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 March 31, 2004
	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 No

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

As of April 21, 2004, Registrant had 49,303,108 outstanding shares of Common Stock.

Back to Contents

STEEL DYNAMICS, INC.
Table of Contents

	PART I. Financial Information
		Page

Item 1.	Consolidated Financial Information:

	Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003	1

	Consolidated Statements of Income for the three month periods ended March 31, 2004 and 2003 (unaudited)	2

	Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and 2003 (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 1.	Legal Proceedings	12

Item 6.	Exhibits and Reports on Form 8-K	12

	Signature	13

Back to Contents

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

	March 31, 2004			December 31, 2003

	(unaudited)
ASSETS
Current assets:
Cash and equivalents	$	58,294		$	65,430
Accounts receivable, net		133,377			100,933
Accounts receivable-related parties		31,219			25,090
Inventories		235,989			184,496
Deferred taxes		13,224			23,217
Other current assets		15,839			8,769

Total current assets		487,942			407,935

Property, plant and equipment, net		1,007,068			1,001,116

Restricted cash		4,211			2,636

Other assets		35,565			36,752

Total assets	$	1,534,786		$	1,448,439

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	51,837		$	42,698
Accounts payable-related parties		76,752			36,628
Accrued interest		8,247			11,312
Other accrued expenses		45,466			46,678
Current maturities of long-term debt		16,077			15,988

Total current liabilities		198,379			153,304


Long-term debt, including unamortized bond premium of $8,413 and $8,834, as of March 31, 2004 and December 31, 2003, respectively		587,777			591,586


Deferred taxes		117,378			115,703

Minority interest		1,262			613

Commitments and contingencies

Stockholders' equity:
Common stock voting, $.01 par value; 100,000,000 shares authorized;
51,597,116 and 51,011,839 shares issued; and 49,219,990 and 48,645,246 shares
outstanding, as of March 31, 2004 and December 31, 2003, respectively		515			509
Treasury stock, at cost; 2,377,126 and 2,366,593 shares, at March 31, 2004
and December 31, 2003, respectively		(28,908	)		(28,670	)
Additional paid-in capital		372,408			362,328
Retained earnings		289,216			257,254
Other accumulated comprehensive loss		(3,241	)		(4,188	)

Total stockholders’ equity		629,990			587,233


Total liabilities and stockholders’ equity	$	1,534,786		$	1,448,439

See notes to consolidated financial statements

Back to Contents

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

	Three Months Ended March 31,

		2004			2003

Net sales:
Unrelated parties	$	334,379		$	202,543
Related parties		49,766			32,961

Total net sales		384,145			235,504

Cost of goods sold		302,555			185,969

Gross profit		81,590			49,535

Selling, general and administrative expenses		23,050			14,975

Operating income		58,540			34,560

Interest expense		9,504			9,166
Other (income) expense, net		(2,103	)		149

Income before income taxes		51,139			25,245

Income taxes		19,177			9,467

Net income		31,962		$	15,778



Basic earnings per share	$	.65		$	.33


Weighted average common shares outstanding		48,947			47,601



Diluted earnings per share, including effect of assumed conversions	$	.58		$	.33


Weighted average common shares and share
equivalents outstanding		56,212			47,786

See notes to consolidated financial statements

Back to Contents

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

	Three Months Ended March 31,

	2004			2003

Operating activities:
Net income	$	31,962		$	15,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		18,779			16,276
Deferred income taxes		11,668			5,244
Loss on disposal of property, plant and equipment		145			59
Minority interest		649			(651	)
Changes in certain assets and liabilities:
Accounts receivable		(38,573	)		(3,466	)
Inventories		(51,493	)		(14,480	)
Other assets		(8,405	)		694
Accounts payable		49,263			16,130
Accrued expenses		(3,330	)		(10,917	)

Net cash provided by operating activities		10,665			24,667


Investing activities:
Purchases of property, plant and equipment		(23,905	)		(37,435	)
Other investing activities		—			(8,291	)

Net cash used in investing activities		(23,905	)		(45,726	)


Financing activities:
Issuance of long-term debt		29,939			21,712
Repayments of long-term debt		(33,659	)		(21,418	)
Issuance of common stock, net of expenses and proceeds
and tax benefits from exercise of stock options		10,086			1,007
Purchase of treasury stock		(238	)		(176	)
Debt issuance costs		(24	)		(1,043	)

Net cash provided by financing activities		6,104			82


Decrease in cash and equivalents		(7,136	)		(20,977	)
Cash and equivalents at beginning of period		65,430			24,218

Cash and equivalents at end of period	$	58,294		$	3,241


Supplemental disclosure of cash flow information:
Cash paid for interest	$	14,925		$	15,632

Cash paid for federal and state income taxes	$	77		$	614

See notes to consolidated financial statements

Back to Contents

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 after elimination of 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 accounting principles generally accepted in the United States and, accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment; valuation allowances for trade receivables, inventories and deferred income tax assets; potential environmental liabilities, litigation claims and settlements. Actual results may differ from these estimates and assumptions.

