-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VSh3HKPbmh4wNBac2ibDbAJ9m84WbjynNAf3xGG3sL64I6jV/G9oQHD3DJyckuOV HQ+klHYcnlui/EaivS1EWg== 0000950123-02-010912.txt : 20021114 0000950123-02-010912.hdr.sgml : 20021114 20021114143144 ACCESSION NUMBER: 0000950123-02-010912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEEL DYNAMICS INC CENTRAL INDEX KEY: 0001022671 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 351929476 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21719 FILM NUMBER: 02824270 BUSINESS ADDRESS: STREET 1: 7030 POINTE INVERNESS WAY STREET 2: SUITE 310 CITY: FORT WAYNE STATE: IN ZIP: 46804 BUSINESS PHONE: 2194593553 MAIL ADDRESS: STREET 1: 7030 POINTE INVERNERSS WAY STREET 2: SUITE 310 CITY: FORT WAYNE STATE: IN ZIP: 46804 10-Q 1 y65814e10vq.txt STEEL DYNAMICS, INC. 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 September 30, 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 (I.R.S. employer of incorporation or organization) 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 November 5, 2002, Registrant had outstanding shares of 47,556,779 Common Stock. STEEL DYNAMICS, INC. Table of Contents PART I. Financial Information Item 1. Consolidated Financial Statements: Page ----- Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001.......... 1 Consolidated Statements of Income for the three and nine-month periods ended September 30, 2002 and 2001 (unaudited)....................................................... 2 Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 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....................................... 12 Item 4. Controls and Procedures.......................................................................... 12 PART II. Other Information Item 1. Legal Proceedings................................................................................ 13 Item 6. Exhibits and Reports on Form 8-K................................................................. 13 Signature........................................................................................ 14 Certifications of Principal Executive Officer and Principal Financial Officer.................... 14
STEEL DYNAMICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30, December 31, 2002 2001 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents ............................................... $ 24,173 $ 78,241 Accounts receivable, net ................................................ 70,531 65,589 Accounts receivable-related parties ..................................... 22,122 16,290 Inventories ............................................................. 135,487 118,368 Deferred taxes .......................................................... 6,068 24,600 Other current assets .................................................... 3,283 9,116 ----------- ----------- Total current assets ........................................... 261,664 312,204 Property, plant, and equipment, net .......................................... 935,708 852,061 Restricted cash .............................................................. 2,606 3,030 Other assets ................................................................. 32,037 12,803 ----------- ----------- Total assets ................................................... $ 1,232,015 $ 1,180,098 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 35,765 $ 30,228 Accounts payable-related parties ........................................ 22,202 11,101 Accrued interest ........................................................ 6,208 4,052 Other accrued expenses .................................................. 40,860 26,697 Current maturities of long-term debt .................................... 27,576 46,033 ----------- ----------- Total current liabilities ...................................... 132,611 118,111 Long-term debt, less current maturities ...................................... 522,162 553,891 Deferred taxes ............................................................... 58,350 62,765 Minority interest ............................................................ 4,806 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; 49,941,251 and 49,586,473 shares issued; and 47,555,337 and 45,743,473 shares outstanding, as of September 30, 2002 and December 31, 2001, respectively ..................................... 499 495 Treasury stock, at cost; 2,385,914 and 3,843,000 shares, at September 30, 2002 and December 31, 2001, respectively .............. (28,889) (46,526) Additional paid-in capital .............................................. 346,849 337,733 Retained earnings ....................................................... 180,728 132,229 Other accumulated comprehensive loss .................................... (7,088) (5,356) ----------- ----------- Total stockholders' equity ..................................... 492,099 418,575 ----------- ----------- Total liabilities and stockholders' equity ..................... $ 1,232,015 $ 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 Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net Sales: Unrelated parties ....................................... $ 203,137 $ 129,227 $ 521,848 $ 384,781 Related parties ......................................... 37,560 27,580 99,491 83,751 --------- --------- --------- --------- Total net sales ..................................... 240,697 156,807 621,339 468,532 Cost of goods sold ........................................... 167,942 134,888 468,167 395,551 --------- --------- --------- --------- Gross profit ................................................. 72,755 21,919 153,172 72,981 Selling, general and administrative expenses ................. 15,679 12,821 48,546 44,799 --------- --------- --------- --------- Operating income ........................................ 57,076 9,098 104,626 28,182 Interest expense ............................................. 