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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
X Quarterly Report Pursuant to Section[X] QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
- ------- Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31,FOR THE PERIOD ENDED JUNE 30, 1997
OR
Transition Report Pursuant to Section[ ] TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
- ------ Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File NumberCOMMISSION FILE NUMBER 0-21719
STEEL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1929476
(State or other jurisdiction (I.R.S. employer Identification No.)
of incorporation or organization)
4500 COUNTY ROAD 59, BUTLER,(EXACT NAME OF REGISTRANT AS SPECIFIED IN 46721
(Address of principal executive offices) (Zip code)ITS CHARTER)
INDIANA 35-1929476
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4500 COUNTY ROAD 59, BUTLER, IN 46721
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (219) 868-8000
Securities registered pursuant to SectionSECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
Title of each class Name of each exchange on which registeredOF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------- -------------------------------------
NONE NONE
Securities registered pursuant to Section
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act:
Common Stock,OF THE ACT:
COMMON STOCK, $0.01 par valuePAR 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 May 8,July 14, 1997, Registrant had outstanding 47,852,70747,869,575 shares of Common
Stock.
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STEEL DYNAMICS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: Page
----
Consolidated Balance Sheets as of December 31, 1996
and unaudited March 31, 1997 ............... 1June 30, 1997................................................... 2
Consolidated Statements of Operations for the three monthand six-month periods
ended
March 30,June 29, 1996 and March 31,June 30, 1997 (unaudited).................................................. 2................................... 3
Consolidated Statements of Cash Flows for the three monthand six-month periods
ended
March 30,June 29, 1996 and March 31,June 30, 1997 (unaudited).................................................. 3................................... 4
Notes to Consolidated Financial Statements....................................................... 4Statements.................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................... 5OPERATIONS..................................................... 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 7
SIGNATURE....................................................................................... 78-K.............................................. 10
SIGNATURES.................................................................... 10
3
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS(AMOUNTS IN THOUSANDS)THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, MARCH 31,JUNE 30,
1996 1997
------------ ---------------------
(UNAUDITED)
ASSETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................................equivalents...................................... $ 57,460 $ 48,17922,293
Accounts receivable, net .......................................................................net....................................... 14,600 22,87022,413
Accounts receivable-related parties ............................................................receivable -- related parties......................... 17,860 18,381
Inventories ....................................................................................14,576
Inventories.................................................... 65,911 46,51556,829
Other current assets ...........................................................................assets........................................... 1,599 1,087
--------- ---------1,217
-------- --------
Total current assets ..................................................................assets...................................... 157,430 137,032117,328
PROPERTY, PLANT, AND EQUIPMENT, NET .................................................................NET................................. 339,263 380,446410,272
DEBT ISSUANCE COSTS, NET ............................................................................NET............................................ 12,405 12,00611,591
RESTRICTED CASH .....................................................................................CASH..................................................... 2,827 3,0633,456
OTHER ASSETS ........................................................................................ASSETS........................................................ 10,366 10,233
--------- ---------9,956
-------- --------
TOTAL ASSETS ..........................................................................ASSETS.............................................. $522,291 $ 522,291 $ 542,780
========= =========552,603
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...............................................................................payable............................................... $ 28,968 $ 35,06220,378
Accounts payable-related parties ...............................................................payable -- related parties............................ 12,218 9,26418,004
Other accrued expenses .........................................................................expenses......................................... 9,196 10,23012,339
Current maturities of long-term debt ...........................................................debt........................... 11,175 29,026
--------- ---------5,931
-------- --------
Total current liabilities .............................................................liabilities................................. 61,557 83,58256,652
LONG-TERM DEBT, less current maturities .............................................................maturities............................. 196,168 177,422199,530
DEFERRED TAXES ...................................................................................... 2,475TAXES...................................................... 1,468
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares
authorized; 47,803,341 and 47,847,90147,866,323 shares issued and
outstanding as of December 31, 1996 and March 31,June 30, 1997,
respectively ........................................................................respectively.................................................. 478 478479
