20180331 Q1 10Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q





 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended March 31, 2018



 



OR



 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



Commission File Number 0-21719





 

 



 

 

Steel Dynamics, Inc.

(Exact name of registrant as specified in its charter)



 

 

Indiana

 

35-1929476

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



 

 

7575 West Jefferson Blvd, Fort Wayne, IN

 

46804

(Address of principal executive offices)

 

(Zip Code)



 

 

Registrant’s telephone number, including area code:  (260) 969-3500



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (see definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act). 





 

 

 

(Check one): 

Large accelerated filer

Accelerated filer

Non-accelerated filer       



 

 

 



Smaller reporting company 

Emerging growth company 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No



As of May 1, 2018, Registrant had 235,933,638 outstanding shares of common stock.


 



 

 

STEEL DYNAMICS, INC.

Table of Contents



PART I.  Financial Information



Item 1.

Financial Statements:

Page



 

 



Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

1



 

 



Consolidated Statements of Income for the three-month periods ended March 31, 2018 and 2017 (unaudited)

2



 

 



Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2018  and 2017 (unaudited)

3



 

 



Notes to Consolidated Financial Statements (unaudited)

4



 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22



 

 

Item 4.

Controls and Procedures

22



 

 



 

 



 

 



PART II.  Other Information

 



 

 

Item 1.

Legal Proceedings

23



 

 

Item 1A.

Risk Factors

23



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23



 

 

Item 3.

Defaults Upon Senior Securities

23



 

 

Item 4.

Mine Safety Disclosures

23



 

 

Item 5.

Other Information

23



 

 

Item 6.

Exhibits

24



 

 

Exhibit Index

 

25



 

 

Signature

 

26



 

 





 


 



STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)







 

 

 

 

 

 



 

 

 

 

 

 



March 31,

 

 

December 31,



2018

 

 

2017

Assets

(unaudited)

 

 

 

 

Current assets

 

 

 

 

 

 

  Cash and equivalents

$

985,824 

 

 

$

1,028,649 

  Short term investments

 

40,000 

 

 

 

 -

  Accounts receivable, net

 

983,457 

 

 

 

846,415 

  Accounts receivable-related parties

 

4,198 

 

 

 

22,422 

  Inventories

 

1,600,058 

 

 

 

1,519,347 

  Other current assets

 

38,705 

 

 

 

91,509 

     Total current assets

 

3,652,242 

 

 

 

3,508,342 



 

 

 

 

 

 

Property, plant and equipment, net

 

2,657,937 

 

 

 

2,675,904 



 

 

 

 

 

 

Intangible assets, net

 

249,983 

 

 

 

256,909 

Goodwill

 

386,045 

 

 

 

386,893 

Other assets

 

26,606 

 

 

 

27,684 

     Total assets

$

6,972,813 

 

 

$

6,855,732 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

  Accounts payable

$

544,419 

 

 

$

473,765 

  Accounts payable-related parties

 

18,199 

 

 

 

15,683 

  Income taxes payable

 

14,564 

 

 

 

3,696 

  Accrued payroll and benefits                

 

113,001 

 

 

 

195,909 

  Accrued interest

 

47,936 

 

 

 

25,533 

  Accrued expenses

 

112,975 

 

 

 

125,138 

  Current maturities of long-term debt

 

9,646 

 

 

 

28,795 

     Total current liabilities

 

860,740 

 

 

 

868,519 



 

 

 

 

 

 

Long-term debt

 

2,353,703 

 

 

 

2,353,145 

Deferred income taxes

 

314,736 

 

 

 

305,949 

Other liabilities

 

20,257 

 

 

 

21,811 

     Total liabilities

 

3,549,436 

 

 

 

3,549,424 



 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 



 

 

 

 

 

 

Redeemable noncontrolling interests

 

111,240 

 

 

 

111,240 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

  Common stock voting, $.0025 par value; 900,000,000 shares authorized;

 

 

 

 

 

 

       265,080,663 and 265,003,133 shares issued; and 236,095,748 and 237,396,839    

 

 

 

 

 

 

       shares outstanding, as of March 31, 2018 and December 31, 2017, respectively

 

644 

 

 

 

644 

  Treasury stock, at cost; 28,984,915 and 27,606,294 shares,

 

