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, 2012
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, 2012, Registrant had 219, 243, 272, outstanding shares of common stock.
STEEL DYNAMICS, INC.
Page
PART I. Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011
1
Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2012 and 2011 (unaudited)
2
Consolidated Statements of Cash Flows for the three- and nine-month periods ended September 30, 2012 and 2011 (unaudited)
3
Notes to Consolidated Financial Statements (unaudited)
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26
Item 4.
Controls and Procedures
PART II. Other Information
Legal Proceedings
27
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
28
Signatures
29
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
December 31,
2012
2011
(unaudited)
Assets
Current assets
Cash and equivalents
$
287,120
390,761
Investments in short-term commercial paper
—
84,830
Accounts receivable, net
656,517
679,898
Accounts receivable-related parties
56,233
42,893
Inventories
1,209,079
1,199,584
Deferred income taxes
28,229
25,341
Income taxes receivable
939
16,722
Other current assets
24,107
15,229
Total current assets
2,262,224
2,455,258
Property, plant and equipment, net
2,213,703
2,193,745
Restricted cash
27,436
26,528
Intangible assets, net
425,034
450,893
Goodwill
740,192
745,066
Other assets
106,927
107,736
Total assets
5,775,516
5,979,226
Liabilities and Equity
Current liabilities
Accounts payable
364,380
414,240
Accounts payable-related parties
12,833
6,584
Income taxes payable
12,014
10,880
Accrued expenses
166,845
185,964
Accrued profit sharing
19,213
38,671
Current maturities of long-term debt
30,114
444,078
Total current liabilities
605,399
1,100,417
Long-term debt
Term loan
250,938
7 3/8% senior notes due 2012
261,250
5.125% convertible senior notes due 2014
287,496
287,500
6 ¾% senior notes due 2015
500,000
7 ¾% senior notes due 2016
6 1/8% senior notes due 2019
400,000
7 5/8% senior notes due 2020
350,000
6 3/8% senior notes due 2022
Other long-term debt
35,491
37,272
Total long-term debt
2,173,925
1,936,022
544,800
489,915
Other liabilities
18,564
82,278
Commitments and contingencies
Redeemable noncontrolling interest
93,774
70,694
Equity
Common stock voting, $.0025 par value; 900,000,000 shares authorized; 255,299,134 and 255,052,811 shares issued; and 219,228,888 and 218,873,720 shares outstanding, as of September 30, 2012 and December 31, 2011, respectively
636
Treasury stock, at cost; 36,070,246 and 36,179,091 shares, as of September 30, 2012 and December 31, 2011, respectively
(720,479
)
(722,653
Additional paid-in capital
1,033,857
1,026,157
Retained earnings
2,049,011
2,011,801
Total Steel Dynamics, Inc. equity
2,363,025
2,315,941
Noncontrolling interests
(23,971
(16,041
Total equity
2,339,054
2,299,900
Total liabilities and equity
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
Net sales
Unrelated parties
1,624,561
1,976,296
5,359,753
5,922,243
Related parties
68,829
67,159
225,480
216,912
Total net sales
1,693,390
2,043,455
5,585,233
6,139,155
Costs of goods sold
1,536,989
1,844,212
5,045,432
5,367,772
Gross profit
156,401
199,243
539,801
771,383
Selling, general and administrative expenses
62,984
72,876
188,603
201,648
Profit sharing
3,954
7,428
20,237
37,085
Amortization of intangible assets
8,848
10,154
26,831
30,320
Impairment charges
7,894
Total selling, general and administrative expenses
83,680
90,458
243,565
269,053
Operating income
72,721
108,785
296,236
502,330
Interest expense, net of capitalized interest
41,490
44,702
123,708
132,860
Other expense (income), net
24,010
(3,523
32,366
(13,835
Income before income taxes
7,221
67,606
140,162
383,305
Income taxes
1,116
27,749
52,975
143,392
Net income
6,105
39,857
87,187
239,913
Net loss attributable to noncontrolling interests
6,728
3,447
15,793
8,004
Net income attributable to Steel Dynamics, Inc.
43,304
102,980
247,917
Basic earnings per share attributable to Steel Dynamics, Inc. stockholders
.06
.20
.47
1.14
Weighted average common shares outstanding
219,191
218,674
219,097
218,389
Diluted earnings per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive
.19
1.08
Weighted average common shares and share equivalents outstanding
220,044
235,759
236,536
236,083
Dividends declared per share
.10
.30
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
58,953
55,962
170,027
166,965
Equity-based compensation
738
3,833
9,463
11,355
34,633
7,118
54,464
29,081
(Gain) loss on disposal of property, plant and equipment
(152
3,701
(565
3,797
Changes in certain assets and liabilities:
Accounts receivable
2,690
33,533
15,604
(193,679
43,005
36,346
6,702
(44,787
(7,484
1,632
(4,917
7,329
6,920
(4,375
(19,015
92,550
Income taxes receivable/payable
25,993
(5,911
16,917
22,409
Accrued expenses and liabilities
(61,929
50,767
(104,375
57,464
Net cash provided by operating activities
117,366
222,463
239,386
392,397
Investing activities:
Purchases of property, plant and equipment
(58,342
(38,126
(158,686
(91,795
Proceeds from maturity of short-term commercial paper
9,998
Other investing activities
655
947
(20,379
1,946
Net cash used in investing activities
(47,689
(37,179
(94,235
(89,849
Financing activities:
Issuance of current and long-term debt
760,000
10,851
1,049,969
15,977
Repayment of current and long-term debt
(946,858
(105
(1,252,202
(7,921
Debt issuance costs
(11,625
(6,884
(13,813
Proceeds from exercise of stock options, including related tax effect
583
402
2,021
13,267
Contributions from noncontrolling investors, net
16,320
11,320
30,943
13,207
Dividends paid
(21,915
(21,865
(65,710
(60,013
Net cash used in financing activities
(203,495
(6,281
(248,792
(32,367
Increase (decrease) in cash and equivalents
(133,818
179,003
(103,641
270,181
Cash and equivalents at beginning of period
420,938
277,691
186,513
Cash and equivalents at end of period
456,694
Supplemental disclosure information:
Cash paid for interest
42,413
14,931
123,973
101,088
Cash paid for federal and state income taxes, net
3,629
12,403
43,976
74,378
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 62% and 60% of the company’s external net sales during the three-month periods ended September 30, 2012 and 2011, respectively, and 62% and 60% of the company’s external net sales during the nine-month periods ended September 30, 2012 and 2011, respectively.
Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations include OmniSource Corporation (OmniSource), the company’s metals recycling, steel scrap procurement, and processing locations, and our two ironmaking initiatives: Iron Dynamics (IDI), a liquid pig iron production facility; and our Minnesota iron operations, an iron nugget production facility and operations to supply the nugget facility with its primary raw material, iron concentrate. Metals recycling and ferrous resources operations accounted for approximately 31% and 35% of the company’s external net sales during the three-month periods ended September 30, 2012 and 2011, respectively, and 32% and 35% of the company’s external net sales during the nine-month periods ended September 30, 2012 and 2011, respectively.
Steel Fabrication Operations. Steel fabrication operations include 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 6% and 4% of the company’s external net sales during the three-month periods ended September 30, 2012 and 2011, respectively, and 5% and 3% of the company’s external net sales during the nine-month periods ended September 30, 2012 and 2011, respectively.
Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions. Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries.
Use of Estimates. These financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; 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, 2011.
Property, Plant and Equipment. In the third quarter of 2012, the company determined that it would terminate two small joint venture entities, which were not aligned with the company’s long-term strategic focus. The decision to terminate these joint ventures triggered an assessment for impairment based on estimated realizable values, resulting in an impairment charge of $7.9 million during the quarter. As these joint ventures are not reported within any of the company’s reportable segments, reported segment results were not affected.
Goodwill. The company’s goodwill is allocated to the following reporting units at September 30, 2012, and December 31, 2011, (in thousands):
OmniSource — Metals Recycling/Ferrous Resources Segment
566,443
571,317
The Techs — Steel Segment
142,783
Roanoke Bar Division — Steel Segment
29,041
New Millennium Building Systems — Fabrication Segment
1,925
OmniSource goodwill decreased $4.9 million from December 31, 2011 to September 30, 2012, in recognition of the 2012 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.
Note 2. 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 6.5 million and 5.8 million shares were anti-dilutive at September 30, 2012 and 2011, respectively. The computation of diluted earnings per share for the three months ended September 30, 2012 did not include the after-tax equivalent of interest of $2.4 million for the company’s 5.125% senior convertible notes, due 2014 and the related weighted average equivalent of 16.6 million shares, as the result would have been anti-dilutive.
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,
Net Income (Numerator)
Shares (Denominator)
Per Share Amount
Basic earnings per share
Dilutive stock option effect
853
703
5.125% convertible senior notes, net of tax
2,358
16,382
Diluted earnings per share
45,662
Nine Months Ended September 30,
908
1,312
7,074
16,531
110,054
254,991
Note 3. 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):
Raw materials
623,101
609,150
Supplies
272,036
251,716
Work-in-progress
85,497
106,609
Finished goods
228,445
232,109
Total inventories
Note 4. Income Taxes
The effective tax rate during the three months ended September 30, 2012 is 15.5%, which is below the 35.0% statutory tax rate. Certain tax positions were effectively settled during the three months ended September 30, 2012, resulting in a decrease in unrecognized tax benefits to $47.6 million (including accrued interest and penalties) at September 30, 2012, and a corresponding income tax benefit being recorded during the three months ended September 30, 2012 for a portion of the decrease. This income tax benefit however was largely offset by an increase during the third quarter of 2012 in the estimated annual effective tax rate for 2012.
5
Note 5. Debt
On January 11, 2012, the company expanded its senior secured credit facility by adding a $275.0 million term loan that matures on September 30, 2016 (Term Loan). Quarterly principal payments under the Term Loan are required to be made in amounts ranging from 1.25% to 3.75% of the original principal amount, with the unpaid principal balance of approximately $158.0 million due on the maturity date. The company used the net proceeds of the Term Loan, together with cash on hand, to fund the January 2012 purchase of $279.7 million of the company’s 7 3/8% Senior Notes due 2012 pursuant to a tender offer. As a result of the tender, the company recorded expenses of $13.9 million in January 2012 related to the tender premium, unamortized debt issuance costs write-off, and tender expenses, which are reflected in other expenses in the consolidated statement of income for the nine-months ended September 30, 2012.
On August 16, 2012, the company issued $400.0 million of 61/8% Senior Notes due 2019 (2019 Senior Notes) and $350.0 million of 63/8% Senior Notes due 2022 (2022 Senior Notes) (together the “Senior Notes”). Interest on the Senior Notes will be paid semiannually on February 15 and August 15 of each year with the first payment on February 15, 2013. The Senior Notes are in equal right of payment with all existing and future senior unsecured indebtedness and senior in right of payment to all subordinated indebtedness. The 2019 Senior Notes contain provisions that allow the company to redeem the notes any time on or after August 15, 2016 at a redemption price of 103.063%, on or after August 15, 2017 at a redemption price of 101.531%, and on or after August 15, 2018 at 100.000%. The 2022 Senior Notes contain provisions that allow the company to redeem the notes any time on or after August 15, 2017 at a redemption price of 103.188%, on or after August 15, 2018 at a redemption price of 102.125%, on or after August 15, 2019 at a redemption price of 101.063%, and on or after August 15, 2020 at 100.000%. Before August 15, 2015, the company may redeem up to 35% of each of the 2019 Senior Notes and the 2022 Senior Notes at a redemption price of 106.125% or 106.375%, respectively, of their principal amount, using the proceeds from the sales of the company’s common stock. At any time prior to August 15, 2016, in the case of the 2019 Senior Notes and August 15, 2017, in the case of the 2022 Senior Notes, the company may redeem some or all of the 2019 Senior Notes and 2022 Senior Notes, respectively, by paying a “make-whole” premium.
A portion of the proceeds from the issuance of the Senior Notes were used to fund the August 16, 2012 purchase of $62.2 million (plus accrued interest) of the company’s 73/8% Senior Notes due 2012, and $410.5 million (plus accrued interest) of the company’s 7¾% Senior Notes due 2016, pursuant to a tender offer. In addition, on August 31, 2012, the company redeemed the then remaining $89.5 million (plus accrued interest) outstanding 7¾% Senior Notes due 2016. The remaining proceeds along with available cash were used for the September 28, 2012 extinguishment of the then remaining $358.1 million (plus accrued interest through the November 1, 2012 maturity date) outstanding 73/8% Senior Notes due 2012.
As a result of the August 16, 2012 tender offer to purchase, August 31, 2012 redemption, and September 28, 2012 extinguishment each noted above, the company recorded expenses of $26.3 million related to the tender and call premiums, loss on early extinguishment of debt, unamortized debt issuance costs write-off, and tender expenses, which are reflected in other expenses in the consolidated statement of income for the three and nine months ended September 30, 2012.
Note 6. Changes in Equity
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to stockholders of Steel Dynamics, Inc. and equity attributable to the noncontrolling interests (in thousands):
Stockholders of Steel Dynamics, Inc.
