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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, 2000
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:
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Title of each class Name of each exchange on which registered
------------------- ------------------------------------------
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
Yes [X] No [ ]
As of November 6, 2000, Registrant had outstanding 45,502,626 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
----
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 .......... 1
Consolidated Statements of Income for the three and nine-month periods ended
September 30, 2000 and 1999 (unaudited).......................................................... 2
Consolidated Statements of Cash Flows for the three and nine-month periods ended
September 30, 2000 and 1999 (unaudited).......................................................... 3
Notes to Consolidated Financial Statements....................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 9
PART II. Other Information
Item 1. Legal Proceedings ............................................................................... 10
Item 6. Exhibits and Reports on Form 8-K................................................................. 10
Signature........................................................................................ 11
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STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
---------- -----------
(unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 4,617 $ 16,615
Accounts receivable, net................................................................ 81,330 74,642
Accounts receivable-related parties..................................................... 28,029 12,007
Inventories............................................................................. 127,023 106,742
Deferred taxes.......................................................................... 9,711 10,987
Other current assets.................................................................... 10,867 4,808
---------- ----------
Total current assets........................................................... 261,577 225,801
PROPERTY, PLANT, AND EQUIPMENT, NET.......................................................... 794,888 742,787
RESTRICTED CASH.............................................................................. 3,499 6,696
OTHER ASSETS ............................................................................... 15,699 16,272
---------- ----------
TOTAL ASSETS................................................................... $1,075,663 $ 991,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 21,041 $ 19,622
Accounts payable-related parties........................................................ 8,583 18,014
Accrued interest........................................................................ 5,631 4,941
Other accrued expenses.................................................................. 23,436 20,077
Current maturities of long-term debt.................................................... 19,010 7,921
---------- ----------
Total current liabilities...................................................... 77,701 70,575
LONG-TERM DEBT, less current maturities...................................................... 536,556 498,042
DEFERRED TAXES............................................................................... 45,112 29,774
MINORITY INTEREST............................................................................ 3,667 1,795
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares
authorized; 49,342,596 and 49,265,078 shares issued; and
45,617,596 and 47,970,978 shares outstanding, as of
September 30, 2000 and December 31, 1999, respectively.............................. 493 493
Treasury stock, at cost; 3,725,000 and 1,294,100 shares as of September 30, 2000 and
December 31, 1999, respectively..................................................... (45,406) (19,650)
Additional paid-in capital................................................................... 335,559 335,237
Retained earnings............................................................................ 121,981 75,290
---------- ----------
Total stockholders' equity..................................................... 412,627 391,370
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $1,075,663 $ 991,556
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
[CAPTION]
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Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
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NET SALES:
Unrelated parties................................... $ 129,049 $ 111,989 $ 426,625 $ 319,983
Related parties..................................... 31,216 46,735 113,549 122,855
----------- ----------- ----------- -----------
Total net sales................................. 160,265 158,724 540,174 442,838
Cost of goods sold....................................... 124,503 124,700 408,459 351,571
----------- ----------- ----------- -----------
GROSS PROFIT ........................................... 35,762 34,024 131,715 91,267
Selling, general and administrative expenses............. 12,185 10,824 40,965 29,842
----------- ----------- ----------- -----------
OPERATING INCOME......................................... 23,577 23,200 90,750 61,425
Interest expense......................................... (5,363) (5,844) (15,322) (17,283)
Other income (expense), net.............................. 216 174 (907) (1,433)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................... 18,430 17,530 74,521 42,709
Income taxes ........................................... 6,047 7,012 27,830 17,081
----------- ----------- ----------- -----------
NET INCOME.......................................... $ 12,383 $ 10,518 $ 46,691 $ 25,628
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Net income per share..................................... $ 0.27 $ 0.22 $ 0.99 $ 0.54
=========== ============ =========== ===========
Weighted average common shares outstanding............... 46,217 47,919 47,261 47,900
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net income per share..................................... $ 0.27 $ 0.22 $ 0.99 $ 0.53
=========== =========== =========== ===========
Weighted average common shares and
share equivalents outstanding....................... 46,359 48,329 47,423 48,298
