Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
ended September 30, 2022
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-21719
Steel Dynamics, Inc.
(Exact name of registrant as specified in its charter)
Indiana
35-1929476
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7575 West Jefferson Blvd, Fort Wayne, IN
46804
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (260) 969-3500
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock voting, $0.0025 par value
STLD
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No⌧
As of October 21, 2022, Registrant had 175,571,409 outstanding shares of common stock.
STEEL DYNAMICS, INC.
PART I. Financial Information
Item 1.
Financial Statements:
Page
Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021
1
Consolidated Statements of Income for the three and nine-month periods ended September 30, 2022 and 2021 (unaudited)
2
Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2022 and 2021 (unaudited)
3
Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2022 and 2021 (unaudited)
4
Notes to Consolidated Financial Statements (unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
25
Item 4.
Controls and Procedures
PART II. Other Information
Legal Proceedings
26
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
27
Exhibit Index
Signature
28
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
December 31,
2022
2021
Assets
(unaudited)
Current assets
Cash and equivalents
$
1,420,497
1,243,868
Short-term investments
583,211
-
Accounts receivable, net
2,255,206
1,911,385
Accounts receivable-related parties
78,788
5,049
Inventories
3,376,532
3,531,130
Other current assets
99,210
209,591
Total current assets
7,813,444
6,901,023
Property, plant and equipment, net
5,146,606
4,751,430
Intangible assets, net
276,586
295,345
Goodwill
451,594
453,835
Other assets
359,468
129,601
Total assets
14,047,698
12,531,234
Liabilities and Equity
Current liabilities
Accounts payable
1,153,299
1,266,833
Accounts payable-related parties
11,848
13,722
Income taxes payable
41,121
13,746
Accrued payroll and benefits
545,311
539,812
Accrued interest
33,535
17,533
Accrued expenses
323,331
278,549
Current maturities of long-term debt
22,951
97,174
Total current liabilities
2,131,396
2,227,369
Long-term debt
3,012,120
3,008,702
Deferred income taxes
856,650
854,905
Other liabilities
112,327
120,087
Total liabilities
6,112,493
6,211,063
Commitments and contingencies
Redeemable noncontrolling interests
172,403
211,414
Equity
Common stock voting, $0.0025 par value; 900,000,000 shares authorized;
267,228,549 and 267,224,622 shares issued; and 176,563,632 and 194,997,922
shares outstanding, as of September 30, 2022 and December 31, 2021, respectively
649
Treasury stock, at cost; 90,664,917 and 72,226,700 shares,
as of September 30, 2022 and December 31, 2021, respectively
(4,046,555)
(2,674,267)
Additional paid-in capital
1,219,947
1,218,933
Retained earnings
10,799,863
7,761,417
Accumulated other comprehensive income (loss)
(2,748)
(2,091)
Total Steel Dynamics, Inc. equity
7,971,156
6,304,641
Noncontrolling interests
(208,354)
(195,884)
Total equity
7,762,802
6,108,757
Total liabilities and equity
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three-Month Periods Ended
Nine-Month Periods Ended
Net sales
Unrelated parties
5,438,747
5,081,476
16,814,051
13,072,657
Related parties
212,960
6,812
620,436
25,536
Total net sales
5,651,707
5,088,288
17,434,487
13,098,193
Costs of goods sold
4,187,278
3,487,659
12,304,203
9,497,606
Gross profit
1,464,429
1,600,629
5,130,284
3,600,587
Selling, general and administrative expenses
132,627
157,526
403,019
461,686
Profit sharing
105,122
113,880
373,333
244,868
Amortization of intangible assets
6,836
7,178
21,158
22,054
Operating income
1,219,844
1,322,045
4,332,774
2,871,979
Interest expense, net of capitalized interest
25,347
12,704
67,683
44,871
Other (income) expense, net
(13,975)
6,776
2,472
26,886
Income before income taxes
1,208,472
1,302,565
4,262,619
2,800,222
Income tax expense
289,997
302,406
1,022,138
649,105
Net income
918,475
1,000,159
3,240,481
2,151,117
Net income attributable to noncontrolling interests
(4,150)
(9,396)
(12,671)
(27,556)
Net income attributable to Steel Dynamics, Inc.
914,325
990,763
3,227,810
2,123,561
Basic earnings per share attributable to Steel
Dynamics, Inc. stockholders
5.07
4.89
17.33
10.22
Weighted average common shares outstanding
180,264
202,450
186,288
207,704
Diluted earnings per share attributable to Steel
Dynamics, Inc. stockholders, including the effect
of assumed conversions when dilutive
5.03
4.85
17.21
10.15
Weighted average common shares and share equivalents outstanding
181,613
204,167
187,531
209,222
Dividends declared per share
0.34
0.26
1.02
0.78
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Other comprehensive income - net unrealized gain (loss) on cash
flow hedging derivatives, net of income tax (benefit) of $703,
($6,797), ($205), and $2,711 for the three and nine-month periods
ended September 30, 2022 and 2021, respectively
2,251
(21,761)
(657)
8,681
Comprehensive income
920,726
978,398
3,239,824
2,159,798
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Steel Dynamics, Inc.
