Business context and reporting period
Steel Dynamics, Inc. (SDI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. SDI manufactures steel products and recycles metals through steel operations, metals recycling and ferrous resources, and steel fabrication.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,801.3 | $1,909.8 | $3,597.0 | $3,891.8 |
| Gross profit / margin | $147.7 / 8.2% | $182.1 / 9.5% | $324.0 / 9.0% | $383.4 / 9.9% |
| Operating income / margin | $69.2 / 3.8% | $103.7 / 5.4% | $165.4 / 4.6% | $223.5 / 5.7% |
| Net income attributable to SDI | $29.0 | $44.5 | $77.2 | $90.1 |
| Basic / diluted EPS | $0.13 / $0.13 | $0.20 / $0.20 | $0.35 / $0.34 | $0.41 / $0.40 |
| Operating cash flow | $32.7 | $100.6 | $62.4 | $122.0 |
Consolidated net income was $23.3 million in Q2 and $64.5 million in the first half; SDI-attributable income was higher because of losses allocated to noncontrolling interests. Q2 diluted EPS was $0.13, versus $0.21 in Q1 2013.
- Six-month capital expenditures were $94.6 million, leaving operating cash flow less capital expenditures of approximately negative $32.2 million. Cash and equivalents fell to $243.8 million from $375.9 million at year-end 2012.
- At June 30, current assets were $2.24 billion and current liabilities $869.8 million. Inventory was $1.17 billion, down $34.0 million from year-end.
- Total debt, including current maturities, was approximately $2.10 billion. The company reported a 45.5% long-term-debt-to-capitalization ratio, down from 47.3% at year-end.
- The $1.1 billion revolving credit facility had no borrowings and approximately $1.1 billion available, less $14 million of letters of credit and other obligations. The company reported interest coverage of 4.22:1 and net-debt leverage of 3.21:1, within covenant limits.
Material changes versus prior periods
- Q2 sales declined 6% year over year and first-half sales declined 8%. Q2 operating income fell 33%; first-half operating income fell 26%.
- Management attributed weaker steel results principally to compressed metal spreads: Q2 average steel selling prices fell $76 per ton year over year, compared with a $41-per-ton decrease in ferrous scrap cost. First-half selling prices fell $82 per ton versus a $54-per-ton decline in scrap cost.
- Steel segment Q2 operating income fell to $85.5 million from $136.6 million. Metals recycling and ferrous resources recorded a $7.3 million operating loss, improved from a $19.4 million loss. Steel fabrication operating income rose to $2.3 million from $0.2 million.
- SDI issued $400 million of 5.25% senior notes due 2023 and used proceeds and cash to retire its remaining 6.75% notes due 2015. The refinancing extended maturities and reduced overall debt by about $100 million; first-half debt declined $103.8 million. Refinancing charges were $2.6 million for the first half.
- Q2 dividends declared were $0.11 per share, versus $0.10 in Q2 2012. First-half dividends declared totaled $0.22 per share.
Outlook, commentary, risks and unusual items
- Management estimated 2013 capital expenditures of approximately $200 million; more than half of first-half spending related to growth or expansion projects. It anticipated maintaining the current quarterly dividend for the rest of 2013, subject to board approval and financing restrictions.
- Management believed operating cash flows and available funding would be adequate for the next 12 months to meet debt service, working capital and expected capital expenditures, and anticipated continued covenant compliance.
- Management cited domestic steel oversupply and increased imports as pressures on steel prices and margins. Other stated risks include industrial demand, construction and automotive markets, raw-material and energy costs, import competition, and plant outages or equipment failures.
- Mesabi Nugget had a planned approximately month-long outage in Q2 for modifications intended to improve production. Management said Mining Resources expected to reach full capacity by year-end 2013. Minnesota iron operations reduced Q2 net income by approximately $9.3 million and first-half net income by $23.2 million.
- A steel-industry antitrust class action remains pending. SDI said it could not determine the outcome and did not consider a material impact reasonably possible based on information then available; an adverse result could materially affect financial condition, results or liquidity.
- Commodity contracts include take-or-pay commitments, and the company is exposed to price movements in steel, scrap, energy and other inputs. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether steel selling prices and metal spreads stabilize or continue to pressure margins, particularly in steel operations.
- Cash generation and working-capital trends, including receivables, and the pace and returns of planned capital spending.
- Debt maturities, covenant headroom, and continued availability of the revolver; the filing reports a leverage ratio of 3.21:1 against a 5.00:1 covenant maximum.
- Progress and economics of the Mesabi Nugget and Mining Resources operations, including the expected production improvements and full-capacity timing.
- Developments in the antitrust litigation and any changes to the company’s assessment of potential loss.