XMEX:STLD Steel Dynamics Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XMEX:STLD (Steel Dynamics Inc): Fair Value Estimate
Premium
XMEX:STLD (Steel Dynamics Inc): Consider Buying
Premium
XMEX:STLD (Steel Dynamics Inc): Consider Selling
Premium
XMEX:STLD (Steel Dynamics Inc): Fair Value Uncertainty
Premium
XMEX:STLD (Steel Dynamics Inc): Economic Moat
Premium
XMEX:STLD (Steel Dynamics Inc): Stewardship
Premium
 

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, 2012

 

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 30, 2012, Registrant had 219,167,317 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, 2012 (unaudited) and December 31, 2011

1

 

 

 

 

Consolidated Statements of Income for the three and six-month periods ended June 30, 2012 and 2011 (unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 2012 and 2011 (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,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

420,938

 

$

390,761

 

Investments in short-term commercial paper

 

9,998

 

84,830

 

Accounts receivable, net

 

660,351

 

679,898

 

Accounts receivable-related parties

 

55,089

 

42,893

 

Inventories

 

1,252,153

 

1,199,584

 

Deferred income taxes

 

26,917

 

25,341

 

Income taxes receivable

 

17,082

 

16,722

 

Other current assets

 

15,816

 

15,229

 

Total current assets

 

2,458,344

 

2,455,258

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,208,660

 

2,193,745

 

 

 

 

 

 

 

Restricted cash

 

27,806

 

26,528

 

Intangible assets, net

 

433,559

 

450,893

 

Goodwill

 

741,817

 

745,066

 

Other assets

 

101,194

 

107,736

 

Total assets

 

$

5,971,380

 

$

5,979,226

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

381,250

 

$

414,240

 

Accounts payable-related parties

 

11,924

 

6,584

 

Income taxes payable

 

2,164

 

10,880

 

Accrued expenses

 

168,928

 

185,964

 

Accrued profit sharing

 

15,271

 

38,671

 

Current maturities of long-term debt

 

439,912

 

444,078

 

Total current liabilities

 

1,019,449

 

1,100,417

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Term loan

 

254,375

 

 

7 3/8% senior notes, due 2012

 

 

261,250

 

5.125% convertible senior notes, due 2014

 

287,498

 

287,500

 

6 ¾% senior notes, due 2015

 

500,000

 

500,000

 

7 ¾% senior notes, due 2016

 

500,000

 

500,000

 

7 5/8% senior notes, due 2020

 

350,000

 

350,000

 

Other long-term debt

 

36,224

 

37,272

 

Total long-term debt

 

1,928,097

 

1,936,022

 

 

 

 

 

 

 

Deferred income taxes

 

510,479

 

489,915

 

Other liabilities

 

81,795

 

82,278

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interest

 

77,424

 

70,694

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 255,225,325 and 255,052,811 shares issued; and 219,154,966 and 218,873,720 shares outstanding, as of June 30, 2012 and December 31, 2011, respectively

 

636

 

636

 

Treasury stock, at cost; 36,070,359 and 36,179,091 shares, as of June 30, 2012 and December 31, 2011, respectively

 

(720,481

)

(722,653

)

Additional paid-in capital

 

1,033,086

 

1,026,157

 

Retained earnings

 

2,058,108

 

2,011,801

 

Total Steel Dynamics, Inc. equity

 

2,371,349

 

2,315,941

 

Noncontrolling interests

 

(17,213

)

(16,041

)

Total equity

 

2,354,136

 

2,299,900

 

Total liabilities and equity

 

$

5,971,380

 

$

5,979,226

 

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,830,117

 

$

2,004,283

 

$

3,735,192

 

$

3,945,947

 

Related parties

 

79,686

 

75,448

 

156,651

 

149,753

 

Total net sales

 

1,909,803

 

2,079,731

 

3,891,843

 

4,095,700

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,727,667

 

1,803,345

 

3,508,443

 

3,523,560

 

