1 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 June 30, 2001 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) <TABLE> <S> <C> 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) </TABLE> Registrant's telephone number, including area code: (219) 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 July 25, 2001, Registrant had outstanding shares of 45,712,405 Common Stock.
2 STEEL DYNAMICS, INC. Table of Contents <TABLE> <CAPTION> PART I. Financial Information Item 1. Consolidated Financial Statements: Page ---- <S> <C> Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 ............... 1 Consolidated Statements of Income for the three and six-month periods ended June 30, 2001 and 2000 (unaudited)............................................................... 2 Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 2001 and 2000 (unaudited)............................................................... 3 Notes to Consolidated Financial Statements....................................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 10 PART II. Other Information Item 1. Legal Proceedings ............................................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders.............................................. 11 Item 5. Other Information ............................................................................... 12 Item 6. Exhibits and Reports on Form 8-K................................................................. 12 Signature........................................................................................ 13 </TABLE>
3 STEEL DYNAMICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) <TABLE> <CAPTION> June 30 December 31 2001 2000 ----------- ----------- (unaudited) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents ........................................................... $ 18,170 $ 10,184 Accounts receivable, net ............................................................ 85,270 82,838 Accounts receivable-related parties ................................................. 18,927 20,148 Inventories ......................................................................... 113,725 106,745 Deferred taxes ...................................................................... 11,803 12,854 Other current assets ................................................................ 19,352 9,844 ----------- ----------- Total current assets ....................................................... 267,247 242,613 PROPERTY, PLANT, AND EQUIPMENT, NET ...................................................... 808,749 807,322 RESTRICTED CASH .......................................................................... 3,577 3,465 OTHER ASSETS ............................................................................. 13,234 13,674 ----------- ----------- TOTAL ASSETS ............................................................... $ 1,092,807 $ 1,067,074 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .................................................................... $ 32,369 $ 18,874 Accounts payable-related parties .................................................... 11,021 9,114 Accrued interest .................................................................... 4,510 5,364 Other accrued expenses .............................................................. 26,082 26,302 Current maturities of long-term debt ................................................ 15,295 17,044 ----------- ----------- Total current liabilities .................................................. 89,277 76,698 LONG-TERM DEBT, less current maturities .................................................. 525,107 515,476 DEFERRED TAXES ........................................................................... 50,663 52,027 MINORITY INTEREST ........................................................................ 4,639 4,089 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock voting, $.01 par value; 100,000,000 shares authorized; 49,555,405 and 49,347,626 shares issued; and 45,712,405 and 45,504,626 shares outstanding, as of June 30, 2001 and December 31, 2000, respectively ..... 495 493 Treasury stock, at cost; 3,843,000 shares ........................................... (46,526) (46,526) Additional paid-in capital .......................................................... 337,173 335,732 Retained earnings ................................................................... 135,421 129,085 Other accumulated comprehensive income .............................................. (3,442) - ----------- ----------- Total stockholders' equity ................................................. 423,121 418,784 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 1,092,807 $ 1,067,074 =========== =========== </TABLE> See notes to consolidated financial statements. 1
