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STLD > SEC Filings for STLD > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for STEEL DYNAMICS INC



Annual Report


Forward-Looking Statements

This report contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap markets, Steel Dynamics' revenues, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements are intended to be made as "forward-looking," subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Some factors that could cause such forward-looking statements to turn out differently than anticipated include:
(1) the effects of a slowing in industrial demand; (2) changes in economic conditions, either generally or in any of the steel or scrap-consuming sectors which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, and other steel-consuming industries; (3) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass-on any cost increases; (4) the impact of domestic and foreign import price competition; (5) risks and uncertainties involving product and/or technology development; and (6) occurrences of unexpected plant outages or equipment failures.

More specifically, we refer you to the sections titled Special Note Regarding Forward-Looking Statements at the beginning of Part I of this Report and Risk Factors set forth in Item 1A of this Report, as well as in other subsequent reports we file with the Securities and Exchange Commission, for a more detailed discussion of some of the many factors, variable risks and uncertainties and subsequent developments 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,, and on our web site, 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 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,

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property taxes, profit sharing, equity-based compensation, 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 (Income) Expense, net. Other income consists of interest income earned on our temporary cash deposits and 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.


We are one of the largest steel producers and one of the largest metals recyclers in the United States based on a current estimated annual steelmaking capability of 6.4 million tons and actual recycling volumes. We reported net sales of $7.4 billion, $7.3 billion, and $8.0 billion during 2013, 2012, and 2011, respectively. The primary sources of our revenues are from the manufacture and sale of steel products, processing and sale of recycled ferrous and nonferrous metals, and, to a lesser degree, fabrication and sale of steel joist and decking products. Our operations are managed and reported based on three operating segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.

Actual steel and metals recycling ferrous and nonferrous shipments during 2013, 2012, and 2011 are presented in the tables below.

     Steel Shipments             OmniSource Ferrous         OmniSource Nonferrous
    Thousands of Tons                Shipments                    Shipments
                              Thousands of Gross Tons         Millions of Pounds
[[Image Removed: GRAPHIC]]   [[Image Removed: GRAPHIC]]   [[Image Removed: GRAPHIC]]

During 2013, net sales of $7.4 billion and operating income of $386.5 million was relatively unchanged from 2012 net sales of $7.3 billion and operating income of $391.2 million, despite generally higher shipments, as 2013 full year metal margins declined for our steel and metals recycling operations. However, 2013 consolidated pretax income increased $58.8 million, or 29%, reflecting interest cost savings of $30.9 million and a reduction in refinancing costs of $37.7 million, which were associated with our 2012 and early 2013 financing activities. Net income attributable to Steel Dynamics, Inc. was $189.3 million or $0.83 per diluted share in 2013, compared with $163.6 million, or $0.73 per diluted share in 2012.

In spite of record annual shipments in our steel operations, compressed metal margins (which we define as the difference between average selling prices and the cost of ferrous scrap-our primary raw material) resulted in a modest 2% increase in steel operations operating income, to $504.4 million, compared to 2012. Average 2013 steel prices per ton shipped declined $41 amidst continued pricing pressure, while average ferrous scrap consumed for production only declined $25 per ton. Operating income of OmniSource, our metals recycling operations decreased 12% to $41.9 million, as 2013 ferrous and nonferrous metals shipments were comparable to 2012; however, both ferrous and nonferrous metal margins (which we define as the difference between average selling prices and the cost of purchased scrap) decreased slightly during the year. The impact of losses from our Minnesota iron operations on 2013 net income was approximately $42 million, or $0.18 per diluted share in each

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of 2013 and 2012. Our steel fabrication operations reported operating income of $7.0 million in 2013, an increase of $4.9 million, or 231%, compared to 2012, experiencing a 24% increase in selling volumes, the result of improved domestic demand for fabricated steel as well as our fabrication operations' gains in market share.

