filings.toolsSteel Dynamics 10-Q 2021-09-30
Filed 2021-11-02. 8 sections, 111K characters. Original on sec.gov · Markdown · JSON
Cover and 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 period
ended September 30, 2021
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 0-21719
Steel Dynamics, Inc.
(Exact name of registrant as specified in its charter)
| Indiana | 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
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 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 29, 2021, Registrant had 198,451,226 outstanding shares of common stock.
STEEL DYNAMICS, INC.
Table of Contents
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | |
|---|---|---|---|---|---|---|
| | September 30, | | | December 31, | ||
| | 2021 | | | 2020 | ||
| Assets | (unaudited) | | | | | |
| Current assets | | | | | | |
| Cash and equivalents | $ | 1,095,701 | | | $ | 1,368,618 |
| Accounts receivable, net | | 1,886,759 | | | | 967,981 |
| Accounts receivable-related parties | | 6,036 | | | | 3,937 |
| Inventories | | 2,894,970 | | | | 1,843,548 |
| Other current assets | | 104,106 | | | | 74,363 |
| Total current assets | | 5,987,572 | | | | 4,258,447 |
| | | | | | | |
| Property, plant and equipment, net | | 4,654,192 | | | | 4,105,569 |
| | | | | | | |
| Intangible assets, net | | 302,522 | | | | 324,577 |
| Goodwill | | 454,683 | | | | 457,226 |
| Other assets | | 137,016 | | | | 119,743 |
| Total assets | $ | 11,535,985 | | | $ | 9,265,562 |
| Liabilities and Equity | | | | | | |
| Current liabilities | | | | | | |
| Accounts payable | $ | 1,208,499 | | | $ | 760,536 |
| Accounts payable-related parties | | 11,938 | | | | 8,919 |
| Income taxes payable | | 80,167 | | | | 2,386 |
| Accrued payroll and benefits | | 406,538 | | | | 201,778 |
| Accrued interest | | 33,540 | | | | 19,656 |
| Accrued expenses | | 258,551 | | | | 178,618 |
| Current maturities of long-term debt | | 55,056 | | | | 86,894 |
| Total current liabilities | | 2,054,289 | | | | 1,258,787 |
| | | | | | | |
| Long-term debt | | 3,019,175 | | | | 3,015,782 |
| Deferred income taxes | | 722,220 | | | | 536,288 |
| Other liabilities | | 117,367 | | | | 106,479 |
| Total liabilities | | 5,913,051 | | | | 4,917,336 |
| | | | | | | |
| Commitments and contingencies | | | | | | |
| | | | | | | |
| Redeemable noncontrolling interests | | 186,814 | | | | 158,614 |
| | | | | | | |
| Equity | | | | | | |
| Common stock voting, $0.0025 par value; 900,000,000 shares authorized; | | |
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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 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 current 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 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. 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 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 third quarter of 2021 were highlighted by record net sales of $5.1 billion, operating income of $1.3 billion, net income of $990.8 million, and cash flow from operations of $630.8 million. Our steel fabrication segment achieved record quarterly shipments and operating income, while our steel segment achieved record quarterly operating income. During the third quarter of 2021, steel demand remained strong as product pricing continued its positive trajectory in our steel and fabrication operations. Higher realized steel selling values drove significant metal spread expansion and were again most prominent within our flat roll steel operations, as continued demand strength and low customer inventories persisted throughout the supply chain and supported prices. Domestic steel consumption was strong from the automotive, construction, and industrial sectors, while the energy sector continued to show signs of recovery. Operating results for the third quarter and first nine months of 2021 were significantly improved over the same periods in 2020, which was negatively impacted by the global COVID-19 pandemic, most notably in the second quarter 2020. Volumes and selling values strengthened during the second half of 2020 and have continued through the first nine months of 2021.
Consolidated operating income increased $1.2 billion, or 748%, to $1.3 billion for the third quarter 2021, compared to the third quarter 2020. Third quarter 2021 net income attributable to Steel Dynamics, Inc. increased $890.6 million, or 889%, to $990.8 million, compared to the third quarter 2020, consistent with the increased operating income.
Consolidated operating income increased $2.3 billion, or 388%, to $2.9 billion for the first nine months of 2021, compared to the first nine months of 2020. First nine months 2021 net income attributable to Steel Dynamics, Inc. increased $1.8 billion, or 485%, to $2.1 billion, compared to the first nine months of 2020, consistent with the increased operating income.