916,576
969,002
3,227,153
2,132,242
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Operating activities:
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
98,714
87,407
281,961
261,373
Equity-based compensation
12,093
9,917
39,681
36,765
3,990
71,008
3,986
188,474
Other adjustments
(12,409)
(781)
(1,892)
(2,915)
Changes in certain assets and liabilities:
Accounts receivable
326,731
(321,771)
(417,550)
(920,877)
270,628
(412,952)
154,391
(1,052,475)
(15,789)
(20,361)
(9,274)
(18,818)
(264,313)
48,726
(152,763)
472,562
Income taxes receivable/payable
8,269
(353)
146,822
86,791
149,766
169,817
31,132
278,240
Net cash provided by operating activities
1,496,155
630,816
3,316,975
1,480,237
Investing activities:
Purchases of property, plant and equipment
(241,229)
(214,629)
(564,701)
(801,698)
Purchases of short-term investments
(283,188)
(634,698)
Proceeds from maturities of short-term investments
49,794
Business combination
(47,638)
Investments in unconsolidated affiliates
(222,480)
Other investing activities
4,113
1,024
9,340
3,273
Net cash used in investing activities
(518,148)
(213,605)
(1,410,383)
(798,425)
Financing activities:
Issuance of current and long-term debt
348,286
343,007
1,050,933
1,059,912
Repayment of current and long-term debt
(363,060)
(382,489)
(1,127,051)
(1,095,338)
Dividends paid
(62,088)
(53,380)
(177,131)
(161,025)
Purchases of treasury stock
(481,676)
(337,616)
(1,387,890)
(730,814)
Other financing activities
(6,057)
(4,776)
(88,825)
(27,468)
Net cash used in financing activities
(564,595)
(435,254)
(1,729,964)
(954,733)
Increase (decrease) in cash, cash equivalents, and restricted cash
413,412
(18,043)
176,628
(272,921)
Cash, cash equivalents, and restricted cash at beginning of period
1,012,585
1,119,244
1,249,369
1,374,122
Cash, cash equivalents, and restricted cash at end of period
1,425,997
1,101,201
Supplemental disclosure information:
Cash paid for interest
9,214
9,174
59,496
62,216
Cash paid for income taxes, net
276,948
222,691
867,350
370,835
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Description of the Business and Significant Accounting Policies
Description of the Business
Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is one of the largest and most diversified domestic steel producers and metals recycler. The company has three reporting segments: steel operations, metals recycling operations, and steel fabrication operations.
Steel Operations Segment. Steel operations include the company’s electric arc furnace (EAF) steel mills, including Butler Flat Roll Division, Columbus Flat Roll Division, Southwest-Sinton Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, and Steel of West Virginia; and steel coating and processing operations at The Techs, Heartland Flat Roll Division, United Steel Supply (USS), and Vulcan Threaded Products, Inc (Vulcan). Steel operations accounted for 66% and 72% of the company’s consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 67% and 72% of the company’s consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
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 8% and 12% of the company’s consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 10% and 12% of the company’s consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Steel Fabrication Operations Segment. Steel fabrication operations include the company’s New Millennium Building Systems’ joist and deck plants located throughout the United States, and in Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 20% and 10% of the company’s consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 18% and 8% of the company’s consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Other. Other operations consist of subsidiary operations that are below the company’s quantitative thresholds required for reportable segments and primarily consist of joint ventures, and the company’s 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 the company’s profit sharing component, representing 8% of consolidated pretax income.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SDI, together with its wholly- and majority-owned or controlled consolidated subsidiaries, after elimination of intercompany accounts and transactions. Noncontrolling and redeemable noncontrolling interests represent the noncontrolling owners’ 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 87.5% by SDI) are $61.2 million at September 30, 2022 and $100.2 million at December 31, 2021. Noncontrolling members of USS exercised their put option to require the company to purchase an additional 12.5% of the equity interest of USS effective April 1, 2022. Redeemable noncontrolling interests related to Mesabi Nugget (owned 85% by SDI) are $111.2 million at September 30, 2022, and December 31, 2021.
Note 1. Description of the Business and Significant Accounting Policies (Continued)
Use of Estimates
These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.
In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Cash and Equivalents, and Restricted Cash
Cash and equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Restricted cash is primarily funds held in escrow as required by various insurance and government organizations. The balance of cash, cash equivalents and restricted cash in the consolidated statements of cash flows includes restricted cash of $5.5 million for all periods presented, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.
