Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2017)
  • 10-Q (Aug 7, 2017)
  • 10-Q (May 8, 2017)
  • 10-Q (Nov 9, 2016)
  • 10-Q (Aug 5, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
Other

Steel Dynamics 10-Q 2017
20170331 Q1 10Q



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

March 31, 2017

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

 

46268

(Address of principal executive offices)

 

(Zip Code)



 

 

Registrant’s telephone number, including area code:  (260) 969-3500



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



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



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





 

 

 

(Check one): 

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 May 1, 2017, Registrant had 241,787,407 outstanding shares of common stock.


 



 

 

STEEL DYNAMICS, INC.

Table of Contents



PART I.  Financial Information



Item 1.

Financial Statements:

Page



 

 



Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016

1



 

 



Consolidated Statements of Income for the three-month periods ended March  31, 2017 and 2016 (unaudited)

2



 

 



Consolidated Statements of Cash Flows for the three-month periods ended  March  31, 2017 and 2016 (unaudited)

3



 

 



Notes to Consolidated Financial Statements (unaudited)

4



 

 

Item 2.

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

15



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21



 

 

Item 4.

Controls and Procedures

21



 

 



 

 



 

 



PART II.  Other Information

 



 

 

Item 1.

Legal Proceedings

22



 

 

Item 1A.

Risk Factors

22



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22



 

 

Item 3.

Defaults Upon Senior Securities

22



 

 

Item 4.

Mine Safety Disclosures

22



 

 

Item 5.

Other Information

22



 

 

Item 6.

Exhibits

23



 

 



Signatures

24



 

 





 


 



STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)







 

 

 

 

 

 



 

 

 

 

 

 



March 31,

 

 

December 31,



2017

 

 

2016

Assets

(unaudited)

 

 

 

 

Current assets

 

 

 

 

 

 

  Cash and equivalents

$

966,826 

 

 

$

841,483 

  Accounts receivable, net

 

860,676 

 

 

 

703,565 

  Accounts receivable-related parties

 

22,471 

 

 

 

26,219 

  Inventories

 

1,361,550 

 

 

 

1,275,211 

  Other current assets

 

33,442 

 

 

 

83,197 

     Total current assets

 

3,244,965 

 

 

 

2,929,675 



 

 

 

 

 

 

Property, plant and equipment, net

 

2,760,544 

 

 

 

2,787,215 



 

 

 

 

 

 

Restricted cash

 

17,846 

 

 

 

18,060 

Intangible assets, net

 

276,553 

 

 

 

283,977 

Goodwill

 

391,740 

 

 

 

393,351 

Other assets

 

12,387 

 

 

 

11,454 

     Total assets

$

6,704,035 

 

 

$

6,423,732 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

  Accounts payable

$

514,788 

 

 

$

382,126 

  Accounts payable-related parties

 

16,170 

 

 

 

13,070 

  Income taxes payable

 

80,741 

 

 

 

5,593 

  Accrued payroll and benefits                

 

106,733 

 

 

 

164,543 

  Accrued interest

 

50,650 

 

 

 

30,295 

  Accrued expenses

 

109,400 

 

 

 

113,556 

  Current maturities of long-term debt

 

2,965 

 

 

 

3,632 

     Total current liabilities

 

881,447 

 

 

 

712,815 



 

 

 

 

 

 

Long-term debt

 

2,353,744 

 

 

 

2,353,194 

Deferred income taxes

 

454,426 

 

 

 

448,375 

Other liabilities

 

19,711 

 

 

 

20,649 

     Total liabilities

 

3,709,328 

 

 

 

3,535,033 



 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 



 

 

 

 

 

 

Redeemable noncontrolling interests

 

111,240 

 

 

 

111,240 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

  Common stock voting, $.0025 par value; 900,000,000 shares authorized;

 

 

 

 

 

 

       264,135,545 and 264,130,544 shares issued; and 242,110,745 and 243,785,485    

 

