STEEL DYNAMICS, INC. 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 the sections titled Special Note Regarding Forward-Looking Statements at the beginning of Part I of this Report and Item 1A. Risk Factors, as well as in other subsequent reports we file with theSecurities and Exchange Commission . These reports are available publicly on theSecurities and Exchange Commission website, www.sec.gov, and on our website, www.steeldynamics.com under "Investors - SEC Filings."
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.
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2020 Overview
Impact of COVID-19 on Our Business
InMarch 2020 , theWorld Health Organization categorized COVID-19 as a pandemic, and since that time, efforts to slow the contagion have impacted domestic and global economies. Countries, includingthe United States , issued "shelter in place" orders, temporarily closing non-essential businesses and restricting social interactions in an effort to slow the spread of COVID-19. States began to reopen during the second quarter 2020, and domestic manufacturing started to improve. Steelmaking and its ancillary support businesses are considered a "critical infrastructure industry" by theU.S. Department of Homeland Security and we have been deemed an essential busines in all of the states in which we operate. As a result, all of our locations continued to operate during all of 2020 and continue to operate.
Our teams are our most valued priority, and we have implemented numerous additional process and procedural initiatives to ensure the health and safety of our people, their families, and our communities. We adjusted schedules to support social distancing, provided additional and more frequent sanitizing applications, provided additional protective measures, among many other actions.
Results Overview
While our consolidated results for 2020 represented our fourth best year based on net income, we were negatively impacted in the second quarter by the continuing effects of COVID-19 due to the related temporary closures of numerous domestic steel consuming businesses. This largely reversed during the third quarter, as most manufacturing activity resumed throughout the remainder of the year. Domestic steel demand rebounded meaningfully during the third and fourth quarters of 2020, driving higher steel shipments, as well as significantly higher scrap flows and profitability for our steel and metals recycling operations. The non-residential construction market remained strong, with construction activity largely intact, resulting in record 2020 shipments and operating income for our steel fabrication operations.
Consolidated operating income for 2020 decreased
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for additional information regarding results of operations for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , and segment operating results for 2019 as compared to 2018. 34 Table of Contents
Segment Operating Results (dollars in thousands)
Years Ended December 31,
2020 % Change 2019
Net sales
Steel Operations $ 7,455,637 (9)% $ 8,234,179 Metals Recycling Operations 2,403,140 (4)% 2,494,014 Steel Fabrication Operations 906,364 (6)%
963,259
Other 501,187 25% 400,747
11,266,328 12,092,199
Intra-company (1,664,846) (1,627,208)
$ 9,601,482 (8)% $ 10,464,991
Operating income (loss)
Steel Operations $ 889,480 (14)% $ 1,030,554
Metals Recycling Operations 32,991 102% 16,308
Steel Fabrication Operations 120,575 1% 119,099
Other (188,525) (1)% (186,159)
854,521 979,802
Intra-company (7,379) 7,078
$ 847,142 (14)% $ 986,880
Steel Operations Segment
Steel operations consist of our six EAF steel mills, producing steel from
ferrous scrap and scrap substitutes, utilizing continuous casting, automated
rolling mills with 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 (see Item 1.
Business). Steel operations accounted for 74% and 76% of our consolidated net
sales during 2020 and 2019, respectively.
