Steel Dynamics 10-Q 2007
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
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 0-21719
Registrants 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.
PART I. Financial Information
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
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 companys consolidated subsidiaries.
The company has three reporting segments: steel, steel fabrication, and steel scrap and scrap substitute operations. Steel operations are comprised of the companys five steelmaking mini-mills; steel fabrication operations are comprised of the companys five joist and deck manufacturing plants; and steel scrap and scrap substitute operations are comprised of the companys various scrap collection and processing sites.
Roanoke Electric Steel Corporation (Roanoke Electric) operating results have been reflected in the companys 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):
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 Taxesan 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys steel scrap and scrap substitute segment.
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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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):
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):
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 companys 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 companys five New Millennium Building Systems 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 companys steel scrap collection and processing locations and from the companys 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 companys senior secured credit facilities, senior unsecured notes, convertible subordinated notes, certain other investments and profit sharing expenses.
The companys 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 companys Annual Report on Form10-K for the year ended December 31, 2006, for more information related to the companys segment reporting. Inter-segment sales and any related profits are eliminated in consolidation.
The companys segment results for the three and six-month periods ended June 30 are as follows (in thousands):
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 companys Annual Report on Form 10-K for the year ended December 31, 2006.
Condensed Consolidating Balance Sheets
Condensed Consolidating Statements of Income