The company’s goodwill consisted of the following at September 30, 2022, and December 31, 2021 (in thousands):
Steel Operations Segment
272,133
Metals Recycling Operations Segment
177,536
179,777
Steel Fabrication Operations Segment
1,925
Metals Recycling Operations Segment goodwill decreased $2.2 million from December 31, 2021 to September 30, 2022, in recognition of the 2022 tax benefit related to the normal amortization of the component of Metals Recycling Operations tax-deductible goodwill in excess of book goodwill.
6
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 September 30, 2022, the company reported $2.3 billion of accounts receivable, net of allowances for credit losses of $6.3 million. Changes in the allowance were not material for each of the three and nine-month periods ended September 30, 2022 and 2021.
Note 2. Investments in Unconsolidated Affiliates and Business Combinations
On January 31, 2022, the company purchased a 45% minority equity interest in New Process Steel, L.P. (NPS), a metals solutions and distribution supply-chain management company headquartered in Houston, Texas, with a focus toward growing its value-added manufacturing applications. On February 28, 2022, the company also purchased a minority equity interest in Aymium, a producer of renewable biocarbon products. As the company does not have power to control these entities, the company accounts for these investments using the equity method of accounting, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.
On July 29, 2022, the company attained a 94.4% equity interest in a joint venture concurrently formed with Unity Aluminum, Inc., for the construction and operation of a new state-of-the-art low-carbon aluminum flat rolled mill. Operating results from and after July 29, 2022, are reflected in the company’s consolidated financial statements, in other operations. On October 1, 2022, the company acquired 100% of ROCA ACERO, S.A. de C.V. (“ROCA”), as part of its North American raw material procurement strategy. ROCA is headquartered in Monterrey, Mexico, and operates five ferrous and nonferrous scrap facilities strategically positioned near high-volume industrial scrap sources located throughout Central and Northern Mexico. Both transactions were funded with available cash.
Note 3. Earnings Per Share
Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive restricted stock units, deferred stock units, restricted stock, and performance awards, and are excluded from the computation in periods in which they have an anti-dilutive effect. There were no anti-dilutive common share equivalents as of or for the three and nine-month periods ended September 30, 2022 and 2021.
Three-Month Periods Ended September 30,
Weighted
Average
Net Income
Shares
Per Share
(Numerator)
(Denominator)
Amount
Basic earnings per share
Dilutive common share equivalents
1,349
1,717
Diluted earnings per share
7
Note 3. Earnings Per Share (Continued)
Nine-Month Periods Ended September 30,
1,243
1,518
Note 4. Inventories
Inventories are stated at lower of cost or net realizable value. Cost is determined using a weighted average cost method for raw materials and supplies, and on a first-in, first-out basis for other inventory. Inventory consisted of the following (in thousands):
Raw materials
1,797,858
1,870,300
Supplies
601,480
552,616
Work in progress
314,658
402,207
Finished goods
662,536
706,007
Total inventories
8
Note 5. 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 of the three and nine-month periods ended September 30, 2022 and 2021:
Stockholders of Steel Dynamics, Inc.
Accumulated
Additional
Other
Redeemable
Common
Treasury
Paid-In
Retained
Comprehensive
Noncontrolling
Total
Stock
Capital
Earnings
Income (Loss)
Interests
Balances at December 31, 2021
Dividends declared
(64,344)
Noncontrolling investors, net
(21,633)
16,500
Share repurchases
(389,190)
12,960
(14,910)
(121)
(2,071)
1,103,931
3,423
1,107,354
Other comprehensive income, net of tax
11,387
Balances at March 31, 2022
(3,050,497)
1,204,023
8,800,883
9,296
(214,094)
6,750,260
227,914
630
(2,495)
1,235
(630)
(59,611)
(517,024)
1,028
8,828
(144)
9,712
1,209,554
5,098
1,214,652
(14,295)
Balances at June 30, 2022
(3,566,493)
1,213,481
9,945,710
(4,999)
(207,761)
7,380,587
168,303
(60,031)
(4,743)
4,100
1,614
6,466
(141)
7,939
4,150
Balances at September 30, 2022
Balances at December 31, 2020
648
(1,623,747)
1,207,392
4,758,969
1,902
(155,552)
4,189,612
158,614
(54,917)
(9,905)
5,000
8,881
(4,447)
(161)
4,273
430,507
8,248
438,755
3,765
Balances at March 31, 2021
(1,614,866)
1,202,945
5,134,398
5,667
(157,209)
4,571,583
163,614
(18,879)
12,800
(393,198)
1,169
7,888
(125)
8,932
702,291
9,912
712,203
26,677
Balances at June 30, 2021
(2,006,895)
1,210,833
5,783,184
32,344
(166,176)
4,853,938
176,414
(51,942)
(150)
(15,026)
(15,176)
10,400
34
8,605
8,518
9,396
Balances at September 30, 2021
(2,344,477)
1,219,438
6,721,734
10,583
(171,806)
5,436,120
186,814
9
Note 6. 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.
Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s significant futures contract commitments as of September 30, 2022:
Commodity Futures
Long/Short
Metric Tons
Aluminum
Long
12,150
Short
17,975
Copper
13,144
25,997
The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of September 30, 2022, and December 31, 2021, and gains and losses related to derivatives included in the company’s statement of income for each of the three and nine-month periods ended September 30, 2022 and 2021 (in thousands):
Asset Derivatives
Liability Derivatives
Balance sheet
Fair Value
location
September 30, 2022
December 31, 2021
Derivative instruments designated as hedges
Commodity futures
4,357
1,278
5,753
7,430
Derivative instruments not designated as hedges
8,399
4,319
4,069
6,171
Total derivative instruments
12,756
5,597
9,822
13,601
10
Note 6. Derivative Financial Instruments (Continued)
The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $13.0 million at September 30, 2022, and $24.9 million at December 31, 2021, and are reflected in other current assets in the consolidated balance sheets.
Amount of gain (loss)
recognized in income
Location of gain
on derivatives for the
(loss) recognized
three-month periods
Hedged items in
in income on
ended September 30,
fair value hedge
related hedged
derivatives
relationships
items
Derivatives in fair value hedging relationships
(7,663)
(5,205)
Firm commitments
3,389
4,404
Inventory
4,941
500
8,330
4,904
Derivatives not designated as hedging instruments
18,164
12,160
nine-month periods
5,618
4,765
(2,146)
187
(1,440)
(1,705)
(3,586)
(1,518)
34,333
(33,620)
Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $151,000 and $1.6 million during the three-month periods ended September 30, 2022 and 2021, respectively, and gains of $145,000 and $17,000 during the nine-month periods ended September 30, 2022 and 2021, respectively. Gains excluded from hedge effectiveness testing of $817,000 and $1.3 million decreased cost of goods sold during the three-month periods ended September 30, 2022 and 2021, respectively. Gains excluded from hedge effectiveness testing of $1.9 million and $3.2 million decreased cost of goods sold during the nine-month periods ended September 30, 2022 and 2021, respectively.
Derivatives accounted for as cash flow hedges resulted in net gains of $10.0 million and net losses of $2.3 million recognized in other comprehensive income for the three-month periods ended September 30, 2022 and 2021, respectively, and net gains of $6.8 million and $41.8 million for the nine-month periods ended September 30, 2022 and 2021, respectively. Net losses of $7.1 million and net gains of $23.2 million were reclassified from accumulated other comprehensive income for the three-month periods ended September 30, 2022 and 2021, respectively, and net losses of $7.7 million and net gains of $30.4 million for the nine-month periods ended September 30, 2022 and 2021, respectively. At September 30, 2022, the company expects to reclassify all $3.6 million of net losses on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts. The maximum term over which the company is hedging its exposure to the variability of future cash flows for forecasted transactions is less than 12 months.
11
Note 7. 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:
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of September 30, 2022 and December 31, 2021 (in thousands):
Quoted Prices
Significant
in Active
Markets for
Observable
Unobservable
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
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 short-term investments and commodity futures contracts are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on references available (Level 2). The fair value of long-term debt, including current maturities, as determined by quoted market prices (Level 2), was approximately $2.6 billion and $3.3 billion at September 30, 2022 and December 31, 2021, respectively (with a corresponding carrying amount in the consolidated balance sheet of $3.1 billion at September 30, 2022 and December 31, 2021).
Note 8. 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 the company’s financial condition, results of operations, or liquidity.
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Note 9. 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 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 the company’s profit sharing component.
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
Recycling
Fabrication
Operations
Eliminations
Consolidated
Net sales - disaggregated revenue
External
3,512,202
328,187
1,140,272
314,104
5,294,765
External Non-U.S.
