Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
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Audited Financial Statements of Severstal Columbus, LLC |
|
|
Independent Auditors’ Report |
F-2 |
|
Balance Sheets as of December 31, 2013 and 2012 |
F-3 |
|
Statements of Operations for the Years ended December 31, 2013, 2012 and 2011 |
F-4 |
|
Statements of Member’s Equity for the Years ended December 31, 2013, 2012 and 2011 |
F-5 |
|
Statements of Cash Flows for the Years ended December 31, 2013, 2012 and 2011 |
F-6 |
|
Notes to Financial Statements |
F-7 |
|
|
|
|
Unaudited Financial Statements of Severstal Columbus, LLC |
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|
Independent Auditors’ Review Report |
F-19 |
|
Balance Sheets as of June 30, 2014 and December 31, 2013 |
F-20 |
|
Statements of Operations for the Six Months ended June 30, 2014 and 2013 |
F-21 |
|
Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013 |
F-22 |
|
Notes to Financial Statements |
F-23 |
Independent Auditors’ Report
The Board of Directors
Severstal Columbus, LLC:
We have audited the accompanying financial statements of Severstal Columbus, LLC, which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of operations, member’s equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Severstal Columbus, LLC as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in accordance with U.S. generally accepted accounting principles.
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Jackson, Mississippi |
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April 11, 2014 |
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F-2
SEVERSTAL COLUMBUS, LLC
Balance Sheets
December 31, 2013 and 2012
(Amounts in thousands of U.S. dollars)
|
|
|
2013 |
|
2012 |
|
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
941 |
|
$ |
3,440 |
|
|
Accounts receivable: |
|
|
|
|
|
|
Trade and other (net of allowance for doubtful accounts of $181 and $1,895 at December 31, 2013 and 2012, respectively) |
|
150,205 |
|
111,400 |
|
|
Affiliates |
|
10,069 |
|
6,645 |
|
|
Inventories |
|
320,770 |
|
273,338 |
|
|
Other current assets |
|
1,415 |
|
2,252 |
|
|
Total current assets |
|
483,400 |
|
397,075 |
|
|
Property, plant, and equipment: |
|
|
|
|
|
|
Land |
|
6,423 |
|
6,423 |
|
|
Buildings and improvements |
|
285,276 |
|
282,656 |
|
|
Machinery and equipment |
|
1,490,840 |
|
1,440,469 |
|
|
Construction in progress |
|
4,151 |
|
17,934 |
|
|
|
|
1,786,690 |
|
1,747,482 |
|
|
Less accumulated depreciation |
|
536,394 |
|
458,575 |
|
|
Net property, plant, and equipment |
|
1,250,296 |
|
1,288,907 |
|
|
Investment in unconsolidated affiliate |
|
1,195 |
|
1,041 |
|
|
Deferred charges and other |
|
14,578 |
|
16,006 |
|
|
Total assets |
|
$ |
1,749,469 |
|
$ |
1,703,029 |
|
|
Liabilities and Member’s Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable: |
|
|
|
|
|
|
Trade |
|
$ |
228,470 |
|
$ |
200,408 |
|
|
Affiliates |
|
21,557 |
|
20,282 |
|
|
Current portion of long-term debt |
|
400 |
|
659 |
|
|
Short-term debt |
|
45 |
|
— |
|
|
Interest payable |
|
20,959 |
|
23,072 |
|
|
Other accrued liabilities |
|
16,286 |
|
14,337 |
|
|
Total current liabilities |
|
287,717 |
|
258,758 |
|
|
Long term debt—related parties |
|
538,523 |
|
481,340 |
|
|
Long-term debt—other |
|
564,898 |
|
631,126 |
|
|
Deferred credits |
|
22,510 |
|
23,957 |
|
|
Other liabilities |
|
6,331 |
|
14,536 |
|
|
Total liabilities |
|
1,419,979 |
|
1,409,717 |
|
|
Member’s equity |
|
329,490 |
|
293,312 |
|
|
Total liabilities and member’s equity |
|
$ |
1,749,469 |
|
$ |
1,703,029 |
|
See accompanying notes to financial statements.
F-3
SEVERSTAL COLUMBUS, LLC
Statements of Operations
Years ended December 31, 2013, 2012 and 2011
(Amounts in thousands of U.S. dollars)
|
|
|
2013 |
|
2012 |
|
2011 |
|
|
Sales: |
|
|
|
|
|
|
|
|
Unaffiliated customers |
|
$ |
1,862,301 |
|
$ |
1,741,686 |
|
$ |
1,419,136 |
|
|
Affiliates |
|
76,270 |
|
129,306 |
|
121,087 |
|
|
Total sales |
|
1,938,571 |
|
1,870,992 |
|
1,540,223 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Costs (excluding items listed below) |
|
1,759,724 |
|
1,786,437 |
|
1,408,938 |
|
|
Depreciation and amortization |
|
81,136 |
|
79,008 |
|
51,910 |
|
|
Selling and administrative expenses |
|
34,165 |
|
31,661 |
|
24,910 |
|
|
Total costs and expenses |
|
1,875,025 |
|
1,897,106 |
|
1,485,758 |
|
|
Operating income (loss) |
|
63,546 |
|
(26,114 |
) |
54,465 |
|
|
Interest income |
|
62 |
|
63 |
|
5 |
|
|
Interest expense |
|
(107,045 |
) |
(111,394 |
) |
(84,739 |
) |
|
Gain (loss) on disposal of assets |
|
200 |
|
— |
|
(235 |
) |
|
Other—net |
|
(49 |
) |
236 |
|
568 |
|
|
Equity income from unconsolidated affiliate |
|
25 |
|
318 |
|
— |
|
|
Loss before income taxes |
|
(43,261 |
) |
(136,891 |
) |
(29,936 |
) |
|
Income tax expense |
|
(479 |
) |
— |
|
— |
|
|
Net loss |
|
$ |
(43,740 |
) |
$ |
(136,891 |
) |
$ |
(29,936 |
) |
See accompanying notes to financial statements.
F-4
SEVERSTAL COLUMBUS, LLC
Statements of Member’s Equity
Years ended December 31, 2013, 2012 and 2011
(Amounts in thousands of U.S. dollars)
|
|
|
Contributed
capital |
|
Accumulated
deficit |
|
Total |
|
|
Balance at December 31, 2010 |
|
$ |
1,328,407 |
|
$ |
(873,869 |
) |
$ |
454,538 |
|
|
Net loss |
|
— |
|
(29,936 |
) |
(29,936 |
) |
|
Distributions to member |
|
— |
|
(271 |
) |
(271 |
) |
|
Balance at December 31, 2011 |
|
1,328,407 |
|
(904,076 |
) |
424,331 |
|
|
Net loss |
|
— |
|
(136,891 |
) |
(136,891 |
) |
|
Capital contribution from member |
|
6,000 |
|
— |
|
6,000 |
|
|
Distributions to member |
|
— |
|
(128 |
) |
(128 |
) |
|
Balance at December 31, 2012 |
|
1,334,407 |
|
(1,041,095 |
) |
293,312 |
|
|
Net loss |
|
— |
|
(43,740 |
) |
(43,740 |
) |
|
Capital contribution from member |
|
80,000 |
|
— |
|
80,000 |
|
|
Distributions to member |
|
— |
|
(82 |
) |
(82 |
) |
|
Balance at December 31, 2013 |
|
$ |
1,414,407 |
|
$ |
(1,084,917 |
) |
$ |
329,490 |
|
See accompanying notes to financial statements.
