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, 2011

 

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 October 31, 2011, Registrant had 218,693,681 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, 2011 (unaudited) and December 31, 2010

 

1

 

 

 

 

 

Consolidated Statements of Income for the three and nine-month periods ended September 30, 2011 and 2010 (unaudited)

 

2

 

 

 

 

 

Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2011 and 2010 (unaudited)

 

3

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

Item 2.

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

 

16

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

26

 

 

 

 

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

 

28

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

456,694

 

$

186,513

 

Accounts receivable, net

 

764,715

 

584,068

 

Accounts receivable-related parties

 

51,153

 

38,121

 

Inventories

 

1,158,848

 

1,114,063

 

Deferred income taxes

 

21,652

 

20,684

 

Income taxes receivable

 

24,519

 

37,311

 

Other current assets

 

18,646

 

19,243

 

Total current assets

 

2,496,227

 

2,000,003

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,168,444

 

2,213,333

 

 

 

 

 

 

 

Restricted cash

 

20,763

 

23,132

 

Intangible assets, net

 

460,206

 

489,240

 

Goodwill

 

746,737

 

751,675

 

Other assets

 

111,104

 

112,551

 

Total assets

 

$

6,003,481

 

$

5,589,934

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

453,232

 

$

335,031

 

Accounts payable-related parties

 

9,107

 

13,570

 

Income taxes payable

 

14,844

 

5,227

 

Accrued expenses

 

203,191

 

175,041

 

Accrued profit sharing

 

35,883

 

23,524

 

Current maturities of long-term debt

 

1,210

 

8,924

 

Total current liabilities

 

717,467

 

561,317

 

 

 

 

 

 

 

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% senior notes, due 2020

 

350,000

 

350,000

 

Other long-term debt

 

41,550

 

40,397

 

Total long-term debt

 

2,379,050

 

2,377,897

 

 

 

 

 

 

 

Deferred income taxes

 

482,543

 

457,432

 

Other liabilities

 

77,391

 

62,159

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

64,364

 

54,294

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 255,029,406 and 254,002,799 shares issued; and 218,690,315 and 217,574,826 shares outstanding, as of September 30, 2011 and December 31, 2010, respectively

 

636

 

633

 

Treasury stock, at cost; 36,339,091 and 36,427,973 shares, as of September 30, 2011 and December 31, 2010, respectively

 

(725,849

)

(727,624

)

Additional paid-in capital

 

1,023,295

 

998,728

 

Retained earnings

 

2,003,486

 

1,821,133

 

Total Steel Dynamics, Inc. equity

 

2,301,568

 

2,092,870

 

Noncontrolling interests

 

(18,902

)

(16,035

)

Total equity

 

2,282,666

 

2,076,835

 

Total liabilities and equity

 

$

6,003,481

 

$

5,589,934

 

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

1,976,296

 

$

1,520,346

 

$

5,922,243

 

$

4,584,285

 

Related parties

 

67,159

 

63,818

 

216,912

 

188,468

 

Total net sales

 

2,043,455

 

1,584,164

 

6,139,155

 

4,772,753

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

1,844,212

 

1,444,632

 

5,367,772

 

4,230,755

 

Gross profit

 

199,243

 

139,532

 

771,383

 

541,998

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

72,876

 

54,679

 

201,648

 

167,796

 

Profit sharing

 

7,428

 

4,562

 

37,085

 

21,833

 

Amortization of intangible assets

 

10,154

 

11,291

 

30,320

 

34,437

 

Total selling, general and administrative expenses

 

90,458

 

70,532

 

269,053

 

224,066

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

108,785

 

69,000

 

502,330

 

317,932

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

44,702

 

44,286

 

132,860

 

125,249

 

Other income, net

 

(3,523

)

(6,215

)

(13,835

)

(12,817

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

67,606

 

30,929

 

383,305

 

205,500

 

Income taxes

 

27,749

 

15,574

 

143,392

 

79,959

 

 

 

 

 

 

 

 

 

 

 

Net income

 

39,857

 

15,355

 

239,913

 

125,541

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

3,447

 

3,386

 

8,004

 

7,376

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Steel Dynamics, Inc.

 

$

43,304

 

$

18,741

 

$

247,917

 

$

132,917

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.20

 

$

.09

 

$

1.14

 

$

.61

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

218,674

 

216,881

 

218,389

 

216,600

 

 

 

 

 

 

 

 

 

 

 

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

 

$

.19

 

$

.09

 

$

1.08

 

$

.60

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

235,759

 

234,543

 

236,083

 

234,601

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.10

 

$

.075

 

$

.30

 

$

.225

 

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

39,857

 

$

15,355

 

$

239,913

 

$

125,541

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

55,962

 

57,278

 

166,965

 

168,948

 

Equity-based compensation

 

3,833

 

3,626

 

11,355

 

9,724

 

Deferred income taxes

 

7,118

 

2,735

 

29,081

 

21,620

 

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

 

3,701

 

(176

)

3,797

 

1,330

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

33,533

 

(26,820

)

(193,679

)

(228,537

)

Inventories

 

36,346

 

9,715

 

(44,787

)

(155,356

)

Other assets

 

1,632

 

(2,409

)

7,329

 

(10,998

)

Accounts payable

 

(4,375

)

(12,446

)

92,550

 

83,064

 

Income taxes receivable/payable

 

(5,911

)

8,829

 

22,409

 

106,378

 

Accrued expenses

 

50,767

 

33,733

 

57,464

 

59,799

 

Net cash provided by operating activities

 

222,463

 

89,420

 

392,397

 

181,513

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(38,126

)

(24,224

)

(91,795

)

(95,868

)

Other investing activities

 

947

 

936

 

1,946

 

2,417

 

Net cash used in investing activities

 

(37,179

)

(23,288

)

(89,849

)

(93,451

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

10,851

 

25,428

 

15,977

 

571,980

 

Repayment of current and long-term debt

 

(105

)

(146

)

(7,921

)

(355,952

)

Debt issuance costs

 

(6,884

)

 

(6,884

)

(6,707

)

Proceeds from exercise of stock options, including related tax effect

 

402

 

1,566

 

13,267

 

8,004

 

Contributions from noncontrolling investors, net

 

11,320

 

1,805

 

13,207

 

4,416

 

Dividends paid

 

(21,865

)

(16,260

)

(60,013

)

(48,693

)

Net cash provided by (used in) financing activities

 

(6,281

)

12,393

 

(32,367

)

173,048

 

 

 

 

 

 

 

 

 

 

 

Increase in cash and equivalents

 

179,003

 

78,525

 

270,181

 

261,110

 

Cash and equivalents at beginning of period

 

277,691

 

191,593

 

186,513

 

9,008

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

456,694

 

$

270,118

 

$

456,694

 

$

270,118

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

14,931

 

$

15,016

 

$

101,088

 

$

90,778

 

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

 

$

12,403

 

$

(12

)

$

74,378

 

$

(55,019

)

 

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 61% of the company’s external net sales during the three and nine-month periods ended September 30, 2011 and 2010, respectively.

 

Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations are primarily 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 liquid pig iron facility. In addition, the impact related to the ongoing start-up of the Mesabi Nugget iron nugget manufacturing facility and future mining operations, both in Hoyt Lakes, Minnesota is also included in this segment. Metals recycling and ferrous resources operations accounted for approximately 35% of the company’s external net sales during each of the three and nine-month periods ended September 30, 2011 and 2010.

 

Steel Fabrication Operations.  Steel fabrication operations represent the company’s 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 approximately 4% and 3% of the company’s external net sales during the three-month periods ended September 30, 2011 and 2010, respectively, and 3% during each of the nine-month periods ended September 30, 2011 and 2010.

 

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; income taxes; unrecognized income 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, 2010.

 

Goodwill.  The company’s goodwill is allocated to the following reporting units at September 30, 2011, and December 31, 2010, (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

OmniSource — Metals Recycling/Ferrous Resources Segment

 

$

572,988

 

$

577,926

 

The Techs — Steel Segment

 

142,783

 

142,783

 

Roanoke Bar Division — Steel Segment

 

29,041

 

29,041

 

New Millennium Building Systems — Fabrication Segment

 

1,925

 

1,925

 

 

 

$

746,737

 

$

751,675

 

 

OmniSource goodwill decreased $4.9 million from December 31, 2010 to September 30, 2011, in recognition of the 2011 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.

 

4



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2. Senior Secured Revolving Credit Facility

 

On September 29, 2011, the company amended, restated and expanded its existing senior secured revolving credit facility from the prior $924.0 million level to a renewed 5-year $1.1 billion facility. Subject to certain conditions, the company has the opportunity to increase the facility size by an additional $400.0 million. The 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 will be available to fund working capital, capital expenditures, and other general corporate purposes.

 

The amended credit agreement contains financial covenants and other covenants that limit or restrict our ability 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 contained in the senior secured credit agreement.  At September 30, 2011, there were no outstanding borrowings under our senior secured revolver, which is subject to a quarterly borrowing base.