Total
Common
Additional Paid-In
Retained
Treasury
Noncontrolling
Stock
Capital
Earnings
Interests
Balances at January 1, 2012
Proceeds from the exercise of stock options, including related tax effect
Dividends declared
(65,746
Equity-based compensation and issuance of restricted stock
7,825
5,680
(24
2,169
Conversion of 5.125% convertible senior notes
(1
Contributions from noncontrolling investors
7,973
Distributions to noncontrolling investors
(110
Net income (loss)
(15,793
Balances at September 30, 2012
6
Note 7. 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 and option 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 may be entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies may be entered into 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. No cash flow hedges existed for the periods presented.
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 option and futures contract commitments as of September 30, 2012 (MT represents metric tons and Lbs represents pounds):
Commodity Options — nickel
60
MT
Commodity Futures
Long/Short
Aluminum
Long
5,575
Short
5,600
Copper
10,444
28,406
Nickel
90
Silver
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, 2012, and December 31, 2011, and for the three- and nine-month periods ended September 30, 2012 and 2011 (in thousands):
Fair Value
September 30, 2012
December 31, 2011
Balance Sheets
Commodity futures and options — net liability
7,487
1,219
Gain (Loss) for Three Months Ended
September 30, 2011
Statements of Income
Commodity futures and options
(9,085
7,112
Gain (Loss) for Nine Months Ended
(6,810
11,457
7
Note 8. Fair Value Measurements
FASB accounting standards provide a comprehensive framework for measuring fair value and set forth a definition of fair value and establish 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, 2012, and December 31, 2011 (in thousands):
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Commodity options — financial liabilities
35
Commodity futures — financial assets
2,357
Commodity futures — financial liabilities
9,809
3,159
4,378
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 short-term commercial paper and commodity futures and options contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices, was approximately $2.3 billion and $2.5 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.2 billion and $2.4 billion) at September 30, 2012 and December 31, 2011, respectively.
Note 9. Commitments and Contingencies
The company is involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois that alleges a conspiracy 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. All but one of the Complaints purport to be brought on behalf of a class consisting of all direct purchasers of steel products during the period of the alleged conspiracy. The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied. The parties have been conducting discovery related primarily to class certification matters, and on May 24, 2012, Plaintiffs filed their Motion for Class Certification. A time frame for hearing this Motion has not yet been determined. Due to the uncertainties of litigation, the company cannot presently determine the ultimate outcome of this litigation. However, the company believes that, based on the information available to us at this time, there is not presently a “reasonable possibility” (as that term is defined in ASC 450-20-20) that the outcome of these legal proceedings would have a material impact on the company’s financial condition, results of operations, or liquidity.
Although not presently necessary or appropriate to make a dollar estimate of exposure to loss, if any, in connection with the above matter, the company may in the future determine that a loss accrual is necessary. Although the company may make loss accruals, if and as warranted, any amounts that the company may accrue from time to time could vary significantly from the amounts the company actually pays, due to the inherent uncertainties and shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, under such circumstances an adverse result could have a material effect on the company’s financial condition, results of operations and liquidity.
8
Note 10. 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, 2011, 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, 2012 and 2011 are as follows (in thousands):
For the three months ended
Metals Recycling /
Steel Fabrication
Steel Operations
Ferrous Resources
Operations
Other
Eliminations
Consolidated
Net Sales
External
985,524
475,547
102,401
17,156
1,580,628
External Non-U.S.
65,825
46,684
253
112,762
Other segments
48,157
268,137
41
4,864
(321,199
1,099,506
790,368
102,442
22,273
Operating income (loss)
(15,697
3,141
(17,759
)(1)
(3,891
)(2)
Income (loss) before income taxes
88,394
(24,829
1,225
(53,678
25,937
26,449
2,100
4,518
(51
Capital expenditures
14,625
42,370
1,005
342
58,342
As of September 30, 2012
2,523,616
2,586,568
249,988
597,297
(3)
(181,953
)(4)
Liabilities
482,348
507,367
18,143
2,505,036
(5)
(170,206
)(6)
3,342,688
Footnotes related to the three months ended September 30, 2012 segment results (in millions):
(1)
Corporate SG&A
(7.6
(2.9
(7.9
Other, net
0.6
(17.8
(2)
Gross profit reduction from intra-company sales
(3.9
246.8
0.9
28.2
75.7
Debt issuance costs, net
29.4
Intra-company debt
129.1
87.2
597.3
(4)
Elimination of intra-company receivables
(35.8
Elimination of intra-company debt
(129.1
(17.1
(182.0
32.3
12.7
Accrued interest
28.9
15.5
Debt
2,156.2
240.9
18.5
2,505.0
(6)
Elimination of intra-company payables
(39.0
(2.1
(170.2
9
Note 10. Segment Information (continued)
1,183,665
624,742
83,094
24,018
1,915,519
44,345
83,296
295
127,936
49,854
351,219
16
3,033
(404,122
1,277,864
1,059,257
83,110
27,346
136,194
(3,388
(246
(28,437
4,662
114,805
(14,697
(2,139
(35,025
27,320
25,164
1,847
1,682
10,457
26,575
503
591
38,126
As of September 30, 2011
2,629,873
2,557,147
234,452
757,275
(175,266
6,003,481
488,476
531,827
16,820
2,785,613
(166,285
3,656,451
Footnotes related to the three months ended September 30, 2011 segment results (in millions):
(19.1
Company-wide stock option expense
(3.6
(5.5
(0.2
(28.4
Gross profit increase from intra-company sales
4.7
391.5
24.5
21.6
72.1
25.6
130.6
91.4
757.3
(30.6
(130.6
(14.1
(175.3
32.6
15.0
61.8
31.4
2,342.0
221.0
81.8
2,785.6
(35.9
0.2
(166.3
10
For the nine months ended
3,279,344
1,643,522
273,060
54,071
5,249,997
166,025
168,818
393
335,236
148,839
1,009,604
45
12,290
(1,170,778
3,594,208
2,821,944
273,105
66,754
380,832
(30,905
666
(49,294
(5,063
325,521
(57,932
(4,408
(117,956
78,405
78,114
6,007
7,654
(153
26,848
127,133
3,502
1,203
158,686
Footnotes related to the nine months ended September 30, 2012 segment results (in millions):
(22.4
(5.7
(15.3
2.0
(49.3
(5.1
3,551,626
1,944,928
197,112
75,260
5,768,926
138,723
230,954
552
370,229
163,991
1,069,661
612
8,452
(1,242,716
3,854,340
3,245,543
197,724
84,264
543,117
39,987
(4,764
(78,115
2,105
480,296
8,033
(9,918
(97,105
1,999
82,164
75,784
4,969
4,201
28,891
58,458
1,454
2,992
91,795
Footnotes related to the nine months ended September 30, 2011 segment results (in millions):
(38.4
(11.0
1.9
(78.1
2.1
11
Note 11. Condensed Consolidating Information
Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior notes due 2014, 2015, 2019, 2020, and 2022. 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, 2011.