F-5
SEVERSTAL COLUMBUS, LLC
Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
(Amounts in thousands of U.S. dollars)
|
|
|
2013 |
|
2012 |
|
2011 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(43,740 |
) |
$ |
(136,891 |
) |
$ |
(29,936 |
) |
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
81,136 |
|
79,008 |
|
51,910 |
|
|
Amortization of capitalized debt costs |
|
4,953 |
|
2,912 |
|
2,522 |
|
|
(Gain) loss on disposal of assets |
|
(200 |
) |
— |
|
235 |
|
|
Equity income from unconsolidated affiliate |
|
(25 |
) |
(318 |
) |
— |
|
|
Accretion of leases |
|
109 |
|
316 |
|
150 |
|
|
Interest in kind from related party |
|
36,435 |
|
27,410 |
|
15,670 |
|
|
Share-based payment awards benefit |
|
(894 |
) |
(1,726 |
) |
(1,154 |
) |
|
Amortization of grants |
|
(1,447 |
) |
(1,447 |
) |
(1,447 |
) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
(42,229 |
) |
66,890 |
|
(109,227 |
) |
|
Inventories |
|
(47,432 |
) |
(28,962 |
) |
(126,538 |
) |
|
Other current assets and deferred charges |
|
332 |
|
251 |
|
2,223 |
|
|
Accounts payable and accrued liabilities |
|
37,541 |
|
(7,462 |
) |
136,563 |
|
|
Net cash provided by (used in) operating activities |
|
24,539 |
|
(19 |
) |
(59,029 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
(46,748 |
) |
(55,145 |
) |
(246,232 |
) |
|
Proceeds from disposal of assets |
|
— |
|
— |
|
1,617 |
|
|
Other—net |
|
321 |
|
176 |
|
(44 |
) |
|
Net cash used in investing activities |
|
(46,427 |
) |
(54,969 |
) |
(244,659 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt financing |
|
1,193,058 |
|
532,415 |
|
697,000 |
|
|
Payment of debt |
|
(1,249,612 |
) |
(484,150 |
) |
(388,360 |
) |
|
Fees paid for debt |
|
(3,975 |
) |
(97 |
) |
(3,728 |
) |
|
Distributions to member |
|
(82 |
) |
(128 |
) |
(271 |
) |
|
Capital contribution from member |
|
80,000 |
|
6,000 |
|
— |
|
|
Net cash provided by financing activities |
|
19,389 |
|
54,040 |
|
304,641 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
(2,499 |
) |
(948 |
) |
953 |
|
|
Cash and cash equivalents—beginning of year |
|
3,440 |
|
4,388 |
|
3,435 |
|
|
Cash and cash equivalents—end of year |
|
$ |
941 |
|
$ |
3,440 |
|
$ |
4,388 |
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
60,637 |
|
$ |
68,258 |
|
$ |
65,016 |
|
|
Interest capitalized |
|
— |
|
733 |
|
11,949 |
|
|
Interest in kind from related party |
|
47,186 |
|
28,143 |
|
27,619 |
|
|
Noncash transaction: |
|
|
|
|
|
|
|
|
New capital lease obligation |
|
$ |
— |
|
$ |
— |
|
$ |
5,123 |
|
See accompanying notes to financial statements.
F-6
SEVERSTAL COLUMBUS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
(Amounts in thousands of U.S. dollars unless otherwise noted)
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Severstal Columbus, LLC (SCL or the Company), is a Delaware limited liability company formed on August 10, 2005 and a wholly owned subsidiary of Severstal Columbus Holdings, LLC (Holdings), a Delaware limited liability company. Holdings is a wholly owned subsidiary of Severstal US Holdings, LLC (SUSH), a wholly owned subsidiary of OAO Severstal (Severstal). The Company was formed to construct and operate a steel manufacturing plant (the Plant) producing hot rolled, cold rolled, and coated steel products for high value added steel sheet applications and with the capability to supply the exposed automotive sheet market. SCL sells and distributes its steel sheet products throughout the continental United States and Mexico. The Company continues to focus on product development and operational improvements. SCL’s Phase 2 expansion was substantially completed during 2011, which doubled its production capacity from 1.7 million net tons per year to 3.4 million net tons per year.
The financial statements include the accounts of SCL. Investments in business entities in which the Company does not have control but has the ability to exercise significant influence over the entity’s operating and financial policies are accounted for under the equity method.
(b) Segment Information
SCL operates in one segment, the manufacture and sale of flat-rolled steel products. The Company’s business is conducted in North America with the exception of certain raw material and semi-finished steel procurement, which from time to time accesses global markets.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(d) Revenue Recognition
Revenue from product sales is recognized when product shipment has occurred, the customer has taken title and assumed the risks of ownership, the price is fixed or determinable, and collectibility is reasonably assured. Provisions for returns and other adjustments are recorded in the period in which the revenue is recognized.
(e) Financial Instruments
The carrying amount of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, and short-term debt, approximates their fair value at December 31, 2013 and 2012. The carrying amounts for short-term and long-term revolving and affiliate debt approximate fair value because the debt’s interest rates vary with the market and, therefore, are adjusted frequently. SCL considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
F-7
(f) Significant Risk and Uncertainties
Industry
The steel industry is cyclical in nature and, within the United States, has been adversely affected in recent years by the volatility of steel imports, worldwide production overcapacity, increased domestic and international competition, high labor and energy costs, inefficient plants, and, at times, shortages of raw materials. As a result of these conditions, SCL pursues initiatives designed to improve the Company’s competitiveness, including cost and productivity improvements.
Environmental
The Company’s operations are subject to federal, state, and local laws, regulations, permits, and consent agreements relating to the protection of human health and the environment. Although the Company believes that its facilities are in material compliance with these provisions, from time to time the Company is subject to investigations by environmental agencies. In management’s opinion, such current investigations, in the aggregate, will not have a materially adverse effect on the Company’s financial position, results of operations, or cash flows.
Current Economic Conditions
The Company’s operations and principal markets for its products in the domestic automotive industry and their suppliers, service centers, and steel converters have been, and could be, adversely affected by near-term unfavorable general economic conditions. While general economic conditions have improved since the recession of 2008-2010, SCL and Holdings’ aforementioned initiatives continued throughout 2012-2013 and have at various times included selective reduction in melt and finishing operations, optimization of production schedules across related North American facilities, efforts to align the Company’s supply base more consistently with downscaled production requirements, and labor and overhead cost reduction actions.
(g) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable. SCL limits its credit risk by performing ongoing credit evaluations and, when deemed necessary, by requiring letters of credit, guarantees, or collateral. The Company’s customers comprise manufacturers in the domestic automotive industry and their suppliers, service centers, and steel converters serving various market segments. Management believes that risk associated with the Company’s concentration of credit at December 31, 2013 is adequately addressed by existing controls. However, the ability of SCL’s debtors to honor their obligations to the Company is dependent upon economic developments in the automotive and other flat-rolled steel-consuming industries. General slowdowns in consumer spending caused by uncertainty about future market conditions have at times adversely impacted the profits and cash flows of the Company’s customers and may continue to do so. As such, it is reasonably possible that the financial condition of SCL’s customers may deteriorate in the near term. Inventory, accounts receivable, and revenue losses resulting from such deterioration may have a correspondingly adverse impact on the operations of the Company.
(h) Trade Accounts Receivable
The Company reviews its allowance for doubtful accounts monthly. Balances over 90 days past due and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
At December 31, 2013 and 2012, SCL had accounts receivable of $17,605 from one customer and $11,726 from another customer, respectively. No other customer accounted for more than 10% of accounts receivable as of December 31, 2013 and 2012. There were no customers that accounted for more than 10% of revenues for the years ended December 31, 2013, 2012 and 2011.
F-8
(i) Inventories
The Company values its inventories at the lower of cost or market. Cost is determined using the average actual cost method for raw materials, semi finished, and finished goods, and the first-in, first-out (FIFO) method for nonproduction inventories and sundry. Costs in inventory include raw materials, labor, applied manufacturing overhead, and galvanized coating processes.
(j) Property, Plant, and Equipment
Purchases of property, plant, and equipment are recorded at cost. Replacements and major improvements are capitalized, while planned or unplanned maintenance and repairs are expensed as incurred. Interest costs for debt incurred as a result of large long-term construction projects are capitalized as a component of construction in progress.
Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings ranges from 30 to 35 years, land improvement is 20 years, steel-producing machinery and equipment is 20 years, furniture and fixtures is 10 years and office equipment ranges from 3 to 10 years. Property, plant and equipment held under capital leases are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the leased assets. Expenditures for improvements are capitalized and depreciated over the expected useful lives. Expenditures for normal maintenance and repairs are charged to expense as incurred. Mill roll expenditures are capitalized as incurred and depreciated over their expected useful life of up to 3 years.
SCL has completed projects to upgrade and expand its steelmaking facilities. The Company’s expansion included an additional electric arc furnace, ladle metallurgy furnace, vacuum tank degasser, continuous caster and tunnel reheat furnace, as well as a push-pull pickle line and a second galvanizing line. The $560,000 expansion was completed in 2011, with the exception of the vacuum tank degasser, which was completed in 2012.
Environmental expenditures are capitalized if the costs mitigate or prevent future environmental contamination or if the costs improve existing assets’ environmental safety or efficiency. All other environmental expenditures are expensed as incurred.
(k) Investment in Unconsolidated Affiliate
The Company accounts for its 20% investment in Mississippi Steel Processing (MSP), an unconsolidated affiliate, using the equity method. SCL does not have control but has the ability to exercise significant influence over the entity’s operating and financial policies.
(l) Long-Lived Assets
Long-lived assets, such as property and equipment, purchased intangibles subject to amortization, and the investment in an unconsolidated subsidiary are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to its estimated future cash flows or, where applicable, independent appraisal. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. Assets subject to disposition would be separately presented in the balance sheet and reported at lower of carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of an asset group classified as held-for-sale would be presented separately in the appropriate asset and liability section of the balance sheet. No impairment charges were recorded during the years ended December 31, 2013, 2012 and 2011.
F-9
(m) Income Taxes
The Company is considered a disregarded entity by SUSH for federal income tax purposes. As such, SCL is not directly subject to federal and most state income taxes and the Company’s operating results are included in the income tax filings of SUSH.
(n) Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant, and equipment and the investment in an affiliate; valuation allowances for receivables and inventories; valuation of share-based payments; and obligations related to employee benefits. Actual results could differ from those estimates.
