Steel Dynamics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling, and steel fabrication segments. Dollar amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $2,368.2 million | $1,741.3 million | Up 36% |
| Gross profit | $472.2 million | $236.0 million | Up 100% |
| Operating income | $334.6 million | $132.0 million | Up 154% |
| Net income attributable to Steel Dynamics | $200.8 million | $62.7 million | Up 220% |
| Diluted EPS | $0.82 | $0.26 | Up $0.56 |
| Operating cash flow | $240.4 million | $291.0 million | Down 17% |
Gross margin was approximately 19.9% versus 13.6%; operating margin was 14.1% versus 7.6%. The effective tax rate declined to 34.7% from 36.6%. Net interest expense decreased 8% to $34.0 million, primarily following the December 2016 refinancing and repayment of term debt.
Segments and drivers
- Steel operations: Sales increased 41% to $1,775.7 million and operating income rose 163% to $348.5 million. Shipments increased 8%; average selling price rose $174 per ton, or 31%. Mill utilization averaged 95%, compared with 88%. Metallic raw material cost per net ton increased 44%, but steel spreads expanded.
- Metals recycling: Sales increased 48% to $720.1 million and operating income rose to $17.8 million from $2.8 million. Improved ferrous spreads and shipments supported results; nonferrous spread contracted 8%.
- Steel fabrication: Sales increased 8% to $194.1 million, with record quarterly shipments. Operating income declined 26% to $23.7 million as steel input costs rose 21%, outpacing the 4% increase in selling prices.
Management attributed the stronger consolidated results chiefly to firm sheet-steel demand, historically low customer inventories, higher shipments and utilization, and improved steel pricing and spreads. The comparison also includes Vulcan Threaded Products, acquired in August 2016.
Cash flow, liquidity and capital
- Cash and equivalents were $966.8 million at quarter-end, up from $841.5 million at December 31, 2016. Revolver availability was $1,187.6 million; total reported liquidity was $2,154.4 million. No revolver borrowings were outstanding.
- Total debt was approximately $2.4 billion and remained relatively unchanged. Long-term debt to capitalization was 44.0%, down from 44.9% at year-end. Interest coverage was 9.92:1 and net debt leverage was 1.35:1; the company reported compliance with its covenants.
- Operating cash flow was $240.4 million, versus $291.0 million. Higher receivables and inventory contributed to a $145.6 million increase in operational working capital. Capital expenditures were $41.7 million, versus $27.7 million.
- Financing activities used $100.3 million, including $34.1 million of dividends paid and $61.3 million of treasury-stock purchases. The company repurchased 1.823 million shares under its $450 million program. The declared quarterly dividend increased 11% to $0.155 per share.
Outlook, risks and other matters
The filing provides no numerical earnings or revenue guidance. Management described steel demand as robust, with automotive steady and construction improving; it also expected non-residential construction demand to remain strong. Management believed available operating cash flow and funding sources would be sufficient for the next twelve months to meet debt service, working-capital needs, and anticipated capital expenditures, while noting that future results, cash flows, and credit access are not assured.
Key risks cited include economic and cyclical demand shifts, steel and scrap price changes and the ability to pass on cost increases, import competition, integration or start-up challenges, technology risks, and plant outages or equipment failures. The company also faces commodity, energy, and interest-rate exposures; certain supplier commitments contain take-or-pay provisions. Routine litigation and environmental matters were not expected to have a material impact; $200,000 of environmental fines or penalties was recorded. No material change to previously disclosed risk factors was reported.
ASC 606 revenue-recognition implementation was in progress. Management preliminarily expected no significant change in the amount or timing of revenue recognized and intended adoption in Q1 2018, subject to completion of its assessment. Adoption of the inventory measurement standard in Q1 2017 had no reported impact.
Investor verification priorities
- Assess whether Q1 steel pricing, spreads, and utilization can persist as raw-material costs and market conditions change.
- Reconcile the substantial earnings increase with lower operating cash flow and higher working-capital investment.
- Monitor fabrication margins, where input costs rose faster than selling prices, and nonferrous recycling spreads.
- Verify debt maturities, revolver availability, covenant headroom, and the effect of buybacks and dividends on liquidity.
- Follow the final ASC 606 adoption assessment and check for any changes to revenue timing, systems, or disclosures.