Apr 23, 2009
Executives
Fred Warner – Investor Relations Manager Keith Busse – Chairman & Chief Executive Officer Richard Teets, Jr. – Executive Vice President for Steelmaking President & Chief Operating Officer of Steel Operations Mark Millett – Executive Vice President for Metals Recycling & Ferrous Resources President & Chief Operating Officer of OmniSource Corporation Gary Heasley – Executive Vice President for Strategic Planning & Business Development Theresa Wagler – Vice President & Chief Financial Officer
Analysts
Mark Parr – KeyBanc John Tumazos – John Tumazos Very Independent Research Sal Tharani – Goldman Sachs Luke Folta – Longbow Research Michael Gambardella – JPMorgan Evan Kurtz – Morgan Stanley Brett Levy – Jefferies & Company Timna Tanners – UBS Michelle Applebaum – Michelle Applebaum Research Kuni Chen – Bank of America
Operator
Good day, everyone, and welcome to today's Steel Dynamics First Quarter 2008 Earnings Call. Today's conference is being recorded.
Joining us today are Keith Busse, Chairman and Chief Executive Officer; Richard Teets, President and Chief Operating Officer of Steel Operations; Mark Millett, President and Chief Operating Officer, OmniSource Corporation; Gary Heasley, Executive Vice President; Theresa Wagler, our Chief Financial Officer; and Fred Warner, Manager of Investor Relations. For opening remarks, I would turn the call over to Fred Warner.
Please go ahead, sir.
Fred Warner
Thank you and welcome to today's Steel Dynamics conference call being webcast April 23, 2009 from Fort Wayne, Indiana. A replay of this call can be heard and downloaded as a podcast from our website, www.steeldynamics.com.
Today's management discussion may include various forward-looking statements. All statements regarding anticipated results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements, which by their nature are predictive and are not statements of historical fact are often preceded by such words as believe, anticipate, estimate, expect, or other conditional words, and are not intended as guarantees of future performance. We caution that actual future results and events may differ materially from such forward-looking statements or projections that we maybe making today.
Some factors that could cause actual results to differ include general economic conditions, government monetary of fiscal policy, industrial production levels, changes in market supply and demand, foreign imports, conditions in the credit markets, price and availability of scrap and other raw materials, litigation outcomes, and equipment failures. You may obtain additional information concerning a variety of other factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to the forward-looking statements and Risk Factor sections of our most recent Annual Report on Form 10-K or in our quarterly reports on Form 10-Q as filed with the Securities & Exchange Commission as well as in other reports we file from time-to-time with the commission.
These reports are publicly available on the SEC website www.sec.gov and on our steeldynamics website. After today's management discussion, we will open the call for questions from participants, who have informed us they may wish to ask questions.
Please keep your questions short and limit to one question per caller on the first round. We should have time for follow-up questions.
We will now begin today's call with introductory remarks by our Chairman and Chief Executive Officer, Keith Busse.
Keith Busse
Good morning everyone. Thank you for joining us this morning.
Obviously, results reported were dismal, but nonetheless, I think there is really room for optimism. I noted in one of the early first call or first take outlooks that one of the analysts, was quoted saying the company's position was more at more sober tone to it or somber tone, and why wouldn't it be somber in this kind of an economy yet.
I just want to offer a few positive comments that I think today I can say with great confidence that our mills are in super shape, they're in good condition and ready for any recovery that we might experience on a go forward basis. I think the mental attitude of our employees is very positive and in spite of the fact that their earnings are down significantly in this kind of economic climate.
And let me say our cost position has never been better. I think we were very pleased with where our cost structure is obviously that comes at the expense of an $83 million adjustment to inventories in the first quarter, principally realized through significant write-downs of resource costs at our flat rolled steel making division.
And there was further deterioration quarter-over-quarter, as our net sales were down 33% and our shipments were down 21% in the first quarter versus the fourth quarter. So, it is a very somber time, yet at the same time I wanted to reflect on the fact that our mills are in excellent shape and employee morale and spree decor is good and the cost structure is world class and second to no operator in the U.S.
or broad for that matter in my opinion. One of the more significant impacts to our earnings was the inventory charge, it was $83 million it was about $13 million greater than we had contemplated.
And that really was a result of not receiving as much material in the quarter at greatly reduced pricing from past quarters. We didn't receive as much as we had contemplated and obviously we didn't ship as much as much as we internally had contemplated.
You might have had our shipments in more or less, but we thought we would ship a little more and did not, thus you use up a little less of that scrap pile, which at the end of the quarter was adjusted in terms of its valuation and I think I noted in one of the, or I saw in one of the early-morning comments that the inventory valuation adjustments are largely behind us that was their belief and its my belief as well they're behind us and we will not play a material role in future results. So, when you look at our results ex the $83 million non-cash adjustment to inventories and the non-cash additional amortization charge related to Recycle South in the final valuation of intangibles and goodwill at Recycle South, which was worth on the bottom-line net income about $0.02, the inventory is $0.27, if you kind of back that away from our results we were within the range that we had forecast at the late in the first quarter, but in early March of this year.
Unfortunately, the call we had in March was a very necessary update as business conditions continue to deteriorate in the quarter specifically deteriorated significantly from heightened levels, you might say in December and early January to more dismal business conditions in late January and throughout February and early March and our visibility in March told us nothing was about to change. So, significant deterioration in selling values was eminent and so we updated our earnings in March and came fairly.
It's very difficult, came fairly close to hitting our prognostication, that it's very difficult to have any visibility when order entry is really just hand-to-mouth, it's weekly, it's monthly, its steady and I might add that it's been increasing recently in the flat rolled arena. It's pretty steady in small shapes, its fairly steady in SBQ bar arena and order entry has gotten worse in large long products, specifically structural, which and I think the third paragraph of our press release spoke to all of that when you look at the operating rate at the mills was about 46%.
And for those of you who might want to know how that breaks down, it was we probably operated it close to 50% in flat-roll, something under. We shipped in flat-roll in the low 40s, 40% to 45% we actually build little inventory, actually produced a little more than we sold, but the operating rate was sub-50%.
In structural, it really depends on whether you look at it through the eyes of our capacity a year or so ago prior to the construction of the new mill, new medium section mill. If you looked at it through that set of binoculars, you probably operate it closer to 40% when you consider our newfound capability capacity, we operated probably closer to 30% during the quarter.
We operated about 50% of our capacity at Roanoke and Steel of West Virginia as well, so, on a production basis. On a shipping basis, as I said, on a consolidated basis it was about 46% in the recycling arena we operated at about 42% of our current capability there as well and things didn't really change at fabrication, where we are operating at about 45% there.
