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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 March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21719
STEEL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1929476
(State or other jurisdiction of incorporation or organization) (I.R.S. employer Identification No.)
6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN 46804
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (260) 459-3553
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes [X] No [ ]
As of May 1, 2003, Registrant had 47,636,097 outstanding shares of Common Stock.
STEEL DYNAMICS, INC.
Table of Contents
PART I. Financial Information
Item 1. Consolidated Financial Information:
Page
----
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002......... 1
Consolidated Statements of Income for the three month period ended
March 31, 2003 and 2002 (unaudited)..................................................... 2
Consolidated Statements of Cash Flows for the three month period ended
March 31, 2003 and 2002 (unaudited)..................................................... 3
Notes to Consolidated Financial Statements................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 11
Item 4. Controls and Procedures ................................................................... 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................... 12
Signature.................................................................................. 13
Certifications of Principal Executive Officer and Principal Financial Officer.............. 13
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2003 2002
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 3,241 $ 24,218
Accounts receivable, net ......................................................... 82,849 83,779
Accounts receivable-related parties .............................................. 39,096 34,700
Inventories ...................................................................... 167,684 153,204
Deferred taxes ................................................................... 7,081 6,680
Other current assets ............................................................. 5,859 8,322
----------- ------------
Total current assets ................................................. 305,810 310,903
Property, plant, and equipment, net .................................................... 951,368 929,338
Restricted cash ........................................................................ 2,622 2,616
Other assets ........................................................................... 36,165 32,839
----------- ------------
Total assets ......................................................... $ 1,295,965 $ 1,275,696
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 29,568 $ 27,390
Accounts payable-related parties ................................................. 32,779 18,827
Accrued interest ................................................................. 5,665 10,665
Other accrued expenses ........................................................... 38,306 44,755
Current maturities of long-term debt ............................................. 12,936 11,913
----------- ------------
Total current liabilities ............................................ 119,254 113,550
Long-term debt, less current maturities ................................................ 539,121 543,537
Deferred taxes ......................................................................... 75,975 70,330
Minority interest ...................................................................... 1,029 4,632
Other long-term contingent liabilities ................................................. 21,987 21,987
Commitments and contingencies
Stockholders' equity:
Common stock voting, $.01 par value; 100,000,000 shares authorized;
50,030,265 and 49,966,590 shares issued; and 47,631,097 and
47,580,676 shares outstanding, as of March 31, 2003 and
December 31, 2002, respectively ........................................ 500 499
Treasury stock, at cost; 2,399,168 and 2,385,914 shares, at March 31, 2003
and December 31, 2002, respectively ........................................ (29,065) (28,889)
Additional paid-in capital ....................................................... 348,056 347,050
Retained earnings ................................................................ 225,884 210,106
Other accumulated comprehensive loss ............................................. (6,776) (7,106)
----------- ------------
Total stockholders' equity ........................................... 538,599 521,660
----------- ------------
Total liabilities and stockholders' equity ........................... $ 1,295,965 $ 1,275,696
=========== ============
See notes to consolidated financial statements.
1
STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months
Ended March 31,
----------------------
2003 2002
-------- --------
Net Sales:
Unrelated parties ..................... $202,543 $139,149
Related parties ....................... 32,961 27,754
-------- --------
Total net sales ................. 235,504 166,903
Cost of goods sold .......................... 185,969 139,529
-------- --------
Gross profit ................................ 49,535 27,374
Selling, general and administrative expenses 14,975 16,332
-------- --------
Operating income ...................... 34,560 11,042
Interest expense ............................ 9,166 4,265
Other expense, net .......................... 149 4,153
-------- --------
Income before income taxes ............ 25,245 2,624
Income tax expense .......................... 9,467 984
-------- --------
Net income .................................. $ 15,778 $ 1,640
======== ========
Basic earnings per share:
Net income ............................ $ .33 $ .04
======== ========
Weighted average number of shares outstanding 47,601 46,045
======== ========
Diluted earnings per share:
Net income ............................ $ .33 $ .04
======== ========
Weighted average number of shares and share
equivalents outstanding ............... 47,786 46,348
======== ========
See notes to consolidated financial statements.
