Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (see definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
(Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 30, 2015, Registrant had 242,123,707 outstanding shares of common stock.
STEEL DYNAMICS, INC.
Page
PART I. Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014
1
Consolidated Statements of Income for the three- and nine- month periods ended September 30, 2015 and 2014 (unaudited)
2
Consolidated Statements of Cash Flows for the three- and nine-month periods ended September 30, 2015 and 2014 (unaudited)
3
Notes to Consolidated Financial Statements (unaudited)
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
27
Item 4.
Controls and Procedures
PART II. Other Information
Legal Proceedings
28
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
29
Signatures
30
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
December 31,
2015
2014
(unaudited)
Assets
Current assets
Cash and equivalents
$
473,790
361,363
Accounts receivable, net
757,110
859,835
Accounts receivable-related parties
41,915
42,990
Inventories
1,321,397
1,618,419
Deferred income taxes
28,839
35,503
Other current assets
28,744
55,655
Total current assets
2,651,795
2,973,765
Property, plant and equipment, net
3,013,659
3,123,906
Restricted cash
19,621
19,312
Intangible assets, net
353,561
370,669
Goodwill
740,243
745,158
Other assets
63,662
78,217
Total assets
6,842,541
7,311,027
Liabilities and Equity
Current liabilities
Accounts payable
378,594
489,791
Accounts payable-related parties
7,776
21,265
Income taxes payable
14,246
6,086
Accrued payroll and benefits
95,150
128,968
Accrued interest
47,998
50,405
Accrued expenses
102,510
107,607
Current maturities of long-term debt
31,584
46,460
Total current liabilities
677,858
850,582
Long-term debt
Senior term loan
228,125
237,500
Senior notes
2,350,000
2,700,000
Other long-term debt
37,694
40,206
Total long-term debt
2,615,819
2,977,706
576,674
542,033
Other liabilities
16,405
18,839
Commitments and contingencies
Redeemable noncontrolling interests
126,340
Equity
Common stock voting, $.0025 par value; 900,000,000 shares authorized; 261,938,768, and 261,420,126 shares issued; and 242,090,224, and 241,449,423 shares outstanding, as of September 30, 2015 and December 31, 2014, respectively
636
635
Treasury stock, at cost; 19,848,544, and 19,970,703 shares, as of September 30, 2015 and December 31, 2014, respectively
(396,473
)
(398,898
Additional paid-in capital
1,104,832
1,083,435
Retained earnings
2,250,901
2,227,843
Total Steel Dynamics, Inc. equity
2,959,896
2,913,015
Noncontrolling interests
(130,451
(117,488
Total equity
2,829,445
2,795,527
Total liabilities and equity
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
Net sales
Unrelated parties
1,901,415
2,276,747
5,851,371
6,030,408
Related parties
49,508
62,269
151,994
208,451
Total net sales
1,950,923
2,339,016
6,003,365
6,238,859
Costs of goods sold
1,722,197
2,050,504
5,415,854
5,564,272
Gross profit
228,726
288,512
587,511
674,587
Selling, general and administrative expenses
82,371
80,240
241,381
223,745
Profit sharing
9,008
12,865
18,637
28,729
Amortization of intangible assets
6,318
6,764
19,134
20,633
Operating income
131,029
188,643
308,359
401,480
Interest expense, net of capitalized interest
37,084
31,904
117,334
92,523
Other expense, net
239
22,072
15,219
19,687
Income before income taxes
93,706
134,667
175,806
289,270
Income taxes
34,839
47,010
64,660
101,574
Net income
58,867
87,657
111,146
187,696
Net loss attributable to noncontrolling interests
1,750
3,516
11,782
14,359
Net income attributable to Steel Dynamics, Inc.
60,617
91,173
122,928
202,055
Basic earnings per share attributable to Steel Dynamics, Inc. stockholders
0.25
0.38
0.51
0.88
Weighted average common shares outstanding
242,074
240,087
241,836
229,772
Diluted earnings per share attributable to Steel Dynamics, Inc. stockholders, including the effect of assumed conversions when dilutive
0.85
Weighted average common shares and share equivalents outstanding
243,822
242,244
243,393
241,895
Dividends declared per share
0.1375
0.1150
0.4125
0.3450
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
74,211
65,957
221,306
181,966
Equity-based compensation
5,332
5,104
20,232
15,572
13,130
(3,417
46,214
(7,788
(Gain) loss on disposal of property, plant and equipment
655
(662
6,638
5,435
Changes in certain assets and liabilities:
Accounts receivable
36,361
30,955
122,296
(157,691
(8,763
27,212
317,410
21,088
(3,100
(4,928
8,794
2,776
(62,757
9,690
(127,075
28,116
Income taxes receivable/payable
19,888
8,062
29,309
22,491
Accrued expenses and liabilities
30,554
23,594
(47,973
(1,670
Net cash provided by operating activities
164,378
249,224
708,297
297,991
Investing activities:
Purchases of property, plant and equipment
(30,286
(24,531
(86,458
(82,906
Acquisition of business, net of cash acquired
(45,000
(1,647,463
Other investing activities
3,715
2,959
6,184
34,157
Net cash used in investing activities
(71,571
(1,669,035
(125,274
(1,696,212
Financing activities:
Issuance of current and long-term debt
67,999
1,394,497
179,033
1,501,895
Repayment of current and long-term debt
(73,420
(138,533
(561,428
(271,191
Debt issuance costs
—
(18,020
Exercise of stock options proceeds, including related tax effect
302
11,576
7,261
22,997
Contributions from noncontrolling investors, net
(17
(52
(1,181
4,712
Dividends paid
(33,282
(27,556
(94,281
(77,737
Net cash provided by (used in) financing activities
(38,418
1,221,912
(470,596
1,162,656
Increase (decrease) in cash and equivalents
54,389
(197,899
112,427
(235,565
Cash and equivalents at beginning of period
419,401
357,490
395,156
Cash and equivalents at end of period
159,591
Supplemental disclosure information:
Cash paid for interest
26,701
40,022
115,345
100,523
Cash paid (received) for federal and state income taxes, net
1,172
41,267
(10,321
86,418
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. Effective the third quarter 2015, the company changed its reportable segments, consistent with how it currently manages the business, representing three reporting segments: steel operations, metals recycling operations, and steel fabrication operations. Segment information provided within this Form 10-Q, including that within Note 10: Segment Information, has been adjusted for all prior periods consistent with the current reportable segment presentation.
