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



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q





 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended March 31, 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, $0.025 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 May 1, 2019, Registrant had 222,245,142 outstanding shares of common stock.


 



 

 

STEEL DYNAMICS, INC.

Table of Contents



PART I.  Financial Information



Item 1.

Financial Statements:

Page



 

 



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

1



 

 



Consolidated Statements of Income for the three month periods ended March 31, 2019 and 2018 (unaudited)

2



 

 



Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2019 and 2018 (unaudited)

3



 

 



Consolidated Statements of Cash Flows for the three month periods ended March 31, 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

18



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24



 

 

Item 4.

Controls and Procedures

24



 

 



 

 



 

 



PART II.  Other Information

 



 

 

Item 1.

Legal Proceedings

25



 

 

Item 1A.

Risk Factors

25



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25



 

 

Item 3.

Defaults Upon Senior Securities

25



 

 

Item 4.

Mine Safety Disclosures

25



 

 

Item 5.

Other Information

25



 

 

Item 6.

Exhibits

25



 

 

Exhibit Index

 

26



 

 

Signature

 

27



 

 

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)







 

 

 

 

 

 



 

 

 

 

 

 



March 31,

 

 

December 31,



2019

 

 

2018

Assets

(unaudited)

 

 

 

 

Current assets

 

 

 

 

 

 

  Cash and equivalents

$

791,444 

 

 

$

828,220 

  Short-term investments

 

173,723 

 

 

 

228,783 

  Accounts receivable, net

 

1,141,038 

 

 

 

1,040,220 

  Accounts receivable-related parties

 

2,357 

 

 

 

3,536 

  Inventories

 

1,867,700 

 

 

 

1,859,168 

  Other current assets

 

52,628 

 

 

 

72,730 

     Total current assets

 

4,028,890 

 

 

 

4,032,657 



 

 

 

 

 

 

Property, plant and equipment, net

 

2,936,893 

 

 

 

2,945,767 



 

 

 

 

 

 

Intangible assets, net

 

263,315 

 

 

 

270,328 

Goodwill

 

530,716 

 

 

 

429,645 

Other assets

 

97,419 

 

 

 

25,166 

     Total assets

$

7,857,233 

 

 

$

7,703,563 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

  Accounts payable

$

582,284 

 

 

$

536,743 

  Accounts payable-related parties

 

9,183 

 

 

 

14,011 

  Income taxes payable

 

26,896 

 

 

 

7,468 

  Accrued payroll and benefits                

 

114,575 

 

 

 

264,542 

  Accrued interest

 

47,955 

 

 

 

25,526 

  Accrued expenses

 

141,239 

 

 

 

146,613 

  Current maturities of long-term debt

 

80,958 

 

 

 

24,234 

     Total current liabilities

 

1,003,090 

 

 

 

1,019,137 



 

 

 

 

 

 

Long-term debt

 

2,354,427 

 

 

 

2,352,489 

Deferred income taxes

 

447,087 

 

 

 

435,838 

Other liabilities

 

63,171 

 

 

 

8,870 

     Total liabilities

 

3,867,775 

 

 

 

3,816,334 



 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 



 

 

 

 

 

 

Redeemable noncontrolling interests

 

139,930 

 

 

 

111,240 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

       265,552,825 and 265,822,402 shares issued; and 222,931,285 and 225,272,174    

 

 

 

 

 

 

       shares outstanding, as of March 31, 2019 and December 31, 2018, respectively

 

645 

 

 

 

645 

  Treasury stock, at cost; 42,621,540 and 40,550,228 shares,

 

 

 

 

 

 

       as of March 31, 2019 and December 31, 2018, respectively

 

(1,261,837)

 

 

 

(1,184,243)

  Additional paid-in capital

 

1,160,139 

 

 

 

1,160,048 

  Retained earnings

 

4,109,034 

 

 

 

3,958,320 

  Accumulated other comprehensive income

 

130 

 

 

 

301 

     Total Steel Dynamics, Inc. equity

 

4,008,111 

 

 

 

3,935,071 

  Noncontrolling interests

 

(158,583)

 

 

 

(159,082)

     Total equity

 

3,849,528 

 

 

 

3,775,989 

     Total liabilities and equity

$

7,857,233 

 

 

$

7,703,563 

See notes to consolidated financial statements.

1

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2019

 

2018



 

 

 

 

 

Net sales

 

 

 

 

 

  Unrelated parties

$

2,814,486 

 

$

2,597,312 

  Related parties

 

2,949 

 

 

6,563 

     Total net sales

 

2,817,435 

 

 

2,603,875 



 

 

 

 

 

Costs of goods sold

 

2,383,865 

 

 

2,140,459 

     Gross profit

 

433,570 

 

 

463,416 



 

 

 

 

 

Selling, general and administrative expenses

 

111,038 

 

 

106,431 

Profit sharing

 

23,677 

 

 

26,662 

Amortization of intangible assets

 

7,013 

 

 

6,926 

     Operating income

 

291,842 

 

 

323,397 



 

 

 

 

 

Interest expense, net of capitalized interest

 

31,122 

 

 

31,896 

Other (income) expense, net

 

(6,343)

 

 

(4,463)

     Income before income taxes

 

267,063 

 

 

295,964 



 

 

 

 

 

Income tax expense

 

62,236 

 

 

70,489 

     Net income

 

204,827 

 

 

225,475 



 

 

 

 

 

Net (income) loss attributable to noncontrolling interests

 

(499)

 

 

2,076 

     Net income attributable to Steel Dynamics, Inc.