4 STEEL DYNAMICS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 -------------------------- -------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> NET SALES: Unrelated parties ........................... $ 126,804 $ 145,901 $ 256,070 $ 297,576 Related parties ............................. 30,835 44,836 55,655 82,333 --------- --------- --------- --------- Total net sales ......................... 157,639 190,737 311,725 379,909 Cost of goods sold ............................... 132,140 138,795 260,663 283,956 --------- --------- --------- --------- GROSS PROFIT ..................................... 25,499 51,942 51,062 95,953 Selling, general and administrative expenses ..... 18,176 14,930 31,978 28,780 --------- --------- --------- --------- OPERATING INCOME ................................. 7,323 37,012 19,084 67,173 Interest expense ................................. 4,169 5,030 9,008 9,959 Other (income) expense, net ...................... (22) 1,306 (226) 1,123 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES ....................... 3,176 30,676 10,302 56,091 Income taxes ..................................... 1,223 11,617 3,966 21,783 --------- --------- --------- --------- NET INCOME .................................. $ 1,953 $ 19,059 $ 6,336 $ 34,308 ========= ========= ========= ========= BASIC EARNINGS PER SHARE: Net income per share ............................. $ 0.04 $ 0.40 $ 0.14 $ 0.72 ========= ========= ========= ========= Weighted average common shares outstanding ....... 45,648 47,570 45,578 47,783 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: Net income per share ............................. $ 0.04 $ 0.40 $ 0.14 $ 0.72 ========= ========= ========= ========= Weighted average common shares and share equivalents outstanding ............... 45,891 47,705 45,799 47,954 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements. 2
5 STEEL DYNAMICS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> OPERATING ACTIVITIES: Net income ................................................... $ 1,953 $ 19,059 $ 6,336 $ 34,308 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................. 12,277 11,454 23,828 23,357 Deferred income taxes ..................................... (1,207) 4,690 (313) 9,379 Minority interest ......................................... 137 (562) 550 2,227 Other accumulated comprehensive income .................... 529 - (3,442) - Changes in certain assets and liabilities: Accounts receivable .................................... 1,315 (11,529) (1,211) (28,809) Inventories ............................................ 762 (12,809) (6,980) (24,990) Other assets ........................................... (14,494) 2,074 (9,625) 2,637 Accounts payable ....................................... 5,272 (8,883) 15,402 (844) Accrued expenses ....................................... (1,037) (1,632) (1,074) 3,064 -------- -------- -------- -------- Net cash provided by (used in) operating activities .... 5,507 (8,138) 23,471 20,329 -------- -------- -------- -------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment .................. (14,457) (25,644) (24,810) (54,850) Other ........................................................ - 1,197 - (108) -------- -------- -------- -------- Net cash used in investing activities .................. (14,457) (24,447) (24,810) (54,958) -------- -------- -------- -------- FINANCING ACTIVITIES: Issuance of long-term debt ................................... 82,020 41,388 88,319 47,039 Repayments of long-term debt ................................. (61,521) (1,638) (80,437) (5,923) Issuance of common stock, net of expenses and proceeds and tax benefits from exercise of stock options ........... 1,101 60 1,443 283 Purchase of treasury stock ................................... - (13,708) - (13,708) -------- -------- -------- -------- Net cash provided by financing activities .............. 21,600 26,102 9,325 27,691 -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents ................. 12,650 (6,483) 7,986 (6,938) Cash and cash equivalents at beginning of period ................. 5,520 16,160 10,184 16,615 -------- -------- -------- -------- Cash and cash equivalents at end of period ....................... $ 18,170 $ 9,677 $ 18,170 $ 9,677 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest ........................................... $ 8,693 $ 8,954 $ 18,307 $ 18,093 ======== ======== ======== ======== Cash paid for taxes .............................................. $ 3,073 $ 10,623 $ 3,613 $ 10,978 ======== ======== ======== ======== </TABLE> See notes to consolidated financial statements. 3
6 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Principles of Consolidation. The consolidated financial statements include the accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company) after elimination of the significant intercompany accounts and transactions. Minority interest represents the minority shareholders' proportionate share in the equity or income of the company's consolidated subsidiaries. Use of Estimates. These financial statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto. Actual results may differ from those estimates. In the opinion of management, these estimates 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 2000 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): <TABLE> <CAPTION> June 30 December 31 2001 2000 ---------- ----------- <S> <C> <C> Raw Materials............................................ $ 38,005 $ 39,302 Supplies................................................. 42,336 41,770 Work-in-progress......................................... 10,569 7,916 Finished Goods........................................... 22,815 17,757 ---------- ---------- $ 113,725 $ 106,745 ========== ========== </TABLE> 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 six-month periods ended June 30 are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Basic weighted average common shares outstanding............... 45,648 47,570 45,578 47,783 Dilutive effect of stock options............................... 243 135 221 171 ---------- ---------- ---------- ---------- Diluted weighted average common shares and share equivalents outstanding...................... 45,891 47,705 45,799 47,954 ========== ========== ========== ========== </TABLE> 4. 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): <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> Net income available to common shareholders.............. $ 1,953 $ 19,059 $ 6,336 $ 34,308 Cumulative effect of an accounting change................ - - (2,468) - Unrealized gain (loss) on derivative instrument.......... 529 - (974) - ----------- ----------- ---------- ---------- Comprehensive income..................................... $ 2,482 $ 19,059 $ 2,894 $ 34,308 =========== =========== ========== =========== </TABLE> The company recorded a gain from hedging activities of approximately $47,000 and a loss from hedging activities of approximately $41,000, for the three and six-month periods ended June 30, 2001, respectively. 4
7 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT INFORMATION The company has two operating segments: Steel Operations and Steel Scrap Substitute Operations. Steel Operations include all revenues from the flat roll mill facility, which produces and sells hot rolled, cold rolled, and galvanized sheet steel; and also includes all start-up costs associated with the structural and rail mill, which will produce structural steel and rail products. Steel Scrap Substitute Operations include revenues from Iron Dynamics, Inc., which will provide liquid pig iron to the company. In addition, Corporate and Eliminations include certain unallocated corporate accounts, such as SDI senior bank debt and certain other investments. The company's operations are primarily organized and managed by operating segment. The company evaluates performance and allocates resources based on operating profit or loss before income taxes. The accounting policies of the operating segments are consistent with those described in Note 1 to the financial statements. Intersegment sales and transfers are accounted for at standard prices and are eliminated in consolidation. Segment results for the three and six-month periods ended June 30, are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ ------------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> STEEL OPERATIONS Net sales External $ 141,602 $ 190,737 $ 283,335 $ 379,909 Other segments 8,745 1,273 13,821 1,273 Operating income 18,010 46,461 36,589 85,223 Assets 865,739 901,493 865,739 901,493 - ------------------------------------------------------------------------------------------------------------ STEEL SCRAP SUBSTITUTE OPERATIONS Net sales External $ - $ - $ - $ - Other segments 4,057 2,283 4,660 5,547 Operating loss (5,567) (3,716) (9,394) (7,826) Assets 154,189 129,867 154,189 129,867 - ------------------------------------------------------------------------------------------------------------ CORPORATE AND ELIMINATIONS Net sales External $ 16,037 $ - $ 28,390 $ - Other segments (12,802) (3,556) (18,481) (6,820) Operating loss (5,120) (5,733) (8,111) (10,224) Assets 72,879 31,118 72,879 31,118 - ------------------------------------------------------------------------------------------------------------ CONSOLIDATED Net sales External $ 157,639 $ 190,737 $ 311,725 $ 379,909 Operating income 7,323 37,012 19,084 67,173 Assets 1,092,807 1,062,478 1,092,807 1,062,478 - ------------------------------------------------------------------------------------------------------------ </TABLE> The external net sales of the company's Steel Operations include sales to Non-U.S. companies of $1.5 million and $2.0 million for the three months ended June 30, 2001 and 2000, respectively, and $3.1 million and $8.1 million for the six months ended June 30, 2001 and 2000, respectively. 5
