Steel Dynamics, Inc. — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012, with unaudited quarterly results for Q4. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments. The company reported 6,670 employees and annual steelmaking capability of approximately 6.4 million tons. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $7.290 billion | $7.998 billion | Down 9% |
| Gross profit / margin | $719.9 million / 9.9% | $931.5 million / 11.6% | Margin down 1.7 pts |
| Operating income / margin | $391.2 million / 5.4% | $584.8 million / 7.3% | Down 33% |
| Net income attributable to Steel Dynamics | $163.6 million | $278.1 million | Down 41% |
| Diluted EPS | $0.73 | $1.22 | Down 40% |
| Cash from operating activities | $445.7 million | $486.4 million | Down 8% |
| Capital expenditures | $223.5 million | $167.0 million | Up 34% |
| Total debt at year-end | $2.202 billion | $2.380 billion | Down $177.9 million |
Cash from operations less capital expenditures was approximately $222.2 million in 2012, versus $319.3 million in 2011. Cash and short-term commercial paper totaled $407.4 million at year-end, compared with $475.6 million. Operational working capital was $1.282 billion, broadly unchanged year over year. The current ratio, calculated from reported balance-sheet totals, was approximately 3.8, up from 2.2, primarily reflecting lower current debt maturities.
Steel shipments were essentially flat at 5.83 million tons. Ferrous recycling shipments fell 4% to 5.65 million gross tons, and nonferrous shipments declined 1% to 1.05 billion pounds. Steel fabrication shipments increased 35% to 295,000 tons.
Q4 2012 results
Q4 net sales were $1.705 billion, versus $1.858 billion in Q4 2011. Gross profit was $180.1 million versus $160.1 million, operating income was $94.9 million versus $82.5 million, and net income attributable to Steel Dynamics was $60.6 million versus $30.2 million. Diluted EPS was $0.27 versus $0.14. Q4 2012 included $26.4 million of refinancing-related non-operating expense; quarterly EPS is calculated independently and may not sum to annual EPS.
Material changes and management commentary
- Steel operations: Segment operating income declined 25% to $495.6 million. Average selling prices fell about $64 per ton while metallic raw-material costs fell about $32 per ton, compressing spreads. Sheet shipments declined 3%; long-product shipments rose 4%.
- Metals recycling and ferrous resources: The segment shifted to a $36.5 million operating loss from $26.6 million income in 2011. Lower metal pricing and shipments compressed recycling margins; Minnesota iron operations continued to incur start-up losses.
- Steel fabrication: Segment revenue rose 34% and operating results improved to $2.1 million income from a $6.6 million loss, supported by higher shipments and improved cost spreads.
- Financing: The company refinanced debt during 2012, issuing $400 million of 6.125% notes due 2019 and $350 million of 6.375% notes due 2022, alongside a $275 million term loan. Management said the transactions extended maturities and reduced borrowing costs; they generated $40.3 million of refinancing-related expense.
Liquidity, debt and outlook
At December 31, 2012, total liquidity availability was reported at $1.493 billion, including $375.9 million cash, $31.5 million short-term commercial paper, and $1.086 billion of revolver availability. The $1.1 billion revolver had no borrowings outstanding. Total debt to capitalization was 47.1%, down from 50.1%; the company reported covenant compliance, with interest coverage of 4.05x and net debt leverage of 2.93x.
Management expected operating cash flow and available funding to cover principal and interest, working capital, and planned capital spending for the next 12 months. Planned 2013 capital expenditures were $200 million to $225 million. Management expected Mining Resources to reach full capacity in the first half of 2013 and anticipated improvements to Mesabi Nugget during that period; these were expectations, not guarantees. It said internally sourced iron concentrate could cost below $50 per metric ton compared with market pricing then above $140.
Risks, contingencies and unusual items
- Steel and scrap markets are cyclical; weak demand, imports, excess global capacity, volatile scrap and energy costs, and inability to pass through input-cost increases could further pressure margins.
- Mesabi Nugget and other iron initiatives carry technology, start-up, operating, commodity-price, and permitting risks. The Minnesota iron operations reduced net income by approximately $41.5 million in 2012.
- Environmental permits, compliance costs, remediation obligations, and potential changes in environmental or greenhouse-gas regulation could affect operations and capital needs. 2012 environmental monitoring and compliance costs were approximately $37.7 million.
- The company faces steel-pricing antitrust class actions seeking treble damages. Management said it could not determine the outcome, but did not then consider a material impact reasonably possible; no dollar estimate of exposure was provided.
- Other notable items included an $8.3 million impairment charge from plans to terminate two small joint ventures, $40.3 million of debt-refinancing expenses, and a lower 2012 effective tax rate of 30.3% versus 37.4%, principally due to tax-audit settlements.
- Contractual obligations included $74.5 million of construction commitments and $126.4 million of purchase obligations, including take-or-pay commitments. The $287.5 million of convertible senior notes due in 2014 is a nearer-term maturity to monitor.
Important facts for investors to verify
- Whether steel selling prices and metal spreads stabilize or recover relative to scrap and other input costs.
- Whether metals recycling margins and segment profitability improve, and whether Minnesota iron start-up losses decline as planned.
- Progress, production, product quality, costs, and permitting for Mining Resources, Mesabi Nugget, and planned mill expansions.
- Cash generation, capital spending, debt maturities, covenant headroom, and compliance with dividend restrictions.
- Developments in the antitrust litigation, environmental matters, tax examinations, and any resulting accruals or cash payments.
- The filing provides no numerical earnings or revenue guidance; management’s outlook is expressed through operating expectations and a 2013 capital-spending range.