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STLD > SEC Filings for STLD > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for STEEL DYNAMICS INC

Form 10-Q for STEEL DYNAMICS INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains some predictive statements about future events, including statements related to conditions in domestic and global economies, conditions in the steel and recycled metals marketplaces, our revenue, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements are intended to be made as "forward-looking," subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Such predictive statements are not guarantees of future performance, and actual results could differ materially from our current expectations. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of a recurrent recession on industrial demand; (2) changes in economic conditions, either generally or in any of the steel or scrap-consuming sectors which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, and other steel-consuming industries; (3) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (4) the impact of domestic and foreign import price competition; (5) risks and uncertainties involving product and/or technology development; and (6) occurrences of unexpected plant outages or equipment failures.

More specifically, we refer you to the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the year ended December 31, 2011, as well as in other reports which we file with the Securities and Exchange Commission, for a more detailed discussion of some of the many factors, variable risks and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated. These reports are available publicly on the SEC web site, www.sec.gov, and on our web site, www.steeldynamics.com. Forward-looking or predictive statements we make are based upon information and assumptions, concerning our businesses and the environments in which they operate, which we consider reasonable as of the date on which these statements are made. Due to the foregoing risks and uncertainties however, as well as, matters beyond our control which can affect forward-looking statements, you are cautioned not to place undue reliance on these predictive statements, which speak only as of the date of this report. We undertake no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Operating Statement Classifications

Net Sales. Net sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of the steel products. Except for our steel fabrication operations segment, we recognize revenue from sales and the allowance for estimated costs associated with returns from these sales at the time the title of the product is transferred to the customer. Provision is made for estimated product returns and customer claims based on estimates and actual historical experience. Net sales from steel fabrication operations are recognized from construction contracts utilizing a percentage-of-completion method, which is based on the percentage of steel consumed to date as compared to the estimated total steel required for each contract.

Costs of Goods Sold. Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel, direct and indirect labor and related benefits, alloys, zinc, transportation and freight, repairs and maintenance, utilities (most notably electricity and natural gas), and depreciation.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and related benefits, professional services, insurance premiums, property taxes, profit sharing, and amortization of intangible and other assets.

Interest Expense, net of Capitalized Interest. Interest expense consists of interest associated with our senior credit facilities and other debt net of interest costs that are required to be capitalized during the construction period of certain capital investment projects.

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


Table of Contents

Overview

Net income was $12.8 million, or $0.06 per diluted share, during the third quarter of 2012, compared with net income of $43.3 million, or $0.19 per diluted share, during the third quarter of 2011, and net income of $44.5 million, or $0.20 per diluted share, during the second quarter of 2012. Our net sales decreased $350.1 million, or 17%, to $1.7 billion in the third quarter of 2012 versus the third quarter of 2011, while net sales decreased $216.4 million, or 11%, versus the second quarter of 2012. Our gross profit percentage was 9% during the third quarter of 2012 as compared to 10% for both the third quarter of 2011, and the second quarter of 2012.

Third quarter 2012 external steel shipments decreased 5% as compared to the third quarter of 2011 (with total sheet products shipments decreasing 7% and long products shipments decreasing 1%), and metals recycling external ferrous metals shipments decreased 9% and nonferrous external shipments decreased 10%. Conversely, steel fabrication external shipments increased 24% in the third quarter of 2012 compared to the same period in 2011. Operating income decreased 33% in the third quarter 2012, as compared to the same period in 2011, as steel sales volumes were down and gross margins were compressed, particularly in our steel operations long products divisions. The average external selling price per ton shipped for the company's steel operations decreased $88 per ton in the third quarter of 2012, compared to the prior year third quarter, while the average ferrous scrap cost per ton melted decreased $67 for the same comparative period.

