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Steel Dynamics 10-Q 2010

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x

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

 

 

For the quarterly period ended June 30, 2010

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (see definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of July 28, 2010, Registrant had 216,837,032 outstanding shares of common stock.

 

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

 

 

Page

 

 

 

PART I.  Financial Information

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009

1

 

 

 

 

Consolidated Statements of Operations for the three and six-month periods ended June 30, 2010 and 2009 (unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 2010 and 2009 (unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. Other Information

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 3.

Defaults Upon Senior Securities

27

 

 

 

Item 5.

Other Information

27

 

 

 

Item 6.

Exhibits

27

 

 

 

 

Signatures

29

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

191,593

 

$

9,008

 

Accounts receivable, net

 

577,380

 

396,036

 

Accounts receivable-related parties

 

50,928

 

30,556

 

Inventories

 

1,017,874

 

852,831

 

Deferred income taxes

 

21,678

 

21,492

 

Income taxes receivable

 

35,819

 

137,024

 

Other current assets

 

14,844

 

9,856

 

Total current assets

 

1,910,116

 

1,456,803

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,237,927

 

2,254,050

 

 

 

 

 

 

 

Restricted cash

 

20,592

 

12,595

 

Intangible assets, net

 

511,002

 

533,510

 

Goodwill

 

753,355

 

758,259

 

Other assets

 

112,813

 

114,655

 

Total assets

 

$

5,545,805

 

$

5,129,872

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

354,550

 

$

255,520

 

Accounts payable-related parties

 

8,786

 

6,765

 

Income taxes payable

 

2,008

 

5,664

 

Accrued expenses

 

165,842

 

156,570

 

Accrued profit sharing

 

16,771

 

2,860

 

Senior secured revolving credit facility, due 2012

 

 

167,000

 

Current maturities of long-term debt

 

6,341

 

1,182

 

Total current liabilities

 

554,298

 

595,561

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

7 3/8% senior notes, due 2012

 

700,000

 

700,000

 

5.125% convertible senior notes, due 2014

 

287,500

 

287,500

 

6 ¾% senior notes, due 2015

 

500,000

 

500,000

 

7 ¾% senior notes, due 2016

 

500,000

 

500,000

 

7 5/8% notes, due 2020

 

350,000

 

 

Other long-term debt

 

64,179

 

67,072

 

 

 

2,401,679

 

2,054,572

 

 

 

 

 

 

 

Deferred income taxes

 

430,635

 

416,468

 

Other liabilities

 

61,594

 

60,006

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 253,233,868 and 252,589,627 shares issued; and 216,805,895 and 215,999,801 shares outstanding, as of June 30, 2010 and December 31, 2009, respectively

 

631

 

629

 

Treasury stock, at cost; 36,427,973 and 36,589,826 shares, as of June 30, 2010 and December 31, 2009, respectively

 

(727,624

)

(730,857

)

Additional paid-in capital

 

983,780

 

972,985

 

Retained earnings

 

1,827,194

 

1,745,511

 

Total Steel Dynamics, Inc. stockholders’ equity

 

2,083,981

 

1,988,268

 

Noncontrolling interests

 

13,618

 

14,997

 

Total stockholders’ equity

 

2,097,599

 

2,003,265

 

Total liabilities and stockholders’ equity

 

$

5,545,805

 

$

5,129,872

 

 

See notes to consolidated financial statements.

 

1



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,570,093

 

$

773,137

 

$

3,066,175

 

$

1,560,947

 

Related parties

 

62,706

 

19,021

 

122,414

 

45,861

 

Total net sales

 

1,632,799

 

792,158

 

3,188,589

 

1,606,808

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,440,815

 

723,321

 

2,786,123

 

1,578,598

 

Gross profit

 

191,984

 

68,837

 

402,466

 

28,210

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

55,957

 

48,559

 

113,117

 

105,879

 

Profit sharing

 

7,827

 

 

17,271

 

(42

)

Amortization of intangible assets

 

11,565

 

13,994

 

23,146

 

29,692

 

Total selling, general and administrative expenses

 

75,349

 

62,553

 

153,534

 

135,529

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

116,635

 

6,284

 

248,932

 

(107,319

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

43,448

 

37,043

 

80,963

 

73,294

 

