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, 2002
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
As of May 9, 2002, Registrant had outstanding shares of 47,382,905 Common Stock.
STEEL DYNAMICS, INC.
Table of Contents
PART I. Financial Information Statements:
Item 1. Consolidated Financial Statements
Page
----
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 .............. 1
Consolidated Statements of Income for the three months ended
March 31, 2002 and 2001 (unaudited)............................................................ 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (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
PART II. Other Information
Item 1. Legal Proceedings ............................................................................... 12
Item 6. Exhibits and Reports on Form 8-K................................................................. 12
Signature........................................................................................ 13
2
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001
---------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 32,319 $ 78,241
Accounts receivable, net................................................................ 68,508 65,589
Accounts receivable-related parties..................................................... 17,820 16,290
Inventories............................................................................. 112,356 118,368
Deferred taxes.......................................................................... 21,966 24,600
Other current assets.................................................................... 3,996 9,116
----------- -----------
Total current assets........................................................... 256,965 312,204
PROPERTY, PLANT, AND EQUIPMENT, NET.......................................................... 872,538 852,061
RESTRICTED CASH.............................................................................. 3,311 3,030
OTHER ASSETS ............................................................................... 22,760 12,803
---------- ----------
TOTAL ASSETS................................................................... $1,155,574 $1,180,098
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 33,153 $ 30,228
Accounts payable-related parties........................................................ 17,383 11,101
Accrued interest........................................................................ 2,204 4,052
Other accrued expenses.................................................................. 27,799 26,697
Current maturities of long-term debt.................................................... 8,870 46,033
---------- ----------
Total current liabilities...................................................... 89,409 118,111
LONG-TERM DEBT, less current maturities...................................................... 536,801 553,891
DEFERRED TAXES............................................................................... 58,427 62,765
MINORITY INTEREST............................................................................ 5,025 4,769
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;
49,706,131 and 49,586,473 shares issued; and 47,320,217 and 45,743,473
shares outstanding, as of March 31, 2002 and December 31, 2001, respectively...... 497 495
Treasury stock, at cost; 2,385,914 and 3,843,000 shares, at March 31, 2002
and December 31, 2001, respectively................................................. (28,889) (46,526)
Additional paid-in capital.............................................................. 343,197 337,733
Retained earnings....................................................................... 133,869 132,229
Other accumulated comprehensive loss.................................................... (4,749) (5,356)
---------- ----------
Total stockholders' equity..................................................... 443,925 418,575
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $1,155,574 $1,180,098
========== ==========
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,
2002 2001
----------- -----------
Net Sales:
Unrelated parties............................................................ $ 139,149 $ 129,266
Related parties.............................................................. 27,754 24,820
----------- -----------
Total net sales.......................................................... 166,903 154,086
Cost of goods sold................................................................ 139,529 128,523
----------- -----------
Gross profit...................................................................... 27,374 25,563
Selling, general and administrative expenses...................................... 13,088 13,802
----------- -----------
Operating Income............................................................. 14,286 11,761
Interest expense.................................................................. 4,265 4,839
Other (income) expense............................................................ 4,153 (204)
----------- -----------
Income before income taxes and extraordinary item............................ 5,868 7,126
Income taxes...................................................................... 2,200 2,743
----------- -----------
Income before extraordinary item............................................. 3,668 4,383
Extraordinary loss on debt extinguishment, net of tax benefit of $1,216........... 2,028 -
----------- -----------
Net income........................................................................ $ 1,640 $ 4,383
=========== ===========
Basic earnings per share:
Income before extraordinary items................................................. $ 0.08 $ 0.10
Extraordinary item........................................................... (0.04) -
---------- -----------
Net income........................................................................ $ 0.04 $ 0.10
========== ===========
Weighted average number of shares outstanding..................................... 46,045 45,511
=========== ===========
Diluted earnings per share:
Income before extraordinary items................................................. $ 0.08 $ 0.10
Extraordinary item........................................................... (0.04) -
---------- -----------
Net income........................................................................ $ 0.04 $ 0.10
========== ===========
Weighted average number of shares outstanding..................................... 46,348 45,710
=========== ===========
See notes to consolidated financial statements.
