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 quarterly period ended March 31, 2006
	OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-21719

Steel Dynamics, Inc.
(Exact name of registrant as specified in its charter)

Indiana		35-1929476
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN		46804
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code:  (260) 459-3553

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

(Check one):       Large accelerated filer x          Accelerated filer o         Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

As of May 5, 2006, Registrant had 48,675,685 outstanding shares of Common Stock.

STEEL DYNAMICS, INC.
Table of Contents

PART I. Financial Information
Item 1.		Financial Statements:
		Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
		Consolidated Statements of Income for the three-month periods ended March 31, 2006 and 2005 (unaudited)
		Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2006 and 2005 (unaudited)
		Notes to Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
Item 4.		Controls and Procedures
PART II. Other Information
Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits
		Signatures

 

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

		March 31, 2006			December 31, 2005
		(Unaudited)
Assets
Current assets:
Cash and equivalents		$	195,705		$	65,518
Accounts receivable, net		229,124			202,878
Accounts receivable-related parties		31,771			38,830
Inventories		381,505			398,684
Deferred taxes		6,950			6,516
Other current assets		13,300			13,307
Total current assets		858,355			725,733
Property, plant and equipment, net		990,506			999,969
Restricted cash		2,139			1,588
Other assets		30,619			30,397
Total assets		$	1,881,619		$	1,757,687
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	178,501		$	111,067
Accounts payable-related parties		1,614			4,475
Other accrued expenses		63,041			89,479
Current maturities of long-term debt		1,072			2,156
Total current liabilities		244,228			207,177
Long-term debt
Senior unsecured 9.5% notes		300,000			300,000
Subordinated convertible 4.0% notes		110,000			115,000
Other long-term debt		17,807			17,960
Unamortized bond premium		5,037			5,459
		432,844			438,419
Deferred taxes		231,668			231,105
Minority interest		1,357			1,118
Commitments and contingencies
Stockholders’ equity:
Common stock voting, $.01 par value; 100,000,000 shares authorized; 53,617,457 and 53,055,720 shares issued, and 44,061,455 and 43,183,989 shares outstanding, as of March 31, 2006 and December 31, 2005, respectively		534			529
Treasury stock, at cost; 9,556,002 and 9,871,731 shares, at March 31, 2006and December 31, 2005, respectively		(262,241		)	(270,905		)
Additional paid-in capital		421,648			405,900
Retained earnings		811,581			744,344
Total stockholders’ equity		971,522			879,868
Total liabilities and stockholders’ equity		$	1,881,619		1,757,687

 

See notes to consolidated financial statements.

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

		Three Months Ended
		March 31,
		2006			2005
Net sales
Unrelated parties		$	608,618		$	500,846
Related parties		57,260			69,860
Total net sales		665,878			570,706
Costs of goods sold		506,391			441,929
Gross profit		159,487			128,777
Selling, general and administrative expenses		28,375			22,454
Operating income		131,112			106,323
Interest expense		8,136			8,077
Other income, net		(681		)	(578		)
Income before income taxes		123,657			98,824
Income taxes		47,608			38,047
Net income		$	76,049		$	60,777
Basic earnings per share		$	1.75		$	1.27
Weighted average common shares outstanding		43,517			47,703
Diluted earnings per share, including effect of assumed conversions		$	1.52		$	1.12
Weighted average common shares and share equivalents outstanding		50,336			54,828
Dividends declared per share		$	.20		$	.10

 

See notes to consolidated financial statements.

2

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

		Three Months Ended
		March 31,
		2006			2005
Operating activities:
Net income		$	76,049		$	60,777
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,917			21,830
Deferred income taxes		128			13,033
Loss on disposal of property, plant and equipment		46			—
Minority interest		239			119
Changes in certain assets and liabilities:
Accounts receivable		(19,187		)	(13,932		)
Inventories		17,179			(14,147		)
Other assets		3,020			10,519
Accounts payable		60,079			10,843
Accrued expenses		(26,438		)	(34,067		)
Net cash provided by operating activities		136,032			54,975
Investing activities:
Purchase of property, plant and equipment		(14,585		)	(19,141		)
Purchase of short-term investments		(14,075		)	—
Maturities of short-term investments		9,375			—
Net cash used in investing activities		(19,285		)	(19,141		)
Financing activities:
Issuance of long-term debt		—			61,308
Repayment of long-term debt		(6,658		)	(40,511		)
Issuance of common stock (net of expenses) and proceeds and tax benefits from exercise of stock options		15,753			12,364
Issuance (purchase) of treasury stock		8,664			(76,700		)
Dividends paid		(4,319		)	(4,882		)
Net cash provided by (used in) financing activities		13,440			(48,421		)
Increase (decrease) in cash and equivalents		130,187			(12,587		)
Cash and equivalents at beginning of period		65,518			16,334
Cash and equivalents at end of period		$	195,705		$	3,747
Supplemental disclosure information:
Cash paid for interest		$	14,268		$	14,057
Cash paid for federal and state income taxes		$	1,176		$	170

 

See notes to consolidated financial statements.

