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Steel Dynamics 10-Q 2007

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 

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

For the quarterly period ended June 30, 2007

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.)

 

 

 

6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN

 

46804

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (260) 459-3553

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

(Check one):        Large accelerated filer  x         Accelerated filer  o         Non-accelerated filer  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 August 6, 2007, Registrant had 90,669,612 outstanding shares of Common Stock.

 

 




STEEL DYNAMICS, INC.
Table of Contents

 

PART I.  Financial Information

 

 

 

 

Page

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006

 

 

1

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and six-month periods ended June 30, 2007 and 2006 (unaudited)

 

 

2

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 2007 and 2006 (unaudited)

 

 

3

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

4

 

 

 

 

 

 

 

 

Item 2.

 

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

 

 

11

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

16

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II.  Other Information

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

17

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

17

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

17

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

 

17

 

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

17

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

18

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

18

 

 

 

 

 

 

 

 

 

 

Signatures

 

 

18

 

 




STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

12,212

 

$

29,373

 

Accounts receivable, net

 

399,699

 

355,011

 

Accounts receivable-related parties

 

42,425

 

53,365

 

Inventories

 

726,236

 

569,317

 

Deferred taxes

 

14,488

 

13,964

 

Other current assets

 

31,493

 

15,167

 

Total current assets

 

1,226,553

 

1,036,197

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,249,178

 

1,136,703

 

 

 

 

 

 

 

Restricted cash

 

6,592

 

5,702

 

 

 

 

 

 

 

Intangible assets

 

14,110

 

12,226

 

 

 

 

 

 

 

Goodwill

 

48,490

 

30,966

 

 

 

 

 

 

 

Other assets

 

30,963

 

25,223

 

Total assets

 

$

2,575,886

 

$

2,247,017

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

212,239

 

$

145,938

 

Accounts payable-related parties

 

6,079

 

2,004

 

Income taxes payable

 

26,365

 

30,497

 

Accrued profit sharing

 

27,619

 

46,341

 

Accrued expenses

 

92,401

 

94,024

 

Senior secured revolving credit facility

 

215,000

 

80,000

 

Current maturities of long-term debt

 

699

 

686

 

Total current liabilities

 

580,402

 

399,490

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

91¤2% senior unsecured notes

 

 

300,000

 

63¤4% senior unsecured notes

 

500,000

 

 

Subordinated convertible 4.0% notes

 

37,500

 

37,500

 

Other long-term debt

 

16,750

 

16,920

 

Unamortized bond premium

 

 

3,772

 

 

 

554,250

 

358,192

 

 

 

 

 

 

 

Deferred taxes

 

256,210

 

256,803

 

 

 

 

 

 

 

Minority interest

 

869

 

1,424

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock voting, $.005 par value; 200,000,000 shares authorized; 108,408,426 and 107,865,486 shares issued, and 91,923,320 and 96,983,303 shares outstanding, as of June 30, 2007 and December 31, 2006, respectively

 

540

 

537

 

Treasury stock, at cost; 16,485,106 and 10,882,183 shares, at June 30, 2007and December 31, 2006, respectively

 

(464,405

)

(230,472

)

Additional paid-in capital

 

386,935

 

367,772

 

Retained earnings

 

1,261,085

 

1,093,271

 

Total stockholders’ equity

 

1,184,155

 

1,231,108

 

Total liabilities and stockholders’ equity

 

$

2,575,886

 

$

2,247,017

 

 

See notes to consolidated financial statements.

1




STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

850,443

 

$

758,186

 

$

1,675,037

 

$

1,366,804

 

Related parties

 

60,805

 

63,061

 

101,885

 

120,321

 

Total net sales

 

911,248

 

821,247

 

1,776,922

 

1,487,125

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

694,666

 

624,692

 

1,343,937

 

1,131,083

 

Gross profit

 

216,582

 

196,555

 

432,985

 

356,042

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

48,922

 

42,407

 

94,015

 

70,782

 

Operating income

 

167,660

 

154,148

 

338,970

 

285,260

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

7,198

 

8,025

 

14,444

 

16,161

 

Other (income) expense, net

 

11,523

 

(1,275

)

10,807

 

(1,956

)

Income before income taxes

 

148,939

 

147,398

 

313,719

 

271,055

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

54,997

 

50,529

 

117,613

 

98,137

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

93,942

 

$

96,869

 

$

196,106

 

$

172,918

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.01

 

$

1.00

 

$

2.07

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

93,429

 

96,461

 

94,873

 

91,747

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share, including effect of assumed conversions

 

$

.95

 

$

.89

 

$

1.96

 

$

1.65

 

Weighted average common shares and share equivalents outstanding

 

98,781

 

110,037

 

100,209

 

105,507

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.15

 

$

.10

 

$

.30

 

$

.20

 

 

See notes to consolidated financial statements.