Condensed Consolidating Balance Sheets (in thousands)
Combined
Consolidating
Parent
Guarantors
Non-Guarantors
Adjustments
242,963
26,990
17,167
275,227
832,486
11,238
(406,201
712,750
607,567
499,059
109,038
(6,585
57,564
13,384
3,778
(21,451
53,275
1,183,321
1,371,919
141,221
(434,237
Property, plant and equiment, net
1,020,336
654,436
541,605
(2,674
Other assets, including investments in subs
2,768,937
31,405
9,383
(2,675,362
134,363
4,972,594
3,222,986
692,209
(3,112,273
125,105
245,287
75,072
(68,251
377,213
Other current liabilities
120,827
102,065
10,418
(35,238
198,072
14,227
300
34,313
(18,726
260,159
347,652
119,803
(122,215
2,144,521
173,260
(143,856
Other long-term liabilities
204,889
2,104,391
38,512
(1,784,428
563,364
Common stock
33,896
18,121
(52,017
Treasury stock
Additional paid-in-capital
117,737
453,287
(571,024
Retained earnings (deficit)
619,310
(180,577
(438,733
770,943
290,831
(1,061,774
266,860
12
Note 11. Condensed Consolidating Information (continued)
As of December 31, 2011
301,073
58,699
30,989
319,995
726,192
8,971
(332,367
722,791
584,079
533,022
85,046
(2,563
83,116
4,119
2,304
(32,247
57,292
1,373,093
1,322,032
127,310
(367,177
1,059,011
660,048
477,514
(2,828
2,791,718
33,507
9,853
(2,700,814
134,264
5,223,822
3,211,546
614,677
(3,070,819
155,220
273,049
23,195
(30,640
420,824
157,868
98,498
10,012
(30,863
235,515
439,199
53,551
(48,972
752,287
371,847
86,758
(110,475
1,905,199
169,797
(138,974
250,395
2,132,778
51,625
(1,862,605
572,193
347,151
(464,888
555,288
(113,428
(441,860
706,921
251,844
(958,765
235,803
13
Condensed Consolidating Statements of Operations (in thousands)
For the three months ended,
785,168
1,918,774
48,167
(1,058,719
685,074
1,823,447
69,520
(1,041,052
Gross profit (loss)
100,094
95,327
(21,353
(17,667
Selling, general and administrative
19,927
53,023
14,032
(3,302
80,167
42,304
(35,385
(14,365
27,153
13,997
1,619
(1,279
Other (income) expense, net
23,345
434
(1,046
1,277
Income (loss) before income taxes and equity in net income of subsidiaries
29,669
27,873
(35,958
(14,363
Income taxes (benefit)
(2,771
8,668
73
(4,854
32,440
19,205
(36,031
(9,509
Equity in net loss of subsidiaries
(19,607
19,607
Net income (loss) attributable to Steel Dynamics, Inc.
(29,303
10,098
932,793
2,309,239
45,407
(1,243,984
809,684
2,194,687
60,673
(1,220,832
123,109
114,552
(15,266
(23,152
37,678
53,755
2,475
(3,450
85,431
60,797
(17,741
(19,702
26,163
18,237
2,343
(2,041
(3,232
(1,895
(437
2,041
62,500
44,455
(19,647
19,524
16,023
(247
(7,551
42,976
28,432
(19,400
(12,151
Equity in net income of subsidiaries
328
(328
(15,953
(12,479
14
For the nine months ended,
2,625,152
6,408,166
131,024
(3,579,109
2,275,227
6,106,504
189,477
(3,525,776
349,925
301,662
(58,453
(53,333
72,196
160,513
20,940
(10,084
277,729
141,149
(79,393
(43,249
81,583
41,208
5,068
(4,151
31,419
(436
(2,767
4,150
164,727
100,377
(81,694
(43,248
31,809
36,354
444
(15,632
132,918
64,023
(82,138
(27,616
(29,938
29,938
(66,345
2,322
2,798,097
6,955,744
143,872
(3,758,558
2,293,661
6,599,291
184,424
(3,709,604
504,436
356,453
(40,552
(48,954
109,870
163,742
6,545
(11,104
394,566
192,711
(47,097
(37,850
77,984
53,763
7,070
(5,957
(10,115
(7,659
(2,123
6,062
326,697
146,607
(52,044
(37,955
103,264
54,695
(260
(14,307
223,433
91,912
(51,784
(23,648
24,484
(24,484
(43,780
(48,132
15
Condensed Consolidating Statements of Cash Flows (in thousands)
Net cash provided by (used in) operating activities
145,121
128,705
(39,928
5,488
(19,249
(74,342
(81,123
80,479
Net cash provided by (used in) financing activities
(183,982
(86,072
107,229
(85,967
Decrease in cash and equivalents
(58,110
(31,709
(13,822
314,438
112,213
(34,211
(43
(77,125
(40,015
(27,597
54,888
(22,680
(23,309
68,467
(54,845
Increase in cash and equivalents
214,633
48,889
6,659
173,563
10,628
388,196
59,517
8,981
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. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of a recurrent recession on industrial demand; (2) changes in economic conditions, either generally or in any of the steel or scrap-consuming sectors which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, and other steel-consuming industries; (3) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (4) the impact of domestic and foreign import price competition; (5) risks and uncertainties involving product and/or technology development; and (6) occurrences of unexpected plant outages or equipment failures.
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, 2011, 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 are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel, direct and indirect labor and related benefits, alloys, zinc, transportation and freight, repairs and maintenance, utilities (most notably electricity and natural gas), and depreciation.
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 Expense (Income), net. Other income consists of interest income earned on our temporary cash deposits and investments; 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, including premiums paid for refinancing activities.
Overview
Net income was $12.8 million, or $0.06 per diluted share, during the third quarter of 2012, compared with net income of $43.3 million, or $0.19 per diluted share, during the third quarter of 2011, and net income of $44.5 million, or $0.20 per diluted share, during the second quarter of 2012. Our net sales decreased $350.1 million, or 17%, to $1.7 billion in the third quarter of 2012 versus the third quarter of 2011, while net sales decreased $216.4 million, or 11%, versus the second quarter of 2012. Our gross profit percentage was 9% during the third quarter of 2012 as compared to 10% for both the third quarter of 2011, and the second quarter of 2012.