 

 

 

 

 

       shares outstanding, as of March 31, 2017 and December 31, 2016, respectively

 

641 

 

 

 

641 

  Treasury stock, at cost; 22,024,800 and 20,345,059 shares,

 

 

 

 

 

 

       as of March 31, 2017 and December 31, 2016 respectively

 

(475,072)

 

 

 

(416,829)

  Additional paid-in capital

 

1,135,892 

 

 

 

1,132,749 

  Retained earnings

 

2,373,718 

 

 

 

2,210,459 

     Total Steel Dynamics, Inc. equity

 

3,035,179 

 

 

 

2,927,020 

  Noncontrolling interests

 

(151,712)

 

 

 

(149,561)

     Total equity

 

2,883,467 

 

 

 

2,777,459 

     Total liabilities and equity

$

6,704,035 

 

 

$

6,423,732 



See notes to consolidated financial statements.

1

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2017

 

2016



 

 

 

 

 

Net sales

 

 

 

 

 

  Unrelated parties

$

2,319,663 

 

$

1,698,004 

  Related parties

 

48,553 

 

 

43,297 

     Total net sales

 

2,368,216 

 

 

1,741,301 



 

 

 

 

 

Costs of goods sold

 

1,896,062 

 

 

1,505,265 

     Gross profit

 

472,154 

 

 

236,036 



 

 

 

 

 

Selling, general and administrative expenses

 

102,933 

 

 

87,530 

Profit sharing

 

27,231 

 

 

9,291 

Amortization of intangible assets

 

7,424 

 

 

7,250 

     Operating income

 

334,566 

 

 

131,965 



 

 

 

 

 

Interest expense, net of capitalized interest

 

33,973 

 

 

37,043 

Other expense (income), net

 

(3,659)

 

 

(1,792)

     Income before income taxes

 

304,252 

 

 

96,714 



 

 

 

 

 

Income tax expense

 

105,586 

 

 

35,396 

     Net income

 

198,666 

 

 

61,318 



 

 

 

 

 

Net loss attributable to noncontrolling interests

 

2,151 

 

 

1,419 

     Net income attributable to Steel Dynamics, Inc.

$

200,817 

 

$

62,737 



 

 

 

 

 



 

 

 

 

 



 

 

 

 

 

Basic earnings per share attributable to Steel Dynamics,

 

 

 

 

 

  Inc. stockholders

$

0.83 

 

$

0.26 



 

 

 

 

 

Weighted average common shares outstanding

 

242,943 

 

 

243,202 



 

 

 

 

 

Diluted earnings per share attributable to Steel Dynamics, Inc.

 

 

 

 

 

  stockholders, including the effect of assumed conversions

 

 

 

 

 

  when dilutive

$

0.82 

 

$

0.26 



 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

244,546 

 

 

244,608 



 

 

 

 

 

Dividends declared per share

$

0.155 

 

$

0.140 



















See notes to consolidated financial statements.

2

 


 



STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)







 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2017

 

2016



 

 

 

 

 

Operating activities:

 

 

 

 

 

   Net income

$

198,666 

 

$

61,318 



 

 

 

 

 

   Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

       operating activities:

 

 

 

 

 

       Depreciation and amortization

 

75,057 

 

 

73,985 

       Equity-based compensation

 

11,303 

 

 

10,534 

       Deferred income taxes

 

7,716 

 

 

17,087 

       Other adjustments

 

(104)

 

 

180 

       Changes in certain assets and liabilities:

 

 

 

 

 

           Accounts receivable

 

(153,364)

 

 

(75,596)

           Inventories

 

(86,819)

 

 

82,567 

           Other assets

 

2,113 

 

 

548 

           Accounts payable

 

133,809 

 

 

112,659 

           Income taxes receivable/payable

 

96,319 

 

 

13,993 

           Accrued expenses

 

(44,247)

 

 

(6,247)

