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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended September 30, 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)
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<S> <C>
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)
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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 November 8, 1999, Registrant had outstanding 47,952,847 shares of Common
Stock.
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STEEL DYNAMICS, INC.
Table of Contents
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PART I. Financial Information
Item 1. Consolidated Financial Statements:
Page
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Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 .... 1
Consolidated Statements of Operations for the three and nine-month periods ended
September 30, 1999 and 1998 (unaudited).................................................. 2
Consolidated Statements of Cash Flows for the three and nine-month periods ended
September 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................................. 10
PART II. Other Information
Item 1. Legal Proceedings........................................................................ 11
Item 5. Other Information........................................................................ 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)
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<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents................................................... $ 7,064 $ 5,243
Accounts receivable, net.................................................... 62,142 42,507
Accounts receivable-related parties......................................... 21,246 23,448
Inventories ................................................................ 114,837 126,706
Deferred taxes.............................................................. 20,657 15,134
Other current assets........................................................ 7,368 9,675
-------- --------
Total current assets............................................ 233,314 222,713
PROPERTY, PLANT, AND EQUIPMENT, NET............................................... 727,060 655,872
RESTRICTED CASH................................................................... 10,100 13,057
OTHER ASSETS...................................................................... 16,331 15,828
-------- --------
TOTAL ASSETS.................................................... $986,805 $907,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 18,654 $ 24,850
Accounts payable-related parties............................................ 15,637 9,592
Accrued interest............................................................ 4,206 3,267
Other accrued expenses...................................................... 19,722 15,954
Current maturities of long-term debt........................................ 6,477 6,933
-------- --------
Total current liabilities....................................... 64,696 60,596
LONG-TERM DEBT, less current maturities........................................... 509,316 477,013
DEFERRED TAXES.................................................................... 35,676 18,796
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares
authorized; 49,243,255 and 49,158,279 shares issued and
outstanding as of September 30, 1999 and December 31, 1998,
respectively.......................................................... 492 492
Treasury stock, at cost; 1,294,100 shares as of September 30, 1999 and
December 31, 1998................................................... (19,650) (19,650)
Additional paid-in capital.................................................. 334,787 334,363
Retained earnings........................................................... 61,488 35,860
-------- --------
Total stockholders' equity...................................... 377,117 351,065
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $986,805 $907,470
======== ========
</TABLE>
See notes to consolidated financial statements.
1
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
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Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
(unaudited) (unaudited)
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NET SALES:
Unrelated parties............................ $ 111,989 $ 105,251 $ 319,983 $ 277,594
Related parties.............................. 46,735 35,707 122,855 102,868
-------------- -------------- --------------- --------------
Total net sales........................ 158,724 140,958 442,838 380,462
Cost of goods sold................................. 124,700 114,892 351,571 320,216
-------------- -------------- --------------- --------------
GROSS PROFIT....................................... 34,024 26,066 91,267 60,246
Selling, general and administrative expenses....... 10,824 5,998 29,842 13,104
-------------- -------------- --------------- --------------
OPERATING INCOME................................... 23,200 20,068 61,425 47,142
Interest expense................................... (5,844) (5,965) (17,283) (12,925)
Other income (expense)............................. 174 69 (1,433) 4,906
-------------- -------------- --------------- --------------
INCOME BEFORE INCOME TAXES......................... 17,530 14,172 42,709 39,123
Income taxes....................................... 7,012 5,674 17,081 15,536
-------------- -------------- --------------- --------------
NET INCOME................................... $ 10,518 $ 8,498 $ 25,628 $ 23,587
============== ============== =============== ==============
BASIC EARNINGS PER SHARE:
Net income per share............................... $ 0.22 $ 0.18 $ 0.54 $ 0.48
============== ============== =============== ==============
Weighted average number of shares outstanding...... 47,919 48,113 47,900 48,662
============== ============== =============== ==============
DILUTED EARNINGS PER SHARE:
Net income per share............................... $ 0.22 $ 0.18 $ 0.53 $ 0.48
============== ============== =============== ==============
Weighted average number of shares outstanding...... 48,329 48,478 48,298 49,087
============== ============== =============== ==============
</TABLE>
See notes to consolidated financial statements.