Additional paid-in capital .....................................................................capital..................................... 303,846 303,996304,078
Accumulated deficit ............................................................................deficit............................................ (39,758) (25,173)
--------- ---------(9,604)
-------- --------
Total stockholders' equity ............................................................equity................................ 264,566 279,301
--------- ---------294,953
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................EQUITY................ $522,291 $ 522,291 $ 542,780
========= =========552,603
======== ========
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STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -------------------------------
MARCHJUNE 29, 1996 JUNE 30, MARCH 31,1997 JUNE 29, 1996 JUNE 30, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)------------- ------------- ------------- -------------
NET SALES:
Unrelated parties .......................parties...................... $30,602 $62,125 $ 18,87249,474 $ 52,165114,290
Related parties ......................... 13,415 45,894parties........................ 35,773 40,593 49,188 86,487
------- ------- -------- --------
Total net sales ..................... 32,287 98,059sales........................ 66,375 102,718 98,662 200,777
Cost of goods sold ........................... 35,184 73,910sold.......................... 60,407 76,270 95,591 150,180
------- ------- -------- --------
GROSS PROFIT (LOSS) .......................... (2,897) 24,149PROFIT................................ 5,968 26,448 3,071 50,597
Selling, general and administrative
expenses.. 2,817 5,339expenses.................................. 3,077 7,140 5,894 12,479
------- ------- -------- --------
OPERATING INCOME (LOSS) ...................... (5,714) 18,810..................... 2,891 19,308 (2,823) 38,118
Foreign currency gain ........................ 154 92gain....................... 106 169 260 261
Interest expense ............................. (5,837) (2,401)expense............................ (6,291) (1,594) (12,128) (3,995)
Interest income .............................. 93 752income............................. 486 512 579 1,264
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............ (11,304) 17,253TAXES........... (2,808) 18,395 (14,112) 35,648
Income taxes ................................. 2,668taxes................................ 2,826 5,494
------- ------- -------- --------
NET INCOME (LOSS) ............................ $(11,304)...................... $(2,808) $15,569 $ 14,585(14,112) $ 30,154
======= ======= ======== ========
NET INCOME (LOSS) PER SHARE ..................SHARE................. $ (.35)(.08) $ .30.33 $ (.41) $ .63
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING .......... 32,665 47,838OUTSTANDING......... 36,719 47,855 34,695 47,851
======= ======= ======== ========
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STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED ------------------------------
MARCHSIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 29, 1996 JUNE 30, 1997 JUNE 29, 1996 MARCH 31,JUNE 30, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) ............................................. $(11,304)..................... $ 14,585(2,808) $ 15,569 $ (14,112) $ 30,154
Adjustments to reconcile net income
(loss) to net cash provided (used)
in operating activities:
Depreciation and amortization ............................. 3,588 5,691amortization...... 5,205 5,916 8,793 11,607
Foreign currency gain ..................................... (154) (92)gain.............. (106) (169) (260) (261)
Deferred taxes ............................................ 2,475taxes..................... (1,007) 1,468
Changes in certain assets and
liabilities:
Accounts receivable .................................. (19,981) (8,791)
Inventories .......................................... (7,755) 19,396receivable.............. (8,039) 4,262 (28,020) (4,529)
Inventories...................... (4,644) (10,314) (12,399) 9,082
Other assets ......................................... 21 512assets..................... (1,007) (130) (986) 382
Accounts payable ..................................... 1,529 3,140payable................. (493) (5,944) 1,036 (2,804)
Accrued expenses ..................................... 6,513 1,126expenses................. (4,931) 2,280 1,582 3,406
-------- -------- -------- --------
Net cash provided (used) in
operating activities . (27,543) 38,042activities........ (16,823) 10,463 (44,366) 48,505
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment ................... (5,471) (46,330)equipment.......................... (6,591) (35,194) (12,062) (81,524)
Proceeds from government grants ............................... 1,413
Other ......................................................... (955) (1)grants....... 54 1,467
Purchase of short term investments.... (7,000) (7,000)
Other................................. 384 58 (571) 56
-------- -------- -------- --------
Net cash used in investing
activities ............ (5,013) (46,331)activities.................. (13,153) (35,136) (18,166) (81,468)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt .................................... 34,961debt............ 450 35,411
Repayments of long-term debt .................................. (154) (1,131)debt.......... (339) (1,295) (493) (2,426)
Issuance of common stock, net of
expenses ..................... 5,052 150expenses........................... 40,043 82 45,095 233
Debt issuance costs ........................................... (3,500)costs................... (42) (3,542) (11)
-------- -------- -------- --------
Net cash provided by(used) in
financing activities ........ 36,359 (992)activities........ 40,112 (1,213) 76,471 (2,204)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents ................... 3,803 (9,281)equivalents........................... 10,136 (25,886) 13,939 (35,167)
Cash and cash equivalents at beginning
of period ...................period............................. 10,687 48,179 6,884 57,460
-------- -------- -------- --------
Cash and cash equivalents at end of
period .........................period................................ $ 10,68720,823 $ 48,17922,293 $ 20,823 $ 22,293
======== ======== ======== ========
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STEEL DYNAMICS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may also be affected by the estimates and assumptions management is
required to make. Actual results may differ from those estimates.
