10-Q 1 a15-11883_110q.htm 10-Q

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, 2015

 

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 website, 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, 2015, Registrant had 242,063,063 outstanding shares of common stock.

 

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

PART I. Financial Information

 

 

 

Item 1.

Financial Statements:

Page

 

 

 

 

Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014

1

 

 

 

 

Consolidated Statements of Income for the three- and six- month periods ended June 30, 2015 and 2014 (unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three- and six-month periods ended June 30, 2015 and 2014 (unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. Other Information

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 3.

Defaults Upon Senior Securities

27

 

 

 

Item 4.

Mine Safety Disclosures

27

 

 

 

Item 5.

Other Information

27

 

 

 

Item 6.

Exhibits

28

 

 

 

 

Signatures

29

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

419,401

 

$

361,363

 

Accounts receivable, net

 

772,309

 

859,835

 

Accounts receivable-related parties

 

44,213

 

42,990

 

Inventories

 

1,292,069

 

1,618,419

 

Deferred income taxes

 

31,396

 

35,503

 

Other current assets

 

32,004

 

55,655

 

Total current assets

 

2,591,392

 

2,973,765

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,047,401

 

3,123,906

 

 

 

 

 

 

 

Restricted cash

 

19,571

 

19,312

 

Intangible assets, net

 

358,402

 

370,669

 

Goodwill

 

741,898

 

745,158

 

Other assets

 

68,099

 

78,217

 

Total assets

 

$

6,826,763

 

$

7,311,027

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

438,363

 

$

489,791

 

Accounts payable-related parties

 

8,335

 

21,265

 

Income taxes payable

 

2,411

 

6,086

 

Accrued payroll and benefits

 

78,201

 

128,968

 

Accrued interest

 

38,988

 

50,405

 

Accrued expenses

 

97,215

 

107,607

 

Current maturities of long-term debt

 

35,075

 

46,460

 

Total current liabilities

 

698,588

 

850,582

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Senior term loan

 

231,250

 

237,500

 

Senior notes

 

2,350,000

 

2,700,000

 

Other long-term debt

 

38,324

 

40,206

 

Total long-term debt

 

2,619,574

 

2,977,706

 

 

 

 

 

 

 

Deferred income taxes

 

567,754

 

542,033

 

Other liabilities

 

16,147

 

18,839

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interests

 

125,972

 

126,340

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 261,904,809, and 261,420,126 shares issued; and 242,055,377, and 241,449,423 shares outstanding, as of June 30, 2015 and December 31, 2014, respectively

 

636

 

635

 

Treasury stock, at cost; 19,849,432, and 19,970,703 shares, as of June 30, 2015 and December 31, 2014, respectively

 

(396,491

)

(398,898

)

Additional paid-in capital

 

1,099,669

 

1,083,435

 

Retained earnings

 

2,223,599

 

2,227,843

 

Total Steel Dynamics, Inc. equity

 

2,927,413

 

2,913,015

 

Noncontrolling interests

 

(128,685

)

(117,488

)

Total equity

 

2,798,728

 

2,795,527

 

Total liabilities and equity

 

$

6,826,763

 

$

7,311,027

 

 

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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,945,983

 

$

1,987,635

 

$

3,949,956

 

$

3,753,516

 

Related parties

 

59,024

 

82,126

 

102,486

 

146,327

 

Total net sales

 

2,005,007

 

2,069,761

 

4,052,442

 

3,899,843

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,833,264

 

1,846,990

 

3,693,657

 

3,513,768

 

Gross profit

 

171,743

 

222,771

 

358,785

 

386,075

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

82,660

 

73,463

 

159,010

 

143,505

 

Profit sharing

 

5,031

 

10,469

 

9,629

 

15,864

 

Amortization of intangible assets

 

6,493

 

6,934

 

12,816

 

13,869

 

Operating income

 

77,559

 

131,905

 

177,330

 

212,837

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

37,163

 

30,050

 

80,250

 

60,619

 

Other expense (income), net

 

(1,212

)

(1,754

)

14,980

 

(2,385

)

Income before income taxes

 

41,608

 

103,609

 

82,100

 

154,603

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

16,283

 

37,268

 

29,821

 

54,564

 

 

 

 

 

 

 

 

 

 

 

Net income

 

25,325

 

66,341

 

52,279

 

100,039

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

6,225

 

5,962

 

10,032

 

10,843

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Steel Dynamics, Inc.

 

$

31,550

 

$

72,303

 

$

62,311

 

$

110,882

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.13

 

$

0.32

 

$

.26

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

241,900

 

226,220

 

241,718

 

224,615

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.13

 

0.31

 

$

.26

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

243,491

 

242,048

 

243,179

 

241,721

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.1375

 

$

0.1150

 

$

.2750

 

$

0.2300

 

 

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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

25,325

 

$

66,341

 

$

52,279

 

$

100,039

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

74,273

 

58,441

 

147,095

 

116,009

 

Equity-based compensation

 

6,357

 

4,700

 

14,900

 

10,468

 

Deferred income taxes

 

16,367

 

(280

)

33,084

 

(4,371

)

Loss on disposal of property, plant and equipment

 

998

 

3,456

 

5,983

 

6,097

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(47,149

)

(99,696

)

85,935

 

(188,646

)

Inventories

 

161,174

 

11,230

 

326,173

 

(6,124

)

Other assets

 

7,386

 

345

 

11,894

 

7,704

 

Accounts payable

 

62,735

 

13,385

 

(64,318

)

18,426

 

Income taxes receivable/payable

 

(6,844

)

(4,964

)

9,421

 

14,429

 

Accrued expenses and liabilities

 

8,590

 

23,056

 

(78,527

)

(25,264

)

Net cash provided by operating activities

 

309,212

 

76,014

 

543,919

 

48,767

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(22,821

)

(33,534

)

(56,172

)

(58,375

)

Other investing activities

 

806

 

2,314

 

2,469

 

31,198

 

Net cash used in investing activities

 

(22,015

)

(31,220

)

(53,703

)

(27,177

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

60,941

 

63,945

 

111,034

 

107,398

 

Repayment of current and long-term debt

 

(60,557

)

(76,412

)

(488,008

)

(132,658

)

Exercise of stock options proceeds, including related tax effect

 

5,206

 

8,516

 

6,959

 

11,421

 

Contributions from noncontrolling investors, net

 

(1,135

)

(606

)

(1,164

)

4,764

 

Dividends paid

 

(33,233

)

(25,666

)

(60,999

)

(50,181

)

Net cash used in financing activities

 

(28,778

)

(30,223

)

(432,178

)

(59,256

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

258,419

 

14,571

 

58,038

 

(37,666

)

Cash and equivalents at beginning of period

 

160,982

 

342,919

 

361,363

 

395,156

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

419,401

 

$

357,490

 

$

419,401

 

$

357,490

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

48,550

 

$

20,838

 

$

88,644

 

$

60,501

 

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

 

$

7,046

 

$

43,008

 

$

(11,493

)

$

45,151

 

 

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 Butler Flat Roll Division, Columbus Flat Roll Division (acquired September 16, 2014), The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, and Steel of West Virginia. These operations consist of electric arc furnace steel mills, producing steel from ferrous scrap, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. Steel operations accounted for 69% and 61% of the company’s consolidated external net sales during the three-month periods ended June 30, 2015 and 2014, and 68% and 61% of the company’s consolidated external net sales during the six-month periods ended June 30, 2015 and 2014, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations primarily include OmniSource Corporation (OmniSource), the company’s metals recycling and processing locations, ferrous scrap procurement, and an ironmaking facility, Iron Dynamics (IDI), a liquid pig iron production facility. Our other ironmaking operations located in Minnesota were indefinitely idled in May 2015, due to a significant and sustained decline in global pig iron pricing, which resulted in the cost of iron nugget production being higher than product selling values. Metals recycling and ferrous resources operations accounted for 23% and 31% of the company’s consolidated external net sales during the three-month periods ended June 30, 2015, and 2014, and 23% and 31% of the company’s consolidated external net sales during the six-month periods ended June 30, 2015 and 2014,  respectively.

 

Steel Fabrication Operations.  Steel fabrication operations include the company’s six New Millennium Building Systems’ joist and deck 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 8% and 7% of the company’s consolidated external net sales during the three-month periods ended June 30, 2015, and 2014, and 8% and 6% of the company’s consolidated external net sales during the six-month periods ended June 30, 2015 and 2014, 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; unrecognized 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, 2014.