8 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMMITMENTS AND CONTINGENCIES During March 1998, the company entered into a ten-year Reciprocal License and Technology Sharing Agreement (the License Agreement) with Nakornthai Strip Mill Public Co. Limited (NSM) to provide NSM with the right to use the company's technology in exchange for equity ownership in NSM. Concurrently, the company entered into a ten-year Management Advisory and Technical Assistance Agreement (the Technical Assistance Agreement) in exchange for an annual management fee. Effective December 31, 1998, the company terminated the License and Technical Assistance Agreements in accordance with the company's termination rights under the provisions of these agreements. The company was sued in a total of nine separate but related lawsuits, seeking aggregate compensatory damages of approximately $240 million, as well as punitive damages, in an unspecified amount, and treble damages in certain of the actions. The cases were brought in either state or federal courts against the company and various investment banking firms, relating to a note offering in March 1998 by Nakornthai Strip Mill Public Company Ltd, and its investment bankers (the other co-defendant in the litigation). During the second quarter of 2001, the company settled four of the nine pending lawsuits, all of which were fully funded by applicable insurance. The remaining five lawsuits are still pending, seeking aggregate compensatory damages of approximately $110 million. The company maintains that it was engaged solely to license its technology and to provide post-offering technical and operational advice and consultation services to the NSM mini-mill project, that it was not an issuer, guarantor, underwriter or seller of any of the notes, and that it did not draft any of the offering materials. While the company believes that it has meritorious legal and factual defenses to these claims, and is vigorously defending itself in the remaining related actions, and while the company believes that it also has meritorious claims against one or more of the other co-defendants for some or all of the plaintiffs' claims, there can be no assurance as to the ultimate outcome with respect to any or all of such remaining lawsuits or that we will not be found jointly and severally liable for all of the claimed damages in some or all of the cases. 6
9 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 statement as a result of these risks and uncertainties, including those incorporated by reference herein from our Report on Form 10-K for the year ended December 31, 2000, set forth under "Forward Looking Statements" and under "Risk Factors That May Affect Future Operations", or in other reports filed with the Commission. You should read the following discussion in conjunction with the foregoing qualifications and in conjunction with our Annual Report on Form 10-K, for the year ended December 31, 2000 for a full understanding of our financial condition and results of operations. OVERVIEW Industry. During the first half of 2001 and throughout much of the second half of 2000, we experienced historically low selling prices coupled with declining product orders. This market environment resulted from increased supply caused by record-high steel import levels and from decreased demand caused by the weakening economy. The severity of this imbalance is evident through the numerous bankruptcy filings witnessed within our industry during the past several years. We anticipate continued pricing pressure, with slight improvements possible during the third quarter. We expect to see a strengthening of this market environment upon execution of the Bush Administration's trade actions against the previously mentioned unfairly traded steel imports. We fully expect the U.S. government to take the necessary actions to resolve this problem. Facilities. We operate a technologically advanced flat rolled steel mini-mill in Butler, Indiana with an annual production capacity of 2.2 million tons. We achieved record shipments during the second quarter of 2001, a 7 percent increase in comparison to our first quarter shipments. We manufacture and market a broad range of high quality flat-rolled carbon steel products. We sell hot rolled, cold rolled and coated steel products, including high strength low alloy and medium carbon steels. Our products are used for various applications, including automotive, appliance, manufacturing, consumer durable goods, industrial machinery and various other applications. In addition to our flat-rolled mini-mill, we have a second facility operated by our subsidiary, Iron Dynamics, Inc (IDI). IDI involves the pioneering of a process to produce direct reduced iron, which is converted into liquid pig iron, a high quality steel scrap substitute for use in our flat-roll facility. On July 24, 2001, we announced that the re-start of IDI's ironmaking operations, which began in February, was halted, with no specific date set for resumption of actual production. During the second quarter of 2001, further technical success of IDI's ironmaking process was achieved, showing increasing yields of liquid pig iron and substantial improvements in metallization rates. However, the suspension of operations was the result of continued higher than expected start-up and process refinement costs, compounded by exceptionally high energy costs and low production quantities, resulting in higher unit costs. The steel scrap market is also currently experiencing historical pricing lows. Due to these current and unusual market factors, the cost to purchase and use steel scrap at our flat rolled mill is less than our cost to produce and use IDI's direct reduced iron, further supporting our belief that the current continuation of start-up operations at IDI is financially unwise, until