In the opinion of management these estimates reflect all adjustments,
consisting of only normal recurring accruals, including elimination of all
significant intercompany balances and transactions, which are necessary to a
fair statement of the results for the interim periods covered by such
statements. Certain amounts from prior year financial statements have been
reclassified to conform to the current year presentation. These financial
statements and notes should be read in conjunction with the audited financial
statements included in the Company'sCompany s 1996 Annual Report on Form 10-K.
2. INVENTORIES (in thousands)(IN THOUSANDS)
DecemberDECEMBER 31, March 31,JUNE 30,
1996 1997
------------ -----------------
Raw Materials ................................ $48,065 $28,871
Supplies .....................................Materials......................................................... $ 48,065 $ 39,130
Supplies.............................................................. 11,854 13,08414,299
Work in Progress...................................................... 77
Finished Goods ...............................Goods........................................................ 5,992 4,560
------- -------
$65,911 $46,515
=======3,400
------------ --------
$ 65,911 $ 56,906
========== =======
3. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Shares AmountSHARES AMOUNT
---------- --------
(in thousands)--------------
(IN THOUSANDS)
BalanceBalances at January 1, 1997 ...................1997....................................... 47,803,341 $304,324
Exercise of stock options .................... 44,560 150options......................................... 62,982 83
---------- --------
Balance--------------
Balances at March 31, 1997 .................... 47,847,901 $304,474
========== ========June 30, 1997......................................... 47,866,323 $304,557
========= ===========
Effective January 10, 1997, the SDI Board of Directors, acting as the
Committee authorized options under the 1994 Incentive Stock Option Plan, reduced
the vesting period for exercise of stock options to six months after the grant
date with respect to one-third of the shares covered by options, and this was
made effective for all outstanding as well as newly granted options. The
remaining two-thirds of the optioned shares retain their original five year
vesting period.
Consistent with the 1996 Plan, effective May 21, 1997, the SDI Board of
Directors, acting as the Committee under the 1996 Incentive Stock Option Plan,
granted options for 94,408 shares at an exercise price of $21.00 per share to
substantially all the employees of the Company.
4. EARNINGS PER SHARENEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "EarningsEarnings per Share"Share
which establishes new requirements for computing and presenting earnings per
share ("SFAS No. 128"EPS"). Specifically, SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the
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STEEL DYNAMICS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Management has determined that the adoption of
SFAS No. 128 will not have a material effect on the accompanying consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 130, Comprehensive Income. SFAS No.
130 becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement.
Management has not yet determined the effect, if any, of SFAS No. 130 on the
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement will change the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS 131 on
the consolidated financial statements.
5. SUBSEQUENT EVENTS
On July 9, 1997, the Company amended its credit facility which increased
the amounts committed to the Company from $345 million to $450 million, changed
the maturities, revised the covenants and lowered the effective interest rate
charged by the bank group.
As a result of the substantial modifications with this amendment, the
Company will incur an extraordinary loss of approximately $10.5 million (net of
tax benefit of $2.2 million) related to prepayment penalties and the write-off
of the financing costs associated with the original credit facility.
Effective July 1, 1997, the Company entered into an interest rate swap
agreement with The First National Bank of Chicago ("First Chicago") to make
fixed rate payments at 6.935% and to receive variable rate payments at LIBOR on
a notional amount of $100 million. The interest rate swap agreement was entered
into as an anticipatory hedge of the seven year term tranche of the new credit
agreement. The maturity date of the interest rate swap agreement is July 2,
2001; however, on June 28, 2001 First Chicago has the right to extend the
maturity date to July 1, 2004 at predetermined interest rates. The interest rate
swap agreement will be accounted for on a settlement basis. The Company is
exposed to credit loss in the event of nonperformance by the counterparty for
the net interest differential when variable rates exceed the fixed rate.
