UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q





Commission File Number 0-21719





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). 





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 November 1, 2018 , Registrant had 229,552,226 outstanding shares of common stock.

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STEEL DYNAMICS, INC.

CONSOLIDATED B AL ANCE SHEETS

(in thousands, except share data)







	September 30,				December 31,
	2018				2017
Assets	(unaudited)
Current assets
Cash and equivalents	$	884,315			$	1,028,649
Short term investments		115,000				-
Accounts receivable, net		1,224,477				846,415
Accounts receivable-related parties		3,713				22,422
Inventories		1,853,862				1,519,347
Other current assets		50,110				91,509
Total current assets		4,131,477				3,508,342

Property, plant and equipment, net		2,901,658				2,675,904

Intangible assets, net		236,563				256,909
Goodwill		502,900				386,893
Other assets		25,770				27,684
Total assets	$	7,798,368			$	6,855,732
Liabilities and Equity
Current liabilities
Accounts payable	$	595,286			$	473,765
Accounts payable-related parties		15,742				15,683
Income taxes payable		10,872				3,696
Accrued payroll and benefits		228,911				195,909
Accrued interest		47,967				25,533
Accrued expenses		136,111				125,138
Current maturities of long-term debt		14,776				28,795
Total current liabilities		1,049,665				868,519

Long-term debt		2,351,979				2,353,145
Deferred income taxes		398,814				305,949
Other liabilities		11,833				21,811
Total liabilities		3,812,291				3,549,424

Commitments and contingencies

Redeemable noncontrolling interests		111,240				111,240

Equity
Common stock voting, $.0025 par value; 900,000,000 shares authorized;
265,117,573 and 265,003,133 shares issued; and 233,422,108 and 237,396,839
shares outstanding, as of September 30, 2018 and December 31, 2017, respectively		644				644
Treasury stock, at cost; 31,695,465 and 27,606,294 shares,
as of September 30, 2018 and December 31, 2017, respectively		(854,052)				(665,297)
Additional paid-in capital		1,156,556				1,141,534
Retained earnings		3,730,662				2,874,693
Accumulated other comprehensive loss		(42)				-
Total Steel Dynamics, Inc. equity		4,033,768				3,351,574
Noncontrolling interests		(158,931)				(156,506)
Total equity		3,874,837				3,195,068
Total liabilities and equity	$	7,798,368			$	6,855,732

See notes to consolidated financial statements.

1

 

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEM ENT S OF INCOME (UNAUDITED)

(in thousands, except per share data)







	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017

Net sales
Unrelated parties	$	3,220,891		$	2,399,116		$	8,902,025		$	7,066,083
Related parties		2,656			44,266			15,922			136,235
Total net sales		3,223,547			2,443,382			8,917,947			7,202,318

Costs of goods sold		2,537,466			2,046,864			7,116,368			5,941,128
Gross profit		686,081			396,518			1,801,579			1,261,190

Selling, general and administrative expenses		102,614			97,056			310,076			298,422
Profit sharing		45,304			21,175			114,301			69,714
Amortization of intangible assets		6,591			7,272			20,346			22,120
Operating income		531,572			271,015			1,356,856			870,934

Interest expense, net of capitalized interest		31,560			34,177			94,968			102,019
Other (income) expense, net		(7,103)			2,526			(16,601)			(4,968)
Income before income taxes		507,115			234,312			1,278,489			773,883

Income tax expense		109,209			83,300			292,536			271,258
Net income		397,906			151,012			985,953			502,625

Net loss attributable to noncontrolling interests		469			2,246			2,422			5,383
Net income attributable to Steel Dynamics, Inc.	$	398,375		$	153,258		$	988,375		$	508,008



Basic earnings per share attributable to Steel Dynamics,
Inc. stockholders	$	1.70		$	0.64		$	4.20		$	2.11

Weighted average common shares outstanding		234,208			239,066			235,483			241,117

Diluted earnings per share attributable to Steel Dynamics, Inc.
stockholders, including the effect of assumed conversions
when dilutive	$	1.69		$	0.64		$	4.17		$	2.09

Weighted average common shares and share equivalents outstanding		235,649			240,880			236,772			242,816

Dividends declared per share	$	0.1875		$	0.1550		$	0.5625		$	0.4650





















See notes to consolidated financial statements.