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries after elimination of significant intercompany accounts and transactions. Minority interest represents the minority shareholders’ proportionate share in the equity or income of the company’s consolidated subsidiaries.

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

In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Note 2. Stock-Based Compensation

The company has several stock-based employee compensation plans which are more fully described in Notes 1 and 6 of the company’s 2005 Annual Report on Form 10-K. Prior to January 1, 2006, the company accounted for awards granted under those plans following the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations.

Effective January 1, 2006, the company adopted the fair value recognition provisions of Financial Accounting Standard (FAS) No. 123 R, “Share-Based Payments,” (FAS 123R) using the modified prospective application method. Under this transition method, compensation cost recognized in the quarter ended March 31, 2006 includes the applicable amounts of compensation cost of all stock-based payments granted prior to, but not yet vested as of January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of FAS No. 123 and previously presented in the pro forma footnote disclosures). Compensation cost in the future will also include all stock-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of FAS 123R). Results for prior periods have not been restated. Prior to the adoption of FAS 123R, no compensation cost was reflected in net income for stock options as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. In accordance with FAS 123R, compensation expense for stock options is now recorded over the vesting period using the fair value on the date of grant, as calculated using the Black-Scholes model.

Total estimated share-based compensation expense, related to all of the company’s share-based awards, primarily incentive stock options,  recognized for the three-month period ended March 31, 2006 was comprised as follows (in thousands, except per share data):

 

Under the modified prospective application method, results for prior periods have not been restated to reflect the effects of implementing FAS 123R.

Pro Forma Information FAS 123 for Periods Prior to 2006

Prior to adopting the provisions of FAS 123R, the company recorded estimated compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion 25 (APB 25), “Accounting for Stock Issued to Employees” and provided the required pro forma disclosures of FAS 123. Because the company established the exercise price based on the fair market value of the company’s stock at the date of grant, the stock options had no intrinsic value upon grant, and therefore no estimated expense was recorded prior to adopting FAS 123R. Each accounting period, the company reported the potential dilutive impact of stock options in its diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period was below the strike price of the stock option) were not included in diluted earnings per common share as their effect was anti-dilutive.

4

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For purposes of pro forma disclosures under FAS 123 for the three-month period ended March 31, 2005, the estimated fair value of the stock options was assumed to be amortized to expense over the stock options’ vesting periods. The pro forma effects of recognizing estimated compensation expense under the fair value method on net income and earnings per common share for the three-month period ended March 31, 2005 were as follows (in thousands, except per share data):

 

The above disclosures related to the effect of share-based compensation expense for the three-month period ended March 31, 2006 and the pro forma effect as if FAS 123R had been applied to the three-month period ended March 31, 2005, are based on the fair value of stock option awards estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:

(1)         The volatility is based on the historical volatility of the company’s stock.

(2)         The risk-free interest rate is based on the U.S. Treasury strip rate for the expected life of the option.

(3)         The dividend yield is based on the company’s latest annualized dividend rate and the current market price of the underlying common stock at the date of grant.

(4)         The expected life in years is determined primarily from historical stock option exercise data.

Note 3. Earnings Per Share

The company computes and presents earnings per common share in accordance with FASB Statement No. 128, “Earnings Per Share”. Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes, in addition to the above, the weighted average dilutive effect of common share equivalents outstanding during the period. Common share equivalents represent dilutive stock options and dilutive shares related to the company’s convertible subordinated debt and are excluded from the computation in periods in which they have an anti-dilutive effect.

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

		Three Months Ended
		2006								2005
		Net Income (Numerator)			Shares (Denominator)		Per Share Amount			Net Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings per share		$	76,049		43,517		$	1.75		$	60,777		47,703		$	1.27
Dilutive stock option effect		—			282					—			362
Convertible subordinated debt effect		665			6,537					664			6,763
Diluted earnings per share		$	76,714		50,336		$	1.52		$	61,441		54,828		$	1.12

 

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Note 4. Inventories

Inventories are stated at lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market. Inventory consisted of the following (in thousands):

 

Note 5. Segment Information

The company has two reportable segments: steel operations and steel scrap substitute operations.

