Table of Contents

 

 

 

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 September 30, 2008

 

 

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) 969-3500

 

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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

 

(Do not check if a smaller
reporting company)

 

 

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 November 3, 2008, Registrant had 181,691,718 outstanding shares of common stock.

 

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

Table of Contents

 

PART I.  Financial Information

 

 

 

 

 

Page

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007

 

1

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine-month periods ended September 30, 2008 and 2007 (unaudited)

 

2

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2008 and 2007 (unaudited)

 

3

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

21

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

21

 

 

 

 

 

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

22

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

22

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

22

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

22

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

22

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

23

 

 

 

 

 

 

 

 

 

Signatures

 

23

 

 



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

22,135

 

$

28,486

 

Accounts receivable, net

 

1,032,734

 

670,020

 

Accounts receivable-related parties

 

89,914

 

44,103

 

Inventories

 

1,356,992

 

904,398

 

Deferred income taxes

 

12,023

 

10,427

 

Other current assets

 

61,977

 

38,795

 

Total current assets

 

2,575,775

 

1,696,229

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,997,495

 

1,652,097

 

 

 

 

 

 

 

Restricted cash

 

7,679

 

11,945

 

Intangible assets, net

 

625,537

 

514,547

 

Goodwill

 

781,555

 

510,983

 

Other assets

 

66,838

 

133,652

 

Total assets

 

$

6,054,879

 

$

4,519,453

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

644,263

 

$

358,921

 

Accounts payable-related parties

 

8,532

 

19,928

 

Income taxes payable

 

31,614

 

25,870

 

Accrued expenses

 

274,886

 

150,687

 

Accrued profit sharing

 

75,212

 

53,958

 

Senior secured revolving credit facility, due 2012

 

575,000

 

239,000

 

Current maturities of long-term debt

 

65,203

 

56,162

 

Total current liabilities

 

1,674,710

 

904,526

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Senior secured term A loan, due 2012

 

519,900

 

481,250

 

7 3/8% senior notes, due 2012

 

700,000

 

700,000

 

6 ¾% senior notes, due 2015

 

500,000

 

500,000

 

7 ¾% senior notes, due 2016

 

500,000

 

 

4.0% convertible subordinated notes

 

 

37,250

 

Other long-term debt

 

15,884

 

16,183

 

 

 

2,235,784

 

1,734,683

 

 

 

 

 

 

 

Deferred income taxes

 

333,025

 

301,470

 

Minority interest

 

8,939

 

11,038

 

Other liabilities

 

63,027

 

38,540

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock voting, $.0025 par value; 900,000,000 shares authorized; 218,636,669 and 217,770,922 shares issued; and 183,115,409 and 190,324,402 shares outstanding, as of September 30, 2008 and December 31, 2007, respectively

 

544

 

542

 

Treasury stock, at cost; 35,521,260 and 27,446,520 shares, as of September 30, 2008 and December 31, 2007, respectively

 

(720,835

)

(457,368

)

Additional paid-in capital

 

538,445

 

553,805

 

Other accumulated comprehensive income

 

 

21

 

Retained earnings

 

1,921,240

 

1,432,196

 

Total stockholders’ equity

 

1,739,394

 

1,529,196

 

Total liabilities and stockholders’ equity

 

$

6,054,879

 

$

4,519,453

 

 

Note:  All prior period share data has been adjusted to reflect the company’s two-for-one stock split effective March 2008.

 

See notes to consolidated financial statements.

 

1



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

Unrelated parties

 

$

2,479,655

 

$

1,104,076

 

$

6,582,741

 

$

2,779,114

 

Related parties

 

84,288

 

52,517

 

287,346

 

154,401

 

Total net sales

 

2,563,943

 

1,156,593

 

6,870,087

 

2,933,515

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

2,118,737

 

928,142

 

5,597,917

 

2,272,079

 

Gross profit

 

445,206

 

228,451

 

1,272,170

 

661,436

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

67,459

 

37,670

 

219,355

 

98,242

 

Profit sharing

 

30,800

 

14,699

 

76,204

 

43,740

 

Amortization of intangible assets

 

10,765

 

2,155

 

30,416

 

6,556

 

Total selling, general and administrative expenses

 

109,024

 

54,524

 

325,975

 

148,538

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

336,182

 

173,927

 

946,195

 

512,898

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net capitalized interest

 

37,446

 

14,602

 

102,728

 

29,048

 

Other (income) expense, net

 

(8,342

)

(602

)

(33,048

)

10,205

 

Income before income taxes

 

307,078

 

159,927

 

876,515

 

473,645

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

114,070

 

59,336

 

330,456

 

176,949

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

193,008

 

$

100,591

 

$

546,059

 

$

296,696

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.99

 

$

.56

 

$

2.85

 

$

1.59

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

195,347

 

179,481

 

191,579

 

186,324

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share, including the effect of assumed conversions

 

$

.98

 

$

.53

 

$

2.75

 

$

1.51

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents outstanding

 

196,859

 

189,858

 

198,840

 

196,898

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

.10

 

$

.075

 

$

.30

 

$

.225

 

 

Note:  All prior period share data has been adjusted to reflect the company’s two-for-one stock split effective March 2008.