2
STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months
Ended March 31,
------------------------
2003 2002
-------- ---------
Operating activities:
Net income .............................................. $ 15,778 $ 1,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 16,276 13,833
Deferred income taxes ............................. 5,244 (1,704)
Minority interest ................................. (651) 256
Changes in certain assets and liabilities:
Accounts receivable ......................... (3,466) (4,449)
Inventories ................................. (14,480) 6,012
Other assets ................................ 753 7,833
Accounts payable ............................ 16,130 9,207
Accrued expenses ............................ (10,917) (139)
-------- ---------
Net cash provided by operating activities ......... 24,667 32,489
-------- ---------
Investing activities:
Purchases of property, plant, and equipment ............. (37,435) (33,759)
Other investing activities .............................. (8,291) --
-------- ---------
Net cash used in investing activities ............. (45,726) (33,759)
-------- ---------
Financing activities:
Issuance of long-term debt .............................. 21,712 476,149
Repayments of long-term debt ............................ (21,418) (508,403)
Issuance of common stock, net of expenses and proceeds
and tax benefits from exercise of stock options ...... 1,007 1,103
Purchase of treasury stock .............................. (176) --
Debt issuance costs ..................................... (1,043) (13,501)
-------- ---------
Net cash provided by (used in) financing activities 82 (44,652)
-------- ---------
Decrease in cash and cash equivalents ......................... (20,977) (45,922)
Cash and cash equivalents at beginning of period .............. 24,218 78,241
-------- ---------
Cash and cash equivalents at end of period .................... $ 3,241 $ 32,319
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................. $ 15,632 $ 6,187
======== =========
Cash paid for federal and state income taxes ............ $ 614 $ 110
======== =========
Issuance of common stock from treasury to
extinguish portion of long-term debt ................. $ -- $ 22,000
======== =========
See notes to consolidated financial statements.
3
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries,
including New Millennium Building Systems LLC (NMBS), 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 subsidiaries. During the first quarter of 2003, the
company increased its ownership interest in NMBS from 46.6% to 100%.
Use of Estimates. These financial statements are prepared in conformity with
accounting principles generally accepted in the United States 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 these estimates.
In the opinion of management, these financial statements 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 2002 Annual Report on
Form 10-K.
Prior Year Reclassifications. In accordance with the Financial Accounting and
Standards Board (FASB) Statement No. 145 (FAS 145), "Rescission of FASB
Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical
Corrections," the company has reclassified its extraordinary loss on
extinguishment of debt of $3.2 million, recorded in March 2002, as selling,
general and administrative expense and the corresponding income tax effect. This
reclassification had no effect on net income as previously reported.
Stock-Based Compensation. In December 2002, the FASB issued Statement No. 148
(FAS 148), "Accounting for Stock-Based Compensation Transition and Disclosure,"
which amends FASB Statement No. 123 (FAS 123), "Accounting for Stock-Based
Compensation." FAS 148 is effective for fiscal years ending after December 15,
2002, and gives further guidance regarding methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation and regarding disclosure requirements as previously defined in FAS
123. At March 31, 2003, the company had three incentive stock option plans and
accounted for these plans under the recognition and measurement principles of
Accounting and Standards Board APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under APB 25, no stock-based
employee compensation cost related to the incentive stock option plans is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of FAS 123 to
its stock-based employee compensation for the three months ended March 31 (in
thousands, except per share data):
2003 2002
---------- ----------
Net income, as reported ............................................... $ 15,778 $ 1,640
Total stock-based employee compensation expense
using the fair value based method, net of related tax effects (583) (491)
---------- ----------
Pro forma net income .................................................. $ 15,195 $ 1,149
========== ==========
Basic earnings per share:
As reported ........................................................ $ .33 $ .04
Pro forma .......................................................... .32 .03
Diluted earnings per share:
As reported ....................................................... $ .33 $ .04
Pro forma ......................................................... .32 .03
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the vesting period. No individual options were granted
during the three months ended March 31, 2003 and 2002. The fair values at the
date of grant are estimated using the Black-Scholes option-pricing model with
the following assumptions: no-dividend-yield, risk-free interest rates from 3.2%
to 7.1%, expected volatility from 30% to 62% and expected lives from two months
to eight years.
Note 2. Earnings Per Share
The company computes and presents earnings per common share in accordance with
FASB Statement No. 128, "Earnings Per Share". Basic earnings per share is based
on the weighted average shares of common stock outstanding during the period.
