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STEEL DYNAMICS INC - Quarter Report: 2017 March (Form 10-Q)



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 quarterly period ended

March 31, 2017

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

 

46268

(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, 2017, Registrant had 241,787,407 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, 2017 (unaudited) and December 31, 2016

1



 

 



Consolidated Statements of Income for the three-month periods ended March  31, 2017 and 2016 (unaudited)

2



 

 



Consolidated Statements of Cash Flows for the three-month periods ended  March  31, 2017 and 2016 (unaudited)

3



 

 



Notes to Consolidated Financial Statements (unaudited)

4



 

 

Item 2.

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

15



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21



 

 

Item 4.

Controls and Procedures

21



 

 



 

 



 

 



PART II.  Other Information

 



 

 

Item 1.

Legal Proceedings

22



 

 

Item 1A.

Risk Factors

22



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22



 

 

Item 3.

Defaults Upon Senior Securities

22



 

 

Item 4.

Mine Safety Disclosures

22



 

 

Item 5.

Other Information

22



 

 

Item 6.

Exhibits

23



 

 



Signatures

24



 

 





 


 



STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)







 

 

 

 

 

 



 

 

 

 

 

 



March 31,

 

 

December 31,



2017

 

 

2016

Assets

(unaudited)

 

 

 

 

Current assets

 

 

 

 

 

 

  Cash and equivalents

$

966,826 

 

 

$

841,483 

  Accounts receivable, net

 

860,676 

 

 

 

703,565 

  Accounts receivable-related parties

 

22,471 

 

 

 

26,219 

  Inventories

 

1,361,550 

 

 

 

1,275,211 

  Other current assets

 

33,442 

 

 

 

83,197 

     Total current assets

 

3,244,965 

 

 

 

2,929,675 



 

 

 

 

 

 

Property, plant and equipment, net

 

2,760,544 

 

 

 

2,787,215 



 

 

 

 

 

 

Restricted cash

 

17,846 

 

 

 

18,060 

Intangible assets, net

 

276,553 

 

 

 

283,977 

Goodwill

 

391,740 

 

 

 

393,351 

Other assets

 

12,387 

 

 

 

11,454 

     Total assets

$

6,704,035 

 

 

$

6,423,732 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

  Accounts payable

$

514,788 

 

 

$

382,126 

  Accounts payable-related parties

 

16,170 

 

 

 

13,070 

  Income taxes payable

 

80,741 

 

 

 

5,593 

  Accrued payroll and benefits                

 

106,733 

 

 

 

164,543 

  Accrued interest

 

50,650 

 

 

 

30,295 

  Accrued expenses

 

109,400 

 

 

 

113,556 

  Current maturities of long-term debt

 

2,965 

 

 

 

3,632 

     Total current liabilities

 

881,447 

 

 

 

712,815 



 

 

 

 

 

 

Long-term debt

 

2,353,744 

 

 

 

2,353,194 

Deferred income taxes

 

454,426 

 

 

 

448,375 

Other liabilities

 

19,711 

 

 

 

20,649 

     Total liabilities

 

3,709,328 

 

 

 

3,535,033 



 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 



 

 

 

 

 

 

Redeemable noncontrolling interests

 

111,240 

 

 

 

111,240 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

       264,135,545 and 264,130,544 shares issued; and 242,110,745 and 243,785,485    

 

 

 

 

 

 

       shares outstanding, as of March 31, 2017 and December 31, 2016, respectively

 

641 

 

 

 

641 

  Treasury stock, at cost; 22,024,800 and 20,345,059 shares,

 

 

 

 

 

 

       as of March 31, 2017 and December 31, 2016 respectively

 

(475,072)

 

 

 

(416,829)

  Additional paid-in capital

 

1,135,892 

 

 

 

1,132,749 

  Retained earnings

 

2,373,718 

 

 

 

2,210,459 

     Total Steel Dynamics, Inc. equity

 

3,035,179 

 

 

 

2,927,020 

  Noncontrolling interests

 

(151,712)

 

 

 

(149,561)

     Total equity

 

2,883,467 

 

 

 

2,777,459 

     Total liabilities and equity

$

6,704,035 

 

 

$

6,423,732 



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,



2017

 

2016



 

 

 

 

 

Net sales

 

 

 

 

 

  Unrelated parties

$

2,319,663 

 

$

1,698,004 

  Related parties

 

48,553 

 

 

43,297 

     Total net sales

 

2,368,216 

 

 

1,741,301 



 

 

 

 

 

Costs of goods sold

 

1,896,062 

 

 

1,505,265 

     Gross profit

 

472,154 

 

 

236,036 



 

 

 

 

 

Selling, general and administrative expenses

 

102,933 

 

 

87,530 

Profit sharing

 

27,231 

 

 

9,291 

Amortization of intangible assets

 

7,424 

 

 

7,250 

     Operating income

 

334,566 

 

 

131,965 



 

 

 

 

 

Interest expense, net of capitalized interest

 

33,973 

 

 

37,043 

Other expense (income), net

 

(3,659)

 

 

(1,792)

     Income before income taxes

 

304,252 

 

 

96,714 



 

 

 

 

 

Income tax expense

 

105,586 

 

 

35,396 

     Net income

 

198,666 

 

 

61,318 



 

 

 

 

 

Net loss attributable to noncontrolling interests

 

2,151 

 

 

1,419 

     Net income attributable to Steel Dynamics, Inc.

$

200,817 

 

$

62,737 



 

 

 

 

 



 

 

 

 

 



 

 

 

 

 

Basic earnings per share attributable to Steel Dynamics,

 

 

 

 

 

  Inc. stockholders

$

0.83 

 

$

0.26 



 

 

 

 

 

Weighted average common shares outstanding

 

242,943 

 

 

243,202 



 

 

 

 

 

Diluted earnings per share attributable to Steel Dynamics, Inc.

 

 

 

 

 

  stockholders, including the effect of assumed conversions

 

 

 

 

 

  when dilutive

$

0.82 

 

$

0.26 



 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

244,546 

 

 

244,608 



 

 

 

 

 

Dividends declared per share

$

0.155 

 

$

0.140 



















See notes to consolidated financial statements.

