Steel Dynamics Reports Fourth Quarter and Annual 2017 Results

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Jan 22, 2018, 06:00 ET

FORT WAYNE, Ind., Jan. 22, 2018 /PRNewswire/ --

Annual 2017 Results:

Record company-wide safety performance
Record steel shipments of 9.7 million tons
Record fabrication shipments of over 627,000 tons
Record net sales of $9.5 billion
Record operating income of $1.1 billion and pretax income of $935 million
Record EBITDA of $1.4 billion

Steel Dynamics, Inc. (NASDAQ/GS: STLD) today announced fourth quarter and annual 2017 financial results. The company reported fourth quarter 2017 net sales of $2.3 billion and net income of $305 million, or $1.28 per diluted share, which includes the following items:

Lower pretax earnings of $7 million, or $0.02 per diluted share, related to debt refinancing and repayment charges,
Lower pretax earnings of approximately $27 million, or $0.07 per diluted share, related to the company's two flat roll division planned outages, which resulted in higher costs and lower value-add shipments, as indicated in the company's December 15, 2017 guidance press release,
A tax benefit of approximately $16 million, or $0.07 per diluted share, related to certain discrete valuation allowance reductions, state tax refunds and equity-based compensation, and
An additional one-time tax benefit of $181 million, or $0.76 per diluted share, resulting from the company's revaluation of its deferred tax assets and liabilities in connection with the recently enacted U.S. Federal "Tax Cuts and Jobs Act of 2017" (TCJA). The company currently estimates the related reduction in its corporate tax rate will result in an effective tax rate of between 24 percent and 25 percent for 2018.

Comparatively, prior year fourth quarter net sales were $1.9 billion, with net income of $20 million, or $0.08 per diluted share, which included non-cash goodwill and asset impairment charges of $0.31 per diluted share and debt refinancing and repayment charges of $0.04 per diluted share. Sequential third quarter 2017 net sales were $2.4 billion, with net income of $153 million, or $0.64 per diluted share, which includes debt refinancing and repayment charges of $0.02 per diluted share.

Annual 2017 net income was $813 million, or $3.36 per diluted share. Excluding the one-time TCJA tax benefit and debt refinancing costs, the company still achieved record annual net income of $641 million, or $2.65 per diluted share. Comparatively, annual 2016 net income was $382 million, or $1.56 per diluted share. Excluding charges related to litigation settlements, non-cash goodwill and asset impairment, and debt refinancing, annual 2016 adjusted net income was $472 million, or $1.92 per diluted share.

"The performance of the entire Steel Dynamics team was exceptional this year," said Mark D. Millett, President and Chief Executive Officer. "We performed at the top of our industry, both operationally and financially, and most importantly, we did it safely. We achieved numerous annual records, including steel and fabrication shipments, operating income of $1.1 billion, and EBITDA of $1.4 billion. Based on our strong cash flow generation from operations of $740 million in 2017, we maintained near-record liquidity of over $2.2 billion, while simultaneously investing in our company through organic growth, a sustained positive dividend profile and the continuation of our share repurchase program. We have a firm foundation for our continued growth. In recognition of the team's tremendous achievements during the year, we were pleased to award each non-executive employee a special cash performance bonus in December which totaled $7 million.

"In spite of the continuation of elevated levels of steel imports, which were over 15 percent higher than in 2016," continued Millett, "the domestic steel industry benefited in 2017 from an improvement in underlying demand, as the automotive sector remained strong, and the construction and energy sectors continued to improve. Our steel operations achieved record annual operating income of $1.1 billion. Supported by improved domestic steel utilization, the metals recycling team maintained volume, increased metal spread and reduced costs throughout the year, resulting in annual 2017 operating income of $85 million, more than double last year's performance.

"Our fabrication platform also had a solid year with annual 2017 operating income of $87 million, achieving record shipments which substantially offset margin compression caused by higher average raw material steel costs," said Millett. "Our fabrication order backlog and customer sentiment remains strong. We believe this is a positive indication that the non-residential construction market is continuing to strengthen."