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 Annual Report on Form 10-K for the year ended December 31, 2003.

Stock-Based Compensation. At March 31, 2004, the company had three incentive stock option plans and accounted for these plans under the recognition and measurement principles of Accounting 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):


	2004			2003


Net income, as reported	$	31,962		$	15,778
Stock-based employee compensation expense, using the
fair value based method, net of related tax effect		(716	)		(583	)

Net income, pro forma	$	31,246		$	15,195


Basic earnings per share:
As reported	$	.65		$	.33
Pro forma		.64			.32
Diluted earnings per share:
As reported	$	.58		$	.33
Pro forma		.57			.32

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 shares related to the company’s convertible subordinated debt and are excluded from the computation in periods in which they have an anti-dilutive effect. The conversion requirements for the company’s convertible debt were met during the first quarter of 2004.

The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for net income for the three months ended March 31 (in thousands, except per share data):

	2004						2003


	Net Income (Numerator)		Shares (Denominator)		Per Share Amount		Net Income (Numerator)		Shares (Denominator)		Per Share Amount


Basic earnings per share	$	31,692		48,947	$	0.65	$	15,778		47,601	$	0.33
Dilutive stock option effect		—		502				—		185
Convertible subordinated debt effect		645		6,763				—		—

Diluted earnings per share	$	32,337		56,212	$	0.58	$	15,778		47,786	$	0.33

Back to Contents

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the common share equivalents that were excluded from the company’s diluted earnings per share calculation because they were anti-dilutive or not convertible at March 31 (in thousands):

	2004		2003


Stock options		56		1,609
Convertible subordinated debt		—		6,763

Excluded common share equivalents		56		8,372

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):

	2004		2003

Net income available to common shareholders
	$	31,962	$	15,778
Unrealized gain on derivative instruments		647		387
Unrealized gain (loss) on available-for-sale securities		300		(57	)


Comprehensive income	$	32,909	$	16,108

The company recorded a gain from hedging activities during the three months ended March 31, 2004 of approximately $275,000 and recorded a loss of approximately $257,000 during the three months ended March 31, 2003.

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, 2004		December 31, 2003

Raw materials	$	68,181	$	46,347
Supplies		65,937		60,420
Work-in-progress		33,759		15,996
Finished goods		68,112		61,733

Total inventories	$	235,989	$	184,496

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, galvanized products, and painted products. The Flat Roll 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 Structural and Rail Division produces and sells structural steel beams, pilings, and other steel components directly to end-users and steel service centers to be used primarily in the construction, transportation and industrial machinery markets. This facility is also designed to produce and sell a variety of standard and premium-grade rail for the railroad industry. The company anticipates supplying standard rail to potential customers to begin the evaluation process during the second quarter of 2004.

On December 29, 2003, the company’s Bar Products Division began commissioning and successfully produced certain SBQ and MBQ rounds. The company expects to increase its SBQ and MBQ product offerings throughout the first half of 2004 and anticipates the addition of angles, flats and channels during the third quarter. The facility’s anticipated annual production capacity is between 500,000 and 600,000 tons. The Bar Products Division plans to market its products directly to end-users and to service centers for the construction, transportation and industrial machinery markets.

Steel Scrap Substitute Operations. 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. During the fourth quarter of 2002, IDI successfully completed certain operating trials utilizing a modified production process. This process may significantly reduce the eventual per-unit cost of liquid pig iron production. Throughout 2003, the company invested $13.3 million for capital expenditures required to implement this modified production process and Iron Dynamics restarted operations mid-November, producing approximately 15,100 tonnes of hot briquetted iron during December. Since restart, the Flat Roll Division has successfully used these iron briquettes as a part of its metallic raw material inputs. During the first quarter of 2004, IDI produced 31,800 tonnes of hot briquetted iron and

Back to Contents

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the company is in the process of restarting the submerged arc furnace. This final stage of the IDI production process involves the liquefaction of the solid iron briquettes to produce liquid pig iron.

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. 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 $2.8 million and $40.3 million for the three months ended March 31, 2004 and 2003, respectively. The company’s segment results for the three months ended March 31 are as follows (in thousands):

	2004			2003


Steel Operations
Net sales
External	$	352,783		$	216,574
Other segments		20,285			12,429
Operating income		64,917			41,041
Assets		1,258,039			1,097,589

Steel Scrap Substitute Operations
Net sales
External	$	—		$	—
Other segments		6,893			2
Operating loss		(2,684	)		(2,094	)
Assets		158,912			151,073

All Other
Net sales
External	$	31,362			18,930
Other segments		353			117
Operating loss		(2,862	)		(4,741	)
Assets		230,449			151,836