Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2010

 

OR

 

o         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

 

35-1929476

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7575 West Jefferson Blvd, Fort Wayne, IN

 

46804

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (260) 969-3500

 

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  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (see definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 29, 2010, Registrant had 217,051,360 outstanding shares of common stock.

 

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

 

 

 

Page

 

 

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009

 

1

 

 

 

 

 

Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2010 and 2009 (unaudited)

 

2

 

 

 

 

 

Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2010 and 2009 (unaudited)

 

3

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

 

 

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

27

 

 

 

 

Item 1A.

Risk Factors

 

27

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

27

 

 

 

 

Item 5.

Other Information

 

27

 

 

 

 

Item 6.

Exhibits

 

27

 

 

 

 

 

Signatures

 

29

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

270,118

 

$

9,008

 

Accounts receivable, net

 

599,108

 

396,036

 

Accounts receivable-related parties

 

55,837

 

30,556

 

Inventories

 

1,008,309

 

852,831

 

Deferred income taxes

 

24,786

 

21,492

 

Income taxes receivable

 

30,413

 

137,024

 

Other current assets

 

21,451

 

9,856

 

Total current assets

 

2,010,022

 

1,456,803

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,214,105

 

2,254,050

 

 

 

 

 

 

 

Restricted cash

 

20,570

 

12,595

 

Intangible assets, net

 

500,021

 

533,510

 

Goodwill

 

753,355

 

758,259

 

Other assets

 

112,386

 

114,655

 

Total assets

 

$

5,610,459

 

$

5,129,872

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

356,042

 

$

255,520

 

Accounts payable-related parties

 

10,289

 

6,765

 

Income taxes payable

 

5,431

 

5,664

 

Accrued expenses

 

193,919

 

156,570

 

Accrued profit sharing

 

21,333

 

2,860

 

Senior secured revolving credit facility, due 2012

 

 

167,000

 

Current maturities of long-term debt

 

8,438

 

1,182

 

Total current liabilities

 

595,452

 

595,561

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

7 3/8% senior notes, due 2012

 

700,000

 

700,000

 

5.125% convertible senior notes, due 2014

 

287,500

 

287,500

 

6 ¾% senior notes, due 2015

 

500,000

 

500,000

 

7 ¾% senior notes, due 2016

 

500,000

 

500,000

 

7 5/8% notes, due 2020

 

350,000

 

 

Other long-term debt

 

71,938

 

67,072

 

 

 

2,409,438

 

2,054,572

 

 

 

 

 

 

 

Deferred income taxes

 

439,748

 

416,468

 

Other liabilities

 

62,145

 

60,006

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 253,422,407 and 252,589,627 shares issued; and 216,994,434 and 215,999,801 shares outstanding, as of September 30, 2010 and December 31, 2009, respectively

 

632

 

629

 

Treasury stock, at cost; 36,427,973 and 36,589,826 shares, as of September 30, 2010 and December 31, 2009, respectively

 

(727,624

)

(730,857

)

Additional paid-in capital

 

988,972

 

972,985

 

Retained earnings

 

1,829,659

 

1,745,511

 

Total Steel Dynamics, Inc. stockholders’ equity

 

2,091,639

 

1,988,268

 

Noncontrolling interests

 

12,037

 

14,997

 

Total stockholders’ equity

 

2,103,676

 

2,003,265

 

Total liabilities and stockholders’ equity

 

$

5,610,459

 

$

5,129,872

 

 

See notes to consolidated financial statements.

 

1



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,520,346

 

$

1,129,024

 

$

4,584,285

 

$

2,689,971

 

Related parties

 

63,818

 

43,172

 

188,468

 

89,033

 

Total net sales

 

1,584,164

 

1,172,196

 

4,772,753

 

2,779,004

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,444,632

 

955,503

 

4,230,755

 

2,534,101

 

Gross profit

 

139,532

 

216,693

 

541,998

 

244,903

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

54,679

 

56,133

 

167,796

 

162,012

 

Profit sharing

 

4,562

 

451

 

21,833

 

409

 

Amortization of intangible assets

 

11,291

 

11,661

 

34,437

 

41,353

 

Total selling, general and administrative expenses

 

70,532

 

68,245

 

224,066

 

203,774

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

69,000

 

148,448

 

317,932

 

41,129

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

44,286

 

34,520

 

125,249

 

107,814

 

Other income, net

 

(6,215

)

(2,167

)

(12,817

)

(2,129

)

Income (loss) before income taxes

 

30,929

 

116,095

 

205,500

 

(64,556

)

 

 

 

 

 

 

 

 

 

 

Income taxes (benefit)

 

15,574

 

47,365

 

79,959

 

(26,991

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

15,355

 

68,730

 

125,541

 

(37,565

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

3,386

 

288

 

7,376

 

2,730

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

18,741

 

$

69,018

 

$

132,917

 

$

(34,835

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share attributable to Steel Dynamics, Inc. stockholders

 

$

.09

 

$

.32

 

$

.61

 

$

(.18

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

216,881

 

215,218

 

216,600

 

195,689

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive

 

$

.09

 

$

.30

 

$

.60

 

$

(.18

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

234,543

 

234,080

 

243,601

 

195,689

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.075

 

$

.075

 

$

.225

 

$

.25

 

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,355

 

$

68,730

 

$

125,541

 

$

(37,565

)

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

57,278

 

51,915

 

168,948

 

166,643

 

Equity-based compensation

 

3,626

 

2,887

 

9,724

 

14,779

 

Deferred income taxes

 

2,735

 

8,341

 

21,620

 

21,833

 

(Gain) loss on disposal of property, plant and equipment

 

(176

)

(276

)

1,330

 

(1,023

)

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(26,820

)

(117,442

)

(228,537

)

18,354

 

Inventories

 

9,715

 

(96,062

)

(155,356

)

192,331

 

Other assets

 

(2,409

)

40,052

 

(10,998

)

43,296

 

Accounts payable

 

(12,446

)

130,610

 

83,064

 

82,763

 

Income taxes receivable/payable

 

8,829

 

2,432

 

106,378

 

1,027

 

Accrued expenses

 

33,733

 

45,495

 

59,799

 

(79,395

)

Net cash provided by operating activities

 

89,420

 

136,682

 

181,513

 

423,043

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(24,224

)

(95,662

)

(95,868

)

(243,166

)

Investment in direct financing lease

 

 

(27,967

)

 

(27,967

)

Other investing activities

 

936

 

(2,857

)

2,417

 

(13,370

)

Net cash used in investing activities

 

(23,288

)

(126,486

)

(93,451

)

(284,503

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

25,428

 

240,586

 

571,980

 

949,330

 

Repayment of current and long-term debt

 

(146

)

(251,219

)

(355,952

)

(1,451,666

)

Debt issuance costs

 

 

(221

)

(6,707

)

(13,972

)

Issuance of common stock (net of expenses) and proceeds from exercise of stock options, including related tax effect

 

1,566

 

6,645

 

8,004

 

417,134

 

Contribution from noncontrolling investors

 

1,805

 

 

4,416

 

5,000

 

Dividends paid

 

(16,260

)

(16,110

)

(48,693

)

(52,505

)

Net cash provided by (used in) financing activities

 

12,393

 

(20,319

)

173,048

 

(146,679

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

78,525

 

(10,123

)

261,110

 

(8,139

)

Cash and equivalents at beginning of period

 

191,593

 

18,217

 

9,008

 

16,233

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

270,118

 

$

8,094

 

$

270,118

 

$

8,094

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

15,016

 

$

3,849

 

$

90,778

 

$

83,282

 

Cash paid (received) for federal and state income taxes, net

 

$

(12

)

$

228

 

$

(55,019

)

$

(53,546

)

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies

 

Description of the Business

 

Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is a domestic manufacturer of steel products and metals recycler. The company has three reporting segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.

 

Steel Operations.  Steel operations include the company’s Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia (SWVA) and The Techs operations. These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting, automated rolling mills, and downstream finishing facilities. The company’s steel operations sell directly to end users and service centers. These products are used in numerous industry sectors, including the automotive, construction, commercial, transportation and industrial machinery markets. Steel operations accounted for approximately 61% and 63% of the company’s external net sales during the three- and nine-month periods ended September 30, 2010 and 2009, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations primarily are composed of the company’s steel scrap procurement and processing locations, operated through the company’s wholly-owned subsidiary, OmniSource Corporation (OmniSource), as well as Iron Dynamics (IDI), the company’s iron-substitute production facility. In addition, the impact related to the construction and ongoing start-up of the Mesabi Nugget iron-making facility and potential future mining operations in Hoyt Lakes, Minnesota is also included in this segment.  Mesabi Nugget, which was under construction during 2009 and had limited production in January 2010 and made its first shipment in February 2010, continues to ramp up production during 2010.  Metals recycling and ferrous resources operations accounted for approximately 35% and 33% of the company’s external net sales during the three-month periods ended September 30, 2010 and 2009, respectively, and 35% and 31% during the nine-month periods ended September 30, 2010 and 2009, respectively.

 

Steel Fabrication Operations.  Steel fabrication operations represent the company’s New Millennium Building Systems plants located throughout the United States. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry. Steel fabrication operations accounted for approximately 3% of the company’s external net sales during the three-month periods ended September 30, 2010 and 2009, and 3% and 5% during the nine-month periods ended September 30, 2010 and 2009, respectively.

 

Significant Accounting Policies

 

Principles of Consolidation. The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions.  Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries.

 

Use of Estimates.  These financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto.  Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; income taxes; unrecognized income tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.

 

In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K/A for the year ended December 31, 2009.

 

Comprehensive Income (Loss) Attributable to Steel Dynamics, Inc.  The components of comprehensive income (loss) are summarized in the following table (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

18,741

 

$

69,018

 

$

132,917

 

$

(34,835

)

Unrealized gain on interest rate swap, net of tax

 

 

 

 

581

 

Reversal of unrealized loss on interest rate swap, net of tax

 

 

 

 

830

 

Comprehensive income (loss) attributable to Steel Dynamics, Inc.