208,623
143,879
4,440
356,942
Other segments
152,719
512,559
5,554
(670,832)
3,873,544
984,625
1,145,826
318,544
Operating income (loss)
654,677
6,735
676,726
(137,160)
(1)
18,866
Income (loss) before income taxes
646,426
5,415
674,718
(136,613)
18,526
76,453
12,932
2,454
6,875
Capital expenditures
131,753
11,137
4,975
93,364
241,229
As of September 30, 2022
9,011,489
1,201,017
1,446,405
2,511,506
(2)
(122,719)
(3)
Footnotes related to the three-month period ended September 30, 2022, segment results (in millions):
Corporate SG&A
(15.5)
1,230.8
Companywide equity-based compensation
(14.6)
583.2
Company profit sharing component
(103.8)
28.1
Other, net
(3.3)
58.0
(137.2)
280.8
Intra-company debt
35.8
294.8
2,511.5
Elimination of intra-company receivables
(50.5)
Elimination of intra-company debt
(35.8)
(36.4)
(122.7)
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Note 9. Segment Information (Continued)
September 30, 2021
3,503,964
430,087
493,452
337,011
4,764,514
163,754
157,005
352
2,663
323,774
243,455
625,025
122
453
(869,055)
3,911,173
1,212,117
493,926
340,127
1,346,967
43,616
89,389
(138,576)
(19,351)
1,341,051
43,328
88,892
(150,992)
(19,714)
65,852
14,054
2,263
5,238
200,721
6,870
3,458
3,580
214,629
Footnotes related to the three-month period ended September 30, 2021, segment results (in millions):
(17.0)
(10.7)
(111.1)
0.2
(138.6)
For the nine-month period ended
11,015,050
1,252,323
3,155,824
941,799
16,364,996
610,293
449,103
183
1,069,491
426,470
1,782,398
10,117
1,030
(2,220,015)
12,051,813
3,483,824
3,166,124
952,741
2,920,412
106,138
1,742,792
(473,889)
37,321
2,885,437
104,591
1,736,680
(500,385)
36,296
217,097
39,207
7,317
18,340
403,807
37,893
13,234
109,767
564,701
Footnotes related to the nine-month period ended September 30, 2022, segment results (in millions):
(47.8)
(39.3)
(366.1)
(20.7)
(473.9)
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8,991,273
1,243,837
1,081,123
960,953
12,277,186
421,648
388,961
518
9,880
821,007
535,541
1,810,337
3,020
2,125
(2,351,023)
9,948,462
3,443,135
1,084,661
972,958
2,997,375
141,775
127,652
(357,183)
(37,640)
2,970,465
141,063
125,827
(398,485)
(38,648)
198,170
41,994
7,344
13,865
740,569
38,112
9,156
13,861
801,698
Footnotes related to the nine-month period ended September 30, 2021, segment results (in millions):
(53.2)
(56.6)
(238.2)
(9.2)
(357.2)
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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, aluminum, 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 imports of steel and North American aluminum flat rolled supply deficit, 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 energy resources are subject to volatile market conditions; (7) increased environmental, greenhouse gas emissions and sustainability considerations or regulations; (8) compliance with and changes in environmental and remediation requirements; (9) significant price and other forms of competition from other steel and aluminum producers, scrap processors and alternative materials; (10) availability of an adequate source of supply of scrap 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; (17) the impacts of impairment charges; (18) unanticipated difficulties in integrating or starting up new assets; and (19) risks and uncertainties involving product and/or technology development.
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, 2021, 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.”
We are one of the largest domestic steel producers and metal recyclers in the United States, based on estimated steelmaking and steel coating capacity of approximately 16 million tons, including 3 million tons related to our new Southwest-Sinton Flat Roll Division (Sinton), 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 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, including, among other items, labor and related benefits, and professional services.
Company-wide 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; any other non-operating income activity, including income from investments in unconsolidated affiliates accounted for under the equity method. Other expense consists of any non-operating costs, such as certain acquisition and financing expenses.
Results Overview
In the third quarter of 2022 we achieved record steel shipments of 3.2 million tons, record steel fabrication operating income of $676.7 million, and record cash flow from operations of $1.5 billion. During the third quarter of 2022, steel demand remained strong, most notably in the construction industry, and complemented by the automotive, industrial, and energy sectors, resulting in record steel shipments. Our steel fabrication segment achieved record operating income and record shipments during the quarter, on robust non-residential construction demand and continued increasing record average selling prices.
Consolidated operating income decreased $102.2 million, or 8%, to $1.2 billion for the third quarter of 2022, compared to the third quarter of 2021, as record steel fabrication operating income was more than offset by lower steel operating income. Third quarter 2022 net income attributable to Steel Dynamics, Inc. decreased $76.4 million, or 8%, to $914.3 million, compared to the third quarter of 2021, consistent with the decreased operating income.
Consolidated operating income increased $1.5 billion, or 51%, to $4.3 billion for the first nine months of 2022, compared to the first nine months of 2021, due to a $1.6 billion increase in steel fabrication operating income. First nine months 2022 net income attributable to Steel Dynamics, Inc. increased 52% to $3.2 billion, compared to the first nine months of 2021, consistent with the increased operating income.
