Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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 October 30, 2015, Registrant had 242,123,707 outstanding shares of common stock.

 

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

 

 

 

Page

 

PART I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

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

 

1

 

 

 

 

 

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

 

2

 

 

 

 

 

Consolidated Statements of Cash Flows for the three- and nine-month periods ended September 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

 

19

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

27

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

28

 

 

 

 

Item 4.

Mine Safety Disclosures

 

28

 

 

 

 

Item 5.

Other Information

 

28

 

 

 

 

Item 6.

Exhibits

 

29

 

 

 

 

 

Signatures

 

30

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

473,790

 

$

361,363

 

Accounts receivable, net

 

757,110

 

859,835

 

Accounts receivable-related parties

 

41,915

 

42,990

 

Inventories

 

1,321,397

 

1,618,419

 

Deferred income taxes

 

28,839

 

35,503

 

Other current assets

 

28,744

 

55,655

 

Total current assets

 

2,651,795

 

2,973,765

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,013,659

 

3,123,906

 

 

 

 

 

 

 

Restricted cash

 

19,621

 

19,312

 

Intangible assets, net

 

353,561

 

370,669

 

Goodwill

 

740,243

 

745,158

 

Other assets

 

63,662

 

78,217

 

Total assets

 

$

6,842,541

 

$

7,311,027

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

378,594

 

$

489,791

 

Accounts payable-related parties

 

7,776

 

21,265

 

Income taxes payable

 

14,246

 

6,086

 

Accrued payroll and benefits

 

95,150

 

128,968

 

Accrued interest

 

47,998

 

50,405

 

Accrued expenses

 

102,510

 

107,607

 

Current maturities of long-term debt

 

31,584

 

46,460

 

Total current liabilities

 

677,858

 

850,582

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Senior term loan

 

228,125

 

237,500

 

Senior notes

 

2,350,000

 

2,700,000

 

Other long-term debt

 

37,694

 

40,206

 

Total long-term debt

 

2,615,819

 

2,977,706

 

 

 

 

 

 

 

Deferred income taxes

 

576,674

 

542,033

 

Other liabilities

 

16,405

 

18,839

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

126,340

 

126,340

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 261,938,768, and 261,420,126 shares issued; and 242,090,224, and 241,449,423 shares outstanding, as of September 30, 2015 and December 31, 2014, respectively

 

636

 

635

 

Treasury stock, at cost; 19,848,544, and 19,970,703 shares, as of September 30, 2015 and December 31, 2014, respectively

 

(396,473

)

(398,898

)

Additional paid-in capital

 

1,104,832

 

1,083,435

 

Retained earnings

 

2,250,901

 

2,227,843

 

Total Steel Dynamics, Inc. equity

 

2,959,896

 

2,913,015

 

Noncontrolling interests

 

(130,451

)

(117,488

)

Total equity

 

2,829,445

 

2,795,527

 

Total liabilities and equity

 

$

6,842,541

 

$

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,901,415

 

$

2,276,747

 

$

5,851,371

 

$

6,030,408

 

Related parties

 

49,508

 

62,269

 

151,994

 

208,451

 

Total net sales

 

1,950,923

 

2,339,016

 

6,003,365

 

6,238,859

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,722,197

 

2,050,504

 

5,415,854

 

5,564,272

 

Gross profit

 

228,726

 

288,512

 

587,511

 

674,587

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

82,371

 

80,240

 

241,381

 

223,745

 

Profit sharing

 

9,008

 

12,865

 

18,637

 

28,729

 

Amortization of intangible assets

 

6,318

 

6,764

 

19,134

 

20,633

 

Operating income

 

131,029

 

188,643

 

308,359

 

401,480

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

37,084

 

31,904

 

117,334

 

92,523

 

Other expense, net

 

239

 

22,072

 

15,219

 

19,687

 

Income before income taxes

 

93,706

 

134,667

 

175,806

 

289,270

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

34,839

 

47,010

 

64,660

 

101,574

 

 

 

 

 

 

 

 

 

 

 

Net income

 

58,867

 

87,657

 

111,146

 

187,696

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

1,750

 

3,516

 

11,782

 

14,359

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Steel Dynamics, Inc.

 

$

60,617

 

$

91,173

 

$

122,928

 

$

202,055

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.25

 

$

0.38

 

$

0.51

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

242,074

 

240,087

 

241,836

 

229,772

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.25

 

0.38

 

$

0.51

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

243,822

 

242,244

 

243,393

 

241,895

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.1375

 

$

0.1150

 

$

0.4125

 

$

0.3450

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

58,867

 

$

87,657

 

$

111,146

 

$

187,696

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

74,211

 

65,957

 

221,306

 

181,966

 

Equity-based compensation

 

5,332

 

5,104

 

20,232

 

15,572

 

Deferred income taxes

 

13,130

 

(3,417

)

46,214

 

(7,788

)

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

 

655

 

(662

)

6,638

 

5,435

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

36,361

 

30,955

 

122,296

 

(157,691

)

Inventories

 

(8,763

)

27,212

 

317,410

 

21,088

 

Other assets

 

(3,100

)

(4,928

)

8,794

 

2,776

 

Accounts payable

 

(62,757

)

9,690

 

(127,075

)

28,116

 

Income taxes receivable/payable

 

19,888

 

8,062

 

29,309

 

22,491

 

Accrued expenses and liabilities

 

30,554

 

23,594

 

(47,973

)

(1,670

)

Net cash provided by operating activities

 

164,378

 

249,224

 

708,297

 

297,991

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(30,286

)

(24,531

)

(86,458

)

(82,906

)

Acquisition of business, net of cash acquired

 

(45,000

)

(1,647,463

)

(45,000

)

(1,647,463

)

Other investing activities

 

3,715

 

2,959

 

6,184

 

34,157

 

Net cash used in investing activities

 

(71,571

)

(1,669,035

)

(125,274

)

(1,696,212

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

67,999

 

1,394,497

 

179,033

 

1,501,895

 

Repayment of current and long-term debt

 

(73,420

)

(138,533

)

(561,428

)

(271,191

)

Debt issuance costs

 

 

(18,020

)

 

(18,020

)

Exercise of stock options proceeds, including related tax effect

 

302

 

11,576

 

7,261

 

22,997

 

Contributions from noncontrolling investors, net

 

(17

)

(52

)

(1,181

)

4,712

 

Dividends paid

 

(33,282

)

(27,556

)

(94,281

)

(77,737

)

Net cash provided by (used in) financing activities

 

(38,418

)

1,221,912

 

(470,596

)

1,162,656

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

54,389

 

(197,899

)

112,427

 

(235,565

)

Cash and equivalents at beginning of period

 

419,401

 

357,490

 

361,363

 

395,156

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

473,790

 

$

159,591

 

$

473,790

 

$

159,591

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

26,701

 

$

40,022

 

$

115,345

 

$

100,523

 

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

 

$

1,172

 

$

41,267

 

$

(10,321

)

$

86,418

 

 

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. Effective the third quarter 2015, the company changed its reportable segments, consistent with how it currently manages the business, representing three reporting segments: steel operations, metals recycling operations, and steel fabrication operations. Segment information provided within this Form 10-Q, including that within Note 10: Segment Information, has been adjusted for all prior periods consistent with the current reportable segment presentation.

