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 June 30, 2013

 

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 July 31, 2013, Registrant had 220,795,089 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 June 30, 2013 (unaudited) and December 31, 2012

1

 

 

 

 

Consolidated Statements of Income for the three- and six-month periods ended June 30, 2013 and 2012 (unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three- and six-month periods ended June 30, 2013 and 2012 (unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

 

 

 

 

PART II.  Other Information

 

 

 

 

Item 1.

Legal Proceedings

26

 

 

 

Item 1A.

Risk Factors

26

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

Item 4.

Mine Safety Disclosures

26

 

 

 

Item 5.

Other Information

26

 

 

 

Item 6.

Exhibits

27

 

 

 

 

Signatures

28

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

243,753

 

$

375,917

 

Investments in short-term commercial paper

 

 

31,520

 

Accounts receivable, net

 

725,105

 

599,499

 

Accounts receivable-related parties

 

48,022

 

42,864

 

Inventories

 

1,168,499

 

1,202,507

 

Deferred income taxes

 

23,682

 

23,449

 

Other current assets

 

33,028

 

20,469

 

Total current assets

 

2,242,089

 

2,296,225

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,232,852

 

2,231,198

 

 

 

 

 

 

 

Restricted cash

 

23,231

 

27,749

 

Intangible assets, net

 

401,104

 

416,635

 

Goodwill

 

735,281

 

738,542

 

Other assets

 

101,353

 

105,067

 

Total assets

 

$

5,735,910

 

$

5,815,416

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

355,678

 

$

344,953

 

Accounts payable-related parties

 

8,652

 

15,144

 

Income taxes payable

 

2,862

 

16,941

 

Accrued payroll and benefits

 

65,698

 

85,802

 

Accrued interest

 

32,509

 

35,306

 

Accrued expenses

 

80,209

 

81,900

 

Current maturities of long-term debt

 

324,241

 

29,631

 

Total current liabilities

 

869,849

 

609,677

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Term note

 

233,750

 

247,500

 

Senior notes

 

1,500,000

 

1,600,000

 

Convertible senior notes

 

 

287,496

 

Other long-term debt

 

40,493

 

37,610

 

Total long-term debt

 

1,774,243

 

2,172,606

 

 

 

 

 

 

 

Deferred income taxes

 

556,023

 

537,304

 

Other liabilities

 

20,324

 

19,173

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interests

 

104,734

 

98,814

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 256,630,645 and 255,592,901 shares issued; and 220,665,831 and 219,522,655 shares outstanding, as of June 30, 2013 and December 31, 2012, respectively

 

640

 

637

 

Treasury stock, at cost; 35,964,814 and 36,070,246 shares, as of June 30, 2013 and December 31, 2012, respectively

 

(718,373

)

(720,479

)

Additional paid-in capital

 

1,050,470

 

1,037,687

 

Retained earnings

 

2,116,262

 

2,087,620

 

Total Steel Dynamics, Inc. equity

 

2,448,999

 

2,405,465

 

Noncontrolling interests

 

(38,262

)

(27,623

)

Total equity

 

2,410,737

 

2,377,842

 

Total liabilities and equity

 

$

5,735,910

 

$

5,815,416

 

 

See notes to consolidated financial statements.

 

1



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,735,420

 

$

1,830,117

 

$

3,463,821

 

$

3,735,192

 

Related parties

 

65,920

 

79,686

 

133,215

 

156,651

 

Total net sales

 

1,801,340

 

1,909,803

 

3,597,036

 

3,891,843

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,653,648

 

1,727,667

 

3,273,080

 

3,508,443

 

Gross profit

 

147,692

 

182,136

 

323,956

 

383,400

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

65,356

 

61,235

 

130,618

 

125,619

 

Profit sharing

 

4,779

 

8,211

 

11,422

 

16,283

 

Amortization of intangible assets

 

8,051

 

8,991

 

16,178

 

17,983

 

Impairment charges

 

308

 

 

308

 

 

Total selling, general and administrative expenses

 

78,494

 

78,437

 

158,526

 

159,885

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

69,198

 

103,699

 

165,430

 

223,515

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

31,465

 

41,106

 

66,094

 

82,218

 

Other expense (income), net

 

(1,246

)

(1,892

)

(2,292

)

8,356

 

Income before income taxes

 

38,979

 

64,485

 

101,628

 

132,941

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

15,706

 

25,180

 

37,103

 

51,859

 

 

 

 

 

 

 

 

 

 

 

Net income

 

23,273

 

39,305

 

64,525

 

81,082

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

5,685

 

5,167

 

12,648

 

9,065

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Steel Dynamics, Inc.

 

$

28,958

 

$

44,472

 

$

77,173

 

$

90,147

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.13

 

$

0.20

 

$

0.35

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

220,471

 

219,104

 

220,233

 

219,050

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.13

 

$

0.20

 

$

0.34

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

221,736

 

236,208

 

238,246

 

236,367

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.11

 

$

0.10

 

$

0.22

 

$

0.20

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

23,273

 

$

39,305

 

$

64,525

 

$

81,082

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

56,826

 

55,502

 

113,887

 

111,074

 

Equity-based compensation

 

2,344

 

2,602

 

7,097

 

8,725

 

Impairment charges

 

308

 

 

308

 

 

Deferred income taxes

 

10,812

 

10,634

 

21,747

 

19,831

 

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

 

588

 

326

 

(795

)

(413

)

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(19,826

)

73,734

 

(130,764

)

12,914

 

Inventories

 

1,660

 

18,787

 

34,008

 

(36,303

)

Other assets

 

6,783

 

(393

)

10,141

 

2,567

 

Accounts payable

 

(46,370

)

(60,837

)

(7,382

)

(25,935

)

Income taxes receivable/payable

 

(23,304

)

(26,468

)

(26,326

)

(9,076

)

Accrued expenses and liabilities

 

19,621

 

(12,590

)

(24,021

)

(42,446

)

Net cash provided by operating activities

 

32,715

 

100,602

 

62,425

 

122,020

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(49,236

)

(54,789

)

(94,582

)

(100,344

)

Proceeds from maturity of short-term commercial paper

 

 

54,984

 

31,520

 

74,832

 

Other investing activities

 

863

 

678

 

3,277

 

(21,034

)

Net cash provided by (used in) investing activities

 

(48,373

)

873

 

(59,785

)

(46,546

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

32

 

 

409,293

 

289,969

 

Repayment of current and long-term debt

 

(202,312

)

(21,896

)

(508,003

)

(305,344

)

Debt issuance costs

 

(195

)

 

(6,192

)

(2,188

)

Proceeds from exercise of stock options, including related tax effect

 

2,977

 

341

 

10,591

 

1,438

 

Contributions from noncontrolling investors, net

 

5,286

 

5,117

 

5,697

 

14,623

 

Dividends paid

 

(24,238

)

(21,908

)

(46,190

)

(43,795

)

Net cash used in financing activities

 

(218,450

)

(38,346

)

(134,804

)

(45,297

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

(234,108

)

63,129

 

(132,164

)

30,177

 

Cash and equivalents at beginning of period

 

477,861

 

357,809

 

375,917

 

390,761

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

243,753

 

$

420,938

 

$

243,753

 

$

420,938

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

17,583

 

$

62,807

 

$

67,315

 

$

81,560

 

Cash paid for federal and state income taxes, net

 

$

27,360

 

$

41,302

 

$

38,525

 

$

40,347

 

 

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-month periods ended June 30, 2013 and 2012, respectively, and 60% and 62% of the company’s external net sales during the six-month periods ended June 30, 2013 and 2012, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations include OmniSource Corporation (OmniSource), the company’s metals recycling, steel scrap procurement, and processing locations, and our two ironmaking initiatives: Iron Dynamics (IDI), a liquid pig iron production facility; and our Minnesota iron operations, an iron nugget production facility and operations to supply the nugget facility with its primary raw material, iron concentrate. Metals recycling and ferrous resources operations accounted for approximately 33% and 31% of the company’s external net sales during the three-month periods ended June 30, 2013 and 2012, respectively, and 34% and 33% of the company’s external net sales during the six-month periods ended June 30, 2013 and 2012, respectively.

 

Steel Fabrication Operations.  Steel fabrication operations include the company’s New Millennium Building Systems plants located throughout the United States and Northern Mexico. 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 6% and 5% of the company’s external net sales during the three-month periods ended June 30, 2013 and 2012, respectively, and 6% and 4% of the company’s external net sales during the six-month periods ended June 30, 2013 and 2012, 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 for the year ended December 31, 2012.

