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STEEL DYNAMICS INC - Quarter Report: 2018 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 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, net

 

161.7 

 

 

 

 

 



Intra-company debt

 

12.9 

 

 

 

 

 



Other

 

37.4 

 

 

 

 

 



 

$

1,250.9 

 

 

 

 

 

10

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Segment Information (Continued)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Metals

 

Steel

 

 

 

 

 

 

 

 

 

For the three months ended

 

Steel

 

Recycling

 

Fabrication

 

 

 

 

 

 

 

 

 

March 31, 2017

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales - disaggregated revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

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



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(12.4)

 

(2)

Gross profit decrease from intra-company sales

$

(1.6)



Company-wide equity-based compensation

 

(9.6)

 

 

 

 

 



Profit sharing

 

(26.5)

 

 

 

 

 



Other, net

 

(5.5)

 

 

 

 

 



 

$

(54.0)

 

 

 

 

 





11

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information



Certain 100% owned subsidiaries of SDI have fully and unconditionally guaranteed jointly and severally all of the indebtedness relating to the issuance of the company’s senior unsecured notes due 2021, 2023, 2024, 2025 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, 2017.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

As of March 31, 2018

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Cash and equivalents

 

$

969,240 

 

$

9,294 

 

$

7,290 

 

$

 -

 

$

985,824 

Short term investments

 

 

40,000 

 

 

 -

 

 

 -

 

 

 -

 

 

40,000 

Accounts receivable, net

 

 

349,276 

 

 

1,475,249 

 

 

33,922 

 

 

(870,792)

 

 

987,655 

Inventories

 

 

743,939 

 

 

804,504 

 

 

59,192 

 

 

(7,577)

 

 

1,600,058 

Other current assets

 

 

23,717 

 

 

14,814 

 

 

5,095 

 

 

(4,921)

 

 

38,705 

  Total current assets

 

 

2,126,172 

 

 

2,303,861 

 

 

105,499 

 

 

(883,290)

 

 

3,652,242 

Property, plant and equipment, net

 

 

854,685 

 

 

1,605,485 

 

 

197,767 

 

 

 -

 

 

2,657,937 

Intangible assets, net

 

 

 -

 

 

219,374 

 

 

30,609 

 

 

 -

 

 

249,983 

Goodwill

 

 

 -

 

 

378,221 

 

 

7,824 

 

 

 -

 

 

386,045 

Other assets, including investments in subs

 

 

2,486,756 

 

 

6,081 

 

 

5,588 

 

 

(2,471,819)

 

 

26,606 

  Total assets

 

$

5,467,613 

 

$

4,513,022 

 

$

347,287 

 

$

(3,355,109)

 

$

6,972,813 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

185,459 

 

$

363,178 

 

$

87,276 

 

$

(73,295)

 

$

562,618 

Accrued expenses

 

 

185,020 

 

 

232,542 

 

 

11,103 

 

 

(140,189)

 

 

288,476 

Current maturities of long-term debt

 

 

746 

 

 

 -

 

 

36,761 

 

 

(27,861)

 

 

9,646 

  Total current liabilities

 

 

371,225 

 

 

595,720 

 

 

135,140 

 

 

(241,345)

 

 

860,740 

Long-term debt

 

 

2,327,621 

 

 

 -

 

 

167,787 

 

 

(141,705)

 

 

2,353,703 

Other liabilities

 

 

(701,952)

 

 

775,007 

 

 

22,547 

 

 

239,391 

 

 

334,993 

  Total liabilities

 

 

1,996,894 

 

 

1,370,727 

 

 

325,474 

 

 

(143,659)

 

 

3,549,436 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 -

 

 

 -

 

 

111,240 

 

 

 -

 

 

111,240 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

644 

 

 

1,727,859 

 

 

15,016 

 

 

(1,742,875)

 

 

644 

Treasury stock

 

 

(730,700)

 

 

 -

 

 

 -

 

 

 -

 

 

(730,700)

Additional paid-in-capital

 

 

1,142,871 

 

 

128,076 

 

 

803,204 

 

 

(931,280)

 

 

1,142,871 

Retained earnings (deficit)

