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, 1998March 31, 1999
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 of incorporation or organization) (I.R.S. employer Identification No.)
7030 POINTE INVERNESS WAY, SUITE 310, FORT WAYNE, INDIANAIN 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 October 27, 1998,May 5, 1999, Registrant had outstanding 47,864,17949,195,721 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, 1998 (unaudited) and
December 31, 1997 ......................................................1
Consolidated Statements of Operations for the three and nine-month
periods ended September 30, 1998 and 1997 (unaudited)...................2
Consolidated Statements of Cash Flows for the three and nine-month
periods ended September 30, 1998 and 1997 (unaudited)...................3
Notes to Consolidated Financial Statements................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................6
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................10
SIGNATURE..............................................................11
Page
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998.................................................. 1
Consolidated Statements of Operations for the three month periods
ended March 31, 1999 and 1998 (unaudited).......................... 2
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998 (unaudited).......................... 3
Notes to Consolidated Financial Statements......................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 10
SIGNATURE......................................................... 10
3
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS(DOLLARS IN THOUSANDS)
SEPTEMBER 30,MARCH 31, DECEMBER 31,
1999 1998 1997
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................................................... $ 3,98710,917 $ 8,6185,243
Accounts receivable, net ............................................ 44,529 33,465......................................................... 47,954 42,507
Accounts receivable-related parties ................................. 22,355 11,210.............................................. 17,844 23,448
Inventories ......................................................... 116,286 60,163...................................................................... 119,055 126,706
Deferred taxes ...................................................... 12,444 19,688................................................................... 18,087 15,134
Other current assets ................................................ 4,410 2,158............................................................. 6,417 9,675
--------- ---------
Total current assets .......................................... 204,011 135,302.................................................... 220,274 222,713
PROPERTY, PLANT, AND EQUIPMENT, NET .................................... 620,757 491,859................................................... 695,696 655,872
RESTRICTED CASH ....................................................................... 13,109 13,057
OTHER ASSETS ........................................................... 31,300 13,721.......................................................................... 16,949 15,828
--------- ---------
TOTAL ASSETS .............................................................................................................. $ 856,068946,028 $ 640,882907,470
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................................................................................... $ 35,68748,396 $ 39,34724,850
Accounts payable-related parties .................................... 20,778 15,352................................................. 871 9,592
Accrued interest ..................................................................................................................... 3,616 3,267 2,319
Other accrued expenses .............................................. 14,892 13,366........................................................... 14,234 15,954
Current maturities of long-term debt ................................ 6,791 6,144............................................. 6,976 6,933
--------- ---------
Total current liabilities ..................................... 81,415 76,528............................................... 74,093 60,596
LONG-TERM DEBT, less current maturities ................................ 407,598 213,397
DEFERRED REVENUE ....................................................... 15,066............................................... 497,510 477,013
DEFERRED TAXES ......................................................... 8,205 13,362........................................................................ 20,307 18,796
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
CommonClass A common stock voting, $.01 par value; 100,000,000 shares authorized;
49,158,27949,183,340 and 49,131,27349,158,279 shares issued and outstanding as of September 30, 1998March 31, 1999
and December 31, 1997,1998, respectively ...................................................... 492 491492
Treasury stock, at cost; 1,252,200 and 75,0001,294,100 shares as of September 30,
1998March 31, 1999 and
December 31, 1997, respectively ............................ (18,783) (1,236)1998 .......................................................... (19,650) (19,650)
Additional paid-in capital ............................................. 334,312 334,164capital........................................................ 334,446 334,363
Retained earnings ...................................................... 27,763 4,176................................................................ 38,830 35,860
--------- ---------
Total stockholders' equity .................................... 343,784 337,595.............................................. 354,118 351,065
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................................. $ 856,068946,028 $ 640,882907,470
========= =========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
------------------------
1999 1998 1997 1998 1997
--------- ---------
--------- ---------(UNAUDITED)
NET SALESSALES:
Unrelated parties ...................................................................... $ 105,25185,133 $ 62,086 $ 277,594 $ 176,37687,615
Related parties ............................................. 35,707 42,616 102,868 129,103
--------- ---------............................. 32,320 30,847
--------- ---------
Total net sales .......................................... 140,958 104,702 380,462 305,479......................... 117,453 118,462
Cost of goods sold ............................................. 114,892 81,004 320,216 231,182
--------- ---------............................... 99,072 103,483
--------- ---------
GROSS PROFIT ................................................... 26,066 23,698 60,246 74,297..................................... 18,381 14,979
Selling, general and administrative expenses ................... 5,998 7,471 13,104 19,689