Segment Operating Results 2013 vs. 2012 (dollars in thousands)

                                                Years Ended December 31,
                                              %                          %
                                2013        Change         2012       Change         2011
Net sales
Steel                       $  4,768,004          1 %  $  4,701,108        (7 )% $  5,070,306
Metals recycling and
ferrous resources              3,663,486          1 %     3,611,796       (13 )%    4,152,568
Steel fabrication                439,655         18 %       371,406        34 %       276,408
Other                            115,326         32 %        87,462       (17 )%      105,148

                               8,986,471                  8,771,772                 9,604,430
Intra-company                 (1,613,547 )               (1,481,538 )              (1,606,930 )

Consolidated                $  7,372,924          1 %  $  7,290,234        (9 )% $  7,997,500

Operating income (loss)
Steel                       $    504,384          2 %  $    495,640       (25 )% $    658,120
Metals recycling and
ferrous resources                (52,468 )      (44 )%      (36,508 )    (237 )%       26,597
Steel fabrication                  7,003        231 %         2,114       132 %        (6,584 )
Other(1)                         (71,446 )                  (66,829 )                 (95,141 )

                                 387,473                    394,417                   582,992
Intra-company                       (948 )                   (3,252 )                   1,828

Consolidated                $    386,525         (1 )% $    391,165       (33 )% $    584,820

º (1)
º Other consists of the results of subsidiary operations that are below the quantitative thresholds required for reportable segments as well as unallocated corporate accounts, including profit sharing.

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. During 2013, 2012, and 2011, our steel operations accounted for 61%, 62%, and 61% respectively, of our external net sales. Operating income for steel operations increased $8.7 million, or 2%, to $504.4 million in 2013 versus 2012. This increased profitability is due primarily to increased shipping volumes of 5%, particularly at our Flat Roll Division and Structural and Rail Division, offset partially by a compression of metal margins.

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Steel operations shipping volumes for the respective periods were as follows:

                                              Years Ended December 31,
                                     % of                      % of                      % of
                        2013       external       2012       external       2011       external
Shipments (tons)
Flat Roll Division     2,904,149                 2,717,995                 2,770,466
The Techs                669,608                   664,485                   715,833

Sheet products         3,573,757          63 %   3,382,480          62 %   3,486,299          64 %
Structural and
Rail Division          1,178,606                 1,031,504                   879,145
Engineered Bar
Products Division        488,393                   535,882                   634,964
Roanoke Bar
Division                 569,260                   581,180                   544,384
Steel of West
Virginia                 309,868                   301,730                   297,902

Long products          2,546,127          45 %   2,450,296          45 %   2,356,395          43 %

Total shipments        6,119,884         109 %   5,832,776         108 %   5,842,694         108 %
shipments               (135,938 )                (123,876 )                (130,813 )

Segment shipments      5,983,946                 5,708,900                 5,711,881
shipments               (355,314 )                (285,736 )                (292,145 )

External shipments     5,628,632                 5,423,164                 5,419,736

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 63% of our steel segment's shipped tons in 2013, as compared to 62% in 2012, and 64% in 2011.

Long Products. Our Structural and Rail Division sells structural steel beams, pilings, a variety of standard strength carbon and intermediate alloy hardness rail for the railroad industry, and is also designed to produce and sell premium rail grades. Our Engineered Bar Products Division primarily sells larger diameter special bar quality and merchant bar quality rounds and round-cornered squares; and in late 2013, we began commissioning a new rolling mill which will produce precision smaller-diameter round engineered bars. Our Roanoke Bar Division primarily sells merchant steel products, including angles, plain rounds, flats and channels, and billets. Steel of West Virginia primarily sells merchant beams, channels and specialty structural steel sections.

Net sales for the steel segment increased in 2013 by $66.9 million, or 1%, compared to 2012, with the segment achieving record shipments of 6.1 million tons in 2013. Selling volumes increased for both our sheet products (6%) and long products (4%) in 2013 compared to 2012, and overall product mix between sheet products and long products remained relatively consistent. Our sheet products operations reported increased shipments in 2013 compared to 2012, with our Flat Roll Division increasing 7%, achieving record levels in both shipments and production, and experienced improved volumes of value-added products. Shipments in 2013 at our Structural and Rail Division increased 14% to a record 1.2 million tons, primarily due to a 43% increase in standard rail shipments as compared to 2012. As the non-residential construction market continued its slow recovery, we saw a 10% improvement in sales of beam products at our Structural and Rail Division in 2013 as compared to 2012, in addition to the increase in rail shipments. Residential construction continues to improve domestically, which is positive for the nonresidential construction industry, as it is a leading indicator for the sector.

Our 2013 average steel operations' segment selling price per ton shipped, including intra-company shipments, decreased $41 compared with 2012. Sheet products 2013 average selling price per ton

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shipped decreased $34 compared with 2012, and long products average selling prices decreased $50 per ton compared with 2012.

