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 March 31, 2013
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 April 30, 2013, Registrant had 220,400,174, outstanding shares of common stock.
STEEL DYNAMICS, INC.
Page
PART I. Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012
1
Consolidated Statements of Income for the three-month periods ended March 31, 2013 and 2012 (unaudited)
2
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2013 and 2012 (unaudited)
3
Notes to Consolidated Financial Statements (unaudited)
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22
Item 4.
Controls and Procedures
PART II. Other Information
Legal Proceedings
23
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
24
Signature
25
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,
December 31,
2013
2012
(unaudited)
Assets
Current assets
Cash and equivalents
$
477,861
375,917
Investments in short-term commercial paper
—
31,520
Accounts receivable, net
703,896
599,499
Accounts receivable-related parties
49,405
42,864
Inventories
1,170,159
1,202,507
Deferred income taxes
23,564
23,449
Other current assets
24,056
20,469
Total current assets
2,448,941
2,296,225
Property, plant and equipment, net
2,232,413
2,231,198
Restricted cash
23,400
27,749
Intangible assets, net
408,832
416,635
Goodwill
736,912
738,542
Other assets
106,076
105,067
Total assets
5,956,574
5,815,416
Liabilities and Equity
Current liabilities
Accounts payable
401,407
344,953
Accounts payable-related parties
9,225
15,144
Income taxes payable
13,438
16,941
Accrued payroll and benefits
59,488
85,802
Accrued interest
19,290
35,306
Accrued expenses
80,257
81,900
Current maturities of long-term debt
231,582
29,631
Total current liabilities
814,687
609,677
Long-term debt
Term note
240,625
247,500
Senior notes
1,500,000
1,600,000
Convertible senior notes
287,496
Other long-term debt
41,093
37,610
Total long-term debt
2,069,214
2,172,606
546,722
537,304
Other liabilities
19,947
19,173
Commitments and contingencies
Redeemable noncontrolling interest
99,414
98,814
Equity
Common stock voting, $.0025 par value; 900,000,000 shares authorized; 256,333,083 and 255,592,901 shares issued; and 220,333,057 and 219,522,655 shares outstanding, as of March 31, 2013 and December 31, 2012, respectively
639
637
Treasury stock, at cost; 36,000,026 and 36,070,246 shares, as of March 31, 2013 and December 31, 2012, respectively
(719,076
)
(720,479
Additional paid-in capital
1,045,973
1,037,687
Retained earnings
2,111,597
2,087,620
Total Steel Dynamics, Inc. equity
2,439,133
2,405,465
Noncontrolling interests
(32,543
(27,623
Total equity
2,406,590
2,377,842
Total liabilities and equity
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Net sales
Unrelated parties
1,728,401
1,905,075
Related parties
67,295
76,965
Total net sales
1,795,696
1,982,040
Costs of goods sold
1,619,432
1,780,776
Gross profit
176,264
201,264
Selling, general and administrative expenses
65,262
64,384
Profit sharing
6,643
8,072
Amortization of intangible assets
8,127
8,992
Total selling, general and administrative expenses
80,032
81,448
Operating income
96,232
119,816
Interest expense, net of capitalized interest
34,629
41,112
Other expense (income), net
(1,046
10,248
Income before income taxes
62,649
68,456
Income taxes
21,397
26,679
Net income
41,252
41,777
Net loss attributable to noncontrolling interests
6,963
3,898
Net income attributable to Steel Dynamics, Inc.
48,215
45,675
Basic earnings per share attributable to Steel Dynamics, Inc. stockholders
.22
.21
Weighted average common shares outstanding
219,995
218,996
Diluted earnings per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive
.20
Weighted average common shares and share equivalents outstanding
238,087
236,526
Dividends declared per share
.11
.10
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
57,061
55,572
Equity-based compensation
4,753
6,123
10,935
9,197
Gain on disposal of property, plant and equipment
(1,383
(739
Changes in certain assets and liabilities:
Accounts receivable
(110,938
(60,820
32,348
(55,090
3,358
2,963
38,988
34,902
Income taxes receivable/payable
(3,022
17,392
Accrued expenses and liabilities
(43,642
(29,856
Net cash provided by operating activities
29,710
21,421
Investing activities:
Purchases of property, plant and equipment
(45,346
(45,555
Other investing activities
33,934
(1,864
Net cash used in investing activities
(11,412
(47,419
Financing activities:
Issuance of current and long-term debt
409,261
289,969
Repayment of current and long-term debt
(305,691
(283,448
Debt issuance costs
(5,997
(2,191
Proceeds from exercise of stock options, including related tax effect
7,614
1,097
Contributions from noncontrolling investors, net
411
9,506
Dividends paid
(21,952
(21,887
Net cash provided by (used in) financing activities
83,646
(6,954
Increase (decrease) in cash and equivalents
101,944
(32,952
Cash and equivalents at beginning of period
390,761
Cash and equivalents at end of period
357,809
Supplemental disclosure information:
Cash paid for interest
49,732
18,753
Cash paid (received) for federal and state income taxes, net
11,165
(955
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 59% and 60% of the company’s external net sales during the three-month periods ended March 31, 2013 and 2012, 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 35% of the company’s external net sales during each of the three-month periods ended March 31, 2013 and 2012, 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 5% and 4% of the company’s external net sales during the three-month periods ended March 31, 2013 and 2012, 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, 2012.