Steel Operations Shipments (tons):
Years Ended December 31,
2020 % Change 2019
Total shipments 10,718,333 (1)% 10,816,641
Intra-segment shipments (1,001,396) (975,372)Steel Operations Segment shipments 9,716,937 (1)% 9,841,269
External shipments 9,257,334 (2)% 9,402,608
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Segment Results 2020 vs. 2019
COVID-19 negatively impacted our steel operations during 2020, most notably in the second quarter. Domestic steel demand and raw material supply were robust early in the year, but demand from many steel consuming industries and scrap generation significantly reduced during the second quarter 2020, as the automotive sector and its supply chain temporarily closed. As a result, a significant amount of higher-cost domestic steel production was idled. As travel restrictions and stay at home orders were lifted, and the broader manufacturing base restarted mid-year, steel demand quickly recovered, resulting in steel operations segment shipments decreasing only 1% in 2020, as compared to 2019, reflecting the overall strong steel demand environment. As demand improved in the second half of 2020, some domestic steel production remained idled. When coupled with extremely low steel inventory levels throughout the supply chain, flat roll steel index prices increased over$500 per ton from August through the end of the year. However, overall steel segment operations average selling prices decreased 8%, or$69 per ton, in 2020 compared to 2019. Net sales for the steel operations segment decreased 9% in 2020 when compared to 2019, due to the 8% decrease in average steel selling prices and minimal decline in shipments. Metallic raw materials used in our EAFs represent our single most significant steel manufacturing cost, generally comprising approximately 50 to 60% of our steel mill operations' manufacturing costs. Our metallic raw material cost per net ton consumed in our steel mills decreased$25 , or 9%, in 2020 compared
to 2019. As a result of average selling prices decreasing more than scrap costs, metal spread (which we define as the difference between average steel selling prices and the cost of ferrous scrap consumed in our steel mills) decreased 8% in 2020 compared to 2019. Due to this metal spread contraction, coupled with the slight decrease in shipments, operating income for the steel operations decreased 14%, to$889.5 million , in 2020 compared to 2019. 36 Table of Contents
Metals Recycling Operations Segment
Metals recycling operations includes both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage, and scrap management services. InAugust 2020 , we completed the acquisition of Zimmer, whose post-acquisition operations are included in 2020 results. Our steel mills utilize a large portion (approximately 69% in 2020 and 66% in 2019) 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. Metals recycling operations accounted for 11% of our consolidated net sales during 2020 and 2019.
Metals Recycling Operations Shipments:
Years Ended December 31,
2020 % Change 2019
Ferrous metal (gross tons)
Total 4,591,881 (1)% 4,627,214
Inter-company (3,184,451) 4% (3,061,257)
External shipments 1,407,430 (10)% 1,565,957
Nonferrous metals (thousands of pounds)
Total 977,882 (8)% 1,068,208
Inter-company (146,753) (144,229)
External shipments 831,129 (10)% 923,979
Segment Results 2020 vs. 2019
As stated previously, our metals recycling operations benefitted from a rebound
in manufacturing in steel consuming industries during the second half of 2020.
Scrap flows increased as temporary closures of domestic automotive and other
steel consuming manufacturers and their related supply chain were lifted. In
addition, domestic steel mill utilization rates rose from the trough experienced
in the second quarter 2020, resulting in increased ferrous scrap demand and
significantly higher selling prices. However, net sales for our metals recycling
operations decreased 4% in 2020 as compared to 2019, as total annual shipments
decreased, most notably in the second quarter. Ferrous scrap average selling
prices increased 10% during 2020 compared to 2019, while nonferrous pricing was
flat year over year. Ferrous metal spread (which we define as the difference
between average selling prices and the cost of purchased scrap) increased 27%,
while nonferrous metal spread decreased 4% in 2020 compared to 2019. Metals
recycling operations operating income in 2020 of $33.0 million increased 102%
from 2019 operating income of $16.3 million , due to ferrous metal spread
expansion and positive operating results from our Zimmer acquisition, which more
than offset decreases in ferrous and nonferrous shipments.
Steel Fabrication Operations Segment
Steel fabrication operations include sevenNew Millennium Building Systems joist and deck plants located throughoutthe United States and inNorthern 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 9% of our consolidated net sales during 2020 and 2019. 37 Table of Contents [[Image Removed: Graphic]]
Segment Results 2020 vs. 2019
Net sales for the steel fabrication operations decreased$56.9 million , or 6%, during 2020 compared to 2019, as shipments increased 3% to a record 666,000 tons, while average selling prices decreased$133 per ton, or 9%. As our steel fabrication operations continue to leverage our national operating footprint, market demand, orders and backlog continued to be strong in 2020, indicating resilience of the non-residential construction market during COVID-19. The purchase of various steel products is the largest single cost of production for our steel fabrication operations, generally representing approximately two-thirds of the total cost of manufacturing. The average cost of steel consumed decreased by 14% in 2020, as compared to 2019, consistent with decreased steel selling prices in our steel operations. Average selling prices decreased 9%, with resulting metal spread (which we define as the difference between average selling prices and the cost of purchased steel) decreasing 2%, as the decrease in selling prices per ton outpaced the decrease in the cost of purchased steel. Operating income increased$1.5 million to a record$120.6 million in 2020 compared to 2019, as increased shipments more than offset decreased metal spread. Other Operations
