Steel Dynamics Reports Second Quarter 2020 Results

Rhea-AI Summary

Steel Dynamics, Inc. reported second quarter 2020 net sales of $2.1 billion and net income of $75 million, or $0.36 per diluted share. Adjusted net income was $100 million, or $0.47 per diluted share. Compared to the second quarter of 2019, sales decreased by 25% and earnings dropped 61%. Operating income was $159 million with an EBITDA of $217 million. The company's liquidity improved to $2.8 billion, and steel shipments were only 12% lower than record first quarter volumes. The impact of COVID-19 resulted in lower demand, particularly in the automotive sector.

Positive

• Liquidity increased to $2.8 billion, a 21% year-over-year increase.
• Steel shipments only 12% lower than record volumes from the previous quarter.
• Strong cash flow from operations of $486 million, showing effective working capital management.
• Successful execution of $400 million and $500 million notes offering, extending debt maturity and lowering interest rates.

Negative

• Net income decreased by 61% compared to the previous year.
• Operating income for steel operations declined 41% sequentially due to lower selling values and demand.
• Steel shipments decreased 25% year-over-year, reflecting the impacts of COVID-19.

FORT WAYNE, Ind., July 20, 2020 /PRNewswire/ -- Steel Dynamics, Inc. (NASDAQ/GS: STLD) today announced second quarter 2020 financial results. The company reported second quarter 2020 net sales of $2.1 billion and net income of $75 million, or $0.36 per diluted share. Excluding the impact from the following items, the company's second quarter 2020 adjusted net income was $100 million, or $0.47 per diluted share:

• Additional financing costs related to the company's June 2020 refinancing activities of approximately $25 million, or $0.08 per diluted share, and
• Costs (net of capitalized interest) associated with the construction of the company's Sinton Texas Flat Roll Steel Mill of approximately $10 million, or $0.03 per diluted share.

Comparatively, prior year second quarter net sales were $2.8 billion, with net income of $194 million, or $0.87 per diluted share, and sequential first quarter 2020 net sales were $2.6 billion, with net income of $187 million, or $0.88 per diluted share.

"I am incredibly proud of the 8,400 individuals that I am fortunate to work alongside at Steel Dynamics," said Mark D. Millett, President and Chief Executive Officer. "The operating, commercial, and financial teams achieved best-in-class performance within the current unprecedented health and economic environment. We are operating safely, providing ongoing customer support, and taking advantage of longer-term financing opportunities. Our spirit of excellence was once again evidenced in our strong second quarter 2020 performance.  Even though earnings were lower than robust sequential first quarter results, the team's performance was tremendous within the circumstances. Our second quarter 2020 consolidated operating income was $159 million, adjusted EBITDA was $217 million, and cash flow generation from operations increased sequentially to $486 million, resulting in near-record liquidity of $2.8 billion. 

"Our differentiated business model, coupled with the passion of our people drove strong steel mill production utilization, allowing for cost compression benefits and market share gains.  Our second quarter 2020 steel shipments were only 12 percent lower than our record high sequential first quarter volumes," continued Millett. "Our steel mills operated at almost 80 percent utilization, while the rest of the domestic industry operated at an estimated 55 percent. Our fabrication operations and steel processing locations helped achieve this higher utilization, complementing the market share gains. In addition, our metals recycling platform provided a competitive advantage in sourcing ferrous scrap for our steel mills in a challenging supply environment." 

In the second quarter of 2020, the company generated strong cash flow from operations of $486 million and available cash and short-term investments increased $111 million, as working capital management more than offset capital investments of $310 million. The company also executed its second investment grade notes offering, issuing $400 million of 2.400% notes due 2025 and $500 million of 3.250% notes due 2031. These transactions were leverage neutral and proceeds were used to repay $400 million of its 5.250% senior notes due 2023 and $500 million of its 5.500% senior notes due 2024. These transactions combined with the company's December 2019 inaugural investment grade refinancing have extended its overall debt maturity profile and lowered its effective interest rate to four percent.

Second Quarter 2020 Comments

Second quarter 2020 operating income for the company's steel operations was $172 million, or 41 percent lower than sequential first quarter results, due to lower selling values and shipments related to the temporary closures of numerous steel consuming businesses in response to the coronavirus (COVID-19) pandemic. Domestic automotive producers and the related supply chain idled operations beginning in March 2020 and slowly began restarting production in May and June. Construction related steel demand was steadier than industrial manufacturing throughout the second quarter. The second quarter 2020 average external product selling price for the company's steel operations decreased $19 sequentially to $755 per ton. The average ferrous scrap cost per ton melted at the company's steel mills decreased $1 sequentially to $266 per ton.  The company's steel mill's operated at 79 percent of their production capability during the second quarter 2020, with the flat roll group achieving a rate of 89 percent. Additionally, second quarter 2020 steel shipments of 2.5 million tons were only 12 percent lower than record high sequential first quarter shipments of 2.8 million tons, and only nine percent lower than the second quarter of 2019. 

