1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended September 30, 2000March 31, 2001
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.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.)
70306714 Pointe Inverness Way, Suite 310,200, Fort Wayne, IN 46804
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (219) 459-3553
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- ------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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 [X]/X/ No [ ]/ /
As of November 6, 2000,May 10, 2001, Registrant had outstanding 45,502,62645,584,456 shares of Common
Stock.
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STEEL DYNAMICS, INC.
Table of Contents
PART I. Financial Information
Item 1. Consolidated Financial Statements:
Page
----
Consolidated Balance Sheets as of September 30, 2000March 31, 2001 (unaudited) and December 31, 19992000 .......... 1
Consolidated Statements of Income for the three months ended
March 31, 2001 and nine-month periods ended
September 30, 2000 and 1999 (unaudited).......................................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and nine-month periods ended
September 30, 2000 and 1999 (unaudited).......................................................... 3
Notes to Consolidated Financial Statements.......................................................Statements................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................Operations.................................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 9Risk................................... 8
PART II. Other Information
Item 1. Legal Proceedings ............................................................................... 10........................................................................... 9
Item 6. Exhibits and Reports on Form 8-K.................................................................8-K............................................................. 9
Signature.................................................................................... 10
Signature........................................................................................ 11
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STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30March 31 December 31
2001 2000
1999
--------------------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...............................................................equivalents ...................................................... $ 4,6175,520 $ 16,61510,184
Accounts receivable, net................................................................ 81,330 74,642net ....................................................... 86,914 82,838
Accounts receivable-related parties..................................................... 28,029 12,007
Inventories............................................................................. 127,023 106,742parties ............................................ 18,598 20,148
Inventories .................................................................... 114,487 106,745
Deferred taxes.......................................................................... 9,711 10,987taxes ................................................................. 11,275 12,854
Other current assets.................................................................... 10,867 4,808
---------- ----------assets ........................................................... 4,930 9,844
----------- -----------
Total current assets........................................................... 261,577 225,801assets .................................................. 241,724 242,613
PROPERTY, PLANT, AND EQUIPMENT, NET.......................................................... 794,888 742,787NET ................................................. 806,336 807,322
RESTRICTED CASH.............................................................................. 3,499 6,696CASH ..................................................................... 3,697 3,465
OTHER ASSETS ............................................................................... 15,699 16,272
---------- ----------........................................................................ 13,275 13,674
----------- -----------
TOTAL ASSETS................................................................... $1,075,663ASSETS .......................................................... $ 991,556
========== ==========1,065,032 $ 1,067,074
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................payable ............................................................... $ 21,04121,107 $ 19,62218,874
Accounts payable-related parties........................................................ 8,583 18,014parties ............................................... 17,011 9,114
Accrued interest........................................................................ 5,631 4,941interest ............................................................... 4,832 5,364
Other accrued expenses.................................................................. 23,436 20,077expenses ......................................................... 26,797 26,302
Current maturities of long-term debt.................................................... 19,010 7,921
---------- ----------debt ........................................... 7,679 17,044
----------- -----------
Total current liabilities...................................................... 77,701 70,575liabilities ............................................. 77,426 76,698
LONG-TERM DEBT, less current maturities...................................................... 536,556 498,042maturities ............................................. 512,224 515,476
DEFERRED TAXES............................................................................... 45,112 29,774TAXES ...................................................................... 51,342 52,027
MINORITY INTEREST............................................................................ 3,667 1,795INTEREST ................................................................... 4,502 4,089
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A commonCommon stock voting, $.01 par value; 100,000,000 shares authorized;
49,342,59649,356,988 and 49,265,07849,347,626 shares issued; and 45,617,59645,513,988 and 47,970,97845,504,626
shares outstanding, as of September 30, 2000March 31, 2001 and December 31, 1999, respectively.............................. 4932000, respectively 494 493
Treasury stock, at cost; 3,725,000 and 1,294,1003,843,000 shares as of September 30, 2000 and
December 31, 1999, respectively..................................................... (45,406) (19,650)...................................... (46,526) (46,526)
Additional paid-in capital................................................................... 335,559 335,237capital ..................................................... 336,073 335,732
Retained earnings............................................................................ 121,981 75,290
---------- ----------earnings .............................................................. 133,468 129,085
Other accumulated comprehensive income ......................................... (3,971) --
----------- -----------
Total stockholders' equity..................................................... 412,627 391,370
---------- ----------equity ............................................ 419,538 418,784
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $1,075,663EQUITY ............................ $ 991,556
========== ==========1,065,032 $ 1,067,074