Goodwill. The company’s goodwill is allocated to the following reporting units at March 31, 2013, and December 31, 2012, (in thousands):
March 31, 2013
December 31, 2012
OmniSource — Metals Recycling/Ferrous Resources Segment
563,163
564,793
The Techs — Steel Segment
142,783
Roanoke Bar Division — Steel Segment
29,041
New Millennium Building Systems — Fabrication Segment
1,925
OmniSource goodwill decreased $1.6 million from December 31, 2012 to March 31, 2013, in recognition of the 2013 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, restricted and deferred stock units, restricted shares, and dilutive shares related to the company’s 5.125% convertible senior notes. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect. Options to purchase 3.0 million and 3.9 million shares were anti-dilutive at March 31, 2013 and 2012, 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 March 31,
Net Income (Numerator)
Shares (Denominator)
Per Share Amount
Basic earnings per share
0.22
0.21
Dilutive common share equivalents
1,460
1,148
5.125% convertible senior notes, net of tax
2,358
16,632
16,382
Diluted earnings per share
50,573
48,033
0.20
Note 3. Inventories
Inventories are stated at lower of cost or market. Cost is determined using a weighted average method for scrap, and a first-in, first-out basis for all other inventory. Inventories consisted of the following (in thousands):
Raw materials
526,280
594,388
Supplies
277,400
278,494
Work in progress
113,542
82,934
Finished goods
252,937
246,691
Total inventories
Note 4. Debt
On March 25, 2013, the company issued $400.0 million of 51/4% Senior Notes due 2023 (2023 Notes). Interest on the 2023 Notes is due semiannually on April 15 and October 15, with the first payment due on October 15, 2013. The 2023 Notes are redeemable at any time after April 15, 2018. The redemption price (expressed as a percentage of principal amount) is 102.625% during the period April 15, 2018 to April 14, 2019; 101.750% during the period April 15, 2019 to April 14, 2020; 100.875% during the period April 15, 2020 to April 14, 2021; and 100% on and after April 15, 2021, plus accrued interest to the redemption date. In addition, at any time before April 15, 2016, the company may redeem up to 35% of the principal amount of the 2023 Notes with the net cash proceeds from one or more sales of the company’s common stock at a redemption price (expressed as a percentage of principal amount) of 105.250%, plus accrued interest to the redemption date. The 2023 Notes are unsecured and rank pari passu with all existing and future senior unsubordinated unsecured indebtedness and senior in right of payment to all subordinated indebtedness.
A portion of the proceeds from the issuance of the 2023 Notes was used to fund the March 25, 2013 purchase of $301.7 million (plus accrued interest) of the company’s 63/4% Senior Notes due 2015 (2015 Notes) pursuant to a tender offer. As a result of the tender offer to purchase the 2015 Notes, the company recorded expenses of $2.0 million related to tender premiums, unamortized debt issuance costs write-off, and tender expenses, which is reflected in other expenses in the consolidated statement of income for the three months ended March 31, 2013. On April 9, 2013, the company used the remaining proceeds from the issuance of the 2023 Notes, along with available cash, to repay the remaining outstanding 2015 Notes due at a price of 100% of the principal amount of $198.3 million (plus accrued interest).
5
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 and redeemable amounts attributable to the noncontrolling interests (in thousands):
Stockholders of Steel Dynamics, Inc.
