.2 million tons of steel, fabricated steel, and ferrous and non-ferrous scrap resources.
The company continued its share repurchase program through the year, with a total of 12.6 million shares repurchased in 2007 at a cost of $534 million. At December 31, 2007, an additional 3.0 million shares remained authorized for repurchase, and the company had approximately 95.2 million shares of common stock outstanding.
Management Comments—“Our 2007 results are indicative of our success as it relates to diversification and growth strategies,” said Keith Busse, Chairman and CEO. “In a year when flat-rolled steel, the largest market segment in the U.S. steel industry, struggled, we experienced record consolidated results. Our strategy to diversify from the flat-roll steel business that we started in the mid-1990s into a multi-product steel producer has resulted in five steelmaking operations, plus related steel processing, fabricating, scrap, and virgin-iron resource operations. Our steelmaking operations each produce distinct steel products that permit us to serve a variety of end markets.
“During 2007, while our shipments of flat-rolled sheet declined 2%, our structural steel volume increased 15% and shipments of engineered bars increased 9%, netting a 4% year-over-year increase in steel shipments from our three Indiana mills that were owned and operated throughout 2006 and 2007,” continued Busse. “Total steel shipments, including acquired steelmaking operations, grew to 5.6 million tons in 2007, a 17% increase over 2006.
Busse noted the contribution of three noteworthy acquisitions to SDI's revenue growth in 2007: OmniSource Corp. (October 2007), The Techs (July 2007), and Elizabethton Iron (April 2007). He said that the integration of these operations was proceeding well, and anticipates that further efficiencies will be realized throughout 2008.
Steel Operations Segment Results—In the fourth quarter of 2007, SDI's largest segment, Steel Operations, represented 65% of the company's fourth quarter net sales. This segment includes five steel mills plus related steel processing facilities such as The Techs, which produce galvanized steel sheet using substrate that is sourced primarily from third parties.
The Steel Operations segment shipped 1.5 million tons in the fourth quarter on net sales of $1.0 billion. Average selling price per ton, $710, represents an $11 increase compared to $699 in the third quarter and a $36 increase over the year-ago quarter.
Compared to the previous quarter (3Q07), selling price increases were strongest in structural and merchant-bar products. The average scrap cost per net ton charged increased $9 compared to the third quarter, but was $47 higher than the fourth quarter of 2006. Operating income was $188.3 million, or $131 per ton shipped, excluding profit sharing costs of approximately 8%.
This segment’s operating income per ton and operating margins continue to be lower than historical levels beginning with the inclusion of shipments of galvanized steel from The Techs as of the third quarter of 2007. Although The Techs operate three very efficient and cost-effective steel coating operations, the margin for the galvanized steels produced by The Techs is lower than SDI's other galvanizing operations due to the incremental cost of purchasing a steel coil to be coated vs. producing that coil at cost.
Scrap and Scrap Substitute Operating Segment—Beginning in the fourth quarter, OmniSource Corp. became the principal reporting entity in this segment. This quarter’s results include just over two months of operating results for OmniSource following its purchase on October 26, 2007. Also included in this segment are the scrap operations that were a part of SDI before the purchase of OmniSource and Iron Dynamics, which produces direct-reduced iron (DRI) and molten pig-iron for consumption by the Flat Roll Division.
The segment's fourth quarter net sales were $451 million, or 28% of SDI's fourth quarter net sales. Total ferrous scrap shipments during the quarter were 831,000 tons and non-ferrous scrap shipments were 98.2 million pounds. During the fourth quarter, the company's scrap operations supplied 239,000 tons of ferrous scrap to SDI's steel operations, approximately 22% of the mills’ ferrous scrap purchases for the quarter. Operating income for this segment was $11.2 million, excluding profit- sharing costs. It is expected that OmniSource will be accretive to earnings during the first quarter of 2008.
