Steel Dynamics, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company manufactures steel products and recycles metals, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $2,079.7 million | $1,632.8 million | $4,095.7 million | $3,188.6 million |
| Gross profit | $276.4 million | $192.0 million | $572.1 million | $402.5 million |
| Operating income | $188.2 million | $116.6 million | $393.5 million | $248.9 million |
| Net income attributable to Steel Dynamics | $98.7 million | $49.2 million | $204.6 million | $114.2 million |
| Diluted earnings per share | $0.43 | $0.22 | $0.89 | $0.51 |
| Gross margin, as reported by management | 13% | 12% | 14% | 13% |
- Q2 sales rose 27% year over year and 3% from Q1 2011; attributable net income was below Q1’s $105.9 million. Six-month sales rose 28% and operating income increased 58% year over year.
- Management attributed the year-over-year improvement to higher sales prices and volumes across segments. In steel operations, Q2 shipments increased 14% year over year and average selling price rose $118 per ton. For the first half, long-product shipments increased 26%, while sheet shipments were broadly flat.
- Metals recycling had higher shipment volumes but weaker ferrous margins. Segment operating income was $3.9 million in Q2, down from $6.9 million a year earlier. Steel fabrication remained loss-making, with a $1.6 million Q2 operating loss, although its loss narrowed from $4.7 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was $169.9 million, versus $92.1 million in the first half of 2010. Capital expenditures were $53.7 million, compared with $71.6 million; cash and equivalents ended June at $277.7 million, up from $186.5 million at year-end 2010.
- At June 30, current assets were $2.374 billion and current liabilities were $670.8 million. Working capital increased by $169.4 million during the first half, to approximately $1.4 billion, as defined by management; trade receivables and inventories also increased.
- Total debt was approximately $2.38 billion, including $700 million of 7.375% senior notes due 2012. Long-term debt to capitalization was 50.7%, down from 52.8% at year-end. No borrowings were outstanding under the senior secured revolver; stated availability was $907.4 million.
- The company reported compliance with its credit covenants at quarter-end: first-lien leverage 0.03:1, interest coverage 4.55:1, and total debt leverage 3.04:1. The current secured credit agreement expires in June 2012.
Outlook, risks and unusual items
- Management estimated 2011 capital expenditures at approximately $200 million or less, anticipated gross interest expense to remain consistent through year-end, and expected to maintain the current quarterly dividend during the remainder of 2011, subject to board approval and debt restrictions.
- Management believed operating cash flow and available funding would be sufficient for the next 12 months, and anticipated putting a replacement secured credit agreement in place before the existing facility expires in June 2012. These are expectations, not assurances.
- Management cited risks from economic and steel-market cycles, demand, imports and price competition, scrap and other input costs, energy prices, production outages, and environmental regulation. Non-residential construction remained historically weak, and management cautioned that any recovery could be slow.
- Mesabi Nugget continued start-up operations and incurred higher losses; a planned three-week furnace reline in May affected Q2 results. Metals recycling’s Q2-versus-Q1 comparison included a $14.3 million unfavorable swing in unrealized hedging activity.
- Steel-industry antitrust class actions remained in discovery. The company said it could not estimate ultimate exposure and did not then consider a material impact reasonably possible, while noting an adverse result could be material. Separately, after quarter-end, on July 13, 2011, criminal charges and civil counterclaims against OmniSource were dismissed with prejudice and seized funds were to be returned; OmniSource agreed to donate the returned proceeds to a law-enforcement training fund.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company refinanced or replaced its secured credit agreement before its June 2012 expiration, and how it addressed the $700 million notes due in 2012.
- Whether steel pricing, shipment volumes, input costs, and ferrous recycling margins sustained the first-half improvement.
- Mesabi Nugget’s operating progress, costs, and required capital, as well as the non-residential construction recovery relevant to fabrication.
- Subsequent developments in the antitrust litigation, potential environmental obligations, and the company’s ability to maintain dividends under its debt terms and cash needs.