=========== ===========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
[CAPTION]
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------March 31
---------------------------
2001 2000
1999 2000 1999
----------- ----------- ----------- -------------------- ---------
(unaudited)
(unaudited)
NET SALES:
Unrelated parties...................................parties ......................... $ 129,049129,266 $ 111,989 $ 426,625 $ 319,983151,675
Related parties..................................... 31,216 46,735 113,549 122,855
----------- ----------- ----------- -----------parties ........................... 24,820 37,497
--------- ---------
Total net sales................................. 160,265 158,724 540,174 442,838sales ....................... 154,086 189,172
Cost of goods sold....................................... 124,503 124,700 408,459 351,571
----------- ----------- ----------- -----------sold ............................. 128,523 145,161
--------- ---------
GROSS PROFIT ........................................... 35,762 34,024 131,715 91,267................................... 25,563 44,011
Selling, general and administrative expenses............. 12,185 10,824 40,965 29,842
----------- ----------- ----------- -----------expenses ... 13,802 13,850
--------- ---------
OPERATING INCOME......................................... 23,577 23,200 90,750 61,425INCOME ............................... 11,761 30,161
Interest expense......................................... (5,363) (5,844) (15,322) (17,283)expense ............................... 4,839 4,929
Other income (expense), net.............................. 216 174 (907) (1,433)
----------- ----------- ----------- -----------(income) expense, net .................... (204) (183)
--------- ---------
INCOME BEFORE INCOME TAXES............................... 18,430 17,530 74,521 42,709TAXES ..................... 7,126 25,415
Income taxes ........................................... 6,047 7,012 27,830 17,081
----------- ----------- ----------- -----------................................... 2,743 10,166
--------- ---------
NET INCOME..........................................INCOME ................................ $ 12,3834,383 $ 10,518 $ 46,691 $ 25,628
=========== =========== =========== ===========15,249
========= =========
BASIC EARNINGS PER SHARE:
Net income per share.....................................share ........................... $ 0.270.10 $ 0.22 $ 0.99 $ 0.54
=========== ============ =========== ===========0.32
========= =========
Weighted average common shares outstanding............... 46,217 47,919 47,261 47,900
=========== =========== =========== ===========outstanding ..... 45,511 47,996
========= =========
DILUTED EARNINGS PER SHARE:
Net income per share.....................................share ........................... $ 0.270.10 $ 0.22 $ 0.99 $ 0.53
=========== =========== =========== ===========0.32
========= =========
Weighted average common shares and
share equivalents outstanding....................... 46,359 48,329 47,423 48,298
=========== =========== =========== ===========outstanding ............. 45,710 48,203
========= =========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------March 31
---------------------------
2001 2000
1999 2000 1999
------------ ----------- ------------ -------------------- --------
(unaudited)
(unaudited)
OPERATING ACTIVITIES:
Net income...........................................income ................................................. 4,383 $ 12,383 $ 10,518 $ 46,691 $ 25,62815,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 10,866 10,194 34,223 28,613amortization .......................... 11,551 11,903
Deferred income taxes............................. 7,235 2,794 16,614 10,169taxes .................................. 894 4,689
Minority interest................................. (355) - 1,872 -interest ...................................... 413 2,789
Other accumulated comprehensive income ................. (3,971) --
Changes in certain assets and liabilities:
Accounts receivable............................ 6,099 (7,976) (22,710) (17,432)
Inventories.................................... 4,709 383 (20,281) 11,869receivable ............................... (2,526) (17,280)
Inventories ....................................... (7,742) (12,181)
Other assets................................... (5,371) (3,058) (2,556) 2,129assets ...................................... 4,869 563
Accounts payable............................... (7,168) (7,255) (8,012) (151)payable .................................. 10,130 18,039
Accrued expenses............................... 985 5,466 4,049 4,707
----------- ----------- ----------- -----------expenses .................................. (37) 4,696
-------- --------
Net cash provided by operating activities...... 29,383 11,066 49,890 65,532
----------- ----------- ----------- -----------activities ......... 17,964 28,467
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment.......... (30,921) (23,186) (85,771) (99,318)equipment ................ (10,353) (29,206)
Other ............................................... - 1,098 (108) 3,333
----------- ----------- ----------- -----------...................................................... -- (1,305)
-------- --------
Net cash used in investing activities.......... (30,921) (22,088) (85,879) (95,985)
----------- ----------- ----------- -----------activities ............. (10,353) (30,511)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt........................... 19,607 20,948 66,646 42,710debt ................................. 6,299 5,651
Repayments of long-term debt......................... (11,120) (5,640) (17,043) (10,864)debt ............................... (18,916) (4,285)
Issuance of common stock, net of expenses and
proceeds and tax benefits from exercise of stock options... 39 263 322 424
Purchase of treasury stock........................... (12,048) - (25,756) -
Debt issuance costs.................................. - 43 (178) 4
----------- ----------- ----------- -----------options 342 223
-------- --------
Net cash provided by (used in) by financing activities (3,522) 15,614 23,991 32,274
----------- ----------- ----------- -----------
Increase (decrease)(12,275) 1,589
-------- --------
Decrease in cash and cash equivalents.......... (5,060) 4,592 (11,998) 1,821equivalents ........................... (4,664) (455)
Cash and cash equivalents at beginning of period.......... 9,677 2,472period ................ 10,184 16,615
5,243
----------- ----------- ----------- ------------------- --------
Cash and cash equivalents at end of period................period ...................... $ 4,6175,520 $ 7,064 $ 4,617 $ 7,064
=========== =========== =========== ===========16,160
======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest....................................interest .......................................... $ 10,1619,614 $ 7,781 $ 28,254 $ 25,155
=========== =========== =========== ===========9,139
======== ========
Cash paid for taxes.......................................taxes ............................................. $ 6,730540 $ 5,395 $ 17,708 $ 7,180
=========== =========== =========== ===========355
======== ========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Principles of Consolidation. The consolidated financial statements include the
accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries (the
company) after elimination of the significant intercompany accounts and
transactions. Minority interest represents the minority shareholders'
proportionate share in the equity or income of the company's consolidated
subsidiary, New Millennium Building Systems, LLC (NMBS).subsidiaries.