Common
Additional Paid-In
Retained
Treasury
Noncontrolling
Total
Redeemable Noncontrolling
Stock
Capital
Earnings
Interests
Balances at January 1, 2013
Proceeds from the exercise of stock options, including related tax effect
7,612
Dividends declared
(24,238
Equity-based compensation and issuance of restricted stock
2,906
1,403
4,309
Acquisition of noncontrolling interest
(2,232
2,232
Contributions from noncontrolling investors
112
600
Distributions to noncontrolling investors
(301
Net income (loss)
(6,963
Balances at March 31, 2013
Note 6. Derivative Financial Instruments
The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate interest rate risk, foreign currency exchange rate risk, and commodity margin risk. 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. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous metals (specifically aluminum, copper, nickel and silver). The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements. The company began to designate certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments in January 2013.
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 futures contract commitments as of March 31, 2013 (MT represents metric tons and Lbs represents pounds):
Commodity Futures
Long/Short
Aluminum
Long
2,950
MT
Short
3,050
Copper
2,813
11,884
Nickel
78
Silver
686
Lbs
6
Note 6. Derivative Financial Instruments (Continued)
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 March 31, 2013, and December 31, 2012, and for the three-month periods ended March 31, 2013 and 2012 (in thousands):
Asset Derivatives
Liability Derivatives
Fair Value
Balance sheet location
Derivative instruments designated as fair value hedges -
Commodity futures
3,417
(521
Derivative instruments not designated as hedges -
2,296
4,024
(327
(1,854
Total derivative instruments
5,713
(848
Location of gain
Amount of gain (loss) recognized in income on derivatives for the three months ended
Hedged items
Location of gain (loss)
Amount of gain (loss) recognized in income on related hedged items for the three months ended
(loss) recognized in income on derivatives
March 31, 2012
in fair value hedge relationships
recognized in income on related hedged item
Derivatives in fair value hedging relationships -
Cost of goods sold
5,684
Firm commitments
1,316
Inventory
(6,779
(5,463
Derivatives not designated as hedging instruments -
2,401
(3,618
Derivatives accounted for as fair value hedges had ineffectiveness resulting in a gain of $221,000, and a gain excluded from hedge effectiveness testing of $2.3 million, that reduced cost of goods sold during the three month period ended March 31, 2013.
Note 7. 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.
7
Note 7. Fair Value Measurements (Continued)
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 March 31, 2013, and December 31, 2012 (in thousands):
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Commodity futures — financial assets
Commodity futures — financial liabilities
848
1,854
The carrying amounts of financial instruments including cash and equivalents approximate fair value. 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 (Level 2), was approximately $2.4 billion and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.3 billion and $2.2 billion) at March 31, 2013 and December 31, 2012, respectively.
Note 8. Commitments and Contingencies
The company is involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which are expected to have a material impact on our financial condition, results of operations, or liquidity.
The company is involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, which 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 were brought on behalf of a purported class consisting of all direct purchasers of steel products between January 1, 2005, and the present. The other Complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period. In addition, in December 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. That case has been removed to the federal court in Chicago that is hearing the main complaint. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. In January 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied in June 2009. Following a period of preliminary discovery relating to class certification matters, Plaintiffs filed their Motion for Class Certification in May 2012, and on February 28, 2013, Defendants filed their Joint Memorandum in Opposition to Plaintiffs’ Motion for Class Certification, together with joint motions to exclude the expert opinions of both of Plaintiffs’ two retained experts. Additional briefing is anticipated on all issues related to the pending motions. 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
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, 2012, for more information related to the company’s segment reporting. The company’s segment results for the three-month periods ended March 31, 2013 and 2012 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
1,011,195
557,611
93,797
19,371
1,681,974
External Non-U.S.
