What drove the large increase in 2004 earnings?

Management attributed the increase in net income to higher selling values and shipping volumes. Net sales rose 117% to $2.14 billion, with the average consolidated selling price up 79% to $625 per ton, while shipments increased 22% to 3.4 million tons. A steel surcharge tied to a scrap index helped pass some rising raw material costs to customers.

How are rising scrap costs affecting the business?

Metallic raw materials represented 65% of cost of goods sold in 2004, up from 52% in 2003. The filing says current scrap costs are unsustainable even with higher steel pricing and could erode gross margins. Management also noted that integrated producers, which rely less on scrap, may gain a cost advantage when scrap prices are high.

What are the main risks in the Iron Dynamics and Mesabi Nugget projects?

Iron Dynamics has had a history of start-up difficulties and had an investment of $185 million as of December 31, 2004. The Mesabi Nugget joint venture would require an estimated $60 to $80 million over two years to build a full-scale commercial plant. The filing warns that these technologies may not perform as expected, that cost overruns or delays are possible, and that the company could lose its investment.

How did the company's capital structure change in 2004?

Total debt fell to $448.4 million from $607.6 million after prepayments, including a $100 million reduction in senior secured debt in October 2004. Stockholders' equity increased to $847.1 million from $587.2 million, and the revolving credit facility remained undrawn at year-end.

What are the company's plans for capital spending and shareholder returns in 2005?

The company expects to spend approximately $160 million on capital expenditures in 2005, including $60 to $80 million for the Mesabi Nugget joint venture. It anticipates continuing comparable quarterly cash dividends. It has about 2.4 million shares remaining under its repurchase authorization after buying 1.0 million shares from January 4 through January 26, 2005.

STLD 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 2005. Cited figures are marked; the original filing is the authoritative source.

Steel Dynamics, Inc. (STLD) reported a sharply stronger 2004 as steel prices surged.

Net sales rose to $2.14 billion^a from $987.2 million in 2003, and net income reached $295.3 million, or $5.27 per diluted share, compared with $47.1 million, or $.91 per diluted share, a year earlier. Management attributed the improvement to increased selling values and shipping volumes. Consolidated shipments grew to 3.4 million tons, and the average selling price rose to $625 per ton from $350 in 2003.

Metallic raw materials, mainly steel scrap, became the largest cost item and reached 65% of cost of goods sold in 2004, which prompted a scrap-indexed surcharge to customers. Scrap prices rose sharply, with No. 1 factory bundles at $376^b per ton in December 2004 versus $186 in December 2003, and management described these costs as unsustainable at current levels. The balance sheet strengthened considerably.

Total debt fell to $448.4 million^c from $607.6 million, stockholders' equity rose to $847.1 million, and the long-term debt-to-capitalization ratio dropped to 34% from 50%. The company refinanced its senior secured facilities into a $230 million revolving credit facility that was undrawn at year-end. It also began paying quarterly cash dividends, declaring $.25 per share for 2004, and repurchased 1.6 million shares in the fourth quarter at an average of $35, with a further 1.0 million shares bought in January 2005.

The filing also flags execution risks. The Iron Dynamics scrap-substitute facility has consumed significant capital, with an investment of $185 million^d, and the company plans a $60 to $80 million Mesabi Nugget joint venture. The Structural and Rail Division's rail production was not yet at Class I quality, with that quality expected in the second quarter of 2005.

Heidtman Steel Products, an affiliate, accounted for about 12% of 2004 net sales, and the company has a 4-year $230 million revolver. Capital expenditures for 2005 are projected at about $160 million.

02—Key points

Key Highlights

Net sales rose to $2.14 billion in 2004 from $987.2 million in 2003, and net income rose to $295.3 million from $47.1 million.
Diluted EPS was $5.27 in 2004 versus $.91 in 2003, and the average selling price increased to $625 per ton from $350.
Total debt declined to $448.4 million from $607.6 million, and the long-term debt-to-capitalization ratio fell to 34% from 50%.
Metallic raw materials reached 65% of cost of goods sold in 2004, and No. 1 factory bundle scrap rose to $376 per ton from $186 a year earlier.
The company declared its first quarterly dividend in July 2004, rising to $.10 per share in the fourth quarter, and bought back 1.6 million shares in Q4 2004 at an average of $35.
The $230 million senior secured revolving credit facility was undrawn at December 31, 2004, and the company was in covenant compliance.
Concentration risk remains, as the top ten Flat Roll customers accounted for about 36% of consolidated net sales and Heidtman accounted for about 12%.

03—Questions

Frequently Asked Questions

What drove the large increase in 2004 earnings?
Management attributed the increase in net income to higher selling values and shipping volumes. Net sales rose 117% to $2.14 billion, with the average consolidated selling price up 79% to $625 per ton, while shipments increased 22% to 3.4 million tons. A steel surcharge tied to a scrap index helped pass some rising raw material costs to customers.
How are rising scrap costs affecting the business?
Metallic raw materials represented 65% of cost of goods sold in 2004, up from 52% in 2003. The filing says current scrap costs are unsustainable even with higher steel pricing and could erode gross margins. Management also noted that integrated producers, which rely less on scrap, may gain a cost advantage when scrap prices are high.
What are the main risks in the Iron Dynamics and Mesabi Nugget projects?
Iron Dynamics has had a history of start-up difficulties and had an investment of $185 million as of December 31, 2004. The Mesabi Nugget joint venture would require an estimated $60 to $80 million over two years to build a full-scale commercial plant. The filing warns that these technologies may not perform as expected, that cost overruns or delays are possible, and that the company could lose its investment.
How did the company's capital structure change in 2004?
Total debt fell to $448.4 million from $607.6 million after prepayments, including a $100 million reduction in senior secured debt in October 2004. Stockholders' equity increased to $847.1 million from $587.2 million, and the revolving credit facility remained undrawn at year-end.
What are the company's plans for capital spending and shareholder returns in 2005?
The company expects to spend approximately $160 million on capital expenditures in 2005, including $60 to $80 million for the Mesabi Nugget joint venture. It anticipates continuing comparable quarterly cash dividends. It has about 2.4 million shares remaining under its repurchase authorization after buying 1.0 million shares from January 4 through January 26, 2005.

04—Continue

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