$

204,328 

 

$

227,551 



 

 

 

 

 



 

 

 

 

 



 

 

 

 

 

Basic earnings per share attributable to Steel Dynamics,

 

 

 

 

 

  Inc. stockholders

$

0.91 

 

$

0.96 



 

 

 

 

 

Weighted average common shares outstanding

 

224,058 

 

 

236,623 



 

 

 

 

 

Diluted earnings per share attributable to Steel Dynamics, Inc.

 

 

 

 

 

  stockholders, including the effect of assumed conversions

 

 

 

 

 

  when dilutive

$

0.91 

 

$

0.96 



 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

224,962 

 

 

237,723 



 

 

 

 

 

Dividends declared per share

$

0.2400 

 

$

0.1875 





















See notes to consolidated financial statements.

2

 


 



 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2019

 

2018



 

 

 

 

 

Net income

$

204,827 

 

$

225,475 

Other comprehensive loss - net unrealized loss on cash flow

 

 

 

 

 

    hedging derivatives, net of income tax benefit of $54 

 

 

 

 

 

    for the three months ended March 31, 2019

 

(171)

 

 

 -

Comprehensive income

 

204,656 

 

 

225,475 



 

 

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests

 

(499)

 

 

2,076 

     Comprehensive income attributable to Steel Dynamics, Inc.

$

204,157 

 

$

227,551 

























































































See notes to consolidated financial statements.

3

 


 





STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2019

 

2018



 

 

 

 

 

Operating activities:

 

 

 

 

 

   Net income

$

204,827 

 

$

225,475 



 

 

 

 

 

   Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

       operating activities:

 

 

 

 

 

       Depreciation and amortization

 

80,174 

 

 

76,135 

       Equity-based compensation

 

15,308 

 

 

12,841 

       Deferred income taxes

 

12,091 

 

 

9,545 

       Other adjustments

 

728 

 

 

30 

       Changes in certain assets and liabilities:

 

 

 

 

 

           Accounts receivable

 

(61,062)

 

 

(118,818)

           Inventories

 

39,469 

 

 

(80,711)

           Other assets

 

301 

 

 

(105)

           Accounts payable

 

3,206 

 

 

66,332 

           Income taxes receivable/payable

 

49,850 

 

 

63,962 

           Accrued expenses

 

(163,339)

 

 

(76,751)

       Net cash provided by operating activities

 

181,553 

 

 

177,935 



 

 

 

 

 

Investing activities:

 

 

 

 

 

   Purchases of property, plant and equipment

 

(54,436)

 

 

(50,606)

   Purchases of short-term investments

 

(49,677)

 

 

(40,000)

   Proceeds from maturities of short-term investments

 

104,737 

 

 

 -

   Acquisition of business, net of cash and restricted cash acquired

 

(93,412)

 

 

 -

   Other investing activities

 

364 

 

 

229 

       Net cash used in investing activities

 

(92,424)

 

 

(90,377)



 

 

 

 

 

Financing activities:

 

 

 

 

 

   Issuance of current and long-term debt

 

121,234 

 

 

93,058 

   Repayment of current and long-term debt

 

(115,271)

 

 

(113,034)

   Dividends paid

 

(42,239)

 

 

(36,797)

   Purchases of treasury stock

 

(84,308)

 

 

(69,269)

   Other financing activities

 

(5,720)

 

 

(5,180)

       Net cash used in financing activities

 

(126,304)

 

 

(131,222)



 

 

 

 

 

Decrease in cash, cash equivalents, and restricted cash

 

(37,175)

 

 

(43,664)

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

 

834,423 

 

 

1,035,085 



 

 

 

 

 

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

$

797,248 

 

$

991,421 



 

 

 

 

 



 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

   Cash paid for interest

$

8,606 

 

$

8,629 

   Cash paid (received) for income taxes, net

$

1,839 

 

$

(1,045)







See notes to consolidated financial statements.

 

4

 


 

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 75% and 74% of the company’s consolidated external net sales during the three months ended March 31, 2019 and 2018, respectively.

Metals Recycling Operations Segment. Metals recycling operations consists solely of OmniSource Corporation (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and scrap management services. Metals recycling operations accounted for 13% and 15% of the company’s consolidated external net sales during the three months ended March 31, 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 8% of the company’s consolidated external net sales during the three months ended March 31, 2019 and 2018.

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.



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 $5.8 million, $6.2 million, $5.6 million, and $6.4 million at March 31, 2019, December 31, 2018, March 31, 2018, and December 31, 2017, respectively, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.







5

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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



Goodwill    



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



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 



 

 

2019

 

2018

 



Steel Operations Segment

 

 

 

 

 

 

 



     Columbus Flat Roll Division

 

$

19,682 

 

$

19,682 

 



     The Techs

 

 

142,783 

 

 

142,783 

 



     Heartland Flat Roll Division

 

 

46,143 

 

 

46,143 

 



     United Steel Supply

 

 

101,918 

 

 

 -

 



     Vulcan Threaded Products

 

 

7,824 

 

 

7,824 

 



     Roanoke Bar Division

 

 

29,041 

 

 

29,041 

 



Metals Recycling Operations Segment – OmniSource

 

 

181,400 

 

 

182,247 

 



Steel Fabrication Operations Segment – New Millennium Building Systems

 

 

1,925 

 

 

1,925 

 



 

 

$

530,716 

 

$

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 $101.9 million of goodwill was recorded. OmniSource goodwill decreased $847,000 from December 31, 2018 to March 31, 2019, in recognition of the 2019 tax benefit related to the normal amortization of the component of OmniSource 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: 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 is currently evaluating 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, subject to customary actual working capital purchase price adjustments. 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.