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

193,008

 

$

100,591

 

$

546,059

 

$

296,696

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

55,359

 

33,853

 

156,153

 

96,096

 

Unamortized bond premium

 

 

 

 

(3,350

)

Equity-based compensation

 

3,293

 

1,817

 

9,976

 

6,218

 

Deferred income taxes

 

(2,047

)

(562

)

(9,893

)

(1,679

)

(Gain) loss on disposal of property, plant and equipment

 

27

 

99

 

(208

)

179

 

Minority interest

 

(3,365

)

107

 

(2,099

)

(448

)

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

89,664

 

12,544

 

(307,540

)

(21,204

)

Inventories

 

(135,430

)

35,212

 

(353,125

)

(118,514

)

Other assets

 

(33,670

)

(3,022

)

(46,719

)

(21,521

)

Accounts payable

 

(133,911

)

29,784

 

230,269

 

100,594

 

Income taxes payable

 

(32,114

)

5,374

 

5,743

 

1,242

 

Accrued expenses

 

76,421

 

34,402

 

117,507

 

14,058

 

Net cash provided by operating activities

 

77,235

 

250,199

 

346,123

 

348,367

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(115,636

)

(99,935

)

(310,625

)

(255,845

)

Acquisition of businesses, net of cash acquired

 

 

(373,407

)

(271,159

)

(411,626

)

Purchases of securities

 

 

 

(20,373

)

 

Sales of securities

 

32,533

 

 

32,758

 

 

Other investing activities

 

(1,753

)

169

 

2,176

 

7

 

Net cash used in investing activities

 

(84,856

)

(473,173

)

(567,223

)

(667,464

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Issuance of current and long-term debt

 

1,186,000

 

798,000

 

2,190,900

 

1,795,000

 

Repayment of current and long-term debt

 

(814,665

)

(366,230

)

(1,449,820

)

(1,028,387

)

Debt issuance costs

 

(28

)

(2,603

)

(7,544

)

(10,591

)

Issuance of common stock (net of expenses) and proceeds from exercise of stock options, including related tax effect

 

2,029

 

4,113

 

19,483

 

20,260

 

Purchase of treasury stock

 

(439,166

)

(197,867

)

(485,293

)

(433,183

)

Dividends paid

 

(19,819

)

(13,840

)

(52,977

)

(42,564

)

Net cash provided by (used in) financing activities

 

(85,649

)

221,573

 

214,749

 

300,535

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash and equivalents

 

(93,270

)

(1,401

)

(6,351

)

(18,562

)

Cash and equivalents at beginning of period

 

115,405

 

12,212

 

28,486

 

29,373

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

22,135

 

$

10,811

 

$

22,135

 

$

10,811

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

7,982

 

$

4,563

 

$

76,701

 

$

22,921

 

Cash paid for federal and state income taxes

 

$

153,938

 

$

51,236

 

$

315,847

 

$

183,521

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1.  Summary of Accounting Policies and Recent Accounting Pronouncements

 

Description of the Business.

 

Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is a domestic manufacturer of steel products. The company has three reporting segments: steel operations, steel fabrication operations, and metals recycling and ferrous resources operations.

 

Steel Operations.  Steel operations include the company’s Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia and The Techs operations. These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting, automated rolling mills, and downstream finishing facilities. The Techs was acquired in July 2007 and operates three galvanizing lines specializing in the galvanizing of specific types of flat-rolled steels in non-automotive applications. The company’s steel operations sell directly to end users and service centers. These products are used in numerous industry sectors, including the automotive, construction, commercial, transportation and industrial machinery markets. Steel operations accounted for approximately 53%, and 86% of the company’s net sales during the three-month periods ended September 30, 2008 and 2007, respectively and approximately 55% and 85% during the nine-month periods ended September 30, 2008 and 2007, respectively.

 

Fabrication Operations.  Fabrication operations include the company’s New Millennium Building Systems plants located throughout the eastern United States. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry. Fabrication operations accounted for approximately 4% and 8% of the company’s net sales during the three-month periods ended September 30, 2008 and 2007, respectively and approximately 3% and 8% during the nine-month periods ended September 30, 2008 and 2007, respectively.

 

Metals Recycling and Ferrous Resources Operations. This segment includes Iron Dynamics and the company’s steel scrap procurement and processing locations, including OmniSource Corporation (OmniSource) operations, which were acquired on October 26, 2007 and Recycle South, LLC (Recycle South) operations which were acquired on June 9, 2008 (See Note 2). In addition, the impact related to the construction of the Mesabi Nugget iron-making facility in Hoyt Lakes, Minnesota are also included in this segment.  Metals recycling and ferrous resources operations accounted for approximately 42% and 5% of the company’s net sales during the three-month periods ended September 30, 2008 and 2007, respectively and approximately 40% and 5% during the nine-month periods ended September 30, 2008 and 2007, respectively.

 

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.

 

Uncertain Tax Positions.   The company files income tax returns in the U.S. federal jurisdiction as well as income tax returns in various state jurisdictions. The Internal Revenue Service (IRS) completed an examination of the company’s federal income tax returns for 1997 through 2001 in the third quarter of 2007. The final examination adjustments did not result in a material change to the company’s financial position or results of operations. The state of Indiana completed its examination of the calendar years 2000 through 2005 during the third quarter of 2008.  The total tax paid on October 1, 2008, to settle the examination was $20.7 million and was included in the balance of the unrecognized tax benefits at September 30, 2008.  The additional tax settlement related primarily to the deductibility of intercompany royalty and interest payments.  Indiana did not assess any interest or penalties.  With few exceptions the company is no longer subject to federal, state and local income tax examinations by tax authorities for the years ended before 2004.

 

Included in the balance of unrecognized tax benefits at September 30, 2008 are potential benefits of $50.8 million that, if recognized, would decrease the effective tax rate. The company recognizes interest and penalties related to its tax contingencies on a net-of-tax basis in income tax expense. During the nine-month period ended September 30, 2008, the company recognized interest income of $394,000, net of tax, and penalties of $142,000 on all uncertain tax positions.  At September 30, 2008, the company had $5.2 million accrued for the payment of interest and penalties.

 

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, intangible assets and goodwill; 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, 2007.

 

4



Table of Contents

 

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Comprehensive Income.  The components of comprehensive income are summarized in the following table (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income

 

$

193,008

 

$

100,591

 

$

546,059

 

$

296,696

 

Reversal of unrealized gain upon sale of available-for-sale securities, net of tax

 

(5,011

)

 

(21

)

 

Comprehensive income

 

$

187,997

 

$

100,591

 

$

546,038

 

$

296,696

 

 

Other accumulated comprehensive income consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

Unrealized gain on available-for-sale securities

 

$

 

$

21

 

Tax effect

 

 

 

Total other accumulated comprehensive income

 

$

 

$

21

 

 

Recent Accounting Pronouncements.

