Steel Dynamics, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Steel Dynamics manufactures steel products and recycles metals, reporting steel operations, metals recycling and ferrous resources, and steel fabrication. Columbus Flat Roll, acquired in September 2014, is included in 2015 results but not in reported Q1 2014 results.
Financial results
Unless otherwise noted, amounts are in millions of dollars. The filing presents unaudited results.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $2,047.4 | $1,830.1 |
| Gross profit / margin | $187.0 / 9.1% | $163.3 / 8.9% |
| Operating income / margin | $99.8 / 4.9% | $80.9 / 4.4% |
| Net income | $27.0 | $33.7 |
| Net income attributable to Steel Dynamics | $30.8 | $38.6 |
| Diluted EPS | $0.13 | $0.17 |
| Operating cash flow | $234.7 | $(27.2) |
| Capital expenditures | $33.4 | $24.8 |
Net income attributable to Steel Dynamics exceeds consolidated net income because of losses attributable to noncontrolling interests. Cash and equivalents were $161.0 million at March 31, down from $361.4 million at year-end. Operating cash flow benefited from lower receivables and inventories. Financing cash outflow was $403.4 million, principally reflecting $427.5 million of debt repayments and $27.8 million of dividends paid.
Debt, liquidity and capital
- Total debt was approximately $2.65 billion at March 31, 2015, down about $370 million during the quarter. The company redeemed $350 million of 7⅝% senior notes due 2020.
- Cash plus revolver availability totaled $1.35 billion, including $1.19 billion of revolver availability; there were no revolver borrowings outstanding.
- Long-term debt to capitalization was 47.6%, versus 50.9% at December 31, 2014. The company reported compliance with its credit-facility covenants: interest coverage of 5.96x and net debt leverage of 2.41x.
- Quarterly dividend increased 20% to $0.1375 per share. Q1 dividends declared were $33.2 million.
Changes and operating performance
- Reported sales increased 12% and operating income increased 23% year over year. The comparison is affected by Columbus being included only in 2015; steel-segment sales rose 24%, largely due to the acquisition.
- Steel-segment shipments increased 35%, including Columbus, but declined 5% excluding Columbus. Selling prices fell $68 per ton (8%) and mill utilization was 73%, compared with 86% a year earlier. Steel-segment operating income rose 6% to $111.5 million.
- Metals recycling and ferrous resources sales declined 23%; the segment operating loss widened to $17.1 million from $15.5 million. Ferrous scrap prices fell 28% year over year, and ferrous and nonferrous metal spreads contracted 14% and 10%, respectively.
- Steel fabrication sales increased 39%, on shipment growth of 19% and selling-price growth of 17%. Segment operating income rose to $21.4 million from $3.1 million.
- Attributable net income fell 20% and diluted EPS declined from $0.17 to $0.13, primarily due to $16.7 million of pretax note-redemption costs and higher interest expense associated with the Columbus acquisition.
Outlook, risks and unusual items
- Management estimated 2015 capital expenditures of $150 million to $175 million and said cash flows and available funding should cover obligations, working capital and planned capital expenditures for the next 12 months. It anticipated continued covenant compliance during 2015; no earnings or revenue guidance was provided.
- Management described domestic steel consumption as strong, with improving nonresidential construction, automotive and other manufacturing demand. It also cited import-driven customer inventories, delayed orders, falling steel prices and weaker scrap spreads as current pressures.
- Minnesota ironmaking operations remained idle after the nugget facility was idled in February 2015 to work through inventory and complete equipment work. Management said pig-iron prices had fallen below expected cash production costs and that it was assessing how long the cost-price inversion might persist.
- Other expense included approximately $16.7 million of premiums and deferred financing-cost write-offs tied to the senior-note redemption. Gross interest expense increased with acquisition-related debt, partly offset by the note redemption.
- Risks include economic and cyclical demand, raw-material and energy costs, import competition, integration or startup difficulties, and unexpected outages. Commodity contracts had a cumulative unrealized loss of $2.6 million, substantially settling within 12 months; certain supply arrangements include take-or-pay provisions.
- Steel-price-fixing class actions remained pending, with class certification under advisement. The company said it could not estimate potential exposure and that an adverse result could materially affect results or liquidity, although it did not then believe a material impact was reasonably possible. Environmental compliance and remediation obligations also remain subject to changing regulation.
Investor verification priorities
- Assess the underlying year-over-year performance excluding Columbus and distinguish acquisition-driven growth from organic shipment and pricing trends.
- Track steel pricing, imports, customer inventories, mill utilization, scrap costs and recycling spreads, including whether margins stabilize.
- Monitor the Minnesota ironmaking idle period, operating costs and any decision to restart or change the operation.
- Review the debt-repayment impact on cash, interest expense, liquidity and covenant headroom, alongside the $150–$175 million capital-spending plan and dividend policy.
- Follow developments in the steel antitrust litigation, environmental obligations and the integration and financial-control evaluation for Columbus.