2




STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

93,942

 

$

96,869

 

$

196,106

 

$

172,918

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

32,978

 

32,181

 

62,244

 

56,676

 

Unamortized bond premium

 

(3,350

)

422

 

(3,350

)

844

 

Equity-based compensation

 

2,132

 

1,744

 

4,401

 

3,157

 

Deferred income taxes

 

(796

)

(5,862

)

(1,118

)

(5,734

)

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

 

86

 

(58

)

80

 

(11

)

Minority interest

 

(173

)

389

 

(555

)

628

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(20,146

)

(10,797

)

(33,748

)

(29,984

)

Inventories

 

(96,824

)

(30,993

)

(153,726

)

(13,814

)

Other assets

 

(17,703

)

(11,166

)

(18,499

)

(8,148

)

Accounts payable

 

(6,532

)

(29,446

)

70,810

 

(7,383

)

Income taxes payable

 

(58,982

)

(30,852

)

(4,132

)

7,163

 

Accrued expenses

 

25,101

 

11,417

 

(20,345

)

(15,019

)

Net cash provided by (used in) operating activities

 

(50,267

)

23,848

 

98,168

 

161,293

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(101,981

)

(34,123

)

(155,910

)

(48,708

)

Acquisition of business, net of cash acquired

 

(38,219

)

(89,106

)

(38,219

)

(89,106

)

Maturities of short-term investments

 

 

4,700

 

 

14,075

 

Purchases of short-term investments

 

 

 

 

(14,075

)

Other investing activities

 

61

 

241

 

(162

)

241

 

Net cash used in investing activities

 

(140,139

)

(118,288

)

(194,291

)

(137,573

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

852,000

 

 

997,000

 

 

Repayment of long-term debt

 

(532,079

)

(45,488

)

(662,157

)

(47,146

)

Issuance of common stock (net of expenses) and proceeds and tax benefits from exercise of stock options

 

8,960

 

6,790

 

16,146

 

24,199

 

Issuance (purchase) of treasury stock

 

(132,429

)

193

 

(235,314

)

788

 

Dividends paid

 

(14,178

)

(8,812

)

(28,725

)

(13,131

)

Debt issuance costs

 

(7,988

)

 

(7,988

)

 

Net cash provided by (used in) financing activities

 

174,286

 

(47,317

)

78,962

 

(35,290

)

 

 

 

 

 

 

 

 

 

 

Decrease in cash and equivalents

 

(16,120

)

(141,757

)

(17,161

)

(11,570

)

Cash and equivalents at beginning of period

 

28,332

 

195,705

 

29,373

 

65,518

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

12,212

 

$

53,948

 

$

12,212

 

$

53,948

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,019

 

$

2,171

 

$

18,358

 

$

16,439

 

Cash paid for federal and state income taxes

 

$

131,817

 

$

94,365

 

$

132,285

 

$

95,541

 

 

See notes to consolidated financial statements.

3




STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.  Summary of Accounting Policies and Recent Accounting Pronouncements

Principles of Consolidation. The consolidated financial statements include the accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries after elimination of significant intercompany accounts and transactions.  Minority interest represents the minority shareholders’ proportionate share in the equity or income of the company’s consolidated subsidiaries.

The company has three reporting segments:  steel, steel fabrication, and steel scrap and scrap substitute operations.  Steel operations are comprised of the company’s five steelmaking mini-mills; steel fabrication operations are comprised of the company’s five joist and deck manufacturing plants; and steel scrap and scrap substitute operations are comprised of the company’s various scrap collection and processing sites.