 

 

3,057,904 

 

 

1,286,360 

 

 

(749,065)

 

 

(537,295)

 

 

3,057,904 

  Total Steel Dynamics, Inc. equity

 

 

3,470,719 

 

 

3,142,295 

 

 

69,155 

 

 

(3,211,450)

 

 

3,470,719 

Noncontrolling interests

 

 

 -

 

 

 -

 

 

(158,582)

 

 

 -

 

 

(158,582)

  Total equity

 

 

3,470,719 

 

 

3,142,295 

 

 

(89,427)

 

 

(3,211,450)

 

 

3,312,137 

  Total liabilities and equity

 

$

5,467,613 

 

$

4,513,022 

 

$

347,287 

 

$

(3,355,109)

 

$

6,972,813 



12

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (Continued)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

As of December 31, 2017

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Cash and equivalents

 

$

1,001,405 

 

$

20,441 

 

$

6,803 

 

$

 -

 

$

1,028,649 

Accounts receivable, net

 

 

274,968 

 

 

1,426,036 

 

 

37,387 

 

 

(869,554)

 

 

868,837 

Inventories

 

 

685,103 

 

 

752,151 

 

 

91,890 

 

 

(9,797)

 

 

1,519,347 

Other current assets

 

 

73,748 

 

 

16,005 

 

 

5,962 

 

 

(4,206)

 

 

91,509 

  Total current assets

 

 

2,035,224 

 

 

2,214,633 

 

 

142,042 

 

 

(883,557)

 

 

3,508,342 

Property, plant and equipment, net

 

 

859,419 

 

 

1,618,438 

 

 

198,047 

 

 

 -

 

 

2,675,904 

Intangible assets, net

 

 

 -

 

 

225,503 

 

 

31,406 

 

 

 -

 

 

256,909 

Goodwill

 

 

 -

 

 

379,069 

 

 

7,824 

 

 

 -

 

 

386,893 

Other assets, including investments in subs

 

 

2,512,594 

 

 

6,622 

 

 

5,505 

 

 

(2,497,037)

 

 

27,684 

  Total assets

 

$

5,407,237 

 

$

4,444,265 

 

$

384,824 

 

$

(3,380,594)

 

$

6,855,732 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

168,282 

 

$

316,676 

 

$

101,948 

 

$

(97,458)

 

$

489,448 

Accrued expenses

 

 

222,023 

 

 

254,196 

 

 

10,243 

 

 

(136,186)

 

 

350,276 

Current maturities of long-term debt

 

 

731 

 

 

 -

 

 

56,454 

 

 

(28,390)

 

 

28,795 

  Total current liabilities

 

 

391,036 

 

 

570,872 

 

 

168,645 

 

 

(262,034)

 

 

868,519 

Long-term debt

 

 

2,326,466 

 

 

 -

 

 

169,799 

 

 

(143,120)

 

 

2,353,145 

Other liabilities

 

 

(661,839)

 

 

869,196 

 

 

24,868 

 

 

95,535 

 

 

327,760 

  Total liabilities

 

 

2,055,663 

 

 

1,440,068 

 

 

363,312 

 

 

(309,619)

 

 

3,549,424 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 -

 

 

 -

 

 

111,240 

 

 

 -

 

 

111,240 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

644 

 

 

1,727,859 

 

 

14,908 

 

 

(1,742,767)

 

 

644 

Treasury stock

 

 

(665,297)

 

 

 -

 

 

 -

 

 

 -

 

 

(665,297)

Additional paid-in-capital

 

 

1,141,534 

 

 

128,076 

 

 

797,196 

 

 

(925,272)

 

 

1,141,534 

Retained earnings (deficit)

 

 

2,874,693 

 

 

1,148,262 

 

 

(745,326)

 

 

(402,936)

 

 

2,874,693 

  Total Steel Dynamics, Inc. equity

 

 

3,351,574 

 

 

3,004,197 

 

 

66,778 

 

 

(3,070,975)

 

 

3,351,574 

Noncontrolling interests

 

 

 -

 

 

 -

 

 

(156,506)

 

 

 -

 

 

(156,506)