2
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
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Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- -------------- ---------------- ---------------
(unaudited) (unaudited)
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OPERATING ACTIVITIES:
Net income................................................. $ 10,518 $ 8,498 $ 25,628 $ 23,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 10,194 8,411 28,613 22,652
Deferred income taxes................................ 2,794 3,524 10,169 2,086
Changes in certain assets and liabilities:
Accounts receivable............................... (7,976) (20,363) (17,432) (22,209)
Inventories....................................... 383 (23,511) 11,869 (56,123)
Other assets...................................... (3,058) 285 2,129 (2,252)
Accounts payable.................................. (7,255) 3,271 (151) 1,767
Accrued expenses.................................. 5,466 3,102 4,707 2,472
Deferred revenue.................................. - (887) - (402)
---------------- -------------- ---------------- ---------------
Net cash provided (used) in operating activities.. 11,066 (17,670) 65,532 (28,422)
---------------- -------------- ---------------- --------------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment................ (23,186) (46,483) (99,318) (151,016)
Other...................................................... 1,098 (879) 3,333 (1,428)
---------------- -------------- ---------------- --------------
Net cash used in investing activities............. (22,088) (47,362) (95,985) (152,444)
---------------- -------------- ---------------- --------------
FINANCING ACTIVITIES:
Issuance of long-term debt................................. 20,948 63,421 42,710 199,092
Repayments of long-term debt............................... (5,640) (1,380) (10,864) (4,073)
Purchase of treasury stock................................. - (2,900) - (17,547)
Issuance of common stock, net of expenses.................. 263 - 424 150
Debt issuance costs........................................ 43 (291) 4 (1,387)
---------------- -------------- ---------------- --------------
Net cash provided by financing activities......... 15,614 58,850 32,274 176,235
---------------- -------------- ---------------- --------------
Increase (decrease) in cash and cash equivalents............. 4,592 (6,182) 1,821 (4,631)
Cash and cash equivalents at beginning of period............. 2,472 10,169 5,243 8,618
---------------- -------------- ---------------- --------------
Cash and cash equivalents at end of period................... $ 7,064 $ 3,987 $ 7,064 $ 3,987
================ ============== ================ ==============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest....................................... $ 7,781 $ 6,379 $ 25,155 $ 16,456
================ ============== ================ ==============
Cash paid for taxes.......................................... $ 5,395 $ 2,159 $ 7,180 $ 13,619
================ ============== ================ ==============
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See notes to consolidated financial statements.
3
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may also be affected by the estimates and assumptions management is
required to make. Actual results may differ from those estimates.
In the opinion of management these 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)
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September 30, December 31,
1999 1998
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Raw Materials............................................................... $ 54,782 $ 78,351
Supplies.................................................................... 36,928 26,849
Work-in-progress............................................................ 7,551 7,449
Finished Goods.............................................................. 15,576 14,057
------------- -------------
$ 114,837 $ 126,706
============= =============
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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:
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Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
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Basic weighted average common shares................. 47,919 48,113 47,900 48,662
Dilutive effect of stock options..................... 410 365 398 425
---------- ---------- ----------- -----------
Diluted weighted average common shares .............. 48,329 48,478 48,298 49,087
========== ========== =========== ===========
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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.
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.
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Three Months Ended September 30,
--------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Scrap Steel Scrap Steel
Steel Substitute Total Steel Substitute Total
----------- ----------- ----------- ----------- ----------- ----------
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Segment revenues from external customers...... $ 158,724 $ - $ 158,724 $ 140,958 $ - $ 140,958
Segment income (loss) from operations......... 27,023 (3,823) 23,200 21,298 (1,230) 20,068
Segment assets................................ 869,509 117,296 986,805 773,659 82,409 856,068
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Nine Months Ended September 30,
--------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Scrap Steel Scrap Steel
Steel Substitute Total Steel Substitute Total
----------- ----------- ----------- ----------- ----------- ----------
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Segment revenues from external customers...... $ 442,838 $ - $ 442,838 $ 380,462 $ - $ 380,462
Segment income (loss) from operations......... 71,337 (9,912) 61,425 49,680 (2,538) 47,142
Segment assets................................ 869,509 117,296 986,805 773,659 82,409 856,068
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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 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 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 are one of the fastest growing and most profitable electric furnace
mini-mill steel producers in the United States. We operate a technologically
advanced flat-rolled steel mini-mill in Butler, Indiana with an annual
production capacity of 2.2 million tons. We manufacture and market a broad range
of high quality flat-rolled carbon steel products. We sell hot rolled, cold
rolled and coated steel products, including high strength low alloy and medium
carbon steels. We sell these products directly to end users and through steel
service centers primarily in the Midwestern United States. Our products are used
for various applications, including automotive, appliance, manufacturing;
consumer durable goods, industrial machinery and various other applications.
