Steel Dynamics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial figures are rounded. Steel Dynamics is a domestic steel producer and metals recycler, with steel operations, metals recycling, and steel fabrication segments.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $3.091B | $2.391B | $5.694B | $4.759B |
| Gross profit | $652.1M | $392.5M | $1.115B | $864.7M |
| Operating income | $501.9M | $265.4M | $825.3M | $599.9M |
| Net income attributable to Steel Dynamics | $362.4M | $153.9M | $590.0M | $354.8M |
| Diluted EPS | $1.53 | $0.63 | $2.49 | $1.46 |
| Operating cash flow | $326.0M | $81.0M | $504.0M | $321.4M |
- Q2 sales rose 29%, operating income 89%, and attributable net income 135% year over year. First-half sales rose 20%, operating income 38%, and attributable net income 66%.
- Gross margin was approximately 21.1% in Q2 versus 16.4% a year earlier; operating margin was 16.2% versus 11.1%. For the first half, gross margin was 19.6% versus 18.2%, and operating margin was 14.5% versus 12.6%.
- Q2 diluted EPS increased to $1.53 from $0.63. The first-half dividend declared was $0.375 per share, versus $0.31 in 2017.
- At June 30, cash and equivalents were $720.4M and short-term investments were $90.0M. Cash, cash equivalents, and restricted cash totaled $726.4M at period-end under the cash-flow presentation.
- Long-term debt plus current maturities was approximately $2.370B, down about $11.5M from year-end 2017. Debt to capitalization declined to 39.0% from 41.9%.
- First-half capital expenditures were $105.8M, and the Heartland acquisition used $396.4M of cash. The company repurchased $118.4M of shares and paid $81.1M in dividends during the half.
Business developments and changes versus prior year
- Strong demand, higher selling prices, and increased shipments supported results. Steel operations reported record Q2 shipments; segment operating income rose 98% in Q2 and 40% in the first half.
- Steel selling prices increased $159 per ton in Q2 and $119 per ton in the first half year over year. Metallic raw-material costs also rose, but steel selling-price gains exceeded scrap-cost increases, expanding steel metal spreads.
- Metals recycling operating income increased 37% in Q2 and 38% in the first half. Higher prices and shipments helped, although Q2 ferrous spread contracted 5% as procurement costs outpaced selling-price gains.
- Steel fabrication operating income fell 30% in Q2 and 23% in the first half. Steel input costs rose faster than selling prices, compressing spreads despite higher sales and shipments.
- On June 29, 2018, the company acquired Heartland Steel Processing for an initial $396.4M cash purchase price, subject to working-capital adjustments. Heartland expands higher-margin flat-roll processing capacity. The preliminary purchase-price allocation included $123.1M of goodwill and remained incomplete at filing.
- The company adopted ASC 606 in January 2018 with no reported change to the amount or timing of revenue recognized. The 2017 comparative figures were not recast.
Liquidity, outlook, risks, and contingencies
- Reported total liquidity was $1.999B, including $1.188B of revolver availability after letters of credit and other obligations. The $1.2B revolver was renewed in June 2018 and extended to June 2023; there were no revolver borrowings at June 30.
- Management reported covenant ratios of 13.14:1 interest coverage and 1.07:1 net debt leverage, in compliance with required limits. Management expected continued covenant compliance and said available resources should meet principal and interest payments, working capital, and anticipated capital expenditures for the next 12 months.
- Management cited continued strong demand across segments and strong non-residential construction demand and order backlogs. The filing does not provide quantified earnings or revenue guidance.
- Key risks include economic and cyclical demand changes, steel and scrap price movements and the ability to pass through cost increases, import competition, integration or start-up challenges, and unexpected plant outages or equipment failures. Certain commodity and transportation contracts include take-or-pay terms.
- Routine litigation and environmental matters were not expected to materially affect financial condition, results, or liquidity. The company recorded $436,000 for certain fines or penalties as of June 30, 2018. No material risk-factor changes were reported.
- The lower effective tax rate following the 2017 Tax Cuts and Jobs Act contributed to earnings growth: Q2 rate was 23.7% versus 35.0%; first-half rate was 23.8% versus 34.8%.
Important facts for investors to verify
- Heartland’s final purchase-price allocation, working-capital adjustments, integration progress, and contribution to future results.
- Whether steel selling prices continue to outpace scrap and other input costs, and whether fabrication margins recover.
- Working-capital requirements and cash conversion, given the first-half increase in operational working capital and lower cash balance after the acquisition.
- Ongoing demand, shipment trends, and exposure to commodity prices, imports, take-or-pay commitments, and operational disruptions.
- Future capital allocation, including share repurchases and dividends, in light of debt levels, liquidity, and revolver covenants.