Gross profit

 

182,136

 

276,386

 

383,400

 

572,140

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

61,235

 

63,631

 

125,619

 

128,772

 

Profit sharing

 

8,211

 

14,454

 

16,283

 

29,657

 

Amortization of intangible assets

 

8,991

 

10,082

 

17,983

 

20,166

 

Total selling, general and administrative expenses

 

78,437

 

88,167

 

159,885

 

178,595

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

103,699

 

188,219

 

223,515

 

393,545

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

41,106

 

44,812

 

82,218

 

88,158

 

Other expense (income), net

 

(1,892

)

(5,745

)

8,356

 

(10,312

)

Income before income taxes

 

64,485

 

149,152

 

132,941

 

315,699

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

25,180

 

53,326

 

51,859

 

115,643

 

 

 

 

 

 

 

 

 

 

 

Net income

 

39,305

 

95,826

 

81,082

 

200,056

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

5,167

 

2,884

 

9,065

 

4,557

 

Net income attributable to Steel Dynamics, Inc.

 

$

44,472

 

$

98,710

 

$

90,147

 

$

204,613

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.20

 

$

.45

 

$

.41

 

$

.94

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

219,104

 

218,500

 

219,050

 

218,246

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.20

 

$

.43

 

$

.40

 

$

.89

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

236,208

 

236,266

 

236,367

 

236,245

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.10

 

$

.10

 

$

.20

 

$

.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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

39,305

 

$

95,826

 

$

81,082

 

$

200,056

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

55,502

 

56,257

 

111,074

 

111,003

 

Equity-based compensation

 

2,602

 

3,812

 

8,725

 

7,522

 

Deferred income taxes

 

10,634

 

9,028

 

19,831

 

21,963

 

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

 

326

 

139

 

(413

)

96

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

73,734

 

34,536

 

12,914

 

(227,212

)

Inventories

 

18,787

 

(9,026

)

(36,303

)

(81,133

)

Other assets

 

(393

)

2,315

 

2,567

 

5,697

 

Accounts payable

 

(60,837

)

2,750

 

(25,935

)

96,925

 

Income taxes receivable/payable

 

(26,468

)

(17,119

)

(9,076

)

28,320

 

Accrued expenses

 

(12,590

)

(12,521

)

(42,446

)

6,697

 

Net cash provided by operating activities

 

100,602

 

165,997

 

122,020

 

169,934

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(54,789

)

(34,976

)

(100,344

)

(53,669

)

Proceeds from maturity of short-term commercial paper

 

54,984

 

 

74,832

 

 

Other investing activities

 

678

 

2,142

 

(21,034

)

999

 

Net cash provided by (used in) investing activities

 

873

 

(32,834

)

(46,546

)

(52,670

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

 

 

289,969

 

5,126

 

Repayment of current and long-term debt

 

(21,896

)

(491

)

(305,344

)

(7,816

)

Debt issuance costs

 

 

 

(2,188

)

 

Proceeds from exercise of stock options, including related tax effect

 

341

 

4,569

 

1,438

 

12,865

 

Contributions from noncontrolling investors, net

 

5,117

 

1,470

 

14,623

 

1,887

 

Dividends paid

 

(21,908

)

(21,830

)

(43,795

)

(38,148

)

Net cash used in financing activities

 

(38,346

)

(16,282

)

(45,297

)

(26,086

)

 

 

 

 

 

 

 

 

 

 

Increase in cash and equivalents

 

63,129

 

116,881

 

30,177

 

91,178

 

Cash and equivalents at beginning of period

 

357,809

 

160,810

 

390,761

 

186,513

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

420,938

 

$

277,691

 

$

420,938

 

$

277,691

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

62,807

 

$

71,047

 

$

81,560

 

$

86,157

 

Cash paid for federal and state income taxes, net

 

$

41,302

 

$

60,455

 

$

40,347

 

$

61,975

 

 