 

The senior secured revolving credit facility pricing grid is adjusted quarterly and is based on the company’s leverage of total debt to last-twelve-month’s (LTM) adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions, as defined in the credit agreement).  The minimum pricing is LIBOR plus 1.00% or Prime, and the maximum pricing is LIBOR plus 2.00% or Prime plus 1.00%.  In addition the company is subject to an unused commitment fee of between 0.25% and 0.45% (based on leverage of total debt to LTM adjusted EBITDA) which is applied to the unused portion of the $1.1 billion revolver each quarter.

 

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 and restricted shares, 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 5.8 million and 2.3 million shares were anti-dilutive at September 30, 2011 and 2010, 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 attributable to Steel Dynamics, Inc. (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

43,304

 

218,674

 

$

.20

 

$

18,741

 

216,881

 

$

.09

 

Dilutive stock option effect

 

 

703

 

 

 

 

1,280

 

 

 

5.125% convertible senior notes, net of tax

 

2,358

 

16,382

 

 

 

2,377

 

16,382

 

 

 

Diluted earnings per share

 

$

45,662

 

235,759

 

$

.19

 

$

21,118

 

234,543

 

$

.09

 

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

247,917

 

218,389

 

$

1.14

 

$

132,917

 

216,600

 

$

.61

 

Dilutive stock option effect

 

 

1,312

 

 

 

 

1,619

 

 

 

5.125% convertible senior notes, net of tax

 

7,074

 

16,382

 

 

 

7,131

 

16,382

 

 

 

Diluted earnings per share

 

$

254,991

 

236,083

 

$

1.08

 

$

140,048

 

234,601

 

$

.60

 

 

5



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 principally on a first-in, first-out basis.  Inventories consisted of the following (in thousands):

 

 

 

September 30, 

 

December 31,

 

 

 

2011

 

2010

 

Raw materials

 

$

578,008

 

$

589,859

 

Supplies

 

240,512

 

231,816

 

Work-in-progress

 

116,557

 

94,346

 

Finished goods

 

223,771

 

198,042

 

Total inventories

 

$

1,158,848

 

$

1,114,063

 

 

Note 5. Changes in Equity

 

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

 

 

 

 

 

Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

Total

 

Common

 

Additional
Paid-In

 

Retained

 

Treasury

 

Noncontrolling

 

 

 

Equity

 

Stock

 

Capital

 

Earnings

 

Stock

 

Interests

 

Balances at January 1, 2011

 

$

2,076,835

 

$

633

 

$

998,728

 

$

1,821,133

 

$

(727,624

)

$

(16,035

)

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

 

13,267

 

3

 

13,264

 

 

 

 

Dividends declared

 

(65,564

)

 

 

(65,564

)

 

 

Equity-based compensation and issuance of restricted stock

 

13,078

 

 

11,303

 

 

1,775

 

 

Contributions from noncontrolling investors

 

5,645

 

 

 

 

 

5,645

 

Distributions to noncontrolling investor

 

(508

)

 

 

 

 

(508

)

Net and comprehensive income (loss)

 

239,913

 

 

 

247,917

 

 

(8,004

)

Balances at September 30, 2011

 

$

2,282,666

 

$

636

 

$

1,023,295

 

$

2,003,486

 

$

(725,849

)

$

(18,902

)

 

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 nonferrous metals (specifically aluminum, copper, nickel and silver) from the company’s metals recycling operations. Interest rate swaps are entered into at times 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 at times to manage foreign currency exchange rate risk as necessary. No interest rate swaps or significant forward exchange contracts on foreign currency existed for the periods presented.

 

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 income 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 September 30, 2011 (MT represents metric tons and Lbs represents pounds):

 

Commodity

 

Long/Short

 

Total

 

 

Aluminum

 

Long

 

8,400

 

MT

Aluminum

 

Short

 

4,400

 

MT

Copper

 

Long

 

6,554

 

MT

Copper

 

Short

 

6,067

 

MT

Nickel

 

Long

 

12

 

MT

Nickel

 

Short

 

54

 

MT

Silver

 

Long

 

343

 

Lbs

 

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 September 30, 2011, and December 31, 2010, and for the three and nine-month periods ended September 30, 2011 and 2010 (in thousands):

 

 

 

 

 

Fair Value

 

Balance Sheets

 

 

 

September 30, 2011

 

December 31, 2010

 

Commodity futures net asset

 

Other current assets

 

$

1,440

 

$

 

Commodity futures net liability

 

Accrued expenses

 

 

4,988

 

 

 

 

 

 

Gain (Loss) for Three Months Ended

 

Statements of Income

 

 

 

September 30, 2011

 

September 30, 2010

 

Commodity futures contracts

 

Costs of goods sold

 

$

7,112

 

$

(720

)

 

 

 

 

 

Gain for Nine Months Ended

 

Statements of Income

 

 

 

September 30, 2011

 

September 30, 2010

 

Commodity futures contracts

 

Costs of goods sold

 

$

11,457

 

$

3,688

 

 

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  September 30, 2011, and December 31, 2010 (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, 2011

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

 

$

10,158

 

$

 

$

10,158

 

$

 

Commodity futures – financial liabilities

 

8,718

 

 

8,178

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

 

7,052

 

 

7,052

 

 

Commodity futures – financial liabilities

 

12,040

 

 

12,040

 

 

 

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 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, was approximately $2.4 billion and $2.5 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion) at September 30, 2011, and December 31, 2010, respectively, and was based on quoted market prices.

 

Note 8.  Commitments and Contingencies

 

On September 17, 2008, we 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.  In addition, on December 28, 2010, we and the other co-defendants were served with a substantially similar complaint in the Circuit Court of Cocke County, Tennessee, purporting to be on behalf of indirect purchasers of steel products in Tennessee. The case has been removed to federal court. 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 discovery. We believe that the lawsuits are without merit and we are aggressively defending these actions.  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 our financial condition, results of operations, or liquidity.

 

Although not presently necessary or appropriate to make a dollar estimate of exposure to loss, if any, in connection with the above matter, we may in the future determine that a loss accrual is necessary. Although we may make loss accruals, if and as warranted, any amounts that we may accrue from time to time could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, an adverse result could have a material effect on our financial condition, results of operations and liquidity.

 

8



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information

 

The company has three reportable segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.  These operations are described in Note 1 to the financial statements.  Revenues included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of further processing, slitting, and sale of certain steel products and the resale of certain secondary and excess steel products.  In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit 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. Intra-segment and intra-company sales and any related profits are eliminated in consolidation. Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2010, for more information related to the company’s segment reporting.  The company’s segment results for the three and nine-month periods ended September 30, 2011 and 2010 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2011

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,183,665

 

$

624,742

 

$

83,094

 

$

24,018

 

 

$

1,915,519

 

External Non-U.S.

 

44,345

 

83,296

 

 

295

 

 

127,936

 

Other segments

 

49,854

 

351,219

 

16

 

3,033

 

(404,122

)

 

 

 

1,277,864

 

1,059,257

 

83,110

 

27,346

 

(404,122

)

2,043,455

 

Operating income (loss)

 

136,194

 

(3,388

)

(246

)

(28,437

)(1)

4,662

(2)

108,785

 

Income (loss) before income taxes

 

114,805

 

(14,697

)

(2,139

)

(35,025

)

4,662

 

67,606

 

Depreciation and amortization

 

27,320

 

25,164

 

1,847

 

1,682

 

(51

)

55,962

 

Capital expenditures

 

10,457

 

26,575

 

503

 

591

 

 

38,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,629,873

 

2,557,147

 

234,452

 

757,275

(3)

(175,266

)(4)

6,003,481

 

Liabilities

 

488,476

 

531,827

 

16,820

 

2,785,613

(5)

(166,285

)(6)

3,656,451

 

 


Footnotes related to the three months ended September 30, 2011 segment results (in millions):

 

(1)

Corporate SG&A

 

$

(19.1

)

 

Company-wide stock option expense

 

(3.6

)

 

Profit sharing

 

(5.5

)

 

Other, net

 

(0.2

)

 

Total

 

$

(28.4

)

 

 

 

 

 

(2)

Gross profit increase from intra-company sales

 

$

4.7

 

 

 

 

 

 

(3)

Cash and equivalents

 

$

391.5

 

 

Income taxes receivable

 

24.5

 

 

Deferred income taxes

 

21.6

 

 

Property, plant and equipment, net

 

72.1

 

 

Debt issuance costs

 

25.6

 

 

Intra-company debt

 

130.6

 

 

Other

 

91.4

 

 

Total

 

$

757.3

 

 

 

 

 

 

(4)

Elimination of intra-company receivables

 

$

(30.6

)

 

Elimination of intra-company debt

 

(130.6

)

 

Other

 

(14.1

)

 

Total

 

$

(175.3

)

 

 

 

 

 

(5)

Accounts payable

 

32.6

 

 

Income taxes payable

 

15.0

 

 

Accrued interest

 

61.8

 

 

Accrued profit sharing

 

31.4

 

 

Debt

 

2,342.0

 

 

Deferred income taxes

 

221.0

 

 

Other

 

81.8

 

 

Total

 

$

2,785.6

 

 

 

 

 

 

(6)

Elimination of intra-company payables

 

$

(35.9

)

 

Elimination of intra-company debt

 

(130.6

)

 

Other

 

0.2

 

 

Total

 

$

(166.3

)

 

9



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the three months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

938,162

 

$

484,605

 

$

53,723

 

$

11,660

 

$

 

$

1,488,150

 

External Non-U.S.

