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, 2014

 

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, 2014, Registrant had 240,040,043 outstanding shares of common stock.

 

 

 


 


Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

 

 

Page

 

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

1

 

 

 

 

Consolidated Statements of Income for the three- and six-month periods ended June 30, 2014 and 2013 (unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three- and six-month periods ended June 30, 2014 and 2013 (unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

 

 

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

26

 

 

 

 

Signatures

27

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

357,490

 

$

395,156

 

Accounts receivable, net

 

852,440

 

664,208

 

Accounts receivable-related parties

 

58,356

 

56,392

 

Inventories

 

1,320,871

 

1,314,747

 

Deferred income taxes

 

17,813

 

17,964

 

Other current assets

 

23,216

 

25,167

 

Total current assets

 

2,630,186

 

2,473,634

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,177,007

 

2,226,134

 

 

 

 

 

 

 

Restricted cash

 

18,460

 

23,827

 

Intangible assets, net

 

372,819

 

386,159

 

Goodwill

 

728,751

 

731,996

 

Other assets

 

57,979

 

91,256

 

Total assets

 

$

5,985,202

 

$

5,933,006

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

422,761

 

$

404,605

 

Accounts payable-related parties

 

17,930

 

10,327

 

Income taxes payable

 

19,448

 

4,023

 

Accrued payroll and benefits

 

74,155

 

93,432

 

Accrued interest

 

30,682

 

31,363

 

Accrued expenses

 

86,486

 

89,884

 

Current maturities of long-term debt

 

61,761

 

341,544

 

Total current liabilities

 

713,223

 

975,178

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Senior term loan

 

199,375

 

220,000

 

Senior notes

 

1,500,000

 

1,500,000

 

Other long-term debt

 

42,753

 

46,045

 

Total long-term debt

 

1,742,128

 

1,766,045

 

 

 

 

 

 

 

Deferred income taxes

 

548,285

 

556,038

 

Other liabilities

 

22,356

 

23,376

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

124,180

 

116,514

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 259,588,037 and 258,840,350 shares issued; and 239,620,885 and 222,867,408 shares outstanding, as of June 30, 2014 and December 31, 2013, respectively

 

647

 

645

 

Treasury stock, at cost; 19,967,152 and 35,972,942 shares, as of June 30, 2014 and December 31, 2013, respectively

 

(398,818

)

(718,529

)

Additional paid-in capital

 

1,058,921

 

1,085,694

 

Retained earnings

 

2,237,147

 

2,179,513

 

Total Steel Dynamics, Inc. equity

 

2,897,897

 

2,547,323

 

Noncontrolling interests

 

(62,867

)

(51,468

)

Total equity

 

2,835,030

 

2,495,855

 

Total liabilities and equity

 

$

5,985,202

 

$

5,933,006

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,987,635

 

$

1,735,420

 

$

3,753,516

 

$

3,463,821

 

Related parties

 

82,126

 

65,920

 

146,327

 

133,215

 

Total net sales

 

2,069,761

 

1,801,340

 

3,899,843

 

3,597,036

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,846,990

 

1,653,648

 

3,513,768

 

3,273,080

 

Gross profit

 

222,771

 

147,692

 

386,075

 

323,956

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

73,463

 

65,356

 

143,505

 

130,618

 

Profit sharing

 

10,469

 

4,779

 

15,864

 

11,422

 

Amortization of intangible assets

 

6,934

 

8,051

 

13,869

 

16,178

 

Impairment charges

 

 

308

 

 

308

 

Total selling, general and administrative expenses

 

90,866

 

78,494

 

173,238

 

158,526

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

131,905

 

69,198

 

212,837

 

165,430

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

30,050

 

31,465

 

60,619

 

66,094

 

Other expense (income), net

 

(1,754

)

(1,246

)

(2,385

)

(2,292

)

Income before income taxes

 

103,609

 

38,979

 

154,603

 

101,628

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

37,268

 

15,706

 

54,564

 

37,103

 

 

 

 

 

 

 

 

 

 

 

Net income

 

66,341

 

23,273

 

100,039

 

64,525

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

5,962

 

5,685

 

10,843

 

12,648

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Steel Dynamics, Inc.