I think its important to note that prices declined and if you look at the second page of our press release at the bottom we talk about the first quarter's average selling price per ton for Steel Operations was $720, a decrease of $193 per ton from $913 in the fourth quarter, and a decrease of $62 per ton from a year-ago quarter, which I don't think is very relevant at this point in time. We are talking about the fact that the average scrap cost per net ton charged decreased $78 a ton, compared to the fourth quarter.
As I went on to say this data speaks volumes about the cost reductions or cost control achieved in recent quarters by our employees, they've done a phenomenal job think about that. The selling values go down $193, your principal input, scrap, or your, which is scrap goes down $78.
So, there were significant cost reductions achieved to achieve what our fairly unchanged results, slightly positively changed results from an operating income perspective. I might also note that without the non-cash charge, our steel operating units actually had an operating profit of about $17 million or $22 a ton versus an operating profit of only $3 a ton in the fourth quarter.
So, actually positive total change in that regard, which I think is significant. Like most of you, most of you know from, on an operating basis corporate overhead is not included nor is amortization and profit sharing.
And I think in the statement we made added corporate overhead just for clarity the corporate overhead is not considered, when we talk about operating profit, it hasn’t been in the past and it is not these statistics. So, they're very comparable it is very comparable data, but even if you allocate corporate overhead and of course there was no profit sharing expense, you allocate corporate overhead to the steel division it would have still had a bottom line operating profit inclusive of corporate overhead.
So, just wanted to note that because I think the progress our employees have made in this very dire environment has been extraordinary and we salute them I think they are indeed the best steel makers in the world today. Recycling, well you saw that our average scrap cost per net ton charge continued to decline.
Scrap costs during the quarter continue to fall, there was a slight strengthening early in the quarter, but obviously deliveries of material in the month of March were down and certainly deliveries going into April were down maybe $30 a ton, $40 a ton in some cases, now people are talking about a rebound in that arena, but any rebound as you can see given the operating rates of Steel Dynamics and many of our peers out there all being sub-50 any rebound in scrap is probably short-lived I would guess, as we move into the spring and summer months where the flows increase and I think the spark if there is any has been export activity, which has caused scrap on the east coast to move up slightly month-over-month now or mid-month. And I think the big question is will that continue into the Mid-West and its not likely to impact the Mid-West to the same degree on the upside as it has the east coast because, obviously to get material to the east coast there is a considerable freight bill associated with it.
So, the net-net to the provider may not quite be as attractive. So, again not having a crystal ball and Mark will speak to that issue.
And Mark’s opinion may well differ from mine, but I think as we look at delivery of materials in May and June, it could be anywhere from up very slightly to sideways to down slightly I don’t think its going to materially move from the arena of where we are today. I know a lot of you from time to time look for a little guidance its something we haven’t done, but I'll just tell you kind of where we are from a scrap perspective.
We talk about how we’re moving up and down quarter-over-quarter, we are down $78, I noted a competitor was down a $102, very good progress for both entities, but our cost per net ton charge you should know is in the mid twos, sub-$300 again I repeat in the mid twos. So, that's about where we were in the quarter in terms of the cost per net ton charge again very good position I think relative to most and obviously with the inventory adjustment being behind us I think the company from a cost perspective is well positioned in what are today a rather dismal marketplace.
There is no visibility out there right now and there is no light at the end of the tunnel, that I can share with you as I said order entry is steady every week it seems to come in and go out at about the same rate. We're running one caster at Butler, and from time to time when we get a little bit of a surge, we can run to, but that's about where we are today.
Relative to fabrication, you might have noticed that in fabrication, we made about the same amount of money in this quarter's we did a year ago and about the same amount of money as we did in the last several quarters in the $3 million, $4 million, $5 million net profit range. We remain profitable in fabrication, and we're better positioned there than we’ve ever, ever been.
With the closure of the facility in Florence, South Carolina, which will not likely ever reopen, the Florence facility was in the backyard of some fairly strong competition and wedged right in between our Virginia operation and our Florida operation, which were much better cost positioned facilities from a cost of raw materials and a conversion cost perspectives. Our continental plant, which was closed during the quarter could reopen some day that’s a possibility should, the business climate in non-residential construction improve, we’re not forecasting it’s going to or it is better positioned there than we have been and I think the three remaining fab facilities and roll forming facilities are the finest in the world and so we have a very strong cost position and we see the operating rates not changing a heck of a lot as the non-residential construction market is clearly still in the tank.
So, I think that’s just, that’s kind of a brief recap of where we are in steel and where we are in processing and in fabrication I would like to turn it over now to and we'll save any discussion on the balance sheet and another comments this morning our first outlooks about covenants and we will talk about that at the time Theresa speaks to the audience, but I would like to turn it over now to Dick Teets for his more specific comments about what’s going on inside the steel port.
Richard Teets, Jr.
Well thank you Keith. Good morning.
As Keith said the Flat-Roll division is operating around the 50% level and that is achieved by the operations of one castor continuously and the intermittent use of the second castor as orders demand, while still taking the appropriate maintenance downtime. Now, the teams at Butler and Jeffersonville have finished the commissioning of the closed loops coating weight control systems and all three galvanizing lines for their ironize for a more accurate coating profile and we also commissioned our surface inspection system at Jeffersonville to help assure the highest quality of products are being shipped to customers.
At The Techs, remaining on flat-rolled congratulations are in order for achieving a zero loss workday performance at all three of the facilities. The focus there has really been on maintaining our quality and customer service, while managing our inventory positions all of the inventories to lower than historical levels.
At Columbia City structural and rail division it also is operating as Keith mentioned between 35% and 40% levels compared to the first quarter of ’08. The backlogs suggest a continuation of that level.
The team continues to put effort into rail production, over 15,000 tons of rail were produced in the first quarter and at the new mill efforts are continuing to increase the selection of products made available as the 12 inch M beam and the 12 inch C channels were successfully commissioned in the first quarter. We have slowed the installation of the second castor, but we continue to work on the assembly utilizing our skilled employees.
We will use contractors only when safety precludes us from their undertaking. If we look at Pittsboro, the SBQ production and shipments were also in the 50% range and production of the small sizes, which are 4.25 and smaller and medium sizes, which are between 4.25 and 6.5 have been an area of focus as the competitive landscape has changed in the marketplace with competitors cutting production and/or scaling back operations.
The grades that are holding up the best are alloy class 1s and 2s those are for transmission tower legs and tool steel as well as for seamless tube, small tubes, and forgings. Congratulations are deserved by the Pittsboro team for becoming certified to produce mooring steels by the American Bureau of Shipping this requires incredibly detailed testing visitation by survivors from ABS.
