Steel Dynamics, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021, compared with the same 2020 periods. Steel Dynamics operates steel production, metals recycling, and steel fabrication businesses. Management attributed the strong results to robust demand, higher selling prices, and improved metal spreads; the prior-year comparison was affected by the COVID-19 downturn.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $4.465 billion | $2.094 billion | $8.010 billion | $4.669 billion |
| Gross profit | $1.200 billion | $284.4 million | $2.000 billion | $699.7 million |
| Operating income | $955.7 million | $158.9 million | $1.550 billion | $432.5 million |
| Net income attributable to Steel Dynamics | $702.3 million | $75.5 million | $1.133 billion | $262.8 million |
| Diluted EPS | $3.32 | $0.36 | $5.35 | $1.24 |
| Cash provided by operating activities | $587.2 million | $486.0 million | $849.4 million | $697.3 million |
Margins: Q2 gross margin was approximately 26.9% versus 13.6%; operating margin was 21.4% versus 7.6%; and net income attributable margin was 15.7% versus 3.6%.
- Q2 net sales rose 113%, operating income rose 502%, and attributable net income rose 830% year over year. For the first half, sales increased 72%, operating income 258%, and attributable net income 331%.
- Q2 steel shipments increased 16%; average steel selling prices rose 72% ($542 per ton), while metallic raw material cost per ton rose 65%. Steel segment operating income reached $1.013 billion.
- Metals recycling Q2 operating income was $47.6 million, compared with an $8.7 million loss a year earlier. Fabrication operating income rose 5% to $28.4 million in Q2, but first-half operating income declined 32% to $38.3 million as higher steel input costs compressed spreads.
Cash, debt, and liquidity
- At June 30, cash and equivalents were $1.114 billion; total reported liquidity, including $1.188 billion of revolver availability, was $2.302 billion. No revolver borrowings were outstanding.
- Total debt, including current maturities, was approximately $3.110 billion. Long-term debt to capitalization was 38.2%, down from 41.6% at year-end 2020. The company reported covenant ratios of 22.38:1 interest coverage and 0.38:1 debt to capitalization and stated it was in compliance.
- First-half capital expenditures were $587.1 million, including $488.5 million for the Southwest-Sinton steel mill. Management estimated second-half 2021 capital investments of $350–$400 million, including approximately $300 million for Sinton.
- Working capital requirements increased: operational working capital rose $729 million, or 44%, to $2.4 billion, primarily reflecting higher receivables and inventory. Inventories increased to $2.482 billion from $1.844 billion at year-end.
- First-half cash dividends paid were $107.6 million. Share repurchases were $393.2 million; the prior program was exhausted in July, and the board authorized a new program of up to $1.0 billion in July 2021.
Management outlook, risks, and contingencies
- Management described domestic steel demand as strong, particularly in automotive, construction, and industrial markets. Fabrication order backlogs were at a record level at quarter-end. The filing does not provide a specific earnings or sales forecast.
- Management said operating cash flow and available funding were expected to be adequate for the next 12 months to meet debt service, working capital, and anticipated capital spending needs.
- Key risks include steel-industry cyclicality, imports and competition, volatility in scrap and other input prices, the ability to pass through costs, energy costs, COVID-19 impacts, environmental regulation, cybersecurity, equipment downtime, and execution of growth projects.
- Commodity derivatives are used to manage metal-price exposure. The company reported $48.6 million of cumulative unrealized gains on related financial contracts at June 30, substantially settling within 12 months; it expected to reclassify $39.4 million of net derivative gains from accumulated other comprehensive income into earnings over the next 12 months.
- Routine litigation, regulatory, environmental, and commercial matters were not expected to materially affect results or liquidity. Related fines or penalties disclosed for environmental matters did not exceed $1 million in aggregate at June 30. No material change to previously disclosed risk factors was reported.
- Higher profit-sharing expense reflected stronger earnings; Q2 expense was $82.1 million versus $9.1 million. SG&A also increased, partly due to Sinton start-up expenses. Interest expense declined following debt refinancing and increased capitalized interest.
Important facts for investors to verify
- Whether steel prices and metal spreads remain strong as scrap and other input costs fluctuate.
- Whether the Sinton project meets its spending, construction, and operational milestones, and whether projected capital spending remains on track.
- How elevated receivables and inventories affect working capital and cash generation as demand and prices change.
- The timing and earnings impact of derivative settlements and reclassified hedge gains.
- The pace and cost of share repurchases under the new $1.0 billion authorization, alongside dividends and investment needs.