2
STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Operating activities:
Net income...................................................................... $ 1,640 $ 4,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on debt extinguishment.................................... 3,244 -
Depreciation and amortization................................................ 13,833 11,551
Deferred income taxes........................................................ (1,704) 894
Minority interest............................................................ 256 413
Changes in certain assets and liabilities:
Accounts receivable....................................................... (4,449) (2,526)
Inventories............................................................... 6,012 (7,742)
Other assets.............................................................. 4,588 4,869
Accounts payable.......................................................... 9,207 10,130
Accrued expenses.......................................................... (139) (4,008)
------------ ------------
Net cash provided by operating activities................................. 32,489 17,964
------------ ------------
Net cash used in investing activity: Purchases of property, plant, and equipment... (33,759) (10,353)
Financing activities:
Issuance of long-term debt...................................................... 476,149 6,299
Repayments of long-term debt.................................................... (508,403) (18,916)
Issuance of common stock, net of expenses and proceeds
and tax benefits from exercise of stock options.............................. 1,103 342
Debt issuance costs............................................................. (13,501) -
------------ ------------
Net cash used in financing activities..................................... (44,652) (12,275)
------------ ------------
Decrease in cash and cash equivalents............................................... (45,922) (4,664)
Cash and cash equivalents at beginning of period.................................... 78,241 10,184
------------ ------------
Cash and cash equivalents at end of period.......................................... $ 32,319 $ 5,520
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest.............................................................. $ 6,187 $ 9,614
============ ============
Cash paid for federal and state income taxes........................................ $ 110 $ 540
============ ============
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
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
subsidiaries.
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 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 2001 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):
March 31, December 31,
2002 2001
---------- ----------
Raw Materials................................................................................ $ 39,116 $ 44,807
Supplies..................................................................................... 42,384 42,258
Work-in-progress............................................................................. 11,272 8,512
Finished Goods............................................................................... 19,584 22,791
---------- ----------
$ 112,356 $ 118,368
========== ==========
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 months ended March 31 are as follows
(in thousands):
2002 2001
---------- ----------
Basic weighted average common shares outstanding............................................. 46,045 45,511
Dilutive effect of stock options............................................................. 303 199
---------- ----------
Diluted weighted average common shares and share equivalents outstanding..................... 46,348 45,710
========== ==========
4. 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):
2002 2001
---------- ----------
Net income available to common shareholders.................................................. $ 1,640 $ 4,383
Cumulative effect of an accounting change............................................... - (2,468)
Unrealized gain (loss) on derivative instrument......................................... 607 (1,503)
---------- ----------
Comprehensive income......................................................................... $ 2,247 $ 412
========== ==========
The company recorded a gain from hedging activities of approximately $45,000 for
the three months ended March 31, 2002, and a loss of approximately $88,000 for
the three months ended March 31, 2001.
4
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long Term Debt
On March 26, 2002, the company refinanced its existing $450.0 million senior
secured credit facility and its $45.0 million senior unsecured credit facility
with the following:
o $75.0 million in the form of a five-year revolving credit facility,
maturing March 26, 2007, which is subject to a borrowing base and bears
interest at floating rates;
o $70.0 million in the form of a five-year term A loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2007, and bearing interest at floating rates;
o $205.0 million in the form of a six-year term B loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2008, and bearing interest at floating rates;
and
o $200.0 million in the form of 9.50% seven-year senior unsecured notes
due March 15, 2009 (non-callable for four years), with interest payable
semiannually.
The new $350.0 million senior secured credit facility is secured by liens and
mortgages on substantially all of the personal and real property assets of the
company and its wholly owned subsidiaries and by pledges of all shares of
capital stock and intercompany debt held by the company and its wholly owned
subsidiaries. The new senior secured credit facility contains financial
covenants and other covenants that limit or restrict the company with respect to
its ability to make capital expenditures, incur indebtedness, and make
restricted payments or investments, among other things.
The $200.0 million 9.50% senior unsecured notes have a maturity of seven years.