 

$

18,741

 

$

69,018

 

$

132,917

 

$

(33,424

)

 

4



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies (continued)

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at September 30, 2010 and December 31, 2009, (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

OmniSource

 

$

579,606

 

$

584,510

 

The Techs

 

142,783

 

142,783

 

Roanoke Bar Division

 

29,041

 

29,041

 

New Millennium Building Systems

 

1,925

 

1,925

 

 

 

$

753,355

 

$

758,259

 

 

OmniSource goodwill decreased $4.9 million from December 31, 2009 to September 30, 2010 in recognition of the 2010 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.

 

Income Taxes.  The company’s estimated 2010 annual income tax rate increased to 38.9% during the three-months ended September 30, 2010, from 36.9% through June 30, 2010, resulting in additional income tax expense of $3.5 million ($.02 per diluted share) being recognized during the third quarter 2010.

 

Note 2.  Earnings (Loss) Per Share

 

Basic earnings (loss) per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive stock options and dilutive shares related to the company’s 5.125% convertible senior notes and are excluded from the computation in periods in which they have an anti-dilutive effect. Options to purchase 2.3 million and 1.3 million shares were anti-dilutive at September 30, 2010 and 2009, respectively.

 

The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for net income (loss) attributable to Steel Dynamics, Inc. (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

 

 

2010

 

2009

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

18,741

 

216,881

 

$

.09

 

$

69,018

 

215,218

 

$

.32

 

Dilutive stock option effect

 

 

1,280

 

 

 

 

2,480

 

 

 

5.125% convertible senior notes

 

2,377

 

16,382

 

 

 

2,211

 

16,382

 

 

 

Diluted earnings per share

 

$

21,118

 

234,543

 

$

.09

 

$

71,229

 

234,080

 

$

.30

 

 

 

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Loss
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings (loss) per share

 

$

132,917

 

216,600

 

$

.61

 

$

(34,835

)

195,689

 

$

(.18

)

Dilutive stock option effect

 

 

1,619

 

 

 

 

 

 

 

5.125% convertible senior notes

 

7,131

 

16,382

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

140,048

 

234,601

 

$

.60

 

$

(34,835

)

195,689

 

$

(.18

)

 

Note 3.  Inventories

 

Inventories are stated at lower of cost or market.  Cost is determined principally on a first-in, first-out basis.  Inventories consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Raw materials

 

$

513,876

 

$

405,794

 

Supplies

 

224,026

 

219,320

 

Work-in-progress

 

83,916

 

72,279

 

Finished goods

 

186,491

 

155,438

 

Total inventories

 

$

1,008,309

 

$

852,831

 

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 4.  Debt

 

7 5/8% Senior Notes

 

In March 2010, the company issued $350.0 million of 7 5/8% senior notes due 2020.  The net proceeds from the notes were used to pay down the then outstanding senior secured revolving credit facility and for general corporate purposes.

 

Senior Secured Revolving Credit Facility, due 2012

 

On April 26, 2010, the company entered into an amendment to its senior secured revolving credit facility, due 2012 which provided for the addition of a lender who extended an additional commitment of $50.0 million, which increased the total revolving credit facility commitment from $874.0 million to $924.0 million.

 

Note 5. Changes in Stockholders’ Equity

 

The following table provides a reconciliation of the beginning and ending carrying amounts of total stockholders’ equity, equity attributable to stockholders of Steel Dynamics, Inc. and equity attributable to the noncontrolling interests (in thousands):

 

 

 

 

 

Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

Common

 

Additional
Paid-In

 

Retained

 

Treasury

 

Noncontrolling

 

 

 

Total

 

Stock

 

Capital

 

Earnings

 

Stock

 

Interests

 

Balances at January 1, 2010

 

$

2,003,265

 

$

629

 

$

972,985

 

$

1,745,511

 

$

(730,857

)

$

14,997

 

Proceeds from the exercise of stock options, including related tax effect

 

8,004

 

3

 

8,001

 

 

 

 

Dividends declared

 

(48,769

)

 

 

 

(48,769

)

 

 

Equity-based compensation and issuance of restricted stock

 

11,219

 

 

7,986

 

 

3,233

 

 

Contributions from noncontrolling investors

 

4,416

 

 

 

 

 

4,416

 

Comprehensive income (loss)

 

125,541

 

 

 

132,917

 

 

(7,376

)

Balances at September 30, 2010

 

$

2,103,676

 

$

632

 

$

988,972

 

$

1,829,659

 

$

(727,624

)

$

12,037

 

 

Note 6.  Derivative Financial Instruments

 

The company is exposed to certain risks relating to its ongoing business operations. At times the company utilizes derivative instruments to mitigate commodity margin risk, interest rate risk, and foreign currency exchange rate risk. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases and sales of non-ferrous materials (specifically aluminum, copper, nickel and silver) from the company’s metals recycling operations. Interest rate swaps are entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk as necessary.

 

The company designated its interest rate swap, which was terminated in June 2009, as a cash flow hedge of floating-rate borrowings. Forward contracts on various commodities and forward exchange contracts on various foreign currencies are not designated as hedging instruments.

 

Cash Flow Hedging Strategy.  For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate borrowings). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the assessment of effectiveness, are recognized in the statement of operations during the current period.

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Derivative Financial Instruments (continued)

 

Commodity Futures Contracts.  If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity.  If the company is “short” on futures contracts, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity.  The following summarizes the company’s commodity futures contract commitments as of September 30, 2010 (MT represents metric tons):

 

Commodity

 

Long/Short

 

Total

 

Aluminum

 

Long

 

2,425

MT

Aluminum

 

Short

 

3,075

MT

Copper

 

Long

 

4,286

MT

Copper

 

Short

 

8,085

MT

Nickel

 

Long

 

126

MT

Nickel

 

Short

 

180

MT

 

The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in the company’s financial statements as of September 30, 2010 and December 31, 2009, and for the three and nine-month periods ended September 30, 2010 and 2009 (in thousands):

 

 

 

 

 

Fair Value

 

Balance Sheets

 

 

 

September 30, 2010

 

December 31, 2009

 

Commodity futures net asset

 

Other current assets

 

$

1,883

 

$

 

Commodity futures net liability

 

Accrued expenses

 

 

3,113

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for Three Months Ended

 

Statements of Operations

 

 

 

September 30, 2010

 

September 30, 2009

 

Commodity futures contracts

 

Costs of goods sold

 

$

720

 

$

469

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) for Nine Months Ended

 

Statements of Operations

 

 

 

September 30, 2010

 

September 30, 2009

 

Commodity futures contracts

 

Costs of goods sold

 

$

3,688

 

$

12,848

 

Interest rate swap

 

Other comprehensive income

 

 

2,294

 

Interest rate swap

 

Other expense

 

 

(1,350

)

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Fair Value Measurements

 

FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.  Levels within the hierarchy are defined as follows:

 

·                  Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets;

·                  Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and

·                  Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of September 30, 2010, and December 31, 2009 (in thousands):

 

September 30, 2010

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Commodity futures — financial assets

 

$

5,192

 

$

 

$

5,192

 

$

 

Commodity futures — financial liabilities

 

3,309

 

 

3,309

 

 

 

December 31, 2009

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Commodity futures — financial assets

 

$

3,819

 

$

 

$

3,819

 

$

 

Commodity futures — financial liabilities

 

6,932

 

 

6,932

 

 

 

The carrying amounts of financial instruments including cash and equivalents, accounts receivable and accounts payable approximate fair value, because of the relatively short maturity of these instruments. The fair value of long-term debt, including current maturities, was approximately $2.5 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion) and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.2 billion) at September 30, 2010, and December 31, 2009, respectively.

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  Commitments and Contingencies

 

On September 17, 2008, the company and eight other steel manufacturing companies were served with a class action antitrust complaint, filed in the United States District Court for the Northern District of Illinois in Chicago by Standard Iron Works of Scranton, Pennsylvania, alleging violations of Section 1 of the Sherman Act.  The Complaint alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States, starting in 2005, by artificially restricting the supply of such steel products.  Seven additional lawsuits, each of them materially similar to the original, have also been filed in the same federal court, each of them likewise seeking similar class certification.  All but one of the Complaints purport to be brought on behalf of a class consisting of all direct purchasers of steel products between January 1, 2005 and the present.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period.  All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits. On June 12, 2009, however, the Court denied the Motion. The parties are currently conducting limited discovery. Although the company believes that the lawsuits are without merit and plans to aggressively defend these actions, the company cannot presently predict the outcome of this litigation or make any judgment with respect to its potential exposure, if any.

 

On October 25, 2010, our wholly-owned subsidiary, OmniSource Corporation, was indicted by a Grand Jury in Marion County, Indiana, on multiple criminal charges involving the alleged receipt or attempted receipt of stolen property. These charges, involving small dollar amount individual retail purchases of scrap metal, stem from a February 2009 police raid on the company’s Indianapolis facilities, are baseless and will be fiercely defended.  Earlier, on October 18, 2010, our Indianapolis subsidiary filed its own lawsuit against the Prosecutor in Marion Superior Court, seeking return of cash seized by the police during that February 2009 raid.

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information

 

The company has three reportable segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.  These operations are described in Note 1 to the financial statements.  Revenues included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of further processing, slitting, and sale of certain steel products and the resale of certain secondary and excess steel products.  In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facilities, senior notes and convertible senior notes, certain other investments, and certain profit sharing expenses.

