UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2004
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-21719
STEEL DYNAMICS, INC. (Exact name of registrant as specified in its charter) |
Indiana
(State or other jurisdiction of incorporation or organization) |
35-1929476 (I.R.S. Employer Identification Number) |
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6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN
(Address of principal executive offices) |
46804 (Zip code) |
Registrant’s telephone number, including area code: (260) 459-3553
Securities registered pursuant to Section 12(b) of the Act:
Title of each class None |
Name of each exchange on which registered None |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b2). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004, was approximately, $892,481,000. Registrant has no non-voting shares. For purposes of this calculation, shares of common stock held by directors, officers and 5% stockholders known to the registrant have been deemed to be owned by affiliates, but this should not be construed as an admission that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.
As of February 4, 2005, Registrant had outstanding 47,627,811 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s definitive proxy statement referenced in Part III, Items 10, 11 and 12 of this report, to be filed prior to April 29, 2005, which are incorporated by reference herein.
STEEL DYNAMICS, INC.
Table of Contents
PART I
Special Note Regarding Forward-Looking Statements |
Throughout this report, or in other reports or registration statements filed from time to time with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or under the Securities Act of 1933, as well as in documents we incorporate by reference or in press releases or oral statements made by our officers or representatives, we may make statements that express our opinions, expectations, or projections regarding future events or future results, in contrast with statements that reflect historical facts. These predictive statements, which we generally precede or accompany by such typical conditional words as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” or by the words “may,” “will,” or “should,” are intended to operate as “forward looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995, incorporated in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. That legislation protects such predictive statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.
While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.
The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those we may have anticipated or predicted:
| • | cyclical changes in market supply and demand for steel; general economic conditions affecting steel consumption; U.S. or foreign trade policy affecting the price of imported steel, or adverse outcomes of pending and future trade cases alleging unlawful practices in
connection with steel imports or exports, including the repeal, lapse or exemptions, from existing U.S. tariffs on imported steel; and governmental monetary or fiscal policy in the U.S. and other major international economies; |
| • | increased price competition brought about by excess domestic and global steelmaking capacity and imports of low priced steel; |
| • | consolidation in the domestic and global steel industry, resulting in larger producers with much greater market power to affect price and/or supply; |
| • | risks and uncertainties involving new products or new technologies, such as our Iron Dynamics ironmaking process, or our Mesabi Nugget joint venture, in which the new product or process or certain critical elements thereof may not work at all, may not work as well as
expected, or may turn out to be uneconomic even if they do work; |
| • | changes in the availability or cost of steel scrap, which has more than doubled in price over the past year, or in the availability or cost of steel scrap substitute materials, including pig iron, or other raw materials or supplies which we use in our production processes, as well
as periodic fluctuations in the availability and cost of electricity, natural gas or other utilities; |
| • | the occurrence of unanticipated equipment failures and plant outages or the occurrences of extraordinary operating expenses; |
| • | competitive actions by our domestic and foreign competitors, including addition of new production capacity or the use of previously idled production capacity resulting from bankruptcy reorganizations or asset purchases out of bankruptcy; |
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| • | margin squeeze or compression resulting from our inability to pass through to our customers, through price increases or surcharges, the increased cost of raw materials and supplies; |
| • | loss of business from one or more of our major customers or end-users; |
| • | labor unrest, work stoppages and/or strikes involving our own workforce, those of our important suppliers or customers, or those affecting the steel industry in general; |
| • | the effect of the elements upon our production or upon the production or needs of our important suppliers or customers; |
| • | the impact of, or changes in, environmental laws or in the application of other legal or regulatory requirements upon our production processes or costs of production or upon those of our suppliers or customers, including actions by government agencies, such as the U.S.
Environmental Protection Agency or the Indiana Department of Environmental Management, on pending or future environmentally related construction or operating permits; |
| • | private or governmental liability claims or litigation, or the impact of any adverse outcome of any litigation on the adequacy of our reserves, the availability or adequacy of our insurance coverage, our financial well-being or our business and assets; |
| • | changes in interest rates or other borrowing costs, or the effect of existing loan covenants or restrictions upon the cost or availability of credit to fund operations or take advantage of other business opportunities; |
| • | changes in our business strategies or development plans which we may adopt or which may be brought about in response to actions by our suppliers or customers, and any difficulty or inability to successfully consummate or implement as planned any planned or potential
projects, acquisitions, joint ventures or strategic alliances; and |
| • | the impact of regulatory or other governmental permits or approvals, litigation, construction delays, cost overruns, technology risk or operational complications upon our ability to complete, start-up or continue to profitably operate a project or a new business, or to
complete, integrate and operate any potential acquisitions as anticipated. |
We also refer you to and believe that you should carefully read the portion of this report described in “Risk Factors” to better understand the risks and uncertainties inherent in our business or in owning our securities.
Any forward looking statements which we make in this report or in any of the documents that are incorporated by reference herein speak only as of the date of such statement, and we undertake no ongoing obligation to update such statements. Comparisons of results between current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
ITEM 1. BUSINESS |
Our Company |
Overview |
We are a steel manufacturing company that owns and operates three steelmaking mini-mills. We produce our steel principally from steel scrap, using electric arc melting furnaces, continuous casting and automated rolling mills.
Steel Dynamics, Inc. was incorporated in August 1993, in Indiana. We maintain our principal executive offices at 6714 Pointe Inverness Way, Suite 200, Fort Wayne, Indiana 46804. Our telephone number is (260) 459-3553.
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During 2004, our sales were $2.1 billion and, at year-end, we had 1,645 employees. None of our employees are represented by labor unions.