 

$

72,303

 

$

28,958

 

$

110,882

 

$

77,173

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.32

 

$

0.13

 

$

0.49

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

226,220

 

220,471

 

224,615

 

220,233

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.31

 

$

0.13

 

$

0.48

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

242,048

 

221,736

 

241,721

 

238,246

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.115

 

$

0.11

 

$

0.23

 

$

0.22

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

66,341

 

$

23,273

 

$

100,039

 

$

64,525

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

58,441

 

56,826

 

116,009

 

113,887

 

Equity-based compensation

 

4,700

 

2,344

 

10,468

 

7,097

 

Impairment charges

 

 

308

 

 

308

 

Deferred income taxes

 

(280

)

10,812

 

(4,371

)

21,747

 

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

 

3,456

 

588

 

6,097

 

(795

)

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(99,696

)

(19,826

)

(188,646

)

(130,764

)

Inventories

 

11,230

 

1,660

 

(6,124

)

34,008

 

Other assets

 

345

 

6,783

 

7,704

 

10,141

 

Accounts payable

 

13,385

 

(46,370

)

18,426

 

(7,382

)

Income taxes receivable/payable

 

(4,964

)

(23,304

)

14,429

 

(26,326

)

Accrued expenses and liabilities

 

23,056

 

19,621

 

(25,264

)

(24,021

)

Net cash provided by operating activities

 

76,014

 

32,715

 

48,767

 

62,425

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(33,534

)

(49,236

)

(58,375

)

(94,582

)

Proceeds from maturity of short-term commercial paper

 

 

 

 

31,520

 

Other investing activities

 

2,314

 

863

 

31,198

 

3,277

 

Net cash used in investing activities

 

(31,220

)

(48,373

)

(27,177

)

(59,785

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

63,945

 

32

 

107,398

 

409,293

 

Repayment of current and long-term debt

 

(76,412

)

(202,312

)

(132,658

)

(508,003

)

Debt issuance costs

 

 

(195

)

 

(6,192

)

Proceeds from exercise of stock options, including related tax effect

 

8,516

 

2,977

 

11,421

 

10,591

 

Contributions from noncontrolling investors, net

 

(606

)

5,286

 

4,764

 

5,697

 

Dividends paid

 

(25,666

)

(24,238

)

(50,181

)

(46,190

)

Net cash used in financing activities

 

(30,223

)

(218,450

)

(59,256

)

(134,804

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

14,571

 

(234,108

)

(37,666

)

(132,164

)

Cash and equivalents at beginning of period

 

342,919

 

477,861

 

395,156

 

375,917

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

357,490

 

$

243,753

 

$

357,490

 

$

243,753

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

20,838

 

$

17,583

 

$

60,501

 

$

67,315

 

Cash paid for federal and state income taxes, net

 

$

43,008

 

$

27,360

 

$

45,151

 

$

38,525

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies

 

Description of the Business

 

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

 

Steel Operations.  Steel operations include the company’s Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia and The Techs operations. These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting, automated rolling mills, and downstream finishing facilities. Steel operations accounted for 61% of the company’s external net sales during each of the three-month periods ended June 30, 2014 and 2013, and 61% and 60% of the company’s external net sales during the six-month periods ended June 30, 2014 and 2013, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations primarily include OmniSource Corporation, the company’s metals recycling, steel scrap procurement, and processing locations, and our two ironmaking initiatives: Iron Dynamics, a liquid pig iron production facility; and our Minnesota iron operations, an iron nugget production facility and operations to supply the nugget facility with its primary raw material, iron concentrate. Metals recycling and ferrous resources operations accounted for 31% and 33% of the company’s external net sales during the three-month periods ended June 30, 2014 and 2013, respectively, and 31% and 34% of the company’s external net sales during the six-month periods ended June 30, 2014 and 2013, 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 7% and 6% of the company’s external net sales during the three-month periods ended June 30, 2014 and 2013, respectively, and 6% of the company’s external net sales for each of the six-month periods ended June 30, 2014 and 2013.