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at June 30, 2015, and December 31, 2014, (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

OmniSource — Metals Recycling/Ferrous Resources Segment

 

$

453,467

 

$

456,727

 

The Techs — Steel Segment

 

142,783

 

142,783

 

Butler Flat Roll Division, Structural and Rail Division, and Engineered Bar Division — Metals Recycling and Ferrous Resources Segment

 

95,000

 

95,000

 

Roanoke Bar Division — Steel Segment

 

29,041

 

29,041

 

Columbus Flat Roll Division — Steel Segment

 

19,682

 

19,682

 

New Millennium Building Systems — Fabrication Segment

 

1,925

 

1,925

 

 

 

$

741,898

 

$

745,158

 

 

OmniSource goodwill decreased $3.3 million from December 31, 2014 to June 30, 2015, in recognition of the 2015 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 1.  Description of the Business and Significant Accounting Policies (continued)

 

Recently Issued Accounting Standards.

 

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition.  The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Because the guidance in ASC 606 is principles-based, it can be applied to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Additionally, ASC 606 requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. This guidance is effective, as deferred by the FASB on July 9, 2015, for annual and interim periods ending after December 15, 2017, but can be early adopted for annual and interim periods ending after December 15, 2016. The company is currently evaluating the impact of the provisions of ASC 606, including the timing of adoption.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern), effective for annual and interim periods ending after December 15, 2016. ASU 2014-15 requires management to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. There are required disclosures if principal conditions or events are identified that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans), as well as management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. This ASU is not expected to have any impact on our overall results of operations, financial position or cash flows.

 

In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented as a deduction from the corresponding debt liability, rather than as a separate asset, which is the current accounting method of the company. Implementation of this new guidance is required by the company in the first quarter of 2016, but can be early adopted. Upon adoption, the company must apply the new guidance retrospectively to all prior periods presented in the financial statements. The company is currently evaluating when, and the manner in which to adopt the presentation and disclosure requirements of the new guidance, however we do not expect it to have any impact on our overall results of operations, equity or cash flows as previously reported.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market.  This new guidance is effective for interim and annual periods beginning after December 15, 2016, but can be early adopted. The company is currently evaluating the impact of this ASU’s adoption.

 

Note 2.  Acquisition

 

The company completed its acquisition of 100% of Severstal Columbus, LLC (Columbus) on September 16, 2014, for a purchase price of $1.625 billion, with additional working capital adjustments of $44.4 million. The acquisition was funded through the issuance of $1.2 billion in Senior Notes, borrowings under the company’s senior secured credit facility, and available cash. The company purchased Columbus to significantly expand and diversify its steel operating base with the addition of 3.4 million tons of hot roll steel production capacity. The product offerings are diversified with respect to width, gauge, and strength when compared to the capabilities of our Butler Flat Roll Division. Located in northeast Mississippi, Columbus is one of the newest and most technologically advanced sheet steel electric arc furnace mills in North America. Additionally, Columbus is advantageously located to serve the growing markets in the southern U.S. and Mexico, providing the company with geographic diversification and growth opportunities.

 

Unaudited Proforma Information.  Columbus’ operating results have been reflected in the company’s financial statements since the effective date of the acquisition, September 16, 2014, in the steel operations reporting segment. The following unaudited pro forma information is presented below for comparison purposes as if the Columbus acquisition was completed as of January 1, 2013, (in thousands):

 

 

 

Six Months Ended 

 

 

 

June 30, 2014

 

Net sales

 

$

4,985,410

 

Net income attributable to Steel Dynamics, Inc.

 

161,119

 

 

The information presented is for information purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at January 1, 2013, nor is it necessarily indicative of future operating results of the combined companies under the ownership and management of the company. The pro forma results reflect the pre-acquisition operations of Columbus for the six-month period ended June 30, 2014.

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 3.  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 stock units, deferred stock units, and dilutive shares related to the company’s convertible subordinated debt; and are excluded from the computation in periods in which they have an anti-dilutive effect. There were no anti-dilutive options at June 30, 2015, and 2014.

 

The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three- and six-month periods ended June 30, 2015 and 2014 (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

31,550

 

241,900

 

$

.13

 

$

72,303

 

226,220

 

$

.32

 

Dilutive common share equivalents

 

 

1,591

 

 

 

 

1,789

 

 

 

5.125% Convertible Senior Notes, net of tax

 

 

 

 

 

1,969

 

14,039

 

 

 

Diluted earnings per share

 

$

31,550

 

243,491

 

$

.13

 

$

74,272

 

242,048

 

$

.31

 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

62,311

 

241,718

 

$

.26

 

$

110,882

 

224,615

 

$

.49

 

Dilutive common share equivalents

 

 

1,461

 

 

 

 

1,699

 

 

 

5.125% convertible senior notes, net of tax

 

 

 

 

 

4,327

 

15,407

 

 

 

Diluted earnings per share

 

$

62,311

 

243,179

 

$

.26

 

$

115,209

 

241,721

 

$

.48

 

 

Note 4.  Inventories

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Raw materials

 

$

518,096

 

$

764,883

 

Supplies

 

385,728

 

374,599

 

Work in progress

 

110,750

 

128,882

 

Finished goods

 

277,495

 

350,055

 

Total inventories

 

$

1,292,069

 

$

1,618,419

 

 

During the second quarter 2015, the company recorded an inventory lower-of-cost or market charge of $21.0 million (inclusive of noncontrolling interests of $3.6 million), related to the idling of its Minnesota ironmaking operations. The expense is recorded within cost of goods sold during the three- and six-months ended June 30, 2015.

 

Note 5.  Debt

 

On March 16, 2015, the company called and repaid all $350.0 million of its outstanding 7 5/8% Senior Notes due 2020 (the “Notes”) at a redemption price of 103.813% of the principal amount of the Notes, plus accrued interest and unpaid interest to, but not including, the date of redemption. Associated premiums and the write off of deferred financing costs of approximately $16.7 million were recorded in other expense in conjunction with the redemption.

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  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, 2015

 

$

635

 

$

1,083,435

 

$

2,227,843

 

$

(398,898

)

$

(117,488

)

$

2,795,527

 

$

126,340

 

Exercise of stock options proceeds, including related tax effect

 

1

 

7,153

 

 

 

 

7,154

 

 

Dividends declared

 

 

 

(66,515

)

 

 

(66,515

)

 

Distributions to noncontrolling investors, net

 

 

 

 

 

(1,165

)

(1,165

)

(368

)

Equity-based compensation

 

 

9,081

 

(40

)

2,407

 

 

11,448

 

 

Comprehensive and net income (loss)

 

 

 

62,311

 

 

(10,032

)

52,279

 

 

Balances at June 30, 2015

 

$

636

 

$

1,099,669

 

$

2,223,599

 

$

(396,491

)

$

(128,685

)

$

2,798,728

 

$

125,972

 

 

Note 7.  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. 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.

 

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 a futures contract, 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, 2015 (MT represents metric tons and Lbs represents pounds):

 

Commodity Futures

 

Long/Short

 

Total

 

 

 

Aluminum

 

Long

 

2,825

 

MT

 

Aluminum

 

Short

 

3,275

 

MT

 

Copper

 

Long

 

8,912

 

MT

 

Copper

 

Short

 

16,041

 

MT

 

Silver

 

Short

 

343

 

Lbs

 

 

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of June 30, 2015, and December 31, 2014, and gains and losses related to derivatives included in the company’s statement of income for the three- and six-month periods ended June 30, 2015, and 2014 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

Fair Value

 

 

 

Balance sheet location

 

June 30, 2015

 

December 31, 2014

 

June 30, 2015

 

December 31, 2014

 

Derivative instruments designated as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

2,508

 

$

3,180

 

$

1,479

 

$

913

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

1,964

 

2,132

 

1,974

 

626

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

4,472

 

$

5,312

 

$

3,453

 

$

1,539

 

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Derivative Financial Instruments (continued)

 

The fair value of the above derivative instruments, along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $6.4 million at June 30, 2015, and $7.6 million at December 31, 2014, are reflected in other current assets in the consolidated balance sheet.