The aggregate purchase price was preliminarily allocated to the opening balance sheet of USS as of March 1, 2019. The following initial allocation of the purchase price (in thousands) is preliminary based on the information available as of the acquisition date 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 the acquired assets, assumed liabilities and identifiable intangible assets, if any, including goodwill. 







 

 

 

 

 

 

 



 

Current assets, net of cash acquired

$

94,020 

 

 

 



 

Property, plant & equipment

 

7,388 

 

 

 



 

Intangible assets and goodwill

 

101,918 

 

 

 



 

Total assets acquired

 

203,326 

 

 

 



 

Liabilities assumed

 

81,224 

 

 

 



 

Redeemable noncontrolling interest

 

28,690 

 

 

 



 

Net cash consideration

$

93,412 

 

 

 







6

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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-month period ended March 31, 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 terms.



Operating lease right-of-use assets and lease obligations included in the consolidated balance sheet at March 31, 2019, are as follows (in thousands):





 

 

 

 

 

 



 

Right-of-use assets under operating leases:

 

 

 

 



 

    Other assets - noncurrent

$

72,219 

 

 



 

Lease obligations under operating leases:

 

 

 

 



 

    Accrued liabilities

$

16,378 

 

 



 

    Other liabilities - noncurrent

 

56,215 

 

 



 

 

$

72,593 

 

 



The weighted average remaining lease term for our operating leases is 6.3 years and the weighted-average discount rate is 4.00% as of

March 31, 2019. Future operating lease liabilities as of March 31, 2019, for the next five years and thereafter are as follows (in thousands):







 

 

 

 

 

 



 

2019 - for the remaining nine months

$

14,565 

 

 



 

2020

 

17,316 

 

 



 

2021

 

14,165 

 

 



 

2022

 

10,891 

 

 



 

2023

 

7,924 

 

 



 

Thereafter

 

20,503 

 

 



 

Total undiscounted cash flows

 

85,364 

 

 



 

    Less imputed interest

 

(12,771)

 

 



 

Lease obligations under operating leases

$

72,593 

 

 



Operating and short-term lease expense included in the consolidated statement of income was $4.7 million and $4.4 million, respectively, for the three-month period ended March 31, 2019. Cash paid related to operating lease obligations was $4.8 million for the three-month period ended

March 31, 2019. Variable lease costs were not material for the three-month period ended March 31, 2019.

 



7

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 months ended March 31, 2019 and 2018.



The following tables present a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three months ended March 31, 2019 and 2018 (in thousands, except per share data):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



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

$

204,328 

 

 

224,058 

 

$

0.91 

 

$

227,551 

 

 

236,623 

 

$

0.96 

Dilutive common share equivalents

 

 -

 

 

904 

 

 

 

 

 

 -

 

 

1,100 

 

 

 

Diluted earnings per share

$

204,328 

 

 

224,962 

 

$

0.91 

 

$

227,551 

 

 

237,723 

 

$

0.96 









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):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 

 



 

 

2019

 

2018

 

 



 

Raw materials

$

828,733 

 

$

810,766 

 

 



 

Supplies

 

450,584 

 

 

436,828 

 

 



 

Work in progress

 

184,866 

 

 

195,224 

 

 



 

Finished goods

 

403,517 

 

 

416,350 

 

 



 

Total inventories

$

1,867,700 

 

$

1,859,168 

 

 





















8

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 the three months ended

March 31, 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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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 







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, occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation risk. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous 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. 



9

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7.  Derivative Financial Instruments (Continued)



Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s futures contract commitments as of March 31, 2019:



 

 

 

 

 

 



 

 

 

 

 

 



Commodity Futures

 

Long/Short

 

Metric Tons

 



Aluminum

 

Long

 

3,075 

 



Aluminum

 

Short

 

5,925 

 



Copper

 

Long

 

12,440 

 



Copper

 

Short

 

22,759 

 



 

 

 

 

 

 



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





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Asset Derivatives

 

Liability Derivatives



Balance sheet

 

Fair Value

 

Fair Value



 location

 

March 31, 2019

 

December 31, 2018

 

March 31, 2019

 

December 31, 2018

Derivative instruments designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

$

552 

 

$

2,999 

 

$

1,068 

 

$

1,837 



 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

 

1,480 

 

 

1,559 

 

 

1,752 

 

 

2,053 

Total derivative instruments

 

 

$

2,032 

 

$

4,558 

 

$

2,820 

 

$

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 $3.7 million at March 31, 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) recognized

 

 

 

Location of gain

 

Amount of gain (loss) recognized



 

Location of gain

 

in income on derivatives 

 

 

 

(loss) recognized

 

in income on related hedged items



 

(loss) recognized

 

for the three months ended

 

Hedged items in

 

in income on

 

for the three months ended



 

in income on

 

March 31,

 

March 31,

 

fair value hedge

 

related hedged

 

March 31,

 

March 31,



 

derivatives

 

2019

 

2018

 

relationships

 

items

 

2019

 

2018

Derivatives in fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(1,453)

 

$

8,516 

 

Firm commitments

 

Costs of goods sold

 

$

(1,499)

 

$

(793)



 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

 

721 

 

 

(2,596)

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(778)

 

$

(3,389)

as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(4,077)

 

$

2,756 

 

 

 

 

 

 

 

 

 

 



Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $1.1 million and $101,000 during the three-month periods ended March 31, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $2.2 million increased cost of goods sold during the three-month period ended March 31, 2019. Gains excluded from hedge effectiveness testing of $5.0 million decreased cost of goods sold during the three-month period ended March 31, 2018.



