Steel Dynamics Reports Third Quarter 2011 Results
10/18/2011 - Steel Dynamics, Inc. announced net income of $43 million on net sales of $2.0 billion for the third quarter, and net income of $248 million on net sales of $6.14 billion for the nine months ended September 30, 2011.
Steel Dynamics, Inc. announced net income of $43 million on net sales of $2.0 billion for the third quarter, and net income of $248 million on net sales of $6.14 billion for the nine months ended September 30, 2011.
Third Quarter Results — The $43 million net income ($0.19 per diluted share) compares to net income of $19 million, or $0.09 per diluted share in the year-ago third quarter and net income of $99 million ($0.43 per diluted share) in the previous quarter. Net sales of $2.0 billion compare to net sales of $1.6 billion in the year-ago third quarter, and net sales of $2.1 billion in the previous quarter.
Steel shipments were 1.5 million tons, 12% higher than the year-ago third quarter and 1% higher than the previous quarter. The average external steel selling price (including sales by The Techs) increased $115 per ton shipped to $897 from an average sales price of $782 in the year-ago third quarter, and decreased $50 per ton shipped from the second quarter 2011 average sales price of $947 per ton.
Based on the tons of scrap melted at the company’s five steel mills, the average ferrous scrap cost per ton melted increased $79 compared to the year-ago third quarter, and increased $5 compared to the previous quarter (2Q11).
OmniSource's ferrous shipments were 1.5 million gross tons, 9% higher than the year-ago third quarter, but 5% lower than the previous quarter. OmniSource provided 53% of the ferrous scrap purchased by SDI's steel mills during the third quarter. Third quarter non-ferrous shipments were 270 million pounds, 5 percent higher than the third quarter of 2010, and 6 percent higher than the second quarter of 2011.
Management Comments — “Quarter-over-quarter operating income was significantly impacted by decreased flat rolled earnings,” said Keith Busse, Chairman and CEO. “Despite relatively unchanged volumes, earnings from our flat rolled operations declined 60% in the third quarter as declines in pricing were matched with increased raw material costs, resulting in significant margin compression. Our average flat rolled selling price per ton shipped decreased $95 in the third quarter. Orders remain fairly consistent, and we currently believe flat rolled pricing has reached a current cycle bottom. The Flat Roll mill operated at an estimated production capacity of 93 percent during the third quarter.”
Busse noted that operating income from the company's steel operations was $139 million ($96 per ton shipped) in the third quarter of 2011, an increase of $51 million ($28 per ton) compared to the year-ago third quarter, but a decrease of $78 million ($57 per ton) compared to the previous quarter (2Q11).
“Business at the Engineered Bar Products Division remains strong,” continued Busse, “and our team is executing very well. The mill's production of 167,000 tons in the third quarter was at a rate exceeding its theoretical annual capacity of 625,000 tons. During the third quarter our Structural and Rail Division achieved a 50% utilization rate, its highest production rate since the recession lows of 2009. Third-quarter rail shipments were 31,000 tons, bringing year-to-date rail shipments to 97,000 tons. Steel of West Virginia is also experiencing strong demand and operated at 90 percent of capacity during the third quarter.”
Third quarter operating losses for the fabrication segment narrowed to $250,000, as compared to $500,000 in the year-ago third quarter, and $1.6 million in the previous quarter (2Q11).
“Operating income for OmniSource was $11 million in the third quarter, a decrease of $11 million in comparison to the third quarter of 2010, and a decrease of $7 million in comparison to the second quarter of 2011,” said Mark Millett, President and Chief Operating Officer. “In spite of weaker sequential volumes, earnings from our ferrous operations improved in the third quarter through margin expansion. However, the unexpected dramatic slide in copper, aluminum and nickel prices during late September resulted in negative earnings from our non-ferrous operations which more than offset the quarter over quarter ferrous improvement. We recorded non-cash, unrealized losses of $6 million, or approximately $0.02 per diluted share after-tax, in late September associated specifically with marking our fixed price forward purchase contracts to lower market values. However, our complete hedging program, including the offset from fixed price forward purchase contracts, resulted in a non-cash, unrealized hedging gain of $2 million in the third quarter."
The impact of Mesabi Nugget start-up losses on the company's third quarter 2011 consolidated pre-tax earnings was unchanged from the second quarter at $13 million (approximately $0.03 per diluted share, after tax). The company produced 33,000 tonnes of iron nuggets in the third quarter, a decrease from the 38,000 tonnes produced in the previous quarter, due to a planned three-week outage in September to install equipment.
“I am pleased to report that we have made progress in assuring a low-cost, secure alternative future supply of iron concentrate for use at Mesabi Nugget,” said Millett. “One of the uncertainties of the project has been the timing related to issuance of the necessary mining permits from the State of Minnesota, which is necessary for us to benefit from lower-cost iron concentrate in the production process. Progress continues to be made, but we currently believe the earliest we might receive the permit is the end of 2012.
“During the third quarter, as an alternative and complement to mining, we entered into a joint-venture agreement with Magnetation, Inc. to form a business to supply sufficient iron concentrate to fully meet the needs of the Mesabi Nugget plant at full utilization. We anticipate obtaining permits for this venture before the end of the year, and expect production to begin in the third quarter of 2012. Iron Dynamics continues to provide a consistent supply of liquid pig iron to the Flat Roll Division. Its output, combined with our supply of iron nuggets, makes the company self-sufficient in providing iron resources to our Flat Roll mill."
Financial Highlights — In September, the company also amended, restated and expanded its senior secured revolving credit facility from the prior $924 million level to a renewed five-year $1.1 billion facility. Combined with cash deposits of $457 million, the company achieved record liquidity of over $1.5 billion at September 30, 2011. Subject to certain conditions, the company also has the opportunity to increase the facility size by an additional $400 million.
The company recorded other non-cash expenses of approximately $3.3 million, or approximately $0.01 per diluted share, after-tax, during the third quarter 2011, related to an equipment impairment charge and the write-off of financing fees associated with the prior revolving credit facility.
In addition, in appreciation for the dedication and performance demonstrated by the company's employees during the past two years, the company awarded each employee with a $1,000 cash bonus during the third quarter, which totaled $5.8 million (approximately $0.02 per diluted share) after-tax.
Steel Operations Segment — SDI’s Steel Operations Segment Steel operations represented 60% of the company's third quarter 2011 external net sales. Net sales for steel operations were $1.3 billion on shipments of 1.5 million tons, compared to net sales of $1.0 billion on shipments of 1.3 million tons during the same period in 2010, and $1.4 billion in net sales on shipments of 1.5 million tons in the previous quarter (including intra-segment and intra-company sales).
Average external steel selling price decreased $50 per ton in the third quarter to $897 from the previous quarter’s average of $947. The third quarter's average ferrous scrap cost per ton charged was $5 higher than the second quarter of 2011. Third quarter operating income for the steel segment was $139 million ($96 per ton shipped), compared to $88 million ($68 per ton) in the year-ago third quarter, and $217 million ($153 per ton) in the previous quarter (2Q11).
SDI’s Steel Operations segment includes five EAF 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, special-bar-quality steel, rail, and specialty shapes.
Outlook — “Looking ahead to the fourth quarter of 2011,” Busse said, “we believe the economic climate will remain challenging in light of decreased consumer confidence, the uncertain domestic political landscape and the European debt crisis. To a large degree, these elements are out of our control; however, we remain confident that with our low-cost manufacturing structure, exceptional employee base, and superior operating culture, we are prepared to capitalize on all opportunities presented.”
Busse noted the company will provide more definitive quantitative guidance regarding the fourth quarter in December.