6
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In addition to our flat-rolled mini-mill, we are completing a second
facility and are preparing to build a third. Our second facility, operated by
our subsidiary, Iron Dynamics Inc., is contiguous to our flat-rolled mini-mill.
It produces direct reduced iron, which we then convert into liquid pig iron, a
high quality steel scrap substitute for use in our flat-rolled facility. Iron
Dynamics has begun to achieve stable operating results; however, these results
are currently at significantly lower than expected volumes due to certain
problems at the submerged arc furnace. We have identified the necessary
modifications to correct the problems, which includes some redesign and
replacement of equipment. We now estimate that the necessary redesign will be
completed during midyear 2000, and we anticipate operating in a curtailed mode
until that time. Our third facility is a planned structural and rail mill to be
located in Whitley County, Indiana. Upon completion of this facility, which we
estimate to be in the first half of 2001, we plan to manufacture structural
steel beams, pilings and rails for the construction and railroad markets.
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.
In order to ensure consistent and efficient hot band plant utilization, we
have entered into a multi-year "off-take" sales and distribution agreement with
Heidtman Steel Products, Inc. which accounts for approximately 30,000 tons of
our monthly flat-rolled production at prevailing market prices. We do not enter
into material fixed price, long-term, exceeding one calendar quarter, contracts
for the sale of steel. Although fixed price contracts may reduce risks related
to price declines, these contracts may also limit our ability to take advantage
of price increases.
Cost of goods sold
Our cost of goods sold represents all direct and indirect costs associated
with the manufacture of our flat- rolled carbon steel, and hot-rolled,
cold-rolled and coated products. The principal elements of these costs are:
- Alloys - Electricity
- Natural gas - Oxygen
- Argon - Electrodes
- Steel scrap and scrap substitutes - Depreciation
- Direct and indirect labor benefits
Steel scrap and scrap substitutes represent the most significant component of
our cost of goods sold.
Selling, general and administrative expense
Selling, general and administrative expenses are comprised of all costs
associated with the sales, finance and accounting, materials and
transportation, and administrative departments. These costs include labor and
benefits, professional services, financing cost amortization, property taxes,
profit sharing expense and start-up costs associated with new projects.
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.
RESULTS OF OPERATIONS
Three months ended September 30, 1999 compared to three months ended September
30, 1998
7
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Net sales. Our net sales were $158.7 million for the three months ended
September 30, 1999, as compared to $140.9 million for the three months ended
September 30, 1998, an increase of $17.8 million, or 13%. Total net tons shipped
increased 106,000 tons, or 28%, for the third quarter of 1999 as compared to the
third quarter of 1998. These increases were attributable in part to increased
volumes, as markets recovered after the import crisis; however, our third
quarter operating results were negatively impacted by several nonrecurring,
isolated events. We experienced motor failures in our cold mill in August 1999,
resulting in lost tonnage and a lower-margin product mix. We also experienced
approximately 40 hours of electricity interruptions during July 1999, due to
excessive temperatures in the upper Midwest. Based on our estimates, we believe
the third quarter's earnings were negatively impacted by at least $.08 per share
due to these events, as well as the slower than anticipated Iron Dynamics
restart.
Cost of goods. Cost of goods sold was $124.7 million for the three months
ended September 30, 1999, as compared to $114.9 million for the three months
ended September 30, 1998, an increase of $9.8 million, or 9%. As a percentage
of net sales, cost of goods sold decreased 3% for the three months ended
September 30, 1999, as compared to the same period in 1998. This decrease was
primarily attributable to lower scrap costs during 1999. Our net yielded scrap
cost was $114 per net ton for the three months ended September 30, 1999, as
compared to $141 per net ton for the three months ended September 30, 1998, a
decrease of $27 per net ton, or 19%. 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 $10.8 million for the three months ended September
30, 1999, as compared to $6.0 million for the three months ended September 30,
1998, an increase of $4.8 million, or 80%. A portion of this increase is the
result of start-up costs of $5.1 million for the third quarter of 1999, compared
to $1.6 million for the same period in 1998, an increase of $3.5 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. During the third quarter of 1999, Iron
Dynamics identified a design flaw in its submerged arc furnace. We believe the
reengineering of the furnace will be completed during June of 2000. In the
interim we anticipate operating at a curtailed level.
Interest expense. Interest expense was $5.8 million for the three months
ended September 30, 1999, as compared to $6.0 million for the three months
ended September 30, 1998, a decrease of $200,000.