Fourth Quarter 2017 Comments

Fourth quarter 2017 operating income for the company's steel operations decreased 26 percent to $207 million sequentially, based on a four percent decline in shipments, product mix shift, and metal spread compression. During October, the company successfully completed an equipment upgrade and facility expansion at the Butler Flat Roll Division and an equipment upgrade with additional value-add product opportunities at the Columbus Flat Roll Division. However, the longer than typical planned outages resulted in higher costs and lower value-add shipments, reducing fourth quarter 2017 pretax earnings by approximately $27 million. The company's average overall steel product price decreased more than consumed raw material scrap costs, resulting in steel metal spread compression. The fourth quarter 2017 average product selling price for the company's steel operations decreased $17 to $761 per ton. The average ferrous scrap cost per ton melted decreased $5 to $300 per ton.

Fourth quarter 2017 operating income attributable to the company's flat roll products decreased 30 percent when compared to the sequential third quarter, based on lower shipments, the prolonged outages, and metal spread compression. Operating income from long products decreased eight percent as a result of lower shipments, as merchant steel volumes remained under pressure from prefabricated steel imports and excess domestic production capability. Prefabricated steel imports increased more than 80 percent in a five year timeframe. The company's steel production utilization rate was 89 percent in the fourth quarter 2017, compared to 92 percent in the sequential third quarter and compared to the domestic industry utilization rate of approximately 73 percent.

Fourth quarter 2017 operating income from the company's metals recycling operations was $22 million, compared to $21 million in the sequential third quarter. Despite decreased shipments and lower average quarterly ferrous pricing, ferrous metal spread remained steady and non-ferrous metal spread improved.

The company's fabrication operations fourth quarter 2017 operating income was $22 million, consistent with sequential third quarter results. The fabrication group achieved another quarter of record shipments and maintains a strong order backlog.

During the second half of 2017, the company successfully refinanced $350 million of senior notes, reducing its ongoing interest burden, extending its debt maturity profile, and further supporting continued growth. These actions reduced third and fourth quarter 2017 pretax income by $8 million and $7 million, respectively, due to the required call premium and other associated finance expenses, and are expected to provide an estimated annual interest savings of approximately $8 million.

Annual 2017 Comparison

Annual 2017 net sales were a record $9.5 billion compared to $7.8 billion in 2016. Each of the company's three operating platforms achieved higher average annual selling values and the steel and fabrication operating platforms also each achieved record shipments. Annual 2017 operating income was a record $1.1 billion compared to adjusted 2016 operating income of $861 (which excludes non-cash goodwill and asset impairment charges of $133 million). The improvement in annual earnings resulted from record results for the company's steel operations and significant increase in the metals recycling financial performance. The average 2017 selling price for the company's steel operations increased $107 to $765 per ton. The average 2017 ferrous scrap cost per ton melted increased $73 to $293 per ton.

Outlook

"We remain confident that current and anticipated macroeconomic and market conditions are in place to benefit domestic steel consumption in 2018," said Millett. "Domestic steel inventory levels have moderated. World steel demand and pricing have structurally improved and domestic steel demand remains healthy. We believe North American automotive steel consumption will be steady, and we continue to gain momentum in that sector. We also believe that there will be continued additional growth in the construction and energy sectors. We believe the recent tax reform will also provide a stimulus for additional domestic fixed asset investment and growth. In combination with our own SDI expansion initiatives, we believe there are firm drivers for growth in 2018."

"We continue to strengthen our financial position through strong cash flow generation and the execution of our long-term strategy. We are well-positioned for growth, and remain focused on delivering shareholder value through organic and strategic growth opportunities," concluded Millett.

Conference Call and Webcast

Steel Dynamics, Inc. will hold a conference call to discuss fourth quarter and annual 2017 operating and financial results on Tuesday, January 23, 2018, at 10:00 a.m. Eastern 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 Time on January 28, 2018.

