Steel Dynamics, Inc. — Q1 2011 Form 10-Q
Business context and reporting period. Domestic steel producer and metals recycler reporting for the three months ended March 31, 2011, compared primarily with Q1 2010. Its segments are steel operations, metals recycling and ferrous resources, and steel fabrication.
Financial performance
Amounts are in millions of dollars, except per-share data and where noted.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $2,016 | $1,556 |
| Gross profit | $296 | $210 |
| Operating income | $205 | $132 |
| Net income attributable to Steel Dynamics | $106 | $65 |
| Diluted EPS | $0.46 | $0.29 |
| Cash from operations | $3.9 | $72.7 |
| Capital expenditures | $18.7 | $30.7 |
- Sales increased 30%; gross profit rose about 41% and operating income about 55%. Derived gross margin was approximately 14.7% versus 13.5%; operating margin was approximately 10.2% versus 8.5%.
- Cash from operations fell sharply, mainly reflecting higher receivables and inventories. Operating working capital increased $166.8 million during the quarter. Cash less capital expenditures was approximately negative $14.8 million.
- At March 31, cash and equivalents were $160.8 million; total debt was approximately $2.38 billion, with fair value estimated at $2.6 billion. Long-term debt to capitalization was 51.6%, down from 52.8% at year-end 2010.
- Revolver borrowings were zero; reported availability was $907.5 million. The company reported compliance with credit covenants, including interest coverage of 4.10x and total debt leverage of 3.37x.
- Quarterly dividend declared was $0.10 per share, up from $0.075 a year earlier.
Material changes and operating trends
- Improved demand, selling prices, and metal spreads lifted results. Steel segment operating income increased to $193.0 million from $134.7 million; metals recycling and ferrous resources operating income rose to $39.5 million from $24.1 million.
- Steel shipments increased 4% year over year. Steel selling prices rose more than metallic raw-material costs, although those costs also increased.
- Metals recycling segment sales increased 47%, supported by higher scrap volumes and prices. Domestic steel mill utilization was reported at 75%, versus 61% in Q1 2010.
- Steel fabrication remained loss-making, with a $2.9 million operating loss, although improved from a $6.6 million loss in Q1 2010. Non-residential construction remained weak.
- Q1 2011 results also improved substantially from Q4 2010: sales increased 32%, gross margin rose from 9% to 15%, and net income attributable to the company rose from $7.8 million to $105.9 million.
Outlook, risks, and unusual items
- Management anticipated generally steady demand and pricing in Q2 2011, with sustained strength in sheet steel and continued improvement in long products. It expected gross interest expense to remain consistent through the rest of 2011.
- Planned 2011 capital expenditures were $155–$180 million, with depreciation expected to be approximately $200 million. Management expected cash flows and available funding to meet the next 12 months’ debt service, working-capital, and capital-spending needs.
- Mesabi Nugget remained in start-up and process-refinement mode. Management aimed to improve sustainable production during 2011 and potentially reach monthly breakeven by year-end; Q1 start-up operating loss was $13.8 million, including noncontrolling interest.
- Key risks include cyclical steel and scrap markets, imports and price competition, raw-material and energy costs, production interruptions, and environmental regulation. Certain supplier commitments include take-or-pay provisions.
- Steel price-fixing class actions seeking treble damages remained in discovery; the company said it could not estimate potential exposure. In the OmniSource Indianapolis matter, a May 4, 2011 ruling dismissed racketeering charges but left five alleged attempted-receipt charges for trial; a related civil forfeiture counterclaim remained contested.
- Commodity futures had a reported $4.5 million unrealized gain at quarter-end, with associated contracts expected to settle within 12 months. No interest-rate swaps were in place.
Important facts for investors to verify
- Whether improved steel and scrap prices, shipment levels, and segment margins continued after Q1.
- Cash conversion and working-capital trends, given the quarter’s low operating cash flow and rising receivables and inventories.
- Mesabi Nugget production progress, remaining start-up costs, and the feasibility of management’s breakeven objective.
- Liquidity, covenant compliance, and refinancing plans for the $700 million of 7⅜% senior notes due in 2012.
- Developments and potential financial exposure from the antitrust litigation and the OmniSource criminal and forfeiture proceedings.