Steel Dynamics, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the same periods in 2016. Amounts below are in U.S. dollars unless noted. Steel Dynamics manufactures steel products and recycles metals, with steel fabrication as a third reportable segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $2,390.7 million | $2,023.9 million | $4,758.9 million | $3,765.2 million |
| Gross profit | $392.5 million | $380.4 million | $864.7 million | $616.4 million |
| Operating income | $265.4 million | $256.1 million | $599.9 million | $388.1 million |
| Net income attributable to Steel Dynamics | $153.9 million | $142.0 million | $354.8 million | $204.7 million |
| Diluted EPS | $0.63 | $0.58 | $1.46 | $0.84 |
Q2 sales grew 18%, operating income 4%, and attributable net income 8%. First-half sales increased 26%, operating income 55%, and attributable net income 73%. Approximate gross, operating, and attributable net margins were 16.4%, 11.1%, and 6.4% in Q2 2017, versus 18.8%, 12.7%, and 7.0% in Q2 2016. For the first half, the respective margins were 18.2%, 12.6%, and 7.5%, compared with 16.4%, 10.3%, and 5.4%.
Cash flow, liquidity and debt
- First-half operating cash flow was $321.5 million, down from $449.0 million. The company attributed working-capital growth to higher volumes, pricing and profitability; operational working capital increased $233.9 million to $1.5 billion.
- First-half capital expenditures were $85.0 million, versus $63.4 million. Cash and equivalents were $908.8 million at June 30, up from $841.5 million at year-end.
- Total liquidity was $2.097 billion: cash of $908.8 million plus $1.188 billion of revolver availability. There were no revolver borrowings; $11.9 million of letters of credit and other obligations reduced availability.
- Debt was approximately $2.374 billion, including current maturities; total debt was described as relatively unchanged during the half. Long-term debt to capitalization was 43.9%, down from 44.9% at year-end.
- Credit-facility interest coverage and net-debt leverage ratios were 10.17:1 and 1.36:1, respectively; the company reported compliance with its covenants and expected continued compliance over the next 12 months.
- First-half financing included $138.1 million of treasury-stock purchases and $71.7 million of dividends paid. The quarterly dividend was raised 11% to $0.155 per share.
Material changes and segment performance
- Steel operations: Q2 operating income declined 1% to $269.9 million despite sales growth, as shipments fell 3%. A planned Butler mill outage and equipment upgrade, startup-related quality issues at Columbus, and import pressure constrained shipments. First-half operating income rose 53% to $618.5 million, supported by a 19% expansion in metal spread and 3% higher shipments.
- Metals recycling: Q2 operating income rose 49% to $16.5 million; first-half operating income increased 148% to $34.3 million. Better metal spreads and lower operating costs offset lower shipment volumes.
- Steel fabrication: Q2 shipments reached a record for the second consecutive quarter, but operating income fell 14% to $20.1 million. Steel input costs rose 24% in Q2, outpacing the 9% increase in selling prices. First-half operating income declined 21% to $43.9 million.
- Q2 steel mill utilization averaged 91%, down from 95% a year earlier. Steel average selling prices rose $140 per ton, or 22%, while metallic raw-material cost per net ton increased $76, or 33%.
- Interest expense fell 8% in Q2 and $5.8 million in the first half, primarily reflecting the December 2016 refinancing of $400 million of 6.125% notes with 5.000% notes due 2026 and repayment of the remaining $228.1 million term loan.
Outlook, risks and other notable items
- No quantified earnings or sales guidance was provided. Management described domestic steel demand as strong, with construction and energy markets improving and non-residential construction remaining strong. It also cited import pressure, some customer order hesitancy, and planned outage and startup effects on Q2 performance.
- Management said current and anticipated operating cash flow and other available funding should cover the next 12 months’ debt service, working capital and expected capital expenditures. This outlook is subject to economic conditions, cyclical demand, raw-material and energy costs, import competition, integration or startup difficulties, and plant outages or equipment failures.
- Commodity exposure includes scrap, energy, zinc and nonferrous metals. Nonferrous-metal financial contracts had a cumulative unrealized loss of $2.5 million at June 30, substantially all settling within 12 months. Certain supply and transportation commitments contain take-or-pay provisions, extending up to four years for physical commodities and 12 years for air products.
- Routine litigation, environmental and other proceedings were not expected to materially affect financial condition, results or liquidity. Recorded environmental fines and penalties totaled $0.2 million. No material risk-factor changes were reported.
- The company preliminarily expected ASC 606 adoption in Q1 2018 and did not then expect a significant change in revenue amount or timing; its assessment remained in progress. It was evaluating the impact and timing of the new lease-accounting standard.
Most important facts for investors to verify
- Whether steel shipment recovery follows the Butler outage and Columbus line startup, and whether import pressure or order hesitancy persists.
- Whether steel and fabrication selling prices continue to keep pace with scrap and purchased-steel cost changes, given the Q2 spread pressure in fabrication.
- Whether working-capital investment moderates and operating cash flow improves after the first-half decline.
- Progress on the $450 million share-repurchase authorization, remaining authorization, and the sustainability of the increased dividend alongside capital needs and debt obligations.
- Final ASC 606 adoption conclusions, and any material effects from commodity commitments, environmental matters, or other contingencies.