Steel Dynamics, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Steel Dynamics produces steel, recycles ferrous and nonferrous metals, and fabricates steel products; its three reporting segments are steel operations, metals recycling and ferrous resources, and steel fabrication.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $7.373 billion | $7.290 billion | Up 1% |
| Gross profit | $719.1 million | $719.9 million | Nearly flat |
| Gross margin | 9.8% | 9.9% | Down slightly |
| Operating income | $386.5 million | $391.2 million | Down 1% |
| Operating margin | 5.2% | 5.4% | Down slightly |
| Net income attributable to Steel Dynamics | $189.3 million | $163.6 million | Up 16% |
| Diluted EPS | $0.83 | $0.73 | Up 14% |
| Cash from operations | $312.2 million | $445.7 million | Down $133.5 million |
| Capital expenditures | $186.8 million | $223.5 million | Down $36.7 million |
Consolidated net income was $163.5 million in 2013 versus $142.3 million in 2012; the higher amount attributable to Steel Dynamics reflects losses allocated to noncontrolling interests. Lower interest expense and refinancing costs helped lift pretax income despite essentially flat operating income. Gross interest expense fell 17% to $132.3 million, and the effective debt interest rate was reduced to less than 5.6% at year-end.
Fourth quarter: Net sales were $1.864 billion, gross profit $198.0 million, operating income $107.8 million, net income attributable to Steel Dynamics $54.7 million, and diluted EPS $0.24. Compared with Q4 2012, sales, gross profit, and operating income increased; attributable net income and diluted EPS decreased from $60.6 million and $0.27.
Segments and material year-over-year changes
- Steel operations: Revenue increased 1% to $4.768 billion; operating income rose 2% to $504.4 million. Shipments reached a record 6.1 million tons, up 5%, but average selling prices fell $41 per ton while metallic raw-material costs fell $25 per ton, compressing metal spreads.
- Metals recycling and ferrous resources: Segment revenue increased 1% to $3.663 billion, but the segment reported an operating loss of $52.5 million, compared with a $36.5 million loss in 2012. OmniSource itself earned $41.9 million, down 12%; weaker ferrous pricing and compressed margins weighed on results. Minnesota iron operations reduced 2013 net income by about $42 million, or $0.18 per diluted share.
- Steel fabrication: Revenue rose 18% to $439.7 million and operating income increased to $7.0 million from $2.1 million. Shipments grew 24% to 367,000 tons, reflecting improved demand and market-share gains.
- Against 2011, 2013 sales remained lower and operating income was substantially lower: 2011 net sales were $8.0 billion and operating income $584.8 million. Attributable net income was $278.1 million in 2011.
Liquidity, debt, and capital allocation
- Year-end cash and equivalents were $395.2 million; revolver availability was approximately $1.086 billion, for total stated availability of about $1.481 billion. The $1.1 billion revolver had no borrowings outstanding and matures in September 2016.
- Total debt was $2.108 billion, down $94.6 million from 2012. Debt to capitalization was 44.7%, versus 47.1%. The company reported covenant ratios of 5.30x interest coverage and 2.60x net debt to adjusted EBITDA and said it was in compliance.
- Current debt maturities were $341.5 million, including $287.5 million of 5.125% convertible notes due June 2014. The filing describes the notes’ conversion terms; the maturity and potential conversion or repayment require attention.
- Operational working capital increased $121.6 million to $1.406 billion. Inventory rose $112.2 million to $1.315 billion, contributing to lower operating cash flow. Management attributed inventory growth partly to higher production and scrap purchases late in the year.
- The company declared $0.44 per share in dividends for 2013, up from $0.40 in 2012. Management estimated 2014 capital expenditures of $125–$150 million.
Outlook, commentary, risks, and unusual items
- Management cited ongoing recovery in nonresidential construction and improving demand in fabricated steel, and planned 2014 expansions in engineered bar, rail, and sheet-coating capacity. It did not provide a specific earnings or revenue forecast.
- Mesabi Nugget continued to face production-cost, yield, operational, and quality challenges. Trials continued into 2014; management expected to assess by late first quarter whether further improvements were justified. The project’s future economics remain uncertain.
- Key exposures include cyclical steel and construction demand; imports and global overcapacity; volatile scrap, iron-unit, energy, and other input costs; inability to pass costs through; operating outages; and environmental regulation and permitting.
- A steel-industry antitrust class action alleges price fixing during 2005–2007 and seeks treble damages. The company said it could not determine the ultimate outcome or estimate potential loss; a class-certification hearing was scheduled for March 2014. An adverse outcome could materially affect financial results or liquidity.
- Environmental compliance and monitoring costs were $37.6 million in 2013, with $1.4 million of environmental capital expenditures. Management did not expect current compliance to have a material adverse effect but noted future rules or remediation could raise costs.
- Debt refinancing was a significant year-over-year item: 2013 refinancing charges were $2.6 million versus $40.3 million in 2012. The 2013 annual goodwill and indefinite-lived intangible impairment tests resulted in no impairment charge; 2012 included an $8.3 million impairment charge related to two joint ventures.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective at year-end.
Investor verification priorities
- Review the June 2014 convertible-note maturity, repayment or conversion outcome, and subsequent liquidity impact.
- Track steel selling prices, scrap costs, metal spreads, and inventory levels against shipment growth and operating cash generation.
- Assess whether Mesabi Nugget improves yield and costs enough to justify continued investment, and monitor the resulting losses and impairment assumptions.
- Check segment reporting and distinguish profitable OmniSource operations from the broader metals recycling and ferrous resources segment loss.
- Follow the antitrust litigation, environmental and mining permits, and compliance with debt covenants and dividend restrictions.
- Compare actual 2014 capital spending and expansion performance with management’s $125–$150 million plan; the filing provides no quantified earnings guidance.