Steel Dynamics, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Steel Dynamics manufactures steel products and recycles metals, with steel, metals recycling and ferrous resources, and steel fabrication reporting segments. Figures below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,909.8 | $2,079.7 | $3,891.8 | $4,095.7 |
| Gross profit | $182.1 | $276.4 | $383.4 | $572.1 |
| Operating income | $103.7 | $188.2 | $223.5 | $393.5 |
| Net income attributable to Steel Dynamics | $44.5 | $98.7 | $90.1 | $204.6 |
| Diluted EPS | $0.20 | $0.43 | $0.40 | $0.89 |
| Operating cash flow | $100.6 | $166.0 | $122.0 | $169.9 |
Q2 gross margin was approximately 9.5% versus 13.3% a year earlier; operating margin was approximately 5.4% versus 9.1%. For the first half, gross and operating margins were approximately 9.9% and 5.7%, compared with 14.0% and 9.6% in 2011. Q2 operating cash flow less capital expenditures was approximately $45.8 million; first-half cash flow less capital expenditures was approximately $21.7 million.
- Q2 sales fell 8% year over year and 4% sequentially; operating income declined 45% year over year and 13% from Q1 2012.
- Q2 steel segment operating income was $136.6 million, down 36%; metals recycling and ferrous resources reported a $19.4 million operating loss versus $3.9 million income; fabrication reported $0.2 million income versus a $1.6 million loss.
- Q2 steel shipments rose 5% year over year, but average steel selling price fell $93 per ton while ferrous scrap cost fell only $19 per ton. Recycling margins weakened as scrap prices fell amid oversupply and lower exports.
Financial position, debt and liquidity
- At June 30, cash and equivalents were $420.9 million, short-term commercial paper investments were $10.0 million, and current assets were $2,458.3 million against current liabilities of $1,019.4 million.
- Total debt, including current maturities, was approximately $2,368.0 million, compared with approximately $2,380.1 million at year-end 2011. Long-term debt to capitalization was 49.3%, down from 50.1%.
- The $1.1 billion revolving facility had no borrowings outstanding; the filing reports $1.1 billion availability and $14.1 million in letters of credit and other obligations reducing availability. Minimum liquidity exceeded $1.5 billion versus a $570.3 million requirement. The company reported compliance with its debt covenants.
- First-half capital expenditures were $100.3 million, including investment in a copper rod mill and iron tailings project. Cash dividends declared were $0.20 per share for the first half.
Outlook, commentary and risks
- Management estimated 2012 capital expenditures of $225–$245 million and anticipated maintaining the current quarterly dividend for the rest of 2012, subject to board approval, financial conditions and debt restrictions.
- Management said operating cash flow and available funding were expected to be adequate for the next 12 months for debt service, working capital and planned capital spending; this depends on future performance and access to funding.
- After quarter-end, the company announced plans to issue approximately $750 million of debt, subject to market and other conditions, and use proceeds and cash for tenders of up to $210 million of 2012 notes and all outstanding 2016 notes. Completion and terms were not assured.
- The Mesabi Nugget facility had a planned five-week outage in April–May. Availability rose to just over 80% in June; management cited a target above 90% and was evaluating process improvements. The iron tailings operation was expected to start in Q3 2012. Minnesota iron operations reduced Q2 net income by approximately $11 million.
- A $13.9 million expense related to the January debt tender contributed to first-half other expense. The company also cited elevated steel-price competition, raw-material and commodity-price volatility, economic and construction demand, plant outages, and environmental regulation as risks.
- Steel-price-fixing antitrust class actions remained pending; plaintiffs moved for class certification in May 2012. The company said it could not estimate the outcome and had not determined an accrual was appropriate, but noted an adverse outcome could materially affect results, financial condition or liquidity.
Key facts for investors to verify
- Whether selling prices and steel/recycling margins stabilize, given the sharp year-over-year earnings decline.
- Execution, cost and timing of the copper rod mill, iron tailings project and Mesabi Nugget improvements.
- Completion, pricing and resulting debt profile of the announced debt issuance and tender offers.
- Future liquidity and covenant headroom, dividend capacity, and the outcome of the antitrust class-certification process.