01—Abstract
Summary
Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.
Steel Dynamics, Inc. reported 2003 net sales of $987.2 milliona, up from $864.5 million in 2002, on shipments of 2.8 million tons.
Net income fell to $47.1 millionb, or $.98 per diluted share, from $77.9 million, or $1.64 per diluted share, in 2002. The company attributes the earnings decline primarily to sharply higher metallic raw material costs: steel scrap and scrap substitutes. Metallic raw materials represented 53% of cost of goods sold in 2003, up from 48% in 2002, and the company's average metallic cost rose $29 per net ton while its average selling price fell $12 per ton to $350.
Gross profit declined to $160.0 millionc from $225.6 million, and operating income to $96.6 million from $158.4 million. Management said it expects to pass some of these costs through via a scrap surcharge tied to an indexed scrap price and expects a higher gross margin in the first quarter of 2004. Growth investments were significant in 2003.
The Structural and Rail Division was in its first full year of operations, the Bar Products (Pittsboro) mill began limited production in December 2003, and a $25 milliond paint line and a galvanizing facility in Jeffersonville, Indiana came online. Capital expenditures totaled $137.1 million. Long-term debt including current maturities rose to $607.6 million, and the company issued an additional $100 million of 9 1/2% senior notes in November 2003.
Cash and equivalents increased to $65.4 million. Iron Dynamics, the company's scrap substitute facility, was restarted in late 2003 and had $185 million of equity investment; the company stated that its undiscounted cash flow estimate exceeded the carrying amount of $125 million of related assets by approximately $54 million, so no impairment was recorded.
The filing highlights concentration and risk: Heidtman Steel Products accounted for 13% of 2003 net sales, the top ten Butler customers for approximately 42%, and OmniSource supplied approximately 89% of scrap purchases, with that supply agreement terminated effective March 31, 2004 in favor of multiple sources. The company also noted that the Section 201 steel tariffs were rescinded in December 2003 and that scrap prices had risen to $310 per ton in early March 2004.
02—Key points
Key Highlights
- Net sales rose 14% to $987.2 million in 2003, driven mainly by the first full year of the Structural and Rail Division, which contributed $145.5 million of external structural sales.
- Net income fell to $47.1 million ($.98 diluted EPS) from $77.9 million ($1.64) in 2002, as metallic raw material costs rose sharply.
- Gross profit declined to $160.0 million from $225.6 million; cost of goods sold was 84% of net sales versus 74% in 2002.
- Average selling price fell $12 per ton to $350, while metallic raw material cost increased $29 per net ton charged.
- Capital expenditures were $137.1 million, including $50.7 million at the Bar Products Division and $24.8 million for the paint line at the Flat Roll Division.
- A $100 million add-on of 9 1/2% senior unsecured notes was issued in November 2003, with $58.8 million used to prefund 2004 capital expenditures and $50.0 million to prepay term B debt.
- Customer and supplier concentration remains high: Heidtman accounted for 13% of net sales and OmniSource supplied about 89% of scrap purchases, a relationship being shifted to multiple scrap sources in 2004.
03—Questions
Frequently Asked Questions
Why did Steel Dynamics' earnings decline in 2003 despite higher sales?
Net sales increased to $987.2 million, but the company said net income fell to $47.1 million from $77.9 million because metallic raw material costs rose sharply. Average metallic cost per ton increased $29 while the average selling price decreased $12 per ton, compressing gross margin from 26% of sales in 2002 to about 16% in 2003 (gross profit of $160.0 million versus $225.6 million).
What is management doing to address rising scrap costs?
Beginning in 2004, the company announced a scrap surcharge tied to an indexed scrap number to pass some metallic cost increases to customers. Management believes this surcharge, along with a general base price increase and stronger demand, will raise gross margin in the first quarter of 2004. The company is also developing its own scrap substitute at Iron Dynamics and diversifying scrap sources after terminating the OmniSource supply agreement effective March 31, 2004.
What is the status of the Iron Dynamics scrap substitute project?
Iron Dynamics was restarted in late 2003, and in December 2003 it produced 15,100 tonnes of hot briquetted iron. The company expects to ramp HBI output to approximately 30,000 to 35,000 tonnes per month by the end of the second quarter of 2004, and plans to restart the submerged arc furnace to produce liquid pig iron in the first quarter or early second quarter of 2004. The equity investment in the project was $185 million at December 31, 2003, and the filing warns the process may not succeed economically.
How is the company's debt structure and liquidity position?
Total debt was $607.6 million at December 31, 2003, including $300 million of 9 1/2% senior unsecured notes due 2009 (the November 2003 add-on included), $115 million of 4% convertible subordinated notes due 2012, and $111.3 million under the senior secured credit facility. Cash and equivalents were $65.4 million, and $75.0 million under the revolving credit facility was undrawn. Management stated that cash flow from operations, together with available borrowings, will be adequate for the next two years for debt service, capital expenditures and working capital.
What are the main risks to investors identified in the filing?
Key risks include excessive steel imports depressing U.S. prices, global overcapacity, cyclical demand, and the rescission in December 2003 of the Section 201 tariffs, which the company noted was tied to a November 10, 2003 WTO ruling. Other risks include the Iron Dynamics technology risk, high concentration among major customers (Heidtman about 13% of sales) and a single principal scrap supplier, start-up risks at the Pittsboro bar mill, and the potential dilution from up to 6,762,874 shares issuable on conversion of the 4% convertible notes.
04—Continue