50,117
63,517
88
113,722
Other segments
61,048
276,364
578
5,395
(343,385
1,122,360
897,492
94,375
24,854
Operating income (loss)
119,301
(9,824
1,530
(16,439
)(1)
1,664
(2)
Income (loss) before income taxes
105,007
(17,854
(76
(26,092
26,387
27,136
2,057
1,532
(51
Capital expenditures
24,726
19,069
881
670
45,346
As of March 31, 2013
2,566,642
2,529,951
254,176
822,064
(3)
(216,259
)(4)
Liabilities
557,404
526,457
15,646
2,556,590
(5)
(205,527
)(6)
3,450,570
Footnotes related to the three months ended March 31, 2013 segment results (in millions):
(1) Corporate SG&A
(8.0
(2) Gross profit increase from intra-company sales
1.7
Company-wide equity-based compensation
(3.2
(5.9
Other, net
0.7
(16.4
(3) Cash and equivalents
445.8
(4) Elimination of intra-company receivables
(49.4
23.5
Elimination of intra-company debt
(156.0
74.8
(10.9
Debt issuance costs, net
31.3
(216.3
Intra-company debt
156.0
90.7
822.1
(5) Accounts payable
38.8
(6) Elimination of intra-company payables
(49.7
13.4
19.1
0.2
Debt
2,247.1
(205.5
213.8
24.4
2,556.6
9
Note 9. Segment Information (Continued)
For the three months ended March 31, 2012
Metals Recycling / Ferrous Resources
Steel Fabrication Operations
1,135,912
634,134
74,892
20,732
1,865,670
50,808
65,466
96
116,370
47,759
411,520
3,262
(462,545
1,234,479
1,111,120
74,896
24,090
137,308
4,163
(2,668
(16,862
(2,125
)(2)
119,078
(4,273
(4,184
(40,040
26,084
26,074
1,848
1,617
5,948
37,906
1,168
533
45,555
As of March 31, 2012
2,677,623
2,610,476
231,284
712,673
(188,429
6,043,627
494,177
574,598
14,542
2,732,432
(178,607
3,637,142
Footnotes related to the three months ended March 31, 2012 segment results (in millions):
(7.6
(2) Gross profit reduction from intra-company sales
(2.1
Company-wide equity-based compensation\
(3.7
(6.5
0.9
(16.9
278.2
(27.9
65.0
(149.6
26.1
84.6
(188.4
24.0
149.6
85.2
712.7
29.2
14.6
54.5
(1.1
2,333.6
(178.6
213.1
87.4
2,732.4
10
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 2014, 2015, 2019, 2020, 2022 and 2023. 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 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, 2012.
Condensed Consolidating Balance Sheets (in thousands)
Combined
Consolidating
Parent
Guarantors
Non-Guarantors
Adjustments
441,989
22,546
13,326
290,332
874,233
25,813
(437,077
753,301
604,370
482,512
88,668
(5,391
51,597
8,443
6,298
(18,718
47,620
1,388,288
1,387,734
134,105
(461,186
Property, plant and equiment, net
1,018,938
657,918
558,130
(2,573
Other assets, including investments in subs
2,745,488
25,784
8,724
(2,650,520
129,476
5,152,714
3,217,180
700,959
(3,114,279
186,419
232,442
63,767
(71,996
410,632
104,882
91,586
10,179
(34,174
172,473
215,991
300
41,517
(26,226
507,292
324,328
115,463
(132,396
2,033,955
198,695
(163,436
172,334
2,067,830
49,376
(1,722,871
566,669
Common stock
33,896
18,121
(52,017
Treasury stock
Additional paid-in-capital
117,737
479,648
(597,385
Retained earnings (deficit)
673,389
(227,215
(446,174
825,022
270,554
(1,095,576
238,011
11
Note 10. Condensed Consolidating Information (Continued)
As of December 31, 2012
322,707
41,675
11,535
277,428
772,868
11,293
(419,226
642,363
564,882
536,331
107,422
(6,128
51,268
7,253
4,006
(18,609
43,918
1,247,805
1,358,127
134,256
(443,963
1,017,587
664,332
551,903
(2,624
2,768,360
30,862
9,189
(2,675,595
132,816
5,033,752
3,208,498
695,348
(3,122,182
150,191
219,415
56,472
(65,981
360,097
144,719
98,484
9,877
(33,131
219,949
14,237
52,595
(37,501
309,147
318,199
118,944
(136,613
2,140,958
169,223
(137,575
178,182
2,087,957
41,581
(1,751,243
556,477
476,677
(594,414
650,709
(200,389
(450,320
802,342
294,409
(1,096,751
266,786
12
Condensed Consolidating Statements of Operations (in thousands)
For the Three Months Ended,
827,201
2,015,487
66,370
(1,113,362
706,387
1,914,058
95,941
(1,096,954
Gross profit (loss)
120,814
101,429
(29,571
(16,408
Selling, general and administrative
28,686
53,992
2,138
(4,784
92,128
47,437
(31,709
(11,624
22,046
12,039
1,701
(1,157
Other (income) expense, net
(820
(200
(1,183
1,157
Income (loss) before income taxes and equity in net income of subsidiaries
70,902
35,598
(32,227
11,394
12,919
699
(3,615
59,508
22,679
(32,926
(8,009
Equity in net loss of subsidiaries
(11,293
Net income (loss) attributable to Steel Dynamics, Inc.