--------- ---------..... 8,099 3,897
--------- ---------
OPERATING INCOME ............................................... 20,068 16,227 47,142 54,608................................. 10,282 11,082
Interest expense ............................................... (5,965) (1,487) (12,925) (5,480)................................. (5,599) (3,343)
Other income ................................................... 69 251 4,906 1,515
--------- ---------..................................... 262 4,723
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS ...................................... 14,172 14,991 39,123 50,643....................... 4,945 12,462
Income tax expense ............................................. 5,674 1,954 15,536 7,452
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ............................ 8,498 13,037 23,587 43,191
Extraordinary loss, net of $5,083 deferred tax benefit in 1997.. (7,624) (7,624)
--------- ---------taxes ..................................... 1,975 4,866
--------- ---------
NET INCOME ...................................................................................... $ 8,4982,970 $ 5,413 $ 23,587 $ 35,567
========= =========7,596
========= =========
BASIC EARNINGS PER SHARE:
Income before extraordinary loss ............................ $ .18 $ .27 $ .48 $ .90
Extraordinary loss .......................................... (.16) (.16)
--------- --------- --------- ---------
Net income ..................................................per share ............................. $ .18.06 $ .11 $ .48 $ .74.16
========= =========
Weighted average number of shares outstanding .... 47,877 49,002
========= =========
DILUTED EARNINGS PER SHARE:
Income before extraordinary loss ............................ $ .18 $ .27 $ .48 $ .89
Extraordinary loss .......................................... (.16) (.16)
--------- --------- --------- ---------
Net income ..................................................per share ............................. $ .18.06 $ .11 $ .48 $ .73.15
========= =========
Weighted average number of shares outstanding .... 48,244 49,451
========= =========
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 30, SEPTEMBER 30,MARCH 31,
1999 1998
1997 1998 1997
--------- --------- --------- ----------------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income ........................................................................................................................ $ 8,4982,970 $ 5,413 $ 23,587 $ 35,5677,596
Adjustments to reconcile net income to net cash provided (used) inby operating activities:
Depreciation and amortization ............................ 8,411 6,016 22,652 17,623
Foreign currency gain .................................... 1 (260)............................................. 8,191 6,963
Deferred income taxes ........................................... 3,524 (4,509) 2,086 (3,041)
Extraordinary loss ....................................... 11,019 11,019..................................................... (2,631) 4,106
Changes in certain assets and liabilities:
Accounts receivable ...................................... (20,363) (5,141) (22,209) (9,670).................................................. 157 (1,083)
Inventories .............................................. (23,511) 3,031 (56,123) 12,113.......................................................... 7,651 (5,633)
Other assets ............................................. 285 (1,079) (2,252) (697)......................................................... 3,258 (2,668)
Accounts payable ......................................... 3,271 (2,723) 1,767 (5,527)..................................................... 14,825 (1,634)
Accrued expenses ......................................... 3,102 2,587 2,472 5,993..................................................... (1,371) (3,924)
Deferred revenue ......................................... (887) (402)
--------- --------- --------- ---------..................................................... -- 1,372
-------- --------
NET CASH PROVIDED (USED) INBY OPERATING ACTIVITIES ........ (17,670) 14,615 (28,422) 63,120
--------- --------- --------- ---------........................ 33,050 5,095
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment ................. (46,483) (49,935) (151,016) (131,459)................................... (47,851) (46,868)
Other ....................................................... (879) 91 (1,428) 147
--------- --------- --------- ---------......................................................................... (134) (190)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................... (47,362) (49,844) (152,444) (131,312)............................ (47,985) (47,058)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt .................................. 63,421 199,092.................................................... 21,762 41,252
Repayments of long-term debt ................................ (1,380) (1,243) (4,073) (3,669).................................................. (1,222) (1,333)
Purchase of treasury stock .................................. (2,900) (17,547).................................................... -- (979)
Issuance of common stock, net of expenses ................... 29,711 150 29,944..................................... 83 29
Debt issuance costs ......................................... (291) (443) (1,387) (454)
--------- --------- --------- ---------........................................................... (14) (518)
-------- --------
NET CASH PROVIDED INBY FINANCING ACTIVITIES ............... 58,850 28,025 176,235 25,821
--------- --------- --------- ---------
DECREASE........................ 20,609 38,451
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (6,182) (7,204) (4,631) (42,371)................................... 5,674 (3,512)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............... 10,169 22,293................................... 5,243 8,618
57,460
--------- --------- --------- ----------------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................................................. $ 3,98710,917 $ 15,089 $ 3,987 $ 15,089
========= ========= ========= =========5,106
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ...................................................................................................... $ 6,3798,246 $ 3,949 $ 16,456 $ 10,906
========= ========= ========= =========4,336
======== ========
Cash paid for taxes ............................................................................................................ $ 2,159310 $ 1,750 $ 13,619 $ 5,840
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INFORMATION:
Investment in Nakornthai Strip Mill received in exchange for the
right to use SDI technology ................................. $ $ $ 15,468 $
========= ========= ========= =========838
======== ========
See notes to consolidated financial statements.