However, the Company does not anticipate nonperformance by the counterparty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales totaled approximately $102.7 million for the second quarter 1997
and $200.8 million for the first half of 1997 compared to $66.4 million for the
second quarter in 1996 and $98.7 for the first half of 1996. SDI commenced
production of primary grade steel on January 2, 1996 and has continued to
increase its net sales as its production tons increased. By the end of the
second quarter of operations ended June 30, 1996, the Company was operating at
an annualized rate of 642,000 tons, or 46% of full capacity. By the end of June
1997, the Company was operating at an annualized rate of 1.2 million tons, or
83% of full capacity. In addition, the average sales price per prime ton
increased from $302 for January 1996 to $357 for June 1997 and the percentage of
prime tons produced increased from 84% for the six months ended June 29, 1996 to
95% for the six months ended June 30, 1997 and from 34% for the quarter ended
June 29, 1996 to 95% for the quarter ended June 30, 1997.
Cost of Goods Sold
Cost of goods sold totaled approximately $76.3 million, or 74% of net
sales, for the second quarter of 1997 and approximately $150.2 million, or 75%
of net sales, for the first half of 1997 compared to approximately $60.4 million
for the second quarter of 1996 and approximately $95.6 million for the first
half of 1996. As the Company continues to increase the number of prime tons
sold, the Company expects that cost of goods sold will continue to increase but,
as a percentage of net sales, the cost of goods sold will decrease.
Selling, General and Administrative
Selling, general and administrative was approximately $3 million and $7.1
million for the second quarter of 1996 and 1997, respectively, and approximately
$5.9 million and $12.5 million for the first half of 1996 and 1997,
respectively. The increase in selling, general and administrative expenses for
the first six months of 1997 was due to approximately $3.2 million of start up
costs for the Cold Mill and Caster Projects and approximately $1.9 million of
profit sharing expense.
Interest Expense
Interest expense totaled approximately $6.3 million and $1.6 million for
the second quarter of 1996 and 1997, respectively, and approximately $12.1 and
$4 million for the first half of 1996 and 1997, respectively.
Foreign Currency Gain
The foreign currency gain represents transaction gains incurred by the
Company for purchases of equipment used within the Company's mini-mill. A
portion of the purchase price, as stated within the contract to purchase the
equipment, was denominated in German marks. The Company committed to purchase
the equipment in December 1993 with settlement of the liability primarily
occurring during the construction period of the mini-mill. No commitments for
equipment purchases denominated in a foreign currency exist as of June 30, 1997.
Foreign currency gain totaled $260,000 and $261,000 for the six months ended
June 29, 1996 and June 30, 1997, respectively.
Interest Income
Interest income totaled approximately $486,000 and $512,000 and the second
quarter of 1996 and 1997, respectively, and approximately $579,000 and $1.3
million for the first half of 1996 and 1997, respectively.
Taxes
At December 31, 1996, the Company had available net operating losses that
can be carried forward for federal income tax purposes of approximately $49.4
million of which $200,000 expire in 2009, $2.3 million
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expire in 2010 and $46.9 million expire in 2011. Because of the Company's
limited operating history, a valuation allowance has been established for a
portion of the deferred tax asset. The Company will continually access the need
for a valuation allowance for the deferred tax asset based on expectations of
future taxable income.
For the six months ended June 30, 1997, income taxes are computed using the
Company s expected annual effective tax rate, which gives effect to the
utilization of available net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics' business is capital intensive and requires substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. The Company's liquidity needs arise primarily from capital
investments, working capital requirements and principal and interest payments on
its indebtedness. Since its inception, SDI has met these liquidity requirements
with cash provided by equity, long-term borrowings, state and local government
grants and capital cost reimbursements.