  Total equity

 

 

3,351,574 

 

 

3,004,197 

 

 

(89,728)

 

 

(3,070,975)

 

 

3,195,068 

  Total liabilities and equity

 

$

5,407,237 

 

$

4,444,265 

 

$

384,824 

 

$

(3,380,594)

 

$

6,855,732 

13

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (Continued)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statements of Operations (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2018

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net sales

 

$

1,036,674 

 

$

2,823,129 

 

$

152,587 

 

$

(1,408,515)

 

$

2,603,875 

Costs of goods sold

 

 

819,145 

 

 

2,551,620 

 

 

148,630 

 

 

(1,378,936)

 

 

2,140,459 

  Gross profit

 

 

217,529 

 

 

271,509 

 

 

3,957 

 

 

(29,579)

 

 

463,416 

Selling, general and administrative

 

 

62,927 

 

 

76,952 

 

 

5,597 

 

 

(5,457)

 

 

140,019 

  Operating income (loss)

 

 

154,602 

 

 

194,557 

 

 

(1,640)

 

 

(24,122)

 

 

323,397 

Interest expense, net of capitalized interest

 

 

18,623 

 

 

12,437 

 

 

3,540 

 

 

(2,704)

 

 

31,896 

Other expense (income), net

 

 

(5,203)

 

 

(1,697)

 

 

(273)

 

 

2,710 

 

 

(4,463)

Income (loss) before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  equity in net income of subsidiaries

 

 

141,182 

 

 

183,817 

 

 

(4,907)

 

 

(24,128)

 

 

295,964 

Income taxes

 

 

29,746 

 

 

45,720 

 

 

909 

 

 

(5,886)

 

 

70,489 



 

 

111,436 

 

 

138,097 

 

 

(5,816)

 

 

(18,242)

 

 

225,475 

Equity in net income of subsidiaries

 

 

116,115 

 

 

 -

 

 

 -

 

 

(116,115)

 

 

 -

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

2,076 

 

 

 -

 

 

2,076 

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

 

$

227,551 

 

$

138,097 

 

$

(3,740)

 

$

(134,357)

 

$

227,551 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 expense (income), 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 

14

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Condensed Consolidating Information (Continued)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statements of Cash Flows (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2018

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net cash provided by operating activities

 

$

9,009 

 

$

149,336 

 

$

21,283 

 

$

(1,693)

 

$

177,935 

Net cash used in investing activities

 

 

(60,919)

 

 

(24,517)

 

 

(2,997)

 

 

(1,944)

 

 

(90,377)

Net cash provided by (used in) financing activities

 

 

18,920 

 

 

(135,966)

 

 

(17,813)

 

 

3,637 

 

 

(131,222)

Increase (decrease) in cash and equivalents

 

 

(32,990)

 

 

(11,147)

 

 

473 

 

 

 -

 

 

(43,664)

  Cash, cash equivalents, and restricted cash at beginning of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     period

 

 

1,002,230 

 

 

20,740 

 

 

12,115 

 

 

 -

 

 

1,035,085 

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

 

$

969,240 

 

$

9,593 

 

$

12,588 

 

$

 -

 

$

991,421 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2017

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net cash provided by (used in) operating activities

 

$

102,209 

 

$

132,733 

 

$

(877)

 

$

6,365 

 

$

240,430 

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

 

 

169,576 

 

 

(43,691)

 

 

(561)

 

 

 -

 

 

125,324 

  Cash, cash equivalents, and restricted cash at beginning of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     period

 

 

767,594 

 

 

54,859 

 

 

25,652 

 

 

 -

 

 

848,105 

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

 

$

937,170 

 

$

11,168 

 

$

25,091 

 

$

 -

 

$

973,429 









 

15

 


 

 

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, manufacturing, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials and supplies (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 in our most recent Annual Report on Form 10-K under the headings Special Note Regarding Forward-Looking Statements and Risk Factors for the year ended December 31, 2017,  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 estimated annual steelmaking and metals recycling capability, with facilities located throughout the United States, and in Mexico. 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 our 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 point in time control of the product transfers to the customer, upon shipment or delivery. Our steel fabrication operations recognizes revenues over time based on completed fabricated tons to date as a percentage of total 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, utilities such as electricity and natural gas, 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, and property taxes. Company-wide profit sharing and amortization of intangible assets are each separately presented in the statement of operations.