Use of Estimates. These financial statements are prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts that
are based on management's estimates and assumptions that affect the amounts
reported in the financial statements and in the notes thereto. Actual results
may differ from those estimates. In the opinion of management, these estimates
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 included in the company's
19992000 Annual Report on Form 10-K.
2. INVENTORIES
Inventories are stated at lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market. Inventories
consisted of the following (in thousands):
September 30March 31 December 31
2001 2000
1999
---------- ------------------ --------
Raw Materials................................................................................Materials ........................ $ 52,24137,763 $ 46,171
Supplies..................................................................................... 41,508 39,981
Work-in-progress............................................................................. 10,517 3,75439,302
Supplies ............................. 42,765 41,770
Work-in-progress ..................... 8,713 7,916
Finished Goods............................................................................... 22,757 16,836
---------- ----------
$ 127,023 $ 106,742
========== ==========Goods ....................... 25,246 17,757
-------- --------
$114,487 $106,745
======== ========
3. EARNINGS PER SHARE
Diluted earnings per share amounts are based upon the weighted average number of
common and common equivalent shares outstanding during the year. Common
equivalent shares are excluded from the computation in periods in which they
have an anti-dilutive effect. The difference between basic and diluted earnings
per share for the company is solely attributable to the dilutive effect of stock
options. The reconciliationsreconciliation of the weighted average common shares for basic and
diluted earnings per share for the three and nine months ended September 30 areMarch 31 is as follows (in
thousands):
Three Months Ended Nine Months Ended
--------------------------- ----------------------------2001 2000
1999 2000 1999
----------- ----------- ---------- ---------------- ------
Basic weighted average common shares outstanding......... 46,217 47,919 47,261 47,900outstanding ....................... 45,511 47,996
Dilutive effect of stock options......................... 142 410 162 398
----------- ---------- ---------- ----------options ....................................... 199 207
------ ------
Diluted weighted average common shares and share equivalents outstanding..................... 46,359 48,329 47,423 48,298
=========== ========== ========== ==========outstanding 45,710 48,203
====== ======
4. NEW ACCOUNTING PRONOUNCEMENTS
The company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities,Activity," was issued in June 1998 and then wasas amended,
bycommencing January 1, 2001. SFAS No. 137 in June 1999 and SFAS No. 138 in June 2000. SFAS No.
137 deferred the effective date of SFAS No. 133 to all fiscal years beginning
after June 15, 2000. SFAS No. 138 addressed a limited number of issues
regarding implementation difficulties. This statement establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. If certain conditionsDerivatives that are met a derivative may be
specificallynot
designated as ahedges must be adjusted to fair value hedge, a cash flow hedge, or a hedge
of foreign currency exposure. The accounting for changesthrough income. 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 through earnings or as other
comprehensive income, until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
In the normal course of business, the company has limited involvement with
derivative (thatfinancial instruments in an effort to manage the company's exposure
to fluctuations in interest and foreign exchange rates. The company employs an
interest rate swap agreement and a foreign currency exchange contract. The
company designates and assigns the financial 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. Prior to adoption of SFAS no. 133, the
cost associated with the interest rate swap agreement is recognized as interest
expense over the term of the hedged obligation. Realized gains and losses) is dependent uponlosses from
the intended useforeign currency contract, incurred for the purchase of theequipment
denominated in a foreign currency, are recorded in results from operations. The
company classifies its derivative financial instruments as held or issued for
purposes other than trading. The company's results of operations and the resulting designation. Management has identified all
potential derivative instruments and is substantially complete with evaluating
possible financial
statement impact. This process will be completed during the
fourth quarter of 2000. To date, management believesposition reflected the impact of SFAS No. 133 will be immaterial tocommencing January 1, 2001, as a
one-time after-tax cumulative effect of an accounting change of approximately
$2.5 million as a reduction in other comprehensive income. At March 31, 2001,
the company's financial statements.company recorded a reduction in other comprehensive income of $1.5 million,
net of tax, and a loss from hedging activities of approximately $88,000.