Flat Roll Division |
We own and operate a flat roll mini-mill located in Butler, Indiana, which produces sheet steel and which we built and have operated since 1996. Currently, this mill has an annual production capacity of approximately 2.4 million tons of flat-rolled steel. We produced 2.4 million tons at this facility during 2004. We produce a broad range of high quality hot-rolled, cold-rolled and coated steel products, including a large variety of high value-added and high margin specialty products such as thinner gauge rolled products and galvanized products. We sell our flat-rolled products directly to end-users, intermediate steel processors and service centers primarily in the Midwestern United States. Our products are used in numerous industry sectors, including the automotive, construction and commercial industries.
In November 2003, we completed construction of our new $25 million in-plant painting facility at our Butler mini-mill and commenced coating operations. This facility has an annual production capacity to coat approximately 240,000 tons of steel. During 2004, we painted 199,000 tons of flat-rolled steel products at this facility.
In March 2003, we also purchased the assets of a coating facility formerly owned by GalvPro II, LLC in Jeffersonville, Indiana for a purchase price of $19 million. This facility has a production capacity of between 300,000 and 350,000 tons per year of light-gauge, hot- dipped cold-rolled galvanized steel. We operate this new facility as a part of our Flat Roll Division, which also supplies the Jeffersonville plant with steel coils for coating. Production began at Jeffersonville in July 2003. During 2004, we produced 257,000 tons of coated products at this facility. Our new Jeffersonville facility, together with our new painting facility, have enabled us to further increase the mix of higher-margin value-added downstream steel products.
Structural and Rail Division |
We also own and operate a structural steel and rail mini-mill in Columbia City, Indiana. We began construction in May 2001, completed plant construction in April 2002 and commenced commercial structural steel operations during the third quarter of 2002. Our Columbia City mini-mill is designed to have an annual production capacity, depending on the product mix, of up to 1.2 million tons of structural steel beams, pilings and other steel components for the construction, transportation and industrial machinery markets, as well as standard and premium grade rails for the railroad industry. Through regular product introductions and continued production ramp-up of structural steel products, we were able to begin to offer a broad array of wide flange beams and H-piling structural steel products during 2003 and were able to commission all of the wide flange beam sizes of products we expect to offer, save for 6 inch and 36 inch beams. We commissioned all of the 36 inch beam sizes during 2004 and we offered these for sale during the first quarter of 2005. We expect our 6 inch beams to be available for sale during the second quarter of 2005.
With regard to our rail production facility, we commissioned the casting and rolling equipment for the production of rail products during 2003, and in 2004 commissioned the rail finishing and inspection facility. During subsequent 2004 rolling trials, however, we determined that the finished rail sections contained certain quality imperfections, which we traced to the casting process. While the resulting product was acceptable for industrial use, it would not qualify for Class I railroad use, so we made necessary process and equipment modifications to address the problem, ran confirmatory trials during the balance of 2004 and ordered and recently received new casting machine molds. We believe that these deficiencies are fixable and that we will be able to produce Class I quality standard rail during the second quarter of 2005, which we will provide to the railroad companies to be tested and monitored for product evaluation.
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Bar Products Division |
On September 6, 2002, we purchased the special bar quality mini-mill assets in Pittsboro, Indiana formerly owned by Qualitech Steel SBQ LLC. We paid $45 million for these assets. We have upgraded certain equipment and installed additional equipment to improve the efficiency of the Pittsboro mill and to expand its product capabilities. The mill is capable of producing a variety of merchant bar quality, or MBQ products such as angles, flats, rounds and other merchant bars and shapes, as well as reinforcing bar, or rebar, products as well as special bar quality, or SBQ products. At December 31, 2004, we had invested a total of $147.4 million in this facility, which included capitalized interest of $6.6 million. We started melting and casting operations in mid-December and began shipping limited products by year-end 2003. During 2004, we produced approximately 337,000 tons, of which 308,000 tons were SBQ products. To date, we have produced very little MBQ products and no smaller rounds, angles, flats, channels and shapes. The Bar Products Division has an annual production capacity of between 500,000 and 600,000 tons.
Iron Dynamics Scrap Substitute Facility |
In November 2003, after making numerous changes to equipment and processes, we recommenced operations at our Iron Dynamics ironmaking facility. During December 2003, we produced 15,000 tonnes of direct reduced iron, which we then briquetted to form hot briquetted iron, or HBI. During 2004, we produced 173,000 tonnes of direct reduced iron, 106,000 tonnes of which we converted into HBI and 47,000 tonnes of which we converted into liquid pig iron in our submerged arc furnace. We consumed all of the HBI and liquid pig iron produced by Iron Dynamics in our steelmaking operations.
Mesabi Nugget Project |
In March 2002, we formed a joint venture with certain entities owned by Kobe Steel, Ltd., Cleveland-Cliffs Inc., and Ferrometrics, Inc., to pursue the development of a proprietary technology owned by Kobe, known as “ITmK3®,” for the production of a fully metallized iron nugget product suitable as an alternative iron or scrap substitute feedstock in electric arc furnace steelmaking. The ITmK3® process is a new ironmaking technology that uses a rotary hearth furnace to turn iron ore fines and pulverized coal into iron nuggets of comparable quality to blast furnace pig iron. The ITmK3® process is designed to complete reduction, melting and slag reduction in approximately ten minutes. We currently hold an approximate 19% equity interest in a pilot plant in Minnesota. The pilot plant began operations in May 2003, shipped its first iron nuggets to our flat roll mill in June 2003, which we used in our melt mix, and successfully produced approximately 10,000 tonnes of quality iron nuggets through the completion of test activities in July 2004.
Based on the successful operation of the pilot plant, we are planning to invest between $60 and $80 million over the next two years in a joint venture to build a full-scale commercial plant, which will be located either in Indiana or in Minnesota. We also anticipate entering into an offtake agreement with the joint venture for the iron nuggets to use as a raw material in our steelmaking operations.
