Steel Dynamics, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Third-quarter revenue: $2,043.5, up 29% from $1,584.2 in Q3 2010 and down 2% from Q2 2011.
- Third-quarter earnings: Operating income was $108.8, versus $69.0 a year earlier. Net income attributable to Steel Dynamics was $43.3, or $0.19 diluted EPS, versus $18.7, or $0.09, in Q3 2010. Gross margin was 10%, compared with 9% a year earlier and 13% in Q2 2011.
- Nine-month results: Revenue was $6,139.2, up 29%; operating income was $502.3, up 58%; and net income attributable to Steel Dynamics was $247.9, or $1.08 diluted EPS, versus $132.9, or $0.60, in the first nine months of 2010. Gross margin was 13%, compared with 11%.
- Cash flow: Nine-month operating cash flow was $392.4, capital expenditures were $91.8, and dividends paid were $60.0. Cash increased by $270.2 to $456.7 at September 30.
- Liquidity and debt: Current assets were $2,496.2 and current liabilities $717.5. Long-term debt, including current maturities, was approximately $2,380.3, down about $6.5 from year-end 2010. The company had no revolver borrowings and reported $1,084.0 of revolver availability. Its September 30 leverage and interest-coverage ratios were 2.41:1 and 4.63:1, respectively, and it reported covenant compliance.
- Margins and working capital: Trade receivables rose 31% to $815.9 and inventories rose 4% to $1,158.8 from year-end. Management reported operational working capital increased $62 to $1.3 billion.
Changes and operating drivers
- Year-over-year growth reflected higher sales prices and volumes across the reporting segments. Steel segment operating income rose to $136.2 in Q3, but fell $77.8 from Q2 as steel prices—particularly sheet prices—declined. Steel shipments were up 11% year over year; average segment selling price rose $113 per ton year over year but fell $50 sequentially.
- Metals recycling and ferrous resources reported a Q3 operating loss of $3.4, versus income of $1.1 a year earlier. Management cited narrower metals margins, including weaker nonferrous pricing late in the quarter. Nine-month segment operating income increased to $40.0 from $32.2.
- Steel fabrication reported a Q3 operating loss of $0.2, improving from a $0.5 loss a year earlier. Nine-month operating loss narrowed to $4.8 from $11.8, with higher sales volume and pricing.
- Profit-sharing and incentive compensation increased with profitability. Q3 SG&A included approximately $5.8 of special employee awards and $2.9 of noncash expenses, primarily equipment impairment charges. Commodity futures contributed a $7.1 Q3 gain in cost of goods sold, versus a $0.7 loss a year earlier.
Outlook, risks and contingencies
- Management estimated Q4 2011 capital expenditures of $50–$65 and anticipated gross interest expense to remain consistent in Q4. It expected to maintain the current quarterly dividend through the remainder of 2011, subject to board discretion and debt restrictions. No specific earnings forecast was provided.
- Management said cash from operations and other available funding sources should be adequate for the next 12 months for debt service, working capital and anticipated capital expenditures, and expected covenant compliance for the remainder of 2011.
- The company renewed and expanded its secured revolving credit facility to $1.1 billion for five years, with a conditional option to increase it by $400. Availability is subject to borrowing-base requirements and financial covenants.
- Key stated risks include cyclical steel and metals demand, pricing and import competition, scrap and energy costs, equipment failures, and environmental regulation. The filing also describes “take or pay” commodity and transportation commitments.
- Steel-pricing antitrust class actions remain in discovery and seek treble damages. The company said it believes the claims are without merit and that a material impact was not presently reasonably possible, but also cautioned that an adverse outcome could materially affect its financial condition, results or liquidity.
- Mesabi Nugget continued start-up operations; a planned three-week September shutdown for furnace refractory repairs and efficiency equipment increased its Q3 operating loss.
Important facts for investors to verify
- Whether sheet-steel pricing and margins stabilized after the sequential Q3 decline, and how steel demand and shipment trends developed.
- Whether metals recycling margins recovered, and whether Mesabi Nugget improved production and reduced start-up losses.
- The company’s ability to manage receivables, inventories and working-capital needs while funding capital expenditures and the $700 million senior notes due in 2012.
- Ongoing compliance with revolver covenants and borrowing-base limits, and the status and potential exposure of the antitrust litigation.
- Whether Q4 capital spending and the anticipated dividend level matched management’s stated plans.