This is the product that is used to form the links on the mooring chains for ocean based oil well platforms. I mean it’s a very interesting product, huge links for greater in the 4-inch diameter steel bars.
Pittsboro continues to develop more advanced metallurgical options for our customers where quality is the first priority. Congratulations are also in order for the Roanoke bar division team for their safety results for both the fourth quarter of ’08 and first quarter ’09.
As they had only one recordable in each period and zero loss time accidents, so it was really a great job. At Roanoke, the melt shop operated at 40% of capacity, while the rolling mill operated at close to 60.
The difference is due to the lack of billet sales, both internally and externally. Internally meaning Steel of West Virginia and externally being to our other customers.
At Steel of West Virginia, they continue to deal with a significant downturn in the special sections OEM markets that they serve. With a downturn in the economy there has been a significant reduction in the manufacturing of forklifts, truck trailers, and the like.
Steel of West Virginia has responded in several ways. In the near term unfortunately, significant layoffs have occurred and but they are controlling their spending to new lows.
On a positive note, they are currently adding new sections to their mills, which will hopefully provide new opportunities. We anticipate a start-up of the new straightener for the number one mill in the third quarter, the straightener will improve product quality and yield while lowering our fabricating cost.
It's needless to say all the facilities are paying close attention to all inventories both raw materials and finished goods and cost reduction opportunities that have no adverse effect on safety, quality, or customer service. And finally I would like to state that my head is off to the employees of our subsidiary, Dynamic Composites.
They are in the business of making composite railroad ties and highway sound barrier systems from steel, rubber, and plastics. They just recently shipped their largest order to-date of 4000 ties to the Burlington Northern Santa Fe railroad.
Congratulations folks. Keith?
Keith Busse
Mark Millett
Thanks, Keith. Good morning, everybody.
Hope all are well. Relative to our recycling business, I think although times in relative to precipitous decline we saw in the second half of the last year, the ferrous markets remained difficult through the quarter.
Domestic steel mill utilization remained at 40%, 43% through the quarter for that regard arc furnace capacity perhaps is a little higher at 45% may be 50% with the iron foundry business certainly continuing to decline. So, demand was subsequently constrained resulting in scrap shipments of 730,000 net tons for the quarter, a 19% decline over the Q4 of ’08.
Concurrently, market pricing decreased through the quarter thereby compressing margins as higher priced inventory flow through the system. In slight contrast, our non-ferrous business showed improvement through the quarter with volumes increasing 7% quarter-over-quarter to 119 million pounds.
Copper was a particular highlight having somewhat of a bull run on strong buying pressure from China in a very tight domestic market. Albeit a tough quarter, I am proud of the Omni team's performance, we lost about $50.5 million, yet generated about $9 million in cash flow, yet a far cry from the $120 million, $122 million we lost last quarter.
Obviously, the tempered market helped the credit should be given to the significant effort and creativity demonstrated in cost reduction. Total operating costs were reduced by $24 million for the quarter from a level perhaps in a normal operating environment of Q3 of '08 and we feel that this further improvement is expected.
In fact, with a benefit of the strong copper markets, we were actually profitable in March. Again proud of our team, they reacted well in the tough market.
They had courage to make the tough decisions, and are committed to making Omni even more competitive in the future. Relative to the markets in general, I think the ferrous markets remain tenuous, but it would appear that there is some price support at current levels for preventing further deterioration.
I agree with Keith, I do believe there is somewhat range band until there is material increase or improved electric art furnace utilization. Demand is soft, but the supply side is equally soft, inbound scrap flows are extremely limited.
Industrial flow has dramatically reduced due to an anemic manufacturing base. Wholesale and obsolete flow is also weak.
This particular sector was very profitable last year, and yards and dealers are reluctant to let material flow at today's low prices as compared to the highs seen last year. And particularly as their inventory values are relatively high at this moment in time.
They're willing to wait at the cycle and capitalize on the normal and expected uptick in pricing that they have seen in the past. Additionally, the economy is forcing people to keep cars longer.
They are fixing up their old cars, giving a tremendous boost to the picker part industry, which has seen a two, three-fold increase in sales. Car hulks are thus greater value reducing the flow of the shredders and supporting in field transaction prices.
And as Keith suggested further support is manifest through increasing export interest at the current low market prices. Non-ferrous copper has had a bull run of late with China buying at large premiums.
Domestic consumers even while operating at probably 50% rate or having difficulty fulfilling their raw material needs and thus having to pay up for the material. Aluminum is less volatile and seemingly range band at a level that probably matches sort of a global production cost.
And certainly global production in this metal, the cuts have not been similar or to the extent we've seen in other commodities. So, again that's probably going to be a range band material for some time.
Change in the Iron Dynamics, the plant is running extremely consistently it's got a capability now at 15,000 metric tons to 16,000 metrics tons of liquid iron per month. Shipments in this first quarter were limited somewhat as our input rate was reduced in concert with the reduction in operating rate at the flat rolled division.
Again the team has executed well. We've made some dramatic improvements in cost structure with further improvements expected as our natural gas contracts draw down to spot values and the team has continued their excellent safety record for their improvement last year by having only one minor recordable accident in an incident in the quarter.
Mesabi Nugget even given the tough winter conditions up there, construction progress was excellent and we anticipated a start-up in September. We've delayed that by a couple of months pushed it into the fourth quarter to bounce CapEx expenditures.
CapEx for the project is on track for the adjusted $265 million that we've been suggesting for the last six to seven months. So, the recycles business is challenging, but there is a lot of fun.
Keith?
Keith Busse
Thank you, Mark. Just another quick comment about Mesabi Nugget.
Given our inventory position on iron, there is no rush to get there, and by affecting a small delay in the project, we can actually shove back some CapEx from quarter-to-quarter and not take on operating losses earlier in the year, but rather later in the year. So, that's kind of the decision we made we didn't really want that to extend any deeper into the winter as there may well be impairment to refractory linings on the furnaces, et cetera, et cetera.
But things are coming along fairly well there, and as you said, at Iron Dynamics, steady state progress there, they're probably in a better position Iron Dynamics to run record tonnages now than they’ve ever been obviously we just don’t need the material at this point in time. As we told everyone, we thought we would be profitable perhaps in the recycling arena in the first quarter and we were not made significant improvement.
As Mark noted it did turn a small profit in the month of March, that's not likely going to continue into April as selling values deteriorated on a delivery basis, but could well return to profitability in the May and June timeframe. So, that's just kind of our outlook from a recycling perspective and my perspective as with regard recycling.
I want to turn it over to Gary Heasley tell a little bit more about the changes in the fabricating arena.
Gary Heasley
Thanks Keith. Shipments in fabrication were about 45,000 tons, which is two-thirds of the shipments we saw a year ago and given the two-third shipment level holding income relatively flat was quite an achievement for the team.