(o) Deferred Credits
SCL received certain grants from governmental and other entities to reimburse the Company for property, plant, and equipment costs. The grants require the Company to meet certain conditions, including capital expenditure and employment targets, over a several-year period. SCL has recorded these grants, net of any related costs, as deferred income and will amortize the grant income as earned. In June 2009, the Company met the grant conditions and began amortizing the deferred income. These grants are being amortized on a straight-line basis over a 20-year period. Amortization during the years ended December 31, 2013, 2012 and 2011 approximated $1,447 each year. Amortization is included in costs in the accompanying statements of operations. The unamortized balances of $22,510 and $23,957 are included in deferred credits in the accompanying balance sheets at December 31, 2013 and 2012, respectively.
(p) Commitments and Contingencies
Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
(q) New Accounting Standards
There were no accounting pronouncements adopted or issued during 2013 that had, or are expected to have, a material impact on the Company’s results of operations or financial condition.
(r) Reclassifications
Certain reclassifications have been made to the 2011 and 2012 financial statements to conform with the 2013 presentation.
F-10
(2) Inventories
The major classes of inventories are as follows:
|
|
|
December 31 |
|
|
|
|
2013 |
|
2012 |
|
|
Production: |
|
|
|
|
|
|
Raw materials |
|
$ |
171,034 |
|
$ |
134,149 |
|
|
Semi finished and finished steel products: |
|
|
|
|
|
|
On site |
|
100,819 |
|
103,228 |
|
|
On consignment |
|
6,396 |
|
— |
|
|
Total production inventories at average actual cost |
|
278,249 |
|
237,377 |
|
|
Nonproduction and sundry |
|
42,521 |
|
35,961 |
|
|
Total inventories |
|
$ |
320,770 |
|
$ |
273,338 |
|
(3) Investment in Unconsolidated Affiliate
MSP is a flat-rolled steel slitting and cut-to-length operation. Costs associated with MSP’s processing of the Company’s products are reflected in costs and expenses. At December 31, 2013 and 2012, the Company’s share of the underlying net assets of MSP approximated its investment.
The tables below set forth summarized financial information for SCL’s unconsolidated affiliate:
|
|
|
December 31 |
|
|
|
|
2013 |
|
2012 |
|
|
Current assets |
|
$ |
929 |
|
$ |
1,389 |
|
|
Noncurrent assets |
|
9,256 |
|
8,404 |
|
|
Current liabilities |
|
988 |
|
170 |
|
|
Noncurrent liabilities |
|
5,263 |
|
6,453 |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
|
2013 |
|
2012 |
|
2011 |
|
|
Net sales |
|
$ |
8,457 |
|
$ |
8,531 |
|
$ |
3,196 |
|
|
Gross profit |
|
8,420 |
|
8,510 |
|
3,181 |
|
|
Net income (loss) |
|
834 |
|
1,666 |
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
F-11
(4) Debt
Debt consisted of the following at December 31, 2013 and 2012:
|
|
|
December 31 |
|
Rate of
interest at
December 31, |
|
Maturity |
|
|
|
|
2013 |
|
2012 |
|
2013 |
|
date |
|
|
Short-term debt: |
|
|
|
|
|
|
|
|
|
|
Insurance premium financing |
|
$ |
45 |
|
$ |
— |
|
3.89 |
% |
March 2014 |
|
|
Current portion of long-term debt |
|
400 |
|
659 |
|
7.62 |
|
|
|
|
Total short-term debt |
|
445 |
|
659 |
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
45,803 |
|
112,774 |
|
4.00 |
|
November 2018 |
|
|
Term loan: |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
1,415 |
|
2,073 |
|
7.62 |
|
February 2017 |
|
|
Bonds payable (net of discount) |
|
518,080 |
|
516,938 |
|
10.25 |
|
February 2018 |
|
|
Unsecured loan—due to SUSH, an affiliate |
|
444,524 |
|
287,059 |
|
8.00 |
|
January 2017 -September 2018 |
|
|
Unsecured loan—due to OAO, an affiliate |
|
— |
|
107,373 |
|
|
|
|
|
|
Unsecured loan—due to Severstal Dearborn, an affiliate |
|
93,999 |
|
86,908 |
|
8.00 |
|
September 2018 |
|
|
Total long-term debt |
|
1,103,821 |
|
1,113,125 |
|
|
|
|
|
|
Less amount due in one year |
|
$ |
400 |
|
$ |
659 |
|
|
|
|
|
|
Long-term debt due after one year |
|
1,103,421 |
|
1,112,466 |
|
|
|
|
|
|
Total debt |
|
$ |
1,103,866 |
|
$ |
1,113,125 |
|
|
|
|
|
Debt matures as follows:
|
|
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
Thereafter |
|
Total |
|
|
Short-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premium financing |
|
$ |
45 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
45 |
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility—Columbus |
|
— |
|
— |
|
— |
|
— |
|
45,803 |
|
— |
|
45,803 |
|
|
Term loan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
400 |
|
400 |
|
400 |
|
400 |
|
— |
|
— |
|
1,600 |
|
|
Bonds payable |
|
— |
|
— |
|
— |
|
— |
|
518,080 |
|
— |
|
518,080 |
|
|
Unsecured loan—due to SUSH, an affiliate |
|
— |
|
— |
|
— |
|
123,277 |
|
321,247 |
|
— |
|
444,524 |
|
|
Unsecured loan—due to Dearborn, an affiliate |
|
— |
|
— |
|
— |
|
— |
|
93,999 |
|
— |
|
93,999 |
|
|
Total maturities |
|
$ |
445 |
|
$ |
400 |
|
$ |
400 |
|
$ |
123,677 |
|
$ |
979,129 |
|
$ |
— |
|
1,104,051 |
|
|
Less amounts representing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
185 |
|
|
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,103,866 |
|
F-12
(a) Revolving Credit Facilities
In November 2013, SCL executed a $335,000 credit agreement (Asset Based Revolver or ABR) with certain financial institutions with Bank of America as agent. The ABR replaced the credit agreement from Citicorp more fully described below. The ABR will expire in November 2018 and, under certain conditions, is subject to combination within a single agreement with another related party’s similar ABR agreement. The ABR is secured primarily by SCL’s accounts receivable and inventories and by a secondary interest in plant equipment. Borrowings under the ABR are limited to specified percentages of accounts receivable and inventories. The ABR has one financial covenant: a minimum fixed charge coverage ratio (FCCR) that is tested only when borrowing availability falls below a certain threshold. As of December 31, 2013, SCL was not required to test the FCCR as availability was above the threshold.
At December 31, 2013, eligible accounts receivables and inventories at SCL supported borrowing capacity under the Asset Based Revolver of $326,132, of which up to $278,940 could be borrowed after subtracting the amount of borrowings outstanding and the amount of letters of credit outstanding. Outstanding letters of credit at December 31, 2013 for SCL were $1,389. The ABR bears an unused-line fee of 0.325% per year. Interest on loans under the ABR is calculated by one of two methods: (i) the prime rate plus a per annum margin ranging from 0.5% to 1.0%, depending on average quarterly excess availability for the preceding quarter and (ii) LIBOR plus a per annum margin ranging from 1.5% to 2.0%, depending on average quarterly excess availability for the preceding quarter. In 2013, SCL paid and capitalized closing fees of $3,975. The capitalized closing fees are being amortized over 60 months, the duration of the ABR. The unamortized capitalized closing fee of $3,843 for SCL is included in deferred charges in the accompanying balance sheet at December 31, 2013.
In February 2010, SCL entered into a $150,000 revolving credit agreement with Citicorp (Citicorp Revolver) which was amended in July 2011 to increase the commitment to $350,000. Borrowings under the Citicorp Revolver were limited to specified percentages of SCL accounts receivable and inventories. The Citicorp Revolver bore interest at a rate of LIBOR plus 2.25% to 2.75% or Base Rate plus 1.25% to 1.75% based upon the available credit during the previous month. The Citicorp Revolver had a maturity date of July 2016. The agreement bore unused commitment fees at 0.375% to 0.500%, based upon the available credit during the previous month per annum. Unused commitment fees for the years ended December 31, 2012 and 2011 were $520 and $700, respectively. The Citicorp Revolver had two financial covenants: (i) a limit on capital expenditures and (ii) a minimum fixed charge coverage ratio that is tested only when available credit is below a certain threshold. In November 2013, SCL terminated the Citicorp Revolver and repaid all amounts outstanding.
In 2011 and 2012, SCL paid closing fees of $3,824 and was amortizing this amount over 60 months, the duration of the Second Amended and Restated Credit Agreement prior to the termination. Upon termination of the Second Amended and Restated Credit Agreement, the unamortized fees of $2,103 that would have been amortized in 2014 through 2016 were recognized in interest expense in the statement of operations in 2013.
(b) Senior Bonds
In February 2010, SCL issued $525,000 of 10.25% bonds due February 2018. The bonds were issued with an original issue discount of 1.922%. The bondholders hold a first lien on SCL property, plant, and equipment. Interest is paid semiannually in February and August. Bond amortization of $1,142, $1,029 and $928 is included in interest expense in the accompanying statements of operations for the years ended December 2013, 2012 and 2011, respectively. In 2010, SCL paid and capitalized closing fees of $17,146. The capitalized closing fees are being amortized over 96 months, the term of the bonds. The unamortized capitalized closing fees of $8,930 and $11,074 are included in deferred charges in the accompanying balance sheets at December 31, 2013 and 2012.