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------
2000 1999 2000 1999
------------ ----------- ------------ ------------
(unaudited) (unaudited)
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OPERATING ACTIVITIES:
Net income........................................... $ 12,383 $ 10,518 $ 46,691 $ 25,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 10,866 10,194 34,223 28,613
Deferred income taxes............................. 7,235 2,794 16,614 10,169
Minority interest................................. (355) - 1,872 -
Changes in certain assets and liabilities:
Accounts receivable............................ 6,099 (7,976) (22,710) (17,432)
Inventories.................................... 4,709 383 (20,281) 11,869
Other assets................................... (5,371) (3,058) (2,556) 2,129
Accounts payable............................... (7,168) (7,255) (8,012) (151)
Accrued expenses............................... 985 5,466 4,049 4,707
----------- ----------- ----------- -----------
Net cash provided by operating activities...... 29,383 11,066 49,890 65,532
----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment.......... (30,921) (23,186) (85,771) (99,318)
Other ............................................... - 1,098 (108) 3,333
----------- ----------- ----------- -----------
Net cash used in investing activities.......... (30,921) (22,088) (85,879) (95,985)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Issuance of long-term debt........................... 19,607 20,948 66,646 42,710
Repayments of long-term debt......................... (11,120) (5,640) (17,043) (10,864)
Issuance of common stock, net of expenses and proceeds
and tax benefits from exercise of stock options... 39 263 322 424
Purchase of treasury stock........................... (12,048) - (25,756) -
Debt issuance costs.................................. - 43 (178) 4
----------- ----------- ----------- -----------
Net cash provided (used in) by financing activities (3,522) 15,614 23,991 32,274
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.......... (5,060) 4,592 (11,998) 1,821
Cash and cash equivalents at beginning of period.......... 9,677 2,472 16,615 5,243
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period................ $ 4,617 $ 7,064 $ 4,617 $ 7,064
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 10,161 $ 7,781 $ 28,254 $ 25,155
=========== =========== =========== ===========
Cash paid for taxes....................................... $ 6,730 $ 5,395 $ 17,708 $ 7,180
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Principles of Consolidation. The consolidated financial statements include the
accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries (the
company) after elimination of the significant intercompany accounts and
transactions. Minority interest represents the minority shareholders'
proportionate share in the equity or income of the company's consolidated
subsidiary, New Millennium Building Systems, LLC (NMBS).
Use of Estimates. These financial statements are prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts
that are based on management's estimates and assumptions that affect the
amounts reported in the financial statements and in the notes thereto. Actual
results may differ from those estimates. In the opinion of management, these
estimates reflect all normal recurring adjustments necessary for a fair
presentation of the interim period results. These financial statements and
notes should be read in conjunction with the audited financial statements
included in the company's 1999 Annual Report on Form 10-K.
2. INVENTORIES
Inventories are stated at lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market.
Inventories consisted of the following (in thousands):
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September 30 December 31
2000 1999
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Raw Materials................................................................................ $ 52,241 $ 46,171
Supplies..................................................................................... 41,508 39,981
Work-in-progress............................................................................. 10,517 3,754
Finished Goods............................................................................... 22,757 16,836
---------- ----------
$ 127,023 $ 106,742
========== ==========
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3. EARNINGS PER SHARE
Diluted earnings per share amounts are based upon the weighted average number
of common and common equivalent shares outstanding during the year. Common
equivalent shares are excluded from the computation in periods in which they
have an anti-dilutive effect. The difference between basic and diluted
earnings per share for the company is solely attributable to the dilutive
effect of stock options. The reconciliations of the weighted average common
shares for basic and diluted earnings per share for the three and nine months
ended September 30 are as follows (in thousands):
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<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ---------- ----------
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Basic weighted average common shares outstanding......... 46,217 47,919 47,261 47,900
Dilutive effect of stock options......................... 142 410 162 398
----------- ---------- ---------- ----------
Diluted weighted average common shares
and share equivalents outstanding..................... 46,359 48,329 47,423 48,298
=========== ========== ========== ==========
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4. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June 1998 and then was
amended by SFAS No. 137 in June 1999 and SFAS No. 138 in June 2000. SFAS No.
137 deferred the effective date of SFAS No. 133 to all fiscal years beginning
after June 15, 2000. SFAS No. 138 addressed a limited number of issues
regarding implementation difficulties. 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) is dependent upon the intended use of
the derivative and the resulting designation. Management has identified all
potential derivative instruments and is substantially complete with evaluating
possible financial statement impact. This process will be completed during the
fourth quarter of 2000. To date, management believes the impact of SFAS 133
will be immaterial to the company's financial statements.
