Description of the Business and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Description of the Business and Significant Accounting Policies

Description of the Business and Significant Accounting Policies

Note 1. Description of the Business and Summary of 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. Approximately 9% of the company’s workforce in six locations is represented by collective bargaining agreements, none of which expire during 2020.

Steel Operations Segment

Steel operations include the company’s Butler Flat Roll Division, Columbus Flat Roll Division, The Techs galvanizing lines, Heartland Flat Roll Division – acquired June 29, 2018, United Steel Supply (USS) – acquired 75% equity interest March 1, 2019, Structural and Rail Division, Engineered Bar Products Division, Vulcan Threaded Products, Inc. (Vulcan), 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, with several coating and processing lines. Steel operations accounted for 76%, 75%, and 72% of the company’s consolidated net sales during 2019, 2018, and 2017, respectively.

Metals Recycling Operations Segment

Metals recycling operations consists solely of OmniSource, LLC (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and scrap management services. Metals recycling operations accounted for 11%, 13%, and 15% of the company’s consolidated net sales during 2019, 2018, and 2017, 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 9%, 8%, and 9% of the company’s consolidated net sales during 2019, 2018, and 2017, respectively.

Other

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

The idle Minnesota ironmaking operations consist of Mesabi Nugget, (owned 84% by SDI); the company’s wholly-owned iron concentrate and potential iron mining operations, Mesabi Mining; and the company’s wholly-owned iron tailings operations, Mining Resources.

Summary of Significant Accounting Policies

Principles of Consolidation

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

Note 1. Description of the Business and Summary of 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.

Revenue from Contracts with Customers

The company adopted Accounting Standards Codification ASC 606, Revenue from Contracts with Customers (ASC 606), effective January 1, 2018, using the modified retrospective approach. We applied the standard to contracts that were not completed as of the adoption date, with no cumulative effect adjustment at date of adoption. Accordingly, amounts and disclosures for reporting periods 2018 and 2019, are presented under ASC 606, while comparative amounts and disclosures for 2017 have not been adjusted and continue to be reported in accordance with historical accounting policies for revenue recognition prior to the adoption of ASC 606.

In the steel and metals recycling operations segments, revenue is recognized at the point in time the performance obligation is satisfied, and control of the product is transferred to the customer upon shipment or delivery, at the amount of consideration the company expects to receive, including any variable consideration. The variable consideration included in the company’s steel operations segment contracts, which is not constrained, include estimated product returns and customer claims based on historical experience, and may include volume rebates which are recorded on an expected value basis. Revenue recognized is limited to the amount the company expects to receive. The company does not exercise significant judgements in determining the timing of satisfaction of performance obligations or the transaction price. Shipment of products to customers is considered a fulfillment activity with amounts billed to customers included in sales and costs associated with such included in cost of goods sold.

The company’s steel fabrication operations segment recognizes revenue over time at the amount of consideration the company expects to receive. Revenue is measured on an output method representing completed fabricated tons to date as a percentage of total tons required for each contract. Revenue from fabrication of tons remaining on partially fabricated customer contracts as of a reporting date, and revenue from yet to be fabricated customer contracts, has not been disclosed under the practical expedient in paragraph ASC 606-10-50-14 related to customer contracts with expected duration of one year or less. The company does not exercise significant judgements in determining the timing of satisfaction of performance obligations or the transaction price. Shipment of products to customers, which occurs after control over the product has transferred to the customer and revenue is recognized, is considered a fulfillment activity with amounts billed to customers included in sales and costs associated with such included in cost of goods sold.

Payments from customers for all operating segments are generally due within 30 days of invoicing, which generally occurs upon shipment of the products. Shipment for the steel fabrication operations segment generally occurs within 30 days of satisfaction of the performance obligation and revenue recognition. The company does not have financing components. Payments from customers have historically generally been within these terms, however, payments for non-U.S. sales may extend longer. The allowance for doubtful accounts for all operating segments is based on the company’s best estimate of known credit risks, historical experience, and current economic conditions affecting the company’s customers. Customer accounts receivable are charged off when all collection efforts have been exhausted and the amounts are deemed uncollectible.

Refer to Note 13. Segment Information, for disaggregated revenue by segment to external, external non-United States, and other segment customers.

Cash and Equivalents, and Restricted Cash and Equivalents

Cash and equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Restricted cash and equivalents 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

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

$5.9 million, $6.2 million, $6.4 million, and $6.6 million at December 31, 2019, 2018, 2017, and 2016, respectively, which are recorded in Other Assets (noncurrent) in the company’s consolidated balance sheets.

