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Steel Dynamics Reports Fourth Quarter Loss and Record Full Year 2008 Results

Posted on: Monday, 26 January 2009, 17:46 CST

FORT WAYNE, Ind., Jan. 26 /PRNewswire-FirstCall/ -- Steel Dynamics, Inc. (Nasdaq: STLD) today announced another strong year of growth, achieving record full-year 2008 results despite weak fourth-quarter sales and shipments and fourth-quarter losses from unrealized hedging losses and inventory write- downs. Net sales for the year grew to a record $8.1 billion, an increase of 84 percent compared to net sales of $4.4 billion in 2007. The increase in sales for 2008 resulted primarily from the acquisition of OmniSource Corporation in October 2007 and from additional metals recycling operations in mid-2008, plus significantly higher average selling prices for steel and recycled metals during 2008. Net Income for 2008 was a record $463 million, a 17 percent increase from $395 million in 2007. Diluted earnings per share in 2008 were $2.38, up 18 percent compared to $2.01 in 2007. Net cash flow from operating activities for 2008 was $775 million, compared to $428 million in 2007.

Following a very strong performance in both the steel and metals recycling segments for the first three quarters of 2008, the significant weakening in order activity first seen by our Flat Roll Division and in metals recycling in late September broadened to other steel operations as the fourth quarter progressed. Compared to the third quarter, fourth-quarter 2008 steel shipments of 942,000 were down 34 percent, ferrous metals shipments of 898,000 net tons were down 49 percent, and non-ferrous metals shipments of 177 million pounds were down 27 percent. Lower volumes combined with declining prices for all business segments resulted in fourth-quarter sales of $1.2 billion, down 53 percent from $2.6 billion in the third quarter, and down 17 percent from $1.5 billion in the year-ago quarter.

For the fourth quarter, the company incurred a net loss of $83 million, or $0.45 per diluted share. This compares to net income of $193 million in the third quarter of 2008, or $0.98 per diluted share, and to net income of $98 million in the fourth quarter of 2007, or $0.50 per diluted share. Steel operations achieved operating income in the fourth quarter, but this income declined significantly from recent quarters due to slower operating rates and shipping volumes, declining steel selling prices, and higher input costs as lower production volumes led to a slower than anticipated depletion of ferrous raw materials that had been purchased at higher prices. Steel fabrication operations also generated an operating profit for the quarter on lower volume.

A significant portion of the fourth-quarter loss was due to a non-cash, unrealized hedging loss of $35 million related to valuing certain non-ferrous financial contracts at fair market value. Additionally, our steel and metals recycling operations recorded losses of approximately $26 million and $10 million, respectively, due to necessary reductions in ending inventory values for lower of cost or market requirements. After making these adjustments and having consumed much of the older, higher-cost raw materials, our steel and metals recycling operations begin 2009 with lower scrap costs reflecting more recent market values.

"It is strange to be reporting the best year in the company's history and at the same time the company's worst quarter," said Keith Busse, Chairman and CEO. "The steel industry took it on the chin in the fourth quarter as orders dried up, and Steel Dynamics was not exempted. The combination of weaker demand, inventory reductions in both distribution and at the OEM level, and the commercial paralysis brought about by tight credit markets led to very slow order activity. This resulted in fourth-quarter production curtailments at our mills and metals-recycling facilities. We have started the new year with somewhat better activity, but we cannot be certain how long it will take the steel and scrap markets to return to more normal demand patterns. All of our SDI facilities are currently operating well below capacity. However, the company is prepared to ramp up very quickly with any pick-up in business activity.