Net cash used in operating activities totaled approximately $16.8 million
for the second quarter of 1996 and $44.4 million for the first half of 1996. The
use of cash in operating activities for the second quarter and first half of
1996 primarily related to the build-up of raw material inventory as a result of
favorable pricing and the substantial increase in accounts receivable from the
beginning of the year as a result of increased sales. During the second quarter
of 1997, the Company provided net cash of approximately $10.5 million from
operating activities resulting from net income and decreases in accounts
receivable through controlling the number and amount of aged accounts
outstanding. Cash was used in operations to build up raw material inventory
resulting from favorable pricing levels. During the first half of 1997, the
Company provided net cash of approximately $48.5 million from operating
activities resulting from net income and a net decrease in raw material
inventory due to less favorable pricing levels. Net cash used in investing
activities totaled approximately $13.2 million from the second quarter of 1996,
approximately $35.1 million for the second quarter of 1997, approximately $18.1
million from the first half of 1996, and approximately $81.4 million from the
first half of 1997. Investing activities primarily consisted of capital
expenditures of approximately $6.6 million and $35.2 million for the second
quarter of 1996 and 1997, respectively, and approximately $12 million and $81.5
million for the first half of 1996 and 1997, respectively, for the construction
of the Company's existing facilities and the beginning of the Cold Mill Project.
Additionally, approximately $7 million was invested in short-term investments
during the second quarter of 1996. Cash provided by financing activities totaled
approximately $40 million for the second quarter of 1996 and approximately $76.5
million for the first half of 1996. Cash used in financing activities totaled
approximately $1.2 for the second quarter of 1997, and approximately $2.2 for
the first half of 1997. The 1996 increase in cash provided by financing
activities primarily relates to approximately $35 million of borrowings under
its credit facility.
The Company's Credit Agreement provides for up to an aggregate of $300.0
million of senior term loans ("Senior Term Loans") and a $45.0 million revolving
credit facility (the "Revolving Credit Facility") for working capital purposes,
subject to borrowing base restrictions. Indebtedness outstanding under the
Credit Agreement is collateralized by a first priority lien on substantially all
of the assets of the Company. Of the $300.0 million in senior term loan
commitments, the Company borrowed $150.0 million of the Senior Term Loans for
the construction of the mini-mill and $150.0 million was designated and remains
available for the construction of the Cold Mill Project. As of June 30 1997,
$150.0 million of Senior Term Loans were outstanding and there were no
outstanding borrowings under the Revolving Credit Facility.
As of June 30, 1997, the Company's long-term debt (including the current
portion) was approximately $205.5 million. Approximately 80% of this
indebtedness bears interest at floating rates.
On July 9, 1997, the Company amended its credit facility which increased
the amount committed to the Company from $345 million to $450 million, changed
the maturities, revised the covenants and lowered the effective interest rate
charged by the bank group.
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As a result of the substantial modifications with this amendment, the
Company will incur an extraordinary loss of approximately $10.5 million (net of
tax benefit of $2.2 million) related to prepayment penalties and the write-off
of the financing costs associated with the original credit facility.
The Company currently estimates that the funds required for the
construction and start-up of the Cold Mill, IDI and Caster Projects will total
approximately $350.0 million. Approximately $155 million of that amount has been
incurred through June 30, 1997. The Company intends to finance the cost of the
Cold Mill and Caster Projects with cash on hand and borrowings available under
the credit facility.
The Company will use $20.0 million of the funds $25.4 million of net
proceeds from a private placement of its common stock in 1996 to finance a
portion of the IDI Project and intends to finance the remaining $45.0 million
with additional debt. Although IDI is negotiating to obtain the financing
needed, it has not yet secured a commitment. The Company expects the financing
for the IDI project will be finalized by the end of July, 1997. However, no
assurance can be given that the IDI financing commitment currently being
negotiated will be obtained on terms acceptable to the Company or at all. The
Company raised approximately $140.2 million (net of expenses) with its initial
public offering in November 1996. Approximately $56.0 million was used to prepay
the subordinated notes, including accrued interest and prepayment fees. As of
December 31, 1996, the Company had approximately $58.0 million invested in
short-term cash investments. This cash will continue to be used to fund the
construction of the Caster Project as the costs of construction are incurred.