The company may redeem the notes at any time on or after March 15, 2006, at a
redemption price of 104.750%, on or after March 15, 2007, at a redemption price
of 102.275%, and on or thereafter March 15, 2008, at a redemption price of
100.000%. In addition, at any time prior to March 15, 2005, the company may
redeem up to 35% of the principal amount of the notes with the net cash proceeds
of its common stock at a redemption price of 109.500% plus accrued interest up
to the redemption date, provided that certain other restrictions as described in
the indenture are met. The notes bear interest at 9.50%, payable semiannually on
each March 15 and September 15, commencing September 15, 2002.
6. Segment Information
The company has two reportable segments: steel operations and steel scrap
substitute operations. The steel operations segment includes the company's flat
rolled division and structural and rail division. The flat rolled 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 rolled division sells directly to end-users
and service centers 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 and anticipates the
commencement of structural steel production during the second quarter of 2002
and rail production during the first quarter of 2003. This facility is designed
to produce and sell 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.
Steel scrap substitute operations include the revenues and expenses associated
with the company's wholly owned subsidiary, Iron Dynamics. Since operational
start-up processes at Iron Dynamics were halted in 2001, IDI's costs are
composed of those expenses required to maintain the facility and further
evaluate the project and its related benefits.
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 joist 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, and certain other
investments.
5
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 $2.5 million and $1.6 million, for the
three months ended March 31, 2002 and 2001, respectively. Segment results for
the three months ended March 31 are as follows (in thousands):
2002 2001
------------ ------------
STEEL OPERATIONS
Net sales
External $ 146,293 $ 141,733
Other segments 11,182 5,076
Operating income 19,359 18,579
Assets 915,623 866,693
- ---------------------------------------------------------------------------------------------
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External $ - $ -
Other segments - 603
Operating loss (2,788) (3,827)
Assets 154,245 151,200
- ---------------------------------------------------------------------------------------------
ALL OTHER
Net sales
External $ 20,610 $ 12,353
Other segments 208 -
Operating loss (1,851) (2,737)
Assets 172,666 127,867
- ---------------------------------------------------------------------------------------------
ELIMINATIONS
Net sales
External $ - $ -
Other segments (11,390) (5,679)
Operating loss (434) (254)
Assets (86,960) (80,728)
- ---------------------------------------------------------------------------------------------
CONSOLIDATED
Net sales $ 166,903 $ 154,086
Operating income 14,286 11,761
Assets 1,155,574 1,065,032
- ---------------------------------------------------------------------------------------------
7. Commitments and Contingencies
During 1999, Steel Dynamics, together with a number of investment banks, was
sued for recissionary and compensatory damages of $240 million, as well as
punitive damages and attorney fees, in various state and federal courts in 9
separate but related lawsuits. The lawsuits were brought by institutional
purchasers in a 1998 note offering by certain investment banks on behalf of
Nakornthai Strip Mill Public Co. Limited, the owner and operator of a steel
mini-mill in Thailand for whom Steel Dynamics agreed to render certain
post-offering technical and operational advisory services.
During the second and third quarters of 2001, the company settled seven of the
nine pending lawsuits, and in the first quarter of 2002, the company settled an
eighth suit, in each case without any admission of liability and, to the extent
of any monetary payments, except for approximately $2.3 million (which was
appropriately recorded in the 2001 financial statements), for amounts provided
by our insurance carriers and within applicable insurance coverage. The
remaining lawsuit was settled May 6, 2002, without any admission of liability.
8. Condensed Consolidating Information
SDI Investment company (SDI Investment) is a wholly-owned subsidiary of SDI and
was incorporated in 2000. SDI Investment has 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 SDI Investment, as
the guarantor. 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 consolidated subsidiaries under the
equity method of accounting, (ii) SDI Investment, as the guarantor, (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, 2001.
