1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
-------
Exchange Act of 1934
For the period ended September 30, 1997March 31, 1998
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
-------
Exchange Act of 1934
Commission File Number 0-21719
STEEL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1929476
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) (I.R.S. employer 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 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 No
--- ---
As of November 6, 1997,May 14, 1998, Registrant had outstanding 49,131,11649,008,120 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 March 31, 1998 (unaudited) and December 31, 1996 and unaudited September 30, 1997 .......................... 1
Consolidated Statements of Operations for the three and nine month periods ended
September 28, 1996March 31, 1998 and September 30, 1997 (unaudited)...................................................................................................... 2
Consolidated Statements of Cash Flows for the three and nine month periods ended
September 28, 1996March 31, 1998 and September 30, 1997 (unaudited)...................................................................................................... 3
Notes to Consolidated Financial Statements....................................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................... 65
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 9
SIGNATURE....................................................................................... 97
SIGNATURE........................................................................................ 7
3
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS(DOLLARS IN THOUSANDS)THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
SEPTEMBER 30,
19961998 1997
--------- ------------
-------------
(UNAUDITED)
ASSETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................................................................. $ 57,4605,106 $ 15,0898,618
Accounts receivable, net ................................................................. 14,600 24,490.................................................. 35,897 33,465
Accounts receivable-related parties ...................................................... 17,860 17,640....................................... 9,861 11,210
Inventories .............................................................................. 65,911 53,798............................................................... 65,796 60,163
Deferred taxes ........................................................................... 17,239............................................................ 18,379 19,688
Other current assets ..................................................................... 1,599 2,296
-------- --------...................................................... 4,826 2,158
--------- ---------
Total current assets ............................................................ 157,430 130,552............................................. 139,865 135,302
PROPERTY, PLANT, AND EQUIPMENT, NET ........................................................... 339,263 454,412
DEBT ISSUANCE COSTS, NET ...................................................................... 12,405 973
RESTRICTED CASH ............................................................................... 2,827 2,749............................................ 531,939 491,859
OTHER ASSETS .................................................................................. 10,366 9,773
-------- --------................................................................... 29,940 13,721
--------- ---------
TOTAL ASSETS .................................................................... $522,291 $598,459
======== ========..................................................... $ 701,744 $ 640,882
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................................................................................... $ 28,96836,740 $ 27,01739,347
Accounts payable-related parties ......................................................... 12,218 8,642.......................................... 16,325 15,352
Accrued interest .......................................................... 2,420 2,319
Other accrued expenses ................................................................... 9,196 14,930.................................................... 9,343 13,366
Current maturities of long-term debt ..................................................... 11,175 6,071
-------- --------...................................... 6,332 6,144
--------- ---------
Total current liabilities ....................................................... 61,557 56,660........................................ 71,160 76,528
LONG-TERM DEBT, less current maturities ....................................................... 196,168 197,525........................................ 253,344 213,397
DEFERRED REVENUE ............................................................... 16,840
DEFERRED TAXES ................................................................................ 14,198................................................................. 16,159 13,362
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
CommonClass A common stock voting, $.01 par value; 100,000,000 shares authorized;
47,803,34149,136,704 and 49,131,11649,131,273 shares issued and outstanding as of
March 31, 1998 and December 31, 1996 and September 30,
1997, respectively .................................................................. 478.................. 491 491
Treasury stock, at cost; 135,000 and 75,000 shares as of March 31, 1998 and
December 31, 1997, respectively ..................................... (2,215) (1,236)
Additional paid-in capital ............................................................... 303,846 333,777
Accumulated deficit ...................................................................... (39,758) (4,192)
-------- --------................................................ 334,193 334,164
Retained earnings ......................................................... 11,772 4,176
--------- ---------
Total stockholders' equity ...................................................... 264,566 330,076
-------- --------....................................... 344,241 337,595
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $522,291 $598,459
======== ========....................... $ 701,744 $ 640,882
========= =========
See notes to consolidated financial statements.
