10-K 1 stld-20161231x10k.htm FORM 10-K 20161231 FY 10K v2



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

6

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

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
(State or other jurisdiction of incorporation or organization)

35-1929476
(IRS Employer Identification No.)

7575 West Jefferson Blvd, Fort Wayne, IN
(Address of principal executive offices)

46804
(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

Name of each exchange on which registered

Common Stock, $.0025 par value

Nasdaq Global Select Stock Market



Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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



 

 

 

Large accelerated filer 

Accelerated file 

Non-accelerated filer 
(Do not check if a smaller reporting company.)

Smaller reporting company 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 

The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold as of June 30, 2016, was approximately $4,763,581,526. Registrant has no non-voting shares. For purposes of this calculation, shares of common stock held by directors, officers and 5% stockholders known to the registrant have been deemed to be owned by affiliates, but this should not be construed as an admission that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

As of February 17, 2017, Registrant had outstanding 242,349,757 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE



Portions of registrant’s definitive proxy statement referenced in Part III, Items 10 through 14 of this report, to be filed prior to May 1, 2017, are incorporated herein by reference.


 

STEEL DYNAMICS, INC.

Table of Contents



 

 



 

Page

Part I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

23

Item 2.

Properties

24

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

25

Part II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

Item 6.

Selected Financial Data

28

Item 7.

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

30

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 8.

Consolidated Financial Statements and Supplementary Data

45

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

83

Item 9A.

Controls and Procedures

83

Item 9B.

Other Information

83

Part III

 

 

Item 10.

Directors, Executive Officers, and Corporate Governance

84

Item 11.

Executive Compensation

84

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

84

Item 13.

Certain Relationships and Related Transactions, and Director Independence

84

Item 14.

Principal Accounting Fees and Services

84

Part IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

85



 

 













 


 

 

PART I

Special Note Regarding Forward‑Looking Statements

Throughout this report, or in other reports or registration statements filed from time to time with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or under the Securities Act of 1933, as well as in documents we incorporate by reference herein or herefrom, or in press releases or oral statements made by our officers or Regulation FD authorized representatives, we may make statements that express our opinions, expectations, or projections regarding future events or future results, in contrast with statements that reflect present or  historical facts. These predictive 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 operate as “forward looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995, incorporated in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve both known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  That legislation protects such predictive and cautionary statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.

While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward-looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.

The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those we may have anticipated or predicted:

·

the adverse impact of the economic slowdown, or periods of slower than anticipated economic growth, resulting in a general decrease of or stagnating demand for our products;

·

the weakening of demand for steel products within the construction, manufacturing, or other metal consuming industries;

·

conditions affecting steel or recycled metals consumption;

·

United States or foreign trade policy affecting the amount of foreign steel imported in the United States, or adverse or less than satisfactory outcomes of pending and future trade cases alleging unlawful practices in connection with steel imports;

·

cyclical changes in market supply and demand for steel and recycled metals;

·

increased price competition brought about by global steelmaking overcapacity;

·

changes in the availability or cost of raw materials, such as recycled metals, iron substitute materials, including pig iron, iron concentrate, or other raw materials or supplies, which we use in our production processes;

·

periodic fluctuations in the availability and cost of electricity, natural gas, or other utilities;

·

the occurrence of unanticipated equipment failures and plant outages;

·

margin compression resulting from falling selling prices with no offsetting reduction in raw material costs, or our inability to pass increases in costs of raw materials and supplies, if any, onto our customers;

·

labor unrest, work stoppages and/or strikes involving our own workforce, those of our important suppliers or customers, or those affecting the steel industry in general;

·

the impact of, or changes in, environmental law or in the application of other legal or regulatory requirements upon our production processes or costs of production or upon those of our suppliers or customers, including actions by government agencies, such as the United States Environmental Protection Agency or related state agencies, upon our receipt of pending or future environmentally related construction or operating permits;

·

the impact of United States government or various other governmental agencies introducing laws or regulatory changes in response to the subject of climate change and greenhouse gas emissions, including the introduction of carbon emissions trading mechanisms;

·

private or governmental liability claims or litigation, or the impact of any adverse litigation costs or outcome of any litigation on the adequacy of our reserves or the availability or adequacy of our insurance coverage;

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·

changes in our business strategies or development plans which we have adopted, or which may be brought about in response to actions by our suppliers or customers, and any difficulty or inability to successfully consummate, implement, or integrate any planned or potential projects, acquisitions, joint ventures or strategic alliances;

·

increased price and other forms of competition from other steel producers, scrap processors and alternative materials;

·

the impact of construction delays, cost overruns, technology risk or operational complications upon our ability to complete, start-up or continue to profitably operate a project or a new business, or to complete, integrate and operate any potential acquisitions as anticipated;

·

the impact of impairment charges;

·

costs to idle facilities, idled facility carrying costs, or increased costs to resume production at idled facilities;

·

increased global information technology security requirements, vulnerabilities and threats, and a rise in sophisticated cyber crime that pose a risk to the security of our operating systems and data networks and to the confidentiality, availability and integrity of our data; and

·

uncertainties involving new products or new technologies.

We also refer you to and urge you to carefully read the section entitled Risk Factors at Item 1A of this report to better understand some of the principal risks and uncertainties inherent in our businesses or in owning our securities, as well as the section entitled Management Discussion and Analysis of Financial Condition and Results of Operations at Item 7. You should also review the notes to consolidated financial statements under headings in Note 1 Use of Estimates and in Note 9 Commitments and Contingencies.   

Any forward-looking statements which we make in this report or in any of the documents that are incorporated by reference herein or herefrom speak only as of the date of such statement, and we undertake no ongoing obligation to update such statements. Comparisons of results between current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

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ITEM 1.BUSINESS



Our Company

Steel Dynamics, Inc. is one of the largest domestic steel producers and metal recyclers in the United States based on current estimated steelmaking and coating capacity of 11 million tons and actual metals recycling volumes.  The primary source of revenues are from the manufacture and sale of steel products, processing and sale of recycled ferrous and nonferrous metals, and fabrication and sale of steel joists and deck products.

We believe our core company values and strategic focus foster an entity-wide entrepreneurial culture which positions us well for continuing strong cash flow generation, financial strength and flexibility.  Our strategic focus is centered on the following six company pillars:

·

Safety – We are focused on providing a safe working environment for all employees.  Our goal is to achieve zero incidents – no accidents, no lost workdays, no injuries.



·

Enhancing Customer Relationships and Commitment – Our customers are our most important partners.  We strive to provide outstanding products and solutions that exceed our customers’ expectations, anticipating future needs, and delivering great value.



·

Sustaining Superior Operating Culture – Success is not driven by state-of-the-art technology alone, but, more importantly, it is linked to managing the technology, and creating a culture in which to exploit it.  We foster our entrepreneurial spirit by ensuring that we have the right people for the right job – infusing our teams with energetic, positive individuals who apply their minds and ingenuity to create unparalleled success. Our performance driven compensation framework is directly relatable to the safe provision of quality products and the effective and efficient use of resources.



·

Strategic Growth, Intentional Margin Expansion and Consistency Through the Cycle – We are focused on growth opportunities, including downstream manufacturing businesses that utilize our steel products and could provide sustainable, high profit margins within our areas of expertise.  We also plan to lever our existing facilities through capital-effective organic growth, greenfield expansion, and the continued exploration of new opportunities.



·

Driving Innovation – We continually challenge the status quo, with a renewed focus on being the technology and process leader to not only exceed current customer expectations, but to meet their future needs.  We innovate to improve safety, quality, and productivity.



·

Financial Strength and Flexibility – We have a disciplined focus on remaining a low-cost, highly efficient, customer-centric company generating best-in-class financial and operating performance that drives strong cash flow generation to support our current operations and continued growth.



Competitive Strengths / Business Strategies

We believe our financial strength and flexibility, coupled with our competitive advantages of maintaining a low, highly variable cost structure, producing a diversified value-added product offering, controlling a secure supply of recycled ferrous metals, fostering an entity-wide entrepreneurial culture and having an experienced senior management team and work force, positions us well to continue to strengthen our leadership position and execute our growth strategy. 

One of the Lowest Cost Steel Producers in the United States; State-of-the-Art Facilities / Continue to Maintain Low Production Costs

We are focused on continuing to maintain and enhance one of the lowest operating cost structures in the North American steel industry. Our low operating costs are primarily a result of our efficient plant designs and operations, our high productivity rate, low ongoing maintenance cost requirements and strategic locations near our customers and sources of our primary raw material, ferrous scrap.

We will continue to drive innovative ways to use our equipment, enhance our productivity and explore new technologies to further improve our unit costs of production at each of our facilities. As one of the lowest cost producers in each of our three primary operating segments, we are able to better manage through cyclical and non-cyclical downturns, and to consistently maximize our profitability. We continuously seek to maximize the variability of our cost structure and to reduce per unit and fixed costs. Our incentive compensation plans at all employee levels are based on both divisional and consolidated company performance. Performance-based incentive compensation is designed to reward high productivity and efficient and safe use of physical resources and capital employed. Additionally, leveraging our existing facilities through capital effective organic growth and diversified product offerings allows us to maximize utilization of our current cost structure.



Secure Supply of High Quality Just-in-Time Ferrous Raw Materials



We maintain a secure supply of ferrous raw material resources through the benefit of our metals recycling operations and Iron Dynamics (IDI). Ferrous materials represent the single largest raw material component of our steel operations’ manufacturing costs, at approximately 60% of such costs. During 2016, 2015, and 2014, OmniSource, our metals recycling operations, provided our steel operations with 40%, 41%, and 44%, respectively, of its ferrous scrap requirements. This represented 61%, 54%, and 48% of OmniSource’s total ferrous scrap shipments during 2016, 2015, and 2014, respectively. During 2016, 2015, and 2014, our steel operations consumed 9.9 million, 8.8 million, and 7.6 million tons,

3

 


 

 

respectively, of metallic materials, of which iron units, other than scrap, represented approximately 14%, 12%, and 9% in 2016, 2015, and 2014, respectively. IDI supplies 100% of its production to the Butler Flat Roll Division, representing 65%, 66%, and 62% of their iron units in 2016, 2015, and 2014, respectively, through the transfer of liquid pig iron and hot briquetted iron, which are higher quality, energy-saving ferrous raw materials. We believe our metals recycling operations and IDI provide us with a high quality, cost effective, and secure raw material platform for effective working capital management.   



Diversified Product Mix / Expanded Product Offerings

We are one of the most diversified steel companies in the United States, with very broad product offerings. We currently offer a broad range of steel products (more specifically enumerated in the Steel Operations Products and Sales by End Market later in this section), including:

Steel Operations:

Sheet Products.  Hot roll, cold roll and coated steel, including a wide variety of specialty products, such as light gauge hot roll,    galvanized, galvanneal, Galvalume®, Galfan®, and painted products.

Long Products.  Structural steel beams, pilings, and standard and premium grade rail; engineered special-bar-quality of numerous sizes and chemistries; various merchant-bar products including rounds, angles, flats, channels and reinforcing bar, and channels and specialty steel sections.

Steel Finishing. Turning, polishing, straightening, chamfering, threading, precision saw-cutting, cold draw and heat treating of bar products; and cutting to length, additional straightening, hole punching, shot blasting, welding and coating of beams, channels and specialty steel sections.

Metals Recycling Operations.  An array of both ferrous and nonferrous scrap processing, scrap management, transportation, and brokerage products and services.

Steel Fabrication Operations.  Steel joists and steel deck material, including specialty deck.

This diversified portfolio of products enables us to access a broad range of end-user markets, serve a broad customer base, and help mitigate our market exposure to any one product or end-user market. In addition, our value-added product offerings help to balance our exposure to commodity grade products supplied by other domestic steel, and to a larger extent in recent years, foreign manufacturers.

We will continue to seek additional opportunities and to collaborate with our customers to anticipate their future needs by further expanding our range of products, such as the recent $100 million expansion at our Columbus Flat Roll Division, providing 250,000 tons of annual coating capacity, including value-added painted and Galvalume®  sheet steel products, and the recent expansion at our Engineered Bar Products Division into high quality smaller-diameter SBQ bars.  

Strategic Geographic Locations / Enter New Geographic Markets

The majority of our steelmaking facilities are in locations near sources of scrap materials and near our customer base, allowing us to realize freight savings for inbound scrap as well as for outbound steel products destined for our customers. This also allows us to provide consistent on-time delivery to our customer base with relatively short lead times, further enhancing our customer relationships. Our coated sheet steel products are cost effectively available through our locations in Pittsburgh, Pennsylvania, Jeffersonville, Indiana and Columbus, Mississippi due to river access.  Recycled ferrous scrap and iron units represent the most significant component of our cost of steel manufacturing. We believe that our metals recycling facilities are in the regions that account for a majority of the total ferrous scrap produced in the United States. Our steel fabrication operations have a national footprint allowing us to serve the entire joist and deck domestic market and national accounts.