 

Steel Segment Operations.  Steel Segment 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, Steel of West Virginia, and now, Iron Dynamics (IDI), a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. Steel operations accounted for 69% and 62% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015 and 2014, and 69% and 61% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014, respectively.

 

Metals Recycling Segment Operations. Metals recycling operations consist solely of OmniSource Corporation (OmniSource), the company’s metals recycling and processing locations, and ferrous scrap procurement operations. Metals recycling operations accounted for 18% and 26% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015, and 2014, and 19% and 27% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014,  respectively.

 

Steel Fabrication Segment Operations.  Steel fabrication operations include the company’s eight 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 9% and 8% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015, and 2014, and 8% and 7% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014, respectively.

 

Other. TheOther” category consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and several smaller joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.

 

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.

 

4



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

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

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

2015

 

2014

 

Metals Recycling Segment:

 

OmniSource

 

$

451,812

 

$

456,727

 

 

 

Butler Flat Roll Division, Structural and Rail Division, and Engineered Bar Division

 

95,000

 

95,000

 

Steel Segment:

 

The Techs

 

142,783

 

142,783

 

 

 

Roanoke Bar Division

 

29,041

 

29,041

 

 

 

Columbus Flat Roll Division

 

19,682

 

19,682

 

Fabrication Segment:

 

New Millennium Building Systems

 

1,925

 

1,925

 

 

 

 

 

$

740,243

 

$

745,158

 

 

OmniSource goodwill decreased $4.9 million from December 31, 2014 to September 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.

 

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 for annual and interim periods beginning 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. This guidance is effective for annual and interim periods beginning after December 15, 2015, 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.  Acquisitions

 

Consolidated Systems, Inc.

 

On September 14, 2015, the company purchased from Consolidated Systems, Inc. (“CSi”) certain of its steel decking facilities (including associated assets) and net working capital of approximately $30 million, for a purchase price of $45 million in cash. Operating results of these facilities have been reflected in the company’s financial statements since the September 14, 2015, purchase date, in the fabrication operations reporting segment. The purchased assets include three decking facilities located in Memphis, Tennessee; Phoenix, Arizona; and Terrell, Texas. Producing both standard and premium specialty deck profiles, the new locations will allow for enhanced geographic reach into the southwestern and western markets, and further diversify New Millennium Building Systems’ product offerings.

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  Acquisitions (Continued)

 

Severstal Columbus, LLC.

 

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 Pro forma 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):

 

 

 

Nine Months Ended

 

 

 

September 30, 2014

 

Net sales

 

$

7,838,681

 

Net income attributable to Steel Dynamics, Inc.

 

298,731

 

 

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 nine-month period ended September 30, 2014.

 

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 September 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 nine-month periods ended September 30, 2015 and 2014 (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

60,617

 

242,074

 

$

0.25

 

$

91,173

 

240,087

 

$

0.38

 

Dilutive common share equivalents

 

 

1,748

 

 

 

 

2,157

 

 

 

Diluted earnings per share

 

$

60,617

 

243,822

 

$

0.25

 

$

91,173

 

242,244

 

$

0.38

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

122,928

 

241,836

 

$

0.51

 

$

202,055

 

229,772

 

$

0.88

 

Dilutive common share equivalents

 

 

1,557

 

 

 

 

1,852

 

 

 

5.125% convertible senior notes, net of tax

 

 

 

 

 

4,327

 

10,271

 

 

 

Diluted earnings per share

 

$

122,928

 

243,393

 

$

0.51

 

$

206,382

 

241,895

 

$

0.85

 

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Raw materials

 

$

559,996

 

$

764,883

 

Supplies

 

385,347

 

374,599

 

Work in progress

 

114,718

 

128,882

 

Finished goods

 

261,336

 

350,055

 

Total inventories

 

$

1,321,397

 

$

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 nine-months ended September 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.

 

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

 

7,454

 

 

 

 

7,455

 

 

Dividends declared

 

 

 

(99,802

)

 

 

(99,802

)

 

Distributions to noncontrolling investors, net

 

 

 

 

 

(1,181

)

(1,181

)

 

Equity-based compensation

 

 

13,943

 

(68

)

2,425

 

 

16,300

 

 

Comprehensive and net income (loss)

 

 

 

122,928

 

 

(11,782

)

111,146

 

 

Balances at September 30, 2015

 

$

636

 

$

1,104,832

 

$

2,250,901

 

$

(396,473

)

$

(130,451

)

$

2,829,445

 

$

126,340

 

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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, 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 September 30, 2015 (MT represents metric tons and Lbs represents pounds):

 

Commodity Futures

 

Long/Short

 

Total

 

 

 

Aluminum

 

Long

 

2,350

 

MT

 

Aluminum

 

Short

 

2,275

 

MT

 

Copper

 

Long

 

7,602

 

MT

 

Copper

 

Short

 

13,860

 

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 September 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 nine-month periods ended September 30, 2015, and 2014 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

Fair Value

 

 

 

Balance sheet
location

 

September 30,
2015

 

December 31,
2014

 

September 30,
2015

 

December 31,
2014

 

Derivative instruments designated as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

$

614

 

$

3,180

 

$

2,410

 

$

913

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges -

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Other current assets

 

1,635

 

2,132

 

1,019

 

626

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

2,249

 

$

5,312

 

$

3,429

 

$

1,539

 

 

The fair value of the above derivative instruments, along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $1.8 million at September 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
in income on

 

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

 

 

 

in income on
derivatives

 

September 30,
2015

 

September 30,
2014

 

fair value hedge
relationships

 

related hedged
items

 

September 30,
2015

 

September 30,
2014

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(2,825

)

$

4,371

 

Firm commitments

 

Costs of goods sold

 

$

662

 

$

784

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

800

 

(4,163

)

 

 

 

 

 

 

 

 

 

 

 

 

$

1,462

 

$

(3,379

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

6,707

 

$

2,672

 

 

 

 

 

 

 

 

 

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Derivative Financial Instruments (Continued)

 

 

 

Location of gain
(loss) recognized

 

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

 

Hedged items in

 

Location of gain
recognized in

 

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

 

 

 

in income on
derivatives

 

September 30,
2015

 

September 30,
2014

 

fair value hedge
relationships

 

income on related
hedged items

 

September 30,
2015

 

September 30,
2014

 

Derivatives in fair value hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(4,063

)

$

3,356

 

Firm commitments

 

Costs of goods sold

 

$

1,518

 

$

1,115

 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

1,291

 

(3,805

)

 

 

 

 

 

 

 

 

 

 

 

 

$

2,809

 

$

(2,690

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

13,377

 

$

8,598

 

 

 

 

 

 

 

 

 

 

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $191,000 and $229,000 during the three-month periods ended September 30, 2015, and 2014, respectively; and a loss of $64,000 and gain of $227,000 during the nine-month periods ended September 30, 2015 and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $1.2 million reduced cost of goods sold during the three-month periods ended September 30, 2015, and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $439,000 reduced cost of goods sold during the nine-month periods ended September 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.