Other income (expense). For the three months ended September 30, 1999,
other income was $174,000 as compared to $69,000 for the three months ended
September 30, 1998.
Federal income taxes. For the three months ended September 30, 1999, our
income tax provision was $7.0 million, as compared to $5.7 million for the same
period in 1998. This tax provision reflects income tax expense at the
statutory income tax rate.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Net sales. Our net sales were $442.8 million for the nine months ended
September 30, 1999, as compared to $380.5 million for the nine months ended
September 30, 1998, an increase of $62.3 million, or 16%. Total net tons shipped
increased 335,000 tons, or 33%, for the nine months ended September 30, 1999, as
compared to the same period of 1998. This increase was primarily attributable to
increased volumes, as markets recovered after the import crisis. This increase
in shipments was the direct result of our cold mill running at near capacity
during most of the first half of 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
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 nine months of 1999,
as compared to the first nine months of 1998. Our average price per ton
increased approximately $12, or 4%, during the second quarter of 1999, as
compared to the first quarter of 1999, but decreased during the third quarter of
1999 as compared to the second quarter of 1999. This third quarter average price
decrease was the direct result of a lower-margin product mix caused by the
August 1999 cold mill motor failures. As a result of these failures, we
redirected our sales efforts and sold more hot-band products at lower-margin
pricing while the cold mill was being maintenanced.
Cost of goods sold. Cost of goods sold was $351.6 million for the nine
months ended September 30, 1999, as compared to $320.2 million for the nine
months ended September 30, 1998, an increase of $31.4 million, or 10%. As a
percentage of net sales, cost of goods sold decreased 5% for the nine months
ended September 30, 1999, as compared to the same period in 1998. This decrease
was primarily attributable to lower scrap costs during 1999. Our net yielded
scrap cost was $112 per net ton for the nine months ended September 30, 1999, as
compared to $148 per net ton for the nine months ended September 30, 1998, a
decrease of $36 per net ton, or 24%. 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 $29.8 million for the nine months ended September
30, 1999, as compared to $13.1 million for the nine months ended September 30,
1998, an increase of $16.7 million. A portion of this increase is the result of
start-up costs of $13.6 million for the first nine months of 1999, compared to
$3.5 million for the same period in 1998, an increase of $10.1 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
8
<PAGE> 11
additional start-up costs related to the repairing of the facility. During the
third quarter of 1999, Iron Dynamics and its equipment supplier identified a
design flaw in its submerged arc furnace. We believe the re-engineering of the
furnace will be completed midyear 2000. In the interim we anticipate operating
at a curtailed level.
Interest expense. Interest expense was $17.3 million for the nine months
ended September 30, 1999, as compared to $12.9 million for the nine months ended
September 30, 1998, an increase of $4.4 million, or 34%. 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 nine months ended September 30, 1999,
other income was $677,000, as compared to $4.9 million for the nine months ended
September 30, 1998, a decrease of $4.2 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 nine months ended September 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 nine months ended September 30, 1999, our
income tax provision was $17.1 million, as compared to $15.5 million for the
same period in 1998. This tax provision reflects income tax expense at the
statutory income tax rate.
Liquidity and Capital ResourcesLiquidity 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 operations, equity, long-term borrowings,
state and local grants and capital cost reimbursements.
For the nine months ended September 30, 1999, cash provided by operating
activities was $65.5 million, as compared to cash used in operating activities
of $28.4 million for the nine months ended September 30, 1998, an increase of
$93.9 million. This increase was attributable to a 69% reduction in inventories
caused by elevated raw material levels during 1998. Cash used in investing
activities was $96.0 million, of which $99.3 million represented capital
investments, for the nine months ended September 30, 1999, as compared to $152.4
million, of which $151.0 million represented capital investments, for the nine
months ended September 30, 1998. Approximately 66% of our capital investment
costs incurred during the first nine months of 1999 were utilized in the
preliminary construction of the structural mill. Approximately 22% 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. Cash provided by financing activities was $32.3 million for the
nine months ended September 30, 1999, as compared to $176.2 million for the nine
months ended September 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 September 30, 1999, we had
distributed $21.2 million of these approved funds to IDI.
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.
9
<PAGE> 12
Impact of Year 2000
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.
Our original hot mill was completed less than five years ago; therefore,
all of our equipment and computer systems were acquired recently, and as such,
required minimal, if any, modification to become Year 2000 compliant. We have
incurred total costs of less than $250,000 as of the date of this filing to
address our Year 2000 issues. This amount 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.
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 as of the date of this filing, 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.