We may seek to enter new markets in strategic geographic locations that offer attractive growth opportunities within our areas of expertise.

Experienced Management Team and Unique Corporate Culture / Foster Entrepreneurial Culture

Our senior management team is highly experienced and has a proven track record in the steel, metals recycling, and steel fabrication industries. Management’s objectives are closely aligned with our stockholders through meaningful stock ownership positions and performance‑based compensation programs that are correlated to the company’s profitability and operational performance in relationship to its steel manufacturing peers. Our entrepreneurial culture resonates throughout each of our operating segments. We emphasize decentralized decision making, with corporate risk oversight, and have established incentive compensation programs specifically designed to reward employee teams for their efforts toward identifying innovative ways to enhance productivity, improve profitability, and control costs.

We intend to continue to foster our entrepreneurial culture and emphasize decentralized operational decision making and responsibility, while continuing to maintain appropriate corporate policy and risk oversight. We reward teamwork, innovation, and operating efficiency, and will also continue to focus on maintaining the effectiveness of our incentive‑based bonus plans that are designed to maximize overall productivity and align the interests of our management and employees with our stockholders.  

4

 


 

 

Experienced Executive Management Team





 

 

 

 

Name

 

Age

 

Position

Mark D. Millett

 

57

 

Chief Executive Officer

Theresa E. Wagler

 

46

 

Executive Vice President and Chief Financial Officer

Russ B. Rinn

 

59

 

Executive Vice President Metals Recycling and



 

 

 

    President and COO of OmniSource Corporation

Chris A. Graham

 

52

 

Senior Vice President, Manufacturing Group

Glenn A. Pushis

 

51

 

Senior Vice President, Long Products Steel Group

Barry T. Schneider

 

48

 

Senior Vice President, Flat Roll Steel Group





Mark D. Millett, a co-founder of our company and a director since inception, was appointed our President and Chief Executive Officer effective January 1, 2012. Prior to that, from April 2011, Mr. Millett served as our President and Chief Operating Officer and, from June 2008 to April 2011, our Executive Vice President of Metals Recycling and Ferrous Resources and President and Chief Operating Officer of OmniSource Corporation. In that role, he was responsible for the company’s metallic resources platform, including all ferrous and nonferrous metals recycling operations, as well as the company’s ironmaking initiatives. In 2007 and 2008, Mr. Millett managed the company’s flat roll operations, including the Butler Flat Roll Division, Jeffersonville coating facilities and The Techs. From 1998 to 2007, Mr. Millett managed the company’s Flat Roll Division at Butler, Indiana, including the hot mill, cold mill, and coating facilities. Between 1993 and 1996, Mr. Millett was responsible for the design, construction and start-up operation of the company’s Butler, Indiana flat roll, melting and casting operations. A metallurgist by training, Mr. Millett, prior to his co-founding of Steel Dynamics, served from 1981 to 1985 as chief metallurgist for Nucor Corporation’s Darlington, South Carolina, division, charged with developing the world’s first commercially viable thin-slab-casting process as the manager of that project at Nucor’s Hazelett facility. In 1987, Mr. Millett was given the responsibility by Nucor for the design, construction, staffing, and operation of the melting and casting facility at Nucor’s world’s‑first thin-slab casting facility at Crawfordsville, Indiana. Mr. Millett holds a bachelor’s degree in metallurgy from the University of Surrey in England (1981). Mr. Millett was named Steelmaker of the Year in 2014 by the Association of Iron and Steel Technology.



Theresa E. Wagler is our Executive Vice President and Chief Financial Officer since May 2007.  She joined the Steel Dynamics corporate finance team in 1998, and has held various finance and accounting positions, including Chief Accounting Officer and Vice President and Corporate Controller, and was appointed to her current position in May 2007. She is responsible for and oversees accounting, risk management, taxation, treasury, and information technology functions, as well as, financial planning and analysis, investor relations, and corporate communications. Prior to joining Steel Dynamics, Ms. Wagler served as Assistant Corporate Controller for Fort Wayne National Bank and as a certified public accountant with Ernst & Young LLP. She graduated cum laude from Taylor University with a bachelor’s degree in accounting and systems analysis.



Russell B. Rinn is our Executive Vice President for Metals Recycling, and President and Chief Operating Officer of OmniSource Corporation since July 2011. Mr. Rinn is responsible for OmniSource’s ferrous and nonferrous metals recycling operations in the Midwest and in the Southeastern United States, as well as sourcing, marketing, trading, and logistics activities spanning the nation. OmniSource procures metal scrap, processes it, and markets these recycled metals to external customers and supplies ferrous scrap to the company’s steel mills. Prior to joining Steel Dynamics, Mr. Rinn was an Executive Vice President of Commercial Metals Company (CMC), a Texas-based mini-mill steel company. He has more than 30 years of experience in the steel and metals recycling industries. Mr. Rinn is a graduate of the Executive Program of the Stanford University Graduate School of Business and of the Management Development Program at the University of Michigan’s Business School. He holds a Bachelor’s degree in Finance, Marketing and Business Administration from Texas Lutheran University.



Chris A. Graham is our Senior Vice President, Manufacturing Group since March 2016. Since 2013, Mr. Graham served as a Vice President of Steel Dynamics and the President of its fabrication operations.  Mr. Graham is responsible for the company's fabrication operations, but with the added responsibility of the company's other downstream manufacturing facilities. He will lead the company's strategic growth in the area of adding businesses that will utilize Steel Dynamics metal products as raw material in the manufacture of other products.  Mr. Graham was part of the team that constructed the company's first steel mill in 1994.  He held various leadership positions within the company's steel group prior to moving into the fabrication operations in 2007.  He was responsible for four operating fabrication plants from 2007 to 2010, at which point he also became the team leader responsible for overseeing the restructuring and integration of three acquired fabrication facilities, and in 2014 was made responsible for the integration of the Columbus Flat Roll Division.  Mr. Graham earned a bachelor's degree in business management from Western Governors University and an MBA from the University of Saint Francis



Glenn A. Pushis is our Senior Vice President, Long Products Steel Group since March 2016.  Since 2014, Mr. Pushis has served as a Vice President overseeing the company's Butler Flat Roll Division and six flat roll coating facilities located in Indiana and Pennsylvania.  Mr. Pushis is responsible for the company's four long product steel mills, which together have approximately 3.8 million tons of annual steelmaking capacity, producing specialized engineered bars, structural steel, railroad rail, merchant bars and other specialty steels, primarily serving the construction, transportation and industrial sectors. Mr. Pushis was also part of the team that constructed the company's first steel mill in 1994.  He held various leadership positions within the company's steel group, including the positions of General Manager for the Engineered Bar Products Division from 2003 to 2007 and more recently, the Butler Flat Roll Division from 2007 to 2014. Mr. Pushis earned a bachelor's degree in mechanical engineering from Purdue University and his MBA from Indiana University.



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Barry T. Schneider is our Senior Vice President, Flat Roll Steel Group since March 2016.  Since 2014, Mr. Schneider served as a Vice President overseeing the company's Engineered Bar Products and Roanoke Bar steel divisions.  Mr. Schneider is responsible for the company's two flat roll steel mills and eleven flat roll coating lines, which together have approximately 7.2 million tons of annual capacity, producing hot roll, cold roll and coated steel products, including a wide variety of specialty products, such as light gauge hot roll, galvanized and painted products. Mr. Schneider was also part of the team that constructed the company's first steel mill in 1994, serving in several engineering and operational roles in the melt shop during the company's first five years of operations. He was the manager of the Butler Flat Roll Division's hot strip mill and later the cold rolling and coating facilities from 2000 to 2007. Mr. Schneider then held the position of General Manager for the Engineered Bar Products Division from 2007 to 2014. Mr. Schneider earned a bachelor's degree in mechanical engineering and a master of science in engineering management from Rose-Hulman Institute of Technology.



Industry Segments



We have three reporting segments: steel operations, metals recycling operations, and steel fabrication operations.  Refer to Notes 1 and 13 in the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K for additional segment information.







Steel Operations Segment



Steel operations consist of our six electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and eleven downstream steel coating lines, and several processing lines, and IDI our liquid pig iron production facility that supplies solely the Butler Flat Roll Division. Our steel operations sell directly to end-users, steel fabricators, and service centers. These products are used in numerous industry sectors, including the construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets. Our steel operations accounted for 72%, 69%, and 63% of our consolidated net sales in 2016, 2015, and 2014, respectively. We are predominantly a domestic steel company, with only 4%, 5%, and 4% of our revenues generated from exported sales during 2016, 2015, and 2014, respectively.    

Our steel operations consist primarily of steelmaking and coating operations. The following chart summarizes the locations and the current estimated production capacities of our facilities:    





 

 

 

 

 

 

 



 

Steelmaking

 

 

 

 

 

Steel Production Capacity (tons)

 

Capacity

 

Galvanizing

 

Painting

 

Sheet Products:

 

 

 

(Included in Steelmaking Capacity)

 

Butler Flat Roll Division

 

 

 

 

 

 

 

    Butler, Indiana

 

3,000,000 

 

785,000 

 

240,000 

 

    Jeffersonville, Indiana

 

 

 

370,000 

 

190,000 

 

Columbus Flat Roll Division – Columbus, Mississippi

 

3,200,000 

 

1,100,000 

 

250,000 

 

The Techs – Pittsburgh, Pennsylvania*

 

1,005,000 

 

1,005,000 

 

 -

 

Long Products:

 

 

 

 

 

 

 

Structural and Rail Division – Columbia City, Indiana

 

1,800,000 

 

 -

 

 -

 

Engineered Bar Products Division – Pittsboro, Indiana

 

950,000 

 

 -

 

 -

 

Vulcan Threaded Products Division – Pelham, Alabama**

 

120,000 

 

 

 

 

 

Roanoke Bar Division – Roanoke, Virginia

 

 

 

 -

 

 -

 

Merchant Bars

 

500,000 

 

 -

 

 -

 

Billets

 

150,000 

 

 -

 

 -

 

Steel of West Virginia – Huntington, West Virginia

 

355,000 

 

 -

 

 -

 



 

11,080,000 

 

3,260,000 

 

680,000 

 





Note: Steelmaking capacities represent manufacturing capabilities based on mill configuration and related employee support. These capacities do not represent expected volumes in a given year. In addition, estimates of mill capacity are highly dependent on the specific product mix manufactured. Each of our mills can and do roll many different types and sizes of products; therefore, our capacity estimates assume a typical product mix.



 * The Techs galvanizing capacity is included in “Steelmaking Capacity” to represent the capability to utilize sheet steel substrate to  produce galvanized sheet steel at their facilities.

** Vulcan Threaded Products bar finishing capacity is included in “Steelmaking Capacity’ to represent the capability to utilize steel long-product substrate to produce threaded rod, and cold draw and heat treat bar products at their facility.



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The following chart summarizes our steel operations products and the percentage of sales tons by end market: 

Picture 1

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SHEET STEEL PRODUCTS

Our sheet steel products, consisting of hot roll, cold roll and coated steel products are produced by our Butler and Columbus Flat Roll Divisions, and our eleven downstream coating lines. Our sheet steel operations represented 70%, 65%, and 59% of steel operations net sales in 2016, 2015, and 2014, respectively. We produced the following sheet steel at these facilities (tons):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014

 

 



Butler Flat Roll Division

3,051,000 

 

2,695,000 

 

3,016,000 

 

 



Columbus Flat Roll Division

3,076,000 

 

2,645,000 

 

815,000 

*

 



The Techs

778,000 

 

661,000 

 

712,000 

 

 



*  Columbus Flat Roll Division acquired September 14, 2014

 The following chart summarizes the types of sheet steel products sold by sales dollars, during the respective years:



Picture 3

Customers. Steel processors and service centers typically act as intermediaries between primary sheet steel producers and the many end-user manufacturers that require further processing of hot roll coils. The additional processing performed by the intermediate steel processors and service centers include pickling, galvanizing, cutting to length, slitting to size, leveling, blanking, shape correcting, edge rolling, shearing and stamping. We believe that our intermediate steel processor and service center customers will remain an integral part of our customer base. The Columbus Flat Roll Division allows us to capitalize on the industrial markets in the Southern United States and Mexico, as well as further expand our customer base in painted, and line and other pipe products. Galvanized flat roll products produced by our Butler and Columbus Flat Roll Divisions, and The Techs are similar and are sold to a similar customer base.  However, The Techs specializes in the galvanizing of specific types of flat roll steels in primarily non-automotive applications, servicing a variety of customers in the heating, ventilation and air conditioning (HVAC), construction, agriculture and consumer goods markets.  Our sheet steel operations also provide a significant portion of the sheet steel utilized in our steel fabrication operations.

