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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, 1998
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 (I.R.S. employer
of incorporation or organization) Identification No.)
4500 COUNTY ROAD 59, BUTLER, IN 46721
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (219) 868-8000
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 14, 1998, Registrant had outstanding 49,008,120 shares of Common
Stock.
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STEEL DYNAMICS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Page
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Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 .............. 1
Consolidated Statements of Operations for the three month periods ended
March 31, 1998 and 1997 (unaudited)............................................................ 2
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1998 and 1997 (unaudited)............................................................ 3
Notes to Consolidated Financial Statements....................................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................... 5
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 7
SIGNATURE........................................................................................ 7
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STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 5,106 $ 8,618
Accounts receivable, net .................................................. 35,897 33,465
Accounts receivable-related parties ....................................... 9,861 11,210
Inventories ............................................................... 65,796 60,163
Deferred taxes ............................................................ 18,379 19,688
Other current assets ...................................................... 4,826 2,158
--------- ---------
Total current assets ............................................. 139,865 135,302
PROPERTY, PLANT, AND EQUIPMENT, NET ............................................ 531,939 491,859
OTHER ASSETS ................................................................... 29,940 13,721
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TOTAL ASSETS ..................................................... $ 701,744 $ 640,882
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 36,740 $ 39,347
Accounts payable-related parties .......................................... 16,325 15,352
Accrued interest .......................................................... 2,420 2,319
Other accrued expenses .................................................... 9,343 13,366
Current maturities of long-term debt ...................................... 6,332 6,144
--------- ---------
Total current liabilities ........................................ 71,160 76,528
LONG-TERM DEBT, less current maturities ........................................ 253,344 213,397
DEFERRED REVENUE ............................................................... 16,840
DEFERRED TAXES ................................................................. 16,159 13,362
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares authorized;
49,136,704 and 49,131,273 shares issued and outstanding as of
March 31, 1998 and December 31, 1997, respectively .................. 491 491
Treasury stock, at cost; 135,000 and 75,000 shares as of March 31, 1998 and
December 31, 1997, respectively ..................................... (2,215) (1,236)
Additional paid-in capital ................................................ 334,193 334,164
Retained earnings ......................................................... 11,772 4,176
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Total stockholders' equity ....................................... 344,241 337,595
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 701,744 $ 640,882
========= =========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
--------- ---------
(UNAUDITED) (UNAUDITED)
NET SALES:
Unrelated parties ..................... $ 87,615 $ 52,165
Related parties ....................... 30,847 45,894
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Total net sales ................... 118,462 98,059
Cost of goods sold ......................... 103,483 73,834
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GROSS PROFIT ............................... 14,979 24,225
Selling, general and administrative expenses 3,897 5,323
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OPERATING INCOME ........................... 11,082 18,902
Interest expense ........................... (3,343) (2,401)
Other income ............................... 4,723 752
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INCOME BEFORE INCOME TAXES ................. 12,462 17,253
Income taxes ............................... 4,866 2,668
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NET INCOME ................................. $ 7,596 $ 14,585
========= =========
BASIC EARNINGS PER SHARE:
Net income per share ....................... $ .16 $ .30
========= =========
DILUTED EARNINGS PER SHARE:
Net income per share ....................... $ .15 $ .30
========= =========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- --------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income ...................................................................... $ 7,596 $ 14,585
Adjustments to reconcile net income to net cash provided in operating activities:
Depreciation and amortization ............................................... 6,963 5,691
Foreign currency gain ....................................................... (92)
Deferred taxes .............................................................. 4,106 2,475
Changes in certain assets and liabilities:
Accounts receivable .................................................... (1,083) (8,791)
Inventories ............................................................ (5,633) 19,396
Other assets ........................................................... (2,668) 512
Accounts payable ....................................................... (1,634) 3,140
Accrued expenses ....................................................... (3,924) 1,126
Deferred revenue ....................................................... 1,372
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NET CASH PROVIDED IN OPERATING ACTIVITIES .......................... 5,095 38,042
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INVESTING ACTIVITIES:
Purchases of property, plant, and equipment ..................................... (46,868) (46,330)
Other ........................................................................... (190) (1)
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NET CASH USED IN INVESTING ACTIVITIES .............................. (47,058) (46,331)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt ...................................................... 41,252
Repayments of long-term debt .................................................... (1,333) (1,131)
Purchase of treasury stock ...................................................... (979)
Issuance of common stock, net of expenses ....................................... 29 150
Debt issuance costs ............................................................. (518) (11)
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NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES ................... 38,451 (992)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (3,512) (9,281)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................................... 8,618 57,460
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 5,106 $ 48,179
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................... $ 4,336 $ 3,696
======== ========
Cash paid for taxes .................................................................. $ 838 $
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SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Investment in Nakornthai Strip Mill received in exchange for the right to use
SDI technology .................................................................. $ 15,468 $
======== ========
See notes to consolidated financial statements.