Steel Segment Operations. Steel Segment Operations include the company’s Butler Flat Roll Division, Columbus Flat Roll Division (acquired September 16, 2014), The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia, and now, Iron Dynamics (IDI), a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. Steel operations accounted for 69% and 62% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015 and 2014, and 69% and 61% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014, respectively.
Metals Recycling Segment Operations. Metals recycling operations consist solely of OmniSource Corporation (OmniSource), the company’s metals recycling and processing locations, and ferrous scrap procurement operations. Metals recycling operations accounted for 18% and 26% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015, and 2014, and 19% and 27% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014, respectively.
Steel Fabrication Segment Operations. Steel fabrication operations include the company’s eight 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 approximately 9% and 8% of the company’s consolidated external net sales during the three-month periods ended September 30, 2015, and 2014, and 8% and 7% of the company’s consolidated external net sales during the nine-month periods ended September 30, 2015 and 2014, respectively.
Other. The “Other” category consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and several smaller joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.
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, 2014.
Note 1. Description of the Business and Significant Accounting Policies (Continued)
Goodwill. The company’s goodwill is allocated to the following reporting units at September 30, 2015, and December 31, 2014, (in thousands):
Metals Recycling Segment:
OmniSource
451,812
456,727
Butler Flat Roll Division, Structural and Rail Division, and Engineered Bar Division
95,000
Steel Segment:
The Techs
142,783
Roanoke Bar Division
29,041
Columbus Flat Roll Division
19,682
Fabrication Segment:
New Millennium Building Systems
1,925
OmniSource goodwill decreased $4.9 million from December 31, 2014 to September 30, 2015, in recognition of the 2015 tax benefit related to the amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.
Recently Issued Accounting Standards.
In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Because the guidance in ASC 606 is principles-based, it can be applied to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Additionally, ASC 606 requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. This guidance is effective for annual and interim periods beginning after December 15, 2017, but can be early adopted for annual and interim periods ending after December 15, 2016. The company is currently evaluating the impact of the provisions of ASC 606, including the timing of adoption.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern), effective for annual and interim periods ending after December 15, 2016. ASU 2014-15 requires management to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. There are required disclosures if principal conditions or events are identified that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans), as well as management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. This ASU is not expected to have any impact on our overall results of operations, financial position or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented as a deduction from the corresponding debt liability, rather than as a separate asset, which is the current accounting method of the company. This guidance is effective for annual and interim periods beginning after December 15, 2015, but can be early adopted. Upon adoption, the company must apply the new guidance retrospectively to all prior periods presented in the financial statements. The company is currently evaluating when, and the manner in which to adopt the presentation and disclosure requirements of the new guidance, however we do not expect it to have any impact on our overall results of operations, equity or cash flows as previously reported.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. This new guidance is effective for interim and annual periods beginning after December 15, 2016, but can be early adopted. The company is currently evaluating the impact of this ASU’s adoption.
Note 2. Acquisitions
Consolidated Systems, Inc.
On September 14, 2015, the company purchased from Consolidated Systems, Inc. (“CSi”) certain of its steel decking facilities (including associated assets) and net working capital of approximately $30 million, for a purchase price of $45 million in cash. Operating results of these facilities have been reflected in the company’s financial statements since the September 14, 2015, purchase date, in the fabrication operations reporting segment. The purchased assets include three decking facilities located in Memphis, Tennessee; Phoenix, Arizona; and Terrell, Texas. Producing both standard and premium specialty deck profiles, the new locations will allow for enhanced geographic reach into the southwestern and western markets, and further diversify New Millennium Building Systems’ product offerings.
5
Note 2. Acquisitions (Continued)
Severstal Columbus, LLC.
The company completed its acquisition of 100% of Severstal Columbus, LLC (Columbus) on September 16, 2014, for a purchase price of $1.625 billion, with additional working capital adjustments of $44.4 million. The acquisition was funded through the issuance of $1.2 billion in Senior Notes, borrowings under the company’s senior secured credit facility, and available cash. The company purchased Columbus to significantly expand and diversify its steel operating base with the addition of 3.4 million tons of hot roll steel production capacity. The product offerings are diversified with respect to width, gauge, and strength when compared to the capabilities of our Butler Flat Roll Division. Located in northeast Mississippi, Columbus is one of the newest and most technologically advanced sheet steel electric arc furnace mills in North America. Additionally, Columbus is advantageously located to serve the growing markets in the southern U.S. and Mexico, providing the company with geographic diversification and growth opportunities.
Unaudited Pro forma Information. Columbus’ operating results have been reflected in the company’s financial statements since the effective date of the acquisition, September 16, 2014, in the steel operations reporting segment. The following unaudited pro forma information is presented below for comparison purposes as if the Columbus acquisition was completed as of January 1, 2013, (in thousands):
September 30, 2014
7,838,681
298,731
The information presented is for information purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at January 1, 2013, nor is it necessarily indicative of future operating results of the combined companies under the ownership and management of the company. The pro forma results reflect the pre-acquisition operations of Columbus for the nine-month period ended September 30, 2014.
Note 3. Earnings Per Share
Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive stock options, restricted stock units, deferred stock units, and dilutive shares related to the company’s convertible subordinated debt; and are excluded from the computation in periods in which they have an anti-dilutive effect. There were no anti-dilutive options at September 30, 2015, and 2014.
The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three- and nine-month periods ended September 30, 2015 and 2014 (in thousands, except per share data):
Three Months Ended September 30,
Net Income (Numerator)
Shares (Denominator)
Per Share Amount
Basic earnings per share
Dilutive common share equivalents
1,748
2,157
Diluted earnings per share
Nine Months Ended September 30,
1,557
1,852
5.125% convertible senior notes, net of tax
4,327
10,271
206,382
6
Note 4. 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
559,996
764,883
Supplies
385,347
374,599
Work in progress
114,718
128,882
Finished goods
261,336
350,055
Total inventories
During the second quarter 2015, the company recorded an inventory lower-of-cost or market charge of $21.0 million (inclusive of noncontrolling interests of $3.6 million), related to the idling of its Minnesota ironmaking operations. The expense is recorded within cost of goods sold during the nine-months ended September 30, 2015.
