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STEEL DYNAMICS INC - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

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 September 30, 2019

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

Securities registered pursuant to Section 12(b) of the Act.

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock voting, $0.0025 par value

STLD

NASDAQ Global Select Market

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 every Interactive Data File required to be submitted 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 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 October 28, 2019, Registrant had 215,452,169 outstanding shares of common stock.

Table of Contents

STEEL DYNAMICS, INC.

Table of Contents

PART I. Financial Information

Item 1.

Financial Statements:

Page

Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018

1

Consolidated Statements of Income for the three and nine-month periods ended September 30, 2019 and 2018 (unaudited)

2

Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2019 and 2018 (unaudited)

3

Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2019 and 2018 (unaudited)

4

Notes to Consolidated Financial Statements (unaudited)

5

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

27

PART II. Other Information

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

Exhibit Index

29

Signature

30

Table of Contents

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30,

December 31,

2019

2018

Assets

(unaudited)

Current assets

Cash and equivalents

$

1,146,007

$

828,220

Short-term investments

69,529

228,783

Accounts receivable, net

983,515

1,040,220

Accounts receivable-related parties

3,431

3,536

Inventories

1,767,020

1,859,168

Other current assets

50,818

72,730

Total current assets

4,020,320

4,032,657

Property, plant and equipment, net

3,031,731

2,945,767

Intangible assets, net

249,598

270,328

Goodwill

540,913

429,645

Other assets

100,685

25,166

Total assets

$

7,943,247

$

7,703,563

Liabilities and Equity

Current liabilities

Accounts payable

$

518,909

$

536,743

Accounts payable-related parties

9,720

14,011

Income taxes payable

2,074

7,468

Accrued payroll and benefits

181,785

264,542

Accrued interest

47,945

25,526

Accrued expenses

162,692

146,613

Current maturities of long-term debt

82,150

24,234

Total current liabilities

1,005,275

1,019,137

Long-term debt

2,355,243

2,352,489

Deferred income taxes

468,248

435,838

Other liabilities

70,126

8,870

Total liabilities

3,898,892

3,816,334

Commitments and contingencies

Redeemable noncontrolling interests

143,614

111,240

Equity

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

265,553,499 and 265,822,402 shares issued; and 215,740,572 and 225,272,174

shares outstanding, as of September 30, 2019 and December 31, 2018, respectively

645

645

Treasury stock, at cost; 49,812,927 and 40,550,228 shares,

as of September 30, 2019 and December 31, 2018, respectively

(1,469,078)

(1,184,243)

Additional paid-in capital

1,175,512

1,160,048

Retained earnings

4,349,523

3,958,320

Accumulated other comprehensive income

39

301

Total Steel Dynamics, Inc. equity

4,056,641

3,935,071

Noncontrolling interests

(155,900)

(159,082)

Total equity

3,900,741

3,775,989

Total liabilities and equity

$

7,943,247

$

7,703,563

See notes to consolidated financial statements.

1

Table of Contents

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Net sales

Unrelated parties

$

2,523,279

$

3,220,891

$

8,104,129

$

8,902,025

Related parties

3,566

2,656

10,666

15,922

Total net sales

2,526,845

3,223,547

8,114,795

8,917,947

Costs of goods sold

2,167,006

2,537,466

6,900,220

7,116,368

Gross profit

359,839

686,081

1,214,575

1,801,579

Selling, general and administrative expenses

107,242

102,614

324,530

310,076

Profit sharing

17,848

45,304

64,396

114,301

Amortization of intangible assets

6,704

6,591

20,730

20,346

Operating income

228,045

531,572

804,919

1,356,856

Interest expense, net of capitalized interest

31,339

31,560

94,782

94,968

Other income, net

(4,545)

(7,103)

(15,137)

(16,601)

Income before income taxes

201,251

507,115

725,274

1,278,489

Income tax expense

48,643

109,209

171,093

292,536

Net income

152,608

397,906

554,181

985,953

Net (income) loss attributable to noncontrolling interests

(1,560)

469

(4,503)

2,422

Net income attributable to Steel Dynamics, Inc.

$

151,048

$

398,375

$

549,678

$

988,375

Basic earnings per share attributable to Steel Dynamics,

Inc. stockholders

$

0.69

$

1.70

$

2.49

$

4.20

Weighted average common shares outstanding

217,873

234,208

221,145

235,483

Diluted earnings per share attributable to Steel Dynamics, Inc.

stockholders, including the effect of assumed conversions

when dilutive

$

0.69

$

1.69

$

2.47

$

4.17

Weighted average common shares and share equivalents outstanding

219,109

235,649

222,197

236,772

Dividends declared per share

$

0.2400

$

0.1875

$

0.7200

$

0.5625

See notes to consolidated financial statements.

2

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Net income

$

152,608

$

397,906

$

554,181

$

985,953

Other comprehensive income (loss) - net unrealized gain (loss) on

cash flow hedging derivatives, net of income tax expense (benefit)

(39)

63

(262)

(42)

Comprehensive income

152,569

397,969

553,919

985,911

Comprehensive (income) loss attributable to noncontrolling interests

(1,560)

469

(4,503)

2,422

Comprehensive income attributable to Steel Dynamics, Inc.

$

151,009

$

398,438

$

549,416

$

988,333

See notes to consolidated financial statements.

3

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Operating activities:

Net income

$

152,608

$

397,906

$

554,181

$

985,953

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization

79,470

81,383

240,555

236,638

Equity-based compensation

8,841

7,978

33,229

28,860

Deferred income taxes

11,311

23,899

34,952

45,437

Other adjustments

(1,116)

312

(952)

197

Changes in certain assets and liabilities:

Accounts receivable

85,633

(48,024)

95,195

(330,307)

Inventories

35,479

(69,885)

139,889

(240,908)

Other assets

39

(6,429)

7,632

(7,164)

Accounts payable

1,111

(14,883)

(54,167)

100,368

Income taxes receivable/payable

6,293

(31,127)

19,715

55,414

Accrued expenses

64,533

79,310

(83,001)

49,920

Net cash provided by operating activities

444,202

420,440

987,228

924,408

Investing activities:

Purchases of property, plant and equipment

(154,131)

(70,668)

(293,687)

(176,477)

Purchases of short-term investments

(34,884)

(35,000)

(134,026)

(125,000)

Proceeds from maturities of short-term investments

79,508

10,000

293,279

10,000

Acquisition of business, net of cash and restricted cash acquired

(3,694)

(37,589)

(97,106)

(433,998)

Other investing activities

2,746

576

4,023

1,462

Net cash used in investing activities

(110,455)

(132,681)

(227,517)

(724,013)

Financing activities:

Issuance of current and long-term debt

128,230

110,041

374,686

327,670

Repayment of current and long-term debt

(119,988)

(115,039)

(369,134)

(346,162)

Dividends paid

(52,751)

(44,081)

(148,493)

(125,146)

Purchases of treasury stock

(114,950)

(74,965)

(292,394)

(193,379)

Other financing activities

(1,527)

-

(7,259)

(8,324)

Net cash used in financing activities

(160,986)

(124,044)

(442,594)

(345,341)

Increase (decrease) in cash, cash equivalents, and restricted cash

172,761

163,715

317,117

(144,946)

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

978,779

726,424

834,423

1,035,085

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

$

1,151,540

$

890,139

$

1,151,540

$

890,139

Supplemental disclosure information:

Cash paid for interest

$

9,115

$

8,643

$

71,702

$

70,498

Cash paid for income taxes, net

$

29,794

$

119,802

$

116,149

$

198,752

See notes to consolidated financial statements.