Interest Expense, net of Capitalized InterestInterest 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), netOther income consists of interest income earned on our temporary cash deposits and short term 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.



















16

 


 

 

Results Overview  

Our consolidated results for the first quarter of 2018 benefited from continued strong demand in each of our three operating segments. Steel operations achieved record shipments and increased average selling prices in first quarter 2018 compared to the same quarter in 2017, while our metals recycling operations benefited from increased average selling prices, more than offsetting the impact of lower shipments resulting from the mid-March 2017 sale of some non-core locations. The non-residential construction market remained strong, resulting in consistent year over year shipments for our steel fabrication operations, with average selling prices continuing to rise. While our metals recycling operations was able to achieve substantial growth in operating income, both steel and steel fabrication operations experienced slight decreases in operating income due to increases in operating expenses which outpaced modestly higher metal spreads in both segments.



Consolidated operating income decreased $11.2 million, or 3%, to $323.4 million for the first quarter 2018, compared to the first quarter 2017.  First quarter 2018 net income attributable to Steel Dynamics, Inc. increased $26.7 million, or 13%, to $227.6 million, compared to the first quarter 2017, with the reduction in the effective income tax rate to 23.8% in the first quarter 2018 from 34.7% in the first quarter 2017.



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











 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended March 31,



2018

 

% Change

 

 

2017

Net sales:

 

 

 

 

 

 

 

  Steel Operations Segment

$

1,981,774 

 

12%

 

$

1,775,676 

  Metals Recycling Operations Segment

 

752,766 

 

5%

 

 

720,137 

  Steel Fabrication Operations Segment

 

201,703 

 

4%

 

 

194,108 

  Other

 

92,618 

 

4%

 

 

89,285 



 

3,028,861 

 

 

 

 

2,779,206 

  Intra-company

 

(424,986)

 

 

 

 

(410,990)



$

2,603,875 

 

10%

 

$

2,368,216 



 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

  Steel Operations Segment

$

334,562 

 

(4)%

 

$

348,532 

  Metals Recycling Operations Segment

 

24,715 

 

38%

 

 

17,849 

  Steel Fabrication Operations Segment

 

19,791 

 

(17)%

 

 

23,726 

  Other

 

(55,406)

 

(3)%

 

 

(53,970)



 

323,662 

 

 

 

 

336,137 

  Intra-company

 

(265)

 

 

 

 

(1,571)



$

323,397 

 

(3)%

 

$

334,566 







Steel Operations Segment



Steel operations consist of our electric arc furnace steel mills, producing sheet and long products steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills with several downstream coating and bar processing lines, as well as IDI, our liquid pig iron production facility that supplies solely the Butler Flat Roll Division. Our steel operations sell a diverse portfolio of sheet and long products directly to end-users, steel fabricators, and service centers. These products are used in numerous industry sectors, including the construction, automotive, manufacturing, transportation, heavy equipment and agriculture, and pipe and tube (including OCTG) markets. Steel operations accounted for 74% and 73% of our consolidated external net sales during the first quarter of 2018 and 2017, respectively.





17

 


 

 

Steel Operations Segment Shipments (tons):





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2018

 

% Change

 

2017



 

 

 

 

 

Total shipments

2,534,644 

 

2%

 

2,481,747 

   Intra-segment shipments

(121,653)

 

 

 

(102,785)

Steel Operations Segment Shipments

2,412,991 

 

1%

 

2,378,962 



 

 

 

 

 

External shipments

2,327,515 

 

1%

 

2,305,080 



Picture 2



Segment Results 2018 vs. 2017



Overall domestic steel consumption remained strong, particularly within the automotive and construction sectors, while energy and general industrial demand continued to grow. Steel operations segment shipments remained relatively flat in the first quarter 2018, as compared to the same period in 2017, with long products improving slightly.  Net sales for the steel operations increased 12% in the first quarter 2018 when compared to the same period in 2017, due primarily to an increase of $74 per ton, or 10%, in average selling prices consistent with increased steel market pricing. Our steel mill utilization rate averaged 94% for the first quarter 2018, as compared to 95% in the first quarter 2017.