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may also be affected by the estimates and assumptions management is
required to make. Actual results may differ from those estimates.
In the opinion of management these estimates reflect all adjustments, consisting
of only normal recurring accruals, including elimination of all significant
intercompany balances and transactions, which are necessary to a fair statement
of the results for the interim periods covered by such statements. Certain
amounts from prior year financial statements have been reclassified to conform
to the current year presentation. These financial statements and notes should be
read in conjunction with the audited financial statements included in the
Company's 1997 Annual Report on Form 10-K.
2. INVENTORIES (in thousands)
March 31, December 31,
1998 1997
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Raw Materials ...................... $29,106 $22,851
Supplies ........................... 23,721 17,861
Work-in-progress ................... 3,296 6,656
Finished Goods ..................... 9,673 12,795
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$65,796 $60,163
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3. EARNINGS PER SHARE (in thousands)
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
March 31,
----------------------
1998 1997
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Basic weighted average common shares ........... 49,002 47,838
Dilutive effect of stock options ............... 449 495
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Diluted weighted average common shares ......... 49,451 48,333
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4. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 130, "Comprehensive Income", which requires that separate
disclosure of certain items, including foreign currency translation adjustments
and gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. It has
been determined that the Company currently has no amounts which require
classification under comprehensive income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales increased to $118.5 million in the first quarter of 1998 from $98.1
million in the first quarter of 1997, a 21% increase. The Company shipped 15%
more tons in the first quarter of 1998 as compared to the first quarter of 1997.
During 1997, the Company began producing and shipping value-added Cold Mill
products including pickled and oiled coils, cold-rolled coils, hot-rolled
galvanized coils and cold-rolled galvanized coils. During the first quarter of
1998, the Company shipped 168,330 tons of hot band and 153,379 tons of Cold Mill
product. Shipments of Cold Mill product did not begin until the third quarter of
1997 (44,817 tons).
Cost of Goods Sold
For the first quarter of 1998 and 1997, total cost of goods sold were $103.5
million and $73.8 million, respectively. Gross margin for the first quarter of
1998 and 1997 was $15.0 million and $24.2 million, respectively. As a percentage
of net sales, cost of goods sold was 87% and 75%, respectively. The $40 per ton
decrease in gross margin is primarily attributable to a $25 per ton decrease in
total per ton pricing in conjunction with a $11 per ton increase in scrap costs.
Selling, General and Administrative
Selling, general and administrative expense was $3.9 million and $5.3 million
for the first quarter of 1998 and 1997, respectively. The decrease in selling,
general and administrative expense is primarily due to the reduction in start-up
costs related to expansion projects and the reduction of amortization expense as
a result of the amended credit agreement that was finalized in the second
quarter of 1997.