 

 

 

 

Location of gain
(loss) recognized

 

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

 

Hedged items in

 

Location of gain
(loss) recognized

 

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

 

 

 

in income on
derivatives

 

June 30,
2015

 

June 30,
2014

 

fair value hedge
relationships

 

in income on related
hedged items

 

June 30,
2015

 

June 30,
2014

 

Derivatives in fair value hedging relationships - Commodity futures

 

Costs of goods sold

 

$

3,075

 

$

(2,632

)

Firm commitments

 

Costs of goods sold

 

$

362

 

$

(653

)

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

(2,165

)

2,846

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,803

)

$

2,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments - Commodity futures

 

Costs of goods sold

 

$

(326

)

$

(2,030

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of gain
(loss) recognized

 

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

 

Hedged items in

 

Location of gain
recognized in

 

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

 

 

 

in income on
derivatives

 

June 30,
2015

 

June 30,
2014

 

fair value hedge
relationships

 

income on related
hedged items

 

June 30,
2015

 

June 30,
2014

 

Derivatives in fair value hedging relationships - Commodity futures

 

Costs of goods sold

 

$

(1,238

)

$

(1,015

)

Firm commitments

 

Costs of goods sold

 

$

856

 

$

331

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

491

 

358

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,347

 

$

689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments - Commodity futures

 

Costs of goods sold

 

$

6,670

 

$

5,926

 

 

 

 

 

 

 

 

 

 

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $20,000 and $160,000 during the three-month periods ended June 30, 2015, and 2014, respectively; and gains of $127,000 and $456,000 during the six-month periods ended June 30, 2015 and 2014, respectively. Gains excluded from hedge effectiveness testing of $1,252,000 reduced cost of goods sold during the three-month period ended June 30, 2015, and losses of $599,000 increased costs of goods sold during the three-month period ended June 30, 2014. Losses of $18,000 and $782,000 increased cost of goods sold during the six-month periods ended June 30, 2015 and 2014, respectively.

 

Note 8.  Fair Value Measurements

 

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

 

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

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

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

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  Fair Value Measurements (continued)

 

The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of June 30, 2015, and December 31, 2014 (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, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

4,472

 

$

 

$

4,472

 

$

 

Commodity futures — financial liabilities

 

3,453

 

 

3,453

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

5,312

 

$

 

$

5,312

 

$

 

Commodity futures — financial liabilities

 

1,539

 

 

1,539

 

 

 

The carrying amounts of financial instruments including cash and equivalents approximate fair value. The fair values of commodity futures 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 $2.7 billion and $3.1 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.7 billion and $3.0 billion) at June 30, 2015, and December 31, 2014, respectively.

 

Note 9.  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 other steel manufacturing companies, in several class action antitrust complaints pending in federal court in Chicago, Illinois, which allege a conspiracy to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a period between 2005 and 2007, by artificially restricting the supply of such steel products. One of the complaints was brought on behalf of a purported class consisting of all direct purchasers of steel products.  A second complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period.  An additional complaint was brought in December 2010, on behalf of indirect purchasers of steel products in Tennessee and has been consolidated with the original complaints.  All complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  Plaintiffs filed a 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. A hearing on class certification was held on March 5 – 7 and April 11, 2014, and the matter remains under advisement. It’s unclear when the court will issue its ruling on class certification.

 

Due to the uncertain nature of litigation, the company 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.

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information

 

The company has three reportable segments: steel operations (includes Columbus since its September 16, 2014 acquisition), metals recycling and ferrous resources operations, and steel fabrication operations.  Columbus is reported in the steel operations reporting segment from its September 16, 2014, acquisition date. The segment 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 facility, 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 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, 2014, 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, 2015, and 2014, are as follows (in thousands):

 

For the three months ended

 

 

 

Steel Operations

 

Metals Recycling and
Ferrous Resources
Operations

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,303,278

 

$

416,525

 

$

154,513

 

$

13,044

 

$

 

$

1,887,360

 

External Non-U.S.

 

72,399

 

45,108

 

 

140

 

 

117,647

 

Other segments

 

53,560

 

218,480

 

12

 

5,973

 

(278,025

)

 

 

 

1,429,237

 

680,113

 

154,525

 

19,157

 

(278,025

)

2,005,007

 

Operating income (loss)

 

107,761

 

(35,182

)

27,660

 

(18,191

)(1)

(4,489

)(2)

77,559

 

Income (loss) before income taxes

 

86,039

 

(40,312

)

25,879

 

(25,508

)

(4,490

)

41,608

 

Depreciation and amortization

 

49,171

 

21,775

 

2,158

 

1,221

 

(52

)

74,273

 

Capital expenditures

 

9,762

 

12,121

 

534

 

404

 

 

22,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

4,023,351

 

2,023,082

 

295,642

 

693,993

(3)

(209,305

)(4)

6,826,763

 

Liabilities

 

710,780

 

541,396

 

57,566

 

2,792,947

(5)

(200,626

)(6)

3,902,063

 

 


Footnotes related to the three months ended June 30, 2015 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(8.1

)

 

 

Company-wide equity-based compensation

 

(6.3

)

 

 

Profit sharing

 

(3.5

)

 

 

Other, net

 

(0.3

)

 

 

 

 

$

(18.2

)

 

 

 

 

 

 

(2)

 

Gross profit decrease from intra-company sales

 

$

(4.5

)

 

 

 

 

 

 

(3)

 

Cash and equivalents

 

$

355.6

 

 

 

Accounts receivable

 

8.4

 

 

 

Inventories

 

12.3

 

 

 

Deferred income taxes

 

31.4

 

 

 

Property, plant and equipment, net

 

67.1

 

 

 

Debt issuance costs

 

35.6

 

 

 

Intra-company debt

 

146.6

 

 

 

Other

 

37.0

 

 

 

 

 

$

694.0

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(53.1

)

 

 

Elimination of intra-company debt

 

(146.6

)

 

 

Other

 

(9.6

)

 

 

 

 

$

(209.3

)

 

 

 

 

 

 

(5)

 

Accounts payable

 

$

47.8

 

 

 

Income taxes payable

 

2.6

 

 

 

Accrued interest

 

38.8

 

 

 

Accrued profit sharing

 

7.0

 

 

 

Debt

 

2,597.0

 

 

 

Deferred income taxes

 

79.2

 

 

 

Other

 

20.5

 

 

 

 

 

$

2,792.9

 

 

 

 

 

 

 

(6)

 

Elimination of intra-company payables

 

$

(53.5

)

 

 

Elimination of intra-company debt

 

(146.6

)

 

 

Other

 

(0.5

)

 

 

 

 

$

(200.6

)

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)

 

For the three months ended

 

 

 

Steel Operations

 

Metals Recycling and
Ferrous Resources
Operations

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,214,247

 

$

587,385

 

$

134,852

 

$

24,181

 

$

 

$

1,960,665

 

External Non-U.S.

 

50,857

 

57,831

 

 

408

 

 

109,096

 

Other segments

 

69,802

 

303,617

 

 

7,309

 

(380,728

)

 

 

 

1,334,906

 

948,833

 

134,852

 

31,898

 

(380,728

)

2,069,761

 

Operating income (loss)

 

155,949

 

(6,053

)

7,590

 

(24,159

)(1)

(1,422

)(2)

131,905

 

Income (loss) before income taxes

 

142,594

 

(12,634

)

6,099

 

(31,028

)

(1,422

)

103,609

 

Depreciation and amortization

 

28,869

 

25,870

 

2,401

 

1,352

 

(51

)

58,441

 

Capital expenditures

 

16,332

 

16,384

 

536

 

282

 

 

33,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,732,388

 

2,551,899

 

297,149

 

624,518

(3)

(220,752

)(4)

5,985,202

 

Liabilities

 

578,124

 

640,459

 

20,879

 

1,996,306

(5)

(209,776

)(6)

3,025,992

 

 


Footnotes related to the three months ended June 30, 2014 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(11.0

)

 

 

Company-wide equity-based compensation

 

(4.7

)

 

 

Profit sharing

 

(8.9

)

 

 

Other, net

 

0.4

 

 

 

 

 

$

(24.2

)

 

 

 

 

 

 

(2)

 

Gross profit decrease from intra-company sales

 

$

 (1.4

)

 

 

 

 

 

 

(3)

 

Cash and equivalents

 

$

299.9

 

 

 

Accounts receivable

 

14.4

 

 

 

Inventories

 

12.4

 

 

 

Deferred income taxes

 

17.7

 

 

 

Property, plant and equipment, net

 

70.9

 

 

 

Debt issuance costs

 

22.9

 

 

 

Intra-company debt

 

158.1

 

 

 

Other

 

28.2

 

 

 

 

 

$

624.5

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(52.0

)

 

 

Elimination of intra-company debt

 

(158.1

)

 

 

Other

 

(10.7

)

 

 

 

 

$

(220.8

)

 

 

 

 

 

 

(5)

 

Accounts payable

 

$

46.0

 

 

 

Income taxes payable

 

19.4

 

 

 

Accrued interest

 

30.5

 

 

 

Accrued profit sharing

 

13.6

 

 

 

Debt

 

1,737.0

 

 

 

Deferred income taxes

 

120.5

 

 

 

Other

 

29.3

 

 

 

 

 

$

1,996.3

 

 

 

 

 

 

 

(6)

 

Elimination of intra-company payables

 

$

(52.4

)

 

 

Elimination of intra-company debt

 

(158.1

)

 

 

Other

 

0.7

 

 

 

 

 

$

(209.8

)

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)

 

For the six months ended

 

 

 

Steel Operations

 

Metals Recycling and
Ferrous Resources
Operations

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,616,704

 

$

843,936

 

$

315,537

 

$

35,158

 

$

 

$

3,811,335

 

External Non-U.S.