2

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2017

 

2016



 

 

 

 

 

Operating activities:

 

 

 

 

 

   Net income

$

198,666 

 

$

61,318 



 

 

 

 

 

   Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

       operating activities:

 

 

 

 

 

       Depreciation and amortization

 

75,057 

 

 

73,985 

       Equity-based compensation

 

11,303 

 

 

10,534 

       Deferred income taxes

 

7,716 

 

 

17,087 

       Other adjustments

 

(104)

 

 

180 

       Changes in certain assets and liabilities:

 

 

 

 

 

           Accounts receivable

 

(153,364)

 

 

(75,596)

           Inventories

 

(86,819)

 

 

82,567 

           Other assets

 

2,113 

 

 

548 

           Accounts payable

 

133,809 

 

 

112,659 

           Income taxes receivable/payable

 

96,319 

 

 

13,993 

           Accrued expenses

 

(44,247)

 

 

(6,247)

       Net cash provided by operating activities

 

240,449 

 

 

291,028 



 

 

 

 

 

Investing activities:

 

 

 

 

 

   Purchases of property, plant and equipment

 

(41,677)

 

 

(27,708)

   Other investing activities

 

26,918 

 

 

3,054 

       Net cash used in investing activities

 

(14,759)

 

 

(24,654)



 

 

 

 

 

Financing activities:

 

 

 

 

 

   Issuance of current and long-term debt

 

 -

 

 

20,452 

   Repayment of current and long-term debt

 

(1,429)

 

 

(4,232)

   Dividends paid

 

(34,130)

 

 

(33,425)

   Purchases of treasury stock

 

(61,256)

 

 

 -

   Other financing activities

 

(3,532)

 

 

750 

       Net cash used in financing activities

 

(100,347)

 

 

(16,455)



 

 

 

 

 

Increase in cash and equivalents

 

125,343 

 

 

249,919 

Cash and equivalents at beginning of period

 

841,483 

 

 

727,032 



 

 

 

 

 

Cash and equivalents at end of period

$

966,826 

 

$

976,951 



 

 

 

 

 



 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

   Cash paid for interest

$

12,649 

 

$

26,286 

   Cash paid for income taxes, net

$

1,554 

 

$

699 













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 reporting 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. – acquired August 1, 2016, Roanoke Bar Division, Steel of West Virginia, and Iron Dynamics (IDI), a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and eleven downstream coating lines, and several bar processing lines. Steel operations accounted for 73% and 70% of the company’s consolidated external net sales during the three months ended March 31, 2017 and 2016, 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, 2017 and 2016.

Steel Fabrication Operations Segment.  Steel fabrication operations include the company’s eight 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% and 10% of the company’s consolidated external net sales during the three months ended March 31, 2017 and 2016, respectively.

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



In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2016.



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, 2017, and December 31, 2016, (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 



 

 

2017

 

2016

 



Columbus Flat Roll Division – Steel Operations Segment

 

$

19,682 

 

$

19,682 

 



The Techs – Steel Operations Segment

 

 

142,783 

 

 

142,783 

 



Vulcan Threaded Products – Steel Operations Segment

 

 

7,824 

 

 

7,824 

 



Roanoke Bar Division – Steel Operations Segment

 

 

29,041 

 

 

29,041 

 



Butler Flat Roll Division,  Structural and Rail Division, and Engineered

 

 

 

 

 

 

 



   Bar Division – Metals Recycling Operations Segment

 

 

95,000 

 

 

95,000 

 



OmniSource – Metals Recycling Operations Segment

 

 

95,485 

 

 

97,096 

 



New Millennium Building Systems – Steel Fabrication Operations Segment

 

 

1,925 

 

 

1,925 

 



 

 

$

391,740 

 

$

393,351 

 



OmniSource goodwill decreased $1.6 million from December 31, 2016 to March 31, 2017, in recognition of the 2017 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 July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. The company adopted ASU 2015-11 as required in the first quarter of 2017 on a prospective basis, and the adoption had no impact on its financial condition, results of operations, or cash flow. 

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 has since 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. ASC 606 guidance is effective for annual and interim periods beginning after December 15, 2017, but can be early adopted for annual and interim periods ending after December 15, 2016, using a full retrospective or modified retrospective approach.  The company is currently working through an adoption plan and has identified current revenue streams and initially analyzed those revenue streams pursuant to the new accounting requirements. The company intends to complete the adoption plan during the second half of 2017, including final determination of whether the accounting impact of ASC 606 significantly differs from the company’s current revenue accounting, evaluating and concluding on the timing and method of adoption and related disclosure, and determine whether implementation of the new standard may affect functions, processes and systems within the company. Based on our analysis within the adoption plan completed to date, the company preliminarily does not believe there will be significant change in the amount or timing of revenue recognized under the new standard, or significant changes required to the company’s functions, processes or systems. The company preliminarily intends to adopt ASU 2014-09 in the first quarter of 2018. These preliminary assessments may however change as we complete the adoption plan. 

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).  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases.  This new guidance is effective for annual and interim periods beginning after December 15, 2018, but can be early adopted.  The company is currently evaluating the impact of the provisions of ASU 2016-02, including the timing of adoption. 

Reclassifications



The company early adopted, effective December 31, 2016, Improvement to Employee Share-based Payment Accounting (ASU 2016-09). Cash paid to tax authorities from shares withheld to satisfy the company’s statutory income tax withholding obligation of $2.1 million were reclassified to financing activities from operating activities in the three-month period ended March 31, 2016, statement of cash flows. 









5

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  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, stock options and other equity-based 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 at or for the three months ended March 31, 2017 and 2016.



The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three months ended March 31, 2017 and 2016 (in thousands, except per share data):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



2017

 

2016



Net Income

 

 

Shares

 

Per Share

 

Net Income

 

 

Shares

 

Per Share



(Numerator)

 

 

(Denominator)

 

Amount

 

(Numerator)

 

 

(Denominator)

 

Amount

Basic earnings per share

$

200,817 

 

 

242,943 

 

$

0.83 

 

$

62,737 

 

 

243,202 

 

$

0.26 

Dilutive common share equivalents

 

 -

 

 

1,603 

 

 

 

 

 

 -

 

 

1,406 

 

 

 

Diluted earnings per share

$

200,817 

 

 

244,546 

 

$

0.82 

 

$

62,737 

 

 

244,608 

 

$

0.26 







Note 3.  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,

 

 



 

 

2017

 

2016

 

 



 

Raw materials

$

574,969 

 

$

515,924 

 

 



 

Supplies

 

376,903 

 

 

383,134 

 

 



 

Work in progress

 

113,995 

 

 

103,606 

 

 



 

Finished goods

 

295,683 

 

 

272,547 

 

 



 

Total inventories

$

1,361,550 

 

$

1,275,211 

 

 





Note 4.  Changes in Equity



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Additional

 

 

 

 

 

 

 

Redeemable



Common

 

Treasury

 

Paid-In

 

Retained

 

Noncontrolling

 

Total

 

Noncontrolling



Stock

 

Stock

 

Capital

 

Earnings

 

Interests

 

Equity

 

Interests

Balances at December 31, 2016

$

641 

 

$

(416,829)

 

$

1,132,749 

 

$

2,210,459 

 

$

(149,561)

 

$

2,777,459 

 

$

111,240 

Dividends declared

 

 -

 

 

 -

 

 

 -

 

 

(37,527)

 

 

 -

 

 

(37,527)

 

 

 -

Share repurchases

 

 -

 

 

(61,256)

 

 

 -

 

 

 -

 

 

 -

 

 

(61,256)

 

 

 -

Equity-based compensation

 

 -

 

 

3,013 

 

 

3,143 

 

 

(31)

 

 

 -

 

 

6,125 

 

 

 -

Comprehensive and net income (loss)

 

 -

 

 

 -

 

 

 -

 

 

200,817 

 

 

(2,151)

 

 

198,666 

 

 

 -

Balances at March 31, 2017

$

641 

 

$

(475,072)

 

$

1,135,892 

 

$

2,373,718 

 

$

(151,712)

 

$

2,883,467 

 

$

111,240 







6

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 





Note 5.  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, interest rate risk and foreign currency exchange rate 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, 2017 (MT represents metric tons):