Note 5. Debt
On March 16, 2015, the company called and repaid all $350.0 million of its outstanding 7 5/8% Senior Notes due 2020 (the “Notes”) at a redemption price of 103.813% of the principal amount of the Notes, plus accrued interest and unpaid interest to, but not including, the date of redemption. Associated premiums and the write off of deferred financing costs of approximately $16.7 million were recorded in other expense in conjunction with the redemption.
Note 6. Changes in Equity
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to stockholders of Steel Dynamics, Inc. and equity 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, 2015
7,454
7,455
Dividends declared
(99,802
Distributions to noncontrolling investors, net
13,943
(68
2,425
16,300
Comprehensive and net income (loss)
(11,782
Balances at September 30, 2015
7
Note 7. 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. 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, and silver). The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.
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 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 September 30, 2015 (MT represents metric tons and Lbs represents pounds):
Commodity Futures
Long/Short
Aluminum
Long
2,350
MT
Short
2,275
Copper
7,602
13,860
Silver
343
Lbs
The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of September 30, 2015, and December 31, 2014, and gains and losses related to derivatives included in the company’s statement of income for the three- and nine-month periods ended September 30, 2015, and 2014 (in thousands):
Asset Derivatives
Liability Derivatives
Fair Value
Balance sheet location
September 30, 2015
December 31, 2014
Derivative instruments designated as fair value hedges -
Commodity futures
614
3,180
2,410
913
Derivative instruments not designated as hedges -
1,635
2,132
1,019
626
Total derivative instruments
2,249
5,312
3,429
1,539
The fair value of the above derivative instruments, along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $1.8 million at September 30, 2015, and $7.6 million at December 31, 2014, are reflected in other current assets in the consolidated balance sheet.
Location of gain (loss) recognized
Amount of gain (loss) recognized in income on derivatives for the three months ended
Hedged items in
Location of gain (loss) recognized in income on
Amount of gain (loss) recognized in income on related hedged items for the three months ended
in income on derivatives
fair value hedge relationships
related hedged items
Derivatives in fair value hedging relationships -
(2,825
4,371
Firm commitments
662
784
Inventory
800
(4,163
1,462
(3,379
Derivatives not designated as hedging instruments -
6,707
2,672
8
Note 7. Derivative Financial Instruments (Continued)
Amount of gain (loss) recognized in income on derivatives for the nine months ended
Location of gain recognized in
Amount of gain recognized in income on related hedged items for the nine months ended
income on related hedged items
(4,063
3,356
1,518
1,115
1,291
(3,805
2,809
(2,690
13,377
8,598
Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $191,000 and $229,000 during the three-month periods ended September 30, 2015, and 2014, respectively; and a loss of $64,000 and gain of $227,000 during the nine-month periods ended September 30, 2015 and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $1.2 million reduced cost of goods sold during the three-month periods ended September 30, 2015, and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $439,000 reduced cost of goods sold during the nine-month periods ended September 30, 2015 and 2014, respectively.
Note 8. 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 on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of September 30, 2015, and December 31, 2014 (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 $2.6 billion and $3.1 billion (with a corresponding carrying amount in the consolidated balance sheets of $2.6 billion and $3.0 billion) at September 30, 2015, and December 31, 2014, respectively.
9
Note 9. 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 two other remaining steel manufacturing company defendants, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, originally against eight companies. The Complaint alleges a conspiracy on the part of the original defendants to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a specified 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. In addition, another similar complaint was filed in December 2010 purporting to be on behalf of indirect purchasers of steel products in Tennessee. All Complaints have been consolidated in the Chicago action and 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 filed a 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. Following a three-day hearing on the pending motion during March and April of 2014, the Court took the motion under advisement. On September 9, 2015, the Court certified the class, limited, however, to the issue of the alleged conspiracy, and denied class certification on the issue of antitrust impact. There will be additional merits discovery, but the extent thereof is currently being discussed. In the meantime, the defendants have appealed the court’s class certification ruling on the conspiracy issue, and Plaintiff has cross-appealed on the impact issue. Steel Dynamics has also filed a motion for summary judgment, as has co-defendant SSAB. 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 the Company’s financial condition, results of operations, or liquidity
10
Note 10. Segment Information
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 sales and any related profits are eliminated in consolidation. Effective the third quarter 2015, the company changed its reportable segments, consistent with how it currently manages the business, in three reporting segments: steel operations (includes Columbus since its September 16, 2014 acquisition), metals recycling operations, and steel fabrication operations. The segment operations are described in Note 1 to the financial statements. Amounts included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments. In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.
The company’s segment results for the three- and nine-month periods ended September 30, 2015, and 2014, each adjusted consistent with our current reportable segments presentation, are as follows (in thousands):
For the three months ended September 30, 2015
Steel Operations
Metals Recycling Operations
Steel Fabrication Operations
Other
Eliminations
Consolidated
Net Sales
External
1,285,459
294,357
173,047
78,802
1,831,665
External Non-U.S.