2

 

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)







	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017

Net income	$	397,906		$	151,012		$	985,953		$	502,625
Other comprehensive income (loss) - net unrealized gain (loss) on cash flow
hedging derivatives, net of income tax expense (benefit) of $19 and $(13)
for the three and nine months ended September 30, 2018, respectively		63			-			(42)			-
Comprehensive income		397,969			151,012			985,911			502,625

Comprehensive loss attributable to noncontrolling interests		469			2,246			2,422			5,383
Comprehensive income attributable to Steel Dynamics, Inc.	$	398,438		$	153,258		$	988,333		$	508,008

























































































See notes to consolidated financial statements.

3

 

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)







	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017

Operating activities:
Net income	$	397,906		$	151,012		$	985,953		$	502,625

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		81,383			75,210			236,638			224,068
Equity-based compensation		7,978			6,875			28,860			24,558
Deferred income taxes		23,899			3,284			45,437			17,849
Other adjustments		312			8,202			197			8,055
Changes in certain assets and liabilities:
Accounts receivable		(48,024)			(36,123)			(330,307)			(193,233)
Inventories		(69,885)			(67,285)			(240,908)			(211,726)
Other assets		(6,429)			(9,528)			(7,164)			(2,014)
Accounts payable		(14,883)			44,887			100,368			133,251
Income taxes receivable/payable		(31,127)			(12,929)			55,414			5,803
Accrued expenses		79,310			62,249			49,920			38,058
Net cash provided by operating activities		420,440			225,854			924,408			547,294

Investing activities:
Purchases of property, plant and equipment		(70,668)			(42,795)			(176,477)			(127,746)
Purchases of short term investments		(35,000)			-			(125,000)			-
Proceeds from maturities of short term investments		10,000			-			10,000			-
Acquisition of business, net of cash and restricted cash acquired		(37,589)			(5,518)			(433,998)			(5,518)
Other investing activities		576			1,081			1,462			30,386
Net cash used in investing activities		(132,681)			(47,232)			(724,013)			(102,878)

Financing activities:
Issuance of current and long-term debt		110,041			450,215			327,670			501,448
Repayment of current and long-term debt		(115,039)			(294,913)			(346,162)			(331,339)
Dividends paid		(44,081)			(37,180)			(125,146)			(108,837)
Purchases of treasury stock		(74,965)			(99,085)			(193,379)			(237,154)
Other financing activities		-			(4,832)			(8,324)			(8,364)
Net cash provided by (used in) financing activities		(124,044)			14,205			(345,341)			(184,246)

Increase (decrease) in cash, cash equivalents, and restricted cash		163,715			192,827			(144,946)			260,170
Cash, cash equivalents, and restricted cash at beginning of period		726,424			915,448			1,035,085			848,105

Cash, cash equivalents, and restricted cash at end of period	$	890,139		$	1,108,275		$	890,139		$	1,108,275


Supplemental disclosure information:
Cash paid for interest	$	8,643		$	13,530		$	70,498		$	80,155
Cash paid for income taxes, net	$	119,802		$	93,123		$	198,752		$	246,793







See notes to consolidated financial statements.

 

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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 (acquired June 29, 2018), Structural and Rail Division, Engineered Bar Products Division, Vulcan Threaded Products, Inc., Roanoke Bar Division, Steel of West Virginia, and Iron Dynamics, a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and numerous downstream processing and coating lines. Steel operations accounted for 77% and 73% of the company’s consolidated external net sales during the three months ended September 30, 2018 and 2017, respectively, and 75% and 73% during the nine months ended September 30, 2018 and 2017.

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 12% and   14% of the company’s consolidated external net sales during the three months ended September 30, 2018 and 2017, respectively, and 14% and 15% during the nine months ended September 30, 2018 and 2017.