Diluted earnings per share assumes, in addition to the above, the weighted
average dilutive effect of common share equivalents outstanding during the
period. Common share equivalents represent dilutive stock options and dilutive
convertible subordinated debt and are excluded from the computation in periods
in which they have an anti-dilutive effect. The difference between the company's
basic and diluted earnings per
4
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share is solely attributable to stock options. The following table presents the
common share equivalents that were excluded from the company's dilutive earnings
per share calculation because they were anti-dilutive at March 31 (in
thousands):
2003 2002
------ -----
Stock options ............................ 1,609 930
Convertible subordinated debt ............ 6,763 --
------ -----
Total anti-dilutive share equivalents 8,372 930
====== =====
Note 3. Comprehensive Income
The following table presents the company's components of comprehensive income,
net of related tax, for the three months ended March 31 (in thousands):
2003 2002
-------- ------
Net income available to common shareholders ......... $ 15,778 $1,640
Unrealized gain on derivative instruments ...... 387 607
Unrealized loss on available-for-sale securities (57) --
-------- ------
Comprehensive income ................................ $ 16,108 $2,247
======== ======
The company recorded a loss from hedging activities of approximately $257,000
and a gain of approximately $45,000 for the three months ended March 31, 2003,
and 2002, respectively.
Note 4. Inventories
Inventories are stated at lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market. Inventory
consisted of the following (in thousands):
March 31, December 31,
2003 2002
-------- --------
Raw Materials .... $ 58,861 $ 53,532
Supplies ......... 56,255 52,815
Work-in-progress.. 9,921 14,835
Finished Goods ... 42,647 32,022
-------- --------
$167,684 $153,204
======== ========
Note 5. Segment Information
The company has two reportable segments: steel operations and steel scrap
substitute operations. The steel operations segment includes the company's Flat
Roll Division, Structural and Rail Division, and Bar Products Division. The Flat
Roll Division sells a broad range of hot-rolled, cold-rolled and coated steel
products, including a large variety of specialty products such as thinner gauge
hot-rolled products and galvanized products. The Flat Roll Division sells
directly to end-users and service centers, including Heidtman, located primarily
in the Midwestern United States and these products are used in numerous industry
sectors, including the automotive, construction and commercial industries. The
company began significant construction of its Structural and Rail Division in
May 2001, with structural steel production commencing in the third quarter of
2002. Construction of the rail facility is continuing, with initial test
production anticipated to commence in the second quarter of 2003. This facility
produces and sells structural steel beams, pilings, and other steel components
directly to end-users and service centers for the construction, transportation
and industrial machinery markets. This facility is also designed to produce and
sell a variety of standard and premium-grade rails for the railroad industry. On
September 9, 2002, the company purchased the special bar quality mini-mill
assets of Qualitech Steel SBQ, LLC. The company plans to invest between $70 and
$75 million of additional capital to convert the facility to the production of
merchant bars and shapes and reinforcing bar products, with an anticipated
annual production capacity of between 500,000 and 600,000 tons. The company
anticipates initial production will begin during the first quarter of 2004 and
anticipates marketing the bar products directly to end-users and to service
centers for the construction, transportation and industrial machinery markets.
Steel scrap substitute operations include the revenues and expenses associated
with the company's wholly owned subsidiary, Iron Dynamics. From the time
operations were halted in 2001 through the fourth quarter of 2002, the costs
incurred at IDI were composed of those expenses required to maintain the
facility and further evaluate the project and its related benefits. On July 10,
2002, IDI announced that it would begin experimental production trials in the
fourth quarter of 2002. These trials utilized a modified production process. IDI
successfully completed certain operating trials which may significantly reduce
the eventual per-unit cost of liquid pig iron production.
5
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional modifications and refinements required to implement this modified
production process at the IDI facility are estimated to cost approximately $14.0
million, and are expected to be completed during 2003. The company recently
announced its intent to restart IDI during the second half of 2003. Revenues
included in the category "All Other" are from two subsidiary operations that are
below the quantitative thresholds required for reportable segments. These
revenues are from the fabrication of trusses, girders, steel joists and steel
decking for the non-residential construction industry; from the further
processing, or slitting, and sale of certain steel products; and from the resale
of certain secondary and excess steel products. In addition, "All Other" also
includes certain unallocated corporate accounts, such as the company's senior
secured credit facilities, senior unsecured notes, convertible subordinated
notes and certain other investments.