4

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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, Heartland Flat Roll Division, United Steel Supply (acquired 75% equity interest March 1, 2019), 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, with several downstream coating and bar processing lines. Steel operations accounted for 76% and 77% of the company’s consolidated external net sales during the three months ended September 30, 2019 and 2018, respectively, and 76% and 75% during the nine months ended September 30, 2019 and 2018, respectively.

Metals Recycling Operations Segment. Metals recycling operations consists solely of OmniSource, LLC (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and scrap management services. Metals recycling operations accounted for 11% and 12% of the company’s consolidated external net sales during the three months ended September 30, 2019 and 2018, respectively, and 12% and 14% during the nine months ended September 30, 2019 and 2018, respectively.

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 10% and 8% of the company’s consolidated external net sales during the three months ended September 30, 2019 and 2018, respectively, and 9% and 8% of the company’s consolidated external net sales during the nine months ended September 30, 2019 and 2018, respectively.

Other. Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of smaller joint ventures, and the idle Minnesota ironmaking operations. 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/controlled subsidiaries, after elimination of 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/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, 2018.

5

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Cash and Equivalents, and Restricted Cash

Cash and equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Restricted cash is primarily funds held in escrow as required by various insurance and government organizations. The balance of cash, cash equivalents and restricted cash in the consolidated statements of cash flows includes restricted cash of $5.5 million, $6.2 million, $6.2 million, $5.8 million, $6.0 million, and $6.4 million at September 30, 2019, June 30, 2019, December 31, 2018, September 30, 2018, June 30, 2018, and December 31, 2017, respectively, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.

Goodwill

The company’s goodwill consisted of the following at September 30, 2019, and December 31, 2018, (in thousands):

September 30,

December 31,

2019

2018

Steel Operations Segment

$

359,283

$

245,473

Metals Recycling Operations Segment

179,705

182,247

Steel Fabrication Operations Segment

1,925

1,925

$

540,913

$

429,645

The company acquired a 75% equity interest in United Steel Supply on March 1, 2019 (refer to Note 2 Acquisition – United Steel Supply, LLC), resulting in a preliminary purchase price allocation in which $113.8 million of goodwill has been recorded in the Steel Operations Segment at September 30, 2019. Metals Recycling Operations segment goodwill decreased $2.5 million from December 31, 2018 to September 30, 2019, in recognition of the 2019 tax benefit related to the normal amortization of the component of tax-deductible goodwill in excess of book goodwill.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, and it’s subsequent corresponding updates: which requires an entity to use a forward-looking expected loss model versus the current incurred loss model for most financial instruments, including accounts receivable. This new guidance is effective for annual and interim periods beginning after December 15, 2019, but can be early adopted. The company anticipates adopting ASU 2016-13 on January 1, 2020. The company is working through its adoption plan to evaluate policies, processes and systems to determine the impact ASU 2016-13 will have in its consolidated financial statements and related disclosure.

Note 2. Acquisition – United Steel Supply, LLC

On March 1, 2019, the company purchased 75% of the equity interest of United Steel Supply, LLC (USS) for cash consideration of $93.4 million, plus a customary working capital transaction purchase price adjustment of $3.7 million in September 2019. Additionally, the company has an option to purchase, and the sellers have the option to require the company to purchase, the remaining 25% equity interest of USS in the future. Headquartered in Austin, Texas, USS is a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications, with distribution centers strategically located in Mississippi, Indiana, Arkansas, and Oregon. USS provides the company a new, complementary distribution channel and connects it to a rapidly growing industry segment with customers that do not traditionally purchase steel directly from a steel producer. USS’s operating results from and after March 1, 2019, are reflected in the company’s financial statements in the steel operations reporting segment.

6

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 2. Acquisition – United Steel Supply, LLC (Continued)

The aggregate purchase price was preliminarily allocated to the opening balance sheet of USS as of March 1, 2019, and updated in September 2019 upon the final working capital adjustment, as presented below. The following allocation of the purchase price (in thousands) is preliminary based on the information available to estimate the fair value of assets acquired and liabilities assumed. The accounting for the acquisition has not yet been completed because the company has not finalized the valuations of identifiable intangible assets, if any, and thus goodwill. The company anticipates finalizing the valuation of identifiable intangible assets by December 31, 2019.

September 30,

2019 Allocation

Adjustments

Initial Allocation

Current assets, net of cash acquired

$

86,236

$

(7,784)

$

94,020

Property, plant & equipment

7,388

-

7,388

Intangible assets and goodwill

113,810

11,892

101,918

Total assets acquired

207,434

4,108

203,326

Liabilities assumed

77,954

(3,270)

81,224

Redeemable noncontrolling interest

32,374

3,684

28,690

Net cash consideration

$

97,106

$

3,694

$

93,412

Note 3. Leases

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) and its subsequent corresponding updates; which established 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. The company adopted ASC 842 effective January 1, 2019, using the optional transition method, thereby applying the new guidance at the effective date, without retrospective application to prior periods. The company elected practical expedients permitted under the transition guidance which allowed the company to not reassess under the new standard its prior conclusions regarding lease identification and classification. The company elected to use hindsight when determining the lease term. The company also elected the short-term lease exemption, and did not recognize right-of-use assets and lease liabilities for short-term leases, those with lease commencement date terms of 12 months or less. The company recognized right-of-use assets and lease liabilities of $76.3 million, with no impact on retained earnings, in the consolidated balance sheet on January 1, 2019, and the standard did not have a significant impact on the company’s operating results or cash flows for the three and nine-month periods ended September 30, 2019.

The company has operating leases relating principally to transportation and other equipment, and some real estate. The company determines if an arrangement contains a lease at inception, which generally occurs when the arrangement identifies a specific asset that the company has the right to direct the use of and obtain substantially all of the economic benefit from use of the identified asset. Certain of our lease agreements contain rent escalation clauses (including fixed and index-based escalations), and options to extend or terminate the lease. For purposes of calculating operating lease obligations under the standard, the company’s lease terms include options to extend the lease when it is reasonably certain that the company will exercise such option. The company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is the rate of interest the company could borrow on a collateralized basis over a similar term with similar payments. Operating lease expense is recognized on a straight-line basis over the lease term.

Operating lease right-of-use assets and lease obligations included in the consolidated balance sheet at September 30, 2019, are as follows (in thousands):

Right of use assets under operating leases:

Other assets - noncurrent

$

74,843

Lease obligations under operating leases:

Accrued liabilities

$

17,202

Other liabilities - noncurrent

57,946

$

75,148

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3. Leases (Continued)

The weighted average remaining lease term for our operating leases is six years and the weighted-average discount rate is 4.0% as of September 30, 2019. Future operating lease liabilities as of September 30, 2019, for the next five years and thereafter are as follows (in thousands):

2019 - for the remaining three months

$

19,954

2020

17,120

2021

13,719

2022

10,636

2023

7,506

Thereafter

17,095

Total undiscounted cash flows

86,030

Less imputed interest

(10,882)

Lease obligations under operating leases

$

75,148

Operating lease expense included in the consolidated statements of income was $5.2 million and $15.0 million for the three and nine months ended September 30, 2019, respectively. Cash paid related to operating lease obligations was $5.2 million and $15.1 million for the three and nine months ended September 30, 2019, respectively. Variable lease costs were not material for the three and nine months ended September 30, 2019. Short-term lease expense included in the consolidated statements of income was $5.0 million and $14.8 million for the three and nine months ended September 30, 2019, respectively. Right-of-use assets obtained in exchange for new operating lease liabilities during the three and nine months ended September 30, 2019 were $1.4 million and $11.3 million, respectively.

