UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
ended
OR
Commission File Number
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol | Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (see definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).
|
| Accelerated filer ◻ |
| Non-accelerated filer ◻ | |||
Smaller reporting company | Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of April 19, 2021, Registrant had
STEEL DYNAMICS, INC.
Table of Contents
PART I. Financial Information | ||
Page | ||
Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020 | 1 | |
2 | ||
3 | ||
4 | ||
5 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
21 | ||
21 | ||
22 | ||
22 | ||
22 | ||
22 | ||
22 | ||
22 | ||
23 | ||
23 | ||
24 | ||
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, | December 31, | |||||
2021 | 2020 | |||||
Assets | (unaudited) | |||||
Current assets | ||||||
Cash and equivalents | $ | | $ | | ||
Accounts receivable, net | | | ||||
Accounts receivable-related parties | | | ||||
Inventories | | | ||||
Other current assets | | | ||||
Total current assets | | | ||||
Property, plant and equipment, net | | | ||||
Intangible assets, net | | | ||||
Goodwill | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities and Equity | ||||||
Current liabilities | ||||||
Accounts payable | $ | | $ | | ||
Accounts payable-related parties | | | ||||
Income taxes payable | | | ||||
Accrued payroll and benefits | | | ||||
Accrued interest | | | ||||
Accrued expenses | | | ||||
Current maturities of long-term debt | | | ||||
Total current liabilities | | | ||||
Long-term debt | | | ||||
Deferred income taxes | | | ||||
Other liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Redeemable noncontrolling interests | | | ||||
Equity | ||||||
Common stock voting, $ | ||||||
| ||||||
shares outstanding, as of March 31, 2021 and December 31, 2020, respectively | | | ||||
Treasury stock, at cost; | ||||||
as of March 31, 2021 and December 31, 2020, respectively | ( | ( | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Accumulated other comprehensive income | | | ||||
Total Steel Dynamics, Inc. equity | | | ||||
Noncontrolling interests | ( | ( | ||||
Total equity | | | ||||
Total liabilities and equity | $ | | $ | | ||
See notes to consolidated financial statements.
1
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three-Month Periods Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Net sales | |||||
Unrelated parties | $ | | $ | | |
Related parties | | | |||
Total net sales | | | |||
Costs of goods sold | | | |||
Gross profit | | | |||
Selling, general and administrative expenses | | | |||
Profit sharing | | | |||
Amortization of intangible assets | | | |||
Operating income | | | |||
Interest expense, net of capitalized interest | | | |||
Other (income) expense, net | | ( | |||
Income before income taxes | | | |||
Income tax expense | | | |||
Net income | | | |||
Net income attributable to noncontrolling interests | ( | ( | |||
Net income attributable to Steel Dynamics, Inc. | $ | | $ | | |
Basic earnings per share attributable to Steel Dynamics, | |||||
Inc. stockholders | $ | $ | |||
Weighted average common shares outstanding | |||||
Diluted earnings per share attributable to Steel Dynamics, Inc. | |||||
stockholders, including the effect of assumed conversions | |||||
when dilutive | $ | $ | |||
Weighted average common shares and share equivalents outstanding | |||||
Dividends declared per share | $ | $ | |||
See notes to consolidated financial statements.
2
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three-Month Periods Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Net income | $ | | $ | | |
Other comprehensive income - net unrealized gain on | |||||
cash flow hedging derivatives, net of income tax | | | |||
Comprehensive income | | | |||
Comprehensive income attributable to noncontrolling interests | ( | ( | |||
Comprehensive income attributable to Steel Dynamics, Inc. | $ | | $ | | |
See notes to consolidated financial statements.
3
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three-Month Periods Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Operating activities: | |||||
Net income | $ | | $ | | |
Adjustments to reconcile net income to net cash provided by | |||||
operating activities: | |||||
Depreciation and amortization | | | |||
Equity-based compensation | | | |||
Deferred income taxes | | | |||
Other adjustments | ( | ( | |||
Changes in certain assets and liabilities: | |||||
Accounts receivable | ( | ( | |||
Inventories | ( | | |||
Other assets | | ( | |||
Accounts payable | | | |||
Income taxes receivable/payable | | | |||
Accrued expenses | ( | ( | |||
Net cash provided by operating activities | | | |||
Investing activities: | |||||
Purchases of property, plant and equipment | ( | ( | |||
Purchases of short-term investments | - | ( | |||
Proceeds from maturities of short-term investments | - | | |||
Other investing activities | | | |||
Net cash used in investing activities | ( | ( | |||
Financing activities: | |||||
Issuance of current and long-term debt | | | |||
Repayment of current and long-term debt | ( | ( | |||
Dividends paid | ( | ( | |||
Purchases of treasury stock | - | ( | |||
Other financing activities | ( | ( | |||
Net cash used in financing activities | ( | ( | |||
Decrease in cash, cash equivalents, and restricted cash | ( | ( | |||
Cash, cash equivalents, and restricted cash at beginning of period | | | |||
Cash, cash equivalents, and restricted cash at end of period | $ | | $ | | |
Supplemental disclosure information: | |||||
Cash paid for interest | $ | | $ | | |
Cash paid for income taxes, net | $ | | $ | | |
See notes to consolidated financial statements.