As states issued shelter-in-place mandates and domestic manufacturing slowed, scrap supply and collection declined.  In addition, significantly lower second quarter 2020 domestic steel production of an estimated 55 percent, resulted in weak ferrous scrap demand.  As a result, the company's metals recycling operations recorded an operating loss of $6 million for the second quarter 2020, compared to operating income of $8 million in the sequential first quarter. As states have started to reopen, scrap flows have improved, and the company expects its metals recycling operations to return to profitability for the third quarter 2020.  

Second quarter 2020 operating income from the company's steel fabrication operations of $27 million was strong, nearly equal to sequential first quarter results of $29 million, based on steady shipments. The steel fabrication platform's customer order backlog remains strong, and customers remain constructive concerning non-residential construction projects. The team has not seen widespread project delays or cancellations.

Year-to-Date June 30, 2020 Comparison

For the six months ended June 30, 2020, net income was $263 million, or $1.24 per diluted share, with net sales of $4.7 billion, as compared to net income of $399 million, or $1.78 per diluted share, with net sales of $5.6 billion for the same period in 2019. Excluding the impact from the following items, the company's first half 2020 adjusted net income was $291 million, or $1.37 per diluted share:

• Additional financing costs related to the company's June 2020 refinancing activities of approximately $25 million, or $0.08 per diluted share, and
• Costs (net of capitalized interest) associated with the construction of the company's Sinton Texas Flat Roll Steel Mill of approximately $15 million, or $0.05 per diluted share.

First half 2020 net sales decreased 16 percent and operating income declined 25 percent to $433 million, when compared to the same period in 2019. Lower earnings were primarily the result of steel metal spread compression, as significantly lower average steel selling values, more than offset average ferrous scrap cost reductions across the steel platform. Compared to first half 2019, the average first half 2020 external selling price for the company's steel operations decreased $124 to $766 per ton. The average first half 2020 ferrous scrap cost per ton melted at the company's steel mills decreased $61 to $266 per ton. Even though first half 2020 steel shipments of 5.4 million tons were only two percent lower than 2019 results, the impact of COVID-19 on steel and ferrous scrap demand in the second quarter of 2020 contributed significantly to the year-over-year decline in net sales and earnings.

In contrast, based on the company's differentiated business model and highly, variable cost structure, the company increased cash flow generation from operations to $697 million in the first half 2020, an increase of 28 percent in comparison to prior year. In addition, liquidity at the end of the second quarter 2020 increased $479 million, or 21 percent, when compared to June 30, 2019.  During the first half of 2020, the company invested $527 million in capital investments, paid cash dividends of $104 million, and repurchased $107 million of its common stock, while maintaining strong liquidity.

Outlook 

"We entered 2020 in a position of strength with ample cash and available liquidity of $2.8 billion, and we remain in a position of strength maintaining that liquidity at the end of the second quarter 2020," stated Millett. "Our differentiated business model and performance-driven culture have proven our ability to generate strong cash flow during challenging times such as these. We entered 2020 prepared for the capital investment requirements related to the construction of our new state-of-the art, electric-arc-furnace (EAF) flat roll steel mill. We are excited about this strategic project, and the associated long-term value creation it will bring through geographic and value-added product diversification. This facility is designed to have product size and quality capabilities beyond that of existing EAF flat roll steel producers, competing even more effectively with the integrated steel model and foreign competition, as well as providing a much more environmentally friendly steel production alternative for our customers. We have targeted specific regional markets. Our facility is located and designed to have a meaningful competitive advantage in these regions and in the displacement of imports. We have also now signed long-term agreements with two customers to co-locate on our site, and they plan to represent annual steel consuming and processing capability of over 800,000 tons. Construction is going well within our expected capital costs of $1.9 billion, with plans on schedule to commence operations mid-year 2021.

"I also want to congratulate our Columbus Flat Roll Division team for producing their first prime coil July 9^th on their new 400,000-ton galvanizing line. This is their fourth value-added line investment and will allow them to sell significantly more higher margin products, while also providing a ready hot band consumer base in the South for our anticipated new Texas flat roll steel mill. 

"It is still not possible to determine the full scope of the negative impact COVID-19 will cause to global economies and the related impact to domestic steel demand," continued Millett. "As states continue to determine their reopening guidelines and many steel consuming businesses have resumed operations, we anticipate steel and metals recycling demand will improve in the second half of the year compared to second quarter 2020 trough results. The automotive sector and its related supply chain have restarted production, and we have started to see some resulting increase in steel demand and prime scrap production. The construction sector has remained more resilient and related steel demand has been steady, as evidenced by our Structural and Rail Division volume and steel fabrication platform's customer backlog. The weaker sectors continue to be related to energy and general industrial consumers, which likely require a longer recovery period.

"Our commitment is to the safety of our teams, families, communities and to meet the needs of our customers. Our culture and our business model continue to positively differentiate our performance from the rest of the industry, and we are in a place of strength. We are competitively positioned and focused to deliver long-term value creation for all of our stakeholders," concluded Millett.        