Note 4. 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 and nine-month periods ended September 30, 2019 and 2018.

Three Months Ended September 30,

2019

2018

Weighted

Weighted

Average

Average

Net Income

Shares

Per Share

Net Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic earnings per share

$

151,048

217,873

$

0.69

$

398,375

234,208

$

1.70

Dilutive common share equivalents

-

1,236

-

1,441

Diluted earnings per share

$

151,048

219,109

$

0.69

$

398,375

235,649

$

1.69

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4. Earnings Per Share (Continued)

Nine Months Ended September 30,

2019

2018

Weighted

Weighted

Average

Average

Net Income

Shares

Per Share

Net Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic earnings per share

$

549,678

221,145

$

2.49

$

988,375

235,483

$

4.20

Dilutive common share equivalents

-

1,052

-

1,289

Diluted earnings per share

$

549,678

222,197

$

2.47

$

988,375

236,772

$

4.17

Note 5. 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):

September 30,

December 31,

2019

2018

Raw materials

$

758,677

$

810,766

Supplies

492,604

436,828

Work in progress

156,443

195,224

Finished goods

359,296

416,350

Total inventories

$

1,767,020

$

1,859,168

Note 6. Changes in Equity

The following tables provide 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) for each quarterly period in the nine months ended September 30, 2019 and 2018:

Stockholders of Steel Dynamics, Inc.

Accumulated

Additional

Other

Redeemable

Common

Treasury

Paid-In

Retained

Comprehensive

Noncontrolling

Total

Noncontrolling

Stock

Stock

Capital

Earnings

Loss

Interests

Equity

Interests

Balances at December 31, 2018

$

645

$

(1,184,243)

$

1,160,048

$

3,958,320

$

301

$

(159,082)

$

3,775,989

$

111,240

Dividends declared

-

-

-

(53,504)

-

-

(53,504)

-

Noncontrolling investors of USS

-

-

-

-

-

-

-

28,690

Share repurchases

-

(84,308)

-

-

-

-

(84,308)

-

Equity-based compensation

-

6,714

91

(110)

-

-

6,695

-

Net income

-

-

-

204,328

-

499

204,827

-

Other comprehensive loss, net of tax

-

-

-

-

(171)

-

(171)

-

Balances at March 31, 2019

645

(1,261,837)

1,160,139

4,109,034

130

(158,583)

3,849,528

139,930

Dividends declared

-

-

-

(52,751)

-

-

(52,751)

-

Share repurchases

-

(93,136)

-

-

-

-

(93,136)

-

Equity-based compensation

-

816

7,366

(166)

-

-

8,016

-

Net income

-

-

-

194,302

-

2,444

196,746

-

Other comprehensive loss, net of tax

-

-

-

-

(52)

-

(52)

-

Balances at June 30, 2019

645

(1,354,157)

1,167,505

4,250,419

78

(156,139)

3,908,351

139,930

Dividends declared

-

-

-

(51,778)

-

-

(51,778)

-

Noncontrolling investors of USS

-

-

-

-

-

(1,321)

(1,321)

3,684

Share repurchases

-

(114,950)

-

-

-

-

(114,950)

-

Equity-based compensation

-

29

8,007

(166)

-

-

7,870

-

Net income

-

-

-

151,048

-

1,560

152,608

-

Other comprehensive loss, net of tax

-

-

-

-

(39)

-

(39)

-

Balances at September 30, 2019

$

645

$

(1,469,078)

$

1,175,512

$

4,349,523

$

39

$

(155,900)

$

3,900,741

$

143,614

9

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6. Changes in Equity (Continued)

Stockholders of Steel Dynamics, Inc.

Accumulated

Additional

Other

Redeemable

Common

Treasury

Paid-In

Retained

Comprehensive

Noncontrolling

Total

Noncontrolling

Stock

Stock

Capital

Earnings

Loss

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

Dividends declared

-

-

-

(44,080)

-

-

(44,080)

-

Noncontrolling investors, net

-

-

-

-

-

(3)

(3)

-

Share repurchases

-

(49,145)

-

-

-

-

(49,145)

-

Equity-based compensation

-

757

6,496

(110)

-

-

7,143

-

Net income

-

-

-

362,449

-

123

362,572

-

Other comprehensive loss, net of tax

-

-

-

-

(105)

-

(105)

-

Balances at June 30, 2018

644

(779,088)

1,149,367

3,376,163

(105)

(158,462)

3,588,519

111,240

Dividends declared

-

-

-

(43,767)

-

-

(43,767)

-

Noncontrolling investors, net

-

-

-

-

-

-

-

-

Share repurchases

-

(74,965)

-

-

-

-

(74,965)

-

Equity-based compensation

-

1

7,189

(109)

-

-

7,081

-

Net income

-

-

-

398,375

-

(469)

397,906

-

Other comprehensive loss, net of tax

-

-

-

-

63

-

63

-

Balances at September 30, 2018

$

644

$

(854,052)

$

1,156,556

$

3,730,662

$

(42)

$

(158,931)

$

3,874,837

$

111,240

Note 7. 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, and occasionally to mitigate foreign currency exchange rate risk or 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 and ferrous 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 significant futures contract commitments as of September 30, 2019:

Commodity Futures

Long/Short

Metric Tons

Aluminum

Long

575

Aluminum

Short

4,100

Copper

Long

10,036

Copper

Short

21,704

10

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7. Derivative Financial Instruments (Continued)

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of September 30, 2019, and December 31, 2018, and gains and losses related to derivatives included in the company’s statement of income for the three and nine-month periods ended September 30, 2019 and 2018 (in thousands):

Asset Derivatives

Liability Derivatives

Balance sheet

Fair Value

Fair Value

 location

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

Derivative instruments designated as hedges

Commodity futures

Other current assets

$

1,063

$

2,999

$

805

$

1,837

Derivative instruments not designated as hedges

Commodity futures

Other current assets

313

1,559

3,100

2,053

Total derivative instruments

$

1,376

$

4,558

$

3,905

$

3,890

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $4.3 million at September 30, 2019, and $4.9 million at December 31, 2018, and are reflected in other current assets in the consolidated balance sheets.