 

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 September 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)

 

September 30, 2015

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

2,249

 

$

 

$

2,249

 

$

 

Commodity futures — financial liabilities

 

3,429

 

 

3,429

 

 

 

 

 

 

 

 

 

 

 

 

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 $2.6 billion and $3.1 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.6 billion and $3.0 billion) at September 30, 2015, and December 31, 2014, respectively.

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 two other remaining steel manufacturing company defendants, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, originally against eight companies. The Complaint alleges a conspiracy on the part of the original defendants to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a specified 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.  In addition, another similar complaint was filed in December 2010 purporting to be on behalf of indirect purchasers of steel products in Tennessee. All Complaints have been consolidated in the Chicago action and 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 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. Following a three-day hearing on the pending motion during March and April of 2014, the Court took the motion under advisement. On September 9, 2015, the Court certified the class, limited, however, to the issue of the alleged conspiracy, and denied class certification on the issue of antitrust impact. There will be additional merits discovery, but the extent thereof is currently being discussed. In the meantime, the defendants have appealed the court’s class certification ruling on the conspiracy issue, and Plaintiff has cross-appealed on the impact issue. Steel Dynamics has also filed a motion for summary judgment, as has co-defendant SSAB.  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 the Company’s financial condition, results of operations, or liquidity

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information

 

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. Effective the third quarter 2015, the company changed its reportable segments, consistent with how it currently manages the business, in three reporting segments: steel operations (includes Columbus since its September 16, 2014 acquisition), metals recycling operations, and steel fabrication operations. The segment operations are described in Note 1 to the financial statements. Amounts included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments.  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 segment results for the three- and nine-month periods ended September 30, 2015, and 2014, each adjusted consistent with our current reportable segments presentation, are as follows (in thousands):

 

For the three months ended
September 30, 2015

 

Steel Operations

 

Metals Recycling
Operations

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,285,459

 

$

294,357

 

$

173,047

 

$

78,802

 

$

 

$

1,831,665

 

External Non-U.S.

 

65,928

 

51,215

 

1,907

 

208

 

 

119,258

 

Other segments

 

56,146

 

270,888

 

2

 

4,209

 

(331,245

)

 

 

 

1,407,533

 

616,460

 

174,956

 

83,219

 

(331,245

)

1,950,923

 

Operating income (loss)

 

124,712

 

(3,555

)

36,733

 

(28,401

)(1)

1,540

(2)

131,029

 

Income (loss) before income taxes

 

102,566

 

(6,967

)

35,108

 

(38,541

)

1,540

 

93,706

 

Depreciation and amortization

 

52,404

 

15,913

 

2,300

 

3,645

 

(51

)

74,211

 

Capital expenditures

 

21,975

 

6,286

 

935

 

1,090

 

 

30,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

 

 

 

 

 

 

 

 

 

Assets

 

4,096,188

 

1,588,821

 

372,673

 

898,772

(3)

(113,913

)(4)

6,842,541

 

Liabilities

 

676,097

 

309,191

 

84,379

 

2,923,253

(5)

(106,164

)(6)

3,886,756

 

 


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

 

(1)  Corporate SG&A

 

$

(9.5

)

Company-wide equity-based compensation

 

(5.3

)

Profit sharing

 

(7.5

)

Minnesota operations

 

(4.1

)

Other, net

 

(2.0

)

 

 

$

(28.4

)

 

(2) Gross profit increase from intra-company sales

 

$

1.5

 

 

(3) Cash and equivalents

 

$

415.7

 

Accounts receivable

 

30.0

 

Inventories

 

36.8

 

Deferred income taxes

 

28.8

 

Property, plant and equipment, net

 

309.6

 

Debt issuance costs

 

34.4

 

Intra-company debt

 

6.5

 

Other

 

37.0

 

 

 

$

898.8

 

 

(4) Elimination of intra-company receivables

 

$

(100.8

)

Elimination of intra-company debt

 

(6.5

)

Other

 

(6.6

)

 

 

$

(113.9

)

 

(5) Accounts payable

 

$

109.8

 

Income taxes payable

 

14.7

 

Accrued interest

 

47.8

 

Accrued profit sharing

 

14.5

 

Debt

 

2,641.3

 

Deferred income taxes

 

68.0

 

Other

 

27.2

 

 

 

$

2,923.3

 

 

(6) Elimination of intra-company payables

 

$

(100.0

)

Elimination of intra-company debt

 

(6.5

)

Other

 

0.3

 

 

 

$

(106.2

)

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)

 

For the three months ended
September 30, 2014

 

Steel Operations

 

Metals Recycling

 

Steel Fabrication
Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,400,370

 

$

534,348

 

$

189,993

 

$

99,834

 

$

 

$

2,224,545

 

External Non-U.S.

 

50,841

 

63,300

 

 

330

 

 

114,471

 

Other segments

 

75,321

 

355,835

 

43

 

36,544

 

(467,743

)

 

 

 

1,526,532

 

953,483

 

190,036

 

136,708

 

(467,743

)

2,339,016

 

Operating income (loss)

 

202,600

 

8,489

 

19,474

 

(42,960

)(1)

1,040

(2)

188,643

 

Income (loss) before income taxes

 

187,072

 

3,863

 

17,877

 

(75,185

)(7)

1,040

 

134,667

 

Depreciation and amortization

 

35,265

 

18,769

 

2,974

 

9,000

 

(51

)

65,957

 

Capital expenditures

 

12,506

 

7,769

 

477

 

3,779

 

 

24,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

 

 

 

 

 

 

 

 

 

Assets

 

4,663,142

 

1,842,485

 

315,381

 

929,041

(3)

(171,766

)(4)

7,578,283

 

Liabilities

 

830,172

 

401,111

 

34,386

 

3,436,135

(5)

(161,510

)(6)

4,540,294

 

 


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

 

(1)  Corporate SG&A

 

$

(12.4

)

Company-wide equity-based compensation

 

(5.1

)

Profit sharing

 

(11.6

)

Minnesota operations

 

(10.7

)

Other, net

 

(3.2

)

 

 

$

(43.0

)

 

(2) Gross profit increase from intra-company sales

 

$

1.0

 

 

(3) Cash and equivalents

 

$

82.9

 

Accounts receivable

 

51.3

 

Inventories

 

114.6

 

Deferred income taxes

 

18.3

 

Property, plant and equipment, net

 

572.9

 

Debt issuance costs

 

39.9

 

Intra-company debt

 

7.4

 

Other

 

41.7

 

 

 

$

929.0

 

 

(4) Elimination of intra-company receivables

 

$

(155.6

)

Elimination of intra-company debt

 

(7.4

)

Other

 

(8.8

)

 

 

$

(171.8

)

 

(5) Accounts payable

 

$

165.0

 

Income taxes payable

 

26.9

 

Accrued interest

 

21.1

 

Accrued profit sharing

 

25.2

 

Debt

 

3,054.9

 

Deferred income taxes

 

100.6

 

Other

 

42.4

 

 

 

$

3,436.1

 

 

(6) Elimination of intra-company payables

 

$

(155.6

)

Elimination of intra-company debt

 

(7.4

)

Other

 

1.5

 

 

 

$

(161.5

)

 

(7) Includes $25.0 million of acquisition and bridge financing costs associated with the acquisition of Columbus.