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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 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's 19971998 Annual Report on Form 10-K.
2. INVENTORIES (in thousands)
September 30,March 31, December 31,
1999 1998 1997
-------- --------
Raw materials ......................Materials .......................... $ 52,14160,774 $ 22,85178,351
Supplies ........................... 35,749 17,861............................... 31,428 26,849
Work-in-progress ................... 8,759 6,656....................... 7,719 7,449
Finished goods ..................... 19,637 12,795Goods ......................... 19,134 14,057
-------- --------
$116,286 $ 60,163$119,055 $126,706
======== ========
3. EARNINGS PER SHARE (in thousands)
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------March 31,
--------------------
1999 1998 1997 1998 1997
------ ------
------ ------
Basic weighted average common shares ........... 48,113 48,540 48,662 48,080............... 47,877 49,002
Dilutive effect of stock options ............... 365 566 425 512
------ ------................... 367 449
------ ------
Diluted weighted average common shares ......... 48,478 49,106 49,087 48,592
====== ======............. 48,244 49,451
====== ======
4. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 130 ("SFAS131 (SFAS No. 130"), "Comprehensive Income", which requires that
separate 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. It
has been determined that the Company currently has no amounts which require
classification under comprehensive income.
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 ("SFAS No. 131")131), "Disclosures about Segments of an Enterprise
and Related Information" which changes 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. SFAS No. 131 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. It has not yet been determined that the Company is required to
provide additional disclosure as a result of thecustomer.
The adoption of SFAS No. 131.
4
7131 did not affect results of operations or financial
position or cash flows, but did affect the disclosure for segment information
(See Note 5).
Statement of Financial Standards No. 133 ("SFAS(SFAS No. 133")133), "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. 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
conditions are met a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a hedge of foreign currency exposure. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. Management has not yet quantified the effect, if any, of the new
standard on the financial statements.
4
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
The Company has two reportable segments: Steel and Scrap Steel Substitute. The
Steel segment consists of the Flat-Rolled Mill, which produces and sells
hot-rolled, cold-rolled and galvanized sheet steel; and the Structural Mill,
which will produce structural steel products but is currently under
construction. The Scrap Steel Substitute segment consists of Iron Dynamics, Inc.
(IDI), which will provide steel scrap substitute to the Company. 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 Steel and Scrap Steel
Substitute segments are consistent with those described in Note 1. Intersegment
sales and transfers are accounted for at standard prices and are eliminated in
consolidation.
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
SCRAP STEEL SCRAP STEEL
STEEL SUBSTITUTE TOTAL STEEL SUBSTITUTE TOTAL
--------- --------- --------- --------- --------- ---------
Segment revenues from external customers $ 117,453 $ -- $ 117,453 $ 118,462 $ -- $ 118,462
Segment income (loss) from operations .. 13,246 (2,964) 10,282 12,183 (1,101) 11,082
Segment assets ......................... 840,478 105,550 946,028 673,823 27,921 701,744
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Throughout this report or elsewhere in other reports filed from time to time
with the Securities and Exchange Commission under the Securities Exchange Act of
1934, as well as in press releases or in oral statements made to the market by
officers, there may be various statements that express Company opinions,
expectations, or projections regarding future events or future results, in
contrast with statements that reflect historical facts. These expressions,
generally preceded by such typical conditional words as "anticipates,"
"intends," "believes," "estimates," and "expects," are intended to operate as
"forward looking statements," as permitted by the Private Securities Litigation
Reform Act of 1995. That legislation creates a "safe harbor" for predictive
statements of this kind, in the event that things do not turn out as
anticipated.
Forward looking statements, by their very nature, involve known and unknown
risks and uncertainties that may cause actual results, performance, or
achievements to differ materially from the anticipated results, performance, or
achievements that may have been expressed or implied by such forward looking
statements. While management intends to express its best judgment when making
statements about what may occur in the future, and although management believes
them to be reasonable in light of the circumstances then known, a number of
important factors can come into play to cause the Company's actual results and
experience to differ materially from those expected or implied by management in
such forward looking statements.