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Commodity Futures

 

Long/Short

 

Total

 

 



Aluminum

 

Long

 

2,450 

MT

 



Aluminum

 

Short

 

3,450 

MT

 



Copper

 

Long

 

5,512 

MT

 



Copper

 

Short

 

14,243 

MT

 



 

 

 

 

 

 

 



The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2017, and December 31, 2016, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2017 and 2016 (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



Asset Derivatives

 

Liability Derivatives



Balance sheet

 

Fair Value

 

Fair Value



 location

 

March 31, 2017

 

December 31, 2016

 

March 31, 2017

 

December 31, 2016

Derivative instruments designated

 

 

 

 

 

 

 

 

 

 

 

 

 

as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

$

1,770 

 

$

2,910 

 

$

314 

 

$

1,300 



 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedges -

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

 

812 

 

 

1,150 

 

 

700 

 

 

783 

Total derivative instruments

 

 

$

2,582 

 

$

4,060 

 

$

1,014 

 

$

2,083 



The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $2.8 million at March 31, 2017, and $3.2 million at December 31, 2016, 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

 

2017

 

2016

 

relationships

 

items

 

2017

 

2016

Derivatives in fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(153)

 

$

932 

 

Firm commitments

 

Costs of goods sold

 

$

539 

 

$

(1,222)



 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

 

495 

 

 

278 

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,034 

 

$

(944)

as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(4,346)

 

$

(872)

 

 

 

 

 

 

 

 

 

 



7

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5.  Derivative Financial Instruments (Continued)



Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $48,000 for the three months ended March 31, 2017 and losses of $45,000 during the three months ended March 31, 2016.  Gains excluded from hedge effectiveness testing of $833,000 and $32,000 decreased cost of goods sold during the three months ended March 31, 2017, and 2016, respectively.   



Note 6.  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, 2017, and December 31, 2016 (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, 2017

 

 

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

$

2,582 

 

$

 -

 

$

2,582 

 

$

 -

Commodity futures – financial liabilities

 

1,014 

 

 

 -

 

 

1,014 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Commodity futures – financial assets

$

4,060 

 

$

 -

 

$

4,060 

 

$

 -

Commodity futures – financial liabilities

 

2,083 

 

 

 -

 

 

2,083 

 

 

 -



The carrying amounts of financial instruments including cash and equivalents approximate fair value. The fair values of commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.4 billion and $2.5 billion (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion at March 31, 2017, and December 31, 2016, respectively). 





Note 7.  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

8

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  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 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 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.

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Metals

 

Steel

 

 

 

 

 

 

 

 

 

For the three months ended

 

Steel

 

Recycling

 

Fabrication

 

 

 

 

 

 

 

 

 

March 31, 2017

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  External

 

$

1,633,630 

 

$

310,951 

 

$

194,035 

 

$

88,951 

 

$

 -

 

$

2,227,567 

  External Non-U.S.

 

 

87,703 

 

 

52,885 

 

 

61 

 

 

 -

 

 

 -

 

 

140,649 

  Other segments

 

 

54,343 

 

 

356,301 

 

 

12 

 

 

334 

 

 

(410,990)

 

 

 -



 

 

1,775,676 

 

 

720,137 

 

 

194,108 

 

 

89,285 

 

 

(410,990)

 

 

2,368,216 

Operating income (loss)

 

 

348,532 

 

 

17,849 

 

 

23,726 

 

 

(53,970)

(1)

 

(1,571)

(2)

 

334,566 

Income (loss) before income taxes

 

 

326,764 

 

 

16,072 

 

 

22,339 

 

 

(59,352)

 

 

(1,571)

 

 

304,252 

Depreciation and amortization

 

 

56,331 

 

 

13,035 

 

 

2,971 

 

 

2,720 

 

 

 -

 

 

75,057 

Capital expenditures

 

 

33,578 

 

 

6,776 

 

 

1,151 

 

 

172 

 

 

 -

 

 

41,677 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,274,952 

 

$

1,010,993 

 

$

354,256 

 

$

1,202,678 

(3)

$

(138,844)

(4)

$

6,704,035 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

Footnotes related to the three months ended March 31, 2017 segment results (in millions):



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(12.4)

 

(2)

Gross profit increase from intra-company sales

$

(1.6)



Company-wide equity-based compensation

 

(9.6)

 

 

 

 

 



Profit sharing

 

(26.5)

 

 

 

 

 



Other, net

 

(5.5)

 

 

 

 

 



 

$

(54.0)

 

 

 

 

 



 

 

 

 

 

 

 

 

(3)

Cash and equivalents

$

947.0 

 

(4)

Elimination of intra-company receivables

$

(109.5)



Accounts receivable

 

7.9 

 

 

Elimination of intra-company debt

 

(15.1)



Inventories

 

28.7 

 

 

Other  

 

(14.2)



Property, plant and equipment, net

 

166.2 

 

 

 

$

(138.8)



Intra-company debt

 

15.1 

 

 

 

 

 



Other

 

37.8 

 

 

 

 

 



 

$

1,202.7 

 

 

 

 

 

9

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8.  Segment Information (Continued)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Metals

 

Steel

 

 

 

 

 

 

 

 

 

For the three months ended

 

Steel

 

Recycling

 

Fabrication

 

 

 

 

 

 

 

 

 

March 31, 2016

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  External

 

$

1,156,969 

 

$

236,757 

 

$

180,041 

 

$

74,626 

 

$

 -

 

$

1,648,393 

  External Non-U.S.

 

 

60,207 

 

 

32,650 

 

 

14 

 

 

37 

 

 

 -

 

 

92,908 

  Other segments

 

 

41,212 

 

 

217,778 

 

 

26 

 

 

1,226 

 

 

(260,242)

 

 

 -



 

 

1,258,388 

 

 

487,185 

 

 

180,081 

 

 

75,889 

 

 

(260,242)

 

 

1,741,301 

Operating income (loss)

 

 

132,275 

 

 

2,767 

 

 

32,016 

 

 

(31,930)

(1)

 

(3,163)

(2)

 

131,965 

Income (loss) before income taxes

 

 

109,375 

 

 

(223)

 

 

30,016 

 

 

(39,291)

 

 

(3,163)

 

 

96,714 

Depreciation and amortization

 

 

52,483 

 

 

14,580 

 

 

2,821 

 

 

4,152 

 

 

(51)

 

 

73,985 

Capital expenditures

 

 

23,904 

 

 

3,080 

 

 

604 

 

 

120 

 

 

 -

 

 

27,708 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

Footnotes related to the three months ended March 31, 2016 segment results (in millions):



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(11.1)

 

(2)

Gross profit decrease from intra-company sales

$

(3.2)



Company-wide equity-based compensation

 

(7.0)

 

 

 

 

 



Profit sharing

 

(8.2)

 

 

 

 

 



Other, net

 

(5.6)

 

 

 

 

 



 

$

(31.9)

 

 

 

 

 









10

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Condensed Consolidating Information



Certain 100% owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the company’s senior unsecured notes due 2021, 2022, 2023, 2024 and 2026. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations, and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information on a consolidated basis. The following statements should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K for the year ended December 31, 2016.











