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, 2014
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, 2014, Registrant had 223,375,430 outstanding shares of common stock.
STEEL DYNAMICS, INC.
PART I. Financial Information
Page
Item 1.
Financial Statements:
Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013
1
Consolidated Statements of Income for the three-month periods ended March 31, 2014 and 2013 (unaudited)
2
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2014 and 2013 (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
Signatures
25
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,
December 31,
2014
2013
(unaudited)
Assets
Current assets
Cash and equivalents
$
342,919
395,156
Accounts receivable, net
760,654
664,208
Accounts receivable-related parties
50,446
56,392
Inventories
1,332,101
1,314,747
Deferred income taxes
17,871
17,964
Other current assets
24,363
25,167
Total current assets
2,528,354
2,473,634
Property, plant and equipment, net
2,197,503
2,226,134
Restricted cash
18,588
23,827
Intangible assets, net
379,488
386,159
Goodwill
730,360
731,996
Other assets
59,564
91,256
Total assets
5,913,857
5,933,006
Liabilities and Equity
Current liabilities
Accounts payable
401,539
404,605
Accounts payable-related parties
15,629
10,327
Income taxes payable
23,531
4,023
Accrued payroll and benefits
57,384
93,432
Accrued interest
21,911
31,363
Accrued expenses
87,715
89,884
Current maturities of long-term debt
343,722
341,544
Total current liabilities
951,431
975,178
Long-term debt
Term note
209,687
220,000
Senior notes
1,500,000
Other long-term debt
45,341
46,045
Total long-term debt
1,755,028
1,766,045
550,225
556,038
Other liabilities
22,843
23,376
Commitments and contingencies
Redeemable noncontrolling interests
121,834
116,514
Equity
Common stock voting, $.0025 par value; 900,000,000 shares authorized; 259,046,646 and 258,840,350 shares issued; and 223,173,055 and 222,867,408 shares outstanding, as of March 31, 2014 and December 31, 2013, respectively
646
645
Treasury stock, at cost; 35,873,591 and 35,972,942 shares, as of March 31, 2014 and December 31, 2013, respectively
(716,545
)
(718,529
Additional paid-in capital
1,092,281
1,085,694
Retained earnings
2,192,413
2,179,513
Total Steel Dynamics, Inc. equity
2,568,795
2,547,323
Noncontrolling interests
(56,299
(51,468
Total equity
2,512,496
2,495,855
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
1,765,881
1,728,401
Related parties
64,201
67,295
Total net sales
1,830,082
1,795,696
Costs of goods sold
1,666,778
1,619,432
Gross profit
163,304
176,264
Selling, general and administrative expenses
70,042
65,262
Profit sharing
5,395
6,643
Amortization of intangible assets
6,935
8,127
Total selling, general and administrative expenses
82,372
80,032
Operating income
80,932
96,232
Interest expense, net of capitalized interest
30,569
34,629
Other expense (income), net
(631
(1,046
Income before income taxes
50,994
62,649
Income taxes
17,296
21,397
Net income
33,698
41,252
Net loss attributable to noncontrolling interests
4,881
6,963
Net income attributable to Steel Dynamics, Inc.
38,579
48,215
Basic earnings per share attributable to Steel Dynamics, Inc. stockholders
.17
.22
Weighted average common shares outstanding
223,011
219,995
Diluted earnings per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive
.21
Weighted average common shares and share equivalents outstanding
241,394
238,087
Dividends declared per share
.115
.11
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
57,568
57,061
Equity-based compensation
5,768
4,753
(4,091
10,935
(Gain) loss on disposal of property, plant and equipment
2,641
(1,383
Changes in certain assets and liabilities:
Accounts receivable
(88,950
(110,938
(17,354
32,348
7,359
3,358
5,041
38,988
Income taxes receivable/payable
19,393
(3,022
Accrued expenses and liabilities
(48,320
(43,642
Net cash provided by (used in) operating activities
(27,247
29,710
Investing activities:
Purchases of property, plant and equipment
(24,841
(45,346
Other investing activities
28,884
33,934
Net cash provided by (used in) investing activities
4,043
(11,412
Financing activities:
Issuance of current and long-term debt
43,453
409,261
Repayment of current and long-term debt
(56,246
(305,691
Debt issuance costs
—
(5,997
Proceeds from exercise of stock options, including related tax effect
2,905
7,614
Contributions from noncontrolling investors, net
5,370
411
Dividends paid
(24,515
(21,952
Net cash provided by (used in) financing activities
(29,033
83,646
Increase (decrease) in cash and equivalents
(52,237
101,944
Cash and equivalents at beginning of period
375,917
Cash and equivalents at end of period
477,861
Supplemental disclosure information:
Cash paid for interest
39,663
49,732
Cash paid for federal and state income taxes, net
2,143
11,165
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 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. Steel operations accounted for 61% and 59% of the company’s external net sales during the three-month periods ended March 31, 2014 and 2013, respectively.