Roanoke Electric Steel Corporation (Roanoke Electric) operating results have been reflected in the company’s financial statements since April 12, 2006, the effective date of the merger.  The following unaudited pro forma information is presented below as if the merger was completed as of January 1, 2006 (in thousands, except per share amounts):

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2006

 

Net sales

 

$

821,247

 

$

1,636,357

 

Net income

 

100,187

 

181,819

 

Basic earnings per share

 

1.03

 

1.88

 

Diluted earnings per share

 

.91

 

1.66

 

 

The information presented above is for information purposes only and is not necessarily indicative of the actual results that would have occurred had the merger been consummated at January 1, 2006, nor is it necessarily indicative of future operating results of the combined companies under the ownership and management of the company.  The three-month pro forma results reflect Roanoke Electric operations for the period between the effective date of the merger and June 30, 2006, and the six-month pro forma results reflect Roanoke Electric operations for that same period in addition to operations for the three-month period ended January 31, 2006.

Uncertain Tax Positions.  In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a significant impact on the company’s financial position or results of operations.

As of January 1, 2007, the company had unrecognized tax benefits of $24.0 million including accrued interest and penalties. There has been no significant change in the unrecognized tax benefits during the six months ended June 30, 2007. If recognized, the effective tax rate would be affected by the unrecognized tax benefits. The company recognizes interest and penalties related to its tax contingencies on a net-of-tax basis in income tax expense. The company’s January 1, 2007 tax contingencies included $1.7 million of interest and penalties.

The company files U.S. federal income tax returns as well as income tax returns in various state jurisdictions. The company is currently under examination by the Internal Revenue Service (IRS) for calendar years 1997 through 2001 and it expects this audit to be completed by the end of 2007. The company may be subject to examination by the IRS for calendar years 2003 through 2006. The company is currently under examination by the state of Indiana for calendar years 2000 through 2005. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of these audits. Based on the current audits in process, the payment of taxes as a result of audit settlements could be from zero to $24.0 million during the next twelve months. For other major state tax jurisdictions, the company is no longer subject to state and local tax examinations by tax authorities for years before 2003.

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; potential environmental liabilities, 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 included in the company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Note 2.  Elizabethton Herb & Metal

The company purchased the property, plant and equipment and the inventory of Elizabethton Herb & Metal, Inc. (Elizabethton) on April 1, 2007.  Elizabethton consists of two scrap processing yards located in Elizabethton and Johnson City, Tennessee.  The two yards process approximately 225,000 tons of ferrous scrap annually.  Elizabethton supplied the company’s Roanoke Bar Division with a portion of its steel scrap requirements before the purchase and is expected to continue to do so.  In addition, Elizabethton may provide ferrous scrap to the company’s other steel operations. The company purchased Elizabethton in an effort to continue to control more of its raw material needs for its steelmaking operations. The operating results of Elizabethton will be included in the company’s steel scrap and scrap substitute segment.

4




Note 3.  Financing Activities

Senior Note Issuance.  On April 3, 2007, the company issued $500 million of 6¾% Senior Notes due 2015 (6¾% Notes).  The net proceeds from the 6¾% Notes were used to redeem the company’s existing $300 million 9½% Senior Unsecured Notes due 2009 (9½% Notes) at a redemption price of 102.375% on May 3, 2007, to repay amounts outstanding under the company’s senior secured revolving credit facility and for general corporate purposes, including capital expenditures.  In connection with the redemption of the 9½% Notes, the company also terminated its underlying $200 million fair-value interest rate swap at an after-tax cost of $3.1 million, which was recognized as a loss on hedging activities during the second quarter of 2007.  In addition, the company incurred after-tax expense of approximately $4.5 million related to the redemption premium, an after-tax benefit of approximately $2.1 million related to the recognition of the remaining unamortized bond premium, and an after-tax expense of approximately $1.4 million related to the write-off of previously capitalized financing costs.

Revolving Credit Facility.  On June 19, 2007 the company amended, restated and expanded its existing senior secured revolving credit facility from the prior $350 million level to a renewed 5-year $750 million facility.  Subject to certain conditions, the company has the opportunity to increase the facility by an additional $350 million.  The amended facility is guaranteed by certain of the company’s subsidiaries and is secured by substantially all of its accounts receivable and inventories.  The proceeds of the revolver are available to fund working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes.  The amended credit agreement contains financial covenants and other covenants that limit or restrict the company’s ability to permit liens on its property, incur indebtedness, enter into mergers, acquisition or consolidations, conduct asset sales, make restricted payments or investments or enter into other specified transactions or activities.