10,580 5,201 19,875 14,209 Other (income) expense ....................................... (113) 446 3,909 220 --------- --------- --------- --------- Income before income taxes and extraordinary item ....... 46,609 3,451 80,842 13,753 Income taxes ................................................. 17,478 1,329 30,315 5,295 --------- --------- --------- --------- Income before extraordinary item ........................ 29,131 2,122 50,527 8,458 Extraordinary loss on debt extinguishment, net of tax benefit of $1,216 ............................ -- -- 2,028 -- --------- --------- --------- --------- Net income ................................................... $ 29,131 $ 2,122 $ 48,499 $ 8,458 ========= ========= ========= ========= Basic earnings per share: Income before extraordinary item ........................ $ 0.61 $ 0.05 $ 1.07 $ 0.19 Extraordinary loss on debt extinguishment ............... -- -- (0.04) -- --------- --------- --------- --------- Net income .............................................. $ 0.61 $ 0.05 $ 1.03 0.19 ========= ========= ========= ========= Weighted average number of shares outstanding ................ 47,545 45,723 47,005 45,626 ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary item ........................ $ 0.61 $ 0.05 $ 1.07 $ 0.19 Extraordinary loss on debt extinguishment ............... -- -- (0.05) -- --------- --------- --------- --------- Net income .............................................. $ 0.61 $ 0.05 $ 1.02 $ 0.19 ========= ========= ========= ========= Weighted average number of shares and share equivalents outstanding ................................. 47,854 45,929 47,354 45,842 ========= ========= ========= =========
See notes to consolidated financial statements. 2 STEEL DYNAMICS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Three Months Ended Nine Months ended September 30, September 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- Operating activities: Net income .................................................... $ 29,131 $ 2,122 $ 48,499 $ 8,458 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt extinguishment ................. -- -- 3,244 -- Depreciation and amortization ............................. 15,716 11,766 43,796 35,605 Deferred income taxes ..................................... 7,427 (1,784) 14,118 (2,097) Minority interest ......................................... (193) 311 37 861 Changes in certain assets and liabilities: Accounts receivable .................................. (3,031) 6,706 (10,774) 5,495 Inventories .......................................... (20,731) (522) (17,118) (7,502) Other assets ......................................... 1,510 11,197 (3,783) 1,543 Accounts payable ..................................... 12,396 64 16,638 15,466 Accrued expenses ..................................... 1,289 (72) 14,486 (4,588) --------- --------- --------- --------- Net cash provided by operating activities ................. 43,514 29,788 109,143 53,241 --------- --------- --------- --------- Net cash used in investing activity: Purchases of property, plant, and equipment ................... (65,890) (27,307) (125,087) (52,099) Financing activities: Issuance of long-term debt .................................... 8,298 11,483 494,213 99,802 Repayments of long-term debt .................................. (10,235) (17,629) (522,399) (98,066) Issuance of common stock, net of expenses and proceeds and tax benefits from exercise of stock options ............. 549 298 4,757 1,741 Debt issuance costs ........................................... (810) -- (14,695) -- --------- --------- --------- --------- Net cash provided by (used in) financing activities ....... (2,198) (5,848) (38,124) 3,477 --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents ................... (24,574) (3,367) (54,068) 4,619 Cash and cash equivalents at beginning of period ................... 48,747 18,170 78,241 10,184 --------- --------- --------- --------- Cash and cash equivalents at end of period ......................... $ 24,173 $ 14,803 $ 24,173 $ 14,803 ========= ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ........................................ $ 15,691 $ 8,781 $ 27,920 $ 27,087 ========= ========= ========= ========= Cash paid for federal and state income taxes .................. $ 2,647 $ 785 $ 6,882 $ 4,398 ========= ========= ========= ========= 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), including New Millennium Building Systems LLC, 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):
September 30, December 31, 2002 2001 ------------- ------------ Raw Materials ........... $ 51,477 $ 44,807 Supplies ................ 50,104 42,258 Work-in-progress ........ 12,140 8,512 Finished Goods .......... 21,766 22,791 -------- -------- $135,487 $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 and nine-month periods ended September 30 are as follows (in thousands):
Three Months Ended Nine Months Ended -------------------- -------------------- 2002 2001 2002 2001 ------ ------ ------ ------ Basic weighted average common shares outstanding ........ 47,545 45,723 47,005 45,626 Dilutive effect of stock options ........................ 309 206 349 216 ------ ------ ------ ------ Diluted weighted average common shares and share equivalents outstanding .................... 47,854 45,929 47,354 45,842 ====== ====== ====== ======
4. Comprehensive Income The following table presents the company's components of comprehensive income (loss), net of related tax, for the three and nine-month periods ended September 30 (in thousands):
Three Months Ended Nine Months Ended ------------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net income available to common shareholders ............ $ 29,131 $ 2,122 $ 48,499 $ 8,458 Cumulative effect of an accounting change ......... -- -- -- (2,468) Unrealized loss on derivative instrument .......... (966) (2,752) (1,548) (3,726) -------- -------- -------- -------- Comprehensive income (loss) ............................ $ 28,165 $ (630) $ 46,951 $ 2,264 ======== ======== ======== ========