Third quarter 2012 external steel shipments decreased 5% as compared to the third quarter of 2011 (with total sheet products shipments decreasing 7% and long products shipments decreasing 1%), and metals recycling external ferrous metals shipments decreased 9% and nonferrous external shipments decreased 10%. Conversely, steel fabrication external shipments increased 24% in the third quarter of 2012 compared to the same period in 2011. Operating income decreased 33% in the third quarter 2012, as compared to the same period in 2011, as steel sales volumes were down and gross margins were compressed, particularly in our steel operations long products divisions. The average external selling price per ton shipped for the company’s steel operations decreased $88 per ton in the third quarter of 2012, compared to the prior year third quarter, while the average ferrous scrap cost per ton melted decreased $67 for the same comparative period.
Looking at the third quarter of 2012 as compared to the second quarter of 2012, steel operations and metals recycling ferrous external shipments decreased 8%, while metals recycling external nonferrous shipments decreased 5%. Conversely, steel fabrication continued its trend of increasing external shipments, showing a 3% sequential quarter gain. Consolidated quarterly operating income decreased 30% sequentially due primarily to decreased volume and margins within our steel operations. Despite lower volumes and selling values within our metals recycling operations, ferrous metal spreads expanded 23%, while nonferrous margins remained consistent in the third quarter of 2012 as compared to the same 2011 quarter. These factors caused overall metals recycling metal margins to increase 18% resulting in an $11.5 million increase in metals recycling operating income in the third quarter of 2012, as compared to the second quarter of 2012.
Segment Operating Results 2012 vs. 2011 (dollars in thousands)
Second
Sequential
Quarter
% Change
Net sales:
Steel
(14
)%
1,260,223
(13
(7
Metals recycling and ferrous resources
(25
920,456
Steel fabrication
23
%
95,767
38
(19
20,390
(21
2,014,589
2,447,577
2,296,836
6,756,011
7,381,871
Intra-company
(387,033
(17
1,909,803
(11
(9
Operating income (loss):
136,597
(22
(30
(363
(19,371
19
(177
1,377
193
1,527
114
(14,673
37
76,612
(26
104,123
102,746
301,299
(40
500,225
953
(33
103,699
(41
18
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, agriculture and industrial machinery markets. In the third quarters of 2012 and 2011, our steel operations accounted for 62% and 60%, respectively, of our external net sales. Operating income for the steel segment decreased $29.3 million, or 21%, to $106.9 million in the third quarter of 2012, compared to the third quarter of 2011, as total shipments decreased 4% and gross margin percentage, and correspondingly operating income percentage, compressed due to an $85 decrease in average segment selling prices per ton shipped coupled with only a $67 per ton decrease in average ferrous scrap cost melted in the third quarter of 2012, as compared to the third quarter of 2011. Operating income for the steel segment decreased $162.3 million, or 30%, to $380.8 million in the first nine months of 2012, compared to the first nine months of 2011. Gross margin percentage, and correspondingly operating income percentage, compressed due to a $63 decrease in average segment selling prices per ton shipped while the average ferrous scrap cost melted in the first nine months of 2012 decreased only $22 per ton compared to the same period in 2011.
Steel Operations Shipments (net tons)
Flat Roll Division
638,776
701,212
706,944
2,004,225
2,091,505
The Techs
167,982
166,417
171,437
484,034
554,044
Sheet products
806,758
57
867,629
59
878,381
58
2,488,259
2,645,549
Structural and Rail Division
255,533
224,514
252,524
769,063
628,543
Engineered Bar Products Division
113,327
160,649
166,208
437,024
463,944
Roanoke Bar Division
152,922
141,060
149,010
453,228
415,271
Steel of West Virginia
76,481
76,487
74,456
228,149
223,425
Long products
598,263
43
602,710
642,198
42
1,887,464
1,731,183
40
Total shipments
1,405,021
1,470,339
1,520,579
4,375,723
4,376,732
Intra-segment shipments
(34,594
(2
(29,952
(29,560
(92,211
(102,265
Segment shipments
1,370,427
1,440,387
1,491,019
4,283,512
4,274,467
Intra-company shipments
(71,195
(5
(71,165
(77,315
(214,629
(224,235
External shipments
1,299,232
1,369,222
1,413,704
4,068,883
4,050,232
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 57% of total steel shipped tons in the third quarter of 2012, as compared to 59% in the third 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 decreased in the third quarter of 2012 by $178.4 million, or 14%, compared to the third quarter of 2011, as total steel segment shipments decreased 4% and steel segment selling prices per ton decreased 10%, or $85 per ton. There was also a shift in mix with sheet products shipments decreasing 7% compared with long products, which experienced only a 1% volume decrease. This slight long products volume decrease is despite Engineered Bar Division’s volumes decreasing 29%, as customers realigned inventories throughout the supply chain. Rail product shipments continue to show steady improvement, with the third quarter of 2012 shipments increasing 11% as compared to the third quarter of 2011.
Net sales for the segment decreased by $260.1 million, or 7%, in the first nine months of 2012, compared to the same period in 2011. While selling volumes for our steel products was steady overall in the first nine months of 2012 compared to the first nine months of 2011, there was a shift in mix to long products from sheet products. Sheet products shipments decreased 6%, while long products increased 9% in the first nine months of 2012 compared to the same period in 2011. Our first nine months 2012 average steel operations’ segment selling price per ton shipped decreased $63 compared with the first nine months of 2011, as the higher sheet selling prices seen in the first nine months of 2011 abated in the slower 2012 market.
Steel operations Average Selling Prices and Volumes
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 decreased $67 in the third quarter 2012 compared with the third quarter of 2011. During the third quarter of 2012 and 2011, respectively, our metallic raw material costs represented 64% and 68% of our steel operations’ manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes. Our metallic raw material cost per net ton consumed in our steel operations decreased $22 the first nine months of 2012 compared with the first nine months of 2011, and represented 67% and 68%, respectively, of our steel operations’ manufacturing costs, excluding the operations of The Techs.
Metals Recycling and Ferrous Resources Operations
Metals Recycling and Ferrous Resources Operations. This operating segment includes our metals recycling operations (OmniSource); our liquid pig iron production facility, Iron Dynamics (IDI); and our Minnesota iron operations. Our metals recycling and ferrous resources operations segment accounted for 31% of our external net sales in the third quarter of 2012 and 35% in the third quarter of 2011. Operating income for the metals recycling and ferrous resources operations segment decreased $12.3 million in the third quarter of 2012 to a loss of $15.7 million, compared to the third quarter of 2011, due primarily to increases in metals recycling operating income of $6.0 million being more than offset by increased losses at our Minnesota iron operations and a decrease in operating income at our IDI facility, due to falling selling prices, which are based on a pig iron indexed price. Operating income for the metals recycling and ferrous resources operations segment decreased $70.9 million in the first nine months of 2012 from $40.0 million in 2011 to a loss of $30.9 million for 2012. The decrease was primarily related to decreased sales volumes and metal margins for both ferrous and nonferrous metals in metals recycling operations, and increased losses at our Minnesota iron operations and decreased operating income at our IDI facility due to lower selling prices..