 

FASB Statement No. 159.  In February 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure, on an item-by-item basis, specific financial instruments and certain other items at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date.  FAS 159 is effective for fiscal years beginning after November 15, 2007.  The provisions of this statement are required to be applied prospectively.  The company adopted FAS 159 January 1, 2008, and there was no significant impact to the company’s financial statements from the adoption.

 

FASB Statement No. 160.  In December 2007, the FASB issued Statement No. 160 (FAS 160), Non-Controlling Interests in Consolidated Financial Statements.  The statement clarifies the classification of non-controlling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such non-controlling interests.  FAS 160 is effective for the first annual reporting period beginning on or after December 15, 2008, and early adoption is prohibited.  FAS 160 is generally required to be adopted prospectively.  The minority interest reflected in the company’s balance sheet will be reclassified to stockholders’ equity upon adoption of FAS 160.

 

FASB Statement No. 161.  In March 2008, the FASB issued Statement No. 161 (FAS 161), Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.  FAS 161 amends and expands the disclosure requirements for derivative instruments and hedging activities, with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial statements.  FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The company will comply with the disclosure requirements of FAS 161 beginning January 1, 2009.

 

Note 2.  Acquisitions.

 

Sturgis Iron & Metal Acquisition

 

On June 24, 2008, the company completed the acquisition of certain assets of Sturgis Iron & Metal, an operator of scrap collection and processing locations in Indiana, Michigan and Georgia.  The assets were purchased for approximately $43.4 million in cash through bankruptcy proceedings and will be operated as a part of the company’s wholly-owned subsidiary, OmniSource Corporation.  The company purchased the assets to continue its expansion of its metals recycling operations and have begun operating three of the acquired locations.

 

Recycle South Acquisition

 

On June 9, 2008, the company completed its acquisition of Recycle South, one of the nation’s largest, privately-held, regional scrap metal recycling companies, headquartered in Spartanburg, South Carolina.  OmniSource (which already owned 25% of Recycle South), acquired the remaining 75% equity interest for a purchase price of approximately $376.3 million.  The company paid approximately $236.6 million in cash, including transaction costs, and issued 3,938,000 shares of Steel Dynamics, Inc. common stock valued at approximately $139.8 million.  In addition, the company assumed approximately $144.9 million of net debt, of which approximately $142.8 million was repaid upon the closing of the acquisition. The cash portion of the acquisition was funded from the company’s cash on hand which included proceeds from the issuance of the $500 million 7¾% senior notes due April 2016, which were issued in April 2008.  The company valued the common stock issued at $35.49 per share based on the average stock price of the company’s common stock during the two days before and after the date the acquisition agreement was agreed to and announced (May 8, 2008).

 

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Table of Contents

 

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The company purchased Recycle South to expand its metals recycling business. Recycle South will provide a significant presence in the southeastern United States through its 22 locations within North Carolina, South Carolina and Georgia.  Recycle South’s consolidated operating results have been reflected in the company’s financial statements since June 9, 2008, the effective date of the acquisition, in the metals recycling and ferrous resources reporting segment.

 

The aggregate purchase price of $376.3 million for the remaining 75% equity interest in Recycle South, combined with the recently acquired 25% interest through the OmniSource acquisition, results in a total purchase price of $501.8 million.  The following initial allocation of the total purchase price is preliminary.  The following is subject to adjustments based on further determination of actual acquisition costs and the fair values, lives, and amortization methods of the acquired assets, assumed liabilities and identifiable intangible assets (in thousands):

 

Current assets

 

$

212,599

 

Property, plant & equipment, net

 

93,949

 

Intangible assets

 

155,000

 

Goodwill

 

271,785

 

Other assets

 

1,902

 

Total assets acquired

 

735,235

 

 

 

 

 

Current liabilities, excluding debt

 

88,492

 

Debt

 

144,947

 

Total liabilities assumed

 

233,439

 

 

 

 

 

Net assets acquired

 

$

501,796

 

 

Preliminary goodwill and intangible assets of $271.8 million and $155.0 million, respectively, were recorded as a result of the acquisition. The goodwill is expected to be deductible for tax purposes.

 

The preliminary valuation of identifiable intangible assets related to the acquisition consisted of the following (in thousands):

 

 

 

Amount

 

Useful Life

 

Customer relationships

 

$

31,000

 

10 years

 

Scrap generator relationships

 

77,500

 

25 years

 

Trademarks

 

46,500

 

Indefinite

 

 

 

$

155,000

 

 

 

 

The company utilizes an accelerated amortization methodology so as to follow the pattern in which the economic benefits of the intangible assets are anticipated to be consumed.  The related aggregate amortization expense recognized for the nine-month period ended September 30, 2008 was $2.5 million.  The estimated intangible asset amortization expense related to the total acquisition of Recycle South for the next five years and thereafter follows (in thousands):

 

2008 (including January 1 to September 30)

 

$

5,005

 

2009

 

10,049

 

2010

 

9,135

 

2011

 

8,461

 

2012

 

7,785

 

Thereafter

 

68,065

 

Total

 

$

108,500

 

 

OmniSource Corporation Acquisition

 

On October 26, 2007, the company completed its acquisition of 100% of the stock of OmniSource Corporation, a privately owned ferrous and non-ferrous scrap processing and trading company. The company paid approximately $449.1 million in cash, including transaction costs, and issued 19.4 million shares (on a post March 19, 2008 two-for-one stock split basis) of the company’s common stock with a value of approximately $455.0 million. In addition, the company assumed approximately $210.6 million of debt, which the company repaid on the closing of the acquisition. The cash portion of the acquisition was funded from the company’s cash on hand which included the proceeds of the $700.0 million 73/8% senior note offering that was consummated on October 12, 2007. The company valued the common stock issued at $23.46 per share based on the average stock price of the company’s common stock during the two days before and after the date the acquisition agreement was agreed to and announced (October 1, 2007).