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 63% and 61% of the company’s external net sales during the three-month periods ended June 30, 2012 and 2011, respectively, and 62% and 60% of the company’s external net sales during the six-month periods ended June 30, 2012 and 2011, 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 planned operations to supply the nugget facility with its primary raw material, iron concentrate. Metals recycling and ferrous resources operations accounted for approximately 31% and 35% of the company’s external net sales during the three-month periods ended June 30, 2012 and 2011, respectively, and 33% and 36% of the company’s external net sales during the six-month periods ended June 30, 2012 and 2011, 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 5% and 3% of the company’s external net sales during the three-month periods ended June 30, 2012 and 2011, respectively, and 4% and 3% of the company’s external net sales during the six-month periods ended June 30, 2012 and 2011, 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, 2011.

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at June 30, 2012, and December 31, 2011, (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

OmniSource — Metals Recycling/Ferrous Resources Segment

 

$

568,068

 

$

571,317

 

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

 

 

 

$

741,817

 

$

745,066

 

 

OmniSource goodwill decreased $3.2 million from December 31, 2011 to June 30, 2012, in recognition of the 2012 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 and restricted shares, and dilutive shares related to the company’s 5.125% convertible senior notes, and are excluded from the computation in periods in which they have an anti-dilutive effect. Options to purchase 6.6 million and 1.2 million shares were anti-dilutive at June 30, 2012 and 2011, respectively.

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

44,472

 

219,104

 

$

.20

 

$

98,710

 

218,500

 

$

.45

 

Dilutive stock option effect

 

 

722

 

 

 

 

1,384

 

 

 

5.125% convertible senior notes, net of tax

 

2,358

 

16,382

 

 

 

2,358

 

16,382

 

 

 

Diluted earnings per share

 

$

46,830

 

236,208

 

$

.20

 

$

101,068

 

236,266

 

$

.43

 

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

90,147

 

219,050

 

$

.41

 

$

204,613

 

218,246

 

$

.94

 

Dilutive stock option effect

 

 

935

 

 

 

 

1,617

 

 

 

5.125% convertible senior notes, net of tax

 

4,716

 

16,382

 

 

 

4,716

 

16,382

 

 

 

Diluted earnings per share

 

$

94,863

 

236,367

 

$

.40

 

$

209,329

 

236,245

 

$

.89

 

 

Note 3.  Inventories

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

654,831

 

$

609,150

 

Supplies

 

262,061

 

251,716

 

Work-in-progress

 

82,839

 

106,609

 

Finished goods

 

252,422

 

232,109

 

Total inventories

 

$

1,252,153

 

$

1,199,584

 

 

Note 4.  Debt

 

On January 11, 2012, the company expanded its senior secured credit facility by adding a $275.0 million term loan that matures on September 30, 2016 (Term Loan).  Quarterly principal payments under the Term Loan are required to be made in amounts ranging from 1.25% to 3.75% of the original principal amount, with the unpaid principal balance of approximately $158.0 million due on the maturity date.  The company used the net proceeds of the Term Loan, together with cash on hand, to fund the January 2012 purchase of $279.7 million of the company’s 7 3/8% Senior Notes, due 2012 pursuant to a tender offer. As a result of the tender, the company recorded expenses of $13.9 million in January 2012 related to the tender premium, unamortized debt issuance costs write-off, and tender expenses, which are reflected in other expenses in the consolidated statement of income for the six-months ended June 30, 2012.

 

On August 2, 2012, the company announced that it plans to sell approximately $750 million aggregate principal amount of debt securities in a transaction exempt from the registration requirements of the Securities Act of 1933, subject to market and other conditions. Pursuant to a concurrent debt tender offer and consent solicitation (Offer), the company intends to use the proceeds from this new debt financing, along with available cash, to purchase up to $210.0 million of the $420.3 million outstanding aggregate principal amount of the 73/8% Senior Notes due 2012 and for any and all of the $500.0 million outstanding aggregate principal amount of the 73/4% Senior Notes due 2016 (collectively, the “Notes”), and to pay fees and expenses associated with the tender offer and consent solicitation.  The Offer is subject to a number of conditions including, without limitation, the completion of the new debt financing on terms reasonably satisfactory to the company and in an amount generating net proceeds sufficient to purchase the Notes tendered in the Offer, up to the tender cap.