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Segment Operating Results 2022 vs. 2021 (dollars in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
% Change
Net sales:
(1)%
21%
(19)%
1%
132%
192%
(6)%
(2)%
6,322,539
5,957,343
19,654,502
15,449,216
Intra-company
11%
33%
Operating income (loss):
(51)%
(3)%
(85)%
(25)%
657%
1265%
(33)%
1,200,978
1,341,396
4,295,453
2,909,619
(8)%
51%
Steel operations consist of our electric arc furnace steel mills, 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 66% and 72% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 67% and 72% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Steel Operations Segment Shipments (tons):
Total shipments
3,154,857
13%
2,803,571
9,163,930
8%
8,517,121
Intra-segment shipments
(339,980)
(291,868)
(1,080,989)
(841,743)
Steel Operations Segment shipments
2,814,877
12%
2,511,703
8,082,941
5%
7,675,378
External shipments
2,694,709
14%
2,366,928
7,796,390
7%
7,281,752
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Steel Operations Segment Results 2022 vs. 2021
During the third quarter of 2022, steel demand remained steady compared to the first half of 2022, with the construction, automotive, industrial and energy sectors continuing to lead steel demand. This continued strong demand resulted in record quarterly total shipments, including 268,000 tons from Sinton. Sheet steel pricing continued to trend downward, as it had throughout the first half of 2022, resulting in lower realized selling values than in the third quarter of 2021. Third quarter 2022 total steel segment average selling prices decreased 12%, or $181 per ton, compared to third quarter of 2021. Steel operations segment shipments, including Sinton, increased 12% in the third quarter 2022, as compared to the same period in 2021. Net sales for the steel operations in the third quarter 2022 were comparable to the same period in 2021, due to the decrease in average steel selling prices offsetting increased shipments. Net sales for the steel operations increased 21%, which included Sinton, in the first nine months of 2022 when compared to the same period in 2021, due to the 5% increase in steel shipments combined with a 15% increase in average selling prices.
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 decreased $17, or 3%, in the third quarter of 2022, compared to the same period in 2021, consistent with overall decreased domestic scrap pricing noted below in the metals recycling operations segment discussion. In the first nine months of 2022, our metallic raw material cost per ton increased $62, or 14% compared to the same period in 2021.
As a result of average selling prices decreasing more than scrap costs, specifically for sheet steel products, 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) decreased 14% in the third quarter of 2022 compared to the third quarter of 2021. As a result of this metal spread compression and additional costs during start-up at Sinton, operating income for the steel operations decreased 51%, to $657.4 million, in the third quarter of 2022, compared to the same period in 2021. First nine months 2022 operating income decreased 3%, to $2.9 billion, compared to the first nine months of 2021 due to additional costs during start-up at Sinton during 2022.
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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 third quarters of 2022 and 2021, 68% and 65%, respectively, of metals recycling operations ferrous scrap was sold to our own steel mills, as our steel mills utilization was 93% in the third quarters of 2022 and 2021. Our metals recycling operations accounted for 8% and 12% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 10% and 12% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Metals Recycling Operations Segment Shipments:
Ferrous metal (gross tons)
1,320,117
(4)%
1,371,126
3,944,068
(5)%
4,167,416
Inter-company
(896,933)
0%
(895,559)
(2,645,655)
(2,733,941)
423,184
(11)%
475,567
1,298,413
(9)%
1,433,475
Nonferrous metals (thousands of pounds)
257,710
271,325
785,381
818,993
(37,523)
(31,840)
(98,183)
(103,324)
220,187
239,485
687,198
715,669
Metals Recycling Operations Segment Results 2022 vs. 2021
Our metals recycling operations were challenged by sharply decreasing selling prices for recycled scrap in the third quarter of 2022. Net sales decreased 19% during the third quarter of 2022 compared to the same period in 2021, driven by lower average selling prices for both ferrous and nonferrous metals, and lower shipments as domestic steel mill utilization rates declined. Domestic steel mill utilization rates were approximately 78% in the third quarter of 2022, as compared to approximately 85% in the third quarter of 2021. Ferrous scrap average selling prices decreased 20% during the third quarter of 2022 compared to the same period in 2021, while average nonferrous scrap prices decreased 7%. Ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) decreased 22%, and nonferrous metal spread decreased 11% during the third quarter of 2022 compared to the same period in 2021. As a result of the lower shipments and compressed ferrous and nonferrous metals spreads, metals recycling operations operating income decreased 85% to $6.7 million in the third quarter of 2022 compared to the third quarter of 2021.
