Steel Dynamics, Inc. — Q1 2013 Form 10-Q
Business context and period: Domestic steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. This unaudited report covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless noted.
Financial performance and position
- Revenue: Net sales were $1.796 billion, down 9% from $1.982 billion. Management attributed the decline primarily to lower selling prices and reduced metals recycling sales.
- Profitability: Gross profit was $176.3 million versus $201.3 million; gross margin was approximately 10% in both periods. Operating income fell 20% to $96.2 million from $119.8 million. Net income attributable to Steel Dynamics rose to $48.2 million from $45.7 million; diluted EPS was $0.21 versus $0.20. The effective tax rate was 34.2%, compared with 39.0%.
- Segment performance: Steel operations income declined 13% to $119.3 million as average selling prices per ton fell $87, exceeding the $66 decline in average scrap cost per ton. Metals recycling and ferrous resources recorded a $9.8 million operating loss, versus $4.2 million of income, primarily due to higher-cost inventory write-downs at Minnesota iron operations and lower IDI pricing. Fabrication returned to operating income of $1.5 million from a $2.7 million loss, with higher shipments and improved margins.
- Cash flow and investment: Operating cash flow was $29.7 million, up from $21.4 million. Capital expenditures were $45.3 million, leaving operating cash flow less capital expenditures of negative $15.6 million. Cash and equivalents increased to $477.9 million from $375.9 million.
- Liquidity and debt: At March 31, total debt, including current maturities, was approximately $2.3 billion; long-term debt was $2.069 billion and current maturities were $231.6 million. The company had no revolver borrowings and $1.1 billion of revolver availability, subject to $14.0 million of letters of credit and other obligations. It reported covenant ratios of 4.17x interest coverage and 3.13x net debt to adjusted EBITDA, within requirements.
- Balance sheet: Current assets were $2.449 billion and current liabilities were $814.7 million. Inventories were $1.170 billion, down $32.3 million from year-end; accounts receivable increased with sales. Total equity was $2.407 billion.
Material changes and notable items
- On March 25, the company issued $400 million of 5.25% senior notes due 2023 and used part of the proceeds to tender for $301.7 million of 6.75% notes due 2015. On April 9, it repaid the remaining $198.3 million of those 2015 notes using remaining proceeds and cash. Management said the refinancing reduced debt by about $100 million, extended and staggered maturities, and lowered the overall effective interest rate. The filing reports post-April 9 long-term debt to capitalization of 45.6%, versus 47.1% at December 31, 2012.
- Other expense was a net benefit of $1.0 million, versus $10.2 million of expense in Q1 2012. The 2013 period included $2.0 million of 2015-note tender-related costs; Q1 2012 included $13.9 million of charges related to a partial tender of other senior notes.
- Q1 2013 results benefited from a favorable adjustment for 2012 research and development tax credits enacted in January 2013.
Outlook, risks and contingencies
- Management estimated 2013 capital expenditures of $200 million to $225 million and anticipated maintaining the current quarterly dividend level for the remainder of 2013, subject to board approval and applicable debt restrictions. No specific earnings or revenue guidance is provided.
- Management expected further reductions in gross interest expense in 2013 from refinancing and debt repayments, and stated that available liquidity should be adequate for the next 12 months to meet debt service, working capital and anticipated capital expenditure needs.
- Management expected improvements being implemented at the Mesabi Nugget facility in Q2 2013 to improve production; the iron tailings operation was expected to reach full capacity in the first half of 2013. Minnesota iron operations reduced Q1 net income by approximately $13.8 million.
- Key risks include slowing industrial or construction demand, steel and scrap price movements and the ability to pass through cost increases, import competition, and unexpected plant outages or equipment failures. Certain commodity supply and transportation contracts include take-or-pay requirements.
- The company faces a steel-pricing antitrust class action seeking treble damages and other relief. It could not determine the ultimate outcome, but stated that a material impact was not reasonably possible based on information then available; it cautioned that an adverse outcome could be material. Routine litigation was not expected to materially affect results.
- Environmental compliance and permitting may require future spending; management said current requirements were not expected to have a material adverse effect, while noting future regulation could become more stringent.
Important facts for investors to verify
- Whether steel selling-price and scrap-cost trends support recovery in steel operating margins, and how shipment mix evolves.
- Whether Minnesota iron operations achieve expected production improvements and reduce losses; track the planned Q2 modifications and tailings operation ramp-up.
- Post-refinancing debt, interest expense, maturity schedule, revolver availability, and continued compliance with credit-facility covenants.
- Progress on the antitrust class-certification motions and any change in the company’s assessment of potential loss.
- Actual 2013 capital expenditures, liquidity generation, and dividend decisions versus management’s stated expectations.