Steel Dynamics, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; filed November 9, 2016. Amounts below are in U.S. dollars. The company produces steel, recycles metals, and fabricates steel products.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2,101.3 million | $1,950.9 million | $5,866.5 million | $6,003.4 million |
| Gross profit | $408.5 million | $228.7 million | $1,024.9 million | $587.5 million |
| Operating income | $283.9 million | $131.0 million | $671.9 million | $308.4 million |
| Net income attributable to Steel Dynamics | $157.4 million | $60.6 million | $362.1 million | $122.9 million |
| Diluted EPS | $0.64 | $0.25 | $1.48 | $0.51 |
| Operating cash flow | $196.3 million | $164.4 million | $643.2 million | $708.3 million |
- Q3 revenue rose about 8%; nine-month revenue declined about 2%. Q3 gross margin was approximately 19.4% versus 11.7%, and operating margin was 13.5% versus 6.7%. Nine-month gross margin was approximately 17.5% versus 9.8%, and operating margin was 11.5% versus 5.1%.
- Q3 improvement reflected higher steel shipments and expanded sheet-steel spreads, plus better metals-recycling spreads and lower operating costs. Nine-month earnings also benefited from lower metallic raw-material costs and fewer prior-year Minnesota ironmaking losses.
- Steel operations’ Q3 sales increased 16% and operating income increased 147%; steel shipments rose 3% and average selling prices rose 12%. Metals recycling returned to operating profit, while fabrication operating income fell 52% in Q3 amid selling-price declines and higher steel input costs.
Cash, debt, and liquidity
- At September 30, 2016, cash and equivalents were $1,051.5 million, total current assets $3,136.6 million, and total current liabilities $794.1 million. Cash was $727.0 million at December 31, 2015.
- Total debt, including current maturities, was approximately $2.587 billion, broadly unchanged from year-end 2015. Long-term debt to capitalization was 46.7%, versus 49.3% at December 31, 2015.
- Total stated liquidity was $2,239.0 million: cash of $1,051.5 million plus $1,187.5 million of revolver availability. The $1.2 billion revolver had no borrowings outstanding; letters of credit and other obligations reduced availability by $12.1 million.
- Nine-month operating cash flow was $643.2 million, down from $708.3 million. Capital expenditures were $123.2 million, compared with $86.5 million. Dividends paid were $101.6 million.
- The company reported compliance with its credit-facility covenants: interest coverage ratio 7.36x against a 2.50x minimum, and net debt leverage ratio 2.01x against a 5.00x maximum. Management expected continued compliance over the next 12 months.
Material developments, outlook, and risks
- Steel Dynamics acquired 100% of Vulcan Threaded Products on August 1, 2016, for approximately $113.0 million in cash. Vulcan’s results are included in steel operations from the acquisition date; purchase accounting remained preliminary.
- In October 2016, the board authorized a share repurchase program of up to $450 million. The program has no required purchase amount and may be changed or discontinued.
- The quarterly dividend was increased 2% to $0.14 per share in Q1 2016. Future dividends remain at the board’s discretion and may be restricted by debt agreements.
- Management described domestic steel demand as generally steady: automotive and non-residential construction were firm, while heavy equipment, agriculture, and energy remained weak. Sheet-steel imports declined approximately 20% in the first nine months versus 2015, alongside trade duties and relatively low customer inventories. No quantitative earnings or revenue guidance was provided.
- Management believes cash flows and available funding will cover expected needs for the next 12 months, including debt service, working capital, and planned capital expenditures. The Columbus Flat Roll expansion, including painted and Galvalume capacity, was a major capital investment underway.
- Steel and scrap price volatility, import competition, demand cyclicality, raw-material and energy costs, plant outages, and integration of acquisitions are identified risks. Certain supply contracts include take-or-pay commitments, with terms varying by commodity and extending as long as 12 years for air products.
- The company recorded an estimated $4.6 million charge related to a proposed settlement of the direct-purchaser steel antitrust case. Court preliminary approval was granted November 3, 2016; indirect-purchaser litigation remained unresolved, and an adverse result could materially affect the company.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether steel spreads, shipments, and pricing remained favorable after Q3, and whether weaker end markets or imports changed the demand picture.
- Whether the Vulcan acquisition’s preliminary purchase-price allocation, expected benefits, and integration results were finalized as planned.
- Actual capital spending and progress on the Columbus expansion, alongside working-capital needs and operating cash-flow trends.
- Use of the $450 million repurchase authorization, and the balance between repurchases, dividends, acquisitions, and debt reduction.
- Final court approval and any opt-outs from the $4.6 million direct-purchaser settlement, as well as developments in the remaining indirect-purchaser case.
- Continued covenant compliance and available revolver capacity if profitability, cash flows, or commodity prices weaken.