New Millennium Building Systems |
During 2003, we increased our ownership in our consolidated New Millennium Building Systems subsidiary from 46.6% to 100%.
The New Millennium Butler, Indiana facility, which began production in June of 2000, produces steel building components, including joists, girders, trusses and steel roof and floor decking, which we sell primarily in the upper Midwest non-residential building components market. Our Flat Roll Division supplies a majority of the hot-rolled steel utilized in New Millennium’s manufacturing operations. During 2004, New Millennium’s Butler, Indiana facility, which has an annual production capacity of approximately 100,000 tons, produced 96,000 tons of steel building components.
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In September 2004, New Millennium began construction of a new 270,000 square foot manufacturing facility in Lake City, Florida. As of January 31, 2005, we had invested $21.7 million in capital expenditures related to the expansion. This plant began actual production of joists, girders and trusses in February 2005 and will begin decking shipments in April 2005. The facility will manufacture a similar array of steel building components as our Butler, Indiana facility but will market these products primarily to the non-residential building components industry in Florida and the southeastern United States. We plan to supply our new Florida plant with hot-rolled steel from our Flat Roll Division.
Financing |
On June 30, 2004, we completed a refinancing of our senior secured credit facilities and entered into a new 4-year $230 million senior secured revolving credit facility. Our senior secured credit agreement is secured by liens and mortgages on substantially all of our personal and real property assets, by liens and mortgages on substantially all of the personal and real property assets of our wholly-owned subsidiaries, and by pledges of all shares of capital stock and inter-company debt held by us and each wholly-owned subsidiary. In addition, our wholly-owned subsidiaries have guaranteed our obligations under the senior secured credit agreement. The senior secured credit agreement contains financial covenants and other covenants that limit or restrict our ability to make capital expenditures; incur indebtedness; permit liens on our property; enter into transactions with affiliates; make restricted payments or investments; enter into mergers, acquisitions or consolidations; conduct asset sales; pay dividends or distributions and enter into other specified transactions and activities. Our ability to draw down the revolver is dependent upon our continued compliance with the financial covenants and other covenants contained in our senior secured credit agreement. We were in compliance with these covenants at December 31, 2004, and expect to remain in compliance during the next twelve months. As of December 31, 2004, this facility was undrawn.
Our new senior secured credit agreement allows us to pay cash dividends dependent upon our continued compliance with the financial covenants and other covenants within the agreement. During the fourth quarter our board of directors declared our third cash dividend. The dividend of $.10 (ten cents) per common share was paid on January 17, 2005 to shareholders of record at the close of business on December 31, 2004. The aggregate dividend payment was $4.2 million. On October 26, 2004 we also announced our Board of Directors approved the repurchase of up to 5 million shares of our common stock to be made from time to time based upon the market price of our stock, the nature of other investment opportunities present, our cash flows from operations, and general economic conditions. We terminated our existing share repurchase plan and amended our senior secured credit facility as a result of this approval. At December 31, 2004, we had repurchased 1.6 million shares in the open market at an average price of $35 per share. We repurchased an additional 1.0 million shares from January 4, 2005 through January 26, 2005, at an average of price of $35 per share. We have approximately 2.4 million shares still authorized to be repurchased pursuant to our current share repurchase plan.
In March 2002, we issued $200.0 million of 91/2% unsecured senior notes due 2009, and in November 2003 we issued an additional $100.0 million of the same 91/2% unsecured senior notes due 2009. All $300.0 million of these notes were outstanding as of December 31, 2004.
During December 2002 and January 2003, we also issued $115.0 million of our 4% convertible subordinated notes due 2012. The notes are convertible into approximately 6,762,874 shares of common stock initially issuable upon conversion of the notes. Under the terms of the convertible notes, holders of the notes have the right to convert their notes into shares of our common stock at a conversion rate of 58.8076 shares per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $17.0046 per share).
Due to the increasing interest rate environment during 2004 and anticipated in 2005, we entered into two forward interest rate agreements during January 2005 to lock the six-month LIBOR setting of our $200 million fair value interest rate swap which resets each March and September at six-month LIBOR in arrears plus 5.7%.
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We locked the six-month LIBOR in arrears settings at 3.1% for the interest reset date of March 15, 2005 and at 3.7% for the interest reset date of September 15, 2005.
Competitive Strengths |
We believe that we have the following competitive strengths:
One of the Lowest Cost Producers in the United States; State-of-the-Art Facilities |
We believe that our facilities are among the lowest-cost steel manufacturing facilities in the United States. Our low operating costs are primarily a result of our efficient plant designs and operations, our high productivity rate of approximately 0.3 man hours per ton at our Flat Roll Division’s mini-mill, low ongoing maintenance cost requirements and strategic locations near sources of our primary raw material, scrap steel.
Experienced Management Team and Unique Corporate Culture |
Our senior management team is highly experienced and has a proven track record in the steel industry, including pioneering the development of thin-slab flat-rolled technology. Their objectives are closely aligned with our stockholders through meaningful stock ownership positions and performance-based compensation programs. Our corporate culture is also unique for the steel industry. We emphasize decentralized decision-making and have established incentive compensation programs specifically designed to reward employee teams for their efforts towards enhancing productivity, improving profitability and controlling costs.
Diversified Product Mix |
Our current products include hot-rolled and cold-rolled steel products, galvanized sheet products, light gauge steel products, structural steel and rails, and joists and deck materials. We have broadened our offering of painted and coated products with the addition of our coil coating facility at our flat roll facility in Butler and the addition of our Jeffersonville, Indiana galvanizing facility. We have entered the special bar quality, or SBQ market, as well as the merchant bar, or MBQ market with an array of angles, flats, rounds, reinforcing bar and other shapes, through our Bar Products Division in Pittsboro, Indiana. This diversified mix of products should enable us to access a broader range of end-user markets, serve a broader customer base and mitigate our exposure to cyclical downturns in commodity grade flat- rolled products or in any one product or end-user market.