The company's operations are primarily organized and managed by operating
segment. Operating segment performance and resource allocations are primarily
based on operating results before income taxes. The accounting policies of the
reportable segments are consistent with those described in Note 1 to the
financial statements. Certain amounts in 2002 have been reclassified as a result
of the company's compliance with FAS 145 as discuss in Note 1. Intersegment
sales and any related profits are eliminated in consolidation. The external net
sales of the company's steel operations include sales to non-U.S. companies of
$40.3 million and $2.5 million, for the three-months ended March 31, 2003 and
2002, respectively. The company's segment results are as follows (in thousands):
2003 2002
----------- -----------
STEEL OPERATIONS
Net sales
External $ 216,574 $ 146,293
Other segments 12,429 11,182
Operating income 41,041 19,359
Assets 1,097,589 915,623
----------- -----------
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External $ -- $ --
Other segments 2 --
Operating loss (2,094) (2,788)
Assets 151,073 154,245
----------- -----------
ALL OTHER
Net sales
External $ 18,930 $ 20,610
Other segments 117 208
Operating loss (4,741) (5,095)
Assets 151,836 172,666
----------- -----------
ELIMINATIONS
Net sales
External $ -- $ --
Other segments (12,548) (11,390)
Operating income (loss) 354 (434)
Assets (104,533) (86,960)
----------- -----------
CONSOLIDATED
Net sales $ 235,504 $ 166,903
Operating income 34,560 11,042
Assets 1,295,965 1,155,574
=========== ===========
Note 6. Condensed Consolidating Information
Certain 100%-owned subsidiaries of SDI, one of which was incorporated in 2000
and the others in 2002, have fully and unconditionally guaranteed all of the
indebtedness relating to the issuance of $200.0 million of senior notes issued
in March 2002 and due 2009. Set forth below are condensed consolidating
financial statements of the company, including the guarantors. The following
condensed consolidating financial statements present the financial position,
results of operations and cash flows of (i) SDI (in each case, reflecting
investments in its
6
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated subsidiaries under the equity method of accounting), (ii) the
guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and
(iv) the eliminations necessary to arrive at the information for the company on
a consolidated basis. The condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
the company and the company's Report on Form 10-K for the year ended December
31, 2002.
Condensed Consolidating Balance Sheets (in thousands):
AS OF MARCH 31, 2003
Combined Consolidating Total
Parent Guarantors non-guarantors adjustments consolidated
----------- ---------- -------------- ------------- ------------
Cash ........................................ $ 2,220 $ 340 $ 681 $ -- $ 3,241
Accounts receivable ......................... 121,416 -- 9,868 (9,339) 121,945
Inventories ................................. 150,576 -- 17,863 (755) 167,684
Other current assets ........................ 13,549 3 82 (694) 12,940
----------- ------- --------- --------- -----------
Total current assets ..................... 287,761 343 28,494 (10,788) 305,810
Property, plant and equipment, net .......... 759,374 49,392 142,715 (113) 951,368
Other assets ................................ 199,423 42,398 326 (203,360) 38,787
----------- ------- --------- --------- -----------
Total assets ............................. $ 1,246,558 $92,133 $ 171,535 $(214,261) $ 1,295,965
=========== ======= ========= ========= ===========
Accounts payable ............................ $ 60,553 $ 1 $ 11,132 $ (9,339) $ 62,347
Accrued expenses ............................ 41,733 18 2,708 (488) 43,971
Current maturities of long-term debt ........ 8,834 -- 4,120 (18) 12,936
----------- ------- --------- --------- -----------
Total current liabilities ................ 111,120 19 17,960 (9,845) 119,254
Other liabilities ........................... 74,728 30,065 (3,330) (3,501) 97,962
Long-term debt .............................. 523,829 -- 24,154 (8,862) 539,121
Minority interest ........................... 607 -- -- 422 1,029
Common stock ................................ 500 46,481 176,055 (222,536) 500
Treasury stock .............................. (29,065) -- -- -- (29,065)
Additional paid in capital .................. 348,056 16 -- (16) 348,056
Retained earnings ........................... 223,348 15,552 (43,093) 30,077 225,884
Other accumulated comprehensive loss ........ (6,565) -- (211) -- (6,776)
----------- ------- --------- --------- -----------
Total stockholders' equity ............... 536,274 62,049 132,751 (192,475) 538,599
----------- ------- --------- --------- -----------
Total liabilities and stockholders' equity $ 1,246,558 $92,133 $ 171,535 $(214,261) $ 1,295,965