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at June 30, 2013, and December 31, 2012, (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

OmniSource — Metals Recycling/Ferrous Resources Segment

 

$

561,532

 

$

564,793

 

The Techs — Steel Segment

 

142,783

 

142,783

 

Roanoke Bar Division — Steel Segment

 

29,041

 

29,041

 

New Millennium Building Systems — Fabrication Segment

 

1,925

 

1,925

 

 

 

$

735,281

 

$

738,542

 

 

OmniSource goodwill decreased $3.3 million from December 31, 2012 to June 30, 2013, in recognition of the 2013 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.

 

4



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  Earnings Per Share

 

Basic earnings 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, restricted and deferred stock units, restricted shares, and dilutive shares related to the company’s 5.125% convertible senior notes. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect. Options to purchase 2.5 million and 6.6 million shares were anti-dilutive at June 30, 2013 and 2012, respectively. The computation of diluted earnings per share for the three month period ended June 30, 2013 did not include the after-tax equivalent of interest of $2.4 million for the company’s 5.125% senior convertible notes, due 2014 and the related weighted average equivalent of 16.7 million shares, as the result would have been anti-dilutive.

 

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 attributable to Steel Dynamics, Inc. (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

28,958

 

220,471

 

$

0.13

 

$

44,472

 

219,104

 

$

0.20

 

Dilutive common share equivalents

 

 

1,265

 

 

 

 

722

 

 

 

5.125% convertible senior notes, net of tax

 

 

 

 

 

2,358

 

16,382

 

 

 

Diluted earnings per share

 

$

28,958

 

221,736

 

$

0.13

 

$

46,830

 

236,208

 

$

0.20

 

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

77,173

 

220,233

 

$

0.35

 

$

90,147

 

219,050

 

$

0.41

 

Dilutive common share equivalents

 

 

1,363

 

 

 

 

935

 

 

 

5.125% convertible senior notes, net of tax

 

4,716

 

16,650

 

 

 

4,716

 

16,382

 

 

 

Diluted earnings per share

 

$

81,889

 

238,246

 

$

0.34

 

$

94,863

 

236,367

 

$

0.40

 

 

Note 3.  Inventories

 

Inventories are stated at lower of cost or market.  Cost is determined using a weighted average method for scrap, and a first-in, first-out basis for all other inventories.  Inventories consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Raw materials

 

$

558,355

 

$

594,388

 

Supplies

 

279,147

 

278,494

 

Work-in-progress

 

89,156

 

82,934

 

Finished goods

 

241,841

 

246,691

 

Total inventories

 

$

1,168,499

 

$

1,202,507

 

 

Note 4.  Debt

 

On March 26, 2013, the company issued $400.0 million of 51/4% Senior Notes due 2023 (2023 Notes). Interest on the 2023 Notes is due semiannually on April 15 and October 15, with the first payment due on October 15, 2013. The 2023 Notes are redeemable at any time after April 15, 2018. The redemption price (expressed as a percentage of principal amount) is 102.625% during the period April 15, 2018 to April 14, 2019; 101.750% during the period April 15, 2019 to April 14, 2020; 100.875% during the period April 15, 2020 to April 14, 2021; and 100% on and after April 15, 2021, plus accrued interest to the redemption date. In addition, at any time before April 15, 2016, the company may redeem up to 35% of the principal amount of the 2023 Notes with the net cash proceeds from one or more sales of the company’s common stock at a redemption price (expressed as a percentage of principal amount) of 105.250%, plus accrued interest to the redemption date. The 2023 Notes are unsecured and rank pari passu with all existing and future senior unsubordinated unsecured indebtedness and senior in right of payment to all subordinated indebtedness.

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 4.  Debt (Continued)

 

A portion of the proceeds from the issuance of the 2023 Notes was used to fund the March 26, 2013 purchase of $301.7 million (plus accrued interest) of the company’s 63/4% Senior Notes due 2015 (2015 Notes) pursuant to a tender offer. On April 9, 2013, the company used the remaining proceeds from the issuance of the 2023 Notes, along with available cash, to repay the remaining outstanding 2015 Notes due at a price of 100% of the principal amount of $198.3 million (plus accrued interest). As a result of the tender offer to purchase the 2015 Notes in March and the early payoff of the remaining balance of the 2015 Notes in April, the company recorded expenses related to tender premiums, unamortized debt issuance costs write-off, and tender expenses of $600,000 and $2.6 million, which is reflected in other expenses in the consolidated statement of income for the three and six-month periods ended June 30, 2013.

 

Note 5.  Changes in Equity

 

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

 

 

 

Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

 

 

Common

 

Additional
Paid-In

 

Retained

 

Treasury

 

Noncontrolling

 

Total

 

Redeemable
Noncontrolling

 

 

 

Stock

 

Capital

 

Earnings

 

Stock

 

Interests

 

Equity

 

Interests

 

Balances at January 1, 2013

 

$

637

 

$

1,037,687

 

$

2,087,620

 

$

(720,479

)

$

(27,623

)

$

2,377,842

 

$

98,814

 

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

 

3

 

10,588

 

 

 

 

10,591

 

 

Dividends declared

 

 

 

(48,511

)

 

 

(48,511

)

 

Equity-based compensation and issuance of restricted stock

 

 

4,427

 

(20

)

2,106

 

 

6,513

 

 

Acquisition of noncontrolling interest

 

 

(2,232

)

 

 

2,232

 

 

 

Contributions from noncontrolling investors

 

 

 

 

 

126

 

126

 

5,920

 

Distributions to noncontrolling investors

 

 

 

 

 

(349

)

(349

)

 

Net income (loss)

 

 

 

77,173

 

 

(12,648

)

64,525

 

 

Balances at June 30, 2013

 

$

640

 

$

1,050,470

 

$

2,116,262

 

$

(718,373

)

$

(38,262

)

$

2,410,737

 

$

104,734

 

 

Note 6.  Derivative Financial Instruments

 

The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate interest rate risk, foreign currency exchange rate risk, and commodity margin risk. Interest rate swaps may be entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies may be entered into to manage foreign currency exchange rate risk as necessary. No interest rate swaps or significant forward exchange contracts on foreign currency existed for the periods presented. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous metals (specifically aluminum, copper, nickel and silver).  The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.  The company began to designate certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments in January 2013.

 

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 futures contract commitments as of June 30, 2013 (MT represents metric tons and Lbs represents pounds):

 

Commodity Futures

 

Long/Short

 

Total

 

 

 

Aluminum

 

Long

 

1,925

 

MT

 

Aluminum

 

Short

 

1,750

 

MT

 

Copper

 

Long

 

5,232

 

MT

 

Copper

 

Short

 

5,699

 

MT

 

Silver

 

Long

 

343

 

Lbs

 

Silver

 

Short

 

686

 

Lbs

 

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Derivative Financial Instruments (Continued)

 

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 June 30, 2013, and December 31, 2012, and for the three and six-month periods ended June 30, 2013 and 2012 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

Fair Value

 

 

 

Balance sheet location

 

June 30,
2013

 

December 31,
2012

 

June 30,
2013

 

December 31,
2012

 

Derivative instruments designated as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

1,747

 

 

 

$

1,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

1,714

 

$

4,024

 

$

595

 

$

1,854

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

3,461

 

$

4,024

 

$

2,172

 

$

1,854

 

 

 

 

Location of gain

 

Amount of gain (loss)
recognized in income on
derivatives for the three
months ended

 

Hedged items

 

Location of gain (loss)

 

Amount of gain (loss)
recognized in income on
related hedged items for the
three months ended

 

 

 

(loss) recognized in
income on derivatives

 

June 30,
2013

 

June 30,
2012

 

in fair value hedge
relationships

 

recognized in income on
related hedged item

 

June 30,
2013

 

June 30,
2012

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(654

)

 

 

Firm commitments

 

Costs of goods sold

 

$

1,297

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

(2,014

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(717

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

6,621

 

$

5,893

 

 

 

 

 

 

 

 

 

 

 

 

Location of gain

 

Amount of gain (loss)
recognized in income on
derivatives for the six
months ended

 

Hedged items

 

Location of gain (loss)

 

Amount of gain (loss)
recognized in income on
related hedged items for the
six months ended

 

 

 

(loss) recognized in
income on derivatives

 

June 30,
2013

 

June 30,
2012

 

in fair value hedge
relationships

 

recognized in income on
related hedged item

 

June 30,
2013

 

June 30,
2012

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

7,392

 

 

 

Firm commitments

 

Costs of goods sold

 

$

2,613

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

(8,822

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(6,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

6,629

 

$

2,275

 

 

 

 

 

 

 

 

 

 

Derivatives accounted for as fair value hedges had ineffectiveness resulting in a loss of $108,000 during the three-month period ended June 30, 2013, and a gain of $113,000 during the six-month period ended June 30, 2013; and a loss excluded from hedge effectiveness testing of $1.2 million that increased costs of goods sold during the three-month period ended June 30, 2013, and a gain of $1.1 million that reduced costs of goods sold during the six-month period ended June 30, 2013.