Conference Call and Webcast

Steel Dynamics, Inc. will hold a conference call to discuss second quarter 2020 operating and financial results on Tuesday, July 21, 2020, at 10:00 a.m. Eastern Daylight Time. You may access the call and find dial-in information on the Investors section of the company's website at www.steeldynamics.com.  A replay of the call will be available on our website until 11:59 p.m. Eastern Daylight Time on July 26, 2020.

About Steel Dynamics, Inc.

Steel Dynamics 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 facilities located throughout the United States, and in Mexico. Steel Dynamics produces steel products, including hot roll, cold roll, and coated sheet steel, structural steel beams and shapes, rail, engineered special-bar-quality steel, cold finished steel, merchant bar products, specialty steel sections and steel joists and deck. In addition, the company produces liquid pig iron and processes and sells ferrous and nonferrous scrap.

Note Regarding Non-GAAP Financial Measures

The company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). Management believes that Adjusted Net Income, Adjusted Diluted Earnings Per Share, EBITDA and Adjusted EBITDA, non-GAAP financial measures, provide additional meaningful information regarding the company's performance and financial strength. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results prepared in accordance with GAAP. In addition, because not all companies use identical calculations, EBITDA and Adjusted EBITDA included in this release may not be comparable to similarly titled measures of other companies.

Forward-Looking Statements

This press release contains some predictive statements about future events, including statements related to conditions in domestic or global economies, conditions in steel and recycled metals market places, Steel Dynamics' revenues, costs of purchased materials, future profitability and earnings, and the operation of new, existing or planned facilities. These statements, which we generally precede or accompany by such typical conditional words as "anticipate", "intend", "believe", "estimate", "plan", "seek", "project", or "expect", or by the words "may", "will", or "should", 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. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not a guarantee of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of uncertain economic conditions; (2) the effects of pandemics or other health issues, such as the recent novel coronavirus outbreak (COVID-19); (3) cyclical and changing industrial demand; (4) changes in conditions in any of the steel or scrap-consuming sectors of the economy which affect demand for our products, including the strength of the non-residential and residential construction, automotive, manufacturing, appliance, energy, and other steel-consuming industries; (5) fluctuations in the cost of key raw materials and supplies (including steel scrap, iron units, zinc, graphite electrodes, and energy costs) and our ability to pass on any cost increases; (6) the impact of domestic and foreign imports, including trade policy, restrictions, or agreements; (7) unanticipated difficulties in integrating or starting up new, acquired or planned businesses or assets; (8) risks and uncertainties involving product and/or technology development; and (9) occurrences of unexpected plant outages or equipment failures.

More specifically, we refer you to Steel Dynamics' more 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 under the headings Special Note Regarding Forward-Looking Statements and Risk Factors, in our quarterly reports on Form 10-Q, or in other reports which we from time to time file with the Securities and Exchange Commission. These are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on the Steel Dynamics website, www.steeldynamics.com under "Investors — SEC Filings".

Steel Dynamics, Inc.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
		Three Months Ended		Six Months Ended		Three Months
		June 30,		June 30,		Ended
		2020		2019		2020		2019		March 31, 2020
Net sales		$	2,094,305		$	2,770,515		$	4,669,405		$	5,587,950		$	2,575,100
Costs of goods sold			1,809,874			2,349,349			3,969,745			4,733,214			2,159,871
Gross profit			284,431			421,166			699,660			854,736			415,229
Selling, general and administrative expenses			109,299			106,250			222,197			217,288			112,898
Profit sharing			9,092			22,871			30,546			46,548			21,454
Amortization of intangible assets			7,190			7,013			14,381			14,026			7,191
Operating income			158,850			285,032			432,536			576,874			273,686
Interest expense, net of capitalized interest			27,702			32,321			55,721			63,443			28,019
Other expense (income), net			28,103			(4,249)			25,514			(10,592)			(2,589)
Income before income taxes			103,045			256,960			351,301			524,023			248,256
Income tax expense			24,280			60,214			81,700			122,450			57,420
Net income			78,765			196,746			269,601			401,573			190,836
Net income attributable to noncontrolling interests			(3,269)			(2,444)			(6,765)			(2,943)			(3,496)
Net income attributable to Steel Dynamics, Inc.		$	75,496		$	194,302		$	262,836		$	398,630		$	187,340
Basic earnings per share attributable to Steel Dynamics, Inc. stockholders		$	0.36		$	0.88		$	1.24		$	1.79		$	0.88
Weighted average common shares outstanding			210,343			221,505			211,798			222,781			213,254
Diluted earnings per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive		$	0.36		$	0.87		$	1.24		$	1.78		$	0.88
Weighted average common shares and share equivalents outstanding			211,378			222,519			212,701			233,741			214,024
Dividends declared per share		$	0.25		$	0.24		$	0.50		$	0.48		$	0.25

 

Steel Dynamics, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
	June 30,			December 31,
Assets	2020			2019
	(unaudited)