These factors include, among others, the following: (1) changes in economic
conditions in the United States and other major international economies
(especially affecting the significant steel producing and steel consuming
nations in Europe, Asia, and Russia); (2) elements of United States trade policy
and actions regarding steel imports; (3) effects of changes in the availability
and costs of the principal raw materials such as scrap steel and other supplies
used by the Company in its production processes; (4) changes in market demand
and resulting market prices, against available supply, for the Company's steel
products, including the role of steel substitutes such as aluminum and plastics
in the demand for new steel; (5) unanticipated or extraordinary expenses; (6)
loss of business from major customers; (7) inability of the Company to
successfully consummate or implement acquisitions; (8) changes in business
strategy or development plans; (9) actions by the Company's domestic and foreign
competitors, including new or existing production capacities coming into or
leaving the market; (10) availability and cost, as well as unplanned outages, of
electricity and other utilities, upon which the Company is dependent, especially
in light of current and ongoing deregulation reforms; (11) unplanned equipment
failures and other types of plant outages; (12) labor unrest, work stoppage,
and/or strikes, not only if they involve the Company directly, but if they
negatively impact the Company's suppliers and/or its customers; (13) the impact
of monetary or fiscal policy or of increases in interest rates or in the
Company's cost of borrowing; (14) the effect of weather or the elements; (15)
the impact of changes in environmental laws or in other legal and regulatory
requirements applicable to the Company, or any unanticipated private or
governmental claims arising under any of such laws or regulations; (16) loss of
key members of management; (17) risks and difficulties in implementing new
technology that is not yet operational or is relatively new, such as the
Company's Iron Dynamics Project to manufacture scrap substitutes; (18) changes
in cost, completion, or start-up dates, and the performance and future
capabilities of Company projects; (19) unanticipated outcomes of litigation or
the impact of litigation on the adequacy of reserves, if any, or insurance
coverages in connection with such litigation; and (20) risks and difficulties in
implementing information technology, including year 2000 compliance issues.
Any forward looking statements contained in this report or in any other report,
press releases, or oral statements that operate as forward looking speak only as
of the date of such statement, and the Company undertakes no obligation to
update such statements. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of future
performance, unless expressed as such, and should only be relied upon as
historical data.
This commentary should be read in conjunction with the Annual Report of Steel
Dynamics, Inc., on Form 10-K, for the year ended December 31, 1998 for a full
understanding of the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
Comparative operating results for the three-month periods ending March 31, 1999
and 1998 are as follows:
Three months ended March 31,
----------------------
1999 1998
------- -------
(In thousands, except ton data)
Net sales ........................................ 117,453 118,462
Gross profit ..................................... 18,381 14,979
Gross profit as a percentage of net sales ........ 15.6% 12.6%
Tons shipped - hot band .......................... 163,568 168,330
Tons shipped - cold mill ......................... 205,965 153,379
6
9
Net Sales
AggregateNet sales for the first three months of 1999 decreased $1.0 million or 0.9%
compared to the corresponding 1998 period. The decrease in net sales was
primarily attributable to lower realized prices resulting from the high levels
of unfairly traded steel imports and to an extended January mill outage which
was dedicated to the installation of an additional finishing stand.
Net tons shipped for the first three months of 1999 increased 47,824 tons or
14.9% compared to $141.0 millionthe corresponding 1998 period. The increase in net tons
shipped was the thirdresult of the Cold Mill running at near capacity for the first
time during the first quarter of 1998
from $104.7 million in the third quarter of 1997, an aggregate increase of 35%.
Net sales of hot bands alone, for the third quarter of 1998, decreased 31% to
$60.9 million, on shipments of 191,138 tons, at an average price of $319 per net
ton, compared to net sales of $87.6 million on shipments of 254,570 tons of hot
bands for the third quarter of 1997, at an average price of $344 per ton. Hot
band sales in the third quarter of 1998 decreased by 31% from the third quarter
of 1997 due to the Company's deliberate use of1999. The Company deliberately used a
substantial portion of its hot band production as feed stock during the continued start-up of itsfirst
quarter for the Cold Mill. This resulted in the decrease in hot band net tons
shipped, in comparison to the increase in hot band net tons produced. Hot band
production increased 36%35.3% from thirdthe first quarter 1997 to third quarterin 1998.
Net sales of Cold Mill products, including pickled and oiled, cold-rolled,
hot-rolled galvanized and cold-rolled galvanized coils, which did not begin
untilThe Company believes that the thirdmarket has reached its low from a product pricing
perspective during the first quarter of 1997, increased to $80.1 million1999. SDI has positioned itself for
long-term competitiveness through the third
quartercompletion of 1998 on shipmentsseveral construction
projects and through the continuation of 187,679 tons, for an average price for Cold Mill
products of $427 per ton from $17.1 million for the third quarter of 1997 on
shipments of 46,337 tons, for an average price for Cold Mill products of $369
per ton.