1
4
STEEL DYNAMICS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996MARCH 31,
----------------------------
1998 1997
1996 1997
------------- ------------- ------------- ---------------------- ---------
(UNAUDITED) (UNAUDITED)
NET SALES:
Unrelated parties .............................................. $ 41,54587,615 $ 62,086 $ 91,019 $ 176,37652,165
Related parties ........................... 34,412 42,616 83,600 129,103
--------- ---------....................... 30,847 45,894
--------- ---------
Total net sales ....................... 75,957 104,702 174,619 305,479................... 118,462 98,059
Cost of goods sold ............................. 62,664 81,003 158,257 231,182
--------- ---------......................... 103,483 73,834
--------- ---------
GROSS PROFIT ................................... 13,293 23,699 16,362 74,297............................... 14,979 24,225
Selling, general and administrative expenses ... 3,455 7,471 9,347 19,949
--------- ---------3,897 5,323
--------- ---------
OPERATING INCOME ............................... 9,838 16,228 7,015 54,348
Foreign currency gain (loss) ................... (1) 260 260........................... 11,082 18,902
Interest expense ........................... (3,343) (2,401)
Other income ............................... (5,922) (1,487) (18,050) (5,480)
Interest income ................................ 378 251 957 1,515
--------- ---------4,723 752
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS ....................... 4,294 14,991 (9,818) 50,643................. 12,462 17,253
Income tax expense ............................. 1,954 7,452
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ........ 4,294 13,037 (9,818) 43,191
Extraordinary loss, net of tax ................. (7,624) (7,624)
--------- ---------taxes ............................... 4,866 2,668
--------- ---------
NET INCOME (LOSS) .......................................................... $ 4,2947,596 $ 5,413 $ (9,818) $ 35,56714,585
========= =========
BASIC EARNINGS PER SHARE:
Net income per share ....................... $ .16 $ .30
========= =========
INCOME (LOSS)DILUTED EARNINGS PER SHARE BEFORE
EXTRAORDINARY LOSS ...........................SHARE:
Net income per share ....................... $ .11.15 $ .27 $ (0.27) $ .90
PER SHARE EFFECT OF EXTRAORDINARY LOSS ......... (0.16) (0.16)
--------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE .................... $ .11 $ .11 $ (0.27) $ .74
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING ............ 38,441 48,540 35,940 48,080
========= =========.30
========= =========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996MARCH 31,
----------------------------
1998 1997
1996 1997
------------- ------------- ----------- --------------------- --------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss) ................................................................................................................... $ 4,2947,596 $ 5,413 $ (9,818) $ 35,56714,585
Adjustments to reconcile net income (loss) to net cash provided (used) in operating activities:
Depreciation and amortization ............................. 5,415 6,078 14,208 17,685............................................... 6,963 5,691
Foreign currency gain ..................................... 1 (260) (260)....................................................... (92)
Deferred taxes ............................................ (4,509) (3,041)
Extraordinary loss ........................................ 11,019 11,019.............................................................. 4,106 2,475
Changes in certain assets and liabilities:
Accounts receivable .................................. (6,922) (5,141) (34,942) (9,670).................................................... (1,083) (8,791)
Inventories .......................................... (9,881) 3,031 (22,280) 12,113............................................................ (5,633) 19,396
Other assets ......................................... 1,396 (1,079) 410 (697)........................................................... (2,668) 512
Accounts payable ..................................... 2,926 (2,723) 3,962 (5,527)....................................................... (1,634) 3,140
Accrued expenses ..................................... 1,513 2,587 3,095 5,993
--------- --------- --------- ---------
Net cash provided (used) in operating activities ... (1,259) 14,677 (45,625) 63,182
--------- --------- --------- ---------....................................................... (3,924) 1,126
Deferred revenue ....................................................... 1,372
-------- --------
NET CASH PROVIDED IN OPERATING ACTIVITIES .......................... 5,095 38,042
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment ................... (17,224) (49,935) (29,286) (131,459)
Proceeds from government grants ............................... 91 1,558
