Steel Dynamics, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net sales | $1,982.0 | $2,016.0 |
| Gross profit / margin | $201.3 / 10.2% | $295.8 / 14.7% |
| Operating income / margin | $119.8 / 6.0% | $205.3 / 10.2% |
| Net income attributable to Steel Dynamics | $45.7 | $105.9 |
| Diluted EPS | $0.20 | $0.46 |
| Cash from operations | $21.4 | $3.9 |
| Capital expenditures | $45.6 | $18.7 |
| Cash and equivalents | $357.8 | $390.8 at Dec. 31, 2011 |
| Short-term commercial paper | $65.0 | $84.8 at Dec. 31, 2011 |
| Total debt, including current maturities | $2,371.7 | $2,380.1 at Dec. 31, 2011 |
Current assets were $2,526.9 and current liabilities $1,121.9 at quarter-end. The company reported $1.1 billion of revolving-credit availability, with no revolver borrowings and $16.2 million of letters of credit and other obligations reducing availability. Its long-term debt-to-capitalization ratio was 49.6%, versus 50.1% at year-end. The reported interest-coverage and net-debt leverage ratios were 4.51:1 and 2.62:1, respectively; the company said it was compliant with its covenants.
Changes and operating results
- Sales declined 2% year over year, while operating income fell 42% and attributable net income fell about 57%. Lower selling prices and higher scrap costs compressed steel margins; weaker ferrous and nonferrous spreads hurt recycling results.
- Steel-segment operating income was $137.3, down 29%. Total steel shipments were nearly flat, but sheet shipments fell 12% and long-product shipments rose 19%. Average steel-segment selling price declined $12 per ton while average ferrous scrap cost increased $18 per ton.
- Metals recycling and ferrous resources operating income was $4.2, down from $39.5. Recycling spreads declined 9% for ferrous and 24% for nonferrous metals. Minnesota iron operations’ losses reduced Q1 2012 net income by about $10.
- Fabrication sales increased 42% to $74.9, with volume up 37%, but the segment remained loss-making at $2.7 as input-cost increases outpaced pricing.
- Sequentially versus Q4 2011, sales rose 7% and operating income rose 45%; management cited improved steel and recycling margins and higher recycling volumes. Steel operating income rose 19%, despite lower segment volumes.
- Operating cash flow was $21.4, with cash and equivalents down $33.0 during the quarter. Working capital increased: receivables rose $66.4 and inventories rose $71.4 from year-end.
Outlook, financing, risks and unusual items
- Management estimated 2012 capital expenditures of $225–$250, including investments in a copper rod mill and iron-tailings operation. The iron-tailings operation was expected to start in Q3 2012; a planned four-week outage at Mesabi Nugget began early in Q2 to address mechanical and operational issues.
- Management anticipated maintaining the current quarterly dividend during the remainder of 2012, subject to board approval and credit-agreement and indenture restrictions. It stated that available funding sources should cover the next 12 months’ debt service, working capital and planned capital expenditures, but cautioned that future operating cash flow and access to capital are not assured.
- In January 2012, the company added a $275.0 term loan due September 2016 and used its proceeds, with cash on hand, to tender for $279.7 of 7⅜% notes due 2012. The tender, debt-cost write-off and related expenses generated $13.9 of Q1 expense; management expected about $3.6 of quarterly interest savings in each of Q2 and Q3 versus the pre-refinancing structure.
- Key risks cited include economic and steel-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 supply commitments include take-or-pay provisions. The company also uses commodity derivatives; their reported net unrealized gain was $0.8 at March 31.
- The company faces steel-industry antitrust class actions seeking treble damages and other relief. It could not determine the outcome, but said it did not then believe a material impact was reasonably possible; an adverse outcome could nevertheless materially affect results, financial condition or liquidity. Environmental requirements and permitting are additional exposures.
- Management reported disclosure controls were effective as of March 31, 2012, and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track steel selling prices, scrap costs, product mix and margins, particularly flat-roll pricing amid increased domestic capacity and imports.
- Assess whether recycling spreads recover and whether Mesabi Nugget resolves operational issues and the iron-tailings project meets its expected start-up schedule.
- Verify execution of the capital-spending plan, project returns, working-capital needs and the sustainability of operating cash flow.
- Monitor debt maturities, covenant headroom, revolver availability, interest savings and any restrictions on dividends.
- Follow developments in the antitrust litigation and environmental permitting or compliance matters.