Looking at the third quarter of 2012 as compared to the second quarter of 2012, steel operations and metals recycling ferrous external shipments decreased 8%, while metals recycling external nonferrous shipments decreased 5%. Conversely, steel fabrication continued its trend of increasing external shipments, showing a 3% sequential quarter gain. Consolidated quarterly operating income decreased 30% sequentially due primarily to decreased volume and margins within our steel operations. Despite lower volumes and selling values within our metals recycling operations, ferrous metal spreads expanded 23%, while nonferrous margins remained consistent in the third quarter of 2012 as compared to the same 2011 quarter. These factors caused overall metals recycling metal margins to increase 18% resulting in an $11.5 million increase in metals recycling operating income in the third quarter of 2012, as compared to the second quarter of 2012.

Segment Operating Results 2012 vs. 2011 (dollars in thousands)



                             Three Months Ended              Second      Sequential             Nine Months Ended
                                September 30,                Quarter      Quarter                 September 30,
                                     %                                       %                         %
                        2012       Change       2011          2012         Change         2012       Change       2011

Net sales:
Steel                $ 1,099,506      (14 )% $ 1,277,864   $ 1,260,223          (13 )% $ 3,594,208       (7 )% $ 3,854,340
Metals recycling
and ferrous
resources                790,368      (25 )%   1,059,257       920,456          (14 )%   2,821,944      (13 )%   3,245,543
Steel fabrication        102,442       23 %       83,110        95,767            7 %      273,105       38 %      197,724
Other                     22,273      (19 )%      27,346        20,390            9 %       66,754      (21 )%      84,264
                       2,014,589               2,447,577     2,296,836                   6,756,011               7,381,871
Intra-company           (321,199 )              (404,122 )    (387,033 )                (1,170,778 )            (1,242,716 )
      Consolidated   $ 1,693,390      (17 )% $ 2,043,455   $ 1,909,803          (11 )% $ 5,585,233       (9 )% $ 6,139,155

Operating income
(loss):
Steel                $   106,927      (21 )% $   136,194   $   136,597          (22 )% $   380,832      (30 )% $   543,117
Metals recycling
and ferrous
resources                (15,697 )   (363 )%      (3,388 )     (19,371 )         19 %      (30,905 )   (177 )%      39,987
Steel fabrication          3,141    1,377 %         (246 )         193        1,527 %          666      114 %       (4,764 )
Other                    (17,759 )     38 %      (28,437 )     (14,673 )        (21 )%     (49,294 )     37 %      (78,115 )
                          76,612      (26 )%     104,123       102,746          (25 )%     301,299      (40 )%     500,225
Eliminations              (3,891 )                 4,662           953                      (5,063 )                 2,105
      Consolidated   $    72,721      (33 )% $   108,785   $   103,699          (30 )% $   296,236      (41 )% $   502,330


Table of Contents

Steel Operations

Steel Operations. Steel operations consist of our five electric-arc furnace mini-mills, producing steel from steel scrap, utilizing continuous casting, automated rolling mills, and various downstream finishing facilities, including The Techs operations. Collectively, our steel operations sell directly to end users and service centers. These products are used in numerous industry sectors, including the automotive, construction, commercial, transportation, agriculture and industrial machinery markets. In the third quarters of 2012 and 2011, our steel operations accounted for 62% and 60%, respectively, of our external net sales. Operating income for the steel segment decreased $29.3 million, or 21%, to $106.9 million in the third quarter of 2012, compared to the third quarter of 2011, as total shipments decreased 4% and gross margin percentage, and correspondingly operating income percentage, compressed due to an $85 decrease in average segment selling prices per ton shipped coupled with only a $67 per ton decrease in average ferrous scrap cost melted in the third quarter of 2012, as compared to the third quarter of 2011. Operating income for the steel segment decreased $162.3 million, or 30%, to $380.8 million in the first nine months of 2012, compared to the first nine months of 2011. Gross margin percentage, and correspondingly operating income percentage, compressed due to a $63 decrease in average segment selling prices per ton shipped while the average ferrous scrap cost melted in the first nine months of 2012 decreased only $22 per ton compared to the same period in 2011.