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income. The following table presents the company's components of
comprehensive income, net of related tax for the three months ended March 31 (in
thousands).
2001 2000
------- -------
Net income available to common shareholders ....... $ 4,383 $15,249
Cumulative effect of an accounting change ......... (2,468) --
Unrealized loss on derivative instrument .......... (1,503) --
------- -------
Comprehensive income .............................. $ 412 $15,249
======= =======
5. SEGMENT INFORMATION
The company has two operating segments: Steel Operations and Steel Scrap
Substitute Operations. Steel Operations include all revenues from the flat roll
mill facility, which produces and sells hot rolled, cold rolled, and galvanized
sheet steel; and also includes all start-up costs associated with the structural
and rail mill, which will produce structural steel and rail products. Steel
Scrap Substitute Operations include revenues from Iron Dynamics, Inc., which
will provide liquid pig iron to the company. In addition, Corporate and
Eliminations include certain unallocated corporate accounts, such as SDI senior
bank debt and certain other investments, which
include NMBS operations and SDI Investment Company.investments. The company's operations are primarily
organized and managed by operating segment. The company evaluates performance
and allocates resources based on operating profit or loss before income taxes.
The accounting policies of the operating segments are consistent with those
described in Note 1 to the 1999 financial statements. Intersegment sales and
transfers are accounted for at standard prices and are eliminated in
consolidation. Segment results for the three and
nine months ended September 30,March 31, are as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------2001 2000 1999 2000 1999
----------- -----------
----------- -----------
STEEL OPERATIONS
Net sales
External $ 155,409141,733 $ 158,724 $ 535,318 $ 442,838189,172
Other segments 1,418 - 2,691 -5,076 --
Operating income 30,824 29,238 116,047 77,45418,579 38,762
Assets 895,177 837,506 895,177 837,506
- ------------------------------------------------------------------------------------------------------------------------866,693 876,650
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External $ --- $ - $ - $ ---
Other segments 205 720 5,752 1,062603 3,264
Operating loss (1,856) (3,848) (9,682) (9,950)(3,827) (4,110)
Assets 135,943 117,296 135,943 117,296
- ------------------------------------------------------------------------------------------------------------------------151,200 126,001
CORPORATE AND ELIMINATIONS
Net sales
External $ 4,85612,353 $ - $ 4,857 $ ---
Other segments (1,623) (720) (8,443) (1,062)(5,679) (3,264)
Operating loss (5,391) (2,190) (15,615) (6,079)(2,991) (4,491)
Assets 44,543 32,003 44,543 32,003
- ------------------------------------------------------------------------------------------------------------------------47,139 33,505
CONSOLIDATED
Net sales
External $ 160,265154,086 $ 158,724 $ 540,174 $ 442,838189,172
Operating income 23,577 23,200 90,750 61,42511,761 30,161
Assets 1,075,663 986,805 1,075,663 986,805
- ------------------------------------------------------------------------------------------------------------------------1,065,032 1,036,156
The external net sales of the company's Steel Operations include sales to
Non-U.S. companies of $938,000$1.6 million and $4.7 million$6.1 for the three months ended September 30,March 31,
2001 and 2000, and 1999, respectively, and $9.0 million and $5.4 million
for the nine months ended September 30, 2000 and 1999, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
numerous risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statement as a result of these risks
and uncertainties, including those incorporated by reference herein from "Exhibit
99.1" filed with our
Report on Form 10-K for the year ended December 31, 1999.2000, set forth under
"Forward Looking Statements" and under "Risk Factors That May Affect Future
Operations", or in other reports filed with the Commission. You should read this commentarythe
following discussion in conjunction with the foregoing qualifications and in
conjunction with our Annual Report on Form 10-K, for the year ended December 31,
19992000 for a full understanding of our financial condition and results of
operations.
OVERVIEW
Industry. During the first quarter of 2001 and throughout much of the second
half of 2000, we experienced historically low selling prices coupled with
declining product orders. This market environment resulted from increased supply
caused by record-high steel import levels and from decreasing demand caused by
the weakening economy. The severity of this imbalance is evident through the
numerous bankruptcy filings witnessed within our industry during the past
several years. We anticipate continued pricing pressure and reduced demand
throughout the second quarter of 2001, with slight improvements possible during
the second half of the year.
Facilities. We operate a technologically advanced flat-rolled steel mini-mill in
Butler, Indiana with an annual production capacity of 2.2 million tons. We
manufacture and market a broad range of high quality flat-rolled carbon steel
products. We sell hot rolled, cold rolled and coated steel products, including
high strength low alloy and medium carbon steels. We sell these products
directly to end usersend-users and through steel service centers primarily in the
Midwestern United States. Our products are used for various applications,
including automotive, appliance, manufacturing, consumer durable goods,
industrial machinery and various other applications.