F-13
(c) Subordinated Debt
In April 2008, SCL and Severstal Dearborn, LLC, a related company, executed a $130,000 subordinated loan agreement (the $130 Million Subordinated Loan). Loans under the $130 Million Subordinated Loan agreement had an expiration date of September 2014 that bore interest at an annual rate of 15%. Interest is paid in kind and has been included in the outstanding balance of the related loan. In February 2010, an amendment to the $130 Million Subordinated Loan agreement extended the expiration date to September 2018. In September 2012, the $130 Million Subordinate Loan was amended to reduce the interest rate from 15% to 8%.
In February 2010, SCL and SUSH executed a $388,000 subordinated loan agreement (the $388 Million Subordinated Loan). Loans under the $388 Million Subordinated Loan agreement have an expiration date of September 2018. Interest of 8% is paid in kind and has been included in the outstanding balance of the related loan.
In August 2010, SCL and OAO Severstal, a related company, executed a $100,000 subordinated loan agreement (the $100 Million Subordinated Loan). Loans under the $100 Million Subordinated Loan agreement had an expiration date of January 2017. Interest of 8% was paid in kind and was included in the outstanding balance of the related loan. In December 2011, the $100 Million Subordinated Loan was amended so that the interest was no longer paid in kind, but rather payable upon maturity of the loan. In August 2013, this loan was transferred to and assumed by SUSH. Accrued interest at the time of transfer was paid in kind and included in the outstanding balance of the loan transferred to SUSH.
(d) Insurance Premium Financing
In 2013, SCL financed annual insurance premium of $222 with Premium Funding Associates, Inc. The financings carry an interest rate of 3.89% per annum payable in equal monthly installments through March 2014.
(e) Capital Lease
SCL is obligated under various capital leases covering property and certain furniture, fixtures, and office equipment. At December 31, 2013 and 2012, the amount of property, plant, and equipment and related accumulated amortization recorded under capital leases were as follows:
|
|
|
December 31 |
|
|
|
|
2013 |
|
2012 |
|
|
Land |
|
$ |
2,422 |
|
$ |
2,422 |
|
|
Equipment and other |
|
5,123 |
|
5,123 |
|
|
|
|
7,545 |
|
7,545 |
|
|
Less accumulated amortization |
|
768 |
|
512 |
|
|
|
|
$ |
6,777 |
|
$ |
7,033 |
|
Amortization of assets held under capital leases is included in depreciation expense.
(5) Income Taxes
The Company’s income tax expense consists of the following components:
|
|
|
Year ended December 31 |
|
|
|
|
2013 |
|
2012 |
|
2011 |
|
|
Current |
|
$ |
479 |
|
$ |
— |
|
$ |
— |
|
|
Deferred |
|
— |
|
— |
|
— |
|
|
Income tax expense |
|
$ |
479 |
|
$ |
— |
|
$ |
— |
|
The $479 of current tax expense recognized in 2013 represents state income taxes in a state that does not follow the federal treatment of disregarded entities. The Company is still subject to state examinations for open tax years in a jurisdiction that does not follow the federal treatment of disregarded entities, currently extending back until 2009.
F-14
(6) Commitments and Contingencies
(a) Contractual Purchase Commitments
The Company is obligated to make payments under contractual purchase commitments, including unconditional purchase obligations. Payments for contracts with remaining terms are summarized below:
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
Thereafter |
|
Total |
|
|
$ |
15,726 |
|
$ |
22,094 |
|
$ |
26,825 |
|
$ |
17,058 |
|
$ |
16,342 |
|
$ |
91,712 |
|
$ |
189,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations relate to the supply of raw materials, transportation services, and industrial gases with terms ranging from three to 22 years. Total payments relating to unconditional purchase obligations in 2013, 2012 and 2011 were approximately $28,751, $166,083 and $276,322, respectively.
(b) Capital Commitments
At December 31, 2013, SCL’s commitments to acquire property, plant and equipment totaled approximately $9,179.
(c) Lease Commitments
The Company has several noncancelable operating leases, primarily for equipment, that expire over the next eight years. These leases generally contain renewal options for periods ranging from one to five years, and require the Company to pay all executory costs, such as maintenance and insurance. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2013 are as follows:
|
Year ending December 31: |
|
|
|
|
2014 |
|
$ |
166 |
|
|
2015 |
|
110 |
|
|
2016 |
|
110 |
|
|
2017 |
|
74 |
|
|
2018 |
|
74 |
|
|
2019 and thereafter |
|
258 |
|
|
Total |
|
$ |
792 |
|
Operating rent expense for the years ended December 31, 2013, 2012 and 2011 was $4,452, $2,974 and $2,942, respectively.
(d) Legal Matters
The Company is party to legal actions and claims arising in the ordinary course of business. SCL believes, based upon information currently available, that such litigation and claims, both individually and in the aggregate, will be resolved without a material effect on its results of operations and its financial statements as a whole in the period of resolution. However, litigation involves an element of uncertainty, and future developments could cause these actions or claims to have a material adverse effect on SCL’s results of operations and its financial statements as a whole in the period of resolution.
F-15
(7) Related-Party Transactions
The Company purchases certain raw materials, services, and semi-finished steel from related parties located in North America and Europe. The Company also sells certain services, raw materials, and semi-finished steel to the same related parties. Purchases and sales for years ended December 31, 2013, 2012 and 2011 and amounts payable and receivable for such transactions as of December 31, 2013 and 2012 are as follows:
|
|
|
As of and for the year ended
December 31, 2013 |
|
|
|
|
Purchases |
|
Payable |
|
Sales |
|
Receivable |
|
|
Severstal US Holdings, LLC |
|
$ |
— |
|
$ |
298 |
|
$ |
— |
|
$ |
— |
|
|
Severstal Dearborn, LLC |
|
14,385 |
|
15,603 |
|
76,270 |
|
10,055 |
|
|
Severstal Export GmbH |
|
57,480 |
|
5,495 |
|
— |
|
— |
|
|
OAO Severstal |
|
138 |
|
— |
|
— |
|
— |
|
|
MSP |
|
832 |
|
161 |
|
— |
|
14 |
|
|
Total |
|
$ |
72,835 |
|
$ |
21,557 |
|
$ |
76,270 |
|
$ |
10,069 |
|
|
|
|
As of and for the year ended
December 31, 2012 |
|
|
|
|
Purchases |
|
Payable |
|
Sales |
|
Receivable |
|
|
Severstal Dearborn, LLC |
|
$ |
6,556 |
|
$ |
3,895 |
|
$ |
129,306 |
|
$ |
6,457 |
|
|
Severstal Export GmbH |
|
72,054 |
|
15,937 |
|
— |
|
— |
|
|
OAO Severstal |
|
590 |
|
450 |
|
— |
|
— |
|
|
MSP |
|
715 |
|
— |
|
— |
|
188 |
|
|
Total |
|
$ |
79,915 |
|
$ |
20,282 |
|
$ |
129,306 |
|
$ |
6,645 |
|
|
|
|
Year ended
December 31, 2011 |
|
|
|
|
Purchases |
|
Sales |
|
|
Severstal Dearborn, LLC |
|
$ |
20,577 |
|
$ |
116,911 |
|
|
Severstal Sparrows Point, LLC |
|
3,851 |
|
— |
|
|
Severstal Wheeling, Inc. |
|
— |
|
4,176 |
|
|
Severstal Export GmbH |
|
5,146 |
|
— |
|
|
Total |
|
$ |
29,574 |
|
$ |
121,087 |
|
During the years ended December 31, 2013, 2012 and 2011, the Company expensed $14,725, $16,851 and $7,413, respectively, of corporate management fees from a related party in selling and administrative expenses in the accompanying statements of operations.
During the years ended December 31, 2013, 2012 and 2011, the Company expensed $40,380, $36,205 and $15,670, respectively, of interest expense from related party debt in the accompanying statements of operations.
F-16
(8) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
· Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities
· Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices in active markets that are observable either directly or indirectly
· Level 3—Unobservable inputs for which there is little or no market data
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques outlined in ASC Subtopic 820-10 Fair Value Measurements and Disclosures:
· Market approach—Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
· Cost approach—Amount that would be required to replace the service capacity of an asset (replacement cost)
· Income approach—Techniques to convert future amounts to a single present amount based upon market expectations
(a) Items Measured at Fair Value on a Recurring Basis
A share-based payment award liability is included in the Company’s financial instruments. The liability related to the share-based payment awards is recorded at fair value based on an estimated price to settle the liability. At December 31, 2013 and 2012, the estimated fair value of this liability was $2,386 and $3,786, respectively (see note 9). The fair value of this liability was determined using Level 3 inputs and determined based on the estimated fair value of the Company based on a discounted cash flow model.
(b) Financial Instruments Not Carried at Fair Value
The carrying value of the Company’s long-term debt excluding bonds approximates fair value based on interest rates that are believed to be available to the Company for debt with similar provisions provided for in the existing debt agreements.