Aggregate net sales of hot band and Cold Mill products, for the first nine
months of 1998, increased to $380.5 million from $305.5 million in the first
nine month of 1997, an increase of approximately 25%. Overall, the Company's
revenues were up by an average of $23 per ton.start-up activities. The Company
anticipates however, that revenuesthese activities will result in a stronger, even more cost
effective operation in future quarters. This cost competitiveness coupled with
anticipated price increases is anticipated to significantly strengthen 1999
operating results during the fourth quarterremaining three quarters.
Cost of 1998 andGoods Sold
Cost of goods sold for the first quarter of 1999 across all product lines, but principally
affecting hot band sales, will reflectand 1998 was $99.1 million and
$103.5 million, respectively. This decrease was primarily attributable to scrap
costs that were 24.8% lower per ton in the industry wide softeningfirst quarter 1999 than in demand and
selling prices duethe first
quarter 1998. Gross profit in large partthe first three months of 1999 increased $3.4
million or 22.7% compared to the current uncontrolled influx of cheap
foreign steel, of varying qualities, primarily from Russia and Asia. This
situation has been exacerbated by the collapse of the Asian consumer markets for
new steel and the concurrent strength of the U.S. dollar.
On September 30, 1998, the Company and eleven other producers of carbon
hot-rolled sheet products joined the United Steelworkers of America and the
Independent Steelworkers Unioncorresponding period in filing antidumping cases against steel imports
from Russia, Japan and Brazil. The International Trade Commission will make a
preliminary injury decision within 45 days and the U.S. Department of Commerce
will issue a preliminary subsidy determination within 85 days and preliminary
dumping determinations within 160 days.
Cost of Goods Sold
For the third quarters of 1998 and 1997, total cost of goods sold was $114.9
million and $81.0 million, respectively. Gross profit for the third quarters of
1998 and 1997 were $26.1 million and $23.7 million, respectively. For the first
nine months of 1998 and 1997, total cost of goods sold was $320.2 million and
$231.2 million, respectively. Gross profit for the first nine months of 1998 and
1997 were $60.2 million and $74.3 million, respectively.1998. As a percentage
of net sales, costgross profit increased 3.0%. This increase was the net result of
goods sold was 82% and 77% for the third quarter of 1998 and
1997, respectively. As a percentage of net15% increase in shipment volumes, a 14% decrease in average sales cost of goods sold was 84% and
76% for the first nine months of 1998 and 1997, respectively.
The gross margin percentage decrease from 1997 to 1998 is attributable to
increasing scrap costs (up $3 per ton for the first nine months of 1998 compared
to 1997) and the start-up of the Cold Mill Project that began in the second half
of 1997 and continued into 1998. In connection with that start-up, and in order
not to have to cut back on its hot band commitments to existing customers, the
Company purchased hot band coils in the open market, at prices that were higher
than the Company's cost of production for similar products. These coils were
used to supply the Cold Mill operations, in part, during its start-up, and until
the Company's new second caster became operational in June 1998, increasing its
annual output capacity for hot bands from 1.3 to 2.3 million tons.
Since September, market prices for scrap have decreased $30-$40 per
ton and market prices for hot bands have decreased an estimated $20-$30a 25% decrease in scrap costs per ton.
Selling, General and Administrative Expense
Selling, general and administrative expense in the first three months of 1999
was $6.0$8.1 million, and $7.5 million
for the third quarteror 6.9% of 1998 and 1997, respectively,net sales, compared to $13.1$3.9 million, and $19.7 million for the first nine monthsor 3.3% of
1998 and 1997, respectively.net sales in 1998. The decrease in selling, general and administrative expenseincrease is primarily dueattributable to the reduction inCompany's
increased start-up costs related to certainassociated with Iron Dynamics, Inc. (IDI) and the new
structural mill project in 1999. IDI commissioned its submerged arc furnace
during March 1999 and produced 1,200 tonnes of the Company's expansion
projects.
During the first quarterliquid pig iron with sulfur
readings below expectation and with relatively high levels of 1998, the Company entered into a ten-year
Reciprocal License and Technology Sharing Agreement (the "License Agreement")
with Nakornthai Strip Mill Public Co. Limited ("NSM") providing NSM with the
right to use the Company's technology in exchange for shares and warrantsmetallization.
This production of NSM
stock valued at $15.5 million. The Company's ownership in NSMliquid pig iron 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 Assistance Agreementanticipated to provide training and advice toSDI with
considerable cost savings as a management company under contract with NSM to manage
NSM's mill, for whichsteel scrap substitute during the Company is to receive a feesecond half
of $2.0 million annually.
Such amount is payable annually in advance and is being recognized in income
ratably throughout each year of service.
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91999.