Metals Recycling and Ferrous Resources Operations. Metals recycling and ferrous resources operations primarily include OmniSource Corporation, the company’s metals recycling, steel scrap procurement, and processing locations, and our two ironmaking initiatives: Iron Dynamics, 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 32% and 35% of the company’s external net sales during the three-month periods ended March 31, 2014 and 2013, respectively.
Steel Fabrication Operations. Steel fabrication operations include the company’s six New Millennium Building Systems joist and deck 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 5% of the company’s external net sales during the three-month periods ended March 31, 2014 and 2013, respectively.
Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions. Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries.
Use of Estimates. These financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.
In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Goodwill. The company’s goodwill is allocated to the following reporting units at March 31, 2014, and December 31, 2013, (in thousands):
OmniSource — Metals Recycling/Ferrous Resources Segment
556,611
558,247
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, 2013 to March 31, 2014, in recognition of the 2014 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 stock units, deferred stock units, and dilutive shares related to the company’s 5.125% convertible senior notes, which mature in June 2014; and are excluded from the computation in periods in which they have an anti-dilutive effect. No options to purchase shares were anti-dilutive at March 31, 2014, while options to purchase 3.0 million shares were anti-dilutive at March 31, 2013.
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
Dilutive common share equivalents
1,608
1,460
5.125% convertible senior notes, net of tax
2,358
16,775
16,632
Diluted earnings per share
40,937
50,573
0.21
Note 3. Inventories
Inventories are stated at lower of cost or market. Cost is determined using a weighted average cost method for scrap, and on a first-in, first-out basis for other inventory. Inventory consisted of the following (in thousands):
Raw materials
615,776
660,384
Supplies
292,119
293,533
Work in progress
112,504
84,710
Finished goods
311,702
276,120
Total inventories
Note 4. 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, 2014
Proceeds from the exercise of stock options, including related tax effect
3,537
3,538
Dividends declared
(25,665
Equity-based compensation and issuance of restricted stock
3,050
(14
1,984
5,020
Contributions from noncontrolling investors
89
5,320
Distributions to noncontrolling investors
(39
Net income (loss)
(4,881
Balances at March 31, 2014
5
Note 5. 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 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 designates certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments.
Commodity Futures Contracts. If the company is “long” on a futures contract, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, 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, 2014 (MT represents metric tons and Lbs represents pounds):
Commodity Futures
Long/Short
Aluminum
Long
2,625
MT
Short
1,525
Copper
4,260
15,014
Silver
343
Lbs
The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2014, and December 31, 2013, and gains and losses related to derivatives included in the company’s statement of income for the three-month periods ended March 31, 2014 and 2013 (in thousands):
Asset Derivatives
Liability Derivatives
Fair Value
Balance sheet location
March 31, 2014
December 31, 2013
Derivative instruments designated as fair value hedges - Commodity futures
2,154
658
(1,048
1,886
Derivative instruments not designated as hedges - Commodity futures
1,466
352
(478
2,601
Total derivative instruments
3,620
1,010
(1,526
4,487
The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $5.4 million at March 31, 2014 and $3.6 million at December 31, 2013, are reflected in other current assets in the consolidated balance sheet.
