Steel Dynamics, Inc. announced third quarter net income of $12.8 million on net sales of $1.7 billion. By comparison, prior year third quarter net income was $43.3 million on net sales of $2.0 billion, and sequential second quarter 2012 net income was $44.5 million on net sales of $1.9 billion. In the nine months ended 30 September 2012 net income was $103.0 million on net sales of $ 5.6 billion. By comparison, in the nine months ended 30 September 2011 net income was $247.9 million on net sales of $ 6.1 billion.

A significant portion of the decrease in earnings from the prior quarter was attributable to the following unique items announced on 11 September 2012:

• The incurrence of non-operating charges related to the company’s third quarter refinancing activities of $26.3 million, which were primarily associated with prepayment fees. These transactions, along with the resulting repayment of $170 million of debt with available cash, not only extended the company’s overall debt maturity profile, but should also provide an estimated interest savings of approximately $20 million in 2013.
• The incurrence of non-cash impairment charges of $7.9 million related to the intended termination of two small joint venture entities, which were not aligned with the company’s long term strategic focus.

"Relative to overall market demand, our operating performance was commendable for the third quarter," said Chief Executive Officer Mark Millett. "The U.S. market in general remains tepid, as uncertainty surrounding the strength of Europe, growth in China, and the near-term U.S. economic and political environment continues to weigh heavily on customers’ purchasing decisions. Aside from our fabrication operations, this reluctance in customer buying resulted in reduced selling volumes across our major operating platforms.

"Compared to the second quarter, operating income from our steel platform decreased $30 million," stated Millett, "primarily caused by reduced volumes, most notably within the special-bar-quality arena. Earlier customer estimates of robust growth have not been fully realized during the year, resulting in excess special-bar-quality inventory build throughout the customer supply chain. Inventory realignment seems to have begun later in the second quarter, and could continue through the remainder of 2012. However, we believe there is steady underlying demand that will support volumes as the destocking subsides.

"Within our metals recycling platform, despite a challenging environment that resulted in decreased volumes," continued Millett, "ferrous operating margins improved significantly, as metal spreads expanded 23 percent and initiatives to reduce operating expenses were achieved, resulting in operating income of $16.6 million in the third quarter, compared to $5.1 million in the second quarter of this year. The ferrous scrap market continues to be oversupplied, as the export market and U.S. steel mill utilization rates have moderated. However, we believe an inflection point has been reached and ferrous scrap pricing is likely near a bottom."

Third Quarter Review
The company’s steel operations third quarter margins and operating income declined in comparison to second quarter 2012. Operating income from the company’s steel operations was $109.2 million for the third quarter 2012, a decrease of $29.8 million as compared to the second quarter 2012. The average selling price per ton shipped decreased $45 per ton to $809, and the average ferrous scrap cost per ton melted decreased $44. As the combined steel metal spread was generally consistent quarter over quarter, reduced profitability was largely a function of decreased volume and product mix changes. Operating income attributable to the company’s long product operations declined 32 percent, while declining 11 percent for the company’s sheet operations. The most notable volume decrease occurred within the company’s Engineered Bar Products Division, as shipments sequentially declined 32 percent based on customer inventory realignment.

Despite lower volumes and selling values in the company’s metals recycling business, ferrous metal spreads expanded 23 percent in the third quarter, as compared to second quarter 2012. Operating income for OmniSource increased $11.5 million sequentially to $16.6 million for the third quarter 2012 as compared to $5.1 million in the prior quarter.

In spite of continued non-residential construction market weakness, the company’s fabrication operations reported increased positive quarterly operating income, based on pricing improvement, increased volumes, and better associated manpower utilization.

The impact of losses from the company’s Minnesota operations for third quarter 2012 consolidated net income was $11 million (net of tax), or approximately $0.05 per diluted share, unchanged from the impact for the second quarter 2012. As previously indicated, during periods of time between June and August of this year, higher operating rates at the company’s iron nugget facility were achieved for extended periods of time, which provided the opportunity to identify a number of key process optimization options necessary to increase both productivity and product quality. Beginning mid-September, the company proceeded with a six week outage of the nugget facility in order to lay the groundwork necessary for the implementation of the improvements. The company expects to recommence operations in November, with final equipment installation expected during the first half of 2013, at an estimated investment of $25 million.

The company’s iron concentrate facility commenced operations late September and supplied its first shipment of low-cost iron concentrate to the nugget facility just prior to the end of the third quarter. This is a pivotal achievement toward lowering the eventual cost structure of the company’s iron nuggets. As previously discussed, higher priced third-party iron concentrate remains in inventory for use through the remainder of the year.

The company’s liquidity position remains strong with $1.4 billion in unrestricted cash and available funding under the revolving credit facility at September 30, 2012. The decrease in liquidity from 30 June 2012 of $144 million was due to the company’s refinancing initiative which reduced overall debt by $170 million. The company’s debt to equity capitalization rate was 47.5 percent as of 30 September 2012, or 2 percent lower than the end of the second quarter 2012.

2011 Comparison
A general overall decline in volume for the nine months ended 30 September 2012 resulted in net sales of $5.6 billion, or 9 percent, less than those achieved for the same period in 2011. Operating income decreased 41 percent, as margins decreased within the company’s flat roll steel and special bar quality operations. The average selling price per ton shipped for the company’s steel operations in the nine months ended 30 September 2012 was $847, a decrease of $64 per ton compared to the same period last year. The average ferrous scrap cost per ton melted was $22 lower than the comparative period for 2011. Charges related to the refinancing activities transacted in the first and third quarters of 2012, resulted in year-to-date decreased pretax earnings of $40 million, or approximately $0.11 per diluted share.

Outlook
"Looking ahead," Millett said, "we have seen softening in agriculture, transportation and certain areas within energy, related to natural gas exploration; however, automotive and manufacturing appears strong and residential construction has shown incremental improvement, as housing starts and rents have improved in face of declining inventories. We believe volumes could continue to be challenged in the fourth quarter, as fluctuations in immediate customer needs and hesitancy for customers to carry inventory persists. Ferrous scrap pricing fell further in October, which could challenge our metals recycling operations, while benefiting our steel operations early in the fourth quarter. While U.S. and world economies remain anemic, we remain uniquely equipped to capitalize on the opportunities ahead, supported by our superior low-cost, highly-variable cost structure, our diversified, value-added product mix, our vertical integration and our exceptional team of employees."