Steel Dynamics Inc.’s (STLD) net income of $19 million or 9 cents per share in the third quarter of 2010 plummeted 72% from last year’s $69 million or 30 cents. Sequentially, it declined 29% from $49 million or 22 cents.

However, results matched the Zacks Consensus Estimate, as the lower steel selling prices and nearly flat shipments were more or less within analyst expectations. Average realized steel prices were down 6% to $782 per ton.

Although average realized steel prices are softening, they remain above year-ago levels. A 22% year-over-year increase in average steel prices to $782 per ton, coupled with a 5% increase in steel shipments to 1.3 million tons yielded revenue growth of 35% to $1.6 billion in the quarter. Quarterly revenues exceeded the Zacks Consensus Estimate of $1.5 billion.

On a sequential basis, revenues reflected a modest 3% improvement with a 6% fall in steel prices partially offset by a 4% rise in steel shipments.

Operating costs escalated 51% to $1.4 billion, eroding profits. Operating income more than halved to $69 million from $148 million in the year-ago quarter. Operating margins came in at 4% versus 13% in the same quarter of the previous year.

Segment Review

Steel Operations

Revenues of $960 million were up 29% year over year. Steel shipments increased 6% to 1.3 million tons, of which flat-rolled products accounted for the largest share of 60% (down from 64% in the previous quarter). Structural steel and rail, and engineered bars each accounted for 12% of total shipments. Merchant bars and Steel of West Virginia constituted about 11% and 5%, respectively of total shipments.

Average selling prices were up 22% year over year to $782 per ton, while declining 6%, sequentially. However, higher costs led to a 37% decline in operating income that totaled $88 million or $68 per toncompared with $108 per ton in the second quarter of 2010.

Metals Recycling and Ferrous Resources

Net sales shot up 69% to $558 million on higher shipments. Ferrous metal shipments increased 26% to 805,474 tons while non-ferrous shipments increased 17% to 254,730 tons.

The Mesabi Nugget project, which started operations recently, reported production of 24,553 tons, which is supplied to Steel Dynamic’s flat-rolled and engineered bar businesses. However, operating income plunged 40% year over year to $9 million, hurt by higher costs.

Steel Fabrication Operations

The segment includes the New Millennium Building Systems fabricating plants that produce joists, trusses and steel decking used in the construction of non-residential buildings. Third quarter net sales were $54 million on shipments of 46,709 tons compared with net sales of $32 million on shipments of 34,089 in the third quarter of 2009. Operating loss narrowed slightly to $494,000 from a $5 million loss in the year earlier quarter.

Financial View

Steel Dynamics’ debt-to-capital ratio has remained above 50% in the last three quarters. As of September 30, 2010, Steel Dynamics recorded long-term debt of $2.4 billion while about $8.4 million are payable in the short term. Cash and cash equivalent of $270 million, though sufficient to offload the immediate debt lacks the long-term leverage.

Guidance

Steel Dynamics foresees margin improvement in both the Steel Operations and Metals Recycling segments for the fourth quarter of 2010. However, the company remains unsure of the demand for flat-rolled steel products. It also expects to record a one-time charge related to the recent purchase of certain steel fabrication assets from Commercial Metals Corporation.

Zacks Consensus Estimate

Steel Dynamics has exhibited a negative earnings trend over the past two quarters. The company missed the Zacks Consensus Estimate in two of the trailing four quarters and posted a negative average earnings surprise of 0.60%. The Zacks Consensus Estimate for the upcoming quarter and full year 2010 is pegged at 20 cents and 78 cents with a downside potential of 25% and 6.41%, respectively.

As a result, Steel Dynamics now has a short-term (1 to 3 months) rating of Strong Sell, as denoted by the Zacks #5 Rank, as well as a long-term Underperform recommendation.

 
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