 

The aggregate purchase price of $904.1 million was preliminarily allocated to the opening balance sheet of OmniSource at October 26, 2007, the date of the acquisition.  During the first nine months of 2008, the company adjusted the initial purchase price allocation to reflect additional refinement in the valuation of the acquisition.  The following purchase price allocation is preliminary and based on estimated acquisition costs and the fair

 

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

value and lives of the acquired assets, assumed liabilities and identifiable intangible assets (in thousands):

 

 

 

September 30,
2008

 

Current assets

 

$

485,909

 

Property, plant & equipment, net

 

220,105

 

Intangible assets

 

305,000

 

Goodwill

 

319,285

 

Other assets

 

111,403

 

Total assets acquired

 

1,441,702

 

 

 

 

 

Current liabilities, excluding debt

 

275,956

 

Debt

 

210,797

 

Other liabilities

 

50,847

 

Total liabilities assumed

 

537,600

 

Net assets acquired

 

$

904,102

 

 

Goodwill and intangible assets of $316.1 million and $305.0 million, respectively, were recorded as a result of the acquisition. The goodwill is deductible for tax purposes.  In addition, goodwill recorded for tax purposes is $103.6 million greater than goodwill recorded for financial statement purposes.  For tax purposes, the excess tax-goodwill is being amortized over a 15-year period, and the resulting tax benefit recorded as a reduction to goodwill recorded for financial statement purposes.  The identifiable intangible assets related to the acquisition consisted of the following (in thousands):

 

 

 

Amount

 

Useful Life

 

Customer relationships

 

$

54,000

 

10 years

 

Scrap generator relationships

 

143,000

 

25 years

 

Trademarks

 

108,000

 

Indefinite

 

 

 

$

305,000

 

 

 

 

The company utilizes an accelerated amortization methodology so as to follow the pattern in which the economic benefits of the intangible assets are anticipated to be consumed.  The related aggregate amortization expense recognized for the three and nine-month periods ended September 30, 2008 was $4.5 and $14.4 million, respectively.  The estimated intangible asset amortization expense related to the OmniSource transaction for the next five years and thereafter follows (in thousands):

 

2008 (including January 1 to September 30)

 

$

18,934

 

2009

 

17,773

 

2010

 

16,206

 

2011

 

15,004

 

2012

 

13,878

 

Thereafter

 

113,205

 

Total

 

$

195,000

 

 

Unaudited Pro Forma Information.  The following unaudited pro forma information is presented below as if the acquisitions of Recycle South (effective on June 9, 2008) and OmniSource (effective on October 26, 2007) had occurred as of January 1, 2007 related to both OmniSource and Recycle South, and January 1, 2008 related to Recycle South (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

2,563,943

 

$

1,777,471

 

$

7,243,746

 

$

4,877,952

 

Net income

 

193,008

 

107,739

 

569,135

 

331,747

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.99

 

$

.53

 

$

2.93

 

$

1.58

 

Diluted earnings per share

 

.98

 

.51

 

2.83

 

1.51

 

 

The information presented above is for information purposes only and is not necessarily indicative of the actual results that could have occurred had the acquisitions been consummated at January 1, 2007 or 2008, nor is it necessarily indicative of future operating results of the combined companies under the ownership and management of the company.  The pro forma results reflect the inclusion of the acquired operations of Recycle South for the nine month period ended September 30, 2008 and the three and nine-month periods ended September 30, 2007, and OmniSource for the three and nine-month periods ended September 30, 2007. The actual results of Recycle South for the three-month period ended September 30, 2008 and OmniSource for the three and nine-month periods ended September 30, 2008 are included in the consolidated results of the company.

 

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 (in thousands, except per share data):

 

 

 

 

Three Months Ended September 30,

 

 

 

2008

 

2007

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

193,008

 

195,347

 

$

.99

 

$

100,591

 

179,481

 

$

.56

 

Dilutive stock option effect

 

 

978

 

 

 

 

1,595

 

 

 

Convertible subordinated 4.0% notes

 

13

 

534

 

 

 

215

 

8,782

 

 

 

Diluted earnings per share

 

$

193,021

 

196,859

 

$

.98

 

$

100,806

 

189,858

 

$

.53

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2008

 

2007

 

 

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net Income
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Basic earnings per share

 

$

546,059

 

191,579

 

$

2.85

 

$

296,696

 

186,324

 

$

1.59

 

Dilutive stock option effect

 

 

1,370

 

 

 

 

1,766

 

 

 

Convertible subordinated 4.0% notes

 

429

 

5,891

 

 

 

642

 

8,808

 

 

 

Diluted earnings per share

 

$

546,488

 

198,840

 

$

2.75

 

$

297,338

 

196,898

 

$

1.51

 

 

During the three and nine-month periods ended September 30, 2008, holders of the company’s convertible subordinated 4.0% notes converted $16.0 million and $37.3 million of the notes to Steel Dynamics common stock, resulting in the issuance of 3.8 million and 8.8 million shares of the company’s treasury stock, respectively.  As of September 30, 2008, all of the company’s convertible subordinated 4.0% notes have been converted.

 

Note 4.  Financing Activities

 

On March 31, 2008, the company amended its senior secured credit facility to increase the commitments of the term A loan by $94 million and the revolving credit facility by $124 million, resulting in a total senior secured revolver of $874 million. The net proceeds for the additional term A loan were used to repay amounts outstanding under the senior secured revolving credit facility and for general corporate purposes.  In addition, the amendment includes a provision to increase either the revolver or the term A loan facility by as much as $250 million, under certain circumstances.  The combined facilities are due June 2012 and are secured by substantially all of the company’s and its wholly-owned subsidiaries’ receivables and inventories and by pledges of all shares of the company’s wholly-owned subsidiaries’ capital stock.

 

The senior secured credit agreement contains financial covenants and other covenants that limit or restrict the company’s ability to make capital expenditures; incur indebtedness; permit liens on property; enter into transactions with affiliates; make restricted payments or investments; enter into mergers, acquisitions or consolidations; conduct asset sales; pay dividends or distributions and enter into other specified transactions and activities. The company’s ability to borrow funds under the combined facilities is dependent upon its continued compliance with the financial covenants and other covenants contained in the senior secured credit agreement, as amended and restated.