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The following chart summarizes the types of customers who purchased our sheet steel products, by sales dollars, during the respective years:

Picture 4

   * Energy, included in Pipe & Tube, represents 2% of total sheet steel sales in 2016 and 2015.

** Automotive, included in Other OEM, represents 4% and 3% of 2016 and 2015 total sheet sales, respectively.



LONG PRODUCTS

Our Structural and Rail Division is capable of producing a variety of parallel flange sections such as Wide Flange Beams, American Standard Beams, Manufactured Housing Beams, and H Piling and Channel sections for the construction, transportation and industrial machinery markets. They also produce standard strength carbon, intermediate alloy hardness, and premium grade rails in 40 to 320 feet length for the railroad industry. Our state-of-the-art heat treating system allows us to produce high quality premium rail, which has been certified by all Class I railroads. In addition, our rail-welding facility has the ability to weld (Continuous Welded Rail) in lengths up to 1,600 feet, which offers substantial savings to the railroads both in terms of initial capital cost and through reduced maintenance.  Our Structural and Rail Division produced 1.3 million, 1.2 million, and 1.3 million tons during 2016, 2015, and 2014, respectively, of which 238,000, 269,000, and 225,000 tons, respectively, was rail production. 

Our Engineered Bar Products Division is capable of producing a broad array of engineered special-bar-quality (SBQ), merchant-bar-quality (MBQ), rounded-cornered squares, and smaller-diameter engineered round bars. We produced 480,000, 516,000, and 670,000 tons during 2016,  2015, and 2014, respectively, at this facility. Adjacent to this mill, we have a bar finishing facility, which provides various downstream finishing operations for our SBQ steel bars. Processing operations include turning, polishing, straightening, chamfering, precision saw-cutting and heat-treating capabilities. In addition, non-destructive testing services are available, including eddy current, flux leakage and ultrasonic inspection. On August 1, 2016, we acquired Vulcan Threaded Products, Inc. (Vulcan), which produces threaded rod product, and cold drawn and heat treated bar, creating strategic pull-through demand of special-bar-quality products provided from our Engineered Bar Products Division. 

Our Roanoke Bar Division primarily sells merchant bar products, including angles, merchant rounds, flats, channels, and reinforcing bar. During 2016,  2015, and 2014, respectively, Roanoke Bar Division produced 537,000, 536,000, and 601,000 tons of billets and 405,000, 389,000, and 432,000 tons of finished steel products. 

Steel of West Virginia primarily sells beams, channels and specialty steel sections, and frequently performs fabrication and finishing operations on its products, such as cutting to length, additional straightening, hole punching, shot blasting, welding and coating. Through this additional finishing, we create custom finished products that are generally placed directly into our customers’ assembly operations. We produced 289,000, 295,000, and 294,000 tons of various merchant and structural steel products at Steel of West Virginia during 2016,  2015, and 2014, respectively.

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Customers. The principal customers for our structural steel products are steel service centers, steel fabricators and various manufacturers. Service centers, though not the ultimate end-user, provide valuable mill distribution functions to the fabricators and manufacturers, including small quantity sales, repackaging, cutting, preliminary processing and warehousing. The steel rail marketplace in the United States, Canada and Mexico is specialized and defined, with seven Class I railroads and a large distribution network.

SBQ products are principally consumed by cold finishers, forgers, intermediate processors, OEM manufacturers, steel service centers, and distributors, as well as Vulcan Threaded Products. Our MBQ products are sold primarily to steel service centers, as well as rebar distributors, joist producers, and OEMs. Some of the excess steel billet production at the Roanoke Bar Division is sold to mills without sufficient melting capacities, including our Steel of West Virginia facility.  Our steel fabrication operations also purchase angles from Roanoke Bar Division. Steel of West Virginia’s customers are primarily OEMs producing truck trailers, industrial lift trucks, merchant products, guardrail posts, manufactured housing, mining, and off-highway construction equipment. Steel of West Virginia’s flexible manufacturing capabilities enable us to meet demand for a variety of custom-ordered and designed products. Many of these products are produced in small quantities for low volume end-uses resulting in a wide variety of customers, the largest of which are in the truck trailer and industrial lift truck industries. 

Competition. The markets in which we conduct business are highly competitive with an abundance of competition in the carbon steel industry from North American and foreign integrated and mini-mill steelmaking and processing operations.  We compete in numerous industry sections, most significantly tied to the construction, automotive, and other manufacturing sectors.  In many applications within these industry sections, steel competes with other materials, such as aluminum, cement, composites, plastics, carbon fiber, glass and wood.  Some of our products are commodities, subject to their own cyclical fluctuations in supply and demand.  However, we are focused on providing a broader range of diversified value-added products that de-emphasize commodity steel. The primary competitive influences on products we sell are price, quality and value-added services.

Global steelmaking capacity exceeds global consumption of steel products.  Such excess capacity sometimes results in steel manufacturers in certain countries exporting steel at prices that are lower than prevailing domestic prices, and sometimes at or below their cost to produce.  Excessive imports of steel in the United States, such as in 2015 and 2014, intensifies price competition on the domestic steel industry which negatively affects our ability to increase our selling prices, and realize higher, margins and profitability. 

IRON DYNAMICS

IDI produces liquid pig iron and hot briquetted iron (HBI) that serves as a substitute for a portion of the metallic raw material mix that goes directly into our Butler Flat Roll Division electric arc furnaces to produce steel. IDI’s primary focus is to maximize liquid pig iron production, due to the inherent economic benefits achieved at the steel mill when the material is used in the steelmaking process, such as reduced energy cost, reduced materials cost, and quicker melting cycles. During 2016 and 2015, respectively, IDI produced 255,000 and 245,000 metric tons, of which 98% was liquid pig iron.  We have used, and plan to continue to use, all of the facility’s output internally.





Metals Recycling Operations Segment



The metals recycling operations consists solely of OmniSource and includes both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage, and consulting 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 over 700 locations throughout North America. Our metals recycling operations accounted for 15%, 19%, and 25% of our consolidated net sales in 2016, 2015, and 2014, respectively. Our steel mills utilize a portion of the ferrous scrap processed through OmniSource as raw material in our steelmaking operations, and the remainder is sold to other consumers, such as other steel manufacturers and foundries. This strategic symbiotic relationship with our own steelmaking operations provides valuable pull-through demand to OmniSource’s ferrous scrap operations. In 2016, 2015, and 2014, OmniSource supplied our steel mills with approximately 36%, 37%, and 44%, respectively, of the tons of their ferrous raw material requirements, representing approximately 61%, 54%, and 48%, respectively, of OmniSource’s 2016, 2015, and 2014, ferrous shipped tons.

OmniSource sold approximately 5.1 million gross tons of ferrous material in 2016 and 2015 and 5.6 million gross tons in 2014, and approximately 1.1 billion pounds of nonferrous material, during 2016 and 2015,  and 1.2 billion pounds in 2014.  Approximately 7%, 8% and 7% of OmniSource’s revenues were from export sales of primarily nonferrous materials during 2016, 2015 and 2014, respectively.

We sell various grades of processed ferrous scrap primarily to steel mills and foundries.  Ferrous scrap metal is the primary raw material for electric arc furnaces, such as our steel mills.  In addition, we sell various grades of nonferrous metals such as copper, brass, aluminum and stainless steel, to aluminum, steel and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, smelters, specialty mills, alloy manufacturers, and other consumers. 







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We purchase ferrous and nonferrous scrap metals, processed and unprocessed, in a variety of forms for our metals recycling facilities.

Ferrous scrap comes from two primary sources:

·

Manufacturers and industrial plants, metal fabrication plants, machine shops and factories, which generate ferrous scrap referred to as prompt or industrial scrap, and

·

Scrap dealers, retail individuals, auto wreckers, demolition firms and others who provide steel and iron scrap, referred to as “obsolete” scrap. Obsolete scrap includes scrap recycled from end-of-life automobiles, appliances, railroad cars and railroad track materials, agricultural machinery and demolition scrap from obsolete structures, containers and machines and represents a significant source of scrap generation.

Nonferrous scrap comes from three primary sources:

·

Manufacturers and other nonferrous scrap sources, which generate or sell scrap aluminum, copper, stainless steel, and other nonferrous metals,

·

Producers of electric wire, telecommunication service providers, aerospace, defense and recycling companies that generate nonferrous scrap consisting primarily of copper wire, aluminum beverage cans, and various other metals and alloys, and

·

Retail individuals who sell material directly to our facilities, which they collect from a variety of sources.

We do not purchase a significant amount of scrap metal from a single source or from a limited number of major sources.  Market demand and the composition, quality, size, weight, and location of the materials are the primary factors that determine prices.

Products.    Our metals recycling operations primarily involve the purchase, processing, and resale of ferrous and nonferrous scrap metals into reusable forms and grades.  We process an array of ferrous products through a variety of methods, including sorting, shredding, shearing, cutting, torching, baling, briquetting, and breaking. Our major ferrous products include heavy melting steel, busheling, bundled scrap, shredded scrap and other scrap metal products, such as steel turnings and cast iron. These products vary in properties or attributes related to cleanness, size of individual pieces, and residual alloys. The necessary characteristics of the ferrous products are determined by the specific needs and requirements of the consumer and affect the individual product’s relative value. We process various grades of nonferrous products, including aluminum, brass, copper, stainless steel, and other nonferrous metals. Additionally, we provide transportation logistics (truck, rail, and river barge), management services, marketing, brokerage, and consulting services related to the scrap industry.

Customers.    We sell various grades of processed ferrous scrap to end-users, such as electric arc furnace steel mills, integrated steelmakers, foundries, secondary smelters, and metal brokers, who aggregate materials for other large users. Ferrous scrap metal is the primary raw material for electric arc furnaces, such as our steel mills. Most of our ferrous scrap customers purchase processed scrap through negotiated spot sales contracts which establish a quantity purchase for the month. The price we charge for ferrous scrap depends upon market demand and pricing, transportation costs, as well as, the quality and grade of the scrap. We sell various grades of processed nonferrous scrap to end-users such as aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries, mills, smelters, specialty steelmakers, alloy manufacturers, wire and cable producers, utilities, and telephone networks.  The price we charge for nonferrous scrap depends upon market demand and pricing, transportation costs, as well as, the quality and grade of the scrap.

Competition.  Scrap is a global commodity influenced by conditions in a number of industrialized and emerging markets throughout Asia, Europe and North America. The markets for scrap metals are highly competitive, both in the purchase of raw or unprocessed scrap, and the sale of processed scrap. With regard to the purchase of raw scrap, we compete with numerous independent recyclers, as well as smaller scrap companies engaged only in collecting obsolete scrap. In many cases we also purchase unprocessed scrap metal from smaller scrap dealers and other processors. Successful procurement of materials is determined primarily by the price offered by the purchaser for the raw scrap and the proximity of our processing facility to the source of the raw scrap. Both ferrous and nonferrous scrap sells as a commodity in both domestic and international markets, which are affected, sometimes significantly, by relative economic conditions, currency fluctuations, and the availability and cost of transportation. Competition for sales of processed scrap is based primarily on the price, quality, and location of the scrap metals, as well as the level of service provided in terms of reliability and timing of delivery.

We also face potential competition for sales of processed scrap from other producers of steel products, such as electric arc furnace and integrated steel mills, some of which are also vertically integrated in the scrap metals recycling business. In addition, other steel mills may compete with us in attempting to secure scrap supply through direct purchasing from our scrap suppliers. Scrap metal processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, HBI, pig iron, direct reduced iron (DRI), and other forms of processed iron. The availability and relative prices of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap and could result in lower prices and/or lower demand for our scrap products.

The industry is highly fragmented with many smaller family-owned companies, many regional scrap companies, along with a number of national and global companies, each of which has multiple locations in areas in which OmniSource also operates. No single scrap metals recycler has a significant market share in the domestic market.







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Steel Fabrication Operations Segment



Our steel fabrication operations include eight New Millennium Building Systems plants that primarily serve the non-residential construction industry throughout the United States.  We have a national operating footprint that allows us to serve the entire domestic construction market, as well as national accounts, such as large retail chains.

Steel fabrication operations accounted for 9% of our consolidated net sales during 2016 and 2015 and 7% during 2014. We sold 563,000, 493,000, and 481,000 tons of joist and deck products during 2016,  2015 and 2014, respectively. Our steel operations supply a substantial portion, approximately 59%, 63% and 51% in 2016,  2015 and 2014, respectively, of the steel utilized in our steel fabrication operations, providing strategic pull-through demand. 