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

As of March 31, 2017

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Cash and equivalents

 

$

936,047 

 

$

10,986 

 

$

19,793 

 

$

 -

 

$

966,826 

Accounts receivable, net

 

 

277,244 

 

 

1,372,691 

 

 

35,115 

 

 

(801,903)

 

 

883,147 

Inventories

 

 

624,594 

 

 

694,956 

 

 

52,100 

 

 

(10,100)

 

 

1,361,550 

Other current assets

 

 

22,277 

 

 

9,026 

 

 

5,101 

 

 

(2,962)

 

 

33,442 

  Total current assets

 

 

1,860,162 

 

 

2,087,659 

 

 

112,109 

 

 

(814,965)

 

 

3,244,965 

Property, plant and equipment, net

 

 

889,697 

 

 

1,666,091 

 

 

204,756 

 

 

 -

 

 

2,760,544 

Intangible assets, net

 

 

 -

 

 

245,158 

 

 

31,395 

 

 

 -

 

 

276,553 

Goodwill

 

 

 -

 

 

383,916 

 

 

7,824 

 

 

 -

 

 

391,740 

Other assets, including investments in subs

 

 

2,696,497 

 

 

7,678 

 

 

5,560 

 

 

(2,679,502)

 

 

30,233 

  Total assets

 

$

5,446,356 

 

$

4,390,502 

 

$

361,644 

 

$

(3,494,467)

 

$

6,704,035 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

195,273 

 

$

341,361 

 

$

95,142 

 

$

(100,818)

 

$

530,958 

Accrued expenses

 

 

248,907 

 

 

209,587 

 

 

7,249 

 

 

(118,219)

 

 

347,524 

Current maturities of long-term debt

 

 

688 

 

 

 -

 

 

32,345 

 

 

(30,068)

 

 

2,965 

  Total current liabilities

 

 

444,868 

 

 

550,948 

 

 

134,736 

 

 

(249,105)

 

 

881,447 

Long-term debt

 

 

2,325,394 

 

 

 -

 

 

171,392 

 

 

(143,042)

 

 

2,353,744 

Other liabilities

 

 

(359,085)

 

 

1,111,191 

 

 

38,108 

 

 

(316,077)

 

 

474,137 

  Total liabilities

 

 

2,411,177 

 

 

1,662,139 

 

 

344,236 

 

 

(708,224)

 

 

3,709,328 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 -

 

 

 -

 

 

111,240 

 

 

 -

 

 

111,240 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

641 

 

 

1,727,859 

 

 

14,908 

 

 

(1,742,767)

 

 

641 

Treasury stock

 

 

(475,072)

 

 

 -

 

 

 -

 

 

 -

 

 

(475,072)

Additional paid-in-capital

 

 

1,135,892 

 

 

128,076 

 

 

779,678 

 

 

(907,754)

 

 

1,135,892 

Retained earnings (deficit)

 

 

2,373,718 

 

 

872,428 

 

 

(736,706)

 

 

(135,722)

 

 

2,373,718 

  Total Steel Dynamics, Inc. equity

 

 

3,035,179 

 

 

2,728,363 

 

 

57,880 

 

 

(2,786,243)

 

 

3,035,179 

Noncontrolling interests

 

 

 -

 

 

 -

 

 

(151,712)

 

 

 -

 

 

(151,712)

  Total equity

 

 

3,035,179 

 

 

2,728,363 

 

 

(93,832)

 

 

(2,786,243)

 

 

2,883,467 

  Total liabilities and equity

 

$

5,446,356 

 

$

4,390,502 

 

$

361,644 

 

$

(3,494,467)

 

$

6,704,035 



11

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Condensed Consolidating Information (Continued)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

As of December 31, 2016

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Cash and equivalents

 

$

766,685 

 

$

54,677 

 

$

20,121 

 

$

 -

 

$

841,483 

Accounts receivable, net

 

 

229,148 

 

 

1,257,245 

 

 

23,689 

 

 

(780,298)

 

 

729,784 

Inventories

 

 

587,319 

 

 

639,148 

 

 

58,696 

 

 

(9,952)

 

 

1,275,211 

Other current assets

 

 

45,049 

 

 

36,062 

 

 

4,447 

 

 

(2,361)

 

 

83,197 

  Total current assets

 

 

1,628,201 

 

 

1,987,132 

 

 

106,953 

 

 

(792,611)

 

 

2,929,675 

Property, plant and equipment, net

 

 

899,370 

 

 

1,679,751 

 

 

208,094 

 

 

 -

 

 

2,787,215 

Intangible assets, net

 

 

 -

 

 

251,919 

 

 

32,058 

 

 

 -

 

 

283,977 

Goodwill

 

 

 -

 

 

385,527 

 

 

7,824 

 

 

 -

 

 

393,351 

Other assets, including investments in subs

 

 

2,769,884 

 

 

7,335 

 

 

5,832 

 

 

(2,753,537)

 

 

29,514 

  Total assets

 

$

5,297,455 

 

$

4,311,664 

 

$

360,761 

 

$

(3,546,148)

 

$

6,423,732 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

141,089 

 

$

265,764 

 

$

89,659 

 

$

(101,316)

 

$

395,196 

Accrued expenses

 

 

198,085 

 

 

220,917 

 

 

8,793 

 

 

(113,808)

 

 

313,987 

Current maturities of long-term debt

 

 

674 

 

 

700 

 

 

29,347 

 

 

(27,089)

 

 

3,632 

  Total current liabilities

 

 

339,848 

 

 

487,381 

 

 

127,799 

 

 

(242,213)

 

 

712,815 

Long-term debt

 

 

2,324,298 

 

 

 -

 

 

168,566 

 

 

(139,670)

 

 

2,353,194 

Other liabilities

 

 

(293,711)

 

 

1,219,444 

 

 

42,482 

 

 

(499,191)

 

 

469,024 

  Total liabilities

 

 

2,370,435 

 

 

1,706,825 

 

 

338,847 

 

 

(881,074)

 

 

3,535,033 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 -

 

 

 -

 

 

111,240 

 

 

 -

 

 

111,240 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

641 

 

 

1,727,859 

 

 

14,908 

 

 

(1,742,767)

 

 

641 

Treasury stock

 

 

(416,829)

 

 

 -

 

 

 -

 

 

 -

 

 

(416,829)

Additional paid-in-capital

 

 

1,132,749 

 

 

128,076 

 

 

779,678 

 

 

(907,754)

 

 

1,132,749 

Retained earnings (deficit)

 

 

2,210,459 

 

 

748,904 

 

 

(734,351)

 

 

(14,553)

 

 

2,210,459 

  Total Steel Dynamics, Inc. equity

 

 

2,927,020 

 

 

2,604,839 

 

 

60,235 

 

 

(2,665,074)

 

 

2,927,020 

Noncontrolling interests

 

 

 -

 

 

 -

 

 

(149,561)

 

 

 -

 

 

(149,561)

  Total equity

 

 

2,927,020 

 

 

2,604,839 

 

 

(89,326)

 

 

(2,665,074)

 

 

2,777,459 

  Total liabilities and equity

 

$

5,297,455 

 

$

4,311,664 

 

