Business context and reporting period
Steel Dynamics, Inc. (SDI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. SDI manufactures steel and recycles metals, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. The 2015 comparisons include Columbus Flat Roll, acquired in September 2014, so reported steel growth is not fully comparable with 2014.
Financial performance and position
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,005.0 | $2,069.8 | $4,052.4 | $3,899.8 |
| Gross profit | $171.7 | $222.8 | $358.8 | $386.1 |
| Operating income | $77.6 | $131.9 | $177.3 | $212.8 |
| Net income attributable to SDI | $31.6 | $72.3 | $62.3 | $110.9 |
| Diluted EPS | $0.13 | $0.31 | $0.26 | $0.48 |
- Q2 gross margin was approximately 8.6% (10.8% prior year); operating margin was 3.9% (6.4%); and attributable net margin was 1.6% (3.5%). First-half operating margin was approximately 4.4% versus 5.5%.
- First-half operating cash flow was $543.9 million, compared with $48.8 million in 2014. Capital expenditures were $56.2 million; dividends paid were $61.0 million.
- At June 30, cash and equivalents were $419.4 million and revolver availability was $1,186.2 million, for total reported liquidity of $1,605.6 million. The $1.2 billion revolver had no borrowings outstanding.
- Total debt, including current maturities, was approximately $2.655 billion, down $369.5 million during the first half. Long-term debt to capitalization was 47.6%, versus 50.9% at year-end 2014. Interest coverage was 5.71x and net debt leverage was 2.40x; SDI reported compliance with facility covenants.
Material changes versus the prior comparable period
- Q2 sales decreased 3%, while operating income fell 41% and attributable net income fell 56%. For the first half, sales rose 4%, but operating income declined 17% and attributable net income declined 44%.
- Management attributed weaker steel results to high steel imports, lower shipments and selling prices, and narrower metal spreads. Q2 average steel selling prices fell $168 per ton, or 20%, year over year; metallic raw-material cost per ton fell $109, or 30%. Steel mill utilization was 87%, versus 95%.
- Steel segment operating income fell 31% in Q2 to $107.8 million. Excluding Columbus, Q2 steel shipments were down 8% year over year; reported segment shipments rose 35% with Columbus included.
- Metals recycling and ferrous resources recorded a Q2 operating loss of $35.2 million, versus a $6.1 million loss a year earlier. The segment’s first-half operating loss was $52.2 million, versus $21.6 million.
- Fabrication was a relative strength: Q2 segment sales rose 15% and operating income increased to $27.7 million from $7.6 million, supported by stronger non-residential construction demand, higher shipments and improved spreads.
- First-half operating cash flow benefited substantially from working-capital reductions, including lower inventory and receivables; inventory declined to $1.292 billion from $1.618 billion at year-end.
Outlook, commentary, risks and unusual items
- Management said underlying domestic steel demand remained solid, including in non-residential construction, automotive and manufacturing, but imports captured a significant portion of demand and pressured domestic mill utilization, shipments and pricing. No specific earnings or revenue guidance was provided.
- Management estimated 2015 capital expenditures of approximately $150 million and expected operating cash flow and other available funding to cover debt service, working capital and planned capital expenditures for the next twelve months.
- SDI indefinitely idled its Minnesota ironmaking operations after pig iron prices fell below cash production costs and chose to monetize related raw-material inventory. The idling prompted a $21.0 million inventory lower-of-cost-or-market charge in Q2, including $3.6 million attributable to noncontrolling interests. Minnesota iron operations reduced Q2 net income by approximately $16.5 million.
- SDI redeemed $350 million of 7⅝% senior notes in March 2015. The redemption premium and write-off of financing costs produced approximately $16.7 million of expense, contributing to first-half other expense of $15.0 million.
- Key operating risks include steel and scrap price volatility, import competition, cyclical demand, raw-material and energy costs, plant outages, and integration or start-up challenges. Certain commodity and transportation contracts include take-or-pay commitments.
- SDI was defending steel-price-fixing class actions alleging conduct during 2005–2007. Class certification remained under advisement; SDI said it could not estimate exposure and did not then consider a material loss reasonably possible, while noting an adverse outcome could materially affect results or liquidity. Routine litigation was not expected to have a material impact.
Important facts for investors to verify
- Whether steel imports, pricing pressure and reduced mill utilization persist, and whether lower scrap costs can restore steel metal spreads.
- How much of reported steel growth and future results reflects Columbus versus comparable operations, and the acquired mill’s contribution to earnings and cash flow.
- Whether metals recycling and ferrous resources losses improve after the Minnesota idling and completion of IDI’s furnace maintenance outage.
- The sustainability of first-half operating cash flow, which was aided by working-capital releases, alongside planned capital spending, dividends and debt repayment.
- Developments in the antitrust litigation, covenant headroom and the company’s ability to maintain liquidity under weaker market conditions.