Steel Operations Shipments (net tons)



                      Three Months Ended                Second                 Nine Months Ended
                        September 30,                   Quarter                  September 30,
                   2012               2011               2012               2012               2011

Flat Roll
Division           638,776            701,212            706,944          2,004,225          2,091,505
The Techs          167,982            166,417            171,437            484,034            554,044
Sheet products     806,758    57 %    867,629    59 %    878,381    58 %  2,488,259    57 %  2,645,549    60 %

Structural and
Rail Division      255,533            224,514            252,524            769,063            628,543
Engineered Bar
Products
Division           113,327            160,649            166,208            437,024            463,944
Roanoke Bar
Division           152,922            141,060            149,010            453,228            415,271
Steel of West
Virginia            76,481             76,487             74,456            228,149            223,425
 Long products     598,263    43 %    602,710    41 %    642,198    42 %  1,887,464    43 %  1,731,183    40 %

         Total
     shipments   1,405,021          1,470,339          1,520,579          4,375,723          4,376,732
Intra-segment
shipments          (34,594 )  (2 )%   (29,952 )  (2 )%   (29,560 )  (2 )%   (92,211 )  (2 )%  (102,265 )  (2 )%
       Segment
     shipments   1,370,427          1,440,387          1,491,019          4,283,512          4,274,467
Intra-company
shipments          (71,195 )  (5 )%   (71,165 )  (5 )%   (77,315 )  (5 )%  (214,629 )  (5 )%  (224,235 )  (5 )%
      External
     shipments   1,299,232          1,369,222          1,413,704          4,068,883          4,050,232

Sheet Products. Our Flat Roll Division sells a broad range of sheet steel products, such as hot rolled, cold rolled and coated steel products, including a large variety of specialty products such as light gauge hot rolled, galvanized, Galvalume® and painted products. The Techs operations, comprised of three galvanizing lines, also sells specialized galvanized sheet steels used in non-automotive applications. Sheet products represented 57% of total steel shipped tons in the third quarter of 2012, as compared to 59% in the third quarter of 2011.

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

Net sales for the segment decreased in the third quarter of 2012 by $178.4 million, or 14%, compared to the third quarter of 2011, as total steel segment shipments decreased 4% and steel segment selling prices per ton decreased 10%, or $85 per ton. There was also a shift in mix with sheet products shipments decreasing 7% compared with long products, which experienced only a 1% volume decrease. This slight long products volume decrease is despite Engineered Bar Division's volumes decreasing 29%, as customers realigned inventories throughout the supply chain. Rail product shipments continue to show steady improvement, with the third quarter of 2012 shipments increasing 11% as compared to the third quarter of 2011.

Net sales for the segment decreased by $260.1 million, or 7%, in the first nine months of 2012, compared to the same period in 2011. While selling volumes for our steel products was steady overall in the first nine months of 2012 compared to the first nine months of 2011, there was a shift in mix to long products from sheet products. Sheet products shipments decreased 6%, while long products increased 9% in the first nine months of 2012 compared to the same period in 2011. Our first nine months 2012 average steel operations' segment selling price per ton shipped decreased $63 compared with the first nine months of 2011, as the higher sheet selling prices seen in the first nine months of 2011 abated in the slower 2012 market.


Table of Contents

Steel operations Average Selling Prices and Volumes

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Metallic raw materials used in our electric arc furnaces represent our single most significant manufacturing cost. Our metallic raw material cost per net ton consumed in our steel operations decreased $67 in the third quarter 2012 compared with the third quarter of 2011. During the third quarter of 2012 and 2011, respectively, our metallic raw material costs represented 64% and 68% of our steel operations' manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes. Our metallic raw material cost per net ton consumed in our steel operations decreased $22 the first nine months of 2012 compared with the first nine months of 2011, and represented 67% and 68%, respectively, of our steel operations' manufacturing costs, excluding the operations of The Techs.