<TABLE>
<CAPTION>
Year 2000 Project Plan
- -----------------------------------------------------------------------------------------------------------
Resolution Phases Assessment Remediation Testing Implementation
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business systems and 100% complete 100% complete 100% complete 100% complete
process control systems
- -----------------------------------------------------------------------------------------------------------
Operating Equipment 100% complete 100% complete 100% complete 100% complete
with Embedded Chips
or Software
- -----------------------------------------------------------------------------------------------------------
Third Party 100% for system 100% for system 100% complete 100% complete
interface; 100% for interface
all other exposures
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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 September 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.
10
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been sued in a total of seven separate but related lawsuits (one of
which is a duplicative filing), in either state or federal courts in California,
New York, New Jersey, Minnesota, and Connecticut, by various institutional
investors which purchased certain high risk notes or "junk bonds" issued in
March 1998 by two affiliates of Nakornthai Strip Mill Public Company, Limited,
or "NSM," a Thailand owner and operator of a steel mini-mill project that is
currently shut down and in the process of attempting to restructure its debt, as
part of a U.S. $452 million financing underwritten and sold to these and other
institutional investors in a non-registered "Rule 144A" offering by NatWest
Capital Markets Limited, McDonald & Company Securities, Inc., PaineWebber
Incorporated and ECT Securities Corp. Although we were neither an issuer, nor a
guarantor of the notes, nor were we the underwriters or sellers of these notes,
and while our only relationship to the NSM mini-mill project was to have been as
a technical and operational advisor and consultant from and after the close of
the financing, we have nonetheless been named as defendants on the basis of a
combination of various state or federal statutory and common law claims that
posit that the plaintiffs were misled into purchasing and overpaying for the
securities by reason of numerous misrepresentations or omissions in the offering
documents, or as a result of statements made at one or more of the "road shows"
in connection with the offering. According to the plaintiffs' allegations, they
assert, in general, that various misrepresentations or omissions in the written
offering materials (none of which were authored by us) or in statements alleged
to have been made at or in connection with one or more of the road show
presentations, implied either that we were endorsing the entire project's
operational and financial soundness, as well as the accuracy and completeness of
all of the offering materials, or that our involvement in the project as
advisors and consultants imposed a duty on our part to have conducted extensive,
pre-offering "due diligence," including a duty to warn investors.
We neither acted as nor were noted in NSM's Offering Memorandum, or elsewhere,
as an expert rendering any kind of report on or evaluation of the pre-offering
technical or operational status of the Thai mini-mill project.
An aggregate of approximately U.S. $203 million of rescissionary and related
damage claims have been asserted in these seven lawsuits. It is our opinion that
the sudden bunching of these lawsuits reflects various anticipated statute of
limitations concerns by these note purchasers that were associated with
mid-October 1999.
We do not believe that we have any liability to these plaintiffs or to any other
note purchaser in connection with the NSM transaction and will vigorously defend
ourselves in these lawsuits. We believe that the plaintiffs in these lawsuits
have mischaracterized our entire role and relationship to the NSM project and
that there is nothing in any of NSM's or the underwriters' offering materials,
nor anything stated or implied by our president, Keith E. Busse, at any road
show, that supports the plaintiffs' complaint allegations. We continue to be
perplexed and dismayed that we have been named as defendants in these lawsuits
and that certain of our post-offering advisory reports to NSM's management and
board of various start-up, operational and management problems that we observed
at the mill after the offering and once our people began to perform their
services, have been mischaracterized as "admissions" that the underlying source
of these problems were fundamental to the offering and constituted fraud that we
should have not only discovered but warned investors about prior to the
offering. We do not believe that the law or the facts will support these
conclusions.
Our sole and only relationship with NSM was pursuant to a written Management
Advisory and Technical Assistance Agreement and a written Reciprocal License and
Technology Sharing Agreement, both dated March 12, 1998, which were entered into
concurrently with the closing of the offering and which make manifest that we
undertook no "due diligence" role vis-a-vis NSM, the underwriters or the
investors. We believe that the various plaintiffs attempt to characterize us as
an endorser of all aspects of the project, or as a virtual guarantor to these
plaintiffs, is misplaced.
The seven pending lawsuits include Farallon Capital Partners, LP, et al v.
Gleacher & Co., Inc., et al filed in the Superior Court of the State of
California for the County of Los Angeles - Central District in August 1999 as
Case No. BC 215260 (involving a $33 million claim); Merrill Lynch Global
Allocation Fund, Inc., et al v. Natwest Finance, Inc., et al filed in the
Superior Court of New Jersey, Law Division - Middlesex County, as Case No.