Note 4.  Subsequent Events

The Techs Purchase.  The company completed its acquisition of The Techs, a Pennsylvania-based flat-rolled steel galvanizing company,

on July 2, 2007.  The company paid approximately $370 million for The Techs, which was funded from the company’s existing senior secured revolving credit facility.  The Techs consist of three non-union galvanizing facilities: GalvTech, MetalTech and NexTech.  Each facility specializes in the galvanizing of specific types of flat-rolled steels in non-automotive applications, servicing a variety of customers in the HVAC, commercial construction and consumer goods markets.  In 2006, The Techs shipped approximately 958,000 tons of galvanized steel and generated revenues of approximately $831 million.  Beginning July 2, 2007, The Techs will be reflected in the company’s steel operations segment.

Note 5.  Earnings Per Share

The company computes and presents earnings per common share in accordance with FASB Statement No. 128, “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, in addition to the above, the weighted average dilutive effect of common share equivalents outstanding during the period.  Common share equivalents represent dilutive stock options 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.

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

 

 

Three Months Ended

 

 

 

2007

 

2006

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

93,942

 

93,429

 

$

1.01

 

$

96,869

 

96,461

 

$

1.00

 

Dilutive stock option effect

 

 

 

941

 

 

 

 

898

 

 

 

Subordinated convertible 4.0% notes

 

214

 

4,411

 

 

 

609

 

12,678

 

 

 

Diluted earnings per share

 

$

94,156

 

98,781

 

$

.95

 

$

97,478

 

110,037

 

$

.89

 

 

 

 

Six Months Ended

 

 

 

2007

 

2006

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

196,106

 

94,873

 

$

2.07

 

$

172,918

 

91,747

 

$

1.88

 

Dilutive stock option effect

 

 

 

925

 

 

 

 

884

 

 

 

Subordinated convertible 4.0% notes

 

428

 

4,411

 

 

 

1,274

 

12,876

 

 

 

Diluted earnings per share

 

$

196,534

 

100,209

 

$

1.96

 

$

174,192

 

105,507

 

$

1.65

 

 

5




Note 6.  Inventories

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

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

Raw materials

 

$

348,598

 

$

243,770

 

Supplies

 

147,279

 

130,373

 

Work-in-progress

 

81,148

 

54,555

 

Finished goods

 

149,211

 

140,619

 

Total inventories

 

$

726,236

 

$

569,317

 

 

Note 7.  Segment Information

The company has three segments: steel operations, steel fabrication operations and steel scrap and scrap substitute operations.

Steel operations include the company’s Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division and Steel of West Virginia operations.  These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting and automated rolling mills.

Steel fabrication operations include the company’s five New Millennium Building System’s plants located in Butler, Indiana; Continental, Ohio; Salem, Virginia; Florence, South Carolina; and Lake City, Florida.  Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel decking.  Prior to April 2006, the revenues associated with these operations were included in “All Other”, as the operations were below the quantitative thresholds required for reportable segments. Accordingly, the company has reclassified these revenues from prior periods to conform to the current presentation.

The steel scrap and scrap substitute operations include the revenues and expenses associated with the company’s steel scrap collection and processing locations and from the company’s scrap substitute manufacturing facility, Iron Dynamics.

Revenues included in the category “All Other” are from a subsidiary operation that is below the quantitative thresholds required for reportable segments.  These revenues are from the further processing and resale of certain secondary and excess flat rolled steel products.  In addition, “All Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facilities, senior unsecured notes, convertible subordinated notes, certain other investments and profit sharing expenses.

The company’s operations are organized and managed as operating segments.  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.  Refer to the company’s Annual Report on Form10-K for the year ended December 31, 2006, for more information related to the company’s segment reporting.  Inter-segment sales and any related profits are eliminated in consolidation.

6




The company’s segment results for the three and six-month periods ended June 30 are as follows (in thousands):

 

 

Three Months Ended

 

Six Months Ended

 

 

 

2007

 

2006

 

2007

 

2006

 

Steel Operations

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

External

 

$

792,928

 

$

733,532

 

$

1,556,684

 

$

1,338,487

 

Other segments

 

65,339

 

62,873

 

131,158

 

90,922

 

Operating income

 

176,936

 

169,403

 

363,756

 

315,876

 

Assets

 

1,984,711

 

1,778,855

 

1,984,711

 

1,778,855

 

Steel Fabrication Operations

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

External

 

$

86,605

 

$

66,969

 

$

164,982

 

$

107,820

 

Other segments

 

5,430

 

1,097

 

10,276

 

1,117

 

Operating income (loss)

 

7,017

 

(2,608

)

12,137

 

620

 

Assets

 

215,808

 

160,245

 

215,808

 

160,245

 