Strategic Geographic Locations |
The strategic locations of our facilities near sources of scrap materials and our customer base allow us to realize significant pricing advantages due to freight savings for inbound scrap as well as for outbound steel products destined for our customers. Our mini-mills are located in the Upper Midwest, a region which we believe accounts for a majority of the total scrap produced in the United States. Our Jeffersonville, Indiana galvanizing facility, on the Ohio River, also provides us with an expanded geographic reach to Southern markets.
Business Strategy |
Expand Product Offerings |
The completion of our Structural and Rail Division and the commencement of production at that facility, the completion of our Flat Roll Division coating facility and the expansion of production of coated products at that facility, as well as our acquisitions of the Pittsboro, Indiana bar mill and the Jeffersonville, Indiana galvanizing facility, are important steps in pursuing our strategy of product line expansion. The Structural and Rail Division is strategically located to serve the Upper Midwest, Northeast and Canadian markets, which we
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believe are attractive and under-served markets. Our strategy to expand our flat rolled steel product offerings is to focus on the production of high value-added thinner gauge products, galvanized products and various coated products. The margins on high value-added products typically exceed those of the commodity grade and the number of producers that make them is more limited. Our Bar Products Division is likewise strategically located to position ourselves to cost-effectively serve our markets. We will continue to seek additional opportunities to further expand our range of high value-added products through the expansion of existing facilities, greenfield projects and acquisitions of other steel manufacturers or steelmaking assets that may become available through the continuing consolidation of the domestic steel industry.
Enter New Geographic Markets |
We may seek to enter new steel markets in strategic geographic locations such as the Southeastern or Western United States that offer attractive growth opportunities. The greenfield expansion of our New Millennium business now underway in Lake City, Florida, is an example of such a growth opportunity.
Due to the ongoing restructuring and consolidation of the domestic steel industry, we believe there are attractive opportunities to grow our business geographically through acquisitions of existing assets, through strategic partnerships and alliances, and through other greenfield projects.
Continue to Maintain Low Production Costs |
We are focused on continuing to maintain one of the lowest operating cost structures in the North American steel industry based upon operating cost per ton. We will continue to optimize the use of our equipment, enhance our productivity and explore new technologies to further improve our unit cost of production at each of our facilities.
Foster Entrepreneurial Culture |
We intend to continue to foster our entrepreneurial corporate culture and emphasize decentralized decision-making, while rewarding teamwork, innovation and operating efficiency. We will also continue to focus on maintaining the effectiveness of our incentive bonus- based plans that are designed to enhance overall productivity and align the interests of our management and employees with our stockholders.
Industry Segments |
Under Statement of Financial Accounting Standards No. 131 “Disclosures About Segments of an Enterprise and Related Information,” we have two reportable segments: Steel Operations and Steel Scrap Substitute Operations.
Available Information |
Our internet website address is http://www.steeldynamics.com. We make available on our internet website, under “Investor Relations—SEC Filings,” free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, press releases, ownership reports pursuant to Section 16(a) of the Securities Act of 1933, as well as our Code of Ethics for Principal Executive Officers and Senior Financial Officers, and any amendments to or waivers of our Code of Ethics, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.
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Risk Factors |
Our profitability is subject to the risks described under this section on “Risk Factors” described below. Although the following are not necessarily the only ones facing our company, our business, financial condition or results of operations could be materially adversely affected by any of the following risks:
Risks Related to Our Industry |
In recent years, imports of steel into the United States have adversely affected, and may yet again adversely affect, U.S. steel prices, which would impact our sales, margins and profitability |
Excessive imports of steel into the United States have in recent years exerted, and may again in the future exert downward pressure on U.S. steel prices and significantly reduce our sales, margins and profitability. U.S. steel producers compete with many foreign producers. Competition from foreign producers is typically strong, is periodically exacerbated by weakening of the economies of certain foreign steelmaking countries, and is further intensified during periods when the U.S. dollar is strong (something which is not currently so) relative to foreign currencies. Economic difficulties in these countries or a reduction in demand for steel produced by these countries, when those events occur, results in lower local demand for steel products in these countries and tends to encourage greater steel exports to the United States at depressed prices.
In addition, we believe the downward pressure on, and periodically depressed levels of U.S. steel prices in some recent years have been further exacerbated by imports of steel involving dumping and subsidy abuses by foreign steel producers. Some foreign steel producers are owned, controlled or subsidized by foreign governments. As a result, decisions by these producers with respect to their production, sales and pricing are often influenced to a greater degree by political and economic policy considerations than by prevailing market conditions, realities of the marketplace or consideration of profit or loss. For example, between 1998 and 2001, when imports of hot-rolled and cold-rolled products increased dramatically, domestic steel producers, including us, were adversely affected by unfairly priced or “dumped” imported steel. Even though various protective actions taken by the U.S. government during 2001, including the enactment of various steel import quotas and tariffs, resulted in an abatement of some steel imports during 2002 and 2003, these protective measures were only temporary, many foreign steel manufacturers were granted exemptions from the application of these measures and President Bush, in December 2003, rescinded a substantial part of these protective measures, the so-called Section 201 tariffs, as a result of a November 10, 2003 Word Trade Organization ruling declaring that the tariffs on hot-rolled and cold-rolled finished steel imports violated global trade rules, and as a result of economic and political pressures from foreign governments, including threats of retaliatory tariffs on U.S. exports. Moreover, there are products and countries that were not covered by these protective measures, and imports of these exempt products or of products from these countries may have an additional adverse effect upon our revenues and income. In any event, when any of these remaining measures expire or if they are further relaxed or repealed, or if increasingly higher U.S. steel prices enable foreign steelmakers to export their steel products into the United States, even with the presence of duties or tariffs, the resurgence of substantial imports of foreign steel could again create downward pressure on U.S. steel prices.