The company realized no net gain or loss from hedging activities during the three month period ended September 30, 2002 and realized a gain of approximately $45,000 for the nine-month period ended September 30, 2002, which resulted in a net effect of zero for the period since inception of the hedge. The company realized a gain of approximately $41,000 for the three-month period ended September 30, 2001, which resulted in a net effect of zero for the nine months ended September 30, 2001. 4 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 commenced limited structural production in June 2002. The company expects to ramp up the structural operations through regular product introductions and be fully operational by the end of 2002. In addition, the company expects to commence production of rails 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. 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 $2.7 and $2.0 million for the three months ended September 30, 2002 and 2001 and $6.7 million and $5.1 million for the nine months ended September 30, 2002 and 2001, respectively. Segment results for the three and nine-month periods ended September 30 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- -------------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- STEEL OPERATIONS Net sales External $ 221,312 $ 137,374 $ 558,816 $ 420,709 Other segments 12,710 10,251 37,947 24,072 Operating income 63,311 12,288 120,737 48,877 Assets 1,021,477 870,087 1,021,477 870,087 ----------- ----------- ----------- ----------- STEEL SCRAP SUBSTITUTE OPERATIONS Net sales External $ -- $ -- $ -- $ -- Other segments -- -- -- 4,660 Operating loss (2,271) (2,046) (7,086) (11,440) Assets 151,404 155,106 151,404 155,106 ----------- ----------- ----------- ----------- ALL OTHER Net sales External $ 19,385 $ 19,433 $ 62,523 $ 47,823 Other segments 162 18 488 696 Operating loss (4,293) (871) (7,948) (8,348) Assets 160,150 149,745 160,150 149,745 ----------- ----------- ----------- ----------- ELIMINATIONS Net sales External $ -- $ -- $ -- $ -- Other segments (12,872) (10,269) (38,435) (29,428) Operating income (loss) 329 (273) (1,077) (907) Assets (101,016) (86,465) (101,016) (86,465) ----------- ----------- ----------- ----------- CONSOLIDATED Net sales $ 240,697 $ 156,807 $ 621,339 $ 468,532 Operating income 57,076 9,098 104,626 28,182 Assets 1,232,015 1,088,473 1,232,015 1,088,473 =========== =========== =========== ===========
5 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Condensed Consolidating Information Certain 100% owned subsidiaries of SDI, one of which was incorporated in 2000 and the others in 2002 have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of $200.0 million of Senior Notes in March 2002 and due 2009. Set forth below are condensed consolidating financial statements of the company, including the guarantors. The following condensed consolidating financial statements present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of the company and the company's Report on Form 10-K for the year ended December 31, 2001. Condensed Consolidating Balance Sheets (in thousands):
COMBINED CONSOLIDATING TOTAL AS OF SEPTEMBER 30, 2002 PARENT GUARANTORS NON-GUARANTORS ADJUSTMENTS CONSOLIDATED ----------- ----------- -------------- ------------- ------------ Cash .............................................. $ 19,549 $ 214 $ 4,410 $ -- $ 24,173 Accounts receivable ............................... 91,975 -- 10,576 (9,898) 92,653 Inventories ....................................... 119,315 -- 17,415 (1,243) 135,487 Other current assets .............................. 9,589 -- 38 (276) 9,351 ----------- ----------- ----------- ----------- ----------- Total current assets ........................... 240,428 214 32,439 (11,417) 261,664 Property, plant and equipment, net ................ 750,943 45,408 139,463 (106) 935,708 Other assets ...................................... 199,376 43,713 257 (208,703) 34,643 ----------- ----------- ----------- ----------- ----------- Total assets ................................... $ 1,190,747 $ 89,335 $ 172,159 $ (220,226) $ 1,232,015 =========== =========== =========== =========== =========== Accounts payable .................................. $ 43,013 $ 13,286 $ 11,565 $ (9,897) $ 57,967 Accrued expenses .................................. 44,271 125 2,734 (62) 47,068 Current maturities of long-term debt .............. 11,592 -- 16,002 (18) 27,576 ----------- ----------- ----------- ----------- ----------- Total current liabilities ...................... 98,876 13,411 30,301 (9,977) 132,611 Other liabilities ................................. 81,307 -- (838) (132) 80,337 Long-term debt .................................... 516,353 -- 8,506 (2,697) 522,162 Minority interest ................................. 629 -- -- 4,177 4,806 Common stock ...................................... 499 45,332 172,164 (217,496) 499 Treasury stock .................................... (28,889) -- -- -- (28,889) Additional paid in capital ........................ 346,849 16 -- (16) 346,849 Retained earnings ................................. 182,027 30,576 (37,790) 5,915 180,728 Other accumulated comprehensive loss .............. (6,904) -- (184) -- (7,088) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity ..................... 493,582 75,924 134,190 (211,597) 492,099 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity ..... $ 1,190,747 $ 89,335 $ 172,159 $ (220,226) $ 1,232,015 =========== =========== =========== =========== =========== 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 =========== =========== =========== =========== ===========
6 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Income (in thousands):
