Steel Dynamics, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 27, 2019. Steel Dynamics is a U.S. steel producer and metals recycler, with steel fabrication as a third reporting segment.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $11.82 billion | $9.54 billion |
| Gross profit / gross margin | $2.32 billion / 19.6% | $1.58 billion / 16.6% |
| Operating income / operating margin | $1.72 billion / 14.6% | $1.07 billion / 11.2% |
| Net income attributable to Steel Dynamics | $1.26 billion | $813 million |
| Diluted EPS | $5.35 | $3.36 |
| Cash provided by operating activities | $1.42 billion | $739 million |
| Capital expenditures | $239 million | $165 million |
| Cash, equivalents and short-term investments | $1.06 billion | $1.03 billion |
| Long-term debt, including current maturities | $2.38 billion | $2.38 billion |
Sales rose 24%, operating income 61%, and attributable net income 55%. Margins above are calculated from reported figures. Operating cash flow less capital expenditures was approximately $1.18 billion, a derived measure. Cash and short-term investments were supplemented by $1.19 billion of revolver availability, for reported total liquidity of $2.25 billion. No revolver borrowings were outstanding at year-end; debt-to-capitalization was 37.9%.
Steel operations generated 75% of consolidated sales and recorded $1.84 billion of operating income, up 67%; segment shipments increased 7% to 10.0 million tons, and mill utilization reached 96%. Metals recycling operating income increased 7% to $75.9 million. Steel fabrication operating income fell 29% to $61.9 million as higher steel input costs outpaced price and volume gains.
Material changes and unusual items
- Domestic demand, steel shipments and selling prices strengthened; management cited lower finished-steel imports than in 2017. Steel average selling prices increased $158 per ton, while metallic raw-material cost per ton increased $48; the company’s steel metal spread expanded 23%.
- Heartland Flat Roll was acquired on June 29, 2018, for $434 million including working-capital adjustment. Its results are included from the acquisition date.
- 2017 net income included a one-time $180.6 million tax benefit from U.S. tax reform. The 2018 effective tax rate was 22.5%, versus 13.8% in 2017; the comparison therefore includes a significant prior-year tax benefit.
- Share repurchases totaled $524 million for 13.1 million shares in 2018; $399 million remained under the then-current authorization at year-end. The quarterly dividend was increased 21% to $0.1875 per share during 2018.
- Fourth-quarter 2018 sales were $2.90 billion and operating income was $366 million; attributable net income was $270 million and diluted EPS was $1.17. Fourth-quarter 2017 attributable net income of $305 million and diluted EPS of $1.28 included the tax-reform benefit.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management said cash from operations and other funding sources should be adequate for the next 12 months to cover debt service, working capital and anticipated capital expenditures, and anticipated continued covenant compliance. Plans included a new southwestern U.S. electric-arc-furnace flat-roll mill with approximately 3.0 million tons of annual capacity; the filing does not provide a clear expected completion date. A $140 million Columbus galvanizing line was expected to begin operating in mid-2020. A February 2019 agreement to acquire 75% of United Steel Supply for $134 million, including assumed debt, was disclosed as a subsequent event.
- Steel and scrap markets are cyclical. Global overcapacity, imports and possible changes to Section 232 tariffs could pressure steel prices and margins; volatile scrap, zinc, electrodes, energy and freight costs may not be passed through to customers.
- Growth projects and acquisitions carry construction, integration, permitting, labor, demand and financing risks. The planned mill represents a major execution and capital commitment.
- Supplier commitments, including take-or-pay arrangements, totaled $742 million; construction commitments were $155 million at year-end. Long-term contractual obligations totaled $4.01 billion, including estimated debt interest.
- Environmental regulation, permits, remediation and litigation could increase costs. The company reported $42.3 million of environmental monitoring and compliance costs in 2018, plus $3.3 million accrued for metals-recycling remediation and $2.6 million for Minnesota ironmaking remediation. Routine litigation was not expected to materially affect financial condition, results or liquidity; recorded environmental fines and penalties totaled $451,000.
- Minnesota ironmaking operations have been idle since May 2015. No 2018 goodwill impairment was recorded; future impairment remains possible. The 2016 impairment is not a current-year charge.
Important facts for investors to verify
- Whether steel pricing and metal spreads remain strong enough to offset raw-material cost volatility and an eventual demand slowdown.
- The detailed funding, schedule, expected returns and permit status for the proposed 3.0-million-ton mill and other expansion projects.
- Debt maturities, particularly $700 million of notes due in 2021, and compliance with facility covenants; year-end net-debt leverage was 0.85:1.00.
- How the Heartland acquisition performs and whether the announced United Steel Supply transaction closes on the disclosed terms.
- The full scope and timing of environmental, tax and other contingent obligations, and the impact of the 2017 tax benefit on year-over-year earnings comparisons.
- Internal-control scope: management and the auditor excluded Heartland from the 2018 internal-control assessment; Heartland represented about 7% of year-end assets and 2% of 2018 sales. The auditor issued unqualified opinions on the consolidated financial statements and on internal control within the stated scope.