 

The company’s operations are primarily organized and managed by operating segment.  Operating segment performance and resource allocations are primarily based on operating results before income taxes.  The accounting policies of the reportable segments are consistent with those described in Note 1 to the financial statements.  Refer to the company’s Annual Report on Form 10-K/A for the year ended December 31, 2009, for more information related to the company’s segment reporting.  Intra-segment and intra-company sales and any related profits are eliminated in consolidation. The company’s segment results for the three month periods ended September 30, 2010 and 2009 are as follows (in thousands):

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

938,162

 

$

484,605

 

$

53,723

 

$

11,660

 

$

 

$

1,488,150

 

External Non-U.S.

 

21,509

 

74,265

 

 

240

 

 

96,014

 

Other segments

 

40,715

 

245,810

 

197

 

2,463

 

(289,185

)

 

 

 

1,000,386

 

804,680

 

53,920

 

14,363

 

(289,185

)

1,584,164

 

Operating income (loss)

 

85,201

 

1,077

 

(494

)

(14,781

)(1)

(2,003

)(2)

69,000

 

Income (loss) before income taxes

 

65,666

 

(9,588

)

(1,919

)

(21,147

)

(2,083

)

30,929

 

Depreciation and amortization

 

28,596

 

26,224

 

1,404

 

1,105

 

(51

)

57,278

 

Capital expenditures

 

10,530

 

10,145

 

 

3,549

 

 

24,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,353,807

 

2,424,479

 

186,737

 

1,004,933

(3)

(359,497

)(4)

5,610,459

 

Liabilities

 

254,699

 

558,227

 

8,846

 

3,036,375

(5)

(351,364

)(6)

3,506,783

 

 


Footnotes related to the three months ended September 30, 2010 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(5.8

)

 

 

Company-wide stock option expense

 

(3.6

)

 

 

Profit sharing

 

(3.5

)

 

 

Other, net

 

(1.9

)

 

 

 

 

$

(14.8

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(2.0

)

 

 

 

 

 

 

(3)

 

Deferred income taxes

 

$

311.4

 

 

 

Income taxes receivable

 

30.4

 

 

 

Debt issuance costs

 

25.1

 

 

 

Property, plant and equipment, net

 

57.7

 

 

 

Intra-company debt receivable

 

235.8

 

 

 

Cash and equivalents

 

258.9

 

 

 

Other

 

85.6

 

 

 

 

 

$

1,004.9

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(47.6

)

 

 

Deferred income tax elimination

 

(63.7

)

 

 

Elimination of intra-company debt

 

(235.8

)

 

 

Other

 

(12.4

)

 

 

 

 

$

(359.5

)

 

 

 

 

 

 

(5)

 

Debt

 

$

2,341.0

 

 

 

Deferred income taxes

 

505.9

 

 

 

Accounts payable

 

36.0

 

 

 

Income taxes payable

 

5.4

 

 

 

Accrued interest

 

61.8

 

 

 

Other

 

86.3

 

 

 

 

 

$

3,036.4

 

 

 

 

 

 

 

(6)

 

Deferred income tax elimination

 

$

(66.1

)

 

 

Elimination of intra-company debt

 

(235.8

)

 

 

Elimination of intra-company payables

 

(47.7

)

 

 

Other

 

(1.8

)

 

 

 

 

$

(351.4

)

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2009

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

725,635

 

$

351,788

 

$

32,310

 

$

12,871

 

$

 

$

1,122,604

 

External Non-U.S.

 

17,455

 

32,094

 

 

43

 

 

49,592

 

Other segments

 

28,096

 

171,351

 

620

 

1,517

 

(201,584

)

 

 

 

771,186

 

555,233

 

32,930

 

14,431

 

(201,584

)

1,172,196

 

Operating income (loss)

 

126,140

 

37,405

 

(3,228

)

(7,793

)(1)

(4,076

)(2)

148,448

 

Income (loss) before income taxes

 

111,047

 

28,006

 

(4,514

)

(14,368

)

(4,076

)

116,095

 

Depreciation and amortization

 

26,455

 

23,079

 

1,449

 

932

 

 

51,915

 

Capital expenditures

 

13,701

 

81,743

 

(26

)

244

 

 

95,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,297,886

 

2,230,991

 

154,089

 

636,580

(3)

(210,582

)(4)

5,108,964

 

Liabilities

 

279,415

 

323,227

 

8,682

 

2,717,413

(5)

(207,856

)(6)

3,120,881

 

 


Footnotes related to the three months ended September 30, 2009 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(7.8

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(4.1

)

 

 

 

 

 

 

(3)

 

Deferred income taxes

 

$

287.8

 

 

 

Income taxes receivable

 

92.8

 

 

 

Debt issuance costs

 

25.9

 

 

 

Property, plant and equipment, net

 

30.3

 

 

 

Intra-company debt receivable

 

104.8

 

 

 

Other

 

95.0

 

 

 

 

 

$

636.6

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(31.4

)

 

 

Deferred income tax elimination

 

(86.4

)

 

 

Elimination of intra-company debt

 

(104.8

)

 

 

Other

 

12.0

 

 

 

 

 

$

(210.6

)

 

 

 

 

 

 

(5)

 

Debt

 

$

2,076.2

 

 

 

Deferred income taxes

 

476.2

 

 

 

Accrued Interest

 

62.3

 

 

 

Other

 

102.7

 

 

 

 

 

$

2,717.4

 

 

 

 

 

 

 

(6)

 

Deferred income tax elimination

 

$

(90.6

)

 

 

Elimination of intra-company debt

 

(104.3

)

 

 

Other

 

(13.0

)

 

 

 

 

$

(207.9

)

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the nine months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,835,969

 

$

1,497,542

 

$

119,949

 

$

62,519

 

$

 

$

4,515,979

 

External Non-U.S.

 

72,906

 

183,317

 

 

551

 

 

256,774

 

Other segments

 

123,936

 

728,491

 

236

 

7,182

 

(859,845

)

 

 

 

3,032,811

 

2,409,350

 

120,185

 

70,252

 

(859,845

)

4,772,753

 

Operating income (loss)

 

351,085

 

32,150

 

(11,787

)

(50,476

)(1)

(3,040

)(2)

317,932

 

Income (loss) before income taxes

 

295,332

 

(3,413

)

(15,696

)

(66,886

)

(3,837

)

205,500

 

Depreciation and amortization

 

84,894

 

76,351

 

4,516

 

3,323

 

(136

)

168,948

 

Capital expenditures

 

39,747

 

41,503

 

150

 

15,106

 

(638

)

95,868

 

 


Footnotes related to the nine months ended September 30, 2010 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(22.8

)

 

 

Company-wide stock option expense

 

(8.8

)

 

 

Profit sharing

 

(18.8

)

 

 

Other, net

 

(0.1

)

 

 

 

 

$

(50.5

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(3.0

)

 

 

 

For the nine months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2009

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,708,648

 

$

787,257

 

$

129,565

 

$

32,315

 

$

 

$

2,657,785

 

External Non-U.S.

 

46,377

 

74,729

 

 

113

 

 

121,219

 

Other segments

 

65,979

 

298,593

 

1,198

 

3,736

 

(369,506

)

 

 

 

1,821,004

 

1,160,579

 

130,763

 

36,164

 

(369,506

)

2,779,004

 

Operating income (loss)

 

91,399

 

6,701

 

(152

)

(30,601

)(1)

(26,218

)(2)

41,129

 

Income (loss) before income taxes

 

42,940

 

(21,217

)

(4,341

)

(50,719

)

(31,219

)

(64,556

)

Depreciation and amortization

 

77,143

 

80,186

 

4,696

 

4,618

 

 

166,643

 

Capital expenditures

 

57,479

 

185,813

 

(475

)

349

 

 

243,166

 

 


Footnotes related to the nine months ended September 30, 2009 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(28.3

)

 

 

Other, net

 

(2.3

)

 

 

 

 

$

(30.6

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(24.6

)

 

 

Other

 

(1.6

)

 

 

 

 

$

(26.2

)

 

12



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information

 

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior notes due 2012, 2015, 2016, and 2020 and convertible senior notes due 2014. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company on a consolidated basis. The following statements should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K/A for the year ended December 31, 2009.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

259,029

 

$

9,779

 

$

1,310

 

$

 

$

270,118

 

Accounts receivable, net

 

259,581

 

671,444

 

8,562

 

(284,642

)

654,945

 

Inventories

 

522,523

 

413,788

 

77,900

 

(5,902

)

1,008,309

 

Other current assets

 

89,605

 

10,780

 

3,070

 

(26,805

)

76,650

 

Total current assets

 

1,130,738

 

1,105,791

 

90,842

 

(317,349

)

2,010,022

 

Property, plant and equiment, net

 

1,123,598

 

689,308

 

404,281

 

(3,082

)

2,214,105

 

Intangible assets, net

 

 

500,021

 

 

 

500,021

 

Goodwill

 

 

753,355

 

 

 

753,355

 

Other assets, including investments in subs

 

2,836,130

 

328,506

 

7,484

 

(3,039,164

)

132,956

 

Total assets

 

$

5,090,466

 

$

3,376,981

 

$

502,607

 

$

(3,359,595

)

$

5,610,459

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

128,608

 

$

248,656

 

$

30,920

 

$

(41,853

)

$

366,331

 

Accrued expenses

 

143,746

 

99,984

 

8,110

 

(31,157

)

220,683

 

Current maturities of long-term debt

 

856

 

338

 

51,134

 

(43,890

)

8,438

 

Total current liabilities

 

273,210

 

348,978

 

90,164

 

(116,900

)

595,452

 

Long-term debt

 

2,351,645

 

 

277,463

 

(219,670

)

2,409,438

 

Other liabilities

 

373,972

 

2,341,483

 

34,490

 

(2,248,052

)

501,893

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

632

 

19,753

 

6,601

 

(26,354

)

632

 

Treasury stock

 

(727,624

)

 

 

 

(727,624

)

Additional paid-in-capital

 

988,972

 

117,753

 

123,301

 

(241,054

)

988,972

 

Retained Earnings

 

1,829,659

 

549,014

 

(41,449

)