4
Note 1. Description of the Business and Significant Accounting Policies
Description of the Business
Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is one of the largest and most diversified domestic steel producers and metals recycler. The company has
Steel Operations Segment. Steel operations include the company’s
Metals Recycling Operations Segment. Metals recycling operations include the company’s OmniSource ferrous and nonferrous processing, transportation, marketing, brokerage, and scrap management services primarily throughout the United States and in Central and Northern Mexico. Metals recycling operations accounted for
Steel Fabrication Operations Segment. Steel fabrication operations include the company’s New Millennium Building Systems’ joist and deck plants located throughout the United States, and in Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for
Other. Other operations consist of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of joint ventures, and our idle Minnesota ironmaking operations. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior unsecured credit facility, senior notes, certain other investments and certain profit sharing expenses.
Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of SDI, together with its wholly- and majority-owned or controlled subsidiaries, after elimination of intercompany accounts and transactions. Noncontrolling and redeemable noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries. Redeemable noncontrolling interests related to USS (owned
Use of Estimates. These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.
5
Note 1. Description of the Business and Significant Accounting Policies (Continued)
In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Cash and Equivalents, and Restricted Cash
Cash and equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Restricted cash is primarily funds held in escrow as required by various insurance and government organizations. The balance of cash, cash equivalents and restricted cash in the consolidated statements of cash flows includes restricted cash of $
Goodwill
The company’s goodwill consisted of the following at March 31, 2021, and December 31, 2020, (in thousands):
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Steel Operations Segment | $ | | $ | | ||||
Metals Recycling Operations Segment | | | ||||||
Steel Fabrication Operations Segment | | | ||||||
$ | | $ | | |||||
Metals Recycling Operations Segment goodwill decreased $
Credit Losses
The company is exposed to credit risk in the event of nonpayment of accounts receivable by customers. The company mitigates its exposure to credit risk, which it generally extends on an unsecured basis, by performing ongoing credit evaluations and taking further action if necessary, such as requiring letters of credit or other security interests to support the customer receivable. The allowance for credit losses for accounts receivable is based on the company’s reasonable estimate of known credit risks and historical experience, adjusted for current and anticipated economic and other pertinent factors affecting the company’s customers, that may differ from historical experience. Customer accounts receivable are written off when all collection efforts have been exhausted and the amounts are deemed uncollectible.
At March 31, 2021, the company reported $
6
Note 2. Earnings Per Share
Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive restricted stock units, deferred stock units, restricted stock, and performance awards, and are excluded from the computation in periods in which they have an anti-dilutive effect. There were
Three-Month Periods Ended March 31, | |||||||||||||||||
2021 | 2020 | ||||||||||||||||
Weighted | Weighted | ||||||||||||||||
Average | Average | ||||||||||||||||
Net Income | Shares | Per Share | Net Income | Shares | Per Share | ||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||
Basic earnings per share | $ | | | $ | | $ | | | $ | | |||||||
Dilutive common share equivalents | - | | - | | |||||||||||||
Diluted earnings per share | $ | | | $ | | $ | | | $ | | |||||||
Note 3. Inventories
Inventories are stated at lower of cost or net realizable value. Cost is determined using a weighted average cost method for raw materials and supplies, and on a first-in, first-out basis for other inventory.
March 31, | December 31, | ||||||||
2021 | 2020 | ||||||||
Raw materials | $ | $ | |||||||
Supplies | |||||||||
Work in progress | |||||||||
Finished goods | |||||||||
Total inventories | $ | $ | |||||||
7
Note 4. Changes in Equity
The following tables provide a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to stockholders of Steel Dynamics, Inc., and equity and redeemable amounts attributable to noncontrolling interests (in thousands) for each three-month period ended March 31, 2021 and 2020:
Note 5. Derivative Financial Instruments
The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate commodity margin risk, and occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation risk. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous and ferrous metals (primarily aluminum and copper). The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.