FOR THE THREE MONTHS ENDED, SEPTEMBER 30, 2002 COMBINED CONSOLIDATING TOTAL PARENT GUARANTORS NON-GUARANTORS ADJUSTMENTS CONSOLIDATED --------- ---------- -------------- ------------- ------------ Net sales .......................................... $ 234,022 $ -- $ 19,547 $ (12,872) $ 240,697 Cost of good sold .................................. 161,246 -- 19,576 (12,880) 167,942 --------- --------- --------- --------- --------- Gross profit .................................... 72,776 -- (29) 8 72,755 Selling, general and administration ................ 13,518 97 2,385 (321) 15,679 --------- --------- --------- --------- --------- Operating income (loss) ............................ 59,258 (97) (2,414) 329 57,076 Interest expense ................................... 10,209 -- 440 (69) 10,580 Other (income) expense ............................. 13,883 (14,092) (7) 103 (113) --------- --------- --------- --------- --------- Income (loss) before income taxes and equity in net loss of subsidiaries ............ 35,166 13,995 (2,847) 295 46,609 Income tax (expense) benefit .................... (13,298) (5,248) 1,068 -- 17,478 Equity in net income of subsidiaries ............ 7,017 -- -- (7,017) -- --------- --------- --------- --------- --------- Net income (loss) .................................. $ 28,885 $ 8,747 $ (1,779) $ (6,722) $ 29,131 ========= ========= ========= ========= ========= FOR THE THREE MONTHS ENDED, SEPTEMBER 30, 2001 Net sales .......................................... $ 147,624 $ -- $ 19,452 $ (10,269) $ 156,809 Cost of good sold .................................. 127,087 -- 18,080 (10,279) 134,888 --------- --------- --------- --------- --------- Gross profit .................................... 20,537 -- 1,372 10 21,919 Selling, general and administration ................ 10,061 5 2,472 283 12,821 --------- --------- --------- --------- --------- Operating income (loss) ............................ 10,476 (5) (1,100) (273) 9,098 Interest expense ................................... 3,727 -- 2,036 (562) 5,201 Other (income) expense ............................. 9,066 (9,172) (9) 562 447 --------- --------- --------- --------- --------- Income (loss) before income taxes and equity in net loss of subsidiaries ............ (2,317) 9,167 (3,127) (273) 3,450 Income tax (expense) benefit .................... 997 (3,529) 1,204 -- (1,328) Equity in net income of subsidiaries ............ 3,715 -- -- (3,715) -- --------- --------- --------- --------- --------- Net income (loss) .................................. $ 2,395 $ 5,638 $ (1,923) $ (3,988) $ 2,122 ========= ========= ========= ========= =========
Condensed Consolidating Statement of Income (in thousands):
FOR THE NINE MONTHS ENDED, SEPTEMBER 30, 2002 COMBINED CONSOLIDATING TOTAL PARENT GUARANTORS NON-GUARANTORS ADJUSTMENTS CONSOLIDATED --------- ---------- -------------- ------------- ------------ Net sales .......................................... $ 596,764 $ -- $ 63,010 $ (38,435) $ 621,339 Cost of good sold .................................. 443,867 -- 61,513 (37,213) 468,167 --------- --------- --------- --------- --------- Gross profit .................................... 152,897 -- 1,497 (1,222) 153,172 Selling, general and administration ................ 41,516 104 7,070 (144) 48,546 --------- --------- --------- --------- --------- Operating income (loss) ............................ 111,381 (104) (5,573) (1,078) 104,626 Interest expense ................................... 18,330 -- 1,627 (82) 19,875 Other (income) expense ............................. 39,819 (36,063) (17) 170 3,909 --------- --------- --------- --------- --------- Income (loss) before income taxes, equity in net income of subsidiaries and extraordinary items ........................ 53,232 35,959 (7,183) (1,166) 80,842 Income tax (expense) benefit ....................... (19,780) (13,257) 2,722 -- (30,315) --------- --------- --------- --------- --------- Income (loss) before equity in net income of subsidiaries and extraordinary items ......... 33,452 22,702 (4,461) (1,166) 50,527 Extraordinary loss on debt extinguishment, net of tax benefit of $1,216 .................... (1,564) -- (464,) -- (2,028) Equity in net income of subsidiaries ............... 17,826 -- -- (17,826) -- --------- --------- --------- --------- --------- Net income (loss) .................................. $ 49,714 $ 22,702 $ (4,925) $ (18,992) $ 48,499 ========= ========= ========= ========= =========
7 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMBINED CONSOLIDATING TOTAL PARENT GUARANTORS NON-GUARANTORS ADJUSTMENTS CONSOLIDATED --------- ---------- -------------- ------------- ------------ Net sales ....................................... $ 444,782 $ -- $ 53,178 $ (29,427) $ 468,533 Cost of good sold ............................... 378,153 -- 46,713 (29,315) 395,551 --------- --------- --------- --------- --------- Gross profit ................................. 66,629 -- 6,465 (112) 72,982 Selling, general and administration ............. 27,546 12 16,772 470 44,800 --------- --------- --------- --------- --------- Operating income (loss) ......................... 39,083 (12) 10,307 (582) 28,182 Interest expense ................................ 12,509 -- 3,002 (1,302) 14,209 Other (income) expense .......................... 26,375 (27,446) (9) 1,301 221 --------- --------- --------- --------- --------- Income (loss) before income taxes and equity in net income of subsidiaries ......... 199 27,434 (13,300) (581) 13,752 Income tax (expense) benefit .................... 149 (10,254) 5,109 -- (5,294) Equity in net income of subsidiaries ............ 8,990 -- -- (8,990) -- --------- --------- --------- --------- --------- Net income (loss) ............................... $ 9,040 $ 17,180 $ (8,191) $ (9,571) $ 8,458 ========= ========= ========= ========= =========