(507,565

)

1,829,659

 

Total Steel Dynamics, Inc. stockholders’ equity

 

2,091,639

 

686,520

 

88,453

 

(774,973

)

2,091,639

 

Noncontrolling interests

 

 

 

12,037

 

 

12,037

 

Total stockholders’ equity

 

2,091,639

 

686,520

 

100,490

 

(774,973

)

2,103,676

 

Total liabilities and stockholders’ equity

 

$

5,090,466

 

$

3,376,981

 

$

502,607

 

$

(3,359,595

)

$

5,610,459

 

 

13



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of December 31, 2009

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

430

 

$

6,363

 

$

2,215

 

$

 

$

9,008

 

Accounts receivable, net

 

201,749

 

461,535

 

9,217

 

(245,909

)

426,592

 

Inventories

 

437,375

 

368,823

 

50,376

 

(3,743

)

852,831

 

Other current assets

 

177,271

 

5,954

 

551

 

(15,404

)

168,372

 

Total current assets

 

816,825

 

842,675

 

62,359

 

(265,056

)

1,456,803

 

Property, plant and equiment, net

 

1,159,215

 

728,601

 

368,815

 

(2,581

)

2,254,050

 

Intangible assets, net

 

 

533,510

 

 

 

533,510

 

Goodwill

 

 

758,259

 

 

 

758,259

 

Other assets, including investments in subs

 

2,726,175

(1)

326,293

 

9,415

 

(2,934,633

)(1)

127,250

 

Total assets

 

$

4,702,215

 

$

3,189,338

 

$

440,589

 

$

(3,202,270

)

$

5,129,872

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

87,635

 

$

157,711

 

$

43,567

 

$

(26,628

)

$

262,285

 

Accured expenses

 

86,035

 

107,375

 

2,774

 

(31,090

)

165,094

 

Current maturities of long-term debt

 

167,832

 

350

 

14,907

 

(14,907

)

168,182

 

Total current liabilities

 

341,502

 

265,436

 

61,248

 

(72,625

)

595,561

 

Long-term debt

 

2,001,953

 

25

 

238,192

 

(185,598

)

2,054,572

 

Other liabilities

 

370,492

 

2,298,846

 

29,556

 

(2,222,420

)

476,474

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

629

 

19,753

 

7,763

 

(27,516

)

629

 

Treasury stock

 

(730,857

)

 

 

 

(730,857

)

Additional paid-in-capital

 

972,985

 

117,753

 

112,437

 

(230,190

)

972,985

 

Retained earnings

 

1,745,511

(1)

487,525

 

(23,604

)

(463,921

)(1)

1,745,511

 

Total Steel Dynamics, Inc. stockholders’ equity

 

1,988,268

 

625,031

 

96,596

 

(721,627

)

1,988,268

 

Noncontrolling interests

 

 

 

14,997

 

 

14,997

 

Total stockholders’ equity

 

1,988,268

 

625,031

 

111,593

 

(721,627

)

2,003,265

 

Total liabilities and stockholders’ equity

 

$

4,702,215

 

$

3,189,338

 

$

440,589

 

$

(3,202,270

)

$

5,129,872

 

 


(1)         The December 31, 2009 Parent Balance Sheet was adjusted to increase Retained Earnings to $1,745,511 (from $1,495,771) and Other Assets, including Investments in Subsidiaries, to $2,726,175 (from $2,476,435) to reflect undistributed earnings (losses) of certain guarantor and non-guarantor subsidiaries. This adjustment had no impact on previously reported combined non-guarantors or consolidated amounts.

 

14



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

Condensed Consolidating Statements of Operations (in thousands)

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

707,009

 

$

1,784,299

 

$

25,347

 

$

(932,491

)

$

1,584,164

 

Costs of goods sold

 

628,785

 

1,696,687

 

39,466

 

(920,306

)

1,444,632

 

Gross profit (loss)

 

78,224

 

87,612

 

(14,119

)

(12,185

)

139,532

 

Selling, general and administrative

 

21,294

 

49,906

 

2,000

 

(2,668

)

70,532

 

Operating income (loss)

 

56,930

 

37,706

 

(16,119

)

(9,517

)

69,000

 

Interest expense, net of capitalized interest

 

26,197

 

17,302

 

3,494

 

(2,707

)

44,286

 

Other (income) expense, net

 

(3,419

)

(5,619

)

37

 

2,786

 

(6,215

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

34,152

 

26,023

 

(19,650

)

(9,596

)

30,929

 

Income taxes (benefit)

 

17,246

 

9,743

 

(7,587

)

(3,828

)

15,574

 

 

 

16,906

 

16,280

 

(12,063

)

(5,768

)

15,355

 

Equity in net income of subsidiaries

 

1,835

 

 

 

(1,835

)

 

Net loss attributable to noncontrolling interests

 

 

 

3,386

 

 

3,386

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

18,741

 

$

16,280

 

$

(8,677

)

$

(7,603

)

$

18,741

 

 

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2009

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

532,431

 

$

1,323,768

 

$

12,505

 

$

(696,508

)

$

1,172,196

 

Costs of goods sold

 

427,132

 

1,203,069

 

11,123

 

(685,821

)

955,503

 

Gross profit

 

105,299

 

120,699

 

1,382

 

(10,687

)

216,693

 

Selling, general and administrative

 

16,611

 

53,360

 

3,580

 

(5,306

)

68,245

 

Operating income (loss)

 

88,688

 

67,339

 

(2,198

)

(5,381

)

148,448

 

Interest expense, net of capitalized interest

 

18,298

 

14,002

 

1,201

 

1,019

 

34,520

 

Other (income) expense, net

 

(88

)

(3,004

)

(17

)

942

 

(2,167

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

70,478

 

56,341

 

(3,382

)

(7,342

)

116,095

 

Income taxes (benefit)

 

27,518

 

24,983

 

(1,470

)

(3,666

)

47,365

 

 

 

42,960

 

31,358

 

(1,912

)

(3,676

)

68,730

 

Equity in net income of subsidiaries

 

26,058

(2)

 

 

(26,058

)(2)

 

Net loss attributable to noncontrolling interests

 

 

 

288

 

 

288

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

69,018

 

$

31,358

 

$

(1,624

)

$

(29,734

)

$

69,018

 

 

15



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,160,162

 

$

5,348,572

 

$

92,116

 

$

(2,828,097

)

$

4,772,753

 

Costs of goods sold

 

1,844,035

 

5,060,220

 

123,213

 

(2,796,713

)

4,230,755

 

Gross profit (loss)

 

316,127

 

288,352

 

(31,097

)

(31,384

)

541,998

 

Selling, general and administrative

 

74,675

 

150,432

 

6,594

 

(7,635

)

224,066

 

Operating income (loss)

 

241,452

 

137,920

 

(37,691

)

(23,749

)

317,932

 

Interest expense, net of capitalized interest

 

73,082

 

50,160

 

9,029

 

(7,022

)

125,249

 

Other (income) expense, net

 

(10,685

)

(10,526

)

575

 

7,819

 

(12,817

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

179,055

 

98,286

 

(47,295

)

(24,546

)

205,500

 

Income taxes (benefit)

 

69,098

 

36,781

 

(17,935

)

(7,985

)

79,959

 

 

 

109,957

 

61,505

 

(29,360

)

(16,561

)

125,541

 

Equity in net income of subsidiaries

 

22,960

 

 

 

(22,960

)

 

Net loss attributable to noncontrolling interests

 

 

 

7,376

 

 

7,376

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

132,917

 

$

61,505

 

$

(21,984

)

$

(39,521

)

$

132,917

 

 

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2009

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,229,082

 

$

3,034,599

 

$

34,238

 

$

(1,518,915

)

$

2,779,004

 

Costs of goods sold

 

1,163,834

 

2,813,517

 

34,643

 

(1,477,893

)

2,534,101

 

Gross profit (loss)

 

65,248

 

221,082

 

(405

)

(41,022

)

244,903

 

Selling, general and administrative

 

52,602

 

158,257

 

9,599

 

(16,684

)

203,774

 

Operating income (loss)

 

12,646

 

62,825

 

(10,004

)

(24,338

)

41,129

 

Interest expense, net of capitalized interest

 

59,292

 

41,281

 

1,996

 

5,245

 

107,814

 

Other (income) expense, net

 

51,038

 

(54,741

)

5

 

1,569

 

(2,129

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

(97,684

)

76,285

 

(12,005

)

(31,152

)

(64,556

)

Income taxes (benefit)

 

(42,645

)

33,303

 

(4,049

)

(13,600

)

(26,991

)

 

 

(55,039

)

42,982

 

(7,956

)

(17,552

)

(37,565

)

Equity in net income of subsidiaries

 

20,204

(2)

 

 

(20,204

)(2)

 

Net loss attributable to noncontrolling interests

 

 

 

2,730

 

 

2,730

 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

(34,835

)

$

42,982

 

$

(5,226

)

$

(37,756

)

$

(34,835

)

 


(2)         The Parent Statement of Operations for the three and nine-month periods ended September 30, 2009 was adjusted to change Equity in Net Income of Subsidiaries to $26,058, from $29,446; and to $20,204, from $35,026, respectively, to reflect in net income (loss) attributable to Steel Dynamics, Inc. the net loss attributable to the noncontrolling interests, and the net income (loss) effect of consolidating adjustments. These adjustments had no impact on previously reported combined non-guarantors or total consolidated amounts.