=========== ======= ========= ========= ===========
AS OF DECEMBER 31, 2002
Cash ........................................ $ 22,530 $ 282 $ 1,406 $ -- $ 24,218
Accounts receivable ......................... 117,001 -- 9,403 (7,925) 118,479
Inventories ................................. 137,072 -- 16,868 (736) 153,204
Other current assets ........................ 15,209 50 99 (356) 15,002
----------- ------- --------- --------- -----------
Total current assets ..................... 291,812 332 27,776 (9,017) 310,903
Property, plant and equipment, net .......... 742,202 46,139 141,107 (110) 929,338
Other assets ................................ 189,807 28,454 330 (183,136) 35,455
----------- ------- --------- --------- -----------
Total assets ............................. $ 1,223,821 $74,925 $ 169,213 $(192,263) $ 1,275,696
=========== ======= ========= ========= ===========
Accounts payable ............................ $ 44,608 $ -- $ 9,533 $ (7,924) $ 46,217
Accrued expenses ............................ 52,537 -- 3,030 (147) 55,420
Current maturities of long-term debt ........ 7,292 -- 4,639 (18) 11,913
----------- ------- --------- --------- -----------
Total current liabilities ................ 104,437 -- 17,202 (8,089) 113,550
Other liabilities ........................... 72,959 22,926 (2,188) (1,380) 92,317
Long-term debt .............................. 524,733 -- 22,496 (3,692) 543,537
Minority interest ........................... 622 -- -- 4,010 4,632
Common stock ................................ 499 45,361 172,196 (217,557) 499
Treasury stock .............................. (28,889) -- -- -- (28,889)
Additional paid in capital .................. 347,050 16 -- (16) 347,050
Retained earnings ........................... 209,299 6,622 (40,276) 34,461 210,106
Other accumulated comprehensive loss ........ (6,889) -- (217) -- (7,106)
----------- ------- --------- --------- -----------
Total stockholders' equity ............... 521,070 51,999 131,703 (183,112) 521,660
----------- ------- --------- --------- -----------
Total liabilities and stockholders' equity $ 1,223,821 $74,925 $ 169,213 $(192,263) $ 1,275,696
=========== ======= ========= ========= ===========
7
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income (in thousands):
FOR THE THREE MONTHS ENDED,
MARCH 31, 2003
Combined Consolidating Total
Parent Guarantors non-guarantors adjustments consolidated
-------- ---------- -------------- ------------- ------------
Net sales ........................... $229,003 $ -- $ 19,049 $(12,548) $235,504
Cost of good sold ................... 178,840 -- 19,654 (12,525) 185,969
-------- -------- -------- -------- --------
Gross profit (loss) .............. 50,163 -- (605) (23) 49,535
Selling, general and administration . 12,735 506 2,111 (377) 14,975
-------- -------- -------- -------- --------
Operating income (loss) ............. 37,428 (506) (2,716) 354 34,560
Interest expense .................... 9,087 (233) 455 (143) 9,166
Other (income) expense .............. 13,999 (14,022) (1) 173 149
-------- -------- -------- -------- --------
Income (loss) before income taxes and
equity in net loss of subsidiaries 14,342 13,749 (3,170) 324 25,245
Income taxes ........................ 5,836 4,820 (1,189) -- 9,467
-------- -------- -------- -------- --------
8,506 8,929 (1,981) 324 15,778
Equity in net income of subsidiaries 6,948 -- -- (6,948) --
-------- -------- -------- -------- --------
Net income (loss) ................... $ 15,454 $ 8,929 $ (1,981) $ (6,624) $ 15,778
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED,
MARCH 31, 2002
Combined Consolidating Total
Parent Guarantors non-guarantors adjustments consolidated
-------- ---------- -------------- ------------- ------------
Net sales ............................ $ 157,475 $ -- $ 20,818 $(11,390) $166,903
Cost of good sold .................... 131,014 -- 19,735 (11,220) 139,529
--------- ------- -------- -------- --------
Gross profit ...................... 26,461 -- 1,083 (170) 27,374
Selling, general and administration .. 13,053 3 3,011 265 16,332
--------- ------- -------- -------- --------
Operating income (loss) .............. 13,408 (3) (1,928) (435) 11,042
Interest expense ..................... 3,381 -- 888 (4) 4,265
Other (income) expense ............... 13,609 (9,489) (3) 36 4,153
--------- ------- -------- -------- --------
Income (loss) before income taxes and
equity in net loss of subsidiaries (3,582) 9,486 (2,813) (467) 2,624
Income taxes ......................... (1,263) 3,330 (1,083) -- 984
--------- ------- -------- -------- --------
(2,319) 6,156 (1,730) (467) 1,640
Equity in net income of subsidiaries . 4,426 -- -- (4,426) --
--------- ------- -------- -------- --------
Net income (loss) .................... $ 2,107 $ 6,156 $ (1,730) $ (4,893) $ 1,640
========= ======= ======== ======== ========