Products:  Our steel fabrication operations produce steel building components, including steel joists, girders, trusses (six locations), and steel deck (six locations). Our joist products include bowstring, arched, scissor, double‑pitched and single‑pitched joists. Our deck products include a full range of steel roof, form, composite floor, specialty architectural, floor systems, and bridge deck.

Customers and Markets.  Our primary steel fabrication operations customers are non-residential steel fabricators. Other customers include metal building companies, general construction contractors, developers, brokers and governmental entities.  Our customers are located throughout the United States, including national accounts.  The steel joist and deck market in the United States was approximately 1.9 million tons in 2016 and 1.7 million tons in 2015 and 2014, based on trade association estimates.  Based on this information, our steel fabrication operations’ growth rate has outpaced the steel joist and deck market growth resulting in our market share of approximately 31% in 2016 and 2015 and 30% in 2014. We believe we are well positioned with our national footprint to continue to grow as the non-residential construction market continues to be strong, and we have available capacity that can be deployed as needed.

Competition.  We compete with other North American joist and steel deck producers primarily on the basis of price, quality, customer service, and proximity to the customer.  Our national footprint allows us to service the entire domestic non-residential construction market, as well as national accounts such as large retail chains, and certain specialty deck customers.







Other Operations



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 were indefinitely idled in May 2015, and smaller joint ventures.  Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses. 

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Sources, Availability, and Cost of Steel and Other Operations’ Raw Materials

Scrap Metals. The principal raw material of our steel operations is scrap metal derived from, among other sources “home scrap,” generated internally at steel mills themselves; industrial scrap, generated as a by-product of manufacturing; and “obsolete” scrap recycled from end-of-life automobiles, appliances, railroad cars and railroad track materials, agricultural machinery and demolition scrap from obsolete structures, containers and machines.

Ferrous scrap typically comprises more than 80% of the metallic melt mix in electric arc furnace steelmaking, in contrast to integrated mill steelmaking, where the proportion of scrap has traditionally been approximately 25% to 35%. Depending upon the scrap substitute material that may be available from time to time, and the relative cost of such material, the percentage of scrap used in our steelmaking operations could be increased or reduced in our metallic melt mix.

Many variables can impact ferrous scrap prices, all of which reflect the pushes and pulls of the supply demand equation. These factors include the level of domestic steel production (high quality low-residual scrap is a by-product of steel manufacturing activity), the level of exports of scrap from the United States, and the amount of obsolete scrap production. Generally, as domestic steel demand increases, so does scrap demand and resulting scrap prices. The reverse is also normally, but not always, true with scrap prices following steel prices downward when supply exceeds demand. In 2015, domestic steel mill utilization and steel pricing was negatively impacted by record levels of steel imports resulting in lower demand for scrap, forcing ferrous pricing downward throughout the year.  These excess sheet steel imports declined during 2016 with duties levied pursuant to the trade case rulings from the United States International Trade Commission, resulting in increased domestic steel mill and more so our own steel mill utilization.

The price of ferrous scrap, as a commodity, has tended to be volatile, rising and falling with supply, and not always in lock step with or in proportion to the market price of steel. In addition, domestic ferrous scrap prices generally have a strong correlation and spread to global pig iron pricing. Scrap prices declined sharply in 2015 due to domestic scrap competition, the strong United States dollar tempering scrap exports, lower steel mill utilization rates resulting from excessive steel imports, and decreasing global pig iron prices. In 2016, scrap prices improved as mill utilization rates increased with the lower level of steel imports.  When scrap prices greatly accelerate, this challenges one of the principal elements of an electric arc furnace based steel mill’s traditional lower cost structure—the cost of its metallic raw material.

The following table provides pricing per gross ton from American Metal Market (AMM) and Ryan’s Notes (Pig Iron) estimates for ferrous materials used in steel production:

Picture 10



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Iron Units. In addition to scrap, DRI, HBI, pig iron, and iron nuggets are used in our electric arc furnace steel mill production. During 2016,  2015 and 2014, we consumed 9.9 million, 8.8 million and 7.6 million tons, respectively, of metallic materials in our steelmaking furnaces, of which, iron units other than scrap, represented approximately 14%, 12% and 9% of the tons in 2016, 2015 and 2014, respectively. Of these iron substitute units consumed, our IDI operations supplies 100% of its production to the Butler Flat Roll Division mill, representing 65%, 66% and 62% of their iron units in 2016, 2015 and 2014, respectively.    

Energy Resources

Electricity.  Electricity is a significant input required in the electric arc furnaces in our steelmaking operations (excluding The Techs and Vulcan), representing 7%, 6% and 5% of steel production costs of goods sold in 2016,  2015 and 2014, respectively. We have entered into a fixed price interruptible electricity supply agreement that extends through December 31, 2017, for the Butler Flat Roll Division. The contract allows our supplier to interrupt service in the event of an emergency or in response to various market conditions. Columbus Flat Roll Division, Roanoke Bar Division and Steel of West Virginia have each entered into fixed price contracts, while our Engineered Bar Products Division has a combination of fixed pricing and market pricing for the various components of the electrical services (demand charge, energy charge, riders, etc.). Our Structural and Rail Division purchases electricity at current market prices and through forward contracts at fixed prices.  

Patents and Trademarks

We currently do not own any material patents or patent applications for technologies that are in use in our production processes. We have seven major registered trademarks, as follows:

·

the mark “SDI” and a chevron alone;

·

the mark “SDI” and a chevron and “Steel Dynamics, Inc.” to the right of the chevron;

·

the mark “SDI” and a chevron and “Steel Dynamics” to the right of the chevron;

·

the mark “OmniSource Corporation” with the circle logo design;

·

the slogan “The Best in Metals Recycling”;

·

the mark “The Techs”;

·

the mark “New Millennium Building Systems, LLC”; and

Research and Development

Our research and development activities have consisted of efforts to expand, develop and improve our products and operating processes, and our efforts to develop and improve alternative ironmaking technologies through IDI and, prior to idling, our Minnesota ironmaking operations. Most of these research and development efforts have been conducted in-house by our employees.

Environmental Matters

Our operations are subject to substantial and evolving local, state, and federal environmental, health and safety laws and regulations concerning, among other things, emissions to the air, discharges to surface and ground water and to sewer systems, and the generation, handling, storage, transportation, treatment and disposal of solid and hazardous wastes. Our manufacturing operations are dependent upon permits regulating discharges into the air or into the water or the use and handling of by-products in order to operate our facilities. We dedicate considerable resources aimed at achieving compliance with federal and state laws concerning the environment.  While we do not currently believe that our future compliance efforts with such provisions will have a material adverse effect on our results of operations, cash flows or financial condition, this is subject to change in the evolving regulatory environment in which we operate.

Since the level of enforcement of environmental laws and regulations, or the nature of those laws that may be enacted from time to time are subject to changing social or political pressures, our environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. The cost of current and future environmental compliance may also place United States steel producers at a competitive disadvantage with respect to foreign steel producers, which may not be required to undertake equivalent costs in their operations.

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Pursuant to the Resource Conservation and Recovery Act, or RCRA, which governs the treatment, handling and disposal of solid and hazardous wastes, the United States Environmental Protection Agency, or United States EPA, and authorized state environmental agencies may conduct inspections to identify areas where there may have been releases of solid or hazardous constituents into the environment and require the facilities to take corrective action to remediate any such releases. RCRA also allows citizens to bring certain suits against regulated facilities for potential damages and cleanup. Our steelmaking and certain other facilities generate wastes subject to RCRA. Our manufacturing operations produce various by-products, some of which, for example electric arc furnace or EAF dust, are categorized as solid or hazardous waste, requiring special handling for disposal or for the recovery of metallics. We collect such by-products in pollution controlled equipment, such as baghouses, and either recycle or dispose of these by-products. While we cannot predict the future actions of the regulators or other interested parties, the potential exists for required corrective action at these facilities, the costs of which could be substantial.

Under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the United States EPA and, in some instances, private parties have the authority to impose joint and several liability for the remediation of contaminated properties upon generators of waste, current and former site owners and operators, transporters and other potentially responsible parties, regardless of fault or the legality of the original disposal activity. Many states have statutes and regulatory authorities similar to CERCLA and to the United States EPA. We have a number of material handling agreements with various contractors to properly dispose of or recycle our electric arc furnace dust and certain other by-products of our operations. However, we cannot assure that, even if there has been no fault by us, we may not still be cited as a waste generator by reason of an environmental cleanup at a site to which our by-products were transported.

The Clean Water Act and similar state laws apply to aspects of our operations and impose regulatory burdens related to the discharge of wastewater, storm water and dredged or fill material.  United States EPA, states and, in certain instances, private parties have the ability to bring suit alleging violations and seeking penalties and damages.  The Clean Water Act’s provisions can require new or expanded water treatment investments to be made and can limit or even prohibit certain current or planned activities at our operations.

The Clean Air Act and analogous state laws require many of our facilities to obtain and maintain air permits in order to operate.  Air permits can impose new or expanded obligations to limit or prevent current or future emissions and to add costly pollution control equipment.  Enforcement can be brought by the United States EPA, the states, and in certain instances private parties, and can result in penalties and injunctive relief.

In addition, there are a number of other environmental, health and safety laws and regulations that apply to our facilities and may affect our operations. By way of example and not of limitation, certain portions of the federal Toxic Substances Control Act, Oil Pollution Act, Safe Drinking Water Act and Emergency Planning and Community Right-to-Know Act, as well as state and local laws and regulations implemented by the regulatory agencies, apply to aspects of our facilities’ operations. Many of these laws allow both the governments and citizens to bring certain suits against regulated facilities for alleged environmental violations. Finally, any steelmaking and metals recycling company could be subject to certain toxic tort suits brought by citizens or other third parties alleging causes of action such as nuisance, negligence, trespass, infliction of emotional distress, or other claims alleging personal injury or property damage.

Employees

We emphasize decentralized decision making and responsibility and have established performance-based incentive compensation programs specifically designed to enhance productivity, improve profitability, control costs and foster innovation. Our work force consisted of approximately 7,695 full time employees at December 31, 2016, of which approximately 9% were represented by collective bargaining agreements. The largest group of unionized employees is at Steel of West Virginia.   The remaining unionized employees are located in five different OmniSource metals recycling locations, each of which has its own agreement.  We believe that our relationship with our employees is good.



Available Information



Our internet website address is www.steeldynamics.com. We make available on our internet website, under “Investors,” free of charge, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as well as press releases, ownership reports pursuant to Section 16(a) of the Securities Act of 1933, our Code of Ethics for Principal Executive Officers and Senior Financial Officers, our Code of Business Conduct and Ethics, and any amendments thereto or waivers thereof, as well as our Audit, Compensation and Nominating and Corporate Governance Committee Charters. We do not intend to incorporate the contents of our or any other website into this report. 

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ITEM 1A.    RISK FACTORS

        Many factors could have an effect on our financial condition, cash flows and results of operations. We are subject to various risks resulting from changing economic, environmental, political, industry, business and financial conditions. The factors described below represent our principal risks.  

Risks Related to our Industry

Our industry is affected by domestic and global economic factors including periods of slower than anticipated economic growth and the risk of a new recession.

        Our financial results are substantially dependent not only upon overall economic conditions in the United States and globally, including Europe and in Asia, but also as they may affect one or more of the industries upon which we depend for the sale of our products. Recent global actions, such as the new United States political administration, the United Kingdom referendum to exit the European Union, and the possibility of domestic and international trade restrictions, could result in changing economic conditions in the United States and globally, the effects of which are not known at this time.  Additionally, periods of slower than anticipated economic growth, such as the slow and uneven recovery from the recent recession, could reduce customer confidence and adversely affect demand for our products and further adversely affect our business. Metals industries have historically been vulnerable to significant declines in consumption and product pricing during periods of economic downturn or continued uncertainty, including the pace of domestic non-residential construction activity.

        Our business is also dependent upon certain industries, such as construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets, and these industries are also cyclical in nature. Therefore, these industries may experience their own fluctuations in demand for our products based on such things as economic conditions, energy prices, consumer demand and infrastructure funding decisions by governments. Many of these factors are beyond our control. As a result of volatility in our industry or in the industries we serve, we may have difficulty increasing or maintaining our level of sales or profitability. If our industry or the industries we serve were to suffer a downturn, then our business may be adversely affected.

Our level of production and our sales and earnings are subject to significant fluctuations as a result of the cyclical nature of the steel industry and some of the industries we serve.

