1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended June 30, 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, IN 46804
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (219) 459-3553
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
As of August 2, 1999, Registrant had outstanding 49,209,526 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 June 30, 1999 (unaudited) and December 31, 1998 ....... 1
Consolidated Statements of Operations for the three and six-month periods ended
June 30, 1999 and 1998 (unaudited)................................................... 2
Consolidated Statements of Cash Flows for the three and six-month periods ended
June 30, 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............................... 11
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders...................................... 12
Item 6. Exhibits and Reports on Form 8-K......................................................... 12
Signature................................................................................ 13
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STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 2,472 $ 5,243
Accounts receivable, net............................................. 60,962 42,507
Accounts receivable-related parties.................................. 14,449 23,448
Inventories ......................................................... 115,220 126,706
Deferred taxes....................................................... 15,419 15,134
Other current assets................................................. 4,488 9,675
------------- --------------
Total current assets..................................... 213,010 222,713
PROPERTY, PLANT, AND EQUIPMENT, NET........................................ 713,892 655,872
RESTRICTED CASH............................................................ 11,696 13,057
OTHER ASSETS............................................................... 15,876 15,828
------------- --------------
TOTAL ASSETS............................................. $ 954,474 $ 907,470
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 25,468 $ 24,850
Accounts payable-related parties..................................... 16,078 9,592
Accrued interest..................................................... 3,420 3,267
Other accrued expenses............................................... 15,042 15,954
Current maturities of long-term debt................................. 7,652 6,933
------------- --------------
Total current liabilities................................ 67,660 60,596
LONG-TERM DEBT, less current maturities.................................... 492,833 477,013
DEFERRED TAXES............................................................. 27,645 18,796
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares
authorized; 49,196,093 and 49,158,279 shares issued and
outstanding as of June 30, 1999 and
December 31, 1998, respectively................................ 492 492
Treasury stock, at cost; 1,294,100 shares as of June 30, 1999 and
December 31, 1998.............................................. (19,650) (19,650)
Additional paid-in capital........................................... 334,524 334,363
Retained earnings.................................................... 50,970 35,860
------------- --------------
Total stockholders' equity............................... 366,336 351,065
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 954,474 $ 907,470
============= ==============
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Three Months Ended June 30 Six Months Ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
NET SALES:
Unrelated parties.......................... $ 90,541 $ 84,728 $ 175,674 $ 172,343
Related parties............................ 76,120 36,314 108,440 67,161
---------------- -------------- ---------------- --------------
Total net sales...................... 166,661 121,042 284,114 239,504
Cost of goods sold............................... 127,799 101,841 226,871 205,324
---------------- -------------- ---------------- --------------
GROSS PROFIT..................................... 38,862 19,201 57,243 34,180
Selling, general and administrative expenses..... 10,919 3,209 19,018 7,106
---------------- -------------- ---------------- --------------
OPERATING INCOME................................. 27,943 15,992 38,225 27,074
Interest expense................................. (5,840) (3,617) (11,439) (6,960)
Other expense.................................... (2,110) - (2,110) -
Other income..................................... 241 114 503 4,837
---------------- -------------- ---------------- --------------
INCOME BEFORE INCOME TAXES....................... 20,234 12,489 25,179 24,951
Income taxes..................................... 8,094 4,997 10,069 9,862
---------------- -------------- ---------------- --------------
NET INCOME................................. $ 12,140 $ 7,492 $ 15,110 $ 15,089
================ ============== ================ ==============
BASIC EARNINGS PER SHARE:
Net income per share............................. $ 0.25 $ 0.15 $ 0.32 $ 0.31
================ ============== ================ ==============
Weighted average number of shares outstanding.... 47,900 48,880 47,889 48,941
================ ============== ================ ==============
DILUTED EARNINGS PER SHARE:
Net income per share............................. $ 0.25 $ 0.15 $ 0.31 $ 0.31