Steel Scrap and Scrap Substitute Operations

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

External

 

$

15,682

 

$

3,572

 

$

18,864

 

$

3,572

 

Other segments

 

42,110

 

25,118

 

71,977

 

36,370

 

Operating income (loss)

 

4,672

 

2,316

 

6,396

 

(4,249

)

Assets

 

171,272

 

135,530

 

171,272

 

135,530

 

All Other

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

External

 

$

16,033

 

$

17,173

 

$

36,392

 

$

37,246

 

Other segments

 

401

 

220

 

619

 

439

 

Operating loss

 

(23,563

)

(13,743

)

(45,658

)

(26,833

)

Assets

 

288,871

 

425,239

 

288,871

 

425,239

 

Eliminations

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

External

 

$

 

$

 

$

 

$

 

Other segments

 

(113,280

)

(89,307

)

(214,030

)

(128,848

)

Operating income (loss)

 

2,598

 

(1,220

)

2,339

 

(153

)

Assets

 

(84,776

)

(335,396

)

(84,776

)

(335,396

)

Consolidated

 

 

 

 

 

 

 

 

 

Net sales

 

$

911,248

 

$

821,247

 

$

1,776,922

 

$

1,487,125

 

Operating income

 

167,660

 

154,148

 

338,970

 

285,260

 

Assets

 

2,575,886

 

2,164,473

 

2,575,886

 

2,164,473

 

Net sales to non-US companies

 

58,963

 

19,967

 

97,672

 

35,679

 

 

7




Note 8.  Condensed Consolidating Information

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of $500.0 million of senior notes due April 2015.  Following are condensed consolidating financial statements of the company, including the guarantors.  The following condensed consolidating financial statements present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company on a consolidated basis.  The following condensed consolidating financial statements (presented dollars in thousands) 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, 2006.

Condensed Consolidating Balance Sheets

As of June 30, 2007

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash

 

$

3,304

 

$

8,050

 

$

858

 

$

 

$

12,212

 

Accounts receivable

 

295,657

 

319,032

 

7,993

 

(180,558

)

442,124

 

Inventories

 

563,207

 

159,197

 

11,929

 

(8,097

)

726,236

 

Other current assets

 

44,376

 

1,323

 

325

 

(43

)

45,981

 

Total current assets

 

906,544

 

487,602

 

21,105

 

(188,698

)

1,226,553

 

Property, plant and equipment, net

 

1,016,112

 

225,216

 

7,850

 

 

1,249,178

 

Other assets

 

437,088

 

88,340

 

399

 

(425,672

)

100,155

 

Total assets

 

$

2,359,744

 

$

801,158

 

$

29,354

 

$

(614,370

)

$

2,575,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

215,714

 

$

36,361

 

$

8,298

 

$

(15,690

)

$

244,683

 

Accrued expenses

 

88,281

 

31,876

 

714

 

(851

)

120,020

 

Current maturities of long-term debt

 

215,677

 

23

 

8,107

 

(8,108

)

215,699

 

Total current liabilities

 

519,672

 

68,260

 

17,119

 

(24,649

)

580,402

 

Other liabilities

 

113,744

 

426,378

 

3,384

 

(287,296

)

256,210

 

Long-term debt

 

554,118

 

132

 

3,649

 

(3,649

)

554,250

 

Minority interest

 

(264

)

 

 

1,133

 

869

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

540

 

19,753

 

7,746

 

(27,499

)

540

 

Treasury stock

 

(464,405

)

(818

)

 

818

 

(464,405

)

Additional paid in capital

 

386,935

 

117,753

 

 

(117,753

)

386,935

 

Retained earnings

 

1,249,404

 

169,700

 

(2,544

)

(155,475

)

1,261,085

 

Total stockholders’ equity

 

1,172,474

 

306,388

 

5,202

 

(299,909

)

1,184,155

 

Total liabilities and stockholders’ equity

 

$

2,359,744

 

$

801,158

 

$

29,354

 

$

(614,370

)

$

2,575,886

 

 

As of December 31, 2006

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash

 

$

15,571

 

$

12,610

 

$

1,192

 

$

 

$

29,373

 

Accounts receivable

 

291,521

 

282,152

 

5,425

 

(170,722

)

408,376

 

Inventories

 

419,519

 

148,958

 

11,336

 

(10,496

)

569,317

 

Other current assets

 

28,041

 

877

 

263

 

(50

)

29,131

 

Total current assets

 