 

12



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)

 

For the nine months ended

 

 

 

Metals Recycling

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2015

 

Steel Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

3,902,162

 

$

1,014,753

 

$

488,584

 

$

237,501

 

$

 

$

5,643,000

 

External Non-U.S.

 

210,320

 

147,626

 

1,907

 

512

 

 

360,365

 

Other segments

 

158,609

 

751,542

 

18

 

29,114

 

(939,283

)

 

 

 

4,271,091

 

1,913,921

 

490,509

 

267,127

 

(939,283

)

6,003,365

 

Operating income (loss)

 

338,690

 

229

 

85,754

 

(117,273

)(1)

959

(2)

308,359

 

Income (loss) before income taxes

 

269,187

 

(12,780

)

80,581

 

(162,141

)

959

 

175,806

 

Depreciation and amortization

 

154,616

 

50,207

 

6,688

 

9,948

 

(153

)

221,306

 

Capital expenditures

 

52,324

 

17,332

 

2,506

 

14,296

 

 

86,458

 

 


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

 

(1) Corporate SG&A

 

$

(27.1

)

Company-wide equity-based compensation

 

(17.5

)

Profit sharing

 

(14.4

)

Minnesota operations

 

(50.3

)

Other, net

 

(8.0

)

Total

 

$

(117.3

)

 

(2) Gross profit increase from intra-company sales

 

$

1.0

 

 

For the nine months ended

 

 

 

 

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2014

 

Steel Operations

 

Metals Recycling

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

3,675,696

 

$

1,522,334

 

$

440,706

 

$

261,992

 

$

 

$

5,900,728

 

External Non-U.S.

 

158,218

 

178,947

 

 

966

 

 

338,131

 

Other segments

 

188,854

 

1,024,447

 

43

 

70,798

 

(1,284,142

)

 

 

 

4,022,768

 

2,725,728

 

440,749

 

333,756

 

(1,284,142

)

6,238,859

 

Operating income (loss)

 

469,204

 

27,362

 

30,190

 

(129,260

)(1)

3,984

(2)

401,480

 

Income (loss) before income taxes

 

426,676

 

12,394

 

25,628

 

(179,412

)(3)

3,984

 

289,270

 

Depreciation and amortization

 

96,010

 

56,898

 

7,597

 

21,615

 

(154

)

181,966

 

Capital expenditures

 

48,209

 

16,242

 

1,324

 

17,131

 

 

82,906

 

 

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

 

(1) Corporate SG&A

 

$

(31.7

)

Company-wide equity-based compensation

 

(14.4

)

Profit sharing

 

(25.2

)

Minnesota operations

 

(49.8

)

Other, net

 

(8.2

)

Total

 

$

(129.3

)

 

(2) Gross profit increase from intra-company sales

 

$

4.0

 

 

(3)  Includes $25.0 million of acquisition and bridge financing costs associated with the acquisition of Columbus.

 

13



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

 

As of September 30, 2015

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

410,170

 

$

52,752

 

$

10,868

 

$

 

$

473,790

 

Accounts receivable, net

 

235,529

 

1,199,733

 

40,496

 

(676,733

)

799,025

 

Inventories

 

613,697

 

673,646

 

36,150

 

(2,096

)

1,321,397

 

Other current assets

 

61,961

 

11,830

 

1,150

 

(17,358

)

57,583

 

Total current assets

 

1,321,357

 

1,937,961

 

88,664

 

(696,187

)

2,651,795

 

Property, plant and equipment, net

 

966,388

 

1,754,945

 

294,388

 

(2,062

)

3,013,659

 

Intangible assets, net

 

 

353,561

 

 

 

353,561

 

Goodwill

 

 

740,243

 

 

 

740,243

 

Other assets, including investments in subs

 

3,570,277

 

22,075

 

6,454

 

(3,515,523

)

83,283

 

Total assets

 

$

5,858,022

 

$

4,808,785

 

$

389,506

 

$

(4,213,772

)

$

6,842,541

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

122,112

 

$

273,957

 

$

79,370

 

$

(89,069

)

$

386,370

 

Accrued expenses

 

156,735

 

186,923

 

5,681

 

(89,435

)

259,904

 

Current maturities of long-term debt

 

13,109

 

700

 

57,253

 

(39,478

)

31,584

 

Total current liabilities

 

291,956

 

461,580

 

142,304

 

(217,982

)

677,858

 

Long-term debt

 

2,582,524

 

347

 

163,728

 

(130,780

)

2,615,819

 

Other liabilities

 

23,645

 

1,505,018

 

34,545

 

(970,129

)

593,079

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

126,340

 

 

126,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

636

 

1,727,859

 

18,121

 

(1,745,980

)

636

 

Treasury stock

 

(396,473

)

 

 

 

(396,473

)

Additional paid-in-capital

 

1,104,833

 

117,737

 

650,858

 

(768,596

)

1,104,832

 

Retained earnings (deficit)

 

2,250,901

 

996,244

 

(615,939

)

(380,305

)

2,250,901

 

Total Steel Dynamics, Inc. equity

 

2,959,897

 

2,841,840

 

53,040

 

(2,894,881

)

2,959,896

 

Noncontrolling interests

 

 

 

(130,451

)

 

(130,451

)

Total equity

 

2,959,897

 

2,841,840

 

(77,411

)

(2,894,881

)

2,829,445

 

Total liabilities and equity

 

$

5,858,022

 

$

4,808,785

 

$

389,506

 

$

(4,213,772

)

$

6,842,541

 

 

14



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of December 31, 2014

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

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

 

 

15



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)

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2015

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

735,250

 

$

2,103,824

 

$

96,204

 

$

(984,355

)

$

1,950,923

 

Costs of goods sold

 

619,833

 

1,965,364

 

99,864

 

(962,864

)

1,722,197

 

Gross profit (loss)

 

115,417

 

138,460

 

(3,660

)

(21,491

)

228,726

 

Selling, general and administrative

 

35,235

 

64,259

 

2,845

 

(4,642

)

97,697

 

Operating income (loss)

 

80,182

 

74,201

 

(6,505

)

(16,849

)

131,029

 

Interest expense, net of capitalized interest

 

18,312

 

18,138

 

1,692

 

(1,058

)

37,084

 

Other (income) expense, net

 

252

 

(631

)

(440

)

1,058

 

239

 

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

 