================ ============== ================ ==============
Weighted average number of shares outstanding.... 48,331 49,348 48,239 49,397
================ ============== ================ ==============
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net income .......................................... $ 12,140 $ 7,492 $ 15,110 $ 15,089
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 10,227 7,278 18,418 14,241
Deferred income taxes............................... 10,006 (5,544) 7,375 (1,438)
Changes in certain assets and liabilities:
Accounts receivable............................... (9,613) (763) (9,456) (1,846)
Inventories....................................... 3,835 (26,979) 11,486 (32,612)
Other assets...................................... 1,929 131 5,187 (2,537)
Accounts payable.................................. (7,721) 130 7,104 (1,504)
Accrued expenses.................................. 612 3,298 (759) (628)
Deferred revenue.................................. - (887) - 485
------------ ------------- ------------- --------------
Net cash provided (used) in operating activities.. 21,415 (15,844) 54,465 (10,750)
------------ ------------- ------------- --------------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment........... (28,281) (57,668) (76,132) (104,535)
Other................................................. 2,369 (359) 2,235 (549)
------------ ------------ ------------ -------------
Net cash used in investing activities............. (25,912) (58,027) (73,897) (105,084)
------------ ------------ ------------ -------------
FINANCING ACTIVITIES:
Issuance of long-term debt............................ - 94,419 21,762 135,671
Repayments of long-term debt.......................... (4,001) (1,360) (5,233)(5,223) (2,693)
Purchase of treasury stock............................ - (13,668) - (14,647)
Issuance of common stock, net of expenses............. 78 121 161 150
Debt issuance costs................................... (25) (578) (39) (1,096)
------------ ------------ ------------ -------------
Net cash provided (used) in financing activities.. (3,948) 78,934 16,661 117,385
------------ ------------ ------------ -------------
Increase (decrease) in cash and cash equivalents........ (8,445) 5,063 (2,771) 1,551
Cash and cash equivalents at beginning of period........ 10,917 5,106 5,243 8,618
------------ ------------ ------------ -------------
Cash and cash equivalents at end of period.............. $ 2,472 $ 10,169 $ 2,472 $ 10,169
============ ============ ============ =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 9,128 $ 5,193 $ 17,374 $ 9,529
============ ============ ============ =============
Cash paid for taxes..................................... $ 1,475 $ 10,622 $ 1,785 $ 11,460
============ ============ ============ =============
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. These financial statements and notes should be read in conjunction
with the audited financial statements included in the Company's 1998 Annual
Report on Form 10-K.
2. INVENTORIES (in thousands)
June 30, December 31,
1999 1998
------------ ------------
Raw Materials..................... $ 57,232 $ 78,351
Supplies.......................... 34,875 26,849
Work-in-progress.................. 5,524 7,449
Finished Goods.................... 17,589 14,057
------------ ------------
$ 115,220 $ 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 June 30, Six Months Ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Basic weighted average common shares............. 47,900 48,880 47,889 48,941
Dilutive effect of stock options................. 431 468 350 456
---------- ---------- ---------- ----------
Diluted weighted average common shares .......... 48,331 49,348 48,239 49,397
========== ========== ========== ==========
4. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," was originally issued in June
1998 and then was amended by SFAS No. 137 in June 1999. SFAS No. 137 deferred
the effective date of SFAS No. 133 to all fiscal years beginning after June 15,
2000. 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.
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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 June 30,
----------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Scrap Steel Scrap Steel
Steel Substitute Total Steel Substitute Total
---------- ------------ ----------- ---------- ----------- ----------
Segment revenues from external customers.. $ 166,661 $ - $ 166,661 $ 121,042 $ - $ 121,042
Segment income (loss) from operations..... 31,067 (3,124) 27,943 16,767 (775) 15,992
Segment assets............................ 843,305 111,169 954,474 735,401 51,825 787,226
Six Months Ended June 30,
----------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Scrap Steel Scrap Steel
Steel Substitute Total Steel Substitute Total
---------- ------------ ----------- ---------- ----------- ----------
Segment revenues from external customers.. $ 284,114 $ - $ 284,114 $ 239,504 $ - $ 239,504
Segment income (loss) from operations..... 44,314 (6,089) 38,225 28,382 (1,308) 27,074
Segment assets............................ 843,305 111,169 954,474 735,401 51,825 787,226
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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 our Annual Report on
Form 10-K, for the year ended December 31, 1998 for a full understanding of our
financial condition and results of operations.