 

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 set forth a definition of fair value and establish 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  June 30, 2013, and December 31, 2012 (in thousands):

 

 

 

Total

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

3,461

 

$

 

$

3,461

 

$

 

Commodity futures — financial liabilities

 

2,172

 

 

2,172

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Investments in short-term commercial paper

 

$

31,520

 

$

 

$

31,520

 

$

 

Commodity futures — financial assets

 

4,024

 

 

4,024

 

 

Commodity futures — financial liabilities

 

1,854

 

 

1,854

 

 

 

The carrying amounts of financial instruments including cash and equivalents approximate fair value. The fair values of short-term commercial paper and commodity futures and options contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.2 billion and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.1 billion and $2.2 billion) at June 30, 2013 and December 31, 2012, respectively.

 

Note 8.  Commitments and Contingencies

 

The company is involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which are expected to have a material impact on our financial condition, results of operations, or liquidity.

 

The company is involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, which alleges a conspiracy 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. All but one of the Complaints were brought on behalf of a purported class consisting of all direct purchasers of steel products between January 1, 2005, and the present.  The other Complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period.  In addition, in December 2010, we and the other co-defendants were served with a substantially similar complaint in the Circuit Court of Cocke County, Tennessee, purporting to be on behalf of indirect purchasers of steel products in Tennessee. That case has been removed to the federal court in Chicago that is hearing the main complaint. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  In January 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied in June 2009.  Following a period of preliminary discovery relating to class certification matters, Plaintiffs filed their Motion for Class Certification in May 2012, and on February 28, 2013, Defendants filed their Joint Memorandum in Opposition to Plaintiffs’ Motion for Class Certification, together with joint motions to exclude the expert opinions of both of Plaintiffs’ two retained experts. Additional briefing is anticipated on all issues related to the pending motions.  Due to the uncertain nature of litigation, we cannot presently determine the ultimate outcome of this litigation. However, we have determined, based on the information available at this time, that there is not presently a “reasonable possibility” (as that term is defined in ASC 450-20-20), that the outcome of these legal proceedings would have a material impact on our financial condition, results of operations, or liquidity.

 

Although not presently necessary or appropriate to make a dollar estimate of exposure to loss, if any, in connection with the above matter, we may in the future determine that a loss accrual is necessary. Although we may make loss accruals, if and as warranted, any amounts that we may accrue from time to time could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, an adverse result could have a material effect on our financial condition, results of operations and liquidity.

 

8



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. Intra-segment and intra-company sales and any related profits are eliminated in consolidation. Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2012, for more information related to the company’s segment reporting.  The company’s segment results for the three and six-month periods ended June 30, 2013 and 2012 are as follows (in thousands):

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2013

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,038,868

 

$

538,599

 

$

103,595

 

$

20,828

 

$

 

$

1,701,890

 

External Non-U.S.

 

52,148

 

46,893

 

 

409

 

 

99,450

 

Other segments

 

52,897

 

275,666

 

564

 

6,885

 

(336,012

)

 

 

 

1,143,913

 

861,158

 

104,159

 

28,122

 

(336,012

)

1,801,340

 

Operating income (loss)

 

85,545

 

(7,251

)

2,330

 

(14,434

)(1)

3,008

(2)

69,198

 

Income (loss) before income taxes

 

71,732

 

(14,439

)

800

 

(22,122

)

3,008

 

38,979

 

Depreciation and amortization

 

26,496

 

26,704

 

2,179

 

1,498

 

(51

)

56,826

 

Capital expenditures

 

34,533

 

13,545

 

822

 

336

 

 

49,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,582,168

 

2,490,215

 

261,556

 

604,195

(3)

(202,224

)(4)

5,735,910

 

Liabilities

 

512,634

 

522,306

 

16,136

 

2,362,721

(5)

(193,358

)(6)

3,220,439

 

 


Footnotes related to the three months ended June 30, 2013 segment results (in millions):

 

(1) Corporate SG&A

 

$

(9.1

)

(2) Gross profit increase from intra-company sales

 

$

3.0

 

Company-wide equity-based compensation

 

(2.0

)

 

 

 

 

Profit sharing

 

(3.2

)

 

 

 

 

Other, net

 

(0.1

)

 

 

 

 

Total

 

$

(14.4

)

 

 

 

 

 

 

 

 

 

 

 

 

(3) Cash and equivalents

 

$

218.2

 

(4) Elimination of intra-company receivables

 

$

(40.2

)

Deferred income taxes

 

23.6

 

Elimination of intra-company debt

 

(154.2

)

Property, plant and equipment, net

 

73.7

 

Other

 

(7.8

)

Debt issuance costs, net

 

29.3

 

Total

 

$

(202.2

)

Intra-company debt

 

154.2

 

 

 

 

 

Other

 

105.2

 

 

 

 

 

Total

 

$

604.2

 

 

 

 

 

 

 

 

 

 

 

 

 

(5) Accounts payable

 

$

43.5

 

(6) Elimination of intra-company payables

 

$

(40.5

)

Income taxes payable

 

2.9

 

Elimination of intra-company debt

 

(154.2

)

Accrued interest

 

32.3

 

Other

 

1.3

 

Debt

 

2,045.3

 

Total

 

$

(193.4

)

Deferred income taxes

 

205.1

 

 

 

 

 

Other

 

33.6

 

 

 

 

 

Total

 

$

2,362.7

 

 

 

 

 

 

9



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

 

 

 

 

 

 

 

June 30, 2012

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,157,908

 

$

533,841

 

$

95,767

 

$

16,183

 

$

 

$

1,803,699

 

External Non-U.S.

 

49,392

 

56,668

 

 

44

 

 

106,104

 

Other segments

 

52,923

 

329,947

 

 

4,164

 

(387,034

)

 

 

 

1,260,223

 

920,456

 

95,767

 

20,391

 

(387,034

)

1,909,803

 

Operating income (loss)

 

136,597

 

(19,371

)

193

 

(14,673

)(1)

953

(2)

103,699

 

Income (loss) before income taxes

 

118,049

 

(28,830

)

(1,449

)

(24,238

)

953

 

64,485

 

Depreciation and amortization

 

26,384

 

25,591

 

2,059

 

1,519

 

(51

)

55,502

 

Capital expenditures

 

6,275

 

46,857

 

1,329

 

328

 

 

54,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,604,810

 

2,607,834

 

255,967

 

725,717

(3)

(222,948

)(4)

5,971,380

 

Liabilities

 

464,861

 

574,204

 

14,807

 

2,699,661

(5)

(213,713

)(6)

3,539,820

 

 


Footnotes related to the three months ended June 30, 2012 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(7.2

)

(2)

 

Gross profit increase from intra-company sales

 

$

1.0

 

 

 

Company-wide equity-based compensation

 

(2.0

)

 

 

 

 

 

 

 

 

Profit sharing

 

(5.9

)

 

 

 

 

 

 

 

 

Other, net

 

0.4

 

 

 

 

 

 

 

 

 

Total

 

$

(14.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)

 

Cash and equivalents

 

$

309.2

 

(4)

 

Elimination of intra-company receivables

 

$

(38.8

)

 

 

Investments in short-term commercial paper

 

10.0

 

 

 

Elimination of intra-company debt

 

(170.6

)

 

 

Income taxes receivable

 

17.1

 

 

 

Other

 

(13.5

)

 

 

Deferred income taxes

 

26.9

 

 

 

Total

 

$

(222.9

)

 

 

Property, plant and equipment, net

 

83.9

 

 

 

 

 

 

 

 

 

Debt issuance costs, net

 

22.3

 

 

 

 

 

 

 

 

 

Intra-company debt

 

170.6

 

 

 

 

 

 

 

 

 

Other

 

85.7

 

 

 

 

 

 

 

 

 

Total

 

$

725.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5)

 

Accounts payable

 

$

28.7

 

(6)

 

Elimination of intra-company payables

 

$

(41.2

)

 

 

Income taxes payable

 

2.9

 

 

 

Elimination of intra-company debt

 

(170.6

)

 

 

Accrued interest

 

31.0

 

 

 

Other

 

(1.9

)

 

 

Accrued profit sharing

 

12.6

 

 

 

Total

 

$

(213.7

)

 

 

Debt

 

2,330.0

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

213.0

 

 

 

 

 

 

 

 

 

Other

 

81.5

 

 

 

 

 

 

 

 

 

Total

 

$

2,699.7

 

 

 

 

 

 

 

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (Continued)

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2013

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,050,063

 

$

1,096,210

 

$

197,392

 

$

40,199

 

$

 

$

3,383,864

 

External Non-U.S.

