Steel Dynamics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to Q1 2022 unless otherwise noted. Steel Dynamics is a domestic steel producer and metals recycler with steel fabrication operations.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $4.893 billion | $5.570 billion | Down 12% |
| Gross profit / gross margin | $1.056 billion / 21.6% | $1.783 billion / 32.0% | Margin down 10.4 percentage points |
| Operating income / operating margin | $835.4 million / 17.1% | $1.495 billion / 26.8% | Operating income down 44% |
| Net income attributable to Steel Dynamics | $637.3 million | $1.104 billion | Down 42% |
| Diluted earnings per share | $3.70 | $5.71 | Down 35% |
| Operating cash flow | $733.8 million | $819.0 million | Down $85.2 million |
| Capital expenditures | $226.3 million | $159.3 million | Up $67.0 million |
Cash from operations less capital expenditures was approximately $507.5 million. Cash and equivalents were $1.605 billion, short-term investments were $714.8 million, and total liquidity, including revolver availability, was $3.511 billion at quarter-end. Total debt was approximately $3.061 billion, broadly unchanged from year-end; the company reported a 26.9% long-term debt-to-capitalization ratio. Cash and short-term investments exceeded debt by approximately $1.259 billion, before other liquidity considerations.
Current assets were $7.563 billion against current liabilities of $1.821 billion. The company had no revolver borrowings and $1.191 billion of revolver availability. It reported compliance with its debt covenants. The quarterly dividend declared increased 25% to $0.425 per share.
Business results and material changes
- Steel operations: Segment sales fell 19% to $3.186 billion and operating income fell 71% to $341.8 million. Record total shipments of 3.3 million tons rose 14%; external shipments rose 18%. Average steel selling prices fell 32% year over year, while metallic raw-material costs per ton fell 13%, compressing the segment’s metal spread 39%. Management also cited Sinton start-up costs.
- Metals recycling: Segment sales increased 2% to $1.162 billion, while operating income decreased 12% to $39.7 million. Higher shipment volumes were offset by lower scrap prices and spreads.
- Steel fabrication: Segment sales decreased 7% to $868.8 million as shipments fell 18%, despite average selling prices rising 13%. Lower steel input costs contributed to a 40% increase in metal spread; operating income rose 18% to $551.3 million. The segment had a historically high order backlog and strong order entry, according to management.
- Consolidated sales and profit declined mainly because steel selling prices were substantially below the unusually high Q1 2022 levels. The company said demand remained strong, particularly in automotive, non-residential construction, energy and industrial markets.
Cash, capital allocation and outlook
Operating cash flow was lower year over year. Cash flow benefited from inventory reduction and income-tax-related working-capital movements, but was offset in part by a $417.9 million decrease in accrued expenses. Operational working capital increased $254.5 million to $3.5 billion, primarily reflecting funding of 2022 company-wide profit sharing.
The company invested $226.3 million in property, plant and equipment. Planned investments include four flat-roll coating lines at Sinton and Heartland and a previously announced $2.5 billion low-carbon aluminum flat-roll mill and supporting recycled-aluminum slab centers, with expenditures expected to continue through 2025. Management said available cash and expected operating cash flows should fund anticipated capital needs and other obligations over the next 12 months.
Steel Dynamics repurchased $354.0 million of shares during the quarter; $982.1 million remained under the November 2022 authorization. The filing provides no specific quantitative earnings or revenue guidance. Management described demand as strong but cautioned that results depend on market conditions, pricing, input costs and facility execution.
Risks, contingencies and notable items
- Key disclosed risks include steel-industry cyclicality and overcapacity, imports, volatility and availability of scrap and other inputs, energy costs, competition, environmental regulation, cybersecurity, facility outages, growth-strategy execution, and financing covenant restrictions.
- Commodity futures are used to manage metal-price exposure. The company reported a cumulative unrealized gain of approximately $1 million on relevant financial contracts at March 31, 2023; most were expected to settle within 12 months. Certain long-term “take-or-pay” supply commitments extend beyond five years.
- Routine litigation, environmental and other proceedings were not expected to materially affect financial condition, results or liquidity. Environmental fines or penalties disclosed did not exceed $1 million in aggregate as of March 31, 2023. The company reported no material change to its previously disclosed risk factors.
- Net other income was $34.9 million, versus net other expense of $20.5 million a year earlier, primarily reflecting increased interest income and earnings from equity investments. This supported pretax results relative to the prior-year period.
- After quarter-end, on April 1, a USS noncontrolling member exercised an option requiring the company to acquire a 2.5% interest, increasing Steel Dynamics’ ownership to 90%; the remaining 10% option was extended to on or after February 28, 2025.
Important facts for investors to verify
- Whether steel pricing and metal spreads continue to recover, and how they compare with scrap and other input costs.
- Sinton start-up progress, costs and shipment contribution, along with execution of the planned coating lines and aluminum investment.
- Steel fabrication backlog conversion, order trends and margins as input prices and shipments change.
- Operating cash flow, working-capital movements, capital spending and the pace of share repurchases and dividends.
- Debt, revolver availability and covenant compliance, including the timing and funding of future capital commitments.
- Potential effects of commodity, energy, environmental, legal and long-term supply-contract exposures.