Overview
We began operations in January 1996 as a new, state-of-the-art flat-rolled
steel mini-mill. We were founded in September of 1993 by Keith E. Busse, Mark D.
Millett and Richard P. Teets, Jr. These individuals pioneered the development of
thin-slab flat-rolled compact strip production technology and directed the
construction and operation of the world's first thin-slab flat-rolled mini-mill.
Building on our extensive experience within the CSP technology arena, we were
able to construct our facility to produce steel at a greater efficiency, lower
cost and higher quality than our competitors. We accomplished this feat in a
record fourteen months, commissioning the facility in December 1995. This
original facility, located in Butler, Indiana, consisted of a hot mill with a
single twin-shell furnace battery and a single caster, tunnel furnace and
coiler. Our total capital cost was $280 million.
In the last quarter of 1997, we entered the cold-rolled and galvanized
products market with the completion of our Cold Mill, which we began
constructing during 1996. This allowed us to begin producing value-added
cold-rolled and coated steel products. Our Cold Mill has an annual capacity of
1.0 million tons and includes a continuous pickle line, a semi tandem two-stand
reversing mill, two galvanizing lines, batch anneal furnaces and a temper mill.
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During 1998, we added a second furnace battery and a second caster, tunnel
furnace and coiler to our original flat-roll mill facility located in Butler,
Indiana. These additions increased the aggregate product capacity of our hot
mill to approximately 2.2 million tons annually. During the fourth quarter of
1998, we acquired a plant site and have been doing preliminary development and
site preparation work preparatory to starting construction on a new structural
mill and rail manufacturing facility. This facility will produce a broad range
of structural products used in the construction market as well as rails for use
in the railroad industry. We estimate this facility will have an annual
production capacity of approximately 1,100,000 tons dependent upon product mix,
with a capital cost of approximately $257 million for the structural
manufacturing facility and $40 million for the rail manufacturing addition.
Construction work has been delayed due to pending appeals by certain project
opponents regarding the issuance of our air permit. We anticipate this
structural and rail mill will be operational during the fourth quarter of 2000.
During 1999, we completed the installation of a seventh rolling stand in
our flat-rolled mill, allowing us to produce even higher quality, light gauge
products. In March 1999 our newly completed $94.1 million scrap substitute
facility, Iron Dynamics, Inc. (a wholly-owned subsidiary), produced our first
direct reduced iron. The production of direct reduced iron is the first step in
the process of producing steel scrap substitute in the form of liquid pig iron.
Iron Dynamics' production of liquid pig iron represents a pioneering technology
within the steel industry. The production of a steel scrap substitute allows us
to better control the cost and availability of the primary raw material for both
the hot mill and the anticipated structural mill. Iron Dynamics is located
adjacent to our melt shop, where the liquid pig iron will be transferred in its
molten state to be used in the SDI's melt mix. Iron Dynamics has the capacity to
produce approximately 520,000 metric tonnes of direct reduced iron and
approximately 470,000 tonnes of liquid pig iron annually.
As evidenced by our history, we intend to lead in the development and use
of new technologies, while remaining the superior, low cost producer of a broad
range of steel products and serving more markets than any other mini-mill.
Net sales
Our sales are a factor of net tons shipped, product mix and related
pricing. Our net sales are determined by subtracting product returns, sales
discounts, return allowances and claims from total sales. We charge premium
prices for certain grades of steel, dimensions of product, or certain smaller
volumes, based on our cost of production. We also provide further value-added
products from our Cold Mill. These products include hot-rolled and cold-rolled
galvanized products, along with cold-rolled products, allowing us to charge
marginally higher prices compared to hot-rolled products. We have not entered
into any material fixed-price, long-term (exceeding one calendar quarter)
contracts for the sale of steel. Although fixed price contracts may reduce our
risk related to price declines, these contracts also limit our ability to take
advantage of price increases.
Cost of goods sold
Our cost of goods sold represents all direct and indirect costs associated
with the manufacture of our flat- rolled carbon steel, and hot-rolled,
cold-rolled and coated products. The principal elements of these costs are:
- Alloys - Electricity
- Natural gas - Oxygen
- Argon - Electrodes
- Steel and scrap substitutes - Depreciation
- Direct and indirect labor benefits
Selling, general and administrative expense
Selling, general and administrative expenses are comprised of all costs
associated with the sales, finance and accounting, materials and transportation,
and administrative departments. These costs include labor and benefits,
professional services, amortization of financing costs, property taxes, profit
sharing expense and start-up costs associated with new projects.