8
Note 5. Derivative Financial Instruments (Continued)
Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity.
March 31, 2021:
Commodity Futures | Long/Short | Metric Tons | |||
Aluminum | Long | ||||
Aluminum | Short | ||||
Copper | Long | ||||
Copper | Short |
The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of March 31, 2021, and December 31, 2020, and gains and losses related to derivatives included in the company’s statement of income for the three-month periods ended March 31, 2021, and 2020 (in thousands):
Asset Derivatives | Liability Derivatives | ||||||||||||
Balance sheet | Fair Value | Fair Value | |||||||||||
location | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | |||||||||
Derivative instruments designated as hedges | |||||||||||||
Commodity futures | Other current assets | $ | | $ | | $ | | $ | | ||||
Derivative instruments not designated as hedges | |||||||||||||
Commodity futures | Other current assets | | | | | ||||||||
Total derivative instruments | $ | | $ | | $ | | $ | | |||||
The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $
December 31, 2020, and are reflected in other current assets in the consolidated balance sheets.
Amount of gain (loss) | Amount of gain (loss) | |||||||||||||||
recognized in income | Location of gain | recognized in income | ||||||||||||||
Location of gain | on derivatives for the | (loss) recognized | on derivatives for the | |||||||||||||
(loss) recognized | three-month periods | Hedged items in | in income on | three-month periods | ||||||||||||
in income on | ended March 31, | fair value hedge | related hedged | ended March 31, | ||||||||||||
derivatives | 2021 | 2020 | relationships | items | 2021 | 2020 | ||||||||||
Derivatives in fair value | ||||||||||||||||
hedging relationships | ||||||||||||||||
Commodity futures | Costs of goods sold | $ | | $ | | Firm commitments | Costs of goods sold | $ | ( | $ | | |||||
Inventory | Costs of goods sold | ( | ( | |||||||||||||
Derivatives not designated | $ | ( | $ | | ||||||||||||
as hedging instruments | ||||||||||||||||
Commodity futures | Costs of goods sold | $ | ( | $ | | |||||||||||
Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $
9
Note 5. Derivative Financial Instruments (Continued)
Derivatives accounted for as cash flow hedges resulted in net gains of $
Note 6. Fair Value Measurements
Accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. Levels within the hierarchy are defined as follows:
| ● | Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets; |
| ● | Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and |
| ● | Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of March 31, 2021, and December 31, 2020 (in thousands):
Quoted Prices | Significant | ||||||||||
in Active | Other | Significant | |||||||||
Markets for | Observable | Unobservable | |||||||||
Identical Assets | Inputs | Inputs | |||||||||
Total | (Level 1) | (Level 2) | (Level 3) | ||||||||
March 31, 2021 | |||||||||||
Commodity futures – financial assets | $ | | $ | $ | | $ | |||||
Commodity futures – financial liabilities | | | |||||||||
December 31, 2020 | |||||||||||
Commodity futures – financial assets | $ | | $ | $ | | $ | |||||
Commodity futures – financial liabilities |
| |
|
| |
| |||||
The carrying amounts of financial instruments including cash and equivalents, and restricted cash approximate fair value (Level 1). The fair values of the commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available (Level 2). The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $
10
Note 7. Commitments and Contingencies
The company is involved in various routine litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which are expected to have a material impact on our financial condition, results of operations, or liquidity.
Note 8. Segment Information
The company’s operations are primarily organized and managed by reportable operating segments, which are steel operations, metals recycling operations, and steel fabrication operations. The segment operations are more fully described in Note 1 to the consolidated financial statements. Operating segment performance and resource allocations are primarily based on operating results before income taxes. The accounting policies of the reportable segments are consistent with those described in Note 1 to the consolidated financial statements. Intra-segment sales and any related profits are eliminated in consolidation. Amounts included in the category “Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of smaller joint ventures, and the idle Minnesota ironmaking operations. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior unsecured credit facility, senior notes, certain other investments and certain profit sharing expenses.