 

During April 2008, the company issued $500 million of 7¾% senior notes due April 2016.  The net proceeds were used to repay amounts outstanding under the company’s senior secured revolving credit facility and for general corporate purposes, including the acquisition of Recycle South as described in Note 2.

 

Note 5.  Inventories

 

Inventories are stated at lower of cost or market.  Cost is determined principally on a first-in, first-out basis.  Inventory consisted of the following, of which all ferrous materials residing at both the steel and metals recycling operations are included in raw materials (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

Raw materials

 

$

721,169

 

$

461,194

 

Supplies

 

209,560

 

175,052

 

Work-in-progress

 

120,260

 

72,518

 

Finished goods

 

306,003

 

195,634

 

Total inventories

 

$

1,356,992

 

$

904,398

 

 

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6.  Fair Value Measurements

 

Effective January 1, 2008, the company adopted FASB Statement No. 157 (FAS 157), Fair Value Measurements, which provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements.  Specifically, FAS 157 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.  The adoption of this statement had an immaterial impact on the company’s financial statements.  FAS 157 defines levels within the hierarchy as follows:

 

·                  Level 1—Unadjusted quoted prices for identical assets and liabilities in active markets;

 

·                  Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and

 

·                  Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

In February 2008, the FASB issued FSP 157-2, which delays the effective date FAS 157 for all non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008.  The company is currently evaluating the potential impact that the application of FSP 157-2 will have on its financial statements.  The following table sets forth financial assets and liabilities measured at fair value in the consolidated statement of financial position and the respective levels to which the fair value measurements are classified within the fair value hierarchy as of September 30, 2008 (in thousands):

 

 

 

September 30,
2008

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

2,426

 

$

2,426

 

$

 

$

 

Commodity futures

 

17,228

 

 

17,228

 

 

Financial assets

 

$

19,654

 

2,426

 

17,228

 

$

 

Commodity futures-Financial liabilities

 

$

20,962

 

$

 

$

20,962

 

$

 

 

Note 7.  Commitments and Contingencies

 

On February 1, 2008, the company was served with a complaint by Prime Eagle Group Limited (Plaintiff), a corporation with its principal place of business in Thailand.  The complaint alleges that the company, which performed certain consulting services for a management company formed to assist a Thailand-based steel company, Nakornthai Strip Mill Public Company, Limited (NSM) in its operational start-up in 1998, caused NSM’s start-up efforts to fail by falsely and fraudulently expressing its opinion that there were certain equipment and design issues that needed to be addressed.  The complaint alleges damages in excess of $1.1 billion.  The company believes that the allegations and claims set forth in the complaint are without merit and accordingly has not accrued a liability for this complaint.  On April 30, 2008, the company filed a Motion to Dismiss the entire lawsuit.  The Motion to Dismiss has been fully briefed and is awaiting a ruling from the Court.

 

On September 17, 2008, Steel Dynamics, Inc. was served with a class action antitrust complaint alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against Steel Dynamics and eight other steel manufacturing companies.  The Complaint, filed in the United States District Court for the Northern District of Illinois in Chicago, alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products.  Since the original filing, six additional lawsuits, each of them materially similar to the original, have been filed in the same federal court, each of them likewise seeking similar class certification.  All but one of the Complaints purport to be brought on behalf of a class consisting of all purchasers of steel products directly from the defendants between January 1, 2005 and the present.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products from the defendants within the same time period.  All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  Although the company believes that the lawsuits are without merit and plans to aggressively defend these actions, the company cannot presently predict the outcome of this litigation or make any judgment with respect to its potential exposure, if any.

 

Note 8.  Segment Information

 

The company has three reportable segments: steel operations, fabrication operations, and metals recycling and ferrous resources operations (formerly steel scrap and scrap substitute).  These operations are described in Note 1 to the financial statements.  Revenues included in the category “All Other” are from subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of further processing, slitting, and sale of certain steel products and 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 notes, convertible subordinated notes, certain other investments, and certain profit sharing expenses.

 

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Table of Contents

 

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The company’s operations are primarily 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 Form 10-K for the year ended December 31, 2007, for more information related to the company’s segment reporting.  Inter-segment sales and any related profits are eliminated in consolidation. The company’s segment results for the three and nine-month periods ended September 30 are as follows (in thousands):

 

For the three months ended,

 

 

 

Steel Fabrication

 

Metals Recycling /

 

 

 

 

 

 

 

September 30, 2008

 

Steel Operations

 

Operations

 

Ferrous Resources

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

1,436,195

 

$

110,084

 

$

788,205

 

$

32,630

 

$

 

$

2,367,114

 

External Non-U.S.

 

115,463

 

 

81,297

 

69

 

 

196,829

 

Other segments

 

112,294

 

442

 

469,345

 

436

 

(582,517

)

 

 

 

1,663,952

 

110,526

 

1,338,847

 

33,135

 

(582,517

)

2,563,943

 

Operating income (loss)

 

278,300

 

4,430

 

95,830

 

(61,618

)

19,240

 

336,182

 

Income (loss) before income taxes

 

261,961

 

2,318

 

82,351

 

(58,792

)

19,240

 

307,078

 

Depreciation and amortization

 

27,798

 

1,919

 

24,340

 

1,302

 

 

55,359

 

Capital expenditures

 

54,679

 

911

 

59,608

 

438

 

 

115,636

 

As of September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

3,098,925

 

283,356

 

2,484,008

 

344,398

 

(155,808

)

6,054,879

 

Liabilities

 

510,370

 

15,396

 

360,374

 

3,547,089

 

(117,744

)

4,315,485

 

 

For the three months ended,

 

 

 

Steel Fabrication

 

Metals Recycling /

 

 

 

 

 

 

 

September 30, 2007

 

Steel Operations

 

Operations

 

Ferrous Resources

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

944,637

 

$

97,900

 

$

18,895

 

$

20,200

 

$

 

$

1,081,632

 

External Non-U.S.