Derivatives accounted for as cash flow hedges resulted in net gains of $58,000 recognized in other comprehensive income for the three-month period ended March 31, 2019. Net gains of $283,000 were reclassified from accumulated other comprehensive three-month period ended March 31, 2019. At March 31, 2019, the company expects to reclassify $170,000 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.







10

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 March 31, 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)

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

$

173,723 

 

$

 

 

$

173,723 

 

$

 

Commodity futures – financial assets

 

2,032 

 

 

 -

 

 

2,032 

 

 

 -

Commodity futures – financial liabilities

 

2,820 

 

 

 -

 

 

2,820 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019 and December 31, 2018, respectively (with a corresponding carrying amount in the consolidated balance sheet of $2.5 billion at March 31, 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



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 our idle Minnesota ironmaking operations. In addition, “Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.



11

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)



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

 

 

 

 

 

 

 

 

 

March 31, 2019

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales - disaggregated revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  External

 

$

2,044,491 

 

$

285,725 

 

$

228,429 

 

$

113,248 

 

$

 -

 

$

2,671,893 

  External Non-U.S.

 

 

80,079 

 

 

65,412 

 

 

51 

 

 

 -

 

 

 -

 

 

145,542 

  Other segments

 

 

75,595 

 

 

385,908 

 

 

189 

 

 

248 

 

 

(461,940)

 

 

 -



 

 

2,200,165 

 

 

737,045 

 

 

228,669 

 

 

113,496 

 

 

(461,940)

 

 

2,817,435 

Operating income (loss)

 

 

309,078 

 

 

16,962 

 

 

20,623 

 

 

(56,920)

(1)

 

2,099 

 

 

291,842 

Income (loss) before income taxes

 

 

293,019 

 

 

15,505 

 

 

19,351 

 

 

(62,696)

 

 

1,884 

 

 

267,063 

Depreciation and amortization

 

 

62,512 

 

 

11,439 

 

 

2,967 

 

 

3,256 

 

 

 -

 

 

80,174 

Capital expenditures

 

 

43,676 

 

 

6,642 

 

 

1,993 

 

 

2,125 

 

 

 -

 

 

54,436 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

5,378,536 

 

$

982,844 

 

$

407,576 

 

$

1,170,832 

(2)

$

(82,555)

(3)

$

7,857,233 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

Footnotes related to the three months ended March 31, 2019, segment results (in millions):



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(22.6)

 

(3)

Elimination of intra-company receivables

$

(59.5)



Company-wide equity-based compensation

 

(9.0)

 

 

Elimination of intra-company debt

 

(10.8)



Profit sharing

 

(23.0)

 

 

Other  

 

(12.3)



Other, net

 

(2.3)

 

 

 

$

(82.6)



 

$

(56.9)

 

 

 

 

 



 

 

 

 

 

 

 

 

(2)

Cash and equivalents

$

756.9 

 

 

 

 

 



Short-term investments

 

153.7 

 

 

 

 

 



Accounts receivable

 

12.2 

 

 

 

 

 



Inventories

 

36.1 

 

 

 

 

 



Property, plant and equipment, net

 

152.6 

 

 

 

 

 



Intra-company debt

 

10.8 

 

 

 

 

 



Other

 

48.5 

 

 

 

 

 



 

$

1,170.8 

 

 

 

 

 

12

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Metals

 

Steel

 

 

 

 

 

 

 

 

 

For the three months ended

 

Steel

 

Recycling

 

Fabrication

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Operations

 

Operations

 

Operations

 

Other

 

Eliminations

 

Consolidated



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales - disaggregated revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  External

 

$

1,832,303 

 

$

329,872 

 

$

201,437 

 

$

92,471 

 

$

 -

 

$

2,456,083 

  External Non-U.S.

 

 

89,486 

 

 

58,250 

 

 

56 

 

 

 -

 

 

 -

 

 

147,792 

  Other segments

 

 

59,985 

 

 

364,644 

 

 

210 

 

 

147 

 

 

(424,986)

 

 

 -



 

 

1,981,774 

 

 

752,766 

 

 

201,703 

 

 

92,618 

 

 

(424,986)

 

 

2,603,875 

Operating income (loss)

 

 

334,562 

 

 

24,715 

 

 

19,791 

 

 

(55,406)

(1)

 

(265)

 

 

323,397 

Income (loss) before income taxes

 

 

315,805 

 

 

23,005 

 

 

18,457 

 

 

(61,033)

 

 

(270)

 

 

295,964 

Depreciation and amortization

 

 

59,141 

 

 

11,558 

 

 

2,898 

 

 

2,538 

 

 

 -

 

 

76,135 

Capital expenditures

 

 

38,402 

 

 

6,946 

 

 

2,077 

 

 

3,181 

 

 

 -

 

 

50,606 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

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



 

 

 

 

 

 

 

 

(1)

Corporate SG&A

$

(15.7)

 

 

 

 

 



Company-wide equity-based compensation

 

(8.5)

 

 

 

 

 



Profit sharing

 

(25.6)

 

 

 

 

 



Other, net

 

(5.6)

 

 

 

 

 



 

$

(55.4)

 

 

 

 

 





13

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information



Certain 100% owned subsidiaries of SDI have fully and unconditionally guaranteed jointly and severally all of the indebtedness relating to the issuance of the company’s senior unsecured notes due 2021, 2023, 2024, 2025 and 2026. Following are the company’s condensed consolidating financial statements, including the guarantors, which present the financial position, results of operations, and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information on a consolidated basis.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