 

16



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

Condensed Consolidating Statements of Cash Flows (in thousands)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

259,377

 

$

2,914

 

$

(80,139

)

$

(639

)

$

181,513

 

Net cash used in investing activities

 

(124,699

)

(23,104

)

(40,305

)

94,657

 

(93,451

)

Net cash provided by financing activities

 

123,921

 

23,606

 

119,539

 

(94,018

)

173,048

 

Increase (decrease) in cash and equivalents

 

258,599

 

3,416

 

(905

)

 

261,110

 

Cash and equivalents at beginning of period

 

430

 

6,363

 

2,215

 

 

9,008

 

Cash and equivalents at end of period

 

$

259,029

 

$

9,779

 

$

1,310

 

$

 

$

270,118

 

 

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2009

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

95,162

 

$

170,207

 

$

(27,478

)

$

185,152

 

$

423,043

 

Net cash used in investing activities

 

(71,030

)

(55,211

)

(158,262

)

 

(284,503

)

Net cash provided by (used in) financing activities

 

(24,818

)

(120,159

)

183,450

 

(185,152

)

(146,679

)

Increase (decrease) in cash and equivalents

 

(686

)

(5,163

)

(2,290

)

 

(8,139

)

Cash and equivalents at beginning of period

 

1,389

 

11,514

 

3,330

 

 

16,233

 

Cash and equivalents at end of period

 

$

703

 

$

6,351

 

$

1,040

 

$

 

$

8,094

 

 

17



Table of Contents

 

ITEM 2.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This report contains some predictive statements about future events, including statements related to conditions in domestic and global economies, conditions in the steel and recycled metals marketplaces, our revenue, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements are intended to be made as “forward-looking,” subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Such predictive statements are not guarantees of future performance, and actual results could differ materially from our current expectations. Factors that could cause such predictive statements to turn out other than as anticipated or predicted include, among others: the effects of a prolonged or deepening recession on industrial demand; general or specific sector (i.e., automotive, consumer appliance or construction) economic conditions affecting steel or recycled metals consumption; the impact of price competition, whether domestic or the result of foreign imports; difficulties in integrating acquired businesses; risks and uncertainties involving new products or new technologies; changes in the availability or cost of steel scrap or substitute materials; increases in energy costs; occurrence of unanticipated equipment failures and plant outages; labor unrest; and the effect of the elements on production or consumption.

 

More specifically, we refer you to the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K/A for the year ended December 31, 2009, as well as in other reports which we file with the Securities and Exchange Commission, for a more detailed discussion of some of the many factors, variable risks and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated. These reports are available publicly on the SEC web site, www.sec.gov, and on our web site, www.steeldynamics.com. Forward-looking or predictive statements we make are based upon information and assumptions, concerning our businesses and the environments in which they operate, which we consider reasonable as of the date on which these statements are made.  Due to the foregoing risks and uncertainties however, as well as, matters beyond our control which can affect forward-looking statements, you are cautioned not to place undue reliance on these predictive statements, which speak only as of the date of this report. We undertake no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Operating Statement Classifications

 

Net Sales.  Net sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of the steel products.  Except for our steel fabrication operations segment, we recognize revenue from sales and the allowance for estimated costs associated with returns from these sales at the time the title of the product is transferred to the customer. Provision is made for estimated product returns and customer claims based on estimates and actual historical experience. Net sales from steel fabrication operations are recognized from construction contracts utilizing a percentage-of-completion method, which is based on the percentage of steel consumed to date as compared to the estimated total steel required for each contract.

 

Costs of Goods Sold.  Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs for our steel operations are steel scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), alloys, zinc, natural gas, argon, direct and indirect labor and related benefits, electricity, oxygen, electrodes, depreciation, materials and freight. The principal elements of these costs for our metals recycling and ferrous resources operations are the costs of procuring the unprocessed scrap materials, material transportation costs, and processing expenses, such as direct and indirect labor and related benefits, depreciation and utilities. The principal elements of these costs for our steel fabrication operations include purchased steel and direct and indirect labor and related benefit expenses.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and related benefits, professional services, insurance premiums, property taxes, profit sharing, and amortization of intangible and other assets.

 

Interest Expense, net of Capitalized Interest.  Interest expense consists of interest associated with our senior credit facilities and other debt net of interest costs that are required to be capitalized during the construction period of certain capital investment projects.

 

Other (Income) Expense, net.  Other income consists of interest income earned on our temporary cash deposits and any other non-operating income activity, including gains on certain short-term investments and income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs.

 

Overview

 

Net income was $18.7 million, or $.09 per diluted share, during the third quarter of 2010, compared with net income of $69.0 million, or $.30 per diluted share, during the third quarter of 2009, and compared with net income of $49.2 million, or $0.22 per diluted share, during the second quarter of 2010. Our net sales increased $412.0 million , or 35%, to $1.6 billion in the third quarter of 2010 versus the third quarter of 2009, and our third quarter 2010 net sales decreased $48.6 million , or 3% versus the second quarter of 2010. Our gross profit percentage was 9% during the third quarter of 2010 as compared to 18% for the third quarter of 2009, and 12% for the second quarter of 2010.

 

Net income was $132.9 million, or $.60 per diluted share during the first nine months of 2010, compared with net loss of $34.8 million, or $.18 per diluted share during the first nine months of 2009.  Our net sales increased $2.0 billion, or 72%, to $4.8 billion in the first nine months of 2010 versus the first nine months of 2009. Our gross profit percentage was 11% during the first nine months of 2010 as compared to 9% for the first nine months of 2009.

 

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Table of Contents

 

During the first nine months of 2010, we have continued to experience the return to profitably we saw in the latter half of 2009, in the wake of the global economic recession of late 2008 and early 2009. Since the second quarter of 2009, improved net sales have been driven by the general improvement of the domestic economy, resulting in increasing customer demand for our products.

 

Throughout 2010 we have experienced consistent to moderately improving customer order volume within our steel operations, and product pricing has also generally improved; although, there are periods of peaks and troughs within this time frame as end market volatility continues to exist. Within our steel operations, the most impactful demand improvement has been in our sheet and special bar-quality steel products. However, pricing volatility continues to impact our sheet products and order entry activity for our sheet steel declined in the third quarter of 2010 and has continued with tepid order backlogs into October. Operating income in our steel operations for the third quarter of 2010 was down $45.9 million, or 35%, compared with that of the second quarter of 2010 due to compressed margins. As we head into the fourth quarter of 2010, we anticipate continued steady demand in special bar-quality products, with steady performance in our other long products categories. Structural steel and steel fabrication demand continues to lag but has shown improvement in recent months.

 

Additionally, throughout 2010 our metals recycling operations experienced improving net sales and shipping volumes of ferrous and nonferrous metals, as demand improved due in large part to domestic and international steel production utilization rates increasing as compared to 2009. While sales volumes continued to show improvement in the third quarter of 2010, operating income retreated slightly as compared to the second quarter due to declining metal margins primarily in ferrous operations.

 

Segment Operating Results 2010 vs. 2009 (dollars in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

Second

 

Linked

 

 

 

September 30,

 

September 30,

 

Quarter

 

Quarter

 

 

 

2010

 

%
Change

 

2009

 

2010

 

%
Change

 

2009

 

2010

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

1,000,386

 

30

%

$

771,186

 

$

3,032,811

 

67

%

$

1,821,004

 

$

1,019,929

 

-2

%

Metals recycling and ferrous resources

 

804,680

 

45

%

555,233

 

2,409,350

 

108

%

1,160,579

 

848,367

 

-5

%

Steel fabrication

 

53,920

 

64

%

32,930

 

120,185

 

-8

%

130,763

 

42,267

 

28

%

Other

 

14,363

 

%

14,431

 

70,252

 

94

%

36,164

 

26,472

 

-46

%

 

 

1,873,349

 

 

 

1,373,780

 

5,632,598

 

 

 

3,148,510

 

1,937,035

 

 

 

Intra-company

 

(289,185

)

 

 

(201,584

)

(859,845

)

 

 

(369,506

)

(304,236

)

 

 

Consolidated

 

$

1,584,164

 

35

%

$

1,172,196

 

$

4,772,753

 

72

%

$

2,779,004

 

$

1,632,799

 

-3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

85,201

 

 

 

$

126,140

 

$

351,085

 

 

 

$

91,399

 

$

131,146

 

 

 

Metals recycling and ferrous resources

 

1,077

 

 

 

37,405

 

32,150

 

 

 

6,701

 

6,939

 

 

 

Steel fabrication

 

(494

)

 

 

(3,228

)

(11,787

)

 

 

(152

)

(4,713

)

 

 

Other

 

(14,781

)

 

 

(7,793

)

(50,476

)

 

 

(30,601

)

(16,820

)

 

 

 

 

71,003

 

 

 

152,524

 

320,972

 

 

 

67,347

 

116,552

 

 

 

Eliminations

 

(2,003

)

 

 

(4,076

)

(3,040

)

 

 

(26,218

)

83

 

 

 

Consolidated

 

$

69,000

 

 

 

$

148,448

 

$

317,932

 

 

 

$

41,129

 

$

116,635

 

 

 

 

Steel Operations

 

Steel Operations.  Steel operations consist of our five electric-arc furnace mini-mills, producing steel from steel scrap, utilizing continuous casting, automated rolling mills, and various downstream finishing facilities, including The Techs operations. Collectively, our steel operations sell directly to end users and service centers. These products are used in numerous industry sectors, including the automotive, construction, commercial, transportation and industrial machinery markets. In the third quarters of 2010 and 2009, our steel operations accounted for 61% and 63%, respectively, of our external net sales, and accounted for 60% in the second quarter of 2010. Operating income for steel operations decreased $40.9 million or 32%, to $85.2 million in the third quarter of 2010 compared to the third quarter of 2009, and decreased $45.9 million, or 35%, on a linked-quarter basis. This decrease in the third quarter 2010 versus the third quarter 2009 and second quarter 2010 was due primarily to compressed margins, as the decrease in steel selling prices, particularly in sheet steel products, was greater than the decrease in the cost of steel scrap consumed during the quarter. Operating income for steel operations increased $259.7 million to $351.1 million in the first nine months of 2010 versus the first nine months of 2009 due to significant increases in sales volumes of 38% across all product types as well as increased selling prices of $128 per ton.