 

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, 2013.

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at June 30, 2014, and December 31, 2013, (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

OmniSource – Metals Recycling/Ferrous Resources Segment

 

$

555,002

 

$

558,247

 

The Techs – Steel Segment

 

142,783

 

142,783

 

Roanoke Bar Division – Steel Segment

 

29,041

 

29,041

 

New Millennium Building Systems – Fabrication Segment

 

1,925

 

1,925

 

 

 

$

728,751

 

$

731,996

 

 

OmniSource goodwill decreased $3.2 million from December 31, 2013 to June 30, 2014, in recognition of the 2014 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.

 

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 company is currently evaluating the impact of the provisions of ASC 606.

 

4



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  Earnings Per Share

 

Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive stock options, restricted stock units, deferred stock units, and dilutive shares related to the company’s 5.125% convertible senior notes, which matured on June 15, 2014 and were dilutive through then; and are excluded from the computation in periods in which they have an anti-dilutive effect. No options to purchase shares were anti-dilutive at June 30, 2014, while options to purchase 2.5 million shares were anti-dilutive at June 30, 2013. The computation of diluted earnings per share for the three month period ended June 30, 2013 did not include the after-tax equivalent of interest of $2.4 million for the company’s 5.125% senior convertible notes due June 2014, and the related weighted average equivalent of 16.7 million shares, as the result would have been anti-dilutive.

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

72,303

 

226,220

 

$

.32

 

$

28,958

 

220,471

 

$

0.13

 

Dilutive common share equivalents

 

 

1,789

 

 

 

 

1,265

 

 

 

5.125% convertible senior notes, net of tax

 

1,969

 

14,039

 

 

 

 

 

 

 

Diluted earnings per share

 

$

74,272

 

242,048

 

$

.31

 

$

28,958

 

221,736

 

$

0.13

 

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

110,882

 

224,615

 

$

.49

 

$

77,173

 

220,233

 

$

0.35

 

Dilutive common share equivalents

 

 

1,699

 

 

 

 

1,363

 

 

 

5.125% convertible senior notes, net of tax

 

4,327

 

15,407

 

 

 

4,716

 

16,650

 

 

 

Diluted earnings per share

 

$

115,209

 

241,721

 

$

.48

 

$

81,889

 

238,246

 

$

0.34

 

 

Note 3.  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,

 

 

 

2014

 

2013

 

Raw materials

 

$

614,098

 

$

660,384

 

Supplies

 

288,631

 

293,533

 

Work in progress

 

130,908

 

84,710

 

Finished goods

 

287,234

 

276,120

 

Total inventories

 

$

1,320,871

 

$

1,314,747

 

 

Note 4.  Debt

 

Holders of $271.8 million principal amount of the company’s 5.125% Convertible Notes due June 15, 2014 (the “Notes”) exercised their option to convert the Notes into shares of common stock by the close of business on June 12, 2014, the conversion election deadline. The conversion rate provided under the terms of the Notes was 58.4731 shares of common stock per $1,000 principal amount of Notes, equivalent to a conversion price of approximately $17.10 per share of common stock, resulting in the company issuing a total of 15,893,457 shares of common stock from treasury shares upon conversion of the Notes. The remaining $15.7 million of the outstanding Notes was paid in cash on June 16, 2014.