Amount of gain (loss)

Amount of gain (loss)

recognized in income

Location of gain

recognized in income

Location of gain

on derivatives for the

(loss) recognized

on derivatives for the

(loss) recognized

three months ended

Hedged items in

in income on

three months ended

in income on

September 30,

fair value hedge

related hedged

September 30,

derivatives

2019

2018

relationships

items

2019

2018

Derivatives in fair value

hedging relationships

Commodity futures

Costs of goods sold

$

302

$

(8,943)

Firm commitments

Costs of goods sold

$

(519)

$

5,111

Inventory

Costs of goods sold

(182)

1,753

Derivatives not designated

$

(701)

$

6,864

as hedging instruments

Commodity futures

Costs of goods sold

$

4,536

$

13,803

Amount of gain (loss)

Amount of gain (loss)

recognized in income

Location of gain

recognized in income

Location of gain

on derivatives for the

(loss) recognized

on derivatives for the

(loss) recognized

three months ended

Hedged items in

in income on

three months ended

in income on

September 30,

fair value hedge

related hedged

September 30,

derivatives

2019

2018

relationships

items

2019

2018

Derivatives in fair value

hedging relationships

Commodity futures

Costs of goods sold

$

(560)

$

1,113

Firm commitments

Costs of goods sold

$

(603)

$

1,718

Inventory

Costs of goods sold

245

(1,659)

Derivatives not designated

$

(358)

$

59

as hedging instruments

Commodity futures

Costs of goods sold

$

5,946

$

19,523

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $69,000 and $5,000 during the three-month periods ended September 30, 2019, and 2018, respectively; and gains of $101,000 and losses of $10,500 during the nine-month periods ended September 30, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $399,000 and $2.1 million increased cost of goods sold during the three-month periods ended September 30, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $918,000 increased cost of goods sold during the nine-month period ended September 30, 2019 and gains of $1.2 million decreased the cost of goods sold during the nine-month period ended September 30, 2018.

11

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7. Derivative Financial Instruments (Continued)

Derivatives accounted for as cash flow hedges resulted in net losses of $8,000 and net gains of $82,000 recognized in other comprehensive income for the three-month periods ended September 30, 2019, and 2018, respectively; and net gains of $139,000 and net losses of $55,000 for the nine-month periods ended September 30, 2019 and 2018, respectively. Net gains of $43,000 and $483,000 were reclassified from accumulated other comprehensive income for the three and nine-month periods ended September 30, 2019. At September 30, 2019, the company expects to reclassify $51,000 of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts.

Note 8. 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 September 30, 2019, and December 31, 2018 (in thousands):

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

September 30, 2019

Short-term investments

$

69,529

$

-

$

69,529

$

-

Commodity futures – financial assets

1,376

-

1,376

-

Commodity futures – financial liabilities

3,905

-

3,905

-

December 31, 2018

Short-term investments

$

228,783

$

-

$

228,783

$

-

Commodity futures – financial assets

4,558

-

4,558

-

Commodity futures – financial liabilities

3,890

-

3,890

-

The carrying amounts of financial instruments including cash and equivalents approximate fair value (Level 1). The fair values of short-term investments and the 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 (Level 2). The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.5 billion and $2.4 billion at September 30, 2019 and December 31, 2018, respectively (with a corresponding carrying amount in the consolidated balance sheet of $2.5 billion at September 30, 2019 and $2.4 billion at December 31, 2018).

Note 9. 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.

12

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10. 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 smaller joint ventures, and the idle Minnesota ironmaking operations. 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.

The company’s segment results, including disaggregated revenue by segment to external, external non-United States, and other segment customers, are as follows (in thousands):

Metals

Steel

For the three months ended

Steel

Recycling

Fabrication

September 30, 2019

Operations

Operations

Operations

Other

Eliminations

Consolidated

Net sales - disaggregated revenue

External

$

1,838,682

$

230,086

$

245,914

$

77,330

$

-

$

2,392,012

External Non-U.S.

83,845

50,823

165

-

-

134,833

Other segments

85,678

293,999

637

100

(380,414)

-

2,008,205

574,908

246,716

77,430

(380,414)

2,526,845

Operating income (loss)

234,683

(101)

35,280

(42,441)

(1)

624

(2)

228,045

Income (loss) before income taxes

217,699

(1,159)

34,080

(49,780)

411

201,251

Depreciation and amortization

63,170

11,769

2,941

1,590

-

79,470

Capital expenditures

40,818

11,498

3,759

98,056

-

154,131

As of September 30, 2019

Assets

$

5,119,419

$

972,493

$

414,835

$

1,513,798

(3)

$

(77,298)

(4)

$

7,943,247

Footnotes related to the three months ended September 30, 2019, segment results (in millions):

(1)

Corporate SG&A

$

(15.4)

(2)

Gross profit increase from intra-company sales

$

0.4

Company-wide equity-based compensation

(8.7)

Profit sharing

(17.0)

Other, net

(1.3)

$

(42.4)

(3)

Cash and equivalents

$

1,072.5

(4)

Elimination of intra-company receivables

$

(61.2)

Short-term investments

69.5

Elimination of intra-company debt

(8.7)

Accounts receivable

7.8

Other

(7.4)

Inventories

36.5

$

(77.3)

Property, plant and equipment, net

271.8

Intra-company debt

8.7

Other

47.0

$

1,513.8

13

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10. Segment Information (Continued)

Metals

Steel

For the three months ended

Steel

Recycling

Fabrication

September 30, 2018

Operations

Operations

Operations

Other

Eliminations

Consolidated

Net sales - disaggregated revenue

External

$

2,400,329

$

323,611

$

250,625

$

110,659

$

-

$

3,085,224

External Non-U.S.

74,715

63,608

-

-

-

138,323

Other segments

111,582

412,795

120

1,294

(525,791)

-

2,586,626

800,014

250,745

111,953

(525,791)

3,223,547

Operating income (loss)

573,848

14,674

13,104

(67,113)

(1)

(2,941)

531,572

Income (loss) before income taxes

557,870

13,488

11,801

(73,109)

(2,935)

(2)

507,115

Depreciation and amortization

64,088

11,491

2,941

2,863

-

81,383

Capital expenditures

57,074

11,603

1,395

596

-

70,668

Footnotes related to the three months ended September 30, 2018, segment results (in millions):

(1)

Corporate SG&A

$

(13.8)

(2)

Gross profit decrease from intra-company sales

$

(2.9)

Company-wide equity-based compensation

(7.8)

Profit sharing

(43.4)

Other, net

(2.1)

$

(67.1)

Metals

Steel

For the nine months ended

Steel

Recycling

Fabrication

September 30, 2019

Operations

Operations

Operations

Other

Eliminations

Consolidated

Net sales - disaggregated revenue

External

$

5,918,189

$

778,637

$

714,782

$

290,219

$

-

$

7,701,827

External Non-U.S.

235,259

176,508

1,201

-

-

412,968

Other segments

243,107

1,013,574

826

469

(1,257,976)

-

6,396,555

1,968,719

716,809

290,688

(1,257,976)

8,114,795

Operating income (loss)

835,172

24,480

86,567

(148,514)

(1)

7,214

804,919

Income (loss) before income taxes

784,873

20,846

82,897

(169,914)

6,572

(2)

725,274

Depreciation and amortization

188,832

34,733

8,882

8,108

-

240,555

Capital expenditures

128,069

30,313

8,771

126,534

-

293,687

Footnotes related to the nine months ended September 30, 2019, segment results (in millions):

(1)

Corporate SG&A

$

(56.0)

(2)

Gross profit increase from intra-company sales

$

6.6

Company-wide equity-based compensation

(26.1)

Profit sharing

(61.3)

Other, net

(5.1)

$

(148.5)

14

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10. Segment Information (Continued)

Metals

Steel

For the nine months ended

Steel

Recycling

Fabrication

September 30, 2018

Operations

Operations

Operations

Other

Eliminations

Consolidated

Net sales - disaggregated revenue

External

$

6,360,177

$

1,001,267

$

669,500

$

326,086

$

-

$

8,357,030

External Non-U.S.