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

Second

 

 

 

 

 

September 30,

 

 

 

September 30,

 

 

 

Quarter

 

 

 

 

 

2010

 

 

 

2009

 

 

 

2010

 

 

 

2009

 

 

 

2010

 

 

 

Shipments (net tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flat Roll Division

 

621,543

 

 

 

656,512

 

 

 

1,993,662

 

 

 

1,415,195

 

 

 

622,861

 

 

 

The Techs

 

166,858

 

 

 

220,383

 

 

 

569,363

 

 

 

466,032

 

 

 

191,960

 

 

 

Sheet products

 

788,401

 

64

%

876,895

 

75

%

2,563,025

 

69

%

1,881,227

 

70

%

814,821

 

69

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural and Rail Division

 

156,940

 

 

 

134,390

 

 

 

471,541

 

 

 

360,421

 

 

 

159,252

 

 

 

Engineered Bar Products Division

 

153,279

 

 

 

80,428

 

 

 

407,140

 

 

 

215,092

 

 

 

128,802

 

 

 

Roanoke Bar Division

 

145,168

 

 

 

97,895

 

 

 

363,747

 

 

 

263,617

 

 

 

109,393

 

 

 

Steel of West Virginia

 

66,610

 

 

 

57,539

 

 

 

172,735

 

 

 

155,622

 

 

 

52,720

 

 

 

Long products

 

521,997

 

43

%

370,252

 

32

%

1,415,163

 

38

%

994,752

 

37

%

450,167

 

38

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shipments

 

1,310,398

 

 

 

1,247,147

 

 

 

3,978,188

 

 

 

2,875,979

 

 

 

1,264,988

 

 

 

 Intra-company and segment

 

(82,859

)

(7

)%

(84,396

)

(7

)%

(251,678

)

(7

)%

(183,998

)

(7

)%

(86,866

)

(7

)%

External shipments

 

1,227,539

 

 

 

1,162,751

 

 

 

3,726,510

 

 

 

2,691,981

 

 

 

1,178,122

 

 

 

 

Sheet Products.  Our Flat Roll Division sells a broad range of sheet steel products, such as hot rolled, cold rolled and coated steel products, including a large variety of specialty products such as light gauge hot rolled, galvanized, Galvalume® and painted products. The Techs operations, comprised of three galvanizing lines, also sells specialized galvanized sheet steels used in non-automotive applications. During the third quarter of 2010, our sheet operations represented 57% of our steel segment’s operating income, as compared to 69% in the third quarter of 2009. The decrease in the percentage in 2010 from 2009 is due primarily to the improved profitability of the Engineered Bar Products and Roanoke Bar divisions during the third quarter of 2010 relative to the segment as a whole.

 

Long Products.  Our Structural and Rail Division sells structural steel beams and pilings and is also designed to produce and sell a variety of standard and premium-grade rail for the railroad industry. Our Engineered Bar Products Division primarily sells special bar quality and merchant bar quality rounds and round-cornered squares. Our Roanoke Bar Division sells billets and merchant steel products, including angles, plain rounds, flats and channels. Steel of West Virginia primarily sells merchant beams, channels and specialty structural steel sections.

 

Net sales for the segment increased by $229.2 million, or 30%, compared to the third quarter of 2009, but decreased $19.5 million, or 2%, on a linked-quarter basis. Third quarter 2010 total shipments were up 5% compared to the same period in 2009 due to the generally improved economic climate during the first nine months of 2010 as steel mill utilization improved with more automotive and heavy machinery demand, and service center inventories have continued to remain at low levels. Linked-quarter total shipments increased 4%, driven by long products which increased 16%. Sheet products shipments decreased 3% on a linked-quarter basis. While recent order entry for sheet products has slowed, long products continue to show modest improvement. We anticipate sheet product demand may remain slow in the fourth quarter, while special bar quality products should continue to show strong demand. Demand for our rail products could also be bolstered by our continued refinement of rail products and development of rail customer relationships. Our third quarter 2010 average steel operations’ selling price per ton shipped, including intra-company shipments, increased $143 compared with the third quarter of 2009, but decreased $47 compared with the second quarter of 2010. In sheet products, our third quarter 2010 average selling price per ton shipped increased $155 per ton compared with the third quarter of 2009, but decreased $58 on a linked-quarter basis. Long products average selling prices increased $107 per ton compared with the third quarter of 2009, but decreased $25 on a linked-quarter basis.

 

Net sales for the segment increased by $1.2 billion, or 67%, in the first nine months of 2010 compared to the same period in 2009. Stronger demand for our steel products in conjunction with the improving economic climate to date in 2010 have driven increases in both volumes and product pricing as compared to the first nine months of 2009. Total shipments for the first nine months of 2010 were up 38% overall compared to the same period in 2009, with sheet products increasing 36% and long products increasing 42%. Our first nine months 2010 average steel operations’ selling price per ton shipped, including intra-company shipments, increased $128 compared with the first nine months of 2009. In sheet products, our first nine months of 2010 average selling price per ton shipped increased $161 per ton compared with the first nine months of 2009. Long products average selling prices increased $67 per ton compared with the first nine months of 2009.

 

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Table of Contents

 

 

Metallic raw materials used in our electric arc furnaces represent our single most significant manufacturing cost. Our metallic raw material cost per net ton consumed in our steel operations increased $111 in the third quarter 2010 compared with the third quarter of 2009, but decreased $23 on a linked-quarter basis. During the third quarter of 2010 and 2009, respectively, our metallic raw material costs represented 61% and 54% of our steel operations’ manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes.

 

Our metallic raw material cost per net ton consumed in our steel operations increased $117 for the first nine months of 2010 compared with the first nine months of 2009, and represented 61% and 50% of our steel operations’ manufacturing costs during the first nine months of 2010 and 2009, respectively, excluding the operations of The Techs.

 

Metals Recycling and Ferrous Resources Operations

 

Metals Recycling and Ferrous Resources Operations.  This operating segment includes our metals recycling operations, liquid pig iron manufacturing facility and iron nugget manufacturing start-up facility. In the third quarter of 2010 and 2009, our metals recycling and ferrous resources operations accounted for 35% and 33%, respectively, of our external net sales, and accounted for 36% in the second quarter of 2010.  Operating income for the segment decreased $36.3 million, to $1.1 million, compared to the third quarter of 2009, as decreased margins more than offset increased volumes in our Metals Recycling operations, and start-up iron nugget operations resulted in additional operating losses in the third quarter 2010 versus the third quarter of 2009.

 

Metals Recycling.  Our metals recycling operations represent our metals sourcing and processing operations and are the most significant source of income in this segment. These operations sell ferrous metals to steel mills and foundries, and nonferrous metals, such as copper, brass, aluminum and stainless steel to, among others, ingot manufacturers, copper refineries and mills, smelters, and specialty mills.  During the third quarter of 2010, our metals recycling operations represented 95% of this segment’s net sales as compared to 96% during the third quarter of 2009 and second quarter of 2010.

 

Ferrous Resources.  Our ferrous resource operations consist of the revenues and expenses associated with our scrap substitute manufacturing facility, Iron Dynamics (IDI); our iron-nugget manufacturing facility, Mesabi Nugget; and our potential future mining operations, Mesabi Mining. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material input exclusively at our Flat Roll Division. Mesabi Nugget began initial, limited production of iron nuggets in January 2010. During the fourth quarter 2010, we anticipate reaching sustainable production rates of approximately 60% of the facility’s anticipated annual production capacity of 500,000 metric tons, with interim periods approaching 85%.

 

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Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

Second

 

 

 

September 30,

 

September 30,

 

Quarter

 

 

 

2010

 

2009

 

2010

 

2009

 

2010

 

Ferrous metal shipments (gross tons)

 

 

 

 

 

 

 

 

 

 

 

Combined

 

1,361,696

 

1,155,196

 

3,942,135

 

2,557,043

 

1,350,364

 

Intra-company

 

(556,222

)

(514,143

)

(1,638,878

)

(985,372

)

(563,350

)

External

 

805,474

 

641,053

 

2,303,257

 

1,571,671

 

787,014

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-ferrous metals shipments (thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

Combined

 

256,514

 

217,068

 

731,407

 

577,246

 

236,648

 

Intra-company

 

(1,784

)

 

(5,924

)

 

(1,946

)

External

 

254,730

 

217,068

 

725,483

 

577,246

 

234,702

 

 

 

 

 

 

 

 

 

 

 

 

 

Mesabi Nugget shipments (metric tons)

 

24,553

 

 

49,210

 

 

17,478

 

 

 

 

 

 

 

 

 

 

 

 

 

Iron Dynamics shipments (metric tons)

 

 

 

 

 

 

 

 

 

 

 

Liquid pig iron

 

45,046

 

49,901

 

130,667

 

127,573

 

39,193

 

Hot briquetted iron

 

11,774

 

4,080

 

38,503

 

23,865

 

15,357

 

Other

 

248

 

33

 

1,514

 

670

 

568

 

Intra-company

 

57,068

 

54,014

 

170,684

 

152,108

 

55,118

 

 

During the third quarter of 2010, this segment recorded combined shipments of 1.4 million gross tons of ferrous metals and 256.5 million pounds of non-ferrous materials, compared with 1.2 million gross tons and 217.1 million pounds during the same period in 2009. On a linked-quarter basis, combined shipments of ferrous metals increased by 11,000 gross tons while shipments of non-ferrous metals increased by 19.9 million pounds, or 8%. During the third quarter of 2010, the metals recycling operations provided approximately 50% of the steel scrap purchased by our steel mills. This represented 27% of the metals recycling operations’ net sales for the quarter as compared to 28% during the second quarter of 2010 and the third quarter of 2009. Domestic steel mill utilization has increased from 61% to 68% during 2010, and as a major consumer of ferrous scrap, this has increased demand.