Metals Recycling and Ferrous Resources Operations

Metals Recycling and Ferrous Resources Operations. This operating segment includes our metals recycling operations (OmniSource); our liquid pig iron production facility, Iron Dynamics (IDI); and our Minnesota iron operations. Our metals recycling and ferrous resources operations segment accounted for 31% of our external net sales in the third quarter of 2012 and 35% in the third quarter of 2011. Operating income for the metals recycling and ferrous resources operations segment decreased $12.3 million in the third quarter of 2012 to a loss of $15.7 million, compared to the third quarter of 2011, due primarily to increases in metals recycling operating income of $6.0 million being more than offset by increased losses at our Minnesota iron operations and a decrease in operating income at our IDI facility, due to falling selling prices, which are based on a pig iron indexed price. Operating income for the metals recycling and ferrous resources operations segment decreased $70.9 million in the first nine months of 2012 from $40.0 million in 2011 to a loss of $30.9 million for 2012. The decrease was primarily related to decreased sales volumes and metal margins for both ferrous and nonferrous metals in metals recycling operations, and increased losses at our Minnesota iron operations and decreased operating income at our IDI facility due to lower selling prices..

Metals Recycling and Ferrous Resources Operations Shipments



                                 Three Months Ended       Second         Nine Months Ended
                                   September 30,          Quarter            September,
                                 2012         2011         2012          2012          2011
Ferrous metal (gross tons)
Total                          1,339,853    1,483,122    1,486,222     4,408,915     4,565,141
Intra-segment                     (7,320 )     (3,594 )     (2,007 )     (10,240 )      (8,786 )
          Segment shipments    1,332,533    1,479,528    1,484,215     4,398,675     4,556,355
Intra-company                   (575,622 )   (645,355 )   (664,661 )  (2,003,137 )  (1,970,429 )
         External shipments      756,911      834,173      819,554     2,395,538     2,585,926
Nonferrous metals
(thousands of pounds)
Total                            249,685      269,753      258,932       800,253       811,511
Intra-segment                     (7,697 )     (1,804 )     (1,707 )      (9,404 )      (6,043 )
          Segment shipments      241,988      267,949      257,225       790,849       805,468
Intra-company                       (779 )          -       (2,891 )      (5,628 )           -
         External shipments      241,209      267,949      254,334       785,221       805,468

Mesabi Nugget (metric tons)
- intra-company                   52,082       32,666       33,840       132,152       106,698

Iron Dynamics (metric tons)
- intra-company                   53,548       61,034       59,103       169,279       182,031


Table of Contents

Metals Recycling. Our metals recycling operations, OmniSource, represent our metals sourcing and processing operations and are the most significant source of net sales in this segment. These operations sell ferrous metals to steel mills and foundries, and nonferrous metals, such as copper, brass, aluminum and stainless steel to, among others, ingot manufacturers, copper refineries and mills, smelters, and specialty mills. Our metals recycling operations represented 93% and 95% of this segment's net sales during the third quarters of 2012 and 2011, respectively.

During the third quarter of 2012, metals recycling recorded sales of $766.1 million on shipments of 1.3 million gross tons of ferrous metals and 249.7 million pounds of nonferrous metals, compared with sales of $1.0 billion on shipments of 1.5 million gross tons of ferrous and 269.8 million pounds of nonferrous metals during the same period in 2011. During the third quarter of 2012 and 2011, the metals recycling operations provided approximately 52% and 53%, respectively, of the steel scrap purchased by our steel mills. This represented 43% and 44% of the metals recycling operations' ferrous shipments for the third quarter of 2012 and 2011, respectively. Sales prices of ferrous metals decreased 20% in the third quarter of 2012 versus the same period in 2011, while sales prices of nonferrous metals decreased 12% between the same periods. During the first nine months of 2012, metals recycling recorded sales of $2.7 billion on shipments of 4.4 million gross tons of ferrous metals and 800.3 million pounds of nonferrous metals, compared with sales of $3.1 billion on shipments of 4.6 million gross tons of ferrous and 811.5 million pounds of nonferrous metals during the same period in 2011. Sales prices of ferrous metals decreased 10% in first nine months of 2012 versus the same period in 2011, while sales prices of nonferrous metals decreased 13% between the same periods.