"We believe that SDI is well positioned with our low, variable cost structure and state-of-the-art facilities that are capable of cost-effectively producing excellent, high-quality products. We are optimistic that, even if we continue to encounter lackluster demand for steel and scrap for several quarters, we will return to profitability in the first quarter and remain profitable in 2009, assuming no recurrence of dramatic price swings such as those experienced in the second half of 2008. Our very preliminary estimate is that we could achieve earnings of $0.05 to $0.15 per diluted share in the first quarter. If needed, further guidance will follow later in the quarter as visibility improves. We continue to believe that earnings for the full year 2009 could, under somewhat improved circumstances, be comparable to those achieved in 2008. We are focusing on cash management and controlling costs tightly, utilizing free cash flow to continue to pay down debt on our revolving line of credit and continue funding capital expenditures for critical projects that are underway," Busse said.

The company reduced total debt by $226 million during the fourth quarter of 2008 and continues to focus on further reductions in leverage, while maintaining and closely monitoring appropriate capital investment plans for future long-term growth. We significantly increased our liquidity position during the quarter, resulting in availability of funds of over $500 million at the end of the year. The company's first meaningful debt amortization does not occur until 2012. The company has prioritized its use of available cash during 2009 as follows: first, to reduce leverage; second, to provide for critical capital investments and any modest strategic initiatives; and third, to provide for continued cash dividends to shareholders.

Operating Segment Information

The following highlights our fourth quarter and full-year 2008 results for each of SDI's three primary operating segments.

Steel Operations. Steel operations represented 63 percent of the company's fourth quarter net sales and 57 percent of company sales for the full year 2008. This segment includes five electric-arc-furnace (EAF) steel mills and related steel finishing and processing facilities. In addition to flat-rolled steel, the company's steel operations produce structural steel, merchant bars, special-bar-quality steel, and other specialty shapes.

Fourth quarter 2008 steel operations net sales were $860 million on shipments of 942,000 tons (including intra-company shipments). Steel operations net sales for the year 2008 were $5.5 billion on shipments of 5.6 million tons (including intra-company shipments). Based on tons shipped for the full year 2008, including steel shipments made by The Techs, flat-rolled products accounted for 56 percent of 2008 steel segment shipments. Structural steel shipments were 20 percent, engineered bars were 10 percent, merchant bars were 9 percent, and the remaining 5 percent were shipments by our Steel of West Virginia subsidiary. Operating income for the steel segment in the fourth quarter was $2 million, or $2 per ton shipped, compared to $200 per ton in the third quarter. Operating income for the year was $861 million, or $153 per ton shipped. These figures exclude profit-sharing costs and amortization related to the segment's intangible assets.

The fourth quarter's average selling price per ton for steel operations was $913, a decrease of $273 per ton from $1,186 in the third quarter of 2008, but an increase of $203 per ton from the year-ago quarter. The average ferrous scrap cost per net ton charged decreased by $209 compared to the third quarter and was $72 higher than the fourth quarter of 2007. For the year 2008, the average selling price per ton was $973, an increase of $284 from 2007. The average scrap cost per ton in 2008 increased $164 from 2007.

Metals Recycling and Ferrous Resources. This segment includes ferrous and non-ferrous metals processing and trading by OmniSource Corporation and SDI's Iron Dynamics scrap-substitute operation, which produces pig iron for use by the Flat Roll Division. The segment also includes expenses related to the Mesabi Nugget project, which is currently under construction. The segment's net sales for the quarter were $389 million (including intra-company sales), representing 28 percent of SDI's fourth quarter net sales. For the year, this segment's net sales were $3.7 billion, representing 38 percent of company sales. The operating loss in the fourth quarter for this segment was $118 million and operating income for the year 2008 was $123 million, excluding profit-sharing costs and amortization related to the segment's intangible assets.

Total ferrous shipments in the fourth quarter, including shipments to SDI's steel operations, were 898,000 tons and non-ferrous metals shipments were 177 million pounds. During the fourth quarter, the company's metals recycling operations supplied 439,000 tons of ferrous scrap to SDI's steel operations, or approximately 42 percent of the tonnage of ferrous scrap purchased by our mills during the quarter. For the year 2008, metals recycling operations supplied 2.3 million tons of ferrous scrap to SDI's steel operations, or approximately 41 percent of the tonnage of ferrous scrap purchased by our mills.