 

102,265

 

110,410

 

 

497

 

 

213,172

 

Other segments

 

113,945

 

552,030

 

1,142

 

12,280

 

(679,397

)

 

 

 

2,266,273

 

1,758,650

 

198,534

 

52,976

 

(679,397

)

3,597,036

 

Operating income (loss)

 

204,846

 

(17,075

)

3,860

 

(30,873

)(1)

4,672

(2)

165,430

 

Income (loss) before income taxes

 

176,739

 

(32,293

)

724

 

(48,214

)

4,672

 

101,628

 

Depreciation and amortization

 

52,883

 

53,840

 

4,236

 

3,030

 

(102

)

113,887

 

Capital expenditures

 

59,259

 

32,614

 

1,703

 

1,006

 

 

94,582

 

 


Footnotes related to the six months ended June 30, 2013 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(17.1

)

(2)

 

Gross profit increase from intra-company sales

 

$

4.7

 

 

 

Company-wide equity-based compensation

 

(5.2

)

 

 

 

 

 

 

 

 

Profit sharing

 

(9.1

)

 

 

 

 

 

 

 

 

Other, net

 

0.5

 

 

 

 

 

 

 

 

 

Total

 

$

(30.9

)

 

 

 

 

 

 

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2012

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,293,820

 

$

1,167,975

 

$

170,659

 

$

36,915

 

$

 

$

3,669,369

 

External Non-U.S.

 

100,200

 

122,134

 

 

140

 

 

222,474

 

Other segments

 

100,682

 

741,467

 

4

 

7,426

 

(849,579

)

 

 

 

2,494,702

 

2,031,576

 

170,663

 

44,481

 

(849,579

)

3,891,843

 

Operating income (loss)

 

273,905

 

(15,208

)

(2,475

)

(31,535

)(1)

(1,172

)(2)

223,515

 

Income (loss) before income taxes

 

237,127

 

(33,103

)

(5,633

)

(64,278

)

(1,172

)

132,941

 

Depreciation and amortization

 

52,468

 

51,665

 

3,907

 

3,136

 

(102

)

111,074

 

Capital expenditures

 

12,223

 

84,763

 

2,497

 

861

 

 

100,344

 

 


Footnotes related to the six months ended June 30, 2012 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(14.8

)

(2)

 

Gross profit reduction from intra-company sales

 

$

(1.2

)

 

 

Company-wide equity-based compensation

 

(5.7

)

 

 

 

 

 

 

 

 

Profit sharing

 

(12.4

)

 

 

 

 

 

 

 

 

Other, net

 

1.4

 

 

 

 

 

 

 

 

 

Total

 

$

(31.5

)

 

 

 

 

 

 

 

11



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 2014, 2019, 2020, 2022 and 2023. 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 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 for the year ended December 31, 2012.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of June 30, 2013

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

213,717

 

$

14,726

 

$

15,310

 

$

 

$

243,753

 

Investments in short-term commercial paper

 

 

 

 

 

 

Accounts receivable, net

 

328,445

 

847,046

 

43,406

 

(445,770

)

773,127

 

Inventories

 

610,160

 

470,759

 

90,197

 

(2,617

)

1,168,499

 

Other current assets

 

63,513

 

6,012

 

5,860

 

(18,675

)

56,710

 

Total current assets

 

1,215,835

 

1,338,543

 

154,773

 

(467,062

)

2,242,089

 

Property, plant and equipment, net

 

1,029,669

 

649,739

 

555,965

 

(2,521

)

2,232,852

 

Intangible assets, net

 

 

401,104

 

 

 

401,104

 

Goodwill

 

 

735,281

 

 

 

735,281

 

Other assets, including investments in subs

 

2,672,022

 

25,627

 

8,516

 

(2,581,581

)

124,584

 

Total assets

 

$

4,917,526

 

$

3,150,294

 

$

719,254

 

$

(3,051,164

)

$

5,735,910

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

143,874

 

$

208,660

 

$

79,910

 

$

(68,114

)

$

364,330

 

Accrued expenses

 

111,890

 

96,622

 

8,741

 

(35,975

)

181,278

 

Current maturities of long-term debt

 

308,628

 

300

 

41,163

 

(25,850

)

324,241

 

Total current liabilities

 

564,392

 

305,582

 

129,814

 

(129,939

)

869,849

 

Long-term debt

 

1,739,453

 

 

196,806

 

(162,016

)

1,774,243

 

Other liabilities

 

164,682

 

1,999,617

 

51,957

 

(1,639,909

)

576,347

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

104,734

 

 

104,734

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

640

 

33,896

 

18,121

 

(52,017

)

640

 

Treasury stock

 

(718,373

)

 

 

 

(718,373

)

Additional paid-in-capital

 

1,050,470

 

117,737

 

502,450

 

(620,187

)

1,050,470

 

Retained earnings (deficit)

 

2,116,262

 

693,462

 

(246,366

)

(447,096

)

2,116,262

 

Total Steel Dynamics, Inc. equity

 

2,448,999

 

845,095

 

274,205

 

(1,119,300

)

2,448,999

 

Noncontrolling interests

 

 

 

(38,262

)

 

(38,262

)

Total equity

 

2,448,999

 

845,095

 

235,943

 

(1,119,300

)

2,410,737

 

Total liabilities and equity

 

$

4,917,526

 

$

3,150,294

 

$

719,254

 

$

(3,051,164

)

$

5,735,910

 

 

12



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (Continued)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of December 31, 2012

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

322,707

 

$

41,675

 

$

11,535

 

$

 

$

375,917

 

Investments in short-term commercial paper

 

31,520

 

 

 

 

31,520

 

Accounts receivable, net

 

277,428

 

772,868

 

11,293

 

(419,226

)

642,363

 

Inventories

 

564,882

 

536,331

 

107,422

 

(6,128

)

1,202,507

 

Other current assets

 

51,268

 

7,253

 

4,006

 

(18,609

)

43,918

 

Total current assets

 

1,247,805

 

1,358,127

 

134,256

 

(443,963

)

2,296,225

 

Property, plant and equipment, net

 

1,017,587

 

664,332

 

551,903

 

(2,624

)

2,231,198

 

Intangible assets, net

 

 

416,635

 

 

 

416,635

 

Goodwill

 

 

738,542

 

 

 

738,542

 

Other assets, including investments in subs

 

2,768,360

 

30,862

 

9,189

 

(2,675,595

)

132,816

 

Total assets

 

$

5,033,752

 

$

3,208,498

 

$

695,348

 

$

(3,122,182

)

$

5,815,416

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

150,191

 

$

219,415

 

$

56,472

 

$

(65,981

)

$

360,097

 

Accrued expenses

 

144,719

 

98,484

 

9,877

 

(33,131

)

219,949

 

Current maturities of long-term debt

 

14,237

 

300

 

52,595

 

(37,501

)

29,631

 

Total current liabilities

 

309,147

 

318,199

 

118,944

 

(136,613

)

609,677

 

Long-term debt

 

2,140,958

 

 

169,223

 

(137,575

)

2,172,606

 

Other liabilities

 

178,182

 

2,087,957

 

41,581

 

(1,751,243

)

556,477

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

98,814

 

 

98,814

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

637

 

33,896

 

18,121

 

(52,017

)

637

 

Treasury stock

 

(720,479

)

 

 

 

(720,479

)

Additional paid-in-capital

 

1,037,687

 

117,737

 

476,677

 

(594,414

)

1,037,687

 

Retained earnings (deficit)

 

2,087,620

 

650,709

 

(200,389

)

(450,320

)

2,087,620

 

Total Steel Dynamics, Inc. equity

 

2,405,465

 

802,342

 

294,409

 

(1,096,751

)

2,405,465

 

Noncontrolling interests

 

 

 

(27,623

)

 

(27,623

)

Total equity

 

2,405,465

 

802,342

 

266,786

 

(1,096,751

)

2,377,842

 

Total liabilities and equity

 

$

5,033,752

 

$

3,208,498

 

$

695,348

 

$

(3,122,182

)

$

5,815,416

 

 

13



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

 

June 30, 2013

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

836,805

 

$

1,998,513

 

$

88,039

 

$

(1,122,017

)

$

1,801,340

 

Costs of goods sold

 

753,761

 

1,900,497

 

107,814

 

(1,108,424

)

1,653,648

 

Gross profit (loss)

 

83,044

 

98,016

 

(19,775

)

(13,593

)

147,692

 

Selling, general and administrative

 

24,916

 

54,764

 

2,673

 

(3,859

)

78,494

 

Operating income (loss)

 

58,128

 

43,252

 

(22,448

)

(9,734

)

69,198

 

Interest expense, net of capitalized interest

 

20,148

 

10,751

 

1,789

 

(1,223

)