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 $56, or 21%, in the first quarter 2018, compared to the same period in 2017, consistent with overall increased domestic scrap pricing. As a result of selling prices increasing more than scrap costs, metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed) increased 4% in the first quarter 2018 compared to the first quarter 2017.



Operating income for the steel operations decreased 4%, to $334.6 million, in the first quarter 2018, compared to the same period in 2017, due primarily to increases in other manufacturing costs not related to metallic raw materials, including planned maintenance outages.

















18

 


 

 

Metals Recycling Operations Segment



Metals recycling operations consists solely of OmniSource and includes both ferrous and nonferrous scrap metal processing, transportation, marketing, and brokerage 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 hundreds of locations throughout North America. Our steel mills utilize a large portion (65% and 64% for the periods presented) of the ferrous scrap sold by 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 quarters of 2018 and 2017.

Metals Recycling Operations Shipments:





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2018

 

% Change

 

2017

Ferrous metal (gross tons)

 

 

 

 

 

  Total

1,256,899 

 

(6)%

 

1,338,599 

  Inter-company

(819,909)

 

 

 

(853,185)

     External shipments

436,990 

 

(10)%

 

485,414 



 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

  Total

271,628 

 

(4)%

 

283,603 

  Inter-company

(20,855)

 

 

 

(30,667)

     External shipments

250,773 

 

(1)%

 

252,936 



Segment Results 2018 vs. 2017



Metals recycling operations operating income in the first quarter 2018 of $24.7 million increased 38% from the first quarter 2017 operating income of $17.8 million, due to a slight improvement in ferrous and a more pronounced improvement in nonferrous metal spreads (which we define as the difference between average selling prices and the cost of purchased scrap). Net sales increased 5% in the first quarter 2018 as compared to the same period in 2017, driven by increased pricing, more than offsetting the impact of lower shipments, resulting from the mid-March 2017 sale of some non-core locations.  Ferrous scrap average selling prices increased 12% during the first quarter 2018 compared to the same period in 2017, while nonferrous average selling prices increased 6% compared to the same period in 2017, resulting in ferrous metal spread expansion of 3%, and nonferrous metal spread expansion of 24%.  Overall domestic steel mill utilization was 76% in the first quarter of 2018, compared to 75% in the same 2017 period. Ferrous shipments to our own steel mills decreased by 4% in the first quarter 2018, compared to the same period in 2017.





Steel Fabrication Operations Segment



Steel fabrication operations include our 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% of  our consolidated external net sales during the first quarters of 2018 and 2017.  

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Picture 1

Segment Results 2018 vs. 2017

Net sales for the steel fabrication operations increased $7.6 million, or 4%, during the first quarter 2018,  compared to the same period in 2017,  as shipments remained consistent, while average selling prices increased $54 per ton, or 4%. Our steel fabrication operations continue to leverage our national operating footprint to sustain and improve market share. Market demand and order backlogs continue to be strong heading into the seasonally busier months ahead, indicating that the non-residential construction market continues to grow.



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 7% in the first quarter 2018, as compared to the same period in 2017 consistent with increased selling prices discussed in the steel operations results, while average selling prices increased only 4%, with resulting metal spread (which we define as the difference between average selling prices and the cost of purchased steel) remaining relatively steady on a per ton basis. However, operating income decreased $3.9 million, or 17%, to $19.8 million in the first quarter 2018 compared to the same period in 2017, due primarily to increases in other non steel related costs.







Other Operations



Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our idled Minnesota ironmaking operations 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 2018 vs. 2017 



Selling, General and Administrative Expenses. Selling, general and administrative expenses of $106.4 million during the first quarter 2018 increased 3% from $102.9 million during the first quarter 2017,  representing a comparable 4.1% and 4.3% of net sales, respectively.