Steel Fabrication Operations Segment.  Steel fabrication operations include the company’s New Millennium Building Systems’ joist and deck plants located throughout the United States, and in Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel deck used within the non-residential construction industry.   Steel fabrication operations accounted for 8% and 9% of the company’s consolidated external net sales during the three months ended September 30, 2018 and 2017, respectively, and 8% during the nine months ended September 30, 2018 and 2017.

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

Significant Accounting Policies



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



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



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



Senior Secured Credit Facility



The company renewed its senior secured credit facility (Facility), which provides a $1.2 billion Revolver, in June 2018, and extended the maturity to June 2023. Subject to certain conditions, the company has the opportunity to increase the Revolver size by a minimum of $750.0 million. The Facility is guaranteed by certain of the company’s subsidiaries; and is secured by substantially all of the company’s and its wholly-owned subsidiaries’ receivables and inventories, and by pledges of all shares of the company’s wholly-owned subsidiaries’ capital stock or other equity interests, and intercompany debt held by the company as collateral. The Revolver is available to fund working capital, capital expenditures, and other general corporate purposes.



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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 is allocated to the following reporting units at September 30, 2018, and December 31, 2017, (in thousands):



			September 30,			December 31,
			2018			2017
	Steel Operations Segment:
	Columbus Flat Roll Division		$	19,682		$	19,682
	The Techs			142,783			142,783
	Heartland Flat Roll Division			118,550			-
	Vulcan Threaded Products			7,824			7,824
	Roanoke Bar Division			29,041			29,041
	Metals Recycling Operations Segment:
	OmniSource			88,095			90,638
	Indiana Steel Mills			95,000			95,000
	Steel Fabrication Operations Segment			1,925			1,925
			$	502,900		$	386,893



Heartland Flat Roll Division (Heartland) was acquired June 29, 2018 (refer to Note 2 Acquisition - Heartland ), resulting in a preliminary purchase price allocation in which $118.6 million of goodwill was recorded. OmniSource goodwill decreased $2.5 million from December 31, 2017 to September 30, 2018, in recognition of the 2018 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.



Recently Adopted/Issued Accounting Standards



In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition .  FASB later issued clarifying guidance in the form of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Consideration (Reporting Revenue Gross versus Net) , ASU 2016-10, Revenue from Contract with Customers: Identifying Performance Obligations and Licensing , and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, collectively (ASC 606). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. The company adopted ASC 606 effective January 1, 2018 using the modified retrospective approach. There was no change in the amount or timing of revenue recognized under ASC 606, or significant changes required to the company’s functions, processes or systems. See Note 3 Revenue from Contracts with Customers for disclosure required by ASC 606 and the updated accounting policy for revenue recognition.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230); which requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The company adopted the provisions of ASU 2016-18 as of January 1, 2018, retrospectively changed beginning and ending amounts reflected in the consolidated statements of cash flows for the three and nine months ended September 30, 2018 and 2017, to include restricted cash. The balance of cash, cash equivalents and restricted cash in the consolidated statements of cash flows includes restricted cash of $5.8 million at September 30, 2018, $6.0 million at June 30, 2018, $6.4 million at December 31, 2017, $6. 3 million at September 30, 2017, and $6.6 million at June 30, 2017 and December 31, 2016, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.

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



Note 2. Acquisition - Heartland  



On June 29, 2018, the company completed its acquisition of 100% of Heartland Steel Processing, LLC (formerly known as Companhia Siderurgica Nacional, LLC) (Heartland ), for an initial cash purchase price of $396.4 million, plus a customary working capital transa ction purchase price adjustment of $37.6 million, which was paid in September 2018. Located in Terre Haute, Indiana, Heartland produces various types of higher-margin, flat roll steel by further processing hot roll coils into pickle and oil, cold roll, and galvanized products. The acquisition will expand the company’s annual flat roll steel shipping capacity of lighter-gauge and greater width flat roll steel offerings that will broaden and diversify the company’s value-added product portfolio, and provide operational and logistics benefits to other nearby operations. Heartland’s post-acquisition   operating results are   reflected in the company’s financial statements in the steel operations reporting segment.