Condensed Consolidating Statements of Cash Flows (in thousands):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMBINED TOTAL PARENT GUARANTORS NON-GUARANTORS CONSOLIDATED --------- ---------- -------------- ------------ Net cash provided by operations ............................. $ 106,436 $ 131 $ 2,576 $ 109,143 Net cash provided by (used in) investing activities ......... (129,069) -- 3,982 (125,087) Net cash used in financing activities ....................... (35,225) -- (2,899) (38,124) --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents ............ (57,858) 131 3,659 (54,068) Cash and cash equivalents at beginning of year .............. 77,407 83 751 78,241 --------- --------- --------- --------- Cash and cash equivalents at end of year .................... $ 19,549 $ 214 $ 4,410 $ 24,173 ========= ========= ========= ========= FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Net cash provided by (used in) operations ................... $ 40,243 $ 33,492 $ (20,494) $ 53,241 Net cash used in investing activities ....................... (46,195) -- (5,904) (52,099) Net cash provided by (used in) financing activities ......... 11,028 (33,440) 25,889 3,477 --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents ............ 5,076 52 (509) 4,619 Cash and cash equivalents at beginning of year .............. 8,924 40 1,220 10,184 --------- --------- --------- --------- Cash and cash equivalents at end of year .................... $ 14,000 $ 92 $ 711 $ 14,803 ========= ========= ========= =========
7. Pittsboro, Indiana Acquisition On July 29, 2002, the company announced that it entered into a definitive agreement with Qualitech Steel SBQ LLC to purchase Qualitech's special bar quality mini-mill assets located in Pittsboro, Indiana. The company agreed to pay $45 million for the assets and announced plans to invest between $60 and $70 million of additional capital to convert the Qualitech mini-mill to the production of between 500,000 and 600,000 annual tons of merchant and reinforcing bar products. The company agreed to close the transaction within 25 days, subject to certain conditions and approvals. However, on August 2, 2002, Nucor Corporation filed suit against Qualitech Steel SBQ LLC in Hendricks County, Indiana Superior Court, seeking to enjoin Qualitech from selling its assets to the company by reason of rights they allege under a prior purchase agreement. On August 6, 2002, the court entered a temporary restraining order prohibiting Qualitech from closing under the company's purchase agreement pending a preliminary injunction hearing scheduled for August 19, 2002. On August 7, 2002, the company intervened in this lawsuit to assert its rights under its purchase agreement with Qualitech. On August 19, 2002, after the conclusion of evidence at the preliminary injunction hearing, the Hendricks County, Indiana Superior Court ruled that Nucor "has little, if any, chance of prevailing at a trial based upon the evidence presented" and denied Nucor's injunction request. On August 20, 2002, Nucor filed a notice of appeal to the Indiana Court of Appeals, and the appeal is currently pending. On September 6, 2002, the company closed the purchase and acquired the asset, not withstanding the pendency for the litigation. Discovery is continuing and the court has set a date of January 13, 2003, for a trial on the merits. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward looking statements as a result of these risks and uncertainties, including those set forth in our Form 10-K under "Forward Looking Statements" and under "Risk Factors." You should read the following discussion in conjunction with "Selected Financial Data" set forth in our Form 10-K and our consolidated financial statements and notes appearing elsewhere in this filing. 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 estimated 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 1.3 million tons, depending on product mix. We are currently operating our Butler mini-mill at an annualized capacity of 2.4 million tons to meet current market demand; however, we may not be able to sustain this elevated production level through the remainder of the year. 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. In May 2002, we announced plans to construct a low-cost, coil coating facility at our Butler mini-mill that will further increase our range of value-added capabilities. We have started construction of the facility and expect to commence coating operations in the middle of 2003. The coating facility is currently expected to have an annual production capacity of 240,000 tons and is estimated to cost between $25 and $30 million. In May 2001, we began construction of a new state-of-the-art structural steel and rail mini-mill in Columbia City, Indiana. Our Columbia City mini-mill is designed to have an annual production capacity of up to 1.3 million tons and produce structural steel and rails at a higher quality and lower cost than comparable mills. We expect to spend approximately $315 million to construct this mini-mill, of which approximately $298 million has been spent as of September 30, 2002. We commenced structural steel operations and shipped our first structural products to initial customers in late June 2002. We expect to ramp up these operations through regular product introductions and be fully operational by the first quarter 2003. In addition, we expect to commence production of standard rail during the first quarter of 2003 and premium rail during the second quarter of 2003. Our structural steel operation is designed to produce steel products for the construction, transportation and industrial machinery markets. Our rail manufacturing operation is designed to produce a variety of rail products for the railroad industry. On July 29, 2002, the company announced that it entered into a definitive agreement with Qualitech Steel SBQ LLC to purchase Qualitech's special bar quality mini-mill assets located in Pittsboro, Indiana. The company agreed to pay $45 million for the assets and announced plans to invest between $60 and $70 million of additional capital to convert the Qualitech mini-mill to the production of between 500,000 and 600,000 