STEEL DYNAMICS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the period ended June 30, 2003

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 No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No

As of July 31 2003, Registrant had 47,751,931 outstanding shares of Common Stock.

STEEL DYNAMICS, INC.
Table of Contents

PART I. Financial Information
		Page
Item 1.	Consolidated Financial Information

	Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002	1

	Consolidated Statements of Income for the three and six-month periods ended June 30, 2003 and 2002 (unaudited)	2

	Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 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	10

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	13

Item 4.	Controls and Procedures	13

PART II. Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	14

Item 6.	Exhibits and Reports on Form 8-K	14

	Signature	15

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STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	June 30, 2003			December 31, 2002

	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,928		$	24,218
Accounts receivable, net		86,654			83,779
Accounts receivable-related parties		25,585			34,700
Inventories		173,424			153,204
Deferred taxes		7,679			6,680
Other current assets		8,372			8,322

Total current assets		313,642			310,903

Property, plant, and equipment, net		959,239			929,338

Restricted cash		2,627			2,616

Other assets		35,622			32,839

Total assets	$	1,311,130		$	1,275,696


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,425		$	27,390
Accounts payable-related parties		35,473			18,827
Accrued interest		9,249			10,665
Other accrued expenses		38,447			44,755
Current maturities of long-term debt		13,837			11,913

Total current liabilities		123,431			113,550

Long-term debt, less current maturities		536,505			543,537

Deferred taxes		82,759			70,330

Minority interest		1,054			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; 50,088,965 and 49,966,590 shares issued; and 47,689,797 and 47,580,676 shares outstanding, as of June 30, 2003 and December 31, 2002, respectively		500			499
Treasury stock, at cost; 2,399,168 and 2,385,914 shares, at June 30, 2003 and December 31, 2002, respectively		(29,065	)		(28,889	)
Additional paid-in capital		348,719			347,050
Retained earnings		231,314			210,106
Other accumulated comprehensive loss		(6,074	)		(7,106	)

Total stockholders’ equity		545,394			521,660

Total liabilities and stockholders’ equity	$	1,311,130		$	1,275,696

See notes to consolidated financial statements.

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STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

Net sales:
Unrelated parties	$	187,342		$	179,562		$	389,488		$	318,711
Related parties		31,290			34,177			64,648			61,931

Total net sales		218,632			213,739			454,136			380,642

Cost of goods sold		186,724			160,696			372,693			300,225

Gross profit		31,908			53,043			81,443			80,417

Selling, general and administrative expenses		14,682			19,779			29,657			36,111

Operating income		17,226			33,264			51,786			44,306

Interest expense		8,938			5,030			18,104			9,295
Other (income) expense, net		(399	)		(131	)		(250	)		4,022

Income before income taxes		8,687			28,365			33,932			30,989

Income taxes		3,257			10,637			12,724			11,621

Net income	$	5,430		$	17,728		$	21,208		$	19,368





Basic earnings per share	$	.11		$	.37		$	.45		$	.41


Weighted average number of shares outstanding		47,650			47,423			47,625			46,734


Diluted earnings per share	$	.11		$	.37		$	.44		$	.41


Weighted average number of shares and share equivalents outstanding		47,853			47,859			47,820			47,103

See notes to consolidated financial statements.

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STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

Operating activities:
Net income	$	5,430		$	17,728		$	21,208		$	19,368
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,643			14,247			32,919			28,080
Deferred income taxes		6,186			8,395			11,430			6,691
Minority interest		24			(26	)		(627	)		230
Changes in certain assets and liabilities:
Accounts receivable		9,706			(3,294	)		6,240			(7,743	)
Inventories		(5,740	)		(2,399	)		(20,220	)		3,613
Other assets		(2,549	)		(9,882	)		(1,796	)		(2,049	)
Accounts payable		(450	)		(4,965	)		15,680			4,242
Accrued expenses		4,427			13,336			(6,490	)		13,197

Net cash provided by operating activities		33,677			33,140			58,344			65,629


Investing activities:
Purchases of property, plant, and equipment		(23,670	)		(25,438	)		(61,105	)		(59,197	)
Other investing activities		8			—			(8,283	)		—

Net cash used in investing activities		(23,662	)		(25,438	)		(69,388	)		(59,197	)


Financing activities:
Issuance of long-term debt		26,768			9,766			48,480			485,915
Repayments of long-term debt		(28,482	)		(3,761	)		(49,900	)		(512,164	)
Issuance of common stock, net of expenses and proceeds and tax benefits from exercise of stock options		663			3,105			1,670			4,208
Purchase of treasury stock		—			—			(176	)		—
Debt issuance costs		(277	)		(384	)		(1,320	)		(13,885	)

Net cash provided by (used in) financing activities		(1,328	)		8,726			(1,246	)		(35,926	)


Increase (decrease) in cash and cash equivalents		8,687			16,428			(12,290	)		(29,494	)
Cash and cash equivalents at beginning of period		3,241			32,319			24,218			78,241

Cash and cash equivalents at end of period	$	11,928		$	48,747		$	11,928		$	48,747



Supplemental disclosure of cash flow information:
Cash paid for interest	$	7,052		$	2,699		$	22,684		$	12,229

Cash paid for federal and state income taxes	$	6,860		$	4,125		$	7,474		$	4,235

Issuance of common stock from treasury to extinguish portion of long-term debt	$	—		$	—		$	—		$	22,000

See notes to consolidated financial statements.

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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 June 30, 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 and six-month periods ended June 30 (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,

	2003		2002		2003		2002


Net income, as reported	$	5,430	$	17,728	$	21,208	$	19,368
Total stock-based employee compensation expense using the fair value based method, net of related tax effects		544		510		1,127		1,001

Pro forma net income	$	4,886	$	17,218	$	20,081	$	18,367


Basic earnings per share:
As reported	$	.11	$	.37	$	.45	$	.41
Pro forma		.10		.36		.42		.39

Diluted earnings per share:
As reported	$	.11	$	.37	$	.44	$	.41
Pro forma		.10		.36		.42		.39

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 June 30 (in thousands):

	2003		2002

Stock options		1,158		800
Convertible subordinated debt		6,763		—

Total anti-dilutive share equivalents		7,921		800

Note 3. Comprehensive Income

The following table presents the company’s components of comprehensive income, net of related tax, for the three and six-month periods ended June 30 (in thousands):

	Three Months Ended					Six Months Ended

	2003		2002			2003		2002

Net income available to common shareholders	$	5,430	$	17,728		$	21,208	$	19,368
Unrealized gain (loss) on derivative instruments		590		(1,189	)		975		(582	)
Unrealized gain on available-for-sale securities		114		—			57		—

Comprehensive income	$	6,134	$	16,539		$	22,240	$	18,786

The company recorded a gain from hedging activities of approximately $257,000 during the three months ended June 30, 2003, offsetting a loss from hedging activities of the same amount recorded during the three months ended March 31, 2003, resulting in no impact to earnings during the six months ended June 30, 2003. The company recorded no gain or loss from hedging activities during the three months ended June 30, 2002, and a gain of approximately $45,000 for the six months ended June 30, 2002.

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):

		June 30, 2003		December 31, 2002

Raw materials	$	48,471	$	53,532
Supplies		55,344		52,815
Work-in-progress		11,835		14,835
Finished goods		57,774