Business context and reporting period
Steel Dynamics, Inc. (SDI) filed this Form 10-K for the fiscal year ended December 31, 2014, with unaudited quarterly data also provided. SDI is a U.S. steel producer and metals recycler, with steel operations, metals recycling and ferrous resources, and steel fabrication segments.
A major change was the September 16, 2014 acquisition of Severstal Columbus for $1.625 billion plus $44.4 million of working-capital adjustments. Columbus added 3.4 million tons of annual hot-roll capacity; results are included from the acquisition date.
Financial performance and key metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $8.756 billion | $7.373 billion |
| Gross profit | $966.2 million | $719.1 million |
| Operating income | $320.3 million | $386.5 million |
| Net income | $91.7 million | $163.5 million |
| Net income attributable to SDI | $157.0 million | $189.3 million |
| Diluted EPS attributable to SDI | $0.67 | $0.83 |
| Cash provided by operating activities | $617.6 million | $312.2 million |
| Capital expenditures | $111.8 million | $186.8 million |
- Revenue rose 19%, reflecting higher shipments across segments, Columbus, and higher average selling prices in steel and fabrication. Gross margin was approximately 11.0%, versus 9.8% in 2013.
- Operating income included a $260 million noncash impairment of Minnesota ironmaking assets. Excluding that charge, management reported operating income of $580.3 million and net income attributable to SDI of $289.6 million, or $1.22 diluted EPS. These are management-presented adjusted figures, not GAAP results.
- Quarterly results were uneven: Q4 2014 operating loss was $81.2 million and net loss attributable to SDI was $45.0 million, largely reflecting the impairment. Q4 2013 operating income was $107.8 million and attributable net income was $54.7 million.
- Segment operating income: steel $671.6 million, up 33%; fabrication $51.9 million, versus $7.0 million; metals recycling and ferrous resources recorded a $308.7 million loss, including the impairment. Before impairment, that segment’s operating loss was $48.7 million.
- Steel shipments increased 20% to 7.36 million tons, including Columbus; steel average selling prices increased $35 per ton. Fabrication shipments increased 31%, and its average selling price rose 10%. Recycling operating income fell as metal spreads narrowed.
- Cash and equivalents were $361.4 million, down from $395.2 million. Total debt, including current maturities, was $3.024 billion, up $916.6 million; debt to capitalization increased to 50.9% from 44.7%. Total assets were $7.311 billion and equity $2.796 billion.
- Reported liquidity was $1.547 billion, comprising $361.4 million cash and $1.186 billion available under the revolver. Operational working capital increased 23% to $1.723 billion, mainly due to Columbus.
- Dividend declared was $0.46 per share for 2014, up from $0.44. The reported interest coverage and net-debt leverage ratios were 6.05x and 2.47x, respectively; SDI said it complied with its credit-facility covenants.
Outlook, commentary, risks and unusual items
- Management described demand as strong in automotive and manufacturing, with non-residential construction improving. It cited new small-diameter bar and premium-rail capacity and expects to invest $150 million to $175 million in 2015 capital expenditures. The filing does not provide formal earnings or revenue guidance.
- SDI planned to warm-idle Minnesota ironmaking operations for six to eight weeks beginning in mid-February 2015, citing lower recovery rates, installation of enhanced recovery equipment, and temporary excess nugget inventory. The $260 million impairment followed an assessment that the assets were not fully recoverable under management’s operating-cost and pricing outlook.
- Columbus was funded partly with $1.2 billion of senior notes, alongside revolver borrowings and cash. In February 2015, SDI announced redemption of $350 million of 7.625% notes due 2020, expected to incur approximately $16.7 million of first-quarter 2015 expense.
- Principal business risks include steel and scrap cyclicality, record-high steel imports in 2014 and global overcapacity, volatility in scrap and energy costs, and the ability to pass cost increases through. Environmental compliance, permits, plant outages, acquisition integration, and Minnesota ironmaking execution also pose risks.
- SDI faces class-action antitrust litigation relating to alleged steel-price conduct during 2005–2007. The company said it could not determine the outcome and had not identified a reasonable possibility of a material impact based on information then available; an adverse result could nevertheless be material. Environmental remediation and other contingencies are also discussed.
- Auditors issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded Columbus from the 2014 internal-control assessment while its controls were being evaluated and integrated; integration was expected to be completed in 2015.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s impairment-adjusted results, and assess the assumptions behind the $260 million Minnesota asset impairment.
- Track Minnesota ironmaking costs, recovery rates, operating status, permits, and the economics of restarting after the planned warm-idle period.
- Assess Columbus integration, full-year contribution, purchase-accounting effects, and the debt and interest burden from its acquisition financing.
- Review steel import levels, selling-price and scrap-cost trends, and whether segment margin gains can persist.
- Confirm liquidity, covenant headroom, debt maturities, and the effect of the announced 2020-note redemption on cash and financing costs.
- Monitor the antitrust case, environmental obligations, and completion of Columbus internal-control integration.