annual tons of merchant and reinforcing bar products. The company agreed to close the transaction within 25 days, subject to certain conditions and approvals. However, on August 2, 2002, Nucor Corporation filed suit against Qualitech Steel SBQ LLC in Hendricks County, Indiana Superior Court, seeking to enjoin Qualitech from selling its assets to the company by reason of rights they allege under a prior purchase agreement. On August 6, 2002, the court entered a temporary restraining order prohibiting Qualitech from closing under the company's purchase agreement pending a preliminary injunction hearing scheduled for August 19, 2002. On August 7, 2002, the company intervened in this lawsuit to assert its rights under its purchase agreement with Qualitech. On August 19, 2002, after the conclusion of evidence at the preliminary injunction hearing, the Hendricks County, Indiana Superior Court ruled that Nucor "has little, if any, chance of prevailing at a trial based upon the evidence presented" and denied Nucor's injunction request. On August 20, 2002, Nucor filed a notice of appeal to the Indiana Court of Appeals, and the appeal is currently pending. On September 6, 2002, the company closed the purchase and acquired the asset, not withstanding the pendency for the litigation. Discovery is continuing and the court has set a date of January 13, 2003, for a trial on the merits. 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. 9 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 set forth in our Form 10K, 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. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales. Our net sales were $240.7 million, with total shipments of 598,000 net tons for the three months ended September 30, 2002, as compared to net sales of $156.8 million, with total shipments of 500,000 net tons for the three months ended September 30, 2001, an increase in net sales of $83.9 million, or 53%, and an increase in total shipments of 98,000 net tons, or 20%. During the third quarter of 2002, the average consolidated selling price per ton increased approximately $89, or 28%, in comparison to the same period in 2001 and increased approximately $63, or 19%, in comparison to the second quarter of 2002. We are currently experiencing similar selling prices in our order backlog for the fourth quarter of 2002. We sold approximately 16% and 17% of our net sales to Heidtman Steel Products, Inc (or affiliates) (Heidtman) for the three months ended September 30, 2002 and 2001, respectively. Cost of Goods Sold. Cost of goods sold was $167.9 million for the three months ended September 30, 2002, as compared to $134.9 million for the three months ended September 30, 2001, an increase of $33.0 million, or 25%, which was primarily volume related. As a percentage of net sales, cost of goods sold represented approximately 70% and 86% for the three months ended September 30, 2002 and 2001, respectively. During the third quarter, this reduction in cost of goods sold as a percentage of net sales is primarily the direct result of operating efficiencies derived from increased production levels. Steel scrap represented approximately 51% and 46% of our total cost of goods sold for the three months ended September 30, 2002 and 2001, respectively. We experienced a steady decline in scrap pricing from the second quarter of 2000 through the first quarter of 2002; however, this downward trend ended in the second quarter of 2002. The average scrap cost per hot band ton produced during the third quarter of 2002 averaged $29, or 29%, more than in the first quarter of 2002 and averaged $14, or 11%, more than the third quarter 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; however, during the second quarter of 2002, our gross margin strengthened as our average product pricing increased by a greater degree than our average scrap cost. Our gross margin continued to strengthen during the third quarter of 2002 as scrap pricing remained competitive and as we realized greater efficiencies through increased production. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $15.7 million for the three months ended September 30, 2002, as compared to $12.8 million for the three months ended September 30, 2001, an increase of $2.9 million, or 22%. This increase is primarily the result of increased performance-related employee incentive programs. As a percentage of net sales, selling, general and administrative expenses represented approximately 7% and 8% for the three months ended September 30, 2002 and 2001, respectively. During the three months ended September 30, 2002, we did not incur start-up expenses classified as selling, general and administrative costs. The costs related to the production ramp-up at our structural and rail mill were recorded within cost of goods sold, as compared to start-up costs of $2.4 million for the three months ended September 30, 2001, which were recorded as part of selling, general and administrative costs. Interest Expense. Interest expense was $10.6 million for the three months ended September 30, 2002, as compared to $5.2 million for the three months ended September 30, 2001, an increase of $5.4 million, or 103%. Gross interest expense increased 33% to $11.1 million and capitalized interest decreased 83% to $541,000, for the three months ended September 30, 2002, as compared to the same period in 2001. This decrease resulted from the reduction of interest required to be capitalized with respect to our structural and rail mill since construction was substantially complete at June 30, 2002. Other (Income) Expense. Other income was $113,000 and other expense was $446,000 for the three months ended September 30, 2002 and 2001, respectively, resulting in an increase to income of $559,000, or 125%. Income Taxes. Our income tax provision was $17.5 million for the three months ended September 30, 2002, as compared to $1.3 million for the same period in 2001, an increase of $16.2 million. 