Location of gain
Amount of gain recognized in income on derivatives for the three
Hedged items
Location of gain (loss)
Amount of gain (loss) recognized in income on related hedged items for
recognized in income on
months ended
in fair value hedge
the three months ended
derivatives
March 31, 2013
relationships
related hedged item
Derivatives in fair value hedging relationships - Commodity futures
1,617
8,046
Firm commitments
984
1,316
Inventory
(2,488
(6,808
(1,504
(5,492
Derivatives not designated as hedging instruments - Commodity futures
7,956
2,401
6
Note 5. Derivative Financial Instruments (Continued)
Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $296,000 and $221,000 during the three-month periods ended March 31, 2014 and 2013, respectively; and a loss excluded from hedge effectiveness testing of $183,000 that increased costs of goods sold during the three-month period ended March 31, 2014, 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 6. Fair Value Measurements
FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. Levels within the hierarchy are defined as follows:
· Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets;
· Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and
· Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of March 31, 2014, and December 31, 2013 (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
The carrying amounts of financial instruments including cash and equivalents approximate fair value. The fair values of commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.2 billion and $2.3 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.1 billion and $2.1 billion) at March 31, 2014 and December 31, 2013, respectively.
7
Note 7. 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 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 during a period between 2005 and 2007, 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. The other complaint was brought on behalf of a purported class consisting of all indirect purchasers of steel products within the same time period. A ninth complaint, in December 2010, was brought on behalf of indirect purchasers of steel products in Tennessee and has been consolidated with the original complaints. All complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. Following a period of discovery relating to class certification matters, plaintiffs’ motion for class action certification filed in 2012, and briefing by both sides, the court, on March 5 – 7 and April 11, 2014, held a class certification hearing. At the conclusion of the hearing, the court took the class certification issue under advisement.
Due to the uncertain nature of litigation, the company 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.
Note 8. 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 facility, senior notes, convertible senior notes, certain other investments, and certain profit sharing expenses.
8
Note 8. Segment Information (Continued)
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, 2013, for more information related to the company’s segment reporting. The company’s segment results for the three-month periods ended March 31, 2014 and 2013 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
1,061,079
517,957
115,861
20,621
1,715,518
External Non-U.S.
56,519
57,817
228
114,564
Other segments
43,732
343,928
6,673
(394,333
1,161,330
919,702
27,522
Operating income (loss)
105,643
(15,519
3,126
(16,545
)(1)
4,227
(2)
Income (loss) before income taxes
91,998
(22,696
1,652
(24,187
27,377
26,621
2,222
1,399
(51
Capital expenditures
18,606
5,779
311
145
24,841
As of March 31, 2014
2,731,246
2,537,892
263,688
609,206
(3)
(228,175
)(4)
Liabilities
576,643
613,611
17,022
2,290,332
(5)
(218,081
)(6)
3,279,527
Footnotes related to the three months ended March 31, 2014 segment results (in millions):
(1)
Corporate SG&A
(8.3
Company-wide equity-based compensation
(4.6
(4.7
Other, net
1.1
(16.5
Gross profit increase from intra-company sales
4.2
285.6
12.3
13.5
17.8
71.6
24.4
Intra-company debt
153.8
30.2
609.2
(4)
Elimination of intra-company receivables
(65.1
Elimination of intra-company debt
(153.8
(9.3
(228.2
44.1
23.5
21.7
Accrued profit sharing
4.8
Debt
2,031.4
138.0
26.8
2,290.3
(6)
Elimination of intra-company payables
(65.5
1.2
(218.1
9
1,011,195
557,611
93,797
19,371
1,681,974
50,117
63,517
88
113,722
61,048
276,364
578
(343,385
1,122,360
897,492
94,375
24,854
119,301
(9,824
1,530
(16,439
1,664
105,007
(17,854
(76
(26,092
26,387
27,136
2,057
1,532
24,726
19,069
881
670
45,346
As of March 31, 2013
2,566,642
2,529,951
254,176
822,064
(216,259
5,956,574
557,404
526,457
15,646
2,556,590
(205,527
3,450,570
Footnotes related to the three months ended March 31, 2013 segment results (in millions):
(8.0
(3.2
(5.9
0.7
(16.4
1.7
445.8
11.6
13.2
74.8
Debt issuance costs, net
31.3
156.0
65.9
822.1
(49.4
(156.0
(10.9
(216.3
38.8
13.4
19.1
5.9
2,247.1
213.8
18.5
2,556.6
(49.7
0.2
(205.5
10
Note 9. 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, 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, 2013.