65,928
51,215
1,907
208
119,258
Other segments
56,146
270,888
4,209
(331,245
1,407,533
616,460
174,956
83,219
Operating income (loss)
124,712
(3,555
36,733
(28,401
)(1)
1,540
(2)
Income (loss) before income taxes
102,566
(6,967
35,108
(38,541
52,404
15,913
2,300
3,645
(51
Capital expenditures
21,975
6,286
935
1,090
30,286
As of September 30, 2015
4,096,188
1,588,821
372,673
898,772
(3)
(113,913
)(4)
Liabilities
676,097
309,191
84,379
2,923,253
(5)
(106,164
)(6)
3,886,756
Footnotes related to the three months ended September 30, 2015 segment results (in millions):
(1) Corporate SG&A
(9.5
Company-wide equity-based compensation
(5.3
(7.5
Minnesota operations
(4.1
Other, net
(2.0
(28.4
(2) Gross profit increase from intra-company sales
1.5
(3) Cash and equivalents
415.7
30.0
36.8
28.8
309.6
34.4
Intra-company debt
6.5
37.0
898.8
(4) Elimination of intra-company receivables
(100.8
Elimination of intra-company debt
(6.5
(6.6
(113.9
(5) Accounts payable
109.8
14.7
47.8
Accrued profit sharing
14.5
Debt
2,641.3
68.0
27.2
2,923.3
(6) Elimination of intra-company payables
(100.0
0.3
(106.2
11
Note 10. Segment Information (Continued)
For the three months ended September 30, 2014
Metals Recycling
1,400,370
534,348
189,993
99,834
2,224,545
50,841
63,300
330
114,471
75,321
355,835
43
36,544
(467,743
1,526,532
953,483
190,036
136,708
202,600
8,489
19,474
(42,960
1,040
187,072
3,863
17,877
(75,185
)(7)
35,265
18,769
2,974
9,000
12,506
7,769
477
3,779
24,531
As of September 30, 2014
4,663,142
1,842,485
315,381
929,041
(171,766
7,578,283
830,172
401,111
34,386
3,436,135
(161,510
4,540,294
Footnotes related to the three months ended September 30, 2014 segment results (in millions):
(12.4
(5.1
(11.6
(10.7
(3.2
(43.0
1.0
82.9
51.3
114.6
18.3
572.9
39.9
7.4
41.7
929.0
(155.6
(7.4
(8.8
(171.8
165.0
26.9
21.1
25.2
3,054.9
100.6
42.4
3,436.1
(161.5
(7) Includes $25.0 million of acquisition and bridge financing costs associated with the acquisition of Columbus.
12
For the nine months ended
Steel Fabrication
Operations
3,902,162
1,014,753
488,584
237,501
5,643,000
210,320
147,626
512
360,365
158,609
751,542
18
29,114
(939,283
4,271,091
1,913,921
490,509
267,127
338,690
229
85,754
(117,273
959
269,187
(12,780
80,581
(162,141
154,616
50,207
6,688
9,948
(153
52,324
17,332
2,506
14,296
86,458
Footnotes related to the nine months ended September 30, 2015 segment results (in millions):
(27.1
(17.5
(14.4
(50.3
(8.0
(117.3
3,675,696
1,522,334
440,706
261,992
5,900,728
158,218
178,947
966
338,131
188,854
1,024,447
70,798
(1,284,142
4,022,768
2,725,728
440,749
333,756
469,204
27,362
30,190
(129,260
3,984
426,676
12,394
25,628
(179,412
)(3)
96,010
56,898
7,597
21,615
(154
48,209
16,242
1,324
17,131
82,906
Footnotes related to the nine months ended September 30, 2014 segment results (in millions):
(31.7
(25.2
(49.8
(8.2
(129.3
4.0
(3) Includes $25.0 million of acquisition and bridge financing costs associated with the acquisition of Columbus.
13
Note 11. Condensed Consolidating Information
Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior unsecured notes due 2019, 2021, 2022, 2023 and 2024. 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, which includes Columbus since acquired on September 16, 2014, (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, 2014.
Condensed Consolidating Balance Sheets (in thousands)
Combined
Consolidating
Parent
Guarantors
Non-Guarantors
Adjustments
410,170
52,752
10,868
235,529
1,199,733
40,496
(676,733
799,025
613,697
673,646
36,150
(2,096
61,961
11,830
1,150
(17,358
57,583
1,321,357
1,937,961
88,664
(696,187
966,388
1,754,945
294,388
(2,062
Other assets, including investments in subs
3,570,277
22,075
6,454
(3,515,523
83,283
5,858,022
4,808,785
389,506
(4,213,772
122,112
273,957
79,370
(89,069
386,370
156,735
186,923
5,681
(89,435
259,904
13,109
700
57,253
(39,478
291,956
461,580
142,304
(217,982
2,582,524
347
163,728
(130,780
23,645
1,505,018
34,545
(970,129
593,079
Common stock
1,727,859
18,121
(1,745,980
Treasury stock
Additional paid-in-capital
1,104,833
117,737
650,858
(768,596
Retained earnings (deficit)
996,244
(615,939
(380,305
2,959,897
2,841,840
53,040
(2,894,881
(77,411
14
Note 11. Condensed Consolidating Information (Continued)
As of December 31, 2014
265,313
81,690
14,360
321,493
1,176,849
44,696
(640,213
902,825
662,970
862,796
94,916
(2,263
94,634
8,416
6,577
(18,469
91,158
1,344,410
2,129,751
160,549
(660,945
1,002,407
1,826,208
297,505
(2,214
3,900,691
24,810
6,635
(3,834,607
97,529
6,247,508
5,096,596
464,689
(4,497,766
151,517
371,037
98,886
(110,384
511,056
191,433
166,101
11,695
(76,163
293,066
13,073
777
73,767
(41,157
356,023
537,915
184,348
(227,704
2,942,360
624
158,665
(123,943
36,110
1,807,989
28,719
(1,311,946
560,872
635,156
(752,893
904,472
(569,172
(335,300
2,750,068
84,105
(2,834,173
(33,383
15
Condensed Consolidating Statements of Operations (in thousands)
For the three months ended,
735,250
2,103,824
96,204
(984,355
619,833
1,965,364
99,864
(962,864
Gross profit (loss)
115,417
138,460
(3,660
(21,491
Selling, general and administrative
35,235
64,259
2,845
(4,642
97,697
80,182
74,201
(6,505
(16,849
18,312
18,138
1,692
(1,058
Other (income) expense, net
252
(631
(440
1,058
Income (loss) before income taxes and equity in net loss of subsidiaries
61,618
56,694
(7,757
Income taxes (benefit)
20,169
21,697
(421
(6,606
41,449
34,997
(7,336
(10,243
Equity in net loss of subsidiaries
19,168
(19,168
Net income (loss) attributable to Steel Dynamics, Inc.