31,465

 

Other (income) expense, net

 

(1,533

)

214

 

(1,149

)

1,222

 

(1,246

)

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

 

39,513

 

32,287

 

(23,088

)

(9,733

)

38,979

 

Income taxes (benefit)

 

5,621

 

12,214

 

1,382

 

(3,511

)

15,706

 

 

 

33,892

 

20,073

 

(24,470

)

(6,222

)

23,273

 

Equity in net loss of subsidiaries

 

(4,934

)

 

 

4,934

 

 

Net loss attributable to noncontrolling interests

 

 

 

5,685

 

 

5,685

 

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

 

$

28,958

 

$

20,073

 

$

(18,785

)

$

(1,288

)

$

28,958

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2012

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

926,791

 

$

2,181,236

 

$

36,022

 

$

(1,234,246

)

$

1,909,803

 

Costs of goods sold

 

804,586

 

2,084,159

 

56,063

 

(1,217,141

)

1,727,667

 

Gross profit (loss)

 

122,205

 

97,077

 

(20,041

)

(17,105

)

182,136

 

Selling, general and administrative

 

24,703

 

52,935

 

4,449

 

(3,650

)

78,437

 

Operating income (loss)

 

97,502

 

44,142

 

(24,490

)

(13,455

)

103,699

 

Interest expense, net of capitalized interest

 

27,213

 

13,605

 

1,739

 

(1,451

)

41,106

 

Other (income) expense, net

 

(2,695

)

194

 

(844

)

1,453

 

(1,892

)

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

 

72,984

 

30,343

 

(25,385

)

(13,457

)

64,485

 

Income taxes (benefit)

 

18,710

 

11,552

 

18

 

(5,100

)

25,180

 

 

 

54,274

 

18,791

 

(25,403

)

(8,357

)

39,305

 

Equity in net loss of subsidiaries

 

(9,802

)

 

 

9,802

 

 

Net loss attributable to noncontrolling interests

 

 

 

5,167

 

 

5,167

 

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

 

$

44,472

 

$

18,791

 

$

(20,236

)

$

1,445

 

$

44,472

 

 

14



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (Continued)

 

For the six months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2013

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,664,006

 

$

4,014,000

 

$

154,409

 

$

(2,235,379

)

$

3,597,036

 

Costs of goods sold

 

1,460,148

 

3,814,555

 

203,755

 

(2,205,378

)

3,273,080

 

Gross profit (loss)

 

203,858

 

199,445

 

(49,346

)

(30,001

)

323,956

 

Selling, general and administrative

 

53,602

 

108,756

 

4,811

 

(8,643

)

158,526

 

Operating income (loss)

 

150,256

 

90,689

 

(54,157

)

(21,358

)

165,430

 

Interest expense, net of capitalized interest

 

42,194

 

22,790

 

3,490

 

(2,380

)

66,094

 

Other (income) expense, net

 

(2,353

)

14

 

(2,332

)

2,379

 

(2,292

)

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

 

110,415

 

67,885

 

(55,315

)

(21,357

)

101,628

 

Income taxes (benefit)

 

17,015

 

25,133

 

2,081

 

(7,126

)

37,103

 

 

 

93,400

 

42,752

 

(57,396

)

(14,231

)

64,525

 

Equity in net loss of subsidiaries

 

(16,227

)

 

 

16,227

 

 

Net loss attributable to noncontrolling interests

 

 

 

12,648

 

 

12,648

 

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

 

$

77,173

 

$

42,752

 

$

(44,748

)

$

1,996

 

$

77,173

 

 

For the six months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2012

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,839,984

 

$

4,489,392

 

$

82,857

 

$

(2,520,390

)

$

3,891,843

 

Costs of goods sold

 

1,590,153

 

4,283,057

 

119,957

 

(2,484,724

)

3,508,443

 

Gross profit (loss)

 

249,831

 

206,335

 

(37,100

)

(35,666

)

383,400

 

Selling, general and administrative

 

52,269

 

107,490

 

6,908

 

(6,782

)

159,885

 

Operating income (loss)

 

197,562

 

98,845

 

(44,008

)

(28,884

)

223,515

 

Interest expense, net of capitalized interest

 

54,430

 

27,211

 

3,449

 

(2,872

)

82,218

 

Other (income) expense, net

 

8,074

 

(870

)

(1,721

)

2,873

 

8,356

 

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

 

135,058

 

72,504

 

(45,736

)

(28,885

)

132,941

 

Income taxes (benefit)

 

34,580

 

27,686

 

371

 

(10,778

)

51,859

 

 

 

100,478

 

44,818

 

(46,107

)

(18,107

)

81,082

 

Equity in net loss of subsidiaries

 

(10,331

)

 

 

10,331

 

 

Net loss attributable to noncontrolling interests

 

 

 

9,065

 

 

9,065

 

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

 

$

90,147

 

$

44,818

 

$

(37,042

)

$

(7,776

)

$

90,147

 

 

15



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 six months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2013

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

(6,011

)

$

98,049

 

$

(39,730

)

$

10,117

 

$

62,425

 

Net cash used in investing activities

 

(62,083

)

(24,118

)

(9,484

)

35,900

 

(59,785

)

Net cash provided by (used in) financing activities

 

(40,896

)

(100,880

)

52,989

 

(46,017

)

(134,804

)

Increase (decrease) in cash and equivalents

 

(108,990

)

(26,949

)

3,775

 

 

(132,164

)

Cash and equivalents at beginning of period

 

322,707

 

41,675

 

11,535

 

 

375,917

 

Cash and equivalents at end of period

 

$

213,717

 

$

14,726

 

$

15,310

 

$

 

$

243,753

 

 

For the six months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2012

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

24,722

 

$

116,105

 

$

(23,941

)

$

5,134

 

$

122,020

 

Net cash provided by (used in) investing activities

 

8,922

 

(55,747

)

(54,773

)

55,052

 

(46,546

)

Net cash provided by (used in) financing activities

 

(29,910

)

(13,809

)

58,608

 

(60,186

)

(45,297

)

Increase (decrease) in cash and equivalents

 

3,734

 

46,549

 

(20,106

)

 

30,177

 

Cash and equivalents at beginning of period

 

301,073

 

58,699

 

30,989

 

 

390,761

 

Cash and equivalents at end of period

 

$

304,807

 

$

105,248

 

$

10,883

 

$

 

$

420,938

 

 

16



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 the steel and recycled metals markets, our revenues, 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. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of a recurrent slowing in industrial demand; (2) changes in economic conditions, either generally or in any of the steel or scrap-consuming sectors which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, and other steel-consuming industries; (3) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (4) the impact of domestic and foreign import price competition; (5) risks and uncertainties involving product and/or technology development; and (6) occurrences of unexpected plant outages or equipment failures.

 

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 for the year ended December 31, 2012, 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 are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel, direct and indirect labor and related benefits, alloys, zinc, transportation and freight, repairs and maintenance, utilities (most notably electricity and natural gas), and depreciation.

 

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 Expense (Income), net.  Other income consists of interest income earned on our temporary cash deposits and investments; 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, such as certain financing expenses.

 

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Table of Contents

 

Overview

 

Net income was $29.0 million, or $0.13 per diluted share, during the second quarter of 2013, compared with net income of $44.5 million, or $0.20 per diluted share, during the second quarter of 2012, and net income of $48.2 million, or $0.21 per diluted share, during the first quarter of 2013. Our net sales decreased $108.5 million, or 6%, to $1.8 billion in the second quarter of 2013 versus the second quarter of 2012, while net sales increased $5.6 million, or less than 1%, versus the first quarter of 2013. Our gross profit percentage was 8% during the second quarter of 2013 as compared to 10% for both the second quarter of 2012 and the first quarter of 2013.

 

Second quarter 2013 external steel shipments decreased 1% as compared to the second quarter of 2012 (with total sheet products shipments increasing 2% and long products shipments decreasing 3%), and external ferrous scrap shipments decreased 4% and external nonferrous scrap shipments decreased 3%. Conversely, steel fabrication external shipments increased 10% in the second quarter of 2013 compared to the same period in 2012. Operating income decreased 33% to $69.2 million in the second quarter 2013, as compared to the same period in 2012, due primarily to reduced operating income from our steel operations as product pricing decreased more than raw material costs.

 

Comparing the second quarter of 2013 to the first quarter of 2013, external steel shipments increased 4% while external ferrous scrap shipments were flat, and external nonferrous scrap shipments decreased 10%. Steel fabrication continued its trend of increasing external shipments, showing an 11% sequential-quarter gain. Consolidated quarterly operating income decreased 28% sequentially, due primarily to lower steel metal spreads, as decreased steel prices more than offset slightly increased volume. Modest growth in the overall construction market continued in the second quarter of 2013 and supported improved shipments for our fabrication operations.