Approximately $26.2 million of the IPO proceeds were used for working capital
needs through the end of the year.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share which establishes new standards for computing
and presenting earnings per share ("EPS"). Specifically, SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Management has determined that the adoption of
SFAS No. 128 will not have a material effect on the accompanying consolidated
financial statements.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales totaled approximately $98.1 millionIn June 1997, the FASB issued SFAS No. 130, Comprehensive Income which
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the first quarter 1997. SDI
commercial production of primary grade steel on January 2, 1996 and has
continued to increase its net sales as its production tons increased. By the end
of the first quarter of operations ended March 31, 1996, the Company was
operating atfinancial statement in
which comprehensive income is reported, but does require that an annualized rate of 440,000 tons, or 31% of full capacity. By the
end of March 1997, the Company was operating at an annualized rate of 1,100,000,
or 79% of full capacity. In addition, the average sales price per prime ton
increased from $302 for January 1996 to $360 for March 1997 and the percentage
of prime tons produced increased from 74% for the quarter ended March 30, 1996
to 95% for the quarter ended March 31, 1997.
Cost of Goods Sold
Cost of goods sold totaled approximately $73.9 million, or 75% of net sales, for
the first quarter of 1997. As the Company continues to increase the number of
prime tons sold, the Company expectsamount
representing total comprehensive income be reported in that cost of goods sold will continue to
increase but, as a percentage of net sales, the cost of goods sold will
decrease.
Selling, General and Administrative
Selling, general and administrative was approximately $2.8 million and $5.3
million for the first quarter of 1996 and 1997, respectively.
Interest Expense
Interest expense totaled approximately $5.8 million and $2.4 million for the
first quarter of 1996 and 1997, respectively.
Foreign Currency Gain
The foreign currency gains represent transaction gains incurred by the Company
for purchases of equipment used within the Company's mini-mill. A portion of the
purchase price, as stated within the contract to purchase the equipment, was
denominated in German marks. The Company committed to purchase the equipment in
December 1993 with settlement of the liability primarily occurring during the
construction period of the mini-mill. No commitments for equipment purchases
denominated in a foreign currency exist as of April 30, 1997. Foreign currency
gain totaled $154,000 and $92,000 for the three months ended March 30, 1996 and
March 31, 1997, respectively.
Interest Income
Interest income totaled approximately $93,000 and $752,000 and the first quarter
of 1996 and 1997, respectively.
Taxes
At December 31, 1996, the Company had available net operating losses ("NOLs")
for federal income tax purposes of approximately $49.4 million of which $.2
million expire in 2009, $2.3 million expire in 2010 and $46.9 million expire in
2011. Because of the Company's limited operating history, a valuation allowance
has been established for a portion of the deferred tax asset. As the Company
continues to be a profitable operation the valuation allowance will continue to
be adjusted.
For the three months ended March 31, 1997, income taxes are computed using the
company's expected annual effective tax rate, which gives effect to the
utilization of available net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics' business is capital intensive and requires substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. The Company's liquidity needs arise primarily from capital
investments, working capital requirements and principal and interest payments on
its indebtedness. Since its inception, SDI has met these liquidity requirements
with cash provided by equity, long-term borrowings, state and local government
grants and capital cost reimbursements.
Net cash used in operating activities totaled approximately $27.5 million for
the first quarter of 1996 The use of cash in operating activities for the first
quarter of 1996 primarily related to the build up of raw material inventory as a
result of favorable pricing and the substantial increase in
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accounts receivable from the beginning of the year as a result of production and
sales increases. During the first quarter of 1997, the Company provided net cash
of approximately $38.0 million from operating activities resulting from net
income and decreased raw material inventory due to less favorable pricing
levels. Net cash used in investing activities totaled approximately $5 million
from the first quarter of 1996 and approximately $46.3 million for the first
quarter of 1997. Investing activities primarily consisted of capital
expenditures of approximately $5.4 million and $46.3 million the first quarter
of 1996 and 1997, respectively, for the construction of the Company's existing
facilities and the beginning of the Cold Mill Project. Cash provided by
financing activities totaled approximately $36.3 million for the first quarter
of 1996 and cash used in financing activities totaled approximately $992,000 for
the first quarter of 1997. The 1996 increase in cash provided by financing
activities primarily relates to the approximately $35 million of proceeds from
senior term debt.
The Company's Credit Agreement provides for up to an aggregate of $300.0 million
of senior term loans and a $45.0 million revolving credit facility (the
"Revolving Credit Facility") for working capital purposes, subject to borrowing
base restrictions. Indebtedness outstanding under the Credit Agreement is
secured by a first priority lien on substantially all of the assets of the
Company. Of the $300.0 million in senior term loan commitments, the Company
borrowed $150.0 million for the construction of the mini-mill and $150.0 million
was designated and remains available for the construction of the Cold Mill
Project. As of March 31 1997, a total of $150.0 million of senior term loans
were outstanding and there were no outstanding borrowings under the Revolving
Credit Facility.