SCL does not carry its fixed rate long-term bond debt at fair value. The carrying value as of December 31, 2013 and 2012 was $518,080 and $516,938, respectively. The estimated fair value as of December 31, 2013 and 2012 was $619,400 and $516,938, respectively. The fair value of the bonds was estimated using discounted cash flow models with market based borrowing rates for similar types of arrangements (Level 2).
F-17
(9) Share-Based Payment Awards
In April 2008, SCL adopted a plan to provide for the grant of share based payment awards to certain key management and employees. The purpose of the plan is to align the interests of the participating employees with the interests of the Company, to motivate them to increase the value of the Company, and to retain them. The plan was effective as of January 1, 2008, and the value of the awards is based on a percentage of the fair value of the Company, which is determined on an annual basis. Participating employees were 100% vested in their awards at December 31, 2011. Distributions related to vested awards are payable in cash. Due to these awards being settled in cash, a liability has been recorded based on the estimated fair value to settle the awards. At December 31, 2013 and 2012, the Company has estimated this liability to be $2,386 and $3,786, respectively, and has recorded this amount in noncurrent other liabilities in the accompanying balance sheets. During 2013, 2012 and 2011, the Company recorded $894, $1,726 and $1,154 of income, respectively, in the accompanying statements of operations related to these awards. Distributions of vested awards were paid to former employees during 2010. As of December 31, 2013, approximately $3,817 in awards have been distributed.
(10) Subsequent Events
On March 12, 2014, SCL redeemed the Senior Bonds. The redemption amount, including fees and interest, was approximately $582,500. The bond redemption was funded by intercompany debt from SUSH bearing interest at a rate of 2% per annum that matures in June 2018.
The Company has evaluated subsequent events from the balance sheet date through April 11, 2014, the date at which the financial statements were available to be issued, and determined there were no other items to disclose.
F-18
Independent Auditors’ Review Report
The Board of Directors
Severstal Columbus, LLC:
Report on the Financial Statements
We have reviewed the accompanying balance sheet as of June 30, 2014 of Severstal Columbus, LLC (the Company) and the related statements of operations and cash flows for the six month periods ended June 30, 2014 and 2013.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with U.S. generally accepted accounting principles.
Auditors’ Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the financial information referred to above for it to be in accordance with U.S. generally accepted accounting principles.
Report on Balance Sheet as of December 31, 2013
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet as of December 31, 2013, and the related statements of operations, member’s equity and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited financial statements in our report dated April 11, 2014. In our opinion, the accompanying balance sheet of Severstal Columbus, LLC as of December 31, 2013 is consistent, in all material respects, with the audited financial statements from which it has been derived.
Jackson, Mississippi
September 3, 2014
F-19
SEVERSTAL COLUMBUS, LLC
Balance Sheets (Unaudited)
June 30, 2014 and December 31, 2013
(Amounts in thousands of U.S. dollars)
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,930 |
|
$ |
941 |
|
|
Accounts receivable: |
|
|
|
|
|
|
Trade and other (net of allowance for doubtful accounts of $155 and $181 at June 30, 2014 and December 31, 2013, respectively) |
|
181,297 |
|
150,205 |
|
|
Affiliates |
|
11,518 |
|
10,069 |
|
|
Inventories |
|
304,303 |
|
320,770 |
|
|
Other current assets |
|
2,928 |
|
1,415 |
|
|
Total current assets |
|
507,976 |
|
483,400 |
|
|
Property, plant, and equipment: |
|
|
|
|
|
|
Land |
|
6,423 |
|
6,423 |
|
|
Buildings and improvements |
|
285,276 |
|
285,276 |
|
|
Machinery and equipment |
|
1,496,710 |
|
1,490,840 |
|
|
Construction in progress |
|
13,265 |
|
4,151 |
|
|
Subtotal |
|
1,801,674 |
|
1,786,690 |
|
|
Less accumulated depreciation |
|
578,003 |
|
536,394 |
|
|
Net property, plant, and equipment |
|
1,223,671 |
|
1,250,296 |
|
|
Investment in unconsolidated affiliate |
|
1,054 |
|
1,195 |
|
|
Deferred charges and other |
|
6,081 |
|
14,578 |
|
|
Total assets |
|
$ |
1,738,782 |
|
$ |
1,749,469 |
|
|
Liabilities and Member’s Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable: |
|
|
|
|
|
|
Trade |
|
$ |
231,186 |
|
$ |
228,470 |
|
|
Affiliates |
|
15,551 |
|
21,557 |
|
|
Current portion of long-term debt |
|
436 |
|
400 |
|
|
Short-term debt |
|
— |
|
45 |
|
|
Interest payable |
|
142 |
|
20,959 |
|
|
Other accrued liabilities |
|
15,850 |
|
16,286 |
|
|
Total current liabilities |
|
263,165 |
|
287,717 |
|
|
Long-term debt—related parties |
|
1,010,765 |
|
538,523 |
|
|
Long-term debt—other |
|
63,396 |
|
564,898 |
|
|
Non-current interest payable |
|
12,258 |
|
3,945 |
|
|
Deferred credits |
|
21,740 |
|
22,510 |
|
|
Other liabilities |
|
2,270 |
|
2,386 |
|
|
Total liabilities |
|
1,373,594 |
|
1,419,979 |
|
|
Member’s equity |
|
365,188 |
|
329,490 |
|
|
Total liabilities and member’s equity |
|
$ |
1,738,782 |
|
$ |
1,749,469 |
|
See accompanying notes to financial statements.
F-20
SEVERSTAL COLUMBUS, LLC
Statements of Operations (Unaudited)
Six Months ended June 30, 2014 and 2013
(Amounts in thousands of U.S. dollars)
|
|
|
2014 |
|
2013 |
|
|
Sales: |
|
|
|
|
|
|
Unaffiliated customers |
|
$ |
1,082,261 |
|
$ |
869,428 |
|
|
Affiliates |
|
57,373 |
|
37,446 |
|
|
Total sales |
|
1,139,634 |
|
906,874 |
|
|
Costs and expenses: |
|
|
|
|
|
|
Costs (excluding items listed below) |
|
975,888 |
|
847,126 |
|
|
Depreciation and amortization |
|
41,609 |
|
40,527 |
|
|
Selling and administrative expenses |
|
6,988 |
|
16,339 |
|
|
Total costs and expenses |
|
1,024,485 |
|
903,992 |
|
|
Operating income |
|
115,149 |
|
2,882 |
|
|
Interest income |
|
43 |
|
1 |
|
|
Interest expense |
|
(32,743 |
) |
(51,969 |
) |
|
Loss on early extinguishment of debt |
|
(46,423 |
) |
— |
|
|
Gain on disposal of assets |
|
— |
|
200 |
|
|
Other—net |
|
72 |
|
(53 |
) |
|
Loss from unconsolidated affiliate |
|
(141 |
) |
(25 |
) |
|
Income (loss) before income taxes |
|
35,957 |
|
(48,964 |
) |
|
Income tax expense |
|
(173 |
) |
(200 |
) |
|
Net income (loss) |
|
$ |
35,784 |
|
$ |
(49,164 |
) |
See accompanying notes to financial statements.
F-21
SEVERSTAL COLUMBUS, LLC
Statements of Cash Flows (Unaudited)
Six Months ended June 30, 2014 and 2013
(Amounts in thousands of U.S. dollars)
|
|
|
2014 |
|
2013 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income (loss) |
|
$ |
35,784 |
|
$ |
(49,164 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
41,609 |
|
40,527 |
|
|
Amortization of capitalized debt costs |
|
755 |
|
1,454 |
|
|
Gain on disposal of assets |
|
— |
|
(200 |
) |
|
Write-off of deferred financing costs |
|
8,561 |
|
— |
|
|
Write-off of unamortized debt discount |
|
6,920 |
|
— |
|
|
Loss from unconsolidated affiliate |
|
141 |
|
25 |
|
|
Accretion of leases |
|
45 |
|
56 |
|
|
Interest in kind from related party |
|
14,965 |
|
15,310 |
|
|
Share-based payment awards expense (benefit) |
|
123 |
|
(894 |
) |
|
Amortization of grants |
|
(770 |
) |
(723 |
) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(32,541 |
) |
(20,625 |
) |
|
Inventories |
|
16,467 |
|
(19,280 |
) |
|
Other current assets and deferred charges |
|
(1,752 |
) |
(10,024 |
) |
|
Accounts payable and accrued liabilities |
|
(16,230 |
) |
(19,017 |
) |
|
Net cash provided by (used in) operating activities |
|
74,077 |
|
(62,555 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
Capital expenditures |
|
(14,984 |
) |
(13,204 |
) |
|
Other |
|
(818 |
) |
(25 |
) |
|
Net cash used in investing activities |
|
(15,802 |
) |
(13,229 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from debt financing |
|
1,706,075 |
|
385,345 |
|
|
Payment of debt |
|
(1,757,275 |
) |
(381,407 |
) |
|
Distributions to member |
|
(86 |
) |
(61 |
) |
|
Capital contribution from member |
|
— |
|
80,000 |
|
|
Net cash provided by (used in) financing activities |
|
(51,286 |
) |
83,877 |
|
|
Net increase in cash and cash equivalents |
|
6,989 |
|
8,093 |
|
|
Cash and cash equivalents—beginning of period |
|
941 |
|
3,440 |
|
|
Cash and cash equivalents—end of period |
|
$ |
7,930 |
|
$ |
11,533 |
|
|
Supplemental information: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
30,206 |
|
$ |
30,890 |
|
See accompanying notes to financial statements.