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5.  Changes in Equity

 

The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to stockholders of Steel Dynamics, Inc. and equity 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, 2014

 

$

645

 

$

1,085,694

 

$

2,179,513

 

$

(718,529

)

$

(51,468

)

$

2,495,855

 

$

116,514

 

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

 

2

 

11,501

 

 

 

 

11,503

 

 

Dividends declared

 

 

 

(53,221

)

 

 

(53,221

)

 

Conversion of 5.125% convertible senior notes

 

 

(45,650

)

 

317,451

 

 

271,801

 

 

Equity-based compensation and issuance of restricted stock

 

 

7,376

 

(27

)

2,260

 

 

9,609

 

 

Contributions from noncontrolling investors

 

 

 

 

 

97

 

97

 

7,666

 

Distributions to noncontrolling investors

 

 

 

 

 

(653

)

(653

)

 

Net income (loss)

 

 

 

110,882

 

 

(10,843

)

100,039

 

 

Balances at June 30, 2014

 

$

647

 

$

1,058,921

 

$

2,237,147

 

$

(398,818

)

$

(62,867

)

$

2,835,030

 

$

124,180

 

 

Note 6.  Derivative Financial Instruments

 

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

 

Commodity Futures Contracts.  If the company is “long” on a futures contract, 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, 2014 (MT represents metric tons and Lbs represents pounds):

 

Commodity Futures

 

Long/Short

 

Total

 

 

 

Aluminum

 

Long

 

3,550

 

MT

 

Aluminum

 

Short

 

3,575

 

MT

 

Copper

 

Long

 

7,129

 

MT

 

Copper

 

Short

 

21,636

 

MT

 

Silver

 

Short

 

343

 

Lbs

 

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Derivative Financial Instruments (Continued)

 

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of June 30, 2014, and December 31, 2013, 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, 2014 and 2013 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

December 31,

 

 

 

December 31,

 

 

 

Balance sheet location

 

June 30, 2014

 

2013

 

June 30, 2014

 

2013

 

Derivative instruments designated as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

274

 

$

658

 

$

(1,800

)

$

1,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

708

 

$

352

 

$

(1,781

)

2,601

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

982

 

$

1,010

 

$

(3,581

)

$

4,487

 

 

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $5.1 million at June 30, 2014 and $3.6 million at December 31, 2013, are reflected in other current assets in the consolidated balance sheet.

 

 

 

 

 

Amount of gain (loss)

 

 

 

 

 

Amount of gain (loss)

 

 

 

 

 

recognized in income on

 

 

 

 

 

recognized in income on

 

 

 

 

 

derivatives for the three

 

 

 

 

 

related hedged items for the

 

 

 

Location of gain (loss)

 

months ended

 

Hedged items

 

Location of gain (loss)

 

three months ended

 

 

 

recognized in income

 

June 30,

 

June 30,

 

in fair value hedge

 

recognized in income

 

June 30,

 

June 30,

 

 

 

on derivatives

 

2014

 

2013

 

relationships

 

on related hedged item

 

2014

 

2013

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(2,632

)

$

(654

)

Firm commitments

 

Costs of goods sold

 

$

(653

)

$

1,297

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

2,846

 

(2,014

)

 

 

 

 

 

 

 

 

 

 

 

 

$

2,193

 

$

(717

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(2,030

)

$

6,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss)

 

 

 

 

 

Amount of gain (loss)

 

 

 

 

 

recognized in income on

 

 

 

 

 

recognized in income on

 

 

 

 

 

derivatives for the six months

 

 

 

 

 

related hedged items for the

 

 

 

Location of gain (loss)

 

ended

 

Hedged items

 

Location of gain (loss)

 

six months ended

 

 

 

recognized in income

 

June 30,

 

June 30,

 

in fair value hedge

 

recognized in income

 

June 30,

 

June 30,

 

 

 

on derivatives

 

2014

 

2013

 

relationships

 

on related hedged item

 

2014

 

2013

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(1,015

)

$

7,392

 

Firm commitments

 

Costs of goods sold

 

$

331

 

$

2,613

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

358

 

(8,822

)

 

 

 

 

 

 

 

 

 

 

 

 

$

689

 

$

(6,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

5,926

 