362,083

198,778

56

-

-

560,917

Other segments

281,828

1,236,830

788

1,565

(1,521,011)

-

7,004,088

2,436,875

670,344

327,651

(1,521,011)

8,917,947

Operating income (loss)

1,441,904

62,027

47,039

(186,137)

(1)

(7,977)

1,356,856

Income (loss) before income taxes

1,390,074

57,458

42,898

(203,970)

(7,971)

(2)

1,278,489

Depreciation and amortization

184,998

34,602

8,785

8,253

-

236,638

Capital expenditures

137,484

27,496

5,526

5,971

-

176,477

Footnotes related to the nine months ended September 30, 2018, segment results (in millions):

(1)

Corporate SG&A

$

(44.0)

(2)

Gross profit decrease from intra-company sales

$

(8.0)

Company-wide equity-based compensation

(24.8)

Profit sharing

(109.6)

Other, net

(7.7)

$

(186.1)

Note 11. Condensed Consolidating Information

Certain 100% owned subsidiaries of SDI 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, at September 30, 2019. 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. In October 2019, the Company’s corporate credit rating was upgraded to an investment grade credit level by all three credit rating agencies, resulting in all the referenced guarantees being automatically released pursuant to the applicable Indentures. 

15

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11. Condensed Consolidating Information (Continued)

Condensed Consolidating Balance Sheets (in thousands)

Combined

Consolidating

Total

As of September 30, 2019

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Cash and equivalents

$

1,070,215

$

64,398

$

11,394

$

-

$

1,146,007

Short-term investments

69,529

-

-

-

69,529

Accounts receivable, net

303,259

1,675,521

63,962

(1,055,796)

986,946

Inventories

725,792

960,506

88,871

(8,149)

1,767,020

Other current assets

29,754

17,464

4,548

(948)

50,818

Total current assets

2,198,549

2,717,889

168,775

(1,064,893)

4,020,320

Property, plant and equipment, net

966,715

1,902,414

162,602

-

3,031,731

Intangible assets, net

-

249,598

-

-

249,598

Goodwill

-

427,103

113,810

-

540,913

Other assets, including investments in subs

2,723,786

61,910

6,420

(2,691,431)

100,685

Total assets

$

5,889,050

$

5,358,914

$

451,607

$

(3,756,324)

$

7,943,247

Accounts payable

$

177,308

$

332,299

$

99,162

$

(80,140)

$

528,629

Accrued expenses

228,600

316,684

16,694

(167,482)

394,496

Current maturities of long-term debt

843

517

103,551

(22,761)

82,150

Total current liabilities

406,751

649,500

219,407

(270,383)

1,005,275

Long-term debt

2,330,968

-

147,310

(123,035)

2,355,243

Other liabilities

(905,310)

1,087,758

34,290

321,636

538,374

Total liabilities

1,832,409

1,737,258

401,007

(71,782)

3,898,892

Redeemable noncontrolling interests

-

-

143,614

-

143,614

Common stock

645

1,727,859

15,016

(1,742,875)

645

Treasury stock

(1,469,078)

-

-

-

(1,469,078)

Additional paid-in-capital

1,175,512

683,048

804,625

(1,487,673)

1,175,512

Retained earnings (deficit)

4,349,523

1,210,749

(756,755)

(453,994)

4,349,523

Accumulated other comprehensive loss

39

-

-

-

39

Total Steel Dynamics, Inc. equity

4,056,641

3,621,656

62,886

(3,684,542)

4,056,641

Noncontrolling interests

-

-

(155,900)

-

(155,900)

Total equity

4,056,641

3,621,656

(93,014)

(3,684,542)

3,900,741

Total liabilities and equity

$

5,889,050

$

5,358,914

$

451,607

$

(3,756,324)

$

7,943,247

16

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11. Condensed Consolidating Information (Continued)

Combined

Consolidating

Total

As of December 31, 2018

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Cash and equivalents

$

809,763

$

13,491

$

4,966

$

-

$

828,220

Short-term investments

198,783

30,000

-

-

228,783

Accounts receivable, net

340,439

1,635,168

26,655

(958,506)

1,043,756

Inventories

793,174

1,038,702

39,214

(11,922)

1,859,168

Other current assets

56,578

18,627

3,994

(6,469)

72,730

Total current assets

2,198,737

2,735,988

74,829

(976,897)

4,032,657

Property, plant and equipment, net

871,482

1,918,198

156,087

-

2,945,767

Intangible assets, net

-

270,328

-

-

270,328

Goodwill

-

429,645

-

-

429,645

Other assets, including investments in subs

2,862,556

5,593

5,557

(2,848,540)

25,166

Total assets

$

5,932,775

$

5,359,752

$

236,473

$

(3,825,437)

$

7,703,563

Accounts payable

$

209,156

$

330,156

$

74,353

$

(62,911)

$

550,754

Accrued expenses

296,528

295,668

11,171

(159,218)

444,149

Current maturities of long-term debt

793

1,355

51,079

(28,993)

24,234

Total current liabilities

506,477

627,179

136,603

(251,122)

1,019,137

Long-term debt

2,327,798

381

166,226

(141,916)

2,352,489

Other liabilities

(836,571)

1,447,464

31,791

(197,976)

444,708

Total liabilities

1,997,704

2,075,024

334,620

(591,014)

3,816,334

Redeemable noncontrolling interests

-

-

111,240

-

111,240

Common stock

645

1,727,859

15,016

(1,742,875)

645

Treasury stock

(1,184,243)

-

-

-

(1,184,243)

Additional paid-in-capital

1,160,048

683,048

695,502

(1,378,550)

1,160,048

Retained earnings (deficit)

3,958,320

873,821

(760,823)

(112,998)

3,958,320

Accumulated other comprehensive income

301

-

-

-

301

Total Steel Dynamics, Inc. equity

3,935,071

3,284,728

(50,305)

(3,234,423)

3,935,071

Noncontrolling interests

-

-

(159,082)

-

(159,082)

Total equity

3,935,071

3,284,728

(209,387)

(3,234,423)

3,775,989

Total liabilities and equity

$

5,932,775

$

5,359,752

$

236,473

$

(3,825,437)

$

7,703,563

Condensed Consolidating Statements of Operations (in thousands)

For the three months ended,

Combined

Consolidating

Total

September 30, 2019

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net sales

$

976,470

$

2,710,767

$

205,617

$

(1,366,009)

$

2,526,845

Costs of goods sold

814,622

2,502,257

188,967

(1,338,840)

2,167,006

Gross profit

161,848

208,510

16,650

(27,169)

359,839

Selling, general and administrative

55,613

74,433

7,827

(6,079)

131,794

Operating income

106,235

134,077

8,823

(21,090)

228,045

Interest expense, net of capitalized interest

18,716

11,536

3,490

(2,403)

31,339

Other income, net

(5,394)

(1,574)

(196)

2,619

(4,545)

Income before income taxes and

equity in net income of subsidiaries

92,913

124,115

5,529

(21,306)

201,251

Income taxes

23,625

29,965

128

(5,075)

48,643

69,288

94,150

5,401

(16,231)

152,608

Equity in net income of subsidiaries

81,760

-

-

(81,760)

-

Net income attributable to noncontrolling interests

-

-

(1,560)

-

(1,560)

Net income attributable to Steel Dynamics, Inc.