Segment Operating Results 2021 vs. 2020 (dollars in thousands)
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||
| | 2021 | | % Change | | | 2020 | | 2021 | | % Change | | 2020 | |||
| Net sales: | | | | | | | | | | | | | | | |
| Steel Operations Segment | $ | 3,911,173 | | 120% | | $ | 1,775,784 | | $ | 9,948,462 | | 81% | | $ | 5,491,334 |
| Metals Recycling Operations Segment | | 1,212,117 | | 90% | | | 636,473 | | | 3,443,135 | | 105% | | | 1,681,900 |
| Steel Fabrication Operations Segment | | 493,926 | | 100% | | | 246,590 | | | 1,084,661 | | 58% | | | 686,459 |
| Other | | 340,127 | | 183% | | | 120,362 | | | 972,958 | | 190% | | | 335,497 |
| | | 5,957,343 | | | | | 2,779,209 | | | 15,449,216 | | | | | 8,195,190 |
| Intra-company | | (869,055) | | | | | (448,377) | | | (2,351,023) | | | | | (1,194,953) |
| | $ | 5,088,288 | | 118% | | $ | 2,330,832 | | $ | 13,098,193 | | 87% | | $ | 7,000,237 |
| | | | | | | | | | | | | | | | |
| Operating income (loss): | | | | | | | | | | | | | | | |
| Steel Operations Segment | $ | 1,346,967 | | 866% | | $ | 139,466 | | $ | 2,997,375 | | 403% | | $ | 595,903 |
| Metals Recycling Operations Segment | | 43,616 | | 244% | | | 12,668 | | | 141,775 | | 1395% | | | 9,481 |
| Steel Fabrication Operations Segment | | 89,389 | | 128% | | | 39,231 | | | 127,652 | | 34% | | | 95,549 |
| Other | | (138,576) | | (303)% | | | (34,384) | | | (357,183) | | (217)% | | | (112,828) |
| | | 1,341,396 | | | | | 156,981 | | | 2,909,619 | | | | | 588,105 |
| Intra-company | | (19,351) | | | | | (1,125) | | | (37,640) | | | | | 287 |
| | $ | 1,322,045 | | 748% | | $ | 155,856 | | $ | 2,871,979 | | 388% | | $ | 588,392 |
| Steel Operations Segment |
|---|
Steel operations consist of our six operating electric arc furnace 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 72% and 73% of our consolidated net sales during the three months ended September 30, 2021 and 2020, respectively, and 72% and 75% of our consolidated net sales during the nine months ended September 30, 2021 and 2020, respectively.
Steel Operations Segment Shipments (tons):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2021 | | % Change | | 2020 | | 2021 | | % Change | | 2020 |
| | | | | | | | | | | | |
| Total shipments | 2,803,571 | | 5% | | 2,682,686 | | 8,517,121 | | 6% | | 8,047,887 |
| Intra-segment shipments | (291,868) | | | | (244,185) | | (841,743) | | | | (754,881) |
| Steel Operations Segment shipments | 2,511,703 | | 3% | | 2,438,501 | | 7,675,378 | | 5% | | 7,293,006 |
| | | | | | | | | | | | |
| External shipments | 2,366,928 | | 2% | | 2,310,004 | | 7,281,752 | | 5% | | 6,958,024 |
Steel Operations Segment Results 2021 vs. 2020
During the third quarter of 2021, steel demand remained strong and product pricing continued its positive trajectory across our entire steel operations segment. Low customer inventories persisted throughout the supply chain, supporting further increased steel selling prices. Domestic steel consumption remained strong from the automotive, construction, and industrial sectors, with the energy sector showing signs of recovery. Third quarter 2021 average selling prices increased 114%, or $829 per ton, compared to third quarter 2020. Steel operations segment shipments increased 3% in the third quarter 2021, as compared to the same period in 2020. Net sales for the steel operations were 120% higher in the third quarter 2021 when compared to the same period in 2020, due to these increased average steel selling prices and volumes. Net sales for the steel operations increased 81% in the first nine months of 2021 when compared to the same period in 2020, due to the 5% increase in steel shipments, and a 73% 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 increased $230, or 89%, in the third quarter 2021, compared to the same period in 2020, consistent with overall increased domestic scrap pricing noted below. In the first nine months of 2021, our metallic raw material cost per net ton increased $169, or 64%, compared to the same period in 2020.
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 123% in the third quarter 2021 compared to the third quarter 2020. As a result of this metal spread expansion and the 3% increase in shipping volumes, operating income for the steel operations increased 866%, to a record $1.3 billion, in the third quarter 2021, compared to the same period in 2020. First nine months 2021 operating income increased 403%, to $3.0 billion, compared to the first nine months of 2020, due to the increased metal spread and the 5% increase in steel shipping volumes.
| 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 third quarter 2021, 65% of the metals recycling operations ferrous scrap was sold to our own steel mills, as our steel mills utilization increased to 93% in the third quarter of 2021 compared to 85% in the same 2020 period. Our metals recycling operations accounted for 12% of our consolidated net sales during the three months ended September 30, 2021 and 2020, and 12% and 10% of our consolidated net sales during the nine months ended September 30, 2021 and 2020, respectively.