the completion of certain additional IDI process and equipment refinements, along with what we anticipate to be a gradual lowering of energy costs and an eventual correction of the current scrap market price inversion in relation to scrap substitute costs. We anticipate that these various process and equipment refinements and repairs will take place during the second half of 2001, with the expected assistance of several IDI vendors and suppliers. A basic crew of IDI professionals will be retained to accomplish these tasks, with a substantial remainder of the workforce reassigned to our Butler and Whitley County facilities or to jobs at New Millennium Building Systems. All of these employees will be subject to recall by IDI. We believe these actions will result in the reduction of IDI's monthly operating loses by approximately $1.5 million, conserving our resources while allowing IDI the opportunity to assess its future options. Given these factors, we believe a future restart could be possible as early as next year. On April 23, 2001, the U.S. Environmental Protection Agency's Environmental appeals board found "without merit" an opponent's appeal to our permit necessary to begin construction on our planned $310 million structural and rail facility located in Whitley County, Indiana. This decision enabled us to immediately commence construction activities on May 1st. Construction is progressing ahead of schedule. We anticipate commercial production to begin during early summer 2002. Upon completion, this facility will be utilized for the manufacture of structural steel beams, pilings and rails for the construction and railroad markets, providing us an opportunity for further production diversification and market penetration. NET SALES Our 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 provide further value-added products from our cold mill. These products include hot rolled and cold rolled galvanized products, along with cold rolled products, allowing us to charge marginally higher prices compared to hot rolled products. 7
10 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: - Alloys - Electricity - Natural gas - Oxygen - Argon - Electrodes - Steel scrap and scrap substitutes - Depreciation - Direct and indirect labor and benefits Steel scrap and scrap substitutes represent the most significant component of our cost of goods sold. Natural gas and electricity are also significant raw materials utilized at both our flat rolled mini-mill and within IDI's steel scrap substitute process. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses are comprised of all costs associated with the sales, finance and accounting, materials and transportation, and administrative departments. These costs include labor and benefits, professional services, financing cost amortization, property taxes, profit sharing expense and start-up costs associated with new projects. INTEREST EXPENSE Interest expense consists of interest associated with our senior credit facility and other debt agreements as described in our notes to financial statements, 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 balance and any other non-operating income activity. Other expense consists of any non-operating costs, including permanent impairments of reported investments. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000 Net Sales. Our net sales were $157.6 million, with total shipments of 516,000 net tons for the three months ended June 30, 2001, as compared to net sales of $190.7 million, with total shipments of 500,000 net tons for the three months ended June 30, 2000, a decrease in net sales of approximately $33.1 million, or 17%, and an increase in total shipments of approximately 16,000 net tons. Although, second quarter shipments increased by 3% in comparison to the same period in 2000, our second quarter 2001 average consolidated price per ton shipped decreased approximately $76, or 20%, in comparison to the same period last year, resulting in the significant decrease in our net sales. We believe that we will continue to see depressed pricing throughout much of 2001. We sold approximately 20% and 24% of our net sales to Heidtman Steel Products, Inc (or affiliates) for the three months ended June 30, 2001 and 2000, respectively. Cost of Goods Sold. Cost of goods sold was $132.1 million for the three months ended June 30, 2001, as compared to $138.8 million for the three months ended June 30, 2000, a decrease of $6.7 million, or 5%. Steel scrap represented approximately 45% and 52% of our total cost of goods sold for the three months ended June 30, 2001 and 2000, respectively. Our costs associated with steel scrap averaged $22 per ton less during the second quarter of 2001 than during the same period in 2000 and $1 per ton more than during the first quarter of 2001. We experienced a steady decline in scrap prices beginning the second quarter 2000 and throughout the first quarter 2001, with a flattening during the second quarter of 2001. We believe we will experience an increase in our scrap costs throughout the remainder of 2001. As a percentage of net sales, cost of goods sold represented