11
Note 8. Segment Information (Continued)
The company’s segment results, including disaggregated revenue by segment to external, external non-United States, and other segment customers, are as follows (in thousands):
Metals | Steel | |||||||||||||||||
For the three-month period ended | Steel | Recycling | Fabrication | |||||||||||||||
March 31, 2021 | Operations | Operations | Operations | Other | Eliminations | Consolidated | ||||||||||||
Net sales - disaggregated revenue | ||||||||||||||||||
External | $ | | $ | | $ | | $ | | $ | - | $ | | ||||||
External Non-U.S. | | | | | - | | ||||||||||||
Other segments | | | | | ( | - | ||||||||||||
| | | | ( | | |||||||||||||
Operating income (loss) | | | | ( | (1) | ( | | |||||||||||
Income (loss) before income taxes | | | | ( | ( | (2) | | |||||||||||
Depreciation and amortization | | | | | - | | ||||||||||||
Capital expenditures | | | | | - | | ||||||||||||
As of March 31, 2021 | ||||||||||||||||||
Assets | $ | | $ | | $ | | $ | | (3) | $ | ( | (4) | $ | | ||||
12
Note 8. Segment Information (Continued)
Metals | Steel | |||||||||||||||||
For the three-month period ended | Steel | Recycling | Fabrication | |||||||||||||||
March 31, 2020 | Operations | Operations | Operations | Other | Eliminations | Consolidated | ||||||||||||
Net sales - disaggregated revenue | ||||||||||||||||||
External | $ | | $ | | $ | | $ | | $ | - | $ | | ||||||
External Non-U.S. | | | - | | - | | ||||||||||||
Other segments | | | | | ( | - | ||||||||||||
| | | | ( | | |||||||||||||
Operating income (loss) | | | | ( | (1) | ( | | |||||||||||
Income (loss) before income taxes | | | | ( | ( | (2) | | |||||||||||
Depreciation and amortization | | | | | - | | ||||||||||||
Capital expenditures | | | | | - | | ||||||||||||
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains some predictive statements about future events, including statements related to conditions in domestic or global economies, conditions in steel and recycled metals market places, Steel Dynamics' revenues, costs of purchased materials, future profitability and earnings, and the operation of new, existing or planned facilities. These statements, which we generally precede or accompany by such typical conditional words as "anticipate", "intend", "believe", "estimate", "plan", "seek", "project", or "expect", or by the words "may", "will", or "should", are intended to be made as "forward-looking", subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) domestic and global economic factors; (2) global steelmaking overcapacity and steel imports, together with increased scrap prices; (3) pandemics, epidemics, widespread illness or other health issues, such as the COVID-19 pandemic; (4) the cyclical nature of the steel industry and the industries we serve; (5) volatility and major fluctuations in prices and availability of scrap metal, scrap substitutes, and our potential inability to pass higher costs on to our customers; (6) cost and availability of electricity, natural gas, oil, or other resources are subject to volatile market conditions; (7) compliance with and changes in environmental and remediation requirements; (8) increased regulation associated with the environment, climate change, greenhouse gas emissions and sustainability; (9) significant price and other forms of competition from other steel producers, scrap processors and alternative materials; (10) availability of an adequate source of supply for our metals recycling operations; (11) cybersecurity threats and risks to the security of our sensitive data and information technology; (12) the implementation of our growth strategy; (13) litigation and legal compliance, (14) unexpected equipment downtime or shutdowns; (15) governmental agencies may refuse to grant or renew some of our licenses and permits; (16) our senior unsecured credit facility contains, and any future financing agreements may contain, restrictive covenants that may limit our flexibility; and (17) the impacts of impairment.
More specifically, we refer you to our more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth in our most recent Annual Report on Form 10-K under the headings Special Note Regarding Forward-Looking Statements and Risk Factors for the year ended December 31, 2020, in our quarterly reports on Form 10-Q, or in other reports which we from time to time file with the Securities and Exchange Commission. These reports are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on our website, www.steeldynamics.com under “Investors – SEC Filings.”
Description of the Business
We are one of the largest domestic steel producers and metal recyclers in the United States, based on estimated steelmaking and coating capacity of approximately 13 million tons and actual metals recycling volumes, with one of the most diversified product and end-market portfolios in the domestic steel industry. Our primary sources of revenue are from the manufacture and sale of steel products, the processing and sale of recycled ferrous and nonferrous metals, and the fabrication and sale of steel joists and deck products. We have three reportable segments: steel operations, metals recycling operations, and steel fabrication operations.
Operating Statement Classifications
Net Sales. Net sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of our steel products. Except for the steel fabrication operations, we recognize revenues from sales and the allowance for estimated returns and claims from these sales at the point in time control of the product transfers to the customer, upon shipment or delivery. Our steel fabrication operations recognize revenues over time based on completed fabricated tons to date as a percentage of total tons required for each contract.
