Earnings Preview: Steel Dynamics Inc. (NASDAQ: STLD): Third Quarter 2010
Tuesday, October 05, 2010 1:26 PM

Steel Dynamics Inc. (NASDAQ: STLD), the fifth-largest US steelmaker, is scheduled to release third-quarter earnings after the closing bell on Monday, October 18, 2010. Analysts, on average, expect the company to report earnings of 9 cents per share on revenue of $1.50 billion. In the year-ago quarter, the company reported earnings of 30 cents per share on revenue of $1.17 billion.

Steel Dynamics, Inc., together with its subsidiaries, manufactures and sells steel products in the United States. It operates in three segments: Steel Operations, Metals Recycling and Ferrous Resources Operations, and Steel Fabrication Operations.

In the preceding second quarter, the Fort Wayne, Indiana-based company's net income was $49.21 million, or 22 cents per share, compared to a net loss of $15.99 million, or 8 cents per share, in the year-ago quarter. Revenue surged to $1.63 billion from $792.16 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 25 cents per share on revenue of $1.64 billion.

In mid-September, the company announced that it expects third quarter earnings per share to be in the range of 5 cents to 10 cents, as compared to second quarter 2010 earnings of 22 cents per share and third quarter 2009 earnings of 30 cents per share. The steelmaker said that the third quarter earnings will be negatively impacted by reduced margins within the steel segment, most significantly within the sheet and structural steel operations, driven by lower per ton selling values. Metals recycling operations will also be negatively impacted by quarter over quarter reduced ferrous metal spreads and reduced volumes. Additionally, the company expects to have a higher than anticipated effective tax rate for the third quarter, principally related to certain state income tax rate adjustments which require a catch-up in the third quarter to reflect the increase in rate for the first six months of the year, potentially decreasing third quarter earnings per diluted share by as much as $.02. The company also recorded an unexpected charge related to its railroad tie operations which is expected to reduce earnings per diluted share by approximately $.01.

However, the company said that it is currently seeing some improvement in order entry for its sheet products. Steel Dynamics' Chairman and CEO Keith E. Busse stated that the remainder of the year could be positively impacted if this order entry pattern is maintained. He added that the earnings from metals recycling operations should also improve if current market conditions are sustained. Busse also said that start-up activities at its Mesabi Nugget operations also continue to improve.

Steel Dynamics has built the Mesabi Nugget plant at Minnesota in cooperation with Kobe Steel Ltd. of Japan, which has licensed the technology and provided equipment and technical support. Steel Dynamics, with 81 percent ownership, is responsible for operation of the plant and utilizes a substantial portion of the plant's output as feedstock for SDI's electric-arc furnace mini mills in Indiana.

According to Busse, Mesabi Nugget comparative second quarter to third quarter production is expected to increase approximately 65% to 70%, while average quarterly nugget sales prices are expected to decline about 10%, in concert with world pig iron prices. The cost of production has improved, but remained higher than expected earlier in the quarter due to additional process refinements. The company expects third quarter earnings to be reduced by Mesabi Nugget in a similar amount as experienced in the second quarter, or approximately $.04 per diluted share.

Among other developments, Steel Dynamics, Inc. recently agreed to acquire from affiliates of Commercial Metals Company, certain facilities and assets of CMC's former steel-joist manufacturing operations. These assets will become a part of SDI's wholly owned subsidiary, New Millennium Building Systems.

In terms of stock performance, shares of the company have lost nearly 20% since the beginning of the year.

Disclosure: Author doesn't own any of the stocks discussed here.



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