$

360,761 

 

$

(3,546,148)

 

$

6,423,732 

12

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Condensed Consolidating Information (Continued)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statements of Operations (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2017

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net sales

 

$

924,566 

 

$

2,572,238 

 

$

143,408 

 

$

(1,271,996)

 

$

2,368,216 

Costs of goods sold

 

 

711,579 

 

 

2,289,664 

 

 

138,041 

 

 

(1,243,222)

 

 

1,896,062 

  Gross profit

 

 

212,987 

 

 

282,574 

 

 

5,367 

 

 

(28,774)

 

 

472,154 

Selling, general and administrative

 

 

61,655 

 

 

76,282 

 

 

5,053 

 

 

(5,402)

 

 

137,588 

  Operating income

 

 

151,332 

 

 

206,292 

 

 

314 

 

 

(23,372)

 

 

334,566 

Interest expense, net of capitalized interest

 

 

18,081 

 

 

15,123 

 

 

3,266 

 

 

(2,497)

 

 

33,973 

Other (income) expense, net

 

 

(3,254)

 

 

(2,667)

 

 

(236)

 

 

2,498 

 

 

(3,659)

Income (loss) before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  equity in net income of subsidiaries

 

 

136,505 

 

 

193,836 

 

 

(2,716)

 

 

(23,373)

 

 

304,252 

Income taxes

 

 

41,585 

 

 

70,311 

 

 

1,790 

 

 

(8,100)

 

 

105,586 



 

 

94,920 

 

 

123,525 

 

 

(4,506)

 

 

(15,273)

 

 

198,666 

Equity in net income of subsidiaries

 

 

105,897 

 

 

 -

 

 

 -

 

 

(105,897)

 

 

 -

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

2,151 

 

 

 -

 

 

2,151 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

200,817 

 

$

123,525 

 

$

(2,355)

 

$

(121,170)

 

$

200,817 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2016

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net sales

 

$

657,814 

 

$

1,857,344 

 

$

85,740 

 

$

(859,597)

 

$

1,741,301 

Costs of goods sold

 

 

548,179 

 

 

1,701,821 

 

 

91,030 

 

 

(835,765)

 

 

1,505,265 

  Gross profit (loss)

 

 

109,635 

 

 

155,523 

 

 

(5,290)

 

 

(23,832)

 

 

236,036 

Selling, general and administrative

 

 

38,602 

 

 

67,200 

 

 

2,802 

 

 

(4,533)

 

 

104,071 

  Operating income (loss)

 

 

71,033 

 

 

88,323 

 

 

(8,092)

 

 

(19,299)

 

 

131,965 

Interest expense, net of capitalized interest

 

 

18,187 

 

 

18,400 

 

 

2,260 

 

 

(1,804)

 

 

37,043 

Other (income) expense, net

 

 

(2,208)

 

 

2,190 

 

 

(3,578)

 

 

1,804 

 

 

(1,792)

Income (loss) before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  equity in net income of subsidiaries

 

 

55,054 

 

 

67,733 

 

 

(6,774)

 

 

(19,299)

 

 

96,714 

Income taxes (benefit)

 

 

17,268 

 

 

25,495 

 

 

(271)

 

 

(7,096)

 

 

35,396 



 

 

37,786 

 

 

42,238 

 

 

(6,503)

 

 

(12,203)

 

 

61,318 

Equity in net income of subsidiaries

 

 

24,951 

 

 

 -

 

 

 -

 

 

(24,951)

 

 

 -

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

1,419 

 

 

 -

 

 

1,419 

Net income (loss) attributable to Steel Dynamics, Inc.

 

$

62,737 

 

$

42,238 

 

$

(5,084)

 

$

(37,154)

 

$

62,737 

13

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Condensed Consolidating Information (Continued)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statements of Cash Flows (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2017

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

101,995 

 

$

132,733 

 

$

(644)

 

$

6,365 

 

$

240,449 

Net cash used in investing activities

 

 

(19,409)

 

 

(1,510)

 

 

(192)

 

 

6,352 

 

 

(14,759)

Net cash provided by (used in) financing activities

 

 

86,776 

 

 

(174,914)

 

 

508 

 

 

(12,717)

 

 

(100,347)

Increase (decrease) in cash and equivalents

 

 

169,362 

 

 

(43,691)

 

 

(328)

 

 

 -

 

 

125,343 

  Cash and equivalents at beginning of period

 

 

766,685 

 

 

54,677 

 

 

20,121 

 

 

 -

 

 

841,483 

  Cash and equivalents at end of period

 

$

936,047 

 

$

10,986 

 

$

19,793 

 

$

 -

 

$

966,826 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2016

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

121,483 

 

$

179,289 

 

$

(6,917)

 

$

(2,827)

 

$

291,028 

Net cash used in investing activities

 

 

(7,318)

 

 

(9,974)

 

 

(4,108)

 

 

(3,254)

 

 

(24,654)

Net cash provided by (used in) financing activities

 

 

136,648 

 

 

(176,209)

 

 

17,025 

 

 

6,081 

 

 

(16,455)

Increase (decrease) in cash and equivalents

 

 

250,813 

 

 

(6,894)

 

 

6,000 

 

 

 -

 

 

249,919 

  Cash and equivalents at beginning of period

 

 

636,877 

 

 

81,976 

 

 

8,179 

 

 

 -

 

 

727,032 

  Cash and equivalents at end of period

 

$

887,690 

 

$

75,082 

 

$

14,179 

 

$

 -

 

$

976,951 















 

14

 


 

 

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



Forward-Looking Statements



This report contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap markets, Steel Dynamics’ revenues, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements, which we generally precede or accompany by such typical conditional words as "anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or "expect," or by the words "may," "will," or "should," are intended to be made as “forward-looking,” subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of uncertain economic conditions; (2) cyclical and changing industrial demand; (3) changes in conditions in any of the steel or scrap-consuming sectors of the economy which affect demand for our products, including the strength of the non-residential and residential construction, automotive, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses; (7) risks and uncertainties involving product and/or technology development; and (8) occurrences of unexpected plant outages or equipment failures.



More specifically, we refer you to our more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth under the headings Special Note Regarding Forward-Looking Statements and Risk Factors, in our most recent Annual Report on Form 10-K for the year ended December 31, 2016,  in our quarterly reports on Form 10-Q or in other reports which we from time to time file with the Securities and Exchange Commission. These reports are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on our website,  www.steeldynamics.com under “Investors – SEC Filings. 



Description of the Business

We are one of the largest domestic steel producers and metal recyclers in the United States based on current estimated steelmaking and coating capacity of 11 million tons and actual metals recycling volumes. The primary source of revenues are from the manufacture and sale of steel products, processing and sale of recycled ferrous and nonferrous metals, and fabrication and sale of steel joists and deck products. We have three reportable segments: steel operations, metals recycling operations, and steel fabrication operations.



Operating Statement Classifications



Net SalesNet sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of the steel products.  Except for the steel fabrication operations, we recognize revenues from sales and the allowance for estimated returns and claims from these sales at the time the title of the product transfers, upon shipment. Provision is made for estimated product returns and customer claims based on historical experience. If the historical data used in the estimates does not reflect future returns and claims trends, additional provision may be necessary. Our steel fabrication operations recognizes revenues from construction contracts utilizing a percentage of completion methodology based on steel tons used on completed units to date as a percentage of estimated total steel tons required for each contract.  