6
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets (in thousands):
AS OF MARCH 31, 2002 COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
------------- ------------- --------------- ------------- ---------------
Cash.................................. $ 29,793 $ 116 $ 2,410 $ - $ 32,319
Accounts receivable................... 82,377 - 10,789 (6,838) 86,328
Inventories........................... 96,099 - 16,448 (191) 112,356
Other current assets.................. 26,029 - 267 (334) 25,962
----------- ----------- ----------- ------------ -----------
Total current assets............... 234,298 116 29,914 (7,363) 256,965
Property, plant and equipment, net.... 727,485 - 145,381 (328) 872,538
Other assets.......................... 158,026 13,930 602 (146,487) 26,071
----------- ----------- ----------- ----------- -----------
Total assets....................... $ 1,119,809 $ 14,046 $ 175,897 $ (154,178) $ 1,155,574
=========== =========== =========== =========== ===========
Accounts payable...................... $ 48,855 $ 1 $ 8,518 $ (6,838) $ 50,536
Accrued expenses...................... 27,810 - 2,193 - 30,003
Current maturities of long-term debt.. 2,360 - 6,527 (17) 8,870
----------- ----------- ----------- ------------ -----------
Total current liabilities.......... 79,025 1 17,238 (6,855) 89,409
Other liabilities..................... 78,884 - 1,564 (34) 80,414
Long-term debt........................ 517,052 - 20,289 (540) 536,801
Minority interest..................... 627 - - 4,398 5,025
Common stock.......................... 497 1 171,401 (171,402) 497
Treasury stock........................ (28,889) - - - (28,889)
Additional paid in capital............ 343,197 16 - (16) 343,197
Retained earnings..................... 134,165 14,028 (34,595) 20,271 133,869
Other accumulated comprehensive loss.. (4,749) - - - (4,749)
------------ ----------- ----------- ----------- -----------
Total stockholders' equity......... 444,221 14,045 136,806 (151,147) 443,925
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity........................... $ 1,119,809 $ 14,046 $ 175,897 $ (154,178) $ 1,155,574
=========== =========== =========== =========== ===========
AS OF DECEMBER 31, 2001
Cash.................................. $ 77,407 $ 83 $ 751 $ - $ 78,241
Accounts receivable................... 78,461 - 10,375 (6,957) 81,879
Inventories........................... 100,709 - 17,680 (21) 118,368
Other current assets.................. 32,973 (16) 1,095 (336) 33,716
----------- ----------- ----------- ----------- -----------
Total current assets............... 289,550 67 29,901 (7,314) 312,204
Property, plant and equipment, net.... 703,896 - 148,270 (105) 852,061
Other assets.......................... 90,044 7,822 1,405 (83,438) 15,833
----------- ----------- ----------- ----------- -----------
Total assets....................... $ 1,083,490 $ 7,889 $ 179,576 $ (90,857) $ 1,180,098
=========== =========== =========== =========== ===========
Accounts payable...................... $ 40,081 $ 1 $ 8,204 $ (6,957) $ 41,329
Accrued expenses...................... 28,165 - 2,585 (1) 30,749
Current maturities of long-term debt.. 2,337 - 43,696 - 46,033
----------- ----------- ----------- ----------- -----------
Total current liabilities.......... 70,583 1 54,485 (6,958) 118,111
Other liabilities..................... 61,308 - 2,728 20,716 84,752
Long-term debt........................ 532,350 - 21,876 (335) 553,891
Minority interest..................... 639 - - 4,130 4,769
Common stock.......................... 495 1 133,351 (133,352) 495
Treasury stock........................ (46,526) - - - (46,526)
Additional paid in capital............ 337,733 16 - (16) 337,733
Retained earnings..................... 132,264 7,871 (32,864) 24,958 132,229
Other accumulated comprehensive loss.. (5,356) - - - (5,356)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity......... 418,610 7,888 100,487 (108,410) 418,575
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity........................... $ 1,083,490 $ 7,889 $ 179,576 $ (90,857) $ 1,180,098
=========== =========== =========== =========== ===========
7
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income (in thousands):
FOR THE THREE MONTHS ENDED,
MARCH 31, 2002 COMBINED CONSOLIDATING
TOTAL
PARENT GUARANTOR 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... 10,551 3 2,269 265 13,088
----------- ----------- ----------- ----------- -----------
Operating income (loss)............... 15,910 (3) (1,186) (435) 14,286
Interest expense...................... 3,381 - 888 (4) 4,265
Other (income) expense................ 13,609 (9,489) (3) 36 4,153