As reflected in the decline of shipments, our plants are operating at lower levels of utilization that puts pressure on per ton production cost and the new Millennium team has been pursuing every opportunity they can find to reduce cost we’ve achieved significant cost savings as Keith mentioned due to the impact of shipping production from our idled Florence, South Carolina facility to our larger and more efficient facilities in Salem, Virginia, and Lake City, Florida. And congratulations for the team for taking the initiative to respond aggressively to the rapid decline in market conditions that we've seen here in recent quarters.
In early March, we announced the closure of our joist fabrication facility in Continental, Ohio that will be effective in May and we will be consolidating that production at our facilities, at our larger and more efficient joist and deck plant in Butler, Indiana and after the closure of Continental as Keith mentioned earlier, we will be very well positioned with three large very efficient facilities in Butler, Indiana; Salem, Virginia, and Lake City, Florida. With regard to market conditions, we’ve seen order entry and shipments continue to fall as end demand has continued to pull back we've also seen in recent months unusual levels of cancellations from orders in our order book, we don’t normally see much in a way of cancellations in the order book, we have seen some of that.
We think that at this point, we've seen the last of any significant cancellations, I think we have seen stabilization there. And on a positive note, our coat activity here in the last eight weeks or so has remained very, very robust that's a very good sign for us and we believe that we are seeing some coat activity coming in as projects that have been put on hold are shelved are revisiting their pricing and coming back to the market in anticipation of receiving financing.
We’re also seeing increased coat activity in new projects, specifically in school, hospital, and military projects that may benefit from government supported financing. So, we are seeing spots of light out there and as the team continues to aggressively go after every opportunity it is going to be a challenging market, but a great performance on the part of the new Millennium folks.
So, thanks to all of them and Keith.
Keith Busse
Yeah I might note that if you look at first quarter results in fabrication versus first quarter results a year earlier ’08 that we actually achieved the same net income on roughly two-thirds of the shipping volume, which again speaks volumes to cost reduction and cost control I think we are really in terrific shape there. Just some other comments recently I had an opportunity to dialog and talk with a couple of large architectural engineering firms and both of these firms indicated that they are extraordinary, extremely busy.
So, they were very pleased firms as big as people like MSKTD. So, that kind of activity, we certainly welcome that kind of news.
As you talk to fabricators out there many of these guys have a lot of activity pent up and these are engineered projects and what they are really waiting on is financing. They can't get the financing, can't move the schools forward without being able to float the bond issues, et cetera, et cetera.
So, we continue in this economy to have our challenges from a lending perspective, which could have a extraordinarily positive impact on economic momentum. Theresa, over to you?
Theresa Wagler
Thank you. Good morning everyone.
Few quick comments, regarding working capital we decreased working capital $225 million during the quarter, $141 million of that reduction was due to our receivables reduction and they still are and what we believe to be outstanding condition, our days' outstanding remained flat at 44 days, and we continue to monitor the creditworthiness of our customer base. Inventories decreased $190 million during the quarter.
It was $107 million if you exclude the valuation loss. About two-thirds of that decrease was actually in scrap inventories at the steel operations, and that reduction was both in volume and in cost.
We currently anticipate further reductions in scrap inventory volumes at our steel operations most specifically update early at the flat-rolled division. Finished goods and with inventory volumes actually remained relatively flat during the quarter.
From a capital investment perspective, we spent $74 million in the quarter about $31 million of that was from steel operations most notably $30 million at the structural mill, which was for the second castor and about $5 million was for the purchase of a substation down at Pittsboro, which will actually have a very quick pay back period for us. The significant remainder was due to our Mesabi Nugget project, we spent about $30 million on that project during the first quarter.
For the remainder of 2009, we can see capital expenditures somewhere between $200 million and $250 million, but it's still very flexible. The most significant portion of that would be about $130 million related from the Mesabi Nugget project for the start-up, potentially in the fall and $30 million for the completion of the second castor at the structural and rail division.
The remainder of that amount anywhere between $40 million to $80 million is very flexible and they're in improvement and maintenance type projects. Depreciation and amortization for the quarter was $57 million, $5 million of that again was due to the additional valuation, amortization regarding Recycle South.
You will notice that goodwill changed for us, and it actually increased by $42 million. That was due to that reevaluation or final evaluation of Recycle South.
The effective tax rate for the quarter was 40.3% on a go-forward basis, we would expect that to be 39.3% and that was due to a credit that we took in the first quarter that would have been a one-time credit. Regarding interest expense, the gross interest expense was $39 million and we had an overall effective rate of approximately 6%.
The capitalized interest was $3 million during the quarter. Our shares outstanding at the end of March were 182.1 million shares.
Regarding liquidity, we've had a lot of questions and comments regarding our covenant structures, et cetera. So, I would like to address that.
During the quarter, as we noted we reduced our outstanding debt by $136 million and we increased availability of funds to over $625 million, and that's predominantly through a small amount of cash and available borrowing capacity on our $874 million revolver. Again that revolver doesn't mature until July of 2012.
Until 2012, the only meaningful payments that we have are $65 million a year on our Term A loan. The covenant structures are such that our maximum leverage is five times debt-to-trailing EBITDA.
The EBITDA is actually on an adjusted basis, and those adjustments will add back to actual EBITDA any unrealized mark-to-market adjustment lower cost to mark inventory adjustments, and equity based compensation cost. At the end of the quarter our adjusted EBITDA to total debt was 2.8 times, compared to 2.4 times at the end of the year.
The adjustments I think this will be helpful to you that we made the EBITDA during 2008 were we added $6 million in the second quarter of 2008, $25 million in the third quarter and $75 million in the fourth quarter. The adjustments for the first quarter of 2009 will be $69 million.
As many of you have commented there is a possibility that we may exceed our maximum leverage threshold of five time during 2009. If this were to occur, we would ask for a waiver from our longstanding bank group regarding compliance with these financial covenants for a specific period of time.
We would anticipate ready cooperation from this group with a one-time fee for the waiver itself and some small adjustments to the interest spread related to our revolver and Term A loan. Currently, we are borrowing at LIBOR plus a 125 basis points on the combination of our revolver and Term A loans anywhere between $800 million and $850 million its at less than 3%, so it's a very attractive rate.
And again just to conclude, we want to maximize our availability of funds, I want to re-emphasize that the prioritization of our free cash used during 2009 is first to maximize liquidity and reduced leverage, second to provide critical capital investments and third to continue to provide cash dividend to our shareholder base. Keith?
