01—Abstract
Summary
Summary of the 10-K/A filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.
Steel Dynamics, Inc. (STLD) reported results for fiscal 2003, when it operated three electric arc furnace mini-mills: a flat-roll mill in Butler, Indiana (the core business, 76.8%a of net sales), a structural and rail mill in Columbia City, Indiana, and a bar products mill in Pittsboro, Indiana.
Net sales rose to $987.2 millionb from $864.5 million, an increase of $122.8 million or 14%, driven mainly by the first full year of the Structural and Rail Division. Consolidated shipments increased 18% to 2.8 million tons. Net income fell to $47.1 million, or $.98 per diluted share, from $77.9 million, or $1.64 per diluted share, in 2002.
The filing attributes the decline to sharply higher metallic raw material costs, mainly steel scrap. Cost of goods sold rose to approximately 84% of net sales from 74%, and gross profit fell to $160.0 millionc from $225.6 million. The company's strategy centers on value-added products, including the new $25 million on-site coating line at Butler, the Jeffersonville galvanizing facility, and the Pittsboro bar mill, which is being upgraded at a planned cost of $75 to $80 million.
The Iron Dynamics scrap-substitute ironmaking project, in which the company had a $185 milliond equity investment at year-end, restarted its front-end process in late 2003, producing 15,100 tonnes of hot briquetted iron in December. Management said it expected to restart the smelting end in the first quarter or early second quarter of 2004. Capital expenditures were $137.1 million in 2003.
Liquidity improved over the year. Cash and equivalents reached $65.4 million, up from $24.2 million, after a $100.0 million add-on issuance of 9½% senior unsecured notes due 2009 that produced net proceeds of $108.8 million. Total long-term debt including current maturities was $607.6 million at year-end.
The company recorded a $14.0 million gain from extinguishing the remaining Iron Dynamics contingent liability. Management noted that scrap costs had reached historic highs and that it planned to pass some of these costs to customers through a scrap surcharge beginning in 2004.
02—Key points
Key Highlights
- Net sales of $987.2 million, up $122.8 million or 14% from $864.5 million in 2002, with consolidated shipments up 18% to 2.8 million tons.
- Net income of $47.1 million, or $.98 per diluted share, versus $77.9 million, or $1.64 per diluted share, in 2002, as higher metallic raw material costs compressed margins.
- Gross profit fell to $160.0 million from $225.6 million; cost of goods sold represented approximately 84% of net sales in 2003 compared with 74% in 2002.
- Steel scrap prices reached historic highs: No. 1 factory bundles were $166 per ton in September 2003, $280 per ton in February 2004 and $310 in early March 2004.
- Cash and equivalents rose to $65.4 million, supported by $108.8 million of net proceeds from the $100.0 million 9½% senior unsecured notes issued in November 2003; $50.0 million was used to prepay the senior secured term B loan.
- A $14.0 million non-cash gain was recognized from extinguishing the $22.0 million Iron Dynamics contingent liability, after a $8.0 million cash payment in December 2003.
- Capital expenditures were $137.1 million, including $50.7 million on the Pittsboro bar mill and $24.8 million on the Butler paint line; Iron Dynamics produced 15,100 tonnes of hot briquetted iron in December 2003.
03—Questions
Frequently Asked Questions
Why did net income decline in 2003 even though sales grew?
The filing states that the decline in net income was due to dramatically increased costs of metallic raw materials, namely steel scrap and scrap substitutes. Metallic raw materials represented 53% of cost of goods sold in 2003 versus 48% in 2002. Average metallic raw material cost rose $29 per net ton during 2003, while the average consolidated sales price fell $12 per ton to $350 per ton.
What is the status of the Iron Dynamics scrap-substitute project?
Iron Dynamics restarted the rotary hearth furnace front end in November 2003 and produced 15,100 tonnes of direct reduced iron compacted into hot briquetted iron in December 2003. Management expected to ramp HBI output to approximately 30,000 to 35,000 tonnes per month by the end of the second quarter of 2004 and planned to restart the submerged arc furnace smelting end in the first quarter or beginning of the second quarter of 2004. The equity investment in the project was $185 million at December 31, 2003. The filing also notes that the facility had experienced repeated start-up difficulties and suspensions since 1999 and may not be able to operate consistently or produce cost-competitive material.
How concentrated is the company's customer base and scrap supply?
Heidtman Steel Products accounted for 13% of 2003 consolidated net sales, purchasing $132.8 million of flat-rolled products, and Heidtman is an affiliate of a large stockholder. The three largest customers together accounted for approximately 23% of total net sales. OmniSource Corporation supplied 2.6 million tons of scrap in 2003, or 89% of total scrap purchases. The scrap supply agreement with OmniSource was terminated effective March 31, 2004, although the company intends to keep buying from OmniSource as one of its major suppliers.
Does the company pay dividends, and how is it financing its growth?
The company has never declared or paid cash dividends and does not expect to pay them in the foreseeable future. Its senior secured credit agreement and senior notes indenture restrict dividend payments. Growth has been funded through cash from operations ($127.6 million in 2003), a $350.0 million senior secured credit facility with $75.0 million of revolver availability undrawn at year-end, 9½% senior unsecured notes due 2009 totaling $300.0 million, and 4.0% convertible subordinated notes due 2012 totaling $115.0 million. Total long-term debt including current maturities was $607.6 million at December 31, 2003.
04—Continue