$

151,048

$

94,150

$

3,841

$

(97,991)

$

151,048

17

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11. Condensed Consolidating Information (Continued)

For the three months ended,

Combined

Consolidating

Total

September 30, 2018

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net sales

$

1,304,801

$

3,540,381

$

144,145

$

(1,765,780)

$

3,223,547

Costs of goods sold

956,735

3,163,110

142,005

(1,724,384)

2,537,466

Gross profit

348,066

377,271

2,140

(41,396)

686,081

Selling, general and administrative

78,824

78,694

2,974

(5,983)

154,509

Operating income (loss)

269,242

298,577

(834)

(35,413)

531,572

Interest expense, net of capitalized interest

18,559

12,489

3,134

(2,622)

31,560

Other income, net

(7,121)

(2,292)

(306)

2,616

(7,103)

Income (loss) before income taxes and

equity in net income of subsidiaries

257,804

288,380

(3,662)

(35,407)

507,115

Income taxes

45,599

71,466

420

(8,276)

109,209

212,205

216,914

(4,082)

(27,131)

397,906

Equity in net income of subsidiaries

186,170

-

-

(186,170)

-

Net loss attributable to noncontrolling interests

-

-

469

-

469

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

$

398,375

$

216,914

$

(3,613)

$

(213,301)

$

398,375

For the nine months ended,

Combined

Consolidating

Total

September 30, 2019

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net sales

$

3,198,215

$

8,837,385

$

611,407

$

(4,532,212)

$

8,114,795

Costs of goods sold

2,628,849

8,141,120

568,914

(4,438,663)

6,900,220

Gross profit

569,366

696,265

42,493

(93,549)

1,214,575

Selling, general and administrative

185,647

221,592

19,891

(17,474)

409,656

Operating income

383,719

474,673

22,602

(76,075)

804,919

Interest expense, net of capitalized interest

56,818

35,107

10,327

(7,470)

94,782

Other income, net

(17,752)

(4,746)

(753)

8,114

(15,137)

Income before income taxes and

equity in net income of subsidiaries

344,653

444,312

13,028

(76,719)

725,274

Income taxes

81,422

107,384

495

(18,208)

171,093

263,231

336,928

12,533

(58,511)

554,181

Equity in net income of subsidiaries

286,447

-

-

(286,447)

-

Net income attributable to noncontrolling interests

-

-

(4,503)

-

(4,503)

Net income attributable to Steel Dynamics, Inc.

$

549,678

$

336,928

$

8,030

$

(344,958)

$

549,678

For the nine months ended,

Combined

Consolidating

Total

September 30, 2018

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net sales

$

3,635,571

$

9,804,316

$

417,450

$

(4,939,390)

$

8,917,947

Costs of goods sold

2,746,516

8,783,145

413,607

(4,826,900)

7,116,368

Gross profit

889,055

1,021,171

3,843

(112,490)

1,801,579

Selling, general and administrative

218,839

233,989

8,550

(16,655)

444,723

Operating income (loss)

670,216

787,182

(4,707)

(95,835)

1,356,856

Interest expense, net of capitalized interest

56,568

36,793

9,489

(7,882)

94,968

Other income, net

(18,299)

(5,612)

(565)

7,875

(16,601)

Income (loss) before income taxes and

equity in net income of subsidiaries

631,947

756,001

(13,631)

(95,828)

1,278,489

Income taxes

127,083

187,794

530

(22,871)

292,536

504,864

568,207

(14,161)

(72,957)

985,953

Equity in net income of subsidiaries

483,511

-

-

(483,511)

-

Net loss attributable to noncontrolling interests

-

-

2,422

-

2,422

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

$

988,375

$

568,207

$

(11,739)

$

(556,468)

$

988,375

18

Table of Contents

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11. Condensed Consolidating Information (Continued)

Condensed Consolidating Statements of Cash Flows (in thousands)

For the nine months ended,

Combined

Consolidating

Total

September 30, 2019

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net cash provided by operating activities

$

368,148

$

624,223

$

18,893

$

(24,036)

$

987,228

Net cash used in investing activities

(116,470)

(78,193)

(7,740)

(25,114)

(227,517)

Net cash provided by (used in) financing activities

8,774

(495,488)

(5,030)

49,150

(442,594)

Increase in cash, cash equivalents and

restricted cash

260,452

50,542

6,123

-

317,117

Cash, cash equivalents, and restricted cash

at beginning of period

809,763

14,368

10,292

-

834,423

Cash, cash equivalents, and restricted cash

at end of period

$

1,070,215

$

64,910

$

16,415

$

-

$

1,151,540

For the nine months ended,

Combined

Consolidating

Total

September 30, 2018

Parent

Guarantors

Non-Guarantors

Adjustments

Consolidated

Net cash provided by operating activities

$

401,680

$

505,175

$

2,101

$

15,452

$

924,408

Net cash used in investing activities

(617,158)

(106,230)

(4,920)

4,295

(724,013)

Net cash provided by (used in) financing activities

77,165

(405,499)

2,740

(19,747)

(345,341)

Decrease in cash, cash equivalents and

(138,313)

(6,554)

(79)

-

(144,946)

restricted cash

Cash, cash equivalents, and restricted cash

1,002,230

20,748

12,107

-

1,035,085

at beginning of period

Cash, cash equivalents, and restricted cash

at end of period

$

863,917

$

14,194

$

12,028

$

-

$

890,139

19

Table of Contents

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 domestic or global economies, conditions in the steel and recycled metals market places, Steel Dynamics’ revenues, costs of purchased materials, future profitability and earnings, and the operation of new, existing or planned 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, zinc, graphite electrodes, and energy costs) and our ability to pass on any cost increases; (5) the impact of domestic and foreign imports, including trade policy, restrictions, or agreements; (6) unanticipated difficulties in integrating or starting up new, existing or planned businesses or assets; (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, 2018, 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 annual steelmaking and coating capability and actual metals recycling volumes. Our primary source of revenues is 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 Sales. Net sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of 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 recognize revenues over time based on completed fabricated tons to date as a percentage of total tons required for each contract.

Costs of Goods Sold. Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel substrate, 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 Expenses. Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and related benefits, professional services, insurance premiums, and property taxes. Company-wide profit sharing and amortization of intangible assets are each separately presented in the statement of income.

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 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.

20

Table of Contents

Acquisition of United Steel Supply, LLC

On March 1, 2019, we purchased 75% of the equity interest of United Steel Supply, LLC (USS) for cash consideration of $93.4 million, plus a customary working capital transaction purchase price adjustment of $3.7 million in September 2019. Additionally, we have an option to purchase, and the sellers have the option to require us to purchase, the remaining 25% equity interest of USS in the future. Headquartered in Austin, Texas, USS is a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications, with distribution centers strategically located in Mississippi, Indiana, Arkansas, and Oregon. USS provides us a new, complementary distribution channel and connects us to a rapidly growing industry segment with customers that do not traditionally purchase steel directly from a steel producer. USS’s operating results from and after March 1, 2019, are reflected in our financial statements in the steel operations reporting segment.

Results Overview

Our consolidated results for the third quarter of 2019 continued to be constrained by a challenging steel pricing environment, as well as sharply falling scrap prices. While underlying domestic steel demand remained intact, customers continued to be hesitant to place orders in a falling price environment, resulting in inventory destocking, in conjunction with further weakening scrap prices. Likewise, our metals recycling operations experienced decreased operating income in the third quarter of 2019 compared to 2018, due to the continued downward ferrous scrap pricing environment and resulting slower scrap flows, as well as lower copper and aluminum pricing. The non-residential construction market remained strong, with our fabrication operations metal margins expanding due to increased average selling prices coupled with decreased steel input costs.