 

 

 

 

 

       as of March 31, 2018 and December 31, 2017 respectively

 

(730,700)

 

 

 

(665,297)

  Additional paid-in capital

 

1,142,871 

 

 

 

1,141,534 

  Retained earnings

 

3,057,904 

 

 

 

2,874,693 

     Total Steel Dynamics, Inc. equity

 

3,470,719 

 

 

 

3,351,574 

  Noncontrolling interests

 

(158,582)

 

 

 

(156,506)

     Total equity

 

3,312,137 

 

 

 

3,195,068 

     Total liabilities and equity

$

6,972,813 

 

 

$

6,855,732 



See notes to consolidated financial statements.

1

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2018

 

2017



 

 

 

 

 

Net sales

 

 

 

 

 

  Unrelated parties

$

2,597,312 

 

$

2,319,663 

  Related parties

 

6,563 

 

 

48,553 

     Total net sales

 

2,603,875 

 

 

2,368,216 



 

 

 

 

 

Costs of goods sold

 

2,140,459 

 

 

1,896,062 

     Gross profit

 

463,416 

 

 

472,154 



 

 

 

 

 

Selling, general and administrative expenses

 

106,431 

 

 

102,933 

Profit sharing

 

26,662 

 

 

27,231 

Amortization of intangible assets

 

6,926 

 

 

7,424 

     Operating income

 

323,397 

 

 

334,566 



 

 

 

 

 

Interest expense, net of capitalized interest

 

31,896 

 

 

33,973 

Other expense (income), net

 

(4,463)

 

 

(3,659)

     Income before income taxes

 

295,964 

 

 

304,252 



 

 

 

 

 

Income tax expense

 

70,489 

 

 

105,586 

     Net income

 

225,475 

 

 

198,666 



 

 

 

 

 

Net loss attributable to noncontrolling interests

 

2,076 

 

 

2,151 

     Net income attributable to Steel Dynamics, Inc.

$

227,551 

 

$

200,817 



 

 

 

 

 



 

 

 

 

 



 

 

 

 

 

Basic earnings per share attributable to Steel Dynamics,

 

 

 

 

 

  Inc. stockholders

$

0.96 

 

$

0.83 



 

 

 

 

 

Weighted average common shares outstanding

 

236,623 

 

 

242,943 



 

 

 

 

 

Diluted earnings per share attributable to Steel Dynamics, Inc.

 

 

 

 

 

  stockholders, including the effect of assumed conversions

 

 

 

 

 

  when dilutive

$

0.96 

 

$

0.82 



 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

237,723 

 

 

244,546 



 

 

 

 

 

Dividends declared per share

$

0.1875 

 

$

0.155 





















See notes to consolidated financial statements.

2

 


 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2018

 

2017



 

 

 

 

 

Operating activities:

 

 

 

 

 

   Net income

$

225,475 

 

$

198,666 



 

 

 

 

 

   Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

       operating activities:

 

 

 

 

 

       Depreciation and amortization

 

76,135 

 

 

75,057 

       Equity-based compensation

 

12,841 

 

 

11,303 

       Deferred income taxes

 

9,545 

 

 

7,716 

       Other adjustments

 

30 

 

 

(104)

       Changes in certain assets and liabilities:

 

 

 

 

 

           Accounts receivable

 

(118,818)

 

 

(153,364)

           Inventories

 

(80,711)

 

 

(86,819)

           Other assets

 

(105)

 

 

2,094 

           Accounts payable

 

66,332 

 

 

133,809 

           Income taxes receivable/payable

 

63,962 

 

 

96,319 

           Accrued expenses

 

(76,751)

 

 

(44,247)

       Net cash provided by operating activities

 

177,935 

 

 

240,430 



 

 

 

 

 

Investing activities:

 

 

 

 

 

   Purchases of property, plant and equipment

 

(50,606)

 

 

(41,677)

   Purchases of short term investments

 

(40,000)

 

 

 -

   Other investing activities

 

229 

 

 

26,918 

       Net cash used in investing activities

 

(90,377)

 

 

(14,759)



 

 

 

 

 

Financing activities:

 

 

 

 

 

   Issuance of current and long-term debt

 

93,058 

 

 

 -

   Repayment of current and long-term debt

 