       Net cash provided by operating activities

 

240,449 

 

 

291,028 



 

 

 

 

 

Investing activities:

 

 

 

 

 

   Purchases of property, plant and equipment

 

(41,677)

 

 

(27,708)

   Other investing activities

 

26,918 

 

 

3,054 

       Net cash used in investing activities

 

(14,759)

 

 

(24,654)



 

 

 

 

 

Financing activities:

 

 

 

 

 

   Issuance of current and long-term debt

 

 -

 

 

20,452 

   Repayment of current and long-term debt

 

(1,429)

 

 

(4,232)

   Dividends paid

 

(34,130)

 

 

(33,425)

   Purchases of treasury stock

 

(61,256)

 

 

 -

   Other financing activities

 

(3,532)

 

 

750 

       Net cash used in financing activities

 

(100,347)

 

 

(16,455)



 

 

 

 

 

Increase in cash and equivalents

 

125,343 

 

 

249,919 

Cash and equivalents at beginning of period

 

841,483 

 

 

727,032 



 

 

 

 

 

Cash and equivalents at end of period

$

966,826 

 

$

976,951 



 

 

 

 

 



 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

   Cash paid for interest

$

12,649 

 

$

26,286 

   Cash paid for income taxes, net

$

1,554 

 

$

699 













See notes to consolidated financial statements.

 

3

 


 

STEEL DYNAMICS, INC.

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 a domestic manufacturer of steel products 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 Butler Flat Roll Division, Columbus Flat Roll Division, The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Vulcan Threaded Products, Inc. – acquired August 1, 2016, Roanoke Bar Division, Steel of West Virginia, and Iron Dynamics (IDI), a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and eleven downstream coating lines, and several bar processing lines. Steel operations accounted for 73% and 70% of the company’s consolidated external net sales during the three months ended March 31, 2017 and 2016, respectively.

Metals Recycling Operations Segment. Metals recycling operations consists solely of OmniSource Corporation (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and consulting services. Metals recycling operations accounted for 15% of the company’s consolidated external net sales during the three months ended March 31, 2017 and 2016.

Steel Fabrication Operations Segment.  Steel fabrication operations include the company’s eight 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 8% and 10% of the company’s consolidated external net sales during the three months ended March 31, 2017 and 2016, respectively.

Other. Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and other smaller joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.

Significant Accounting Policies



Principles of Consolidation.  The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions. Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries. 



Use of Estimates.  These 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 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 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, 2016.



4

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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



GoodwillThe company’s goodwill is allocated to the following reporting units at March 31, 2017, and December 31, 2016, (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 



 

 

2017

 

2016

 



Columbus Flat Roll Division – Steel Operations Segment

 

$

19,682 

 

$

19,682 

 



The Techs – Steel Operations Segment

 

 

142,783 

 

 

142,783 

 



Vulcan Threaded Products – Steel Operations Segment

 

 

7,824 

 

 

7,824 

 



Roanoke Bar Division – Steel Operations Segment

 

 

29,041 

 

 

29,041 

 



Butler Flat Roll Division,  Structural and Rail Division, and Engineered

 

 

 

 

 

 

 



   Bar Division – Metals Recycling Operations Segment

 

 

95,000 

 

 

95,000 

 



OmniSource – Metals Recycling Operations Segment

 

 

95,485 

 

 

97,096 

 



New Millennium Building Systems – Steel Fabrication Operations Segment

 

 

1,925 

 

 

1,925 

 



 

 

$

391,740 

 

$

393,351 

 



OmniSource goodwill decreased $1.6 million from December 31, 2016 to March 31, 2017, in recognition of the 2017 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill.



Recently Adopted/Issued Accounting Standards



In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. The company adopted ASU 2015-11 as required in the first quarter of 2017 on a prospective basis, and the adoption had no impact on its financial condition, results of operations, or cash flow. 