Consolidated operating income decreased $303.5 million, or 57%, to $228.0 million for the third quarter 2019, compared to the record levels in the third quarter 2018. Third quarter 2019 net income attributable to Steel Dynamics, Inc. decreased $247.3 million, or 62%, to $151.0 million, compared to the third quarter 2018, consistent with the decreased operating income.

Consolidated operating income decreased $551.9 million, or 41%, to $804.9 million for the first nine months of 2019, compared to the record levels in the first nine months of 2018. First nine months 2019 net income attributable to Steel Dynamics, Inc. decreased $438.7 million, or 44%, to $549.7 million, compared to the first nine months of 2018, consistent with the decreased operating income.

Segment Operating Results 2019 vs. 2018 (dollars in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2019

% Change

2018

2019

% Change

2018

Net sales:

Steel Operations Segment

$

2,008,205

(22)%

$

2,586,626

$

6,396,555

(9)%

$

7,004,088

Metals Recycling Operations Segment

574,908

(28)%

800,014

1,968,719

(19)%

2,436,875

Steel Fabrication Operations Segment

246,716

(2)%

250,745

716,809

7%

670,344

Other

77,430

(31)%

111,953

290,688

(11)%

327,651

2,907,259

3,749,338

9,372,771

10,438,958

Intra-company

(380,414)

(525,791)

(1,257,976)

(1,521,011)

$

2,526,845

(22)%

$

3,223,547

$

8,114,795

(9)%

$

8,917,947

Operating income (loss):

Steel Operations Segment

$

234,683

(59)%

$

573,848

$

835,172

(42)%

$

1,441,904

Metals Recycling Operations Segment

(101)

(101)%

14,674

24,480

(61)%

62,027

Steel Fabrication Operations Segment

35,280

169%

13,104

86,567

84%

47,039

Other

(42,441)

37%

(67,113)

(148,514)

20%

(186,137)

227,421

534,513

797,705

1,364,833

Intra-company

624

(2,941)

7,214

(7,977)

$

228,045

(57)%

$

531,572

$

804,919

(41)%

$

1,356,856

21

Table of Contents

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 and automated rolling mills, with numerous downstream processing and coating 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 a wide variety of industry sectors, including the construction, automotive, manufacturing, transportation, heavy equipment and agriculture, and pipe and tube (including OCTG) markets. Steel operations accounted for 76% and 77% of our consolidated external net sales during the third quarters of 2019 and 2018, respectively, and 76% and 75% during the first nine months of 2019 and 2018, respectively.

Steel Operations Segment Shipments (tons):

Three Months Ended September 30,

Nine Months Ended September 30,

2019

% Change

2018

2019

% Change

2018

Total shipments

2,711,909

(2)%

2,756,920

8,165,678

2%

8,025,500

Intra-segment shipments

(225,399)

(154,837)

(752,826)

(422,488)

Steel Operations Segment shipments

2,486,510

(4)%

2,602,083

7,412,852

(3)%

7,603,012

External shipments

2,362,915

(5)%

2,489,133

7,096,975

(3)%

7,296,871

Graphic

22

Table of Contents

Segment Results 2019 vs. 2018

Overall domestic steel demand remained steady during the third quarter of 2019, with continued strength in the automotive, construction and other industrial sectors. However, a challenging steel pricing environment has continued throughout 2019, due to customer inventory destocking in conjunction with weakening scrap prices, which has led to decreasing steel selling prices compared to 2018. Steel operations segment shipments decreased 4% in the third quarter 2019, as compared to the same period in 2018. Net sales for the steel operations decreased 22% in the third quarter 2019 when compared to the same period in 2018, due primarily to decreases in overall steel selling prices, particularly in the sheet products, and decreased steel mill shipments. Net sales for the steel operations decreased 9% in the first nine months of 2019 when compared to the same period in 2018, again due to decreases in average steel selling prices and steel segment shipments.

Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost, generally comprising approximately 50 to 60 percent of our steel mill operations’ manufacturing costs. Our metallic raw material cost per net ton consumed in our steel operations decreased $77, or 22%, in the third quarter 2019, compared to the same period in 2018, consistent with overall decreased domestic scrap pricing. In the first nine months of 2019, our metallic raw material cost per ton decreased $31, or 9% compared to the same period in 2018.

As a result of average selling prices decreasing more than scrap costs, metal spread (which we define as the difference between average steel mill selling prices and the cost of ferrous scrap consumed in our steel mills) decreased 20% in the third quarter 2019 compared to the third quarter 2018. Due to this metal spread contraction, most notably in sheet steel, operating income for the steel operations decreased 59%, to $234.7 million, in the third quarter 2019, compared to the record levels in the same period in 2018. First nine months 2019 operating income decreased 42%, to $835.2 million, compared to the first nine months of 2018 record levels, again due to decreased metal spreads and steel segment shipments.

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 (approximately 65%) 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 11% and 12% of our consolidated external net sales during the third quarters of 2019 and 2018, respectively, and 12% and 14% during the first nine months of 2019 and 2018, respectively.

Metals Recycling Operations Shipments:

Three Months Ended September 30,

Nine Months Ended September 30,

2019

% Change

2018

2019

% Change

2018

Ferrous metal (gross tons)

Total

1,169,963

(10)%

1,304,164

3,531,003

(10)%

3,908,079

Inter-company

(773,828)

(8)%

(844,802)

(2,326,550)

(9)%

(2,545,602)

External shipments

396,135

(14)%

459,362

1,204,453

(12)%

1,362,477

Nonferrous metals (thousands of pounds)

Total

257,087

(7)%

277,332

815,347

(4)%

852,994

Inter-company

(31,419)

(38,287)

(105,198)

(99,448)

External shipments

225,668

(6)%

239,045

710,149

(6)%

753,546

Segment Results 2019 vs. 2018

Our metals recycling operations have been negatively impacted during 2019 by consistently falling ferrous and nonferrous scrap prices compared to 2018, as well as a somewhat softer steel market as customers were reluctant to purchase during a falling pricing environment, opting instead to defer purchases. Net sales decreased 28% during the third quarter of 2019 compared to the same period in 2018, driven by the combination of decreased shipments and average selling prices. Ferrous shipments to our own steel mills decreased by 8% in the third quarter 2019, compared to the same period in 2018, as our steel mill utilization percentage decreased from 98% to 87% year over year. Ferrous scrap average selling prices decreased 26% during the third quarter 2019 compared to the same period in 2018, while nonferrous average selling prices decreased 13%. Ferrous metal spread (which we define as the difference

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between average selling prices and the cost of purchased scrap) decreased 14%, as selling prices decreased more than unprocessed scrap procurement costs, while nonferrous metal spread decreased 8%. Metals recycling operations operating income decreased 101% to a loss of $100,000 in the third quarter 2019 compared to the third quarter 2018 operating income of $14.7 million, due to decreased ferrous and nonferrous shipments and metal spread contraction.

Net sales for our metals recycling operations decreased 19% in the first nine months of 2019 as compared to the same period in 2018, driven by decreased pricing and shipments. Ferrous scrap average selling prices decreased 16% during the first nine months of 2019 compared to the same period in 2018, while nonferrous average selling prices decreased 7%. Nonferrous metal spread decreased 2%, while ferrous metal spread decreased 12% in the first nine months of 2019 compared to the first nine months of 2018. Metals recycling operations operating income in the first nine months of 2019 of $24.5 million decreased 61% from the same period 2018 operating income of $62.0 million, due to decreased ferrous and nonferrous shipments, and metal spread contraction.