Condensed Consolidating Balance Sheets (in thousands)
Combined
Consolidating
Parent
Guarantors
Non-Guarantors
Adjustments
281,376
48,071
13,472
320,996
1,012,562
42,095
(564,553
811,100
728,638
502,339
105,553
(4,429
48,969
6,968
5,048
(18,751
42,234
1,379,979
1,569,940
166,168
(587,733
1,042,424
598,946
558,500
(2,367
Other assets, including investments in subs
2,604,100
21,572
7,352
(2,554,872
78,152
5,026,503
3,300,306
732,020
(3,144,972
178,731
266,205
89,012
(116,780
417,168
124,762
107,284
10,050
(51,555
190,541
318,969
300
66,580
(42,127
622,462
373,789
165,642
(210,462
1,714,982
182,506
(142,460
120,264
2,004,584
30,844
(1,582,624
573,068
Common stock
33,896
18,121
(52,017
Treasury stock
Additional paid-in-capital
117,737
575,877
(693,614
Retained earnings (deficit)
770,300
(306,505
(463,795
921,933
287,493
(1,209,426
231,194
11
Note 9. Condensed Consolidating Information (Continued)
As of December 31, 2013
320,866
61,148
13,142
309,691
874,707
32,018
(495,816
720,600
673,763
557,640
91,199
(7,855
50,228
8,399
3,259
(18,755
43,131
1,354,548
1,501,894
139,618
(522,426
1,046,093
619,617
562,843
(2,419
2,630,411
21,789
8,092
(2,545,209
115,083
5,031,052
3,261,455
710,553
(3,070,054
160,255
258,406
60,987
(64,716
414,932
142,055
115,182
10,694
(49,229
218,702
315,521
52,163
(26,440
617,831
373,888
123,844
(140,385
1,725,433
204,385
(163,773
140,465
1,986,260
34,895
(1,582,206
579,414
Redeemable noncontrolling interest
552,946
(670,683
749,674
(288,684
(460,990
901,307
282,383
(1,183,690
230,915
12
Condensed Consolidating Statements of Operations (in thousands)
For the three months ended,
863,563
2,112,389
105,849
(1,251,719
761,395
2,015,576
123,573
(1,233,766
Gross profit (loss)
102,168
96,813
(17,724
(17,953
Selling, general and administrative
28,834
54,289
3,408
(4,159
73,334
42,524
(21,132
(13,794
19,361
10,561
1,880
(1,233
Other (income) expense, net
(976
395
(1,284
1,234
Income (loss) before income taxes and equity in net income of subsidiaries
54,949
31,568
(21,728
(13,795
Income taxes (benefit)
9,925
10,942
696
(4,267
45,024
20,626
(22,424
(9,528
Equity in net loss of subsidiaries
(6,445
6,445
Net income (loss) attributable to Steel Dynamics, Inc.
(17,543
(3,083
827,201
2,015,487
66,370
(1,113,362
706,387
1,914,058
95,941
(1,096,954
120,814
101,429
(29,571
(16,408
28,686
53,992
2,138
(4,784
92,128
47,437
(31,709
(11,624
22,046
12,039
1,701
(1,157
(820
(200
(1,183
1,157
70,902
35,598
(32,227
11,394
12,919
699
(3,615
59,508
22,679
(32,926
(8,009
(11,293
11,293
(25,963
3,284
13
Condensed Consolidating Statements of Cash Flows (in thousands)
9,027
(17,195
(14,149
(4,930
(12,430
(3,997
(1,625
22,095
(36,087
8,115
16,104
(17,165
(39,490
(13,077
330
29,373
14,903
(17,530
2,964
Net cash used in investing activities
(8,837
(11,985
(6,805
16,215
98,746
(22,047
26,126
(19,179
119,282
(19,129
1,791
322,707
41,675
11,535
441,989
22,546
13,326
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 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, manufacturing, 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, 2013, 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, company-wide 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 $38.6 million, or $0.17 per diluted share, during the first quarter of 2014, compared with net income of $48.2 million, or $0.21 per diluted share, during the first quarter of 2013, while comparative operating income decreased $15.3 million, or 16%, to $80.9 million. We experienced one of the most severe and prolonged winter periods in recent history, especially in the Midwest where a majority of our operations are located. This severe weather caused production disruptions and diminished availability of transportation, resulting in lower shipments and meaningful increases in energy costs, most notably within our steel segment at our Flat Roll and Structural and Rail Divisions. As a result, despite a 4% increase in metal spread, our steel segment operating income decreased $13.7 million, or 11%. Underlying sheet steel demand remains good, and demand in structural and special bar quality long product steel increased as end-market demand continues to improve.
