Steel Dynamics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Steel Dynamics is a U.S. steel producer and metals recycler with steel, metals recycling, and steel fabrication segments.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and ratios. Margins are calculated from reported figures.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $2,575.1 | $2,817.4 |
| Gross profit / gross margin | $415.2 / 16.1% | $433.6 / 15.4% |
| Operating income / margin | $273.7 / 10.6% | $291.8 / 10.4% |
| Net income attributable to Steel Dynamics | $187.3 | $204.3 |
| Diluted EPS | $0.88 | $0.91 |
| Cash from operations | $211.3 | $181.6 |
| Capital expenditures | $217.5 | $54.4 |
| Cash, cash equivalents and short-term investments at period end | $1,454.7 | Not provided here |
| Total debt, including current maturities, at period end | $2,716.1 | Not provided here |
- Revenue declined 9% year over year. Operating income fell 6%, and attributable net income fell 8%. Gross margin increased, while operating margin was broadly stable.
- Operating cash flow less capital expenditures was approximately negative $6.3 million, calculated from reported amounts. Cash, cash equivalents and restricted cash declined $146.4 million during the quarter.
- At March 31, total available liquidity was $2,642.7 million: $1,235.5 million cash and equivalents, $219.2 million short-term investments, and $1,188.0 million revolver availability. The revolver had no borrowings outstanding; $12.0 million of letters of credit and other obligations reduced availability.
- Total long-term debt to capitalization was 39.8%. The company reported covenant ratios of 10.54:1 interest coverage and 0.40:1 debt to capitalization, versus limits of at least 2.50:1 and no more than 0.60:1.
- The quarterly dividend declared increased to $0.25 per share from $0.24. The company repurchased 4.4 million shares for $106.5 million in the quarter.
Segment performance and material changes
- Steel operations: Shipments rose 6% and production reached a record, but average selling prices fell 14%. Metallic raw material cost per net ton fell 21%; the steel metal spread contracted 13%. Segment operating income declined 7% to $288.4 million.
- Metals recycling: Sales fell 15% and operating income fell 67% to $5.5 million, mainly from lower scrap prices and narrower metal spreads. Ferrous and nonferrous average selling prices declined 9%; nonferrous spread declined 26%.
- Steel fabrication: Sales declined 3%; selling prices fell 14%, while shipments increased 12%. Lower steel input costs supported a slight spread increase, and segment operating income rose 41% to $29.2 million. Management said non-residential construction demand, orders, and backlog remained strong.
- Interest expense declined 10% to $28.0 million, reflecting lower average interest rates and higher capitalized interest associated with the Sinton mill under construction.
Outlook, risks and contingencies
- COVID-19 had limited impact on first-quarter results, and facilities continued operating as critical infrastructure. Management said the pandemic’s eventual effects were highly uncertain; prolonged disruption could weaken demand, reduce scrap and other raw-material supply, affect productivity and margins, and delay projects. Automotive, energy, and related customers and suppliers had already experienced shutdowns or significant demand reductions.
- The company planned approximately $1.2 billion of capital investment for the rest of 2020, including about $1.0 billion for its Sinton, Texas, flat-roll mill. Management anticipated a mid-2021 start-up but said COVID-related equipment or other delays could shift some 2020 spending into 2021. Environmental permitting for full construction was received in January 2020.
- Management stated that available funds and expected operating cash flows should cover the next 12 months’ requirements, including debt service, working capital, and planned capital expenditures. No significant principal repayments were expected until 2023.
- The company had announced a planned acquisition of Zimmer, S.A. de C.V., a Mexican scrap recycling business; the filing text provided here does not specify a purchase price or closing date.
- Routine litigation and proceedings were not expected to materially affect financial condition, results, or liquidity. Environmental fines or penalties totaling $450,000 were recorded at March 31, 2020.
Important facts for investors to verify
- How post-quarter COVID-19 developments affected steel demand, selling prices, scrap availability, customer collections, and operating margins.
- Whether the Sinton mill’s construction spending and anticipated mid-2021 start-up remained on schedule, and whether planned capital spending changed.
- Whether liquidity, operating cash generation, and covenant headroom remained adequate amid working-capital needs, dividends, and capital investment.
- The status, terms, and financing of the announced Zimmer acquisition, and any subsequent changes to share repurchases or dividends.
- Whether reported segment shipment, pricing, and spread trends continued beyond the first quarter.