STEEL DYNAMICS INC annual report, FY2015

Steel Dynamics, Inc. — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. Steel Dynamics is a U.S. steel producer and metals recycler, with steel operations, metals recycling, and steel fabrication segments. The company reported approximately 11 million tons of annual steelmaking and coating capability.

Financial performance

Metric20152014
Net sales$7.594 billion$8.756 billion
Gross profit$731.7 million$966.2 million
Operating income (loss)$(72.8) million$320.3 million
Net income (loss) attributable to Steel Dynamics$(130.3) million$157.0 million
Diluted EPS$(0.54)$0.67
Cash from operating activities$1.038 billion$617.6 million
Capital expenditures$114.5 million$111.8 million
Cash and equivalents at year-end$727.0 million$361.4 million
Total debt, including current maturities$2.628 billion$3.024 billion

Reported gross margin was approximately 9.6% (2014: 11.0%); reported operating margin was approximately negative 1.0%. The 2015 operating loss includes $428.5 million of non-cash impairment charges, primarily for OmniSource goodwill and trade name assets. Excluding impairment charges, management reported operating income of $355.7 million and net income of $138.3 million, or $0.57 per diluted share, compared with $580.3 million and $289.6 million, or $1.22 per diluted share, respectively, in 2014.

Year-end liquidity was $1.914 billion, including $727.0 million cash and $1.187 billion of revolver availability. No revolver borrowings were outstanding. Long-term debt to capitalization was 49.6%, down from 51.6%; the company reported covenant ratios of 4.76x interest coverage and 2.99x net debt leverage and stated it was in compliance.

Material changes versus 2014

  • Consolidated sales declined 13%, as lower steel and scrap selling prices outweighed higher steel shipments and a full year of Columbus Flat Roll operations. Average steel selling prices fell $149 per ton, or 18%; steel shipments rose 13% overall, but fell 12% excluding Columbus.
  • Steel operations sales fell 7% and operating income fell 41% to $403.2 million, as steel prices declined more sharply than metallic raw material costs.
  • Metals recycling sales fell 34%; ferrous and nonferrous prices declined 37% and 18%, respectively, and volumes for both declined 8%. Excluding the impairment, the segment recorded a $19.6 million operating loss versus $26.0 million operating income in 2014.
  • Steel fabrication sales rose 7% and operating income rose 123% to $115.9 million, benefiting from stronger non-residential construction demand, improved pricing, and lower steel input costs.
  • Operating cash flow increased to $1.038 billion, supported in part by a $476.8 million reduction in operational working capital. Cash increased while debt declined, following repayment of $350 million of 2020 senior notes in March 2015.
  • The company indefinitely idled its Minnesota ironmaking operations in May 2015 amid weak pig iron pricing, recording $21.0 million of inventory valuation charges and approximately $34.8 million of idling-related expenses. The 2014 comparison included a separate $260.0 million impairment charge for those operations.

Outlook, risks, contingencies, and unusual items

  • No specific earnings or revenue guidance is provided. Management estimated 2016 capital expenditures of $250 million to $300 million and expected available cash, operating cash flow, and borrowing capacity to cover anticipated needs over the next 12 months.
  • Management described domestic steel consumption as relatively steady, with strength in automotive and improving non-residential construction, but cited historically high steel imports, customer destocking, and compressed steel and scrap spreads as headwinds. The 2015 OmniSource impairment reflected management’s weaker longer-term scrap market outlook.
  • Growth initiatives included a $45 million cash purchase of CSi steel deck facilities in September 2015 and a $100 million Columbus Flat Roll expansion adding painting and Galvalume capabilities, expected to begin operations in first-quarter 2017.
  • Material risks include cyclical demand and steel prices, imports and global overcapacity, scrap and energy price volatility, raw-material availability, equipment outages, environmental and permitting obligations, and debt covenant restrictions. Certain supplier commitments are take-or-pay; total purchase obligations were $379.4 million, including $224.9 million due in 2016.
  • A consolidated antitrust class action alleges steel price-fixing during 2005–2007 and seeks treble damages. The court certified a class on the conspiracy issue but not on antitrust impact and damages; summary judgment motions were pending. The company said it could not estimate the outcome and had not accrued a loss, while noting an adverse result could be material.
  • The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • How operating performance and cash generation develop excluding non-cash impairments, particularly whether steel margins stabilize and metals recycling returns to profitability.
  • Whether the $1.914 billion reported liquidity and covenant headroom remain adequate under weaker market conditions, and how debt maturities and interest costs evolve.
  • Whether OmniSource’s valuation assumptions and scrap-market outlook prove reasonable, including the potential for additional impairment charges.
  • Progress, cost, and timing of the Columbus expansion and integration of the CSi facilities; verify the expected 2017 start date and planned 2016 capital spending.
  • Developments in the antitrust litigation, environmental matters, tax examinations, and any other contingencies that could affect cash flows or results.