Steel Dynamics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Steel Dynamics is a U.S. steel producer and metals recycler with steel, metals recycling, and steel fabrication segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2,817.4 million | $2,603.9 million | +8% |
| Gross profit | $433.6 million | $463.4 million | -6% |
| Operating income | $291.8 million | $323.4 million | -10% |
| Net income attributable to Steel Dynamics | $204.3 million | $227.6 million | -10% |
| Diluted earnings per share | $0.91 | $0.96 | -5% |
| Cash provided by operating activities | $181.6 million | $177.9 million | +$3.6 million |
| Capital expenditures | $54.4 million | $50.6 million | +$3.8 million |
Gross margin was approximately 15.4%, versus 17.8% a year earlier; operating margin was approximately 10.4%, versus 12.4%. SG&A was $111.0 million, or 3.9% of sales, compared with $106.4 million, or 4.1%. Net interest expense was $31.1 million, and the effective tax rate was 23.3%.
- Cash flow: Operating cash flow was partly offset by $92.4 million of investing outflows and $126.3 million of financing outflows. The company used $93.4 million, net of cash acquired, to acquire United Steel Supply; it also paid $42.2 million in dividends and spent $84.3 million repurchasing shares. Cash, cash equivalents, and restricted cash ended the quarter at $797.2 million, down $37.2 million from the start of the period.
- Debt and liquidity: Balance-sheet debt was $2.44 billion, including current maturities. Cash and equivalents were $791.4 million and short-term investments were $173.7 million. Reported total liquidity, including revolver availability, was $2.15 billion. The $1.2 billion revolver had no borrowings outstanding and $1.188 billion available after letters of credit and other obligations. Long-term debt to capitalization was 37.9%. The company reported interest coverage of 16.81x and net debt leverage of 0.87x, within covenant limits.
- Balance sheet: Total assets were $7.86 billion, total liabilities $3.87 billion, and total equity $3.85 billion at March 31, 2019. Current assets were $4.03 billion and current liabilities $1.00 billion. Inventory was $1.87 billion, broadly unchanged from year-end.
Material changes and segment performance
- Consolidated sales increased 8%, but gross profit and operating income declined as lower shipments and weaker segment results outweighed higher sales and steel spreads. Management attributed the earnings decline principally to challenging markets at the Butler and Columbus flat-roll divisions and lower metals recycling profitability.
- Steel operations: Sales rose 11% to $2.20 billion and operating income fell 8% to $309.1 million. Average steel selling prices increased 10% to $899 per ton, while metallic raw-material cost per ton rose 5%; management said metal spread expanded 13%. Steel mill utilization averaged 90%, versus 94% in Q1 2018. Segment shipments were up 1%, partly reflecting Heartland and the newly acquired USS, while Butler and Columbus shipments were a source of weakness.
- Metals recycling: Sales declined 2% to $737.0 million and operating income fell 31% to $17.0 million. Ferrous shipments and selling prices weakened; ferrous metal spread declined 11%. Nonferrous external shipments increased 1%.
- Steel fabrication: Sales increased 13% to $228.7 million and operating income rose 4% to $20.6 million. Average selling prices increased 17%, shipments fell 3%, and metal spread expanded 7%. Management cited strong non-residential construction demand and order backlogs, with severe weather and construction delays limiting shipments.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings, revenue, or production guidance. Management said it expected available cash flows and other funding sources to cover the next 12 months’ debt service, working capital needs, and anticipated capital expenditures, and anticipated continued compliance with credit-facility covenants.
- Management identified uncertainty in economic conditions and industrial demand, steel and scrap-market cycles, raw-material and energy costs, import competition, integration or start-up challenges, and unexpected plant outages or equipment failures as risks.
- On March 1, 2019, the company acquired 75% of United Steel Supply for $93.4 million cash, subject to working-capital adjustments. The acquired distributor expands the company’s channel for painted Galvalume steel. The purchase-price allocation was preliminary and included $101.9 million of goodwill; the sellers and company have options relating to the remaining 25% interest.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $76.3 million of lease assets and liabilities at adoption, with no retained-earnings impact and no significant effect on quarterly results or cash flows. Lease obligations were $72.6 million at March 31.
- The quarterly dividend increased 28% to $0.24 per share. The company repurchased 2.3 million shares for $84.3 million; $314.8 million remained under its $750 million repurchase authorization.
- Routine litigation and environmental matters were not expected to materially affect financial condition, results, or liquidity. Recorded environmental fines and penalties totaled $451,000. The filing reported no material change in risk factors and no material effect from changes in internal control.
Important facts for investors to verify
- Whether lower flat-roll shipments and the 90% mill utilization rate persist, and how import competition affects pricing and volumes.
- Whether steel spread gains can offset raw-material costs and production-volume pressures, and whether metals recycling spreads and shipments recover.
- Integration and performance of United Steel Supply, completion of the preliminary purchase-price allocation, and the terms or likelihood of a transaction for its remaining 25% interest.
- Use of cash for acquisitions, capital investment, dividends, and repurchases relative to operating cash generation; also monitor revolver availability, debt, and covenant headroom.
- Exposure to raw-material, energy, commodity-price, environmental, and other risks, including the stated forward-looking uncertainties.