Other expense (income), net

 

(3,521

)

786

 

(6,602

)

38

 

Income (loss) before income taxes

 

76,708

 

(31,545

)

174,571

 

(180,651

)

 

 

 

 

 

 

 

 

 

 

Income taxes (benefit)

 

29,911

 

(15,024

)

64,385

 

(74,356

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

46,797

 

(16,521

)

110,186

 

(106,295

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

2,410

 

530

 

3,990

 

2,442

 

 

 

 

 

 

 

 

 

 

 

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

 

$

49,207

 

$

(15,991

)

$

114,176

 

$

(103,853

)

 

 

 

 

 

 

 

 

 

 

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

 

$

.23

 

$

(.08

)

$

.53

 

$

(.56

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

216,635

 

189,848

 

216,459

 

185,924

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.22

 

$

(.08

)

$

.51

 

$

(.56

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

234,600

 

189,848

 

234,630

 

185,924

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.075

 

$

.075

 

$

.150

 

$

.175

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 46,797

 

$

 (16,521

)

$

 110,186

 

$

 (106,295

)

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

55,398

 

57,765

 

111,670

 

114,728

 

Equity-based compensation

 

3,329

 

3,313

 

6,098

 

11,892

 

Deferred income taxes

 

10,417

 

5,797

 

18,885

 

13,492

 

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

 

550

 

(475

)

1,506

 

(747

)

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

21,423

 

(5,297

)

(201,717

)

135,796

 

Inventories

 

(117,013

)

95,296

 

(165,071

)

288,393

 

Other assets

 

(9,529

)

17,856

 

(8,589

)

42,835

 

Accounts payable

 

(22,707

)

(13,793

)

95,510

 

(47,847

)

Income taxes receivable/payable

 

60,416

 

(29,735

)

97,549

 

(40,996

)

Accrued expenses

 

(29,730

)

(42,540

)

26,066

 

(124,890

)

Net cash provided by operating activities

 

19,351

 

71,666

 

92,093

 

286,361

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(40,960

)

(73,166

)

(71,644

)

(147,504

)

Other investing activities

 

977

 

(7,290

)

1,481

 

(10,513

)

Net cash used in investing activities

 

(39,983

)

(80,456

)

(70,163

)

(158,017

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

2,002

 

471,685

 

546,552

 

708,744

 

Repayment of current and long-term debt

 

(4,476

)

(841,781

)

(355,806

)

(1,200,447

)

Debt issuance costs

 

(169

)

(13,298

)

(6,707

)

(13,751

)

Issuance of common stock (net of expenses) and proceeds from exercise of stock options, including related tax effect

 

2,984

 

412,547

 

6,438

 

410,489

 

Contribution from noncontrolling investors

 

2,611

 

 

2,611

 

5,000

 

Dividends paid

 

(16,233

)

(18,213

)

(32,433

)

(36,395

)

Net cash provided by (used in) financing activities

 

(13,281

)

10,940

 

160,655

 

(126,360

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and equivalents

 

(33,913

)

2,150

 

182,585

 

1,984

 

Cash and equivalents at beginning of period

 

225,506

 

16,067

 

9,008

 

16,233

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

 191,593

 

$

18,217

 

$

 191,593

 

$

 18,217

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 71,993

 

$

 67,450

 

$

 75,762

 

$

 79,433

 

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

 

$

 (41,997

)

$

 1,656

 

$

 (55,007

)

$

 (53,774

)

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies

 

Description of the Business

 

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

 

Steel Operations.  Steel operations include the company’s Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia (SWVA) and The Techs operations. These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting, automated rolling mills, and downstream finishing facilities. The company’s steel operations sell directly to end users and service centers. These products are used in numerous industry sectors, including the automotive, construction, commercial, transportation and industrial machinery markets. Steel operations accounted for approximately 60% and 64% of the company’s external net sales during the three-month periods ended June 30, 2010 and 2009, respectively, and 61% and 63% of the company’s external net sales during the six-month periods ended June 30, 2010 and 2009, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations primarily are composed of the company’s steel scrap procurement and processing locations, operated through the company’s wholly-owned subsidiary, OmniSource Corporation (OmniSource), as well as Iron Dynamics (IDI), the company’s iron-substitute production facility. In addition, the impact related to the construction and ongoing start-up of the Mesabi Nugget iron-making facility and potential future mining operations in Hoyt Lakes, Minnesota is also included in this segment.  Mesabi Nugget, which was under construction during 2009 and had its first shipment in February 2010, has and will continue to ramp up production during 2010.  Metals recycling and ferrous resources operations accounted for approximately 36% and 30% of the company’s external net sales during the three-month periods ended June 30, 2010 and 2009, respectively, and 35% and 30% during the six-month periods ended June 30, 2010 and 2009, respectively.