In addition to our flat-rolled mini-mill, we continue to do design
modification and completion work onhave a second facility operated by
our subsidiary, Iron Dynamics, Inc. The facilityInc (IDI). IDI involves the pioneering of a
process to produce direct reduced iron, which we plan to convertis converted into liquid pig iron,
a high quality lower-cost steel scrap substitute for use in our flat-rolledflat-roll facility. During 1999, we determined that certainCertain
of Iron
Dynamics'IDI's equipment and processes would requirerequired design modifications. The
modifications are occurringthat occurred
throughout the second half of 2000, with
completion anticipated during December 2000. We continue to await the conclusionDuring March 2001, production testing began.
As of the administrative appealsfiling date of this Form 10-Q, IDI continues to be in a
production-testing mode. As a result of exceptionally high natural gas costs and
lower production quantities associated with process in
connectiondevelopment and start-up
activities, the unit cost associated with the issuanceproduction of IDI's direct reduced
iron is higher than anticipated. The steel scrap market is also currently
experiencing historical pricing lows. Due to these current and unusual market
factors, the cost to purchase and use steel scrap at our flat rolled mill is
less than our cost to produce and use IDI's direct reduced iron. However, we do
not believe that this price inversion will be a requiredpermanent phenomenon.
On April 23, 2001, the U.S. Environmental Protection Agency's Environmental
appeals board found "without merit" an opponent's appeal to our permit necessary
to enable us to commencebegin construction on our planned structural and rail facility located in
WhitelyWhitley County, Indiana. DueThis decision enabled us to this delay withinimmediately commence
construction activities. We anticipate commercial production to begin during the
permitting process, we
anticipate the earliest operations could begin in this facility is the firstthird quarter of 2002. Upon completion, this facility will be utilized for the
manufacture of structural steel beams, pilings and rails for the construction
and railroad markets, providing us an opportunity for further productproduction
diversification and market penetration.
Our investment in New Millennium Building Systems (NMBS) also provides us the
opportunity to access new markets by providing steel joists, trusses and
girders and roof and floor decking products to the non-residential
construction arena. NMBS began commercial production in July 2000, only seven
months after the commencement of plant construction.
NET SALES
Our sales are a factor of net tons shipped, product mix and related pricing. Our
net sales are determined by subtracting product returns, sales discounts, return
allowances and claims from total sales. We charge premium prices for certain
grades of steel, dimensions of product, or certain smaller volumes, based on our
cost of production. We also provide further value-added products from our cold
mill. These products include hot rolled and cold rolled galvanized products,
along with cold rolled products, allowing us to charge marginally higher prices
compared to hot-rolledhot rolled products.
In order to ensure consistent and efficient hot band plant utilization, we
have entered into a multi-year "off-take" sales and distribution agreement
with Heidtman Steel Products, Inc. which accounts for approximately 30,000
tons of our monthly flat-rolled production at prevailing market prices. We
generally do not enter into material fixed price, long-term, exceeding one
calendar quarter, contracts for the sale of steel. Although fixed price
contracts may reduce risks related to price declines, these contracts may also
limit our ability to take advantage of price increases.
COST OF GOODS SOLD
Our cost of goods sold represents all direct and indirect costs associated with
the manufacture of our flat-rolled carbon steel,flat- rolled mini-mill and hot rolled, cold rolled and
coatedNMBS products. The principal
elements of these costs are:
- Alloys
- Electricity
- Natural gas
- Oxygen
- Argon - Electrodes
- Steel scrap and scrap substitutes
- Depreciation
- Direct and indirect labor and benefits
- Electricity
- Oxygen
- Electrodes
- Depreciation
Steel scrap and scrap substitutes represent the most significant component of
our cost of goods sold. Natural gas isand electricity are also a significant raw
materialmaterials utilized at both our flat-rolled mini-mill and within the Iron DynamicsIDI's steel
scrap substitute process.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses are comprised of all costs
associated with the sales, finance and accounting, materials and transportation,
and administrative departments. These costs include labor and benefits,
professional services, financing cost amortization, property taxes, profit
sharing expense and start-up costs associated with new projects.
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INTEREST EXPENSE
Interest expense consists of interest associated with our senior credit facility
and other debt agreements as described in our notes to financial statements, net
of capitalized interest costs that are related to construction expenditures
during the construction period of capital projects.