As of March 31, 2019

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Cash and equivalents

 

$

755,014 

 

$

26,067 

 

$

10,363 

 

$

 -

 

$

791,444 

Short-term investments

 

 

153,723 

 

 

20,000 

 

 

 -

 

 

 -

 

 

173,723 

Accounts receivable, net

 

 

344,209 

 

 

1,727,028 

 

 

71,953 

 

 

(999,795)

 

 

1,143,395 

Inventories

 

 

786,300 

 

 

1,010,636 

 

 

84,420 

 

 

(13,656)

 

 

1,867,700 

Other current assets

 

 

38,977 

 

 

17,243 

 

 

3,331 

 

 

(6,923)

 

 

52,628 

  Total current assets

 

 

2,078,223 

 

 

2,800,974 

 

 

170,067 

 

 

(1,020,374)

 

 

4,028,890 

Property, plant and equipment, net

 

 

870,626 

 

 

1,905,151 

 

 

161,116 

 

 

 -

 

 

2,936,893 

Intangible assets, net

 

 

 -

 

 

263,315 

 

 

 -

 

 

 -

 

 

263,315 

Goodwill

 

 

 -

 

 

428,798 

 

 

101,918 

 

 

 -

 

 

530,716 

Other assets, including investments in subs

 

 

2,934,875 

 

 

59,075 

 

 

5,850 

 

 

(2,902,381)

 

 

97,419 

  Total assets

 

$

5,883,724 

 

$

5,457,313 

 

$

438,951 

 

$

(3,922,755)

 

$

7,857,233 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

197,481 

 

$

376,400 

 

$

94,697 

 

$

(77,111)

 

$

591,467 

Accrued expenses

 

 

200,512 

 

 

275,807 

 

 

17,763 

 

 

(163,417)

 

 

330,665 

Current maturities of long-term debt

 

 

809 

 

 

1,116 

 

 

104,574 

 

 

(25,541)

 

 

80,958 

  Total current liabilities

 

 

398,802 

 

 

653,323 

 

 

217,034 

 

 

(266,069)

 

 

1,003,090 

Long-term debt

 

 

2,328,859 

 

 

 -

 

 

166,353 

 

 

(140,785)

 

 

2,354,427 

Other liabilities

 

 

(852,048)

 

 

1,398,528 

 

 

33,483 

 

 

(69,705)

 

 

510,258 

  Total liabilities

 

 

1,875,613 

 

 

2,051,851 

 

 

416,870 

 

 

(476,559)

 

 

3,867,775 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 -

 

 

 -

 

 

139,930 

 

 

 -

 

 

139,930 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

645 

 

 

1,727,859 

 

 

15,016 

 

 

(1,742,875)

 

 

645 

Treasury stock

 

 

(1,261,837)

 

 

 -

 

 

 -

 

 

 -

 

 

(1,261,837)

Additional paid-in-capital

 

 

1,160,139 

 

 

683,048 

 

 

787,572 

 

 

(1,470,620)

 

 

1,160,139 

Retained earnings (deficit)

 

 

4,109,034 

 

 

994,555 

 

 

(761,854)

 

 

(232,701)

 

 

4,109,034 

Accumulated other comprehensive loss

 

 

130 

 

 

 -

 

 

 -

 

 

 -

 

 

130 

  Total Steel Dynamics, Inc. equity

 

 

4,008,111 

 

 

3,405,462 

 

 

40,734 

 

 

(3,446,196)

 

 

4,008,111 

Noncontrolling interests

 

 

 -

 

 

 -

 

 

(158,583)

 

 

 -

 

 

(158,583)

  Total equity

 

 

4,008,111 

 

 

3,405,462 

 

 

(117,849)

 

 

(3,446,196)

 

 

3,849,528 

  Total liabilities and equity

 

$

5,883,724 

 

$

5,457,313 

 

$

438,951 

 

$

(3,922,755)

 

$

7,857,233 



14

 


 

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 

15

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statements of Operations (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2019

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net sales

 

$

1,124,735 

 

$

3,110,229 

 

$

171,883 

 

$

(1,589,412)

 

$

2,817,435 

Costs of goods sold

 

 

905,995 

 

 

2,865,989 

 

 

165,460 

 

 

(1,553,579)

 

 

2,383,865 

  Gross profit

 

 

218,740 

 

 

244,240 

 

 

6,423 

 

 

(35,833)

 

 

433,570 

Selling, general and administrative

 

 

69,006 

 

 

74,583 

 

 

3,930 

 

 

(5,791)

 

 

141,728 

  Operating income

 

 

149,734 

 

 

169,657 

 

 

2,493 

 

 

(30,042)

 

 

291,842 

Interest expense, net of capitalized interest

 

 

18,654 

 

 

11,766 

 

 

3,214 

 

 

(2,512)

 

 

31,122 

Other (income) expense, net

 

 

(7,400)

 

 

(1,377)

 

 

(292)

 

 

2,726 

 

 

(6,343)

Income (loss) before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  equity in net income of subsidiaries

 

 

138,480 

 

 

159,268 

 

 

(429)

 

 

(30,256)

 

 

267,063 

Income taxes

 

 

30,764 

 

 

38,534 

 

 

103 

 

 

(7,165)

 

 

62,236 



 

 

107,716 

 

 

120,734 

 

 

(532)

 

 

(23,091)

 

 

204,827 

Equity in net income of subsidiaries

 

 

96,612 

 

 

 -

 

 

 -

 

 

(96,612)

 

 

 -

Net income attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

(499)

 

 

 -

 

 

(499)