Metals Recycling Operations Segment Shipments:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2021 | | % Change | | 2020 | | 2021 | | % Change | | 2020 |
| Ferrous metal (gross tons) | | | | | | | | | | | |
| Total | 1,371,126 | | 9% | | 1,256,351 | | 4,167,416 | | 28% | | 3,250,565 |
| Inter-company | (895,559) | | 1% | | (886,775) | | (2,733,941) | | 19% | | (2,289,368) |
| External shipments | 475,567 | | 29% | | 369,576 | | 1,433,475 | | 49% | | 961,197 |
| | | | | | | | | | | | |
| Nonferrous metals (thousands of pounds) | | | | | | | | | | | |
| Total | 271,325 | | 1% | | 267,338 | | 818,993 | | 16% | | 706,330 |
| Inter-company | (31,840) | | | | (42,026) | | (103,324) | | | | (122,244) |
| External shipments | 239,485 | | 6% | | 225,312 | | 715,669 | | 23% | | 584,086 |
Metals Recycling Operations Segment Results 2021 vs. 2020
Our metals recycling operations continued to benefit from strong steel market demand, driving increased domestic steel mill utilization and continued strong ferrous scrap shipments in the third quarter of 2021. Domestic steel mill utilization rates increased to approximately 85% in the third quarter 2021 from 81% in the sequential second quarter, significantly higher than the COVID-19 impacted utilization rates of the third quarter 2020 of 65%. Net sales increased 90% during the third quarter of 2021 compared to the same period in 2020, driven by increased ferrous shipments, including those from the Mexican scrap company acquired in August 2020, and higher average selling prices. Ferrous scrap average selling prices increased 96% during the third quarter 2021 compared to the same period in 2020, while average nonferrous scrap prices increased 59%. Ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) increased 41%, while nonferrous metal spread increased 60% during the third quarter 2021 compared to the same period in 2020. This resulted in metals recycling operations operating income improving 244% to $43.6 million in the third quarter 2021 compared to the third quarter 2020.
Net sales for our metals recycling operations increased 105% in the first nine months of 2021 as compared to the same period in 2020, driven by increased shipments and pricing. Ferrous scrap average selling prices increased 78% during the first nine months of 2021 compared to the same period in 2020, while nonferrous average selling prices increased 51%. Ferrous metal spread increased 41%, while nonferrous metal spread increased 69% in the first nine months of 2021 compared to the first nine months of 2020. Metals recycling operations operating income in the first nine months of 2021 of $141.8 million improved $132.3 million from the first nine months of 2020, due to increased ferrous and nonferrous shipments and metal spread.
| 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 10% of our consolidated net sales during the three months ended September 30, 2021 and 2020, and 8% and 10% of our consolidated net sales during the nine months ended September 30, 2021 and 2020, respectively.
Steel Fabrication Operations Segment Results 2021 vs. 2020
Our steel fabrication operations continue to benefit from a robust non-residential construction market, as order activity remains strong, resulting in record customer order backlogs at the end of the third quarter 2021. Net sales for the steel fabrication operations doubled during the third quarter 2021 compared to the same period in 2020, as average selling prices increased 70%, or $964 per ton, while shipments increased 18% to a quarterly record 211,000 tons. Net sales for the segment increased 58% during the first nine months of 2021, compared to the same period in 2020, as shipments increased 16%, and average selling prices increased 36%, or $490 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, however closer to three-fourths in 2021 with the increased steel costs. The average cost of steel consumed increased 107% in the third quarter 2021, as compared to the same period in 2020, consistent with increased steel selling prices in our steel operations. As a result of selling prices per ton increasing 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) increased 32% in the third quarter 2021 compared to the same period in 2020. This expanded metal spread, coupled with record shipments, resulted in record operating income of $89.4 million in the third quarter 2021 compared to $39.2 million in the same period in 2020. For the first nine months of 2021 operating income increased 34% to $127.7 million, compared to the first nine months of 2020, driven by a 5% increase in metal spread and a 16% increase in shipments.
| |
|---|
| Other Operations |
Third Quarter Consolidated Results 2021 vs. 2020
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $157.5 million during the third quarter 2021 increased 33% from the $118.2 million during the third quarter 2020 on increased profitability and Southwest-Sinton Flat Roll Division start-up expenses. Selling, general and administrative expenses represented 3.1% and 5.1% of net sales during third quarter 2021 and 2020, respectively. Profit sharing expense during the third quarter of 2021 of $113.9 million was up more than nine-fold from the $11.81 million during the same period in 2020. The company-wide profit sharing plan represents 8% of pretax earnings; therefore, our higher third quarter 2021 earnings resulted in higher profit sharing.
