Steel Dynamics, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Steel Dynamics manufactures steel products and recycles metals, with steel operations, metals recycling, and steel fabrication segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1.741 billion | $2.047 billion |
| Gross profit | $236.0 million | $187.0 million |
| Operating income | $132.0 million | $99.8 million |
| Net income attributable to Steel Dynamics | $62.7 million | $30.8 million |
| Diluted earnings per share | $0.26 | $0.13 |
| Operating cash flow | $288.9 million | $234.7 million |
| Capital expenditures | $27.7 million | $33.4 million |
Gross margin was approximately 13.6% versus 9.1%; operating margin was approximately 7.6% versus 4.9%. Revenue fell 15%, while operating income rose 32% and attributable net income more than doubled. Q1 2016 included no comparable large debt-redemption charge: Q1 2015 other expense included $16.7 million of call premium and financing costs.
Balance sheet and liquidity
- Cash and equivalents were $977.0 million at March 31, up from $727.0 million at December 31, 2015.
- Total debt, including current maturities, was approximately $2.598 billion, relatively unchanged from year-end. Long-term debt to capitalization was 49.0%, down from 49.3%.
- Revolver availability was $1.187 billion, with no revolver borrowings and $12.6 million of letters of credit and other obligations reducing availability. Reported total liquidity was $2.164 billion.
- Interest coverage and net debt leverage ratios were 5.21x and 2.85x, respectively; the company reported compliance with facility covenants.
- Dividends declared were $0.14 per share, up from $0.1375. Cash dividends paid were $33.4 million.
Material changes and management commentary
- Steel operations shipments increased 17%, including a 29% rise in sheet shipments, but segment sales declined 12% as average selling prices fell $189 per ton, or 25%. Steel operating income increased 15% to $132.3 million; mill utilization rose to 88% from 73%.
- Metals recycling sales declined 25%, with ferrous and nonferrous prices down 38% and 20%, respectively. Higher volumes and cost containment helped the segment move from a $4.5 million operating loss to $2.8 million of operating income.
- Steel fabrication sales grew 12% and operating income rose 50% to $32.0 million, supported by stronger shipments, market share gains, added deck assets, and improved metal spreads.
- Management described domestic steel consumption as relatively steady: automotive remained strong and non-residential construction continued to recover, while heavy equipment, agriculture, and energy markets remained weak. Steel imports declined more than 30% year over year in Q1, and steel prices began recovering late in the quarter.
- SG&A, including profit sharing and intangible amortization, rose 19% to $104.1 million, mainly due to higher profit-sharing and incentive compensation tied to improved operating income. Interest expense fell $6.0 million to $37.0 million, primarily reflecting the 2015 senior-note repayment.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management estimated approximately $250 million of 2016 capital expenditures and expected available cash flows and funding sources to cover requirements for the next 12 months.
- Key risks cited include economic and steel-demand cyclicality, raw-material and energy-price volatility, import competition, inability to pass through cost increases, startup or integration challenges, and plant outages or equipment failures.
- The company faces a consolidated antitrust class action alleging steel price-fixing during 2005–2007. The court certified a class on the alleged conspiracy issue but not on antitrust impact or damages; summary judgment motions were pending. Management said a material loss was not presently reasonably possible, but noted an adverse result could materially affect financial condition, results, or liquidity. No loss estimate was provided.
- Commodity derivatives had a cumulative unrealized loss of $1.5 million at quarter-end, substantially all expected to settle within 12 months. Certain commodity supply agreements include take-or-pay provisions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the company’s previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether steel prices and metal spreads recover enough to sustain improved earnings despite lower year-over-year selling prices.
- Whether shipment growth and stronger fabrication demand continue, and how weak heavy equipment, agriculture, and energy markets affect results.
- Progress and potential exposure in the antitrust litigation, for which the filing provides no clear dollar estimate.
- Capital spending against the approximately $250 million 2016 plan, and continued covenant compliance and liquidity.
- The filing’s stated $1.187 billion revolver availability and $2.164 billion total liquidity, alongside debt of approximately $2.598 billion.