Condensed Consolidating Statements of Cash Flows (in thousands):
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
Combined Total
Parent Guarantors non-guarantors consolidated
--------- ---------- -------------- ------------
Net cash provided by (used in) operations ......... $ 27,109 $ (107) $(2,335) $ 24,667
Net cash used in investing activities ............. (39,058) (3,253) (3,415) (45,726)
Net Cash provided by (used in) financing activities (8,361) 3,418 5,025 82
-------- ------- ------- --------
Increase (decrease) in cash and cash equivalents (20,310) 58 (725) (20,977)
Cash and cash equivalents at beginning of year . 22,530 282 1,406 24,218
-------- ------- ------- --------
Cash and cash equivalents at end of year ....... $ 2,220 $ 340 $ 681 $ 3,241
======== ======= ======= ========
FOR THE THREE MONTHS ENDED
MARCH 31, 2002
Combined Total
Parent Guarantors non-guarantors consolidated
--------- ---------- -------------- ------------
Net cash provided by operations ................... $ 31,273 $ 33 $ 1,183 $ 32,489
Net cash provided by (used in) investing activities (35,037) -- 1,278 (33,759)
Net Cash used in financing activities ............. (43,850) -- (802) (44,652)
-------- ---- ------- --------
Increase (decrease) in cash and cash equivalents (47,614) 33 1,659 (45,922)
Cash and cash equivalents at beginning of year . 77,407 83 751 78,241
-------- ---- ------- --------
Cash and cash equivalents at end of year ....... $ 29,793 $116 $ 2,410 $ 32,319
======== ==== ======= ========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that
involve numerous risks and uncertainties. Our actual results could differ
materially from those discussed in the forward-looking statements as a result of
these risks and uncertainties, including those set forth in our Form 10-K under
"Forward-Looking Statements" and under "Risk Factors." You should read the
following discussion in conjunction with "Selected Financial Data" set forth in
our Form 10-K and our consolidated financial statements and notes appearing
elsewhere in this filing.
BUSINESS OUTLOOK
INCOME STATEMENT CLASSIFICATION
NET SALES. Our total net 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 charge
marginally higher prices for our value-added products from our cold mill. These
products include hot-rolled and cold-rolled galvanized products and cold-rolled
products.
COST OF GOODS SOLD. Our cost of goods sold represents all direct and
indirect costs associated with the manufacture of our products. The principal
elements of these costs are steel scrap and scrap substitutes, alloys, natural
gas, argon, direct and indirect labor benefits, electricity, oxygen, electrodes,
depreciation and freight. Our metallic raw materials, steel scrap and scrap
substitutes, represent the most significant component of our cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist of all costs associated with our 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 facilities and other debt agreements as described in the notes
to our financial statements contained elsewhere in this filing, 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 balances and any other non-operating income activity, including
insurance proceeds from litigation efforts. Other expense consists of any
non-operating costs, including permanent impairments of reported investments and
settlement costs from litigation efforts.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
NET SALES. Our net sales were $235.5 million, with total shipments of
648,000 net tons during the first quarter of 2003, as compared to net sales of
$166.9 million, with total shipments of 562,000 net tons during the first
quarter of 2002, an increase in net sales of $68.6 million, or 41%, and an
increase in total shipments of 86,000 net tons, or 15%. During 2002, prices of
domestic flat-rolled steel, which accounted for 93% of our consolidated net
sales during the year, increased dramatically to more normalized levels. In
comparison to the first quarter of 2002, our average consolidated selling price
per ton increased $66, or 22%, during the first quarter of 2003. However, in
comparison to the peak of $403 per ton achieved in the fourth quarter of 2002,
our first quarter 2003 average consolidated selling price per ton decreased
approximately $40, or 10%, to $363 per ton. We experienced a softening in the
flat-rolled markets during the first quarter and anticipate a further decrease
in our consolidated selling prices during the second quarter. We believe this
weakened steel market is primarily caused by the weakened United States economy
which has severely depressed the domestic commercial construction industry. We
are cautiously optimistic, however, that with a domestic economic recovery,
pricing and order levels will increase during the third and fourth quarters of
2003.