 

21,509

 

74,265

 

 

240

 

 

96,014

 

Other segments

 

40,715

 

245,810

 

197

 

2,463

 

(289,185

)

 

 

 

1,000,386

 

804,680

 

53,920

 

14,363

 

(289,185

)

1,584,164

 

Operating income (loss)

 

85,201

 

1,077

 

(494

)

(14,781

)(1)

(2,003

)(2)

69,000

 

Income (loss) before income taxes

 

65,666

 

(9,588

)

(1,919

)

(21,147

)

(2,083

)

30,929

 

Depreciation and amortization

 

28,596

 

26,224

 

1,404

 

1,105

 

(51

)

57,278

 

Capital expenditures

 

10,530

 

10,145

 

 

3,549

 

 

24,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets (7)

 

2,513,562

 

2,476,032

 

198,314

 

718,304

(3)

(295,753

)(4)

5,610,459

 

Liabilities (7)

 

414,455

 

609,779

 

20,423

 

2,749,747

(5)

(287,621

)(6)

3,506,783

 

 


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

 

(1)

Corporate SG&A

 

$

(5.8

)

 

Company-wide stock option expense

 

(3.6

)

 

Profit sharing

 

(3.5

)

 

Other, net

 

(1.9

)

 

Total

 

$

(14.8

)

 

 

 

 

 

(2)

Gross profit reduction from intra-company sales

 

$

(2.0

)

 

 

 

 

 

(3)

Cash and equivalents

 

$

258.9

 

 

Income taxes receivable

 

30.4

 

 

Deferred income taxes

 

24.8

 

 

Property, plant and equipment, net

 

57.7

 

 

Debt issuance costs

 

25.1

 

 

Intra-company debt

 

235.8

 

 

Other

 

85.6

 

 

Total

 

$

718.3

 

 

 

 

 

 

(4)

Elimination of intra-company receivables

 

$

(47.6

)

 

Elimination of intra-company debt

 

(235.8

)

 

Other

 

(12.4

)

 

Total

 

$

(295.8

)

 

 

 

 

 

(5)

Accounts payable

 

$

36.0

 

 

Income taxes payable

 

5.4

 

 

Accrued interest

 

61.8

 

 

Accrued profit sharing

 

19.2

 

 

Debt

 

2,341.0

 

 

Deferred income taxes

 

219.2

 

 

Other

 

67.1

 

 

Total

 

$

2,749.7

 

 

 

 

 

 

(6)

Elimination of intra-company payables

 

$

(47.7

)

 

Elimination of intra-company debt

 

(235.8

)

 

Other

 

(4.1

)

 

Total

 

$

(287.6

)

 

 

(7)

Certain segment deferred tax asset and liability accounts have been reclassified at September 30, 2010, to conform to the September 30, 2011 presentation. These reclassifications had no impact to the previously reported segment income statement information or consolidated income statements as previously reported, nor did they impact previously reported consolidated total assets or liabilities.

 

10



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (continued)

 

For the nine months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2011

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

3,551,626

 

$

1,944,928

 

$

197,112

 

$

75,260

 

$

 

$

5,768,926

 

External Non-U.S.

 

138,723

 

230,954

 

 

552

 

 

370,229

 

Other segments

 

163,991

 

1,069,661

 

612

 

8,452

 

(1,242,716

)

 

 

 

3,854,340

 

3,245,543

 

197,724

 

84,264

 

(1,242,716

)

6,139,155

 

Operating income (loss)

 

543,117

 

39,987

 

(4,764

)

(78,115

)(1)

2,105

(2)

502,330

 

Income (loss) before income taxes

 

480,296

 

8,033

 

(9,918

)

(97,105

)

1,999

 

383,305

 

Depreciation and amortization

 

82,164

 

75,784

 

4,969

 

4,201

 

(153

)

166,965

 

Capital expenditures

 

28,891

 

58,458

 

1,454

 

2,992

 

 

91,795

 

 


Footnotes related to the nine months ended September 30, 2011 segment results (in millions):

 

(1)

Corporate SG&A

 

$

(38.4

)

 

Company-wide stock option expense

 

(11.0

)

 

Profit sharing

 

(30.6

)

 

Other, net

 

1.9

 

 

Total

 

$

(78.1

)

 

 

 

 

 

(2)

Gross profit increase from intra-company sales

 

$

2.1

 

 

For the nine months ended

 

 

 

Metals Recycling /

 

Steel Fabrication

 

 

 

 

 

 

 

September 30, 2010

 

Steel Operations

 

Ferrous Resources

 

Operations

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,835,969

 

$

1,497,542

 

$

119,949

 

$

62,519

 

$

 

$

4,515,979

 

External Non-U.S.

 

72,906

 

183,317

 

 

551

 

 

256,774

 

Other segments

 

123,936

 

728,491

 

236

 

7,182

 

(859,845

)

 

 

 

3,032,811

 

2,409,350

 

120,185

 

70,252

 

(859,845

)

4,772,753

 

Operating income (loss)

 

351,085

 

32,150

 

(11,787

)

(50,476

)(1)

(3,040

)(2)

317,932

 

Income (loss) before income taxes

 

295,332

 

(3,413

)

(15,696

)

(66,886

)

(3,837

)

205,500

 

Depreciation and amortization

 

84,894

 

76,351

 

4,516

 

3,323

 

(136

)

168,948

 

Capital expenditures

 

39,747

 

41,503

 

150

 

15,106

 

(638

)

95,868

 

 


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

 

(1)

Corporate SG&A

 

$

(22.8

)

 

Company-wide stock option expense

 

(8.8

)

 

Profit sharing

 

(18.8

)

 

Other, net

 

(0.1

)

 

Total

 

$

(50.5

)

 

 

 

 

 

(2)

Gross profit reduction from intra-company sales

 

$

(3.0

)

 

11



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information

 

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior notes due 2012, 2014, 2015, 2016, and 2020. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company 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, 2010.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of September 30, 2011

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

388,196

 

$

59,517

 

$

8,981

 

$

 

$

456,694

 

Accounts receivable, net

 

329,791

 

790,072

 

10,868

 

(314,863

)

815,868

 

Inventories

 

584,593

 

496,178

 

80,346

 

(2,269

)

1,158,848

 

Other current assets

 

91,718

 

7,651

 

3,013

 

(37,565

)

64,817

 

Total current assets

 

1,394,298

 

1,353,418

 

103,208

 

(354,697

)

2,496,227

 

Property, plant and equiment, net

 

1,067,385

 

660,174

 

443,764

 

(2,879

)

2,168,444

 

Intangible assets, net

 

 

460,206

 

 

 

460,206

 

Goodwill

 

 

746,737

 

 

 

746,737

 

Other assets, including investments in subs

 

2,792,180

 

32,551

 

8,073

 

(2,700,937

)

131,867

 

Total assets

 

$

5,253,863

 

$

3,253,086

 

$

555,045

 

$

(3,058,513

)

$

6,003,481

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

156,677

 

$

302,606

 

$

35,133

 

$

(32,077

)

$

462,339

 

Accrued expenses

 

175,546

 

99,005

 

8,340

 

(28,973

)

253,918

 

Current maturities of long-term debt

 

440

 

300

 

35,596

 

(35,126

)

1,210

 

Total current liabilities

 

332,663

 

401,911

 

79,069

 

(96,176

)

717,467

 

Long-term debt

 

2,344,065

 

 

165,787

 

(130,802

)

2,379,050

 

Other liabilities

 

275,567

 

2,162,580

 

27,223

 

(1,905,436

)

559,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

 

64,364

 

 

64,364

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

636

 

33,896

 

18,121

 

(52,017

)

636

 

Treasury stock

 

(725,849

)

 

 

 

(725,849

)

Additional paid-in-capital

 

1,023,295

 

117,737

 

312,817

 

(430,554

)

1,023,295

 

Retained earnings

 

2,003,486

 

536,962

 

(93,434

)

(443,528

)

2,003,486

 

Total Steel Dynamics, Inc. equity

 

2,301,568

 

688,595

 

237,504

 

(926,099

)

2,301,568

 

Noncontrolling interests

 

 

 

(18,902

)

 

(18,902

)

Total equity

 

2,301,568

 

688,595

 

218,602

 

(926,099

)

2,282,666

 