F-22
SEVERSTAL COLUMBUS, LLC
Notes to Financial Statements (Unaudited)
(Amounts in thousands of U.S. dollars unless otherwise noted)
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Severstal Columbus, LLC (SCL or the Company), is a Delaware limited liability company formed on August 10, 2005 and a wholly owned subsidiary of Severstal Columbus Holdings, LLC (Holdings), a Delaware limited liability company. Holdings is a wholly owned subsidiary of Severstal US Holdings, LLC (SUSH), a wholly owned subsidiary of OAO Severstal (Severstal). The Company was formed to construct and operate a steel manufacturing plant (the Plant) producing hot rolled, cold rolled, and coated steel products for high value added steel sheet applications and with the capability to supply the exposed automotive sheet market. SCL sells and distributes its steel sheet products throughout the continental United States and Mexico. The Company continues to focus on product development and operational improvements. SCL’s Phase 2 expansion was substantially completed during 2011, which doubled its production capacity from 1.7 million net tons per year to 3.4 million net tons per year.
The financial statements include the accounts of SCL. Investments in business entities in which the Company does not have control but has the ability to exercise significant influence over the entity’s operating and financial policies are accounted for under the equity method.
(b) Segment Information
SCL operates in one segment, the manufacture and sale of flat-rolled steel products. The Company’s business is conducted in North America with the exception of certain raw material and semi-finished steel procurement, which from time to time accesses global markets.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(d) Revenue Recognition
Revenue from product sales is recognized when product shipment has occurred, the customer has taken title and assumed the risks of ownership, the price is fixed or determinable, and collectibility is reasonably assured. Provisions for returns and other adjustments are recorded in the period in which the revenue is recognized.
(e) Financial Instruments
The carrying amount of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, and short-term debt, approximates their fair value at June 30, 2014 and December 31, 2013. At June 30, 2014, the Company’s management has determined that it is not practical to estimate and disclose the fair value of affiliate debt due to the related party nature of these arrangements. SCL considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
F-23
(f) Significant Risk and Uncertainties
Industry
The steel industry is cyclical in nature and, within the United States, has been adversely affected in recent years by the volatility of steel imports, worldwide production overcapacity, increased domestic and international competition, high labor and energy costs, inefficient plants, and, at times, shortages of raw materials. As a result of these conditions, SCL pursues initiatives designed to improve the Company’s competitiveness, including cost and productivity improvements.
Environmental
The Company’s operations are subject to federal, state, and local laws, regulations, permits, and consent agreements relating to the protection of human health and the environment. Although the Company believes that its facilities are in material compliance with these provisions, from time to time the Company is subject to investigations by environmental agencies. In management’s opinion, such current investigations, in the aggregate, will not have a materially adverse effect on the Company’s financial position, results of operations, or cash flows.
Current Economic Conditions
The Company’s operations and principal markets for its products in the domestic automotive industry and their suppliers, service centers, and steel converters have been, and could be, adversely affected by near-term unfavorable general economic conditions. While general economic conditions have improved since the recession of 2008-2010, SCL and Holdings’ aforementioned initiatives continued throughout 2013-2014 and have at various times included selective reduction in melt and finishing operations, optimization of production schedules across related North American facilities, efforts to align the Company’s supply base more consistently with downscaled production requirements, and labor and overhead cost reduction actions.
(g) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable. SCL limits its credit risk by performing ongoing credit evaluations and, when deemed necessary, by requiring letters of credit, guarantees, or collateral. The Company’s customers comprise manufacturers in the domestic automotive industry and their suppliers, service centers, and steel converters serving various market segments. Management believes that risk associated with the Company’s concentration of credit at June 30, 2014 and December 31, 2013 is adequately addressed by existing controls. However, the ability of SCL’s debtors to honor their obligations to the Company is dependent upon economic developments in the automotive and other flat-rolled steel-consuming industries. General slowdowns in consumer spending caused by uncertainty about future market conditions have at times adversely impacted the profits and cash flows of the Company’s customers and may continue to do so. As such, it is reasonably possible that the financial condition of SCL’s customers may deteriorate in the near term. Inventory, accounts receivable, and revenue losses resulting from such deterioration may have a correspondingly adverse impact on the operations of the Company.
(h) Trade Accounts Receivable
The Company reviews its allowance for doubtful accounts monthly. Balances over 90 days past due and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
At December 31, 2013, SCL had accounts receivable of $17,605 from one customer. No other customer accounted for more than 10% of accounts receivable at June 30, 2014 and December 31, 2013, or revenues for the six months ended June 30, 2014 and 2013.
F-24
(i) Inventories
The Company values its inventories at the lower of cost or market. Cost is determined using the average actual cost method for raw materials, semi- finished, and finished goods, and the first-in, first-out (FIFO) method for nonproduction inventories and sundry. Costs in inventory include raw materials, labor, applied manufacturing overhead, and galvanized coating processes.
(j) Property, Plant, and Equipment
Purchases of property, plant, and equipment are recorded at cost. Replacements and major improvements are capitalized, while planned or unplanned maintenance and repairs are expensed as incurred. Interest costs for debt incurred as a result of large long-term construction projects are capitalized as a component of construction in progress.
Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings ranges from 30 to 35 years, land improvement is 20 years, steel-producing machinery and equipment is 20 years, furniture and fixtures is 10 years and office equipment ranges from 3 to 10 years. Property, plant and equipment held under capital leases are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the leased assets. Expenditures for improvements are capitalized and depreciated over the expected useful lives. Expenditures for normal maintenance and repairs are charged to expense as incurred. Mill roll expenditures are capitalized as incurred and depreciated over their expected useful life of up to 3 years.
SCL has completed projects to upgrade and expand its steelmaking facilities. The Company’s expansion included an additional electric arc furnace, ladle metallurgy furnace, vacuum tank degasser, continuous caster and tunnel reheat furnace, as well as a push-pull pickle line and a second galvanizing line. The $560,000 expansion was completed in 2011, with the exception of the vacuum tank degasser, which was completed in 2012.
Environmental expenditures are capitalized if the costs mitigate or prevent future environmental contamination or if the costs improve existing assets’ environmental safety or efficiency. All other environmental expenditures are expensed as incurred.
(k) Investment in Unconsolidated Affiliate
The Company accounts for its approximate 20% investment in Mississippi Steel Processing (MSP), an unconsolidated affiliate, using the equity method. SCL does not have control but has the ability to exercise significant influence over the entity’s operating and financial policies.
(l) Long-Lived Assets
Long-lived assets, such as property and equipment, purchased intangibles subject to amortization, and the investment in an unconsolidated subsidiary are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to its estimated future cash flows or, where applicable, independent appraisal. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. Assets subject to disposition would be separately presented in the balance sheet and reported at lower of carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of an asset group classified as held-for-sale would be presented separately in the appropriate asset and liability section of the balance sheet. No impairment charges were recorded during the six months ended June 30, 2014 and 2013.
F-25
(m) Income Taxes
The Company is considered a disregarded entity by SUSH for federal income tax purposes. As such, SCL is not directly subject to federal and most state income taxes and the Company’s operating results are included in the income tax filings of SUSH.
(n) Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant, and equipment and the investment in an affiliate; valuation allowances for receivables and inventories; valuation of share-based payments; and obligations related to employee benefits. Actual results could differ from those estimates.
(o) Deferred Credits
SCL received certain grants from governmental and other entities to reimburse the Company for property, plant, and equipment costs. The grants require the Company to meet certain conditions, including capital expenditure and employment targets, over a several-year period. SCL has recorded these grants, net of any related costs, as deferred income and will amortize the grant income as earned. In June 2009, the Company met the grant conditions and began amortizing the deferred income. These grants are being amortized on a straight-line basis over a 20-year period. Amortization during the six months ended June 30, 2014 and 2013, respectively, approximated $770 and $723, respectively. Amortization is included in costs in the accompanying statements of operations. The unamortized balances of $21,740 and $22,510 are included in deferred credits in the accompanying balance sheets at June 30, 2014 and December 31, 2013, respectively.
(p) Commitments and Contingencies
Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines, and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
(q) New Accounting Standards
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet evaluated the effect that ASU 2014-09 will have on its financial statements and disclosures.
(r) Reclassifications
Certain reclassifications have been made to the 2013 financial statements to conform with the 2014 presentation.