 

Steel Fabrication Operations.  Steel fabrication operations represent the company’s New Millennium Building Systems plants located in the eastern United States. 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 3% and 5% of the company’s external net sales during the three-month periods ended June 30, 2010 and 2009, respectively, and 2% and 6% during the six-month periods ended June 30, 2010 and 2009, respectively.

 

Significant Accounting Policies

 

Principles of Consolidation. The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions.  Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries.

 

Use of Estimates.  These financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto.  Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.

 

In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K/A for the year ended December 31, 2009.

 

Comprehensive Income (Loss) Attributable to Steel Dynamics, Inc.  The components of comprehensive income (loss) are summarized in the following table (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

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

 

$

 49,207

 

$

 (15,991

)

$

 114,176

 

$

 (103,853

)

Unrealized gain on interest rate swap, net of tax

 

 

243

 

 

581

 

Reversal of unrealized loss on interest rate swap, net of tax

 

 

830

 

 

830

 

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

 

$

 49,207

 

$

 (14,918

)

$

 114,176

 

$

 (102,442

)

 

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 June 30, 2010 and December 31, 2009, (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

OmniSource

 

$

579,606

 

$

584,510

 

The Techs

 

142,783

 

142,783

 

Roanoke Bar Division

 

29,041

 

29,041

 

New Millennium Building Systems

 

1,925

 

1,925

 

 

 

$

753,355

 

$

758,259

 

 

OmniSource goodwill decreased $4.9 million from December 31, 2009 to June 30, 2010 in recognition of the 2010 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.

 

Note 2.  Earnings (Loss) Per Share

 

Basic earnings (loss) 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 and dilutive shares related to the company’s 5.125% convertible senior notes and are excluded from the computation in periods in which they have an anti-dilutive effect. Options to purchase 2.3 million and 2.9 million shares were anti-dilutive at June 30, 2010 and 2009, respectively.

 

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 (loss) attributable to Steel Dynamics, Inc. (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Loss
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

49,207

 

216,635

 

$

.23

 

$

(15,991

)

189,848

 

$

(.08

)

Dilutive stock option effect

 

 

1,583

 

 

 

 

 

 

 

5.125% convertible senior notes

 

2,377

 

16,382

 

 

 

 

 

 

 

Diluted earnings per share

 

$

51,584

 

234,600

 

$

.22

 

$

(15,991

)

189,848

 

$

(.08

)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Loss
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings (loss) per share

 

$

114,176

 

216,459

 

$

.53

 

$

(103,853

)

185,924

 

$

(.56

)

Dilutive stock option effect

 

 

1,789

 

 

 

 

 

 

 

5.125% convertible senior notes

 

4,754

 

16,382

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

118,930

 

234,630

 

$

.51

 

$

(103,853

)

185,924

 

$

(.56

)

 

Note 3.  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,

 

 

 

2010

 

2009

 

Raw materials

 

$

503,979

 

$

405,794

 

Supplies

 

224,531

 

219,320

 

Work-in-progress

 

90,846

 

72,279

 

Finished goods

 

198,518

 

155,438

 

Total inventories

 

$

1,017,874

 

$

852,831

 

 

5



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 4.  Debt

 

7 5/8% Senior Notes

 

In March 2010, the company issued $350.0 million of 7 5/8% senior notes due 2020.  The net proceeds from the notes were used to pay down the then outstanding senior secured revolving credit facility and for general corporate purposes.

 

Senior Secured Revolving Credit Facility, due 2012

 

On April 26, 2010, the company entered into an amendment to its senior secured revolving credit facility, due 2012 which provided for the addition of a lender who extended an additional commitment of $50.0 million, which increased the total revolving credit facility commitment from $874.0 million to $924.0 million.