(25,963
3,284
For the Three Months Ended, March 31, 2012
Combined Non-Guarantors
Consolidating Adjustments
Total Consolidated
913,193
2,308,156
46,835
(1,286,144
785,567
2,198,898
63,894
(1,267,583
127,626
109,258
(17,059
(18,561
27,566
54,555
2,459
(3,132
100,060
54,703
(19,518
(15,429
27,217
13,606
1,710
(1,421
10,769
(1,064
(877
1,420
62,074
42,161
(20,351
(15,428
Income taxes (benefit)
15,870
16,134
353
(5,678
46,204
26,027
(20,704
(9,750
(4,427
4,427
(16,806
(5,323
13
Condensed Consolidating Statements of Cash Flows (in thousands)
Net cash provided by (used in) operating activities
29,373
14,903
(17,530
2,964
(8,837
(11,985
(6,805
16,215
Financing activities
Issuance of long term debt
400,425
23,980
(15,144
Repayments of long term debt
(304,471
(1,203
(9,836
9,819
2,792
(20,844
11,982
(13,854
(19,924
98,746
(22,047
26,126
(19,179
119,282
(19,129
1,791
(31,015
58,900
(7,596
1,132
(3,436
(40,889
(21,708
18,614
7,330
(8,721
14,183
(19,746
(27,121
9,290
(15,121
301,073
58,699
30,989
273,952
67,989
15,868
14
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 in the steel and recycled metals markets, our revenues, 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. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of a recurrent slowing in 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, 2012, 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, such as certain financing expenses.
Overview
Net income was $48.2 million, or $0.21 per diluted share, during the first quarter of 2013, compared with net income of $45.7 million, or $0.20 per diluted share, during the first quarter of 2012, and net income of $60.6 million, or $0.27 per diluted share, during the fourth quarter of 2012. Our net sales decreased $186.3 million, or 9%, to $1.8 billion in the first quarter of 2013 versus the first quarter of 2012, while net sales increased $90.7 million, or 5%, versus the fourth quarter of 2012. Our gross profit percentage was 10% during both the first quarter of 2013 and 2012, and 11% during the fourth quarter of 2012.
First quarter 2013 external steel shipments decreased 1% as compared to the first quarter of 2012 (with total sheet products shipments increasing 7% and long products shipments decreasing 5%), and external ferrous scrap shipments decreased 4% and external nonferrous scrap shipments decreased 5%. Conversely, steel fabrication external shipments increased 28% in the first quarter of 2013 compared to the same period in 2012. Operating income decreased 20% to $96.2 million in the first quarter 2013, as compared to the same period in 2012, primarily due to reduced operating income of $18.0 million from our steel operations as product pricing decreased more than raw material costs.
Comparing the first quarter of 2013 to the fourth quarter of 2012, external steel shipments also decreased 1% and external ferrous scrap shipments increased 19%, while external nonferrous scrap shipments increased 12%. Steel fabrication continued its trend of increasing external shipments, showing a 1% sequential quarter gain. Consolidated quarterly operating income increased 1% sequentially, due primarily to increased volumes across all our operating segments. Within steel operations, increased long products volumes more than offset weaker sheet steel shipments and slightly lower steel metal spreads. Within metals recycling operations, increased volumes were more than offset by decreased metal margins.
Segment Operating Results 2013 vs. 2012 (dollars in thousands)
Fourth
Linked
Quarter
% Change
Steel
(9
)%
1,106,900
%
Metals recycling and ferrous resources
(19
789,852
Steel fabrication
26
98,301
(4
20,708
20
2,139,081
2,444,585
2,015,761
Intra-company
(310,760
1,705,001
(13
114,808
(336
(5,603
(75
157
1,448
(17,535
94,568
(22
121,941
93,118
1,811
(20
94,929
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 first quarter of 2013 and 2012, our steel operations accounted for 59% and 60%of our external net sales, respectively. Operating income for the steel segment decreased $18.0 million, or 13%, to $119.3 million in the first quarter of 2013, compared to the same period of 2012. While total shipments increased 1% gross margin, and thus operating income, decreased 11%primarily due to an $87 decrease in average segment selling prices per ton shipped versus only a $66 per ton decrease in average ferrous scrap cost melted in the first quarter of 2013, as compared to the first quarter of 2012.
