Steel Dynamics, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Steel Dynamics manufactures steel, recycles metals, and fabricates steel joists and deck. Financial amounts below are in U.S. dollars; statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $2,330.8 | $2,526.8 | $7,000.2 | $8,114.8 |
| Gross profit | $292.8 | $359.8 | $992.5 | $1,214.6 |
| Operating income | $155.9 | $228.0 | $588.4 | $804.9 |
| Net income attributable to Steel Dynamics | $100.1 | $151.0 | $363.0 | $549.7 |
| Diluted EPS | $0.47 | $0.69 | $1.71 | $2.47 |
| Cash from operations | $151.8 | $444.2 | $849.1 | $987.2 |
| Capital expenditures | $327.6 | $154.1 | $854.9 | $293.7 |
Q3 gross, operating, and attributable net margins were approximately 12.6%, 6.7%, and 4.3%, respectively, compared with 14.2%, 9.0%, and 6.0% in Q3 2019. First-nine-month margins were approximately 14.2%, 8.4%, and 5.2%, compared with 15.0%, 9.9%, and 6.8% in 2019.
Balance sheet and liquidity
- At September 30, cash and equivalents were $1.268 billion; current assets were $3.855 billion and current liabilities were $1.176 billion.
- Long-term debt was $2.637 billion and current maturities were $82.2 million, or approximately $2.719 billion total carrying debt. Total debt to capitalization was 39.3%, versus 40.2% at year-end 2019.
- Reported total liquidity was $2.456 billion: $1.268 billion cash and $1.188 billion available under the revolving facility. No revolver borrowings were outstanding; letters of credit and other obligations reduced availability.
- Operating cash flow for the first nine months was $849.1 million. Net cash used in investing was $650.0 million, including $854.9 million of capital spending; net cash used in financing was $313.3 million. Cash and equivalents declined from $1.381 billion at December 31, 2019 to $1.268 billion at September 30, 2020.
- Quarterly dividends declared were $0.25 per share, up from $0.24 in Q3 2019. The company repurchased 4.4 million shares for $106.5 million during the first nine months, all in Q1.
Changes and operating drivers
- Q3 sales fell 8%, operating income fell 32%, and attributable net income fell 34% year over year. For the first nine months, sales declined 14%, operating income 27%, and attributable net income 34%.
- Steel operations remained the largest business. Q3 segment operating income decreased 41% to $139.5 million: steel average selling prices declined 9% year over year, while metallic raw-material cost per ton fell 6%; metal spread contracted 11%. Shipments were down 2% year over year but up 8% sequentially from Q2.
- Metals recycling reported Q3 operating income of $12.7 million, compared with a $0.1 million loss a year earlier, as scrap volumes, selling prices, and spreads recovered. First-nine-month segment operating income declined 61% to $9.5 million.
- Steel fabrication achieved record Q3 shipments of 179,000 tons and record segment operating income of $39.2 million, up 11%. Management attributed performance to resilient non-residential construction demand and higher volumes.
- Management said COVID-19 disrupted demand and scrap supply, particularly in Q2, with lower steel selling prices continuing to affect Q3 results. Domestic steel demand and scrap flows improved in Q3 as industrial activity resumed.
Outlook, financing, and risks
- No specific earnings or revenue guidance is provided. Management planned approximately $400 million of Q4 2020 capital investment, including about $360 million for the Sinton, Texas flat-roll mill, which was expected to begin operations in mid-2021.
- In June, the company issued $400 million of 2.400% notes due 2025 and $500 million of 3.250% notes due 2031 to refinance higher-coupon debt. Related premiums and other refinancing expenses of approximately $22.8 million were recorded in 2020.
- In October, after quarter-end, the company issued $350 million of 1.650% notes due 2027 and $400 million of 3.250% notes due 2050 to fund redemption of $350 million of 4.125% notes due 2025 and for general purposes. Approximately $10.3 million of related expenses was expected in Q4.
- Management stated that cash flow and available funding were expected to cover requirements for the next 12 months. At September 30, the company reported compliance with revolving-facility covenants, including interest coverage of 9.22:1 and debt to capitalization of 0.39:1.
- Principal uncertainties include COVID-19’s duration and effects on demand, customer and supplier operations, scrap availability, and the Sinton project schedule; cyclical steel demand; raw-material and energy prices; imports and trade policy; and unplanned outages. Management could not quantify the pandemic’s ultimate impact.
- Routine legal matters were not expected to materially affect financial condition, results, or liquidity. Environmental fines and penalties of $485,000 were recorded. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether steel prices and metal spreads recover faster than, or remain weaker than, scrap and other input costs.
- Progress, remaining spending, and timing for the Sinton mill, including the planned mid-2021 start-up.
- COVID-19 effects on end-market demand, customer and supplier operations, scrap flows, and working capital.
- Cash generation relative to elevated capital spending, debt obligations, dividends, and any future share repurchases.
- Completion and final purchase-price allocation for the $59 million Zimmer acquisition, and the actual Q4 refinancing costs following the October note issuance and redemption.