Steel Operations Average Selling Prices and Volumes

[[Image Removed: GRAPHIC]]

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 $25 in 2013 compared with 2012. During 2013, 2012, and 2011, respectively, our metallic raw material costs represented 65%, 66%, and 68% of our steel operations' manufacturing costs, excluding the operations of The Techs, which purchases, rather than produces, the steel it further processes.

Metals Recycling and Ferrous Resources Operations

Metals Recycling and Ferrous Resources Operations. This operating segment primarily includes our metals recycling operations (OmniSource); our liquid pig iron production facility, Iron Dynamics (IDI); and our Minnesota iron operations. Our metals recycling and ferrous resources operations segment accounted for 32%, 32%, and 35% of our external net sales in 2013, 2012, and 2011, respectively. Operating income for the metals recycling and ferrous resources operations segment decreased $16.0 million in 2013 to a loss of $52.5 million.

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Metals recycling and ferrous resources shipping volumes during the respective periods were as follows:

                                              Years Ended December 31,
                           2013        % Change         2012        % Change         2011
Ferrous metal (gross
Total                     5,505,995           (2 )%    5,647,058           (4 )%    5,879,729
Intra-segment                (5,488 )                    (11,488 )                    (12,227 )

Segment shipments         5,500,507           (2 )%    5,635,570           (4 )%    5,867,502
Intra-company            (2,417,248 )                 (2,575,182 )                 (2,552,472 )

External shipments        3,083,259            1 %     3,060,388           (8 )%    3,315,030

Nonferrous metals
(thousands of
Total                     1,052,494            - %     1,051,333           (1 )%    1,066,648
Intra-segment               (12,371 )                    (10,281 )                          -

Segment shipments         1,040,123            - %     1,041,052           (2 )%    1,066,648
Intra-company                (6,079 )                     (8,207 )                     (8,273 )

External shipments        1,034,044            - %     1,032,845           (2 )%    1,058,375

Mesabi Nugget
shipments                   215,833           28 %       168,633            6 %       159,641

Iron Dynamics
Liquid pig iron             235,861                      198,849                      188,688
Hot briquetted iron          16,002                       18,641                       31,646
Other                         3,440                        8,906                        9,168

                            255,303           13 %       226,396           (1 )%      229,502

Metals Recycling. Our metals recycling operations, OmniSource, represent our metals sourcing and processing operations and are the most significant source of revenues and earnings in this segment. These operations sell ferrous scrap to steel mills and foundries, and nonferrous scrap, 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 91%, 94%, and 95% of this segment's net sales during 2013, 2012, and 2011; and $41.9 million, $47.7 million, and $66.4 million of this segments' operating income for these same periods, respectively.

During 2013, metals recycling recorded sales of $3.3 billion on shipments of 5.5 million gross tons of ferrous metals and 1.05 billion pounds of nonferrous metals, compared with sales of $3.4 billion on shipments of 5.6 million gross tons of ferrous and 1.05 billion pounds of nonferrous metals during 2012. Sales prices of ferrous metals decreased 4% in 2013 versus 2012, while sales prices of nonferrous metals were relatively steady year over year. During 2013, the metals recycling operations provided approximately 45% of the steel scrap purchased by our steel mills. This represented 44% of the metals recycling operations' ferrous shipments for 2013, as compared to 46% for 2012, and 43% for 2011.

Metals recycling operating income decreased $5.8 million, to $41.9 million, in 2013 as compared to 2012, due to slightly lower ferrous selling volumes and slightly compressed metal margins. Slightly lower selling prices equated to lower metal margins in 2013, however these reductions were partially offset by reductions in our operating costs. The ongoing overcapacity of recycled

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shredding locations, particularly in the southeast United States, continues to constrain metal margins, and thus profitability, in spite of increasing steel mill utilization.