Net sales for our metals recycling operations in the first nine months of 2022 were comparable to the same period in 2021, driven by increased pricing while shipments decreased. Ferrous scrap average selling prices increased 5% during the first nine months of 2022 compared to the same period in 2021, while nonferrous average selling prices increased 9%. Ferrous pricing increased consistently during the first nine months of 2021, but has decreased at a slower pace during the first nine months of 2022. Ferrous and nonferrous shipments decreased 5% and 4%, respectively, in the first nine months of 2022 compared to the first nine months of 2021. Ferrous metal spread increased 4%, while nonferrous metal spread increased 2% in the first nine months of 2022 compared to the first nine months of 2021. Metals recycling operations operating income in the first nine months of 2022 of $106.1 million decreased 25% from the first nine months of 2021 operating income of $141.8 million, as increased ferrous and nonferrous metal spread, was more than offset by decreased shipments.
20
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 20% and 10% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 18% and 8% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Steel Fabrication Operations Segment Results 2022 vs. 2021
Our steel fabrication operations continue to benefit from the strong non-residential construction market, resulting in continued historically high order backlog and forward-pricing at the end of the third quarter of 2022. We achieved record quarterly segment operating income of $676.7 million on record shipments of 218,000 tons. Net sales for the steel fabrication operations increased 132% during the third quarter of 2022 compared to the same period in 2021, as average selling prices significantly increased $2,906 per ton, or 124%, while shipments increased 3%. Net sales for the segment increased 192% during the first nine months of 2022, compared to the same period in 2021, as shipments increased 11%, and average selling prices increased 164%, or $3,041 per ton.
The purchase of various steel products is the largest single cost of production for our steel fabrication operations, historically representing approximately two-thirds of the total cost of manufacturing, increasing to approximately three-fourths during 2021 and the first nine months of 2022 consistent with the increased steel costs. The average cost per ton of steel consumed increased 11% in the third quarter 2022, as compared to the same period in 2021. As a result of selling prices per ton increasing significantly more than steel input costs per ton, metal spread (which we define as the difference between average selling prices and the cost of purchased steel) more than quadrupled in the third quarter of 2022 compared to the same period in 2021. This expanded metal spread and increased shipments resulted in record operating income of $676.7 million in the third quarter 2022, more than six times the $89.4 million in the same period in 2021. For the first nine months of 2022, operating income increased $1.6 billion to $1.7 billion compared to the first nine months of 2021, as a 369% increase in metal spread combined with the 11% increase in shipments resulted in record nine-month results.
21
Other Operations
Third Quarter Consolidated Results 2022 vs. 2021
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $132.6 million during the third quarter of 2022 decreased 16% from the $157.5 million during the third quarter of 2021. Selling, general and administrative expenses represented 2.3% and 3.1% of net sales during third quarter 2022 and 2021, respectively. The decrease in third quarter 2022 compared to third quarter 2021 is due primarily to the costs associated with the construction of Sinton being reported in selling, general and administrative in 2021, prior to the completion of the mill’s construction and start-up in early 2022.
Profit sharing expense during the third quarter of 2022 of $105.1 million decreased 8% from the $113.9 million during the same period in 2021, consistent with decreased pretax earnings. The company profit sharing component represents 8% of pretax earnings.
Interest Expense, net of Capitalized Interest. During the third quarter of 2022, interest expense was $25.3 million, an increase of $12.6 million compared to the third quarter of 2021. The higher interest expense in the third quarter 2022 compared to the same period in 2021 was due to higher capitalized interest in 2021 related to the construction of Sinton.
Income Tax Expense. Third quarter 2022 income tax expense of $290.0 million, at an effective income tax rate of 24.0%, decreased 4% compared to the $302.4 million, at an effective income tax rate of 23.2%, during the third quarter of 2021, consistent with decreased pretax earnings.
First Nine Months Consolidated Results 2022 vs. 2021
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $403.0 million during the first nine months of 2022 decreased 13% compared to the $461.7 million during the first nine months of 2021, representing 2.3% and 3.5% of net sales during each period, respectively. The decrease in 2022 compared to 2021 is due primarily to a $27.9 million decrease in certain equity-based compensation expense, as well as $34.6 million more costs associated with the construction of Sinton being reported in selling, general and administrative in 2021, prior to the completion of the mill’s construction and start-up in early 2022.
Profit sharing expense during the first nine months of 2022 of $373.3 million increased 52% from the $244.9 million during the same period in 2021, consistent with increased pretax earnings.
Interest Expense, net of Capitalized Interest. During the first nine months of 2022, interest expense of $67.7 million increased 51% from $44.9 million during the first nine months of 2021. The higher interest expense in 2022 compared to 2021 was due to higher capitalized interest in 2021 related to the construction of Sinton.
Income Tax Expense. First nine months 2022 income tax expense of $1.0 billion, at an effective income tax rate of 24.0%, was up 57% from the $649.1 million, at an effective income tax rate of 23.2%, during the first nine months of 2021, consistent with increased pretax earnings.