754,652

 

444,597

 

18,216

 

(181,268

)

1,036,197

 

Property, plant and equipment, net

 

947,745

 

181,999

 

7,076

 

(117

)

1,136,703

 

Other assets

 

164,955

 

114,612

 

398

 

(205,848

)

74,117

 

Total assets

 

$

1,867,352

 

$

741,208

 

$

25,690

 

$

(387,233

)

$

2,247,017

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

142,593

 

$

37,952

 

$

4,490

 

$

(6,596

)

$

178,439

 

Accrued expenses

 

108,453

 

28,927

 

935

 

2,050

 

140,365

 

Current maturities of long-term debt

 

80,665

 

22

 

7,907

 

(7,908

)

80,686

 

Total current liabilities

 

331,711

 

66,901

 

13,332

 

(12,454

)

399,490

 

Other liabilities

 

(31,435

)

360,422

 

3,498

 

(75,682

)

256,803

 

Long-term debt

 

358,049

 

143

 

1,837

 

(1,837

)

358,192

 

Minority interest

 

(98

)

 

 

1,522

 

1,424

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

537

 

10,745

 

7,946

 

(18,691

)

537

 

Treasury stock

 

(230,472

)

 

 

 

(230,472

)

Additional paid in capital

 

367,772

 

116,868

 

 

(116,868

)

367,772

 

Retained earnings

 

1,071,288

 

186,129

 

(923

)

(163,223

)

1,093,271

 

Total stockholders’ equity

 

1,209,125

 

313,742

 

7,023

 

(298,782

)

1,231,108

 

Total liabilities and stockholders’ equity

 

$

1,867,352

 

$

741,208

 

$

25,690

 

$

(387,233

)

$

2,247,017

 

 

8




Condensed Consolidating Statements of Income

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

700,196

 

$

938,455

 

$

16,434

 

$

(743,837

)

$

911,248

 

Costs of goods sold

 

542,329

 

875,340

 

15,892

 

(738,895

)

694,666

 

Gross profit

 

157,867

 

63,115

 

542

 

(4,942

)

216,582

 

Selling, general and administrative

 

31,971

 

18,130

 

1,114

 

(2,293

)

48,922

 

Operating income (loss)

 

125,896

 

44,985

 

(572

)

(2,649

)

167,660

 

Interest expense

 

5,140

 

2,011

 

182

 

(135

)

7,198

 

Other (income) expense, net

 

60,759

 

(49,387

)

(15

)

166

 

11,523

 

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

 

59,997

 

92,361

 

(739

)

(2,680

)

148,939

 

Income taxes

 

22,122

 

33,291

 

(128

)

(288

)

54,997

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in net income of subsidiaries

 

58,459

 

 

 

(58,459

)

 

Net income (loss)

 

$

96,334

 

$

59,070

 

$

(611

)

$

(60,851

)

$

93,942

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2006

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

651,295

 

$

842,542

 

$

17,394

 

$

(689,984

)

$

821,247

 

Costs of goods sold

 

487,296

 

804,993

 

15,148

 

(682,745

)

624,692

 

Gross profit

 

163,999

 

37,549

 

2,246

 

(7,239

)

196,555

 

Selling, general and administrative

 

23,653

 

18,976

 

1,038

 

(1,260

)

42,407

 

Operating income (loss)

 

140,346

 

18,573

 

1,208

 

(5,979

)

154,148

 

Interest expense

 

6,188

 

1,990

 

88

 

(241

)

8,025

 

Other (income) expense, net

 

40,963

 

(42,434

)

(77

)

273

 

(1,275

)

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

 

93,195

 

59,017

 

1,197

 

(6,011

)

147,398

 

Income taxes

 

30,388

 

21,531

 

484

 

(1,874

)

50,529

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in net income of subsidiaries

 

38,198

 

 

 

(38,198

)

 

Net income (loss)

 

$

101,005

 

$

37,486

 

$

713

 

$

(42,335

)

$

96,869

 

 

For the six months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

June 30, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,361,106

 

$

1,742,071

 

$

117,147

 

$

(1,443,402

)

$

1,776,922

 

Costs of goods sold

 

1,040,451

 

1,634,006

 

103,362

 

(1,433,882

)

1,343,937

 

Gross profit

 

320,655

 

108,065

 

13,785

 

(9,520

)

432,985

 

Selling, general and administrative

 

63,243

 

26,013

 

9,550

 

(4,791

)

94,015