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes,
equity in net loss of subsidiaries and
extraordinary item................ (1,080) 9,486 (2,071) (467) 5,868
Income taxes.......................... (325) 3,330 (805) - 2,200
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item
and net loss of subsidiaries.......... (755) 6,156 (1,266) (467) 3,668
Extraordinary loss on debt
Extinguishment, net of tax benefit
of $1,216.......................... 1,564 - 464 - 2,028
Equity in net income of subsidiaries.. 4,426 - - (4,426) -
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ 2,107 $ 6,156 $ (1,730) $ (4,893) $ 1,640
=========== =========== =========== =========== ===========
FOR THE THREE MONTHS ENDED,
MARCH 31, 2001
Net sales............................. $ 146,809 $ - $ 12,955 $ (5,678) $ 154,086
Cost of good sold..................... 123,791 - 10,448 (5,716) 128,523
----------- ----------- ----------- ----------- -----------
Gross profit....................... 23,018 - 2,507 38 25,563
Selling, general and administration... 8,538 13 5,251 - 13,802
----------- ----------- ----------- ----------- -----------
Operating income (loss)............... 14,480 (13) (2,744) 38 11,761
Interest expense...................... 4,628 - 476 (265) 4,839
Other (income) expense................ 8,591 (9,059) - 264 (204)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
equity in net loss of subsidiaries. 1,261 9,046 (3,220) 39 7,126
Income taxes.......................... 796 3,175 (1,228) - 2,743
----------- ----------- ----------- ----------- -----------
465 5,871 (1,992) 39 4,383
Equity in net income of subsidiaries.. 3,880 - - (3,880) -
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ 4,345 $ 5,871 $ (1,992) $ (3,841) $ 4,385
=========== =========== =========== =========== ===========
Condensed Consolidating Statements of Cash Flows (in thousands):
FOR THE THREE MONTHS ENDED
MARCH 31, 2002 COMBINED TOTAL
PARENT GUARANTOR 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
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
MARCH 31, 2001
Net cash provided by (used in) operations............ $ (7,338) $ 33,418 $ (8,116) $ 17,964
Net cash used in investing activities................ (6,551) - (3,802) (10,353)
Net Cash provided by (used in) financing activities.. 10,217 (33,440) 10,948 (12,275)
----------- ----------- ----------- ------------
Decrease in cash and cash equivalents................ (3,672) (22) (970) (4,664)
Cash and cash equivalents at beginning of year....... 8,924 40 1,220 10,184
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 5,252 $ 18 $ 250 $ 5,520
=========== =========== =========== ===========
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" and our
consolidated financial statements and notes appearing elsewhere in this filing.
OVERVIEW
We own and operate two state-of-the-art, low-cost mini-mills: a flat-rolled
mini-mill located in Butler, Indiana, with an annual production capacity of 2.2
million tons, and a newly built structural steel and rail mini-mill located in
Columbia City, Indiana, with an annual production capacity of between 1.0 and
1.3 million tons, depending on product mix.
Our Butler mini-mill produces a broad range of high quality hot-rolled,
cold-rolled and coated steel products, including a large variety of high
value-added and high margin specialty products such as thinner gauge rolled
products and galvanized products. We sell these products directly to end-users,
intermediate steel processors and steel service centers primarily in the
Midwestern United States. Our products are used in numerous industry sectors,
including the automotive, construction and commercial industries.
Our Columbia City, Indiana structural and rail mill is designed to produce
structural steel and rails at a higher quality and lower cost than comparable
mini-mills. Our capital cost for this mill is approximately $315.0 million (net
of capitalized interest), of which $260.3 million was spent as of March 31,
2002. We successfully completed our first melting and casting trials during
April 2002, and we expect to commence production of structural steel during the
remainder of the second quarter of 2002 and rails during the first quarter of
2003. Our structural steel operation is designed to produce structural steel
beams, pilings and other steel components for the construction, transportation
and industrial machinery markets. Our rail manufacturing operation is designed
to produce a variety of standard and premium grade rails, including
head-hardened rails, for the railroad industry as well as for rail contractors,
transit districts and short-line railroads.