Steel Fabrication Operations. Steel fabrication operations includes New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings. Fourth quarter net sales were $93 million, or 7 percent of SDI's fourth quarter net sales. Net sales for the year were $376 million, or 4 percent of company sales for 2008. Operating income in the fourth quarter for this segment was $5 million, or $84 per ton shipped. For the year, operating income was $18 million, or $63 per ton shipped, excluding profit-sharing costs. Fourth quarter shipments totaled 64,000 tons at an average selling price of $1,461 per ton.

Forward-Looking Statements

This press release contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap markets, Steel Dynamics' revenue growth, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements are intended to be made as "forward-looking," subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Such predictive statements are not guarantees of future performance, and actual results could differ materially from our current expectations.

Factors that could cause such predictive statements to turn out other than as anticipated or predicted include, among others: changes in economic conditions affecting steel consumption; increased foreign imports; increased price competition; difficulties in integrating acquired businesses; risks and uncertainties involving new products or new technologies; changes in the availability or cost of steel scrap or substitute materials; increases in energy costs; occurrence of unanticipated equipment failures and plant outages; labor unrest; and the effect of the elements on production or consumption.

In addition, we refer you to SDI's detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth in our most recent Annual Report on Form 10-K and in other reports which we from time to time file with the Securities and Exchange Commission, available publicly on the SEC Web site, www.sec.gov, and on the Steel Dynamics Web site, www.steeldynamics.com

Forward-looking or predictive statements we make are based on our knowledge of our businesses and the environment in which they operate as of the date on which the statements were made. Due to these risks and uncertainties, as well as matters beyond our control which can affect forward- looking statements, you are cautioned not to place undue reliance on these predictive statements, which speak only as of the date of this press release. We undertake no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Conference Call and Webcast

On Tuesday, January 27, 2009, at 10:00 a.m. Eastern time, Steel Dynamics will host a conference call in which management will discuss fourth quarter and full year 2008 results. You are invited to listen to the live audio broadcast of the conference call over the Internet, accessible from the Steel Dynamics Web site:

www.steeldynamics.com

Dial-in information is available on our Web site. An audio replay of the Webcast will be available from the SDI Web site. No telephone replay will be available. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data) Three Months Ended Twelve Months Ended Three Months Ended December 31, December 31, September 30, 2008 2007 2008 2007 2008 Net sales $1,210,434 $1,451,034 $8,080,521 $4,384,549 $2,563,943 Costs of goods sold 1,251,344 1,196,776 6,849,262 3,468,855 2,118,737 Gross profit (loss) (40,910) 254,258 1,231,259 915,694 445,206 Selling, general, and administrative expenses 48,334 52,623 267,688 150,865 67,459 Profit sharing (9,207) 17,963 66,997 61,703 30,800 Amortization of intangible assets 10,919 5,416 41,334 11,972 10,765 Operating income (loss) (90,956) 178,256 855,240 691,154 336,182 Interest expense, net capitalized interest 41,845 26,368 144,574 55,416 37,446 Other (income) expense, net (99) (4,705) (33,147) 5,500 (8,342) Income (loss) before income taxes (132,702) 156,593 743,813 630,238 307,078 Income taxes (50,029) 58,723 280,427 235,672 114,070 Net income (loss) $(82,673) $97,870 $463,386 $394,566 $193,008 Basic earnings (loss) per share $(.45) $.53 $2.45 $2.12 $.99 Weighted average common shares outstanding 181,825 186,314 189,140 186,321 195,347 Diluted earnings (loss) per share, Including the effect of assumed conversions $(.45) $.50 $2.38 $2.01 $.98 Weighted average common shares and share equivalents outstanding 181,825 196,525 194,586 196,805 196,859 Dividends declared per share $.10 $.075 $.40 $.30 $.10

Note: All prior period share data has been adjusted to reflect the company's two-for-one stock split effective March 2008.