(113,034)

 

 

(1,429)

   Dividends paid

 

(36,797)

 

 

(34,130)

   Purchases of treasury stock

 

(69,269)

 

 

(61,256)

   Other financing activities

 

(5,180)

 

 

(3,532)

       Net cash used in financing activities

 

(131,222)

 

 

(100,347)



 

 

 

 

 

Increase (decrease) in cash and equivalents

 

(43,664)

 

 

125,324 

Cash, cash equivalents, and restricted cash at beginning of period

 

1,035,085 

 

 

848,105 



 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

$

991,421 

 

$

973,429 



 

 

 

 

 



 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

   Cash paid for interest

$

8,629 

 

$

12,649 

   Cash paid (received) for income taxes, net

$

(1,045)

 

$

1,554 













See notes to consolidated financial statements.

 

3

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies



Description of the Business

Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is a domestic manufacturer of steel products and metals recycler. The company has three reportable segments: steel operations, metals recycling operations, and steel fabrication operations.

Steel Operations Segment.  Steel operations include the company’s Butler Flat Roll Division, Columbus Flat Roll Division, The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Vulcan Threaded Products, Inc., Roanoke Bar Division, Steel of West Virginia, and Iron Dynamics, a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and numerous downstream coating and bar processing lines. Steel operations accounted for 74% and 73% of the company’s consolidated external net sales during the three months ended March 31, 2018 and 2017, respectively.

Metals Recycling Operations Segment. Metals recycling operations consists solely of OmniSource Corporation (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and consulting services. Metals recycling operations accounted for 15% of the company’s consolidated external net sales during the three months ended March 31, 2018 and 2017.

Steel Fabrication Operations Segment.  Steel fabrication operations include the company’s New Millennium Building Systems’ joist and deck plants located throughout the United States, and in Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 8% of the company’s consolidated external net sales during the three months ended March 31, 2018 and 2017.

Other. Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that have been idle since May 2015, and other smaller joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.

Significant Accounting Policies



Principles of Consolidation.  The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions. Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries. 



Use of Estimates.  These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions. 



In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2017.



4

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Description of the Business and Significant Accounting Policies (Continued)



GoodwillThe company’s goodwill is allocated to the following reporting units at March 31, 2018, and December 31, 2017, (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 



 

 

2018

 

2017

 



Steel Operations Segment:

 

 

 

 

 

 

 



     Columbus Flat Roll Division

 

$

19,682 

 

$

19,682 

 



     The Techs

 

 

142,783 

 

 

142,783 

 



     Vulcan Threaded Products

 

 

7,824 

 

 

7,824 

 



     Roanoke Bar Division

 

 

29,041 

 

 

29,041 

 



Metals Recycling Operations Segment:

 

 

 

 

 

 

 



     OmniSource

 

 

89,790 

 

 

90,638 

 



     Indiana Steel Mills

 

 

95,000 

 

 

95,000 

 



Steel Fabrication Operations Segment

 

 

1,925 

 

 

1,925 

 



 

 

$

386,045 

 

$

386,893 

 



OmniSource goodwill decreased $848,000 from December 31, 2017 to March 31, 2018, in recognition of the 2018 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.



Recently Adopted/Issued Accounting Standards



In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition.  FASB later issued clarifying guidance in the form of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Consideration (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contract with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, collectively (ASC 606). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. The company adopted ASC 606 effective January1, 2018 using the modified retrospective approach. There was no change in the amount or timing of revenue recognized under ASC 606, or significant changes required to the company’s functions, processes or systems. See Note 2 – Revenue from Contracts with Customers for disclosure required by ASC 606 and the updated accounting policy for revenue recognition.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230); which requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The company adopted the provisions of ASU 2016-18 as of January 1, 2018, retrospectively changed beginning and ending amounts reflected in the consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, to include restricted cash. The balance of cash, cash equivalents and restricted cash in the consolidated statements of cash flows includes restricted cash of $5.6 million at March 31, 2018, $6.4 million at January 1, 2018, and $6.6 million at March 31, 2017, and January 1, 2017, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842); which establishes a new lease accounting model that requires lessees to recognize a right of use asset and related lease liability for most leases having lease terms of more than 12 months (ASU 2016-02).  This new guidance is effective for annual and interim periods beginning after December 15, 2018, but can be early adopted.  The company is working through an adoption plan to evaluate the lease portfolio, systems, processes and policies to determine the impact of the provisions of ASU 2016-02 to our financial statements and disclosures. The company anticipates adopting ASU 2016-02 on January 1, 2019. 