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Note 2. Acquisition (Continued)  



The aggregate purchase price was preliminarily allocated to the opening balance sheet of Heartland as of June 29, 2018, the acquisition date. The following 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. In conjunction with the settlement of the working capital adjustment   in September 2018, the net assets acquired as initially estimated and allocated at June 29, 2018, decreased $8.1 million, to $434.0 million. The accounting for the acquisition has not yet been completed because the company has not finalized the valuations of the acquired property, plant and equipment , and identifiable intangible assets, if any, including goodwill.











Note 3.  Revenue from Contracts with Customers



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



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

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



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



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



Refer to Note 10 Segment Information , for disaggregated revenue by segment to external, external non-United States, and other segment customers.























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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 or nine months ended September 30, 2018 and 2017.



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











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):



















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Note 6.  Changes in Equity



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







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. 



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 September 30, 2018 :  

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





The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $3.5 million at September 30, 2018 , and $5.6 million at December 31, 2017, and are reflected in other current assets in the consolidated balance sheets.

 

Note 7.  Derivative Financial Instruments (Continued)











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

September 30,

September 30,

fair value hedge

related hedged

September 30,

September 30,



derivatives

2018

2017

relationships

items

2018

2017

Derivatives in fair value

hedging relationships

Commodity futures

Costs of goods sold

$

(8,943)

$

4,122

Firm commitments

Costs of goods sold

$

5,111

$

(1,711)



Inventory

Costs of goods sold

1,753

(1,330)

Derivatives not designated

$

6,864

$

(3,041)

as hedging instruments

Commodity futures

Costs of goods sold

$

13,803

$

(10,566)











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 nine months ended

Hedged items in

in income on

for the nine months ended



in income on

September 30,

September 30,

fair value hedge

on related

September 30,

September 30,



derivatives

2018

2017

relationships

hedged items

2018

2017

Derivatives in fair value

hedging relationships

Commodity futures

Costs of goods sold

$

1,113

$

571

Firm commitments

Costs of goods sold

$

1,718

$

995



Inventory

Costs of goods sold

(1,659)

179

Derivatives not designated

$

59

$

1,174

as hedging instruments

Commodity futures

Costs of goods sold

$

19,523

$

(12,528)



Derivatives accounted for as fair value hedges had ine ffectiveness resulting in gains of $5,000 and losse s of $35,000 during th e three-month periods ended September 30, 2018, and 2017, respectively; and losses of $10,500 and gains of $62,000 during the nine -month periods ended September 30, 2018, and 2017, respectively.  Losses excluded from hedge effectiveness testing of $2.1 million increased cost of goods sold during the three-month periods ended September 30, 2018 .   Gains excluded from hedge effectiveness testing of $1.1 million decreased c ost of goods sold during the three -month period ended September 30, 201 7. Gains excluded from hedge effectiveness testing of $1.2 million and $1.7  m illion decreased c ost of goods sold during the nine -month periods ended September 30, 2018, and 2017, respectively. 



Derivatives accounted for as cash flow hedges resulted in net gains of $82,000 recognized in other com prehensive income for the three -month period ended September 30, 2018 and net losses of $55,000 for the nine-month period ended September 30, 2018 . There were no reclassifications of gains or losses from accumulated other comprehensive income into income , nor gains or losses recognized into income during the three- or nine- month periods ended September 30, 2018, and 2017. At September 30, 2018, the company expects to reclassify $55,000 of net losses on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts.



Note 8.  Fair Value Measurements

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



---

 













Note 8.  Fair Value Measurements (Continued)

The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of September 30, 2018, and December 31, 2017 (in thousands):    





The carrying amounts of financial instruments including cash and equivalents, and short term investments in certificates of deposit approximate fair value. The fair values of commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available. The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.4 billion and $2.5 billion at September 30, 2018 and December 31, 2017, respectively (with a corresponding carrying amount in the consolidated balance sheet of $2.4 billion at September 30, 2018 and December 31, 2017).  