A reduction or slowdown in China’s steel consumption could have a material adverse effect on global steel pricing and could result in increased steel exports into the United States |
A significant factor in the worldwide strengthening of steel pricing over the past several years has been the explosive growth in Chinese steel consumption, which has vastly outpaced that country’s manufacturing capacity to produce its own steel needs. This has resulted in China becoming a net importer of steel products, as well as a net importer of raw materials and supplies required in the steel manufacturing process. A combination of a slowdown in China’s economic growth rate and its consumption of steel, coupled with its own expansion of steelmaking capacity, could result in a substantial weakening of both domestic and global steel demand and steel pricing. Should Chinese demand weaken, China might not only become a net exporter of steel but many Asian
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and European steel producers whose steel output currently feeds China’s steel import needs could find their way into the domestic market, through increased steel imports, thus causing an erosion of margins and a reduction in pricing.
Excess global capacity in the steel industry and the availability of competitive substitute materials has resulted in intense competition and may continue to exert downward pressure on our pricing |
The highly competitive nature of the industry, in part, exerts downward pressure on prices for some of our products. Competition within the steel industry, both domestically and worldwide, is intense and it is expected to remain so. We compete primarily on the basis of (1) price, (2) quality and (3) the ability to meet our customers’ product needs and delivery schedules. Our primary competitors have traditionally been other mini-mills, which may have cost structures and management cultures more similar to ours than integrated mills. However, we also compete with many integrated producers of hot-rolled, cold-rolled coated and bar products, many of which are larger and have substantially greater capital resources. Largely as a result of the consolidation within the U.S. and worldwide steel industry brought about not only by bankruptcies and the resulting emergence of a number of integrated steel producers with lower capital costs, new or renegotiated union work rules and labor costs, the elimination or reduction of health care and pension legacy costs, the introduction of more incentive based compensation, and a more decentralized management structure, some of these integrated producers, now have cost structures that are much more competitive. Likewise, with their lesser dependence on scrap as a component of their melt mix, these producers may also from time to time enjoy a raw material cost advantage over the currently high cost of scrap that mini-mills must absorb. The reduction in costs enjoyed by many integrated steel producers further increases the competitive environment in the steel industry and may contribute to future price declines.
In addition, periodic global overcapacity in steel manufacturing or weak demand for steel products have historically had a negative impact on U.S. steel pricing, are likely to recur, and could have a negative impact on our sales, margins and profitability. Over the last decade, periods of weak demand, the construction of new mini-mills, expansion and improved production efficiencies of some integrated mills and substantial expansion of foreign steel capacity have all led to an excess of manufacturing capacity. Increasingly, this overcapacity, when combined with periodic high levels of steel imports into the United States, often at prices substantially below the exporters’ home market prices and not necessarily reflective of their costs of production or capital, exerts downward pressure on domestic steel prices, including the prices of our products, and has resulted, at times, in a dramatic narrowing, or with many companies the elimination, of gross margins.
In the case of certain product applications, we and other steel manufacturers also compete with manufacturers of other materials, including plastic, aluminum, graphite composites, glass, wood and concrete.
Our level of production and our sales and earnings are subject to significant fluctuations as a result of the cyclical nature of the steel industry and the industries we serve |
The price of steel may fluctuate significantly due to many factors beyond our control. This fluctuation directly affects our product mix, production volumes and our sales and earnings. The steel industry is highly cyclical and many of our products are subject to fluctuations in supply and demand. Highly cyclical industries such as the automotive, oil and gas, gas transmission, residential and commercial/industrial construction, commercial equipment, rail transportation, appliance, agricultural and durable goods industries represent significant markets for our company. Future economic downturns, stagnant economies or currency fluctuations in the United States or globally could decrease the demand for our products or increase the amount of imports of steel into the United States, which would decrease our sales, margins and profitability. We are also particularly sensitive to trends and events, including strikes and labor unrest that may impact these industries. These industries are significant markets for our products and are themselves highly cyclical.
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Risks Related to Our Business |
Technology, operating and start-up risks associated with our scrap substitute projects, such as our Iron Dynamics project and our Mesabi Nugget joint venture, may prevent us from realizing the anticipated benefits from one or both of these projects and could result in a loss of our
investment |
If we should abandon or substantially reduce the scope of our Iron Dynamics project, or if our Iron Dynamics process does not achieve success, we will not be able to realize the expected benefits of this project and could suffer the loss of all or a substantial part of our entire investment. As of December 31, 2004, our investment in the Iron Dynamics project was $185 million. Since 1997, we have tried to develop and commercialize a pioneering process of producing a virgin form of iron to serve as a lower cost substitute for a portion of the metallic raw material mix that goes into our electric arc furnaces to be melted into new steel. This scrap substitute project involves processes that are based on various technical assumptions and new applications of technologies that have yet to be fully commercially proven. Since our initial start-up in August 1999, we encountered a number of difficulties associated with major pieces of equipment and with various operating processes and systems and since then have engaged in redesign, re-engineering, reconstruction and retrofitting of major components of our systems and processes. As a result, the Iron Dynamics project has taken considerably longer and has required us to expend considerably greater resources than originally anticipated.