        The steel manufacturing business is cyclical in nature, and the selling price of the steel we make may fluctuate significantly due to many factors beyond our control. Furthermore, a number of our products are commodities, subject to their own cyclical fluctuations in supply and demand in both metal consuming and metal generating industries, including the construction and manufacturing industries. The timing, magnitude and duration of these cycles and the resulting price fluctuations are difficult to predict. The sale of our manufactured steel products is directly affected by demand for our products in other cyclical industries, such as construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets. Economic difficulties, stagnant global economies, supply/demand imbalances and currency fluctuations in the United States or globally could decrease the demand for our products or increase the amount of imports of steel into the United States, which could decrease our sales, margins and profitability.

The scrap metal recycling industry has historically been, and is expected to remain, highly cyclical and this could have a material adverse effect on our metals recycling operations' results.

        Scrap metal prices have become increasingly volatile, and operating results within the metals recycling industry in general have historically been cyclical, and are expected to remain highly cyclical in nature. Similarly, but not necessarily paralleling the price fluctuations in the steel business, the purchase prices for automobile bodies and various other grades of obsolete and industrial scrap, as well as the selling prices for processed and recycled scrap metals we utilize in our own manufacturing process, or which we resell to others through our metals recycling operations, are also highly volatile. During periods of excess domestic supply or increased imports, scrap metal prices may become or remain depressed and adversely affect the sales, profitability and margins of our scrap business. As a metals recycler, we may attempt to respond to changing recycled metal selling prices by adjusting the scrap metal purchase prices we pay to others, but our ability to do this may be limited by competitive or other factors during periods of low scrap prices, when inbound scrap flow may slow considerably, as scrap generators hold on to their scrap in hopes of getting higher prices later. As such, a prolonged period of low scrap prices could reduce our ability to obtain, process, and sell recycled materials, and this could adversely affect our metals recycling operations' results. Conversely, periodic increased foreign demand for scrap can result in an outflow of available domestic scrap, as well as resulting higher scrap prices domestically that cannot always be passed on to domestic scrap consumers, thereby further reducing available domestic scrap flows and scrap margins, all of which could adversely affect our sales and profitability of our scrap business. Additionally during periods of high demand and resulting higher scrap prices, ferrous scrap consumers may seek and develop ferrous scrap alternatives, including pig iron and DRI. The availability and pricing of these scrap alternatives in the domestic market may have a longer term impact on scrap pricing, particularly in prime grades, which could adversely affect our sales, profitability and margins.

Global steelmaking overcapacity and imports of steel into the United States have adversely affected, and may again adversely affect, United States steel prices, which could impact our sales, margins and profitability.

        Global steelmaking capacity currently exceeds global consumption of steel products. Such excess capacity sometimes results in steel manufacturers in certain countries exporting steel at prices that are lower than prevailing domestic prices, and sometimes at or below their cost of

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production. Excessive imports of steel into the United States, such as in recent years, have exerted, and may continue to exert, downward pressure on United States steel prices which negatively affects our ability to increase our sales, margins, and profitability. Furthermore anticipated additional domestic steel capacity could increase this global overcapacity.  This, in turn, may also adversely impact domestic demand for ferrous scrap and our ferrous metallics margins.  United States steel producers compete with many foreign producers, including those in China, Vietnam and other Asian and European countries. Competition from foreign producers is typically strong and is periodically exacerbated by weakening of the economies of certain foreign steelmaking countries. A higher volume of steel exports to the United States tend to occur at depressed prices when steel producing countries experience periods of economic difficulty, decreased demand for steel products or excess capacity.

        The global steelmaking overcapacity is exacerbated by Chinese steel production capacity that far exceeds that country’s current demand and has made China a major global exporter of steel. This combination of a slowdown in China's economic growth and steel consumption coupled with its own expansion of steelmaking capacity has resulted in a weakening of global steel pricing. Moreover, many Asian and European steel producers whose steel output previously fed China's steel import needs could redirect their steel into the United States market through increased steel imports, causing a further erosion of margins or negatively impacting our ability to increase our prices.

        In addition, we believe the downward pressure on, and periodically depressed levels of United States steel prices in recent years have been further exacerbated by imports of steel involving dumping and subsidy abuses by foreign steel producers. Some foreign steel producers are owned, controlled or subsidized by foreign governments. As a result, decisions by these producers with respect to their production, sales and pricing are sometimes influenced to a greater degree by political and economic policy considerations than by prevailing market conditions, realities of the marketplace or consideration of profit or loss. However, while some tariffs and quotas have recently been put into effect for certain steel products imported from a number of countries that have been found to have been unfairly pricing steel imports to the United States, there is no assurance that already imposed tariffs and quotas will remain in place or that new ones, even if justified, will be levied and even when imposed many of these are only short-lived. When such tariffs or duties expire or if others are further relaxed or repealed, or if relatively higher United States steel prices make it attractive for foreign steelmakers to export their steel products to the United States, despite the presence of duties or tariffs, the resurgence of substantial imports of foreign steel could create downward pressure on United States steel prices.

The continued global economic slowdown and the difficult conditions in the global industrial, capital and credit markets that have resulted, have adversely affected and may continue to adversely affect our industry, as well as the industries of many of our customers and suppliers upon whom we are dependent.

        Many of the markets in which our customers participate, such as construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets, are cyclical in nature and experience significant fluctuations in demand for our steel products based on economic conditions, consumer demand, raw material and energy costs, and decisions by our government to fund or not fund infrastructure projects such as highways, bridges, schools, energy plants, railroads and transportation facilities. Many of these factors are beyond our control. These markets are highly competitive, to a large extent driven by end-use markets, and may experience overcapacity, all of which may affect demand for and pricing of our products.

        A decline in consumer and business confidence and spending, together with reductions in the availability of credit or increased cost of credit, as well as volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We are also exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers' business operations is curtailed or if the cost of that credit is increased the resulting inability of our customers or of their customers to access either credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. A renewed disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events may adversely affect our profitability, cash flow, and financial condition.

Volatility and major fluctuations in scrap metal and pig iron prices and our potential inability to pass higher costs on to our customers may constrain operating levels and reduce profit margins.

        Steel producers require large amounts of raw materials, including scrap metal and scrap substitute products such as pig iron, pelletized iron and other supplies such as graphite electrodes and ferroalloys. Our principal raw material is scrap metal derived primarily from junked automobiles, industrial scrap, railroad cars, railroad track materials, agricultural machinery and demolition scrap from obsolete structures, containers and machines. The prices for scrap are subject to market forces largely beyond our control, including demand by United States and international steel producers, freight costs and speculation. The prices for scrap have varied significantly, may vary significantly in the future and do not necessarily fluctuate in tandem with the price of steel. Moreover, some of our integrated steel producer competitors are not as dependent as we are on scrap as a part of their raw material melt mix, which, during periods of high scrap costs relative to the cost of blast furnace iron used by the integrated producers, give them a raw material cost advantage over mini-mills. While our vertical integration into the metals recycling business, through our OmniSource operations, and into the ironmaking business, through our IDI facility, should enable us to continue being a cost-effective supplier to our own steelmaking operations, for some of our metallics requirements, we will still need to rely on other metallics and raw material suppliers, as well as upon general industry supply conditions for the balance of our needs.

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        Purchase prices for auto bodies, scrap metal and scrap substitute products such as pig iron that we consume, and selling prices for scrap and recycled metals that we sell to third parties are volatile and beyond our control. While OmniSource attempts to respond to changing recycled metal selling prices through adjustments to its metal purchase prices, its ability to do so is limited by competitive and other market factors. Changing prices could potentially impact the volume of scrap metal available to us and the volume and realized margins of processed metals we sell.

        The availability and prices of raw materials may also be negatively affected by new laws and regulations, allocation by suppliers, interruptions in production, accidents or natural disasters, changes in exchange rates, global price fluctuations, and the availability and cost of transportation.

        If prices for ferrous metallics increase by a greater margin than corresponding price increases for the sale of our steel products, we may not be able to recoup such cost increases from increases in the selling prices of steel products. Conversely, depressed prices for ferrous scrap may constrain its supply, which may adversely affect our metals recycling operations and also the availability of certain grades of scrap for our steelmaking operations. Additionally, our inability to pass on all or any substantial part of any cost increases during periods of rapidly rising scrap prices, through scrap or other surcharges, or to provide for our customers' needs because of the potential unavailability of key raw materials or other inputs, may result in production curtailments or may otherwise have a material adverse effect on our business, financial condition, results of operations or prospects.



The cost and availability of electricity and natural gas are also subject to volatile market conditions.



        Steel producers like us consume large amounts of energy, inasmuch as mini-mills melt ferrous scrap in electric arc furnaces and use natural gas to reheat steel or steel billets for rolling into finished products. We rely on third parties for the supply of energy resources we consume in our steelmaking activities. The prices for and availability of electricity, natural gas, oil and other energy resources are also subject to volatile market conditions, often affected by weather conditions as well as political and economic factors beyond our control. As large consumers of electricity and gas, we must have dependable delivery in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged blackouts or brownouts or disruptions caused by natural disasters or by political considerations would substantially disrupt our production. In addition, a significant portion of our finished steel products are delivered by truck. Unforeseen fluctuations in the price of fuel attributable to fluctuations in crude oil prices would also have a negative impact on our costs or on the costs of many of our customers. In addition, changes in certain environmental regulations in the United States, including those that may impose output limitations or higher costs associated with climate change or greenhouse gas emissions legislation could substantially increase the cost of manufacturing and raw materials, such as energy, to us and other United States steel producers.



Fluctuations in the value of the United States dollar relative to other currencies may adversely affect our business.



        Fluctuations in the value of the dollar can be expected to affect our business. A strong United States dollar, such as recently, makes imported products less expensive, potentially resulting in more imports of steel products into the United States by our foreign competitors, while a weak United States dollar may have the opposite impact on imports.

Compliance with and changes in environmental and remediation requirements could result in substantially increased capital requirements and operating costs.

        Existing laws or regulations, as currently interpreted or as may be interpreted in the future, as well as future laws or regulations, may have a material adverse effect on our results of operations and financial condition.

We are subject to comprehensive local, state, federal and international statutory and regulatory environmental requirements relating to, among other things:

·

the acceptance, storage, treatment, handling and disposal of solid and hazardous waste;

·

the discharge of materials into the air, including periodic changes to the National Ambient Air Quality Standards and to emission standards;

·

the management and treatment of wastewater and storm water;

·

the remediation of soil and groundwater contamination;

·

global climate change legislation or regulation;

·

the need for and the ability to timely obtain air, water or other operating permits;

·

the timely reporting of certain chemical usage, content, storage and releases;

·

the remediation and reclamation of land used for iron mining;

·

natural resource damages; and

·

the protection of our employees' health and safety.

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Compliance with environmental laws and regulations, which affect our steelmaking, metals recycling and ironmaking operations, is a significant factor in our business. We are required to obtain and comply with environmental permits and licenses, and failure to obtain or renew or the violation of any permit or license could result in substantial fines and penalties, suspension of operations and/or the closure of a subject facility. Similarly, delays, increased costs and/or the imposition of onerous conditions to the securing or renewal of operating permits could have a material adverse effect on these operations.

        Private parties might also bring claims against us under citizen suit provisions and/or for alleged property damage or personal injury resulting from the environmental impacts of our operations. Moreover, legal requirements change frequently, are subject to interpretation and have tended to become more stringent over time. Uncertainty regarding adequate pollution control levels, testing and sampling procedures, and new pollution control technology are factors that may increase our future compliance expenditures. We are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations. Although we work hard to be in substantial compliance with all applicable laws and regulations, legal requirements frequently change and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate pollution control levels, testing and sampling procedures, and evolving pollution control technology are among the factors that may increase our future expenditures to comply with environmental requirements. The cost of complying with existing laws or regulations as currently interpreted or reinterpreted in the future, or with future laws or regulations, may have a material adverse effect on our results of operations and financial condition.

        Our manufacturing and metals recycling operations produce significant amounts of by-products, some of which are handled as solid or hazardous waste. For example, our mills generate electric arc furnace (EAF) dust, which the United States Environmental Protection Agency (United States EPA) and other regulatory authorities classify as hazardous waste and regulate accordingly.

In addition, the primary feed materials for the shredders operated by our metals recycling operations include automobile hulks and obsolete household appliances. A portion of the feed materials consist of unrecyclable material known as shredder residue. If laws or regulations, the interpretation of the laws or regulations, or testing methods change with regard to EAF dust or shredder residue, we may incur significant additional expenditures.

        CERCLA enables the United States EPA, state agencies and certain private parties to recover from owners, operators, generators and transporters the cost of investigation and cleanup of sites at which hazardous substances were disposed. In connection with CERCLA and analogous state laws, we may be required to clean up contamination discovered at our sites including contamination that may have been caused by former owners or operators of the sites, to conduct additional cleanup at sites that have already had some cleanup performed, and/or to perform cleanup with regard to sites formerly used in connection with our operations.