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



---

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)



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





					Metals			Steel
For the three months ended		Steel			Recycling			Fabrication
September 30, 2018		Operations			Operations			Operations			Other			Eliminations			Consolidated

Net Sales - disaggregated revenue
External		$	2,400,329		$	323,611		$	250,625		$	110,659		$	-		$	3,085,224
External Non-U.S.			74,715			63,608			-			-			-			138,323
Other segments			111,582			412,795			120			1,294			(525,791)			-
			2,586,626			800,014			250,745			111,953			(525,791)			3,223,547
Operating income (loss)			573,848			14,674			13,104			(67,113)	(1)		(2,941)	(2)		531,572
Income (loss) before income taxes			557,870			13,488			11,801			(73,109)			(2,935)			507,115
Depreciation and amortization			64,088			11,491			2,941			2,863			-			81,383
Capital expenditures			57,074			11,603			1,395			596			-			70,668

As of September 30, 2018
Assets		$	5,195,048		$	1,019,089		$	489,469		$	1,204,565	(3)	$	(109,803)	(4)	$	7,798,368







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

(1)	Corporate SG&A	$	(13.8)		(2)	Gross profit decrease from intra-company sales	$	(3.0)
	Company-wide equity-based compensation		(7.8)
	Profit sharing		(43.4)
	Other, net		(2.1)
		$	(67.1)

(3)	Cash and equivalents	$	866.1		(4)	Elimination of intra-company receivables	$	(72.6)
	Short term investments		85.0			Elimination of intra-company debt		(17.2)
	Inventories		26.3			Other		(20.0)
	Property, plant and equipment, net		158.9				$	(109.8)
	Intra-company debt		17.2
	Other		51.1
		$	1,204.6

12

 

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)





					Metals			Steel
For the three months ended		Steel			Recycling			Fabrication
September 30, 2017		Operations			Operations			Operations			Other			Eliminations			Consolidated

Net Sales - disaggregated revenue
External		$	1,700,707		$	301,422		$	211,271		$	101,057		$	-		$	2,314,457
External Non-U.S.			82,098			46,793			34			-			-			128,925
Other segments			65,321			360,982			89			116			(426,508)			-
			1,848,126			709,197			211,394			101,173			(426,508)			2,443,382
Operating income (loss)			276,547			17,624			21,862			(44,326)	(1)		(692)			271,015
Income (loss) before income taxes			255,539			16,020			20,199			(56,754)			(692)			234,312
Depreciation and amortization			57,644			12,020			2,866			2,680			-			75,210
Capital expenditures			31,654			8,589			1,524			1,028			-			42,795







Footnotes related to the three months ended September 30, 2017, segment results (in millions):

(1)	Corporate SG&A	$	(12.1)
	Company-wide equity-based compensation		(6.8)
	Profit sharing		(20.2)
	Other, net		(5.2)
		$	(44.3)







					Metals			Steel
For the nine months ended		Steel			Recycling			Fabrication
September 30, 2018		Operations			Operations			Operations			Other			Eliminations			Consolidated

Net Sales - disaggregated revenue
External		$	6,360,177		$	1,001,267		$	669,500		$	326,086		$	-		$	8,357,030
External Non-U.S.			362,083			198,778			56			-			-			560,917
Other segments			281,828			1,236,830			788			1,565			(1,521,011)			-
			7,004,088			2,436,875			670,344			327,651			(1,521,011)			8,917,947
Operating income (loss)			1,441,904			62,027			47,039			(186,137)	(1)		(7,977)	(2)		1,356,856
Income (loss) before income taxes			1,390,074			57,458			42,898			(203,970)			(7,971)			1,278,489
Depreciation and amortization			184,998			34,602			8,785			8,253			-			236,638
Capital expenditures			137,484			27,496			5,526			5,971			-			176,477







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

(1)	Corporate SG&A	$	(44.0)		(2)	Gross profit decrease from intra-company sales	$	(8.0)
	Company-wide equity-based compensation		(24.8)
	Profit sharing		(109.6)
	Other, net		(7.7)
		$	(186.1)











13

 

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10.  Segment Information (Continued)







					Metals			Steel
For the nine months ended		Steel			Recycling			Fabrication
September 30, 2017		Operations			Operations			Operations			Other			Eliminations			Consolidated