Keith Busse
Thank you, Theresa. Just to comment about the covenant, obviously we are forecasting that business conditions will remain fairly flat and dismal on a go forward basis, and any breach of covenant that might materialize is likely to be a third-quarter event, and but as we continue at these operating levels, the likelihood of breaching becomes greater because the timeframe in which we have deteriorated even if there is a surge is just reduced.
So, I think we have talked enough about that at this point in time, which as Theresa said, we have a great group and we will get away, we are pretty positive with that and it's going to cost us a little bit more and we will move on. And, so I think that really concludes our comments, again wanted to note that steel operations ex non-cash adjustments, we are operating in the black, we will continue to operate in the black and hopefully we will be on the road to recovery in the economy and it will have a positive effect on our results.
I actually feel better about our position relative to others and we feel very good about the economy, but I think our position relative to others is excellent and I do think we're going to see some signs like. We are not going to return to running our facilities that are 100% of capability this year and may not even next year, but I think the economy is various sectors of it have some good health, other sectors are rather dismal.
The home construction segment of our economy, the non-residential construction, autos, tractors, trucks, trailers, those things are on their back, but they're seeing some signs of life there and I am sure the road to recovery will be a long road, but I think we're going to see improved activities as inventories continue to work-off and be more inline with the current shipping rates that out there today. So, again, I like our position in the world, feel very good about it, feel bad about the hardships that everyone endures in this kind of a climate including our employees, who have just been excellent stewards of shareholder money.
So, that concludes my comments today and Karin we will turn it over to you for Q&A.
Operator
Thank you, sir. (Operator Instructions).
We will take our first question from Mike (sic) [Mark] Parr with KeyBanc.
Mark Parr – KeyBanc
Thanks. Good morning.
Keith Busse
Good morning, Mark.
Mark Parr – KeyBanc
Keith, I had a question for you regarding the flat-rolled business, you had said you had seen a modest pickup in orders, I guess in the last month or so. And if you think that's easing off of de-stocking at the service center level or is there, perhaps a pick up in automotive or some other end-market that might be affecting that?
Keith Busse
I think that it probably is a result of de-stocking getting their bottom in that arena, clearly if the operating rate or if the economy is moving forward at two-thirds of its former capability or 60% yet the mills are running sub-50 eventually there is going to be a change in the outlook and then change in order entry activity. However, modest it is, it is modest, I don't think we want to forecast, there is a major recovery underway, but there is an improvement and I think it probably has largely to do with de-stocking especially in flat-rolled.
I don't know that we are at the bottom yet, in large structurals that we may still be in a de-stocking arena there that is going to cause operating rates in that universe to be rather dismal for another month or two.
Mark Parr – KeyBanc
And kind of along those lines, I think Gary had commented that, as joist activity or coat activity was beginning to show some signs of life and part of that related to the I guess, the resumption of financing availability. Keith, how much of the slowdown in the structural side do you think is related to this financing or, lack of financing and is there a potential for that to, to perhaps shift a little bit as you move into the height of the construction season in the third quarter?
Richard Teets, Jr.
Well I think, this is Teets. And as Keith mentioned.
Mark Parr – KeyBanc
Hi Dick.
Richard Teets, Jr.
Good morning, Mark. Financing is an issue you talk to the fabricators and they do have backlogs or engineered projects, but the owners are reluctant to pull the trigger on it either for financing and/or the true business return on it as you watch that vacancy rates in the inter-cities and so forth with the downturn occurring when, office complexes have 12% vacancy rates, nobody is going to really take, put their neck out and unless they already have a presold position and that's pretty tough these days.
All I was going to say is that the structural, to me the structural is almost like a trailing product it was the last to falloff because of project continuation the magnitude of projects that see through completion, and with vacancies and so forth I think it will be, potentially the last to pickup without some kind of artificial spark that through stimulus or some project like that.
Keith Busse
Mark, the public arena, people just couldn't fund school projects. People are little nervous about the viability of state and local government and the ability to repay debt and there was a lot of crying, wailing, and gnashing of teeth going on in that area, but I think the bond market has got a little bit of momentum.
Some of these school projects and municipal projects may get financed and come off the drawing boards and that could be very good for new Millennium as well as the long products arena Columbia City.
Mark Parr – KeyBanc
Okay. Let me just ask one more question, Keith and you talked about this covenant thing and I guess, the only question I would around it is if you, what would be the your anticipation of any timing of a waiver announcement, I mean is it something you would do kind of after the third quarter is released, or is it something that you might consider doing say in front of an actual violation occurring, I mean what’s your thought process around the timing of any conclusion to this process.
Keith Busse
I clearly think it needs to be in front of, not after.
Mark Parr – KeyBanc
Okay.
Keith Busse
And so we’ll probably be engaging shortly in that dialog with the providers. Theresa?
Theresa Wagler
I would agree with Keith that we would be in front of it as soon as we know that it would be an actuality Mark, so we will be, we would communicate obviously to the investor base at that time.
Mark Parr – KeyBanc
Okay terrific. Thanks very much guys.
Keith Busse
Thank you.
Operator
We’ll move on to our next question from John Tumazos with John Tumazos Very Independent.
John Tumazos – John Tumazos Very Independent Research
Good morning. You have a very talented team that's built and operated great plans and made some great decisions it looks like the auto business in the upper Midwest and private non-res construction for next several years are going to be very quiet markets.
With a corporate makeover of sorts interest you to try to focus your attention where it's easier to make hey, like the electric furnace industry in India is not as well developed there is a very fine electric furnace plant in Mississippi that’s a little closer to the locus of new auto plants, I don’t know if that would be a merger candidate, but in terms of the big picture, do you think there is better ways to make hey given the many talents of your fine team.
Keith Busse
John we’re always looking at new opportunities in the marketplace and I think the energy subject will provide many new opportunities to us whether it's redoing the energy grid, and transmission towers, or whether it’s windmills and the blades associated with those builds, or the steel superstructures that are going to be associated with them, we're always looking at new markets to enter. We certainly don't want to exit our established positions in other markets, but I couldn't agree with you more though that I think in the next few years, automobile production will not return to 15 million units.
So, it's important for us to be on the right platforms and continue to participate in that arena. I would note that, the number of cars and inventory has declined notably recently I hope that it continues to adjust, and if it does we see some resurgence of activity from the 10 million unit arena hopefully in time into the 11, 12, 13, but none of us are thinking this is going back to 15 million units tomorrow morning, so we are all out there looking at different opportunities.
We've also been very heavily invested in the processing community, service center community they will remain our key clients and they're searching for new outlets all the time and bringing us new ideas. At the same time, a lot of our teams are looking at new OEM opportunities that might suite us on a direct basis better than going through processing.
So, we're always looking for new homes for our products as a regard foreign adventures I think the one foreign adventure we had in Thailand was, its probably still a key within our minds and we're probably not too interested in going abroad at this point in time.
