Steel Dynamics, Inc. — Q2 2010 Form 10-Q
Business context and period. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. This unaudited report covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,632.8 | $792.2 | $3,188.6 | $1,606.8 |
| Gross profit | $192.0 | $68.8 | $402.5 | $28.2 |
| Operating income (loss) | $116.6 | $6.3 | $248.9 | $(107.3) |
| Net income (loss) attributable to SDI | $49.2 | $(16.0) | $114.2 | $(103.9) |
| Diluted EPS | $0.22 | $(0.08) | $0.51 | $(0.56) |
| Operating cash flow | $19.4 | $71.7 | $92.1 | $286.4 |
| Capital expenditures | $41.0 | $73.2 | $71.6 | $147.5 |
- Q2 sales more than doubled year over year; first-half sales rose 98%. Gross margin was approximately 11.8% in Q2 and 12.6% for the first half, versus 8.7% and 1.8%, respectively, in 2009.
- Q2 diluted EPS was $0.22, compared with $0.29 in Q1 2010; management reported Q2 sales up 5% sequentially and gross margin down from 14% in Q1. First-half results returned to profitability after substantial losses in 2009.
- First-half operating cash flow fell to $92.1 million from $286.4 million. Higher receivables and inventory absorbed cash: receivables increased $201.7 million and inventories $165.0 million from year-end 2009. Capital spending was lower than the prior-year period.
Financial position and liquidity
- At June 30, 2010, cash and equivalents were $191.6 million, current assets $1.910 billion, and current liabilities $554.3 million. Reported total assets were $5.546 billion and stockholders’ equity $2.098 billion.
- Total debt was approximately $2.408 billion, including current maturities; the reported long-term debt-to-capitalization ratio was 53%. The company issued $350 million of 7⅝% senior notes due 2020 in March, using net proceeds in part to repay revolver borrowings. No revolver borrowings remained at quarter-end.
- The amended revolving facility commitment was $924 million, with $907 million available at June 30. The company reported compliance with its financial covenants, including a 4.43:1 interest coverage ratio and 0.03:1 first-lien debt ratio.
- Dividends declared were $0.075 per share in Q2 and $0.15 per share for the first half, compared with $0.175 per share for the first half of 2009.
Business changes, outlook and risks
- Steel operations: Q2 operating income was $131.1 million, up from $33.5 million. Higher shipment volumes and selling prices supported the improvement. Sheet order entry slowed late in Q2 and into July; management expected gradual sheet-demand improvement later in Q3 and continued strong demand in special and merchant bar products.
- Metals recycling and ferrous resources: Q2 operating income was $6.9 million versus a $6.6 million loss a year earlier, but down from $24.1 million in Q1. Management attributed the sequential decline mainly to compressed nonferrous margins as copper, aluminum and nickel prices fell. Mesabi Nugget was ramping up after initial shipments; management anticipated 2010 monthly output around two-thirds of its 500,000-metric-ton annual capacity. Start-up losses were $11.5 million in Q2 and $23.3 million for the first half, including noncontrolling interest.
- Steel fabrication: The segment recorded a Q2 operating loss of $4.7 million. Nonresidential construction remained depressed; management expected a slow recovery, with early improvement in orders and pricing but tight margins and input costs outpacing price increases.
- Management estimated 2010 capital expenditures below $150 million and anticipated maintaining the current quarterly dividend for the remainder of 2010, subject to board approval, financial conditions and debt restrictions. It believed available funding would cover expected needs for the next 12 months.
- Key risks include economic and end-market demand, steel and scrap pricing, commodity and energy costs, foreign competition, operating disruptions, covenant and debt-service requirements, and environmental obligations. The filing cautions that forward-looking statements are uncertain and undertakes no duty to update them.
- Contingencies include steel-industry antitrust class actions seeking treble damages, for which the company said exposure could not be assessed; an Ohio environmental matter involving $325,600 in proposed penalties and settlement discussions; and a Thai-related lawsuit alleging damages above $1.1 billion. The Seventh Circuit affirmed dismissal of the latter on July 26, 2010.
Important facts for investors to verify
- Whether steel shipment trends, especially the late-quarter slowdown in sheet orders, and pricing supported the company’s demand outlook after June 30.
- How working-capital growth, especially receivables and inventories, affects cash generation and liquidity in subsequent quarters.
- Mesabi Nugget’s production ramp, ongoing start-up losses, and progress toward expected operating capacity.
- Debt maturities, revolver availability and covenant headroom, including restrictions on dividends and other payments.
- Developments and potential financial exposure in the antitrust litigation and Ohio environmental matter; the filing does not provide a clear estimate of antitrust exposure.