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

 

$

204,328 

 

$

120,734 

 

$

(1,031)

 

$

(119,703)

 

$

204,328 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2018

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net sales

 

$

1,036,674 

 

$

2,823,129 

 

$

152,587 

 

$

(1,408,515)

 

$

2,603,875 

Costs of goods sold

 

 

819,145 

 

 

2,551,620 

 

 

148,630 

 

 

(1,378,936)

 

 

2,140,459 

  Gross profit

 

 

217,529 

 

 

271,509 

 

 

3,957 

 

 

(29,579)

 

 

463,416 

Selling, general and administrative

 

 

62,927 

 

 

76,952 

 

 

5,597 

 

 

(5,457)

 

 

140,019 

  Operating income (loss)

 

 

154,602 

 

 

194,557 

 

 

(1,640)

 

 

(24,122)

 

 

323,397 

Interest expense, net of capitalized interest

 

 

18,623 

 

 

12,437 

 

 

3,540 

 

 

(2,704)

 

 

31,896 

Other (income) expense, net

 

 

(5,203)

 

 

(1,697)

 

 

(273)

 

 

2,710 

 

 

(4,463)

Income (loss) before income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  equity in net income of subsidiaries

 

 

141,182 

 

 

183,817 

 

 

(4,907)

 

 

(24,128)

 

 

295,964 

Income taxes

 

 

29,746 

 

 

45,720 

 

 

909 

 

 

(5,886)

 

 

70,489 



 

 

111,436 

 

 

138,097 

 

 

(5,816)

 

 

(18,242)

 

 

225,475 

Equity in net income of subsidiaries

 

 

116,115 

 

 

 -

 

 

 -

 

 

(116,115)

 

 

 -

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

2,076 

 

 

 -

 

 

2,076 

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

 

$

227,551 

 

$

138,097 

 

$

(3,740)

 

$

(134,357)

 

$

227,551 



16

 


 

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 three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2019

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net cash provided by (used in) operating activities

 

$

38,735 

 

$

151,815 

 

$

(4,520)

 

$

(4,477)

 

$

181,553 

Net cash used in investing activities

 

 

(71,294)

 

 

(16,183)

 

 

(365)

 

 

(4,582)

 

 

(92,424)

Net cash provided by (used in) financing activities

 

 

(22,190)

 

 

(123,429)

 

 

10,256 

 

 

9,059 

 

 

(126,304)

Increase (decrease) in cash, cash equivalents and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     restricted cash

 

 

(54,749)

 

 

12,203 

 

 

5,371 

 

 

 -

 

 

(37,175)

  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

 

$

755,014 

 

$

26,571 

 

$

15,663 

 

$

 -

 

$

797,248 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended,

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

March 31, 2018

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

Net cash provided by operating activities

 

$

9,009 

 

$

149,336 

 

$

21,283 

 

$

(1,693)

 

$

177,935 

Net cash used in investing activities

 

 

(60,919)

 

 

(24,517)

 

 

(2,997)

 

 

(1,944)

 

 

(90,377)

Net cash provided by (used in) financing activities

 

 

18,920 

 

 

(135,966)

 

 

(17,813)

 

 

3,637 

 

 

(131,222)

Increase (decrease) in cash, cash equivalents and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     restricted cash

 

 

(32,990)

 

 

(11,147)

 

 

473 

 

 

 -

 

 

(43,664)

  Cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     at beginning of period

 

 

1,002,230 

 

 

20,740 

 

 

12,115 

 

 

 -

 

 

1,035,085 

  Cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     at end of period

 

$

969,240 

 

$

9,593 

 

$

12,588 

 

$

 -

 

$

991,421 





 

17

 


 

 

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



Forward-Looking Statements



This report contains some predictive statements about future events, including statements related to conditions in the steel and metallic scrap markets, Steel Dynamics’ revenues, costs of purchased materials, future profitability and earnings, and the operation of new or existing facilities. These statements, which we generally precede or accompany by such typical conditional words as "anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or "expect," or by the words "may," "will," or "should," are intended to be made as “forward-looking,” subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) the effects of uncertain economic conditions; (2) cyclical and changing industrial demand; (3) changes in conditions in any of the steel or scrap-consuming sectors of the economy which affect demand for our products, including the strength of the non-residential and residential construction, automotive, manufacturing, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials and supplies (including steel scrap, iron units, zinc, graphite electrodes, and energy costs) and our ability to pass on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses 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 steelmaking and coating capacity of approximately 13 million tons 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 operations.



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.



















18

 


 

 

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, subject to customary actual working capital purchase price adjustments.  Additionally, w 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 the company’s financial statements in the steel operations reporting segment.



Results Overview  

Our consolidated results for the first quarter of 2019 were constrained by a challenging market for our Butler and Columbus Flat Roll Divisions. While product pricing improved in the first quarter of 2019 compared to the same period in 2018, sheet steel shipments from our steel mills decreased, resulting in a decline in steel segment operating income. Likewise, our metals recycling operations experienced decreased operating income in the first quarter of 2019 compared to 2018 largely due to slightly lower utilization rates at our steel mills, which resulted in decreased shipments and product pricing for our ferrous metals. The non-residential construction market remained strong, with increased average selling prices outpacing higher steel input costs in our steel fabrication segment.



Consolidated operating income decreased $31.6 million, or 10%, to $291.8 million for the first quarter 2019, compared to the first quarter 2018. First quarter 2019 net income attributable to Steel Dynamics, Inc. decreased $23.2 million, or 10%, to $204.3 million, compared to the first quarter 2018, due to decreased operating income as described above.