Operator
Moving on to Sal Tharani with Goldman Sachs.
Sal Tharani – Goldman Sachs
Good morning guys.
Unidentified management speaker
Good morning, Sal.
Keith Busse
Hey Sal.
Sal Tharani – Goldman Sachs
Keith, from the guidance just give us some more color you're going to sort of close to break-even perhaps slightly positive, your mills continue to probably make positive profit and is it true to say that they will be positive unit with corporate expense included. So, is that still coming from the scrap there, you may have some concern that you may still loose some money?
Keith Busse
We may have some earlier quarter losses there followed by recovery in later in the quarter in recycling, but you can earn more per ton notably not $3, but $22 on an operating basis yeah when you, so when you multiply that times far fewer tons you don’t have a positive result, but I think I don’t know that I can give you any and we've said we would give you any quantitative color on the second quarter outlook as we said, we'll just stay with it could be small loss, it could be break-even, it could be a small profit and that's about as good a visibility as we have. I think we’ll be as the tax said profitable going forward to the second half specifically I think we will have some decent quarters there as the economy continues to move forward ever so slightly in our position relative to cost delivers a perhaps better opportunity for margins.
So, I think we will have a profitable second half, obviously a break-even kind of quarter isn't going to cheer the first half given the larger losses we had in Q1. And I will refrain from making any comment about where the year might be, quantitatively, but certainly there is an opportunity for us to eat out of small profit, but I am not going to give you any quantitative guidance at this point in time, perhaps we will be able to do that later in this quarter as we get better visibility.
Operator
And we’ll take our next question from Luke Folta with Longbow Research.
Luke Folta – Longbow Research
Hi. Good morning everybody.
Keith Busse
Good morning
Luke Folta – Longbow Research
My first question was regarding I get the impression from your comments that the structural market isn't going to see improvement at least in the near term, but in a kind of rebounding economic scenario, do you think there would be more upside for the flat rolled product offering or more on the bar side?
Keith Busse
Well I think the margins are going to be better on the bar side multiplied times fewer tons, we would agree with you not seeing a major recovery taking place in at least in the next 90 days anyway. The margins could be expanding slightly on sheet goods, but again the volume is probably going to move up the hill slightly, but then again prices have deteriorated recently and just in the last couple of months they have come down significantly again, so the margins are going to be contracting probably a little bit, multiplied by the same tons, or, well maybe they won't contract, they may expand, expand by again not very exciting progress in volume.
Richard Teets, Jr.
I think one thing that's noteworthy, and I know you all know it, but our markets are affected by the type of competitors we have to complement what Keith says, from a flat roll perspective, I don't know the margins or the sales price is going to improve on the flat-roll in the short-term, but the fact that they're mostly integrated competitors from a percentage of market share, that I think the small starts and improvements will be met through the mini-mill sector that aren't big enough improvements that we aren't bringing back, blast furnace or such. And so, but in the structural arena every one is a mini-mill and in some of our bars, it's a mixture.
So, I think who the competitors are and what style of mill they are will affect the go forward in the short-term.
Operator
We will take our next question from Michael Gambardella with JPMorgan.
Michael Gambardella – JPMorgan
Yes, good morning. Have a question on the scrap side, on the ferrous scrap.
Could you give us an idea of where your ferrous scrap inventories are on a tonnage basis at both the scrap recycling business and the steel mills and how that has transpired, since the beginning of the year?
Keith Busse
Yes, Mike. Inventories in flat-rolled have not materially changed.
They're still very high, we bought into a declining price environment, while shipments were weak, so they haven't changed. Obviously, the value of those inventories have now at the end of the quarter dramatically changed.
So, I guess we have a lot of material at fairly economical values. We have an excellent cost structure, but we see that inventory declining sharply in the ensuing months.
And as prices just get into this malaise arena, certainly an opportunity to flush out a lot of cash and pair back inventory at specifically Butler. The inventories are in bad shape at Columbia City.
I would tell you that they only have a couple of months and that's at a dismal operating rate. If we could return to any settlement of capacity there, they wouldn't even have a month supply on hand.
So, it's really tied to the operation rate, but not in bad shape there. Actually went down, and will probably continue to decline somewhat.
As they have at the other long products locations. So, the biggest volume of tonnage, mid to block of tons in inventory is clearly still at Butler, we have a very specific plan to have far fewer tons on the ground by June 30 and September 30, which means we are not going to be big buyers out there in rather a dismal environment, and that's sort of bad news for the resource community, but as Mark said, the flows there in that arena are pretty dismal as well being buoyed only or bolstered by offshore activity, Turkey had been out of the market, China had been out of the market, they came back into the market.
Attractive pricing I don't know that will continue forever either, but it certainly was, I think it sort of caused the resourcing adverse to sort of bottom out in this area. Like I said earlier, it could go down $10, it could walk $10 I don't think it's going to materially move, but it could.
Buying activity abroad disappeared, and operating rates remained at these levels. Scrap could further decline.
That's a possibility. But in terms of volume and tonnage, again, we still have a lot at Butler, and we would be working that off in the ensuing months.
Operator
Our next question comes from Evan Kurtz with Morgan Stanley.
Evan Kurtz – Morgan Stanley
Hi, good morning. Just have a quick three part or actually on scrap as well.
First I was just was hoping you could share with us of the $730,000 ferrous shipments, how many of those were into the export market. Second, given that demand is starting to show signs of life now in Turkey and in Asia, does it make any sense for you at all to ship into the export market even if net of freight you are selling at slightly lower price.
If you can boost volumes and throughput to the yards and finally just want to get your thoughts on how a potential cash for clunkers legislation might affect profitability in the scrap unit? Thanks.
Keith Busse
Well, the answer to your first question from an export standpoint, we dabbled in that market, but didn't have any real material volumes going there. We did have some material going from our Omni southeast division.
And we are continuing to look at export opportunities, wherever it just makes economic sense, it may give you some contribution margin, but the numbers aren't tremendous even today. We are looking at that arena from a standpoint of cash for clunkers, obviously there's legislation that is yet to pass, all we can see is view that the European market obviously, it certainly has impacted their market, whereby many cars are coming to the scrap yards to a point where they can't dispose them, at least they don't have a market to dispose them and customers are actually paying the scrap, the scrap dealers, scrap yards to take the cars, which is kind of a anomaly, compared to where we see ourselves today.
But at an early I think cash for clunkers would certainly help our recycling business, it would increase the flow for sure and also stabilize the market pricing.
Richard Teets, Jr.