4
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
The company has two operating segments: Steel Operations and Steel Scrap
Substitute Operations. Steel Operations include all revenues from the flat
roll mill facility, which produces and sells hot rolled, cold rolled, and
galvanized sheet steel; and also includes all start-up costs associated with
the structural and rail mill, which will produce structural steel and rail
products. Steel Scrap Substitute Operations include revenues from Iron
Dynamics, Inc., which will provide liquid pig iron to the company. In
addition, Corporate and Eliminations include certain unallocated corporate
accounts, such as SDI senior bank debt and certain other investments, which
include NMBS operations and SDI Investment 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 operating segments
are consistent with those described in Note 1 to the 1999 financial
statements. Intersegment sales and transfers are accounted for at standard
prices and are eliminated in consolidation. Segment results for the three and
nine months ended September 30, are as follows (in thousands):
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
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STEEL OPERATIONS
Net sales
External $ 155,409 $ 158,724 $ 535,318 $ 442,838
Other segments 1,418 - 2,691 -
Operating income 30,824 29,238 116,047 77,454
Assets 895,177 837,506 895,177 837,506
------------------------------------------------------------------------------------------------------------------------
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External $ - $ - $ - $ -
Other segments 205 720 5,752 1,062
Operating loss (1,856) (3,848) (9,682) (9,950)
Assets 135,943 117,296 135,943 117,296
------------------------------------------------------------------------------------------------------------------------
CORPORATE AND ELIMINATIONS
Net sales
External $ 4,856 $ - $ 4,857 $ -
Other segments (1,623) (720) (8,443) (1,062)
Operating loss (5,391) (2,190) (15,615) (6,079)
Assets 44,543 32,003 44,543 32,003
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net sales
External $ 160,265 $ 158,724 $ 540,174 $ 442,838
Operating income 23,577 23,200 90,750 61,425
Assets 1,075,663 986,805 1,075,663 986,805
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The external net sales of the company's Steel Operations include sales to
Non-U.S. companies of $938,000 and $4.7 million for the three months ended
September 30, 2000 and 1999, respectively, and $9.0 million and $5.4 million
for the nine months ended September 30, 2000 and 1999, respectively.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statement as a result of risks and
uncertainties, including those incorporated by reference herein from "Exhibit
99.1" filed with our Report on Form 10-K for the year ended December 31, 1999.
You should read this commentary in conjunction with our Annual Report on Form
10-K, for the year ended December 31, 1999 for a full understanding of our
financial condition and results of operations.
OVERVIEW
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.
In addition to our flat-rolled mini-mill, we continue to do design
modification and completion work on a second facility operated by our
subsidiary, Iron Dynamics Inc. The facility involves the pioneering of a
process to produce direct reduced iron, which we plan to convert into liquid
pig iron, a high quality, lower-cost steel scrap substitute for use in our
flat-rolled facility. During 1999, we determined that certain of Iron
Dynamics' equipment and processes would require design modifications. The
modifications are occurring throughout the second half of 2000, with
completion anticipated during December 2000.
We continue to await the conclusion of the administrative appeals process in
connection with the issuance of a required permit to enable us to commence
construction on our planned structural and rail facility located in Whitely
County, Indiana. Due to this delay within the permitting process, we
anticipate the earliest operations could begin in this facility is the first
quarter of 2002. Upon completion, this facility will be utilized for the
manufacture of structural steel beams, pilings and rails for the construction
and railroad markets, providing us an opportunity for further product
diversification and market penetration.
Our investment in New Millennium Building Systems (NMBS) also provides us the
opportunity to access new markets by providing steel joists, trusses and
girders and roof and floor decking products to the non-residential
construction arena. NMBS began commercial production in July 2000, only seven
months after the commencement of plant construction.
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
generally 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 and benefits
Steel scrap and scrap substitutes represent the most significant component of
our cost of goods sold. Natural gas is also a significant raw material
utilized at both our flat-rolled mini-mill and within the Iron Dynamics steel
scrap substitute process.
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.
6
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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 costs, including permanent impairments of reported investments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Sales. Our net sales were $160.3 million, with total shipments of 444,300
net tons for the three months ended September 30, 2000, as compared to net
sales of $158.7 million, with total shipments of 484,700 net tons for the
three months ended September 30, 1999. Even though our third quarter 2000
average price per ton was approximately $33 higher than for the same period in
1999, our average price per ton decreased approximately $21 from the second
quarter of 2000. This average pricing decrease was experienced throughout the
industry and we believe it is the direct result of weakening demand and
over-supply, caused in significant part by elevated service center inventory
levels and record high import levels.