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 and depreciation. Steel scrap
and scrap substitutes represent the most significant component of our cost of
goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses are comprised of all costs
associated with 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net Sales. Our net sales were $166.9 million, with total shipments of 561,900
net tons for the three months ended March 31, 2002, as compared to net sales of
$154.1 million, with total shipments of 482,400 net tons for the three months
ended March 31, 2001, an increase in net sales of $12.8 million, or 8%, and an
increase in total shipments of 79,500 net tons, or 16%. During the first quarter
of 2002, the average consolidated selling price per ton decreased approximately
$22, or 7%, in comparison to the same period in 2001. The increase in our first
quarter 2002 net sales in comparison to the first and fourth quarters of 2001
was driven by volume. A substantial portion of our first quarter 2002 sales were
committed during the fourth quarter 2001 at depressed pricing levels, resulting
in our first quarter average consolidated selling pricing per ton remaining flat
as compared to the fourth quarter; however, we are already experiencing
substantially higher selling prices in our order backlog for the second quarter
2002 and anticipate further increases during the third quarter 2002.
Heidtman Steel Products, Inc (or affiliates) accounted for approximately 17% and
16% of our net sales for the three months ended March 31, 2002 and 2001,
respectively.
Cost of Goods Sold. Cost of goods sold was $139.5 million for the three months
ended March 31, 2002, as compared to $128.5 million for the three months ended
March 31, 2001, an increase of $11.0 million, or 9%, which was primarily volume
related. As a percentage of net sales, cost of goods sold represented
approximately 84% and 83% for the three months ended March 31, 2002 and 2001,
respectively. Steel scrap represented approximately 43% and 44% of the total
cost of goods sold for the three months ended March 31, 2002 and 2001,
respectively. We experienced a steady decline in scrap pricing from the second
quarter of 2000 through the first quarter of 2002. The average costs associated
with steel scrap averaged $9, or 8%, per ton produced less during the first
quarter of 2002 than during the same period of 2001. We experienced a narrowing
of our gross margin throughout 2001 as our average sales price per ton decreased
more rapidly than our average scrap cost per ton, which is the most significant
single component of our cost of goods sold; however, during the first quarter of
2002 we experienced a further decrease in scrap pricing without a corresponding
decrease in our product pricing, resulting in a strengthening in our gross
margin. We anticipate a further strengthening through the third quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.1 million for the three months ended March 31,
2002, as compared to $13.8 million for the three months ended March 31, 2001, a
decrease of $714,000, or 5%. As a percentage of net sales, selling, general and
administrative expenses represented approximately 8% and 9% for the three months
ended March 31, 2002 and 2001, respectively. Start-up costs were $4.6 million,
all of which were related to construction of our structural and rail mill, for
the three months ended March 31, 2002, as compared to start-up costs of $5.1
million, of which Iron Dynamics represents $3.8 million, for the three months
ended March 31, 2001, a decrease of $552,000, or 11%.
Interest Expense. Interest expense was $4.3 million for the three months ended
March 31, 2002, as compared to $4.8 million for the three months ended March 31,
2001, a decrease of $574,000, or 12%. Gross interest expense decreased 15% to
$8.0 million and capitalized interest decreased 19% to $3.7 million, for the
three months ended March 31, 2002, as compared to the same period in 2001.
Throughout 2001 and into 2002, base interest rates, more specifically LIBOR and
prime rates steadily decreased, resulting in a 15% decrease in our gross
interest expense for the first quarter of 2002, as compared to the same period
in 2001, despite only a $1.0 million decrease in our total net debt (total debt,
including other long-term contingent liabilities, less cash and cash
equivalents).