Costs of Goods Sold. Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel substrate, direct and indirect labor and
14
related benefits, alloys, zinc, transportation and freight, repairs and maintenance, utilities such as electricity and natural gas, and depreciation.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and related benefits, professional services, insurance premiums, and property taxes. Companywide profit sharing and amortization of intangible assets are each separately presented in the statement of income.
Interest Expense, net of Capitalized Interest. Interest expense consists of interest associated with our senior credit facilities and other debt net of interest costs that are required to be capitalized during the construction period of certain capital investment projects.
Other (Income) Expense, net. Other income consists of interest income earned on our temporary cash deposits and short-term investments; any other non-operating income activity, including income from non-consolidated investments accounted for under the equity method. Other expense consists of any non-operating costs, such as certain acquisition and financing expenses.
Results Overview
Our consolidated results for the first quarter of 2021 were highlighted by record net sales of $3.5 billion, record operating income of $594.2 million, and record net income of $430.5 million. Domestic steel demand was strong during the first quarter 2021, particularly within the automotive, construction and industrial sectors, driving robust shipments and scrap demand, as well as significantly higher average selling prices across our entire operations, with increased metal spread in steel and metals recycling operations. Strong non-residential construction activity drove record fabrication shipments and backlogs.
Consolidated operating income increased $320.5 million, or 117%, to $594.2 million for the first quarter 2021, compared to the first quarter 2020. First quarter 2021 net income attributable to Steel Dynamics, Inc. increased $243.2 million, or 130%, to a record $430.5 million, compared to the first quarter 2020, consistent with the increased operating income.
Segment Operating Results 2021 vs. 2020 (dollars in thousands)
Three-Month Periods Ended March 31, | |||||||
2021 | % Change | 2020 | |||||
Net sales: | |||||||
Steel Operations Segment | $ | 2,642,847 | 31% | $ | 2,016,152 | ||
Metals Recycling Operations Segment | 1,079,912 | 72% | 628,739 | ||||
Steel Fabrication Operations Segment | 259,020 | 17% | 221,441 | ||||
Other | 307,481 | 155% | 120,690 | ||||
4,289,260 | 2,987,022 | ||||||
Intra-company | (744,663) | (411,922) | |||||
$ | 3,544,597 | 38% | $ | 2,575,100 | |||
Operating income (loss): | |||||||
Steel Operations Segment | $ | 637,411 | 121% | $ | 288,394 | ||
Metals Recycling Operations Segment | 50,563 | 815% | 5,528 | ||||
Steel Fabrication Operations Segment | 9,854 | (66)% | 29,163 | ||||
Other | (90,913) | (96)% | (46,355) | ||||
606,915 | 276,730 | ||||||
Intra-company | (12,716) | (3,044) | |||||
$ | 594,199 | 117% | $ | 273,686 | |||
15
Steel Operations Segment |
Steel operations consist of our six operating EAF steel mills and our under-construction Southwest-Sinton Flat Roll Steel Division, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and numerous value-added downstream steel coating and processing operations. 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. Steel operations accounted for 71% and 75% of our consolidated external net sales during the first quarter of 2021 and 2020, respectively.
Steel Operations Segment Shipments (tons):
Three Month Periods Ended March 31, | |||||
2021 | % Change | 2020 | |||
Total shipments | 2,822,274 | (1)% | 2,847,182 | ||
Intra-segment shipments | (286,296) | (253,477) | |||
Steel Operations Segment shipments | 2,535,978 | (2)% | 2,593,705 | ||
External shipments | 2,410,817 | (3)% | 2,495,164 | ||
16
Steel Operations Segment Results First Quarter 2021 vs. First Quarter 2020
During the first quarter of 2021, steel demand remained robust and product pricing gained momentum across our entire steel operations segment. Historically low customer inventories, coupled with continued strong steel demand from the automotive, construction, and industrial sectors, resulted in higher selling prices during the quarter, particularly within our sheet steel products. First quarter 2021 average selling prices increased 35%, or $269 per ton, compared to first quarter 2020. Steel operations segment shipments decreased 2% in the first quarter 2021, as compared to record quarterly shipments achieved during the same period in 2020. Net sales for the steel operations increased 31% in the first quarter 2021 when compared to the same period in 2020, due to the 35% increase in average steel selling prices and steady volume.
Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost, generally comprising approximately 55 to 65% of our steel mill operations’ manufacturing costs. Our metallic raw material cost per net ton consumed in our steel operations increased $105, or 39%, in the first quarter 2021, compared to the same period in 2020, consistent with overall increased domestic scrap pricing noted below.