approximately 84% and 73% for the three months ended June 30, 2001 and 2000, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $18.2 million for the three months ended June 30, 2001, as compared to $14.9 million for the three months ended June 30, 2000, a substantial portion of which, in both periods, was attributable to litigation costs associated with our Nakornthai Strip Mill Public Company Ltd. (NSM) litigation efforts and start-up costs associated with our construction projects. Start-up costs were $8.9 million, of which IDI represents $7.2 million (including $1.7 million of interest expense), for the three months ended June 30, 2001, as compared to $6.4 million for the three months ended June 30, 2000, an increase of $2.5 million, or 39%. As a percentage of net sales, selling, general and administrative expenses represented approximately 12% and 8% for the three months ended June 30, 2001 and 2000, respectively. Interest Expense. Net interest expense was $4.2 million for the three months ended June 30, 2001, as compared to $5.0 million for the three months ended June 30, 2000. Gross interest expense was $7.2 million, of which $3.0 million was capitalized due to current construction projects for the three months ended June 30, 2001, as compared to gross interest expense of $7.8 million and capitalized interest of $2.7 million for the same period in 2000. 8
11 Other (Income) Expense. For the three months ended June 30, 2001, other income was $22,000, as compared to other expense of $1.3 million, which primarily represented the write-off of our remaining investment in NSM, for the three months ended June 30, 2000, an increase of 102%. We also recorded settlement costs, along with the offsetting insurance proceeds, related to our second quarter 2001 settlement of a portion of our NSM-related lawsuits. Income Taxes. Our income tax provision was $1.2 million for the three months ended June 30, 2001, as compared to $11.6 million for the same period in 2000. This income tax provision reflects federal income tax expense at 35.1% and state income tax expense at 3.4%. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 Net Sales. Our net sales were $311.7 million, with total shipments of 998,000 net tons for the six months ended June 30, 2001, as compared to net sales of $379.9 million, with total shipments of 1,011,000 net tons for the six months ended June 30, 2000, a decrease in net sales of approximately $68.2 million, or 18%, and a decrease in total shipments of approximately 13,000 net tons, or 1%. These decreases were the direct result of declining demand and over-supply, caused in significant part by our weakening economy and record high import levels. Our first half 2001 consolidated average sales price per ton decreased approximately $64, or 17%, in comparison to the same period last year, resulting in an 18% decline in net sales while only experiencing a 2% decrease in total shipments. The entire industry has experienced this pricing decline throughout the second half of 2000 and into 2001. We believe we will continue to see depressed pricing throughout much of 2001. We sold approximately 18% and 22% of our net sales to Heidtman Steel Products, Inc (or affiliates) for the three months ended June 30, 2001 and 2000, respectively. Cost of Goods Sold. Cost of goods sold was $260.7 million for the six months ended June 30, 2001, as compared to $284.0 million for the six months ended June 30, 2000, a decrease of $23.3 million, or 8%. Steel scrap represented approximately 44% and 54% of our total cost of goods sold for the six months ended June 30, 2001 and 2000, respectively. Our costs associated with steel scrap averaged $27 per ton less during the first half of 2001 than during the same period in 2000. As a percentage of net sales, cost of goods sold represented approximately 84% and 75% for the six months ended June 30, 2001 and 2000, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $32.0 million for the six months ended June 30, 2001, as compared to $28.8 million for the six months ended June 30, 2000, a substantial portion of which, in both periods, was attributable to litigation costs associated with our NSM litigation efforts and start-up costs associated with our construction projects. Start-up costs were $14.0 million, of which IDI represents $11.0 million (including $1.7 million of interest expense), for the six months ended June 30, 2001, as compared to $12.5 million for the six months ended June 30, 2000, an increase of $1.5 million, or 12%. As a percentage of net sales, selling, general and administrative expenses represented approximately 10% and 8% for the six months ended June 30, 2001 and 2000, respectively. Interest Expense. Net interest expense was $9.0 million for the six months ended June 30, 2001, as compared to $10.0 million for the six months ended June 30, 2000. Gross interest expense was $15.3 million, of which $6.3 million was capitalized due to current construction projects for the six months ended June 30, 2001, as compared to gross interest expense of $15.2 million and capitalized interest of $5.1 million for the same period in 2000. Other (Income) Expense. For the six months ended June 30, 2001, other income was $226,000, as compared to other expense of $1.1 million, which primarily represented the write-off of our remaining investment in NSM for the six months ended June 30, 2000, an increase of 120%. We also recorded settlement costs, along with the offsetting insurance proceeds, related to our second quarter 2001 settlement of a portion of our NSM-related lawsuits. Income Taxes. Our income tax provision was $4.0 million for the six months ended June 30, 2001, as compared to $21.8 million for the same period in 2000. This income tax provision reflects federal income tax expense at 35.1% and state income tax expense at 3.4%. 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. 9