 

Net sales for the segment in the third quarter of 2010 increased by $249.4 million, or 45%, compared to the third quarter of 2009, but decreased $43.7 million, or 5%, on a linked-quarter basis. The third quarter 2010 increase over 2009 was due to both the increased scrap volumes and improved selling prices as the markets in 2010 were much healthier than in 2009. Ferrous metals prices fell 11% over the quarter as compared to those achieved in the second quarter 2010. However, non-ferrous pricing increased in the third quarter 2010 versus the second quarter 2010 overall, with copper showing the most improvement. Net sales for the segment for the first nine months of 2010 increased by $1.2 billion to $2.4 billion compared to the first nine months of 2009.

 

Operating income for the segment decreased $36.3 million, to $1.1 million in the third quarter 2010, compared to the third quarter of 2009 due primarily to decreased margins in ferrous metals, and decreased $5.9 million, or 84%, on a linked-quarter basis. The majority of the sequential quarter over quarter decline in segment operating income was attributable to margin compression primarily in our ferrous metals operations as noted above, whereas non-ferrous metals experienced an increase in operating income. The operating loss attributable to our Mesabi Nugget start-up operations of $14.3 million (including noncontrolling interest) in the third quarter of 2010 was $2.8 million higher than the second quarter of 2010, and the third quarter 2009 operating loss of $2.3 million, when the location was still being constructed.

 

Operating income for the segment increased $25.4 million to $32.2 million for the first nine months of 2010 compared to the first nine months of 2009 due to both the increased scrap volumes and pricing as the markets in 2010 were much healthier than in 2009. This was despite the operating loss attributable to our Mesabi Nugget start-up operations increasing to $37.6 million (including noncontrolling interest) in the first nine months of 2010 from $5.8 million in the first nine months of 2009, when the location was still being constructed.

 

Steel Fabrication Operations

 

Our steel fabrication operations include three operating and two idled New Millennium Building Systems’ plants located in the Midwest and Southeastern part of the United States.  Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry. Steel fabrication operations accounted for 3% of our external net sales during the third quarter of 2010 and 2009, and during the second quarter of 2010. Operating loss for the segment was $494,000 compared to operating loss of $3.2 million in the third quarter of 2009, and an operating loss of $4.7 million, or 90% lower, on a linked-quarter basis.  Operating loss for the segment was $11.8 million for the first nine months of 2010 compared to operating loss of $152,000 for the first nine months of 2009.

 

Net sales for the segment increased by $21.0 million, or 64%, in the third quarter 2010 compared to the third quarter of 2009, and $11.7 million, or 28%, on a linked-quarter basis. Both volumes and pricing increased in the third quarter 2010, with our average steel fabrication operations’ selling price per ton shipped increasing $187, or 20%, during the third quarter of 2010 when compared with the same period in 2009, and increasing $131, or 13%, on a linked-quarter basis. Net sales for the segment decreased $10.6 million to $120.2 million for the first nine months of 2010 as compared to the first nine months of 2009. Our average steel fabrication operations’ selling price per ton shipped decreased $89, or 8%, in the first nine months of 2010 as compared to the same period in 2009.

 

22



Table of Contents

 

The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the third quarter of 2010 and 2009, the cost of steel products purchased represented 71% and 65%, respectively, of the total cost of manufacturing for our steel fabrication operations; while the cost of steel increased in the third quarter of 2010 as compared to the same period in 2009 by $154 per ton. As the increase in selling prices outpaced input costs, gross margin for the segment increased 128%. During the first nine months of 2010 and 2009, the cost of steel products consumed represented 69% of the total cost of manufacturing for our steel fabrication operations. The cost of steel increased in the first nine months of 2010 as compared to the same period in 2009 by $19 per ton.  This increase, coupled with an 8% decrease in average selling values, resulted in decreased gross margins during the first nine months of 2010 compared to 2009.

 

In spite of the slowly recovering economy and depressed activity in non-residential construction, we are seeing some encouraging signs emerging for our steel fabrication segment. Our October purchase of certain Commercial Metals Company joist-manufacturing facilities in Arkansas, Nevada, and northern Mexico and other assets for $17.0 million will give us a broader geographic presence in the joist market moving forward, providing us the opportunity to better serve our customers that have a nationwide footprint and gain further market share. However, we anticipate the non-residential construction recovery to continue to develop slowly into 2011. We have continued to experience slightly positive trends in order entry activity and product pricing, though gross margins are still tight with input costs cutting into pricing increases.

 

 

Third Quarter Consolidated Results 2010 vs. 2009

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $70.5 million during the third quarter of 2010, as compared to $68.2 million during the third quarter of 2009, an increase of $2.3 million, or 3%. Our selling, general and administrative expenses represented 4% and 6% of our total net sales during the third quarter of 2010 and 2009, respectively. The percentage decrease is primarily a result of improved net sales in the third quarter of 2010 compared with the prior year as measured against certain fixed cost components in selling, general and administrative expenses.

 

The most significant increase in our selling, general and administrative expenses was due to the accrual of profit sharing expense during the third quarter of 2010 as a result of our positive financial results compared to 2009. During the third quarter of 2010, we recorded expense of $3.5 million related to our Steel Dynamics performance-based profit sharing plan (and $1.1 million of other profit sharing), while only $451,000 of expense was recorded in the third quarter of 2009. The contribution percentage for this plan consists of 2% of consolidated pretax earnings plus a unique percentage of each of our operating segments’ pretax earnings. The resulting total contribution percentage was 10% of consolidated pretax earnings (before profit sharing) during the third quarter of 2010.

 

Interest Expense, net of Capitalized Interest.  During the third quarter of 2010, gross interest expense increased $4.8 million, or 12%, to $45.3 million, and capitalized interest decreased $4.9 million to $1.0 million, when compared to the same period in 2009. The increase in gross interest expense for the third quarter of 2010 compared to the third quarter of 2009 is primarily a result of our issuance in March 2010 of $350.0 million of 7 5/8% senior notes due 2020. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities at our various operating segments, which with the completion of several of our construction projects, is not as significant in the third quarter 2010. Our weighted-average interest rate on our outstanding borrowings was 7.3% and 7.2% at September 30, 2010 and 2009, respectively. We currently anticipate gross interest expense to remain consistent through the remainder of the year.

 

23



Table of Contents

 

Other (Income) Expense, net.  Other income was $6.2 million during the third quarter of 2010, as compared to $2.2 million during the same period in 2009. During the third quarter of 2010, we recorded interest income of $1.2 million versus $258,000 in the same period in 2009.

 

Income Taxes (Benefit).  During the third quarter of 2010, our income tax expense was $15.6 million, as compared to $47.4 million during the same period in 2009. Our effective income tax rate before noncontrolling interests was 50.4% and 40.8% during the third quarter of 2010 and 2009, respectively. The higher rate in the third quarter of 2010 was due to a change in the estimated annual effective tax rate to 38.9% from 36.9% the previous quarter, resulting in an additional income tax expense of $3.5 million being recorded in the three months ended September 30, 2010.

 

First Nine Months Consolidated Results 2010 vs. 2009

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $224.1 million during the first nine months of 2010, as compared to $203.8 million during the same period in 2009, an increase of $20.3 million, or 10%. During the first nine months of 2010 and 2009, selling, general and administrative expenses represented approximately 5% and 7% of net sales, respectively. The increase in selling, general and administrative expenses in the first nine months of 2010 compared to the first nine months of 2009 primarily relates to recording profit sharing expense of $18.8 million related to our Steel Dynamics performance-based profit sharing plan (and $3.0 million of other profit sharing) during the first nine months of 2010 and expense of only $409,000 during the same period in 2009.

 

Interest Expense, net of Capitalized Interest.  During the first nine months of 2010, gross interest expense increased $10.2 million, or 8%, to $131.7 million, and capitalized interest decreased $7.2 million, or 53%, to $6.4 million as compared to the same period in 2009. The increase in gross interest expense for the first nine months of 2010 compared to the first nine months of 2009 is primarily a result of our issuance of $350.0 million of 7 5/8% senior notes due 2020, in March 2010. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities at our various operating segments, which with the completion of several of our construction projects, is not as significant in 2010.

 

Other (Income) Expense, net.  Other income was $12.8 million during the first nine months of 2010, as compared to $2.1 million during the same period in 2009. We have recorded interest income of $3.0 million for the first nine months of 2010 versus $527,000 in 2009. During the second quarter of 2009, the company recorded an expense of $1.3 million from the termination of an interest rate swap contract related to a senior secured term loan, which was paid off in the second quarter of 2009.

 

Income TaxesDuring the first nine months of 2010, our income tax provision was $80.0 million, as compared to a benefit of $27.0 million during the same period in 2009. During the first nine months of 2010 and 2009, our effective income tax rates before noncontrolling interests were 38.9% and 41.8%, respectively.

 

Liquidity and Capital Resources

 

Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steelmaking and finishing operations and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily from capital expenditures, working capital requirements and principal and interest payments related to our outstanding indebtedness. We have met these liquidity requirements with cash provided by operations, issuances of common stock, long-term borrowings and state and local grants.

 

Working Capital.  During the first nine months of 2010, our operational working capital position, representing our cash invested in trade receivables, inventories and income taxes receivable, less current liabilities other than debt, increased $117.6 million to $1.1 billion compared to December 31, 2009. Trade receivables increased $228.5 million, or 54%, during the first nine months of 2010 to $654.9 million, of which over 98% were current or less than 60 days past due. Our largest customer is an affiliated company, Heidtman Steel, which represented 7% and 6% of our outstanding trade receivables at September 30, 2010 and December 31, 2009, respectively. Trade receivables increased during the first nine months of 2010 due to increased sales from higher product prices and volumes compared to the fourth quarter of 2009. Total inventories increased $155.4 million, or 18%, to $1.0 billion during the first nine months of 2010. Our raw materials, primarily steel scrap inventories, increased by approximately $108.1 million during the first nine months of 2010, with scrap volumes increasing by 43,000 gross tons. Likewise our work-in-process and finished goods inventories increased $42.7 million, with volumes increasing by 25,000 net tons. Our trade payables and general accruals increased $159.6 million, or 37%, during the first nine months of 2010. The increase in trade payables is a reflection of the increased production activities and commodity raw material purchasing prior to September 30, 2010, compared to that at December 31, 2009, and the increase in profit sharing is due to the increase in pretax income during 2010 when compared to 2009, as our profit sharing is directly tied to earnings. We also received $90.4 million of 2009 income tax overpayment refunds in the second quarter 2010.

