Steel Dynamics, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; filed November 9, 2017. Financial statements are unaudited. Steel Dynamics manufactures steel products and recycles metals, with steel operations, metals recycling, and steel fabrication as its three reportable segments. Dollar figures below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $2,443.4 | $2,101.3 | $7,202.3 | $5,866.5 |
| Gross profit / margin | $396.5 / 16.2% | $408.5 / 19.4% | $1,261.2 / 17.5% | $1,024.9 / 17.5% |
| Operating income / margin | $271.0 / 11.1% | $283.9 / 13.5% | $870.9 / 12.1% | $671.9 / 11.5% |
| Net income attributable to Steel Dynamics | $153.3 | $157.4 | $508.0 | $362.1 |
| Diluted EPS | $0.64 | $0.64 | $2.09 | $1.48 |
| Cash from operations | $226.1 | $196.4 | $547.6 | $645.4 |
- Q3 comparison: Sales grew 16%, but operating income fell 5% and attributable net income fell 3%. Gross margin compressed as raw-material costs rose faster than selling prices.
- Nine-month comparison: Sales increased 23%, operating income 30%, and attributable net income 40%. Higher steel prices and shipment volumes supported the improvement.
- Cash flow and investment: Nine-month capital expenditures were $127.7 million, versus $123.2 million a year earlier. Operating cash flow less capital expenditures was approximately $419.9 million, compared with $522.2 million. Working capital absorbed cash as receivables and inventories increased.
- Balance sheet and liquidity: At September 30, cash and equivalents were $1,102.0 million, current assets $3,572.1 million, and current liabilities $1,066.5 million. Current and long-term debt totaled approximately $2,534.1 million on the balance sheet. After reflecting the October repayment of the remaining 2022 notes, management reported total debt of approximately $2.4 billion, a 43.9% adjusted debt-to-capitalization ratio, and total liquidity of $2,122.9 million, comprising adjusted cash of $934.8 million and revolver availability of $1,188.1 million.
- Shareholder returns: The company repurchased 7.0 million shares for $237.2 million in the first nine months. Dividends declared were $111.4 million; the quarterly dividend had increased 11% to $0.155 per share in Q1 2017.
Segments and operating developments
- Steel operations: Q3 sales rose 14% to $1,848.1 million, while operating income declined 10% to $276.5 million. Shipments increased 7% and mill utilization averaged 92%, but the metal spread contracted 3%. For the first nine months, segment operating income rose 26% to $895.0 million.
- Metals recycling: Q3 sales rose 25% to $709.2 million and operating income increased to $17.6 million from $6.2 million. Higher ferrous and nonferrous pricing and spreads, alongside lower operating costs, outweighed lower shipment volumes.
- Steel fabrication: Q3 sales increased 18% to $211.4 million and operating income rose 23% to $21.9 million. The business recorded a third consecutive quarterly shipment record. Nine-month operating income fell 10% to $65.7 million as narrower spreads offset higher volume.
Outlook, risks, and unusual items
- Management described demand as strong in sheet and special-bar-quality steel, with low customer inventories, continued improvement in construction and energy demand, and strong non-residential construction activity. Domestic automotive demand had softened somewhat. Elevated steel imports constrained domestic price increases relative to raw-material costs.
- The filing provides no specific earnings or revenue guidance. Management said current operations, anticipated growth, operating cash flows, and available funding were expected to cover requirements for the next 12 months; it also anticipated continued compliance with credit-facility covenants. At quarter-end, the interest coverage ratio was 10.22:1 and net debt leverage ratio was 1.49:1.
- In September, the company issued $350 million of 4.125% senior notes due 2025 and used the proceeds and cash to repurchase $182.9 million of 6.375% notes due 2022. It repaid the remaining $167.1 million of those notes in October. Q3 included $8.0 million of tender, debt-cost write-off, and related expenses; an additional $6.6 million call premium was expected to be recorded in Q4.
- Key risks include cyclical steel demand, scrap and other input-cost volatility, the ability to pass cost increases through, import competition, operational outages, and risks in integrating or starting up businesses. Some supply and service commitments include take-or-pay provisions. Derivatives are used to manage certain commodity exposures.
- Routine litigation and environmental matters were not expected to have a material effect on financial condition, results, or liquidity. Environmental fines and penalties of $420,000 were recorded. The company reported no material change in risk factors and stated that disclosure controls were effective.
- Management planned to adopt the new revenue-recognition standard (ASC 606) on January 1, 2018, using the modified retrospective approach, and did not expect a significant change in the amount or timing of revenue recognized. The impact of the new lease standard was still under evaluation.
Important facts for investors to verify
- Whether steel selling prices and metal spreads recover relative to scrap and other input costs, particularly given import competition.
- Whether rising receivables and inventories continue to constrain operating cash flow and working capital.
- The post-October debt balance, interest costs, and the effect of the refinancing premiums and note repayment on subsequent results.
- Whether strong fabrication shipments and recycling spreads persist, and whether lower segment spreads affect future profitability.
- Progress and final disclosure of ASC 606 adoption, as well as any material effects from lease accounting changes or take-or-pay commitments.
- Future share repurchases and dividends, which remain subject to board discretion, cash needs, debt terms, and operating conditions.