COST OF GOODS SOLD. Cost of goods sold was $185.9 million during the
first quarter of 2003, as compared to $139.5 million during the first quarter of
2002, an increase of $46.4 million, or 33%, which was due in large part to
increased sales and production volumes. As a percentage of net sales, cost of
goods sold represented approximately 79% and 84% during the first quarter of
2003 and 2002, respectively. Our metallic raw materials represented 49% and 43%
of our cost of goods sold during the first quarter of 2003 and 2002,
respectively. Our average consolidated metallic raw material cost per net ton
charged was $26, or 29%, higher during the first quarter of 2003 than during the
same period in 2002 and substantially flat when compared to the fourth quarter
of 2002. We anticipate a decrease in our metallic raw materials costs during the
second and third quarters of 2003 due to a greater supply of scrap. During 2002,
our gross margin strengthened from the severely depressed levels experienced
during the weak steel markets of 2001. Our average product pricing increased by
a greater degree than our average metallic raw material costs and we realized
greater operating efficiencies through increased production. Our gross margin
percentage was 21% during the first quarter of 2003, a decrease of 9% from our
peak of 30% achieved during the fourth quarter of 2002. This decrease was
primarily the result of the decreased selling values experienced during the
first quarter of 2003.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $15.0 million during the first quarter of 2003, as
compared to $16.3 million during the same period in 2002, a decrease of $1.3
million, or 8%. As a percentage of net sales, selling, general and
administrative expenses represented approximately 6% and 10% during the first
quarter of 2003 and 2002, respectively. This 4% decrease was primarily related
to the contribution to net sales, without a corresponding increase to selling,
general and administrative expenses, by our Structural and Rail Division which
began commercial operations during the third quarter of 2002. In accordance with
FAS 145, we also reclassified $3.2 million of extraordinary loss from the
extinguishment of debt recorded in the first quarter of 2002, as selling,
general and administrative expense included in our operating income. This
reclassification had no effect on net income as previously reported.
INTEREST EXPENSE. Interest expense was $9.2 million during the first
quarter of 2003, as compared to $4.3 million during the first quarter of 2002,
an increase of $4.9 million, or 115%. During the first quarter of 2003, gross
interest expense increased 33% to $10.6 million and capitalized interest
decreased 61% to $1.5 million, as compared to the same period in 2002. The
increase in our gross interest expense, despite the slight decrease in our total
debt, was due to an increase in our average interest rate caused by the March
2002 refinancing, in which we accessed traditionally higher-priced public debt
markets. The decrease in our capitalized interest resulted from the reduction of
interest required to be capitalized with respect to our Structural and Rail
Division since construction was substantially complete at June 30, 2002. As we
increase our construction activities at our Bar Products Division during the
remainder of 2003, we anticipate increased levels of capitalized interest.
OTHER (INCOME) EXPENSE. Other expense was $149,000 during the first
quarter of 2003, as compared to $4.2 million during the first quarter of 2002, a
decrease of $4.0 million, resulting from a $4.5 million settlement cost recorded
in the first quarter of 2002 for the final remaining lawsuit associated with the
Nakornthai Strip Mill Public Co. Limited litigation.
INCOME TAXES. During the first quarter of 2003 and 2002, respectively,
our income tax provision was $9.5 million and $984,000. Our effective tax rate
was 37.5% during the first quarter of 2003 and 2002. During 2001, we recorded a
$1.9 million deferred tax asset valuation allowance related to foreign tax
credits that may not be fully realized. This allowance is still outstanding at
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive and requires substantial expenditures
for, among other things, the purchase and maintenance of equipment used in our
steelmaking and finishing operations and to remain in compliance 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.
CASH FLOWS. Our cash flows from operating activities primarily result
from sales of flat-rolled and structural steel products, and to a lesser extent,
sales from the fabrication of various steel products for the non-residential
construction industry. For the three months ended March 31, 2003, cash provided
by operating activities was $24.7 million, as compared to $32.5 million for the
three months ended March 31, 2002, a decrease of $7.8 million, or 24%. This
decrease was primarily driven by the Structural and Rail Division's inventory
build as it continues to ramp-up production. Cash used in investing activities,
which represented capital investments, was $45.7 million and $33.8 million for
the three months ended March 31, 2003 and 2002, respectively. During the first
quarter of 2003, we purchased the remaining 54% minority-owned interest of New
Millennium Building Systems for $8.3 million, and we purchased a galvanizing
facility in Jeffersonville, Indiana, for approximately $19.0 million. In
addition, among other investments, we expended approximately $7.0 million in
connection with the completion of our Structural and Rail Division and
approximately $3.3 million in connection with our Bar Products Division. Cash
provided by financing activities was $82,000 for the three months ended March
31, 2003, as compared to cash used in financing activities of $44.7 million for
same period in 2002. The decrease in funds due to financing activities during
2002 was the result of our change in capital structure after the first quarter
refinancing activities and the result of a decrease in debt associated with Iron
Dynamics due to an agreement with the Iron Dynamics lenders to extinguish the
debt under the Iron Dynamics credit agreement at the end of March 2002.