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 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 Operating Income, 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 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 the steel and metallic scrap markets, Steel Dynamics' revenues, costs of purchased materials, future profitability and earnings, and the operation of new or existing 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 guarantees 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) cyclical and changing industrial demand; (3) 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, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses; (7) risks and uncertainties involving product and/or technology development; and (8) 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 SEC website, www.sec.gov, and on the Steel Dynamics website, www.steeldynamics.com: Investors: SEC Filings.

Steel Dynamics, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)

	Three Months Ended				Year Ended				Three Months
	December 31,				December 31,				Ended
	2017		2016		2017		2016		September 30, 2017

Net sales	$	2,336,479	$	1,910,596	$	9,538,797	$	7,777,109	$	2,443,382
Costs of goods sold		2,015,655		1,600,654		7,956,783		6,442,245		2,046,864
Gross profit		320,824		309,942		1,582,014		1,334,864		396,518

Selling, general and administrative expenses		96,209		94,110		394,631		374,009		97,056
Profit sharing		21,595		19,563		91,309		71,285		21,175
Amortization of intangible assets		7,073		7,406		29,193		28,765		7,272
Asset impairment charge		-		132,839		-		132,839		-
Operating income		195,947		56,024		1,066,881		727,966		271,015

Interest expense, net of capitalized interest		32,380		36,149		134,399		146,037		34,177
Other expense (income), net		2,215		17,055		(2,753)		17,796		2,526
Income before income taxes		161,352		2,820		935,235		564,133		234,312

Income tax expense (benefit)		(141,819)		(1,012)		129,439		204,127		83,300
Net income		303,171		3,832		805,796		360,006		151,012
Net loss attributable to noncontrolling interests		1,562		16,180		6,945		22,109		2,246
Net income attributable to Steel Dynamics, Inc.	$	304,733	$	20,012	$	812,741	$	382,115	$	153,258


Basic earnings per share attributable to
Steel Dynamics, Inc. stockholders	$	1.28	$	0.08	$	3.38	$	1.57	$	0.64

Weighted average common shares outstanding		237,177		243,687		240,132		243,576		239,066

Diluted earnings per share attributable to
Steel Dynamics, Inc. stockholders, including the effect
of assumed conversions when dilutive	$	1.28	$	0.08	$	3.36	$	1.56	$	0.64

Weighted average common shares
and share equivalents outstanding		238,677		245,511		241,781		245,298		240,880


Dividends declared per share	$	0.155	$	0.1400	$	0.620	$	0.5600	$	0.155

Steel Dynamics, Inc. CONSOLIDATED BALANCE SHEETS (in thousands)

	December 31,		December 31,
Assets	2017		2016
	(unaudited)
Current assets
Cash and equivalents	$	1,028,649	$	841,483
Accounts receivable, net		868,837		729,784
Inventories		1,519,347		1,275,211
Other current assets		91,509		83,197
Total current assets		3,508,342		2,929,675

Property, plant and equipment, net		2,675,904		2,787,215

Restricted cash		16,939		18,060

Intangible assets, net		256,909		283,977

Goodwill		386,893		393,351

Other assets		10,745		11,454
Total assets	$	6,855,732	$	6,423,732
Liabilities and Equity
Current liabilities
Accounts payable	$	489,448	$	395,196
Income taxes payable		3,696		5,593
Accrued expenses		346,580		308,394
Current maturities of long-term debt		28,795		3,632
Total current liabilities		868,519		712,815

Long-term debt		2,353,145		2,353,194

Deferred income taxes		305,949		448,375

Other liabilities		21,811		20,649
Total liabilities		3,549,424		3,535,033

Commitments and contingencies

Redeemable noncontrolling interests		111,240		111,240

Equity
Common stock		644		641
Treasury stock, at cost		(665,297)		(416,829)
Additional paid-in capital		1,141,534		1,132,749
Retained earnings		2,874,693		2,210,459
Total Steel Dynamics, Inc. equity		3,351,574		2,927,020
Noncontrolling interests		(156,506)		(149,561)
Total equity		3,195,068		2,777,459
Total liabilities and equity	$	6,855,732	$	6,423,732