In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition.  FASB has since issued clarifying guidance in the form of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Consideration (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contract with Customers : Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, collectively (ASC 606). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. ASC 606 guidance is effective for annual and interim periods beginning after December 15, 2017, but can be early adopted for annual and interim periods ending after December 15, 2016, using a full retrospective or modified retrospective approach.  The company is currently working through an adoption plan and has identified current revenue streams and initially analyzed those revenue streams pursuant to the new accounting requirements. The company intends to complete the adoption plan during the second half of 2017, including final determination of whether the accounting impact of ASC 606 significantly differs from the company’s current revenue accounting, evaluating and concluding on the timing and method of adoption and related disclosure, and determine whether implementation of the new standard may affect functions, processes and systems within the company. Based on our analysis within the adoption plan completed to date, the company preliminarily does not believe there will be significant change in the amount or timing of revenue recognized under the new standard, or significant changes required to the company’s functions, processes or systems. The company preliminarily intends to adopt ASU 2014-09 in the first quarter of 2018. These preliminary assessments may however change as we complete the adoption plan. 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): which establishes a new lease accounting model that requires lessees to recognize a right of use asset and related lease liability for most leases having lease terms of more than 12 months (ASU 2016-02).  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases.  This new guidance is effective for annual and interim periods beginning after December 15, 2018, but can be early adopted.  The company is currently evaluating the impact of the provisions of ASU 2016-02, including the timing of adoption. 

Reclassifications



The company early adopted, effective December 31, 2016, Improvement to Employee Share-based Payment Accounting (ASU 2016-09). Cash paid to tax authorities from shares withheld to satisfy the company’s statutory income tax withholding obligation of $2.1 million were reclassified to financing activities from operating activities in the three-month period ended March 31, 2016, statement of cash flows. 









5

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 2.  Earnings Per Share



Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive restricted stock units, deferred stock units, stock options and other equity-based 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 at or for the three months ended March 31, 2017 and 2016.



The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the three months ended March 31, 2017 and 2016 (in thousands, except per share data):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



2017

 

2016



Net Income

 

 

Shares

 

Per Share

 

Net Income

 

 

Shares

 

Per Share



(Numerator)

 

 

(Denominator)

 

Amount

 

(Numerator)

 

 

(Denominator)

 

Amount

Basic earnings per share

$

200,817 

 

 

242,943 

 

$

0.83 

 

$

62,737 

 

 

243,202 

 

$

0.26 

Dilutive common share equivalents

 

 -

 

 

1,603 

 

 

 

 

 

 -

 

 

1,406 

 

 

 

Diluted earnings per share

$

200,817 

 

 

244,546 

 

$

0.82 

 

$

62,737 

 

 

244,608 

 

$

0.26 







Note 3.  Inventories



Inventories are stated at lower of cost or net realizable value. Cost is determined using a weighted average cost method for raw materials and supplies, and on a first-in, first-out, basis for other inventory. Inventory consisted of the following (in thousands):











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 

 



 

 

2017

 

2016

 

 



 

Raw materials

$

574,969 

 

$

515,924 

 

 



 

Supplies

 

376,903 

 

 

383,134 

 

 



 

Work in progress

 

113,995 

 

 

103,606 

 

 



 

Finished goods

 

295,683 

 

 

272,547 

 

 



 

Total inventories

$

1,361,550 

 

$

1,275,211 

 

 





Note 4.  Changes in Equity



The following table provides 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 the noncontrolling interests (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Stockholders of Steel Dynamics, Inc.

