Business context and reporting period
Steel Dynamics, Inc. (NASDAQ: STLD) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates steelmaking and processing, metals recycling, and steel fabrication businesses. Results are compared with the corresponding 2020 periods.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $5,088.3 | $2,330.8 | $13,098.2 | $7,000.2 |
| Gross profit | $1,600.6 | $292.8 | $3,600.6 | $992.5 |
| Operating income | $1,322.0 | $155.9 | $2,872.0 | $588.4 |
| Net income attributable to Steel Dynamics | $990.8 | $100.1 | $2,123.6 | $363.0 |
| Diluted EPS | $4.85 | $0.47 | $10.15 | $1.71 |
| Cash flow from operations | $630.8 | $151.8 | $1,480.2 | $849.1 |
- Q3 gross, operating, and attributable net margins were approximately 31.5%, 26.0%, and 19.5%, respectively; Q3 2020 margins were approximately 12.6%, 6.7%, and 4.3%.
- At September 30, cash and equivalents were $1,095.7; total debt, including current maturities, was approximately $3.1 billion. Total reported liquidity was $2,283.6, including $1,187.9 of revolver availability. No revolver borrowings were outstanding.
- Debt-to-capitalization was 35.4%, versus 41.6% at December 31, 2020. The company reported compliance with its credit covenants.
- Capital expenditures were $801.7 for the first nine months, including $666.2 for the under-construction Southwest-Sinton steel division. Fourth-quarter 2021 capital investments were estimated to exceed $200.
- Operating cash flow rose year over year, but working capital increased $1.2 billion to $2.9 billion, largely reflecting higher receivables and inventory. Inventory was $2,895.0 at quarter-end, up from $1,843.5 at year-end 2020.
Material changes versus prior comparable periods
- Q3 net sales increased 118%, operating income increased 748%, and attributable net income increased 889% year over year. For the first nine months, net sales rose 87%, operating income 388%, and attributable net income 485%.
- Steel operations drove the largest improvement: Q3 segment operating income was a record $1,347.0, up 866%. Average steel selling prices increased 114% year over year, while segment shipments increased 3%; management said selling-price increases outpaced higher scrap costs.
- Metals recycling Q3 operating income rose 244% to $43.6, with higher shipment volumes and selling prices. Steel fabrication operating income reached a Q3 record of $89.4, up 128%, supported by higher prices and record shipments.
- Q3 profit-sharing expense increased to $113.9 from $11.8, reflecting the plan’s 8% share of pretax earnings. Q3 interest expense declined to $12.7 from $19.0; management cited increased capitalized interest during Sinton construction. Nine-month interest expense also fell, partly due to refinancing and capitalized interest.
- The company repurchased $730.8 of shares in the first nine months of 2021, versus $106.5 in the comparable 2020 period. The 2021 repurchase authorization had $713.2 remaining at September 30.
Outlook, commentary, risks, and unusual items
- Management described steel demand as strong, citing low customer inventories and demand from automotive, construction, and industrial customers, with energy showing signs of recovery. Fabrication order backlogs reached a record at quarter-end. The filing provides no specific earnings or revenue guidance.
- Management said current operations and anticipated growth, operating cash flows, and available funding should be adequate for the next 12 months to meet debt service, working capital, and planned capital expenditures.
- Principal stated risks include steel-industry cyclicality, imports and global overcapacity, volatility in scrap and other input prices and availability, energy costs, COVID-19 effects, competition, environmental and climate regulation, operational downtime, cybersecurity, litigation, and financing covenants.
- Commodity-price exposures are managed in part with futures and options. At September 30, the company reported a cumulative unrealized gain of $13.8 on relevant financial contracts, substantially all settling within 12 months; it expected to reclassify $13.9 of derivative gains from accumulated other comprehensive income to earnings over the next 12 months.
- Routine litigation, regulatory, environmental, and other proceedings were not expected to materially affect financial condition, results, or liquidity. The company reported environmental fines or penalties not exceeding $1 million in aggregate as of quarter-end. No material risk-factor changes or material internal-control changes were reported.
- Subsequent to quarter-end, on October 14, 2021, the company agreed to acquire a 45% minority interest in New Process Steel, subject to customary conditions and regulatory approvals.
Important facts for investors to verify
- Whether elevated steel selling prices and spreads remain sustainable as scrap and other input costs, customer inventories, and demand conditions change.
- Southwest-Sinton construction progress, remaining capital requirements, startup costs, and expected contribution to results.
- Working-capital needs and cash conversion, particularly given the sharp increases in receivables and inventories.
- Debt maturities, revolver availability, covenant headroom, and the effect of continued dividends and share repurchases on liquidity.
- Closing conditions, regulatory approvals, and financial terms for the proposed New Process Steel investment.