Steel Dynamics, Inc. — Q3 2010 Form 10-Q
Business and period: Domestic steel manufacturer and metals recycler, reporting for the quarter and nine months ended September 30, 2010. Its reportable segments are steel operations, metals recycling and ferrous resources, and steel fabrication. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,584.2 | $1,172.2 | $4,772.8 | $2,779.0 |
| Gross profit | $139.5 | $216.7 | $542.0 | $244.9 |
| Gross margin | 9% | 18% | 11% | 9% |
| Operating income | $69.0 | $148.4 | $317.9 | $41.1 |
| Net income (loss) attributable to SDI | $18.7 | $69.0 | $132.9 | $(34.8) |
| Diluted EPS | $0.09 | $0.30 | $0.60 | $(0.18) |
| Operating cash flow | $89.4 | $136.7 | $181.5 | $423.0 |
- Quarterly comparison: Sales rose 35%, but operating income fell 54% and SDI-attributable income fell 73%. Gross margin contracted to 9%, mainly because steel selling prices—particularly sheet steel—declined more than scrap costs.
- Nine-month comparison: Sales increased 72% and the company returned to profitability from a year-earlier loss. Management attributed the improvement to higher shipment volumes and selling prices as demand recovered.
- Segment picture: Q3 steel operations earned $85.2 million, down from $126.1 million a year earlier. Metals recycling and ferrous resources earned $1.1 million, versus $37.4 million, amid compressed ferrous margins and Mesabi Nugget start-up losses. Steel fabrication recorded a $0.5 million operating loss.
- Cash and working capital: Cash was $270.1 million at quarter-end, versus $9.0 million at December 31, 2009. Nine-month operating cash flow was $181.5 million; receivables and inventories absorbed cash as sales, prices, and production increased. Capital expenditures were $95.9 million for the nine months.
- Debt and liquidity: Total debt was approximately $2.4 billion, up $195.1 million since year-end; debt-to-capitalization was 53.5%, versus 52.6%. No revolving-facility borrowings were outstanding, and reported revolver availability was $907.8 million. The company reported compliance with its financial covenants at September 30.
- Dividends: Declared dividends totaled $0.225 per share for the first nine months of 2010; quarterly dividend was $0.075 per share.
Outlook, risks, and unusual items
- Management expected 2010 capital expenditures to be less than $150 million and anticipated gross interest expense to remain consistent through year-end. It said current cash flow and available funding should cover requirements for the next 12 months, while noting results and access to capital depend on conditions beyond its control.
- Management expected steady demand for special bar-quality products and other long products, but noted slower sheet-steel order activity and a tepid backlog into October. Non-residential construction recovery was expected to develop slowly into 2011.
- Mesabi Nugget was ramping up production. Management anticipated sustainable Q4 production at about 60% of the facility’s expected annual capacity of 500,000 metric tons, with interim periods approaching 85%. Start-up losses were $14.3 million in Q3 and $37.6 million for the first nine months, including noncontrolling interest.
- In March 2010, SDI issued $350 million of 7⅝% senior notes due 2020, using proceeds in part to repay revolver borrowings. The revolver commitment was increased to $924 million in April.
- Risks include economic and steel-market volatility, imports and price competition, fluctuations in scrap and energy costs, operating disruptions, environmental regulation, and covenant or refinancing constraints. The filing also describes antitrust class-action litigation seeking treble damages; management said it could not estimate potential exposure. OmniSource was indicted in October 2010 on charges related to alleged receipt or attempted receipt of stolen property; the company said it would defend the charges.
- The estimated annual tax rate rose to 38.9% from 36.9%, resulting in an additional $3.5 million of Q3 tax expense. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track steel selling prices, scrap input costs, shipment volumes, and margins—especially in sheet products.
- Monitor cash conversion and working-capital requirements as receivables and inventories grow.
- Assess Mesabi Nugget’s production ramp, costs, and progress toward stated capacity targets.
- Review debt-service capacity, revolver availability, covenant headroom, and dividend restrictions.
- Follow the antitrust litigation and OmniSource criminal case for developments that could change the company’s assessment of exposure.