Cost of Goods Sold. Cost of goods sold was $124.5 million for the three months
ended September 30, 2000, as compared to $124.7 million for the three months
ended September 30, 1999, a decrease of $200,000. Steel scrap represented
approximately 52% and 49% of our total cost of goods sold for the three months
ended September 30, 2000 and 1999, respectively. Our costs associated with
steel scrap averaged $5 per ton more during the third quarter of 2000 than
during the same period in 1999 and $17 per ton less than during the first
quarter of 2000. We believe we will continue to see a decline in scrap pricing
throughout the fourth quarter of 2000.
As a percentage of net sales, cost of goods sold represented approximately 78%
and 79% for the three months ended September 30, 2000 and 1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.2 million for the three months ended September
30, 2000, as compared to $10.8 million for the three months ended September 30,
1999, an increase of $1.4 million, or 13%. The increase was due in part to
costs associated with litigation regarding Nakornthai Strip Mill Public Company
Ltd. (NSM). Start-up costs related to our construction projects were $3.7
million for the three months ended September 30, 2000, as compared to $5.1
million for the three months ended September 30, 1999, a decrease of $1.4
million, or 27%.
As a percentage of net sales, selling, general and administrative expenses
represented approximately 8% and 7% for the three months ended September 30,
2000 and 1999, respectively.
Interest Expense. Net interest expense was $5.4 million for the three months
ended September 30, 2000, as compared to $5.8 million for the three months
ended September 30, 1999, a decrease of $400,000, or 7%. Due to increased
borrowings to fund our various construction projects, gross interest expense
increased 10% to $8.5 million and capitalized interest increased 63% to $3.1
million for the three months ended September 30, 2000, as compared to the same
period in 1999.
Other Income (Expense). For the three months ended September 30, 2000, other
income was $216,000, as compared to $174,000 for the three months ended
September 30, 1999, an increase of 24%.
Income Taxes. Our federal income tax provision was $6.5 million for the three
months ended September 30, 2000, as compared to $6.1 million for the same
period in 1999. This federal tax provision reflects income tax expense at the
statutory income tax rate. During the third quarter 2000, our effective state
tax rate was 4%, excluding a one-time state income tax benefit of $1.2
million, resulting from the reduction in effective tax rate applied to our
cumulative net deferred tax liability.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Our net sales were $540.2 million, with total shipments of
1,458,600 net tons for the nine months ended September 30, 2000, as compared
to net sales of $442.8 million, with total shipments of 1,360,200 net tons for
the nine months ended September 30, 1999, an increase in net sales of $97.4
million, or 22%. These increases were attributable in part to increased
volumes of 98,400 net tons, or 7%, in conjunction with an increase in our
average price per ton for the nine months ended September 20, 2000 as compared
to the same period in 1999.
Cost of Goods Sold. Cost of goods sold was $408.5 million for the nine months
ended September 30, 2000, as compared to $351.6 million for the nine months
ended September 30, 1999, an increase of $56.9 million, or 16%. Steel scrap
represented approximately 53% and 49% of our total cost of goods sold for the
nine months ended September 30, 2000 and 1999, respectively. As a percentage
of net sales, cost of goods sold represented approximately 76% and 79% for the
nine months ended September 30, 2000 and 1999, respectively, reflecting the
increase in our average price per ton and in our constant focus on production
efficiencies and cost savings.
7
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $41.0 million for the nine months ended September
30, 2000, as compared to $29.8 million for the nine months ended September 30,
1999, an increase of $11.2 million, or 38%. This increase was partially
attributable to an increase in start-up costs related to our expansion projects
and partially attributable to the cost of litigating NSM. Start-up costs
related to our structural mill project, NMBS project and IDI were $16.2 million
for the nine months ended September 30, 2000, as compared to $13.6 million for
the nine months ended September 30, 1999, an increase of $2.6 million, or 19%.
As a result of significantly improved operating results during the first three
quarters of 2000 as compared to 1999, employee performance-based incentives
also comprised approximately $3.6 million of the total selling, general and
administrative expense increase. As a percentage of net sales, selling, general
and administrative expenses represented approximately 8% and 7% for the nine
months ended September 30, 2000 and 1999, respectively.