Consolidated Results 2020 vs. 2019
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 9%, or$41.0 million , to$477.5 million during 2020 compared to 2019, representing 5.0% and 4.2% of net sales, respectively. This increase relates primarily to non-capitalized expenses incurred during construction of our new Southwest-Sinton Flat Roll Division. Profit sharing expense was$61.7 million in 2020, a decrease of$16.3 million from the$78.0 million earned during 2019. The company-wide profit sharing plan represents 8% of pretax earnings; therefore, our lower 2020 earnings resulted in lower profit sharing. Interest Expense, net of Capitalized Interest. During 2020, interest expense of$94.9 million decreased$32.2 million from the$127.1 million incurred during 2019 due to decreased interest rates from ourDecember 2019 ,June 2020 , andOctober 2020 refinancing of$1.95 billion of high yield senior notes with lower interest senior notes, and increased capitalized interest in 2020 in conjunction with construction of our new Southwest-Sinton Flat Roll Division. 38
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Other (Income) Expense, net. Net other expense of$46.8 million in 2020 included$33.1 million of costs of premiums, write off of unamortized debt issuance costs, and other expenses related to the call and redemption of our 5 1/4% senior notes due 2023, 5.500% senior notes due 2024, and 4.125% senior notes due 2025. Net other income of$15.6 million in 2019 included interest income of$28.0 million associated with our invested cash and short-term investments, compared to only$9.0 million in 2020, due to lower interest rates on decreasing invested cash and short-term investment balances in 2020. Income Tax Expense. During 2020, income tax expense of$134.7 million , representing an effective income tax rate of 19.1%, was down 32% from$197.4 million , representing an effective income tax rate of 22.6%, during 2019, consistent with decreased income before income taxes. The decrease in effective tax rate in 2020 relates primarily to the release of deferred tax asset valuation allowance and increased federal tax credits. Refer to Note 4. Income Taxes to the consolidated financial statements elsewhere in this report for additional information. Included in the balance of unrecognized tax benefits atDecember 31, 2020 , are potential benefits of$9.0 million that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to our tax contingencies on a net-of-tax basis in income tax expense. During the year endedDecember 31, 2020 , we recognized benefits from the decrease of interest expense and penalties of$450,000 , net of tax. In addition to the unrecognized tax benefits noted above, we had$828,000 accrued for the payment of interest and penalties atDecember 31, 2020 . We file income tax returns inthe United States federal jurisdiction as well as income tax returns in various state jurisdictions. The tax years 2017 through 2019 remain open to examination by the Internal Revenue Service and various state and local jurisdictions. At this time, we do not believe there will be any significant examination adjustments that would result in a material change to our financial position, results of operations or cash flows. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months in an amount ranging from zero to$3.3 million , as a result of the expiration of the statute of limitations and other federal and state income tax audits.
Liquidity and Capital Resources
Capital Resources and Long-term Debt. Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steel, metals recycling, and steel fabrication operations, and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily from working capital requirements, capital expenditures, currently including those related to our new Southwest-Sinton Flat Roll Division, principal and interest payments related to our outstanding indebtedness (no significant principal payments until 2024), dividends to our shareholders, potential stock repurchases, and acquisitions. We have met these liquidity requirements primarily with cash provided by operations and long-term borrowings, and we also have availability under our unsecured Revolver. Our liquidity atDecember 31, 2020 , is as follows (in thousands):
Cash and equivalents $ 1,368,618
Unsecured revolver availability 1,188,096
Total liquidity $ 2,556,714 Our total outstanding debt increased$368.3 million during 2020, due to ourOctober 2020 issuance of the 2027 Notes and 2050 Notes as described below. 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 41.6% and 40.2% atDecember 31, 2020 , andDecember 31, 2019 , respectively. Our unsecured credit agreement has a senior unsecured revolving credit facility (Facility), which provides a$1.2 billion unsecured Revolver, and matures inDecember 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. AtDecember 31, 2020 , we had$1.2 billion of availability on the Revolver,$11.9 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding. The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve-months (LTM) consolidated Adjusted 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. AtDecember 31, 2020 , our interest coverage ratio and debt to capitalization ratio were
10.71:1.00 and 0.42:1.00,
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respectively. We were, therefore, in compliance with these covenants at December
31, 2020 , and we anticipate we will continue to be in compliance during the next
twelve months.