(5,586
(29,411
1,044,207
2,609,731
150,551
(1,465,473
856,372
2,469,396
162,094
(1,437,358
187,835
140,335
(11,543
(28,115
40,932
59,878
3,601
(4,542
99,869
146,903
80,457
(15,144
(23,573
18,965
12,238
1,958
(1,257
22,548
(202
(1,530
1,256
Income (loss) before income taxes and equity in net income of subsidiaries
105,390
68,421
(15,572
(23,572
30,605
24,754
(561
74,785
43,667
(15,011
(15,784
16,388
(16,388
(11,495
(32,172
16
For the nine months ended,
2,300,024
6,447,974
302,657
(3,047,290
1,982,667
6,056,514
352,980
(2,976,307
317,357
391,460
(50,323
(70,983
95,883
188,028
8,878
(13,637
279,152
221,474
203,432
(59,201
(57,346
57,015
58,354
5,084
(3,119
15,131
(597
(2,434
3,119
149,328
145,675
(61,851
35,207
53,903
(4,047
(20,403
114,121
91,772
(57,804
(36,943
8,807
(8,807
(46,022
(45,750
2,915,339
7,035,579
377,639
(4,089,698
2,477,791
6,668,153
427,029
(4,008,701
437,548
367,426
(49,390
(80,997
105,185
170,578
10,415
(13,071
273,107
332,363
196,848
(59,805
(67,926
57,357
33,093
5,824
(3,751
20,016
147
(4,226
3,750
254,990
163,608
(61,403
(67,925
64,480
58,772
949
(22,627
190,510
104,836
(62,352
(45,298
11,545
(11,545
(47,993
(56,843
17
Condensed Consolidating Statements of Cash Flows (in thousands)
Net cash provided by (used in) operating activities
306,941
400,910
(4,302
4,748
(35,100
(82,737
(12,796
5,359
(126,984
(347,111
13,606
(10,107
144,857
(28,938
(3,492
258,952
80,298
(41,245
(14
Net cash provided by (used in) investing activities
(1,692,967
15,023
(16,740
(1,528
1,188,074
(85,774
58,814
1,542
(245,941
9,547
829
320,866
61,148
13,142
74,925
70,695
13,971
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap 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, incorporated in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve both known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of uncertain economic conditions; (2) cyclical and changing industrial demand; (3) changes in conditions in any of the steel or scrap-consuming sectors of the economy which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials (including ferrous scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses; (7) risks and uncertainties involving product and/or technology development; and (8) occurrences of unexpected plant outages or equipment failures.
More specifically, we refer you to our more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth in our most recent Annual Report on Form 10-K for the year ended December 31, 2014, in our quarterly reports on Form 10-Q or in other reports which we from time to time file with the Securities and Exchange Commission. These reports are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on our website, www.steeldynamics.com.
We are a domestic manufacturer of steel products and metals recycler. We have three reporting segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.
Segment Operations. Effective the third quarter 2015, the company changed its reportable segments, consistent with how we currently manage our business, representing three reporting segments: steel operations, metals recycling operations, and steel fabrication operations. Segment information provided within this Form 10-Q has been adjusted for all prior periods consistent with the current reportable segment presentation.
Steel Segment Operations include the company’s Butler Flat Roll Division, Columbus Flat Roll Division (acquired September 16, 2014), The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia, and now, Iron Dynamics (IDI), a liquid pig iron production (scrap substitute) facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities. Metals Recycling Segment Operations consist solely of OmniSource Corporation (OmniSource), the company’s metals recycling and processing locations, and ferrous scrap procurement operations. Steel Fabrication Segment Operations include the company’s eight 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. The “Other” category consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and several joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.
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 methodology based on steel tons used on completed units to date as a percentage of estimated total steel tons 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 income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs, such as acquisition and certain financing expenses.
Results Overview
Consolidated operating income decreased $57.6 million, or 31%, to $131.0 million for the third quarter of 2015, compared to $188.6 million for the third quarter of 2014. Third quarter of 2015 net income decreased $30.6 million, or 34%, to $60.6 million, from $91.2 million for the third quarter of 2014.
For the first nine months of 2015, operating income decreased $93.1 million, or 23%, to $308.4 million compared to the same period of 2014, while net income decreased $79.1 million, or 39%, to $122.9 million.
Our third quarter 2015 and first nine months 2015 operational and financial performance was negatively impacted by decreased steel shipments (excluding the impact of Columbus for the 2015 periods) and average realized steel product pricing, driven primarily by continuing excessive and historically high levels of steel imports. While scrap costs also decreased significantly in the first quarter of 2015 and remained at lower levels during the second and third quarters of 2015, steel metal margins contracted as the drop in steel selling prices was more severe than the decline of scrap costs. Underlying domestic steel consumption remains steady, as we continue to see improvements in non-residential construction, as well as, steady consumption in automotive and other manufacturing segments. However, a larger portion of the domestic steel demand is being served by imports in 2015 than in 2014. As a result, domestic steel mill utilization rates have decreased throughout 2015, as compared to 2014, resulting in decreased ferrous scrap shipments in our metals recycling operations. These decreased ferrous, as well as nonferrous shipments, along with compressed metal margins due to price volatility, resulted in significantly reduced profitability in our metals recycling operations in 2015, as compared to 2014. During 2015, our steel fabrication operations continue to benefit from the improving non-residential construction market, our market share and expanding geographic footprint, and lower steel raw material costs, resulting in significant increases in both sales and operating income, compared to the same periods in 2014.
Segment Operating Results 2015 vs. 2014 (dollars in thousands)
Second
Quarter
Sequential
% Change
Quarter % Change
Net sales:
Steel Segment
(8
)%
1,429,237
(2
%
Metals Recycling Segment
(35
645,449
(4
(30
Steel Fabrication Segment
154,525
(39
90,308
(20
2,282,168
2,806,759
2,319,519
6,942,648
7,523,001
Intra-company
(314,512
2,005,007
(3
Operating income (loss):
(38
99,012
26
(28
(142
8,282
(143
(99
89
27,660
33
184
34
(52,969
46
129,489
187,603
81,985
307,400
397,496
(4,426
(31
77,559
69
(23
20
Steel Segment Operations
Steel Segment Operations. Steel Operations consist of our six electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and eight downstream coating facilities, and IDI, our liquid pig production facility that supplies solely our Butler Flat Roll Division. 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, industrial machinery, pipe and tube and energy markets. Steel operations accounted for 69% and 62% of our consolidated external net sales during the third quarter of 2015 and 2014, and 69% and 61% of our consolidated external net sales during the first nine months of 2015 and 2014, respectively.