16
Steel Operations Shipments (net tons)
Flat Roll Division
704,290
658,505
713,770
The Techs
151,137
144,615
180,451
Sheet products
855,427
58
803,120
55
894,221
61
Structural and Rail Division
280,897
261,006
262,441
Engineered Bar Products Division
112,821
157,489
98,858
Roanoke Bar Division
139,950
151,296
127,952
Steel of West Virginia
80,707
77,212
73,581
Long products
614,375
42
647,003
45
562,832
39
Total shipments
1,469,802
1,450,123
1,457,053
Intra-segment shipments
(32,090
(2
%)
(28,057
(31,665
Segment shipments
1,437,712
1,422,066
1,425,388
Intra-company shipments
(93,280
(6
(66,119
(5
(71,107
External shipments
1,344,432
1,355,947
1,354,281
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 58% of total steel shipments in the first quarter of 2013, as compared to 55% in the first quarter of 2012.
Long Products. Our Structural and Rail Division sells structural steel beams and pilings to the construction market, and also sells standard-grade rail to the railroad industry. Our Engineered Bar Products Division primarily sells engineered, special-bar-quality and merchant bar quality rounds, and round-cornered squares. Our Roanoke Bar Division primarily sells 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 steel segment decreased $112.1 million, or 9%, in the first quarter of 2013 when compared to the first quarter of 2012, as total shipments increased 1%and average selling prices decreased 10%, or $87 per ton. There was also a shift in sales mix as sheet product shipments increased 7% and long product shipments decreased 5%, due primarily to lower volumes at the Engineered Bar Products Division.
17
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 $66 in the first quarter of 2013, compared with the first quarter of 2012. During the first quarter of 2013 and 2012, respectively, our metallic raw material costs represented 65% and 69% of our steel operations’ manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes.
Metals Recycling and Ferrous Resources Operations
Metals Recycling and Ferrous Resources Operations. This operating segment primarily 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 35% of our external net sales in both the first quarter of 2013 and 2012. Operating income for the metals recycling and ferrous resources operations segment decreased $14.0 million compared to the first quarter of 2012, due primarily to the use and write-down of higher cost raw material inventory at our Minnesota iron operations, and decreased product pricing at our IDI facility.
Metals Recycling and Ferrous Resources Operations Shipments
Ferrous metal (gross tons)
1,342,929
1,582,840
1,238,143
Intra-segment
(1,969
(1,787
(1,248
1,340,960
1,581,053
1,236,895
(551,921
(761,980
(572,045
789,039
819,073
664,850
Nonferrous metals (thousands of pounds)
Total and segment shipments
279,656
291,636
251,080
(3,529
(1,958
(3,456
276,127
289,678
247,624
Minnesota iron nuggets (metric tons) — intra-company
59,685
46,230
36,481
Iron Dynamics (metric tons) — intra-company
64,685
56,628
57,117
Metals Recycling. Our metals recycling operations 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 first quarter of 2013 and 2012, respectively.
During the first quarter of 2013, metals recycling recorded sales of $835.0 million on shipments of 1.3 million gross tons of ferrous metals and 279.7 million pounds of nonferrous metals, compared with sales of $1.1 billion on shipments of 1.6 million gross tons of ferrous and 291.6 million pounds of nonferrous metals during the same period in 2012. During the first quarter of 2013 and 2012, the metals recycling operations provided approximately 43% and 52%, respectively, of the steel scrap purchased by our steel mills. This represented 41% and 48% of the metals recycling operations’ ferrous shipments for the first quarter of 2013 and 2012, respectively. Sales prices of ferrous metals decreased 17% in the first quarter of 2013 versus the same period in 2012, while nonferrous sales prices increased 1% for the same periods.
Operating income for metals recycling increased $682,000 in the first quarter of 2013 to $19.5 million compared to the first quarter of 2012 despite decreased volumes, due to a 6% increase in ferrous metal margins and decreased operating expenses.
Ferrous Resources. Our ferrous resources operations consist of our two ironmaking initiatives: Iron Dynamics and our Minnesota iron operations. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material 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 that time, we have continued to refine this pioneering production process and changed equipment configurations to increase production, improve quality, and increase plant availability. A planned six-week outage in the fall of 2012 was used to complete the groundwork necessary for the implementation of further improvements which are being made in the second quarter of 2013. These modifications are expected to improve production volume. The facility’s designed annual production capacity is 500,000 metric tons. In the first quarter of 2013 and 2012, Mesabi Nugget produced 60,000 and 46,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Our iron tailings operation, Mining Resources, started operations in September of 2012 and expects to be at full capacity during the first half of 2013. This operation provides iron ore tailings to be concentrated for use by Mesabi Nugget as low-cost iron concentrate in the nugget production process. This is critical to our Minnesota operations as we will now be able to benefit from the use of lower-cost iron concentrate rather than much higher priced third-party material. Losses from our Minnesota iron operations reduced our net income in the first quarter of 2013 by approximately $13.8 million, $4.2 million more than in the first quarter of 2012.