 

144,392

 

96,411

 

 

304

 

 

241,107

 

Other segments

 

102,463

 

445,558

 

16

 

12,662

 

(560,699

)

 

 

 

2,863,559

 

1,385,905

 

315,553

 

48,124

 

(560,699

)

4,052,442

 

Operating income (loss)

 

219,301

 

(52,248

)

49,021

 

(38,111

)(1)

(633

)(2)

177,330

 

Income (loss) before income taxes

 

171,945

 

(64,982

)

45,473

 

(69,702

)

(634

)

82,100

 

Depreciation and amortization

 

97,785

 

42,613

 

4,388

 

2,411

 

(102

)

147,095

 

Capital expenditures

 

24,448

 

29,779

 

1,571

 

374

 

 

56,172

 

 


Footnotes related to the six months ended June 30, 2015 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(17.5

)

 

 

Company-wide equity-based compensation

 

(12.2

)

 

 

Profit sharing

 

(7.0

)

 

 

Other, net

 

(1.4

)

 

 

Total

 

$

(38.1

)

 

 

 

 

 

 

(2) 

 

Gross profit decrease from intra-company sales

 

$

(0.6

)

 

For the six months ended

 

 

 

Steel Operations

 

Metals Recycling and
Ferrous Resources
Operations

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,275,326

 

$

1,105,342

 

$

250,713

 

$

44,802

 

$

 

$

3,676,183

 

External Non-U.S.

 

107,376

 

115,648

 

 

636

 

 

223,660

 

Other segments

 

113,534

 

647,545

 

 

13,982

 

(775,061

)

 

 

 

2,496,236

 

1,868,535

 

250,713

 

59,420

 

(775,061

)

3,899,843

 

Operating income (loss)

 

261,592

 

(21,572

)

10,716

 

(40,704

)(1)

2,805

(2)

212,837

 

Income (loss) before income taxes

 

234,592

 

(35,330

)

7,751

 

(55,215

)

2,805

 

154,603

 

Depreciation and amortization

 

56,246

 

52,491

 

4,623

 

2,751

 

(102

)

116,009

 

Capital expenditures

 

34,938

 

22,163

 

847

 

427

 

 

58,375

 

 


Footnotes related to the six months ended June 30, 2014 segment results (in millions):

 

(1) 

 

Corporate SG&A

 

$

(19.3

)

 

 

Company-wide equity-based compensation

 

(9.3

)

 

 

Profit sharing

 

(13.6

)

 

 

Other, net

 

1.5

 

 

 

Total

 

$

(40.7

)

 

 

 

 

 

 

(2) 

 

Gross profit increase from intra-company sales

 

$

2.8

 

 

12



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  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 unsecured notes due 2019, 2021, 2022, 2023 and 2024. 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, which includes Columbus since acquired on September 16, 2014, (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, 2014.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

As of June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

351,996

 

$

55,586

 

$

11,819

 

$

 

$

419,401

 

Accounts receivable, net

 

262,708

 

1,182,293

 

36,919

 

(665,398

)

816,522

 

Inventories

 

590,104

 

658,048

 

47,494

 

(3,577

)

1,292,069

 

Other current assets

 

69,807

 

7,343

 

4,436

 

(18,186

)

63,400

 

Total current assets

 

1,274,615

 

1,903,270

 

100,668

 

(687,161

)

2,591,392

 

Property, plant and equipment, net

 

979,749

 

1,769,536

 

300,229

 

(2,113

)

3,047,401

 

Intangible assets, net

 

 

358,402

 

 

 

358,402

 

Goodwill

 

 

741,898

 

 

 

741,898

 

Other assets, including investments in subs

 

3,573,407

 

23,085

 

6,491

 

(3,515,313

)

87,670

 

Total assets

 

$

5,827,771

 

$

4,796,191

 

$

407,388

 

$

(4,204,587

)

$

6,826,763

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

140,249

 

$

314,074

 

$

89,416

 

$

(97,041

)

$

446,698

 

Accrued expenses

 

126,025

 

168,859

 

6,484

 

(84,553

)

216,815

 

Current maturities of long-term debt

 

13,097

 

809

 

61,445

 

(40,276

)

35,075

 

Total current liabilities

 

279,371

 

483,742

 

157,345

 

(221,870

)

698,588

 

Long-term debt

 

2,585,806

 

224

 

167,639

 

(134,095

)

2,619,574

 

Other liabilities

 

35,181

 

1,505,382

 

35,490

 

(992,152

)

583,901

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

125,972

 

 

125,972

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

636

 

1,727,859

 

18,121

 

(1,745,980

)

636

 

Treasury stock

 

(396,491

)

 

 

 

(396,491

)

Additional paid-in-capital

 

1,099,669

 

117,737

 

641,858

 

(759,595

)

1,099,669

 

Retained earnings (deficit)

 

2,223,599

 

961,247

 

(610,352

)

(350,895

)

2,223,599

 

Total Steel Dynamics, Inc. equity

 

2,927,413

 

2,806,843

 

49,627

 

(2,856,470

)

2,927,413

 

Noncontrolling interests

 

 

 

(128,685

)

 

(128,685

)

Total equity

 

2,927,413

 

2,806,843

 

(79,058

)

(2,856,470

)

2,798,728

 

Total liabilities and equity

 

$

5,827,771

 

$

4,796,191

 

$

407,388

 

$

(4,204,587

)

$

6,826,763

 

 

13



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

265,313

 

$

81,690

 

$

14,360

 

$

 

$

361,363

 

Accounts receivable, net

 

321,493

 

1,176,849

 

44,696

 

(640,213

)

902,825

 

Inventories

 

662,970

 

862,796

 

94,916

 

(2,263

)

1,618,419

 

Other current assets

 

94,634

 

8,416

 

6,577

 

(18,469

)

91,158

 

Total current assets

 

1,344,410

 

2,129,751

 

160,549

 

(660,945

)

2,973,765

 

Property, plant and equipment, net

 

1,002,407

 

1,826,208

 

297,505

 

(2,214

)

3,123,906

 

Intangible assets, net

 

 

370,669

 

 

 

370,669

 

Goodwill

 

 

745,158

 

 

 

745,158

 

Other assets, including investments in subs

 

3,900,691

 

24,810

 

6,635

 

(3,834,607

)

97,529

 

Total assets

 

$

6,247,508

 

$

5,096,596

 

$

464,689

 

$

(4,497,766

)

$

7,311,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

151,517

 

$

371,037

 

$

98,886

 

$

(110,384

)

$

511,056

 

Accrued expenses

 

191,433

 

166,101

 

11,695

 

(76,163

)

293,066

 

Current maturities of long-term debt

 

13,073

 

777

 

73,767

 

(41,157

)

46,460

 

Total current liabilities

 

356,023

 

537,915

 

184,348

 

(227,704

)

850,582

 

Long-term debt

 

2,942,360

 

624

 

158,665

 

(123,943

)

2,977,706

 

Other liabilities

 

36,110

 

1,807,989

 

28,719

 

(1,311,946

)

560,872

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

126,340

 

 

126,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

635

 

1,727,859

 

18,121

 

(1,745,980

)

635

 

Treasury stock

 

(398,898

)

 

 

 

(398,898

)

Additional paid-in-capital

 

1,083,435

 

117,737

 

635,156

 

(752,893

)

1,083,435

 

Retained earnings (deficit)

 

2,227,843

 

904,472

 

(569,172

)

(335,300

)

2,227,843

 

Total Steel Dynamics, Inc. equity

 

2,913,015

 

2,750,068

 

84,105

 

(2,834,173

)

2,913,015

 

Noncontrolling interests

 

 

 

(117,488

)

 

(117,488

)

Total equity

 

2,913,015

 