Note 2.  Revenue from Contracts with Customers



The company adopted ASC 606 effective January 1, 2018, using the modified retrospective approach. We applied the standard to contracts that were not completed as of the adoption date, with no cumulative effect adjustment at date of adoption. Accordingly, amounts and disclosures for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative amounts and disclosures for prior periods have not been adjusted and continue to be reported in accordance with historical accounting policies for revenue recognition prior to the adoption of ASC 606. The new revenue standard requires recognition of revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.



In the steel and metals recycling operations segments, revenue is recognized at the point in time the performance obligation is satisfied and control of the product is transferred to the customer upon shipment or delivery, at the amount of consideration the company expects to receive, including any variable consideration.  The variable consideration included in the company’s steel operations segment contracts, which is not constrained, include estimated product returns and customer claims based on historical experience, and may include volume rebates which are

5

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  Revenue from Contracts with Customers (Continued)



recorded on an expected value basis. Revenue recognized is limited to the amount the company expects to receive. The company does not exercise significant judgements in determining the timing of satisfaction of performance obligations or the transaction price. Shipment of products to customers is considered a fulfillment activity with amounts billed to customers included in sales and costs associated with such included in cost of goods sold.



The company’s steel fabrication operations segment recognizes revenue over time at the amount of consideration the company expects to receive. Revenue is measured on an output method representing completed fabricated tons to date as a percentage of total tons required for each contract. Revenue from fabrication of tons remaining on partially fabricated customer contracts as of a reporting date, which are generally expected to be realized within the following fiscal quarter, and revenue from yet to be fabricated customer contracts, has not been disclosed under the practical expedient in paragraph ASC 606-10-50-14 related to customer contracts with expected duration of one year or less. The company does not exercise significant judgements in determining the timing of satisfaction of performance obligations or the transaction price. Shipment of products to customers, which occurs after control over the product has transferred to the customer and revenue is recognized, is considered a fulfillment activity with amounts billed to customers included in sales and costs associated with such included in cost of goods sold.



Payments from customers for all operating segments are generally due within 30 days of invoicing, which generally occurs upon shipment of the products. Shipment for the steel fabrication operations segment generally occurs within 30 days of satisfaction of the performance obligation and revenue recognition. The company does not have financing components. Payments from customers have historically generally been within these terms, however, payments for non-US sales may extend longer. The allowance for doubtful accounts for all operating segments is based on the company’s best estimate of probable credit losses, along with historical experience.



Refer to Note 9 Segment Information, for disaggregated revenue by segment to external, external non-United States, and other segment customers.



Note 3.  Earnings Per Share



Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive restricted stock units, deferred stock units, restricted stock, and performance awards, and are excluded from the computation in periods in which they have an anti-dilutive effect. There were no anti-dilutive common share equivalents as of or for the three months ended March 31, 2018 and March 30, 2017.



The following tables present a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three months ended March 31, 2018 and March 30, 2017 (in thousands, except per share data):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



2018

 

2017



Net Income

 

 

Shares

 

Per Share

 

Net Income

 

 

Shares

 

Per Share



(Numerator)

 

 

(Denominator)

 

Amount

 

(Numerator)

 

 

(Denominator)

 

Amount

Basic earnings per share

$

227,551 

 

 

236,623 

 

$

0.96 

 

$

200,817 

 

 

242,943 

 

$

0.83 

Dilutive common share equivalents

 

 -

 

 

1,100 

 

 

 

 

 

 -

 

 

1,603 

 

 

 

Diluted earnings per share

$

227,551 

 

 

237,723 

 

$

0.96 

 

$

200,817 

 

 

244,546 

 

$

0.82 







Note 4.  Inventories



Inventories are stated at lower of cost or net realizable value. Cost is determined using a weighted average cost method for raw materials and supplies, and on a first-in, first-out basis for other inventory. Inventory consisted of the following (in thousands):









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 

 



 

 

2018

 

2017

 