18
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 5% and 4% of our external net sales during the first quarter of 2013 and 2012, respectively. The segment achieved operating income of $1.5 million in the first quarter of 2013, compared to a $2.7 million loss in the first quarter of 2012. Modest selling price decreases were more than offset by higher shipments, improved metal margins, and reduced conversion costs.
Net sales for the segment increased $19.5 million, or 26%, in the first quarter of 2013 compared to the first quarter of 2012, as volumes increased 29%. However, the segment’s average selling price per ton shipped decreased $28, or 2%, during the same period. Increased first quarter 2013 shipments were the result of continued modest improvement in the non-residential construction market and market share gains.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the first quarter of 2013 and 2012, the cost of steel products purchased represented 69% and 70% of the total cost of manufacturing for our steel fabrication operations, respectively; while the average cost of steel consumed decreased in the first quarter of 2013, as compared to the same period in 2012, by $65 per ton.
First Quarter Consolidated Results 2013 vs. 2012
Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $80.0 million during the first quarter of 2013, as compared to $81.4 million during the first quarter of 2012, a decrease of $1.4 million, or 2%. Our selling, general and administrative expenses represented 4% of our total net sales during both the first quarter of 2013 and 2012. The decrease in our selling, general and administrative expenses during the first quarter of 2013 as compared to the same period in 2012 was due primarily to decreased profit sharing and performance-based compensation, consistent with the lower levels of profitability in the first quarter of 2013.
Interest Expense, net of Capitalized Interest. During the first quarter of 2013, gross interest expense decreased $6.0 million to $35.4 million, and capitalized interest increased $487,000, to $791,000, when compared to the same period in 2012. 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 is due to debt repayment of $175 million during the third quarter of 2012 in conjunction with our refinancing activities, which also reduced our overall cost of debt and extended our maturity schedule. We anticipate further reductions in gross interest expense in 2013, as a result of additional refinancing activities and debt repayments of $100.0 million during March and April 2013.
Other Expense (Income), net. Other income was $1.0 million during the first quarter of 2013, as compared to expense of $10.2 million during the same period in 2012. First quarter 2012 results included $13.9 million of charges related to the partial tender of our 73/8% Senior Notes, and first quarter 2013results included $2.0 million of charges related to the partial tender of our 63/4% Senior Notes.
19
Income Taxes. During the first quarter of 2013, our income tax expense was $21.4 million, as compared to $26.7 million during the same period in 2012. Our effective income tax rate before noncontrolling interests was 34.2% and 39.0%, during the first quarter of 2013 and 2012, respectively. The lower effective tax rate in the first quarter of 2013 is due to a favorable adjustment related to 2012 research and development tax credits that were enacted into the tax code in January 2013.
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 increased $110.9 million during the first quarter of 2013 related to increased sales, when compared to the fourth quarter of 2012. Total inventories decreased $32.3 million, or 3%, to $1.2 billion. Our raw materials, primarily steel scrap inventories, decreased by approximately $68.1 million during the first quarter of 2013, with scrap volumes decreasing by 53,000 gross tons (8%), and costs per gross ton decreasing 8%. Our work-in-process and finished goods inventories increased $36.9 million, with volumes increasing by 77,000 tons. Our trade payables and general accruals increased $6.6 million, or 1%, during the first quarter of 2013, as trade payables were higher due to higher production levels, while 2012 profit sharing and bonus amounts were paid in the first quarter of 2013.
Capital Investments. During the first quarter of 2013, we invested $45.3 million in property, plant and equipment, of which over half related to announced growth or expansion projects at three of our steel mills and OmniSource. We estimate total capital expenditures for 2013 to be in the range of $200 to $225 million.