Steel Dynamics, Inc. UNAUDITED SUPPLEMENTAL OPERATING INFORMATION Three Months Ended Twelve Months Ended December 31, December 31, 2008 2007 2008 2007 Steel Operations* Flat Roll Division 361,145 613,999 2,328,805 2,495,360 Structural and Rail Division 228,132 279,158 1,095,095 1,174,776 Engineered Bar Products Division 123,449 138,455 566,190 546,585 Roanoke Bar Division 94,374 141,788 530,452 595,041 Steel of West Virginia 45,788 69,111 264,695 283,568 The Techs 89,551 224,186 823,661 454,877 Shipments (net tons) 942,439 1,466,697 5,608,898 5,550,207 Intracompany (51,803) (122,039) (447,729) (494,576) External Shipments 890,636 1,344,658 5,161,169 5,055,631 Average Selling Price (per net ton shipped) $ 913 $ 710 $ 973 $ 689 Production (net tons, excluding The Techs) 760,307 1,242,136 4,780,083 5,023,273 Steel Fabrication Operations** Joist and Deck (net tons) 63,783 71,460 286,612 276,836 Intracompany (101) (761) (969) (4,237) External Shipments 63,682 70,699 285,643 272,599 Average Selling Price (per net ton shipped) $1,461 $1,339 $1,310 $1,305 Metals Recycling & Ferrous Resources *** Ferrous Metals (net tons) 897,922 833,779 5,553,540 1,090,758 Intracompany (438,532) (239,245) (2,270,777) (445,202) External shipments 459,390 594,534 3,282,763 645,556 Non-ferrous (thousands of pounds) 177,246 137,417 911,832 137,417 Iron Dynamics (net tons) 52,009 61,427 256,388 246,702 2008 Quarterly Data Steel Operations* First Second Third Flat Roll Division 685,320 706,281 576,059 Structural and Rail Division 299,687 286,150 281,126 Engineered Bar Products Division 147,948 145,085 149,708 Roanoke Bar Division 151,368 136,582 148,128 Steel of West Virginia 75,724 80,334 62,849 The Techs 262,011 262,908 209,191 Shipments (net tons) 1,622,058 1,617,340 1,427,061 Intracompany (130,685) (124,128) (141,113) External Shipments 1,491,373 1,493,212 1,285,948 Average Selling Price (per net ton shipped) $ 782 $ 1,011 $ 1,186 Production (net tons, excluding The Techs) 1,372,364 1,368,071 1,279,341 Steel Fabrication Operations** Joist and Deck (net tons) 68,606 76,018 78,205 Intracompany (273) (43) (552) External Shipments 68,333 75,975 77,653 Average Selling Price (per net ton shipped) $ 1,145 $ 1,227 $ 1,413 Metals Recycling & Ferrous Resources *** Ferrous Metals (net tons) 1,391,382 1,506,902 1,757,334 Intracompany (463,893) (654,117) (714,235) External shipments 927,489 852,785 1,043,099 Non-ferrous (thousands of pounds) 238,788 254,147 241,651 Iron Dynamics (net tons) 67,994 66,727 69,658 * Steel Operations include the company's five steelmaking divisions and The Techs, three flat roll galvanizing plants (acquired July 2007). ** Steel Fabrication Operations include the company's joist and deck fabrication operations. *** Metals Recycling & Ferrous Resources Operations include OmniSource metals recycling operations (acquired October 2007), Recycle South metals recycling operations (acquired June 2008) and Iron Dynamics, the company's pig iron substitute production facility (Note: all Iron Dynamics shipments are consumed internally). Steel Dynamics, Inc. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, December 31, 2008 2007 (unaudited) Assets Current assets Cash and equivalents $16,233 $28,486 Accounts receivable, net 502,932 714,123 Inventories 1,023,235 904,398 Deferred income taxes 23,562 10,427 Other current assets 150,746 38,795 Total current assets 1,716,708 1,696,229 Property, plant and equipment, net 2,072,857 1,652,097 Restricted cash 11,722 11,945 Intangible assets, net 616,459 514,547 Goodwill 770,438 510,983 Other assets 65,393 133,652 Total assets $5,253,577 $4,519,453 Liabilities and Stockholders' Equity Current liabilities Accounts payable $263,393 $378,849 Income taxes payable 4,107 25,870 Accrued expenses 209,697 150,687 Accrued profit sharing 62,561 53,958 Senior secured revolving credit facility, matures 2012 366,000 239,000 Other current maturities of long-term debt 65,223 56,162 Total current liabilities 970,981 904,526 Long-term debt Senior secured term A loan 503,800 481,250 7 3/8% senior notes, due 2012 700,000 700,000 6 3/4% senior notes, due 2015 500,000 500,000 7 3/4% senior notes, due 2016 500,000 - 4.0% convertible subordinated notes, due 2012 - 37,250 Other long-term debt 15,361 16,183 Total long-term debt 2,219,161 1,734,683 Deferred income taxes 365,496 301,470 Minority interest 8,427 11,038 Other liabilities 65,626 38,540 Commitments and contingencies Stockholders' equity Common stock 545 542 Treasury stock, at cost (737,319) (457,368) Additional paid-in capital 541,686 553,805 Other accumulated comprehensive income (loss) (1,411) 21 Retained earnings 1,820,385 1,432,196 Total stockholders' equity 1,623,886 1,529,196 Total liabilities and stockholders' equity $5,253,577 $4,519,453 Steel Dynamics, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended Twelve Months Ended December 31, December 31, 2008 2007 2008 2007 Operating activities: Net income (loss) $(82,673) $97,870 $463,386 $394,566 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 52,599 42,039 208,752 138,136 Unamortized bond premium - - - (3,350) Equity-based compensation 4,302 1,855 14,278 8,073 Deferred income taxes 21,815 14,321 11,923 12,642 Minority interest (512) 62 (2,611) (386) Changes in certain assets and liabilities: Accounts receivable 618,526 78,858 310,985 57,653 Inventories 334,458 (1,063) (18,667) (119,577) Accounts payable (318,720) (149,429) (88,451) (48,835) Income taxes payable (27,508) (11,926) (21,765) (10,684) Other working capital (173,109) 7,249 (102,530) (35) Net cash provided by operating activities 429,178 79,836 775,300 428,203 Investing activities: Purchases of property, plant and equipment (101,872) (139,353) (412,497) (395,198) Acquisition of businesses, net of cash acquired - (436,444) (271,159) (848,071) Purchases of securities - (3,584) (20,373) (3,584) Sales of securities - - 32,758 - Other investing activities (138) 216 2,038 224 Net cash used in investing activities (102,010) (579,165) (669,233) (1,246,629) Financing activities: Issuance of current and long-term debt 655,000 1,362,053 2,845,900 3,157,053 Repayment of current and long-term debt (952,213) (733,421) (2,402,033) (1,761,807) Debt issuance costs - (7,266) (7,544) (17,857) Issuance of common stock (net of expenses) and proceeds from exercise of stock options, including related tax effect (1,061) 9,187 18,422 29,446 Purchase of treasury stock (16,484) (100,472) (501,777) (533,654) Dividends paid (18,312) (13,077) (71,288) (55,642) Net cash provided by (used in) financing activities (333,070) 517,004 (118,320) 817,539 Increase (decrease) in cash and equivalents (5,902) 17,675 (12,253) (887) Cash and equivalents at beginning of period 22,135 10,811 28,486 29,373 Cash and equivalents at end of period $16,233 $28,486 $16,233 $28,486 Supplemental disclosure information: Cash paid for interest $75,562 $33,470 $152,263 $56,391 Cash paid for federal and state income taxes $25,655 $24,800 $341,502 $208,321

SOURCE Steel Dynamics, Inc.

Source: PR Newswire

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