Interest Expense, net of Capitalized Interest.  During the first quarter 2018, interest expense decreased 6% to $31.9 million from $34.0 million during the same period in 2017, due primarily to the call and repayment of our $350.0 million 6.375% senior notes due 2022 with 4.125% senior notes due 2025 in the latter half of 2017.



Income Tax Expense.  During the first quarter 2018, our income tax expense was $70.5 million at an effective income tax rate of 23.8%, as compared to $105.6 million at an effective income tax rate of 34.7%, during the first quarter 2017. The lower effective tax rate in 2018 is due primarily to the enacted Tax Cuts and Jobs Act of 2017, signed into law in December 2017, which lowered the federal income tax rate from 35% to 21% in 2018.







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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,  2018, is as follows (in thousands):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Cash and equivalents

 

$

985,824 

 

 

 



 

 

Short term investments

 

 

40,000 

 

 

 



 

 

Revolver availability

 

 

1,188,114 

 

 

 



 

 

Total liquidity

 

$

2,213,938 

 

 

 



 

 

 

 

 

 

 

 

 



Our total outstanding debt decreased $18.6 million during the first quarter of 2018 due to decreased revolving credit facility borrowings at one of our controlled subsidiaries.  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)  decreased to 40.8% at March 31,  2018,  compared to 41.9% at December 31, 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, 2018, we had $1.2 billion of availability on the Revolver, $11.9 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, 2018, our interest coverage ratio and net debt leverage ratio were 10.76:1.00 and 1.36:1.00, respectively. We were, therefore, in compliance with these covenants at March 31, 2018, and we anticipate we will continue to be in compliance during the next twelve months.  



Working Capital. We generated cash flow from operations of $177.9 million in the first quarter of 2018. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $199.0 million to $1.7 billion at March 31, 2018, consistent with increases in volumes, pricing and profitability during the first quarter 2018. 



Capital Investments.    During the first quarter of 2018, we invested $50.6 million in property, plant and equipment, primarily within our steel operations segment, compared with $41.7 million invested during the same period in 2017.



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 21% to $0.1875 per share in the first quarter 2018 (from $0.155 per share in 2017), resulting in declared cash dividends of $44.3 million during the first quarter of 2018, compared to $37.5 million during the same period in 2017. We paid cash dividends of $36.8 million and $34.1 million during the first quarter of 2018 and 2017, 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.



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 1.5 million shares of our common stock for $69.3 million in the first quarter of 2018 pursuant to this program. See Part II Other Information, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds for additional information.



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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 if necessary 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



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, zinc, and electrodes. 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, zinc, and electrodes. 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 5 years for physical commodity requirements and commodity transportation requirements, and for up to 11 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 have been idle since 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 2018, which 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, 2018, we had a cumulative unrealized gain associated with these financial contracts of $5.7 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 Procedures



As required, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2018, the end of the period covered by this quarterly report, our disclosure controls and procedures were designed to provide and were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



(b)

Changes in Internal Controls Over Financial Reporting



No 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, 2018, 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 penalties, injunctive relief, and/or 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 $432,000 is recorded in our financial statements as of March 31, 2018.



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, 2017.



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, 2018.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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, 2018

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



    January 1 - 31

 

315,210 

 

 

$

47.59 

 

 

315,210 

 

 

$

157,724 

 



    February 1 - 28

 

1,067,153 

 

 

 

44.56 

 

 

1,067,153 

 

 

 

110,168 

 



    March 1 - 31

 

157,291 

 

 

 

42.68 

 

 

157,291 

 

 

 

103,455 

 



 

 

1,539,654 

 

 

 

 

 

 

1,539,654 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 required to be furnished 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 included in Exhibit 95 to this quarterly report. There are no mine safety disclosures to report for the three months ended March 31, 2018, therefore, no Exhibit 95 is required.



ITEM 5.OTHER INFORMATION



None.

23

 


 

 







 

 

ITEM 6.

 

EXHIBITS



Reference is made to the Exhibit Index preceding the signature page hereto, which Exhibit Index is hereby incorporated into this item.

24

 


 

 

EXHIBIT INDEX

 

Executive Officer Certifications



 

 

31.1*

 

Certification of Chief 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 Chief 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

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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 9, 2018





 

 

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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