Steel Dynamics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Steel Dynamics (NASDAQ: STLD) produces steel, recycles metals, and fabricates steel joists and deck. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Net sales | $5.652bn | $5.088bn | $17.434bn | $13.098bn |
| Gross profit | $1.464bn | $1.601bn | $5.130bn | $3.601bn |
| Operating income | $1.220bn | $1.322bn | $4.333bn | $2.872bn |
| Net income attributable to SDI | $914.3m | $990.8m | $3.228bn | $2.124bn |
| Diluted EPS | $5.03 | $4.85 | $17.21 | $10.15 |
| Cash flow from operations | $1.496bn | $630.8m | $3.317bn | $1.480bn |
Margins: Q3 gross margin was approximately 25.9% versus 31.5% a year earlier; operating margin was approximately 21.6% versus 26.0%. For the first nine months, gross margin was approximately 29.4% versus 27.5%, and operating margin approximately 24.9% versus 21.9%. Calculated from reported figures.
- Q3 sales rose 11%, while operating income fell 8% and attributable net income fell 8%. Diluted EPS increased despite lower earnings, alongside a lower weighted-average share count (181.6m versus 204.2m).
- Nine-month sales increased 33%, operating income 51%, and attributable net income 52% year over year.
- Q3 cash from operations was a record, according to management. Nine-month capital expenditures were $564.7m, versus $801.7m in 2021. Nine-month free cash flow, calculated as operating cash flow less reported capital expenditures, was approximately $2.752bn.
Balance sheet, liquidity and capital returns
- At September 30, cash and equivalents were $1.420bn and short-term investments were $583.2m. Total liquidity, including $1.191bn of revolver availability, was $3.195bn.
- Total debt was approximately $3.035bn, including current maturities; long-term debt to capitalization was 27.7%, down from 32.9% at year-end 2021. No revolver borrowings were outstanding. The revolver matures in December 2024; the company reported covenant compliance and no significant principal payments expected until 2024.
- Current assets were $7.813bn and current liabilities $2.131bn. Inventory was $3.377bn, down from $3.531bn at year-end 2021; operational working capital increased $313.2m to $3.7bn.
- Nine-month dividends paid were $177.1m. The quarterly dividend was raised 31% to $0.34 per share in Q1 2022. The company repurchased $1.388bn of shares in the first nine months; $245.5m remained under the $1.25bn 2022 authorization at quarter-end.
Segment trends and changes versus prior year
- Steel operations: Q3 net sales were $3.874bn, down 1%; operating income was $654.7m, down 51%. Shipments increased 12% to 2.815m segment tons, including 268,000 tons from the new Sinton mill. Average selling prices fell 12% year over year; steel metal spread contracted 14%. Nine-month sales rose 21%, while operating income declined 3%, partly reflecting Sinton start-up costs.
- Metals recycling: Q3 sales fell 19% to $984.6m and operating income fell 85% to $6.7m. Lower ferrous and nonferrous scrap prices, reduced shipments, and narrower spreads weighed on results. Nine-month sales were broadly flat, while operating income fell 25% to $106.1m.
- Steel fabrication: Q3 sales more than doubled to $1.146bn; operating income reached a record $676.7m, versus $89.4m. Strong non-residential construction demand, higher selling prices, and wider spreads drove performance. Nine-month sales rose 192% and operating income reached $1.743bn, versus $127.7m.
Outlook, commentary and notable items
- Management reported steady, strong Q3 steel demand, led by construction and supported by automotive, industrial, and energy markets. Fabrication benefited from historically high order backlog and forward pricing. The filing provides no specific quantitative earnings or revenue guidance.
- Management announced a planned $2.2bn investment in a low-carbon aluminum flat-rolled mill and two supporting recycled-aluminum slab centers. Spending began in Q3 and is expected to continue through 2026, funded by available cash and operating cash flow. The company acquired a 94.4% interest in the Unity Aluminum venture in July; operations were consolidated from July 29.
- After quarter-end, on October 1, 2022, SDI acquired 100% of Mexican scrap processor ROCA ACERO for its North American raw-material procurement strategy; the transaction was funded with available cash.
- Key risks include cyclical steel demand, falling or volatile selling prices and scrap costs, energy costs and availability, competition and imports, supply constraints, facility start-up or downtime, environmental regulation, and execution of growth investments. Management identified no material change to the risk factors in its 2021 Form 10-K.
- Routine litigation and environmental matters were not expected to materially affect financial condition, results, or liquidity. Reported aggregate environmental fines or penalties did not exceed $1m as of September 30, 2022. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether steel price declines and compressed steel spreads continue to offset shipment strength, and how Sinton start-up costs and output develop.
- Whether fabrication backlog, forward pricing, and unusually high segment margins are sustainable as construction demand and steel input prices change.
- Funding, schedule, capital requirements, and execution risks for the $2.2bn aluminum project, including the effects on liquidity and planned capital returns.
- Subsequent-period integration and performance of the ROCA acquisition, and the cash and operating effects of the Unity Aluminum venture.
- Share repurchases, debt maturities and revolver availability, alongside working-capital needs and the company’s exposure to commodity and energy-price volatility.