Interest expense
Interest expense consists of interest associated with our senior credit
facility and other debt agreements as described in our notes to financial
statements, net of capitalized interest costs that are related to construction
expenditures during the construction period of capital projects.
Other income (expense)
Other income consists of interest income earned on our cash balance and any
other non-operating income activity. Other expense consists of any non-operating
cost, including permanent impairments of reported investments.
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Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30,
1998
Net sales
Our net sales were $166.7 million for the three months ended June 30, 1999,
as compared to $121.0 million for the three months ended June 30, 1998, an
increase of $45.6 million or 38%. This increase was primarily attributable to
increased volumes, as markets recovered after the import crisis. Total net tons
shipped increased 182,000 tons or 56% for the second quarter of 1999 as compared
to the second quarter of 1998. This increase in shipments was the direct result
of our cold mill running at near capacity during most of the first six months in
1999. We are continuing to use a substantial portion of our hot band production
as feed stock for the cold mill (48% during 1998 and 50% during the first three
months of 1999), producing higher value-added cold rolled and coated products.
Cost of goods sold
Cost of goods sold was $127.8 million for the three months ended June 30,
1999, as compared to $101.8 million for the three months ended June 30, 1998, an
increase of $26.0 million or 25%. As a percentage of net sales, cost of goods
sold decreased 7% for the three months ended June 30, 1999, as compared to the
same period in 1998. This decrease was primarily attributable to lower scrap
costs during the second quarter of 1999. Our net yielded scrap cost was $108 per
net ton for the three months ended June 30, 1999, as compared to $149 per net
ton for the three months ended June 30, 1998, a decrease of $41 per net ton or
28%. As Iron Dynamics begins supplying us with liquid pig iron as a scrap
substitute, we anticipate additional cost savings.
Selling, general and administrative expense
Selling, general and administrative expenses were $10.9 million for the
three months ended June 30, 1999, as compared to $3.2 million for the three
months ended June 30, 1998, an increase of $7.7 million or 241%. A portion of
this increase is the result of start-up costs of $4.5 million for the second
quarter of 1999, compared to $1.1 million for the same period in 1998, an
increase of $3.4 million dollars. During 1999, these start-up costs were
associated with Iron Dynamics and the new structural mill project. Iron Dynamics
experienced an unplanned outage of its submerged arc furnace caused by a
breakout during the second quarter of 1999, resulting in additional start-up
costs related to the repair and reengineering of the facility. Iron Dynamics
anticipates a recommissioning during the third quarter of 1999.
Interest expense
Interest expense was $5.8 million for the three months ended June 30, 1999,
as compared to $3.6 million for the three months ended June 30, 1998, an
increase of $2.2 million or 61%. This increase is the direct result of increased
borrowings utilized in the financing of our expansion projects, in conjunction
with a decrease in related interest capitalization.
Other income (expense)
For the three months ended June 30, 1999, other income was $241,000 as
compared to $114,000 million for the three months ended June 30, 1998.
For the three months ended June 30, 1999, other expense was $2.1 million,
of which $1.8 million represented our entire cost-basis investment in Qualitech
Steel Corporation (Qualitech). Qualitech filed a petition for relief under
Chapter 11 of the Bankruptcy Code on March 22, 1999. It is our belief that our
investment in Qualitech was permanently and fully impaired at June 30, 1999.
Federal income taxes
For the three months ended June 30, 1999, our income tax provision was $8.1
million, as compared to $5.0 million for the same period in 1998. This tax
provision reflects income tax expense at the maximum statutory income tax rate.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Net sales
Our net sales were $284.1 million for the six months ended June 30, 1999,
as compared to $239.5 million for the six months ended June 30, 1998, an
increase of $44.6 million or 19%. This increase was primarily attributable to
increased volumes, as markets recovered after the import crisis. Total net tons
shipped increased 229,700 tons or 36% for the first half of 1999 as compared to
the first half of 1998. This increase in shipments was the direct result of our
cold mill running at near capacity during most of the first six months in 1999.