On January 28, 2002, we entered into an agreement with the Iron
Dynamics lenders to extinguish the debt under the Iron Dynamics credit agreement
at the end of March 2002. We complied with each of the settlement requirements,
thus constituting full and final settlement of all of Iron Dynamics' obligations
and our guarantees under the IDI credit agreement, causing the IDI credit
agreement to terminate. In meeting the requirements of the settlement agreement,
we paid $15.0 million in cash and issued an aggregate of $22.0 million, or 1.5
million shares of our common stock during March 2002. In addition, if IDI
resumes operations by January 27, 2007, and generates positive cash flow (as
defined in the settlement agreement), we are required to make contingent future
payments in an aggregate amount not to exceed $22.0 million.
LIQUIDITY. We believe the principal indicators of our liquidity are our
cash position, remaining availability under our bank credit facilities and
excess working capital. During the three months ended March 31, 2003, our cash
position decreased $21.0 million to $3.2 million and our working capital
position decreased $10.8 million, or 5%, to $186.6 million, as compared to
December 31, 2002. As of March 31, 2003, $75.0 million under our senior secured
revolving credit facility remained undrawn and available. Our ability to draw
10
down the revolver is dependent upon continued compliance with the financial
covenants and other covenants contained in the senior credit agreement.
Our ability to meet our debt service obligations and reduce our total
debt will depend upon our future performance, which in turn, will depend upon
general economic, financial and business conditions, along with competition,
legislation and regulation, factors that are largely beyond our control. In
addition, we cannot assure you that our operating results, cash flow and capital
resources will be sufficient for repayment of our indebtedness in the future.
We believe that based upon current levels of operations and anticipated
growth, cash flow from operations, together with other available sources of
funds, including additional borrowings under our senior secured credit
agreement, will be adequate for the next twelve months for making required
payments of principal and interest on our indebtedness and for funding
anticipated capital expenditures and working capital requirements. We assess our
capital spending at least quarterly and reevaluate our requirements based upon,
among other things, our current and expected operating results. We currently
anticipate our fiscal 2003 capital requirements to be approximately $127
million, of which $37 million was expended during the first quarter of 2003, and
the remaining $90 million is expected to be spent as follows:
- approximately $42 million at our Bar Products Division to
broaden its operational capabilities to include the production
of merchant shapes and reinforcing bars, as well as retain its
ability to produce special-bar-quality products;
- approximately $23 million at our Flat Roll Division, primarily
for the completion of an on-site coil-coating facility
expected to commence production in September 2003;
- approximately $12 million at our Structural and Rail Division,
primarily to allow for rail production;
- approximately $11 million at our Iron Dynamics facility for
its completion; and
- approximately $2 million in connection with various
maintenance projects
OTHER MATTERS
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, apart from our dependence on environmental construction
and operating permits for our existing and proposed manufacturing facilities
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 March 31, 2003, 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation
pursuant to Exchange Act Rule 13a-14, under the supervision and with the
participation of the our management, including our President and Chief Executive
Officer along with the our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant. Based
upon that evaluation, our President and Chief Executive Officer along with our
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in timely alerting them to material information relating to the
company (including our consolidated subsidiaries) required to be included in our
periodic SEC filings. There have been no significant changes in these internal
controls or in other factors which could significantly affect internal controls
subsequent to the date we carried out the evaluation.
11
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
99.1 Certification Required by Section 906 of the Sarbanes Oxley
Act of 2002
(B) Reports on Form 8-K for the quarter ended March 31, 2003:
Qualitech Purchase Litigation Settlement.............................. January 2, 2003
Agreement to Purchase GalvPro Assets.................................. February 4, 2003
Section 906 Annual Certifications..................................... March 28, 2003
Items 1 through 5 of Part II are not applicable for this reporting period and
have been omitted.
12
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.
May 9, 2003
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)
Certifications
I, Keith E. Busse, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steel
Dynamics, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "evaluation Date"); and
c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data ad have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
May 9, 2003
By: /s/ KEITH E. BUSSE .
------------------------------------------------
Keith E. Busse
President and Chief Executive Officer
13
I, Tracy L. Shellabarger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steel
Dynamics, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data ad have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
7. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
May 9, 2003
By: /s/ TRACY L. SHELLABARGER
------------------------------------------
Tracy L. Shellabarger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
14