The steel operations segment includes the company’s Flat Roll Division, Structural and Rail Division, and Engineered Bar Products Division. These divisions operate mini-mills, producing steel from steel scrap, using electric arc melting furnaces, continuous casting and automated rolling mills. The steel scrap substitute operations include the revenues and expenses associated with the company’s steel scrap substitute facility, Iron Dynamics.

Revenues included in the category “All Other” are from two subsidiary operations that are below the quantitative thresholds required for reportable segments. These revenues are from the fabrication of trusses, girders, steel joists and steel decking and from the further processing and resale of certain secondary and excess steel products. In addition, “All Other” also includes certain unallocated corporate accounts, such as the company’s senior secured credit facilities, senior unsecured notes, convertible subordinated notes, certain other investments and profit sharing expenses.

The company’s operations are organized and managed as operating segments. 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. Refer to the company’s Annual Report on Form10-K for the year ended December 31, 2005, for more information related to the company’s segment reporting.

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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 $15.3 million and $25.0 million for the three-months ended March 31, 2006 and 2005, respectively. The company’s segment results for the three-month periods ended March 31 are as follows (in thousands):

 

7

Note 6. Condensed Consolidating Information

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of $300.0 million of senior notes due March 2009. Following 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 following condensed consolidating financial statements (presented dollars in thousands) should be read in conjunction with the accompanying consolidated financial statements and the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Condensed Consolidating Balance Sheets

								Combined			Consolidating			Total
As of March 31, 2006		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Cash		$	192,899		$	64		$	2,742		$	—		$	195,705
Accounts receivable		239,228			151,278			27,622			(157,233		)	260,895
Inventories		343,936			—			40,194			(2,625		)	381,505
Other current assets		19,872			—			409			(31		)	20,250
Total current assets		795,935			151,342			70,967			(159,889		)	858,355
Property, plant and equipment, net		932,815			—			57,808			(117		)	990,506
Other assets		55,397			73,989			793			(97,421		)	32,758
Total assets		$	1,784,147		$	225,331		$	129,568		$	(257,427	)	$	1,881,619
Accounts payable		$	177,152		$	(7,107	)	$	8,917		$	1,153		$	180,115
Accrued expenses		58,367			884			4,705			(915		)	63,041
Current maturities of long-term debt		1,072			—			5,856			(5,856		)	1,072
Total current liabilities		236,591			(6,223		)	19,478			(5,618		)	244,228
Other liabilities		169,778			52,446			82,785			(73,341		)	231,668
Long-term debt		432,844			—			662			(662		)	432,844
Minority interest		(9		)	—			—			1,366			1,357
Common stock		534			2			17,323			(17,325		)	534
Treasury stock		(262,241		)	—			—			—			(262,241		)
Additional paid in capital		421,648			116,868			—			(116,868		)	421,648
Retained earnings		785,002			62,238			9,320			(44,979		)	811,581
Total stockholders’ equity		944,943			179,108			26,643			(179,172		)	971,522
Total liabilities and stockholders’ equity		$	1,784,147		$	225,331		$	129,568		$	(257,427	)	$	1,881,619

 

								Combined			Consolidating			Total
As of December 31, 2005		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Cash		$	62,842		$	59		$	2,617		$	-		$	65,518
Accounts receivable		220,320			147,574			29,612			(155,798		)	241,708
Inventories		361,064			—			41,684			(4,064		)	398,684
Other current assets		19,580			—			279			(36		)	19,823
Total current assets		663,806			147,633			74,192			(159,898		)	725,733
Property, plant and equipment, net		941,996			—			58,091			(118		)	999,969
Other assets		69,214			108,615			650			(146,494		)	31,985
Total assets		$	1,675,016		$	256,248		$	132,933		$	(306,510	)	$	1,757,687
Accounts payable		$	113,461		$	(8,640	)	$	10,305		$	416		$	115,542
Accrued expenses		84,547			1,162			4,968			(1,197		)	89,479
Current maturities of long-term debt		2,136			—			5,877			(5,857		)	2,156
Total current liabilities		200,144			(7,478		)	21,150			(6,638		)	207,177
Other liabilities		184,421			38,584			87,213			(79,113		)	231,105
Long-term debt		438,419			—			—			—			438,419
Minority interest		—			—			—			1,118			1,118
Common stock		529			2			17,322			(17,324		)	529
Treasury stock		(270,905		)	—			—			—			(270,905		)
Additional paid in capital		405,900			116,868			—			(116,868		)	405,900
Retained earnings		716,508			108,273			7,248			(87,685		)	744,344
Total stockholders’ equity		852,032			225,143			24,570			(221,877		)	879,868
Total liabilities and stockholders’ equity		$	1,675,016		$	256,248		$	132,933		$	(306,510	)	$	1,757,687