Short-term Investments

The short-term investments are classified as trading securities, and interest income is recorded as earned. The company’s short-term investments were $262.2 million and $228.8 million as of December 31, 2019, and 2018, respectively. The short-term investments held as of December 31, 2019, consisted of certificate of deposits ($41.1 million) and commercial paper ($221.1 million), with contractual maturities of less than one year, when purchased. Short-term investments held as of December 31, 2018, consisted of certificate of deposits ($130.0 million), commercial paper ($59.2 million), and U.S. Treasuries ($39.6 million), with contractual maturities of less than one year, when purchased.

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 at December 31 (in thousands):

	2019		2018
Raw materials	$	686,831	$	810,766
Supplies		498,298		436,828
Work in progress		154,669		195,224
Finished goods		349,245		416,350
Total inventories	$	1,689,043	$	1,859,168

Property, Plant and Equipment

Property, plant and equipment are stated at cost, except for assets acquired in acquisitions which are valued at fair value, which includes capitalized interest on construction in progress amounts, and is reduced by proceeds received from certain state and local government grants and other capital cost reimbursements. The company assigns each fixed asset a useful life ranging from 3 to 20 years for plant, machinery and equipment, and 10 to 40 years for buildings and improvements. Repairs and maintenance are expensed as incurred. Depreciation is provided utilizing the straight-line depreciation methodology, or the units-of-production depreciation methodology for certain production-related steel segment assets, based on units produced, subject to minimum and maximum levels. Depreciation expense was $285.6 million, $283.3 million, and $263.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The company’s property, plant and equipment consisted of the following at December 31 (in thousands):

	2019		2018
Land and improvements	$	333,879	$	331,926
Buildings and improvements		805,381		778,701
Plant, machinery and equipment		4,594,778		4,416,212
Construction in progress		390,676		158,131
		6,124,714		5,684,970
Less accumulated depreciation		2,988,828		2,739,203
Property, plant and equipment, net	$	3,135,886	$	2,945,767

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

Intangible Assets

The company’s intangible assets consisted of the following at December 31 (in thousands):

						Weighted
						Average
					Useful	Amortization
	2019		2018		Life	Period
Customer and scrap generator relationships	$	501,212	$	435,262	5 to 25 years	22 years
Trade names		147,950		127,350	15 to 25 years	19 years
Other		1,350		2,165	5 years	5 years
		650,512		564,777		21 years
Less accumulated amortization		322,611		294,449
	$	327,901	$	270,328

The company utilizes an accelerated amortization methodology for customer and scrap generator relationships in order to follow the pattern in which the economic benefits of the amounts are anticipated to be consumed. Trade names are amortized using a straight-line methodology. Amortization of intangible assets was $29.6 million, $27.8 million, and $29.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. Estimated amortization expense related to amortizable intangibles for the years ending December 31 is as follows (in thousands):

2020	$	28,199
2021		26,202
2022		25,263
2023		23,937
2024		23,683
Thereafter		200,617
Total	$	327,901

Impairment of Long-Lived Tangible and Definite-Lived Intangible Assets

The company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the assets to its carrying amount. The company considers various factors and determines whether an impairment test is necessary, including by way of examples, a significant and prolonged deterioration in operating results and/or projected cash flows, significant changes in the extent or manner in which an asset is used, technological advances with respect to assets which would potentially render them obsolete, our strategy and capital planning, and the economic climate in markets to be served.

A long-lived asset is classified as held for sale upon meeting specified criteria related to ability and intent to sell. An asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. As of December 31, 2019, and 2018, the company reported $8.0 and $8.3 million, respectively, of assets held for sale within other current assets in our consolidated balance sheet. An impairment loss is recognized for any initial or subsequent write-down of the asset held for sale to its fair value less cost to sell. For assets determined to be classified as held for sale in the years ended December 31, 2019 and 2018, the asset carrying amounts approximated their fair value less cost to sell.

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

Goodwill

The company’s goodwill consisted of the following at December 31 (in thousands):

	2019		2018
Steel Operations Segment	$	272,133	$	245,473
Metals Recycling Operations Segment		178,857		182,247
Steel Fabrication Operations Segment		1,925		1,925
	$	452,915	$	429,645

The increase in Steel Operations Segment goodwill at December 31, 2019 is due to the company acquiring a 75% equity interest in United Steel Supply on March 1, 2019 (refer to Note 2. Acquisition – United Steel Supply, LLC), and as a result of that acquisition recorded $26.7 million of goodwill. Metals Recycling Operations Segment goodwill decreased $3.4 million in 2019 in recognition of the 2019 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill. Cumulative OmniSource goodwill impairment charges were $346.8 million at December 31, 2019 and 2018.