Our cold mill production increased 86% and cold mill shipments increased 63% for
the first half of 1999 as compared to same period in 1998, while our hot mill
production increased 47% with an increase in shipments of 12%. We are continuing
to use a substantial portion of
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our hot band production as feed stock for the cold mill (48% during 1998 and 51%
during the first six months of 1999), producing higher value-added cold-rolled
and coated products.
Our average price per ton decreased 13% for the first half of 1999 as
compared to the first half of 1998; however, our average price per ton increased
approximately $12 or 3.6% during the second quarter of 1999 as compared to the
first quarter of 1999. We believe that market prices reached their low during
the first quarter of 1999, and we anticipate further increases during the third
and fourth quarters of 1999. These further anticipated price increases coupled
with anticipated increasing demand for domestic steel products are expected to
result in stronger net sales in the last two quarters of 1999.
Cost of goods sold
Cost of goods sold was $226.9 million for the six months ended June 30,
1999, as compared to $205.3 million for the six months ended June 30, 1998, an
increase of $21.6 million or 10%. As a percentage of net sales, cost of goods
sold decreased 6% for the six months ended June 30, 1999, as compared to the
same period in 1998. This decrease was primarily attributable to lower scrap
costs during the first half of 1999. Our net yielded scrap cost was $111 per net
ton for the six months ended June 30, 1999, as compared to $153 per net ton for
the six months ended June 30, 1998, a decrease of $42 per net ton or 27%. As
Iron Dynamics begins supplying us with liquid pig iron as a scrap substitute, we
anticipate additional cost savings.
Selling, general and administrative expense
Selling, general and administrative expenses were $19.0 million for the six
months ended June 30, 1999, as compared to $7.1 million for the six months ended
June 30, 1998, an increase of $11.9 million. A portion of this increase is the
result of start-up costs of $8.5 million for the first half of 1999, compared to
$1.9 million for the same period in 1998, an increase of $6.6 million dollars.
These start-up costs are associated with Iron Dynamics and the new structural
mill project during 1999. Iron Dynamics suffered a breakout in its submerged arc
furnace during the second quarter of 1999, resulting in additional start-up
costs related to the repairing and re-engineering of the facility. Iron Dynamics
anticipates a restart of its scrap substitute production during the third
quarter of 1999.
Interest expense
Interest expense was $11.4 million for the six months ended June 30, 1999,
as compared to $7.0 million for the six months ended June 30, 1998, an increase
of $4.4 million or 63%. This increase is the direct result of increased
borrowings utilized in the financing of our expansion projects, in conjunction
with a decrease in related interest capitalization.
Other income (expense)
For the six months ended June 30, 1999, other income was a more normalized
$503,000 as compared to $4.8 million for the six months ended June 30, 1998, a
decrease of $4.3 million. This decrease represented 1998 non-recurring fees
received by us in connection with Nakornthai Strip Mill Public Co. Limited
(NSM). We terminated our agreements with NSM in December 1998.
For the six months ended June 30, 1999, other expense was $2.1 million, of
which $1.8 million represented our entire cost-basis investment in Qualitech
Steel Corporation (Qualitech). Qualitech filed a petition for relief under
Chapter 11 of the Bankruptcy Code on March 22, 1999. It is our belief that our
investment in Qualitech was permanently and fully impaired at June 30, 1999.
Federal income taxes
For the six months ended June 30, 1999, our income tax provision was $10.1
million, as compared to $9.9 million for the same period in 1998. This tax
provision reflects income tax expense at the statutory income tax rate.
Liquidity and Capital Resources
Our business is capital intensive and requires substantial expenditures
for, among other things, the purchase and maintenance of equipment used in our
steelmaking and finishing operations and to remain compliant with environmental
laws. Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by equity, long-term borrowings, state and local
grants and capital cost reimbursements.
For the six months ended June 30, 1999, cash provided by operating
activities was $54.5 million, as compared to $(10.8) million for the six months
ended June 30, 1998, an increase of $65.3 million. This increase was
attributable to a 68% reduction in inventories caused by elevated raw material
levels during 1998. Cash used in investing activities was $73.9 million, of
which $76.1 million represented capital investments, for the six months ended
June 30, 1999, as compared to $105.1 million, of which $104.5 million
represented capital investments, for the six months ended June 30, 1998.
