Business context and reporting period
Steel Dynamics, Inc. (SDI), a U.S. steel producer and metals recycler, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its reportable segments are steel operations; metals recycling and ferrous resources; and steel fabrication. Unless otherwise noted, financial amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1.912 billion | $1.693 billion | $5.509 billion | $5.585 billion |
| Gross profit | $197.2 million | $156.4 million | $521.1 million | $539.8 million |
| Operating income | $113.3 million | $72.7 million | $278.7 million | $296.2 million |
| Net income attributable to SDI | $57.5 million | $12.8 million | $134.7 million | $103.0 million |
| Diluted EPS | $0.25 | $0.06 | $0.59 | $0.47 |
| Operating cash flow | $183.3 million | $117.4 million | $245.7 million | $239.4 million |
- Q3 gross margin was approximately 10.3% versus 9.2%; operating margin was 5.9% versus 4.3%. Nine-month gross and operating margins were approximately 9.5% and 5.1%, respectively, versus 9.7% and 5.3%.
- Capital expenditures were $146.7 million for the first nine months. Cash and equivalents were $370.1 million at September 30, 2013, versus $375.9 million at year-end 2012.
- Total debt, including current maturities, was approximately $2.109 billion, down from $2.202 billion at December 31, 2012. Debt to capitalization declined to 45.2% from 47.3%.
- Current assets were $2.385 billion and current liabilities $954.2 million, implying working capital of about $1.431 billion and a current ratio of approximately 2.5. The $335.3 million of current debt maturities is included in current liabilities.
- The $1.1 billion revolving facility had no borrowings; $14.0 million of letters of credit and other obligations reduced availability. At quarter-end, interest coverage was 4.94x and net-debt leverage 2.76x; SDI reported covenant compliance.
Material changes versus comparable periods
- Q3 sales rose 13% year over year, reflecting higher shipments: external steel shipments increased 13%, ferrous scrap 4%, nonferrous scrap 7%, and steel fabrication shipments 27%. Operating income rose 56%, mainly on stronger steel volumes and improved gross margins.
- Q3 steel-segment operating income increased 37% to $146.6 million. However, average steel selling price fell $18 per ton while ferrous scrap cost fell $3 per ton; management cited domestic oversupply and resulting spread pressure.
- Metals recycling and ferrous resources reported a $17.1 million Q3 operating loss, versus a $15.7 million loss a year earlier. Lower ferrous margins outweighed higher sales volumes. Steel fabrication operating income was $3.3 million, slightly above $3.1 million.
- Nine-month sales declined 1%; operating income declined 6%, while net income attributable to SDI increased 31%. Steel operating income fell 8% as selling prices declined more than scrap costs. Steel fabrication operating income improved to $7.1 million from $0.7 million.
- Interest expense declined, and other income replaced prior-year other expense. Comparisons benefited from significant 2012 refinancing charges ($26.3 million in Q3 and $40.3 million in the first nine months) and a $7.9 million 2012 impairment charge. SDI recorded $2.6 million of 2013 refinancing-related expense in the first nine months.
Outlook, management commentary, risks and contingencies
- Management estimated 2013 capital expenditures of approximately $200 million and anticipated maintaining the $0.11 quarterly dividend through the remainder of 2013, subject to board approval and applicable debt restrictions. No specific earnings or sales guidance was provided.
- Management said cash flows and available funding were expected to cover the next 12 months’ debt service, working capital and anticipated capital expenditures. The 2023 senior notes issued in March carry a 5.25% coupon; proceeds and cash were used to retire the 2015 notes, extending maturities and reducing the effective interest rate.
- Key business sensitivities include industrial and construction demand, steel and scrap prices and spreads, energy and other input costs, import competition, and unexpected outages or equipment failures. Commodity purchase commitments include take-or-pay provisions, in some cases for periods up to 33 months for physical commodities and up to nine years for transportation.
- Mesabi Nugget production improvements raised production rates as expected, but product yield declined; management focused on lowering costs and improving yield. Minnesota iron operations reduced Q3 net income by approximately $10.6 million and nine-month net income by $33.7 million.
- SDI faces a steel-pricing antitrust class action seeking treble damages and other relief. The outcome could not be determined; the company reported no present reasonable possibility of a material impact and no estimated loss accrual, while noting an adverse outcome could be material. Routine litigation was not expected to materially affect results or liquidity.
- Environmental compliance and permitting remain ongoing risks; management noted future regulation could become more stringent. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether steel selling prices and steel/scrap spreads stabilize or improve, given the year-to-date margin pressure and management’s oversupply comments.
- Whether metals recycling margins recover and Minnesota iron operations achieve the targeted lower costs and better Mesabi Nugget yield.
- Execution of the 2013 capital program and whether capital spending remains near the $200 million estimate, alongside cash generation and dividends.
- Debt maturity schedule, refinancing benefits, covenant headroom and revolver availability; current maturities had risen to $335.3 million at quarter-end.
- Developments in the antitrust case, including class-certification proceedings, and any change to the company’s loss assessment.