 

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Condensed Consolidating Statements of Income

For the three months ended,								Combined			Consolidating			Total
March 31, 2006		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	632,968		$	633,004		$	60,953		$	(661,047	)	$	665,878
Costs of goods sold		483,577			626,168			52,295			(655,649		)	506,391
Gross profit		149,391			6,836			8,658			(5,398		)	159,487
Selling, general and administrative		23,342			2,857			4,658			(2,482		)	28,375
Operating income (loss)		126,049			3,979			4,000			(2,916		)	131,112
Interest expense		7,596			—			627			(87		)	8,136
Other (income) expense, net		38,167			(38,943		)	(22		)	117			(681		)
Income (loss) before income taxes and equity in net loss of subsidiaries		80,286			42,922			3,395			(2,946		)	123,657
Income taxes		32,578			15,395			1,322			(1,687		)	47,608
		47,708			27,527			2,073			(1,259		)	76,049
Equity in net income of subsidiaries		29,597			—			—			(29,597		)	—
Net income (loss)		$	77,305		$	27,527		$	2,073		$	(30,856	)	$	76,049

 

For the three months ended,								Combined			Consolidating			Total
March 31, 2005		Parent			Guarantors			Non-Guarantors			Adjustments			Consolidated
Net sales		$	568,605		$	521,727		$	36,295		$	(555,921	)	$	570,706
Costs of goods sold		443,399			516,644			31,879			(549,993		)	441,929
Gross profit		125,206			5,083			4,416			(5,928		)	128,777
Selling, general and administrative		18,587			1,905			3,687			(1,725		)	22,454
Operating income (loss)		106,619			3,178			729			(4,203		)	106,323
Interest expense		7,603			—			472			2			8,077
Other (income) expense, net		33,285			(33,891		)	—			28			(578		)
Income (loss) before income taxes and equity in net loss of subsidiaries		65,731			37,069			257			(4,233		)	98,824
Income taxes		25,964			13,289			99			(1,305		)	38,047
		39,767			23,780			158			(2,928		)	60,777
Equity in net income of subsidiaries		23,938			—			—			(23,938		)	—
Net income (loss)		$	63,705		$	23,780		$	158		$	(26,866	)	$	60,777

 

Condensed Consolidating Statements of Cash Flow

For the three months ended,								Combined			Total
March 31, 2006		Parent			Guarantors			Non-Guarantors			Consolidated
Net cash provided by operations		$	108,419		$	21,584		$	6,029		$	136,032
Net cash used in investing activities		(18,544		)	—			(741		)	(19,285		)
Net cash provided by (used in) in financing activities		40,182			(21,579		)	(5,163		)	13,440
Increase in cash and equivalents		130,057			5			125			130,187
Cash and equivalents at beginning of year		62,842			59			2,617			65,518
Cash and equivalents at end of period		$	192,899		$	64		$	2,742		$	195,705

 

For the three months ended,								Combined			Total
March 31, 2005		Parent			Guarantors			Non-Guarantors			Consolidated
Net cash provided by (used in) operations		$	77,623		$	(14,748	)	$	(7,900	)	$	54,975
Net cash used in investing activities		(7,107		)	—			(12,034		)	(19,141		)
Net cash provided by (used in) in financing activities		(68,304		)	—			19,883			(48,421		)
Increase (decrease) in cash and equivalents		2,212			(14,748		)	(51		)	(12,587		)
Cash and equivalents at beginning of year		4,157			11,869			308			16,334
Cash and equivalents at end of period		$	6,369		$	(2,879	)	$	257		$	3,747

 

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Note 7. Subsequent Events

The company completed its previously announced acquisition of Roanoke Electric Steel Corporation on April 11, 2006, immediately following approval of the transaction by Roanoke stockholders. Pursuant to the Merger Agreement, Roanoke stockholders received $9.75 in cash and 0.4 shares of the company’s common stock for each share of Roanoke stock outstanding at the effective date of the merger. Based on 11,360,901 shares of Roanoke stock outstanding prior to the close of the transaction, the company paid $111 million in cash, issued 4,544,360 shares of registered Steel Dynamics common stock and assumed $45 million in Roanoke debt, which the company retired on April 12, 2006. The cash portion of the purchase price was funded from the company’s cash on hand.

Roanoke has steel manufacturing facilities in Roanoke, Virginia and Huntington, West Virginia. These facilities produce angles, rounds, flats, channels, beams, special sections and billets, which are sold to steel service centers, fabricators, original equipment manufacturers and other steel producers. Roanoke also has certain subsidiaries involved in steel fabrication including bar joist and truck trailer beams and has two steel scrap processing locations.

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