Impairment of Goodwill

At least once annually (as of October 1), or when indicators of impairment exist, the company performs an impairment test for goodwill. Goodwill is allocated to various reporting units, which are generally one level below the company’s operating segments. The fair value of the reporting unit is determined by using an estimate of future cash flows utilizing a risk-adjusted discount rate to calculate the net present value of future cash flows (income approach), and by using a market approach based upon an analysis of valuation metrics of comparable peer companies, using Level 3 fair value inputs as provided for under ASC 820, Fair Value Measurement. If the fair value exceeds the carrying value of the reporting unit, there is no impairment. If the carrying amount exceeds the fair value, the company recognizes an impairment loss in the amount by which the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. No impairment was identified during the company’s 2019, 2018 and 2017 annual goodwill impairment analysis.

Equity-Based Compensation

The company has several stock-based employee compensation plans which are more fully described in Note 6. Equity-Based Incentive Plans. Compensation expense for restricted stock units, deferred stock units, restricted stock, stock appreciation awards, and performance awards is recorded over the vesting periods using the fair value as determined by the closing fair market value of the company’s common stock on the grant date, and with respect to performance awards, an estimate of probability of award achievement during the performance period. The company recognizes forfeitures as they occur. Compensation expense for these stock-based employee compensation plans was $43.3 million, $38.7 million, and $36.6 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Income Taxes

The company accounts for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the basis differences reverse.

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

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 stock equivalents as of and for the years ended December 31, 2019, 2018, and 2017.

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 years ended December 31 (in thousands, except per share data):

	2019						2018
	Net Income		Shares		Per Share		Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Basic earnings per share	$	671,103		219,639	$	3.06	$	1,258,379		233,923	$	5.38
Dilutive common share equivalents		-		1,109				-		1,270
Diluted earnings per share	$	671,103		220,748	$	3.04	$	1,258,379		235,193	$	5.35

	2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic earnings per share	$	812,741		240,132	$	3.38
Dilutive common share equivalents		-		1,649
Diluted earnings per share	$	812,741		241,781	$	3.36

Concentration of Credit Risk

Financial instruments that potentially subject the company to significant concentrations of credit risk principally consist of temporary cash investments, short-term investments, and accounts receivable. The company places its temporary cash and short-term investments with high credit quality financial institutions and companies and limits the amount of credit exposure from any one entity. The company is exposed to credit risk in the event of nonpayment by customers. The company mitigates its exposure to credit risk, which it generally extends initially 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.

Derivative Financial Instruments

The company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. Changes in the fair value of derivatives that are designated as hedges, depending on the nature of the hedge, are recognized as either an offset against the change in fair value of the hedged balance sheet item in the case of fair value hedges or as other comprehensive income in the case of cash flow hedges, until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings for fair value hedges. The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.

In the normal course of business, the company has derivative financial instruments in the form of forward contracts in various metallic commodities, may have involvement with derivative financial instruments related to managing fluctuations in foreign exchange rates, and in the past has had derivative financial instruments related to managing fluctuations in interest rates. At the time of acquiring these financial instruments, the company designates and assigns these instruments as hedges of specific assets, liabilities or anticipated transactions. When hedged assets or liabilities are sold or extinguished, or the anticipated transaction being hedged is no longer expected to occur, the company recognizes the gain or loss on the designated hedged financial instrument.

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

The company routinely enters into forward exchange traded futures and option contracts to manage price risk associated with nonferrous metal inventory, as well as purchases and sales of nonferrous and ferrous metals (primarily aluminum and copper), to reduce exposure to commodity related price fluctuations. The company does not enter into these derivative financial instruments for speculative purposes.

Recently Adopted/Issued Accounting Standards

Refer to Note 12. Leases, for the company’s adoption of ASU 2016-02, Leases (ASC 842), effective January 1, 2019, and related required adoption and ongoing disclosures.

In January 2017, the Financial Accounting Standards Board, (FASB) issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment” (ASU 2017-04). This ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The company early adopted ASU 2017-04, pursuant to its October 1, 2019, annual goodwill impairment analysis, which adoption had no impact to the company’s financial position, results of operations or cash flows, given there was no impairment of goodwill indicated.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, and its subsequent corresponding updates: which requires an entity to use a forward-looking expected loss model versus the current incurred loss model for most financial instruments, including accounts receivable. This new guidance is effective for annual and interim periods beginning after December 15, 2019, but can be early adopted. During the fourth quarter 2019, the company completed its adoption plan of evaluating policies, processes and systems to determine the impact ASU 2016-13 will have in its consolidated financial statements and related disclosure. The company will adopt ASU 2016-13 effective January 1, 2020, which adoption is not expected to result in an impact to the company’s financial position, results of operations or cash flows.