Steel Fabrication Operating Segment—Steel Fabrication Operations includes New Millennium Building Systems, LLC, which operates five fabricating plants that produce joists, trusses, and steel decking used in non-residential construction. Fourth quarter net sales were $95.7 million, or 6% of SDI's fourth quarter net sales. Shipments totaled 71,000 tons at an average selling price of $1,339 per ton. Operating income was $10.1 million, excluding profit-sharing costs, or $141 per ton shipped.
Project Status and Outlook—In addition to the expectation of generally stronger market conditions for 2008,
a number of additional factors enhance the company's outlook for 2008, including:
- For flat-rolled steels, capacity expansions related to equipment upgrades made during the past two years will provide the anticipated flexibility to increase hot-band production volume by 15% or more.
- For coated flat-roll steels, the start-up of SDI's second paint line at Jeffersonville, Ind., in early 2008 will allow the company to enter new markets for painted thin-gauge galvanized steel. Also, The Techs, with an annual production capacity of one million tons, will report full-year results in 2008, vs. six months of results in 2007.
- For structural steel, the company expects to begin commissioning its second rolling mill at Columbia City, Ind., in May, which will ultimately double the mill's annual production capacity to 2.2 million tons. The company expects shipments from the Columbia City mill could reach 1.5 million tons in 2008. Product mix will expand to include smaller beams, light structural shapes, and rail for major railway use. Higher shipping volumes should, in time, improve margins for the division through cost compression.
- The engineered bar business offers substantial opportunities in the future with a capacity expansion in the range of 250,000 tons. Expansion at Pittsboro will increase capacity by 50%, but has been delayed until early 2009 due to equipment delivery delays. Volume is planned to be relatively stable for 2008 with an emphasis on shifting the mix to higher value products.
- New Millennium Building Systems is now positioned to increase shipping volume and expand its market presence, as the three production facilities added as a part of the Roanoke Electric Steel acquisition in 2006 have now been modernized to improve processes and workflow, increasing their production capacities and reducing production costs to allow the plants to compete more effectively.
- The addition of OmniSource will contribute to SDI's earnings and provide growth in 2008 through its expanding participation in the domestic and global ferrous and non-ferrous scrap markets.
Steel Dynamics will also move forward on the Mesabi Nugget project in 2008, including construction of an iron-nugget production plant and preparations for mining and concentrating iron ore on the Mesabi Iron Range in Minnesota. Although production is not set to begin until 2009, this initiative represents a significant development for SDI in assuring additional future domestic supplies of virgin iron resources at attractive costs.
The company noted that achieving these anticipated gains will be dependent on favorable demand/supply conditions in the domestic steel markets, maintenance of the company’s existing business volumes, and the ability to secure new steel business sufficient to operate the company’s facilities at the planned higher utilization rates. Successful commissioning of the new production facilities will also depend on a variety of factors, including the timely delivery and installation of production equipment and systems, testing and calibration of the equipment, hiring and training of crews, and promptly addressing any unanticipated issues that could lead to start-up delays.
Outlook—"Our outlook for 2008 is very positive," Busse said. "Conditions in the U.S. steel marketplace are favorable, absent major events that could severely reduce steel demand. Even with the slowdown in the U.S. economy in 2008, we are currently seeing stronger demand for flat-rolled steels than in 2007, due principally to low steel inventories and an expected lower level of steel imports.
“For long products, demand continues to be strong as we enter the first quarter, and we believe that it will continue,” said Busse. “Meanwhile, ferrous resources have seen dramatic price increases in the past few months, and may remain strong. Significant steel price increases have recently been announced in the industry, yet we expect that the higher steel selling values will be somewhat offset by the increased costs of steel scrap and other inputs. We also expect increased demand for and higher pricing of ferrous scrap to have a positive effect on consolidated earnings in the first quarter.
“As a result of all of the above,” said Busse, “we currently foresee improvement in SDI's earnings to a range of $1.10 to $1.20 per diluted share in the first quarter of 2008.”