 

Segment Operating Results 2013 vs. 2012 (dollars in thousands)

 

 

 

Three Months Ended

 

First

 

Sequential

 

Six Months Ended

 

 

 

June 30,

 

Quarter

 

Quarter

 

June 30,

 

 

 

2013

 

%
Change

 

2012

 

2013

 

%
Change

 

2013

 

%
Change

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

1,143,913

 

(9

)%

$

1,260,223

 

$

1,122,360

 

2

$

2,266,273

 

(9

)% 

$

2,494,702

 

Metals recycling and ferrous resources

 

861,158

 

(6

)%

920,456

 

897,492

 

(4

)%

1,758,650

 

(13

)%

2,031,576

 

Steel fabrication

 

104,159

 

9

%

95,767

 

94,375

 

10

%

198,534

 

16

%

170,663

 

Other

 

28,122

 

38

%

20,391

 

24,854

 

13

%

52,976

 

19

%

44,480

 

 

 

2,137,352

 

 

 

2,296,837

 

2,139,081

 

 

 

4,276,433

 

 

 

4,741,421

 

Intra-company

 

(336,012

)

 

 

(387,034

)

(343,385

)

 

 

(679,397

)

 

 

(849,578

)

Consolidated

 

$

1,801,340

 

(6

)% 

$

1,909,803

 

$

1,795,696

 

$

3,597,036

 

(8

)% 

$

3,891,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

85,545

 

(37

)% 

$

136,597

 

$

119,301

 

(28

)% 

$

204,846

 

(25

)% 

$

273,905

 

Metals recycling and ferrous resources

 

(7,251

)

63

%

(19,371

)

(9,824

)

26

%

(17,075

)

(12

)%

(15,208

)

Steel fabrication

 

2,330

 

1,107

%

193

 

1,530

 

52

%

3,860

 

256

%

(2,475

)

Other

 

(14,434

)

2

%

(14,673

)

(16,439

)

12

%

(30,873

)

2

%

(31,535

)

 

 

66,190

 

(36

)%

102,746

 

94,568

 

(30

)%

160,758

 

(28

)%

224,687

 

Eliminations

 

3,008

 

 

 

953

 

1,664

 

 

 

4,672

 

 

 

(1,172

)

Consolidated

 

$

69,198

 

(33

)% 

$

103,699

 

$

96,232

 

(28

)% 

$

165,430

 

(26

)% 

$

223,515

 

 

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, agriculture and industrial machinery markets. In the second quarter of 2013 and 2012, our steel operations accounted for 61% and 63% of our external net sales, respectively. Operating income for the steel segment decreased $51.1 million, or 37%, to $85.5 million in the second quarter of 2013, compared to the same period of 2012. While segment shipments were flat, gross margin, and thus operating income, decreased 33% primarily due to a $76 decrease in average segment selling prices per ton shipped versus only a $41 per ton decrease in the average cost of ferrous scrap consumed in the second quarter of 2013, as compared to the second quarter of 2012. Continued domestic oversupply, combined with increased import activity, has caused selling values to decrease more than raw material costs, resulting in compressed metal spreads and margins.

 

Operating income for the steel segment decreased $69.1 million, or 25%, to $204.8 million in the first half of 2013, compared to the same period of 2012. Gross margin, and correspondingly operating income, decreased 22% primarily due to a $82 decrease in average segment selling prices per ton shipped versus only a $54 per ton decrease in average ferrous scrap cost melted in the first half of 2013, as compared to the first half of 2012.

 

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Table of Contents

 

Steel Operations Shipments (tons)

 

 

 

Three Months Ended

 

 

 

First

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

Quarter

 

 

 

June 30,

 

 

 

 

 

2013

 

 

 

2012

 

 

 

2013

 

 

 

2013

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flat Roll Division

 

720,582

 

 

 

706,944

 

 

 

704,290

 

 

 

1,424,872

 

 

 

1,365,449

 

 

 

The Techs

 

179,217

 

 

 

171,437

 

 

 

151,137

 

 

 

330,354

 

 

 

316,052

 

 

 

Sheet products

 

899,799

 

59

%

878,381

 

58

%

855,427

 

58

%

1,755,226

 

59

%

1,681,501

 

57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural and Rail Division

 

286,974

 

 

 

252,524

 

 

 

280,897

 

 

 

567,871

 

 

 

513,530

 

 

 

Engineered Bar Products Division

 

123,919

 

 

 

166,208

 

 

 

112,821

 

 

 

236,740

 

 

 

323,697

 

 

 

Roanoke Bar Division

 

134,001

 

 

 

149,010

 

 

 

139,950

 

 

 

273,951

 

 

 

300,306

 

 

 

Steel of West Virginia

 

77,975

 

 

 

74,456

 

 

 

80,707

 

 

 

158,682

 

 

 

151,668

 

 

 

Long products

 

622,869

 

41

%

642,198

 

42

%

614,375

 

42

%

1,237,244

 

41

%

1,289,201

 

43

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shipments

 

1,522,668

 

 

 

1,520,579

 

 

 

1,469,802

 

 

 

2,992,470

 

 

 

2,970,702

 

 

 

Intra-segment shipments

 

(35,031

)

(2

)%

(29,560

)

(2

)%

(32,090

)

(2

)%

(67,121

)

(2

)%

(57,617

)

(2

)%

Segment shipments

 

1,487,637

 

 

 

1,491,019

 

 

 

1,437,712

 

 

 

2,925,349

 

 

 

2,913,085

 

 

 

Intra-company shipments

 

(91,257

)

(6

)%

(77,315

)

(5

)%

(93,280

)

(6

)%

(184,537

)

(6

)%

(143,434

)

(5

)%

External shipments

 

1,396,380

 

 

 

1,413,704

 

 

 

1,344,432

 

 

 

2,740,812

 

 

 

2,769,651

 

 

 

 

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.

 

Long Products.  Our Structural and Rail Division sells structural steel beams and pilings to the construction market, as well as standard-grade rail to the railroad industry. Our Engineered Bar Products Division primarily sells engineered, special-bar-quality and merchant bar quality rounds, and round-cornered squares. Our Roanoke Bar Division primarily sells 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 steel segment decreased $116.3 million, or 9%, in the second quarter of 2013 when compared to the second quarter of 2012, as segment shipments were flat but average selling prices decreased 9%, or $76 per ton. There was also a shift in sales mix as sheet product shipments increased 2%, and long product shipments decreased 3% as the increases in rail and other structural steel products were more than offset by decreases in special-bar-quality and merchant steel products. Net sales for the steel segment decreased $228.4 million, or 9%, in the first half of 2013 when compared to the first half of 2012, as segment shipments increased modestly, but selling prices decreased 10%, or $82 per ton.

 

 

19



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 decreased $41 in the second quarter of 2013, compared with the second quarter of 2012. During the second quarter of 2013 and 2012, respectively, our metallic raw material costs represented 64% and 67% 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 decreased $54 in the first half of 2013 compared with the first half of 2012, and represented 65% and 68%, respectively, of our steel operations’ manufacturing costs, excluding the operations of The Techs.

 

Metals Recycling and Ferrous Resources Operations

 

Metals Recycling and Ferrous Resources Operations.  This operating segment primarily includes our metals recycling operations (OmniSource); our liquid pig iron production facility, Iron Dynamics (IDI); and our Minnesota iron operations. Our metals recycling and ferrous resources operations segment accounted for 33% and 31% of our external net sales in the second quarter of 2013 and 2012, respectively. Operating loss for the metals recycling and ferrous resources operations segment decreased $12.1 million compared to the second quarter of 2012, due primarily to increased metal spreads in metals recycling which more than offset decreases in ferrous and nonferrous volumes. Operating income for metals recycling increased $12.2 million in the first half of 2013 to $29.8 million compared to the first half of 2012.

 

Metals Recycling and Ferrous Resources Operations Shipments

 

 

 

Three Months Ended

 

First

 

Six Months Ended

 

 

 

June 30,

 

Quarter

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2013

 

2012

 

Ferrous metal (gross tons)

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,334,390

 

1,486,222

 

1,342,929

 

2,677,319

 

3,069,062

 

Intra-segment

 

(1,237

)

(2,007

)

(1,969

)

(3,206

)

(2,920

)

Segment shipments

 

1,333,153

 

1,484,215

 

1,340,960

 

2,674,113

 

3,066,142

 

Intra-company

 

(547,031

)

(664,661

)

(551,921

)

(1,098,952

)

(1,427,515

)

External shipments

 

786,122

 

819,554

 

789,039

 

1,575,161

 

1,638,627

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

Total and segment shipments

 

254,495

 

258,932

 

279,656

 

534,151

 

550,568

 

Intra-company

 

(6,737

)

(4,598

)

(3,529

)

(10,266

)

(6,556

)

External shipments

 

247,758

 

254,334

 

276,127

 

523,885

 

544,012

 

 

 

 

 

 

 

 

 

 

 

 

 

Mesabi Nugget (metric tons)

 

44,454

 

33,840

 

59,685

 

104,139

 

80,070

 

 

 

 

 

 

 

 

 

 

 

 

 

Iron Dynamics (metric tons) — intra-company

 

66,285

 

59,103

 

64,685

 

130,970

 

115,731

 

 

Metals Recycling.  Our metals recycling operations represent our metals sourcing and processing operations and are the most significant source of net sales 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. Our metals recycling operations represented 92% and 95% of this segment’s net sales during the second quarter of 2013 and 2012, respectively.