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 attributable to the noncontrolling interests (in thousands):

 

 

 

 

 

Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

Total

 

Common

 

Additional
Paid-In

 

Retained

 

Treasury

 

Noncontrolling

 

 

 

Equity

 

Stock

 

Capital

 

Earnings

 

Stock

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

2,299,900

 

$

636

 

$

1,026,157

 

$

2,011,801

 

$

(722,653

)

$

(16,041

)

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

 

1,438

 

 

1,438

 

 

 

 

Dividends declared

 

(43,840

)

 

 

(43,840

)

 

 

Equity-based compensation and issuance of restricted stock

 

7,661

 

 

5,491

 

 

2,170

 

 

Conversion of 5.125% convertible senior notes

 

2

 

 

 

 

2

 

 

Contributions from noncontrolling investors

 

7,973

 

 

 

 

 

7,973

 

Distributions to noncontrolling investor

 

(80

)

 

 

 

 

(80

)

Net income (loss)

 

81,082

 

 

 

90,147

 

 

(9,065

)

Balances at June 30, 2012

 

$

2,354,136

 

$

636

 

$

1,033,086

 

$

2,058,108

 

$

(720,481

)

$

(17,213

)

 

Note 6.  Derivative Financial Instruments

 

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

 

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

 

Commodity Futures Contracts.  If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity.  If the company is “short” on futures contracts, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s commodity option and futures contract commitments as of June 30, 2012 (MT represents metric tons and Lbs represents pounds):

 

Commodity Options — nickel

 

 

 

60

 

MT

 

 

Commodity Futures

 

Long/Short

 

Total

 

 

 

Aluminum

 

Long

 

6,600

 

MT

 

Aluminum

 

Short

 

5,800

 

MT

 

Copper

 

Long

 

4,797

 

MT

 

Copper

 

Short

 

15,547

 

MT

 

Nickel

 

Short

 

90

 

MT

 

Silver

 

Short

 

343

 

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, 2012, and December 31, 2011, and for the three and six-month periods ended June 30, 2012 and 2011 (in thousands):

 

 

 

 

 

Fair Value

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

Balance Sheets

 

 

 

 

 

 

 

Commodity futures and options — net asset

 

Other current assets

 

$

1,864

 

$

 

Commodity futures — net liability

 

Accrued expenses

 

 

1,219

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain for Three Months Ended

 

 

 

 

 

June 30, 2012

 

June 30, 2011

 

Statements of Income

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

5,893

 

$

1,422

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain for Six Months Ended

 

 

 

 

 

June 30, 2012

 

June 30, 2011

 

Statements of Income

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

2,275

 

$

4,345

 

 

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, 2012, and December 31, 2011 (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, 2012

 

 

 

 

 

 

 

 

 

Investments in short-term commercial paper

 

$

9,998

 

$

 

$

9,998

 

$

 

Commodity options — financial liabilities

 

9

 

 

9

 

 

Commodity futures — financial assets

 

6,138

 

 

6,138

 

 

Commodity futures — financial liabilities

 

4,265

 

 

4,265

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Investments in short-term commercial paper

 

$

84,830

 

$

 

$

84,830

 

$

 

Commodity futures — financial assets

 

3,159

 

 

3,159

 

 

Commodity futures — financial liabilities

 

4,378

 

 

4,378

 

 

 

The carrying amounts of financial instruments including cash and equivalents, accounts receivable and accounts payable approximate fair value, because of the relatively short maturity of these instruments. The fair 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, was approximately $2.4 billion and $2.5 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion) at June 30, 2012 and December 31, 2011, respectively.