Purchase of short term investments ............................ (7,000)
Maturities of short term investments .......................... 4,000 4,000..................................... (46,868) (46,330)
Other ......................................................... (414) 29 (985) 85
--------- --------- --------- ---------
Net cash used in investing activities .............. (13,547) (49,906) (31,713) (131,374)
--------- --------- --------- ---------........................................................................... (190) (1)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................. (47,058) (46,331)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt .................................... 35,157...................................................... 41,252
Repayments of long-term debt .................................. (840) (1,243) (1,079) (3,669).................................................... (1,333) (1,131)
Purchase of treasury stock ...................................................... (979)
Issuance of common stock, net of expenses ..................... 25,387 29,711 70,482 29,944....................................... 29 150
Debt issuance costs ............................................................. (518) (11)
-------- --------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES ................... 38,451 (992)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (3,512) (9,281)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................................... 8,618 57,460
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... (443) (3,542) (454)
--------- --------- --------- ---------
Net cash provided$ 5,106 $ 48,179
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................... $ 4,336 $ 3,696
======== ========
Cash paid for taxes .................................................................. $ 838 $
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Investment in financing activities .......... 24,547 8,025 101,018 25,821
--------- --------- --------- ---------
Increase (decrease)Nakornthai Strip Mill received in cash and cash equivalents ................... 9,741 (7,204) 23,680 (42,371)
Cash and cash equivalents at beginning of period ................... 20,823 22,293 6,884 57,460
--------- --------- --------- ---------
Cash and cash equivalents at end of period .........................exchange for the right to use
SDI technology .................................................................. $ 30,56415,468 $
15,089 $ 30,564 $ 15,089
========= ========= ========= ================= ========
See notes to consolidated financial statements.
3
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STEEL DYNAMICS, INC.
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 financial statementsestimates 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's 19961997 Annual Report on Form 10-K.
2. INVENTORIES (in thousands)
March 31, December 31,
September 30,
19961998 1997
------------ -------------------- -------
Raw Materials .................... $48,065 $28,942...................... $29,106 $22,851
Supplies ......................... 11,854 14,512
Work in Progress ................. 3,507........................... 23,721 17,861
Work-in-progress ................... 3,296 6,656
Finished Goods ................... 5,992 6,837..................... 9,673 12,795
------- -------
$65,911 $53,798$65,796 $60,163
======= =======
3. COMMON STOCK AND ADDITIONAL PAID-IN CAPITALEARNINGS PER SHARE (in thousands)
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
Shares Amount
---------- ----------
(in thousands)March 31,
----------------------
1998 1997
------ ------
Balance at January 1, 1997 ......... 47,803,341 $ 304,324
ExerciseBasic weighted average common shares ........... 49,002 47,838
Dilutive effect of stock options .......... 71,804 307
Issuance of............... 449 495
------ ------
Diluted weighted average common shares ................. 1,255,971 29,637
---------- ----------
Balance at September 30, 1997 ...... 49,131,116 $ 334,268
========== ==========......... 49,451 48,333
====== ======
Effective January 10, 1997, the vesting period under the 1994 Incentive Stock
Option Plan for exercise of stock options was reduced to six months after the
grant date with respect to one-third of the shares covered by options. 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, options were granted
under the 1996 Incentive Stock Option Plan for 94,408 shares at a exercise price
of $20.625 per share to substantially all the employees of the Company.
4
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997,On January 1, 1998 the Financial Accounting Standards Board issuedCompany adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 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.
In June 1997 the FASB issued SFASStandard No. 130, "Comprehensive Income" ("SFAS 130").