As a result of average selling prices increasing more than scrap costs, metal spread (which we define as the difference between average steel mill selling prices and the cost of ferrous scrap consumed in our steel mills) increased 32% in the first quarter 2021 compared to the first quarter 2020. Due to this metal spread expansion, operating income for the steel operations increased 121%, to a record $637.4 million, in the first quarter 2021, compared to the same period in 2020.
Metals Recycling Operations Segment |
Metals recycling operations includes both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage, and scrap management services. Our steel mills utilize a large portion of the ferrous scrap sold by our metals recycling operations as raw material in our steelmaking operations, and the remainder is sold to other consumers, such as other steel manufacturers and foundries. In the first quarter 2021, 69% of the metals recycling operations ferrous scrap was sold to our own steel mills (67% in first quarter 2020), as our steel mills utilization increased 9% to 93% in the first quarter of 2021. Our metals recycling operations accounted for 13% and 11% of our consolidated external net sales during the first quarter of 2021 and 2020, respectively.
Metals Recycling Operations Segment Shipments:
Three Month Periods Ended March 31, | |||||
2021 | % Change | 2020 | |||
Ferrous metal (gross tons) | |||||
Total | 1,395,843 | 17% | 1,192,144 | ||
Inter-company | (958,661) | 20% | (798,493) | ||
External shipments | 437,182 | 11% | 393,651 | ||
Nonferrous metals (thousands of pounds) | |||||
Total | 280,809 | 3% | 272,078 | ||
Inter-company | (43,552) | (40,678) | |||
External shipments | 237,257 | 3% | 231,400 | ||
Metals Recycling Operations Segment Results First Quarter 2021 vs. First Quarter 2020
Our metals recycling operations benefitted from strong steel market demand and increased selling prices for recycled scrap in the first quarter of 2021. Domestic steel production continued to rise during the quarter, with domestic steel mill utilization rates increasing 5% to approximately 77% in the first quarter 2021 from the sequential fourth quarter 2020, and significantly higher than the COVID-19 impacted utilization rates of mid 2020. Net sales increased 72% during the first quarter of 2021 compared to the same period in 2020, driven by increased shipments, including
17
those from the Mexican scrap company acquired in August 2020, and higher average selling prices. Ferrous scrap average selling prices increased 60% during the first quarter 2021 compared to the same period in 2020, while average nonferrous scrap prices increased 47%. Ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) increased 52%, while nonferrous metal spread increased 71% during the first quarter 2021 compared to the same period in 2020. This resulted in metals recycling operations operating income increasing significantly to $50.5 million in the first quarter 2021 compared to the first quarter 2020 operating income of $5.5 million.
Steel Fabrication Operations Segment |
Steel fabrication operations include seven New Millennium Building Systems joist and deck plants located throughout the United States and in Northern Mexico. Revenues from these plants are generated from the fabrication of steel joists, trusses, girders and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 7% and 9% of our consolidated external net sales during the first quarter of 2021 and 2020, respectively.
Steel Fabrication Operations Segment Results First Quarter 2021 vs. First Quarter 2020
Our steel fabrication operations continue to benefit from a robust non-residential construction market, as order activity remains strong, with customer order backlogs at a record level at the end of the first quarter 2021. Net sales for the steel fabrication operations increased 17% during the first quarter 2021 compared to the same period in 2020, as average selling prices increased 4%, or $50 per ton, while shipments increased 13% to a quarterly record 184,000 tons.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations, generally representing approximately two-thirds of the total cost of manufacturing. The average cost of steel consumed increased 24% in the first quarter 2021, as compared to the same period in 2020, consistent with increased steel selling prices in our steel operations. As a result of steel costs per ton increasing more than selling prices per ton, metal spread (which we define as the difference between average selling prices and the cost of purchased steel) decreased 19% in the first quarter 2021 compared to the same period in 2020. As a result of this metal spread compression, operating income
18
decreased 66% to $9.9 million in the first quarter 2021 compared to the same period in 2020, despite the 13% increase in shipments.
Other Operations |
Consolidated Results First Quarter 2021 vs. First Quarter 2020
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $149.8 million during the first quarter 2021 increased 33% from the $112.9 million during the first quarter 2020, representing 4% of net sales during each period, consistent with increased profitability. Profit sharing expense during the first quarter of 2021 of $48.8 million was up 128% from the $21.5 million during the same period in 2020. The companywide profit sharing plan represents 8% of pretax earnings; therefore, our higher first quarter 2021 earnings resulted in higher profit sharing.