Interest Expense, net of Capitalized Interest. During the third quarter 2021, interest expense of $12.7 million decreased 33% from $19.0 million during the third quarter of 2020, due primarily increased capitalized interest in 2021 in conjunction with construction of our new Southwest-Sinton Flat Roll Division.
Income Tax Expense. Third quarter 2021 income tax expense of $302.4 million, at an effective income tax rate of 23.2%, was up significantly from the $29.1 million, at an effective income tax rate of 21.8%, during the third quarter 2020, consistent with increased income before income taxes.
First Nine Months Consolidated Results 2021 vs. 2020
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $461.7 million during the first nine months of 2021 increased 36% compared to the $340.4 million during the first nine months of 2020 on increased profitability and Southwest-Sinton Flat Roll Division start-up expenses. Selling, general and administrative expenses represented 3.5% and 4.9% of net sales during first nine months of 2021 and 2020, respectively. Profit sharing expense during the first nine months of 2021 of $244.9 million increased 479% from the $42.3 million during the same period in 2020, consistent with increased profitability.
Interest Expense, net of Capitalized Interest. During the first nine months of 2021, interest expense of $44.9 million decreased 40% from $74.7 million during the first nine months 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 nine months 2021 income tax expense of $649.1 million, at an effective income tax rate of 23.2%, was up 486% from the $110.8 million, at an effective income tax rate of 22.9%, during the first nine months of 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, and 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 September 30, 2021, is as follows (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
| | | | Cash and equivalents | | $ | 1,095,701 | | | |
| | | | Revolver availability | | | 1,187,941 | | | |
| | | | Total liquidity | | $ | 2,283,642 | | | |
Our total outstanding debt remained consistent at $3.1 billion during the first nine months 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 35.4% and 41.6% at September 30, 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 September 30, 2021, we had $1.2 billion of availability on the Revolver, $12.1 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, 2021, our interest coverage ratio and debt to capitalization ratio were 33.39:1.00 and 0.35:1.00, respectively. We were, therefore, in compliance with these covenants at September 30, 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 $1.5 billion in the first nine months of 2021 compared to $849.1 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 $1.2 billion, or 74%, to $2.9 billion at September 30, 2021, due primarily to increased accounts receivable and inventory, consistent with increased net sales and inventory costs.
Capital Investments. During the first nine months of 2021, we invested $801.7 million in property, plant and equipment, primarily within our steel operations segment, compared with $854.9 million invested during the same period in 2020. We invested $666.2 million in our new Southwest-Sinton Flat Roll Steel Division in the first nine months of 2021, and $639.7 million in the first nine months of 2020. 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. Fourth quarter 2021 capital investments are estimated to exceed $200.0 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 $160.2 million during the first nine months of 2021, compared to $157.8 million during the same period in 2020. We paid cash dividends of $161.0 million and $156.7 million during the first nine months 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 share repurchase program of up to $500.0 million of our common stock. This program was exhausted 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. 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 $730.8 million and $106.5 million of share repurchases during the first nine months of 2021 and 2020, respectively. As of September 30, 2021, we had $713.2 million remaining available to purchase under the 2021 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.
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.
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, 2021, we had a cumulative unrealized gain associated with these financial contracts of $13.8 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 |
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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, 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 |
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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, 2021, 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, 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
| (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, 2021. |
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) (2) | | Maximum Dollar Value of Shares That May Yet be Purchased Under the Programs (in thousands) (1) (2) | |||||
| Quarter ended September 30, 2021 | | | | | | | | | | | | ||
| | | | | | | | | | | | | | |
| July 1 - 31 | | 1,728,066 | | | $ | 60.48 | | | 1,728,066 | | | $ | 946,295 |
| August 1 - 31 | | 1,773,977 | | | | 67.25 | | | 1,773,977 | | | | 826,997 |
| September 1 - 30 | | 1,807,150 | | | | 62.97 | | | 1,807,150 | | | | 713,196 |
| | | 5,309,193 | | | | | | | 5,309,193 | | | | |
| (1) | On February 26, 2020, we announced that our board of directors had authorized a share purchase program of up to $500.0 million of our common stock. This program was completed in July 2021. |
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| (2) | On July 6, 2021, we announced that our board of directors had authorized an additional share purchase program of up to $1.0 billion of our common stock. |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
None.
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
| * | Filed concurrently herewith |
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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.
| November 2, 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) |