Steel Dynamics, Inc. — Q3 2015 Form 10-Q
Business context and period: Domestic steel manufacturer and metals recycler; reporting period ended September 30, 2015. Effective this quarter, the company presented three reportable segments: steel operations, metals recycling, and steel fabrication, with prior-period segment data recast. Financial statement amounts below are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $1.951 billion | $2.339 billion | $6.003 billion | $6.239 billion |
| Gross profit | $228.7 million | $288.5 million | $587.5 million | $674.6 million |
| Operating income | $131.0 million | $188.6 million | $308.4 million | $401.5 million |
| Net income attributable to SDI | $60.6 million | $91.2 million | $122.9 million | $202.1 million |
| Diluted EPS | $0.25 | $0.38 | $0.51 | $0.85 |
| Operating cash flow | $164.4 million | $249.2 million | $708.3 million | $298.0 million |
Year-over-year, Q3 sales fell 17%, operating income 31%, and attributable net income 34%. For the first nine months, sales fell 4%, operating income 23%, and attributable net income 39%. Approximate gross / operating / attributable net margins were 11.7% / 6.7% / 3.1% in Q3 2015, versus 12.3% / 8.1% / 3.9% in Q3 2014; nine-month margins were 9.8% / 5.1% / 2.0%, versus 10.8% / 6.4% / 3.2%.
- Cash and liquidity: Cash and equivalents were $473.8 million at September 30, 2015, versus $361.4 million at year-end 2014. Revolver availability was $1.187 billion; reported total liquidity was $1.661 billion. Current assets were $2.652 billion and current liabilities $677.9 million.
- Debt: Total debt, including current maturities, was approximately $2.647 billion, down $376.8 million from year-end 2014. The company reported a 47.2% long-term debt-to-capitalization ratio, versus 50.9% at year-end. No revolver borrowings were outstanding. Interest coverage was 5.45x and net debt leverage 2.58x; the company said it was in covenant compliance.
- Cash uses and investment: Nine-month capital expenditures were $86.5 million; the estimated 2015 full-year plan was approximately $120 million. Dividends paid were $94.3 million for the nine months; the quarterly dividend was increased 20% to $0.1375 per share in Q1 2015.
Material changes and operating drivers
- Steel: Q3 segment operating income declined 38% to $124.7 million; nine-month operating income declined 28% to $338.7 million. Q3 steel product average selling price fell $172 per ton (21%) year over year, while metallic raw-material cost per ton fell 29%. Management said selling-price declines outpaced scrap-cost reductions, compressing metal spreads. Elevated steel imports also reduced shipments excluding Columbus and lowered mill utilization to 82% from 90%.
- Metals recycling: Q3 sales fell 35%; the segment recorded a $3.6 million operating loss versus $8.5 million income a year earlier. Lower commodity prices and shipments, along with narrower spreads, weighed on results. Nine-month operating income was $0.2 million versus $27.4 million.
- Steel fabrication: Q3 operating income rose 89% to $36.7 million and nine-month income rose 184% to $85.8 million, supported by lower steel input costs, improved selling prices, and stronger non-residential construction activity.
- Other and unusual items: Minnesota ironmaking operations were indefinitely idled in May 2015. The company recorded a $21.0 million inventory valuation charge in Q2 related to the idling and inventory monetization. In March, it redeemed $350 million of 7⅝% notes, recording approximately $16.7 million of premiums and financing-cost write-offs in other expense. Q3 2014 other expense included $25.0 million of Columbus acquisition and financing costs.
- Acquisition: On September 14, 2015, SDI acquired three steel decking facilities and approximately $30 million of net working capital for $45 million cash, expanding fabrication operations into additional western and southwestern markets.
Outlook, risks, and contingencies
- Management described underlying domestic steel consumption as steady, with improvement in non-residential construction, but said imports were capturing a larger share of demand and pressuring prices, shipments, and mill utilization. No specific earnings or revenue guidance was provided.
- Management expected operating cash flow and other available funding, including the revolver, to be adequate for the next 12 months for debt service, working capital, and anticipated capital spending. It anticipated continued compliance with credit-facility covenants during 2015.
- Key disclosed risks include cyclical demand, imports and competition, volatility in scrap and other input costs, the ability to pass cost increases through, facility outages, and integration or start-up challenges. Certain supplier commitments include take-or-pay terms.
- In a long-running steel antitrust class action, the court certified a class on the alleged-conspiracy issue but denied certification on antitrust impact. Both sides appealed aspects of the ruling; SDI and a co-defendant also sought summary judgment. The company said the outcome was uncertain but did not then consider a material impact reasonably possible.
- Routine litigation was not expected to materially affect financial condition, results, or liquidity. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether steel import levels, selling prices, and metal spreads continue to pressure steel-segment earnings and utilization.
- Whether metals recycling margins recover after sharp declines in prices, shipments, and spreads.
- Progress and financial contribution from the acquired decking facilities and the effect of the Minnesota idling.
- Debt repayment, covenant headroom, revolver availability, and the company’s ability to sustain dividends and planned capital expenditures.
- Developments in the antitrust litigation, including appeals and summary-judgment motions.