In October 2020 , we issued $350.0 million of 1.650% notes due 2027 and $400.0
million of 3.250% notes due 2050. The net proceeds from these notes were used to
fund the November 2020 call and redemption of the $350.0 million outstanding
principal amount of our 4.125% senior notes due 2025 at a redemption price of
102.063%, plus accrued and unpaid interest to, but not including, the date of
redemption, and for general corporate purposes. We recorded expenses related to
premiums and write off of unamortized debt issuance costs of approximately $10.3
million , which are reflected in other expenses in the consolidated statement of
income for the year ended December 31, 2020 .
In June 2020 , we issued $400.0 million of 2.400% notes due 2025 and $500.0
million of 3.250% notes due 2031. The net proceeds from these notes were used to
fund the June 2020 call and redemption of the $400.0 million outstanding
principal amount of our 5 1/4% senior notes due 2023 at a redemption price of
100.875%, and the $500.0 million outstanding principal amount of our 5.500%
senior notes due 2024 at a redemption price of 102.750%, plus accrued and unpaid
interest to, but not including, the date of redemption. We recorded expenses
related to premiums, write off of unamortized debt issuance costs, and other
expenses of approximately $22.8 million , which are reflected in other expenses
in the consolidated statement of income for the year ended December 31, 2020 .
Working Capital. We generated cash flow from operations of $987.0 million in
2020. Operational working capital (representing amounts invested in trade
receivables and inventories, less current liabilities other than income taxes
payable and debt) increased $50.6 million (3%) to $1.7 billion at December 31,
2020 , consistent with increased sales during the fourth quarter of 2020, as
compared to the fourth quarter of 2019.
Capital Investments. During 2020, we invested $1.2 billion in property, plant
and equipment, primarily within our steel operations segment, compared with
$451.9 million invested during 2019. The increase in 2020 versus 2019 primarily
relates to our new Southwest-Sinton Flat Roll Division, which represented $927.7
million in 2020. We enter 2021 with sufficient liquidity of $2.6 billion to
provide for our planned 2021 capital requirements, including those necessary to
finish construction of our new steel mill in Sinton, Texas .
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 $0.25 per share in the first quarter 2020 (from
$0.24 per share in 2019), resulting in declared cash dividends of $210.5 million
during 2020, compared to $209.5 million during 2019. We paid cash dividends of
$209.2 million and $200.3 million during 2020 and 2019, respectively. Our board
of directors, along with executive management, approves the payment of dividends
on a quarterly basis. The determination to pay cash dividends in the future is
at the discretion of our board of directors, after taking into account various
factors, including our financial condition, results of operations, outstanding
indebtedness, current and anticipated cash needs and growth plans.
Other. In February 2020 our board of directors authorized a share repurchase
program of up to $500 million of our common stock, subsequent to the completion
of a 2018 board authorized share repurchase program of up to $750 million of our
common stock during the first quarter of 2020. 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 2020 share repurchase program
does not require us to acquire any specific number of shares, and may be
modified, suspended, extended or terminated by us at any time. The 2020 share
repurchase program does not have an expiration date. We repurchased 4.4 million
shares of our common stock for $106.5 million during 2020, all within the first
quarter, fully expending the remaining purchases available under the 2018
program, leaving $444.0 million remaining available to purchase under the 2020
program. See Part II, Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities for additional
information.
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.
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Contractual Obligations and Other Long-Term Liabilities
We have the following minimum commitments under contractual obligations, including purchase obligations, as defined by theSecurities and Exchange Commission . A "purchase obligation" is defined as an agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Other long-term liabilities are defined as long-term liabilities that are reflected on our balance sheet under generally accepted accounting principles. Based on this definition, the following table includes only those contracts which include fixed or minimum obligations. It does not include normal purchases, which are made in the ordinary course of business. The following table provides aggregated information about outstanding contractual obligations and other long-term liabilities as ofDecember 31, 2020 (in thousands): Payments Due By Period Total 2021 2022 & 2023 2024 & 2025 2026 & After Long-term debt (1)$ 3,158,658 $ 86,894 $ 8,154 $ 806,926 $ 2,256,684 Estimated interest payments on debt (2) 1,004,214 101,694 199,984 179,611 522,925 Purchase obligations (3) 624,809 265,736 168,035 51,739 139,299 Construction commitments (4) 561,064 561,064 - - - Lease commitments 106,421 20,734 31,222 20,306 34,159 Other commitments (5) 1,390 225 400 325 440 Total (6)$ 5,456,556 $ 1,036,347 $ 407,795 $ 1,058,907 $ 2,953,507
The long-term debt payment information presented above assumes that our (1) senior notes remain outstanding until maturity. Refer to Note 3. Long-term
Debt to the consolidated financial statements elsewhere in this report for
additional information regarding these transactions, and our long-term debt.