 

Note 5. Changes in Stockholders’ Equity

 

The following table provides a reconciliation of the beginning and ending carrying amounts of total stockholders’ equity, equity attributable to stockholders of Steel Dynamics, Inc. and equity attributable to the noncontrolling interests (in thousands):

 

 

 

 

 

Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Treasury

 

Noncontrolling

 

 

 

Total

 

Stock

 

Capital

 

Earnings

 

Stock

 

Interests

 

Balances at January 1, 2010

 

$

2,003,265

 

$

629

 

$

972,985

 

$

1,745,511

 

$

(730,857

)

$

14,997

 

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

 

6,438

 

2

 

6,436

 

 

 

 

Dividends declared

 

(32,493

)

 

 

 

(32,493

)

 

 

Equity-based compensation and issuance of restricted stock

 

7,592

 

 

4,359

 

 

3,233

 

 

Contributions from noncontrolling investors

 

2,611

 

 

 

 

 

2,611

 

Comprehensive income (loss)

 

110,186

 

 

 

114,176

 

 

(3,990

)

Balances at June 30, 2010

 

$

2,097,599

 

$

631

 

$

983,780

 

$

1,827,194

 

$

(727,624

)

$

13,618

 

 

Note 6.  Derivative Financial Instruments

 

The company is exposed to certain risks relating to its ongoing business operations. At times the company utilizes derivative instruments to mitigate commodity margin risk, interest rate risk, and foreign currency exchange rate risk. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases and sales of non-ferrous materials (specifically aluminum, copper, nickel and silver) from the company’s metals recycling operations. Interest rate swaps are entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk as necessary.

 

The company designated its interest rate swap, which was terminated in June 2009, as a cash flow hedge of floating-rate borrowings. Forward contracts on various commodities and forward exchange contracts on various foreign currencies are not designated as hedging instruments.

 

Cash Flow Hedging Strategy.  For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate borrowings). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the assessment of effectiveness, are recognized in the statement of operations during the current period.

 

6



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Derivative Financial Instruments (continued)

 

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 futures contracts, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity.  The following summarizes the company’s commodity futures contract commitments as of June 30, 2010 (MT represents metric tons):

 

Commodity

 

Long/Short

 

Total

 

Aluminum

 

Long

 

5,375

MT

Aluminum

 

Short

 

5,400

MT

Copper

 

Long

 

10,682

MT

Copper

 

Short

 

7,552

MT

Nickel

 

Long

 

288

MT

Nickel

 

Short

 

606

MT

 

The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in the company’s financial statements as of June 30, 2010 and December 31, 2009, and for the three and six-month periods ended June 30, 2010 and 2009 (in thousands):

 

 

 

 

 

Fair Value

 

 

 

 

 

June 30, 2010

 

December 31, 2009

 

Balance Sheets

 

 

 

 

 

 

 

Commodity futures net asset

 

Other current assets

 

$

668

 

$

 

Commodity futures net liability

 

Accrued expenses

 

 

3,113

 

 

 

 

 

 

Gain for Three Months Ended

 

 

 

 

 

June 30, 2010

 

June 30, 2009

 

Statements of Operations

 

 

 

 

 

 

 

Commodity futures contracts

 

Costs of goods sold

 

$

2,477

 

$

1,856

 

Interest rate swap

 

Other comprehensive income

 

 

1,745

 

Interest rate swap

 

Other expense

 

 

1,350

 

 

 

 

 

 

Gain for Six Months Ended

 

 

 

 

 

June 30, 2010

 

June 30, 2009

 

Statements of Operations

 

 

 

 

 

 

 

Commodity futures contracts

 

Costs of goods sold

 

$

4,408

 

$

13,317

 

Interest rate swap

 

Other comprehensive income

 

 

2,294

 

Interest rate swap

 

Other expense

 

 

1,350

 

 

7



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Fair Value Measurements

 

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

 

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

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

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

 

The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of June 30, 2010, and December 31, 2009 (in thousands):

 

 

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

4,373

 

$

 

$

4,373

 

$

 

Commodity futures — financial liabilities

 

3,705

 

 

3,705

 

 

 

 

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

December 31, 2009

 

 

 

 

 

 

 

 

 

Commodity futures — financial assets

 

$

3,819

 

$

 

$

3,819

 

$

 

Commodity futures — financial liabilities

 

6,932

 

 

6,932

 

 

 

The carrying amounts of financial instruments including cash and equivalents, accounts receivable and accounts payable approximate fair value, because of the relatively short maturity of these instruments. The fair value of long-term debt, including current maturities, was approximately $2.4 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion) and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.2 billion) at June 30, 2010, and December 31, 2009, respectively.