Ferrous Resources. Our ferrous resource operations consist of our two ironmaking initiatives: Iron Dynamics (IDI), a liquid pig iron production facility, and our Minnesota iron operations, consisting of an iron nugget production facility and operations to supply the nugget facility with its primary raw material, iron concentrate. IDI primarily produces liquid pig iron, which is used as a scrap substitute raw material input exclusively at our Flat Roll Division. Our Minnesota iron operations consists of Mesabi Nugget, (owned 81% by us); our potential future iron mining operations, Mesabi Mining; and, our iron tailings operations, Mining Resources (owned 80% by us). The impact of losses from our Minnesota iron operations on 2013 net income was approximately $42 million, or $0.18 per diluted share in each of 2013 and 2012. The iron nugget production facility utilizes a pioneering production process, which from time to time has experienced operational, quality control, and production cost challenges. The facility commenced initial production of iron nuggets in 2010. We have continued to modify, re-engineer and further refine this production process and have changed or modified equipment configurations with resulting increases in plant availability, increased production, and improved quality. During the fourth quarter of 2013, we focused on the reduction of production costs and the improvement of product yield. Certain meaningful adjunct trials that began in the latter half of the fourth quarter have continued into 2014, with some encouraging results. However, toward the end of the first quarter of 2014, we expect that we will be able to assess whether, or to what extent, further process improvements, if any, are justifiable. In 2013, 2012 and 2011, Mesabi Nugget produced 214,000, 178,000 and 156,000 metric tons of iron-nuggets, respectively, for use by our own steel mills. Our Mining Resources operation, which supplies the nugget production facility with its primary raw material, iron concentrate, started operations in 2012, and effectively ramped up operations in 2013, producing 407,000 and 56,000 metric tons of iron tailings during 2013 and 2012, respectively.

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%, 5%, and 3% of our external net sales during 2013, 2012, and 2011, respectively. Operating income for the segment improved to $7.0 million in 2013, compared to $2.1 million in 2012, with the increase year over year due principally to increased selling volumes.

Net sales for the segment increased by $68.2 million, or 18%, in 2013 compared to 2012; as our selling volumes increased 24% to 367,000 tons in 2013, while our average steel fabrication operations' selling price per ton shipped decreased $59, or 5%, in 2013 as compared to 2012. Our volume growth can be attributed to continued improvement within the non-residential construction market as a whole, our organic gains in market share, as well as our increasing utilization of our assets in the south and southwestern United States. Residential construction has improved domestically, which is also positive for the nonresidential construction industry, as it is a leading indicator for the sector. Fabricated steel consumption in the United States improved during 2013, with estimated domestic joist shipments increasing 14% when compared to 2012.

The purchase of various steel products is the largest single cost of goods sold item for our steel fabrication operations. During 2013 the cost of steel products purchased represented 71% of the total cost of manufacturing for our steel fabrication operations compared to 72% in 2012, while the cost of steel decreased in 2013, as compared to 2012, by $54 per ton. As the decrease in selling prices of $59 per ton outpaced the decrease in steel input costs of $54 per ton, our metal spread was reduced. This reduction in metal spread was, however, offset fully by reduced operating costs.

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Steel Fabrication Operations Average Selling Prices and Volumes

[[Image Removed: GRAPHIC]]

Consolidated Results 2013 vs. 2012

Selling, General and Administrative Expense (SG&A). Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) were $332.3 million during 2013, as compared to $320.5 million during 2012, an increase of $11.8 million, or 4%. During 2013 and 2012, selling, general and administrative expenses (excluding non-cash impairment charges) represented approximately 4.5% and 4.4% of net sales, respectively. The increase in SG&A expenses in 2013 compared to 2012 relates most notably to increased non-cash equity-based compensation expenses of $5.3 million. Amortization of intangible assets decreased $3.8 million, or 11%, during 2013 compared to 2012 due to the accelerated amortization methods used for intangible assets related to customer and scrap generator relationships.

Interest Expense, net of Capitalized Interest. During 2013, gross interest expense decreased $27.7 million, or 17%, to $132.3 million, and capitalized interest increased $3.2 million, to $4.6 million, as compared to 2012. The interest capitalized during these periods relates to longer-term construction activities at our various operating segments, which increased in 2013 with our increased expansion plans, as compared to 2012. The decrease in gross interest expense is due to refinancing activities that took place in primarily the second half of 2012 and March 2013. We repaid $175 million of our debt in 2012 and $100 million in 2013. We also refinanced $1.4 billion of senior notes, reducing our overall effective interest rate from almost 7.0% to less than 5.6% at December 31, 2013.

Other (Income) Expense, net. Other income was $4.0 million during 2013, as compared to other expense of $28.5 million during 2012, with interest income of $4.6 million in 2013 versus $4.7 million in 2012. We recorded non-operating charges of $2.6 million in 2013 related to our 2013 refinancing activities, . . .

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