Interest Expense
Interest expense totaled $6.0$5.6 million and $1.5 million for the third quarter of
1998 and 1997, respectively and $12.9 million and $5.5$3.3 million for the first nine monthsquarter of
19981999 and 1997,1998, respectively. The additional interest expense is a result of
additionalincreased borrowings to finance the expansion projects alongin conjunction with
decreased capitalized interest.
Other Income
OtherFor the three months ended March 31, 1999, other income was $4.9 million and $1.5a more normalized
$262,000 in contrast with $4.7 million for the first nine months ofsame period in 1998, and 1997, respectively. The increase in other income is primarily attributable
to nonrecurring income associated with services providedwhich
reflected certain non-recurring fees. These fees were received by the Company in
connection with the Nakornthai Strip Mill Public Co. Limited (NSM). SDI
terminated its NSM transaction.agreements at year-end 1998.
Taxes
The provision forFor the three months ended March 31, 1999 and 1998, income taxes for the third quarter of 1998 and 1997, was $5.7tax provisions were
$2.0 million and $2.0 million, respectively and for the first nine months of 1998 and
1997 was $15.5 million and $7.5$4.9 million, respectively. The tax provision for
1998 reflects income
tax expense for the Company at the statutory income tax rates. For 1997, the Company's effective tax rate differed from the statutory
rate as a result of the reduction in a deferred tax valuation allowance.rate.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics'The Company's 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, SDIThe
Company has metsatisfied these liquidity requirementsneeds with cashfunds provided by equity,
long-term borrowings, state and local government grants and from operations. The Company anticipates that, under current market
conditions, its available resources will be adequate to complete its Iron
Dynamics Project in Butler, Indiana and its new Structural Mill Project
currently slated to be built in Whitley County, Indiana, commencing incapital cost
reimbursements.
For the fourth quarter of 1998.
Net cash used by operating activities totaled $17.7 million for the third
quarter of 1998 and $28.4 million for the first ninethree months of 1998 primarily to
build the Company's scrap inventory and increases in accounts receivable. Netended March 31, 1999, cash provided by operating activities
totaled $14.6was $33.1 million, foran increase of $28.0 million in comparison to the third
quarter of 1997 and $63.1 million for the first nine months of 1997. During the
third quarter of 1997,same
period in 1998. This increase is primarily attributable to the increase in
cashaccounts payable and the decrease in inventories and other assets. Significant
construction projects and timing were the primary drivers of the increased
accounts payable. The reduction in inventories is primarily attributable to the
selling of existing inventories due to strengthening domestic steel demand
resulting from operating activities was
primarily related to net income and recognition of an extraordinary loss. During
the first nine months of 1997 the increase in cash from operating activities was
primarily related to net income, decreased scrap inventory and recognition of an
extraordinary loss. Net cashforeign trade restrictions. Cash used in investing activities totaled $47.4 million
and $49.8 million for the third quarter of 1998 and 1997, respectively, and
$152.4 million and $131.3 million for
the first ninethree months in 1999 and 1998 were $48.0 million and
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$47.1 million, respectively, of 1998which $47.9 million and 1997,
respectively. Investing activities primarily consisted of$46.9 million
represented the Company's capital expendituresinvestments for the same period. The 1999
capital investments were primarily utilized in the preliminary construction of
the Company's existing facilities, the Cold Mill
Project, the Caster Project,structural mill and the Iron Dynamics Project.completion of various projects at the Butler
facilities, including the iron carbide receiving system, the batch annealing
furnaces and an additional rolling stand. Cash provided by financing activities
totaled $58.9was $20.6 million forand $38.5 million in the thirdfirst quarter 1999 and 1998,
respectively. The $17.9 million decrease was the direct result of the Company's
utilization of increased cash from operations in relation to additional
borrowings.
During the first quarter of 1998 and
$176.21999, SDI received approval from its bank group to
loan an additional $10.0 million to IDI for costs related to the first nine months of 1998. The 1998 increase in cash
provided by financing activities is attributable primarily to borrowings of
senior term debt of $63.4 million for the third quarter of 1998 and $199.1
million for the first nine of 1998 under the Company's credit facility.
STOCK REPURCHASE
Under a previously announced stock repurchase program, the Company during the
third quarter of 1998 acquired 277,200 sharescompletion of
its stock in open market
purchases, at an average price per sharefacilities. As of $11.93. In total, the Company has
purchased 1,252,200 shares at an average price per share of $15.32 through the
endMarch 31, 1999, IDI had received $5.0 million of the
third quarter.approved funds.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital expenditures
and operating expensesexpense 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.
IMPACT OF YEAR 2000
THE FOLLOWING IS A YEAR 2000 READINESS DISCLOSURE pursuant to the safe harbor
provisions of Public Law 105-271.
