SDI Optimistic as Demand for High-Quality Steel Continues to Improve
SDI announced third quarter net income of US$57 million, or US$0.25 per diluted share, on net sales of US$1.9 billion. By comparison, prior year third quarter net income was US$13 million, or US$0.06 per diluted share, on net sales of US$1.7 billion, and sequential second quarter 2013 net income was US$29 million, or US$0.13 per diluted share, on net sales of US$1.8 billion. In the nine months ended 30 September 2013 net income was US$135 million, or US$0.59 per diluted share, on net sales of US$ 5.5 billion. By comparison, in the nine months ended 30 September 2012 net income was US$103 million, or US$0.47 per diluted share, on net sales of US$5.6 billion.
The company's prior year financial results included unique charges related to refinancing expenses and non-cash impairment charges. Excluding these items, the company's adjusted earnings per diluted share would have been US$0.15 for the third quarter 2012 and US$0.59 for the nine months ended September 30, 2012.
"Our consolidated operating income increased 64% to US$113 million for the third quarter 2013, as compared to the second quarter of this year," said chief executive officer Mark Millett. "Stronger steel sheet pricing combined with increased overall steel shipments, provided significant improvement to our third quarter financial results, as operating income from our steel operations sequentially increased US$61 million. We continued to see meaningful improvement in galvanized and painted sheet product demand. The automotive market remained strong and the steel consuming manufacturing market, such as HVAC and appliance, rose in concert with the improved residential construction market. Although volumes have increased, customer buying patterns continue to reflect a preference to manage relatively low inventory levels. Additionally, the continued modest growth in the overall construction market benefited our structural steel and fabrication businesses, as evidenced by sequentially higher shipments and profitability.
"Operating income for our metals recycling operations decreased 29% to US$11 million in the third quarter 2013, as compared to the second quarter of this year, which was the result of decreased ferrous metal spread, as increased ferrous volume did not offset the decline in market prices. Profitability from our Midwest operations was actually slightly improved; however the continued industry overcapacity of shredding locations in the Southeast resulted in deterioration in earnings for those locations."
Third Quarter Review
Third quarter 2013 shipments across the company's operating platforms increased as compared to the sequential quarter. Operating income for the company's steel operations increased to US$149 million, or 69% as compared to the second quarter 2013, primarily due to an increase in metal spread as a result of both higher average steel selling prices and a nominal decrease in the average scrap cost per ton melted.
The company's steel mill production utilization rate was 89% in the third quarter 2013, compared to 83% in the second quarter of 2013. The Structural and Rail Division continued to improve production utilization as structural steel shipments increased 17% over the sequential quarter. The average selling price per ton for the company's steel operations increased US$13 to US$794 in the third quarter 2013, and the average ferrous scrap cost per ton melted decreased US$5 per ton. Operating income attributable to the company's steel sheet operations increased 92% as compared to the sequential quarter and earnings from long product operations increased 46%.
Sequential operating income for the company's metals recycling operations decreased in the third quarter of 2013 to US$11 million, as compared toUS$16 million. Reduced earnings were the result of decreased average ferrous metal spreads in the third quarter, which more than offset the benefit of a ten% increase in volume. Generally, sequential earnings associated with nonferrous materials improved modestly during the third quarter as volume increased four% and margins increased slightly.
The impact of losses from the company's Minnesota operations for third quarter 2013 consolidated net income was US$10.6 million, or US$0.04 per diluted share, as compared to a loss of US$9.3 million, or US$0.04 per diluted share in the second quarter 2013. The iron concentrate plant continues to operate as designed, providing raw material to the iron nugget plant at a cash cost below US$50 per metric ton. As noted in the company's recent earnings guidance, production rates and plant availability at the iron nugget plant improved during the quarter, meeting current expectations. However, at higher production rates, product yield has unexpectedly deteriorated. Given the increase in costs related to the unforeseen yield impact and current pig iron prices, profitability related to the Minnesota operations is expected to approach a monthly cash breakeven before the end of 2013, but not to achieve pre-tax breakeven in that same timeframe. Having achieved near-term production targets, the focus is now to reduce the overall cost of production.
Year to Date Comparison
Consolidated net sales were lower for the nine months ended 30 September 2013, at US$5.5 billion, compared to US$5.6 billion for the same period in 2012, as a result of lower average steel product pricing combined with both lower product pricing and decreased volumes in the company's metals recycling operations. Consolidated operating income decreased US$18 million, or 6%, as declines in average steel prices more than offset the benefit of reduced scrap costs in the company's steel operations.
The average selling price per ton shipped for the company's steel operations in the nine months ended 30 September 2013 was US$788, a decrease of US$59 per ton as compared to the same period in 2012. The average ferrous cost per ton melted was US$38 lower than the comparative 2012 period.
“We are optimistic, as the demand for high-quality steel products continues to improve,” Millett said. "The automotive market remains strong, and manufactured goods continue to strengthen. We remain cautiously optimistic about the nonresidential construction market, as evidence of increased demand is shown by improved shipments of our structural and fabricated steel products. However, we recognize the political environment within the U.S. concerning fiscal issues could have a limiting or negative impact on any continued improvement if not resolved in a timely manner. In addition to improved market momentum, we are on schedule to complete two more sizable organic growth projects before the end of 2013: a 325,000 ton capacity expansion at our Engineered Bar Products Division and a product capability expansion into premium rail at our Structural and Rail Division. We are confident that with our exceptional team, and our superior, low-cost operating culture, we are uniquely prepared to capitalize on the opportunities ahead."
Steel Dynamics, Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.3 billion in 2012, over 6,700 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).