$

6,629

 

 

 

 

 

 

 

 

 

 

Derivatives accounted for as fair value hedges had ineffectiveness resulting in a gain of $160,000 and in a loss of $108,000 during the three-month periods ended June 30, 2014 and 2013, respectively; and gains of $456,000 and $113,000 during the six-month periods ended June 30, 2014 and 2013, respectively. Losses excluded from hedge effectiveness testing of $599,000 and $1.2 million increased costs of goods sold during the three-month periods ended June 30, 2014 and 2013, respectively. A loss excluded from hedge effectiveness testing of $782,000 increased costs of goods sold and a gain excluded from hedge effectiveness testing of $1.1 million reduced cost of goods sold during the six-month periods ended June 30, 2014 and 2013, respectively.

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Fair Value Measurements

 

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

 

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

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

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

 

The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of  June 30, 2014, and December 31, 2013 (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, 2014

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

 

$

982

 

$

 

$

982

 

$

 

Commodity futures – financial liabilities

 

(3,581

)

 

(3,581

)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

 

$

1,010

 

$

 

$

1,010

 

$

 

Commodity futures – financial liabilities

 

4,487

 

 

4,487

 

 

 

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 $1.9 billion and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheets of $1.8 billion and $2.1 billion) at June 30, 2014 and December 31, 2013, respectively.

 

Note 8.  Commitments and Contingencies

 

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

 

The company is involved, along with other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, which alleges a conspiracy to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a period between 2005 and 2007, by artificially restricting the supply of such steel products. All but one of the complaints were brought on behalf of a purported class consisting of all direct purchasers of steel products.  The other complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period.  A ninth complaint, in December 2010, was brought 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.  Following a period of discovery relating to class certification matters, plaintiffs’ motion for class action certification filed in 2012, and briefing by both sides, the court, on March 5 — 7 and April 11, 2014, held a class certification hearing. At the conclusion of the hearing, the court took the class certification issue under advisement. It’s unclear when the court will issue its ruling.

 

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.

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information

 

The company has three reportable segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.  These operations are described in Note 1 to the financial statements.  Revenues included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of further processing, slitting, and sale of certain steel products and the resale of certain secondary and excess steel products.  In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, convertible senior notes (which matured in June 2014), certain other investments, and certain profit sharing expenses.

 

The company’s operations are primarily organized and managed by operating segment.  Operating segment performance and resource allocations are primarily based on operating results before income taxes.  The accounting policies of the reportable segments are consistent with those described in Note 1 to the financial statements. Intra-segment and intra-company sales and any related profits are eliminated in consolidation. Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2014 and 2013 are as follows (in thousands):

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2014

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9. Segment Information (Continued)

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2013

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,038,868

 

$

538,599

 

$

103,595

 

$

20,828

 

$

 

$

1,701,890

 

External Non-U.S.

 

52,148

 

46,893

 

 

409

 

 

99,450

 

Other segments

 

52,897

 

275,666

 

564

 

6,885

 

(336,012

)

 

 

 

1,143,913

 

861,158

 

104,159

 

28,122

 

(336,012

)

1,801,340

 

Operating income (loss)

 

85,545

 

(7,251

)

2,330

 

(14,434

)(1)

3,008

(2)

69,198

 

Income (loss) before income taxes

 

71,732

 

(14,439

)

800

 

(22,122

)

3,008

 

38,979

 

Depreciation and amortization

 

26,496

 

26,704

 

2,179

 

1,498

 

(51

)

56,826

 

Capital expenditures

 

34,533

 

13,545

 

822

 

336

 

 

49,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,582,168

 

2,490,215

 

261,556

 

604,195

(3)

(202,224

)(4)

5,735,910

 

Liabilities

 

512,634

 

522,306

 

16,136

 

2,362,721

(5)

(193,358

)(6)

3,220,439

 

 


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

 

(1)

Corporate SG&A

 

$

(9.1

)

 