Metals Recycling and Ferrous Resources Operations Shipments
September,
Ferrous metal (gross tons)
1,339,853
1,483,122
1,486,222
4,408,915
4,565,141
Intra-segment
(7,320
(3,594
(2,007
(10,240
(8,786
1,332,533
1,479,528
1,484,215
4,398,675
4,556,355
(575,622
(645,355
(664,661
(2,003,137
(1,970,429
756,911
834,173
819,554
2,395,538
2,585,926
Nonferrous metals (thousands of pounds)
249,685
269,753
258,932
800,253
811,511
(7,697
(1,804
(1,707
(9,404
(6,043
241,988
267,949
257,225
790,849
805,468
(779
(2,891
(5,628
241,209
254,334
785,221
Mesabi Nugget (metric tons) — intra-company
52,082
32,666
33,840
132,152
106,698
Iron Dynamics (metric tons) — intra-company
53,548
61,034
59,103
169,279
182,031
20
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 93% and 95% of this segment’s net sales during the third quarters of 2012 and 2011, respectively.
During the third quarter of 2012, metals recycling recorded sales of $766.1 million on shipments of 1.3 million gross tons of ferrous metals and 249.7 million pounds of nonferrous metals, compared with sales of $1.0 billion on shipments of 1.5 million gross tons of ferrous and 269.8 million pounds of nonferrous metals during the same period in 2011. During the third quarter of 2012 and 2011, the metals recycling operations provided approximately 52% and 53%, respectively, of the steel scrap purchased by our steel mills. This represented 43% and 44% of the metals recycling operations’ ferrous shipments for the third quarter of 2012 and 2011, respectively. Sales prices of ferrous metals decreased 20% in the third quarter of 2012 versus the same period in 2011, while sales prices of nonferrous metals decreased 12% between the same periods. During the first nine months of 2012, metals recycling recorded sales of $2.7 billion on shipments of 4.4 million gross tons of ferrous metals and 800.3 million pounds of nonferrous metals, compared with sales of $3.1 billion on shipments of 4.6 million gross tons of ferrous and 811.5 million pounds of nonferrous metals during the same period in 2011. Sales prices of ferrous metals decreased 10% in first nine months of 2012 versus the same period in 2011, while sales prices of nonferrous metals decreased 13% between the same periods.
Operating income for metals recycling increased $6.0 million in the third quarter of 2012 to $10.3 million, compared to the third quarter of 2011 despite volume decreases, due primarily to improved ferrous metals margins, along with decreases in operating expenses. Ferrous scrap prices rose mid-quarter due to increased export activity and perceived inventory shortfall. Operating income for metals recycling decreased $29.6 million in the first nine months of 2012 to $27.9 million, compared to the first nine months of 2011, due primarily to decreased metals spreads for both ferrous (11%) and nonferrous (6%) metals and sales volumes decreases of 3% for ferrous and 1% for nonferrous. Decreased exports of ferrous scrap along with moderating domestic steel mill utilization rates resulted in selling prices declining more rapidly than inputs and thus metal margins have compressed during 2012 overall, negatively impacting operating income.
Ferrous Resources. Our ferrous resource operations consist of our two ironmaking initiatives: Iron Dynamics (IDI), a liquid pig iron production facility, and our Minnesota iron operations, consisting of an iron nugget production facility and planned operations to supply the nugget facility with its primary raw material, iron concentrate. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material input exclusively at our Flat Roll Division. Our Minnesota iron operations consists of Mesabi Nugget, (owned 81% by us); our planned future iron mining operations which is currently in the permitting process, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 80% by us). The construction of the Mesabi Nugget facility was completed in 2009, and initial production of iron nuggets commenced January 2010. Since then, we have continued to refine this pioneering production process and changed equipment configurations to increase production and plant availability. During a planned five week outage in April and May 2012, we made numerous equipment modifications to improve the percentage of time the plant is available to operate each month. After restarting, extended higher operating rates were achieved during periods of time between June and August which provided the opportunity to identify a number of key process optimization options necessary to increase both productivity and product quality. Beginning mid-September, we proceeded with a six week outage of the nugget facility in order to lay the groundwork necessary for the implementation of the improvements. We expect to recommence operations in November, with final equipment installation expected during the first half of 2013, at an estimated investment of $25 million. In the third quarter of 2012 and 2011, Mesabi Nugget produced 52,000 and 33,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Mining Resources completed the construction and began the initial start-up phase of the iron tailings operation and produced and sold its first product late in the third quarter 2012. This operation will provide iron ore tailings to be concentrated for use by Mesabi Nugget as a low-cost iron concentrate to the nugget production process, replacing higher-priced concentrate from external sources. Production will continue to ramp up into 2013. Losses from our Minnesota iron operations reduced our net income in the third quarter of 2012 by approximately $11 million, $3 million more than in the third quarter of 2011, due primarily to the lower average selling prices in 2012. In the first nine months of 2012 and 2011, Mesabi Nugget produced 132,000 and 107,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Losses from our Minnesota iron operations reduced our net income in the first nine months of 2012 by approximately $32 million, or $9 million more than in the first nine months of 2011.
Steel Fabrication Operations
Our 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 6% and 4% of our external net sales during the third quarter of 2012 and 2011, respectively. The segment achieved operating income of $3.1 million in the third quarter of 2012, compared to a $246,000 loss in the third quarter of 2011. Modest selling price decreases were more than offset by higher selling volumes, improved metal margins, and reduced conversion costs per ton resulting from increased production levels in the third quarter of 2012 compared to the same period in 2011. The segment had operating income of $666,000 in the first nine months of 2012, compared to a $4.8 million loss in the first nine months of 2011. Again, selling price decreases were more than offset by higher selling volumes, improved metal margins, and reduced costs from increased production for the first nine months of 2012 compared to the same period in 2011.