Approximately 63% of our capital investment costs incurred during the first half
of 1999 were utilized in the preliminary construction of the structural mill.
Approximately 23% was utilized in the completion of various projects within our
flat roll facilities, including an iron carbide receiving system, batch anneal
furnaces and an additional rolling stand.
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Cash provided by financing activities was $16.7 million for the six months ended
June 30, 1999, as compared to $117.4 million for the six months ended June 30,
1998. This decrease in funds provided was the direct result of our utilization
of increased cash from operations in relation to our additional borrowings.
During the first half of 1999, we received approval from our bank group to
loan an additional $25.0 million to IDI for costs related to both the facility's
completion, and repairs and improvements resulting from the submerged arc
furnace breakout, which occurred in May 1999. As of June 30, 1999, we had
distributed $14.1 million of these approved funds to IDI. .
We anticipate our expansion projects will be financed through cash provided
by operating activities and borrowings from our credit facilities. At June 30,
1999, our amended credit agreement consisted of a $450.0 million credit
facility, composed of a $250.0 million five-year revolving credit facility
(which is subject to a borrowing base), and two $100.0 million five-year term
loans amortizable in equal quarterly installments beginning September 30, 2002.
Total debt as of June 30, 1999 and December 31, 1998 was $500.5 million and
$483.9 million, respectively. Current maturities of long-term debt as of June
30, 1999 and December 31, 1998 were $ 7.7 million and $6.9 million,
respectively.
We believe the liquidity of our existing cash and cash equivalents, cash
from operating activities and our available credit facilities will provide
sufficient funding for our working capital and capital expenditure requirements
during 1999. However, we may, if we believe circumstances warrant, increase our
liquidity through the issuance of additional equity or debt to finance growth or
take advantage of other business opportunities.
We have not paid dividends on our common stock.
Inflation
We believe that inflation has not had a material effect on our results of
operations.
Environmental and Other Contingencies
We have incurred, and in the future will continue to incur, capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. We believe that compliance with
current environmental laws and regulations is not likely to have a material
adverse effect on our financial condition, results of operations or liquidity;
however, environmental laws and regulations have changed rapidly in recent years
and we may become subject to more stringent environmental laws and regulations
in the future.
Recent Accounting Pronouncements
Statement of Financial Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," was originally issued in June
1998 and then was amended by SFAS No. 137 in June 1999. SFAS No. 137 deferred
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. 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. We have not yet quantified the effect,
if any, of the new standard on our financial statements.
Impact of Year 2000
The Year 2000 issue has become a general matter of concern to business, and
has been identified by SEC as a matter requiring discussion by publicly held
companies. The Year 2000 issue arises from the design of computer operating
systems and computer software programs which recognize only two digits in the
date field and, as a result, may interpret "00" incorrectly as the year 1900
rather than as the year 2000. This incorrect recognition has the potential to
generate application failures or erroneous information. This could result in
major systems failures or miscalculations within such areas as (a) manufacturing
(b) shipping and receiving of product (c) scheduling of raw materials, parts and
supplies inventories (d) billing and payments records (e) and the availability
of utilities, telephones, data and other essential services.
We are relatively new, considering our original hot mill was completed less
than five years ago. Therefore, all of our equipment and computer systems are of
recent vintage, and as such, are anticipated to require minor modifications to
become Year 2000 compliant, if they are not currently. We are still in the
process of completing our internal reviews by utilizing our internal staff and
equipment vendors. We expect to incur total costs of less than $100,000 to
address any remaining Year 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 we may incur
as a result of the failure any of our suppliers or customers, or any other party
with whom we do business, to become Year 2000 compliant.
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We are currently obtaining information from third party contacts, such as,
external service providers, significant suppliers and customers, and financial
institutions. Our objective is 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 our operations, and to assess any
possible risks of their non-compliance. At this time, we are not in a position
to fully assess this aspect of the Year 2000 problem, but we are taking the
necessary steps to determine with reasonable assurance whether our suppliers,
service providers, and customers are Year 2000 compliant and what impact this
could have by September 1999.