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 September 30, 2002. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales. Our net sales were $621.3 million, with total shipments of 1,788,000 net tons for the nine months ended September 30, 2002, as compared to net sales of $468.5 million, with total shipments of 1,498,000 net tons for the nine months ended September 30, 2001, an increase 10 in net sales of $152.8 million, or 33%, and an increase in total shipments of 290,000 net tons, or 19%. During the first nine months of 2002, the average consolidated selling price per ton increased approximately $35, or 11%, in comparison to the same period in 2001. We sold approximately 16% and 18% of our net sales to Heidtman for the nine months ended September 30, 2002 and 2001, respectively. Cost of Goods Sold. Cost of goods sold was $468.2 million for the nine months ended September 30, 2002, as compared to $395.6 million for the nine months ended September 30, 2001, an increase of $72.6 million, or 18%, which was primarily volume related. As a percentage of net sales, cost of goods sold represented approximately 75% and 84% for the nine months ended September 30, 2002 and 2001, respectively. Steel scrap represented approximately 46% and 45% of our total cost of goods sold for the nine months ended September 30, 2002 and 2001, respectively. We experienced a steady decline in scrap pricing from the second quarter of 2000 through the first quarter of 2002; however, this downward trend ended in the second quarter of 2002. The average scrap cost per hot band ton produced during the first nine months of 2002 averaged $2, or 2%, more than in 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; however, during the second quarter of 2002, our gross margin strengthened as our average product pricing increased by a greater degree than our average scrap cost. Our gross margin continued to strengthen during the third quarter of 2002 as scrap pricing remained competitive and as we realized greater efficiencies through increased production. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $48.5 million for the nine months ended September 30, 2002, as compared to $44.8 million for the nine months ended September 30, 2001, an increase of $3.7 million, or 8%. This increase is primarily the result of increased performance-related employee incentive programs. As a percentage of net sales, selling, general and administrative expenses represented approximately 8% and 10% for the nine months ended September 30, 2002 and 2001, respectively. Start-up costs were $13.0 million, all of which were related to construction and production ramp-up of our structural and rail mill, for the nine months ended September 30, 2002, as compared to start-up costs of $16.4 million, of which Iron Dynamics represents $11.0 million, for the nine months ended September 30, 2001, a decrease of $3.4 million, or 21%. Interest Expense. Interest expense was $19.9 million for the nine months ended September 30, 2002, as compared to $14.2 million for the nine months ended September 30, 2001, an increase of $5.7 million, or 40%. Gross interest expense increased 15% to $30.6 million and capitalized interest decreased 1% to $10.7 million, for the nine months ended September 30, 2002, as compared to the same period in 2001. This decrease resulted from the reduction of interest required to be capitalized with respect to our structural and rail mill since construction was substantially complete at June 30, 2002. The 15% increase in our year to date gross interest expense despite a less than 1% increase in net debt (total debt, including other long-term contingent liabilities, less cash and cash equivalents) was due to an increase in our average interest rate primarily driven by the March 26, 2002, refinancing of our capital structure, in which we introduced higher priced public debt components Other (Income) Expense. Other expense was $3.9 million for the nine months ended September 30, 2002, as compared to $220,000 for the nine months ended September 30, 2001, an increase of $3.7 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 $30.3 million, net of a $1.2 million tax benefit related to our extraordinary loss on debt extinguishment, for the nine months ended September 30, 2002, as compared to $5.3 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 September 30, 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. CASH FLOWS For the nine months ended September 30, 2002, cash provided by operating activities was $109.1 million, as compared to $53.2 million for the nine months ended September 30, 2001, an increase of $55.9 million, or 105%. Cash used in investing activities, which represented capital investments, was $125.1 million and $52.1 million for the nine months ended September 30, 2002 and 2001, respectively. Approximately 63% of our capital investment costs incurred during the first nine months of 2002 were utilized in construction efforts related to our structural steel and rail mill and substantially all of the remaining costs incurred related to our third quarter purchase of the steel producing assets located in Pittsboro, Indiana. Cash used in financing activities was $38.1 million for the nine months ended September 30, 2002, as compared to cash provided by financing activities of $3.5 million for the nine months ended September 30, 2001. This decrease in funds due to financing activities was the result of our change in capital structure after the first quarter 2002 refinancing activities and the result of a decrease in debt associated with Iron Dynamics due to an agreement with the Iron Dynamics lenders to extinguish the debt under the Iron Dynamics credit agreement at the end of March 2002. 