 

74,695

 

 

 

266

 

 

74,961

 

Other segments

 

76,656

 

14,173

 

38,427

 

409

 

(129,665

)

 

 

 

1,095,988

 

112,073

 

57,322

 

20,875

 

(129,665

)

1,156,593

 

Operating income (loss)

 

189,283

 

6,868

 

4,602

 

(24,558

)

(2,268

)

173,927

 

Income (loss) before income taxes

 

174,666

 

7,525

 

4,569

 

(24,533

)

(2,300

)

159,927

 

Depreciation and amortization

 

28,279

 

1,644

 

2,310

 

1,620

 

 

33,853

 

Capital expenditures

 

71,043

 

15,549

 

4,635

 

8,708

 

 

99,935

 

As of September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

2,552,072

 

234,729

 

218,016

 

107,215

 

(16,731

)

3,095,301

 

Liabilities

 

372,556

 

24,634

 

12,780

 

1,647,137

 

(41,765

)

2,015,342

 

 

For the nine months ended,

 

 

 

Steel Fabrication

 

Metals Recycling /

 

 

 

 

 

 

 

September 30, 2008

 

Steel Operations

 

Operations

 

Ferrous Resources

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

4,025,859

 

$

281,778

 

$

2,045,443

 

$

109,501

 

$

 

$

6,462,581

 

External Non-U.S.

 

233,784

 

 

173,432

 

290

 

 

407,506

 

Other segments

 

286,284

 

559

 

1,084,687

 

1,631

 

(1,373,161

)

 

 

 

4,545,927

 

282,337

 

3,303,562

 

111,422

 

(1,373,161

)

6,870,087

 

Operating income (loss)

 

840,400

 

12,435

 

223,345

 

(131,873

)

1,888

 

946,195

 

Income (loss) before income taxes

 

794,329

 

6,651

 

214,162

 

(140,517

)

1,890

 

876,515

 

Depreciation and amortization

 

89,451

 

5,663

 

58,457

 

2,582

 

 

156,163

 

Capital expenditures

 

180,422

 

10,079

 

116,405

 

3,719

 

 

 

310,625

 

 

For the nine months ended,

 

 

 

Steel Fabrication

 

Metals Recycling /

 

 

 

 

 

 

 

September 30, 2007

 

Steel Operations

 

Operations

 

Ferrous Resources

 

Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

2,403,643

 

$

262,882

 

$

37,760

 

$

56,507

 

$

 

$

2,760,792

 

External Non-U.S.

 

172,373

 

 

 

350

 

 

172,723

 

Other segments

 

207,814

 

24,449

 

110,403

 

1,028

 

(343,694

)

 

 

 

2,783,830

 

287,331

 

148,163

 

57,885

 

(343,694

)

2,933,515

 

Operating income (loss)

 

553,039

 

19,005

 

10,997

 

(70,215

)

72

 

512,898

 

Income (loss) before income taxes

 

527,448

 

18,065

 

10,859

 

(82,704

)

(23

)

473,645

 

Depreciation and amortization

 

80,898

 

4,103

 

6,335

 

4,760

 

 

96,096

 

Capital expenditures

 

184,132

 

44,392

 

8,617

 

18,704

 

 

255,845

 

 

10



Table of Contents

 

STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9.  Condensed Consolidating Information

 

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of the $700 million senior notes due 2012, $500 million senior notes due 2015, and $500 million senior notes due 2016.  Following are condensed consolidating financial statements of the company, including the guarantors.  The following 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 statements 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, 2007.

 

Condensed Consolidating Balance Sheets (in thousands)

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of September 30, 2008

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

718

 

$

17,960

 

$

3,457

 

$

 

$

22,135

 

Accounts receivable, net

 

482,189

 

997,771

 

11,932

 

(369,244

)

1,122,648

 

Inventories

 

785,196

 

549,699

 

34,795

 

(12,698

)

1,356,992

 

Other current assets

 

60,593

 

19,413

 

400

 

(6,406

)

74,000

 

Total current assets

 

1,328,696

 

1,584,843

 

50,584

 

(388,348

)

2,575,775

 

Property, plant and equipment, net

 

1,171,965

 

724,150

 

101,380

 

 

1,997,495

 

Other assets

 

3,163,483

 

1,089,989

 

8,145

 

(2,780,008

)

1,481,609

 

Total assets

 

$

5,664,144

 

$

3,398,982

 

$

160,109

 

$

(3,168,356

)

$

6,054,879

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

448,156

 

$

326,564

 

$

49,746

 

$

(171,671

)

$

652,795

 

Accrued expenses

 

233,713

 

162,623

 

1,358

 

(15,982

)

381,712

 

Current maturities of long-term debt

 

640,140

 

63

 

14,906

 

(14,906

)

640,203

 

Total current liabilities

 

1,322,009

 

489,250

 

66,010

 

(202,559

)

1,674,710

 

Other liabilities

 

294,244

 

2,264,708

 

20,267

 

(2,183,167

)

396,052

 

Long-term debt

 

2,235,696

 

88

 

6,328

 

(6,328

)

2,235,784

 

Minority interest

 

 

 

 

8,939

 

8,939

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

544

 

19,754

 

7,832

 

(27,586

)

544

 

Treasury stock

 

(720,835

)

 

 

 

(720,835

)

Additional paid-in capital

 

538,445

 

117,754

 

70,498

 

(188,252

)

538,445

 

Retained earnings

 

1,994,041

 

507,428

 

(10,826

)

(569,403

)

1,921,240

 

Total stockholders’ equity

 

1,812,195

 

644,936

 

67,504

 

(785,241

)

1,739,394

 

Total liabilities and stockholders’ equity

 

$

5,664,144

 

$

3,398,982

 

$

160,109

 

$

(3,168,356

)

$

6,054,879

 

 

 

 

 

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

As of December 31, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Cash and equivalents