2,750,068

 

(33,383

)

(2,834,173

)

2,795,527

 

Total liabilities and equity

 

$

6,247,508

 

$

5,096,596

 

$

464,689

 

$

(4,497,766

)

$

7,311,027

 

 

14



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

Condensed Consolidating Statements of Operations (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

For the three months ended, June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

766,056

 

$

2,153,141

 

$

101,880

 

$

(1,016,070

)

$

2,005,007

 

Costs of goods sold

 

669,259

 

2,019,025

 

134,335

 

(989,355

)

1,833,264

 

Gross profit (loss)

 

96,797

 

134,116

 

(32,455

)

(26,715

)

171,743

 

Selling, general and administrative

 

29,905

 

65,736

 

2,668

 

(4,125

)

94,184

 

Operating income (loss)

 

66,892

 

68,380

 

(35,123

)

(22,590

)

77,559

 

Interest expense, net of capitalized interest

 

18,166

 

18,376

 

1,658

 

(1,037

)

37,163

 

Other (income) expense, net

 

(773

)

(654

)

(822

)

1,037

 

(1,212

)

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

 

49,499

 

50,658

 

(35,959

)

(22,590

)

41,608

 

Income taxes (benefit)

 

8,097

 

19,172

 

(2,510

)

(8,476

)

16,283

 

 

 

41,402

 

31,486

 

(33,449

)

(14,114

)

25,325

 

Equity in net loss of subsidiaries

 

(9,852

)

 

 

9,852

 

 

Net loss attributable to noncontrolling interests

 

 

 

6,225

 

 

6,225

 

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

 

$

31,550

 

$

31,486

 

$

(27,224

)

$

(4,262

)

$

31,550

 

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

For the three months ended, June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,007,569

 

$

2,313,459

 

$

121,239

 

$

(1,372,506

)

$

2,069,761

 

Costs of goods sold

 

860,024

 

2,183,181

 

141,362

 

(1,337,577

)

1,846,990

 

Gross profit (loss)

 

147,545

 

130,278

 

(20,123

)

(34,929

)

222,771

 

Selling, general and administrative

 

35,419

 

56,411

 

3,406

 

(4,370

)

90,866

 

Operating income (loss)

 

112,126

 

73,867

 

(23,529

)

(30,559

)

131,905

 

Interest expense, net of capitalized interest

 

19,031

 

10,294

 

1,986

 

(1,261

)

30,050

 

Other (income) expense, net

 

(1,556

)

(46

)

(1,412

)

1,260

 

(1,754

)

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

 

94,651

 

63,619

 

(24,103

)

(30,558

)

103,609

 

Income taxes (benefit)

 

23,950

 

23,076

 

814

 

(10,572

)

37,268

 

 

 

70,701

 

40,543

 

(24,917

)

(19,986

)

66,341

 

Equity in net loss of subsidiaries

 

1,602

 

 

 

(1,602

)

 

Net loss attributable to noncontrolling interests

 

 

 

5,962

 

 

5,962

 

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

 

$

72,303

 

$

40,543

 

$

(18,955

)

$

(21,588

)

$

72,303

 

 

15



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

For the six months ended, June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,564,774

 

$

4,344,150

 

$

206,453

 

$

(2,062,935

)

$

4,052,442

 

Costs of goods sold

 

1,362,834

 

4,091,150

 

253,116

 

(2,013,443

)

3,693,657

 

Gross profit (loss)

 

201,940

 

253,000

 

(46,663

)

(49,492

)

358,785

 

Selling, general and administrative

 

60,648

 

123,769

 

6,033

 

(8,995

)

181,455

 

Operating income (loss)

 

141,292

 

129,231

 

(52,696

)

(40,497

)

177,330

 

Interest expense, net of capitalized interest

 

38,703

 

40,216

 

3,392

 

(2,061

)

80,250

 

Other (income) expense, net

 

14,879

 

34

 

(1,994

)

2,061

 

14,980

 

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

 

87,710

 

88,981

 

(54,094

)

(40,497

)

82,100

 

Income taxes (benefit)

 

15,038

 

32,206

 

(3,626

)

(13,797

)

29,821

 

 

 

72,672

 

56,775

 

(50,468

)

(26,700

)

52,279

 

Equity in net loss of subsidiaries

 

(10,361

)

 

 

10,361

 

 

Net loss attributable to noncontrolling interests

 

 

 

10,032

 

 

10,032

 

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

 

$

62,311

 

$

56,775

 

$

(40,436

)

$

(16,339

)

$

62,311

 

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

For the six months ended, June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,871,132

 

$

4,425,848

 

$

227,088

 

$

(2,624,225

)

$

3,899,843

 

Costs of goods sold

 

1,621,419

 

4,198,757

 

264,935

 

(2,571,343

)

3,513,768

 

Gross profit (loss)

 

249,713

 

227,091

 

(37,847

)

(52,882

)

386,075

 

Selling, general and administrative

 

64,253

 

110,700

 

6,814

 

(8,529

)

173,238

 

Operating income (loss)

 

185,460

 

116,391

 

(44,661

)

(44,353

)

212,837

 

Interest expense, net of capitalized interest

 

38,392

 

20,855

 

3,866

 

(2,494

)

60,619

 

Other (income) expense, net

 

(2,532

)

349

 

(2,696

)

2,494

 

(2,385

)

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

 

149,600

 

95,187

 

(45,831

)

(44,353

)

154,603

 

Income taxes (benefit)

 

33,875

 

34,018

 

1,510

 

(14,839

)

54,564

 

 

 

115,725

 

61,169

 

(47,341

)

(29,514

)

100,039

 

Equity in net loss of subsidiaries

 

(4,843

)

 

 

4,843

 

 

Net loss attributable to noncontrolling interests

 

 

 

10,843

 

 

10,843

 

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

 

$

110,882

 

$

61,169

 

$

(36,498

)

$

(24,671

)

$

110,882

 

 

16



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

Condensed Consolidating Statements of Cash Flows (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended, June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

212,624

 

$

322,486

 

$

246

 

$

8,563

 

$

543,919

 

Net cash used in investing activities

 

(31,419

)

(18,495

)

(13,260

)

9,471

 

(53,703

)

Net cash provided by (used in) financing activities

 

(94,522

)

(330,095

)

10,473

 

(18,034

)

(432,178

)

Increase (decrease) in cash and equivalents

 

86,683

 

(26,104

)

(2,541

)

 

58,038

 

Cash and equivalents at beginning of period

 

265,313

 

81,690

 

14,360

 

 

361,363

 

Cash and equivalents at end of period

 

$

351,996

 

$

55,586

 

$

11,819

 

$

 

$

419,401

 

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended, June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

94,219

 

$

(19,938

)

$

(23,559

)

$

(1,955

)

$

48,767

 

Net cash used in investing activities

 

(34,747

)

(10,007

)

(13,076

)

30,653

 

(27,177

)

Net cash provided by (used in) financing activities

 

(83,113

)

19,258

 

33,297

 

(28,698

)

(59,256

)

Decrease in cash and equivalents

 

(23,641

)

(10,687

)

(3,338

)

 

(37,666

)

Cash and equivalents at beginning of period

 

320,866

 

61,148

 

13,142

 

 

395,156

 

Cash and equivalents at end of period

 

$

297,225

 

$

50,461

 

$

9,804

 

$

 

$

357,490

 

 

17



Table of Contents

 

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

 

Forward-Looking Statements

 

This report contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap 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, incorporated in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve both known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of uncertain economic conditions; (2) cyclical and changing industrial demand; (3) changes in conditions in any of the steel or scrap-consuming sectors of the economy which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials (including ferrous scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses; (7) risks and uncertainties involving product and/or technology development; and (8) occurrences of unexpected plant outages or equipment failures.

 

More specifically, we refer you to our more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth in our most recent Annual Report on Form 10-K for the year ended December 31, 2014, in our quarterly reports on Form 10-Q or in other reports which we from time to time file with the Securities and Exchange Commission. These reports are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on our website, www.steeldynamics.com.

 

Description of the Business

 

We are a domestic manufacturer of steel products and metals recycler. We have three reporting segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.

 

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 methodology based on steel tons used on completed units to date as a percentage of estimated total steel tons 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, company-wide 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 income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs, such as acquisition and certain financing expenses.

 

18



Table of Contents

 

Results Overview

 

Consolidated operating income decreased $54.3 million, or 41%, to $77.6 million for the second quarter of 2015, compared to $131.9 million for the second quarter of 2014. Second quarter of 2015 net income decreased $40.7 million, or 56%, to $31.6 million, from $72.3 million for the second quarter of 2014.