11 On January 28, 2002, we entered into an agreement with the Iron Dynamics lenders to extinguish the debt under the Iron Dynamics credit agreement at the end of March 2002. We complied with each of the settlement requirements, thus constituting full and final settlement of all of Iron Dynamics' obligations and our guarantees under the IDI credit agreement, causing the IDI credit agreement to terminate. In meeting the requirements of the settlement agreement, we paid $15.0 million in cash and issued an aggregate of $22.0 million, or 1.5 million shares of our common stock during March 2002. In addition, if IDI resumes operations by January 27, 2007, and generates positive cash flow (as defined in the settlement agreement), we are required to make contingent future payments in an aggregate amount not to exceed $22.0 million. LIQUIDITY We believe the principal indicators of our liquidity are our cash position, remaining availability under our bank credit facilities and excess working capital. During the nine months ended September 30, 2002, our cash position decreased $54.1 million to $24.2 million and our working capital position decreased $65.0 million, or 34%, to $129.1 million, as compared to December 31, 2001. As of September 30, 2002, $75.0 million under our senior secured revolving credit facility remained undrawn and available. Our ability to draw down the revolver is dependent upon continued compliance with the financial covenants and other covenants contained in the senior credit agreement. Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance, which in turn, will depend upon general economic, financial and business conditions, along with competition, legislation and regulation, factors that are largely beyond our control. In addition, we cannot assure you that our operating results, cash flow and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including additional borrowings under our senior secured credit agreement, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness and for funding anticipated capital expenditures and working capital requirements. 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 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 September 30, 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. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, the we carried out an evaluation, under the supervision and with the participation of the our management, including the our President and Chief Executive Officer along with the our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our President and Chief Executive Officer along with our Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in these internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out the evaluation. 12 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 29, 2002, the company announced that it entered into a definitive agreement with Qualitech Steel SBQ LLC to purchase Qualitech's special bar quality mini-mill assets located in Pittsboro, Indiana. The company agreed to pay $45 million for the assets and announced plans to invest between $60 and $70 million of additional capital to convert the Qualitech mini-mill to the production of between 500,000 and 600,000 annual tons of merchant and reinforcing bar products. The company agreed to close the transaction within 25 days, subject to certain conditions and approvals. However, on August 2, 2002, Nucor Corporation filed suit against Qualitech Steel SBQ LLC in Hendricks County, Indiana Superior Court, Cause Number 32D01-0208-CT-24, seeking to enjoin Qualitech from selling its assets to the company by reason of rights they allege under a prior purchase agreement. On August 6, 2002, the court entered a temporary restraining order prohibiting Qualitech from closing under the company's purchase agreement pending a preliminary injunction hearing scheduled for August 19, 2002. On August 7, 2002, the company intervened in this lawsuit to assert its rights under its purchase agreement with Qualitech. On August 19, 2002, after the conclusion of evidence at the preliminary injunction hearing, the Hendricks County, Indiana Superior Court ruled that Nucor "has little, if any, chance of prevailing at a trial based upon the evidence presented" and denied Nucor's injunction request. On August 20, 2002, Nucor filed a notice of appeal to the Indiana Court of Appeals, and the appeal is currently pending. On September 6, 2002, the company closed the purchase and acquired the asset, not withstanding the pendency for the litigation. Discovery is continuing and the court has set a date of January 13, 2003, for a trial on the merits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits - (B) Reports on Form 8-K for the quarter ended September 30, 2002: None filed. - -------------------------------------------------------------------------------- Filed herewith Items 2 through 5 of Part II are not applicable for this reporting period and have been omitted. 13 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. November 14, 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) Certifications I, Keith E. Busse, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Steel Dynamics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data ad have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 By: /s/ KEITH E. BUSSE ------------------------------------------------- Keith E. Busse President and Chief Executive Officer 14 I, Tracy L. Shellabarger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Steel Dynamics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: d. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "evaluation Date"); and f. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: c. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data ad have identified for the registrant's auditors any material weaknesses in internal controls; and d. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 7. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 By: /s/ TRACY L. SHELLABARGER ------------------------------------------ Tracy L. Shellabarger Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 15 -----END PRIVACY-ENHANCED MESSAGE-----