Sheet Products. Our sheet operations consist of our Butler Flat Roll Division (Butler), Columbus Flat Roll Division — acquired September 16, 2014 (Columbus), and our downstream coating facilities, including The Techs. These operations sell a broad range of sheet steel products, such as hot roll, cold roll and coated steel products, including a wide variety of specialty products, such as light gauge hot roll and galvanized. Butler sells other products such as Galvalume® and painted products, while Columbus sells other products used to produce high strength OCTG and non-energy line pipe. The Techs is comprised of three galvanizing lines which sell 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, merchant rounds, flats and channels, and reinforcing bar. Steel of West Virginia primarily sells beams, channels and specialty steel sections.
Steel Operations Shipments (tons):
Shipments:
Butler Flat Roll Division
637,289
738,460
721,115
(12
1,937,897
(10
2,158,200
712,992
308
174,754
693,772
1,971,005
1,028
190,130
(7
205,417
182,239
518,303
(6
550,588
Sheet products
1,540,411
38
1,118,631
1,597,126
4,427,205
54
2,883,542
Structural and Rail Division
306,073
(16
365,900
302,250
912,675
994,596
Engineered Bar Products Division
132,901
(25
176,891
120,559
409,826
473,962
130,314
(15
153,395
140,795
396,232
440,760
Steel of West Virginia
81,505
85,226
81,678
236,694
235,681
Long products
650,793
781,412
645,282
1,955,427
(9
2,144,999
Total shipments
2,191,204
1,900,043
2,242,408
6,382,632
5,028,541
Intra-segment shipments
(56,836
(62,201
(62,417
(175,347
(165,639
Segment shipments
2,134,368
1,837,842
2,179,991
6,207,285
4,862,902
External shipments
2,031,096
1,728,023
2,078,685
5,926,152
4,585,478
21
Shipments and Average Selling Price
The 16% increase in steel segment shipments in the third quarter 2015 over those in the same 2014 period was due to Columbus having a full quarter of sales in the third quarter of 2015 versus only a half month in the third quarter of 2014 from the acquisition date of September 14, 2014. Though overall domestic steel demand remains solid, the continued elevated level of steel imports has been a significant negative impact to our sales volumes, product pricing, and steel mill utilization rates. Our average steel mill utilization rate was 82% for the third quarter of 2015, as compared to 90% in the third quarter of 2014. Steel shipments, excluding Columbus, decreased 14% in the third quarter 2015 compared to the third quarter 2014, due primarily to the continued historically high levels of steel being imported into the United States, with commodity-grade hot roll steel products being the most severely impacted. The elevated level of steel imports has continued to also compress steel selling prices. This along with significant reductions in the cost of scrap resulted in our third quarter 2015 average steel product selling prices decreasing $172 per ton, or 21%, compared to the same quarter in 2014. Despite the overall increase in steel segment shipments with Columbus, net sales decreased 8% in the third quarter of 2015, when compared to the third quarter of 2014 due to the significant drop in selling prices.
Net sales for the steel segment increased 6% in the first nine months of 2015, when compared to the first nine months of 2014, as a 28% increase in segment shipments more than offset a decrease of $139 per ton, or16%, in average selling prices. The decrease in average selling prices is due to the elevated level of imported steel into the United States and the significant reductions in the cost of scrap, which has also caused uncertainty for steel consumers. The increase in steel segment shipments is due to the inclusion of Columbus in the first nine months of 2015 results, as sales volumes in 2015, excluding Columbus, are down 9% compared to the first nine months of 2014, due primarily to elevated steel imports to date during 2015.
Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost. During the third quarter 2015 and 2014, our metallic raw material costs represented 55% and 65%, respectively, of our steel operations’ manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes. Our metallic raw material cost per net ton consumed in our steel operations decreased $104, or 29%, in the third quarter of 2015, compared with the third quarter of 2014, consistent with overall declines in scrap market pricing. In the first nine months of 2015, our metallic raw material cost per net ton consumed decreased $95, or 26%, compared to the same period in 2014.
In spite of decreased raw material cost per ton, third quarter 2015 metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed) contracted significantly compared to the third quarter of 2014, as decreases in product selling prices outpaced decreased raw material costs. Thus, despite increases in shipments from the inclusion of Columbus for the full third quarter 2015 versus only a half month in the third quarter 2014, operating income for the steel segment decreased 38%, to $124.7 million, compared to the same period of 2014. Likewise, first nine months 2015 operating income decreased 28%, to $338.7 million, compared to the first nine months of 2014.
Metals Recycling Segment Operations
Metals Recycling Segment Operations. The Metals Recycling segment consists solely of OmniSource, our metals recycling, processing, and ferrous scrap procurement operations. OmniSource sells 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 segment operations accounted for 18% and 26% of our consolidated net sales in the third quarter of 2015 and 2014, respectively, and 19% and 27% of our net sales in the first nine months of 2015 and 2014, respectively.
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Metals Recycling Operations Shipments:
Ferrous metal (gross tons)
1,354,339
1,453,671
1,357,755
3,945,095
4,240,901
Inter-company
(803,263
(673,640
(731,491
(2,125,675
(2,042,272
551,076
(29
780,031
626,264
1,819,420
2,198,629
Nonferrous metals (thousands of pounds)
287,898
325,436
275,439
823,240
884,647
(26,826
(31,478
(22,166
(67,315
(68,830
261,072
(11
293,958
253,273
755,925
815,817
Metals recycling operations net sales decreased 35% in the third quarter of 2015 as compared to the third quarter of 2014. Ferrous shipments decreased 7% in the third quarter of 2015, due primarily to reduced domestic steel mill utilization, caused by elevated steel imports in 2015. Nonferrous shipments also decreased 12%. Both ferrous and nonferrous selling prices decreased significantly during the third quarter of 2015, as compared to the same period in 2014, consistent with the overall decline in scrap commodity market and index prices. Ferrous selling prices declined 35%, while nonferrous declined 24% overall. As a result of these decreased selling prices which outpaced decreases in procurement costs, ferrous metal spreads in the third quarter 2015 decreased 14% compared to third quarter 2014, while nonferrous metal spreads decreased 23%. The declines in shipments and metal spreads resulted in third quarter 2015 operating loss of $3.6 million, as compared to operating income of $8.5 million for the same period in 2014.