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









 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended March 31,



2019

 

% Change

 

 

2018

Net sales:

 

 

 

 

 

 

 

  Steel Operations Segment

$

2,200,165 

 

11%

 

$

1,981,774 

  Metals Recycling Operations Segment

 

737,045 

 

(2)%

 

 

752,766 

  Steel Fabrication Operations Segment

 

228,669 

 

13%

 

 

201,703 

  Other

 

113,496 

 

23%

 

 

92,618 



 

3,279,375 

 

 

 

 

3,028,861 

  Intra-company

 

(461,940)

 

 

 

 

(424,986)



$

2,817,435 

 

8%

 

$

2,603,875 



 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

  Steel Operations Segment

$

309,078 

 

(8)%

 

$

334,562 

  Metals Recycling Operations Segment

 

16,962 

 

(31)%

 

 

24,715 

  Steel Fabrication Operations Segment

 

20,623 

 

4%

 

 

19,791 

  Other

 

(56,920)

 

(3)%

 

 

(55,406)



 

289,743 

 

 

 

 

323,662 

  Intra-company

 

2,099 

 

 

 

 

(265)



$

291,842 

 

(10)%

 

$

323,397 



































19

 


 

 

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 75% and 74% of our consolidated external net sales during the first quarter of 2019 and 2018, respectively.



Steel Operations Segment Shipments (tons):



 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2019

 

% Change

 

2018



 

 

 

 

 

Total shipments

2,684,411 

 

6%

 

2,534,644 

   Intra-segment shipments

(247,403)

 

 

 

(121,653)

Steel Operations Segment shipments

2,437,008 

 

1%

 

2,412,991 



 

 

 

 

 

External shipments

2,347,209 

 

1%

 

2,327,515 



Picture 1



Segment Results 2019 vs. 2018



Overall domestic steel demand remained strong during the first quarter of 2019, with continued strength in the automotive, energy and other industrial sectors. Steel operations segment shipments increased 1% in the first quarter 2019, as compared to the same period in 2018,  with the acquisitions of Heartland Flat Roll Division (June 29, 2018) and USS (March 1, 2019). Net sales for the steel operations increased 11% in the first quarter 2019 when compared to the same period in 2018, due primarily to the additions of Heartland and USS, and a 10% increase in overall steel selling prices to $899 per ton. Our steel mill utilization rate averaged 90% for the first quarter 2019, as compared to 94% in the first quarter 2018.



Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost, generally comprising approximately 60% of our steel mill operations’ manufacturing costs. Our metallic raw material cost per net ton consumed in our steel operations increased $17, or 5%, in the first quarter 2019, compared to the same period in 2018, consistent with overall increased domestic scrap pricing.



As a result of average selling prices increasing more than scrap costs, metal spread (which we define as the difference between average selling prices and the cost of ferrous scrap consumed in our steel mills) increased 13% in the first quarter 2019 compared to the first quarter 2018. In spite of this metal spread expansion, operating income for the steel operations decreased 8%, to $309.1 million, in the first quarter 2019, compared to the

20

 


 

 

same period in 2018, due primarily to decreased shipments at our Butler and Columbus Flat Roll Divisions. Imports of sheet steel into the United States began to increase in late 2018 and into the first quarter of 2019 due to historically high selling prices, presenting a headwind to our flat roll mills, as well as beginning to put downward pressure on average pricing.









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 (increasing from 65% to 67% for the periods presented) of the ferrous scrap sold by OmniSource as raw material in our steelmaking operations, and the remainder is sold to other consumers, such as other steel manufacturers and foundries. Our metals recycling operations accounted for 13% and 15% of our consolidated external net sales during first quarters of 2019 and 2018, respectively.

Metals Recycling Operations Shipments:





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2019

 

% Change

 

2018

Ferrous metal (gross tons)

 

 

 

 

 

  Total

1,171,361 

 

(7)%

 

1,256,899 

  Inter-company

(788,520)

 

 

 

(819,909)

     External shipments

382,841 

 

(12)%

 

436,990 



 

 

 

 

 

Nonferrous metals (thousands of pounds)

 

 

 

 

 

  Total

292,038 

 

8%

 

271,628 

  Inter-company

(39,108)

 

 

 

(20,855)

     External shipments

252,930 

 

1%

 

250,773 



Segment Results 2019 vs. 2018



Our metals recycling operations net sales decreased 2% during the first quarter of 2019 compared to the same period in 2018, driven primarily by decreased ferrous metals shipments and average selling prices. Ferrous shipments to our own steel mills decreased by 4% in the first quarter 2019, compared to the same period in 2018, as our steel mill utilization percentage decreased slightly from prior year. Ferrous scrap average selling prices decreased 3% during the first quarter 2019 compared to the same period in 2018, while nonferrous average selling prices increased 4%. Ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) decreased 11%, as selling prices decreased more than unprocessed scrap procurement costs, while nonferrous metal spread decreased 3%. Metals recycling operations operating income decreased 31% to $17.0 million in the first quarter 2019 compared to the first quarter 2018 operating income of $24.7 million, due to metal spread contraction and decreased ferrous shipments.



















Steel Fabrication Operations Segment



Steel fabrication operations include our New Millennium Building Systems joist and deck plants located throughout the United States and in Northern Mexico. Revenues from these plants are generated from the fabrication of steel joists, trusses, girders and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 8% of our consolidated external net sales during the first quarters of 2019 and 2018.