The estimated interest payments shown above assume interest rates of 2.800%
on our
million senior unsecured notes due
senior unsecured notes due
unsecured notes due
unsecured notes due
Revolver; and an average of 2.5% on our other debt of
Purchase obligations include commitments we have for the purchase of such
commodities as electricity, water, natural gas and its transportation
services, fuel, air products, zinc, and electrodes. These arrangements have (3) "take or pay" or other similar commitment provisions. We have utilized such
"take or pay" requirements during the past three years under these contracts,
except for certain air products at our idle
Refer to Note 9. Commitments and Contingencies to the consolidated financial
statements elsewhere in this report for additional information.
Construction commitments relate to firm contracts we have with various
vendors for the completion of certain construction projects at our various
(4) divisions at
Southwest-Sinton Flat Roll Division mill comprise
total. Refer to Note 9. Commitments and Contingencies to the consolidated
financial statements elsewhere in this report for additional information.
(5) Other commitments principally relate to deferred compensation plan
obligations.
We expect to make cash outlays in the future related to our unrecognized tax
benefits; however, due to the uncertainty of the timing, we are unable to
make reasonably reliable estimates regarding the period of cash settlement (6) with the respective taxing authorities. Accordingly, unrecognized tax
benefits and related interest and penalties of
above. Refer to Note 4. Income Taxes to the consolidated financial statements
elsewhere in this report for additional information.
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Other Matters
Inflation
We believe that inflation has not had a material effect on our results of operations.
Environmental and Other Contingencies
We have incurred, and in the future will continue to incur, capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring and compliance. During 2020, we incurred costs related to the monitoring and compliance of environmental matters in the amount of approximately$34.0 million and capital expenditures related to environmental compliance of approximately$87.3 million , of which approximately$83.7 million is related to the construction of our new Southwest-Sinton Flat Roll Division. Of the costs incurred during 2020 for monitoring and compliance, approximately 70% were related to the normal transportation of certain types of waste produced in our steelmaking processes and other facilities, in accordance with legal requirements. We incurred combined environmental remediation costs of approximately$2.4 million at all of our facilities during 2020. We have an accrual of$6.0 million recorded for environmental remediation related to our metals recycling operations, and$2.6 million related to our idledMinnesota ironmaking operations. We believe, apart from our dependence on environmental construction and operating permits for our existing and any future manufacturing facilities, that compliance with current environmental laws and regulations is not likely to have a materially adverse effect on our financial condition, results of operations or liquidity. However, environmental laws and regulations evolve and change, and we may become subject to more stringent environmental laws and regulations in the future, such as the impact ofUnited States government or various governmental agencies introducing regulatory changes in response to the potential of climate change.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Our Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimations and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition and Credit Losses. Except for our steel fabrication operations, we recognize revenues 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. Our 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. The company does not exercise significant judgements in determining the timing of satisfaction of performance obligations or the transaction price. Provision is made for estimated product returns and customer claims based on historical experience. If the historical data used in our estimates does not reflect future returns and claims trends, additional provision may be necessary. The allowance for credit losses for accounts receivable is based on our reasonable estimate of known credit risks and historical experience, adjusted for current and anticipated economic and other pertinent factors affecting our customers, that may differ from historical experience. We are exposed to credit risk in the event of nonpayment by our customers, which in steel operations are principally intermediate steel processors and service centers that sell our products to numerous industry sectors, including the construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets. Our metals recycling operations sell ferrous scrap to steel mills and foundries, and nonferrous scrap, such as copper, brass, aluminum and stainless steel to, among others, ingot manufacturers, copper refineries and mills, smelters, and specialty mills. Our steel fabrication operations sell fabricated steel joists and deck primarily to the non-residential construction market. We mitigate our exposure to credit risk, which we generally extend initially on an unsecured basis, by performing ongoing credit evaluations and taking further action when necessary, such as requiring letters of credit or other security interests to support the customer receivable. If the financial condition of our customers were to deteriorate for any reason, including the impact of COVID-19 on operations, resulting in the impairment of their ability to make payments, additional allowance may be required. 