Yeah I might add to that, I think cash for clunkers is probably a good stimulus. It's probably a good idea, it gets more environmentally unfriendly gas-guzzlers off the road rather than the cycle we're in, where people are trying to make the clunkers last longer and therefore the pick a part business has been robust and these guys are sitting on bodies longer.
Not liking today's prices and not wanting to bring the bodies to the shredders. In Europe, it clearly had a positive impact in talking to one of our Directors who has been associated with the steel industry for the last 40 or 50 years and lives in Germany and one of the probs they had with it is that the processing community right away wanted to seize a point in opportunity and they were really afraid that this kind of volume would drive prices down materially.
If you start charging people part of the euro rebate on the car to process the car. So, they were getting in all the action and I don't know where they are with that today.
I think one of the dangers that we have with cash for clunkers is making sure the clunker gets to the shredder. And so I think that, it will be legislation that I would be interested in reading, because its not going to do us, it might do us new car production if it just makes to the pick a part yard, that's not going to do our industry a lot of good unless a mix, if they all pileup in the pick a part yard.
So, I don't think they will, I think it will increase flow and I think it's probably a fairly positive stimulus that could help move the economy forward.
Operator
Our next question comes from Brett Levy with Jefferies & Company.
Brett Levy – Jefferies & Company
Hi guys. Can you talk about 2010 CapEx and in fact maintenance CapEx just based on some of the revisions with respect to Mesabi and the second castor?
Theresa Wagler
As far as 2010 we really haven't done a lot of studying related to that there would be some CapEx switched out in the fourth quarter. Second castor we expect to finish in the fourth quarter currently, if not there might be as much as $10 million to $50 million that could be…
Keith Busse
Carry over, yeah.
Theresa Wagler
Carry over, and from Mesabi Nugget it could be as much as $30 million to $50 million put you back.
Richard Teets, Jr.
Well we haven't Brett, we have not really delayed maintenance CapEx. You specifically said maintenance and there is, we don't have any projects of major magnitude that are maintenance oriented that we have not continued to pursue.
Keith Busse
Last comment, our mills are in great shape.
Richard Teets, Jr.
Right.
Keith Busse
We continue to spend in that arena. We don't anticipate at this time given the protracted nature of the recession, that we would have a significant CapEx load in 2010.
As Theresa said, mostly carry over in nature, but things have a way of changing rather dramatically within a six to nine month period of time. But I think we are not going to see we are probably at the bottom of this cycle right now.
But how long we move across, how long we are at the bottom of the L if you will or if anybody's best guess. I don't think anyone really knows.
A lot of people say well, we're only going to see a pickup by the end of the year. I think that's just wishful thinking.
There are some bright spots in the economy. Hopefully, that will be infectious in nature.
Hopefully, we will work down the automobile, the days in inventory. Hopefully, financing we will loosen up and we will move some of these projects forward.
It's very encouraging that there are signs of life on the drawing boards at the architectural engineering firm that's a very positive sign.
Richard Teets, Jr.
From a CapEx standpoint, again just that we had some good projects that under current operating conditions don't have to payback that were initially calculated. And that’s where, those are the projects that got delayed.
They have efficiency, yield improvements so forth, and those as operating rates increased and we return to some more normal margins, then those will be the ones that come back and justify themselves from a payback perspective.
Operator
Our next question will be coming from Timna Tanners with UBS.
Timna Tanners – UBS
Hi good morning.
Keith Busse
Good morning, Timna.
Timna Tanners – UBS
Wanted to follow up with I think Dick was kind of answering it a little bit before, but just explicitly you and the other mills are all kind of saying we're ready to restart as soon as we're able to. What of leading indicators will you look for to know whether or not to restart and like you said and some of the blast furnaces in the sheet side in particular maybe a little bit slower, do you think you can take market share, do you think, how does that proceed in an orderly manner where everybody wants to restart capacity?
Keith Busse
Well, I don't think, we are all looking for signs of life and that for us comes in the form of news about various segments of the economy and the form of order entry, but restarting for us is not a long event, it's about eight hours long, if you will. And so it's not really an issue and we don't produce to stocks, so until we have a backlog, there won't be a C change in how we operate the mills.
That answers your question?
Timna Tanners – UBS
Ask that yourself, but I am just wondering about like, not just your own facilities, but some of the other facilities that are larger and clunkier, is there a risk that when everybody wants to restart they could overdo it, I guess?
Keith Busse
I think that Dick kind of addressed that earlier when he said Jeez, if there are small surges here and there, there's not going to right now there's no joy in mudville and I don't think these guys are going to relight blast furnace activity for a small surge. I think they want to see backlogs and demand in order entry levels.
Wholesale different level before you crank a lot of those tools up. It's not like an electric arc for us.
So, there maybe more caution there, you certainly don't want to get involved in any economic head fix that are out there.
Timna Tanners – UBS
Gotcha. And then real quick if I could on the debate over carbon emissions and how we proceed with that can you give us a quick summary of why mini-mills maybe better positioned and integrated if at all on the carbon emissions debate?
Keith Busse
Well I think the emissions at an EAF said most well positioned EAF facilities are far less onerous in terms of physical content in the environment than they would be at older facilities, especially integrated in nature, but we're all, none of us want to see jobs go offshore because we impose in some manner a carbon tax in our own environment, which takes capacity offshore, eliminates jobs and further damages the environment. I think everyone, and Mr.
Damico has been very vocal in that regard and I applaud him. That's the last thing we need from a planetary perspective is more pollution in fewer jobs here.
So, we need to play on a level playing field and I think there is more heightened awareness of that in the halls of Congress today than there has been in the past. And the steel industry is than 1% of any perceived CO problem.
And that's pretty small I mean from a global warming and CO content perspective there is much more concern about what we are doing with livestock and farming and certainly the tail pipe itself and we haven't solved the problems of the tail pipe, plugging making smaller cars and plugging them into your electrical outlet is because most of the energy generation in this country is coal fired doesn’t resolve the environmental crisis. So, we got to be careful, how we are moving around, how the pieces are moving around here, but we are opposed to any cap-and-trade legislation I don’t think that there are it’s like putting a rule in place before there is science there to support it.
Show me a technology that's going to allow us to emit less for a reasonable modest investment, we will invest in tomorrow, but the technology isn’t out there, so making a lot of rules without the science to support it with the technology to support, it's just going to create job losses and move jobs offshore. So, we're very concerned about the thinking on the hill in this rush to judgment in this regard, but I do think there is a lot more interest in our industry’s position on that subject today, then there has been in awhile.
I can't predict outcomes though.
Operator
We’ll move on to next question from Michelle Applebaum with Michelle Applebaum Research.
Michelle Applebaum – Michelle Applebaum Research
Hi
Keith Busse
Hi.