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  Commitments and Contingencies

 

The company is involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois that 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 purport to be brought on behalf of a class consisting of all direct purchasers of steel products during the period of the alleged conspiracy.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied.  The parties have been conducting discovery related primarily to class certification matters, and on May 24, 2012, Plaintiffs filed their Motion for Class Certification. A time frame for hearing this Motion has not yet been determined. Due to the uncertainties of litigation, the company cannot presently determine the ultimate outcome of this litigation. However, the company believes that, based on the information available to us at this time, 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 the company’s 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, the company may in the future determine that a loss accrual is necessary. Although the company may make loss accruals, if and as warranted, any amounts that the company may accrue from time to time could vary significantly from the amounts the company actually pays, due to the inherent uncertainties and shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, under such circumstances an adverse result could have a material effect on the company’s 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, 2011, 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, 2012 and 2011 are as follows (in thousands):

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2012

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

Company-wide stock option expense

 

(2.0

)

 

 

Profit sharing

 

(5.9

)

 

 

Other, net

 

0.4

 

 

 

 

 

$

(14.7

)

 

 

 

 

 

 

(2)

 

Gross profit increase from intra-company sales

 

$

1.0

 

 

 

 

 

 

 

(3)

 

Cash and equivalents

 

$

309.2

 

 

 

Investments in short-term commercial paper

 

10.0

 

 

 

Income taxes receivable

 

17.1

 

 

 

Deferred income taxes

 

26.9

 

 

 

Property, plant and equipment, net

 

83.9

 

 

 

Debt issuance costs, net

 

22.3

 

 

 

Intra-company debt

 

170.6

 

 

 

Other

 

85.7

 

 

 

 

 

$

725.7

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(38.8

)

 

 

Elimination of intra-company debt

 

(170.6

)

 

 

Other

 

(13.5

)

 

 

 

 

$

(222.9

)

 

 

 

 

 

 

(5)

 

Accounts payable

 

$

28.7

 

 

 

Income taxes payable

 

2.9

 

 

 

Accrued interest

 

31.0

 

 

 

Accrued profit sharing

 

12.6

 

 

 

Debt

 

2,330.0

 

 

 

Deferred income taxes

 

213.0

 

 

 

Other

 

81.5

 

 

 

 

 

$

2,699.7

 

 

 

 

 

 

 

(6)

 

Elimination of intra-company payables

 

$

(41.2

)

 

 

Elimination of intra-company debt

 

(170.6

)

 

 

Other

 

(1.9

)

 

 

 

 

$

(213.7

)

 

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, 2011

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,221,472

 

$

647,845

 

$

61,939

 

$

25,718

 

$

 

$

1,956,974

 

External Non-U.S.

 

45,803

 

76,834

 

 

120

 

 

122,757

 

Other segments

 

62,191

 

353,192

 

23

 

2,948

 

(418,354

)

 

 

 

1,329,466

 

1,077,871

 

61,962

 

28,786

 

(418,354

)

2,079,731

 

Operating income (loss)

 

213,968

 

3,885

 

(1,635

)

(25,422

)(1)

(2,577

)(2)

188,219

 

Income (loss) before income taxes

 

192,782

 

(6,354

)

(3,334

)

(31,338

)

(2,604

)

149,152

 

Depreciation and amortization

 

27,651

 

25,706

 

1,620

 

1,331

 

(51

)

56,257

 

Capital expenditures

 

11,155

 

21,632

 

419

 

1,770

 

 

34,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,712,461

 

2,536,751

 

229,988

 

632,242

(3)

(210,989

)(4)

5,900,453

 

Liabilities

 

467,195

 

563,908

 

16,715

 

2,740,245

(5)

(199,098

)(6)

3,588,965

 

 


Footnotes related to the three months ended June 30, 2011 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(10.0

)

 

 

Company-wide stock option expense

 

 

(3.7

)

 

 

Profit sharing

 

 

(11.9

)