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  Commitments and Contingencies

 

On February 1, 2008, the company was sued by Prime Eagle Group Limited (Plaintiff), a corporation with its principal place of business in Thailand, alleging damages in excess of $1.1 billion, arising out of Steel Dynamics’ activities in providing consulting services to a Thailand-based steel company, Nakornthai Strip Mill Public Company, Limited (NSM) in its operational start-up in 1998. On April 30, 2008, Steel Dynamics filed a Motion to Dismiss the lawsuit, and on February 23, 2009, the court dismissed the complaint, with prejudice, and denied the plaintiffs leave to amend their complaint. Plaintiff appealed this dismissal. On July 26, 2010, the Federal 7th Circuit Court of Appeals affirmed the dismissal.

 

On September 17, 2008, the company and eight other steel manufacturing companies were served with a class action antitrust complaint, filed in the United States District Court for the Northern District of Illinois in Chicago by Standard Iron Works of Scranton, Pennsylvania, alleging violations of Section 1 of the Sherman Act.  The Complaint alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States, starting in 2005, by artificially restricting the supply of such steel products.  Seven additional lawsuits, each of them materially similar to the original, have also been filed in the same federal court, each of them likewise seeking similar class certification.  All but one of the Complaints purport to be brought on behalf of a class consisting of all direct purchasers of steel products between January 1, 2005 and the present.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period.  All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits. On June 12, 2009, however, the Court denied the Motion. The parties are currently conducting limited discovery. Although the company believes that the lawsuits are without merit and plans to aggressively defend these actions, the company cannot presently predict the outcome of this litigation or make any judgment with respect to its potential exposure, if any.

 

On November 23, 2009, OmniSource Corporation was served the Director’s Final Findings and Orders from the State of Ohio Environmental Protection Agency alleging violations of air pollution control rules, ordering new operating practices to address the violations, and assessing penalties in the amount of $325,600. The parties are currently in the process of settlement discussions.

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information

 

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

 

The company’s operations are primarily organized and managed by operating segment.  Operating segment performance and resource allocations are primarily based on operating results before income taxes.  The accounting policies of the reportable segments are consistent with those described in Note 1 to the financial statements.  Refer to the company’s Annual Report on Form 10-K/A for the year ended December 31, 2009, for more information related to the company’s segment reporting.  Intra-segment and intra-company sales and any related profits are eliminated in consolidation. The company’s segment results for the three month periods ended June 30, 2010 and 2009 are as follows (in thousands):

 

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

954,589

 

$

537,519

 

$

42,266

 

$

23,781

 

$

 

$

1,558,155

 

External Non-U.S.

 

22,048

 

52,406

 

 

190

 

 

74,644

 

Other segments

 

43,292

 

258,442

 

1

 

2,501

 

(304,236

)

 

 

 

1,019,929

 

848,367

 

42,267

 

26,472

 

(304,236

)

1,632,799

 

Operating income (loss)

 

131,146

 

6,939

 

(4,713

)

(16,820

)(1)

83

(2)

116,635

 

Income (loss) before income taxes

 

111,778

 

(7,238

)

(6,021

)

(21,816

)

5

 

76,708

 

Depreciation and amortization

 

28,138

 

24,443

 

1,739

 

1,136

 

(58

)

55,398

 

Capital expenditures

 

17,146

 

13,682

 

43

 

10,089

 

 

 

40,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,394,503

 

2,385,902

 

181,807

 

914,436

(3)

(330,843

)(4)

5,545,805

 

Liabilities

 

255,665

 

517,285

 

8,639

 

2,990,606

(5)

(323,989

)(6)

3,448,206

 

 


Footnotes related to the three months ended June 30, 2010 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(7.5

)

 

 

Company-wide stock option expense

 

(2.9

)