Interest Expense, net of Capitalized Interest. During the first quarter 2021, interest expense of $17.3 million decreased 38% from $28.0 million during the first quarter of 2020, due to decreased interest rates from our June 2020 and October 2020 refinancing of $1.6 billion of high yield senior notes with lower rate interest senior notes, and increased capitalized interest in 2021 in conjunction with construction of our new Southwest-Sinton Flat Roll Division.
Income Tax Expense. First quarter 2021 income tax expense of $128.1 million, at an effective income tax rate of 22.6%, was up 123% from the $57.4 million, at an effective income tax rate of 23.1%, during the first quarter 2020, consistent with increased income before income taxes.
Liquidity and Capital Resources
Capital Resources and Long-term Debt. Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steel, metals recycling, and steel fabrication operations, and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily from working capital requirements, capital expenditures, currently including those related to our new Southwest-Sinton Flat Roll Division, principal and interest payments related to our outstanding indebtedness (no significant principal payments until 2024), dividends to our shareholders, potential stock repurchases, and acquisitions. We have met these liquidity requirements primarily with cash provided by operations and long-term borrowings, and we also have availability under our unsecured Revolver. Our liquidity at March 31, 2021, is as follows (in thousands):
Cash and equivalents | $ | 1,245,165 | |||||||
Revolver availability | 1,188,119 | ||||||||
Total liquidity | $ | 2,433,284 |
Our total outstanding debt decreased $5.2 million during the first quarter of 2021. Our total long-term debt to capitalization ratio (representing our long-term debt, including current maturities, divided by the sum of our long-term debt, redeemable noncontrolling interests, and our total stockholders’ equity) was 39.6% and 41.6% at March 31, 2021, and December 31, 2020, respectively.
Our unsecured credit agreement has a senior unsecured revolving credit facility (Facility), which provides a $1.2 billion unsecured Revolver, and matures in December 2024. Subject to certain conditions, we have the opportunity to increase the Facility size by $500.0 million. The unsecured Revolver is available to fund working capital, capital expenditures, and other general corporate purposes. The Facility contains financial covenants and other covenants pertaining to our ability to incur indebtedness and permit liens on property. Our ability to borrow funds within the terms of the unsecured Revolver is dependent upon our continued compliance with the financial and other covenants. At March 31, 2021, we had $1.2 billion of availability on the Revolver, $11.9 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.
The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve-months (LTM) consolidated Adjusted
19
EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in the Facility) by our LTM gross interest expense, less amortization of financing fees. In addition, a debt to capitalization ratio of not more than 0.60:1.00 must be maintained. At March 31, 2021, our interest coverage ratio and debt to capitalization ratio were 13.90:1.00 and 0.39:1.00, respectively. We were, therefore, in compliance with these covenants at March 31, 2021, and we anticipate we will continue to be in compliance during the next twelve months.
Working Capital. We generated cash flow from operations of $262.2 million in the first quarter of 2021 compared to $211.3 million in the comparable 2020 period. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $411.0 million (25%), to $2.1 billion at March 31, 2021, due primarily to increased accounts receivable and inventory, consistent with increased net sales and inventory costs.
Capital Investments. During the first quarter of 2021, we invested $309.9 million in property, plant and equipment, primarily within our steel operations segment, compared with $217.5 million invested during the same period in 2020. The increase in the first quarter of 2021 versus the same period in 2020 relates to our new Southwest-Sinton Flat Roll Steel Division, which represented $254.4 million in 2021. We entered 2021 with ample liquidity of $2.6 billion to provide for our planned 2021 capital requirements, including those necessary to finish construction of our new steel mill in Sinton, Texas. For the remainder of 2021, we are planning for capital investments to be roughly $650 to $700 million, of which the new steel mill in Sinton, Texas, represents approximately $535 million.
Cash Dividends. As a reflection of continued confidence in our current and future cash flow generation ability and financial position, we increased our quarterly cash dividend by 4% to $0.26 per share in the first quarter 2021 (from $0.25 per share in 2020), resulting in declared cash dividends of $54.9 million during the first quarter of 2021, compared to $52.6 million during the same period in 2020. We paid cash dividends of $52.7 million and $51.5 million during the first quarters of 2021 and 2020, respectively. Our board of directors, along with executive management, approves the payment of dividends on a quarterly basis. The determination to pay cash dividends in the future is at the discretion of our board of directors, after taking into account various factors, including our financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs and growth plans.