 

Capital Investments.  During the first nine months of 2010, we invested $95.9 million in property, plant and equipment, of which $39.7 million was within our steel operations, $13.8 million related to our metals recycling operations and $29.6 million related to our Mesabi Nugget and Mesabi Mining facilities. We believe these capital investments will benefit our net sales and related cash flows as each project reaches completion and attains appropriate operational metrics. We continue to estimate capital expenditures for the year 2010 to be less than $150 million.

 

Capital Resources and Long-term Debt.  During the first nine months of 2010, our total outstanding debt increased $195.1 million to $2.4 billion, due to our issuance of $350.0 million of 7 5/8% senior notes due 2020 in March 2010. The net proceeds were used to repay the then outstanding borrowings on our senior secured revolving credit facility. The remaining net proceeds were used for general corporate purposes, with a portion held as cash and equivalents as of September 30, 2010. Our total long-term debt to capitalization ratio, representing our long-term

 

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debt, including current maturities, divided by the sum of our long-term debt and our total stockholders’ equity, was 53.5% at September 30, 2010, and 52.6% at December 31, 2009. At September 30, 2010, there were no outstanding borrowings under our senior secured revolver, which is subject to a monthly borrowing base.

 

Our 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 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 borrow funds within the terms of the revolver is dependent upon our continued compliance with our financial covenants, and other covenants contained in the senior secured credit agreement.

 

We amended our senior secured credit agreement on June 12, 2009, allowing for, among other things, greater flexibility within our financial covenants during 2009 and throughout 2010.  The current financial covenants state that we must maintain an interest coverage ratio of not less than 2.50:1.00 for September 30, 2010 through maturity. Our interest coverage ratio is calculated by dividing our last-twelve trailing months (LTM) consolidated adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in our senior secured credit agreement) by our LTM gross interest expense. We must also maintain a first lien debt to LTM EBITDA ratio of not more than 2.50:1.00 to September 30, 2010; and 3.00:1.00 for December 31, 2010 through maturity. Beginning with the twelve month period ending December 31, 2010, and at all times thereafter, a total debt to consolidated LTM adjusted EBITDA ratio of not more than 5.00:1.00 must be maintained. In addition, if the total debt to EBITDA ratio exceeds 3.50:1:00 at any time, then the ability of the company to make restricted payments as defined in the credit agreement (which includes cash dividends to stockholders and share purchases, among other things), is limited to $25.0 million per quarter.

 

At September 30, 2010, our interest coverage ratio and first lien ratio were 3.94:1:00 and 0.04:1.00, respectively. We were in compliance with these covenants at September 30, 2010, and we expect to remain in compliance during the remainder of 2010.

 

The amendment also activated a monthly borrowing base requirement regarding the maximum availability for the revolver.  At the end of each month, our revolver must be the lesser of:

 

1.               $924.0 million less other applicable commitments, such as letters of credit and other secured debt, as defined within the credit agreement; or

 

2.               The sum of 85% of our eligible accounts receivable and 65% of our eligible inventories, less other applicable commitments, such as letters of credit and other secured debt, as defined within the credit agreement.

 

On April 26, 2010, we entered into another amendment to our senior secured revolving credit agreement which provided for the addition of a lender who extended an additional commitment of $50.0 million, which increased the total revolving credit facility commitment from $874.0 million to $924.0 million.  At September 30, 2010, we had $907.8 million of funding availability pursuant to our senior secured revolving credit agreement

 

Cash Dividends.  We declared cash dividends of $48.8 million, or $.225 per common share ($0.075 per common share each quarter), during the first nine months of 2010 and $50.5 million, or $.25 per common share ($0.10 per common share in the first quarter of 2009 and $0.075 per common share in the second and third quarters of 2009), during the first nine months of 2009. We paid cash dividends of $48.7 million and $52.5 million during the first nine months of 2010 and 2009, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis.  During the remainder of 2010, we anticipate maintaining our current level of quarterly dividends; however, the determination to pay cash dividends in the future will be at the discretion of our board of directors, after taking into account various factors, including our financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs and growth plans. In addition, the terms of our senior secured revolving credit agreement and the indenture relating to our senior notes restrict the amount of cash dividends we can pay.

 

Other.  Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will depend upon general economic, financial and business conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure you that our operating results, cash flow, access to credit markets and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including additional borrowings under our senior secured credit agreement, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness, funding working capital requirements and anticipated capital expenditures.

 

Other Matters

 

Inflation.  We believe that inflation has not had a material effect on our results of operations.

 

Environmental and Other Contingencies. We have incurred, and in the future will continue to incur, capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring, and compliance. We believe, apart from our dependence on environmental construction and operating permits for our existing and proposed manufacturing facilities, that compliance with current environmental laws and regulations is not likely to have a materially adverse effect on our financial condition, results of operations or liquidity; however, environmental laws and regulations have changed rapidly in recent years, and we may become subject to more stringent environmental laws and regulations in the future, such as the impact of United States government or various governmental agencies introducing regulatory changes in response to the potential of climate change.

 

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Critical Accounting Policies and Estimates

 

No material changes have occurred to the indicated critical accounting policies and estimates as disclosed in our 2009 Annual Report on Form 10-K/A.

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

In the normal course of business, we are exposed to interest rate changes. Our objectives in managing exposure to interest rate changes are to limit the impact of these rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to our portfolio of borrowings.

 

Commodity Risk

 

In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of steel products and to the purchase of commodities used in our production process, such as metallic raw materials, electricity, natural gas and alloys. Our risk strategy associated with product sales has generally been to obtain competitive prices for our products and to allow operating results to reflect market price movements dictated by supply and demand.

 

Our risk strategy associated with the purchase of commodities utilized within our production process has generally been to make certain commitments with suppliers relating to future expected requirements for such commodities. Certain commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 36 months for physical commodity requirements and for up to 10 years for commodity transportation requirements. We fully utilized all such “take or pay” requirements during the past three years under these contracts. We believe that production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process. We also purchase electricity consumed at our Flat Roll Division pursuant to a contract which extends through December 2012. The contract designates 160 hours annually as “interruptible service” and establishes an agreed fixed-rate energy charge per Mill/kWh consumed for each year through the expiration of the agreement. At September 30, 2010, no material changes had occurred related to these commodity risks from the information disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2009.

 

In our metals recycling operations we have certain fixed price contracts with various customers and suppliers for future delivery of nonferrous metals. Our risk strategy has generally been to enter into base metal financial contracts with the goal to protect the profit margin, within certain parameters, that was contemplated when we entered into the transaction with the customer. At September 30, 2010, we had a cumulative unrealized gain associated with these financial contracts of $1.9 million, all of which have a settlement date within the next twelve months. We expect the customer contracts associated with the financial contracts to be fully consummated.

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

(b)  Changes in Internal Controls Over Financial Reporting.  No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1.                        LEGAL PROCEEDINGS

 

The company as well as its various subsidiaries, is from time to time involved in various lawsuits and/or governmental claims in the ordinary course of business. None of these lawsuits or claims at the present time, singly or in the aggregate, except as disclosed below, is material.

 

On September 17, 2008, the company and eight other steel manufacturing companies were served with a class action antitrust complaint, filed in the United States District Court for the Northern District of Illinois in Chicago by Standard Iron Works of Scranton, Pennsylvania, alleging violations of Section 1 of the Sherman Act.  The Complaint alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States, starting in 2005, by artificially restricting the supply of such steel products.  Seven additional lawsuits, each of them materially similar to the original, have also been filed in the same federal court, each of them likewise seeking similar class certification.  All but one of the Complaints purport to be brought on behalf of a class consisting of all direct purchasers of steel products between January 1, 2005 and the present.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period.  All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits. On June 12, 2009, however, the Court denied the Motion. The parties are currently conducting limited discovery. Although the company believes that the lawsuits are without merit and plans to aggressively defend these actions, the company cannot presently predict the outcome of this litigation or make any judgment with respect to its potential exposure, if any.

 

On October 25, 2010, our wholly-owned subsidiary, OmniSource Corporation, was indicted by a Grand Jury in Marion County, Indiana, on multiple criminal charges involving the alleged receipt or attempted receipt of stolen property. These charges, involving small dollar amount individual retail purchases of scrap metal, stem from a February 2009 police raid on the company’s Indianapolis facilities, are baseless and will be fiercely defended.  Earlier, on October 18, 2010, our Indianapolis subsidiary filed its own lawsuit against the Prosecutor in Marion Superior Court, seeking return of cash seized by the police during that February 2009 raid.

 

ITEM 1A.               RISK FACTORS

 

No material changes have occurred to the indicated risk factors as disclosed in our 2009 Annual Report on Form 10-K/A.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 5.                        OTHER INFORMATION

 

None.

 

ITEM 6.                        EXHIBITS

 

Executive Officer Certifications

 

31.1*

 

Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Chief Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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XBRL Documents

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Document

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Document

 

 

 

101.PRE*

 

XBRL Taxonomy Presentation Document

 

 

 

101.DEF*

 

XBRL Taxonomy Definition Document

 


*                 Filed concurrently herewith

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

November 5, 2010

 

 

STEEL DYNAMICS, INC.

 

 

 

 

By:

/s/ Theresa E. Wagler

 

 

Theresa E. Wagler

 

 

Chief Financial Officer

 

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