Steel Dynamics Profit Slips

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Fort Wayne-based Steel Dynamics Inc. (Nasdaq: STLD) is reporting first quarter net income of $39 million, compared to $48 million for the same period a year earlier. Chief Executive Officer Mark Millett says essentially all businesses, especially Midwest steel operations, were affected by the severe weather. April 16, 2014

News Release

FORT WAYNE, Ind. - Steel Dynamics, Inc. (nasdaq/gs:STLD) today announced first quarter net income of $39 million, or $0.17 per diluted share, on net sales of $1.8 billion. By comparison, prior year first quarter net income was $48 million, or $0.21 per diluted share, on net sales of $1.8 billion, and sequential fourth quarter 2013 net income was $55 million, or $0.24 per diluted share, on net sales of $1.9 billion.

First quarter 2014 earnings include a benefit of approximately $0.01 per diluted share related to a recent change in Indiana's corporate income tax rate which resulted in the reduction of the company's deferred income tax liability.

"The first quarter 2014 was one of the most severe winter periods in recent history across much of the United States, especially in the Midwest where a majority of our operations are located," said Chief Executive Officer, Mark Millett. "The uncharacteristically severe and prolonged winter weather conditions resulted in increased energy costs, reduced production, diminished availability of transportation and lower shipments. This environment was a major driver of the 25 percent decline in our consolidated operating income for the first quarter 2014, as compared to the sequential fourth quarter of 2013.

"Essentially all of our businesses were negatively impacted in some way; however, our Midwest steel operations were especially impacted. Operating income for our steel operations declined $47 million for the first quarter 2014, as compared to the sequential quarter. Most impactful, sheet steel volumes decreased 12 percent and metal spread also declined, as transportation issues delayed shipments; meaningfully higher energy costs were incurred; and the average quarterly product price improvement did not outpace the higher cost of scrap that was consumed earlier in the quarter. As weather conditions improved, demand also strengthened with increased order activity throughout our steel operations.

"We achieved two important goals during the quarter," stated Millett. "We shipped our first premium rail and the first product from our new smaller-diameter engineered bar rolling mill. We anticipate continued growth in demand for these products throughout 2014 and into 2015."

The company's fabrication business continues to improve, based on increased market share, and more importantly, increased construction demand. Both order inquiries and bookings are strong, supporting the premise of a nonresidential construction market recovery. While first quarter 2014 shipments were seasonally lower on a sequential basis, operating income improved meaningfully compared to both the sequential and prior year quarter.

First Quarter Review

First quarter shipments across the company's operating platforms were generally lower, when compared to the fourth quarter 2013. As a result of higher energy costs at our Midwest steel operations resulting from the severe weather and reduced metal spread at the Flat Roll Division, first quarter 2014 operating income for the company's steel operations decreased 31 percent to $108 million, as compared to the fourth quarter 2013, despite only a 3 percent decline in net sales. Although overall steel metal margin increased in the first quarter 2014, metal margin for steel sheet decreased as improved product pricing was more than offset by early-quarter scrap costs. The average selling price per ton for the company's total steel operations increased $30 sequentially to $835 in the first quarter 2014, while the average ferrous scrap cost per ton melted increased $24 per ton.

First quarter 2014 operating income attributable to the company's sheet steel operations decreased 28 percent when compared to the sequential quarter, and operating income from long product operations decreased 34 percent. The company's steel mill production utilization rate decreased slightly to 86 percent in the first quarter 2014, compared to 88 percent in the fourth quarter 2013, unrelated to demand dynamics but rather due to production interruptions related to power company curtailments.

Operating income from the company's metals recycling operations was $10 million for the first quarter 2014, compared to $12 million for the fourth quarter 2013. The $2 million reduction in profitability was directly related to costs associated with building damage related to excessive snow accumulation. Operationally, external ferrous volumes and overall metal spreads were somewhat lower as transportation was hindered, while nonferrous volumes and metal spreads were somewhat improved.

During the first quarter 2014, the company initiated a two week outage at the nugget production facility in February, due to significantly higher natural gas prices related to weather conditions. The impact of losses from the company's Minnesota operations for first quarter 2014 consolidated net income was $8.9 million, or $0.04 per diluted share, as compared to $8.1 million, or $0.03 per diluted share in the fourth quarter 2013. Despite the outage, the increased loss was directly related to the higher natural gas costs. As referenced in the company's fourth quarter 2013 earnings release, certain meaningful adjunct trials related to product yield and the cost of production were scheduled to be completed during the first quarter 2014. Due to the unanticipated severe weather, not all of the trials were able to be completed; however, meaningful progress was made. The remaining trials are expected to be completed before the end of the second quarter 2014. Given the increased cost of production while testing continues, current expectations concerning losses associated with the Minnesota operations for the second quarter of 2014 are anticipated to be similar to those recorded in the first quarter.

Outlook

"We are optimistic," said Millett. "Rather than a structural change in growth during the first quarter, we believe weather conditions impacted the economy. We have confidence that the broader U.S. economy will continue to improve and that the non-service sector portion of domestic GDP has the ability to grow at a higher rate than overall GDP, driven by strengthened asset values, domestic energy investment and increased infrastructure spending. Steel consuming industries, such as manufacturing, automotive, heavy machinery and the construction market continue to grow, indicative of underlying strength in steel demand. We are poised to be the beneficiaries. We believe our broad range of quality products, our differentiated customer value, combined with the strength of our exceptional employees and historically low-cost operating platforms, uniquely position us to capitalize on the imminent opportunities."

About Steel Dynamics, Inc.

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 $7.4 billion in 2013, over 6,800 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).

Source: Steel Dynamics Inc.