OTHER INCOME (EXPENSE)(INCOME) EXPENSE
Other income consists of interest income earned on our cash balance and any
other non-operating income activity. Other expense consists of any non-operating
costs, including permanent impairments of reported investments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31,
2000
Net Sales. Our net sales were $160.3$154.1 million, with total shipments of 444,300482,000
net tons for the three months ended September 30, 2000,March 31, 2001, as compared to net sales of
$158.7$189.2 million, with total shipments of 484,700511,000 net tons for the three months
ended September 30, 1999. Even though our third quarterMarch 31, 2000, average price per ton wasa decrease in net sales of approximately $33 higher than for the same period$35.1 million, or
19%, and a decrease in 1999, our average price per ton decreasedtotal shipments of approximately $21 from the second
quarter of 2000. This average pricing decrease was experienced throughout the
industry and we believe it is29,000 net tons, or 6%.
These decreases were the direct result of weakeningdeclining demand and over-supply,
caused in significant part by elevated service center inventory
levelsour weakening economy and record high import
levels. Our first quarter 2001 average sales price per flat roll ton decreased
approximately $64, or 17%, in comparison to the same period last year, and
decreased approximately $15, or 5%, in comparison to the fourth quarter 2000.
The entire industry has experienced this pricing decline throughout the second
half of 2000 and into 2001. We believe we will continue to see depressed pricing
throughout much of 2001.
Approximately 16% and 20% of our net sales for the three months ended March 31,
2001 and 2000, respectively, were purchased by Heidtman Steel Products, Inc. (or
affiliates).
Cost of Goods Sold. Cost of goods sold was $124.5$128.5 million for the three months
ended September 30, 2000,March 31, 2001, as compared to $124.7$145.2 million for the three months ended
September 30, 1999,March 31, 2000, a decrease of $200,000.$16.7 million, or 11%. Steel scrap represented
approximately 52%44% and 49%55% of our total cost of goods sold for the three months
ended September 30,March 31, 2001 and 2000, and 1999, respectively. Our costs associated with steel
scrap averaged $5$31 per ton moreless during the thirdfirst quarter of 20002001 than during the
same period in 19992000 and $17$5 per ton less than during the firstfourth quarter of 2000.
We experienced a steady decline in scrap prices beginning the second quarter
2000 and throughout the first quarter 2001. We believe we will continue to seeexperience a
decline inflattening of our scrap pricingcosts throughout the fourth quarterremainder of 2000.2001.
As a percentage of net sales, cost of goods sold represented approximately 78%83%
and 79%77% for the three months ended September 30,March 31, 2001 and 2000, and 1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.2$13.8 million for the three months ended September
30, 2000,March 31,
2001, as compared to $10.8$13.9 million for the three months ended September 30,
1999, an increaseMarch 31, 2000, a
substantial portion of $1.4 million, or 13%. The increasewhich, in both periods, was due in partattributable to litigation
costs associated with litigation regardingour Nakornthai Strip Mill Public Company Ltd. (NSM).litigation
efforts. Start-up costs related to our construction projects were $3.7
million for the three months ended September 30, 2000, as compared to $5.1 million
for the three months ended September 30, 1999,March 31, 2001, as compared to $6.1 million for the
three months ended March 31, 2000, a decrease of $1.4$1.0 million, or 27%16%. As a
percentage of net sales, selling, general and administrative expenses
represented approximately 8%9% and 7% for the three months ended September 30,March 31, 2001
and 2000, and 1999, respectively.
Interest Expense. Net interest expense was $5.4$4.8 million for the three months
ended September 30, 2000,March 31, 2001, as compared to $5.8$4.9 million for the three months ended
September 30, 1999, a decrease of $400,000, or 7%.March 31, 2000. Due to increased borrowings to fund our various construction
projects, gross interest expense increased 10% to $8.5$8.1 million and capitalized
interest increased 63%34% to $3.1$3.2 million for the three months ended September 30, 2000,March 31,
2001, as compared to the same period in 1999.2000.
Other Income (Expense).(Income) Expense. For the three months ended September 30, 2000,March 31, 2001, other income
was $216,000,$204,000, as compared to $174,000$183,000 for the three months ended September 30, 1999,March 31, 2000,
an increase of 24%11%.
Income Taxes. Our federal income tax provision was $6.5$2.7 million for the three months
ended September 30, 2000,March 31, 2001, as compared to $6.1$10.2 million for the same period in 1999.2000.
This federalincome tax provision reflects federal income tax expense at the
statutory income tax rate. During the third quarter 2000, our effective35.1% and state
tax rate was 4%, excluding a one-time state income tax benefit of $1.2
million, resulting from the reduction in effective tax rate applied to our
cumulative net deferred tax liability.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Our net sales were $540.2 million, with total shipments of
1,458,600 net tons for the nine months ended September 30, 2000, as compared
to net sales of $442.8 million, with total shipments of 1,360,200 net tons for
the nine months ended September 30, 1999, an increase in net sales of $97.4
million, or 22%. These increases were attributable in part to increased
volumes of 98,400 net tons, or 7%, in conjunction with an increase in our
average price per ton for the nine months ended September 20, 2000 as compared
to the same period in 1999.