 

$

6,327

 

$

20,096

 

$

2,063

 

$

 

$

28,486

 

Accounts receivable, net

 

299,940

 

631,410

 

7,810

 

(225,037

)

714,123

 

Inventories

 

546,079

 

344,106

 

15,392

 

(1,179

)

904,398

 

Other current assets

 

39,433

 

14,075

 

423

 

(4,709

)

49,222

 

Total current assets

 

891,779

 

1,009,687

 

25,688

 

(230,925

)

1,696,229

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,088,815

 

489,949

 

73,333

 

 

1,652,097

 

Other assets

 

2,161,734

 

1,224,289

 

15,648

 

(2,230,544

)

1,171,127

 

Total assets

 

$

4,142,328

 

$

2,723,925

 

$

114,669

 

$

(2,461,469

)

$

4,519,453

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

154,047

 

$

263,458

 

$

16,045

 

$

(54,701

)

$

378,849

 

Accrued expenses

 

161,577

 

74,925

 

111

 

(6,098

)

230,515

 

Current maturities of long-term debt

 

294,720

 

442

 

9,807

 

(9,807

)

295,162

 

Total current liabilities

 

610,344

 

338,825

 

25,963

 

(70,606

)

904,526

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

298,828

 

2,002,988

 

53,673

 

(2,015,479

)

340,010

 

Long-term debt

 

1,734,557

 

126

 

4,637

 

(4,637

)

1,734,683

 

Minority interest

 

-

 

-

 

-

 

11,038

 

11,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

542

 

19,753

 

7,748

 

(27,501

)

542

 

Treasury stock

 

(457,368

)

 

 

 

(457,368

)

Additional paid-in capital

 

553,805

 

117,753

 

25,823

 

(143,576

)

553,805

 

Other accumulated comprehensive income

 

21

 

 

 

 

21

 

Retained earnings

 

1,401,599

 

244,480

 

(3,175

)

(210,708

)

1,432,196

 

Total stockholders’ equity

 

1,498,599

 

381,986

 

30,396

 

(381,785

)

1,529,196

 

Total liabilities and stockholders’ equity

 

$

4,142,328

 

$

2,723,925

 

$

114,669

 

$

(2,461,469

)

$

4,519,453

 

 

11



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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Income (in thousands)

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2008

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

1,187,112

 

$

2,987,157

 

$

33,219

 

$

(1,643,545

)

$

2,563,943

 

Costs of goods sold

 

939,794

 

2,775,282

 

44,576

 

(1,640,915

)

2,118,737

 

Gross profit (loss)

 

247,318

 

211,875

 

(11,357

)

(2,630

)

445,206

 

Selling, general and administrative

 

69,506

 

46,755

 

2,004

 

(9,241

)

109,024

 

Operating income (loss)

 

177,812

 

165,120

 

(13,361

)

6,611

 

336,182

 

Interest expense, net capitalized interest

 

16,653

 

19,223

 

221

 

1,349

 

37,446

 

Other (income) expense, net

 

72,947

 

(81,462

)

(52

)

225

 

(8,342

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

88,212

 

227,359

 

(13,530

)

5,037

 

307,078

 

Income taxes

 

32,815

 

83,291

 

(5,141

)

3,105

 

114,070

 

 

 

55,397

 

144,068

 

(8,389

)

1,932

 

193,008

 

Equity in net income of subsidiaries

 

135,679

 

 

 

(135,679

)

 

Net income (loss)

 

$

191,076

 

$

144,068

 

$

(8,389

)

$

(133,747

)

$

193,008

 

 

For the three months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

752,243

 

$

1,191,678

 

$

20,875

 

$

(808,203

)

$

1,156,593

 

Costs of goods sold

 

587,735

 

1,121,477

 

20,158

 

(801,228

)

928,142

 

Gross profit

 

164,508

 

70,201

 

717

 

(6,975

)

228,451

 

Selling, general and administrative

 

32,698

 

22,942

 

1,428

 

(2,544

)

54,524

 

Operating income (loss)

 

131,810

 

47,259

 

(711

)

(4,431

)

173,927

 

Interest expense, net capitalized interest

 

12,154

 

2,391

 

192

 

(135

)

14,602

 

Other (income) expense, net

 

51,642

 

(52,392

)

(18

)

166

 

(602

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

68,014

 

97,260

 

(885

)

(4,462

)

159,927

 

Income taxes

 

24,778

 

34,625

 

(82

)

15

 

59,336

 

 

 

43,236

 

62,635

 

(803

)

(4,477

)

100,591

 

Equity in net income of subsidiaries

 

61,832

 

 

 

(61,832

)

 

Net income (loss)

 

$

105,068

 

$

62,635

 

$

(803

)

$

(66,309

)

$

100,591

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2008

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

3,195,055

 

$

7,862,106

 

$

111,642

 

$

(4,298,716

)

$

6,870,087

 

Costs of goods sold

 

2,467,936

 

7,298,021

 

115,749

 

(4,283,789

)

5,597,917

 

Gross profit (loss)

 

727,119

 

564,085

 

(4,107

)

(14,927

)

1,272,170

 

Selling, general and administrative

 

187,667

 

150,032

 

7,086

 

(18,810

)

325,975

 

Operating income (loss)

 

539,452

 

414,053

 

(11,193

)

3,883

 

946,195

 

Interest expense, net capitalized interest

 

51,612

 

47,867

 

570

 

2,679

 

102,728

 

Other (income) expense, net

 

204,459

 

(237,892

)

(250

)

635

 

(33,048

)

Income (loss) before income taxes and equity in net income of subsidiaries

 

283,381

 

604,078

 

(11,513

)

569

 

876,515

 

Income taxes

 

106,979

 

221,410

 

(4,363

)

6,430

 

330,456

 

 

 

176,402

 

382,668

 

(7,150

)

(5,861

)

546,059

 

Equity in net income of subsidiaries

 

375,518

 

 

 

(375,518

)

 

Net income (loss)

 

$

551,920

 

$

382,668

 