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 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, including expansion projects, principal and interest payments related to our outstanding indebtedness (no significant principal payments until 2024), dividends to our shareholders, and potential stock repurchases and acquisitions or investments. We have met and intend to continue to meet these liquidity
22
requirements primarily with available cash and cash provided by operations, and long-term borrowings, and we also have availability under our unsecured Revolver. Our liquidity at September 30, 2022, is as follows (in thousands):
Revolver availability
1,190,835
Total liquidity
3,194,543
Our total outstanding debt of $3.0 billion decreased 2% during the first nine months of 2022 from reductions in revolver borrowings at one of our controlled subsidiaries. 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 27.7% and 32.9% at September 30, 2022, and December 31, 2021, 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 certain assets. 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 September 30, 2022, we had $1.2 billion of availability on the Revolver, $9.2 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding.
The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve-months (LTM) consolidated Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in the Facility) by our LTM gross interest expense, less amortization of financing fees. In addition, a debt to capitalization ratio of not more than 0.60:1.00 must be maintained. At September 30, 2022, our interest coverage ratio and debt to capitalization ratio were 60.45:1.00 and 0.28:1.00, respectively. We were, therefore, in compliance with these covenants at September 30, 2022, and we anticipate we will continue to be in compliance during the next twelve months.
Working Capital. We generated cash flow from operations of $3.3 billion in the first nine months of 2022 compared to $1.5 billion in the same 2021 period. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $313.2 million, or 9%, to $3.7 billion at September 30, 2022, due primarily to increased accounts receivable and inventory values, consistent with increased net sales and selling prices, compared to an increase of $1.2 billion for the same period in 2021.
Capital Investments. During the first nine months of 2022, we invested $564.7 million in property, plant and equipment, primarily within our steel operations segment, compared with $801.7 million invested during the same period in 2021. Spending on Sinton decreased in the first nine months of 2022 versus the same period in 2021 as we completed the construction phase. We entered 2022 with ample liquidity of $2.4 billion and anticipated operating cash flow generation to provide for our planned 2022 capital requirements, including the four new flat roll coating lines at Sinton and Heartland. We announced in July our plans to invest $2.2 billion in a new state-of-the-art low-carbon aluminum flat rolled mill with two supporting satellite recycled aluminum slab centers, which will be funded by available cash and cash flow from operations. Expenditures began in the third quarter of 2022 and are expected to continue through 2026.
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 31% to $0.34 per share in the first quarter of 2022 (from $0.26 per share in 2021), resulting in declared cash dividends of $186.5 million during the first nine months of 2022, compared to $160.2 million during the same period in 2021. We paid cash dividends of $177.1 million and $161.0 million during the first nine months of 2022 and 2021, respectively. Our board of directors, along with executive
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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 $500.0 million of our common stock, which was fully utilized in July 2021. In July 2021, our board of directors authorized an additional share repurchase program of up to $1.0 billion of our common stock, which was fully utilized in March 2022. In February 2022, our board of directors authorized an additional share repurchase program of up to $1.25 billion of our common stock. Under the share repurchase programs, 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 programs do 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 programs do not have an expiration date. There were $1.4 billion and $730.8 million of share repurchases during the first nine months of 2022 and 2021, respectively. As of September 30, 2022, we had $245.5 million remaining available to purchase under the 2022 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, and business conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure that our operating results, cash flows, access to credit markets and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flows from operations, together with other available sources of funds, including 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 funding anticipated capital expenditures.
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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 16 years for air products and 30 years for water 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 idled Minnesota ironmaking operations.
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 September 30, 2022, we had a cumulative unrealized gain associated with these financial contracts of $2.9 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
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 September 30, 2022, 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.
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 September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 September 30, 2022.
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, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
We purchased the following equity securities registered by us pursuant to Section 12 of the Exchange Act during the three-month period ended September 30, 2022.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
Maximum Dollar Value of Shares That May Yet be Purchased Under the Programs(in thousands) (1)
Quarter ended September 30, 2022
July 1 - 31
692,706
72.19
677,159
August 1 - 31
3,476,941
81.87
392,500
September 1 - 30
1,916,455
76.71
245,489
6,086,102
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
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
Amended and Restated Articles of Incorporation of Steel Dynamics, Inc., reflecting all amendments thereto through May 17, 2018, incorporated herein by reference from Exhibit 3.1e to our Form 10-Q filed August 9, 2018.
3.2
Amended and Restated Bylaws of Steel Dynamics, Inc., reflecting all amendments thereto through October 17, 2018, incorporated herein by reference from Exhibit 3.2d to our Form 10-Q filed November 7, 2018.
Executive Officer Certifications
31.1*
Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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
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.
October 26, 2022
By:
/s/ Theresa E. Wagler
Theresa E. Wagler
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)