SFAS 130 becomes effective in 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS 130, which requires that changes in
the amountsseparate
disclosure 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. ManagementIt has
not yetbeen determined that the effect, if any, of SFAS 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 inCompany currently has no amounts 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.
5require
classification under comprehensive income.
4
87
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales totaled approximately $104.7increased to $118.5 million forin the first quarter of 1998 from $98.1
million in the first quarter of 1997, a 21% increase. The Company shipped 15%
more tons in the first quarter of 1998 as compared to the first quarter of 1997.
During 1997, the Company began producing and shipping value-added Cold Mill
products including pickled and oiled coils, cold-rolled coils, hot-rolled
galvanized coils and cold-rolled galvanized coils. During the first quarter of
1998, the Company shipped 168,330 tons of hot band and 153,379 tons of Cold Mill
product. Shipments of Cold Mill product did not begin until the third quarter of
1997 (44,817 tons).
Cost of Goods Sold
For the first quarter of 1998 and $305.51997, total cost of goods sold were $103.5
million for first nine months of 1997. Net sales were approximately $76.0and $73.8 million, respectively. Gross margin for the thirdfirst quarter of
19961998 and $174.61997 was $15.0 million and $24.2 million, respectively. As a percentage
of net sales, cost of goods sold was 87% and 75%, respectively. The $40 per ton
decrease in gross margin is primarily attributable to a $25 per ton decrease in
total per ton pricing in conjunction with a $11 per ton increase in scrap costs.
Selling, General and Administrative
Selling, general and administrative expense was $3.9 million and $5.3 million
for the first nine
months of 1996. The increases in net sales for the periods presented are a
result of the Company increasing its sales and production as it nears capacity.
SDI began commercial production of primary grade steel on January 2, 1996 and
has continued to increase its net sales as its production increased. By the
third quarter ended September 28, 1996, the Company was operating at an
annualized rate of 749,000 tons, or 54% of full capacity. As of September 30,
1997, the Company was operating at an annualized rate of 1.2 million tons, or
86% of full capacity. In addition, the average sales price per prime ton of hot
band increased from $348 for the third quarter 1996 to $352 for the third
quarter 1997 and the percentage of prime tons produced increased from 87% for
the nine months ended September 28, 1996 to 96% for the nine months ended
September 30, 1997.
Cost of Goods Sold
Cost of goods sold totaled approximately $81.0 million, or 77% of net sales, for
the third quarter of 1997 and approximately $231.2 million, or 76% of net sales,
for the first nine months of 1997. Cost of goods sold totaled approximately
$62.7 million, or 83% of net sales, for the third quarter of 1996 and
approximately $158.3 million, or 91% of net sales, for the first nine months of
1996. Total cost of sales increased as a result of production and sales
increases. Management expects total cost of sales to increase as production and
sales continue to rise, however, cost of sales as a percentage of sales should
continue to improve.
Selling, General and administrative
Selling, general and administrative was approximately $3.5 million and $7.5
million for the third quarter of 1996 and 1997, respectively, and approximately
$9.3 million and $20.0 million for the first nine months of 1996 and 1997,
respectively. The increases for the three month period and the nine month period
ended September 30, 1997 over the corresponding periods for the prior year are
predominantly a result of increased start up costs associated with the Cold Mill
Project and Iron Dynamics, increased profit sharing expense as a result of
favorable operations and increases in administrative expenses as the Company
continues to grow as a publicly traded entity.
Interest Expense
Interest expense totaled approximately $5.9 million and $1.5 million for the
third quarter of 1996 and 1997, respectively, and approximately $18.1 and $5.5
million for the first nine months of 19961998 and 1997, respectively. The decrease in interestselling,
general and administrative expense is primarily due to lower interest rates associated withthe reduction in start-up
costs related to expansion projects and the reduction of amortization expense as
a result of the amended credit facility,agreement that was finalized in the prepaymentsecond
quarter of subordinated debt which occurred in
December 1996,1997.