21

 


 

 

Picture 4

Segment Results 2019 vs. 2018

Net sales for the steel fabrication operations increased $27.0 million, or 13%, during the first quarter 2019, compared to the same period in 2018, as average selling prices increased $230 per ton, or 17%, while shipments decreased 3%. Our steel fabrication operations continue to leverage our national operating footprint to sustain market share. Market demand and order backlogs continue to be strong for non-residential construction project development; however, severe weather and other construction delays during the first quarter 2019 restricted shipments somewhat.



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. While the average cost of steel consumed increased in the first quarter 2019, as compared to the same period in 2018 consistent with increased steel selling prices discussed in the steel operations results, the 17% average selling price increase was more significant. As a result, metal spread (which we define as the difference between average selling prices and the cost of purchased steel) increased 7% in the first quarter 2019 compared to the same period in 2018. Operating income increased 4% to $20.6 million in the first quarter 2019 compared to the same period in 2018, due to the increases in metal spread more than offsetting the slight decrease in shipments.









Other Operations



First Quarter Consolidated Results 2019 vs. 2018



Selling, General and Administrative Expenses. Selling, general and administrative expenses of $111.0 million during the first quarter 2019 increased 4% from $106.4 million during the first quarter 2018, representing 3.9% and 4.1% of net sales, respectively. Profit sharing expense during the first quarter of 2019 of $23.7 million was down 11% from the $26.7 million during the same period in 2018, consistent with decreases in income before income taxes.



Interest Expense, net of Capitalized Interest.  During the first quarter 2019, interest expense of $31.1 million was comparable to the $31.9 million during the first quarter of 2018, on consistent debt levels.



Income Tax Expense.  First quarter 2019 income tax expense of  $62.2 million at an effective income tax rate of 23.3%, is comparable to the  $70.5 million at an effective income tax rate of 23.8% during the first quarter 2018.















22

 


 

 

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 March 31, 2019, is as follows (in thousands):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Cash and equivalents

 

$

791,444 

 

 

 



 

 

Short-term investments

 

 

173,723 

 

 

 



 

 

Revolver availability

 

 

1,188,161 

 

 

 



 

 

Total liquidity

 

$

2,153,328 

 

 

 



 

 

 

 

 

 

 

 

 



Our total outstanding debt increased $58.7 million during the first quarter 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 37.9% at March 31, 2019, and December 31, 2018.



Our senior secured credit facility (Facility), which provides a $1.2 billion Revolver, was renewed and extended in June 2018 to extend maturity to 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; and is secured by substantially all of our and our wholly-owned subsidiaries’ receivables and inventories, and by pledges of all shares of our wholly-owned subsidiaries’ capital stock or other equity interests, and intercompany debt held by us as collateral. The Revolver is available to fund working capital, capital expenditures, and other general corporate purposes. The Facility contains financial covenants and other covenants pertaining to our ability (which may under certain circumstances be limited) to make capital expenditures; incur indebtedness; permit liens on property; enter into transactions with affiliates; make restricted payments or investments; enter into mergers, acquisitions or consolidations; conduct asset sales; pay dividends or distributions, or enter into other specified transactions and activities. Our ability to borrow funds within the terms of the Revolver is dependent upon our continued compliance with the financial and other covenants. At March 31, 2019, we had $1.2 billion of availability on the Revolver, $11.8 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 March 31, 2019, our interest coverage ratio and net debt leverage ratio were 16.81:1.00 and 0.87:1.00, respectively. We were, therefore, in compliance with these covenants at March 31, 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 $181.6 million in the first quarter of 2019. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $181.7 million, excluding the effect of acquired USS working capital, to $2.1 billion at March 31, 2019, due primarily to decreased accrued expenses, as our 2018 accrued profit sharing was paid in the first quarter of 2019. 



Capital Investments.    During the first quarter of 2019, we invested $54.4 million in property, plant and equipment, primarily within our steel operations segment, compared with $50.6 million invested during the same period in 2018.



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 $53.5 million during the first quarter of 2019, compared to $44.3 million during the same period in 2018. We paid cash dividends of $42.2 million and $36.8 million during the first quarters 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.



23

 


 

 

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 2.3 million shares of our common stock for $84.3 million in the first quarter of 2019 pursuant to this program, leaving $314.8 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.



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 March 31, 2019, we had a cumulative unrealized loss associated with these financial contracts of $788,000, substantially all of which have a settlement date within the next twelve months. We believe the customer contracts associated with the financial contracts will be fully consummated.



ITEM 4.CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures



As required, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 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 March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 







24

 


 

 

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 $451,000 is recorded in our financial statements as of March 31, 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
March 31, 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)

 



Quarter ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



    January 1 - 31 (1)

 

234,274 

 

 

$

30.19 

 

 

234,274 

 

 

$

392,075 

 



    February 1 - 28 (1)

 

1,469,445 

 

 

 

37.58 

 

 

1,469,445 

 

 

 

336,852 

 



    March 1 - 31 (1)

 

595,422 

 

 

 

36.97 

 

 

595,422 

 

 

 

314,840 

 



 

 

2,299,141 

 

 

 

 

 

 

2,299,141 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 March 31, 2019, therefore, no Exhibit 95 is required.



ITEM 5.OTHER INFORMATION



None.

ITEM 6.EXHIBITS



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











25

 


 

 

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

 



 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 



 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Document

 



 

 

 

101.DEF*

 

XBRL Taxonomy Definition Document

 



 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Document

 



 

 

 

101.PRE*

 

XBRL Taxonomy Presentation Document

 



_____________________________________________________________________________________________________________

*Filed concurrently herewith

**Inapplicable for purposes of this report

26

 


 

 

SIGNATURE



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



May 10, 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)









27