Capital Resources and Long-term Debt. On March 25, 2013, we issued $400.0 million of 51/4% Senior Notes due 2023 (2023 Notes). Interest on the 2023 Notes is due semiannually on April 15 and October 15, with the first payment due on October 15, 2013. The 2023 Notes are redeemable at any time after April 15, 2018. The redemption price (expressed as a percentage of principal amount) is 102.625% during the period April 15, 2018 to April 14, 2019; 101.750% during the period April 15, 2019 to April 14, 2020; 100.875% during the period April 15, 2020 to April 14, 2021; and 100% on and after April 15, 2021, plus accrued interest to the redemption date. In addition, at any time before April 15, 2016, we may redeem up to 35% of the principal amount of the 2023 Notes with the net cash proceeds from one or more sales of our common stock at a redemption price (expressed as a percentage of principal amount) of 105.250%, plus accrued interest to the redemption date. The 2023 Notes are unsecured and rank pari passu with all existing and future senior unsubordinated unsecured indebtedness and senior in right of payment to all subordinated indebtedness.
A portion of the proceeds from the issuance of the 2023 Notes was used to fund the March 25, 2013 purchase of $301.7 million (plus accrued interest) of our 6 3/4% Senior Notes due 2015 (2015 Notes) pursuant to a tender offer. As a result of the tender offer to purchase the 2015 Notes, we recorded expenses of $2.0 million related to tender premiums, unamortized debt issuance costs write-off, and tender expenses, which is reflected in other expenses in the consolidated statement of income for the quarter ended March 31, 2013. On April 9, 2013, we used the remaining proceeds from the issuance of the 2023 Notes, along with available cash, to repay the remaining outstanding 2015 Notes due at a price of 100% of the principal amount of $198.3 million (plus accrued interest). As a result of this refinancing activity, our overall outstanding debt decreased $100.0 million, we extended and laddered our debt maturities, and we reduced our overall effective interest rate.
While total outstanding debt at March 31, 2013, of $2.3 billion was $98.6 million higher than at December 31, 2012, after consideration of the refinancing completed on April 9, 2013, total debt decreased by $99.7 million. Post the debt payment on April 9, 2013, 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 45.6%, as compared to 47.1% at December 31, 2012.
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 March 31, 2013, we had $1.1 billion of availability on the Revolver, $14.0 million of outstanding letters of credit and other obligations which reduce availability, and no outstanding borrowings.
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 March 31, 2013, our interest coverage ratio and net debt leverage ratio were 4.17:1.00 and 3.13:1.00, respectively. We were therefore in compliance with these covenants at March 31, 2013, and we anticipate we will continue to be in compliance during the remainder of the year.
Cash Dividends. We declared cash dividends of $24.2 million, or $0.11 per common share, during the first quarter of 2013, a 10% increase over the $0.10 per common share, or $21.9 million, dividends declared during the first quarter of 2012. We paid cash dividends of $22.0 million and $21.9 million during the first quarter of 2013 and 2012, respectively. Our board of directors approves the payment of dividends on a quarterly basis. During the remainder of 2013, 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.
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 2012 Annual Report on Form 10-K.
21
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 three month periods ended March 31, 2013 or 2012.
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, iron concentrate, fuel, and zinc. Certain of these commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 39 months for physical commodity requirements and for up to 8 years for commodity transportation requirements. We also purchase electricity consumed at our Flat Roll Division pursuant to a contract which extends 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 March 31, 2013, 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, 2012. 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.
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 March 31, 2013, we had a cumulative unrealized gain associated with these financial contracts of $4.9 million, 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 March 31, 2013. 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 Commission’s 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 March 31, 2013, 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 March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes.
We are also involved, along with eight other steel manufacturing companies, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, which 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 were brought on behalf of a purported class consisting of all direct purchasers of steel products between January 1, 2005, and the present. The other Complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period. In addition, in December 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. That case has been removed to the federal court in Chicago that is hearing the main complaint. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. In January 2009, Steel Dynamics and the other defendants filed a Joint Motion to Dismiss all of the direct purchaser lawsuits, but this motion was denied in June 2009. Following a period of preliminary discovery relating to class certification matters, Plaintiffs filed their Motion for Class Certification in May 2012, and on February 28, 2013, Defendants filed their Joint Memorandum in Opposition to Plaintiffs’ Motion for Class Certification, together with joint motions to exclude the expert opinions of both of Plaintiffs’ two retained experts. Additional briefing is anticipated on all issues related to the pending motions. 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.
ITEM 1A. RISK FACTORS
No material changes have occurred to the indicated risk factors as disclosed in our 2012 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.
May 9, 2013
By:
/s/ Theresa E. Wagler
Theresa E. Wagler
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)