Steel Dynamics, Inc. — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011. Steel Dynamics operates steel mills and finishing facilities, metals recycling and ferrous-resource businesses, and steel fabrication operations. The company reported improving demand and pricing during 2011, while non-residential construction remained weak.
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $8.00 billion | $6.30 billion | +27% |
| Gross profit / margin | $931.5 million / 11.6% | $675.7 million / 10.7% | Margin +0.9 percentage points |
| Operating income / margin | $584.8 million / 7.3% | $364.8 million / 5.8% | +60% |
| Net income attributable to Steel Dynamics | $278.1 million | $140.7 million | +98% |
| Diluted earnings per share | $1.22 | $0.64 | +$0.58 |
| Net cash from operating activities | $486.4 million | $169.3 million | +$317.0 million |
| Capital expenditures | $167.0 million | $133.4 million | +$33.6 million |
Operating cash flow less capital expenditures was approximately $319 million in 2011. Cash and short-term commercial paper totaled $475.6 million at year-end. Total debt was $2.38 billion; debt to capitalization was 50.1%, down from 52.8%. The company reported nearly $1.6 billion of liquidity, including revolver availability. The $1.1 billion revolving facility had no borrowings at year-end, though letters of credit and other obligations reduced availability by $16.5 million.
Steel shipments rose 9% to 5.84 million tons; average steel selling price increased $122 per ton. Ferrous recycling shipments increased 14% to 5.88 million gross tons, and nonferrous shipments rose 11%. The company declared dividends of $0.40 per share for 2011, versus $0.30 in 2010.
Material changes and quarterly trend
- Improved steel volumes and pricing drove steel-segment operating income up 50% to $658.1 million. Long-product shipments rose 22%; sheet shipments rose 4%.
- Recycling and ferrous-resources segment operating income increased to $26.6 million from $19.7 million. Higher scrap selling prices and volumes were largely offset by higher procurement costs and compressed margins.
- Steel fabrication’s operating loss narrowed to $6.6 million from $25.1 million, which included a $12.8 million impairment charge in 2010. The segment remained loss-making.
- Results weakened sequentially in the fourth quarter: sales were $1.86 billion, gross profit $160.1 million, operating income $82.5 million, and net income attributable to Steel Dynamics $30.2 million, all below the third quarter.
- Mesabi Nugget output increased to 156,000 metric tons from 75,000, but Minnesota iron operations reduced 2011 net income by approximately $34 million, about $7 million more than in 2010, due to start-up efforts and lower market prices.
Outlook, risks, and unusual items
- Management expected slow, steady U.S. economic growth in 2012, potentially supporting higher volumes across operations. It anticipated continued demand growth in automotive, transportation, energy, industrial, agricultural, and heavy-equipment markets, and modest construction improvement. These are expectations, not a quantified earnings forecast.
- Planned 2012 capital expenditures were $225 million to $250 million. Management emphasized cost control, margin optimization, prudent growth, and risk management.
- In January 2012, the company tendered for and purchased $279.7 million of its $700 million 7⅜% notes due November 2012, funded with a $275 million term loan and cash. The tender reduced near-term refinancing exposure; approximately $13.9 million of related costs were recorded in January 2012.
- Key risks include steel and scrap price cyclicality, import competition, raw-material and energy cost volatility, inability to pass through cost increases, economic and construction weakness, equipment outages, and environmental permitting and compliance requirements.
- Mesabi Nugget is a first-of-its-kind commercial process with technology, operating, cost, and start-up risks. Mesabi Mining remained in permitting; the Mining Resources tailings project was under construction, with start-up expected in third-quarter 2012.
- The company faced steel-price-fixing antitrust class actions seeking treble damages. Management said it could not determine the outcome and had not identified a reasonable possibility of material impact based on information then available; no dollar estimate of exposure was provided. Environmental remediation and tax matters also remain subject to uncertainty.
- Auditors issued unqualified opinions on the financial statements and internal controls; management concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether demand, steel pricing, and operating margins remained resilient after the fourth-quarter sequential decline.
- Progress and economics of the Mesabi Nugget ramp-up, the tailings project, and required Mesabi Mining permits; compare actual losses with the approximately $34 million 2011 net-income impact.
- Refinancing and repayment of the remaining 2012 notes, and ongoing compliance with liquidity, leverage, and interest-coverage covenants.
- Whether recycling margins recover despite strong competition for scrap feedstock and elevated procurement costs.
- Developments in the antitrust litigation, environmental obligations, and tax audits; the filing does not provide a clear quantified maximum exposure for these matters.
- Related-party exposure: Heidtman accounted for approximately 3% of 2011 consolidated sales and 5% of year-end receivables.