01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Steel Dynamics, Inc. (STLD) reported 2008 net sales of $8.08 billiona, up from $4.38 billion in 2007, and net income of $463.4 million, or $2.38 per diluted share, compared with $394.6 million, or $2.01 per diluted share, in 2007.
Growth was driven largely by the OmniSource (acquired October 2007) and Recycle South (acquired June 2008) metals recycling acquisitions, which made the metals recycling and ferrous resources segment 31% of consolidated net sales in 2008 versus 9% in 2007. Gross margin fell to 15% from 21%, reflecting lower-margin recycling operations and The Techs galvanizing business, while total debt rose to $2.65 billionb, a 62% debt-to-capitalization ratio. Management said it anticipates a substantial decrease in steel operations' average pricing in 2009 due to a weak economy and falling demand, and that steel scrap costs should remain relatively low.
The company also faces significant litigation exposure. A $1.1 billionc damages lawsuit by Prime Eagle Group Limited was dismissed with prejudice on February 23, 2009, while a class action antitrust suit under the Sherman Act, filed by Standard Iron Works and others, remains pending with a joint motion to dismiss filed by the defendants. Management reported that internal control over financial reporting was effective as of December 31, 2008, excluding Recycle South, and that the company was in compliance with its senior secured credit facility covenants.
The company is investing in growth, with capital expenditures of $412.5 milliond in 2008 and approximately $270 million planned for 2009. Key projects include a second caster at the Structural and Rail Division and the Mesabi Nugget iron-nugget facility, which is expected to commence production in the second half of 2009. Management believes cash flow from operations and available borrowings will be adequate for the next two years to meet debt service, working capital and capital expenditure needs.
02—Key points
Key Highlights
- Net sales rose to $8.08 billion in 2008 from $4.38 billion in 2007; net income was $463.4 million, or $2.38 per diluted share, versus $2.01 in 2007.
- Gross margin declined to 15% from 21%, which management attributed primarily to the inclusion of The Techs, OmniSource and Recycle South, whose businesses operate at lower margins.
- Metals recycling and ferrous resources accounted for 31% of 2008 consolidated net sales, up from 9% in 2007, following the OmniSource and Recycle South acquisitions.
- Total debt was $2.65 billion at December 31, 2008, with a debt-to-capitalization ratio of 62%; the company issued $500 million of 7 3/4% senior notes due 2016 in April 2008.
- Management expects a substantial decrease in steel operations' average pricing in 2009 compared with 2008, citing the weak economy and falling demand.
- The Prime Eagle $1.1 billion damages lawsuit was dismissed with prejudice on February 23, 2009; a class action antitrust suit under the Sherman Act remains pending.
- Capital expenditures were $412.5 million in 2008, with about $270 million planned for 2009, including the Mesabi Nugget iron-nugget project expected to begin production in the second half of 2009.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Steel Dynamics kept $0.06.
- Revenue$8.08B100.0%
- Cost of revenue−$6.85B84.8%
- Gross profit$1.23B15.2%
- Operating costs−$384.9M4.8%
- Operating income$846.4M10.5%
- Interest, other & tax−$383.0M4.7%
- Net income$463.4M5.7%
Where FY2008 revenue went
$8.08B- Cost of revenue: $6.85B, 85% of revenue
- Net income: $463.4M, 5.7% of revenue
- Operating costs: $384.9M, 4.8% of revenue
- Interest, other & tax: $383.0M, 4.7% of revenue
Kept 5.7% as net incomeNet income $463.4M · 5.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $8.08B$4.38B | +84.3% |
| Cost of Revenue | $6.85B$3.47B | +97.5% |
| Gross Profit | $1.23B$915.69M | +34.5% |
| Operating Income | $846.37M$690.75M | +22.5% |
| Interest Expense | $144.57M$55.42M | +160.9% |
| Net Income | $463.39M$394.57M | +17.4% |
| EPS (Basic) | $2.45$2.12 | +15.6% |
| EPS (Diluted) | $2.38$2.01 | +18.4% |
| Shares Outstanding (Basic) | 189.14M186.32M | +1.5% |
| Shares Outstanding (Diluted) | 194.59M196.81M | −1.1% |
05—Questions
Frequently Asked Questions
Why did gross margin decline in 2008 even though net sales and net income increased?
Management attributed the decline in gross margin to 15% from 21% primarily to the inclusion of The Techs, OmniSource and Recycle South in 2008 results. The Techs' galvanized products carry lower margins because it purchases coil rather than producing it, and the recycling businesses operate at lower margins than the company's historical steel production.
What is the company's debt position and is it in compliance with its loan covenants?
Total debt was $2.65 billion at December 31, 2008, with a debt-to-capitalization ratio of 62%. The company stated it was in compliance with the financial covenants of its senior secured credit agreement at December 31, 2008, with an interest coverage ratio of 7.05 and a total debt to EBITDA ratio of 2.35, and believes it will remain in compliance during the next twelve months.
What outlook does management give for 2009?
Management anticipates a substantial decrease in steel operations' average pricing in 2009 compared with 2008 due to continued weak economy and demand. It expects steel scrap prices to remain relatively low, and anticipates non-residential construction to remain slow, resulting in decreased volumes and selling prices in the steel fabrication segment. It also expects gross interest expense to remain somewhat comparable to 2008.
What are the main legal risks disclosed in the filing?
A February 2008 lawsuit by Prime Eagle Group Limited seeking more than $1.1 billion in damages was dismissed with prejudice on February 23, 2009. A September 2008 class action antitrust complaint under Section 1 of the Sherman Act, alleging price-fixing by steel manufacturers, remains pending, with the defendants having filed a joint motion to dismiss. The company says it believes these lawsuits are without merit and plans to defend them aggressively.
What major growth projects is the company pursuing?
The company is constructing a second caster and a second rolling mill at its Structural and Rail Division in Columbia City, Indiana, with about $46 million of 2009 spending planned for the caster. It is also building the Mesabi Nugget iron-nugget facility in Hoyt Lakes, Minnesota, with an estimated $265 million cost for the nugget plant and $165 million total for the venture, with nugget production expected to commence in the second half of 2009.
06—Continue