Total liabilities and equity

 

$

5,253,863

 

$

3,253,086

 

$

555,045

 

$

(3,058,513

)

$

6,003,481

 

 

12



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of December 31, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

173,563

 

$

10,628

 

$

2,322

 

$

 

$

186,513

 

Accounts receivable, net

 

283,883

 

614,412

 

7,282

 

(283,388

)

622,189

 

Inventories

 

548,726

 

487,298

 

84,183

 

(6,144

)

1,114,063

 

Other current assets

 

96,040

 

9,757

 

3,444

 

(32,003

)

77,238

 

Total current assets

 

1,102,212

 

1,122,095

 

97,231

 

(321,535

)

2,000,003

 

Property, plant and equiment, net

 

1,110,350

 

684,118

 

421,897

 

(3,032

)

2,213,333

 

Intangible assets, net

 

 

489,240

 

 

 

489,240

 

Goodwill

 

 

751,675

 

 

 

751,675

 

Other assets, including investments in subs

 

2,788,097

 

36,617

 

7,601

 

(2,696,632

)

135,683

 

Total assets

 

$

5,000,659

 

$

3,083,745

 

$

526,729

 

$

(3,021,199

)

$

5,589,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

127,246

 

$

227,823

 

$

26,015

 

$

(32,483

)

$

348,601

 

Accrued expenses

 

123,498

 

102,114

 

8,497

 

(30,317

)

203,792

 

Current maturities of long-term debt

 

7,554

 

325

 

34,604

 

(33,559

)

8,924

 

Total current liabilities

 

258,298

 

330,262

 

69,116

 

(96,359

)

561,317

 

Long-term debt

 

2,344,399

 

 

168,278

 

(134,780

)

2,377,897

 

Other liabilities

 

305,092

 

2,158,725

 

27,072

 

(1,971,298

)

519,591

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

 

54,294

 

 

54,294

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

633

 

33,901

 

16,121

 

(50,022

)

633

 

Treasury stock

 

(727,624

)

 

 

 

(727,624

)

Additional paid-in-capital

 

998,728

 

117,737

 

256,905

 

(374,642

)

998,728

 

Retained earnings

 

1,821,133

 

443,120

 

(49,022

)

(394,098

)

1,821,133

 

Total Steel Dynamics, Inc. equity

 

2,092,870

 

594,758

 

224,004

 

(818,762

)

2,092,870

 

Noncontrolling interests

 

 

 

(16,035

)

 

(16,035

)

Total equity

 

2,092,870

 

594,758

 

207,969

 

(818,762

)

2,076,835

 

Total liabilities and equity

 

$

5,000,659

 

$

3,083,745

 

$

526,729

 

$

(3,021,199

)

$

5,589,934

 

 

13



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2011

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

932,793

 

$

2,309,239

 

$

45,407

 

$

(1,243,984

)

$

2,043,455

 

Costs of goods sold

 

809,684

 

2,194,687

 

60,673

 

(1,220,832

)

1,844,212

 

Gross profit (loss)

 

123,109

 

114,552

 

(15,266

)

(23,152

)

199,243

 

Selling, general and administrative

 

37,678

 

53,755

 

2,475

 

(3,450

)

90,458

 

Operating income (loss)

 

85,431

 

60,797

 

(17,741

)

(19,702

)

108,785

 

Interest expense, net of capitalized interest

 

26,163

 

18,237

 

2,343

 

(2,041

)

44,702

 

Other (income) expense, net

 

(3,232

)

(1,895

)

(437

)

2,041

 

(3,523

)

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

 

62,500

 

44,455

 

(19,647

)

(19,702

)

67,606

 

Income taxes (benefit)

 

19,524

 

16,023

 

(247

)

(7,551

)

27,749

 

 

 

42,976

 

28,432

 

(19,400

)

(12,151

)

39,857

 

Equity in net income of subsidiaries

 

328

 

 

 

(328

)

 

Net loss attributable to noncontrolling interests

 

 

 

3,447

 

 

3,447

 

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

 

$

43,304

 

$

28,432

 

$

(15,953

)

$

(12,479

)

$

43,304

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

707,009

 

$

1,784,299

 

$

25,347

 

$

(932,491

)

$

1,584,164

 

Costs of goods sold

 

628,785

 

1,696,687

 

39,466

 

(920,306

)

1,444,632

 

Gross profit (loss)

 

78,224

 

87,612

 

(14,119

)

(12,185

)

139,532

 

Selling, general and administrative

 

21,294

 

49,906

 

2,000

 

(2,668

)

70,532

 

Operating income (loss)

 

56,930

 

37,706

 

(16,119

)

(9,517

)

69,000

 

Interest expense, net of capitalized interest

 

26,197

 

17,302

 

3,494

 

(2,707

)

44,286

 

Other (income) expense, net

 

(3,419

)

(5,619

)

37

 

2,786

 

(6,215

)

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

 

34,152

 

26,023

 

(19,650

)

(9,596

)

30,929

 

Income taxes (benefit)

 

17,246

 

9,743

 

(7,587

)

(3,828

)

15,574

 

 

 

16,906

 

16,280

 

(12,063

)

(5,768

)

15,355

 

Equity in net income of subsidiaries

 

1,835

 

 

 

(1,835

)

 

Net loss attributable to noncontrolling interests

 

 

 

3,386

 

 

3,386

 

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

 

$

18,741

 

$

16,280

 

$

(8,677

)

$

(7,603

)

$

18,741

 

 

14



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (continued)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2011

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,798,097

 

$

6,955,744

 

$

143,872

 

$

(3,758,558

)

$

6,139,155

 

Costs of goods sold

 

2,293,661

 

6,599,291

 

184,424

 

(3,709,604

)

5,367,772

 

Gross profit (loss)

 

504,436

 

356,453

 

(40,552

)

(48,954

)

771,383

 

Selling, general and administrative

 

109,870

 

163,742

 

6,545

 

(11,104

)

269,053

 

Operating income (loss)

 

394,566

 

192,711

 

(47,097

)

(37,850

)

502,330

 

Interest expense, net of capitalized interest

 

77,984

 

53,763

 

7,070

 

(5,957

)

132,860

 

Other (income) expense, net

 

(10,115

)

(7,659

)

(2,123

)

6,062

 

(13,835

)

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

 

326,697

 

146,607

 

(52,044

)

(37,955

)

383,305

 

Income taxes (benefit)

 

103,264

 

54,695

 

(260

)

(14,307

)

143,392

 

 

 

223,433

 

91,912

 

(51,784

)

(23,648

)

239,913

 

Equity in net income of subsidiaries

 

24,484

 

 

 

(24,484

)

 

Net loss attributable to noncontrolling interests

 

 

 

8,004

 

 

8,004

 

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

 

$

247,917

 

$

91,912

 

$

(43,780

)

$

(48,132

)

$

247,917

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,160,162

 

$

5,348,572

 

$

92,116

 

$

(2,828,097

)

$

4,772,753

 

Costs of goods sold

 

1,844,035

 

5,060,220

 

123,213

 

(2,796,713

)

4,230,755

 

Gross profit (loss)

 

316,127

 

288,352

 

(31,097

)

(31,384

)

541,998

 

Selling, general and administrative

 

74,675

 

150,432

 

6,594

 

(7,635

)

224,066

 

Operating income (loss)

 

241,452

 

137,920

 

(37,691

)

(23,749

)

317,932

 

Interest expense, net of capitalized interest

 

73,082

 

50,160

 

9,029

 

(7,022

)

125,249

 

Other (income) expense, net

 

(10,685

)

(10,526

)

575

 

7,819

 

(12,817

)

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

 

179,055

 

98,286

 

(47,295

)

(24,546

)

205,500

 

Income taxes (benefit)

 

69,098

 

36,781

 

(17,935

)

(7,985

)

79,959

 

 

 

109,957

 

61,505

 

(29,360

)

(16,561

)

125,541

 

Equity in net income of subsidiaries

 

22,960

 

 

 

(22,960

)

 

Net loss attributable to noncontrolling interests

 

 

 

7,376

 

 

7,376

 

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

 

$

132,917

 

$

61,505

 

$

(21,984

)

$

(39,521

)

$

132,917

 

 

Condensed Consolidating Statements of Cash Flows (in thousands)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2011

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

314,438

 

$

112,213

 

$

(34,211

)

$

(43

)

$

392,397

 

Net cash used in investing activities

 

(77,125

)

(40,015

)

(27,597

)

54,888

 

(89,849

)

Net cash provided by (used in) financing activities

 

(22,680

)

(23,309

)

68,467

 

(54,845

)

(32,367

)

Increase in cash and equivalents

 

214,633

 

48,889

 

6,659

 

 

270,181

 

Cash and equivalents at beginning of period

 

173,563

 

10,628

 

2,322

 

 

186,513

 

Cash and equivalents at end of period

 

$

388,196

 

$

59,517

 

$

8,981

 

$

 