Net Sales - disaggregated revenue
External		$	5,025,310		$	910,830		$	603,140		$	281,091		$	-		$	6,820,371
External Non-U.S.			237,070			144,750			127			-			-			381,947
Other segments			183,374			1,067,770			244			1,065			(1,252,453)			-
			5,445,754			2,123,350			603,511			282,156			(1,252,453)			7,202,318
Operating income (loss)			895,008			51,968			65,735			(141,406)	(1)		(371)			870,934
Income (loss) before income taxes			830,865			46,674			61,171			(164,456)			(371)			773,883
Depreciation and amortization			170,125			37,048			8,743			8,152			-			224,068
Capital expenditures			101,939			18,539			5,748			1,520			-			127,746







Footnotes related to the nine months ended September 30, 2017, segment results (in millions):

(1)	Corporate SG&A	$	(37.9)
	Company-wide equity-based compensation		(23.5)
	Profit sharing		(66.8)
	Other, net		(13.2)
		$	(141.4)





14

 

---

 

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. The following statements should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K for the year ended December 31, 2017.









Condensed Consolidating Balance Sheets (in thousands)
								Combined			Consolidating			Total
As of September 30, 2018		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Cash and equivalents		$	863,917		$	13,686		$	6,712		$	-		$	884,315
Short term investments			85,000			30,000			-			-			115,000
Accounts receivable, net			382,836			1,745,801			35,404			(935,851)			1,228,190
Inventories			774,486			1,058,194			34,251			(13,069)			1,853,862
Other current assets			30,939			21,613			3,451			(5,893)			50,110
Total current assets			2,137,178			2,869,294			79,818			(954,813)			4,131,477
Property, plant and equipment, net			864,007			1,879,224			158,427			-			2,901,658
Intangible assets, net			-			236,563			-			-			236,563
Goodwill			-			502,900			-			-			502,900
Other assets, including investments in subs			3,043,057			5,905			5,535			(3,028,727)			25,770
Total assets		$	6,044,242		$	5,493,886		$	243,780		$	(3,983,540)		$	7,798,368

Accounts payable		$	195,810		$	399,704		$	86,375		$	(70,861)		$	611,028
Accrued expenses			283,085			283,977			9,719			(152,920)			423,861
Current maturities of long-term debt			777			1,355			44,884			(32,240)			14,776
Total current liabilities			479,672			685,036			140,978			(256,021)			1,049,665
Long-term debt			2,326,733			335			168,476			(143,565)			2,351,979
Other liabilities			(795,835)			681,043			34,562			490,877			410,647
Total liabilities			2,010,570			1,366,414			344,016			91,291			3,812,291

Redeemable noncontrolling interests			-			-			111,240			-			111,240

Common stock			644			1,727,859			15,016			(1,742,875)			644
Treasury stock			(854,052)			-			-			-			(854,052)
Additional paid-in-capital			1,156,556			683,048			689,502			(1,372,550)			1,156,556
Retained earnings (deficit)			3,730,662			1,716,469			(757,063)			(959,406)			3,730,662
Accumulated other comprehensive loss			(138)			96			-			-			(42)
Total Steel Dynamics, Inc. equity			4,033,672			4,127,472			(52,545)			(4,074,831)			4,033,768
Noncontrolling interests			-			-			(158,931)			-			(158,931)
Total equity			4,033,672			4,127,472			(211,476)			(4,074,831)			3,874,837
Total liabilities and equity		$	6,044,242		$	5,493,886		$	243,780		$	(3,983,540)		$	7,798,368



---

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)







								Combined			Consolidating			Total
As of December 31, 2017		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Cash and equivalents		$	1,001,405		$	20,441		$	6,803		$	-		$	1,028,649
Accounts receivable, net			274,968			1,426,036			37,387			(869,554)			868,837
Inventories			685,103			752,151			91,890			(9,797)			1,519,347
Other current assets			73,748			16,005			5,962			(4,206)			91,509
Total current assets			2,035,224			2,214,633			142,042			(883,557)			3,508,342
Property, plant and equipment, net			859,419			1,618,438			198,047			-			2,675,904
Intangible assets, net			-			225,503			31,406			-			256,909
Goodwill			-			379,069			7,824			-			386,893
Other assets, including investments in subs			2,512,594			6,622			5,505			(2,497,037)			27,684
Total assets		$	5,407,237		$	4,444,265		$	384,824		$	(3,380,594)		$	6,855,732