12 Cash Flows. For the six months ended June 30, 2001, cash provided by operating activities was $23.5 million, as compared to $20.3 million for the six months ended June 30, 2000, an increase of $3.2 million, or 16%. Cash used in investing activities was $24.8 million and $55.0 million for the six months ended June 30, 2001 and 2000, respectively, all of which substantially represented capital investments. Approximately 68% of our capital investment costs incurred during the first half of 2001 were utilized in site preparation, pre-construction activities and construction efforts related to the structural mill. Cash provided by financing activities was $9.3 million and $27.7 million for the six months ended June 30, 2001 and 2000, respectively, a decrease of $18.4 million, or 66%. This decline in additional funding resulted from lower capital expenditures and no stock repurchases during the first half of 2001. Liquidity. We believe the principal indicators of our liquidity are cash position, remaining availability within our bank credit facilities and excess working capital. During the first half of 2001, our cash position increased $8.0 million, or 78%, to $18.2 million and our working capital position increased $12.1 million, or 7%, to $178.0 million, as compared to December 31, 2000. We have $577.8 million available under various senior bank credit facilities, of which $484.6 million, or 84% was drawn at June 30, 2001, resulting in a remaining availability of $93.2 million. We believe the liquidity of our existing cash and cash equivalents, cash from operating activities and our available credit facilities will provide sufficient funding for our working capital and capital expenditure requirements during 2001. However, we may, if we believe circumstances warrant, increase our liquidity through the issuance of additional equity or debt to finance growth or take advantage of other business opportunities. We have not paid dividends on our common stock. INFLATION We believe that inflation has not had a material effect on our results of operation. 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 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 June 30, 2001, 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, 2000. 10
13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We incorporate by reference from Part I, Item III of our 2000 Form 10-K Annual Report, filed with the Securities and Exchange Commission on March 30, 2001, the description of our NSM-related legal proceedings. We were sued in a total of nine separate but related lawsuits, seeking aggregate compensatory damages of approximately $240 million, as well as punitive damages, in an unspecified amount, and treble damages in certain of the actions. The cases were brought in either state or federal courts against us and various investment banking firms, relating to a note offering in March 1998 by Nakornthai Strip Mill Public Company Ltd. ("NSM") and its investment bankers (the other co-defendants in the litigation). During the second quarter, we settled four of the pending lawsuits, specifically Farallon Capital Partners, LP, et al. v. Gleacher & Co., Inc., et al (Case No. BC 215260 in the Superior Court of the State of California for the County of Los Angeles); Legg Mason Income Trust, Inc., et al. v. Gleacher & Co., Inc., et al. (Case No. BC 218294 in the Superior Court of the State of California for the County of Los Angeles), Merrill Lynch Global Allocation Fund, Inc., et al. v. Natwest Finance, Inc., et al. (Case No. MID-L-8457-99; in the Superior Court of New Jersey, Law Division-Middlesex County) and Turnberry Capital Partners, LP, et al. v. Natwest Finance, Inc. et al. (Case No. CV-99-0367917-S in the Superior Court for the Judicial District of Fairfield at Bridgeport, Connecticut). All settlements, to the extent, if any, of any monetary payments were fully funded by applicable insurance. The remaining cases are still pending. In Gabriel Capital, LP, et al. v. Natwest Finance, Inc., et al., (Cause No. 99-CV-10488 (SAS) in the United States District Court for the Southern District of New York, plaintiffs' federal fraud claims brought under Section 10(b) and Rule 10b-5 of the federal securities laws as against Steel Dynamics have been dismissed, as have plaintiffs' common law fraud claims; but various state law claims for conspiracy and aiding and abetting remain in the case. A