The so-called "Year 2000" or "Y2K" problemYear 2000 issue has become a general matter of concern to business, and has
been identified by the Securities and Exchange Commission as a matter requiring
discussion by publicly held manufacturing
companiescompanies. The Year 2000 issue arises from the
design of computer operating systems and computer software programs which
recognize only two digits in their periodic reports effective with
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the next quarter ending after August 4, 1998,date field and, as a result, of the fact that,
historically, most computer programs have been written using 2 digits rather
than four to define the applicable year. If not corrected, this could result in
computers recognizing a date that includesmay interpret "00"
incorrectly as the year 1900 rather than as the year 2000, which could then cause any computer2000. This incorrect
recognition has the potential to generate application that is date
dependent to either failfailures or to produce erroneous
information. This could in
turn, result in major systems failures or miscalculations
with regard towithin such matters, for example,areas as (a) manufacturing (b) shipping and receiving of product the(c)
scheduling and availability of raw materials, parts and supplies inventories (d) billing and
payments records (e) and the availability of utilities, telephone,telephones, data and
other essential services.
Because the Company's plant andSDI is relatively new, considering its original hot mill was completed less than
five years ago. Therefore, all of itsthe company's equipment and computer systems
are of recent vintage, from its original hot mill in 1994and as such, are anticipated to its post-1996 Cold Mill,
its Second Caster Project, and its Iron Dynamics Project, the Company believes
and has preliminarily determined that its own internal systems, including its
manufacturing equipment and other process control systems that may have
"imbedded" computer technology, as well as its own information and data systems,
are or, with relativelyrequire minor
modifications will be "Yearto become Year 2000 compliant" in a
timely manner. The Companycompliant, if they are not currently. SDI is
still in the process of completing its internal reviews which it plans to do with itsby utilizing internal
staff itsand SDI equipment vendors, and if
necessary, with outside consultants, and intendsvendors. SDI expects to implementincur total costs of less than
$100,000 to address any remaining modificationsYear 2000 issues. This estimated amount
primarily consists of costs associated with the accelerated replacement of
software, which is not Year 2000 compliant. This estimate does not include any
costs that may be foundincurred by SDI as a result of the failure of any supplier or
customer of SDI, or any other party with whom SDI does business, to be necessary. The Company anticipates that
the cost associated with its own internal Y2K compliance will not be material
and will not pose any significant operational problems.
The Companybecome Year
2000 compliant.
SDI is in the process of developing and implementing a plan to obtain information from its
third party entities, such as external service providers, significant suppliers
and customers, and financial institutions with theinstitutions. The objective of confirmingis to confirm their
plans and status of readiness to become Year 2000 compliant in order to better
understand and evaluate how their respective Year 2000 issues may affect the
Company'sSDI's
operations, and in order to assess any possible risks of non-compliance. At this
time, the Company is not in a position to assess this aspect of the yearYear 2000
problem, but plans to take the necessary steps to provide itself with reasonable
assurance that its suppliers, service providers, and customers are Year 2000
compliant.
Whilecompliant by September 1999.
Based on the Companyinformation currently available, SDI believes that the
implementation of its own internal assessment and its planning
efforts with respectYear 2000 Project Plan will adequately resolve the
company's Year 2000 issues. However, since it is not possible to its external suppliers, service providers and customersanticipate all
possible future outcomes, there could be circumstances under which SDI's
business operations are and willdisrupted as a result of Year 2000 problems. These
disruptions could be adequate to address its reasonable year 2000 concerns, there can
be no assurance that these efforts will be successful, thatcaused by (a) the failure of SDI's systems or equipment to
operate (b) the failure of SDI's suppliers to provide SDI with raw materials,
utilities, supplies or other companies uponproducts or services which are necessary to sustain
SDI's manufacturing processes or other business operations or (c) the Company and its systems rely will in fact be converted
or compliant in a timely manner, that it will be ablefailure of
SDI's customers to reasonably and
adequately protect itself through third party assurances, or that it will not
otherwiseaccept delivery of the Company's product. Any such disruption
of SDI's operations could have a material adverse effect on the Companyfinancial
condition and its operations.results of operations of SDI.
However, based on the Company'sSDI's assessment efforts to date, which does not yet include
an assessment of incoming and outgoing transportation issues involving railroads
and motor carriers, the CompanySDI believes that the reasonably worst case scenario
resulting from one or more supply-side failures, internal imbedded operational
failures, or sell-side failures, will not have a material adverse impact on its
financial condition or results of operations. The CompanySDI already maintains, and will
continue to maintain adequate on-site quantities of raw materials, parts and
supplies sufficient to buffer any anticipated vendor interruptions. The Company'sSDI's
manufacturing facilities, and the separate components of its melting, casting,
and finishing facilities, are and will be capable of being operated manually
should an unanticipated breakdown occur as a result of
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an imbedded failure. And the Company'sSDI's order entry lead times are also of sufficient
magnitude to analyze and repair any anticipated problem that may arise before
they would manifest themselves as a loss of or delay in sales.