$

456,694

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2010

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

259,377

 

$

2,914

 

$

(80,139

)

$

(639

)

$

181,513

 

Net cash used in investing activities

 

(124,699

)

(23,104

)

(40,305

)

94,657

 

(93,451

)

Net cash provided by financing activities

 

123,921

 

23,606

 

119,539

 

(94,018

)

173,048

 

Increase (decrease) in cash and equivalents

 

258,599

 

3,416

 

(905

)

 

261,110

 

Cash and equivalents at beginning of period

 

430

 

6,363

 

2,215

 

 

9,008

 

Cash and equivalents at end of period

 

$

259,029

 

$

9,779

 

$

1,310

 

$

 

$

270,118

 

 

15



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 domestic and global economies, conditions in the steel and recycled metals marketplaces, our revenue, 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. Such predictive statements are not guarantees of future performance, and actual results could differ materially from our current expectations. Factors that could cause such predictive statements to turn out other than as anticipated or predicted include, among others: the effects of a prolonged recession resulting in a decrease of  demand for our products; cyclical changes in market supply and demand  for steel and recycled metals consumption; the impact of price competition, whether domestic or the result of foreign imports; risks and uncertainties involving new products or new technologies; changes in the availability or cost of steel scrap or substitute materials; increases in energy costs; occurrence of unanticipated equipment failures and plant outages; labor unrest; and the effect of the elements on production or consumption.

 

More specifically, we refer you to the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010, as well as in other reports which we file with the Securities and Exchange Commission, for a more detailed discussion of some of the many factors, variable risks and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated. These reports are available publicly on the SEC web site, www.sec.gov, and on our web site, www.steeldynamics.com. Forward-looking or predictive statements we make are based upon information and assumptions, concerning our businesses and the environments in which they operate, which we consider reasonable as of the date on which these statements are made.  Due to the foregoing risks and uncertainties however, as well as, matters beyond our control which can affect forward-looking statements, you are cautioned not to place undue reliance on these predictive statements, which speak only as of the date of this report. We undertake no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

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 method, which is based on the percentage of steel consumed to date as compared to the estimated total steel 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 for our steel operations are steel scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), alloys, zinc, natural gas, argon, direct and indirect labor and related benefits, electricity, oxygen, electrodes, depreciation, materials and freight. The principal elements of these costs for our metals recycling and ferrous resources operations are the costs of procuring the unprocessed scrap metals, transportation costs, and processing expenses, such as direct and indirect labor and related benefits, depreciation and utilities. The principal elements of these costs for our steel fabrication operations include purchased steel and direct and indirect labor and related benefit expenses.

 

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, 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 (Income) Expense, net.  Other income consists of interest income earned on our temporary cash deposits and any other non-operating income activity, including gains on certain short-term investments and income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs.

 

16



Table of Contents

 

Overview

 

Net income was $43.3 million, or $.19 per diluted share, during the third quarter of 2011, compared with net income of $18.7 million, or $.09 per diluted share, during the third quarter of 2010, and net income of $98.7 million, or $0.43 per diluted share, during the second quarter of 2011. Our net sales increased $459.3 million, or 29%, to $2.0 billion in the third quarter of 2011 versus the third quarter of 2010, and net sales decreased $36.3 million, or 2%, versus the second quarter of 2011. Our gross profit percentage was 10% during the third quarter of 2011 as compared to 9% for the third quarter of 2010, and 13% for the second quarter of 2011.

 

Net income was $247.9 million, or $1.08 per diluted share, during the first nine months of 2011, compared with net income of $132.9 million, or $.60 per diluted share, during the first nine months of 2010.  Net sales increased $1.4 billion, or 29%, to $6.1 billion in the first nine months of 2011 versus the first nine months of 2010, and our gross profit percentage was 13% during the first nine months of 2011, as compared to 11% for the first nine months of 2010.

 

Operating income for the first nine months of 2011 increased $184.4 million, or 58%, over the same period of 2010. During the first nine months of 2011, we have experienced increased sales pricing and volumes, resulting in increased gross profit, across all reporting segments in comparison to the same period in 2010.  Within our steel operations, long products volumes improved 22%, while sheet products increased 3%. Additionally during the period, both ferrous and nonferrous metals realized sales volume increases of 16% and 11%, respectively, at OmniSource, our metals recycling operations within our metals recycling and ferrous resources segment, although there was margin percentage compression in both ferrous and nonferrous metals. Third quarter 2011 operating income was $39.8 million higher than that of the third quarter 2010 due primarily to increased volumes, pricing and margins in our steel segment. However, operating income in the third quarter of 2011 was $79.4 million less than second quarter 2011 due primarily to the decreased selling prices, and thus operating profits, of our steel sheet products operations.

 

Segment Operating Results 2011 vs. 2010 (dollars in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

Second

 

Linked

 

 

 

September 30,

 

September 30,

 

Quarter

 

Quarter

 

 

 

2011

 

%
Change

 

2010

 

2011

 

%
Change

 

2010

 

2011

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

1,277,864

 

28

%

$

1,000,386

 

$

3,854,340

 

27

%

$

3,032,811

 

$

1,329,466

 

(4

)%

Metals recycling and ferrous resources

 

1,059,257

 

32

%

804,680

 

3,245,543

 

35

%

2,409,350

 

1,077,871

 

(2

)%

Steel fabrication

 

83,110

 

54

%

53,920

 

197,724

 

65

%

120,185

 

61,962

 

34

%

Other

 

27,346

 

90

%

14,363

 

84,264

 

20

%

70,252

 

28,786

 

(5

)%

 

 

2,447,577

 

 

 

1,873,349

 

7,381,871

 

 

 

5,632,598

 

2,498,085

 

 

 

Intra-company

 

(404,122

)

 

 

(289,185

)

(1,242,716

)

 

 

(859,845

)

(418,354

)

 

 

Consolidated

 

$

2,043,455

 

29

%

$

1,584,164

 

$

6,139,155

 

29

%

$

4,772,753

 

$

2,079,731

 

(2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel

 

$

136,194

 

 

 

$

85,201

 

$

543,117

 

 

 

$

351,085

 

$

213,968

 

 

 

Metals recycling and ferrous resources

 

(3,388

)

 

 

1,077

 

39,987

 

 

 

32,150

 

3,885

 

 

 

Steel fabrication

 

(246

)

 

 

(494

)

(4,764

)

 

 

(11,787

)

(1,635

)

 

 

Other

 

(28,437

)

 

 

(14,781

)

(78,115

)

 

 

(50,476

)

(25,422

)

 

 

 

 

104,123

 

 

 

71,003

 

500,225

 

 

 

320,972

 

190,796

 

 

 

Eliminations

 

4,662

 

 

 

(2,003

)

2,105

 

 

 

(3,040

)

(2,577

)

 

 

Consolidated

 

$

108,785

 

 

 

$

69,000

 

$

502,330

 

 

 

$

317,932

 

$

188,219

 

 

 

 

Steel Operations

 

Steel Operations.  Steel operations consist of our five electric-arc furnace mini-mills, producing steel from steel scrap, utilizing continuous casting, automated rolling mills, and various downstream finishing facilities, including The Techs operations. 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 and industrial machinery markets. In the third quarters of 2011 and 2010, and second quarter of 2011, our steel operations accounted for 60%, 61%, and 61% respectively, of our external net sales. Operating income for the steel segment increased $51.0 million or 60%, to $136.2 million in the third quarter of 2011 compared to the third quarter of 2010, but decreased $77.8 million, or 36%, on a linked-quarter basis. Sales volumes and pricing per ton shipped increased 11% and $113 per ton, respectively, in the third quarter of 2011 as compared to the third quarter of 2010. Sales volumes increased 2% in the third quarter of 2011 as compared to the second quarter of 2011; however, average overall steel segment pricing decreased $50 per ton, driven by declines in sheet products pricing, resulting in significant margin squeeze and reduced operating income. Operating income for steel operations increased $192.0 million to $543.1 million in the first nine months of 2011 versus the first nine months of 2010 due to increases in overall sales volumes of 9%, with long products increasing 22%, as well as increases in average selling prices of $130 per ton shipped, offset by less significant increases in raw material costs.