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Additional

 

 

 

 

 

 

 

Redeemable



Common

 

Treasury

 

Paid-In

 

Retained

 

Noncontrolling

 

Total

 

Noncontrolling



Stock

 

Stock

 

Capital

 

Earnings

 

Interests

 

Equity

 

Interests

Balances at December 31, 2016

$

641 

 

$

(416,829)

 

$

1,132,749 

 

$

2,210,459 

 

$

(149,561)

 

$

2,777,459 

 

$

111,240 

Dividends declared

 

 -

 

 

 -

 

 

 -

 

 

(37,527)

 

 

 -

 

 

(37,527)

 

 

 -

Share repurchases

 

 -

 

 

(61,256)

 

 

 -

 

 

 -

 

 

 -

 

 

(61,256)

 

 

 -

Equity-based compensation

 

 -

 

 

3,013 

 

 

3,143 

 

 

(31)

 

 

 -

 

 

6,125 

 

 

 -

Comprehensive and net income (loss)

 

 -

 

 

 -

 

 

 -

 

 

200,817 

 

 

(2,151)

 

 

198,666 

 

 

 -

Balances at March 31, 2017

$

641 

 

$

(475,072)

 

$

1,135,892 

 

$

2,373,718 

 

$

(151,712)

 

$

2,883,467 

 

$

111,240 







6

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 





Note 5.  Derivative Financial Instruments



The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate commodity margin risk, interest rate risk and foreign currency exchange rate 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 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 futures contract commitments as of March 31, 2017 (MT represents metric tons):







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Commodity Futures

 

Long/Short

 

Total

 

 



Aluminum

 

Long

 

2,450 

MT

 



Aluminum

 

Short

 

3,450 

MT

 



Copper

 

Long

 

5,512 

MT

 



Copper

 

Short

 

14,243 

MT

 



 

 

 

 

 

 

 



The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2017, and December 31, 2016, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2017 and 2016 (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



Asset Derivatives

 

Liability Derivatives



Balance sheet

 

Fair Value

 

Fair Value



 location

 

March 31, 2017

 

December 31, 2016

 

March 31, 2017

 

December 31, 2016

Derivative instruments designated

 

 

 

 

 

 

 

 

 

 

 

 

 

as fair value hedges -

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

$

1,770 

 

$

2,910 

 

$

314 

 

$

1,300 



 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedges -

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

Other current assets

 

 

812 

 

 

1,150 

 

 

700 

 

 

783 

Total derivative instruments

 

 

$

2,582 

 

$

4,060 

 

$

1,014 

 

$

2,083 



The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $2.8 million at March 31, 2017, and $3.2 million at December 31, 2016, are reflected in other current assets in the consolidated balance sheets.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Amount of gain (loss) recognized

 

 

 

Location of gain

 

Amount of gain (loss) recognized



 

Location of gain

 

in income on derivatives 

 

 

 

(loss) recognized

 

in income on related hedged items



 

(loss) recognized

 

for the three months ended

 

Hedged items in

 

in income on

 

for the three months ended



 

in income on

 

March 31,

 

March 31,

 

fair value hedge

 

related hedged

 

March 31,

 

March 31,



 

derivatives

 

2017

 

2016

 

relationships

 

items

 

2017

 

2016

Derivatives in fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging relationships -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(153)

 

$

932 

 

Firm commitments

 

Costs of goods sold

 

$

539 

 

$

(1,222)



 

 

 

 

 

 

 

 

 

Inventory

 

Costs of goods sold

 

 

495 

 

 

278 

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,034 

 

$

(944)

as hedging instruments -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures

 

Costs of goods sold

 

$

(4,346)

 

$

(872)

 

 

 

 

 

 

 

 

 

 



7

 


 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5.  Derivative Financial Instruments (Continued)



Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $48,000 for the three months ended March 31, 2017 and losses of $45,000 during the three months ended March 31, 2016.  Gains excluded from hedge effectiveness testing of $833,000 and $32,000 decreased cost of goods sold during the three months ended March 31, 2017, and 2016, respectively.   



Note 6.  Fair Value Measurements

FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.  Levels within the hierarchy are defined as follows: 



·

Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets;

·

Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for   

           the asset or liability, either directly or indirectly; and

·

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are       

           unobservable.



The following table sets forth financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of March 31, 2017, and December 31, 2016 (in thousands):