Net sales for the segment increased by $19.3 million, or 23%, in the third quarter of 2012 compared to the third quarter of 2011, as volumes increased 24% in the third quarter of 2012 when compared with the same period in 2011. However, our average steel fabrication operations’ selling price per ton shipped decreased $9, or 1%, during the same period. Sales volume increases in the third quarter of 2012 compared to the third quarter of 2011 were the result of some modest improvement in the non-residential construction market, market share gains in existing markets, as well as our expansion into the western United States from the start-up of plants in Arkansas, Nevada and Northern Mexico. We anticipate continuing to expand our market presence and penetration in the western portion of the United States as we continue to
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ramp up our operations in that market. While we have seen increased order entry and sales volumes in 2012 versus 2011, the non-residential construction market continues to recover slowly. Net sales for the segment increased by $75.4 million, or 38%, in the first nine months of 2012 compared to the first nine months of 2011, as volumes increased 40%. However, our average steel fabrication operations’ selling price per ton shipped decreased $14, or 1%, during first nine months of 2012 versus the same period in 2011. Sales volume increases in the first nine months of 2012 compared to the first nine months of 2011 were the result of some modest improvement in the non-residential construction market, and market share gains in existing markets, including our expansion into the western United States.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the third quarter of 2012 and 2011, the cost of steel products purchased represented 69% and 72% of the total cost of manufacturing for our steel fabrication operations, respectively; while the cost of steel decreased in the third quarter of 2012, as compared to the same period in 2011 by $66 per ton. During the first nine months of 2012 and 2011, the cost of steel products purchased represented 71% of the total cost of manufacturing for our steel fabrication operations; while the cost of steel decreased in the first nine months of 2012, as compared to the same period in 2011 by $20 per ton.
Steel Fabrication Operations Average Selling Prices and Volumes
Third Quarter Consolidated Results 2012 vs. 2011
Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing, amortization of intangible assets and impairment charges) were $83.7 million during the third quarter of 2012, as compared to $90.5 million during the third quarter of 2011, a decrease of $6.8 million, or 7%. Excluding impairment charges, our selling, general and administrative expenses represented 4% of our total net sales during both the third quarter of 2012 and 2011. The decrease in our selling, general and administrative expenses during the third quarter of 2012 as compared to the same period 2011was due primarily to decreased profit sharing and bonus expenses, consistent with the lower levels of profitability in the third quarter of 2012, as these items are directly linked to company profitability. The $7.9 million of impairment charges during the quarter related to the third quarter 2012 decision to terminate two small joint venture entities (not within a reportable segment), which were not aligned with our long-term strategic focus.
Interest Expense, net of Capitalized Interest. During the third quarter of 2012, gross interest expense decreased $3.3 million to $41.8 million, and capitalized interest decreased by $115,000 to $353,000, when compared to the same period in 2011. 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. The decrease in gross interest expense in the third quarter of 2012 as compared to the third quarter of 2011 is due to a lower effective interest rate due to the first and third quarter 2012 refinancing of certain of our senior notes. We anticipate further reductions in gross interest expense as a result of the third quarter 2012 refinancing and overall debt reductions.
Other Expense (Income), net. Other expense was $24.0 million during the third quarter of 2012, as compared to income of $3.5 million during the same period in 2011. The increased expense in the third quarter of 2012, compared to the same period in 2011 is due to the incurrence of $26.3 million of non-operating charges related to our third quarter refinancing activities, which were primarily comprised of prepayment fees. During the third quarter of 2012, we recorded interest income of $1.1 million, consistent with the same period in 2011.
Income Taxes. During the third quarter of 2012, our income tax expense was $1.1 million, as compared to $27.7 million during the same period in 2011. Our effective income tax rate before noncontrolling interests was 15.5% and 41.0%, during the third quarter of 2012 and 2011, respectively. Certain tax positions were effectively settled during the three months ended September 30, 2012, resulting in a decrease in
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unrecognized tax benefits and a corresponding income tax benefit being recorded during the quarter. This income tax benefit however was largely offset by an increase during the third quarter in the estimated annual effective tax rate for 2012.
First Nine Months Consolidated Results 2012 vs. 2011
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $243.6 million during the first nine months of 2012, as compared to $269.1 million during the same period in 2011, a decrease of $25.5 million, or 9%. During the first nine months of 2012 and 2011, selling, general and administrative expenses represented approximately 4% of net sales. The decrease in selling, general and administrative expenses during the first nine months of 2012, as compared to the first nine months of 2011, exclusive of the impairment charges in 2012, was due primarily to decreased profit sharing and bonus expenses, consistent with the lower levels of profitability in the first nine months of 2012, as these items are directly linked to company profitability.
Interest Expense, net of Capitalized Interest. During the first nine months of 2012, gross interest expense decreased $9.5 million, or 7%, to $124.6 million, and capitalized interest decreased $324,000, or 27%, to $880,000, as compared to the same period in 2011. The decrease in gross interest expense for the first nine months of 2012, compared to the first nine months of 2011, is due to a lower effective interest rate resulting from the , 2012 refinancings discussed above.
Other Expense (Income), net. Other expense was $32.4 million during the first nine months of 2012, as compared to other income of $13.8 million during the same period in 2011. We incurred non-operating charges of $13.9 million during the first quarter of 2012 and $26.3 million during the third quarter of 2012, related to the previously noted refinancing activities. Interest income was $3.7 million for the first nine months of 2012 versus $3.4 million in the same period in 2011.
Income Taxes. During the first nine months of 2012, our income tax provision was $53.0 million, as compared to $143.4 million during the same period in 2011, and our effective income tax rates before noncontrolling interests were 37.8% and 37.4%, respectively. The higher rate in 2012 versus 2011 is due most notably to our inability to recognize any benefit from the research and development tax credits that have not yet been approved by Congress for 2012, and the impact of increased non-controlling interest losses in 2012 on the effective rate, offset by the impact of the previously noted reduction in unrecognized tax benefits during 2012.
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.
Working Capital. Trade receivables decreased $10.0 million during the first nine months of 2012 on lower sales. Total inventories increased $9.5 million, or 1%, to $1.2 billion during the first nine months of 2012. Our raw materials, primarily steel scrap inventories, increased by approximately $14.0 million during the first nine months of 2012, with scrap volumes decreasing by 47,000 gross tons (6%), but pricing increasing 11%. Our work-in-process and finished goods inventories decreased $24.8 million, with volumes decreasing by 16,000 net tons. Our trade payables and general accruals decreased $82.2 million, or 13%, during the first nine months of 2012, as trade payables were lower due to the lower production levels, and 2011 profit sharing and bonus amounts were paid in the first quarter of 2012.
Capital Investments. During the first nine months of 2012, we invested $158.7 million in property, plant and equipment, of which 46% related to the construction of our copper rod mill and iron tailings plants. 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 total capital expenditures for the fourth quarter of 2012 to be in the range of $40 to $60 million.
Capital Resources and Long-term Debt. During the first nine months of 2012, our total outstanding debt decreased $176.1 million to $2.2 billion due primarily to the 2012 refinancings discussed above. Similarly, 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, decreased to 47.5% at September 30, 2012, as compared to 50.1% at December 31, 2011.
We have a senior secured credit facility (Facility) that matures in September 2016 which provides for a $1.1 billion revolver (Revolver). Subject to certain conditions, we have the opportunity to increase the Revolver capacity by an additional $125.0 million. The Facility is guaranteed by certain of our subsidiaries and is secured by substantially all of our accounts receivable and inventories and pledges of shares of our wholly owned subsidiaries’ capital stock. The Revolver is available to fund working capital, capital expenditures, and other general corporate purposes.