42 Table of Contents Inventories. We record inventories 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. We record amounts required, if any, to reduce the carrying value of inventory to its net realizable value as a charge to cost of goods sold. If product selling prices were to decline in future periods, further write-down of inventory could result, specifically raw material inventory such as scrap purchased during periods of peak market pricing. Impairments of Long-Lived Tangible and Definite-Lived Intangible Assets. We review 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 asset to its carrying amount. We consider various factors and determine 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. When determining future cash flows and if necessary, fair value, we must make judgments as to the expected utilization of assets and estimated future cash flows related to those assets. We consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all other available information at the time the estimates are made. Those estimates and judgments may or may not ultimately prove accurate. 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 ofDecember 31, 2020 , and 2019, the company reported$7.2 million and$8.0 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 year endedDecember 31, 2020 and 2019, the asset carrying amounts approximated their fair value less cost to sell. The company determined fair value using Level 3 fair value inputs as provided for under ASC 820, consisting of information provided by brokers and other external sources along with management's own assumptions. Events occurred during the fourth quarter of 2020, that represented impairment indicators related to the company's noncore oil and gas joint ventures. Therefore, the company undertook a fourth quarter 2020 assessment of the recoverability of the carrying amounts of these joint ventures' property, plant and equipment. Based on the joint ventures' outlook at the time of this 2020 assessment, the company concluded that the carrying amounts of its property, plant and equipment were fully impaired. This assessment resulted in a total non-cash asset impairment charge of$19.4 million , which include amounts attributable to noncontrolling interests of$2.4 , that in total served to reduce net income attributable toSteel Dynamics, Inc. by$12.0 million for the year endedDecember 31, 2020 .Goodwill .
Our goodwill, relating to various business combinations, consisted of the
following at
2020 2019
Steel Operations Segment $ 272,133 $ 272,133
Metals Recycling Operations Segment 183,168 178,857
Steel Fabrication Operations Segment 1,925 1,925
$ 457,226 $ 452,915 At least once annually (as ofOctober 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. If the fair value exceeds the carrying value of the reporting unit, there is no impairment. If the carrying amount exceeds the fair value, we recognize 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. 43 Table of Contents Key assumptions used to determine the estimated fair value of each reporting unit under the discounted cash flows method (income approach) include: (a) expected cash flows for the five-year period following the testing date (including market share, sales volumes and prices, costs to produce and estimated capital needs); (b) an estimated terminal value using a terminal year growth rate determined based on the growth prospects of the reporting unit; and (c) a risk-adjusted discount rate based on management's best estimate of market participants' after-tax weighted average cost of capital and market risk premiums. Key assumptions used to determine the estimated fair value of each reporting unit under the market approach include the expected revenues and cash flows in the next year. We consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair values of its reporting units are estimated. Those estimates and judgments may or may not ultimately prove accurate.Goodwill acquired in past transactions are naturally more susceptible to impairment, primarily due to the fact that they are recorded at fair value based on operating plans and economic conditions at the time of acquisition. Consequently, if operating results and/or economic conditions deteriorate after an acquisition, it could result in the impairment of the acquired assets. A deterioration of economic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models but may also negatively impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, we may recognize an impairment in spite of realizing actual cash flows that are approximately equal to or greater than our previously forecasted amounts. Our fourth quarter 2020, 2019, and 2018 annual goodwill impairment analyses did not result in any impairment charges. Management does not believe that it is reasonably likely that our reporting units will fail the goodwill impairment test in the near term, as the determined fair value of the reporting units with goodwill exceeded their carrying value by more than an insignificant amount. We will continue to monitor operating results within all reporting units throughout the upcoming year to determine if events and circumstances warrant interim impairment testing. Otherwise, all reporting units will again be subject to the required annual impairment test during the fourth quarter of 2021. Changes in judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future operating cash flows and discount rate, could decrease the estimated fair value of our reporting units in the future and could result in an impairment of goodwill. Income Taxes. We are required to estimate our income taxes as a part of the process of preparing our consolidated financial statements. This requires us to estimate our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. We also establish reserves to reduce some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. A number of years may elapse before a particular matter for which we have established a reserve is audited by a taxing authority and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears. Settlement of any particular issue would usually require the use of cash.
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