Accounts payable		$	168,282		$	316,676		$	101,948		$	(97,458)		$	489,448
Accrued expenses			222,023			254,196			10,243			(136,186)			350,276
Current maturities of long-term debt			731			-			56,454			(28,390)			28,795
Total current liabilities			391,036			570,872			168,645			(262,034)			868,519
Long-term debt			2,326,466			-			169,799			(143,120)			2,353,145
Other liabilities			(661,839)			869,196			24,868			95,535			327,760
Total liabilities			2,055,663			1,440,068			363,312			(309,619)			3,549,424

Redeemable noncontrolling interests			-			-			111,240			-			111,240

Common stock			644			1,727,859			14,908			(1,742,767)			644
Treasury stock			(665,297)			-			-			-			(665,297)
Additional paid-in-capital			1,141,534			128,076			797,196			(925,272)			1,141,534
Retained earnings (deficit)			2,874,693			1,148,262			(745,326)			(402,936)			2,874,693
Total Steel Dynamics, Inc. equity			3,351,574			3,004,197			66,778			(3,070,975)			3,351,574
Noncontrolling interests			-			-			(156,506)			-			(156,506)
Total equity			3,351,574			3,004,197			(89,728)			(3,070,975)			3,195,068
Total liabilities and equity		$	5,407,237		$	4,444,265		$	384,824		$	(3,380,594)		$	6,855,732

---

 

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
September 30, 2018		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	1,304,801		$	3,540,381		$	144,145		$	(1,765,780)		$	3,223,547
Costs of goods sold			956,735			3,163,110			142,005			(1,724,384)			2,537,466
Gross profit			348,066			377,271			2,140			(41,396)			686,081
Selling, general and administrative			78,824			78,694			2,974			(5,983)			154,509
Operating income (loss)			269,242			298,577			(834)			(35,413)			531,572
Interest expense, net of capitalized interest			18,559			12,489			3,134			(2,622)			31,560
Other (income) expense, net			(7,121)			(2,292)			(306)			2,616			(7,103)
Income (loss) before income taxes and
equity in net income of subsidiaries			257,804			288,380			(3,662)			(35,407)			507,115
Income taxes			45,599			71,466			420			(8,276)			109,209
			212,205			216,914			(4,082)			(27,131)			397,906
Equity in net income of subsidiaries			186,170			-			-			(186,170)			-
Net income attributable to noncontrolling interests			-			-			469			-			469
Net income (loss) attributable to Steel Dynamics, Inc.		$	398,375		$	216,914		$	(3,613)		$	(213,301)		$	398,375







For the three months ended,								Combined			Consolidating			Total
September 30, 2017		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	946,136		$	2,641,067		$	161,556		$	(1,305,377)		$	2,443,382
Costs of goods sold			763,310			2,402,670			157,564			(1,276,680)			2,046,864
Gross profit			182,826			238,397			3,992			(28,697)			396,518
Selling, general and administrative			51,464			74,151			4,896			(5,008)			125,503
Operating income			131,362			164,246			(904)			(23,689)			271,015
Interest expense, net of capitalized interest			18,831			14,481			3,181			(2,316)			34,177
Other (income) expense, net			2,660			(2,492)			42			2,316			2,526
Income (loss) before income taxes and
equity in net income of subsidiaries			109,871			152,257			(4,127)			(23,689)			234,312
Income taxes			35,309			55,183			1,169			(8,361)			83,300
			74,562			97,074			(5,296)			(15,328)			151,012
Equity in net income of subsidiaries			78,696			-			-			(78,696)			-
Net loss attributable to noncontrolling interests			-			-			2,246			-			2,246
Net income (loss) attributable to Steel Dynamics, Inc.		$	153,258		$	97,074		$	(3,050)		$	(94,024)		$	153,258

17

 

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)