During the fourth quarter of 2002, we concluded that improved production technology, coupled with our new ability to recycle waste material inputs and the increasingly high cost of scrap warranted an additional expenditure of approximately $13 million on certain additional modifications and refinements to the Iron Dynamics process. In December 2003, we restarted the Iron Dynamics process, the production of direct reduced iron on a rotary hearth furnace, and the compaction of the DRI into hot briquetted iron, or HBI, and during 2004, we restarted the submerged arc furnace to convert DRI into liquid pig iron. During 2004, we produced 173,000 tonnes of direct reduced iron, 106,000 tonnes of which we converted into HBI and 47,000 tonnes of which we converted into liquid pig iron.
While we remain optimistic that the remaining operational difficulties with the equipment, technology, systems and processes can be resolved, our Iron Dynamics facility may not be able to consistently operate or be able to produce steel scrap substitute material, whether DRI, HBI or liquid pig iron, in the quantities and for costs that will enable it to be cost competitive with scrap or with purchased pig iron. Moreover, our Iron Dynamics facility may experience additional shutdowns or equipment failures, and such shutdowns or failures may have a material adverse impact on our liquidity, cost structure and earnings.
We also plan to invest between $60 and $80 million over the next two years in a joint venture with Kobe Steel, Ltd. Cleveland-Cliffs, Inc. and Ferrometrics, Inc. to build an iron nugget plant either in Indiana or in Minnesota, using Kobe’s proprietary ITmK3 process. We and our other joint venturers have successfully built and operated a small scale pilot project in Minnesota, using this process. However, while we believe that a full scale commercial plant should work as well as the pilot project and that, when built, it should be capable of consistently producing iron nuggets in sufficient quantities and with a cost structure that will compare favorably with the cost of scrap and of other scrap substitute products, including pig iron, we can provide no assurance that we will be able to achieve these expectations. If we encounter cost overruns, construction delays or systems or process difficulties during or after start-up, our anticipated capital costs could materially increase, our expected operating cost benefits from the development of this iron nugget product could be diminished or lost, and we could also lose our investment in the project.
A substantial portion of our flat-rolled products are sold on the spot market, and therefore, our sales, margins and earnings are negatively impacted by decreases in domestic flat-rolled steel prices |
Our sales, margins and earnings are negatively impacted by decreases in domestic flat-rolled steel prices since a significant portion of our flat-rolled products are sold on the spot market. As a result, we are vulnerable to downturns in the domestic flat-rolled steel market. For the three year period ended December 31, 2004,
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approximately 80% of our Flat Roll Division’s shipments were sold on the spot market under contracts with terms of twelve months or less.
Weakness in the automotive industry would result in a substantial reduction in demand for our products |
A prolonged weakness in the automotive industry would reduce the demand for our products and decrease our sales. In addition, if automobile manufacturers choose to incorporate more plastics, aluminum and other steel substitutes in their automobiles, it could reduce demand for our products. Our sales and earnings fluctuate due to the cyclical nature of the automotive industry. The cyclical nature of the automotive industry is affected by such things as the level of consumer spending, the strength or weakness of the U.S. dollar and the impact of international trade and various factors, such as labor unrest and the availability of raw materials, which affect the ability of the automotive industry to actually build cars. While we do not presently sell a material portion of our steel production directly to the automotive market, a substantial portion of our sales to the intermediate steel processor and service center market is resold to various companies in the automotive industry.
We may be unable to continue to pass on increases in the cost of scrap and other raw materials to our customers which would reduce our earnings |
If we are unable to continue to pass on higher scrap and other raw material costs to our customers we will be less profitable. We may not be able to adjust our product prices or to continue to impose surcharges, especially in the short-term, to recover the costs of increases in scrap and other raw material prices, which have reached historically high levels. In December 2003, the market price of No. 1 factory bundles, a key scrap commodity, was $186 per ton. In December 2004, the market price of No. 1 factory bundles was $376 per ton. Our principal raw material is scrap metal, and prices for scrap are subject to market forces largely beyond our control, including demand by U.S. and international steel producers, freight costs and speculation.
A combination of a weak U.S. dollar, exceptionally strong Chinese and global demand for scrap, and lower production of domestic scrap due to a weak manufacturing economy and the continued loss of manufacturing to foreign competition have driven scrap offshore at exceptionally high prices, have reduced the available domestic scrap supply, and have caused the price of domestic scrap to soar to historical highs. Such scrap costs are unsustainable, even with the sharply increased pricing for our manufactured steel, and could erode or eliminate our gross margins. During February 2004, we announced the imposition of scrap surcharges, keyed to a published scrap index and with minor exceptions these were accepted. We have no assurance, however, that this will continue to be so, or that customers will agree to pay ever higher prices for our steel products, sufficient for us to maintain our margins, without resistance or the selection of other suppliers or alternative materials. If this occurs, we may lose customers, we may be unable to pass these higher scrap costs on to our customers, and we may suffer an erosion of our earnings. Moreover, some of our integrated steel producer competitors are not as dependant as we are on scrap as a major part of their raw material melt mix, which, during periods of high scrap costs relative to the cost of blast furnace iron used by the integrated producers, even with the higher costs they must currently pay for iron ore, coke, coking coal and other raw materials used in their ironmaking processes, may from time to time give them a raw material cost advantage over mini-mills. In addition, our operations require substantial amounts of other raw materials, including various types of alloys, refractories, oxygen, natural gas and electricity, the price and availability of which are also subject to market conditions.
Fluctuations in the value of the United States dollar relative to other currencies may adversely affect our business |
Fluctuations in the value of the United States dollar relative to other currencies may adversely affect our business. A strong U.S. dollar makes imported steel less expensive, potentially resulting in more imports of steel products into the U.S. by our foreign competitors. As a result, our steel products, which are made in the United States, may become relatively more expensive as compared to imported steel, which in the past has had and in the future could have a negative impact on our sales, revenues, margins and profitability.