        In addition, we may be required to pay for, or to pay a portion of, the costs of cleanup at sites to which we sent materials for disposal or recycling, notwithstanding that the original disposal or recycling activity may have complied with all regulatory requirements then in effect. Pursuant to CERCLA, a party can be held jointly and severally liable for all of the cleanup costs associated with a disposal site. In practice, a liable party often splits the costs of cleanup with other potentially responsible parties. We have received notices from the United States EPA, state agencies and third parties that we have been identified as potentially responsible for the cost of investigating and cleaning up a number of disposal sites. In most cases, many other parties are also named as potentially responsible parties.

        Because CERCLA can be imposed retroactively on shipments that occurred many years ago, and because the United States EPA and state agencies are still discovering sites that pose a threat to public health or the environment, we can provide no assurance that we will not become liable for significant costs associated with investigation and remediation of CERCLA cleanup sites.

        CERCLA, including the Superfund Recycling Equity Act of 1999, limits the exposure of scrap metal recyclers for sales of certain recyclable material under certain circumstances. However, the recycling defense is subject to a number of limitations and may be found not to apply to all instances of recycling activity that we conduct.

Increased regulation associated with climate change and greenhouse gas emissions (GHG) could impose significant additional costs on both our steelmaking and metals recycling operations.

        The United States government or various governmental agencies may introduce additional regulatory changes in response to the potential impacts of climate change. International treaties or agreements may also result in increasing regulation of GHG emissions, including the introduction of carbon emissions trading mechanisms. Any such regulation regarding climate change and greenhouse gas, or GHG emissions, could impose significant costs on our steelmaking and metals recycling operations and on the operations of our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with current or future laws or regulations concerning and limitations imposed on our operations by virtue of climate change and GHG emissions laws and regulations. Any adopted future climate change and greenhouse regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations.

        From a medium and long-term perspective, we are likely to see an increase in costs relating to our assets that emit significant amounts of greenhouse gases as a result of these regulatory initiatives. These regulatory initiatives may impact our operations directly or through our suppliers or

19

 


 

 

customers. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our financial condition, operating performance and ability to compete.

Risks Related to the Business

Our senior secured credit facility contains, and any future financing agreements may contain, restrictive covenants that may limit our flexibility.

        Restrictions and covenants in our existing debt agreements, including our senior secured credit facility, and any future financing agreements, may impair our ability to finance future operations or capital needs or to engage in other business activities. Specifically, these agreements may limit or restrict our ability to:

·

incur additional indebtedness;

·

pay dividends or make distributions with respect to our capital stock, in excess of certain amounts;

·

repurchase or redeem capital stock;

·

make some investments;

·

create liens on property;

·

make some capital expenditures;

·

enter into transactions with affiliates or related persons;

·

issue or sell stock of certain subsidiaries;

·

sell or transfer assets; and

·

enter into mergers, acquisitions or consolidations, or some joint ventures.

        A breach of any of the restrictions or covenants could cause a default under our senior secured credit facility, our senior notes, or our other debt. A significant portion of our indebtedness then may become immediately due and payable if the default is not remedied.

        Under our senior secured credit facility, we are required to maintain certain financial covenants tied to our leverage and profitability. Our ability to meet such covenants or other restrictions can be affected by events beyond our control. If a default were to occur, the lenders could elect to declare all amounts then outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our receivables and inventories and all shares of capital stock or other equity interests of our subsidiaries and intercompany debt held by us as collateral for our senior secured credit facility.

We may face significant price and other forms of competition from other steel producers, scrap processors and alternative materials, which could have a material adverse effect on our business, financial condition, results of operation, or prospects.

        The global markets in which steel companies and scrap processors conduct business are highly competitive and became even more so due to continued global economic slowdown and consolidations in the steel and scrap industries. Additionally, in many applications, steel competes with other materials, such as aluminum, cement, composites, plastics, carbon fiber, glass and wood.  Increased use of alternative materials could decrease demand for steel and combined with increased competition could cause us to lose market share, increase expenditures or reduce pricing, any one of which could have a material adverse effect on our business, financial condition, results of operations or prospects. The global steel industry suffers from overcapacity, and that excess capacity intensifies price competition in some of our products. A decrease in the global demand for steel scrap, due to market or other conditions, generally causes a decrease in the price of scrap metals. A decrease in price could result in some scrap generators exiting the marketplace which could further decrease the availability of scrap. This shortage in availability of scrap could have a material adverse effect on both our steelmaking and our metals recycling operations and thus on our business, financial condition, results of operations or prospects.

We are subject to significant risks relating to changes in commodity prices and may not be able to effectively protect against these risks.

        We are exposed to commodity price risk during periods where we hold scrap metal inventory for processing or resale. Prices of commodities, including scrap, can be volatile due to numerous factors beyond our control. In an increasing price environment for raw materials, competitive conditions may limit our ability to pass on price increases to our consumers. In a decreasing price environment for processed scrap, we may not have the ability to fully recoup the cost of raw materials that we procure, process, and sell to our customers. In addition, new entrants into the market areas we serve could result in higher purchase prices for raw materials and lower margins from our scrap. We have not hedged positions in certain

20

 


 

 

commodities where futures markets are not well established. Thus, our sales and inventory position will be vulnerable to adverse changes in commodity prices, which could materially adversely impact our operating and financial performance.

The profitability of our metals recycling operations depends, in part, on the availability of an adequate source of supply.

        We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell recyclable metal to us. In periods of low industry prices, suppliers may elect to hold recyclable metal to wait for higher prices or intentionally slow their metal collection activities. If a substantial number of suppliers cease selling recyclable metal to us, we will be unable to recycle metal at desired levels and our results of operations and financial condition could be materially adversely affected. In addition, a slowdown of industrial production in the United States reduces the supply of industrial grades of metal to the metal recycling industry, resulting in our having less recyclable metal available to process and market.

We may face risks associated with the implementation of our growth strategy.

        Our growth strategy subjects us to various risks. As part of our growth strategy, we may expand existing facilities, enter into new product or process initiatives, acquire or build additional plants, acquire other businesses and assets, enter into joint ventures, or form strategic alliances that we believe will complement our existing business. These transactions will likely involve some or all of the following risks:

·

the risk of entering markets in which we have little experience;

·

the difficulty of competing for acquisitions and other growth opportunities with companies having materially greater financial resources than us;

·

the inability to realize anticipated synergies or other benefits expected from an acquisition;

·

the difficulty of integrating the new or acquired operations and personnel into our existing operations;

·

the potential disruption of ongoing operations;

·

the diversion of financial resources to new operations or acquired businesses;

·

the diversion of management attention from other business concerns to new operations or acquired businesses;
 

·

the loss of key employees and customers of acquired businesses;

·

the potential exposure to unknown liabilities;

·

the inability of management to maintain uniform standards, controls, procedures and policies;

·

the difficulty of managing the growth of a larger company;

·

the risk of becoming involved in labor, commercial, or regulatory disputes or litigation related to the new operations or acquired businesses;

·

the risk of becoming more highly leveraged;

·

the risk of contractual or operational liability to other venture participants or to third parties as a result of our participation;



·

the inability to work efficiently with joint venture or strategic alliance partners; and

·

the difficulties of terminating joint ventures or strategic alliances.

      These initiatives or transactions might be required for us to remain competitive, but we may not be able to complete any such transactions on favorable terms or obtain financing, if necessary. Future transactions may not improve our competitive position and business prospects as anticipated, and if they do not, our sales and earnings may be significantly reduced.

Impairment charges could adversely affect our results of operations.         

Occasionally, assumptions that we have made regarding products or businesses we have acquired or sought to develop about the sustainability of markets we sought to exploit, or about industry conditions that underlay our decisionmaking when we elected to capitalize a venture turn out differently than anticipated.  In such instances, the fair value of such assets may fall below their carrying value recorded on our balance sheet.

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Accordingly, we periodically test goodwill, intangible assets and long-lived assets to determine whether their estimated fair value is in fact less than their value recorded on our balance sheet.  If we determine that the fair value of any of these assets, from whatever cause, is less than the value recorded on our balance sheet, we are required to incur non-cash asset impairment charges, such as those recorded in current and past years, that adversely affect our results of operations. There can be no assurances that continued market dynamics or other factors may not result in future impairment charges.

We are subject to litigation and legal compliance risks which could adversely affect our financial condition, results of operations and liquidity.

We recently entered into settlement agreements in connection with a long-standing class action antitrust lawsuit, Standard Iron Works v Arcelor Mittal, et al, brought against us and others in Chicago federal court in 2008, by both direct and indirect purchasers of steel products, alleging a price fixing conspiracy to limit the output of steel.  The settlements recorded in 2016, are awaiting final court approval, involved the aggregate payment into escrow of approximately $5.6 million in early 2017.

        We are additionally involved from time to time in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which at the present time are expected to have a material impact on our financial conditions, results of operations or liquidity. For additional information regarding legal proceedings please refer to Item 3. Legal Proceedings.

In addition to risks associated with our environmental and other regulatory compliance, our international operations are subject to complex foreign and United States laws and regulations, including the Foreign Corrupt Practices Act, regulations related to import-export controls, the Office of Foreign Assets Control, and other laws and regulations, each of which may increase our cost of doing business and expose us to increased risk.

Unexpected equipment downtime or shutdowns could adversely affect our business, financial condition, results of operations and prospects.

        Interruptions in our production capabilities could adversely affect our production costs, products available for sale and earnings during the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of steelmaking equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers. This equipment may, on occasion, be out of service as a result of unanticipated failures or other events. We have experienced and may in the future experience plant shutdowns or periods of reduced production as a result of such equipment failures or other events. These disruptions could have an adverse effect on our operations, customer service levels, financial results and prospects.

We have incurred, and may incur in the future, costs to idle facilities, idled facility carrying costs, or increased costs to resume production at idled facilities.

        Due to a significant and sustained decline in global pig iron pricing, which resulted in the cost of iron nugget production being higher than product selling values, we indefinitely idled our Minnesota ironmaking operations in May 2015. We incurred approximately $34.8 million (inclusive of noncontrolling interest of $5.1 million) of expenses related to the idling, including $21.0 million of non-cash inventory valuation adjustments in the second quarter of 2015. We continue to incur minor ongoing carrying costs related to these idled facilities and, should we in the future resume production, we would incur further costs related to preparing the Minnesota ironmaking operations for operation, performing any required repairs and maintenance, and training employees.

        Should economic or market conditions dictate, we may in the future idle additional facilities, which may require us to incur additional idling and carrying costs related to those facilities, as well as further increased costs should production be resumed at any idled facility, which could have an adverse effect on our financial results and results of operations.

We may face risks to the security of our information technology.

        Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted cybercrime pose a risk to the security of our systems, our information networks, and to the confidentiality, availability and integrity of our data, as well as to the functionality of our automated and electronically controlled manufacturing operating systems. Although we have adopted procedures and controls to protect our information and operating technology, including sensitive proprietary information and confidential and personal data, there can be no assurance that a system or network failure, or security breach, will be prevented. This could lead to system interruption, production delays or downtimes and operational disruptions, the disclosure, modification or destruction of proprietary and other key information, which could have an adverse effect on our reputation, financial results and results of operations.

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Governmental agencies may refuse to grant or renew some of our licenses and permits.

        We must receive licenses, air, water and other permits and approvals from state and local governments to conduct certain of our operations or to develop or acquire new facilities. Governmental agencies sometimes resist the establishment of certain types of facilities in their communities, including scrap metal collection and processing facilities. There can be no assurance that future approvals, licenses and permits will be granted or that we will be able to maintain and renew the approvals, licenses and permits we currently hold. Failure to do so could have a material adverse effect on our results of operations and financial condition.



ITEM 1B.UNRESOLVED STAFF COMMENTS



None.

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ITEM 2.PROPERTIES



The following table describes our more significant properties as of December 31, 2016. These properties are owned by us and not subject to any significant encumbrances, or are leased by us. We believe these properties are suitable and adequate for our current operations and are appropriately utilized. For additional information regarding our facilities please refer to Item 1. Business.







