Steel Dynamics, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Steel Dynamics is a U.S. steel producer and metals recycler, with steel fabrication as a third reporting segment. This annual report covers the fiscal year ended December 31, 2017; quarterly figures are unaudited. Steel operations accounted for 72% of consolidated sales, metals recycling 15%, and steel fabrication 9% (the remainder includes other operations and eliminations).
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $9.539 billion | $7.777 billion |
| Gross profit / margin | $1.582 billion / 16.6% | $1.335 billion / 17.2% |
| Operating income / margin | $1.067 billion / 11.2% | $728.0 million / 9.4% |
| Net income attributable to Steel Dynamics | $812.7 million | $382.1 million |
| Diluted earnings per share | $3.36 | $1.56 |
| Cash from operations | $739.6 million | $852.8 million |
| Capital expenditures | $164.9 million | $198.2 million |
| Cash and equivalents at year-end | $1.029 billion | $841.5 million |
| Debt, including current maturities, net of issuance costs | $2.382 billion | $2.357 billion |
Sales increased 23% year over year, reflecting higher steel prices and volumes. Reported operating income rose 47%; 2016 included $132.8 million of noncash impairment charges. Gross margin declined despite higher gross profit. Operating cash flow less capital expenditures was approximately $574.7 million, down from $654.6 million in 2016. The 2017 effective tax rate was 13.8%, including a one-time $180.6 million benefit from U.S. tax reform, or $0.75 per diluted share; without that benefit, reported earnings would have been materially lower.
Steel operations reported $1.099 billion of operating income, up 19%, on 4% higher external shipments and a 17% increase in average selling prices. Steel mill utilization was 92%, versus 87% in 2016. Metals recycling operating income was $71.1 million, improving from $20.4 million in 2016, alongside stronger metal spreads and lower operating costs. Steel fabrication operating income declined 4% to $87.3 million: shipments reached a record, but higher steel input costs outpaced selling-price increases.
Liquidity, debt and capital allocation
Year-end liquidity was $2.217 billion: $1.029 billion of cash and $1.188 billion of revolver availability. The $1.2 billion revolving facility had no borrowings outstanding, matures in November 2019, and is secured by substantially all receivables and inventories and subsidiary equity interests. The company reported a 1.35:1 net-debt-to-adjusted-EBITDA ratio and 10.75:1 interest coverage, within its respective 5.00:1 maximum and 2.50:1 minimum covenants. Total debt to capitalization was 41.9%, down from 44.9%.
In 2017, the company issued $350 million of 4.125% notes due 2025 and used proceeds and cash to retire its 6.375% notes due 2022; related tender, call and financing costs were $14.6 million. It paid $145.6 million in dividends and repurchased 7.4 million shares for $252.2 million, leaving $172.7 million of repurchase authorization. Declared dividends were $0.62 per share.
Changes, outlook and material items
- Management characterized 2017 as one of the company’s strongest years, citing record consolidated sales, steel shipments, fabrication shipments and operating income. Demand improved in construction, energy, heavy equipment and general industrial markets; automotive remained strong.
- Imports increased, particularly in structural and fabricated structural products and also in cold-rolled and coated sheet steel. Management said imports represented 27% of 2017 domestic consumption and continued to pressure competition and pricing.
- Management estimated approximately $250 million of 2018 capital expenditures. Projects included a $75 million structural and rail rebar expansion and a $28 million Roanoke rolling-line expansion expected to complete in early 2018.
- The Minnesota ironmaking operations remained indefinitely idled. The 2016 impairment charges included $127.3 million related primarily to those operations and $5.5 million of OmniSource goodwill impairment; there were no 2017 goodwill impairment charges.
- Raw-material exposure is significant: metallics generally represent about 60% of steel manufacturing costs, and 2017 metallic raw-material cost per ton rose 33%. Zinc and graphite-electrode cost and availability, energy prices, and the ability to pass cost increases through to customers are also risks.
- Environmental compliance costs were approximately $39.1 million in 2017, with $2.9 million of environmental capital expenditures. Recorded remediation accruals were $5.5 million in total. The company stated routine litigation was not expected to materially affect financial condition, results or liquidity; $420,000 of environmental fines or penalties was recorded at year-end.
- The company expected to adopt the new revenue recognition standard in the first quarter of 2018 and reported no expected change in revenue amount or timing. Lease-accounting changes were being evaluated for anticipated adoption in 2019.
Investor verification priorities
- Separate recurring earnings from the $180.6 million tax-reform benefit and assess the effect of the 21% federal corporate tax rate beginning in 2018.
- Review steel and scrap price spreads, rising metallics and other input costs, import levels, and whether selling prices can keep pace with costs.
- Track operating cash flow and working-capital investment: operational working capital increased $250.7 million to $1.552 billion in 2017.
- Monitor execution, spending and returns on the planned 2018 capital projects, as well as the status and carrying costs of the idled Minnesota operations.
- Verify debt maturities, refinancing needs and covenant headroom; the senior secured revolver matures in November 2019, and $703.7 million of debt is scheduled for 2021.
- Assess environmental obligations, tax-audit outcomes and other contingencies. The filing reports $16.7 million of unrecognized tax benefits and $4.8 million accrued for related interest and penalties.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of December 31, 2017.