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



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



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



Other Expense (Income), net.  Other income consists of interest income earned on our temporary cash deposits and investments; any other non-operating income activity, including income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs, such as certain acquisition and financing expenses.



Results Overview  

Consolidated operating income increased $202.6 million, or 154%, to $334.6 million for the first quarter 2017, compared to $132.0 million for the first quarter 2016.  First quarter 2017 net income increased $138.1 million, or 220%, to $200.8 million, from $62.7 million for the first quarter 2016.  



15

 


 

 

Our consolidated results for the first quarter 2017 benefited from continued strong demand primarily for our sheet steel products, coupled with historically low customer inventory levels, supporting higher domestic steel shipments, and thus higher company steel mill utilization. Improved domestic steel mill utilization rates drove increased ferrous volumes, pricing and metal spreads for our metals recycling operations. The non-residential construction market remains strong, resulting in record quarterly shipments for our steel fabrication operations; however, metal spreads contracted as increases in average selling prices have been outpaced by rising steel input costs, resulting in decreased segment operating income. 



Segment Operating Results 2017 vs. 2016  (dollars in thousands)











 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended March 31,



2017

 

% Change

 

 

2016

Net sales:

 

 

 

 

 

 

 

  Steel Operations Segment

$

1,775,676 

 

41%

 

$

1,258,388 

  Metals Recycling Operations Segment

 

720,137 

 

48%

 

 

487,185 

  Steel Fabrication Operations Segment

 

194,108 

 

8%

 

 

180,081 

  Other

 

89,285 

 

18%

 

 

75,889 



 

2,779,206 

 

 

 

 

2,001,543 

  Intra-company

 

(410,990)

 

 

 

 

(260,242)



$

2,368,216 

 

36%

 

$

1,741,301 



 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

  Steel Operations Segment

$

348,532 

 

163%

 

$

132,275 

  Metals Recycling Operations Segment

 

17,849 

 

545%

 

 

2,767 

  Steel Fabrication Operations Segment

 

23,726 

 

(26)%

 

 

32,016 

  Other

 

(53,970)

 

(69)%

 

 

(31,930)



 

336,137 

 

 

 

 

135,128 

  Intra-company

 

(1,571)

 

 

 

 

(3,163)



$

334,566 

 

154%

 

$

131,965 









Steel Operations Segment



Steel Operations Segment.  Steel operations consist of our six electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and eleven downstream steel coating lines, and several bar processing lines, as well as Iron Dynamics (IDI), our liquid pig iron production facility that supplies solely the Butler Flat Roll Division. Our steel operations sell directly to end-users, steel fabricators, and service centers. These products are used in numerous industry sectors, including the construction, automotive,  manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets. Steel operations accounted for 73% and 70% of our consolidated external net sales during the first quarter of 2017 and 2016, respectively.



Sheet Steel Products.  Our sheet steel products operations consist of Butler and Columbus Flat Roll Divisions, and our downstream coating lines. These operations sell a broad range of sheet steel products, consisting of hot roll, cold roll and coated steel products, including a wide variety of specialty products, such as light gauge hot roll, galvanized, Galvalume®, and painted products. The Techs is comprised of three galvanizing lines which sell specialized galvanized sheet steels used in primarily non-automotive applications.  

Long Products.    Our Structural and Rail Division sells structural steel beams and pilings to the construction market, as well as standard‑grade and premium rail to the railroad industry. Our Engineered Bar Products Division primarily sells engineered special-bar-quality, merchant-bar-quality, round‑cornered squares, and smaller-diameter engineered round bars. Vulcan Threaded Products produces threaded rod products and also cold drawn and heat treated bar. Our Roanoke Bar Division primarily sells merchant steel products, including angles, merchant rounds, flats and channels, and reinforcing bar. Steel of West Virginia primarily sells beams, channels and specialty steel sections.



16

 


 

 

Steel Operations Segment Shipments (tons):





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2017

 

% Change

 

2016



 

 

 

 

 

Total shipments

2,481,747 

 

9%

 

2,277,208 

   Intra-segment shipments

(102,785)

 

 

 

(65,058)

Steel Operations Segment Shipments

2,378,962 

 

8%

 

2,212,150 



 

 

 

 

 

External shipments

2,305,080 

 

9%

 

2,121,872 



Picture 1



Segment Results 2017 vs. 2016



Overall steel operations performance in the first quarter of 2017 benefited from continued strong demand primarily for our sheet steel products coupled with historically low customer inventory levels, supporting higher domestic steel shipments, and higher steel mill utilization. Our steel mill utilization rate averaged 95% for the first quarter 2017, as compared to 88% in the first quarter 2016. The domestic steel demand outlook remained robust, with automotive remaining steady and construction markets improving. Our long products mills, particularly our Structural and Rail Division and Engineered Bar Products Division,  benefited from positive momentum in their respective markets, resulting in increased shipments at these locations. Sheet steel average selling prices increased 41% in the first quarter 2017 compared to the same period in 2016, while long products rose 8%, despite pricing pressure from excess domestic capacity for long products. Net sales for the steel operations increased 41% in the first quarter 2017, when compared to the same period in 2016, as an 8% increase in steel operations shipments combined with an increase of $174 per ton, or 31%, in average selling prices.



Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost, generally comprising approximately 60% of our steel operations’ manufacturing costs, excluding the operations of The Techs and Vulcan, which purchase, rather than produce, the steel they further process. Our metallic raw material cost per net ton consumed in our steel operations increased $80, or 44%, in the first quarter 2017, compared to the same period in 2016, consistent with overall increased domestic scrap pricing.



Operating income for the steel operations increased 163%, to $348.5 million, in the first quarter 2017, compared to the same period in 2016, due to increased steel shipments and expansion of overall steel operations metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed). Sheet steel metal spread expanded 40%, while long products metal spread expanded 8%.

17

 


 

 







Metals Recycling Operations Segment



Metals Recycling Operations Segment.  Metals recycling operations consists solely of OmniSource and includes both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage, and consulting services strategically located primarily in close proximity to our steel mills and other end-user scrap consumers throughout the eastern half of the United States.  In addition, OmniSource designs, installs, and manages customized scrap management programs for industrial manufacturing companies at approximately 700 locations throughout North America. Our steel mills utilize a large portion of the ferrous scrap processed through OmniSource as raw material in our steelmaking operations, and the remainder is sold to other consumers, such as other steel manufacturers and foundries. Our metals recycling operations accounted for 15% of our consolidated external net sales during the first quarter of 2017 and 2016.