Metals recycling operations net sales decreased 30% in the first nine months of 2015 as compared to the first nine months of 2014. Ferrous shipments decreased 7% in the first nine months of 2015, compared to the same period in 2014, due to reduced domestic steel mill utilization, caused by elevated steel imports in 2015. Nonferrous shipments decreased 7%. Similarly, both ferrous and nonferrous selling prices decreased significantly during the first nine months of 2015, as compared to the same 2014 period, consistent with overall decline in market selling prices. Ferrous selling prices declined by 32% while nonferrous declined 14% overall. As a result of reduced selling prices, metal spreads for ferrous and nonferrous materials contracted 9% and 20%, respectively, during the first nine months of 2015, when compared to the same period in 2014. These declines in shipments and metal spreads resulted in operating income in the first nine months of 2015 decreasing $27.1 million, or 99%, to $229,000, compared to the first nine months of 2014.
Steel Fabrication Segment Operations
Steel Fabrication Segment Operations consist of our eight 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 9% and 8% of our consolidated net sales during the third quarter of 2015 and 2014, and 8% and 7% of the company’s consolidated net sales during the first nine months of 2015 and 2014, respectively.
On September 14, 2015, the company purchased from Consolidated Systems, Inc. (“CSi”) certain of its steel decking facilities (including associated assets) and net working capital of approximately $30 million, for a purchase price of $45 million in cash. Operating results of these facilities have been reflected in the Steel Fabrication Operations financial statements since the September 14, 2015, purchase date. The purchased assets include three decking facilities located in Memphis, Tennessee; Phoenix, Arizona; and Terrell, Texas. Producing both standard and premium specialty deck profiles, the new locations will allow for enhanced geographic reach into the southwestern and western markets, and further diversify Steel Fabrication Operation’s product offerings.
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Sales Volumes and Average Selling Price
Net sales for the steel fabrication segment operations decreased $15.1 million, or 8%, in the third quarter of 2015, compared to the third quarter of 2014. Shipments decreased 10% while average selling prices increased 3% in the third quarter of 2015, as compared to the same period in 2014. While there continues to be a positive trend in the non-residential construction market, and order entry remains strong, our sales volumes in the third quarter 2015 were below those of the same 2014 period as we were able to maintain relatively stable selling prices. Net sales for the segment increased $49.8 million, or 11%, in the first nine months of 2015, compared to the first nine months of 2014, as volumes increased 2% and selling prices increased 9%. Our steel fabrication operations continue to realize strength in order activity and resulting shipments and selling prices, as we leverage our national operating footprint and market demand continues to improve.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations generally representing more than two-thirds of the total cost of manufacturing for our steel fabrication operations. The average cost of steel consumed decreased by 20% in the third quarter of 2015, as compared to the same period in 2014, and coupled with 3% higher selling prices resulted in significantly expanded metal spreads. Likewise, during the first nine months of 2015 the average cost of steel consumed decreased by 11%, as compared to the same period in 2014, coupled with a 9% increase in average selling prices.
As a result of the increased selling prices and metal spread expansion, operating income of $36.7 million in the third quarter 2015 was 89% higher than the same period in 2014 of $19.5 million. Similarly, segment operating income of $85.8 million in the first nine months of 2015 increased 184%, from $30.2 million in the first nine months of 2014.
Other Operations
Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations, which were indefinitely idled in May 2015, and several joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses. Prior to being indefinitely idled, our Minnesota ironmaking operations experienced operating losses. In addition, upon deciding to idle the Minnesota ironmaking operations and to monetize existing raw material inventory, we recorded an inventory lower-of-cost or market charge of $21.0 million (inclusive of noncontrolling interests of $3.6 million), in cost of goods sold in the second quarter 2015. Operating losses associated with our Minnesota ironmaking operations have been significantly curtailed post-idling.
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Third Quarter Consolidated Results 2015 vs. 2014
Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) of $97.7 million during the third quarter of 2015, are comparable to $99.9 million during the third quarter of 2014, representing approximately 5.0% and 4.3% of net sales, respectively.
Interest Expense, net of Capitalized Interest. During the third quarter of 2015, interest expense increased $5.2 million to $37.1 million, when compared to the same period in 2014. The increase in interest expense is due primarily to the addition of the $1.2 billion senior notes in September 2014, in conjunction with our acquisition of Columbus, partially offset by the call of our $350.0 million 7 5/8% Senior Notes due 2020 in March 2015.
Other Expense, net. During the third quarter of 2015, net other expense of $239,000 was $21.8 million less than net other expense of $22.1 million in the same period in 2014, which included $25.0 million of acquisition and financing costs associated with the September 2014, acquisition of Columbus.
Income Taxes. During the third quarter of 2015, our income tax expense was $34.8 million at an effective income tax rate of 37.2%, as compared to $47.0 million resulting in an effective income tax rate of 34.9% during the third quarter of 2014. The effective tax rate in the third quarter of 2014 is lower due primarily to certain favorable discrete tax adjustments recorded during the quarter.
First Nine Months Consolidated Results 2015 vs. 2014
Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) of $279.2 million during the first nine months of 2015, are comparable to $273.1 million during the first nine months of 2014, representing approximately 4.6% and 4.4% of net sales, respectively.
Interest Expense, net of Capitalized Interest. During the first nine months of 2015, interest expense increased $24.8 million to $117.3 million, when compared to the same period in 2014. The increase in interest expense is due primarily to the addition of the $1.2 billion senior notes in September 2014, in conjunction with our acquisition of Columbus, partially offset by the conversion or payoff at maturity of $287.5 million of 5.125% convertible notes in June 2014, and the call of our $350.0 million 7 5/8% Senior Notes due 2020 in March 2015.