Other (Income) Expense. Other expense was $4.2 million for the three months
ended March 31, 2002, as compared to other income of $204,000 for the three
months ended March 31, 2001, an increase in expenses of $4.4 million. During the
first quarter of 2002, we recorded settlement costs in association with the
Nakornthai Strip Mill Public Company Ltd. (NSM) related lawsuits. On May 6,
2002, we settled the remaining NSM-related lawsuit, which was outstanding on
March 31, 2002. Accordingly, we reflected a settlement cost of $4.5 million, net
of any insurance proceeds, in our financial results for the first quarter of
2002.
Income Taxes. Our income tax provision was $2.2 million, net a $1.2 million tax
benefit related to our extraordinary loss on debt extinguishment for the three
months ended March 31, 2002, as compared to $2.7 million for the same period in
2001. Our effective tax rate was 37.5% during 2002, as compared to 38.5% during
2001. During the fourth quarter of 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, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive and requires substantial expenditures for,
among other things, the purchase and maintenance of equipment used in our
steelmaking and finishing operations and to remain compliant with environmental
laws. Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity, long-term borrowings,
state and local grants and capital cost reimbursements.
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CASH FLOWS
For the three months ended March 31, 2002, cash provided by operating activities
was $32.5 million, as compared to $18.0 million for the three months ended March
31, 2001, an increase of $14.5 million, or 81%. A significant portion of this
increase was the result of a decrease in our inventory levels from December 31,
2001 to March 31, 2002, as compared to the inventory increase from December 31,
2000 to March 31, 2001. Cash used in investing activities, which represented
capital investments, was $33.8 million and $10.4 million for the three months
ended March 31, 2002 and 2001, respectively. Substantially all of our capital
investment costs incurred during the first quarter of 2002 were utilized in
construction efforts related to our structural steel and rail mill. Cash used in
financing activities was $44.7 million for the three months ended March 31,
2002, as compared to $12.3 million for the three months ended March 31, 2001, an
increase of $32.4 million. This increase in funds used in financing activities
was the result of our change in capital structure after the first quarter 2002
refinancing activities.
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, 2002, our cash position
decreased $45.9 million to $32.3 million and our working capital position
decreased $26.5 million, or 14%, to $167.6 million, as compared to December 31,
2001. As of March 31, 2002, $75.0 million under our senior secured revolving
credit facility remained undrawn and available.
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 new senior secured credit agreement,
will be adequate for the next two years for making required payments of
principal and interest on our indebtedness and for funding anticipated capital
expenditures and working capital requirements.
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 not to exceed $22.0 million.
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, such as our planned structural steel and rail mill
project in Columbia City, 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 March 31, 2002, 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, 2001.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 2002, we settled the two remaining lawsuits related
to our 1998 undertaking to provide technical and advisory services to Nakornthai
Strip Mill Public Company Limited, or NSM, a Thailand steel mini-mill. The other
seven of the nine original lawsuits related to that matter were previously
settled during 2001. Our total settlement costs for the final two settlements in
the first quarter of 2002 were $6.8 million, net of insurance, of which $2.3
million was recorded in 2001. All lawsuits were settled without any admission of
liability.
In an unrelated matter, H&M Industrial Services, Inc., formerly known as
National Industrial Services, Inc., filed an action on January 24, 2001, against
our subsidiary Iron Dynamics, Inc. in the Circuit Court of DeKalb County,
Indiana, Cause No. 17C01-0101-CP-016. They are asking for damages of
approximately $1.7 million arising out of work allegedly performed by H&M, for
which they claim they have not been paid, in connection with the construction of
Iron Dynamics' ironmaking facility. We have denied all liability to H&M for any
amount and believe that we have adequate defenses to such claims, both factually
and legally, under the governing construction contracts and documents.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
None
(B) Reports on Form 8-K for the quarter ended March 31, 2002 (item reported
date):
Iron Dynamics' Settlement Agreement.........................................................January 28, 2002
Fourth Quarter & Annual 2001 Financial Results..............................................February 5, 2002
Commencement of Refinancing.................................................................February 4, 2002
Subsequent Event Litigation Settlement......................................................March 7, 2002
- --------------------------------------------------------------------------------------------------------------------------
*Filed herewith
Items 2 through 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.
May 15, 2002
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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