 

 

Other, net

 

 

0.2

 

 

 

Total

 

$

(25.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(2.6

)

 

 

 

 

 

 

 

(3)

 

Cash and equivalents

 

$

265.6

 

 

 

Income taxes receivable

 

 

15.3

 

 

 

Deferred income taxes

 

 

21.1

 

 

 

Property, plant and equipment, net

 

 

69.9

 

 

 

Debt issuance costs

 

 

21.0

 

 

 

Intra-company debt

 

 

153.7

 

 

 

Other

 

 

85.6

 

 

 

Total

 

$

632.2

 

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(42.3

)

 

 

Elimination of intra-company debt

 

 

(153.7

)

 

 

Other

 

 

(15.0

)

 

 

Total

 

$

(211.0

)

 

 

 

 

 

 

 

(5)

 

Accounts payable

 

 

35.4

 

 

 

Income taxes payable

 

 

11.6

 

 

 

Accrued interest

 

 

33.7

 

 

 

Accrued profit sharing

 

 

25.8

 

 

 

Debt

 

 

2,340.9

 

 

 

Deferred income taxes

 

 

227.0

 

 

 

Other

 

 

65.8

 

 

 

Total

 

$

2,740.2

 

 

 

 

 

 

 

 

(6)

 

Elimination of intra-company payables

 

$

(43.8

)

 

 

Elimination of intra-company debt

 

 

(153.7

)

 

 

Other

 

 

(1.6

)

 

 

Total

 

$

(199.1

)

 

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, 2012

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

Company-wide stock option expense

 

(5.7

)

 

 

Profit sharing

 

(12.4

)

 

 

Other, net

 

1.4

 

 

 

 

 

$

(31.5

)

 

 

 

 

 

 

(2)

 

Gross profit reduction from intra-company sales

 

$

(1.2

)

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2011

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,367,961

 

$

1,320,186

 

$

114,018

 

$

51,242

 

$

 

$

3,853,407

 

External Non-U.S.

 

94,378

 

147,658

 

 

257

 

 

242,293

 

Other segments

 

114,137

 

718,442

 

596

 

5,419

 

(838,594

)

 

 

 

2,576,476

 

2,186,286

 

114,614

 

56,918

 

(838,594

)

4,095,700

 

Operating income (loss)

 

406,923

 

43,375

 

(4,518

)

(49,678

)(1)

(2,557

)(2)

393,545

 

Income (loss) before income taxes

 

365,491

 

22,730

 

(7,779

)

(62,080

)

(2,663

)

315,699

 

Depreciation and amortization

 

54,844

 

50,620

 

3,122

 

2,519

 

(102

)

111,003

 

Capital expenditures

 

18,434

 

31,883

 

951

 

2,401

 

 

53,669

 

 


Footnotes related to the six months ended June 30, 2011 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(19.3

)

 

 

Company-wide stock option expense

 

(7.4

)

 

 

Profit sharing

 

(25.2

)

 

 

Other, net

 

2.2

 

 

 

Total

 

$

(49.7

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

(2.6

)

 

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 2012, 2014, 2015, 2016, and 2020. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company on a consolidated basis. The following statements should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of June 30, 2012

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

304,807

 

$

105,248

 

$

10,883

 

$

 

$

420,938

 

Investments in short-term commercial paper

 

9,998

 

 

 

 

9,998

 

Accounts receivable, net

 

302,173

 

767,638

 

11,230

 

(365,601

)

715,440

 

Inventories

 

648,242

 

522,961

 

84,899

 

(3,949

)

1,252,153

 

Other current assets

 

71,774

 

7,755

 

1,910

 

(21,624

)

59,815

 

Total current assets

 

1,336,994

 

1,403,602

 

108,922

 

(391,174

)

2,458,344

 

Property, plant and equiment, net

 

1,028,099

 

656,804

 

526,482

 

(2,725

)

2,208,660

 

Intangible assets, net

 

 

433,559