Metals Recycling Operations Shipments:





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2017

 

% Change

 

2016

Ferrous metal (gross tons)

 

 

 

 

 

  Total

1,338,599 

 

3%

 

1,305,154 

  Inter-company

(853,185)

 

 

 

(801,367)

     External shipments

485,414 

 

(4)%

 

503,787 



 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

  Total

283,603 

 

5%

 

270,410 

  Inter-company

(30,667)

 

 

 

(27,850)

     External shipments

252,936 

 

4%

 

242,560 



Segment Results 2017 vs. 2016



Metals recycling operations operating income in the first quarter 2017 of $17.8 million was more than five times higher than the first quarter 2016 operating income of $2.8 million, due to significant improvements in ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) as well as increased shipments in both ferrous and nonferrous metals. Net sales increased 48% in the first quarter 2017 as compared to the same period in 2016, driven by increased shipments and pricing. Ferrous metal spread increased 42%, along with the 3% increase in ferrous shipments. Overall domestic steel mill utilization was 75% in the first quarter 2017, compared to 71% in the first quarter 2016, as our own steel mill utilization improved substantially (95%, compared to 88% in the first quarter 2016), further benefitting our metals recycling operations. Ferrous shipments to our own steel mills increased by 6% in the first quarter 2017, compared to the same period in 2016. Nonferrous scrap average selling prices increased 19% during the first quarter 2017 compared to the same period in 2016,  but the cost of nonferrous scrap increased more, resulting in an 8%  contraction in metal spread, largely offsetting the impact of the 5% increase in nonferrous shipments.







Steel Fabrication Operations Segment



Steel fabrication operations include our eight 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 steel joists, trusses, girders and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 8% and 10% of our consolidated external net sales during the first quarter of 2017 and 2016, respectively.  

18

 


 

 

Picture 3

Segment Results 2017 vs. 2016

The overall non-residential construction market has continued to remain strong, even in a typically lower demand timeframe, and shows signs of further growth as our fabrication operations achieved record quarterly shipments in the first quarter 2017.  Increases in selling prices were, however, outpaced by increased steel input costs during the first quarter 2017 compared to the same period in 2016, resulting in metal spread (which we define as the difference between average selling prices and the cost of purchased steel) contraction. Net sales for the steel fabrication operations increased $14.0 million, or 8%, during the first quarter 2017,  compared to the same period in 2016,  as shipments increased 4%, while average selling prices increased $50 per ton, or 4%. Our steel fabrication operations continue to leverage our national operating footprint to sustain and improve market share, and market demand continues to be strong.



The purchase of various steel products is the largest single cost of production for our steel fabrication operations, generally representing approximately two-thirds of the total cost of manufacturing. The average cost of steel consumed increased by 21% in the first quarter 2017, as compared to the same period in 2016.  With selling prices increasing only 4%, metal spread declined 11%, resulting in a 26% decrease in operating income to $23.7 million in the first quarter 2017, as compared to $32.0 million in the same period in 2016.







Other Operations



Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and 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.



First Quarter Consolidated Results 2017 vs. 2016 



Selling, General and Administrative Expenses. Selling, general and administrative expenses (including profit sharing and amortization of intangible assets) of $137.6 million during the first quarter 2017 increased 32% from $104.1 million during the first quarter 2016,  representing approximately 5.8% and 6.0% of net sales, respectively. The increase in the first quarter 2017 compared to the same period in 2016 is due most notably to increased performance-based incentive compensation, including profit sharing, associated with our increased profitability.



Interest Expense, net of Capitalized Interest.  During the first quarter 2017, interest expense decreased 8% to $34.0 million from $37.0 million during the same period in 2016. The decrease in interest expense is due primarily to the December 2016 refinancing of $400.0 million of 6.125%

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senior notes due 2019 with 5.000% senior notes due 2026. In addition, we repaid the remaining $228.1 million of outstanding Senior Term Loan debt in December 2016, which was set to mature on November 14, 2019



Income Tax Expense.  During the first quarter 2017, our income tax expense was $105.6 million at an effective income tax rate of 34.7%, as compared to $35.4 million at an effective income tax rate of 36.6%, during the first quarter 2016. The lower effective tax rate in 2017 is due primarily to additional permanent tax benefit items, most notably the 2017 domestic manufacturing deduction, resulting from increases in taxable income.



Liquidity and Capital Resources

Capital Resources and Long‑term Debt. Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steel, metals recycling, and steel fabrication operations, and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily from working capital requirements, capital expenditures, principal and interest payments related to our outstanding indebtedness, dividends to our shareholders, and acquisitions. We have met these liquidity requirements primarily with cash provided by operations and long-term borrowings, and we also have availability under our Revolver. Our liquidity at March  31, 2017, is as follows (in thousands):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Cash and equivalents

 

$

966,826 

 

 

 



 

 

Revolver availability

 

 

1,187,593 

 

 

 



 

 

Total liquidity

 

$

2,154,419 

 

 

 



Our total outstanding debt remained relatively unchanged during the first quarter of 2017 at $2.4 billion. Our total long-term debt to capitalization ratio (representing our long-term debt, including current maturities, divided by the sum of our long-term debt, redeemable noncontrolling interests, and our total stockholders’ equity) was 44.0% at March  31, 2017,  from 44.9% at December 31, 2016, due to our profitability during the first quarter 2017.



Our November 2014 senior secured credit facility (Facility), which provides a $1.2 billion Revolver, matures November 2019. Subject to certain conditions, we have the opportunity to increase the Revolver size by at least $750.0 million. The Facility is guaranteed by certain of our subsidiaries; and is secured by substantially all of our and our wholly-owned subsidiaries’ receivables and inventories, and by pledges of all shares of our wholly-owned subsidiaries’ capital stock or other equity interests, and intercompany debt held by us as collateral. The Revolver is available to fund working capital, capital expenditures, and other general corporate purposes. The Facility contains financial covenants and other covenants pertaining to our ability (which may under certain circumstances be limited) to make capital expenditures; incur indebtedness; permit liens on property; enter into transactions with affiliates; make restricted payments or investments; enter into mergers, acquisitions or consolidations; conduct asset sales; pay dividends or distributions, or enter into other specified transactions and activities. Our ability to borrow funds within the terms of the Revolver is dependent upon our continued compliance with the financial and other covenants. At March 31, 2017, we had $1.2 billion of availability on the Revolver, $12.1 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.



The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve-months (LTM) consolidated adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in the Facility) by our LTM gross interest expense, less amortization of financing fees. In addition, a net debt (as defined in the Facility) to consolidated LTM adjusted EBITDA (net debt leverage ratio) of not more than 5.00:1.00 must be maintained. If the net debt leverage ratio exceeds 3.50:1:00 at any time, our ability to make certain payments as defined in the Facility (which includes cash dividends to stockholders and share purchases, among other things), is limited. At March 31, 2017, our interest coverage ratio and net debt leverage ratio were 9.92:1.00 and 1.35:1.00, respectively. We were, therefore, in compliance with these covenants at March 31, 2017, and we anticipate we will continue to be in compliance during the next twelve months.  



Working Capital. We generated cash flow from operations of $240.4 million in the first quarter 2017. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $145.6 million to $1.4 billion at March 31, 2017. Increases in volumes, pricing and profitability resulted in increased accounts receivable, with related increases in inventory more than offset by related increases in accounts payable. 



Capital Investments.    During the first quarter 2017, we invested $41.7 million in property, plant and equipment, primarily within our steel operations segment, compared with $27.7 million invested during the same period in 2016.



