Steel Dynamics, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing was signed November 7, 2012. Steel Dynamics manufactures steel products and recycles metals, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,693.4m | $2,043.5m | $5,585.2m | $6,139.2m |
| Gross profit / margin | $156.4m / 9.2% | $199.2m / 9.8% | $539.8m / 9.7% | $771.4m / 12.6% |
| Operating income | $72.7m | $108.8m | $296.2m | $502.3m |
| Net income attributable to Steel Dynamics | $12.8m | $43.3m | $103.0m | $247.9m |
| Diluted EPS | $0.06 | $0.19 | $0.47 | $1.08 |
| Cash from operations | $117.4m | $222.5m | $239.4m | $392.4m |
- Q3 sales fell 17% year over year; nine-month sales fell 9%. Management cited lower shipments and selling prices, with compressed steel margins.
- Q3 operating income declined 33% year over year. Steel segment operating income decreased 21% to $106.9m; metals recycling and ferrous resources reported a $15.7m operating loss. Fabrication returned to operating income of $3.1m.
- Nine-month capital expenditures were $158.7m, versus $91.8m in 2011. Operating cash flow less capital expenditures was approximately $80.7m, compared with $300.6m a year earlier.
- At September 30, cash and equivalents were $287.1m, down from $390.8m at year-end 2011. Current assets were $2.26bn and current liabilities $605.4m. Total debt, including current maturities, was approximately $2.20bn, down about $176m from year-end.
- The $1.1bn revolving facility had no borrowings outstanding; the filing reports $1.1bn availability and $14.2m of letters of credit and other obligations reducing availability. The company reported compliance with covenants: interest coverage of 3.83x and net-debt leverage of 3.11x.
- Declared dividends were $0.10 per share each quarter, or $0.30 per share for the first nine months.
Material changes and unusual items
- Steel average selling prices fell $85 per ton in Q3 year over year, while average ferrous scrap cost fell $67 per ton; steel shipments declined 4%. For the first nine months, steel selling prices fell $63 per ton while scrap cost fell $22.
- Metals recycling external shipments and selling prices weakened year over year. Management said Q3 ferrous spreads improved sequentially, but the broader 2012 period saw compressed metal margins and lower segment earnings.
- The company issued $400m of 6⅛% notes due 2019 and $350m of 6⅜% notes due 2022, using proceeds and cash to retire 2012 and 2016 notes. It reported lower effective interest costs and extended maturities. Refinancing-related charges were $26.3m in Q3 and $13.9m in Q1, included in other expense.
- A $7.9m impairment charge followed the decision to terminate two small joint ventures outside the reportable segments. Q3 other expense was $24.0m, versus $3.5m of other income in Q3 2011.
- Q3 effective tax rate was 15.5%, partly reflecting a tax benefit from settlement of certain tax positions, substantially offset by an increase in the estimated annual tax rate. The nine-month effective rate was 37.8%.
Outlook, risks and contingencies
- Management estimated Q4 2012 capital expenditures of $40m–$60m and anticipated maintaining the current quarterly dividend for the remainder of 2012, subject to board approval, financial conditions, debt terms and cash needs.
- Management expected available operating cash flow and other funding sources to cover the next 12 months’ debt service, working capital and anticipated capital expenditures, and anticipated covenant compliance during 2012. These are forward-looking expectations, not guarantees.
- Mesabi Nugget operations were undergoing a six-week outage beginning in mid-September for process improvements; operations were expected to resume in November, with further equipment installation planned in the first half of 2013 at an estimated $25m investment. Management reported Minnesota iron operations reduced net income by approximately $11m in Q3 and $32m in the first nine months.
- Principal risks include cyclical demand and recession, steel and scrap price volatility, ability to pass through raw-material costs, import competition, plant outages or equipment failures, and environmental permitting and regulation. Certain commodity supply arrangements include take-or-pay obligations.
- The company faces a steel-price antitrust class action seeking treble damages and other relief. Plaintiffs filed for class certification in May 2012; the company said it could not determine the outcome and did not then consider a material impact reasonably possible, while noting an adverse result could be material.
- Management stated disclosure controls were effective as of September 30, 2012, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether steel pricing, shipment volumes and scrap-cost trends stabilize, and how they affect segment margins.
- Progress, costs and production results at Mesabi Nugget and the iron tailings operation, including the planned 2013 improvements.
- Post-refinancing interest expense, debt reduction, covenant headroom and actual revolver availability.
- Whether the antitrust litigation advances to class certification or changes the company’s assessment of potential loss.
- Actual Q4 capital spending and dividend decisions compared with management’s stated expectations.