 

 

 

 

 

 

 

 



 

 

 

 

 

Site

 

Site



 

 

 

 

 

Acreage

 

Acreage

Operations

 

Location

 

Description

 

Owned

 

Leased

Steel Operations Segment *

 

 

 

 

 

 

 

 

Butler Flat Roll Division:

 

 

 

 

 

 

 

 

 Butler Operations

 

Butler, IN

 

Flat Roll Steel Mill and Coating Facility

 

1,082 

 

 Jeffersonville Operations

 

Jeffersonville, IN

 

Flat Roll Steel Coating Facility

 

27 

 

10 

Columbus Flat Roll Division

 

Columbus, MS

 

Flat Roll Steel Mill and Coating Facility

 

277 

 

1,422 

The Techs

 

Pittsburgh, PA

 

Flat Roll Steel Coating Facilities

 

16 

 

Structural and Rail Division

 

Columbia City, IN

 

Structural and Rail Steel Mill

 

699 

 

Engineered Bar Division

 

Pittsboro, IN

 

Engineered Bar Steel Mill and Finishing Facility

 

285 

 

Vulcan Threaded Products

 

Pelham, AL

 

Bar Steel Processing Facility

 

29 

 

Roanoke Bar Division

 

Roanoke, VA

 

Merchant Bar Steel Mill

 

290 

 

Steel of West Virginia

 

Huntington, WV

 

Specialty Shapes Steel Mill and Finishing Facility

 

49 

 

    Steel of West Virginia

 

Wurtland, KY

 

 

 

28 

 

    Steel of West Virginia

 

Memphis, TN

 

 

 

 

Iron Dynamics

 

Butler, IN

 

Liquid Ironmaking Facility

 

25 

 

Metals Recycling Operations Segment

 

 

 

 

 

 

 

 

   OmniSource:

 

 

 

 

 

 

Alabama

 

Birmingham, AL

 

Ferrous and Nonferrous Scrap Processing

 

 

Indiana

 

Multiple Cities

 

Ferrous and Nonferrous Scrap Processing

 

484 

 

28 

Michigan

 

Multiple Cities

 

Ferrous and Nonferrous Scrap Processing

 

189 

 

North Carolina

 

Multiple Cities

 

Ferrous and Nonferrous Scrap Processing

 

352 

 

Ohio

 

Multiple Cities

 

Ferrous and Nonferrous Scrap Processing

 

212 

 

21 

South Carolina

 

Greenville, SC

 

Ferrous and Nonferrous Scrap Processing

 

13 

 

Tennessee

 

Johnson City, TN

 

Ferrous and Nonferrous Scrap Processing

 

33 

 

Virginia

 

Multiple Cities

 

Ferrous and Nonferrous Scrap Processing

 

196 

 

Steel Fabrication Operations Segment

 

 

 

 

 

 

 

 

New Millennium Building Systems:

 

 

 

 

 

 

 

 

Joist and Deck Operations

 

Butler, IN

 

Steel Joist and Deck Fabrication Facility

 

95 

 

Joist Operations

 

Fallon, NV

 

Steel Joist Fabrication Facility

 

53 

 

Joist and Deck Operations

 

Hope, AR

 

Steel Joist and Deck Fabrication Facility

 

72 

 

Joist Operations

 

Juarez, MX

 

Steel Joist Fabrication Facility

 

17 

 

Joist and Deck Operations

 

Lake City, FL

 

Steel Joist and Deck Fabrication Facility

 

75 

 

Deck Operations

 

Memphis, TN

 

Deck Fabrication Facility

 

19 

 

Deck Operations

 

Phoenix, AZ

 

Deck Fabrication Facility

 

 

Joist and Deck Operations

 

Salem, VA

 

Steel Joist and Deck Fabrication Facility

 

62 

 

Other Operations

 

 

 

 

 

 

 

 

Corporate Headquarters

 

Fort Wayne, IN

 

Office Building (116,000 square feet)

 

20 

 

SDI LaFarga, LLC

 

New Haven, IN

 

Copper Wire Rod Facility

 

35 

 

Mesabi Nugget 

 

Hoyt Lakes, MN

 

Ironmaking Facility – Idled May 2015

 

**

 

**

Mesabi Mining

 

Hoyt Lakes, MN

 

Iron Ore Concentration and Grinding (Mining

 

**

 

**



 

 

 

not developed) – Idled May 2015

 

 

 

 

Mining Resources

 

Chisholm, MN

 

Iron Ore Tailings Mining – Idled May 2015

 

***

 

***




*       For 2016, our steel mill production utilization was 87% of our estimated annual steelmaking capability, as compared to domestic raw steel capability utilization of 71% according to AISI data.

**    The Mesabi Nugget and Mesabi Mining properties are located at the site of an open pit taconite mine on the Mesabi Iron Range near Hoyt Lakes, Minnesota.  The site encompasses 7,981 acres of land owned outright by us (including mineral and surface rights) and land for which we acquired leasehold interests (including 774 acres of mineral and 624 acres of surface rights).  The properties were purchased from Cleveland Cliffs, Inc. and were formerly operated by LTV Corporation.

***  Mining Resources has leases for iron-bearing materials on 916 acres of iron tailings basins located in Chisholm, Minnesota.

24

 


 

 

ITEM 3.LEGAL PROCEEDINGS



In connection with the Standard Iron Works v Arcelor Mittal, et al class action antitrust litigation originally involving two class action complaints (a so-called “direct purchaser” case and a so-called “indirect purchaser” case), alleging an antitrust conspiracy to limit steel output in the United States and pending since 2008 in federal court in Chicago, settlement agreements have been entered into in both cases, one of which (the direct case) has received final court approval, the other of which (the indirect case) is awaiting final court approval. The October 2016 direct purchaser settlement involved a November 2016 payment of $4.6 million with only two relatively small class members opting out of the settlement. The indirect purchaser case has been settled for $990,000, which has been paid into escrow in 2017, and is pending court approval.  Until final settlement approval, the settlement remains preliminary.

We may also be involved from time to time in various governmental investigations, regulatory proceedings or judicial actions seeking 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, all $503,000 of which have been recorded in our financial statements as of December 31, 2016.

We are also 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. 



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 annual report.

25

 


 

 

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is set forth in Part III, Item 12 of this Form 10-K. Our common stock trades on The NASDAQ Global Select Stock Market under the symbol STLD.  The reported high and low “intra-day” sales prices of our common stock and our dividend information for the two most recent fiscal years are set forth in the following table (in dollars):





 

 

 

 

 

 

 

 

 

 



 

Common Stock

 

 

 

 



 

Market Price

 

Dividends

 



 

High

 

Low

 

Declared

 



2016

 

 

 

 

 

 

 

 

 



First Quarter

$

22.92 

 

$

15.32 

 

$

0.1400 

 



Second Quarter

 

26.99 

 

 

21.57 

 

 

0.1400 

 



Third Quarter

 

28.01 

 

 

22.79 

 

 

0.1400 

 



Fourth Quarter

 

40.17 

 

 

23.34 

 

 

0.1400 

 



 

 

 

 

 

 

 

 

 

 



2015

 

 

 

 

 

 

 

 

 



First Quarter

$

20.94 

 

$

16.51 

 

$

0.1375 

 



Second Quarter

 

23.17 

 

 

19.50 

 

 

0.1375 

 



Third Quarter

 

21.73 

 

 

16.52 

 

 

0.1375 

 



Fourth Quarter

 

19.71 

 

 

16.23 

 

 

0.1375 

 



As of February 17, 2017, we had 242,349,757 shares of common stock outstanding and held beneficially by approximately 21,900 stockholders based on our security position listing. Because many of the shares were held by depositories, brokers and other nominees, the number of registered holders (approximately 1,480) is not representative of the number of beneficial holders.

We declared our first quarterly cash dividend during July 2004 and continued quarterly dividends throughout 2016. 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 will be 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 senior secured credit facility and the indentures relating to our senior notes restrict the amount of cash dividends we can pay.

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 December 31, 2016.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Program (1)

 

Maximum Dollar Value of Shares That May Yet be Purchased Under the Program (in thousands) (1)



 

 

 

 

 

 

 

 

 

 

 

 



Quarter ended December 31, 2016

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



October 18-31

 

 -

 

$

 -

 

 

 -

 

$

450,000 



November 1-30

 

 -

 

 

 -

 

 

 -

 

 

450,000 



December 1 - 31

 

732,260 

 

 

34.19 

 

 

732,260 

 

 

424,966 



 

 

732,260 

 

 

 

 

 

732,260 

 

 

 



(1)

On October 18, 2016, we announced that our board of directors had authorized a share repurchase program of up to $450.0 million of our common stock. Our board of directors cancelled the previously authorized program with respect to which no shares had been repurchased for a number of years.

26

 


 

 

Total Return Graph

Picture 9



27

 


 

 

ITEM 6.SELECTED FINANCIAL DATA

The following table sets forth the selected consolidated financial and operating data of Steel Dynamics, Inc. The selected consolidated operating, other financial and balance sheet data, as of and for each of the years in the five-year period ended December 31, 2016, were derived from our audited consolidated financial statements. You should read the following data in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes appearing elsewhere in this Form 10-K.

You should also read the following information in conjunction with the data in the table on the following page:

·

In the fourth quarter of 2016, we recorded non-cash asset impairment charges associated with the company’s Minnesota ironmaking operations and certain OmniSource assets, which reduced 2016 operating and pretax income by $132.8 million, net income by $89.5 million, net income attributable to Steel Dynamics, Inc. by $76.4 million, and basic and diluted earnings per share by $0.31.

·

In the fourth quarter of 2015, we recorded pretax non-cash asset impairment charges related to goodwill, trade name and certain other assets associated with OmniSource, which reduced 2015 operating income by $428.5 million, and net income and net income attributable to Steel Dynamics, Inc. by $268.7 million, and basic and diluted earnings per share by $1.11.

·

In the fourth quarter 2014, we recorded a non-cash asset impairment charge associated with the company’s Minnesota ironmaking operations, which reduced 2014 operating and pretax income by $260.0 million, net income by $179.1 million, net income attributable to Steel Dynamics, Inc. by $132.6 million, and basic and diluted earnings per share by $0.55.

·

On September 16, 2014, we completed the acquisition of Severstal Columbus, LLC (Columbus Flat Roll Division). Located in northeast Mississippi, Columbus Flat Roll Division is one of the newest and most technologically advanced sheet steel electric arc furnace mills in North America. Columbus Flat Roll Division operations are reflected in our steel operations from the date of acquisition.

·

For purposes of calculating our “ratio of earnings to fixed charges”, earnings consist of earnings from continuing operations before income taxes, extraordinary items and before adjustments for noncontrolling interests, adjusted for the portion of fixed charges deducted from these earnings, plus amortization of capitalized interest (adjusted earnings (losses)). Fixed charges consist of interest on all indebtedness, including capitalized interest, and amortization of debt issuance costs.

·

Adjusted earnings in 2016 of $717.0 million include the $132.8 million of pretax non-cash asset impairment charges related to our Minnesota ironmaking and OmniSource operations as noted above.  Without the impact of these non-cash asset impairment charges, 2016 would reflect adjusted earnings of $849.8 million, and a ratio of earnings to fixed charges of 5.72x.

·

Adjusted losses in 2015 of ($81.0) million are not sufficient to cover fixed charges of $154.4 million, by $235.4 million. Adjusted losses in 2015 of ($81.0) million include the $428.5 million of pretax non-cash asset impairment charges related to OmniSource as noted above. Without the impact of these non-cash asset impairment charges, 2015 would reflect adjusted earnings of $347.5 million and a ratio of earnings to fixed charges of 2.20x.

·

Adjusted earnings in 2014 of $309.3 million include the $260.0 million of pretax non-cash asset impairment charges related to our Minnesota ironmaking operations as noted above. Without the impact of these non-cash asset impairment charges, 2014 would reflect adjusted earnings of $569.3 million, and a ratio of earnings to fixed charges of 4.07x.

·

For purposes of calculating our “operational working capital” for all periods presented, we consider amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt as reported on our consolidated balance sheets.