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We rely upon a small number of major customers for a substantial percentage of our sales |
A loss of any large customer or group of customers could materially reduce our sales and earnings. We have substantial business relationships with a few large customers. In 2004, our Flat Roll Division’s top ten customers accounted for approximately 36% of our consolidated net sales. During this period, our largest customer, Heidtman Steel Products, Inc., accounted for approximately 12% of our consolidated net sales. We expect to continue to depend upon a small number of customers for a significant percentage of our net sales, and cannot assure you that any of them will continue to purchase steel from us.
There may be potential conflicts of interest with regard to our relationship with Heidtman Steel Products, Inc. |
If a dispute arises between us and Heidtman, we may be viewed as having a conflict of interest. What is best for Heidtman as a buyer and what is best for us as a product seller may be at odds. We may be unable to resolve potential conflicts. If we do resolve them, we may receive a less favorable resolution since we are dealing with Heidtman rather than an unaffiliated person. Heidtman is an affiliate of one of our large stockholders and its president and chief executive officer serves as one of our directors. This person has obligations to us as well as to Heidtman and may have conflicts of interest with respect to matters potentially or actually involving or affecting us and Heidtman.
Unexpected equipment failures may lead to production curtailments or shutdowns |
Interruptions in our production capabilities will inevitably increase our production costs, and reduce our sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or weather conditions. Our manufacturing processes are dependent upon critical pieces of steelmaking equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. We have experienced and may in the future experience material plant shutdowns or periods of reduced production as a result of such equipment failures. Moreover, any interruption in production capability may require us to make significant capital expenditures to remedy the problem, which could have a negative effect on our profitability and cash flows. We may also sustain revenue losses in excess of any recoveries we make under any applicable business interruption insurance coverages we may have. In addition to such revenue losses, longer-term business disruption could result in a loss of customers, which could adversely affect our business, results of operations and financial condition.
We depend heavily on our senior management and we may be unable to replace key executives if they leave |
The loss of the services of one or more members of our senior management team or our inability to attract, retain and maintain additional senior management personnel could harm our business, financial condition, results of operations and future prospects. Our senior management founded our company, pioneered the development of thin-slab, flat-rolled technology and directed the construction of our Butler flat roll mini-mill, Columbia City structural and rail mini-mill and our Pittsboro bar products mini-mill. Our operations and prospects depend in large part on the performance of our senior management team, including Keith E. Busse, president and chief executive officer, Mark D. Millett, vice president and general manager of our Flat Roll Division, Richard P. Teets, Jr., vice president and general manager of our Structural and Rail Division, Glenn Pushis, vice president and general manager of our Bar Products Division, and John W. Nolan, vice president, sales and marketing. Although these senior managers have each been employees and stockholders of Steel Dynamics for many years, these individuals may not always remain with us as employees. In addition, we may not be able to find qualified replacements for any of these individuals if their services are no longer available. We do not have key man insurance on any of these individuals.
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We may face risks associated with the implementation of our growth strategy |
Our growth strategy subjects us to various risks. As part of our growth strategy, we may expand our existing facilities, build additional plants, acquire other businesses and steel assets, enter into joint ventures, or form strategic alliances that we believe will complement our existing business. These transactions will likely involve some or all of the following risks:
| • | the difficulty of competing for acquisitions and other growth opportunities with companies having materially greater financial resources than ours; |
| • | the difficulty of integrating the acquired operations and personnel into our existing business; |
| • | the potential disruption of our ongoing business; |
| • | the diversion of resources; |
| • | the inability of management to maintain uniform standards, controls, procedures and policies; |
| • | the difficulty of managing the growth of a larger company; |
| • | the risk of entering markets in which we have little experience; |
| • | the risk of becoming involved in labor, commercial, or regulatory disputes or litigation related to the new enterprise; |
| • | the risk of contractual or operational liability to our venture participants or to third parties as a result of our participation; |
| • | the inability to work efficiently with joint venture or strategic alliance partners; and |
| • | the difficulties of terminating joint ventures or strategic alliances. |
These transactions might be required for us to remain competitive, but we may not be able to complete any such transactions on favorable terms or obtain financing, if necessary, for such transactions on favorable terms. Future transactions may not improve our competitive position and business prospects as anticipated, and if they do not, our sales and earnings may be significantly reduced.
Environmental regulation imposes substantial costs and limitations on our operations |
We are subject to the risk of substantial environmental liability and limitations on our operations brought about by the requirements of environmental laws and regulations. We are subject to various federal, state and local environmental, health and safety laws and regulations concerning such issues as air emissions, wastewater discharges, solid and hazardous materials and waste handling and disposal, and the investigation and remediation of contamination. These laws and regulations are increasingly stringent. While we believe that our facilities are and will continue to be in material compliance with all applicable environmental laws and regulations, the risks of substantial costs and liabilities related to compliance with such laws and regulations are an inherent part of our business. Although we are not currently involved in any remediation activities, it is possible that future conditions may develop, arise or be discovered that create substantial environmental remediation liabilities and costs. For example, our steelmaking operations produce certain waste products, such as electric arc furnace dust, which are classified as hazardous waste and must be properly disposed of under applicable environmental laws. These laws can impose clean up liability on generators of hazardous waste and other substances that are shipped off-site for disposal, regardless of fault or the legality of the disposal activities. Other laws may require us to investigate and remediate contamination at our properties, including contamination that was caused in whole or in part by third parties. While we believe that we can comply with environmental legislation and regulatory requirements and that the costs of doing so have been included within our budgeted cost estimates, it is possible that such compliance will prove to be more limiting and costly than anticipated.