Cash Dividends.    As a reflection of continued confidence in our current and future cash flow generation ability and financial position, we increased our quarterly cash dividend by 11% to $0.155 per share in the first quarter 2017 (from $0.140 per share in 2016), resulting in declared cash dividends of $37.5 million during the first quarter 2017, compared to $34.1 million during the same period in 2016. We paid cash dividends of $34.1 million and $33.4 million during the first quarter of 2017 and 2016, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis. The determination to pay cash dividends in the future is at the discretion of our board of directors, after taking into account various factors, including our financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs and growth plans. In addition, the terms of our Facility and the indentures relating to our senior notes may restrict the amount of cash dividends we can pay.



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Other.    In 2016, the board of directors authorized a share repurchase program of up to $450 million of our common stock. Under the share repurchase program, purchases will take place as and when we determine in open market or private transactions made based upon the market price of our common stock, the nature of other investment opportunities or growth projects, our cash flows from operations, and general economic conditions.  The share repurchase program does not require us to acquire any specific number of shares, and may be modified, suspended, extended or terminated by us at any time. We acquired 1.8 million shares of our common stock for $61.3 million in the first quarter 2017 pursuant to this program. See Part II Other Information, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds for additional information.



Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will depend upon general economic, financial and business conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure that our operating results, cash flows, access to credit markets and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flows from operations, together with other available sources of funds, including additional borrowings under our Revolver through its term, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness, funding working capital requirements, and anticipated capital expenditures. 



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest Rate Risk

In the normal course of business, we are exposed to interest rate changes. Our objectives in managing fluctuations in interest rates are to limit the impact of these rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we may use interest rate swaps to manage net exposure to interest rate changes related to our portfolio of borrowings. We did not have any interest rate swaps during the three-month periods ended March  31,  2017 or 2016.



Commodity Risk



In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of our products and to the purchase of raw materials used in our operations, such as metallic raw materials, electricity, natural gas and its transportation services, fuel, air products, and zinc. Our risk strategy associated with product sales has generally been to obtain competitive prices for our products and to allow operating results to reflect market price movements dictated by supply and demand.



Our risk strategy associated with the purchase of raw materials utilized within our operations has generally been to make some commitments with suppliers relating to future expected requirements for some commodities such as electricity, natural gas and its transportation services, fuel, air products, and zinc. Certain of these commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to 4 years for physical commodity requirements and commodity transportation requirements, and for up to 12 years for air products.  We utilized such “take or pay” requirements during the past three years under these contracts, except for certain air products at our Minnesota ironmaking operations which were idled in May 2015. We believe that production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process, other than certain air products related to our Minnesota ironmaking operations during the idle period. We also purchase electricity consumed at our Butler Flat Roll Division pursuant to a contract which extends through December 2017. The contract designates 160 hours annually as “interruptible service” and establishes an agreed fixed-rate energy charge per Mill/kWh consumed for each year through the expiration of the agreement.

In our metals recycling operations we have certain fixed price contracts with various customers and suppliers for future delivery of nonferrous metals. Our risk strategy has been to enter into base metal financial contracts with the goal to protect the profit margin, within certain parameters, that was contemplated when we entered into the transaction with the customer or vendor. At March 31, 2017, we had a cumulative unrealized gain associated with these financial contracts of $1.6 million, substantially all of which have a settlement date within the next twelve months. We believe the customer contracts associated with the financial contracts will be fully consummated.  



ITEM 4.CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,  2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of March 31,  2017, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective.



(b)  Changes in Internal Controls Over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31,  2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

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PART II OTHER INFORMATION



ITEM 1.LEGAL PROCEEDINGS



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



We may also be involved from time to time in various governmental investigations, regulatory proceedings or judicial actions seeking remediation under federal, state and local environmental laws and regulations. The United States EPA has conducted such investigations and proceedings involving us, in some instances along with state environmental regulators, under various environmental laws, including RCRA, CERCLA, the Clean Water Act and the Clean Air Act. Some of these matters have resulted in fines or penalties, for which a total of $200,000 is recorded in our financial statements as of March 31, 2017.



ITEM 1A.RISK FACTORS



No material changes have occurred to the indicated risk factors as disclosed in our Annual Report on Form 10-K for the year ended 
December 31, 2016.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



(c) Issuer Purchases of Equity Securities



We purchased the following equity securities registered by us pursuant to Section 12 of the Exchange Act during the three months ended
March 31, 2017.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Program (1)

 

Maximum Dollar Value of Shares That May Yet be Purchased Under the Program (in thousands)  (1)

 



Quarter ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



  January 1-31

 

133,794 

 

 

$

33.72 

 

 

133,794 

 

 

$

420,455 

 



  February 1-28

 

1,301,934 

 

 

 

33.54 

 

 

1,301,934 

 

 

 

376,792 

 



  March 1-31

 

387,310 

 

 

 

33.78 

 

 

387,310 

 

 

 

363,710 

 



 

 

1,823,038 

 

 

 

 

 

 

1,823,038 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

On October 18, 2016, we announced that our board of directors had authorized a share repurchase program of up to $450.0 million of our common stock.  Our board of directors cancelled the previously authorized program with respect to which no shares had been repurchased for a number of years.



ITEM 3.DEFAULTS UPON SENIOR SECURITIES



None.

ITEM 4.MINE SAFETY DISCLOSURES



Information normally required to be furnished, in Exhibit 95 to this Quarterly Report, pursuant to Item 4 concerning mine safety disclosure matters, if applicable, by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104), is not included in this report, as there are no applicable mine safety disclosure matters to report for the three months ended March 31, 2017. Accordingly, there is no Exhibit 95 attached to this report.



ITEM 5.OTHER INFORMATION



None.

22

 


 

 







 

 

ITEM 6.

 

EXHIBITS



 

 

Executive Officer Certifications



 

 

31.1*

 

Certification of Principal Executive Officer required by Item 307 of Regulation S-K as promulgated by the



 

Securities and Exchange Commission and pursuant to Section 302 of the SarbanesOxley Act of 2002.



 

 

31.2*

 

Certification of Principal Financial Officer required by Item 307 of Regulation S-K as promulgated by the



 

Securities and Exchange Commission and pursuant to Section 302 of the SarbanesOxley Act of 2002.



 

 

32.1*

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to



 

Section 906 of the SarbanesOxley Act of 2002.



 

 

32.2*

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to

   

 

Section 906 of the SarbanesOxley Act of 2002.



 

 

Other

 

 



 

 

95**

 

Mine Safety Disclosures.



 

 

XBRL Documents

 



 

 

101.INS*

 

XBRL Instance Document



 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document



 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Document



 

 

101.DEF*

 

XBRL Taxonomy Definition Document



 

 

101.LAB*

 

XBRL Taxonomy Extension Label Document



 

 

101.PRE*

 

XBRL Taxonomy Presentation Document



_____________________________________________________________________________________________________________

*Filed concurrently herewith

**Inapplicable for purposes of this report

23

 


 

 

SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



May 8, 2017





 

 

STEEL DYNAMICS, INC



 

 

By:

 

/s/ Theresa E. Wagler



 

Theresa E. Wagler



 

Executive Vice President and Chief Financial Officer



 

(Principal Financial Officer and Principal Accounting Officer)













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