 

During the second quarter of 2013, metals recycling recorded sales of $794.8 million on shipments of 1.3 million gross tons of ferrous metals and 254.5 million pounds of nonferrous metals, compared with sales of $876.7 million on shipments of 1.5 million gross tons of ferrous and 258.9 million pounds of nonferrous metals during the same period in 2012. During the second quarter of 2013 and 2012, the metals recycling operations provided approximately 39% and 52%, respectively, of the steel scrap purchased by our steel mills. This represented 41% and 45% of the metals recycling operations’ ferrous shipments for the second quarter of 2013 and 2012, respectively. Sales prices of ferrous metals decreased 5% in the second quarter of 2013 versus the same period in 2012, while nonferrous sales prices increased 6% for the same periods. During the first half of 2013, metals recycling recorded sales of $1.6 billion on shipments of 2.7 million gross tons of ferrous metals and 534.2 million pounds of nonferrous metals, compared with sales of $1.9 billion on shipments of 3.1 million gross tons of ferrous metals and 550.6 million pounds of nonferrous metals during the same period in 2012. Sales prices of ferrous metals decreased 12% in the first half of 2013 versus the same period in 2012, while nonferrous sales prices increased 3% for the same periods.

 

Operating income for metals recycling increased $11.5 million in the second quarter of 2013 to $10.3 million compared to the second quarter of 2012 despite decreased volumes, due to a 22% increase in ferrous metal margins and decreased operating expenses.

 

Operating income for metals recycling increased $12.2 million in the first half of 2013, to $29.8 million, compared to the first half of 2012. The impact of decreased volumes in both ferrous and nonferrous metals in the first half of 2013 as compared to the first half of 2012, were offset by increases in metal spreads of both ferrous and nonferrous metals during the same periods and reduced operating expenses.

 

20



Table of Contents

 

Ferrous Resources.  Our ferrous resources operations consist of our two ironmaking initiatives: Iron Dynamics and our Minnesota iron operations. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material exclusively at our Flat Roll Division. Our Minnesota iron operations consists of Mesabi Nugget, (owned 81% by us); our future potential iron mining operations which is currently in the permitting process, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 80% by us). The construction of the Mesabi Nugget facility was completed in 2009, and initial production of iron nuggets commenced January 2010. Since that time, we have continued to refine this pioneering production process and changed equipment configurations to increase production, improve quality, and increase plant availability. A planned six-week outage in the fall of 2012 was used to complete the groundwork necessary for the implementation of further improvements which were made in the second quarter of 2013 during a planned outage of approximately a month. These modifications are expected to improve production volume. The facility’s designed annual production capacity is 500,000 metric tons. In the second quarter of 2013 and 2012, Mesabi Nugget produced 44,000 metric tons  and 37,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Our iron tailings operation, Mining Resources, started operations in September of 2012 and expects to be at full capacity by the end of 2013. This operation provides iron ore tailings to be concentrated for use by Mesabi Nugget as low-cost iron concentrate in the nugget production process. This is critical to our Minnesota operations as we will be able to benefit from the use of lower-cost iron concentrate rather than much higher priced third-party material. Losses from our Minnesota iron operations reduced our net income in the second quarter of 2013 by approximately $9.3 million, $1.6 million less than in the second quarter of 2012. For the first half of 2013, losses from our Minnesota iron operations reduced our net income by approximately $23.2 million, compared with $20.6 million in the first half of 2012.

 

Steel Fabrication Operations

 

Our steel fabrication operations represent the company’s New Millennium Building Systems’ plants located throughout the United States and Northern Mexico. 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 6% and 5% of our external net sales during the second quarter of 2013 and 2012, respectively. The segment achieved operating income of $2.3 million in the second quarter of 2013, compared to $193,000 in the second quarter of 2012. Modest selling price decreases were more than offset by higher sales volumes and improved metal margins. The segment had operating income of $3.9 million in the first half of 2013, compared to a loss of $2.5 million in the first half of 2012. The 256% increase in operating income is due to 19% increases in sales volume and metal spread.

 

Net sales for the segment increased $8.4 million, or 9%, in the second quarter of 2013 compared to the second quarter of 2012, as volumes increased 11%. However, the segment’s average selling price per ton shipped decreased $23, or 2%, during the same period. Increased second quarter 2013 shipments were the result of continued modest improvement in the non-residential construction market and market share gains. Net sales for the segment increased $27.9 million, or 16%, in the first half of 2013 compared to the first half of 2012, as volumes increased 19%.

 

The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the second quarter of 2013 and 2012, the cost of steel products purchased represented 77% and 84% of the total cost of manufacturing for our steel fabrication operations, respectively; while the average cost of steel consumed decreased in the second quarter of 2013, as compared to the same period in 2012, by $111 per ton. During the first half of 2013 and 2012, the cost of steel products purchased represented 77% and 81% of the total cost of manufacturing, respectively; while the average cost of steel consumed decreased to date in 2013, as compared to the same period in 2012, by $87 per ton.

 

 

21



Table of Contents

 

Second Quarter Consolidated Results 2013 vs. 2012

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $78.2 million during the second quarter of 2013, as compared to $78.4 million during the second quarter of 2012. Our selling, general and administrative expenses represented 4% of our total net sales during both the second quarter of 2013 and 2012.

 

Interest Expense, net of Capitalized Interest.  During the second quarter of 2013, gross interest expense decreased $8.8 million to $32.5 million, and capitalized interest increased $802,000, to $1.0 million, when compared to the same period in 2012. The interest capitalized during these periods relates to construction activities at our various operating segments.  The decrease in gross interest expense is due to refinancing activities that reduced outstanding debt by $175 million during the third quarter of 2012 and $100 million during April 2013 and decreased the interest rate on $1.2 billion of senior notes that were refinanced.

 

Other Expense (Income), net.  Other income was $1.2 million during the second quarter of 2013, as compared to $1.9 million during the same period in 2012.

 

Income Taxes.  During the second quarter of 2013, our income tax expense was $15.7 million with an effective tax rate of 40.3%, as compared to $25.2 million with an effective tax rate of 39.0%, during the same period in 2012. The higher effective tax rate in the second quarter of 2013 is due to the impact on the effective tax rate of higher proportional noncontrolling interest losses in the second quarter of 2013, as compared to the same period in 2012.

 

First Six Months Consolidated Results 2013 vs. 2012

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $158.2 million during the first six months of 2013, as compared to $159.9 million during the first six months of 2012, a decrease of $1.7 million, or nearly 1%. Our selling, general and administrative expenses represented 4% of our total net sales during both the first six months of 2013 and 2012. The decrease in our selling, general and administrative expenses during the first six months of 2013 as compared to the same period in 2012 was due primarily to decreased profit sharing, consistent with the lower levels of profitability in the first six months of 2013.

 

Interest Expense, net of Capitalized Interest.  During the first six months of 2013, gross interest expense decreased $14.8 million to $67.9 million, and capitalized interest increased $1.3 million, to $1.8 million, when compared to the same period in 2012. The interest capitalized during these periods relates to construction activities at our various operating segments. The decrease in gross interest expense is due to refinancing activities that reduced outstanding debt by $175 million during the third quarter of 2012 and $100 million during April 2013 and decreased the interest rate on $1.2 billion of senior notes that were refinanced.

 

Other Expense (Income), net.  Other income was $2.3 million during the first six months of 2013, as compared to other expense of $8.4 million during the same period in 2012. We recorded charges of $13.9 million in the first six months of 2012 related to the partial tender of our 73/8% Senior Notes, while we recorded charges of $2.6 million in the first six months of 2013 related to the partial tender and early repayment of the remaining amount of our 63/4% Senior Notes.

 

Income Taxes.  During the first six months of 2013, our income tax expense was $37.1 million with an effective tax rate of 36.5%, as compared to $51.9 million with an effective tax rate of 39.0% during the same period in 2012. The lower effective tax rate in the first six months of 2013 is due to a favorable adjustment related to 2012 research and development tax credits that were enacted into the tax code in January 2013.