28

 


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Years Ended December 31,



2016

 

2015

 

2014

 

2013

 

2012



 

 

 

 

 

 

 

 

 

 

 

 

 

 



(dollars and shares in thousands, except per share data)

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

7,777,109 

 

$

7,594,411 

 

$

8,755,952 

 

$

7,372,924 

 

$

7,290,234 

Gross profit

 

1,334,864 

 

 

731,718 

 

 

966,211 

 

 

719,144 

 

 

719,898 

Operating income (loss)

 

727,966 

 

 

(72,784)

 

 

320,320 

 

 

386,525 

 

 

391,165 

Asset impairment charges reflected in operating  income (loss)

 

(132,839)

 

 

(428,500)

 

 

(260,000)

 

 

(308)

 

 

(8,250)

Net income (loss)

 

360,006 

 

 

(145,170)

 

 

91,650 

 

 

163,516 

 

 

142,281 

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

 

382,115 

 

 

(130,311)

 

 

157,024 

 

 

189,314 

 

 

163,551 

Basic earnings (loss) per share

$

1.57 

 

$

(0.54)

 

$

0.68 

 

$

0.86 

 

$

0.75 

Weighted average common shares outstanding

 

243,576 

 

 

242,017 

 

 

232,547 

 

 

220,916 

 

 

219,159 

Diluted earnings (loss) per share

$

1.56 

 

$

(0.54)

 

$

0.67 

 

$

0.83 

 

$

0.73 

Weighted average common shares and share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    equivalents outstanding

 

245,298 

 

 

242,017 

 

 

242,078 

 

 

238,996 

 

 

236,624 

Dividends declared per share

 

$0.56 

 

 

$0.55 

 

 

$0.46 

 

 

$0.44 

 

 

$0.40 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

198,160 

 

$

114,501 

 

$

111,785 

 

$

186,843 

 

$

223,525 

Ratio of earnings (losses) to fixed charges

 

4.83x

 

 

Note–prior page

 

 

2.21x

 

 

3.00x

 

 

2.31x

Ratio of earnings, excluding asset impairment charges,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     to fixed charges

 

5.72x

 

 

2.2x

 

 

4.07x

 

 

3.01x

 

 

2.36x



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel operations segment (net tons)

 

9,245,946 

 

 

8,328,150 

 

 

7,358,366 

 

 

6,119,884 

 

 

5,832,776 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metals recycling operations segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous metals (gross tons)

 

5,070,380 

 

 

5,139,506 

 

 

5,566,238 

 

 

5,505,995 

 

 

5,647,058 

Nonferrous metals (thousands of pounds)

 

1,103,505 

 

 

1,082,777 

 

 

1,173,771 

 

 

1,052,494 

 

 

1,051,333 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel fabrication operations segment (net tons) 

 

562,725 

 

 

492,875 

 

 

480,509 

 

 

366,676 

 

 

295,161 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel operations segment production (net tons)

 

9,503,465 

 

 

8,528,885 

 

 

7,376,657 

 

 

6,266,507 

 

 

5,884,775 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding (in thousands)

 

243,785 

 

 

243,090 

 

 

241,449 

 

 

222,867 

 

 

219,523 

Number of employees

 

7,695 

 

 

7,510 

 

 

7,780 

 

 

6,870 

 

 

6,670 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents, and short-term commercial paper

$

841,483 

 

$

727,032 

 

$

361,363 

 

$

395,156 

 

$

407,437 

Operational working capital

 

1,301,405 

 

 

1,246,408 

 

 

1,723,208 

 

 

1,405,736 

 

 

1,281,765 

Property, plant and equipment , net

 

2,787,215 

 

 

2,951,210 

 

 

3,123,906 

 

 

2,226,134 

 

 

2,231,198 

Total assets

 

6,423,732 

 

 

6,202,082 

 

 

7,233,159 

 

 

5,888,534 

 

 

5,763,561 

Long-term debt (including current maturities)

 

2,356,826 

 

 

2,594,656 

 

 

2,981,849 

 

 

2,081,110 

 

 

2,173,832 

Equity

 

2,777,459 

 

 

2,545,111 

 

 

2,795,527 

 

 

2,495,855 

 

 

2,377,842 







29

 


 

 

ITEM 7.       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, appliance, pipe and tube, and other steel-consuming industries; (4) fluctuations in the cost of key raw materials (including steel scrap, iron units, and energy costs) and our ability to pass on any cost increases; (5) the impact of domestic and foreign import price competition; (6) unanticipated difficulties in integrating or starting up new or acquired businesses; (7) risks and uncertainties involving product and/or technology development; and (8) occurrences of unexpected plant outages or equipment failures.



More specifically, we refer you to the sections titled Special Note Regarding Forward-Looking Statements at the beginning of Part I of this Report and Risk Factors set forth in Item 1A of this Report, as well as in other subsequent reports we file with the Securities and Exchange Commission, for a more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently than expected or anticipated. 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”.

 

Operating Statement Classifications



Net SalesNet sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of the 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 time the title of the product transfers, upon shipment. Provision is made for estimated product returns and customer claims based on historical experience. If the historical data used in the estimates does not reflect future returns and claims trends, additional provision may be necessary. Our steel fabrication operations recognizes revenues from construction contracts utilizing a percentage of completion methodology based on steel tons used on completed units to date as a percentage of estimated total steel tons required for each contract.  

Costs of Goods SoldOur costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel, direct and indirect labor and related benefits, alloys, zinc, transportation and freight, repairs and maintenance, electricity, and depreciation.

Selling, General and Administrative ExpensesSelling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and related benefits, professional services, insurance premiums, property taxes, company-wide profit sharing, and amortization of intangible assets.

Interest Expense, net of Capitalized InterestInterest expense consists of interest associated with our senior credit facilities and other debt net of interest costs that are required to be capitalized during the construction period of certain capital investment projects

Other Expense (Income), netOther income consists of interest income earned on our temporary cash deposits and investments and 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.

30

 


 

 

2016 Overview



We are one of the largest steel producers and one of the largest metals recyclers in the United States based on a current estimated annual steelmaking and coating capability of approximately 11 million tons, and actual recycling volumes. The primary sources of our revenues and operating income are from the manufacture and sale of steel products, processing and sale of recycled ferrous and nonferrous metals, and fabrication and sale of steel joists and deck. We have three reportable segments: steel operations, metals recycling operations, and steel fabrication operations.

Our consolidated results for 2016 benefited from positive momentum in the sheet steel supply environment, driving improved sheet steel volume and metal spreads, as well as increased metal spread and operating cost reductions in our metals recycling operations. Underlying domestic steel consumption remained relatively consistent, as the automotive markets were strong and construction improved throughout the year, while heavy equipment, agriculture and energy markets remained weak. Sheet steel import levels declined during 2016 as compared to 2015, amidst the duties levied pursuant to the trade cases filed with the United States International Trade Commission, and customer inventory levels remained low compared to historical averages. Domestic steel mill utilization rates were flat in 2016 compared to 2015, resulting in lower ferrous volumes in our metals recycling operations, our metal spreads improved, particularly in nonferrous materials, and we benefited from continued operational cost containment efforts. The non-residential construction market for our steel fabrication operations remained strong, resulting in record shipments; however, average selling prices contracted, outpacing declining steel input costs, resulting in compressed metal spread during 2016.

Asset Impairment Charges

During the fourth quarter of 2016, we undertook an assessment of the recoverability of the carrying amounts of primarily the Mining Resources and Mesabi Mining fixed assets within our Minnesota ironmaking operations. With our outlook at the time of this assessment regarding future cash flows, we concluded that the carrying value of some of the fixed assets was no longer fully recoverable, and they were in fact impaired. This assessment resulted in a $127.3 million non-cash asset impairment charge, including amounts attributable to noncontrolling interests of $13.1 million, which reduced net income attributable to Steel Dynamics, Inc. by $72.9 million for the year ended December 31, 2016. Also, during the fourth quarter of 2016, a $5.5 million OmniSource goodwill impairment charge was recorded in conjunction with OmniSource entering into a definitive sale agreement with a third-party pertaining to certain OmniSource long-lived assets (classified and reported as held for sale as of December 31, 2016), inventory and spare parts, as provided under ASC 350.

Vulcan Threaded Products, Inc. Acquisition

On August 1, 2016, we acquired 100% of Vulcan Threaded Products, Inc. (Vulcan) for $113.0 million, paid in cash from available funds. Vulcan is the nation’s largest manufacturer and supplier of threaded rod products, and also produces cold drawn and heat treated steel bar. The acquisition of Vulcan is consistent with one of our target growth objectives – higher-margin downstream business opportunities that utilize our steel products in their manufacturing processes. Vulcan utilizes special-bar-quality products produced at our Engineered Bar Products Division. Post-closing operating results of Vulcan are reflected in the steel operations reporting segment.

Excluding the impact of the $132.8 million and $428.5 million in pretax non-cash asset impairment charges in 2016 and 2015, respectively, consolidated operating income increased $505.1 million, or 142%, to $860.8 million in 2016, compared to $355.7 million in 2015, and net income attributable to Steel Dynamics, Inc. increased $320.3 million, or 232%, to $458.6 million, or $1.87 per diluted share, during 2016, compared with net income of $138.3 million, or $0.57 per diluted share, during 2015. The impact of the $132.8 million pretax non-cash asset impairment charges, including amounts attributable to noncontrolling interests of $13.1 million, reduced 2016 net income attributable to Steel Dynamics, Inc. by $76.4 million and our diluted earnings per share by $0.31. The impact of the $428.5 million pretax non-cash asset impairment charge reduced 2015 net income attributable to Steel Dynamics, Inc. by $268.7 million and our diluted earnings per share by $1.11.

31

 


 

 

2015 Overview



Our 2015 consolidated operational and financial results were negatively impacted by decreased steel shipments (excluding Columbus Flat Roll Division for the 2015 and 2014 periods) and average steel product pricing, driven by excessive and historically high levels of steel imports. While scrap costs also decreased significantly throughout 2015, steel metal margins contracted as the drop in steel selling prices was more severe than the decline of scrap costs. Underlying domestic steel consumption remained steady, as we continued to see improvements in non-residential construction, as well as steady consumption in automotive and other manufacturing segments. However, a larger portion of the domestic steel demand was served by imports in 2015 than compared to 2014. As a result of this, as well as customer destocking, domestic steel mill utilization rates decreased throughout 2015, as compared to 2014, resulting in decreased ferrous scrap shipments in our metals recycling operations. Decreased shipments, along with metal margin compression due to monthly price declines, resulted in significantly reduced profitability in our metals recycling operations in 2015, as compared to 2014. During 2015, our steel fabrication operations continued to benefit from the sustained improvements in non-residential construction demand, our market share and expanding geographic footprint, and lower steel raw material costs, resulting in significant increases in both sales and operating income, compared to 2014.



Asset Impairment Charges

In the fourth quarter of 2015, we recorded pretax non-cash impairment charges related to goodwill, indefinite-lived intangibles and certain other assets associated with OmniSource, our metal recycling operations, which reduced 2015 operating income by $428.5 million, and net income and net income attributable to Steel Dynamics, Inc. by $268.7 million, and basic and diluted earnings per share by $1.11. During our 2015 annual goodwill and indefinite-lived intangible asset impairment analysis, we determined that the fair value of OmniSource was less than its carrying value, and upon the completion of the second step of the impairment analysis, that the goodwill and trade name indefinite-lived intangible assets were impaired. The OmniSource goodwill and trade name assets were written down to their respective fair values, resulting in non-cash asset impairment charges of $341.3 million and $68.5 million, respectively. Upon the December 31, 2015, determination and classification of certain OmniSource property and plant assets as held for sale, we recorded a $10.3 million non-cash asset impairment. We reflected a total of $428.5 million of pretax non-cash asset impairment charges in the consolidated statement of operations for the year ended December 31, 2015, within the metals recycling operations. During the fourth quarter of 2014, we recorded a $260.0 million pretax non-cash asset impairment charge in other non-segment operations, related primarily to Mesabi Nugget fixed assets within our Minnesota ironmaking operations, including amounts attributable to noncontrolling interests of $46.5 million, which reduced net income attributable to Steel Dynamics, Inc. by $132.6 million

Excluding the impact of the $428.5 million and $260.0 million in pretax non-cash impairment charges in 2015 and 2014, respectively, consolidated operating income decreased $224.6 million, or 39%, to $355.7 million in 2015, compared to $580.3 million in 2014, and net income decreased $151.3 million, or 52%, to $138.3 million, or $0.57 per diluted share, during 2015, compared with net income of $289.6 million, or $1.22 per diluted share, during 2014. The impact of the $428.5 million pretax non-cash impairment charge related to our metals recycling operations reduced 2015 net income by $268.7 million and our diluted earnings per share by $1.11. The impact of the $260.0 million pretax non-cash asset impairment charge related to our Minnesota ironmaking operations, including amounts attributable to noncontrolling interests of $46.5 million, reduced 2014 net income attributable to Steel Dynamics, Inc. by $132.6 million and our diluted earnings per share by $0.55.



32

 


 

 

Segment Operating Results (dollars in thousands)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Years Ended December 31,



2016

 

% Change

 

2015

 

% Change

 

2014



 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

Steel Operations Segment

$

5,870,924 

 

8%

 

$

5,422,475 

 

(7)%

 

$

5,821,578 

Metals Recycling Operations Segment

 

2,171,877 

 

(7)%

 

 

2,337,716 

 

(34)%

 

 

3,539,206 

Steel Fabrication Operations Segment

 

703,522 

 

4%

 

 

673,399 

 

7%

 

 

631,808 

Other

 

276,912 

 

(12)%

 

 

314,847 

 

(33)%

 

 

468,505 



 

9,023,235 

 

 

 

 

8,748,437 

 

 

 

 

10,461,097 

Intra-company

 

(1,246,126)

 

 

 

 

(1,154,026)

 

 

 

 

(1,705,145)



$

7,777,109 

 

2%

 

$

7,594,411 

 

(13)%

 

$

8,755,952