61,618

 

56,694

 

(7,757

)

(16,849

)

93,706

 

Income taxes (benefit)

 

20,169

 

21,697

 

(421

)

(6,606

)

34,839

 

 

 

41,449

 

34,997

 

(7,336

)

(10,243

)

58,867

 

Equity in net loss of subsidiaries

 

19,168

 

 

 

(19,168

)

 

Net loss attributable to noncontrolling interests

 

 

 

1,750

 

 

1,750

 

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

 

$

60,617

 

$

34,997

 

$

(5,586

)

$

(29,411

)

$

60,617

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2014

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,044,207

 

$

2,609,731

 

$

150,551

 

$

(1,465,473

)

$

2,339,016

 

Costs of goods sold

 

856,372

 

2,469,396

 

162,094

 

(1,437,358

)

2,050,504

 

Gross profit (loss)

 

187,835

 

140,335

 

(11,543

)

(28,115

)

288,512

 

Selling, general and administrative

 

40,932

 

59,878

 

3,601

 

(4,542

)

99,869

 

Operating income (loss)

 

146,903

 

80,457

 

(15,144

)

(23,573

)

188,643

 

Interest expense, net of capitalized interest

 

18,965

 

12,238

 

1,958

 

(1,257

)

31,904

 

Other (income) expense, net

 

22,548

 

(202

)

(1,530

)

1,256

 

22,072

 

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

 

105,390

 

68,421

 

(15,572

)

(23,572

)

134,667

 

Income taxes (benefit)

 

30,605

 

24,754

 

(561

)

(7,788

)

47,010

 

 

 

74,785

 

43,667

 

(15,011

)

(15,784

)

87,657

 

Equity in net loss of subsidiaries

 

16,388

 

 

 

(16,388

)

 

Net loss attributable to noncontrolling interests

 

 

 

3,516

 

 

3,516

 

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

 

$

91,173

 

$

43,667

 

$

(11,495

)

$

(32,172

)

$

91,173

 

 

16



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2015

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,300,024

 

$

6,447,974

 

$

302,657

 

$

(3,047,290

)

$

6,003,365

 

Costs of goods sold

 

1,982,667

 

6,056,514

 

352,980

 

(2,976,307

)

5,415,854

 

Gross profit (loss)

 

317,357

 

391,460

 

(50,323

)

(70,983

)

587,511

 

Selling, general and administrative

 

95,883

 

188,028

 

8,878

 

(13,637

)

279,152

 

Operating income (loss)

 

221,474

 

203,432

 

(59,201

)

(57,346

)

308,359

 

Interest expense, net of capitalized interest

 

57,015

 

58,354

 

5,084

 

(3,119

)

117,334

 

Other (income) expense, net

 

15,131

 

(597

)

(2,434

)

3,119

 

15,219

 

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

 

149,328

 

145,675

 

(61,851

)

(57,346

)

175,806

 

Income taxes (benefit)

 

35,207

 

53,903

 

(4,047

)

(20,403

)

64,660

 

 

 

114,121

 

91,772

 

(57,804

)

(36,943

)

111,146

 

Equity in net loss of subsidiaries

 

8,807

 

 

 

(8,807

)

 

Net loss attributable to noncontrolling interests

 

 

 

11,782

 

 

11,782

 

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

 

$

122,928

 

$

91,772

 

$

(46,022

)

$

(45,750

)

$

122,928

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2014

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,915,339

 

$

7,035,579

 

$

377,639

 

$

(4,089,698

)

$

6,238,859

 

Costs of goods sold

 

2,477,791

 

6,668,153

 

427,029

 

(4,008,701

)

5,564,272

 

Gross profit (loss)

 

437,548

 

367,426

 

(49,390

)

(80,997

)

674,587

 

Selling, general and administrative

 

105,185

 

170,578

 

10,415

 

(13,071

)

273,107

 

Operating income (loss)

 

332,363

 

196,848

 

(59,805

)

(67,926

)

401,480

 

Interest expense, net of capitalized interest

 

57,357

 

33,093

 

5,824

 

(3,751

)

92,523

 

Other (income) expense, net

 

20,016

 

147

 

(4,226

)

3,750

 

19,687

 

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

 

254,990

 

163,608

 

(61,403

)

(67,925

)

289,270

 

Income taxes (benefit)

 

64,480

 

58,772

 

949

 

(22,627

)

101,574

 

 

 

190,510

 

104,836

 

(62,352

)

(45,298

)

187,696

 

Equity in net loss of subsidiaries

 

11,545

 

 

 

(11,545

)

 

Net loss attributable to noncontrolling interests

 

 

 

14,359

 

 

14,359

 

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

 

$

202,055

 

$

104,836

 

$

(47,993

)

$

(56,843

)

$

202,055

 

 

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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)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2015

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

306,941

 

$

400,910

 

$

(4,302

)

$

4,748

 

$

708,297

 

Net cash used in investing activities

 

(35,100

)

(82,737

)

(12,796

)

5,359

 

(125,274

)

Net cash provided by (used in) financing activities

 

(126,984

)

(347,111

)

13,606

 

(10,107

)

(470,596

)

Increase (decrease) in cash and equivalents

 

144,857

 

(28,938

)

(3,492

)

 

112,427

 

Cash and equivalents at beginning of period

 

265,313

 

81,690

 

14,360

 

 

361,363

 

Cash and equivalents at end of period

 

$

410,170

 

$

52,752

 

$

10,868

 

$

 

$

473,790

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2014

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

258,952

 

$

80,298

 

$

(41,245

)

$

(14

)

$

297,991

 

Net cash provided by (used in) investing activities

 

(1,692,967

)

15,023

 

(16,740

)

(1,528

)

(1,696,212

)

Net cash provided by (used in) financing activities

 

1,188,074

 

(85,774

)

58,814

 

1,542

 

1,162,656

 

Increase (decrease) in cash and equivalents

 

(245,941

)

9,547

 

829

 

 

(235,565

)

Cash and equivalents at beginning of period

 

320,866

 

61,148

 

13,142

 

 

395,156

 

Cash and equivalents at end of period

 

$

74,925

 

$

70,695

 

$

13,971

 

$

 

$

159,591

 

 

18



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.

 

Segment Operations.  Effective the third quarter 2015, the company changed its reportable segments, consistent with how we currently manage our business, representing three reporting segments: steel operations, metals recycling operations, and steel fabrication operations. Segment information provided within this Form 10-Q has been adjusted for all prior periods consistent with the current reportable segment presentation.

 

Steel Segment 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, Steel of West Virginia, and now, Iron Dynamics (IDI), a liquid pig iron production (scrap substitute) facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. Metals Recycling Segment Operations consist solely of OmniSource Corporation (OmniSource), the company’s metals recycling and processing locations, and ferrous scrap procurement operations. Steel Fabrication Segment Operations include the company’s eight 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. TheOther” category consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and several joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.

 

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.

 

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Table of Contents

 

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.