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 10% and 8% of our consolidated external net sales during the third quarters of 2019 and 2018, respectively, and 9% and 8% during the first nine months of 2019 and 2018, respectively.

Graphic

Segment Results 2019 vs. 2018

Net sales for the steel fabrication operations decreased 2%, during the third quarter 2019 compared to the same period in 2018, as average selling prices were steady, while shipments decreased slightly. Net sales for the segment increased $46.5 million, or 7%, during the first nine months of 2019, compared to the same period in 2018, as shipments decreased 2%, while average selling prices increased $125 per ton, or 9%. Our steel fabrication operations continue to leverage our national operating footprint to sustain market share. Market demand and orders continue to be strong for non-residential construction project development; however, wet weather during the first half of 2019 and other construction delays have somewhat restricted shipments in 2019 compared to 2018.

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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 decreased 19% in the third quarter 2019, as compared to the same period in 2018. As a result, metal spread (which we define as the difference between average selling prices and the cost of purchased steel) increased 35% in the third quarter 2019 compared to the same period in 2018. Operating income increased 169% to $35.3 million in the third quarter 2019 compared to the same period in 2018, due to the increase in metal spread. For the first nine months of 2019, operating income increased 84% to $86.6 million compared to the first nine months of 2018, due to increased average selling prices and decreased steel cost, as metal spread increased 23% period over period.

Other Operations

Third Quarter Consolidated Results 2019 vs. 2018

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $107.2 million during the third quarter 2019 increased 5% from $102.6 million during the third quarter 2018, representing 4.2% and 3.2% of net sales, respectively. Profit sharing expense during the third quarter of 2019 of $17.8 million was down 61% from the $45.3 million during the same period in 2018, consistent with decreases in pretax income from record levels in 2018.

Interest Expense, net of Capitalized Interest. During the third quarter 2019, interest expense of $31.3 million was comparable to the $31.6 million during the third quarter of 2018, on consistent debt levels.

Income Tax Expense. Third quarter 2019 income tax expense of $48.6 million, at an effective income tax rate of 24.2%, was down 55% from the $109.2 million, at an effective income tax rate of 21.5%, during the third quarter 2018, consistent with decreased pretax income. The third quarter 2018 effective tax rate was lower than the third quarter 2019 effective tax rate due to certain discrete tax benefit items realized in the third quarter 2018.

First Nine Months Consolidated Results 2019 vs. 2018

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $324.5 million during the first nine months of 2019 increased 5% from $310.0 million during the first nine months of 2018, representing 4.0% and 3.5% of net sales, respectively. Profit sharing expense during the first nine months of 2019 of $64.4 million decreased 44% from the $114.3 million during the same period in 2018, consistent with decreases in pretax income from record levels in 2018.

Interest Expense, net of Capitalized Interest. During the first nine months of 2019 and 2018, interest expense of $94.8 million was comparable to the $95.0 million during the same period in 2018, on consistent debt levels.

Income Tax Expense. First nine months 2019 income tax expense of $171.1 million, at an effective income tax rate of 23.6%, was down 42% from the $292.5 million, at an effective income tax rate of 22.9%, during the first nine months of 2018, consistent with decreased pretax 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, stock repurchases, 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 September 30, 2019, is as follows (in thousands):

Cash and equivalents

$

1,146,007

Short-term investments

69,529

Revolver availability

1,158,128

Total liquidity

$

2,373,664

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In October 2019, our corporate credit rating was upgraded to an investment grade credit level by all three credit rating agencies. 

Our total outstanding debt increased $60.7 million during the first nine months of 2019 primarily due to revolving debt assumed in conjunction with our acquisition of USS. 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 37.6% and 37.9% at September 30, 2019, and December 31, 2018, respectively.

Our senior secured credit facility (Facility), which provides a $1.2 billion Revolver, matures in June 2023. 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. The Facility 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. Subsequent to our corporate credit rating upgrade, we began the process to release the collateral securing the Facility, which we expect to be released on or about November 12, 2019. 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 September 30, 2019, we had $1.2 billion of availability on the Revolver, $41.9 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 LTM consolidated 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 September 30, 2019, our interest coverage ratio and net debt leverage ratio were 12.22:1.00 and 1.20:1.00, respectively. We were, therefore, in compliance with these covenants at September 30, 2019, and we anticipate we will continue to be in compliance during the next twelve months.

Working Capital. We generated cash flow from operations of $987.2 million in the first nine months of 2019. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) decreased $124.9 million, excluding the effect of acquired USS working capital, to $1.85 billion at September 30, 2019, due primarily to decreased accounts receivable and inventories consistent with decreased sales and inventory costs.

Capital Investments. During the first nine months of 2019, we invested $293.7 million in property, plant and equipment, primarily within our steel operations segment, compared with $176.5 million invested during the same period in 2018. The increase in the first nine months of 2019 versus the same 2018 period relates primarily to the new Sinton, Texas flat roll steel mill project.

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 28% to $0.2400 per share in the first quarter 2019 (from $0.1875 per share in 2018), resulting in declared cash dividends of $158.0 million during the first nine months of 2019, compared to $132.1 million during the same period in 2018. We paid cash dividends of $148.5 million and $125.1 million during the first nine months of 2019 and 2018, 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 August 2018, our board of directors authorized a share repurchase program of up to $750 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 4.1 million shares of our common stock for $115.0 million in the third quarter of 2019 pursuant to this program. We acquired 9.5 million shares of our common stock for $292.4 million in the first nine months of 2019, leaving $106.8 million remaining available to purchase under the program. See Part II, 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 13 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 idle Minnesota ironmaking operations. 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 2020, which establishes an agreed fixed-rate energy charge per Mill/kWh consumed for each year through the expiration of the agreement.

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 September 30, 2019, we had a cumulative unrealized loss associated with these financial contracts of $2.5 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 September 30, 2019, 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 September 30, 2019, 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 $508,000 is recorded in our financial statements as of September 30, 2019.

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, 2018.

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 September 30, 2019.

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 September 30, 2019

July 1 - 31

246,100

$

32.46

246,100

$

213,715

August 1 - 31

3,509,700

27.91

3,509,700

115,749

September 1 - 30

302,186

29.77

302,186

106,754

4,057,986

4,057,986

(1)On September 4, 2018, we announced that our board of directors had authorized a share purchase program of up to $750.0 million of our common stock.

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 September 30, 2019, therefore, no Exhibit 95 is required.

ITEM 5.    OTHER INFORMATION

None.

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ITEM 6.    EXHIBITS

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

EXHIBIT INDEX

Articles of Incorporation

3.1

Amended and Restated Articles of Incorporation of Steel Dynamics, Inc., reflecting all amendments thereto through May 17, 2018, incorporated herein by reference from Exhibit 3.1e to our Form 10-Q filed August 9, 2018.

3.2

Amended and Restated Bylaws of Steel Dynamics, Inc., reflecting all amendments thereto through October 17, 2018, incorporated herein by reference from Exhibit 3.2d to our Form 10-Q filed November 7, 2018.

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 Sarbanes-Oxley 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 Sarbanes-Oxley 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 Sarbanes-Oxley 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 Sarbanes-Oxley Act of 2002.

Other

95**

Mine Safety Disclosures.

XBRL Documents

101.INS*

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

104

Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.

October 31, 2019

    

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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