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
| Metric | 2015 | 2014 |
|---|---|---|
| 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.