Company-wide equity-based compensation

 

(2.0

)

 

Profit sharing

 

(3.2

)

 

Other, net

 

(0.1

)

 

Total

 

$

(14.4

)

 

(2)

Gross profit increase from intra-company sales

 

$

3.0

 

 

(3)

Cash and equivalents

 

$

218.2

 

 

Accounts receivable

 

13.6

 

 

Inventories

 

15.5

 

 

Deferred income taxes

 

23.6

 

 

Property, plant and equipment, net

 

73.7

 

 

Debt issuance costs, net

 

29.3

 

 

Intra-company debt

 

154.2

 

 

Other

 

76.1

 

 

Total

 

$

604.2

 

 

(4)

Elimination of intra-company receivables

 

$

(40.2

)

 

Elimination of intra-company debt

 

(154.2

)

 

Other

 

(7.8

)

 

Total

 

$

(202.2

)

 

(5)

Accounts payable

 

$

43.5

 

 

Income taxes payable

 

2.9

 

 

Accrued interest

 

32.3

 

 

Accrued profit sharing

 

9.2

 

 

Debt

 

2,045.3

 

 

Deferred income taxes

 

205.1

 

 

Other

 

24.4

 

 

Total

 

$

2,362.7

 

 

(6)

Elimination of intra-company payables

 

$

(40.5

)

 

Elimination of intra-company debt

 

(154.2

)

 

Other

 

1.3

 

 

Total

 

$

(193.4

)

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (Continued)

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2014

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2013

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,050,063

 

$

1,096,210

 

$

197,392

 

$

40,199

 

$

 

$

3,383,864

 

External Non-U.S.

 

102,265

 

110,410

 

 

497

 

 

213,172

 

Other segments

 

113,945

 

552,030

 

1,142

 

12,280

 

(679,397

)

 

 

 

2,266,273

 

1,758,650

 

198,534

 

52,976

 

(679,397

)

3,597,036

 

Operating income (loss)

 

204,846

 

(17,075

)

3,860

 

(30,873

)(1)

4,672

(2)

165,430

 

Income (loss) before income taxes

 

176,739

 

(32,293

)

724

 

(48,214

)

4,672

 

101,628

 

Depreciation and amortization

 

52,883

 

53,840

 

4,236

 

3,030

 

(102

)

113,887

 

Capital expenditures

 

59,259

 

32,614

 

1,703

 

1,006

 

 

94,582

 

 


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

 

(1)

Corporate SG&A

 

$

(17.1

)

 

Company-wide equity-based compensation

 

(5.2

)

 

Profit sharing

 

(9.1

)

 

Other, net

 

0.5

 

 

Total

 

$

(30.9

)

 

(2)

Gross profit increase from intra-company sales

 

$

4.7

 

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information

 

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior notes due 2019, 2020, 2022 and 2023. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information on a consolidated basis. The following statements should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of June 30, 2014

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

297,225

 

$

50,461

 

$

9,804

 

$

 

$

357,490

 

Accounts receivable, net

 

367,627

 

1,077,153

 

49,880

 

(583,864

)

910,796

 

Inventories

 

684,841

 

543,977

 

97,561

 

(5,508

)

1,320,871

 

Other current assets

 

47,442

 

7,719

 

4,310

 

(18,442

)

41,029

 

Total current assets

 

1,397,135

 

1,679,310

 

161,555

 

(607,814

)

2,630,186

 

Property, plant and equipment, net

 

1,033,622

 

584,587

 

561,115

 

(2,317

)

2,177,007

 

Intangible assets, net

 

 

372,819

 

 

 

372,819

 

Goodwill

 

 

728,751

 

 

 

728,751

 

Other assets, including investments in subs

 

2,615,185

 

21,781

 

7,109

 

(2,567,636

)

76,439

 

Total assets

 

$

5,045,942

 

$

3,387,248

 

$

729,779

 

$

(3,177,767

)

$

5,985,202