 



 

Raw materials

$

725,748 

 

$

675,715 

 

 



 

Supplies

 

386,123 

 

 

374,515 

 

 



 

Work in progress

 

169,441 

 

 

128,565 

 

 



 

Finished goods

 

318,746 

 

 

340,552 

 

 



 

Total inventories

$

1,600,058 

 

$

1,519,347 

 

 





6

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 



Note 5.  Changes in Equity



The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to stockholders of Steel Dynamics, Inc., and equity and redeemable amounts attributable to noncontrolling interests (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Additional

 

 

 

 

 

 

 

Redeemable



Common

 

Treasury

 

Paid-In

 

Retained

 

Noncontrolling

 

Total

 

Noncontrolling



Stock

 

Stock

 

Capital

 

Earnings

 

Interests

 

Equity

 

Interests

Balances at December 31, 2017

$

644 

 

$

(665,297)

 

$

1,141,534 

 

$

2,874,693 

 

$

(156,506)

 

$

3,195,068 

 

$

111,240 

Dividends declared

 

 -

 

 

 -

 

 

 -

 

 

(44,269)

 

 

 -

 

 

(44,269)

 

 

 -

Share repurchases

 

 -

 

 

(69,269)

 

 

 -

 

 

 -

 

 

 -

 

 

(69,269)

 

 

 -

Equity-based compensation

 

 -

 

 

3,866 

 

 

1,337 

 

 

(71)

 

 

 -

 

 

5,132 

 

 

 -

Comprehensive and net income (loss)

 

 -

 

 

 -

 

 

 -

 

 

227,551 

 

 

(2,076)

 

 

225,475 

 

 

 -

Balances at March 31, 2018

$

644 

 

$

(730,700)

 

$

1,142,871 

 

$

3,057,904 

 

$

(158,582)

 

$

3,312,137 

 

$

111,240 





Note 6.  Derivative Financial Instruments



The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate commodity margin risk, occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation risk. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous metals (primarily aluminum and copper). The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements. 



Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s futures contract commitments as of March 31, 2018:







 

 

 

 

 

 



 

 

 

 

 

 



Commodity Futures

 

Long/Short

 

Metric Tons

 



Aluminum

 

Long

 

1,950 

 



Aluminum

 

Short

 

2,450 

 



Copper

 

Long

 

6,078 

 



Copper

 

Short

 

16,704 

 



 

 

 

 

 

 



The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2018, and December 31, 2017, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2018, and March 30, 2017 (in thousands):

7

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Derivative Financial Instruments (Continued)









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Asset Derivatives

 

Liability Derivatives



Balance sheet

 

Fair Value

 

Fair Value



 location

 

March 31, 2018

 

December 31, 2017

 

March 31, 2018

 

December 31, 2017

Derivative instruments designated as fair value hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

$

4,918 

 

$

1,211 

 

$

555 

 

$

5,364 



 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

 

2,233 

 

 

1,579 

 

 

852 

 

 

5,142 

Total derivative instruments

 

 

$

7,151 

 

$

2,790 

 

$

1,407 

 

$

10,506 



The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $3.5 million at March 31, 2018, and $5.6 million at December 31, 2017, and are reflected in other current assets in the consolidated balance sheets.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Amount of gain (loss) recognized

 

 

 

Location of gain

 

Amount of gain (loss) recognized



 

Location of gain

 

in income on derivatives 

 

 

 

(loss) recognized

 

in income on related hedged items



 

(loss) recognized

 

for the three months ended

 

Hedged items in

 

in income on

 

for the three months ended



 

in income on

 

March 31,

 

March 31,

 

fair value hedge

 

related hedged

 

March 31,

 

March 31,



 

derivatives

 

2018

 

2017

 

relationships

 

items

 

2018

 

2017

Derivatives in fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

8,516 

 

$

(153)

 

Firm commitments

 

Costs of goods sold

 

$

(793)

 

$

539 



 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

 

(2,596)

 

 

495 

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(3,389)

 

$

1,034 

as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

2,756 

 

$

(4,346)

 

 

 

 

 

 

 

 

 

 







Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $101,000 during the three-month periods ended March 31, 2018 and gains of $48,000 for the three months ended March 31, 2017.  Gains excluded from hedge effectiveness testing of $5.0 million and $833,000 decreased cost of goods sold during the three-month period ended March 31, 2018, and 2017, respectively.