 

For the first half of 2015, operating income decreased $35.5 million, or 17%, to $177.3 million compared to the same period of 2014, while net income decreased $48.6 million, or 44%, to $62.3 million.

 

Our second quarter 2015 and first half 2015 operational and financial performance was negatively impacted by decreased steel shipments and product pricing, driven by excessive and historically high levels of steel product imports.  While scrap costs decreased significantly in the first quarter of 2015 and remained at lower levels during the second quarter of 2015, metal margins contracted as the drop in steel selling prices more than offset the decline of scrap costs. Underlying domestic steel consumption remains strong, as we continue to see improvements in non-residential construction, as well as, automotive and other manufacturing segments. However, a large portion of this domestic steel demand was served by imports in 2015. As a result, domestic steel mill utilization rates decreased in 2015, as compared to 2014, resulting in decreased ferrous scrap shipments in our metals recycling operations. These decreased volumes, along with compressed metal margins due to price volatility, reduced profitability in our metals recycling operations in 2015, as compared to 2014. During 2015, our fabrication operations continue to benefit from the improving non-residential construction market, and raw material costs, resulting in significant increases in both sales and operating income, compared to the same periods in 2014. In May 2015, we indefinitely idled our Minnesota ironmaking operations due to significant and sustained decreases in selling prices to levels that are below our cash costs to produce iron nuggets. In conjunction with the idling, we also made the decision to sell the associated raw material inventory, resulting in a $21.0 million (inclusive of noncontrolling interests of $3.6 million), lower-of-cost or market charge in the second quarter 2015.

 

Segment Operating Results 2015 vs. 2014 (dollars in thousands)

 

 

 

Three Months Ended

 

First

 

 

 

Six Months Ended

 

 

 

June 30,

 

Quarter

 

 

 

June 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

Sequential
Quarter %
Change

 

2015

 

%
Change

 

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

1,429,237

 

7

%

$

1,334,906

 

$

1,434,322

 

%

$

2,863,559

 

15

%

$

2,496,236

 

Metals recycling and ferrous resources

 

680,113

 

(28

)%

948,833

 

705,792

 

(4

)%

1,385,905

 

(26

)%

1,868,535

 

Steel fabrication

 

154,525

 

15

%

134,852

 

161,028

 

(4

)%

315,553

 

26

%

250,713

 

Other

 

19,157

 

(40

)%

31,898

 

28,967

 

(34

)%

48,124

 

(19

)%

59,420

 

 

 

2,283,032

 

 

 

2,450,489

 

2,330,109

 

 

 

4,613,141

 

 

 

4,674,904

 

Intra-company

 

(278,025

)

 

 

(380,728

)

(282,674

)

 

 

(560,699

)

 

 

(775,061

)

Consolidated

 

$

2,005,007

 

(3

)%

$

2,069,761

 

$

2,047,435

 

(2

)%

$

4,052,442

 

4

%

$

3,899,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

107,761

 

(31

)%

$

155,949

 

$

111,540

 

(3

)%

$

219,301

 

(16

)%

$

261,592

 

Metals recycling and ferrous resources

 

(35,182

)

(481

)%

(6,053

)

(17,066

)

(106

)%

(52,248

)

(142

)%

(21,572

)

Steel fabrication

 

27,660

 

264

%

7,590

 

21,361

 

29

%

49,021

 

357

%

10,716

 

Other

 

(18,191

)

25

%

(24,159

)

(19,920

)

9

%

(38,111

)

6

%

(40,704

)

 

 

82,048

 

 

 

133,327

 

95,915

 

 

 

177,963

 

 

 

210,032

 

Intra-company

 

(4,489

)

 

 

(1,422

)

3,856

 

 

 

(633

)

 

 

2,805

 

Consolidated

 

$

77,559

 

(41

)%

$

131,905

 

$

99,771

 

(22

)%

$

177,330

 

(17

)%

$

212,837

 

 

19



Table of Contents

 

Steel Operations

 

Steel Operations. Steel Operations consist of our six electric arc furnace steel mills, producing steel from ferrous scrap, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. 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, industrial machinery, pipe and tube and energy markets. Steel operations accounted for 69% and 61% of our consolidated external net sales during the second quarter of 2015 and 2014, and 68% and 61% of our consolidated external net sales during the first half of 2015 and 2014, respectively.

 

Sheet Products.  Our sheet operations consist of our Butler Flat Roll Division (Butler), Columbus Flat Roll Division — acquired September 16, 2014 (Columbus), and our downstream coating facilities, including The Techs. These operations sell a broad range of sheet steel products, such as hot roll, cold roll and coated steel products, including a wide variety of specialty products, such as light gauge hot roll and galvanized. Butler sells other products such as Galvalume® and painted products, while Columbus, currently sells other products such as high-strength OCTG pipe and non-energy line pipe products. The Techs is comprised of three galvanizing lines which sell 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 and premium rail to the railroad industry. Our Engineered Bar Products Division primarily sells engineered, special-bar-quality and merchant-bar-quality rounds, round-cornered squares, and smaller-diameter round engineered bars. Our Roanoke Bar Division primarily sells merchant steel products, including angles, merchant rounds, flats and channels, and reinforcing bar. Steel of West Virginia primarily sells beams, channels and specialty steel sections.

 

Steel Operations Shipments (tons):

 

 

 

Three Months Ended

 

First

 

 

 

Six Months Ended

 

 

 

June 30,

 

Quarter

 

 

 

June 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

Sequential
Quarter %
Change

 

2015

 

%
Change

 

2014

 

Shipments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Butler Flat Roll Division

 

721,115

 

(7

)%

778,220

 

579,493

 

24

%

1,300,608

 

(8

)%

1,419,740

 

Columbus Flat Roll Division

 

693,772

 

100

%

 

564,241

 

23

%

1,258,013

 

100

%

 

The Techs

 

182,239

 

(5

)%

191,934

 

145,934

 

25

%

328,173

 

(5

)%

345,171

 

Sheet products

 

1,597,126

 

65

%

970,154

 

1,289,668

 

24

%

2,886,794

 

64

%

1,764,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural and Rail Division

 

302,250

 

(10

)%

336,380

 

304,352

 

(1

)%

606,602

 

(4

)%

628,696

 

Engineered Bar Products Division

 

120,559

 

(21

)%

152,768

 

156,366

 

(23

)%

276,925

 

(7

)%

297,071

 

Roanoke Bar Division

 

140,795

 

(2

)%

143,583

 

125,123

 

13

%

265,918

 

(7

)%

287,365

 

Steel of West Virginia

 

81,678

 

9

%

74,881

 

73,511

 

11

%

155,189

 

3

%

150,455

 

Long products

 

645,282

 

(9

)%

707,612

 

659,352

 

(2

)%

1,304,634

 

(4

)%

1,363,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shipments

 

2,242,408

 

34

%

1,677,766

 

1,949,020

 

15

%

4,191,428

 

34

%

3,128,498

 

Intra-segment shipments

 

(62,417

)

 

 

(57,930

)

(56,094

)

 

 

(118,511

)

 

 

(103,438

)

Segment shipments

 

2,179,991

 

35

%

1,619,836

 

1,892,926

 

15

%

4,072,917

 

35

%

3,025,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External shipments

 

2,078,685

 

37

%

1,518,882

 

1,816,371

 

14

%

3,895,056

 

36

%

2,857,455

 

 

20



Table of Contents

 

 

Net sales for the steel segment increased 7% in the second quarter of 2015, when compared to the second quarter of 2014, due primarily to the inclusion of Columbus in 2015 results. While second quarter 2015 segment shipments improved 35%, compared to prior year’s second quarter, shipments excluding Columbus decreased 8%, as they were negatively impacted by continued elevated steel imports. Additionally, our Engineered Bar Products Division experienced some customer inventory destocking, resulting in volumes decreasing 21% in the second quarter of 2015, compared to the same period in 2014. The elevated levels of imported steel into the domestic market continued to compress steel selling prices, with our average steel product selling prices decreasing $168 per ton, or 20%, compared to the same quarter in 2014. Though overall domestic steel demand remains solid, the continued elevated levels of steel imports has been a significant negative impact to our sales volumes, product pricing, and mill utilization rates. Our average steel mill utilization rate was 87% for the second quarter of 2015, as compared to 95% in the second quarter of 2014. Net sales for the steel segment increased 15% in the first half of 2015, when compared to the first half of 2014, as a 35% increase in segment shipments more than offset a decrease of 15%, or $122 per ton, in average selling prices. Again, the increase in net sales is largely due to the inclusion of Columbus in first half 2015 results, as sales volumes in 2015, excluding Columbus, are down 7% compared to the first half of 2014, due primarily to elevated steel imports during 2015.