 

Results Overview

 

Consolidated operating income decreased $57.6 million, or 31%, to $131.0 million for the third quarter of 2015, compared to $188.6 million for the third quarter of 2014. Third quarter of 2015 net income decreased $30.6 million, or 34%, to $60.6 million, from $91.2 million for the third quarter of 2014.

 

For the first nine months of 2015, operating income decreased $93.1 million, or 23%, to $308.4 million compared to the same period of 2014, while net income decreased $79.1 million, or 39%, to $122.9 million.

 

Our third quarter 2015 and first nine months 2015 operational and financial performance was negatively impacted by decreased steel shipments (excluding the impact of Columbus for the 2015 periods) and average realized steel product pricing, driven primarily by continuing excessive and historically high levels of steel imports.  While scrap costs also decreased significantly in the first quarter of 2015 and remained at lower levels during the second and third quarters of 2015, steel metal margins contracted as the drop in steel selling prices was more severe than the decline of scrap costs. Underlying domestic steel consumption remains steady, as we continue to see improvements in non-residential construction, as well as, steady consumption in automotive and other manufacturing segments. However, a larger portion of the domestic steel demand is being served by imports in 2015 than in 2014. As a result, domestic steel mill utilization rates have decreased throughout 2015, as compared to 2014, resulting in decreased ferrous scrap shipments in our metals recycling operations. These decreased ferrous, as well as nonferrous shipments, along with compressed metal margins due to price volatility, resulted in significantly reduced profitability in our metals recycling operations in 2015, as compared to 2014. During 2015, our steel fabrication operations continue to benefit from the improving non-residential construction market, our market share and expanding geographic footprint, and lower steel raw material costs, resulting in significant increases in both sales and operating income, compared to the same periods in 2014.

 

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

 

 

 

Three Months Ended

 

Second

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Quarter

 

Sequential

 

September 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

Quarter %
Change

 

2015

 

%
Change

 

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel Segment

 

$

1,407,533

 

(8

)%

$

1,526,532

 

$

1,429,237

 

(2

)%

$

4,271,091

 

6

%

$

4,022,768

 

Metals Recycling Segment

 

616,460

 

(35

)%

953,483

 

645,449

 

(4

)%

1,913,921

 

(30

)%

2,725,728

 

Steel Fabrication Segment

 

174,956

 

(8

)%

190,036

 

154,525

 

13

%

490,509

 

11

%

440,749

 

Other

 

83,219

 

(39

)%

136,708

 

90,308

 

(8

)%

267,127

 

(20

)%

333,756

 

 

 

2,282,168

 

 

 

2,806,759

 

2,319,519

 

 

 

6,942,648

 

 

 

7,523,001

 

Intra-company

 

(331,245

)

 

 

(467,743

)

(314,512

)

 

 

(939,283

)

 

 

(1,284,142

)

Consolidated

 

$

1,950,923

 

(17

)%

$

2,339,016

 

$

2,005,007

 

(3

)%

$

6,003,365

 

(4

)%

$

6,238,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel Segment

 

$

124,712

 

(38

)%

$

202,600

 

$

99,012

 

26

%

$

338,690

 

(28

)%

$

469,204

 

Metals Recycling Segment

 

(3,555

)

(142

)%

8,489

 

8,282

 

(143

)%

229

 

(99

)%

27,362

 

Steel Fabrication Segment

 

36,733

 

89

%

19,474

 

27,660

 

33

%

85,754

 

184

%

30,190

 

Other

 

(28,401

)

34

%

(42,960

)

(52,969

)

46

%

(117,273

)

9

%

(129,260

)

 

 

129,489

 

 

 

187,603

 

81,985

 

 

 

307,400

 

 

 

397,496

 

Intra-company

 

1,540

 

 

 

1,040

 

(4,426

)

 

 

959

 

 

 

3,984

 

Consolidated

 

$

131,029

 

(31

)%

$

188,643

 

$

77,559

 

69

%

$

308,359

 

(23

)%

$

401,480

 

 

20



Table of Contents

 

Steel Segment Operations

 

Steel Segment Operations. Steel Operations consist of our six electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities, and IDI, our liquid pig production facility that supplies solely our Butler Flat Roll Division. 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 62% of our consolidated external net sales during the third quarter of 2015 and 2014, and 69% and 61% of our consolidated external net sales during the first nine months 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 sells other products used to produce high strength OCTG and non-energy line pipe. 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

 

Second

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Quarter

 

Sequential

 

September 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

Quarter %
Change

 

2015

 

%
Change

 

2014

 

Shipments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Butler Flat Roll Division

 

637,289

 

(14

)%

738,460

 

721,115

 

(12

)%

1,937,897

 

(10

)%

2,158,200

 

Columbus Flat Roll Division

 

712,992

 

308

%

174,754

 

693,772

 

3

%

1,971,005

 

1,028

%

174,754

 

The Techs

 

190,130

 

(7

)%

205,417

 

182,239

 

4

%

518,303

 

(6

)%

550,588

 

Sheet products

 

1,540,411

 

38

%

1,118,631

 

1,597,126

 

(4

)%

4,427,205

 

54

%

2,883,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural and Rail Division

 

306,073

 

(16

)%

365,900

 

302,250

 

1

%

912,675

 

(8

)%

994,596

 

Engineered Bar Products Division

 

132,901

 

(25

)%

176,891

 

120,559

 

10

%

409,826

 

(14

)%

473,962

 

Roanoke Bar Division

 

130,314

 

(15

)%

153,395

 

140,795

 

(7

)%

396,232

 

(10

)%

440,760

 

Steel of West Virginia

 

81,505

 

(4

)%

85,226

 

81,678

 

%

236,694

 

%

235,681

 

Long products

 

650,793

 

(17

)%

781,412

 

645,282

 

1

%

1,955,427

 

(9

)%

2,144,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shipments

 

2,191,204

 

15

%

1,900,043

 

2,242,408

 

(2

)%

6,382,632

 

27

%

5,028,541

 

Intra-segment shipments

 

(56,836

)

 

 

(62,201

)

(62,417

)

 

 

(175,347

)

 

 

(165,639

)

Segment shipments

 

2,134,368

 

16

%

1,837,842

 

2,179,991

 

(2

)%

6,207,285

 

28

%

4,862,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External shipments

 

2,031,096

 

18

%

1,728,023

 

2,078,685

 

(2

)%

5,926,152

 

29

%

4,585,478

 

 

21



Table of Contents

 

Steel Operations

Shipments and Average Selling Price

 

 

The 16%  increase in steel segment shipments in the third quarter 2015 over those in the same 2014 period was due to Columbus having a full quarter of sales in the third quarter of 2015 versus only a half month in the third quarter of 2014 from the acquisition date of September 14, 2014.  Though overall domestic steel demand remains solid, the continued elevated level of steel imports has been a significant negative impact to our sales volumes, product pricing, and steel mill utilization rates. Our average steel mill utilization rate was 82% for the third quarter of 2015, as compared to 90% in the third quarter of 2014. Steel shipments, excluding Columbus, decreased 14% in the third quarter 2015 compared to the third quarter 2014, due primarily to the continued historically high levels of steel being imported into the United States, with commodity-grade hot roll steel products being the most severely impacted. The elevated level of steel imports has continued to also compress steel selling prices. This along with significant reductions in the cost of scrap resulted in our third quarter 2015 average steel product selling prices decreasing $172 per ton, or 21%, compared to the same quarter in 2014. Despite the overall increase in steel segment shipments with Columbus, net sales decreased 8% in the third quarter of 2015, when compared to the third quarter of 2014 due to the significant drop in selling prices.

