Business context and reporting period
Steel Dynamics, Inc. (SDI), a U.S. steel producer and metals recycler, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its reportable segments are steel operations, metals recycling, and steel fabrication.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $2,023.9 | $2,005.0 | $3,765.2 | $4,052.4 |
| Gross profit | $380.4 | $171.7 | $616.4 | $358.8 |
| Operating income | $256.1 | $77.6 | $388.1 | $177.3 |
| Net income attributable to SDI | $142.0 | $31.6 | $204.7 | $62.3 |
| Diluted earnings per share | $0.58 | $0.13 | $0.84 | $0.26 |
| Operating cash flow | $158.0 | $309.2 | $446.9 | $543.9 |
Gross margin was 18.8% in Q2 versus 8.6% a year earlier, and 16.4% for the first half versus 8.9%. Operating margin was 12.7% versus 3.9% in Q2 and 10.3% versus 4.4% for the first half.
At June 30, cash and equivalents were $1,052.7 million; total debt, including current maturities, was approximately $2,591.2 million. Revolver availability was $1,187.6 million, giving reported total liquidity of $2,240.3 million. Long-term debt to capitalization was 47.8%, down from 49.3% at year-end 2015. Current assets were $3,050.5 million and current liabilities $779.2 million. First-half capital expenditures were $63.4 million, and dividends paid were $67.5 million. The quarterly dividend was increased 2% to $0.14 per share.
Material changes versus prior comparable periods
- Q2 sales increased 1%, while first-half sales declined 7%. Q2 operating income rose 230%; first-half operating income rose 119%. Higher steel shipments and improved steel profitability drove much of the earnings improvement.
- Steel operations operating income increased 176% in Q2 and 89% in the first half. Steel shipments rose 10% and 13%, respectively; Q2 steel mill utilization was 95%, versus 87% a year earlier. In the first half, lower average selling prices more than offset higher shipments, and steel metal spread declined 6%.
- Metals recycling sales fell 8% in Q2 and 17% in the first half, largely reflecting lower metal prices. Segment operating income improved, which management attributed mainly to cost reductions.
- Steel fabrication sales increased 11% in both periods, with higher shipment volumes, partly reflecting deck assets acquired in late 2015. Q2 segment operating income fell 15% as selling prices declined more than steel input costs; first-half operating income increased 13%.
- First-half operating cash flow declined to $446.9 million from $543.9 million. Increased accounts receivable used $179.2 million of cash, partly offset by higher accounts payable and other working-capital changes.
Outlook, risks, contingencies, and unusual items
- Management described domestic steel demand as relatively steady: automotive and non-residential construction were strong, while heavy equipment, agriculture, and energy remained weak. It reported sheet-steel imports down approximately 25% in the first half and more balanced customer inventories.
- Management expected available cash and other funding sources to cover the next 12 months’ debt service, working capital, and anticipated capital expenditures, and anticipated continued covenant compliance during the remainder of 2016. At June 30, interest coverage was 6.34x against a 2.50x minimum; net debt leverage was 2.33x against a 5.00x maximum.
- On June 30, SDI agreed to acquire Vulcan Threaded Products for $114 million, including $30 million of working capital, subject to customary adjustments. The acquisition closed August 1, 2016, after the reporting period, using available cash. Management described it as an expansion into higher-margin downstream products.
- A steel antitrust class action concerning alleged price fixing in 2005–2007 remains pending. SDI said it could not determine the outcome and did not consider a material impact reasonably possible based on information then available; it cautioned that an adverse result could be material. Routine litigation was not expected to have a material impact.
- Key risks include cyclical demand, steel and scrap price volatility, import competition, raw-material and energy costs, plant outages, and integration or start-up challenges. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
- The prior-year comparison includes $16.7 million of debt redemption premium and financing-cost write-off in first-half 2015 other expense. Q2 2015 also included $21.0 million of inventory charges associated with the decision to idle Minnesota ironmaking operations in May 2015.
Important facts for investors to verify
- Whether stronger steel spreads, shipments, and mill utilization persist, particularly as prices and scrap costs change.
- Whether operating cash flow recovers as receivables and inventory requirements evolve.
- Vulcan’s post-acquisition contribution, integration progress, and final purchase-price adjustments.
- Changes in the antitrust litigation, including any developments that could affect the company’s assessment of exposure.
- Continued access to revolver liquidity and compliance with debt covenants as the company funds investment, dividends, and debt service.