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In addition to potential clean up liability, in the past we have been, and in the future we may become, subject to substantial monetary fines and penalties for violation of applicable laws, regulations or administrative conditions. We may also be subject from time to time to legal proceedings brought by private parties or governmental agencies with respect to environmental matters, including matters involving alleged property damage or personal injury.
Risks Related to Our Company |
We have substantial indebtedness and debt service requirements which limits our financial and operating flexibility |
As of December 31, 2004, we had no indebtedness under our senior secured credit facility, $300 million in connection with our 91/2% senior unsecured notes due 2009, $115 million in connection with our 4% convertible subordinated notes due 2012, and approximately $33 million of other indebtedness, including $7 million of unamortized bond premium.
Our substantial indebtedness limits our financial and operating flexibility. For example, it could:
| • | make it more difficult to satisfy our obligations with respect to our debt, including our various notes; |
| • | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes; |
| • | require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing our ability to use these funds for other purposes; |
| • | limit our ability to adjust rapidly to changing market conditions; and |
| • | increase our vulnerability to downturns in general economic conditions or in our business. |
Our ability to satisfy our debt obligations will depend upon our future operating performance, which in turn will depend upon the successful implementation of our strategy and upon financial, competitive, regulatory, technical and other factors, many of which are beyond our control. If we are not able to generate sufficient cash from operations to make payments under our credit agreements or to meet our other debt service obligations, we will need to refinance our indebtedness. Our ability to obtain such financing will depend upon our financial condition at the time, the restrictions in the agreements governing our indebtedness and other factors, including general market and economic conditions. If such refinancing were not possible, we could be forced to dispose of assets at unfavorable prices. Even if we could obtain such financing, we cannot be sure that it would be on terms that are favorable to us. In addition, we could default on our debt obligations.
Our business requires substantial capital investment and maintenance expenditures, which we may be unable to provide |
Our business strategy may require additional substantial capital investment. We require capital for, among other purposes, managing acquired assets, acquiring new equipment, maintaining the condition of our existing equipment, completing future acquisitions and maintaining compliance with environmental laws and regulations. To the extent that cash generated internally and cash available under our credit facilities is not sufficient to fund capital requirements, we may require additional debt and/or equity financing. However, this type of financing may not be available or, if available, may not be on satisfactory terms. Future debt financing, if available, may result in increased interest and amortization expense, increased leverage and decreased income available to fund further acquisitions and expansion. In addition, future debt financing may limit our ability to withstand competitive pressures and render us more vulnerable to economic downturns. If we fail to generate or obtain sufficient additional capital in the future, we could be forced to reduce or delay capital expenditures and acquisitions, sell assets or restructure or refinance our indebtedness.
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Our senior secured credit agreement, the indenture relating to our 91/2% senior unsecured notes due 2009 and the indenture relating to our 4% convertible subordinated notes due 2012 contain restrictive covenants that may limit our flexibility |
Restrictions and covenants in our existing debt agreements, including our senior secured credit agreement, the indenture relating to our 91/2% senior unsecured notes due 2009, and the indenture relating to our 4% convertible subordinated notes due 2012 and any future financing agreements, may impair our ability to finance future operations or capital needs or to engage in other business activities. Specifically, these agreements will restrict our ability to:
| • | incur additional indebtedness; |
| • | pay dividends or make distributions with respect to our capital stock; |
| • | repurchase or redeem capital stock; |
| • | make investments; |
| • | create liens and enter into sale and leaseback transactions; |
| • | make capital expenditures; |
| • | enter into transactions with affiliates or related persons; |
| • | issue or sell stock of certain subsidiaries; |
| • | sell or transfer assets; and |
| • | participate in certain joint ventures, acquisitions or mergers. |
A breach of any of the restrictions or covenants in our debt agreements could cause a default under our senior secured credit agreement, other debt or the notes. A significant portion of our indebtedness then may become immediately due and payable. We are not certain whether we would have, or be able to obtain, sufficient funds to make these accelerated payments, including payments on the notes.
We may not have sufficient cash flow to make payments on our notes and our other debt |
Our ability to pay principal and interest on our various notes and on our other debt and to fund our planned capital expenditures depends on our future operating performance. Our future operating performance is subject to a number of risks and uncertainties that are often beyond our control, including general economic conditions and financial, competitive, regulatory and environmental factors. For a discussion of some of these risks and uncertainties, please see “Risk Factors — Risks Related to Our Business.” Consequently, we may not have sufficient cash flow to meet our liquidity needs, including making payments on our indebtedness.
If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our various notes or on our other debt, we may have to sell assets, seek additional capital or restructure or refinance our debt. If we are required to do that, the terms of our debt may not allow for these alternative measures, even if permitted, such measures might not satisfy our scheduled debt service obligations.
If we cannot make scheduled payments on our debt:
| • | our debtholders could declare all outstanding principal and interest to be due and payable; |
| • | the lenders under our senior secured credit agreement could terminate their commitments and commence foreclosure proceedings against our assets; and |
| • | we could be forced into bankruptcy or liquidation. |
| • | you could lose all or part of your investment in the notes. |
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Despite our substantial indebtedness, we may still incur significantly more debt, which could further increase the risks described above |
The terms of our senior secured credit agreement and the indentures related to our 4% convertible subordinated notes due 2012 and our 91/2% senior unsecured notes due 2009 do not prohibit us or our subsidiaries from incurring additional indebtedness in the future. Any additional debt could be senior to the notes and could increase the risks described above.
Our stock price may be volatile and could decline substantially |
Our stock price may decline substantially as a result of the volatile nature of the stock market and other factors beyond our control. The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including:
| • | our operating results failing to meet the expectations of securities analysts or investors in any quarter; |
| • | downward revisions in securities analysts’ estimates; |
| • | consolidation by other competitors in the industry; |