 

Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost. During the second quarter 2015 and 2014, our metallic raw material costs represented 57% and 66%, respectively, 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 $109, or 30%, in the second quarter of 2015, compared with the second quarter of 2014, as the market cost of scrap decreased significantly, consistent with overall scrap market pricing. In the first half of 2015, our metallic raw material cost per net ton consumed decreased $91, or 25%, compared to the same period in 2014.

 

In spite of decreased raw material cost per ton, second quarter 2015 metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed) contracted compared to the second quarter of 2014, as decreases in product selling prices outpaced decreased raw material costs. Thus, despite the increase in sales in the second quarter of 2015 with the inclusion of Columbus, operating income for the steel segment decreased 31%, to $107.8 million, compared to the same period of 2014. Likewise, first half 2015 operating income decreased 16%, to $219.3 million, compared to the first half of 2014.

 

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 idled Minnesota ironmaking operations. Our metals recycling and ferrous resources operations segment accounted for 23% and 31% of our consolidated net sales in the second quarter and first half of 2015 and 2014, respectively. Segment operating losses were $35.2 million in the second quarter of 2015, a decline of $29.1 million compared to the second quarter of 2014. Increased losses were primarily driven by increased costs at our Minnesota ironmaking operations in connection with its idling in May 2015, and losses at IDI related to a planned major furnace maintenance outage. Similarly, operating losses for the segment increased $30.7 million in the first half of 2015, to $52.2 million, compared to the first half of 2014.

 

21



Table of Contents

 

Metals Recycling and Ferrous Resources Shipments:

 

 

 

Three Months Ended

 

First

 

 

 

Six Months Ended

 

 

 

June 30,

 

Quarter

 

 

 

June 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

Sequential
Quarter
%
Change

 

2015

 

%
Change

 

2014

 

Ferrous metal (gross tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,357,755

 

(5

)%

1,422,697

 

1,233,001

 

10

%

2,590,756

 

(7

)%

2,787,230

 

Intra-segment

 

 

 

 

(103

)

 

 

 

 

 

 

(403

)

Segment shipments

 

1,357,755

 

(5

)%

1,422,594

 

1,233,001

 

10

%

2,590,756

 

(7

)%

2,786,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External shipments

 

626,264

 

(19

)%

769,046

 

642,080

 

(2

)%

1,268,344

 

(11

)%

1,418,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

275,439

 

(4

)%

288,233

 

259,903

 

6

%

535,342

 

(4

)%

559,211

 

Intra-segment

 

(21,598

)

 

 

(17,263

)

(17,850

)

 

 

(39,448

)

 

 

(35,606

)

Segment shipments

 

253,841

 

(6

)%

270,970

 

242,053

 

5

%

495,894

 

(5

)%

523,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External shipments

 

253,273

 

(6

)%

270,271

 

241,580

 

5

%

494,853

 

(5

)%

521,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mesabi Nugget shipments (metric tons) – intra-company

 

14,035

 

(57

)%

32,542

 

36,480

 

(62

)%

50,515

 

(28

)%

70,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Iron Dynamics (metric tons) – intra-company

 

42,212

 

(35

)%

64,756

 

65,293

 

(35

)%

107,505

 

(12

)%

121,878

 

 

Metals Recycling.  OmniSource represents our metals sourcing and processing operations and is the primary 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 87% and 88% of this segment’s net sales during the second quarter of 2015 and 2014, and 86% and 89% in the first half of 2015 and 2014, respectively.

 

Metals recycling operations net sales were $645.4 million and $891.6 million, during the second quarter of 2015 and 2014, respectively. Ferrous shipments decreased 5% in the second quarter of 2015, compared to the same period in 2014, due primarily to reduced domestic steel mill utilization, as a result of elevated steel product imports in 2015. Nonferrous shipments also decreased 4%. While both ferrous and nonferrous selling prices decreased during the second quarter of 2015, as compared to the same period in 2014, our ferrous selling prices declined by 34%, consistent with overall scrap market selling prices. While ferrous metal spreads in the second quarter 2015 were consistent with those of second quarter 2014, the reduced nonferrous selling prices caused metal spreads for nonferrous materials to contract, decreasing 25%, during the second quarter of 2015, when compared to the same period in 2014. The declines in shipments and nonferrous metal spreads resulted in second quarter 2015 operating income of $8.3 million, as compared to operating income of $13.9 million for the same period in 2014

 

Metals recycling operations net sales were $1.3 billion and $1.8 billion, during the first half of 2015 and 2014, respectively. Ferrous shipments decreased 7% in the first half of 2015, compared to the same period in 2014, due to reduced domestic steel mill utilization, as a result of elevated steel product imports in 2015. Nonferrous shipments also decreased 4%. While both ferrous and nonferrous selling prices decreased during the first half of 2015, as compared to the same 2014 period, our ferrous selling prices declined by 31% consistent with overall market selling prices. As a result of reduced selling prices, metal spreads for ferrous and nonferrous materials contracted 6% and 19%, respectively, during the first half of 2015, when compared to the same period in 2014. These declines in shipments and metal spreads resulted in operating income in the first half of 2015 decreasing $15.1 million, or 80%, to $3.8 million, compared to the first half of 2014.

 

Ferrous Resources.  Our ferrous resources operations consist primarily of Iron Dynamics (IDI), and our idled Minnesota ironmaking operations. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material input exclusively at our Butler Flat Roll Division. IDI experienced additional losses during the second quarter 2015, related to a planned major furnace maintenance outage that generally takes place every five or more years.

 

22



Table of Contents

 

Our Minnesota ironmaking operations consists of Mesabi Nugget, (owned 82% by us); our iron concentrate and potential future iron mining operations, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 82% by us). The nugget facility was idled in February 2015 to allow us to work through company-wide nugget inventory, as well as, to complete installation of new equipment in the iron concentrate facility to reestablish product yield. However, pig iron prices declined significantly late in the first quarter 2015, have remained low, and are expected to continue to remain low. Current selling prices are below our cash cost to produce iron nuggets. Given this significant and sustained decline in pig iron pricing, we elected to indefinitely idle the Minnesota ironmaking operations and to monetize existing raw material inventory. As a result, we recorded an inventory lower-of-cost or market charge of $21.0 million (inclusive of noncontrolling interests of $3.6 million), in cost of goods sold during the three- and six-months ended June 30, 2015. The impact of losses, and lower-of-cost or market and other charges from the Minnesota iron operations on second quarter 2015 reduced net income by approximately $16.5 million, as compared to approximately $9.1 million during the second quarter 2014. For the first half of 2015, losses, from the Minnesota iron operations reduced net income by approximately $22.8 million, compared with $18.0 million in the first half of 2014.

 

Steel Fabrication Operations

 

Steel Fabrication Operations consist of our six 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 8% and 7% of our consolidated net sales during the second quarter of 2015 and 2014, and 8% and 6% of the company’s consolidated net sales during the first half of 2015 and 2014, respectively.

 

 

Net sales for the steel fabrication operations segment increased $19.7 million, or 15%, in the second quarter of 2015, compared to the second quarter of 2014. Shipments and selling prices increased 4% and 10%, respectively, in the second quarter of 2015, as compared to the same period in 2014, based on increased demand from the non-residential construction market and our continued market share expansion. Net sales for the segment increased $64.8 million, or 26%, in the first half of 2015, compared to the first half of 2014, as volumes increased 11% and selling prices increased 13% for the same reasons. Our steel fabrication operations continue to realize strength in order activity and resulting shipments and selling prices, as we leverage our national operating footprint and market demand improves.

 

The purchase of various steel products is the largest single cost of production for our steel fabrication operations generally representing more than two-thirds of the total cost of manufacturing for our steel fabrication operations. The average cost of steel consumed decreased in the second quarter of 2015, as compared to the same period in 2014, by 11%, and coupled with 10% higher selling prices resulted in expanded metal spreads. Likewise, during the first half of 2015 the average cost of steel consumed decreased, as compared to the same period in 2014, by 5%, coupled with a 13% increase in average selling prices.

 

As a result of the increased shipments and metal spread expansion, operating income of $27.7 million in the second quarter of 2015 was over three and a half times that of the same period in 2014 of $7.6 million. Similarly, segment operating income of $49.0 million in the first half of 2015 increased 357%, from $10.7 million in the first half of 2014.