FORWARD LOOKING STATEMENTS
Throughout this reportYEAR 2000 PROJECT PLAN
RESOLUTION PHASES ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ----------------- ---------- ----------- ------- --------------
Business systems and 100% complete 90% complete 80% complete 75% complete
process control systems
Expected completion Expected completion Expected completion
Date, September 1999 date, September 1999 date, September 1999
Operating Equipment 100% complete 90% complete 90% complete 90% complete
with Embedded Chips
or Software Expected completion Expected completion Expected completion
date, September, 1999 date, September 1999 date, September 1999
Third Party 100% for system 100% for system 75% complete 75% complete
interface; 75% for interface.
all other exposures
Develop contingency Expected completion Expected completion
plans as appropriate, date, September 1999 date, September 1999
September 1999
Expected completion
date for surveying all
third parties, September
1999
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business the Company's market risk is limited to changes
in interest rates. The Company utilizes long-term debt as a primary source of
capital. A portion of the debt has an interest component that resets on a
periodic basis to reflect current market conditions. The Company manages
exposure to fluctuations in interest rates through the use of interest rate
swaps. The Company agrees 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 other reports filed from time to time with the Securities and Exchange Commission under the Securities Exchange Actconsolidated statements of 1934,operations as well as in press releases or in statements madea component of interest expense.
At March 31, 1999, no material changes had occurred related to the market by officers in
oral discussions, there may be various statements that express Company
expectations regarding future events or future results, in contrast with
statements that reflect historical facts. These expressions, generally preceded
by such typical conditional words as "anticipates," "believes," "estimates," and
"expects," are intended to operate as "forward looking statements," as permitted
byCompany's
interest rate risk from the Private Securities Litigation Reform Act of 1995. The Act creates a "safe
harbor" for predictive statements of this kind,information disclosed in the event that things do not
turn out as anticipated.
Forward looking statements, by their nature, involve risksAnnual Report of Steel
Dynamics, Inc. and uncertainties.
While management intends to express its best judgment when making statements
about what may occur in the future, and although management believes them to be
reasonable in light of the circumstances then known, a number of important
factors can come into play to cause actual results to differ materially from
those expected or implied by management in such forward looking statements.
These factors include, but are not limited to, the following: (1) changes in
economic conditions in the United States and other major international economies
(especially affecting the significant steel producing and steel consuming
nations in Asia, in Europe, and Russia); (2) elements of U.S. trade policy and
actions regarding steel imports; (3) effects of changes, in the availability and
costs of the principal raw materials, such as scrap steel, and other supplies
used by the Company in its production processes; (4) changes in market demand
(against available supply),on Form 10-K for the Company's steel products, including the role
of steel substitutes such as aluminum and plastics in the demand for new steel;
(5) actions by the Company's domestic and foreign competitors, including new or
existing production capability coming on or off line; (6) availability and cost,
as well as unplanned outages, of electricity and other utilities, upon which the
Company is dependent, especially in light of current and ongoing deregulation
reforms; (7) unplanned equipment failures and other plant outages; (8) labor
unrest, work stoppage, and/or strikes, not only if they involve the Company
directly, but if they negatively impact the Company's suppliers and/or its
customers; (9) the impact of monetary or fiscal policy or of interest rates;
(10) the effect of weather or the elements; (11) the impact of changes in
environmental laws; (12) risks and difficulties in implementing new technology
that is not yet operational, such as the Company's Iron Dynamics Project to
manufacture scrap substitutes; and (13) risks and difficulties in implementing
information technology, including year 2000 compliance issues.
8ended December 31, 1998.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
Exhibit No.
*10.1b(1) Amended and Restated Credit Agreement between IDI and
Mellon Bank, N.A., et al.; dated June 10, 1998.
*10.1b(2) Second Amended and Restated Credit Agreement between IDI
and Mellon Bank, N.A., et al., dated March 15, 1999.
*27.1 Financial Data Schedule - Exhibit 27
(B) Reports on Form 8-K for the quarter ended September 30, 1998March 31, 1999:
None
- ----------
* Filed herewith
Items 1 - 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 12, 1998May 7, 1999
STEEL DYNAMICS, INC.
By: /s/Tracy TRACY L. ShellabargerSHELLABARGER
-------------------------------------------
TRACY L. SHELLABARGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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