MID-L-8457-99 in September 1999 (involving an $85 million claim), which also
names a number of individuals as defendants, including our president, Keith E.
Busse; a duplicative lawsuit covering approximately half of the claims in the
Merrill Lynch New Jersey lawsuit, filed in the Superior Court for the Judicial
District of Fairfield at Bridgeport, Connecticut, also in September 1999, under
the caption Turnberry Capital Partners, LP, et al v. Natwest Finance, Inc. et
al, which we anticipate will either be dismissed in its entirety or, if it
proceeds, would transfer $42 million of the Merrill Lynch claims to Turnberry
and would reduce the claim in the Merrill Lynch New Jersey litigation to $43
million; Zuri-Invest AG v. Nat West Finance, Inc., et al, filed in the United
States District Court for the District of Minnesota, Fourth Division, as Civil
File No. 99-CV-1452 DWF/AJB in September 1999 (involving an approximate $2
million claim); IDS Bond Fund, Inc., et al v. Gleacher Natwest, Inc., et al,
also filed in the United States District Court for the District of Minnesota,
Fourth Division, as Civil File No. 99-116 MJD/JGL (involving a $62 million
claim); Gabriel Capital, LP, et al v. Natwest Finance, Inc., et al, filed in the
United States District Court for the Southern District of New York in October
1999 as Cause No. 99-CV-10488 (SAS) (involving an approximate $15 million
claim); and Legg Mason Income Trust, Inc., et al v. Gleacher & Co., Inc., et al,
filed in October 1999 in the Superior Court of the State of California for the
County of Los Angeles - Central District as Case No. BC 218294 (a $5 million
claim).
11
<PAGE> 14
We have thus far filed a motion to dismiss in the IDS Bond Fund, Inc. Minnesota
federal court litigation, which has been fully briefed and argued and is
awaiting the Court's ruling, and we have filed a demurrer, the functional
equivalent of a motion to dismiss, in the Farallon Capital Partners, LP
California state court litigation, which has not yet been fully briefed or
argued. We contemplate filing similar motions in the other pending lawsuits. We
believe that these motions have merit, but, if the courts in one or more of
these cases overrule our preliminary motions, we believe that the facts as
developed will subsequently enable us to file additional substantial and
dispositive pretrial motions in most if not all of these cases and will in any
event vindicate our position.
There is also a peripheral lawsuit pending in the Court of Common Pleas of
Cuyahoga County (Cleveland) Ohio, as Case No. 385421, in which John W. Schultes,
the former president and chief executive officer of NSM, has sued both McDonald
and us for damages "in excess of $25,000," alleging that we bear contractual
responsibility for causing his termination of employment and that we slandered
his reputation. We have filed a motion to dismiss on jurisdictional grounds,
which has been briefed but not yet argued.
ITEM 5. OTHER INFORMATION
In August 1999, we amended Section 3.2 of our Bylaws to increase the number of
directors to 10. The Board of Directors also appointed Dr. Jurgen Kolb, a
managing director of Salzgitter AG, a steel manufacturer, and a former member of
our Board of Directors, to fill the vacancy until the next annual meeting of the
stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
*27.1 Financial Data Schedule
(B) Reports on Form 8-K for the quarter ended September 30, 1999:
None
---------------------------
*Filed herewith
Items 2 - 4 of Part II are not applicable for this reporting period and have
been omitted.
12
<PAGE> 15
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, 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)
13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,064,206
<SECURITIES> 0
<RECEIVABLES> 83,387,714
<ALLOWANCES> 0
<INVENTORY> 114,836,956
<CURRENT-ASSETS> 233,313,339
<PP&E> 824,727,502
<DEPRECIATION> 97,667,044
<TOTAL-ASSETS> 986,804,823
<CURRENT-LIABILITIES> 64,695,899
<BONDS> 0
0
0
<COMMON> 492,320
<OTHER-SE> 377,116,839
<TOTAL-LIABILITY-AND-EQUITY> 986,804,823
<SALES> 442,836,826
<TOTAL-REVENUES> 442,836,826
<CGS> 351,571,401
<TOTAL-COSTS> 29,841,030
<OTHER-EXPENSES> 1,432,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,283,323
<INCOME-PRETAX> 42,709,046
<INCOME-TAX> 17,081,391
<INCOME-CONTINUING> 25,627,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,627,654
<EPS-BASIC> .54
<EPS-DILUTED> .53
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