Steel Dynamics, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Steel Dynamics is a U.S. steel producer and metals recycler, with steel fabrication as a third reporting segment.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $10.465 billion | $11.822 billion |
| Gross profit | $1.531 billion | $2.323 billion |
| Operating income | $986.9 million | $1.722 billion |
| Net income attributable to Steel Dynamics | $671.1 million | $1.258 billion |
| Diluted earnings per share | $3.04 | $5.35 |
| Cash from operating activities | $1.396 billion | $1.415 billion |
| Capital expenditures | $451.9 million | $239.4 million |
| Cash, equivalents and short-term investments at year-end | $1.644 billion | $1.057 billion |
| Debt, including current maturities, at year-end | $2.734 billion | $2.377 billion |
- Gross margin was approximately 14.6%, versus 19.6% in 2018; operating margin was approximately 9.4%, versus 14.6%. These percentages are calculated from reported figures.
- Operating cash flow less capital expenditures was approximately $944 million, compared with $1.176 billion in 2018.
- Year-end liquidity totaled approximately $2.802 billion, including $1.644 billion of cash and short-term investments and $1.158 billion of available revolver capacity. The revolver had no borrowings outstanding.
- Steel operations shipped 10.82 million tons, up 2% in total shipments; reported segment shipments after intra-segment shipments were down 2%. Steel fabrication shipments reached a record 644,000 tons. Ferrous recycling shipments fell 10%.
- Fourth-quarter 2019 net sales were $2.350 billion, operating income $182.0 million, net income attributable to Steel Dynamics $121.4 million, and diluted EPS $0.56.
Changes versus 2018
- Sales fell 11%, operating income fell 43%, attributable net income fell 47%, and diluted EPS declined from $5.35 to $3.04.
- Management attributed the weaker steel results to customer inventory destocking after above-normal purchases in late 2018, falling steel prices, and tighter metal spreads. Steel selling prices declined more than scrap costs; steel operations operating income fell 44%.
- Recycling was also pressured by lower prices and shipments: average ferrous and nonferrous scrap selling prices declined 21% and 10%, respectively, and segment operating income fell 79% to $16.3 million.
- Fabrication was a counterpoint: higher selling prices and lower steel input costs lifted segment operating income 92% to $119.1 million.
- Capital expenditures rose to $451.9 million, primarily reflecting growth investment, including construction of the planned Sinton, Texas flat-roll mill.
Outlook, risks and notable items
- The company provided no specific earnings or financial guidance in the supplied filing text. Management said domestic steel demand remained steady in 2019 and that prices firmed in the fourth quarter as destocking subsided; fabrication orders and backlog were described as strong.
- The planned Southwest-Sinton EAF flat-roll mill carries an estimated cost of $1.9 billion, approximately 3.0 million tons of annual steelmaking capacity, and a planned mid-2021 start. Construction commitments at year-end totaled $820.4 million, including $681.9 million related to Sinton. Cost overruns, delays, weaker-than-expected markets, and execution are identified risks.
- In December 2019, the company issued $400 million of 2.800% notes due 2024 and $600 million of 3.450% notes due 2030, using proceeds to redeem $700 million of 5.125% notes due 2021 and for general corporate purposes. Total debt increased year over year. The company reported investment-grade credit upgrades and covenant compliance; year-end interest coverage was 10.72x against a 2.50x minimum, and debt-to-capitalization was 0.40x against a 0.60x maximum.
- Shareholders received declared dividends of $0.96 per share in 2019, up from $0.75 in 2018. The company repurchased $348.6 million of stock during 2019; $50.5 million remained under the repurchase authorization at year-end.
- Key exposures include steel and scrap price cycles, global overcapacity and imports, raw-material and energy costs, economic sensitivity of customer industries, environmental regulation and remediation, cybersecurity, equipment outages, and the Sinton project. Minnesota ironmaking operations remained indefinitely idle.
- Routine litigation was not expected to materially affect financial condition, results or liquidity. Recorded fines or penalties for environmental matters totaled $512,000; environmental remediation accruals were $6.2 million in total for metals recycling and Minnesota ironmaking operations.
- The company reported no goodwill impairment in 2019. The USS acquisition (75% interest, completed March 1, 2019) cost approximately $97.1 million including the working-capital adjustment; its acquired operations were included in steel results from the acquisition date.
Important facts for investors to verify
- Whether steel prices and metal spreads recover or remain under pressure as customer inventories normalize, and how scrap costs move relative to selling prices.
- Sinton project spending, schedule, financing needs, customer commitments, and progress toward the planned mid-2021 start.
- Cash generation after elevated growth capital spending, and the evolution of debt, liquidity and covenant headroom.
- Whether record fabrication volumes and margins are sustainable, and whether recycling shipment volumes and spreads stabilize.
- Potential environmental, regulatory, tax, litigation, and cybersecurity developments; the filing identifies risks but does not quantify all possible future costs.