 

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. Trade receivables increased $130.8 million during the first half of 2013 related to increased sales in the second quarter of 2013, when compared to the fourth quarter of 2012, as days sales outstanding remained consistent. Total inventories decreased $34.0 million, or 3%, to $1.2 billion. Our raw materials, primarily steel scrap inventories, decreased by approximately $36.0 million during the first half of 2013, with scrap volumes increasing by 110,000 gross tons (16%), and costs per gross ton decreasing 20%. Our work-in-process and finished goods inventories increased $1.4 million, with volumes increasing by 29,000 tons (almost 7%). Our trade payables and general accruals decreased $34.4 million, or 6%, during the first half of 2013, as 2012 profit sharing and bonus amounts were paid in the first quarter of 2013, and estimated tax payments were made in the second quarter of 2013.

 

Capital Investments.  During the first half of 2013, we invested $94.6 million in property, plant and equipment, of which over half related to announced growth or expansion projects at three of our steel mills and OmniSource. We estimate total capital expenditures for 2013 to be in the range of $200 million.

 

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Capital Resources and Long-term Debt.  On March 26, 2013, we issued $400.0 million of 51/4% Senior Notes due 2023 (2023 Notes). Interest on the 2023 Notes is due semiannually on April 15 and October 15, with the first payment due on October 15, 2013. The 2023 Notes are redeemable at any time after April 15, 2018. The redemption price (expressed as a percentage of principal amount) is 102.625% during the period April 15, 2018 to April 14, 2019; 101.750% during the period April 15, 2019 to April 14, 2020; 100.875% during the period April 15, 2020 to April 14, 2021; and 100% on and after April 15, 2021, plus accrued interest to the redemption date. In addition, at any time before April 15, 2016, we may redeem up to 35% of the principal amount of the 2023 Notes with the net cash proceeds from one or more sales of our common stock at a redemption price (expressed as a percentage of principal amount) of 105.250%, plus accrued interest to the redemption date. The 2023 Notes are unsecured and rank pari passu with all existing and future senior unsubordinated unsecured indebtedness and senior in right of payment to all subordinated indebtedness.

 

A portion of the proceeds from the issuance of the 2023 Notes was used to fund the March 26, 2013 purchase of $301.7 million (plus accrued interest) of our 6 3/4% Senior Notes due 2015 (2015 Notes) pursuant to a tender offer. On April 9, 2013, we used the remaining proceeds from the issuance of the 2023 Notes, along with available cash, to repay the remaining outstanding 2015 Notes due at a price of 100% of the principal amount of $198.3 million (plus accrued interest). As a result of this refinancing activity, our overall outstanding debt decreased $100.0 million, we further extended and laddered our debt maturities, and we reduced our overall effective interest rate.

 

During the first half of 2013, our total outstanding debt decreased $103.8 million to $2.1 billion. As a result, our total long-term debt to capitalization ratio, representing our long-term debt, including current maturities, divided by the sum of our long-term debt, redeemable noncontrolling interests, and our total stockholders’ equity, decreased to 45.5% at June 30, 2013, from 47.3% at December 31, 2012.

 

We have a senior secured credit facility (Facility) that matures in September 2016 which provides for a $1.1 billion revolver (Revolver). Subject to certain conditions, we have the opportunity to increase the Revolver capacity by an additional $125.0 million. The Facility is guaranteed by certain of our subsidiaries and is secured by substantially all of our accounts receivable and inventories and pledges of shares of our wholly owned subsidiaries’ capital stock. The Revolver is available to fund working capital, capital expenditures, and other general corporate purposes.

 

The outstanding balance on the Revolver must be the lesser of $1.1 billion less other applicable commitments such as letters of credit and other secured debt, as defined within the Facility or the sum of 85% of our eligible accounts receivable and 65% of our eligible inventories, less other applicable commitments. At June 30, 2013, we had $1.1 billion of availability on the Revolver, $14.0 million of outstanding letters of credit and other obligations which reduce availability, and no outstanding borrowings.

 

The Facility 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 the financial and other covenants.

 

The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. 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 Facility) by our LTM gross interest expense. In addition, a net debt (as defined in the Facility) to consolidated LTM adjusted EBITDA ratio (leverage ratio) of not more than 5.00:1.00 must be maintained. If the leverage ratio exceeds 3.50:1:00 at any time, our ability to make restricted payments as defined in the credit agreement (which includes cash dividends to stockholders and share purchases, among other things), is limited. At June 30, 2013, our interest coverage ratio and net debt leverage ratio were 4.22:1.00 and 3.21:1.00, respectively. We were therefore in compliance with these covenants at June 30, 2013, and we anticipate we will continue to be in compliance during the remainder of the year.

 

Cash Dividends.  We declared cash dividends of $48.5 million, or $0.22 per common share ($0.11 per common share each quarter), during the first half of 2013, a 10% increase over the $0.20 per common share, or $43.8 million, dividends declared during the first half of 2012. We paid cash dividends of $46.2 million and $43.8 million during the first half of 2013 and 2012, respectively. Our board of directors approves the payment of dividends on a quarterly basis. During the remainder of 2013, 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 may 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 flows, 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 flows from operations, together with other available sources of funds, including additional borrowings under our senior secured credit agreement through its term, which expires in September 2016, 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.

 

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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.

 

Critical Accounting Policies and Estimates

 

No material changes have occurred to the indicated critical accounting policies and estimates as disclosed in our 2012 Annual Report on Form 10-K.

 

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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. We did not have any interest rate swaps during the periods ended June 30, 2013 or 2012.

 

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 raw materials used in our operations, such as metallic raw materials, electricity, natural gas, iron concentrate, fuel and zinc. 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 raw materials utilized within our operations has generally been to make some commitments with suppliers relating to future expected requirements for certain commodities such as electricity, natural gas and its transportation, fuel, zinc, and iron concentrate. Certain commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 33 months for physical commodity requirements and for up to 9 years for commodity transportation requirements. We also purchase electricity consumed at our Flat Roll Division pursuant to a contract which extends through December 2013. 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 June 30, 2013, no material changes had occurred related to these commodity risks from the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012. We utilized 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.

 

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 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 or supplier. At June 30, 2013, we had a cumulative unrealized gain associated with these financial contracts of $1.3 million, substantially all of which have a settlement date within the next twelve months. We believe the customer and supplier contracts associated with the financial contracts will be fully consummated.

 

ITEM 4.                   CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. 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 June 30, 2013, our principal executive officer and principal 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 June 30, 2013 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

 

We are involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes.

 

We are also involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, which alleges a conspiracy 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. All but one of the Complaints were brought on behalf of a purported class consisting of all direct purchasers of steel products between January 1, 2005, and the present.  The other Complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period.  In addition, in December 2010, we and the other co-defendants were served with a substantially similar complaint in the Circuit Court of Cocke County, Tennessee, purporting to be on behalf of indirect purchasers of steel products in Tennessee. That case has been removed to the federal court in Chicago that is hearing the main complaint. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. In January 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied in June 2009. Following a period of preliminary discovery relating to class certification matters, Plaintiffs filed their Motion for Class Certification in May 2012, and on February 28, 2013, Defendants filed their Joint Memorandum in Opposition to Plaintiffs’ Motion for Class Certification, together with joint motions to exclude the expert opinions of both of Plaintiffs’ two retained experts. Additional briefing is anticipated on all issues related to the pending motions.  Due to the uncertain nature of litigation, we cannot presently determine the ultimate outcome of this litigation.

 

Although not presently necessary or appropriate to make a dollar estimate of exposure to loss, if any, in connection with the above matter, we may in the future determine that a loss accrual is necessary. Although we may make loss accruals, if and as warranted, any amounts that we may accrue from time to time could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, an adverse result could have a material effect on our financial condition, results of operations and liquidity.

 

ITEM 1A.          RISK FACTORS

 

No material changes have occurred to the indicated risk factors as disclosed in our 2012 Annual Report on Form 10-K.

 

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

 

None.

 

ITEM 3.                   DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                   MINE SAFETY DISCLOSURES

 

The information required to be furnished pursuant to Item 4 concerning mine safety disclosure matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report.

 

ITEM 5.                   OTHER INFORMATION

 

None.

 

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ITEM 6.                   EXHIBITS

 

Executive Officer Certifications

 

31.1*

 

Certification of Principal 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 Principal 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.

 

 

 

Other

 

 

 

 

 

95*

 

Mine Safety Disclosures.

 

 

 

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.

 

August 7, 2013

 

 

STEEL DYNAMICS, INC.

 

 

 

 

By:

/s/ Theresa E. Wagler

 

 

Theresa E. Wagler

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Accounting Officer)

 

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