Steel Dynamics, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Steel Dynamics manufactures steel, recycles metals, and fabricates steel products. Its reportable segments are steel operations, metals recycling, and steel fabrication.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.771 billion | $3.091 billion | $5.588 billion | $5.694 billion |
| Gross profit | $421.2 million | $652.1 million | $854.7 million | $1.115 billion |
| Operating income | $285.0 million | $501.9 million | $576.9 million | $825.3 million |
| Net income attributable to Steel Dynamics | $194.3 million | $362.4 million | $398.6 million | $590.0 million |
| Diluted EPS | $0.87 | $1.53 | $1.78 | $2.49 |
| Operating cash flow | $361.5 million | $326.0 million | $543.0 million | $504.0 million |
- Q2 gross margin was approximately 15.2% versus 21.1% a year earlier; operating margin was approximately 10.3% versus 16.2%.
- For the first half, gross margin was approximately 15.3% versus 19.6%; operating margin was approximately 10.3% versus 14.5%.
- At June 30, cash and equivalents were $972.6 million and short-term investments were $114.2 million. Revolver availability was $1.188 billion, for reported total liquidity of $2.275 billion.
- Total debt, including current maturities, was approximately $2.428 billion, versus $2.377 billion at December 31, 2018. Long-term debt to capitalization was 37.5%, down from 37.9%. No revolver borrowings were outstanding; letters of credit and other obligations reduced availability by $11.9 million.
- Six-month capital expenditures were $139.6 million, up from $105.8 million. Dividends paid were $95.7 million and treasury-stock purchases were $177.4 million.
Material changes versus prior comparable periods
- Q2 sales declined 10%, operating income declined 43%, and attributable net income declined 46% year over year. For the first half, sales declined 2%, operating income declined 30%, and attributable net income declined 32%.
- Management attributed the decline mainly to lower steel selling prices, particularly sheet steel, amid customer inventory destocking and falling scrap prices. Q2 steel operations operating income fell 45%; steel shipments declined 4%.
- Metals recycling Q2 sales fell 26% and operating income fell 66%, reflecting lower scrap prices, reduced shipments, and slower scrap flows. Steel fabrication was stronger: Q2 sales rose 11% and operating income rose 117%, as selling prices and spreads improved.
- Steel mill utilization fell to 89% in Q2 from 99% a year earlier. The company said underlying domestic steel demand remained intact, with strength in automotive, energy, and other industrial sectors.
Outlook, management commentary, risks, and unusual items
- Management said operating cash flow and other available funding, including the revolver if needed, should cover debt service, working capital, and anticipated capital expenditures for the next 12 months. It anticipated continued compliance with debt covenants; reported interest coverage and net debt leverage ratios were 14.80:1 and 0.98:1, respectively.
- No numerical earnings or revenue guidance was provided. Management described non-residential construction demand and orders as strong, while noting weather and construction delays had constrained fabrication shipments in the first half.
- Key risks include economic and cyclical demand changes, steel and scrap price volatility, raw-material and energy costs, import competition, integration or start-up challenges, and unexpected plant outages or equipment failures. Certain supply contracts include take-or-pay provisions, in some cases extending up to 13 years.
- On March 1, 2019, the company acquired a 75% interest in United Steel Supply for $93.4 million cash consideration. USS results are included in steel operations from that date; purchase accounting remained preliminary, and options relate to the remaining 25% interest.
- The company adopted lease accounting on January 1, 2019, recognizing $76.3 million of right-of-use assets and lease liabilities at adoption. June 30 operating lease obligations were $78.2 million; management reported no significant impact on results or cash flows.
- Routine litigation and regulatory matters were not expected to materially affect financial condition, results, or liquidity. Environmental fines and penalties of $454,000 were recorded. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether steel selling prices and metal spreads stabilize, and how steel shipments and mill utilization trend after the Q2 decline.
- Whether scrap pricing and volumes recover enough to improve metals recycling profitability.
- USS integration and final purchase-price allocation, including the terms and potential exercise of options for the remaining interest.
- Capital spending, debt levels, and continued covenant headroom as the company funds operations, dividends, and repurchases.
- The status of environmental and other contingencies, and the potential exposure from take-or-pay commitments and other disclosed risks.