Interest Expense. Net interest expense was $15.3 million for the nine months
ended September 30, 2000, as compared to $17.3 million for the nine months
ended September 30, 1999, a decrease of $2.0 million, or 12%. This decrease
was the direct result of increased capitalized interest costs of $2.8 million,
or 52%, offsetting interest costs which were substantially level when
comparing the first nine months of 2000 to the same period in 1999. Gross
interest expense was $23.6 million, with capitalized interest of $8.2 million
for the nine months ended September 30, 2000, as compared to gross interest
expense of $22.7 million, with capitalized interest of $5.4 million for the
same period in 1999.
Other Income (Expense). For the nine months ended September 30, 2000, other
expense was $907,000 as compared to $1.4 million for the nine months ended
September 30, 1999, a decrease of $493,000, or 35%.
Other expense for the three quarters ended September 30, 2000, includes a $1.4
million second quarter write-off of our remaining investment in NSM and for
the same period in 1999, other expense includes a $1.8 million second quarter
write-off of our entire cost-basis investment in Qualitech Steel Corporation
(Qualitech). It is our belief that our investments in NSM and Qualitech were
permanently and fully impaired at the time of write-off.
Income Taxes. Our federal income tax provision was $26.1 million for the nine
months ended September 30, 2000, as compared to $14.9 million for the same
period in 1999. This federal tax provision reflects income tax expense at the
statutory income tax rate. For the first nine months of 2000, our effective
state tax rate was 4%, excluding a one-time state income tax benefit of $1.2
million, resulting from the reduction in effective tax rate applied to our
cumulative net deferred tax liability.
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
steel-making 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, 2000, cash provided by operating
activities was $49.9 million, as compared to $65.5 million for the nine months
ended September 30, 1999, a decrease of $15.6 million. Increasing inventory
and accounts receivable levels were the primarily drivers of this decrease. We
increased steel scrap inventories to take advantage of the lower steel scrap
pricing experienced throughout the first three quarters of 2000. Cash used in
investing activities was $85.9 million, as compared to $96.0 million for the
nine months ended September 30, 2000 and 1999, respectively. Substantially all
of these funds were invested in our capital projects. Approximately 52% of our
capital investment costs incurred during the first nine months of 2000 were
utilized in site preparation and other pre-construction activities for the
structural mill. Cash provided by financing activities was $24.0 million for
the nine months ended September 30, 2000, as compared to $32.3 million for the
same period in 1999. This decrease in funds provided was the direct result of
increased steel scrap purchases and treasury stock purchases which totaled
$25.8 million during the first three quarters of 2000.
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 2000. 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
operation.
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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, apart from our
dependence on environmental construction and operating permits for our
existing and proposed manufacturing facilities, such as our planned structural
and rail mill project in Whitley County, Indiana, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In the normal course of business our market risk is limited to changes in
interest rates. We utilize long-term debt as a primary source of capital. A
portion of our debt has an interest component that resets on a periodic basis
to reflect current market conditions. We manage exposure to fluctuations in
interest rates through the use of an interest rate swap. We agree 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
income as a component of interest expense. At September 30, 2000, no material
changes had occurred related to our 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, 1999.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We incorporate by reference Part I, Item III of our 1999 Form 10-K Annual
Report, filed with the Securities and Exchange Commission on March 29, 2000,
the description of our pending litigation involving the nine related lawsuits,
aggregating some $240 million in claims, brought against us and various
investment banking firms, relating to a note offering in March 1998 by
Nakornthai Strip Mill Public Company Ltd. ("NSM") and its investment bankers
(the other co-defendants in the litigation). All pending cases have progressed
beyond the pleadings stage, and discovery is continuing in all such cases.
Our previously pending lawsuit brought by our Iron Dynamics subsidiary against
Taft Contracting Company was settled during the third quarter 2000 for less
than the amount of Iron Dynamics' retainage, resulting in a final payment to
Taft of $212,648.
A copy of the foregoing is annexed to this report as Exhibit 99.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
*27.1 Financial Data Schedule
99.2 Part I, Item III "Legal Proceedings" of Steel
Dynamics, Inc. 1999 Form 10-K Annual Report
(B) Reports on Form 8-K for the quarter ended September 30, 2000:
None
--------------------------
*Filed herewith
Items 2 - 5 of Part II are not applicable for this reporting period and have
been omitted.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, Steel Dynamics, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
November 13, 2000
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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