 

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Table of Contents

 

Steel Operations Shipments (net tons)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

Second

 

 

 

 

 

September 30,

 

 

 

September 30,

 

 

 

Quarter

 

 

 

 

 

2011

 

 

 

2010

 

 

 

2011

 

 

 

2010

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flat Roll Division

 

701,212

 

 

 

621,543

 

 

 

2,091,505

 

 

 

1,993,662

 

 

 

680,679

 

 

 

The Techs

 

166,417

 

 

 

166,858

 

 

 

554,044

 

 

 

569,363

 

 

 

186,903

 

 

 

Sheet products

 

867,629

 

63

%

788,401

 

64

%

2,645,549

 

65

%

2,563,025

 

69

%

867,582

 

65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural and Rail Division

 

224,514

 

 

 

156,940

 

 

 

628,543

 

 

 

471,541

 

 

 

213,368

 

 

 

Engineered Bar Products Division

 

160,649

 

 

 

153,279

 

 

 

463,944

 

 

 

407,140

 

 

 

144,280

 

 

 

Roanoke Bar Division

 

141,060

 

 

 

145,168

 

 

 

415,271

 

 

 

363,747

 

 

 

152,906

 

 

 

Steel of West Virginia

 

76,487

 

 

 

66,610

 

 

 

223,425

 

 

 

172,735

 

 

 

74,882

 

 

 

Long products

 

602,710

 

44

%

521,997

 

43

%

1,731,183

 

43

%

1,415,163

 

38

%

585,436

 

44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shipments

 

1,470,339

 

 

 

1,310,398

 

 

 

4,376,732

 

 

 

3,978,188

 

 

 

1,453,018

 

 

 

Intra-segment shipments

 

(29,952

)

(2

)%

(17,673

)

(1

)%

(102,265

)

(2

)%

(50,019

)

(1

)%

(35,842

)

(3

)%

Segment shipments

 

1,440,387

 

 

 

1,292,725

 

 

 

4,274,467

 

 

 

3,928,169

 

 

 

1,417,176

 

 

 

Intra-company shipments

 

(71,165

)

(5

)%

(65,186

)

(6

)%

(224,235

)

(6

)%

(201,659

)

(6

)%

(79,568

)

(6

)%

External shipments

 

1,369,222

 

 

 

1,227,539

 

 

 

4,050,232

 

 

 

3,726,510

 

 

 

1,337,608

 

 

 

 

Sheet Products.  Our Flat Roll Division sells a broad range of sheet steel products, such as hot rolled, cold rolled and coated steel products, including a large variety of specialty products such as light gauge hot rolled, galvanized, Galvalume® and painted products. The Techs operations, comprised of three galvanizing lines, also sells specialized galvanized sheet steels used in non-automotive applications. Sheet products represented 63% of our steel segment’s shipped tons in the third quarter of 2011, as compared to 64% in the third quarter of 2010, and 65% in the second quarter of 2011.

 

Long Products.  Our Structural and Rail Division sells structural steel beams and pilings and is also designed to produce and sell a variety of standard and premium-grade rail for the railroad industry. Our Engineered Bar Products Division primarily sells special bar quality and merchant bar quality rounds and round-cornered squares. Our Roanoke Bar Division sells billets and merchant steel products, including angles, plain rounds, flats and channels. Steel of West Virginia primarily sells merchant beams, channels and specialty structural steel sections.

 

Net sales for the segment increased in the third quarter of 2011 by $277.5 million, or 28%, compared to the third quarter of 2010, and decreased $51.6 million, or 4%, on a linked-quarter basis. Third quarter 2011 steel segment shipments were up 11% compared to the same period in 2010 due to the overall improved domestic economic climate as steel mill utilization improved with increased automotive and heavy machinery demand, while service center inventories continue to remain at historically low levels. Linked-quarter 2011 steel segment shipments increased 2% overall, all in long products. Order entry for sheet products has had periods of volatility and slowed in the third quarter of 2011, while long products continued to show improvement with stronger backlogs, especially at our Engineered Bar Products Division.  Although the non-residential construction market continues to remain slow, we have seen some improvement in sales, order entry and backlog at our Structural and Rail Division in 2011 as compared to 2010, including 31,000 rail tons sold in the third quarter of 2011 versus 20,000 rail tons in the third quarter of 2010.

 

Our third quarter 2011 average steel operations’ segment selling price per ton shipped, including intra-company shipments, increased $113 compared with the third quarter of 2010 but decreased $50 compared with the second quarter of 2011. Sheet products third quarter 2011 average selling price per ton shipped increased $103 compared with the third quarter of 2010, but decreased $95 on a linked-quarter basis, consistent with overall industry pricing. Long products average selling prices increased $124 per ton compared with the third quarter of 2010, and increased $18 on a linked-quarter basis, as demand improved in the long products market, especially in those served by our Engineered Bar Products Division.

 

Net sales for the segment increased by $821.5 million, or 27%, in the first nine months of 2011 compared to the same period in 2010. Stronger demand for our steel products in conjunction with the improving economic climate in 2011 have driven increases in both volumes and product pricing as compared to the first nine months of 2010. Segment shipments for the first nine months of 2011 were up 9% overall compared to the same period in 2010, with sheet products increasing 3% and long products increasing 22%. Our first nine months 2011 average steel operations’ selling price per ton shipped, including intra-company shipments, increased $130 overall compared with the first nine months of 2010, fairly consistently between sheet products and long products.

 

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Table of Contents

 

 

Metallic raw materials used in our electric arc furnaces represent our single most significant manufacturing cost. Our metallic raw material cost per net ton consumed in our steel operations increased $79 in the third quarter 2011 compared with the third quarter of 2010, and increased $5 on a linked-quarter basis. During the third quarter of 2011 and 2010, respectively, our metallic raw material costs represented 68% and 61% 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 increased $73 for the first nine months of 2011 compared with the first nine months of 2010, and represented 68% and 61% of our steel operations’ manufacturing costs, respectively, excluding the operations of The Techs.

 

Metals Recycling and Ferrous Resources Operations

 

Metals Recycling and Ferrous Resources Operations.  This operating segment includes and is primarily affected by our metals recycling operations (OmniSource); our liquid pig iron manufacturing facility, Iron Dynamics (IDI); and our iron nugget manufacturing start-up facility, Mesabi Nugget. Our metals recycling and ferrous resources operations segment accounted for 35% of our external net sales in the third quarter of 2011 and 2010, and the second quarter of 2011, respectively. Operating income for the metals recycling and ferrous resources operations segment decreased $4.5 million in the third quarter of 2011, to a loss of $3.4 million, compared to the third quarter of 2010, due primarily to decreased metal margins for nonferrous metals in metals recycling. Operating income for the segment decreased $7.3 million in the third quarter 2011 compared to the second quarter of 2011 due primarily to decreases in certain nonferrous metals pricing, and thus margins, late in the third quarter 2011 in metals recycling.

 

Operating income for the metals recycling and ferrous resources operations segment increased $7.8 million for the first nine months of 2011, to $40.0 million, compared to the same period in 2010. Metals recycling operating income decreased $7.3 million despite increased volume in both ferrous and nonferrous scrap, as metal margins in both ferrous and nonferrous scrap narrowed in 2011. Mesabi Nugget operating losses increased $9.1 million (including noncontrolling interests) from start-up iron nugget operations in the first nine months of 2011 over those in the first nine months of 2010 when operations began. However, the increased losses in metals recycling and Mesabi Nugget were more than offset by the increased operating income of IDI in the first nine months of 2011 as compared to the same period of 2010 due to increased volume and selling prices, as the market price for pig iron increased.

 

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Table of Contents

 

Metals Recycling and Ferrous Resources Operations Shipments

 

 

 

Three Months Ended

 

Nine Months Ended

 

Second

 

 

 

September 30,

 

September 30,

 

Quarter

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

Ferrous metal (gross tons)

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,483,122

 

1,361,696

 

4,565,141

 

3,942,135

 

1,553,828

 

Intra-segment

 

(3,594

)

 

(8,786

)

 

(5,192

)

Segment shipments

 

1,479,528

 

1,361,696

 

4,556,355

 

3,942,135

 

1,548,636

 

 Intra-company

 

(645,355

)

(556,222

)

(1,970,429

)

(1,638,878

)

(655,496

)

External shipments

 

834,173

 

805,474

 

2,585,926

 

2,303,257

 

893,140

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

Total and segment shipments

 

269,753

 

256,514

 

811,511

 

731,407

 

255,113

 

Intra-company

 

(1,804

)

(1,784

)

(6,043

)

(5,924

)

(1,978

)

External shipments

 

267,949

 

254,730

 

805,468

 

725,483

 

253,135

 

 

 

 

 

 

 

 

 

 

 

 

 

Mesabi Nugget (metric tons) — intra-company

 

32,666

 

24,553

 

106,698

 

49,210

 

38,265

 

 

 

 

 

 

 

 

 

 

 

 

 

Iron Dynamics (metric tons) — intra-company

 

61,034

 

57,068

 

182,031

 

170,684

 

59,854

 

 

Metals Recycling.  Our metals recycling operations, OmniSource, represent our metals sourcing and processing operations and are the most significant source of net sales in this segment. These operations sell 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 operations represented 95% of this segment’s net sales during the third quarters of 2011 and 2010, as well as the second quarter of 2011; and $4.4 million, $13.8 million, and $11.2 million of this segments’ operating income for these same quarters, respectively.