Cost of Goods Sold. Cost of goods sold was $408.5 million for the nine months
ended September 30, 2000, as compared to $351.6 million for the nine months
ended September 30, 1999, an increase of $56.9 million, or 16%. Steel scrap
represented approximately 53% and 49% of our total cost of goods sold for the
nine months ended September 30, 2000 and 1999, respectively. As a percentage
of net sales, cost of goods sold represented approximately 76% and 79% for the
nine months ended September 30, 2000 and 1999, respectively, reflecting the
increase in our average price per ton and in our constant focus on production
efficiencies and cost savings.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $41.0 million for the nine months ended September
30, 2000, as compared to $29.8 million for the nine months ended September 30,
1999, an increase of $11.2 million, or 38%. This increase was partially
attributable to an increase in start-up costs related to our expansion projects
and partially attributable to the cost of litigating NSM. Start-up costs
related to our structural mill project, NMBS project and IDI were $16.2 million
for the nine months ended September 30, 2000, as compared to $13.6 million for
the nine months ended September 30, 1999, an increase of $2.6 million, or 19%.
As a result of significantly improved operating results during the first three
quarters of 2000 as compared to 1999, employee performance-based incentives
also comprised approximately $3.6 million of the total selling, general and
administrative expense increase. As a percentage of net sales, selling, general
and administrative expenses represented approximately 8% and 7% for the nine
months ended September 30, 2000 and 1999, respectively.
Interest Expense. Net interest expense was $15.3 million for the nine months
ended September 30, 2000, as compared to $17.3 million for the nine months
ended September 30, 1999, a decrease of $2.0 million, or 12%. This decrease
was the direct result of increased capitalized interest costs of $2.8 million,
or 52%, offsetting interest costs which were substantially level when
comparing the first nine months of 2000 to the same period in 1999. Gross
interest expense was $23.6 million, with capitalized interest of $8.2 million
for the nine months ended September 30, 2000, as compared to gross interest
expense of $22.7 million, with capitalized interest of $5.4 million for the
same period in 1999.
Other Income (Expense). For the nine months ended September 30, 2000, other
expense was $907,000 as compared to $1.4 million for the nine months ended
September 30, 1999, a decrease of $493,000, or 35%.
Other expense for the three quarters ended September 30, 2000, includes a $1.4
million second quarter write-off of our remaining investment in NSM and for
the same period in 1999, other expense includes a $1.8 million second quarter
write-off of our entire cost-basis investment in Qualitech Steel Corporation
(Qualitech). It is our belief that our investments in NSM and Qualitech were
permanently and fully impaired at the time of write-off.
Income Taxes. Our federal income tax provision was $26.1 million for the nine
months ended September 30, 2000, as compared to $14.9 million for the same
period in 1999. This federal tax provision reflects
income tax expense at the
statutory income tax rate. For the first nine months of 2000, our effective
state tax rate was 4%, excluding a one-time state income tax benefit of $1.2
million, resulting from the reduction in effective tax rate applied to our
cumulative net deferred tax liability.3.4%.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive and requires substantial expenditures for,
among other things, the purchase and maintenance of equipment used in our
steel-makingsteelmaking and finishing operations and to remain compliant with environmental
laws. Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity, long-term borrowings,
state and local grants and capital cost reimbursements.
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Cash Flows. For the ninethree months ended September 30, 2000,March 31, 2001, cash provided by
operating activities was $49.9$18.0 million, as compared to $65.5$28.5 million for the
ninethree months ended September 30, 1999,March 31, 2000, a decrease of $15.6$10.5 million. Increasing inventory
and accounts receivable levels were the primarily drivers of this decrease. We
increased steel scrap inventories to take advantage of the lower steel scrap
pricing experienced throughout the first three quarters of 2000. Cash used in
investing activities was $85.9$10.4 million, all of which represented capital
investments, for the three months ended March 31, 2001, as compared to $96.0$30.5
million, of which $29.2 million represented capital investments, for the nine months ended September 30, 2000 and 1999, respectively. Substantially all
of these funds were invested in our capital projects.same
period during 2000. Approximately 52%54% of our capital investment costs incurred
during the first nine months of 2000quarter 2001 were utilized in site preparation and other
pre-construction activities for the structural mill. Cash used in financing
activities was $12.3 million for the three months ended March 31, 2001, as
compared to cash provided by financing activities of $1.6 million for the same
period during 2000. This decrease in funds provided by financing activities was
$24.0 million for
the nine months ended September 30, 2000, as compared to $32.3 million for the
same period in 1999. This decrease in funds provided was the direct result of increased steel scrap purchasesour repayment of senior secured bank debt of approximately
$16.0 million in conjunction with ongoing capital investment expenditures.