During the first quarter of 1998, the Company entered into a ten year Reciprocal
License and capitalized interest associatedTechnology Sharing Agreement (the "License Agreement") with
Nakornthai Strip Mill Public Co. Limited (NSM) providing NSM with the cold millright to
use the Company's technology in exchange for shares and caster
projects.
Foreign Currency Gainwarrants of NSM stock
valued at $15.5 million. The foreign currency gains represent transaction gains incurred byCompany's ownership in NSM is recorded in Other
Assets at its estimated fair value. Income relating to the License Agreement was
deferred and is being recognized in income ratably over the ten year term of the
agreement. Concurrently, the Company entered into a ten year Management Advisory
and Technical Advisory Agreement to provide training and advice to a management
company under contract with NSM to manage NSM's mill in return for purchases$2.0 million
annually. Such amount is payable in advance and is being recognized in income
ratably throughout each year 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 September 30, 1997. Foreign
currency gainservice.
Interest Expense
Interest expense totaled $260,000 for the nine months ended September 28, 1996$3.3 million and September 30, 1997, respectively.
Interest Income
Interest income totaled approximately $378,000 and $251,000 and the third
quarter of 1996 and 1997, respectively, and approximately $957,000 and $1.5$2.4 million for the first nine monthsquarter of
19961998 and 1997, respectively. Taxes
At December 31, 1996,The additional interest expense is a result of
additional borrowings to finance the expansion projects along with decreased
capitalized interest.
Other Income
Other income was $4.7 million and $1.0 million for the first quarter of 1998 and
1997, respectively. The increase in Other Income is primarily attributable to
nonrecurring services provided by the Company had available net operating losses ("NOLs")in connection with the NSM
transaction.
Taxes
The provision for federalincome taxes for the first quarter of 1998 and 1997, was $4.9
million and $2.7 million, respectively. The tax provision for 1998 reflects the
Company at the statutory income tax purposes of approximately $60.6 million of which $200,000
expire in 2009, $2.4 million expire in 2010 and $58.0 million expire in 2011.
Because ofrates. For 1997, the 6
9
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 nine months ended September 30, 1997, income taxes are computed using
the Company's expected annual effective tax
rate which gives effect todiffered from the utilizationstatutory rate as a result of available net operating loss carryforwards.the reduction in a deferred
tax valuation allowance.
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.
5
8
Net cash used inprovided by operating activities totaled approximately $1.3 million for the
third quarter of 1996 and $45.6$5.1 million for the first
nine monthsquarter of 1996.1998. The use of cash inprovided from operating activities for the thirdfirst
quarter and first nine months
of 19961998 primarily related to the build up of raw material inventory as a result
of favorable pricingnet income and the substantial increase in accounts receivable from
the beginning of the year as a result of production and sales increases.deferred taxes. During the
thirdfirst quarter of 1997, the Company provided net cash of approximately $14.7$38.0 million from
operating activities resulting from an increase in net income, a
non-cash extraordinary loss, and decreases in raw material inventory due to less
favorable pricing levels. These cash provisions were offset by an increase in
accounts receivable as a result of production and sales increases. During the
first nine months of 1997, the Company provided net cash of approximately $63.2
million from operating activities resultingprimarily from net income non-cash charges
for depreciation and an extraordinary loss, and an overall net decreased raw material
inventory due to less favorable pricing levels.increasing scrap costs. Management decided to build the raw
material inventory in the first quarter of 1998 due to decreasing scrap costs
and draw down the raw material inventory in the first quarter of 1997 due to
increasing scrap costs. Net cash used in investing activities totaled approximately $13.5 million from the third quarter
of 1996, approximately $49.9 million for the third quarter of 1997,
approximately $31.7 million and $ 131.4$47.1
million for the first nine monthsquarter of 19961998 and 1997, respectively.$46.3 million for the first quarter of
1997. Investing activities primarily consisted of capital expenditures of approximately $17.2$46.9
million and $49.9 million for the third
quarter of 1996 and 1997, respectively, and approximately $29.3 million and
$131.5$46.3 million for the first nine monthsquarter of 19961998 and 1997, respectively,
for the construction of the Company's existing facilities, the Cold Mill
Project, the Caster Project and the Iron Dynamics.Dynamics Project. Cash provided by
financing activities totaled approximately $24.5 million and $28.0 million for the third quarter of 1996 and
1997, respectively, and approximately $101.0 million and $25.8$38.5 million for the first nine monthsquarter of 19961998 and
1997, respectively.cash used in financing activities totaled $992,000 for the first quarter of
1997. The 19961998 increase in cash provided by financing activities primarily
relates to the approximately $35.2$41.2 million of proceeds from senior term debt and $70.5debt. The $48.0
million of proceeds from
common stock issuance. The 1997 increase in cash provided by financing
activities primarily relates to $30.0 millionon hand at the end the first quarter of proceeds1997 was carried over
from common stock
issuance.