 

During the third quarter of 2011, metals recycling recorded sales of $1.0 billion on shipments of 1.5 million gross tons of ferrous metals and 269.8 million pounds of nonferrous metals, compared with sales of $768.1 million on shipments of 1.4 million gross tons of ferrous and 256.5 million pounds of nonferrous metals during the same period in 2010. In the second quarter of 2011, metals recycling sales were $1.0 billion on shipments of 1.55 million gross tons of ferrous metals and 255.1 million pounds of nonferrous metals. Sales prices of ferrous and nonferrous metals increased 25% and 18%, respectively, in the third quarter of 2011 versus the same period in 2010. During the third quarter of 2011, the metals recycling operations provided approximately 53% of the steel scrap purchased by our steel mills. This represented 44% of the metals recycling operations’ ferrous shipments for the third quarter of 2011 and 41% for the third quarter of 2010, as compared to 42% during the second quarter of 2011. During the first nine months of 2011, metals recycling recorded sales of $3.1 billion on shipments of 4.6 million gross tons of ferrous metals and 811.5 million pounds of nonferrous metals, compared with sales of $2.3 billion on shipments of 3.9 million gross tons of ferrous metals and 731.4 million pounds of nonferrous metals. Sales prices of ferrous and nonferrous metal increased 18% and 15%, respectively, in 2011 versus 2010. The increased volume and pricing of our ferrous metals is directly impacted by the increase in both domestic steel mill utilization and global steel mill production, since the steel industry is our primary ferrous customer.

 

Operating income for metals recycling decreased $9.5 million, to $4.4 million, in the third quarter of 2011, compared to the third quarter of 2010, despite the increase in ferrous and nonferrous sales volumes, due primarily to a sharp drop in certain nonferrous pricing, much of which occurred late in the quarter.  Metals recycling operating income decreased $6.8 million on a linked-quarter basis due primarily to decreases in certain nonferrous metals pricing, and thus margins, late in the third quarter. Ferrous metal margin dollars remained consistent in the third quarter 2011 versus the second quarter 2011 as volume decreases were offset by per ton metal margin improvement. Operating income for metals recycling decreased $7.3 million in the first nine months of 2011 as compared to the same period in 2010 with the impact of ferrous and nonferrous volume increases more than offset by decreased metals margins in both ferrous and nonferrous metals.

 

Ferrous Resources.  Our ferrous resource operations consist primarily of the revenues and expenses associated with our IDI scrap substitute manufacturing facility, and our iron-nugget manufacturing facility, Mesabi Nugget. IDI primarily produces liquid pig iron which is used as a scrap substitute raw material input exclusively at our Flat Roll Division. IDI operating income during the third quarter 2011 and first nine months of 2011 increased over the respective 2010 periods due primarily to increased selling prices in 2011 compared to 2010, as the market price for pig iron increased. Mesabi Nugget, which began initial production of iron nuggets in January 2010, continues to refine and improve its pioneering production process, and has seen improvement in its monthly “up-time” and production results. Mesabi Nugget iron nuggets have to date been used as a raw material input at our steel mills. The operating loss of Mesabi Nugget start-up operations in the third quarter of 2011 was $2.4 million higher than in the third quarter of 2010 and $400,000 higher than in the second quarter of 2011 (including noncontrolling interest impact of $453,000 and $78,000, respectively).  The increased operating loss in the third quarter 2011 as compared to the third quarter of 2010 was due primarily to a planned three week shutdown in September 2011 to repair furnace refractory and install equipment to improve efficiency. The operating loss of Mesabi Nugget start-up operations increased $9.1 million in the first nine months of 2011 over that of the first nine months of 2010 (including noncontrolling interest impact of $1.7 million), when the location commissioned initial start-up.

 

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Table of Contents

 

Steel Fabrication Operations

 

Our steel fabrication operations include six operating and two idled New Millennium Building Systems’ plants located in the Midwest, Southeastern and Southwestern parts of 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 4%, 3%, and 3% of our external net sales during the third quarter of 2011 and 2010, and the second quarter of 2011, respectively. The operating loss for the segment was $246,000 in the third quarter of 2011, compared to $494,000 in the third quarter of 2010, and $1.6 million in the second quarter of 2011. Operating loss for the segment was $4.8 million for the first nine months of 2011 compared to an operating loss of $11.8 million for the first nine months of 2010.

 

Net sales for the segment increased by $29.2 million, or 54%, in the third quarter of 2011 compared to the third quarter of 2010, and $21.1 million, or 34%, on a linked-quarter basis. Both pricing and volumes increased in the third quarter of 2011 when compared with the same period in 2010, with our average steel fabrication operations’ selling price per ton shipped increasing $147, or 13%, during the third quarter of 2011 versus the same period in 2010, and remaining relatively consistent on a linked-quarter basis. Sales volumes increased 17,000 tons, or 37%, to 65,000 tons in the third quarter of 2011 compared to the third quarter of 2010, and increased 35% on a linked-quarter basis, with some of this increase coming from market share gains in existing markets, and some related to our expansion into the western United States from the acquisition of plants in Arkansas, Nevada and Northern Mexico in October 2010.  Net sales for the segment increased $77.5 million to $197.7 million for the first nine months of 2011 as compared to the first nine months of 2010. Our average steel fabrication operations’ selling price per ton shipped increased $218, or 21%, in the first nine months of 2011 as compared to the same period in 2010, and selling volumes increased 36% to 156,000 tons. While we have seen increased order entry, sales volumes and margins in the fabrication segment in 2011 versus 2010, the non-residential construction market continues to be at historically low levels, and we anticipate that if the non-residential market continues to develop, it may be slowly.  We also anticipate continuing to expand our market presence and penetration in the western portion of the United States as we ramp up our operations in that market.

 

The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the third quarter of 2011 and 2010, the cost of steel products purchased represented 72% and 71% of the total cost of manufacturing for our steel fabrication operations, respectively; while the cost of steel increased in the third quarter of 2011, as compared to the same period in 2010 by $105 per ton. Margins expanded during the third quarter of 2011 versus those of the third quarter of 2010 as increases in selling prices outpaced raw material cost increases. This, along with the volume increases resulted in increased segment gross profit of $3.1 million in the third quarter of 2011 compared to the same quarter in 2010. During the first nine months of 2011 and 2010, the cost of steel products consumed represented 71% and 69%, respectively, of the total cost of manufacturing for our steel fabrication operations, and the cost of steel increased in the first nine months of 2011 as compared to the same period in 2010 by $103 per ton. As the increase in selling prices outpaced the increase in input costs and volume increased, the segment’s gross profit increased $15.3 million in the first nine months of 2011 versus the same period in 2010.

 

 

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Table of Contents

 

Third Quarter Consolidated Results 2011 vs. 2010

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $90.5 million during the third quarter of 2011, as compared to $70.5 million during the third quarter of 2010, an increase of $20 million, or 28%. Our selling, general and administrative expenses represented 4% of our total net sales during the third quarter of 2011 and 2010.

 

The most significant increase in our selling, general and administrative expenses was due to increased incentive compensation and profit sharing expense during the third quarter of 2011 of $13.7 million due to the increased profitability in 2011. Included in the third quarter 2011 incentive compensation is the special award recognition paid to each non-union employee in August 2011, which totaled approximately $5.8 million.  In addition, we recognized approximately $2.9 million of non-cash expenses in the third quarter of 2011 related primarily to equipment impairment charges.

 

Interest Expense, net of Capitalized Interest.  During the third quarter of 2011, gross interest expense decreased $135,000 to $45.2 million, and capitalized interest decreased $551,000 to $467,000, when compared to the same period in 2010. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities at our various operating segments. Our weighted-average interest rate on our outstanding borrowings was 7.3% at September 30, 2011 and 2010. We currently anticipate gross interest expense to remain consistent in the fourth quarter of the year.

 

Other (Income) Expense, net.  Other income was $3.5 million during the third quarter of 2011, as compared to $6.2 million during the same period in 2010. During the third quarter of 2011, we recorded interest income of $1.1 million versus $1.2 million in the same period in 2010.

 

Income Taxes.  During the third quarter of 2011, our income tax expense was $27.7 million, as compared to $15.6 million during the same period in 2010. Our effective income tax rate before noncontrolling interests was 41.0% and 50.4%, during the third quarter of 2011 and 2010, respectively. The higher rate in the third quarter of 2010 was due to additional income tax expense being recorded during that quarter because of an increase in the annual estimated effective tax rate for 2010.

 

First Nine Months Consolidated Results 2011 vs. 2010

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $269.1 million during the first nine months of 2011, as compared to $224.1 million during the same period in 2010, an increase of $45.0 million, or 20%. During the first nine months of 2011 and 2010, selling, general and administrative expenses represented approximately 4% and 5% of net sales, respectively. The percentage decrease is primarily a result of improved net sales in 2011 compared with the prior year same period as measured against certain fixed cost components in selling, general and administrative expenses. The increase in selling, general and administrative expenses in the first nine months of 2011 compared to the first nine months of 2010 relates primarily to increased incentive compensation (including the special award recognition in August 2011) and profit sharing expenses totaling $30.4 million, due to the increased profitability during 2011.