Michelle Applebaum – Michelle Applebaum Research
Thanks for a really thorough discussion and particularly in terms of the upcoming covenants issues I mean I think I take for granted that covenant breaches are 90% of the time opportunities for banks to come in and get more money from you. Not liquidity crisis triggering events.
And so…
Keith Busse
We would agree with you.
Michelle Applebaum – Michelle Applebaum Research
Right, right well I just have, I think I’ve seen two or three dozen steel companies file bankruptcy so I have a little bit of experience in that, sadly I thought that was a skill set I could flush you guys. So, anyway Omni, there has been a lot of stress about these issues, police things.
Mark, can you kind of talk about it.
Mark Millett
Yeah. And I will try not to get incensed by the whole issue, but I would suggest that back in February we had a very heavy handed closure of our Indianapolis yards.
I would suggest this wasn’t even a closure, more it was absolute police raid. And to say we were surprised by these actions certainly as an understatement.
Our employees actually were felt violated by the actions and I think our reputation certainly has been tarnished or besmirched. But despite the heavy handedness of the investigation, you should know that no employee nor the company so far has been charged with any civil or criminal wrongdoing.
But to put it in perspective, Michelle, there were about 25 incidents over a two-year, roughly two-year period in which we actually had about 550,000 transactions take place over that time and the incidents range from about $3 of transacted material, up to about $83 in material for a total transactional value of about $875. But as people know in the industry that they recognized that the identification of stolen material can be a very, very difficult task and although we constantly train and retrain our employees I believe some of them used poor judgment in executing our own internal policies, but it’s our belief, our strong belief that no individual broke the law or knowingly purchased any stolen property whatsoever.
We’ve been cooperating fully in their investigation. In fact, and perhaps ironically there has been a longstanding strategic working partnership with the Indianapolis Police Department that's gone on for several years, in an attempt to identify question on stolen material and to eradicate scrap that’s been general.
Today that partnership has resulted in more than 1900 investigations and 40 arrests in the Indianapolis area alone and we have similar partnerships in our other communities, for instance, Fort Wayne, we’ve helped in the arresting 200 individuals for scrap melt theft. So, I think our integrity and training our programs are second to note.
Unfortunately, the situation was further aggravated by the discovery recently of some operating licenses that unknowingly expired. As occurred they expired during the time SDI was acquiring OmniSource so perhaps they expired through some confusion.
But know that 13 out of 19 scrap yards in the Indianapolis area share the same dilemma at this moment in time, but there's no excuses on our part. We should have reapplied for them.
That reapplication process is underway, and we anticipate getting licenses here in the next hopefully 10 to 14 days.
Keith Busse
Michelle this is Keith. I would tell you that based on what you heard from Mark this was dramatic overkill at $875 worth of identified transactions that perhaps shouldn't have taken place just poor judgment was used by an individual at the scale.
I mean it, the fact that we have worked with these agencies both in Fort Wayne, in Toledo, in Indianapolis, to prevent this kind of activity are to be a very positive testimony to our attempt to eradicate activity like that. But you almost have to wonder whether or not there isn't some politics involved here.
I mean it just didn't smell right for $800. Something else was going on here.
It was kind of crazy, but I think in the end you will find that company other than allowing a license to expire at a time when we are buying Omni, and probably just was overlooked, was this whole thing was much to do about nothing. Does that answer your question?
Operator
Our next question comes from Kuni Chen with Bank of America.
Kuni Chen – Bank of America
Hi, good day everybody. I guess just to start Theresa, can you please give us the shipment breakdown for flat rolled, the hot rolled, cold rolled, galvalum et cetera?
Theresa Wagler
Yeah. Absolutely, its actually very similar to the fourth quarter, hot rolled was 105,000 tons.
Pickled and oils was 20,000 ton, cold rolls was 34,000 tons. Hot rolled galvanized was 53,000 tons, cold rolled galvanized was 47,000 tons.
Painted was 36,000 tons and galvalum was 9,000 tons.
Kuni Chen – Bank of America
Okay, great thanks. And then, Keith you had mentioned that you think we're near the bottom of the cycle and that things can certainly change quickly in the industry as you look out a couple of months.
Can you guys just talk a bit about your, how you look at your capital structure and your degree of comfort that you have sufficient financial flexibility to really participate fully, when industry conditions do start to recover. Working capital is down $800,000 million since the middle of last year.
But obviously as things start to turn back to the upside, there is going to be pretty substantial working capital drop. So, just hoping you could flush that a bit for us?
Keith Busse
Yeah. We have bottled four cases, an upside case, which we just kind of put on the shelf, and three down side cases, so we're modeling very conservatively I think going forward.
And so any comments are in the context of fairly conservative prognostications, but I actually see our revolver staying in the same arena for a quarter or two, being cut in half by year end from where we are today potentially maybe even less than that. So, there is really no, there are no liquidity issues, because we are modeling it very, very low levels of business activity.
So, I don't see that as a problem as to Jeez your business picks up you are going to build some, your receivables are going to go up sharply, yes they are, but we have a very specific program in place yet to drive value out of our inventories and by inventories we don't carry lot of finished goods as you know as a company have virtually no work in process. So, really talking about scrap and I think any in-surge in accounts receivable activity is what it would be dealt with by a declining inventory valuations, not valuations, but values based on less volume in stock if you want.
So, I don't really see our revolver going up throughout the year, if anything just going down.
Theresa Wagler
Kuni I'd just add to that that even in an extreme upside scenario you are not going to see working capital to keep point get back to the highest levels that it was probably we kicked out in the third quarter of last year. In part because it's just a high valuations of both steel prices and scrap prices and I don't think anyone is currently anticipating those levels, in addition to that Keith's point was that, the actual volume of specifically scrap inventory, I think will be dealt with differently on a go forward basis as OmniSource may hold different levels of volumes that all the efforts you will note.
So, we are not seeing a problem with that.
Keith Busse
Kuni I don't think that we are going bak to $1,100 a ton any time soon, which would really drive the working capital as expected equation to a greater degree, but certainly would love to see some recovery in pricing from these very, very low levels, but again I think that could all be dealt with, within our capital structure, so we are not, I don't know if there is any need to change the capital structure at this point time.
Operator
This does conclude the question-and-answer session for today. If your question was not answered, please contact Fred Warner, Investor Relations Manager with questions at 260-969-3564 or e-mail him at [email protected].
Keith Busse
Karin, thank you. I don't really have many concluding comments other than to thank everyone for their continued interest in the company, their continued support of the company, and to say to all of our employees to give them a sincere pat on the back and a thank you for the cost containment accomplishments of the recent past.
You truly are the best of what you do. Thank you.
Operator
Ladies and gentlemen that does conclude today's conference. Thank you for your participation and have a wonderful day.