Liquidity. We believe the principal indicators of our liquidity are cash
position, remaining availability within our bank credit facilities and treasury stock purchases which totaled
$25.8 million duringexcess
working capital. During the first three quartersquarter of 2001, our cash position decreased
$4.7 million to $5.5 million and our working capital position decreased $1.6
million to $164.3 million, as compared to December 31, 2000. We have $582.3
million available under various bank credit facilities, of which $464.2 million,
or 80% was drawn at March 31, 2001, resulting in a remaining availability of
$118.1 million.
We believe the liquidity of our existing cash and cash equivalents, cash from
operating activities and our available credit facilities will provide sufficient
funding for our working capital and capital expenditure requirements during
2000.2001. However, we may, if we believe circumstances warrant, increase our
liquidity through the issuance of additional equity or debt to finance growth or
take advantage of other business opportunities.
We have not paid dividends on our common stock.
INFLATION
We believe that inflation has not had a material effect on our results of
operation.
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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. We believe, apart from our dependence on
environmental construction and operating permits for our existing and proposed
manufacturing facilities, such as our planned structural and rail mill project
in Whitley County, Indiana, that compliance with current environmental laws and
regulations is not likely to have a material adverse effect on our financial
condition, results of operations or liquidity; however, environmental laws and
regulations have changed rapidly in recent years and we may become subject to
more stringent environmental laws and regulations in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In the normal course of business our market risk is limited to changes in
interest rates. We utilize long-term debt as a primary source of capital. A
portion of our debt has an interest component that resets on a periodic basis to
reflect current market conditions. We manage exposure to fluctuations in
interest rates through the use of an interest rate swap. We agree to exchange,
at specific intervals, the difference between fixed rate and floating rate
interest amounts calculated on an agreed upon notional amount. This interest
differential paid or received is recognized in the consolidated statements of
income as a component of interest expense. At September 30, 2000,March 31, 2001, no material
changes had occurred related to our interest rate risk from the information
disclosed in the Annual Report of Steel Dynamics, Inc. and on Form 10-K for the
year ended December 31, 1999.
92000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We incorporate by reference Part I, Item III of our 19992000 Form 10-K Annual
Report, filed with the Securities and Exchange Commission on March 29, 2000,30, 2001, the
description of our pending litigation involving thelegal proceedings. We have been sued in a total of nine
separate but related lawsuits, aggregating someseeking aggregate compensatory damages of
approximately $240 million, as well as punitive damages, in claims,an unspecified
amount, and treble damages in certain of the actions. The cases have been
brought in either state or federal courts against us and various investment
banking firms, relating to a note offering in March 1998 by Nakornthai Strip
Mill Public Company Ltd. ("NSM") and its investment bankers (the other
co-defendants in the litigation). All pending cases have progressed
beyond the pleadings stage, and discovery is continuingScheduling orders in all such cases.
Our previously pending lawsuit broughtcases contemplate
that potentially dispositive motions for summary judgment, in whole or in part,
will be filed by our Iron Dynamics subsidiary against
Taft Contracting Company wasall parties wishing to do so during 2001. It currently appears
that, if not earlier disposed of or settled, the first of the trials may occur
during the third quarter 2000of 2001.
There is also a peripheral lawsuit pending in the Court of Common Pleas of
Cuyahoga County (Cleveland) Ohio, in which John W. Schultes, the former
president and chief executive officer of NSM, has sued us, McDonald Investments
Inc., NSM McDonald Partnership, KeyCorp Finance, Inc., Enron North America Corp,
ECT Thailand Investments, Inc., and NSM Management Co. LLC for less
thandamages, alleging
that we bear contractual responsibility for causing his termination of
employment and that we slandered his reputation. We deny that we have any
liability to Mr. Schultes in connection with this lawsuit.
In an unrelated matter, H&M Industrial Services, Inc. filed an action on January
24, 2001, against our subsidiary Iron Dynamics, Inc. in the amountCircuit Court of
DeKalb County, Indiana, Cause No. 17C01-0101-CP-016, asking for damages of
$1,645,899 arising out of work allegedly performed by H&M, for which they claim
they have not been paid, in connection with the construction of Iron Dynamics'
retainage, resultingnew ironmaking facility in a final paymentButler, Indiana. We have denied all liability to Taft of $212,648.
A copy ofH&M
for any amount and believe that we have adequate defenses to such claims, both
factually and legally, under the foregoing is annexed to this report as Exhibit 99.2.governing construction contracts and documents.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
*27.1 Financial Data Schedule
99.2 Part I, Item III "Legal Proceedings" of Steel
Dynamics, Inc. 1999 Form 10-K Annual ReportNone
(B) Reports on Form 8-K for the quarter ended September 30, 2000:March 31, 2001:
None
--------------------------- ----------
*Filed herewith
Items 2 - 5 of Part II are not applicable for this reporting period and have
been omitted.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, Steel Dynamics, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
November 13, 2000May 15, 2001
STEEL DYNAMICS, INC.
By: /s/ TRACY L. SHELLABARGER
---------------------------------------------------------------------------------
Tracy L. Shellabarger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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