Steel Dynamics, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)

	Three Months Ended				Year Ended
	December 31,				December 31,
	2017		2016		2017		2016

Operating activities:
Net income	$	303,171	$	3,832	$	805,796	$	360,006

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		74,931		73,139		298,999		296,109
Asset impairment charge		-		132,839		-		132,839
Equity-based compensation		11,639		10,069		36,197		31,656
Deferred income taxes		(153,748)		(33)		(135,899)		53,846
Other adjustments		6,013		17,450		14,068		20,676
Changes in certain assets and liabilities:
Accounts receivable		54,179		43,193		(139,054)		(106,617)
Inventories		(31,157)		(13,236)		(242,883)		(115,575)
Other assets		5,891		198		4,188		12,053
Accounts payable		(37,189)		(10,699)		96,062		106,521
Income taxes receivable/payable		(39,692)		(54,881)		(33,889)		(13,921)
Accrued expenses		(2,037)		5,536		36,021		75,176
Net cash provided by operating activities		192,001		207,407		739,606		852,769

Investing activities:
Purchases of property, plant and equipment		(37,189)		(74,992)		(164,935)		(198,160)
Acquisition of businesses, net of cash acquired		(674)		(14,286)		(6,192)		(123,351)
Other investing activities		1,636		2,851		32,022		8,618
Net cash used in investing activities		(36,227)		(86,427)		(139,105)		(312,893)

Financing activities:
Issuance of current and long-term debt		118,593		400,000		620,041		473,903
Repayment of current and long-term debt		(278,575)		(656,855)		(609,914)		(728,993)
Dividends paid		(36,728)		(34,128)		(145,565)		(135,767)
Purchase of treasury stock		(15,088)		(25,034)		(252,242)		(25,034)
Other financing activities		(17,291)		(14,969)		(25,655)		(9,534)
Net cash used in financing activities		(229,089)		(330,986)		(413,335)		(425,425)

Increase (decrease) in cash and equivalents		(73,315)		(210,006)		187,166		114,451
Cash and equivalents at beginning of period		1,101,964		1,051,489		841,483		727,032
Cash and equivalents at end of period	$	1,028,649	$	841,483	$	1,028,649	$	841,483


Supplemental disclosure information:
Cash paid for interest	$	55,226	$	53,074	$	135,381	$	150,679
Cash paid for income taxes, net	$	49,701	$	55,826	$	296,493	$	159,950

Steel Dynamics, Inc. SUPPLEMENTAL INFORMATION (dollars in thousands)

		Fourth Quarter				Year to Date
		2017		2016		2017		2016		1Q 2017		2Q 2017		3Q 2017
*External Net Sales*
Steel	$	1,669,384	$	1,393,329	$	6,931,764	$	5,634,711	$	1,721,333	$	1,758,242	$	1,782,805
Fabrication		220,515		173,015		823,782		701,041		194,096		197,866		211,305
Metals Recycling		354,460		282,783		1,410,040		1,169,342		363,836		343,529		348,215
Other		92,120		61,469		373,211		272,015		88,951		91,083		101,057
Consolidated	$	2,336,479	$	1,910,596	$	9,538,797	$	7,777,109	$	2,368,216	$	2,390,720	$	2,443,382

*Operating Income*
Steel	$	207,358	$	217,778	$	1,113,884	$	941,126	$	352,423	$	273,818	$	280,285
Fabrication		21,601		17,766		87,459		91,167		23,767		20,188		21,903
Metals Recycling		22,379		9,511		84,826		40,304		21,341		19,988		21,118
Metals Recycling Impairment Charge		-		(5,500)		-		(5,500)		-		-		-
Operations		251,338		239,555		1,286,169		1,067,097		397,531		313,994		323,306