The Company is in the process of renegotiating the terms of the senior term
loans. It is anticipated that the amendment to the Credit Agreement will be
completed in the second quarter of 1997. The Company anticipates the amendment
will include revised pricing and covenants, which the Company believes will be
more favorable than the current agreement.
As of March 31, 1997, the Company's long-term debt (including the current
portion) was approximately $206 million. Approximately 72% of this indebtedness
bears interest at floating rates.
The Company currently estimates that the funds required for the construction and
start-up of the Cold Mill, IDI and Caster Project will total approximately
$350.0 million. Approximately $118 million of that amount has been expensed
through March 31, 1997. The Company intends to finance the remaining needs of
the Cold Mill and Caster Projects with cash on hand and borrowings available
under the Credit Agreement.
The Company will use $20.0 million of the it received from the private placement
of its common stock in 1996 to finance a portion of the IDI Project and intends
to finance the remaining $45.0 million with additional debt. Although IDI is
negotiating to obtain the financing needed, itstatement.
Management has not yet secured a commitment.determined the effect, if any, of SFAS No. 130 on the
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement will change the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Company anticipates thatStatement is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the financing foreffect, if any, of SFAS No. 131
on the IDI project will be secured
by the end of the second quarter in 1997. However, no assurance can be given
that the IDI financing commitment currently being negotiated will be obtained on
terms acceptable to the Company ,or at all.
The Company raised approximately $140.2 million (net of expenses) with its
initial public offering in November 1996. Approximately $56.0 million was used
to prepay the subordinated notes, including accrued interest and prepayment
fees. As of December 31, 1996, the Company had approximately $58.0 million
invested in short-term cash investments. This cash will be used to fund the
construction of the Caster Project as the costs of construction are incurred.
Approximately $26.2 million of the IPO proceeds were used for capital and
working capital needs through the end of the year. The Company intends to
finance the Cold Mill Project with cash on hand and borrowings available under
the Credit Agreement.consolidated financial statements.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. Steel Dynamics believes that
compliance with current environmental laws and regulations is not likely to have
a material adverse effect on the Company's financial condition, results of
operations or liquidity; however, environmental laws and
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regulations have changed rapidly in recent years and SDI may become subject to
more stringent environmental laws and regulations in the future.
INFLATION
SDI does not believe that inflation has had a material effect on its
results of operations.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1997, at the Company's Annual Meeting of Shareholders held
pursuant to the Notice and Solicitation of Proxies pursuant to Regulation 14
under the Securities Exchange Act of 1934, the following matters were considered
and voted upon by the Shareholders:
(A) Election of Directors
Shareholders elected the following directors, all of whom were nominees
covered by the Company's proxy solicitation, and all of whom were elected:
VOTES
--------------------------------------
NAME OF DIRECTOR FOR AGAINST ABSTENSIONS
-------------------------------------- ---------- ------- -----------
Keith E. Busse........................ 38,866,128 0 170,545
Mark D. Millett....................... 38,866,128 0 170,545
Richard P. Teets, Jr. ................ 38,866,128 0 170,545
Tracy L. Shellabarger................. 38,866,128 0 170,545
Leonard Rifkin........................ 38,866,128 0 170,545
John C. Bates......................... 38,866,128 0 170,545
William D. Strittmatter............... 38,866,128 0 170,545
William Laverack, Jr. ................ 38,866,128 0 170,545
Paul B. Edgerley...................... 38,866,128 0 170,545
Dr. Jurgen Kolb....................... 38,866,128 0 170,545
(B) Ratification of Appointment of Auditors
Shareholders ratified the appointment of Deloitte and Touche LLP to serve
as the Company's auditors for the coming year, by a vote of 39,021,543 shares in
favor, none opposed, and 15,130 abstensions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits --- Exhibit 11.1 Statement of Computation of Earnings per
Share (page 8)
(B) Reports on Form 8-K for the quarter ended March 31,June 30, 1997 --- None
Item 1 - 3 and 5 are not applicable for this reporting period and have been
omitted.
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.
May 14, 1997
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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