UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q





Commission File Number 0-21719





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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (see definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act). 





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 AugustMay 1, 2018,2019, Registrant had 234,785,650222,245,142 outstanding shares of common stock.



STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)





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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, United Steel Supply (acquired June 29, 2018)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 numerous downstreambar processing and coating lines. Steel operations accounted for 75% and 73%74% of the company’s consolidated external net sales during the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and 75% and 73% during the six months ended June 30, 2018 and 2017, respectively.

Metals Recycling Operations Segment. Metals recycling operations consists solely of OmniSource Corporation (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and scrap management services. Metals recycling operations accounted for 14%13% and 15% of the company’s consolidated external net sales during the three months ended June 30,March 31, 2019 and 2018, and 2017, and 14% and 15% during the six months ended June 30, 2018 and 2017, 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 7%8% of the company’s consolidated external net sales during the three and six months ended June 30, 2018,March 31, 2019 and 8% during the three and six months ended June 30, 2017.2018.

Other. Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of oursmaller joint ventures, and the idle Minnesota ironmaking operations that have been idle since May 2015, and other smaller joint ventures.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 whollywholly- and majority-owned ormajority-owned/ 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 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, 2017.2018.



Senior Secured Credit FacilityCash 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.



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.



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



Goodwill.  

The company’s goodwill is allocated toconsisted of the following reporting units at June 30, 2018,March 31, 2019, and December 31, 2017,2018, (in thousands):



Heartland Flat Roll Division (Heartland) wasThe company acquired June 29, 2018a 75% equity interest in United Steel Supply on March 1, 2019 (refer to Note 2 Acquisition - Heartland– United Steel Supply, LLC), resulting in a preliminary purchase price allocation in which $123.1$101.9 million of goodwill was recorded. OmniSource goodwill decreased $1.7 million$847,000 from December 31, 20172018 to June 30, 2018,March 31, 2019, in recognition of the 20182019 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.



Recently Adopted/Issued Accounting Standards



In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition.  FASB later issued clarifying guidance in the form of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Consideration (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contract with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, collectively (ASC 606). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. The company adopted ASC 606 effective January1, 2018 using the modified retrospective approach. There was no change in the amount or timing of revenue recognized under ASC 606, or significant changes required to the company’s functions, processes or systems. See Note 3 Revenue from Contracts with Customers for disclosure required by ASC 606 and the updated accounting policy for revenue recognition.

In NovemberJune 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230);2016-13, Financial Instruments - Credit Losses: which requires amounts generally described as restricted cashan entity to be included with cash and cash equivalents when reconcilinguse a forward-looking expected loss model versus 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 six months ended June 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 $6.0 million at June 30, 2018, $5.6 million at March 31, 2018, $6.4 million at December 31, 2017, and $6.6 million at June 30 and March 31, 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 accountingcurrent incurred loss 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).financial instruments, including accounts receivable.  This new guidance is effective for annual and interim periods beginning after December 15, 2018,2019, 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 determinecurrently evaluating the impact of the adoption of the provisions of ASU 2016-02 to our2016-13 will have in its consolidated 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.disclosure.





Note 2. Acquisition - Heartland– United Steel Supply, LLC 



On June 29, 2018,March 1, 2019, the company completed its acquisitionpurchased 75% of 100%the equity interest of HeartlandUnited Steel Processing,Supply, LLC (formerly known as Companhia Siderurgica Nacional, LLC)  (Heartland),(USS) for an initial cash purchase priceconsideration of $396.4$93.4 million, subject to customary actual working capital transaction purchase price adjustments payable before year-end 2018. Locatedadjustments. 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 Terre Haute, Indiana, Heartland produces various typesthe future.  Headquartered in Austin, Texas, USS is a leading distributor of higher-margin,painted Galvalume® flat roll steel by further processing hot roll coils into pickleused for roofing and oil, cold roll,siding applications, with distribution centers strategically located in Mississippi, Indiana, Arkansas, and galvanized products. The acquisition will expandOregon. USS provides the company’s annual flat rollcompany a new, complementary distribution channel and connects it to a rapidly growing industry segment with customers that do not traditionally purchase steel shipping capacity of lighter-gauge and greater width flat rolldirectly from a 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-acquisitionproducer.  USS’s operating results will befrom and after March 1, 2019, are reflected in the company’s financial statements in the steel operations reporting segment.

Note 2. Acquisition (Continued)



The aggregate purchase price was preliminarily allocated to the opening balance sheet of HeartlandUSS as of the June 29, 2018, acquisition date.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.









Note 3.  Revenue from ContractsLeases

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 Customerslease 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 adopted ASC 606 effective January 1, 2018, usinghas 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 modified retrospective approach. We appliedarrangement 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 contractsextend the lease when it is reasonably certain 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 expectswill exercise such option. The company uses its incremental borrowing rate at lease commencement to be entitled in exchange for those goods or services.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.



In the steelOperating lease right-of-use assets 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 considerationlease obligations included in the company’s steel operations segment contracts, whichconsolidated balance sheet at March 31, 2019, are as follows (in thousands):

The weighted average remaining lease term for our operating leases is not constrained, include estimated product returns6.3 years and customer claims based on historical experience,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 may include volume rebates whichthereafter are as follows (in thousands):

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

Operating and short-term lease expense included in salesthe 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 associated with such included in cost of goods sold.were not material for the three-month period ended March 31, 2019.

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.

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 six months ended June 30, 2018March 31, 2019 and 2017.

Note 4.  Earnings Per Share (Continued)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 and six months ended June 30,March 31, 2019 and 2018 and 2017 (in thousands, except per share data):

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)