(2) Inventories
The major classes of inventories are as follows:
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
|
Production: |
|
|
|
|
|
|
Raw materials |
|
$ |
134,669 |
|
$ |
171,034 |
|
|
Semi finished and finished steel products: |
|
|
|
|
|
|
On site |
|
115,175 |
|
100,819 |
|
|
On consignment |
|
8,241 |
|
6,396 |
|
|
Total production inventories at average actual cost |
|
258,085 |
|
278,249 |
|
|
Nonproduction and sundry |
|
46,218 |
|
42,521 |
|
|
Total inventories |
|
$ |
304,303 |
|
$ |
320,770 |
|
F-26
(3) Investment in Unconsolidated Affiliate
MSP is a flat-rolled steel slitting and cut-to-length operation. Costs associated with MSP’s processing of the Company’s products are reflected in costs and expenses.
The tables below set forth summarized financial information for SCL’s unconsolidated affiliate:
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
|
Current assets |
|
$ |
815 |
|
$ |
929 |
|
|
Noncurrent assets |
|
14,220 |
|
9,256 |
|
|
Current liabilities |
|
1,116 |
|
988 |
|
|
Noncurrent liabilities |
|
10,859 |
|
5,263 |
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
2014 |
|
Six Months
Ended
June 30,
2013 |
|
|
Net sales |
|
$ |
4,547 |
|
$ |
4,471 |
|
|
Gross profit |
|
4,496 |
|
4,458 |
|
|
Net income (loss) |
|
(468 |
) |
671 |
|
|
|
|
|
|
|
|
|
(4) Debt
Debt consisted of the following at June 30, 2014 and December 31, 2013:
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Rate of
interest at
June 30,
2014 |
|
Maturity
date |
|
|
Short-term debt: |
|
|
|
|
|
|
|
|
|
|
Insurance premium financing |
|
$ |
— |
|
$ |
45 |
|
N/A |
|
March 2014 |
|
|
Current portion of long-term debt |
|
436 |
|
400 |
|
7.62% |
|
|
|
|
Total short-term debt |
|
436 |
|
445 |
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
62,772 |
|
45,803 |
|
Libor 2%; Prime 4% |
|
November 2018 |
|
|
Term loan: |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
1,060 |
|
1,415 |
|
7.62% |
|
February 2017 |
|
|
Bonds payable (net of discount) |
|
— |
|
518,080 |
|
N/A |
|
February 2018 |
|
|
Unsecured loan—due to SUSH, an affiliate |
|
358,005 |
|
444,524 |
|
8.00% |
|
January 2017 - September 2018 |
|
|
SUSH, an affiliate |
|
555,000 |
|
— |
|
2.00% |
|
June 2018 |
|
|
Unsecured loan—due to Severstal Dearborn, an affiliate |
|
97,760 |
|
93,999 |
|
8.00% |
|
September 2018 |
|
|
Total long-term debt |
|
1,074,597 |
|
1,103,821 |
|
|
|
|
|
|
Less amount due in one year |
|
436 |
|
400 |
|
|
|
|
|
|
Long-term debt due after one year |
|
1,074,161 |
|
1,103,421 |
|
|
|
|
|
|
Total debt |
|
$ |
1,074,597 |
|
$ |
1,103,866 |
|
|
|
|
|
F-27
Annual debt maturities for the twelve month periods ending June 30 follow:
|
|
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
Thereafter |
|
Total |
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
62,772 |
|
$ |
— |
|
$ |
62,772 |
|
|
Capital lease obligations |
|
436 |
|
400 |
|
364 |
|
— |
|
— |
|
— |
|
1,200 |
|
|
Unsecured loan—due to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUSH, an affiliate |
|
— |
|
— |
|
123,277 |
|
555,000 |
|
234,728 |
|
— |
|
913,005 |
|
|
Unsecured loan—due to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dearborn, an affiliate |
|
— |
|
— |
|
— |
|
— |
|
97,760 |
|
— |
|
97,760 |
|
|
Total maturities |
|
$ |
436 |
|
$ |
400 |
|
$ |
123,641 |
|
$ |
555,000 |
|
$ |
395,260 |
|
$ |
— |
|
$ |
1,074,737 |
|
|
Less amounts representing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,074,597 |
|
(a) Revolving Credit Facilities
In November 2013, SCL executed a $335,000 credit agreement (Asset Based Revolver or ABR) with certain financial institutions with Bank of America as agent. The ABR replaced the credit agreement from Citicorp more fully described below. The ABR will expire in November 2018 and, under certain conditions, is subject to combination within a single agreement with another related party’s similar ABR agreement. The ABR is secured primarily by SCL’s accounts receivable and inventories and by a secondary interest in plant equipment. Borrowings under the ABR are limited to specified percentages of accounts receivable and inventories. The ABR has one financial covenant: a minimum fixed charge coverage ratio (FCCR) that is tested only when borrowing availability falls below a certain threshold. As of June 30, 2014, SCL was not required to test the FCCR as availability was above the threshold.
At June 30, 2014, eligible accounts receivables and inventories at SCL totaled $340,861; however the total borrowing capacity under the Asset Based Revolver was limited to $335,000, of which up to $261,687 could be borrowed after subtracting the amount of borrowings outstanding and the amount of letters of credit outstanding. Outstanding letters of credit at June 30, 2014 for SCL were $10,541. The ABR bears an unused-line fee of 0.325% per year. Interest on loans under the ABR is calculated by one of two methods: (i) the prime rate plus a per annum margin ranging from 0.5% to 1.0%, depending on average quarterly excess availability for the preceding quarter and (ii) LIBOR plus a per annum margin ranging from 1.5% to 2.0%, depending on average quarterly excess availability for the preceding quarter. In 2013, SCL paid and capitalized closing fees of $3,975. The capitalized closing fees are being amortized over 60 months, the duration of the ABR. The unamortized capitalized closing fee of $3,455 and $3,843 for SCL is included in deferred charges in the accompanying balance sheets at June 30, 2014 and December 31, 2013, respectively.
In February 2010, SCL entered into a $150,000 revolving credit agreement with Citicorp (Citicorp Revolver) which was amended in July 2011 to increase the commitment to $350,000. Borrowings under the Citicorp Revolver were limited to specified percentages of SCL accounts receivable and inventories. The Citicorp Revolver bore interest at a rate of LIBOR plus 2.25% to 2.75% or Base Rate plus 1.25% to 1.75% based upon the available credit during the previous month. The Citicorp Revolver had a maturity date of July 2016. The agreement bore unused commitment fees at 0.375% to 0.500%, based upon the available credit during the previous month per annum. Unused commitment fees for the six months ended June 30, 2013 were $398. The Citicorp Revolver had two financial covenants: (i) a limit on capital expenditures and (ii) a minimum fixed charge coverage ratio that is tested only when available credit is below a certain threshold. In November 2013, SCL terminated the Citicorp Revolver and repaid all amounts outstanding.
In 2011 and 2012, SCL paid closing fees of $3,824 and was amortizing this amount over 60 months, the duration of the Second Amended and Restated Credit Agreement prior to the termination. As of June 30, 2013, $2,295 in fees remained unamortized. $382 was recognized in interest expense in the statement of operations for the six months ended June 30, 2013.
F-28
(b) Senior Bonds
In February 2010, SCL issued $525,000 of 10.25% bonds originally due February 2018. The bonds were issued with an original issue discount of 1.922%. The bondholders held a first lien on SCL property, plant, and equipment. The Senior Secured Bonds were redeemed on March 12, 2014. The redemption price was 105.125% of the principal amount plus $4,036 representing accrued and unpaid interest. This debt was replaced with subordinated debt from SUSH. During the six month period ended June 30, 2014, the Company recorded a loss from the extinguishment of debt of $46,423, of which $6,920 related to the write-off of any remaining unamortized debt discount and $8,561 related to the write- off of any remaining deferred financing costs. Interest was paid semiannually in February and August. Bond amortization of $740 and $1,072, respectively, is included in interest expense in the accompanying statements of operations for the six months ended June 30, 2014 and 2013. In 2010, SCL paid and capitalized closing fees of $17,146. The capitalized closing fees were being amortized over 96 months, the original term of the bonds. The unamortized capitalized closing fees of $8,930 are included in deferred charges in the accompanying balance sheet at December 31, 2013.
(c) Subordinated Debt
In April 2008, SCL and Severstal Dearborn, LLC, a related company, executed a $130,000 subordinated loan agreement (the $130 Million Subordinated Loan). Loans under the $130 Million Subordinated Loan agreement had an expiration original date of September 2014 that bore interest at an annual rate of 15%. Interest is paid in kind and has been included in the outstanding balance of the related loan. In February 2010, an amendment to the $130 Million Subordinated Loan agreement extended the expiration date to September 2018. In September 2012, the $130 Million Subordinated Loan was amended to reduce the interest rate from 15% to 8%.
In February 2010, SCL and SUSH executed a $388,000 subordinated loan agreement (the $388 Million Subordinated Loan). Loans under the $388 Million Subordinated Loan agreement have an expiration date of September 2018. Interest of 8% is paid in kind and has been included in the outstanding balance of the related loan.