 

Net sales for the steel segment increased 6% in the first nine months of 2015, when compared to the first nine months of 2014, as a 28% increase in segment shipments more than offset a decrease of $139 per ton, or16%, in average selling prices. The decrease in average selling prices is due to the elevated level of imported steel into the United States and the significant reductions in the cost of scrap, which has also caused uncertainty for steel consumers. The increase in steel segment shipments is due to the inclusion of Columbus in the first nine months of 2015 results, as sales volumes in 2015, excluding Columbus, are down 9% compared to the first nine months of 2014, due primarily to elevated steel imports to date during 2015.

 

Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost. During the third quarter 2015 and 2014, our metallic raw material costs represented 55% and 65%, 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 $104, or 29%, in the third quarter of 2015, compared with the third quarter of 2014, consistent with overall declines in scrap market pricing. In the first nine months of 2015, our metallic raw material cost per net ton consumed decreased $95, or 26%, compared to the same period in 2014.

 

In spite of decreased raw material cost per ton, third quarter 2015 metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed) contracted significantly compared to the third quarter of 2014, as decreases in product selling prices outpaced decreased raw material costs. Thus, despite increases in shipments from the inclusion of Columbus for the full third quarter 2015 versus only a half month in the third quarter 2014, operating income for the steel segment decreased 38%, to $124.7 million, compared to the same period of 2014. Likewise, first nine months 2015 operating income decreased 28%, to $338.7 million, compared to the first nine months of 2014.

 

Metals Recycling Segment Operations

 

Metals Recycling Segment Operations.  The Metals Recycling segment consists solely of OmniSource, our metals recycling, processing, and ferrous scrap procurement operations. OmniSource sells 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 segment operations accounted for 18% and 26% of our consolidated net sales in the third quarter of 2015 and 2014, respectively, and 19% and 27% of our net sales in the first nine months of 2015 and 2014, respectively.

 

22



Table of Contents

 

Metals Recycling Operations Shipments:

 

 

 

Three Months Ended

 

Second

 

Sequential

 

Nine Months Ended

 

 

 

September 30,

 

Quarter

 

Quarter

 

September 30,

 

 

 

2015

 

%
Change

 

2014

 

2015

 

%
Change

 

2015

 

%
Change

 

2014

 

Ferrous metal (gross tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,354,339

 

(7

)%

1,453,671

 

1,357,755

 

%

3,945,095

 

(7

)%

4,240,901

 

Inter-company

 

(803,263

)

 

 

(673,640

)

(731,491

)

 

 

(2,125,675

)

 

 

(2,042,272

)

External shipments

 

551,076

 

(29

)%

780,031

 

626,264

 

(12

)%

1,819,420

 

(17

)%

2,198,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

287,898

 

(12

)%

325,436

 

275,439

 

5

%

823,240

 

(7

)%

884,647

 

Inter-company

 

(26,826

)

 

 

(31,478

)

(22,166

)

 

 

(67,315

)

 

 

(68,830

)

External shipments

 

261,072

 

(11

)%

293,958

 

253,273

 

3

%

755,925

 

(7

)%

815,817

 

 

Metals recycling operations net sales decreased 35% in the third quarter of 2015 as compared to the third quarter of 2014. Ferrous shipments decreased 7% in the third quarter of 2015, due primarily to reduced domestic steel mill utilization, caused by elevated steel imports in 2015. Nonferrous shipments also decreased 12%. Both ferrous and nonferrous selling prices decreased significantly during the third quarter of 2015, as compared to the same period in 2014, consistent with the overall decline in scrap commodity market and index prices. Ferrous selling prices declined 35%, while nonferrous declined 24% overall. As a result of these decreased selling prices which outpaced decreases in procurement costs, ferrous metal spreads in the third quarter 2015 decreased 14% compared to third quarter 2014, while nonferrous metal spreads decreased 23%. The declines in shipments and metal spreads resulted in  third quarter 2015 operating loss of $3.6 million, as compared to operating income of $8.5 million for the same period in 2014.

 

Metals recycling operations net sales decreased 30% in the first nine months of 2015 as compared to the first nine months of 2014. Ferrous shipments decreased 7% in the first nine months of 2015, compared to the same period in 2014, due to reduced domestic steel mill utilization, caused by elevated steel imports in 2015. Nonferrous shipments decreased 7%. Similarly, both ferrous and nonferrous selling prices decreased significantly during the first nine months of 2015, as compared to the same 2014 period, consistent with overall decline in market selling prices. Ferrous selling prices declined by 32% while nonferrous declined 14% overall. As a result of reduced selling prices, metal spreads for ferrous and nonferrous materials contracted 9% and 20%, respectively, during the first nine months of 2015, when compared to the same period in 2014. These declines in shipments and metal spreads resulted in operating income in the first nine months of 2015 decreasing $27.1 million, or 99%, to $229,000, compared to the first nine months of 2014.

 

Steel Fabrication Segment Operations

 

Steel Fabrication Segment Operations consist of our eight 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 9% and 8% of our consolidated net sales during the third quarter of 2015 and 2014, and 8% and 7% of the company’s consolidated net sales during the first nine months of 2015 and 2014, respectively.

 

On September 14, 2015, the company purchased from Consolidated Systems, Inc. (“CSi”) certain of its steel decking facilities (including associated assets) and net working capital of approximately $30 million, for a purchase price of $45 million in cash. Operating results of these facilities have been reflected in the Steel Fabrication Operations financial statements since the September 14, 2015, purchase date. The purchased assets include three decking facilities located in Memphis, Tennessee; Phoenix, Arizona; and Terrell, Texas. Producing both standard and premium specialty deck profiles, the new locations will allow for enhanced geographic reach into the southwestern and western markets, and further diversify Steel Fabrication Operation’s product offerings.

 

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Steel Fabrication Operations

Sales Volumes and Average Selling Price

 

 

 

Net sales for the steel fabrication segment operations decreased $15.1 million, or 8%, in the third quarter of 2015, compared to the third quarter of 2014. Shipments decreased 10% while average selling prices increased 3% in the third quarter of 2015, as compared to the same period in 2014. While there continues to be a positive trend in the non-residential construction market, and order entry remains strong, our sales volumes in the third quarter 2015 were below those of the same 2014 period as we were able to maintain relatively stable selling prices. Net sales for the segment increased $49.8 million, or 11%, in the first nine months of 2015, compared to the first nine months of 2014, as volumes increased 2% and selling prices increased 9%. 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 continues to improve.