Metals Recycling and Ferrous Resources operating losses increased $5.7 million, as metals recycling ferrous and nonferrous metal spreads each decreased, operating costs increased due to the severe weather, and weather-related damages to several of our buildings resulted in $2.6 million in losses. Fabrication segment operating income more than doubled in the first quarter of 2014, as compared to the first quarter of 2013, to $3.1 million. Fabrication realized growth in shipments as a result of the improving non-residential construction market as well as increases in market penetration, and achieved reduced operating costs from manufacturing efficiencies and increased production rates.
Our March/April 2013 debt repayments and refinancing activities resulted in decreased interest expense for the first quarter of 2014 of $4.1 million compared to the first quarter of 2013. These activities also elongated our debt maturities profile.
Segment Operating Results 2014 vs. 2013 (dollars in thousands)
%
Change
Steel
3%
Metals recycling and ferrous resources
2%
Steel fabrication
23%
11%
2,224,415
2,139,081
Intra-company
(11)%
(58)%
104%
(1)%
76,705
94,568
(16)%
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 2014 and 2013, our steel operations accounted for 61% and 59% of our external net sales, respectively.
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.
Long Products. Our Structural and Rail Division sells structural steel beams and pilings to the construction market, as well as standard-grade and premium rail to the railroad industry. Our Engineered Bar Products Division primarily sells engineered, special-bar-quality and merchant bar quality rounds, round-cornered squares, and smaller-diameter round engineered bars. 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.
16
Steel Operations Shipments (net tons):
% Change
Shipments
Flat Roll Division
641,520
(9)%
704,290
The Techs
153,237
1%
151,137
Sheet products
794,757
(7)%
855,427
Structural and Rail Division
292,316
4%
280,897
Engineered Bar Products Division
144,303
28%
112,821
Roanoke Bar Division
143,782
139,950
Steel of West Virginia
75,574
(6)%
80,707
Long products
655,975
7%
614,375
Total shipments
1,450,732
1,469,802
Intra-segment shipments
(45,508
(32,090
Segment shipments
1,405,224
(2)%
1,437,712
External shipments
1,338,573
—%
1,344,432
Net sales for the steel segment increased 3% in the first quarter of 2014 when compared to the first quarter of 2013, as a 2% decrease in segment shipments was more than offset by an increase of 6%, or $45 per ton, in average selling prices. The lower segment shipments, primarily at the Flat Roll Division, was largely driven by the historically significant severe winter weather conditions during the first quarter of 2014 which adversely impacted production volumes and limited shipments due to the diminished availability of rail cars and trucks during the period. The fundamental overall demand for sheet steel did not diminish, and demand for long products, most notably structural beams and special bar quality long product steel, improved as end-market demand continues to improve.
Metallic raw materials used in our electric arc furnaces represent our single most significant manufacturing cost. Our metallic raw material cost per net ton consumed in our steel operations increased $29 in the first quarter of 2014, compared with the first quarter of 2013. During the first quarter of 2014 and 2013, our metallic raw material costs represented 65% of our steel operations’ manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes.
Despite the increased metal spread, operating income for the steel segment decreased 11%, to $105.6 million in the first quarter of 2014, compared to the same period of 2013, as the impact of the severe and prolonged winter weather during the first quarter of 2014 hindered production and shipments, and resulted in meaningfully higher electricity and natural gas cost, primarily at our Midwest operations.
17
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 32% and 35% of our external net sales in the first quarter of 2014 and 2013, respectively. Operating loss for the metals recycling and ferrous resources operations segment of $15.5 million, increased $5.7 million compared to the first quarter of 2013, due primarily to decreased ferrous and nonferrous metal spreads and increased operating costs in metals recycling, while operating losses in our Minnesota iron operations decreased.
