Steelmaker Steel Dynamics Inc. (SDI), headquartered in Fort Wayne, Indiana, has reported net sales of $2.1 billion and net income of $75 million, or 36 cents per diluted share, for the second quarter of the year. For the same period in 2019, SDI’s net income was $399 million, or $1.78 per diluted share, and net sales were $5.6 billion.
The company's second-quarter 2020 adjusted net income was $100 million, or 47 cents per diluted share, excluding the impact of additional financing costs related to the company's June refinancing activities of approximately $25 million, or 8 cents per diluted share, and costs (net of capitalized interest) associated with the construction of its Sinton, Texas, flat-roll steel mill of approximately $10 million, or 3 cents per diluted share.
Comparatively, prior-year second-quarter net sales were $2.8 billion, with net income of $194 million, or 87 cents per diluted share, and sequential first quarter 2020 net sales were $2.6 billion, with net income of $187 million, or 88 cents per diluted share, according to SDI.
"I am incredibly proud of the 8,400 individuals that I am fortunate to work alongside at Steel Dynamics," says Mark D. Millett, president and chief executive officer of SDI, in a news release on the company’s second-quarter financial results. "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.”
Millett says the company’s “spirit of excellence” was visible in SDI’s quarterly 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 (earnings before interest, taxes, depreciation and amortization) was $217 million, and cash flow generation from operations increased sequentially to $486 million, resulting in near-record liquidity of $2.8 billion.”
SDI’s second-quarter steel shipments were 12 percent lower than its record-high sequential first-quarter volumes, Millett says. “Our steel mills operated at almost 80 percent utilization, while the rest of the domestic industry operated at an estimated 55 percent,” he continues. “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."
Scrap supply and collection were reduced in the second quarter as states issued shelter-in-place orders and domestic manufacturing slowed. In addition, significantly lower second-quarter 2020 domestic steel production resulted in weak ferrous scrap demand, SDI says. As a result, the company's metals recycling operations recorded an operating loss of $6 million for the quarter compared with operating income of $8 million in the sequential first quarter. As states have started to reopen, scrap flows have improved, and SDI says it expects its metals recycling operations to return to profitability for the third quarter of 2020.
Second-quarter 2020 operating income for SDI’s steel operations was $172 million, or 41 percent lower than sequential first-quarter results, in light of lower selling values and shipments related to the temporary closures of numerous steel-consuming businesses in response to the 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, SDI says. Construction-related steel demand was steadier than industrial manufacturing throughout the second quarter.
SDI says its second-quarter average external product selling price for its 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, with SDI’s steel mills operating at 79 percent of their production capability during the second quarter, with the flat-roll group achieving a rate of 89 percent. Additionally, second-quarter 2020 steel shipments of 2.5 million tons were 12 percent lower than record-high sequential first-quarter shipments of 2.8 million tons, and on par with those of the second quarter of 2019, SDI says.
Second-quarter 2020 operating income from SDI’s steel fabrication operations was $27 million, which the company says was 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 nonresidential construction projects. SDI says it has not seen widespread project delays or cancellations.
In the second quarter of 2020, SDI reports that it generated cash flow from operations of $486 million and that available cash and short-term investments increased $111 million as working capital management more than offset capital investments of $310 million. The company also says it executed its second investment grade notes offering, issuing $400 million of 2.4 percent notes due 2025 and $500 million of 3.25 percent notes due 2031. These transactions were leverage neutral and proceeds were used to repay $400 million of its 5.25 percent senior notes due 2023 and $500 million of its 5.5 percent senior notes due 2024, according to SDI. 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 4 percent.
First half 2020 net sales decreased 16 percent and operating income declined 25 percent to $433 million when compared with 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, according to the company. Compared with the first half of 2019, the 2020 average first-half external selling price for its steel operations decreased $124 to $766 per ton.
For the six months ended June 30, SDI’s net income was $263 million, or $1.24 per diluted share, with net sales of $4.7 billion.
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 2 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, SDI says.
Cash flow generation from operations was $697 million in the first half of 2020, an increase of 28 percent in comparison with the prior year, according to the company. In addition, liquidity at the end of the second quarter of this year increased $479 million, or 21 percent, when compared with June 30, 2019.
"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," Millett says. "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 on their new 400,000-ton galvanizing line,” Millett continues. “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.”
While Millett says 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," he adds that, “we anticipate steel and metals recycling demand will improve in the second half of the year compared to second quarter 2020 trough results.”
He adds that as the automotive sector and the related supply chain have restarted production, SDI has started to see steel demand and prime scrap production return. “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,” Millett says.