Other Expense, net. During the first nine months of 2015, net other expense of $15.2 million included $16.7 million of call premium and other financing costs associated with the March 2015 senior notes call and prepayment. Net other expense of $19.7 million in the first nine months of 2014 included $25.0 million of acquisition and financing costs associated with our September 2014 Columbus acquisition.
Income Taxes. During the first nine months of 2015, our income tax expense was $64.7 million at an effective income tax rate of 36.8%, as compared to $101.6 million resulting in an effective income tax rate of 35.1% during the first nine months of 2014. The higher effective tax rate in the first nine months of 2015 is due primarily to the impact on the effective tax rate of higher proportional (to pretax income) noncontrolling interest losses in the first nine months of 2015 as compared to the same period in 2014, as well as certain more significant favorable discrete tax adjustments in the first nine months of 2014.
Liquidity and Capital Resources
Capital Resources and Long-term Debt. 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 working capital requirements, capital expenditures, principal and interest payments related to our outstanding indebtedness, dividends to our shareholders, and acquisitions. We have met these liquidity requirements primarily with cash provided by operations, long-term borrowings and availability under our Revolver. Our liquidity at September 30, 2015 is as follows (in thousands):
Revolver availability
1,187,165
Total liquidity
1,660,955
Our total outstanding debt decreased $376.8 million during the first nine months of 2015, to $2.6 billion, due primarily to our March 2015 call and prepayment of $350.0 million in 75/8 % senior notes due 2020. As a result, 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 47.2% at September 30, 2015, from 50.9% at December 31, 2014.
25
We have a senior secured credit facility (Facility) that matures in November 2019 which provides for a $1.2 billion Revolver along with a term loan facility. Subject to certain conditions, we also have the ability to increase the combined facility size by a minimum of $750 million. The Facility contains financial and other covenants pertaining to our ability (which may under certain circumstances be limited) 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. At September 30, 2015, we had $1.2 billion of availability on the Revolver, $12.8 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.
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, less amortization of financing fees. In addition, a net debt (as defined in the Facility) to consolidated LTM adjusted EBITDA (net debt leverage ratio) of not more than 5.00:1.00 must be maintained. If the net debt leverage ratio exceeds 3.50:1:00 at any time, our ability to make certain payments as defined in the Facility (which includes cash dividends to stockholders and share purchases, among other things), is limited. At September 30, 2015, our interest coverage ratio and net debt leverage ratio were 5.45:1.00 and 2.58:1.00, respectively. We, were therefore, in compliance with these covenants at September 30, 2015, and we anticipate we will continue to be in compliance during 2015.
Working Capital. We generated cash flow from operations of $708.3 million in the first nine months of 2015. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) decreased $234.8 million, after considering the September 2015 decking asset acquisition which included $30.0 million of working capital, during the first nine months of 2015, to $1.5 billion. Amounts invested in accounts receivable and inventories, net of accounts payable, decreased $276.1 million in conjunction with a decrease in sales and production volume and a significant decrease in the cost of scrap and steel when compared to the fourth quarter of 2014.
Capital Investments. During the first nine months of 2015, we invested $86.5 million in property, plant and equipment, as compared to $82.9 million during the same period in 2014. Our current estimated 2015 annual cash allocation plan includes the investment of approximately $120 million in capital expenditures in our existing and announced operations.
Cash Dividends. As a reflection of confidence in our current and future cash flow generation ability and financial position, we increased our quarterly cash dividend by 20% to $0.1375 per share in the first quarter 2015 (from $0.115 per share previously), resulting in declared cash dividends of $99.8 million during the first nine months of 2015, compared to $80.9 million during the first nine months of 2014. We paid cash dividends of $94.3 million and $77.7 million during the first nine months of 2015 and 2014, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis. 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 credit facility 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 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 Revolver through its term, which expires in November 2019, 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 any future 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 evolve and change, and we may become subject to more stringent environmental laws and regulations in the future, such as the impact of U.S. 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 2014 Annual Report on Form 10-K.
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 occasionally use interest rate swaps to manage net exposure to interest rate changes related to our portfolio of borrowings. We did not have any interest rate swaps during the periods ended September 30, 2015 or 2014.
Commodity Risk
In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of our products and to the purchase of raw materials used in our operations, such as metallic raw materials, electricity, natural gas and its transportation services, fuel, air products, 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 some commodities such as electricity, natural gas and its transportation services, fuel, air products, 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 25 months for physical commodity requirements, for up to 5 years for commodity transportation requirements, and for up to 13 years for air products. 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 also purchase electricity consumed at our Butler Flat Roll Division pursuant to a contract which extends through December 2015. 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.
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 vendor. At September 30, 2015, we had a cumulative unrealized loss associated with these financial contracts of $1.2 million, substantially all of which have a settlement date within the next twelve months. We believe the customer contracts associated with the financial contracts will be fully consummated.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. 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 September 30, 2015, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
(b) Changes in Internal Controls Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2015, 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, none of which are expected to have a material impact on our financial condition, results of operations, or liquidity.
We are involved, along with two other remaining steel manufacturing company defendants, in a class action antitrust complaint filed in federal court in Chicago, Illinois in September 2008, originally against eight companies. The Complaint alleges a conspiracy on the part of the original defendants to fix, raise, maintain and stabilize the price at which steel products were sold in the United States during a specified 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. In addition, another similar complaint was filed in December 2010 purporting to be on behalf of indirect purchasers of steel products in Tennessee. All Complaints have been consolidated in the Chicago action and seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.
ITEM 1A. RISK FACTORS
No material changes have occurred to the indicated risk factors as disclosed in our 2014 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
The information required to be furnished pursuant to Item 4 concerning mine safety disclosure matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Executive Officer Certifications
31.1*
Certification of Principal Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95*
Mine Safety Disclosures.
XBRL Documents
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Document
101.LAB*
XBRL Taxonomy Extension Label Document
101.PRE*
XBRL Taxonomy Presentation Document
101.DEF*
XBRL Taxonomy Definition Document
* Filed concurrently herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 6, 2015
By:
/s/ Theresa E. Wagler
Theresa E. Wagler
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)