In August 2010, SCL and OAO Severstal, a related company, executed a $100,000 subordinated loan agreement (the $100 Million Subordinated Loan). Loans under the $100 Million Subordinated Loan agreement had an original expiration date of January 2017. Interest of 8% was paid in kind and was included in the outstanding balance of the related loan. In December 2011, the $100 Million Subordinated Loan was amended so that the interest was no longer paid in kind, but rather payable upon maturity of the loan. In August 2013, this loan was transferred to and assumed by SUSH. Accrued interest at the time of transfer was paid in kind and included in the outstanding balance of the loan transferred to SUSH.
In March 2014, SCL and SUSH executed a $555,000 subordinated loan agreement (the $555 Million Subordinated Loan). Loans under the $555 Million Subordinated Loan agreement have an expiration date of June 30, 2018. Interest of 2% is accrued per annum, payable on maturity of the loan.
(d) Insurance Premium Financing
In 2013, SCL financed annual insurance premium of $222 with Premium Funding Associates, Inc. The financings carried an interest rate of 3.89% per annum payable in equal monthly installments through March 2014.
F-29
(e) Capital Lease
SCL is obligated under various capital leases covering property and certain furniture, fixtures, and office equipment. At June 30, 2014 and December 31, 2013, the amount of property, plant, and equipment and related accumulated amortization recorded under capital leases were as follows:
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
|
Land |
|
$ |
2,422 |
|
$ |
2,422 |
|
|
Equipment and other |
|
5,123 |
|
5,123 |
|
|
|
|
7,545 |
|
7,545 |
|
|
Less accumulated amortization |
|
918 |
|
768 |
|
|
|
|
$ |
6,627 |
|
$ |
6,777 |
|
Amortization of assets held under capital leases is included in depreciation expense.
(5) Income Taxes
The Company’s income tax expense consists of the following components:
|
|
|
Six
Months Ended
June 30,
2014 |
|
Six
Months Ended
June 30,
2013 |
|
|
Current |
|
$ |
173 |
|
$ |
200 |
|
|
Deferred |
|
— |
|
— |
|
|
Income tax expense |
|
$ |
173 |
|
$ |
200 |
|
The $173 and $200 of current tax expense recognized during the six months ended June 30, 2014 and 2013, respectively, represents state income taxes in a state that does not follow the federal treatment of disregarded entities. The Company is still subject to state examinations for open tax years in a jurisdiction that does not follow the federal treatment of disregarded entities, currently extending back until 2009.
(6) Commitments and Contingencies
(a) Contractual Purchase Commitments
The Company is obligated to make payments under contractual purchase commitments, including unconditional purchase obligations. Annual payments for contracts with remaining terms as of June 30 are summarized below:
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
Thereafter |
|
Total |
|
|
$ |
18,458 |
|
$ |
22,856 |
|
$ |
25,452 |
|
$ |
16,271 |
|
$ |
16,757 |
|
$ |
83,851 |
|
$ |
183,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations relate to the supply of raw materials, transportation services, and industrial gases with terms ranging from three to 22 years.
(b) Capital Commitments
At June 30, 2014, SCL’s commitments to acquire property, plant and equipment totaled approximately $7,394.
F-30
(c) Lease Commitments
The Company has several non-cancelable operating leases, primarily for equipment, that expire over the next eight years. These leases generally contain renewal options for periods ranging from one to five years, and require the Company to pay all executory costs, such as maintenance and insurance. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2014 are as follows:
|
Twelve month period ending June 30: |
|
|
|
|
2015 |
|
$ |
575 |
|
|
2016 |
|
141 |
|
|
2017 |
|
92 |
|
|
2018 |
|
74 |
|
|
2019 |
|
74 |
|
|
2020 and thereafter |
|
221 |
|
|
Total |
|
$ |
1,177 |
|
Operating rent expense for the six months ended June 30, 2014 and 2013, was $2,269, and $2,146, respectively.
(d) Legal Matters
The Company is party to legal actions and claims arising in the ordinary course of business. SCL believes, based upon information currently available, that such litigation and claims, both individually and in the aggregate, will be resolved without a material effect on its results of operations and its financial statements as a whole. However, litigation involves an element of uncertainty, and future developments could cause these actions or claims to have a material adverse effect on SCL’s results of operations and its financial statements as a whole in the period of resolution.
(7) Related-Party Transactions
The Company purchases certain raw materials, services, and semi-finished steel from related parties located in North America and Europe. The Company also sells certain services, raw materials, and semi-finished steel to the same related parties. Purchases and sales and amounts payable and receivable for such transactions are as follows:
|
|
|
Six Months
Ended
June 30, 2014 |
|
Six Months
Ended
June 30, 2013 |
|
|
|
|
Sales |
|
Purchases |
|
Sales |
|
Purchases |
|
|
Severstal Dearborn, LLC |
|
$ |
57,373 |
|
$ |
3,821 |
|
$ |
37,446 |
|
$ |
2,460 |
|
|
Severstal Export GmbH |
|
— |
|
40,073 |
|
— |
|
39,241 |
|
|
MSP |
|
— |
|
1,111 |
|
— |
|
743 |
|
|
Total |
|
$ |
57,373 |
|
$ |
45,005 |
|
$ |
37,446 |
|
$ |
42,444 |
|
|
|
|
June 30, 2014 |
|
December 31, 2013 |
|
|
|
|
Receivables |
|
Payables |
|
Receivables |
|
Payables |
|
|
Severstal Dearborn, LLC |
|
$ |
8,160 |
|
$ |
625 |
|
$ |
10,055 |
|
$ |
15,603 |
|
|
Severstal US Holdings, LLC |
|
3,323 |
|
— |
|
— |
|
298 |
|
|
Severstal Export GmbH |
|
— |
|
14,526 |
|
— |
|
5,495 |
|
|
MSP |
|
35 |
|
400 |
|
14 |
|
161 |
|
|
Total |
|
$ |
11,518 |
|
$ |
15,551 |
|
$ |
10,069 |
|
$ |
21,557 |
|
F-31
During the six months ended June 30, 2013, the Company expensed $7,616 of corporate management fees from a related party in selling and administrative expenses in the accompanying 2013 statement of operations. Beginning in 2014, the Company bills SUSH for the corporate management fees paid by the Company and therefore no corporate management fees were expensed during the six months ended June 30, 2014.
During the six months ended June 30, 2014 and 2013, the Company expensed $23,165 and $19,569, respectively, of interest expense from related party debt in the accompanying statements of operations.
(8) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
· Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities
· Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices in active markets that are observable either directly or indirectly
· Level 3—Unobservable inputs for which there is little or no market data
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques outlined in ASC Subtopic 820-10 Fair Value Measurements and Disclosures:
· Market approach—Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
· Cost approach—Amount that would be required to replace the service capacity of an asset (replacement cost)
· Income approach—Techniques to convert future amounts to a single present amount based upon market expectations
(a) Items Measured at Fair Value on a Recurring Basis
A share-based payment award liability is included in the Company’s financial instruments. The liability related to the share-based payment awards is recorded at fair value based on an estimated price to settle the liability. At June 30, 2014 and December 31, 2013, the estimated fair value of this liability was $2,270 and $2,386, respectively (see note 9). The fair value of this liability was determined using Level 3 inputs and determined based on the estimated fair value of the Company based on a discounted cash flow model.
(b) Financial Instruments Not Carried at Fair Value
SCL does not carry its fixed rate long-term bond debt at fair value. The carrying value as of December 31, 2013 was $518,080. The estimated fair value as of December 31, 2013 was $619,400. The fair value of the bonds was estimated using discounted cash flow models with market based borrowing rates for similar types of arrangements (Level 2).
F-32
(9) Share-Based Payment Awards
In April 2008, SCL adopted a plan to provide for the grant of share based payment awards to certain key management and employees. The purpose of the plan is to align the interests of the participating employees with the interests of the Company, to motivate them to increase the value of the Company, and to retain them. The plan was effective as of January 1, 2008, and the value of the awards is based on a percentage of the fair value of the Company, which is determined on an annual basis. Participating employees were 100% vested in their awards at December 31, 2011. Distributions related to vested awards are payable in cash. Due to these awards being settled in cash, a liability has been recorded based on the estimated fair value to settle the awards. At June 30, 2014 and December 31, 2013, the estimated fair value of this liability was $2,270 and $2,386, respectively, and has recorded this amount in noncurrent other liabilities in the accompanying balance sheets. During the six month period ended June 30, 2014 and 2013, the Company recorded $123 of expense, and $894 of income, respectively, in the accompanying statements of operations related to these awards. Distributions of vested awards were paid to former employees during 2010. As of June 30, 2014, approximately $4,056 in awards have been distributed.
(10) Member’s Equity
During the six month period ended June 30, 2014, the changes in member’s equity related to net income of $35,784 and distributions to member of $86.
(11) Subsequent Events
On July 21, 2014, Severstal announced that they have a signed definitive agreement to sell SCL to Steel Dynamics, Inc. for the amount of $1,625,000.
The Company has evaluated subsequent events from the balance sheet date through September 3, 2014, the date at which the financial statements were available to be issued, and determined there were no other items to disclose.
F-33