Non-cash Amortization of Intangible Assets		(7,073)		(7,406)		(29,193)		(28,765)		(7,424)		(7,424)		(7,272)
Profit Sharing Expense		(21,595)		(19,563)		(91,309)		(71,285)		(27,231)		(21,308)		(21,175)
Non-segment Operations		(26,723)		(29,223)		(98,786)		(111,742)		(28,310)		(19,909)		(23,844)
Minnesota Impairment Charge		-		(127,339)		-		(127,339)		-		-		-
Consolidated Operating Income		195,947		56,024		1,066,881		727,966		334,566		265,353		271,015

Non-cash Impairment Charge		-		132,839		-		132,839		-		-		-
Adjusted Operating Income	$	195,947	$	188,863	$	1,066,881	$	860,805	$	334,566	$	265,353	$	271,015

*Adjusted EBITDA*
Earnings Before Taxes	$	161,352	$	2,820	$	935,235	$	564,133	$	304,252	$	235,319	$	234,312
Net Interest Expense		28,990		34,752		124,250		141,148		32,333		31,629		31,298
Depreciation		66,460		64,199		264,317		261,281		66,269		65,014		66,574
Amortization of Intangible Assets		7,073		7,406		29,193		28,765		7,424		7,424		7,272
Non-controlling Interest		1,562		16,180		6,945		22,109		2,152		985		2,246
EBITDA		265,437		125,357		1,359,940		1,017,436		412,430		340,371		341,702
Non-cash Adjustments
Unrealized Hedging (Gain) Loss		7,325		(143)		4,688		484		(637)		724		(2,724)
Inventory Valuation		198		154		2,955		986		162		2,359		236
Asset Impairment Charge		-		119,764		-		119,764		-		-		-
Equity-based Compensation		11,636		10,069		34,560		30,230		9,074		6,975		6,875
Financing Expenses		1,242		3,104		2,635		3,104		-		-		1,393
Adjusted EBITDA	$	285,838	$	258,305	$	1,404,778	$	1,172,004	$	421,029	$	350,429	$	347,482

*Other Operating Information*
Steel
Average External Sales Price (Per ton)	$	761	$	680	$	765	$	658	$	743	$	779	$	778
Average Ferrous Cost (Per ton melted)	$	300	$	220	$	293	$	220	$	264	$	303	$	305

Flat Roll Shipments		1,659,049		1,565,157		6,865,413		6,631,089		1,735,954		1,737,404		1,733,006
Long Product Shipments
Structural and Rail Division		339,597		319,265		1,339,558		1,299,551		350,555		311,421		337,985
Engineered Bar Products Division		191,652		134,262		757,027		507,163		192,140		180,787		192,448
Roanoke Bar Division		107,319		112,007		470,071		496,808		125,869		116,231		120,652
Steel of West Virginia		66,724		75,453		294,908		311,335		77,229		76,054		74,901
Shipments (Tons)		2,364,341		2,206,144		9,726,977		9,245,946		2,481,747		2,421,897		2,458,992

External Shipments (Tons)		2,184,135		2,041,078		9,015,013		8,558,331		2,305,080		2,246,569		2,279,229

Steel Production (Tons)		2,437,851		2,237,200		9,995,082		9,503,465		2,544,082		2,476,159		2,536,990

Metals Recycling
Nonferrous Shipments (000's of pounds)		271,036		274,790		1,086,799		1,103,505		283,603		270,444		261,716
Ferrous Shipments (Gross tons)		1,172,015		1,175,625		4,952,973		5,070,380		1,338,599		1,222,777		1,219,582
External Ferrous Shipments (Gross tons)		429,512		446,232		1,844,115		1,957,764		485,414		466,506		462,683

Fabrication
Average External Sales Price (Per ton)	$	1,335	$	1,310	$	1,314	$	1,249	$	1,291	$	1,311	$	1,317
Shipments (Tons)		165,338		132,186		627,274		562,725		150,402		151,052		160,482