 

23



Table of Contents

 

Second Quarter Consolidated Results 2015 vs. 2014

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $94.2 million during the second quarter of 2015, as compared to $90.9 million during the second quarter of 2014, an increase of $3.3 million, or 4%. During the second quarters of 2015 and 2014, these selling, general and administrative expenses were comparable in total, and as a percentage of net sales, representing approximately 4.7% and 4.4% of net sales, respectively.

 

Interest Expense, net of Capitalized Interest.  During the second quarter of 2015, interest expense increased $7.1 million to $37.2 million, when compared to the same period in 2014. The increase in interest expense is due primarily to the addition of the $1.2 billion senior notes in September 2014, in conjunction with our acquisition of Columbus, partially offset by the conversion or payoff at maturity of $287.5 million of 5.125% convertible notes in June 2014, and the call of our $350.0 million 7 5/8% Senior Notes due 2020 in March 2015.

 

Other Expense (Income), net.  During the second quarter of 2015, net other income of $1.2 million was comparable to net other income of $1.8 million in the same period in 2014.

 

Income Taxes.  During the second quarter of 2015, our income tax expense was $16.3 million with an effective income tax rate of 39.1%, as compared to $37.3 million with an effective income tax rate of 36.0% during the second quarter of 2014. The higher effective tax rate in the second quarter of 2015 is due primarily to the impact on the effective tax rate of higher proportional (to pretax income) noncontrolling interest losses in the second quarter of 2015 as compared to the same period in 2014.

 

First Six Months Consolidated Results 2015 vs. 2014

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $181.5 million during the first half of 2015, as compared to $173.2 million during the first half of 2014, an increase of $8.2 million, or 5%. During the first half of 2015 and 2014, these selling, general and administrative expenses were comparable, representing approximately 4.5% and 4.4% of net sales, respectively.

 

Interest Expense, net of Capitalized Interest.  During the first half of 2015, interest expense increased $19.6 million to $80.3 million, when compared to the same period in 2014. The increase in interest expense is due primarily to the addition of the $1.2 billion senior notes in September 2014, in conjunction with our acquisition of Columbus, partially offset by the conversion or payoff at maturity of $287.5 million of 5.125% convertible notes in June 2014, and the call of our $350.0 million 7 5/8% Senior Notes due 2020 in March 2015.

 

Other Expense (Income), net.  During the first half of 2015, net other expense of $15.0 million increased $17.4 million compared to net other income of $2.4 million in the same period in 2014, due primarily to $16.7 million of call premium and other finance expenses associated with the March 2015 senior note call and prepayment.

 

Income Taxes.  During the first half of 2015, our income tax expense was $29.8 million with an effective income tax rate of 36.3%, as compared to $54.6 million with an effective income tax rate of 35.3% during the first half of 2014. The higher effective tax rate in the first half of 2015 is due primarily to the impact on the effective tax rate of higher proportional (to pretax income) noncontrolling interest losses in the first half of 2015 as compared to the same period in 2014.

 

Liquidity and Capital Resources

 

Capital Resources and Long-term Debt. 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, principal and interest payments related to our outstanding indebtedness, and dividends to our shareholders. We have met these liquidity requirements primarily with cash provided by operations, long-term borrowings and availability under our Revolver. Our liquidity at June 30, 2015 is as follows (in thousands):

 

Cash and equivalents

 

$

419,401

 

Revolver availability

 

1,186,175

 

Total liquidity

 

$

1,605,576

 

 

Our total outstanding debt decreased $369.5 million during the first half of 2015, to $2.7 billion, due primarily to our March 2015 call and prepayment of $350.0 million in 75/8 % senior notes due 2020. 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 47.6% at June 30, 2015, from 50.9% at December 31, 2014.

 

24



Table of Contents

 

We have a senior secured credit facility (Facility) that matures in November 2019 which provides for a $1.2 billion Revolver along with a term loan facility. Subject to certain conditions, we also have the ability to increase the combined facility size by a minimum of $750 million. The Facility contains financial and other covenants pertaining to our ability (which may under certain circumstances be limited) 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. At June 30, 2015, we had $1.2 billion of availability on the Revolver, $13.8 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.

 

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 proforma EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in our Facility) by our LTM proforma gross interest expense, less amortization of financing fees. In addition, a net debt (as defined in the Facility) to consolidated LTM adjusted proforma EBITDA (net debt leverage ratio) of not more than 5.00:1.00 must be maintained. If the net debt leverage ratio exceeds 3.50:1:00 at any time, our ability to make certain payments as defined in the Facility (which includes cash dividends to stockholders and share purchases, among other things), is limited. At June 30, 2015, our interest coverage ratio and net debt leverage ratio were 5.71:1.00 and 2.40:1.00, respectively. We were therefore in compliance with these covenants at June 30, 2015, and we anticipate we will continue to be in compliance during 2015.

 

Working Capital. We generated cash flow from operations of $543.9 million in the first half of 2015. Operational working capital, representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt, decreased $275.7 million during the first half of 2015, to $1.4 billion. Amounts invested in accounts receivable and inventories, net of accounts payable, decreased $348.3 million in conjunction with a slight decrease in sales and production volume and a significant decrease in the cost of scrap and steel when compared to the fourth quarter of 2014.

 

Capital Investments.  During the first half of 2015, we invested $56.2 million in property, plant and equipment, as compared to $58.4 million during the same period in 2014. We believe these capital investments will benefit our net sales and related cash flows as each project attains appropriate operational metrics. Our current estimated 2015 annual cash allocation plan includes the investment of approximately $150 million in capital expenditures in our existing and announced operations.

 

Cash Dividends.  As a reflection of confidence in our current and future cash flow generation ability and financial position, we increased our quarterly cash dividend by 20% to $0.1375 per share in the first quarter 2015 (from $0.115 per share previously), resulting in declared cash dividends of $66.5 million during the first half of 2015, compared to $53.2 million during the first half of 2014. We paid cash dividends of $61.0 million and $50.2 million during the first half of 2015 and 2014, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis. The determination to pay cash dividends in the future is 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 credit facility 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 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 Revolver through its term, which expires in November 2019, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness, funding working capital requirements, and anticipated capital expenditures.

 

Other Matters

 

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

 

Environmental and Other Contingencies. We have incurred, and in the future will continue to incur, capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring and compliance. We believe, apart from our dependence on environmental construction and operating permits for our existing and any future 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 evolve and change, and we may become subject to more stringent environmental laws and regulations in the future, such as the impact of U.S. 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 2014 Annual Report on Form 10-K.

 

25



Table of Contents

 

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 occasionally 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, 2015 or 2014.

 

Commodity Risk

 

In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of our products and to the purchase of raw materials used in our operations, such as metallic raw materials, electricity, natural gas and its transportation services, fuel, air products, 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 some commodities such as electricity, natural gas and its transportation services, fuel, air products, and zinc. Certain of these commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 30 months for physical commodity requirements, for up to 5 years for commodity transportation requirements, and for up to 13 years for air products. 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. We also purchase electricity consumed at our Butler Flat Roll Division pursuant to a contract which extends through December 2015. 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.

 

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 vendor. At June 30, 2015, we had a cumulative unrealized gain associated with these financial contracts of $1.0 million, substantially all of which have a settlement date within the next twelve months. We believe the customer 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, 2015. 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 Commission’s 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, 2015, 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, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

26



Table of Contents

 

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 involved, along with other steel manufacturing companies, in several class action antitrust complaints pending in federal court in Chicago, Illinois, which allege a conspiracy to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a period between 2005 and 2007, by artificially restricting the supply of such steel products. One of the complaints was brought on behalf of a purported class consisting of all direct purchasers of steel products.  A second complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period.  An additional complaint was brought in December 2010, on behalf of indirect purchasers of steel products in Tennessee and has been consolidated with the original complaints.  All complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  Plaintiffs filed a 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. A hearing on class certification was held on March 5 — 7 and April 11, 2014, and the matter remains under advisement. It’s unclear when the court will issue its ruling on class certification.

 

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.

 

ITEM 1A.          RISK FACTORS

 

No material changes have occurred to the indicated risk factors as disclosed in our 2014 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.

 

27



Table of Contents

 

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

 

28



Table of Contents

 

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 10, 2015

 

 

 

 

 

 

STEEL DYNAMICS, INC.

 

 

 

 

By:

/s/ Theresa E. Wagler

 

 

     Theresa E. Wagler

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

29