Operating income for metals recycling increased $6.0 million in the third quarter of 2012 to $10.3 million, compared to the third quarter of 2011 despite volume decreases, due primarily to improved ferrous metals margins, along with decreases in operating expenses. Ferrous scrap prices rose mid-quarter due to increased export activity and perceived inventory shortfall. Operating income for metals recycling decreased $29.6 million in the first nine months of 2012 to $27.9 million, compared to the first nine months of 2011, due primarily to decreased metals spreads for both ferrous (11%) and nonferrous (6%) metals and sales volumes decreases of 3% for ferrous and 1% for nonferrous. Decreased exports of ferrous scrap along with moderating domestic steel mill utilization rates resulted in selling prices declining more rapidly than inputs and thus metal margins have compressed during 2012 overall, negatively impacting operating income.

Ferrous Resources. Our ferrous resource operations consist of our two ironmaking initiatives: Iron Dynamics (IDI), a liquid pig iron production facility, and our Minnesota iron operations, consisting of an iron nugget production facility and planned operations to supply the nugget facility with its primary raw material, iron concentrate. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material input exclusively at our Flat Roll Division. Our Minnesota iron operations consists of Mesabi Nugget, (owned 81% by us); our planned future iron mining operations which is currently in the permitting process, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 80% by us). The construction of the Mesabi Nugget facility was completed in 2009, and initial production of iron nuggets commenced January 2010. Since then, we have continued to refine this pioneering production process and changed equipment configurations to increase production and plant availability. During a planned five week outage in April and May 2012, we made numerous equipment modifications to improve the percentage of time the plant is available to operate each month. After restarting, extended higher operating rates were achieved during periods of time between June and August which provided the opportunity to identify a number of key process optimization options necessary to increase both productivity and product quality. Beginning mid-September, we proceeded with a six week outage of the nugget facility in order to lay the groundwork necessary for the implementation of the improvements. We expect to recommence operations in November, with final equipment installation expected during the first half of 2013, at an estimated investment of $25 million. In the third quarter of 2012 and 2011, Mesabi Nugget produced 52,000 and 33,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Mining Resources completed the construction and began the initial start-up phase of the iron tailings operation and produced and sold its first product late in the third quarter 2012. This operation will provide iron ore tailings to be concentrated for use by Mesabi Nugget as a low-cost iron concentrate to the nugget production process, replacing higher-priced concentrate from external sources. Production will continue to ramp up into 2013. Losses from our Minnesota iron operations reduced our net income in the third quarter of 2012 by approximately $11 million, $3 million more than in the third quarter of 2011, due primarily to the lower average selling prices in 2012. In the first nine months of 2012 and 2011, Mesabi Nugget produced 132,000 and 107,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Losses from our Minnesota iron operations reduced our net income in the first nine months of 2012 by approximately $32 million, or $9 million more than in the first nine months of 2011.

Steel Fabrication Operations

Our steel fabrication operations represent the company's New Millennium Building Systems' plants located throughout the United States and Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry. Steel fabrication operations accounted for 6% and 4% of our external net sales during the third quarter of 2012 and 2011, respectively. The segment achieved operating income of $3.1 million in the third quarter of 2012, compared to a $246,000 loss in the third quarter of 2011. Modest selling price decreases were more than offset by higher selling volumes, improved metal margins, and reduced conversion costs per ton resulting from increased production levels in the third quarter of 2012 compared to the same period in 2011. The segment had operating income of $666,000 in the first nine months of 2012, compared to a $4.8 million loss in the first nine months of 2011. Again, selling price decreases were more than offset by higher selling volumes, improved metal margins, and reduced costs from increased production for the first nine months of 2012 compared to the same period in 2011.

Net sales for the segment increased by $19.3 million, or 23%, in the third quarter of 2012 compared to the third quarter of 2011, as volumes increased 24% in the third quarter of 2012 when compared with the same period in 2011. However, our average steel fabrication operations' selling price per ton shipped decreased $9, or 1%, during the same period. Sales volume increases in the third quarter of 2012 compared to the third quarter of 2011 were the result of some modest improvement in the non-residential construction market, market share gains in existing markets, as well as our expansion into the western United States from the start-up of plants in Arkansas, Nevada and Northern Mexico. We . . .

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