Based on the information currently available, we believe that the
implementation of our Year 2000 Project Plan will adequately resolve our Year
2000 issues. However, since it is not possible to anticipate all possible future
outcomes, there could be circumstances under which our business operations are
disrupted as a result of Year 2000 problems. These disruptions could be caused
by (a) the failure of our systems or equipment to operate (b) the failure of our
suppliers to provide raw materials, utilities, supplies or other products or
services which are necessary to sustain our manufacturing processes or other
business operations or (c) the failure of our customers to accept delivery of
our product. Any such disruption of our operations could have a material adverse
effect on our financial condition and operating results.
However, based on our assessment efforts to date, which does not yet
include an assessment of income and outgoing transportation issues involving
railroads and motor carriers, we believe 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 our
financial condition or results of operations. We maintain adequate on-site
quantities of raw materials, parts and supplies, in amounts sufficient to buffer
any anticipated vendor interruptions. Our manufacturing facilities are capable
of being operated manually should an unanticipated breakdown occur as a result
of an imbedded failure. Our order entry lead times are also sufficient to
analyze and repair any problem that may arise before they would manifest
themselves as loss of or delay in sales.
Year 2000 Project Plan
- ---------------------------------------------------------------------------------------------------------------------------
Resolution Phases Assessment Remediation Testing Implementation
- ---------------------------------------------------------------------------------------------------------------------------
Business systems and 100% complete 90% complete 90% complete 90% 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 90% complete 90% complete
interface; 90% 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 the consolidated statements of operations as a component of interest expense.
At June 30, 1999, no material changes had occurred related to the Company's
interest rate risk from the information disclosed in the Annual Report of Steel
Dynamics, Inc. and on Form 10-K for the year ended December 31, 1998.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 21, 1999. Proxies were
solicited for the Annual Meeting in accordance with the requirements of the
Securities Exchange Act 1934.
At the Annual Meeting, a total of 36,113,814 of the 47,898,657 shares
outstanding as of the record date of April 27, 1999 (75.4%) were present.
As a result, the appointment of Ernst & Young LLP was ratified to serve as
the Company's independent auditors for 1999, by the affirmative vote of
36,103,875 of the 36,113,814 shares voted, and all of the following
nominees for director of the Company, as described in the Proxy Statement,
were dually elected, with no more than 27,275 shares withheld from or voted
against any single nominee:
Kazuhiro Atsushi
John Bates
Keith Busse
Mark Millett
Leonard Rifkin
Joe Ruffolo
Tracy Shellabarger
William Strittmatter
Richard Teets, Jr.
Any stockholder who intends to present a proposal at the 2000 Annual
Meeting of Stockholders, and desires that such proposal be considered for
inclusion in the Company's 1999 Proxy Statement and Proxy for the Annual
Meeting, must furnish the proposal in writing to the Secretary of the Company no
later than November 30, 1999. With respect to any other stockholder proposals
that are intended to be presented at the 2000 or at any subsequent Annual
Meeting, even if not included in the Proxy Statement and Proxy for that meeting,
discretionary authority will be deemed conferred upon the Company's designated
proxy or proxies to vote upon any or all of such matters, unless the Company
receives notice of such matter no later than 45 days prior to the date on which
the Company first mailed its proxy materials for the prior year's Annual Meeting
of Stockholders. As a result, any such notice would have to be received for the
2000 Annual Meeting of Stockholders no later than April 12, 2000.
--------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
Exhibit No.
*10.1b(3) Third Amendment and Waiver to Credit Agreement
between IDI and Mellon Bank, N.A. et al., dated
June 30, 1999.
*27.1 Financial Data Schedule
(B) Reports on Form 8-K for the quarter ended June 30, 1999:
On April 19, 1999, Steel Dynamics, Inc. filed a report on Form
8-K with the Securities and Exchange Commission regarding a
change in its Certifying Accountant. A Form 8-K/A was filed on
May 20, 1999 related to the same matter.
------------------
*Filed herewith
Items 1 - 3 and Item 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.
August 10,September 1, 1999
STEEL DYNAMICS, INC.
By: /s/ TRACY L. SHELLABARGER
-----------------------------------------
Tracy L. Shellabarger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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