Other. In February 2020 our board of directors authorized a share repurchase program of up to $500 million of our common stock. Under the share repurchase program, purchases take place as and when we determine in open market or private transactions made based upon the market price of our common stock, the nature of other investment opportunities or growth projects, our cash flows from operations, and general economic conditions. The share repurchase program does not require us to acquire any specific number of shares, and may be modified, suspended, extended or terminated by us at any time. The share repurchase program does not have an expiration date. There were no share repurchases during the first quarter of 2021, and $106.5 million of share repurchases during the first quarter of 2020. As of March 31, 2021, we have $444.0 million remaining available to purchase under the 2020 share repurchase program.
Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will depend upon general economic, financial, business and ongoing COVID-19 conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure that our operating results, cash flows, access to credit markets and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flows from operations, together with other available sources of funds, including borrowings under our Revolver, if necessary, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness, funding working capital requirements, and anticipated capital expenditures noted above.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk
In the normal course of business, we are exposed to the market risk and price fluctuations related to the sale of our products and to the purchase of raw materials used in our operations, such as metallic raw materials, electricity, natural gas and its transportation services, fuel, air products, zinc, and electrodes. Our risk strategy associated with product sales has generally been to obtain competitive prices for our products and to allow operating results to reflect market price movements dictated by supply and demand.
Our risk strategy associated with the purchase of raw materials utilized within our operations has generally been to make some commitments with suppliers relating to future expected requirements for some commodities such as electricity, water, natural gas and its transportation services, fuel, air products, zinc, and electrodes. Certain of these commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of generally up to 5 years for physical commodity requirements and commodity transportation requirements, with some extending beyond, and for up to 11 remaining years for air products. We utilized such “take or pay” requirements during the past three years under these contracts, except for certain air products at our idle Minnesota ironmaking operations. We believe that production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process, other than certain air products related to our Minnesota ironmaking operations while idle. We also purchase electricity consumed at our Butler Flat Roll Division pursuant to a contract which extends through December 2022, which establishes an agreed fixed-rate energy charge per Mill/kWh consumed for each year through the expiration of the agreement.
In our metals recycling and steel operations, we have certain fixed price contracts with various customers and suppliers for future delivery of nonferrous and ferrous metals. Our risk strategy has been to enter into base metal financial contracts with the goal to protect the profit margin, within certain parameters, that was contemplated when we entered into the transaction with the customer or vendor. At March 31, 2021, we had a cumulative unrealized gain associated with these financial contracts of $14.5 million, substantially all of which have a settlement date within the next twelve months. We believe the customer contracts associated with the financial contracts will be fully consummated.
ITEM 4. CONTROLS AND PROCEDURES
| (a) | Evaluation of Disclosure Controls and Procedures |
As required, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2021, the end of the period covered by this quarterly report, our disclosure controls and procedures were designed to provide and were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
| (b) | Changes in Internal Controls Over Financial Reporting |
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
21
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various litigation matters, including administrative proceedings, regulatory proceedings, governmental investigations, environmental matters, and commercial and construction contract disputes, none of which are currently expected to have a material impact on our financial condition, results of operations, or liquidity.
We may also be involved from time to time in various governmental investigations, regulatory proceedings or judicial actions seeking penalties, injunctive relief, and/or remediation under federal, state and local environmental laws and regulations. The United States EPA has conducted such investigations and proceedings involving us, in some instances along with state environmental regulators, under various environmental laws, including RCRA, CERCLA, the Clean Water Act and the Clean Air Act. Some of these matters have resulted in fines or penalties, exclusive of interest and costs, which did not exceed $1 million in aggregate, as of March 31, 2021.
ITEM 1A. RISK FACTORS
No material changes have occurred to the indicated risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
22
ITEM 6. EXHIBITS
Reference is made to the Exhibit Index preceding the signature page hereto, which Exhibit Index is hereby incorporated into this item.
EXHIBIT INDEX
Articles of Incorporation | |
3.1 | |
3.2 | |
Executive Officer Certifications | |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
XBRL Documents | |
101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Document |
101.DEF* | Inline XBRL Taxonomy Definition Document |
101.LAB* | Inline XBRL Taxonomy Extension Label Document |
101.PRE* | Inline XBRL Taxonomy Presentation Document |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed concurrently herewith |
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
April 29, 2021 | ||
| ||
STEEL DYNAMICS, INC. | ||
By: | /s/ Theresa E. Wagler | |
Theresa E. Wagler | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
24