November 2001 trial date has been set in Gabriel. Steel Dynamics has filed a Motion for Summary Judgment in IDS Life Series Fund, Inc., et al. v. Gleacher NatWest Inc., et al. (Civil File No. 01-384 DSD/JMM in the United States District Court for the District of Minnesota, Fourth Division). No other trial dates have been scheduled, except as indicated, in the remaining lawsuits. There is also a peripheral lawsuit pending in the Court of Common Pleas of Cuyahoga County (Cleveland) Ohio, in which John W. Schultes, the former president and chief executive officer of NSM, has sued us, McDonald Investments Inc., NSM McDonald Partnership, KeyCorp Finance, Inc., Enron North America Corp, ECT Thailand Investments, Inc., and NSM Management Co. LLC for damages, alleging that we bear contractual responsibility for causing his termination of employment and that we slandered his reputation. We deny that we have any liability to Mr. Schultes in connection with this lawsuit. We have filed a motion to dismiss in this case. In an unrelated matter, H&M Industrial Services, Inc. filed an action on January 24, 2001, against our subsidiary Iron Dynamics, Inc. in the Circuit Court of Dekalb County, Indiana, Cause No. 17C01-0101-CP-016, asking for damages of $1,645,899 arising out of work allegedly performed by H&M, for which they claim they have not been paid, in connection with the construction of Iron Dynamics' new ironmaking facility in Butler, Indiana. We have denied all liability to H&M for any amount and believe that we have adequate defenses to such claims, both factually and legally, under the governing construction contracts and documents. Discovery is ongoing. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY MATTERS The Annual Meeting of Shareholders was held on May 24, 2001. Proxies were solicited for the Annual Meeting in accordance with the requirements of the Securities Exchange Act 1934. At the Annual Meeting, the following occurred: [X] With respects to Item 1 in our Proxy Statement (Election of Directors): <TABLE> <CAPTION> Shares Voted Against Director Shares Voted For or Withheld <S> <C> <C> Keith E. Busse 32,462,797 1,141,954 Richard P. Teets, Jr. 33,039,422 565,329 Mark D. Millett 33,039,422 565,329 Tracy L. Shellabarger 33,039,422 565,329 Leonard Rifkin 33,205,827 398,924 John C. Bates 33,207,327 397,424 Naoki Hidaka 33,207,227 397,524 Dr. Jurgen Kolb 33,207,327 397,424 Joseph D. Ruffolo 33,205,787 398,964 Richard J. Freeland 33,207,127 397,624 James E. Kelley 33,205,677 399,074 </TABLE> 11
14 [X] With respect to Item 2 in our Proxy Statement (Ratification of the Appointment of Independent Auditors) Ernst & Young LLP was approved as our independent auditors for the year 2001: <TABLE> <S> <C> Shares Voted For 31,408,441 Shares Voted Against 2,177,916 Abstentions 18,394 </TABLE> [X] With respect to Item 3 in our Proxy Statement (Approval of the Amended and Restated 1996 Incentive Stock Option Plan): <TABLE> <S> <C> Shares Voted For 22,172,754 Shares Voted Against 6,185,099 Abstentions or No Votes 5,246,898 </TABLE> ITEM 5. OTHER INFORMATION During July 2001, we entered into a Fourth Amendment to our senior secured Credit Agreement and a Second Amendment to our unsecured $50 million Credit Agreement with our lender banks, which allowed us, in our discretion, to loan additional funds to Iron Dynamics, Inc. At the same time, Iron Dynamics entered into an Eighth Amendment to its Credit Agreement with its lender banks, which (i) permits IDI to borrow additional funds from us, (ii) defers for a year the applicability of certain financial requirements and covenants, and (iii) changes the regular interest payment date from quarterly payments to monthly payments. We also agreed to reduce our unborrowed commitment amount under our unsecured Credit Agreement down to $45 million from $50 million, and our lenders agreed to extend their commitment date under the unsecured Credit Agreement to July 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits - *10.1a(3) Third Amendment to Credit Agreement between SDI and Mellon Bank, N.A., et al; dated March 15, 2001. *10.1a(4) Fourth Amendment to Credit Agreement between SDI and Mellon Bank, N.A., et al; dated July 20, 2001. *10.1b(7) Seventh Amendment to Credit Agreement between IDI and Mellon Bank, N.A., et al; dated March 15, 2001. *10.1b(8) Eighth Amendment to Credit Agreement between IDI and Mellon Bank, N.A., et al; dated July 20, 2001. *10.1c Credit Agreement between SDI and Mellon Bank, N.A., et al; dated May 5, 2000. *10.1c(1) First Amendment to Credit Agreement between SDI and Mellon Bank, N.A., et al; dated March 15, 2001 *10.1c(2) Consent and Agreement between SDI and Mellon Bank, N.A., et al; dated July 17, 2001. *10.19a Amended and Restated 1996 Incentive Stock Option Plan (B) Reports on Form 8-K for the quarter ended June 30, 2001: None -------------------------------------------------------------------- *Filed herewith Items 2 and 3 of Part II are not applicable for this reporting period and have been omitted. 12
15 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. July 31, 2001 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) 13