Steel Dynamics, Inc. — FY 2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; quarterly data below includes the three months ended December 31, 2010. Steel Dynamics produces steel, recycles ferrous and nonferrous metals, and fabricates steel joists and decking. Its three reporting segments are steel operations; metals recycling and ferrous resources; and steel fabrication.
Financial performance and position
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $6.301 billion | $3.959 billion |
| Gross profit / margin | $675.7 million / 10.7% | $399.1 million / 10.1% |
| Operating income / margin | $364.8 million / 5.8% | $119.5 million / 3.0% |
| Net income (loss) attributable to Steel Dynamics | $140.7 million | $(8.2) million |
| Diluted earnings (loss) per share | $0.64 | $(0.04) |
| Cash provided by operating activities | $169.3 million | $445.6 million |
| Capital expenditures | $133.4 million | $330.1 million |
| Cash and equivalents at year-end | $186.5 million | $9.0 million |
| Total debt, including current maturities | $2.387 billion | $2.223 billion |
- Liquidity and leverage: The company reported $909 million available under its $924 million revolving credit facility, with no revolver borrowings at year-end, and described total liquidity as $1.1 billion. Operational working capital was $1.221 billion, up from $989.1 million. Debt to capitalization was 52.8%, compared with 52.6%. The company was compliant with its debt covenants; total debt to adjusted EBITDA was 3.74x against a 5.00x maximum.
- Cash generation: Operating cash flow fell despite the return to profitability, largely reflecting higher receivables and inventory as activity and prices recovered. Operating cash flow less capital expenditures was approximately $35.9 million.
- Dividends: Dividends declared were $0.30 per share in 2010, versus $0.325 in 2009.
- Fourth quarter: Sales were $1.528 billion, operating income $46.8 million, net income attributable to Steel Dynamics $7.8 million, and diluted EPS $0.04. Compared with Q3 2010, sales and earnings declined.
Material changes versus the prior comparable period
- Sales rose 59% year over year, while operating income increased to $364.8 million from $119.5 million. Recovery in customer volumes and selling prices, especially in sheet and special bar-quality steel, drove the improvement.
- Steel operations operating income increased 124% to $439.8 million. Steel shipments rose 31% to 5.30 million tons; the average selling price per ton increased $112 year over year. Metallic raw-material cost per ton also rose $107, while gross margin per ton improved $33.
- Metals recycling and ferrous resources revenue increased 89% to $3.179 billion. Ferrous shipments rose 43% to 5.18 million gross tons and nonferrous shipments rose 23% to 961 million pounds. Segment operating income improved to $19.7 million from a $4.7 million loss.
- Steel fabrication remained loss-making: operating loss widened to $25.1 million from $6.4 million, despite sales rising 12%. The segment recorded a $12.8 million non-cash impairment charge for an idled South Carolina facility.
- Mesabi Nugget began production in January 2010 and produced about 75,000 metric tons for company mills. Start-up losses reduced consolidated pretax earnings by $42 million in 2010, excluding noncontrolling interests.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management expected slow, steady U.S. economic growth in 2011, with increased steel and recycling volumes and improvement across segments. It viewed residential and non-residential construction as likely to have bottomed, while expecting a gradual recovery. Planned 2011 capital spending was less than $200 million; management said operations and available cash sources should cover expected requirements.
- Projects and investment: Management expected Mesabi Nugget production to improve in 2011 toward its stated annual capacity of 500,000 metric tons. Mesabi Mining, with estimated project capital cost of approximately $169 million, remained subject to permitting; the company anticipated permits near the end of 2011 and possible mining operations near the end of 2012.
- Key business risks: Results are exposed to steel and scrap price cycles, demand and pricing pressure from imports and excess capacity, raw-material and energy cost volatility, and the ability to pass cost increases to customers. Further risks include construction-market weakness, operational outages, environmental regulation and permitting, and execution and technology risks at Mesabi Nugget.
- Debt and liquidity risks: The revolving credit facility is due in June 2012 and subject to borrowing-base and financial covenants. The company had $700 million of senior notes due in 2012. If total debt leverage exceeds 3.50x, restricted payments, including dividends, are limited to $25 million per quarter; year-end leverage was 3.74x.
- Contingencies: Steel Dynamics and other producers faced class-action antitrust suits seeking treble damages; the company said it could not estimate potential exposure. OmniSource faced criminal charges and related civil proceedings in Indiana, which the company disputed; financial exposure was not estimable. The company also reported environmental remediation accruals and potential tax exposures, including $49.4 million of unrecognized tax benefits and $11.1 million accrued for interest and penalties.
- Other unusual items: The $12.8 million fabrication impairment reduced earnings. A $5.0 million unrealized loss on commodity financial contracts was reported at year-end, with settlement expected in 2011. The company issued $350 million of 7.625% senior notes due 2020 in March 2010, using net proceeds primarily to repay revolver borrowings and for general corporate purposes.
Important facts for investors to verify
- Whether steel prices, shipment volumes, and scrap and energy costs sustain the improved margins—and how these trends affect working capital and operating cash flow.
- Mesabi Nugget’s production ramp, cost performance, and permitting progress for the related Mesabi Mining project.
- The 2012 debt maturities, refinancing plans, covenant headroom, and implications of the 3.74x year-end leverage ratio for dividends and other restricted payments.
- Developments and potential financial consequences of the antitrust litigation and OmniSource Indiana proceedings; the filing does not provide a clear estimate of exposure.
- Whether continued weakness in non-residential construction leads to further fabrication losses, impairments, or delays in integrating the acquired joist assets.