 

 

Profit sharing

 

(6.8

)

 

 

Other, net

 

0.4

 

 

 

 

 

$

(16.8

)

 

 

 

 

 

 

(2)

 

Margin reduction from intra-company sales

 

$

0.1

 

 

 

 

 

 

 

(3)

 

Deferred income taxes

 

$

307.2

 

 

 

Income taxes receivable

 

35.8

 

 

 

Debt issuance costs

 

27.0

 

 

 

Property, plant and equipment, net

 

54.8

 

 

 

Intra-company debt

 

224.8

 

 

 

Cash and equivalents

 

182.8

 

 

 

Other

 

82.0

 

 

 

 

 

$

914.4

 

 

 

 

 

 

 

(4)

 

Elimination of intra-company receivables

 

$

(29.6

)

 

 

Deferred income tax elimination

 

(66.9

)

 

 

Elimination of intra-company debt

 

(224.8

)

 

 

Other

 

(9.5

)

 

 

 

 

$

(330.8

)

 

 

 

 

 

 

(5)

 

Debt

 

$

2,341.1

 

 

 

Deferred income taxes

 

499.1

 

 

 

Accounts payable

 

32.0

 

 

 

Income taxes payable

 

2.0

 

 

 

Accrued interest

 

33.7

 

 

 

Other

 

82.7

 

 

 

 

 

$

2,990.6

 

 

 

 

 

 

 

(6)

 

Deferred income tax elimination

 

$

(68.5

)

 

 

Intra-company debt

 

(224.8

)

 

 

Intra-company payables

 

(30.1

)

 

 

Other

 

(0.6

)

 

 

 

 

$

(324.0

)

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2009

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

494,873

 

$

213,070

 

$

36,470

 

$

8,337

 

$

 

$

752,750

 

External Non-U.S.

 

12,020

 

27,328

 

 

60

 

 

39,408

 

Other segments

 

15,811

 

68,540

 

556

 

1,163

 

(86,070

)

 

 

 

522,704

 

308,938

 

37,026

 

9,560

 

(86,070

)

792,158

 

Operating income (loss)

 

33,470

 

(6,557

)

16

 

(9,757

)(1)

(10,888

)(2)

6,284

 

Income (loss) before income taxes

 

16,319

 

(15,683

)

(1,295

)

(16,324

)

(14,562

)

(31,545

)

Depreciation and amortization

 

25,996

 

27,299

 

1,490

 

2,980

 

 

57,765

 

Capital expenditures

 

12,690

 

60,406

 

17

 

53

 

 

73,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,203,502

 

2,142,622

 

158,364

 

598,232

(3)

(220,908

)(4)

4,881,812

 

Liabilities

 

184,559

 

211,557

 

8,930

 

2,735,762

(5)

(183,479

)(6)

2,957,329

 

 


Footnotes related to the three months ended June 30, 2009 segment results (in millions):

 

(1)

 

Corporate SG&A

 

$

(9.2

)

 

 

Other, net

 

(0.6

)

 

 

 

 

$

(9.8

)

 

 

 

 

 

 

(2)

 

Margin impact from inter-company sales

 

$

(10.9

)

 

 

 

 

 

 

(3)

 

Deferred income taxes

 

$

317.0

 

 

 

Income taxes receivable

 

125.9

 

 

 

Debt issuance costs

 

27.7

 

 

 

Other

 

127.6

 

 

 

 

 

$

598.2

 

 

 

 

 

 

 

(4)

 

Elimination of inter-company receivables

 

$

(19.4

)

 

 

Deferred income taxes elimination

 

(111.0

)

 

 

Other

 

(90.5

)

 

 

 

 

$

(220.9

)

 

 

 

 

 

 

(5)

 

Debt

 

$

2,101.5

 

 

 

Deferred income taxes

 

507.5

 

 

 

Other

 

126.8

 

 

 

 

 

$

2,735.8

 

 

 

 

 

 

 

(6)

 

Deferred income taxes elimination

 

$

(113.5

)

 

 

Intercompany debt

 

(57.6

)

 

 

Other

 

(12.3

)

 

 

 

 

$

(183.4

)

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the six months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

June 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,897,807

 

$

1,012,936

 

$

66,227

 

$

50,859

 

$