 

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 by 20% in the third quarter of 2015, as compared to the same period in 2014, and coupled with 3% higher selling prices resulted in significantly expanded metal spreads. Likewise, during the first nine months of 2015 the average cost of steel consumed decreased by 11%, as compared to the same period in 2014, coupled with a 9% increase in average selling prices.

 

As a result of the increased selling prices and metal spread expansion, operating income of $36.7 million in the third quarter 2015 was 89% higher than the same period in 2014 of $19.5 million. Similarly, segment operating income of $85.8 million in the first nine months of 2015 increased 184%, from $30.2 million in the first nine months of 2014.

 

Other Operations

 

Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations, which were indefinitely idled in May 2015, and several joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses. Prior to being indefinitely idled, our Minnesota ironmaking operations experienced operating losses. In addition, upon deciding to idle the Minnesota ironmaking operations and to monetize existing raw material inventory, 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 in the second quarter 2015.  Operating losses associated with our Minnesota ironmaking operations have been significantly curtailed post-idling.

 

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Third Quarter Consolidated Results 2015 vs. 2014

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) of $97.7 million during the third quarter of 2015, are comparable to $99.9 million during the third quarter of 2014, representing approximately 5.0% and 4.3% of net sales, respectively.

 

Interest Expense, net of Capitalized Interest.  During the third quarter of 2015, interest expense increased $5.2 million to $37.1 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 call of our $350.0 million 7 5/8% Senior Notes due 2020 in March 2015.

 

Other Expense, net.  During the third quarter of 2015, net other expense of $239,000 was $21.8 million less than net other expense of $22.1 million in the same period in 2014, which included $25.0 million of acquisition and financing costs associated with the September 2014, acquisition of Columbus.

 

Income Taxes.  During the third quarter of 2015, our income tax expense was $34.8 million at an effective income tax rate of 37.2%, as compared to $47.0 million resulting in an effective income tax rate of 34.9% during the third quarter of 2014. The effective tax rate in the third quarter of 2014 is lower due primarily to certain favorable discrete tax adjustments recorded during the quarter.

 

First Nine Months Consolidated Results 2015 vs. 2014

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) of $279.2 million during the first nine months of 2015, are comparable to $273.1 million during the first nine months of 2014, representing approximately 4.6% and 4.4% of net sales, respectively.

 

Interest Expense, net of Capitalized Interest.  During the first nine months of 2015, interest expense increased $24.8 million to $117.3 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, net.  During the first nine months of 2015, net other expense of $15.2 million included $16.7 million of call premium and other financing costs associated with the March 2015 senior notes call and prepayment. Net other expense of $19.7 million in the first nine months of  2014 included $25.0 million of acquisition and financing costs associated with our September 2014 Columbus acquisition.

 

Income Taxes.  During the first nine months of 2015, our income tax expense was $64.7 million at an effective income tax rate of 36.8%, as compared to $101.6 million resulting in an effective income tax rate of 35.1% during the first nine months of 2014. The higher effective tax rate in the first nine months 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 nine months of 2015 as compared to the same period in 2014, as well as certain more significant favorable discrete tax adjustments in the first nine months of 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 working capital requirements, capital expenditures, principal and interest payments related to our outstanding indebtedness, dividends to our shareholders, and acquisitions. We have met these liquidity requirements primarily with cash provided by operations, long-term borrowings and availability under our Revolver. Our liquidity at September 30, 2015 is as follows (in thousands):

 

Cash and equivalents

 

$

473,790

 

Revolver availability

 

1,187,165

 

Total liquidity

 

$

1,660,955

 

 

Our total outstanding debt decreased $376.8 million during the first nine months of 2015, to $2.6 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 47.2% at September 30, 2015, from 50.9% at December 31, 2014.

 

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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 September 30, 2015, we had $1.2 billion of availability on the Revolver, $12.8 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 EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in our Facility) by our LTM gross interest expense, less amortization of financing fees. In addition, a net debt (as defined in the Facility) to consolidated LTM adjusted 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 September 30, 2015, our interest coverage ratio and net debt leverage ratio were 5.45:1.00 and 2.58:1.00, respectively. We, were therefore, in compliance with these covenants at September 30, 2015, and we anticipate we will continue to be in compliance during 2015.

 

Working Capital. We generated cash flow from operations of $708.3 million in the first nine months of 2015. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) decreased $234.8 million, after considering the September 2015 decking asset acquisition which included $30.0 million of working capital, during the first nine months of 2015, to $1.5 billion. Amounts invested in accounts receivable and inventories, net of accounts payable, decreased $276.1 million in conjunction with a 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 nine months of 2015, we invested $86.5 million in property, plant and equipment, as compared to $82.9 million during the same period in 2014. Our current estimated 2015 annual cash allocation plan includes the investment of approximately $120 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 $99.8 million during the first nine months of 2015, compared to $80.9 million during the first nine months of 2014. We paid cash dividends of $94.3 million and $77.7 million during the first nine months 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.

 

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ITEM 3.                   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

In the normal course of business, we are exposed to interest rate changes. Our objectives in managing exposure to interest rate changes are to limit the impact of these rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we 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 September 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 25 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 September 30, 2015, we had a cumulative unrealized loss associated with these financial contracts of $1.2 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 September 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 September 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 September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

ITEM 1.                   LEGAL PROCEEDINGS

 

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

 

We are involved, along with two other remaining steel manufacturing company defendants, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, originally against eight companies. The Complaint alleges a conspiracy on the part of the original defendants to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a specified 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.  In addition, another similar complaint was filed in December 2010 purporting to be on behalf of indirect purchasers of steel products in Tennessee. All Complaints have been consolidated in the Chicago action and 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 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. Following a three-day hearing on the pending motion during March and April of 2014, the Court took the motion under advisement. On September 9, 2015, the Court certified the class, limited, however, to the issue of the alleged conspiracy, and denied class certification on the issue of antitrust impact. There will be additional merits discovery, but the extent thereof is currently being discussed. In the meantime, the defendants have appealed the court’s class certification ruling on the conspiracy issue, and Plaintiff has cross-appealed on the impact issue. Steel Dynamics has also filed a motion for summary judgment, as has co-defendant SSAB.  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 the Company’s financial condition, results of operations, or 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.

 

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ITEM 6.                   EXHIBITS

 

Executive Officer Certifications

 

 

 

31.1*

 

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

 

 

 

31.2*

 

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

 

 

 

32.1*

 

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

 

 

 

32.2*

 

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

 

 

 

Other

 

 

 

 

 

95*

 

Mine Safety Disclosures.

 

 

 

XBRL Documents

 

 

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Document

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Document

 

 

 

101.PRE*

 

XBRL Taxonomy Presentation Document

 

 

 

101.DEF*

 

XBRL Taxonomy Definition Document

 


*          Filed concurrently herewith

 

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SIGNATURE

 

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

 

November 6, 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)

 

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