Steel Dynamics, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Steel Dynamics is a U.S. steel producer and metals recycler with steel operations, metals recycling and ferrous resources, and steel fabrication segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $1,830.1 | $1,795.7; up 2% |
| Gross profit / margin | $163.3 / 8.9% | $176.3 / 9.8% |
| Operating income / margin | $80.9 / 4.4% | $96.2 / 5.4%; operating income down 16% |
| Net income attributable to Steel Dynamics | $38.6; diluted EPS $0.17 | $48.2; diluted EPS $0.21 |
| Operating cash flow | $(27.2) | $29.7 |
| Capital expenditures | $24.8 | $45.3 |
| Cash and equivalents at March 31 | $342.9 | $395.2 at December 31, 2013 |
| Total debt, including current maturities | Approximately $2.10 billion | Down $8.8 million from year-end |
Operating cash flow was negative as working capital absorbed cash, including $89.0 million from receivables, $17.4 million from inventories, and $48.3 million from decreases in accrued expenses and liabilities. Cash declined $52.2 million during the quarter. The company reported $1.086 billion of revolver availability and total liquidity of $1.429 billion.
At March 31, total current assets were $2.528 billion and current liabilities were $951.4 million. Long-term debt was $1.755 billion, in addition to $343.7 million of current maturities. The long-term debt-to-capitalization ratio was 44.3%, compared with 44.7% at year-end. The company reported compliance with its credit facility covenants: interest coverage of 5.27x against a 2.50x minimum, and net debt leverage of 2.76x against a 5.00x maximum.
Changes versus the prior-year quarter
- Revenue increased modestly, but profitability weakened: operating income fell 16% and attributable net income fell about 20%.
- Steel segment operating income declined 11% to $105.6 million. Segment sales rose 3%, while segment shipments fell 2%; a 6% increase in average selling prices more than offset lower shipments.
- Metals recycling and ferrous resources reported a $15.5 million operating loss, versus a $9.8 million loss. Metals recycling operating income fell to $5.0 million from $19.5 million, reflecting narrower metal spreads and higher costs.
- Steel fabrication operating income rose to $3.1 million from $1.5 million, with segment sales up 23% and shipments up 22%.
- Net interest expense decreased $4.1 million year over year, reflecting 2013 refinancing and debt repayment activity.
- Operating cash flow shifted from positive $29.7 million to negative $27.2 million. Capital spending was lower than in the prior-year quarter.
Management commentary, outlook, and risks
Management attributed lower shipments and higher energy and operating costs to an unusually severe, prolonged winter, which disrupted production and constrained rail and truck availability. Steel demand remained sound in sheet products, while demand improved in structural and special-bar-quality products. Fabrication benefited from improving non-residential construction demand and increased market penetration. Metals recycling was also affected by reduced metal spreads and $2.6 million of weather-related building damage costs.
- Capital spending: Management estimated 2014 capital expenditures of $125 million to $150 million; approximately half of Q1 spending related to expansion projects at two steel mills nearing completion.
- Liquidity outlook: Management expected cash flows and available funding to cover principal and interest, working capital, and planned capital expenditures for the next 12 months.
- Dividend: The quarterly dividend was increased 5% to $0.115 per share. Management anticipated maintaining that level for the remainder of 2014, subject to board approval and financing restrictions.
- Debt maturity: The 5.125% convertible senior notes mature in June 2014. The filing states that refinancing activity had lengthened the overall debt maturity profile; investors should assess the notes’ repayment or refinancing.
- Operating and market risks: Key risks include economic and end-market demand, raw-material and energy cost volatility and the ability to pass through increases, import competition, and plant outages or equipment failures. Certain commodity and transportation supply commitments include take-or-pay provisions.
- Legal contingency: A steel-price antitrust class action remained pending, with class certification under advisement after a hearing. Management said it could not determine the outcome and had not identified a reasonable possibility of material impact based on information then available; an adverse outcome could nevertheless materially affect financial condition, results, or liquidity.
- Other: Minnesota iron operations continued to incur losses, although losses declined year over year. Production and yield trials at Mesabi Nugget were delayed by winter weather, with remaining trials expected to finish before the end of Q2 2014.
Important facts for investors to verify
- How the June 2014 convertible-note maturity was funded, repaid, or refinanced, and the resulting interest and dilution effects.
- Whether working-capital investment reverses and operating cash flow returns to positive territory.
- Whether steel shipments, energy costs, and margins normalize after the severe winter disruptions.
- Whether metals recycling spreads and segment profitability recover, and whether Mesabi Nugget achieves the expected operating improvements.
- Progress on the antitrust class-certification decision and any subsequent change in the company’s assessment of potential exposure.
- Actual 2014 capital spending and dividends relative to management’s stated plans and credit-facility restrictions.