During the first quarter of 1998, the Company entered into a ten year Reciprocal
License and Technology Sharing Agreement (the "License Agreement") with
Nakornthai Strip Mill Public Co. Limited (NSM) providing NSM with the right to
use the Company's technology in exchange for shares and warrants of NSM stock
valued at $15.5 million. The Company's ownership in NSM is recorded in Other
Assets at its estimated fair value. Income relating to the License Agreement was
deferred and is being recognized in income ratably over the ten year term of the
agreement. Concurrently, the Company entered into a ten year Management Advisory
and Technical Advisory Agreement to provide training and advice to a management
company under contract with NSM to manage NSM's mill in return for $2.0 million
annually. Such amount is payable in advance and is being recognized in income
ratably throughout each year of service.
Interest Expense
Interest expense totaled $3.3 million and $2.4 million for the first quarter of
1998 and 1997, respectively. The additional interest expense is a result of
additional borrowings to finance the expansion projects along with decreased
capitalized interest.
Other Income
Other income was $4.7 million and $1.0 million for the first quarter of 1998 and
1997, respectively. The increase in Other Income is primarily attributable to
nonrecurring services provided by the Company in connection with the NSM
transaction.
Taxes
The provision for income taxes for the first quarter of 1998 and 1997, was $4.9
million and $2.7 million, respectively. The tax provision for 1998 reflects the
Company at the statutory income tax rates. For 1997, the Company's effective tax
rate differed from the statutory rate as a result of the reduction in a deferred
tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics' business is capital intensive and requires substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. The Company's liquidity needs arise primarily from capital
investments, working capital requirements and principal and interest payments on
its indebtedness. Since its inception, SDI has met these liquidity requirements
with cash provided by equity, long-term borrowings, state and local government
grants and capital cost reimbursements.
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Net cash provided by operating activities totaled $5.1 million for the first
quarter of 1998. The cash provided from operating activities for the first
quarter of 1998 primarily related to net income and deferred taxes. During the
first quarter of 1997, the Company provided net cash of $38.0 million from
operating activities primarily from net income and decreased raw material
inventory due to increasing scrap costs. Management decided to build the raw
material inventory in the first quarter of 1998 due to decreasing scrap costs
and draw down the raw material inventory in the first quarter of 1997 due to
increasing scrap costs. Net cash used in investing activities totaled $47.1
million for the first quarter of 1998 and $46.3 million for the first quarter of
1997. Investing activities primarily consisted of capital expenditures of $46.9
million and $46.3 million for the first quarter of 1998 and 1997, respectively,
for the construction of the Company's existing facilities, the Cold Mill
Project, the Caster Project and the Iron Dynamics Project. Cash provided by
financing activities totaled $38.5 million for the first quarter of 1998 and
cash used in financing activities totaled $992,000 for the first quarter of
1997. The 1998 increase in cash provided by financing activities primarily
relates to the $41.2 million of proceeds from senior term debt. The $48.0
million in cash on hand at the end the first quarter of 1997 was carried over
from the initial public offering proceeds received in the fourth quarter of
1996.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital expenditures
and operating expenses for matters relating to environmental control,
remediation, monitoring and compliance. Steel Dynamics believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations have changed rapidly in
recent years and SDI may become subject to more stringent environmental laws and
regulations in the future.
INFLATION
SDI does not believe that inflation has had a material effect on its results of
operations.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
Exhibit 10.40 Management Advisory and Technical Assistance Agreement
between Steel Dynamics, Inc. and NSM Management Co. LLC dated as of
March 12, 1998
Exhibit 10.41 Reciprocal License and Technical Sharing Agreement
Between SDI and Nakornthai Strip Mill Public Company Limited, dated
as of March 12, 1998
(B) Reports on Form 8-K for the quarter ended March 31, 1998 -
None
Item 1 - 5 of Part II are not applicable for this reporting period and have
been omitted.
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, 1998
STEEL DYNAMICS, INC.
By: /s/ TRACY L. SHELLABARGER
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TRACY L. SHELLABARGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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