Metals Recycling and Ferrous Resources Shipments:
Ferrous metal shipments (gross tons)
1,364,533
1,342,929
Intra-segment
(300
(1,969
1,364,233
1,340,960
649,552
(18)%
789,039
Nonferrous metals shipments (thousands of pounds)
270,978
(3)%
279,656
(18,343
(1,431
252,635
278,225
251,588
276,127
Mesabi Nugget shipments (metric tons) — intra-company
37,488
(37)%
59,685
Iron Dynamics (metric tons) — intra-company
57,122
(12)%
64,685
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 90% and 93% of this segment’s net sales during the first quarter of 2014 and 2013, respectively. Metals recycling operations sales were $880.6 million and $835.0 million, and operating income was $5.0 million and $19.5 million, during the first quarter 2014 and 2013, respectively.
Net sales for metals recycling increased 5% overall in the first quarter of 2014 when compared to the first quarter of 2013, as sales prices of ferrous metals increased 11% on 2% higher volumes, while nonferrous metals sales volumes decreased 3%, coupled with a 4% decrease in average selling prices. In spite of increased net sales, operating income for the first quarter of 2014 decreased 74% when compared to the first quarter of 2013, due to decreased metal margins in both ferrous – 6%, and nonferrous – 12% metals. The severe and prolonged winter weather hampered the flow of scrap metals during the first quarter of 2014 and increased operating and maintenance costs. Additionally, we incurred $2.6 million of costs associated with building damage related to excessive snow accumulation.
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 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 potential future iron mining operations, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 80% by us). The impact of losses from our Minnesota iron operations on first quarter 2014 net income was approximately $8.9 million, as compared to approximately $13.8 million during the first quarter of 2013. The iron nugget production facility utilizes a pioneering production process, which has experienced operational, quality control and production cost challenges. The facility commenced initial production of iron nuggets in 2010. We have continued to modify, re-engineer and further refine this production process and have changed or modified equipment configurations with resulting improvement in plant availability, production, and quality. Certain meaningful adjunct trials related to product yield and cost of production that began in the latter half of the fourth quarter of 2013 were scheduled to be completed during the first quarter of 2014. Due to the unanticipated severe winter weather, not all of these trials were able to be completed: however meaningful progress was made. The remaining trials are expected to be completed before the end of the second quarter of 2014. In the first quarter of 2014, Mesabi Nugget shipped 37,000 metric tons of iron-nuggets for use by our own steel mills, compared to 60,000 during the same period in 2013. Weather had a negative impact on our operations during the first quarter of 2014, limiting production and shipments, and increasing natural gas costs.
18
Steel Fabrication Operations
Our steel fabrication operations represent the company’s six 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 5% of our external net sales during the first quarter of 2014 and 2013, respectively.
Net sales for the steel fabrication operations segment increased 23% in the first quarter of 2014 compared to the first quarter of 2013, as volumes increased 22%. Our steel fabrication operations continue to increase market share with our expanded geographic footprint and penetration into new markets, and benefit from the improving demand in the non-residential construction industry.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations. During the first quarter of 2014 and 2013, the cost of steel products purchased represented 73% and 71%, respectively, of the total cost of manufacturing for our steel fabrication operations. The average cost of steel consumed increased in the first quarter of 2014, as compared to the same period in 2013, by $31 per ton.
Operating income for the steel fabrication segment of $3.0 million in the first quarter of 2014 more than doubled compared to the same period in 2013 due to the increased selling volumes and related cost compression, in addition to decreases in conversion costs realized from manufacturing efficiencies.
First Quarter Consolidated Results 2014 vs. 2013
Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing, and amortization of intangible assets) were $82.4 million during the first quarter of 2014, as compared to $80.0 million during the first quarter of 2013, comparable in that they represented 4.5% of our total net sales during each period.
Interest Expense, net of Capitalized Interest. During the first quarter of 2014, gross interest expense decreased $3.5 million to $31.9 million, and capitalized interest increased $538,000 to $1.3 million, when compared to the same period in 2013. The interest capitalized during these periods relates to construction activities at our various operating segments. The decrease in gross interest expense is due to refinancing activities during March/April of 2013 that reduced outstanding debt by $100.0 million and decreased the effective interest rate on $400.0 million of senior notes that were refinanced.