Effective as of June 30, 1997, the Company completed an amendment to the Credit
Agreement, which replaced its previous $345.0 million credit facility. The
Credit Agreement consists of a $450.0 million credit facility, composed of a
$250.0 million five-year revolving credit facility (subject to a borrowing
base), $100.0 million 364-day revolving credit facility (subject to extension if
approved by all of the lenders, or, if not, converted into a five-year term loan
amortizable in equal quarterly installments during the final two years of the
five-year term loan period), and a $100.0 million term loan amortizable in equal
quarterly installments during the final two years of the term loan period,
commencing September 30, 2002. The Credit Agreement is secured by substantially
all of the Company's assets (other than as permitted to be excluded in order to
secure the IDI Financing).
Borrowings under the Credit Agreement bear interest at floating rates. The
Company entered into an interest rate swap agreement on a notional amount of
$100.0 million pursuant to which the Company has agreed to make fixed rate
payments at 6.935% and will receive LIBOR payments. The maturity date of the
interest rate swap agreement is July 2, 2001. The counterparty has the right to
extend the maturity date to July 2, 2004 at predetermined interest rates.
As a result of the substantial modifications with the amendment to the Credit
Agreement, which was completed on July 9, 1997, the Company incurred an
extraordinary loss of approximately $7.6 million (net of a tax benefit of
approximately $5.1 million) related to prepayment penalties and the write-off of
the financing costs associated with the originally negotiated credit facility.
As of September 30, 1997, the Company's long-term debt (including the current
portion) was approximately $203.6 million. Approximately 74% of this
indebtedness bears interest at floating rates.
The Company raised approximately $29.6 million (net of expenses) with ainitial public offering proceeds received in August 1997. Asthe fourth quarter of
September 30, 1997, the Company had approximately
$15.1 of the offering proceeds million invested in short-term cash investments.
In addition to the approximate $14.5 million already expended, this remaining
cash will be used for capital and working capital needs through the end of the
year.
7
101996.
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 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.
86
119
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
Exhibit 11.1 Statement10.40 Management Advisory and Technical Assistance Agreement
between Steel Dynamics, Inc. and NSM Management Co. LLC dated as of
ComputationMarch 12, 1998
Exhibit 10.41 Reciprocal License and Technical Sharing Agreement
Between SDI and Nakornthai Strip Mill Public Company Limited, dated
as of Earnings per Share (page
10)March 12, 1998
(B) Reports on Form 8-K for the quarter ended June 30, 1997March 31, 1998 -
None
Item 1 - 5 of Part II 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.
November 6, 1997May 15, 1998
STEEL DYNAMICS, INC.
By: /s/ TracyTRACY L. ShellabargerSHELLABARGER
----------------------------------------------
TRACY L. SHELLABARGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer
Andand Duly Authorized Officer)
97