For the nine months ended,								Combined			Consolidating			Total
September 30, 2018		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	3,635,571		$	9,804,316		$	417,450		$	(4,939,390)		$	8,917,947
Costs of goods sold			2,746,516			8,783,145			413,607			(4,826,900)			7,116,368
Gross profit			889,055			1,021,171			3,843			(112,490)			1,801,579
Selling, general and administrative			218,839			233,989			8,550			(16,655)			444,723
Operating income (loss)			670,216			787,182			(4,707)			(95,835)			1,356,856
Interest expense, net of capitalized interest			56,568			36,793			9,489			(7,882)			94,968
Other (income) expense, net			(18,299)			(5,612)			(565)			7,875			(16,601)
Income (loss) before income taxes and
equity in net income of subsidiaries			631,947			756,001			(13,631)			(95,828)			1,278,489
Income taxes			127,083			187,794			530			(22,871)			292,536
			504,864			568,207			(14,161)			(72,957)			985,953
Equity in net income of subsidiaries			483,511			-			-			(483,511)			-
Net loss attributable to noncontrolling interests			-			-			2,422			-			2,422
Net income (loss) attributable to Steel Dynamics, Inc.		$	988,375		$	568,207		$	(11,739)		$	(556,468)		$	988,375







For the nine months ended,								Combined			Consolidating			Total
September 30, 2017		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	2,797,557		$	7,827,981		$	449,902		$	(3,873,122)		$	7,202,318
Costs of goods sold			2,241,936			7,054,938			432,657			(3,788,403)			5,941,128
Gross profit			555,621			773,043			17,245			(84,719)			1,261,190
Selling, general and administrative			164,061			226,153			15,253			(15,211)			390,256
Operating income			391,560			546,890			1,992			(69,508)			870,934
Interest expense, net of capitalized interest			55,353			44,245			9,494			(7,073)			102,019
Other (income) expense, net			(4,463)			(7,305)			(273)			7,073			(4,968)
Income (loss) before income taxes and
equity in net income of subsidiaries			340,670			509,950			(7,229)			(69,508)			773,883
Income taxes			106,036			184,891			4,651			(24,320)			271,258
			234,634			325,059			(11,880)			(45,188)			502,625
Equity in net income of subsidiaries			273,374			-			-			(273,374)			-
Net loss attributable to noncontrolling interests			-			-			5,383			-			5,383
Net income (loss) attributable to Steel Dynamics, Inc.		$	508,008		$	325,059		$	(6,497)		$	(318,562)		$	508,008



18

 

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11.  Condensed Consolidating Information (Continued)










Condensed Consolidating Statements of Cash Flows (in thousands)

For the nine months ended,								Combined			Consolidating			Total
September 30, 2018		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net cash provided by operating activities		$	401,680		$	505,175		$	2,101		$	15,452		$	924,408
Net cash used in investing activities			(617,158)			(106,230)			(4,920)			4,295			(724,013)
Net cash provided by (used in) financing activities			77,165			(405,499)			2,740			(19,747)			(345,341)
Decrease in cash, cash equivalents and restricted cash			(138,313)			(6,554)			(79)			-			(144,946)
Cash, cash equivalents, and restricted cash at beginning of
period			1,002,230			20,748			12,107			-			1,035,085
Cash, cash equivalents, and restricted cash at end of period		$	863,917		$	14,194		$	12,028		$	-		$	890,139









For the nine months ended,								Combined			Consolidating			Total
September 30, 2017		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net cash provided by (used in) operating activities		$	126,183		$	434,450		$	(17,989)		$	4,650		$	547,294
Net cash used in investing activities			(48,799)			(50,975)			(7,006)			3,902			(102,878)
Net cash provided by (used in) financing activities			220,346			(405,184)			9,144			(8,552)			(184,246)
Increase (decrease) in cash, cash equivalents and restricted cash			297,730			(21,709)			(15,851)			-			260,170
Cash, cash equivalents, and restricted cash at beginning of
period			767,594			54,859			25,652			-			848,105
Cash, cash equivalents, and restricted cash at end of period		$	1,065,324		$	33,150		$	9,801		$	-		$	1,108,275