Income Taxes. During the first quarter of 2014, our income tax expense was $17.3 million with an effective tax rate of 33.9%, as compared to $21.4 million with an effective tax rate of 34.2% during the same period in 2013. First quarter 2014 income tax expense includes a benefit related to a change in Indiana’s corporate income tax rate which resulted in the reduction of our deferred income tax. The effective tax rate in the first quarter of 2013 includes a favorable adjustment related to 2012 research and development tax credits that were enacted into the tax code in January 2013.
19
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 primarily with cash provided by operations, long-term borrowings and issuances of common stock. Our liquidity at March 31, 2014 is as follows:
Revolver availability
1,086,264
Total liquidity
1,429,183
Working Capital. We used $27.2 million of cash flow in operating activities during the first quarter 2014, due to increased working capital requirements, based on increases in trade receivables and inventory, which used $89.0 and $17.4 million of cash, respectively, and decreases in accrued expenses, which utilized $48.3 million of cash. Accounts receivable increased primarily due to increased sales late in the first quarter of 2014, as compared to late in the fourth quarter of 2013, while days sales outstanding remained consistent. The increase in inventory is primarily the result of builds in steel segment work in process and finished goods inventory due to strong demand related production outpacing the shipments we were able to make during the difficult first quarter 2014 winter weather. This increase was partially offset by reductions in scrap and other raw material inventory used in production. Accrued expenses decreased primarily due to payments of 2013 accrued profit sharing and incentive compensation, as well as semiannual payments of interest on our senior notes.
Capital Investments. During the first three months of 2014, we invested $24.8 million in property, plant and equipment, as compared to $45.3 million during the same period in 2013. Approximately 50% of the 2014 capital investment related to announced growth or expansion projects at two of our steel mills, which are near completion. We estimate total capital expenditures for 2014 to be in the range of $125 million to $150 million.
Capital Resources and Long-term Debt.
During the first three months of 2014, our total outstanding debt of $2.1 billion remained relatively unchanged, decreasing by $8.8 million due to required payments. 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 interests, and our total stockholders’ equity) decreased to 44.3% at March 31, 2014, from 44.7% at December 31, 2013.
We have a senior secured credit facility (Facility) that matures in September 2016 which provides for a $1.1 billion 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, 2014, we had $1.1 billion of availability on the Revolver, excluding the $13.7 million of outstanding letters of credit and other obligations.
The Facility contains financial 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 leverage 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, 2014, our interest coverage ratio and net debt leverage ratio were 5.27:1.00 and 2.76:1.00, respectively. We were therefore in compliance with these covenants at March 31, 2014, and we anticipate we will continue to be in compliance during the remainder of the year.
Cash Dividends. As a reflection of confidence in our current and future strength regarding our cash flow generation ability and financial position, we increased our quarterly cash dividend by 5% to $0.115 per share (from $0.110 per share during 2013), resulting in declared cash dividends of $25.7 million during the first quarter of 2014. We paid cash dividends of $24.5 million and $22.0 million during the first three months of 2014 and 2013, respectively. Our board of directors, along with management, approves the payment of dividends on a quarterly basis. During the remainder of 2014, we anticipate maintaining our current level of quarterly dividends; however, the determination to pay cash dividends in the future is 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.
20
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 flows, 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 flows 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 2013 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 periods ended March 31, 2014 or 2013.
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 services, air products, fuel, and zinc. Certain commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 43 months for physical commodity requirements, for up to 7 years for commodity transportation requirements, and for up to 14 years for air products. 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, 2014, 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, 2013. 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 March 31, 2014, we had a cumulative unrealized gain associated with these financial contracts of $2.1 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, 2014. 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 March 31, 2014, 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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER 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 March 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. 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 purporting to be on behalf of indirect purchasers of steel products in Tennessee and has been consolidated with the original complaint. All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief. Following a period of discovery relating to class certification matters, plaintiffs’ motion for class certification filed in 2012, and briefing by both sides, the court, on March 5 – 7 and April 11, 2014, held a class certification hearing. At the conclusion of the hearing, the court took the class certification issue under advisement.
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.
ITEM 1A. RISK FACTORS
No material changes have occurred to the indicated risk factors as disclosed in our 2013 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 8, 2014
By:
/s/ Theresa E. Wagler
Theresa E. Wagler
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)