Note 7.  Fair Value Measurements

FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. Levels within the hierarchy are defined as follows:



·

Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets;

·

Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and

·

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.



The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of March 31, 2018, and December 31, 2017 (in thousands):    







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Quoted Prices

 

Significant

 

 

 



 

 

 

in Active

 

Other

 

Significant



 

 

 

Markets for

 

Observable

 

Unobservable



 

 

 

Identical Assets

 

Inputs

 

Inputs



Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

$

7,151 

 

$

 -

 

$

7,151 

 

$

 -

Commodity futures – financial liabilities

 

1,407 

 

 

 -

 

 

1,407 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

$

2,790 

 

$

 -

 

$

2,790 

 

$

 -

Commodity futures – financial liabilities

 

10,506 

 

 

 -

 

 

10,506 

 

 

 -



8

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 



Note 7.  Fair Value Measurements (Continued)

The carrying amounts of financial instruments including cash and equivalents, and short-term investments in certificates of deposit approximate fair value. The fair values of commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.4 billion and $2.5 billion at March 31, 2018 and December 31, 2017, respectively (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion at March 31, 2018 and December 31, 2017). 



Note 8.  Commitments and Contingencies



The company is involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which are expected to have a material impact on our financial condition, results of operations, or liquidity



Note 9.  Segment Information



The company’s operations are primarily organized and managed by reportable operating segments, which are steel operations, metals recycling operations, and steel fabrication operations. The segment operations are more fully described in Note 1 to the consolidated financial statements. Operating segment performance and resource allocations are primarily based on operating results before income taxes. The accounting policies of the reportable segments are consistent with those described in Note 1 to the consolidated financial statements. Intra‑segment sales and any related profits are eliminated in consolidation. Amounts included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations and several small joint ventures. In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.



9

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (Continued)



The company’s segment results are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Metals

 

Steel

 

 

 

 

 

 

 

 

 

For the three months ended

 

Steel

 

Recycling

 

Fabrication

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales - disaggregated revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  External

 

$

1,832,303 

 

$

329,872 

 

$

201,437 

 

$

92,471 

 

$

 -

 

$

2,456,083 

  External Non-U.S.

 

 

89,486 

 

 

58,250 

 

 

56 

 

 

 -

 

 

 -

 

 

147,792 

  Other segments

 

 

59,985 

 

 

364,644 

 

 

210 

 

 

147 

 

 

(424,986)

 

 

 -



 

 

1,981,774 

 

 

752,766 

 

 

201,703 

 

 

92,618 

 

 

(424,986)

 

 

2,603,875 

Operating income (loss)

 

 

334,562 

 

 

24,715 

 

 

19,791 

 

 

(55,406)

(1)

 

(265)

 

 

323,397 

Income (loss) before income taxes

 

 

315,805 

 

 

23,005 

 

 

18,457 

 

 

(61,033)

 

 

(270)

 

 

295,964 

Depreciation and amortization

 

 

59,141 

 

 

11,558 

 

 

2,898 

 

 

2,538 

 

 

 -

 

 

76,135 

Capital expenditures

 

 

38,402 

 

 

6,946 

 

 

2,077 

 

 

3,181 

 

 

 -

 

 

50,606 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,462,706 

 

$

1,006,510 

 

$

350,359 

 

$

1,250,869 

(2)

$

(97,631)

(3)

$

6,972,813 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

Footnotes related to the three months ended March 31, 2018, segment results (in millions):



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(15.7)

 

(3)

Elimination of intra-company receivables

$

(72.4)



Company-wide equity-based compensation

 

(8.5)

 

 

Elimination of intra-company debt

 

(12.9)



Profit sharing

 

(25.6)

 

 

Other  

 

(12.3)



Other, net

 

(5.6)

 

 

 

$

(97.6)



 

$

(55.4)

 

 

 

 

 



 

 

 

 

 

 

 

 

(2)

Cash and equivalents

$

970.5 

 

 

 

 

 



Short-term investments

 

40.0 

 

 

 

 

 



Inventories

 

28.4 

 

 

 

 

 



Property, plant and equipment,