The outstanding balance on the Revolver must be the lesser of $1.1 billion less other applicable commitments such as letters of credit and other secured debt, as defined within the Facility or the sum of 85% of our eligible accounts receivable and 65% of our eligible inventories, less other applicable commitments. At September 30, 2012, we had $1.1 billion of availability on the Revolver, $14.2 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.
The Facility 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.
The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve trailing months (LTM) consolidated adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in our Facility) by our LTM gross interest expense. In addition, a net debt (as defined in the Facility) 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, our ability 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, 2012, our interest coverage ratio and net debt leverage ratio were 3.83:1.00 and 3.11:1.00, respectively. We were therefore in compliance with these covenants at September 30, 2012, and we anticipate we will remain in compliance during 2012.
In January 2012, we expanded our Facility by adding a $275.0 million term loan that matures on September 30, 2016 (Term Loan). Quarterly principal payments under the Term Loan are required to be made in amounts ranging from 1.25% to 3.75% of the original principal amount, with the unpaid principal balance of approximately $158.0 million due on the maturity date. We used the net proceeds of the Term Loan, together with cash on hand, to fund the January 2012 purchase of $279.7 million of our 73/8% Senior Notes, due 2012 pursuant to a tender offer for up to $350 million of the 73/8% Senior Notes.
As a result of the refinancing activity in the third quarter of 2012 noted below, we reduced amounts outstanding under our senior notes by $170.0 million, reduced our overall effective interest rate, and extended our debt maturities.
On August 16, 2012, we issued $400.0 million of 61/8% Senior Notes due 2019 (2019 Senior Notes) and $350.0 million of 63/8% Senior Notes due 2022 (2022 Senior Notes) (together the “Senior Notes”). Interest on the Senior Notes will be paid semiannually on February 15 and August 15 of each year with the first payment on February 15, 2013. The Senior Notes are in equal right of payment with all existing and future senior unsecured indebtedness and senior in right of payment to all subordinated indebtedness. The 2019 Senior Notes contain provisions that allow us to redeem the notes any time on or after August 15, 2016 at a redemption price of 103.063%, on or after August 15, 2017 at a redemption price of 101.531%, and on or after August 15, 2018 at 100.000%. The 2022 Senior Notes contain provisions that allow us to redeem the notes any time on or after August 15, 2017 at a redemption price of 103.188%, on or after August 15, 2018 at a redemption price of 102.125%, on or after August 15, 2019 at a redemption price of 101.063%, and on or after August 15, 2020 at 100.000%. Before August 15, 2015, we may redeem up to 35% of each of the 2019 Senior Notes and the 2022 Senior Notes at a redemption price of 106.125% or 106.375%, respectively, of their principal amount, using the proceeds from the sales of our common stock. At any time prior to August 15, 2016, in the case of the 2019 Senior Notes and August 15, 2017, in the case of the 2022 Senior Notes, we may redeem some or all of the 2019 Senior Notes and 2022 Senior Notes, respectively, by paying a “make-whole” premium.
A portion of the proceeds from the issuance of the Senior Notes were used to fund the August 16, 2012 purchase of $62.2 million (plus accrued interest) of our 73/8% Senior Notes due 2012, and $410.5 million (plus accrued interest) of our 7¾% Senior Notes due 2016, pursuant to a tender offer. In addition, on August 31, 2012 we redeemed the then remaining $89.5 million (plus accrued interest) outstanding 7¾% Senior Notes due 2016. The remaining proceeds along with available cash were used for the September 28, 2012 extinguishment of the then remaining $358.1 million (plus accrued interest through the November 1, 2012 maturity date) outstanding 73/8% Senior Notes, due 2012.
Cash Dividends. We declared cash dividends of $65.7 million, or $0.30 per common share ($0.10 per common share each quarter), during the first nine months of 2012 and $65.6 million, or $0.30 per common share, during the first nine months of 2011. We paid cash dividends of $65.7 million and $60.0 million during the first nine months of 2012 and 2011, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis. During the remainder of 2012, 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 may restrict the amount of cash dividends we can pay.
Other. Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will depend upon general economic, financial and business conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure 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.
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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 2011 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, 2012 or 2011.
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 raw materials used in our operations, such as metallic raw materials, electricity, natural gas, iron concentrate, fuel and zinc. Our risk strategy associated with product sales has generally been to obtain competitive prices for our products and to allow operating results to reflect market price movements dictated by supply and demand.
Our risk strategy associated with the purchase of raw materials utilized within our operations has generally been to make some commitments with suppliers relating to future expected requirements for certain commodities such as electricity, natural gas and its transportation, fuel, zinc, and iron concentrate. Certain commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 36 months for physical commodity requirements and for up to 9 years for commodity transportation requirements. We also purchase electricity consumed at our Flat Roll Division pursuant to a contract which was recently extended through December 2014. 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, 2012, 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, 2011. 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, 2012, we had a cumulative unrealized loss associated with these financial contracts of $7,487,000, substantially all of which have a settlement date within the next twelve months. We believe the customer and supplier contracts associated with the financial contracts will be fully consummated.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. 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, 2012, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
(b) Changes in Internal Controls Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART IIOTHER 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.
We are involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois that alleges a conspiracy 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. All but one of the Complaints purport to be brought on behalf of a class consisting of all direct purchasers of steel products during the period of the alleged conspiracy. The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products within the same time period. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. On January 2, 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied. The parties have been conducting discovery related primarily to class certification matters, and on May 24, 2012, Plaintiffs filed their Motion for Class Certification. A time frame for hearing this Motion has not yet been determined. Due to the uncertainties of litigation, we cannot presently determine the ultimate outcome of this litigation. However, we believe that, based on the information available to us at this time, 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 the inherent uncertainties and shortcomings of the estimation process, the uncertainties involved in litigation and other factors. Additionally, under such circumstances an adverse result could have a material effect on our financial condition, results of operations and liquidity.
ITEM 1A. RISK FACTORS
No material changes have occurred to the indicated risk factors as disclosed in our 2011 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
The information required to be furnished pursuant to Item 4 concerning mine safety disclosure matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Executive Officer Certifications
31.1*
Certification of Principal Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95*
Mine Safety Disclosures.
XBRL Documents
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Document
101.LAB*
XBRL Taxonomy Extension Label Document
101.PRE*
XBRL Taxonomy Presentation Document
101.DEF*
XBRL Taxonomy Definition Document
* Filed concurrently herewith
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 7, 2012
By:
/s/ Theresa E. Wagler
Theresa E. Wagler
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)