Steel Dynamics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, financial amounts below are in U.S. dollars and rounded to millions. Steel Dynamics is a domestic steel producer and metals recycler, with steel, metals recycling, and steel fabrication segments.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $2,094 | $2,771 | $4,669 | $5,588 |
| Gross profit | $284 | $421 | $700 | $855 |
| Operating income | $159 | $285 | $433 | $577 |
| Net income attributable to Steel Dynamics | $75 | $194 | $263 | $399 |
| Diluted earnings per share | $0.36 | $0.87 | $1.24 | $1.78 |
| Operating cash flow | $486 | $361 | $697 | $543 |
| Capital expenditures | $310 | $85 | $527 | $140 |
- Q2 gross, operating, and attributable net margins were approximately 13.6%, 7.6%, and 3.6%, respectively, compared with 15.2%, 10.3%, and 7.0% a year earlier. First-half margins were approximately 15.0%, 9.3%, and 5.6%, versus 15.3%, 10.3%, and 7.1%.
- At June 30, cash and equivalents were $1,496 million and short-term investments were $70 million. Total reported liquidity was $2,754 million, including $1,188 million of revolver availability; there were no revolver borrowings.
- Current and long-term debt totaled approximately $2,711 million, versus $2,734 million at year-end 2019. The long-term debt-to-capitalization ratio was 39.6%, compared with 40.2% at year-end. Cash and short-term investments exceeded reported debt by approximately $1,145 million.
- First-half dividends paid were $104 million; the quarterly dividend was increased 4% to $0.25 per share. The company repurchased $106.5 million of shares in the first half, all in Q1.
Material changes and segment results
- Compared with Q2 2019, sales fell 24%, operating income fell 44%, and attributable net income fell 61%. For the first half, sales declined 16%, operating income 25%, and attributable net income 34%.
- Steel operations: Q2 sales fell 22% and operating income fell 42%. Shipments declined 9%, average selling prices fell 14% (about $125 per ton), and metallic raw-material cost per ton fell 16%. Selling prices fell more than scrap costs, contracting metal spread 13%. First-half operating income declined 24%.
- Metals recycling: Q2 sales fell 37%; the segment recorded an $8.7 million operating loss, compared with $7.6 million operating income a year earlier. External ferrous shipments fell 53%, reflecting reduced scrap flows and demand. First-half operating loss was $3.2 million versus $24.6 million of operating income.
- Steel fabrication: Q2 sales fell 10% and operating income fell 11%, while shipments rose 2%; lower selling prices more than offset lower steel input costs. Management said non-residential construction activity, orders, and backlog remained resilient. First-half operating income rose 10%.
- First-half operating cash flow increased to $697 million from $543 million. Working capital investment declined, primarily due to lower inventories and higher accounts payable. Capital spending rose substantially, mainly for the Sinton, Texas, flat-roll mill.
Outlook, management commentary, and risks
- Management attributed weaker Q2 results to COVID-19-related closures and reduced activity among steel-consuming businesses, which lowered steel demand, shipments, selling prices, and scrap flows. Operations remained open as essential businesses. The filing says the pandemic’s ultimate effects on the company and the rest of 2020 could not be quantified or predicted.
- The company planned $800–$850 million of capital investment for the remainder of 2020, including approximately $700–$750 million for the Sinton mill. The mill was expected to begin operations around mid-2021; delays to suppliers or construction could affect that schedule. No specific earnings or revenue guidance is provided.
- In June, the company issued $400 million of 2.400% notes due 2025 and $500 million of 3.250% notes due 2031, using proceeds to redeem equal principal amounts of 5.250% notes due 2023 and 5.500% notes due 2024. Refinancing premiums, debt-cost write-offs, and related expenses totaled approximately $22.8 million and were included in other expense.
- The company reported compliance with credit-facility covenants at quarter-end and said it expected to remain compliant over the next 12 months. It believed available cash flows and other funding sources would cover near-term requirements, while noting that future performance and access to capital remain subject to economic and pandemic-related uncertainty.
- Key risks include prolonged or renewed pandemic effects on customers, suppliers, demand, scrap availability, and operations; steel and scrap price volatility; imports and trade policy; and unexpected outages. Certain commodity and transportation commitments include take-or-pay provisions. Routine litigation and regulatory matters were not expected to materially affect results or liquidity; $495,000 of environmental fines or penalties was recorded.
Important facts for investors to verify
- Whether steel demand, selling prices, and scrap supply recover or weaken further, and the resulting effects on shipments, metal spreads, and segment profitability.
- Progress, remaining cost, and timing of the Sinton mill build, including whether planned 2020 capital spending and the mid-2021 start-up expectation remain achievable.
- Cash generation and liquidity after elevated capital expenditures, and continued compliance with debt covenants as operating conditions change.
- The effects of the June refinancing, including the reported $22.8 million charge and the lower-rate replacement debt’s impact on future interest costs.
- Whether the fabrication segment’s reported backlog and resilient non-residential construction demand persist amid broader economic uncertainty.