 

Interest Expense, net of Capitalized Interest.  During the first nine months of 2011, gross interest expense increased $2.4 million, or 2%, to $134.1 million, and capitalized interest decreased $5.2 million, or 81%, to $1.2 million, as compared to the same period in 2010. The increase in gross interest expense for the first nine months of 2011 compared to the first nine months of 2010 is primarily a result of our issuance of $350.0 million of 7 5/8% senior notes due 2020, in March 2010. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities at our various operating segments, which with the completion of several of our construction projects, is not as significant in 2011.

 

Other (Income) Expense, net.  Other income was $13.8 million during the first nine months of 2011, as compared to $12.8 million during the same period in 2010. Interest income was $3.4 million for the first nine months of 2011 versus $3.0 million in 2010.

 

Income TaxesDuring the first nine months of 2011, our income tax provision was $143.4 million, as compared to $80.0 million during the same period in 2010, and our effective income tax rates before noncontrolling interests were 37.4% and 38.9%, respectively. The higher rate in 2010 versus 2011 is due primarily to research and development tax credits that were not enacted until the fourth quarter of 2010.

 

Liquidity and Capital Resources

 

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 capital expenditures, working capital requirements and principal and interest payments related to our outstanding indebtedness. We have met these liquidity requirements with cash provided by operations, issuances of common stock, long-term borrowings and state and local grants.

 

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Working Capital.  During the first nine months of 2011, our operational working capital position, representing our cash invested in trade receivables, inventories and income taxes receivable, less current liabilities other than debt, increased $62 million to $1.3 billion compared to December 31, 2010. Trade receivables increased $193.7 million, or 31%, during the first nine months of 2011 to $815.9 million, of which over 98% were current or less than 60 days past due. Our largest customer is an affiliated company, Heidtman Steel, which represented 5% of our outstanding trade receivables at September 30, 2011, and December 31, 2010. Trade receivables increased during the first nine months of 2011 due to increased sales from higher product prices and volumes in the third quarter of 2011 as compared to the fourth quarter of 2010, as days sales outstanding has remained consistent. Total inventories increased $44.8 million, or 4%, to $1.2 billion during the first nine months of 2011. Our raw materials, primarily steel scrap inventories, decreased by approximately $11.9 million during the first nine months of 2011, with scrap volumes decreasing by 88,000 gross tons (11%), and pricing increasing 4%. Our work-in-process and finished goods inventories increased $47.9 million, with volumes increasing by 41,000 tons. Our trade payables and general accruals increased $163.9 million, or 30%, during the first nine months of 2011. The increase in trade payables is a reflection of the increased production activities and commodity raw material pricing and purchasing prior to September 30, 2011, compared to that at December 31, 2010. The increase in general accruals is due primarily to the increase in accrued profit sharing and incentive compensation due to the increased profitability during 2011 when compared to 2010.

 

Capital Investments.  During the first nine months of 2011, we invested $91.8 million in property, plant and equipment, of which $28.9 million was within our steel operations, $58.5 million related to our metals recycling and ferrous resource operations, with $31.7 million of that relating to metals recycling. We believe these capital investments will benefit our net sales and related cash flows as each project reaches completion and attains appropriate operational metrics. We estimate capital expenditures for the fourth quarter of 2011 to be approximately $50 to $65 million.

 

Capital Resources and Long-term Debt.  During the first nine months of 2011, our total outstanding debt decreased $6.6 million to $2.4 billion. 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 interest, and our total stockholders’ equity, was 50.4% at September 30, 2011, and 52.8% at December 31, 2010.

 

On September 29, 2011, the company amended, restated and expanded its existing senior secured revolving credit facility from the prior $924.0 million level to a renewed 5-year $1.1 billion facility. Subject to certain conditions, the company has the opportunity to increase the facility size by an additional $400.0 million. The 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 will be available to fund working capital, capital expenditures, and other general corporate purposes.

 

The amended credit agreement contains financial covenants and other covenants that limit or restrict our ability 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. The senior secured credit agreement also contains a monthly borrowing base requirement regarding the maximum availability for the revolver.  At the end of each month, our revolver must be the lesser of:

 

1.              $1.1 billion less other applicable commitments, such as letters of credit and other secured debt, as defined within the credit agreement; or

2.              The sum of 85% of our eligible accounts receivable and 65% of our eligible inventories, less other applicable commitments, such as letters of credit and other secured debt, as defined within the credit agreement.

 

Our ability to borrow funds within the terms of the revolver is dependent upon our continued compliance with the financial and other covenants contained in the senior secured credit agreement as well as the borrowing base requirement. At September 30, 2011, we had no amounts borrowed against the senior secured revolving credit facility, and had $1,084.0 million of funding availability pursuant to our agreement.

 

The current financial covenants under our senior secured credit agreement 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 senior secured credit agreement) by our LTM gross interest expense. We must also maintain minimum liquidity, which is determined by unrestricted cash and revolver availability as defined in the credit agreement, of $150.0 million plus the outstanding amount of the $700.0 million senior notes due 2012, or $850 million at September 30, 2011.   In addition, a net debt (as defined in the credit agreement) to consolidated LTM adjusted EBITDA ratio (leverage ratio) of not more than 5.00:1.00 must be maintained. If the net debt to EBITDA ratio exceeds 3.50:1:00 at any time, the ability of the company to make restricted payments as defined in the credit agreement (which includes cash dividends to stockholders and share purchases, among other things), is limited.

 

At September 30, 2011, our interest coverage ratio and net debt leverage ratio was 4.63:1.00 and 2.41:1.00, respectively, and our minimum liquidity is over $1.5 billion. We were therefore in compliance with these covenants at September 30, 2011, and we expect to remain in compliance during the remainder of 2011.

 

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Cash Dividends.  We declared cash dividends of $65.6 million, or $0.30 per common share ($0.10 per common share each quarter), during the first nine months of 2011 and $48.8 million, or $0.225 per common share ($0.075 per common share per quarter), during the first nine months of 2010. We paid cash dividends of $60.0 million and $48.7 million during the first nine months of 2011 and 2010, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis.  During the remainder of 2011, we anticipate maintaining our current level of quarterly dividends; however, the determination to pay cash dividends in the future will be 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 revolving credit agreement and the indenture relating to our senior notes 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 you that our operating results, cash flow, 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 flow from operations, together with other available sources of funds, including additional borrowings under our senior secured credit agreement through its term, which expires in September 2016, 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 proposed 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 have changed rapidly in recent years, and we may become subject to more stringent environmental laws and regulations in the future, such as the impact of United States 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 2010 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 primarily 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, 2011 or 2010.

 

Commodity Risk

 

In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of steel products and to the purchase of commodities used in our production process, such as metallic raw materials, electricity, natural gas and alloys. 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 certain commodities such as fuel, zinc, iron ore, electricity, and natural gas and its transportation. Certain commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 24 months for physical commodity requirements and for up to 10 years for commodity transportation requirements. We also purchase electricity consumed at our Flat Roll Division pursuant to a contract which extends through December 2012. 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. At September 30, 2011, no material changes had occurred related to these commodity risks from the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. 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.

 

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 supplier. At September 30, 2011, we had a cumulative unrealized gain associated with these financial contracts of $1.4 million, all of which have a settlement date within the next twelve months. We expect the customer and supplier contracts associated with the financial contracts to be fully consummated.

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. 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 Commissions 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, 2011, our chief executive officer and chief 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, 2011 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

 

The company as well as its various subsidiaries, is from time to time involved in various lawsuits and/or governmental claims in the ordinary course of business. None of these lawsuits or claims at the present time, singly or in the aggregate, except as disclosed below, is material.

 

On September 17, 2008, we 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.  In addition, on December 28, 2010, we and the other co-defendants were served with a substantially similar complaint in the Circuit Court of Cocke County, Tennessee, purporting to be on behalf of indirect purchasers of steel products in Tennessee. The case has been removed to federal court. 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 discovery. We believe that the lawsuits are without merit and we are aggressively defending these actions.  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 our financial condition, results of operations, or liquidity.

 

Although not presently necessary or appropriate to make a dollar estimate of exposure to loss, if any, in connection with the above matter, we may in the future determine that a loss accrual is necessary. Although we may make loss accruals, if and as warranted, any amounts that we may accrue from time to time could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, an adverse result could have a material effect on our financial condition, results of operations and liquidity.

 

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ITEM 1A.               RISK FACTORS

 

No material changes have occurred to the indicated risk factors as disclosed in our 2010 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 5.                        OTHER INFORMATION

 

None.

 

ITEM 6.                        EXHIBITS

 

Executive Officer Certifications

 

31.1*

Certification of Chief 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 Chief 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.

 

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 8, 2011

 

 

 

 

 STEEL DYNAMICS, INC.

 

 

 

 

By:

/s/ Theresa E. Wagler

 

 

Theresa E. Wagler

 

 

Executive Vice President and Chief Financial Officer

 

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