$

(7,150

)

$

(381,379

)

$

546,059

 

 

12



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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Consolidating

 

Total

 

September 30, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Adjustments

 

Consolidated

 

Net sales

 

$

2,113,349

 

$

3,017,614

 

$

57,886

 

$

(2,255,334

)

$

2,933,515

 

Costs of goods sold

 

1,628,185

 

2,827,010

 

55,722

 

(2,238,838

)

2,272,079

 

Gross profit

 

485,164

 

190,604

 

2,164

 

(16,496

)

661,436

 

Selling, general and administrative

 

95,942

 

56,172

 

3,760

 

(7,336

)

148,538

 

Operating income (loss)

 

389,222

 

134,432

 

(1,596

)

(9,160

)

512,898

 

Interest expense, net capitalized interest

 

22,525

 

6,386

 

535

 

(398

)

29,048

 

Other (income) expense, net

 

159,085

 

(149,322

)

(50

)

492

 

10,205

 

Income (loss) before income taxes and equity in net income of subsidiaries

 

207,612

 

277,368

 

(2,081

)

(9,254

)

473,645

 

Income taxes

 

77,509

 

99,512

 

(249

)

177

 

176,949

 

 

 

130,103

 

177,856

 

(1,832

)

(9,431

)

296,696

 

Equity in net income of subsidiaries

 

176,024

 

 

 

(176,024

)

 

Net income (loss)

 

$

306,127

 

$

177,856

 

$

(1,832

)

$

(185,455

)

$

296,696

 

 

Condensed Consolidating Statements of Cash Flow (in thousands)

 

For the nine months ended,

 

 

 

 

 

Combined

 

Total

 

September 30, 2008

 

Parent

 

Guarantors

 

Non-Guarantors

 

Consolidated

 

Net cash provided by operating activities

 

$

173,777

 

$

162,963

 

$

9,383

 

$

346,123

 

Net cash used in investing activities

 

(355,025

)

(132,383

)

(79,815

)

(567,223

)

Net cash provided by financing activities

 

175,639

 

(32,716

)

71,826

 

214,749

 

Increase (decrease) in cash and equivalents

 

(5,609

)

(2,136

)

1,394

 

(6,351

)

Cash and equivalents at beginning of period

 

6,327

 

20,096

 

2,063

 

28,486

 

Cash and equivalents at end of period

 

$

718

 

$

17,960

 

$

3,457

 

$

22,135

 

 

 

For the nine months ended,

 

 

 

 

 

Combined

 

Total

 

September 30, 2007

 

Parent

 

Guarantors

 

Non-Guarantors

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

(303,603

)

$

652,130

 

$

(160

)

$

348,367

 

Net cash used in investing activities

 

(172,509

)

(470,825

)

(24,130

)

(667,464

)

Net cash provided by (used in) in financing activities

 

465,126

 

(188,124

)

23,533

 

300,535

 

Decrease in cash and equivalents

 

(10,986

)

(6,819

)

(757

)

(18,562

)

Cash and equivalents at beginning of period

 

15,571

 

12,610

 

1,192

 

29,373

 

Cash and equivalents at end of period

 

$

4,585

 

$

5,791

 

$

435

 

$

10,811

 

 

13



Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

        This report contains some predictive statements about future events, including statements related to conditions in the steel marketplace, our revenue growth, costs of raw materials, future profitability and earnings, and the operation of new or existing facilities. These statements are intended to be made as “forward-looking,” subject to many risks and uncertainties within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Such predictive statements are not guarantees of future performance, and actual results could differ materially from our current expectations.  Factors that could cause such predictive statements to turn out other than as anticipated or predicted include, among others: changes in global economic conditions affecting steel, steel scrap and non-ferrous material consumption; increased foreign imports; reduced domestic exports; increased price competition; difficulties in integrating acquired businesses; risks and uncertainties involving new products or new technologies; changes in the availability or cost of steel scrap or substitute materials; increases in energy costs; occurrence of unanticipated equipment failures and plant outages; labor unrest; and the effect of the elements on production or consumption.

 

        In addition, we refer you to the sections titled Special Note Regarding Forward-Looking Statement and Risk Factors in our Annual report on Form 10-K for the year ended December 31, 2007, as well as in other reports which we file with the Securities and Exchange Commission, for a more detailed discussion of some of the many factors, variable risks and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated.  These reports are available publicly on the SEC Web site, www.sec.gov, and on our web site, www.steeldynamics.com.  Forward-looking or predictive statements we make are based on our knowledge of our businesses and the environment in which they operate as of the date on which the statements were made.  Due to these risks and uncertainties, as well as matters beyond our control which can affect forward-looking statements, you are cautioned not to place undue reliance on these predictive statements, which speak only as of the date of this report.  We undertake no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Income Statement Classifications

 

Net Sales.  Net sales from our operations are a factor of net tons shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of the steel products.  Except for the fabrication operations segment, we recognize revenues from sales and the allowance for estimated costs associated with returns from these sales at the time the title of the product is transferred to the customer. Provision is made for estimated product returns and customer claims based on estimates and actual historical experience. The company’s fabrication operations segment recognizes revenues from construction contracts using a percentage of completion methodology based on steel tons consumed to date as a percentage of estimated total steel tons required by each contract.

 

Costs of Goods Sold.  Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs for our steel operations are steel scrap and ferrous resources, alloys, zinc, natural gas, argon, direct and indirect labor and related benefits, electricity, oxygen, electrodes, depreciation, materials, and freight. Our metallic raw materials represent the most significant cost component of our consolidated costs of goods sold.  The primary costs related to our metals recycling and ferrous resources operations is the cost of raw materials, freight costs, and processing expenses.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments. These costs include, among other items, labor and benefits, professional services, insurance expense, property taxes, profit sharing and amortization of intangibles assets.

 

Interest Expense, net Capitalized Interest.  Interest expense consists of interest associated with our senior credit facilities and other debt (described in more detail in the notes to our financial statements included in our 2007 Annual Report on Form 10-K and in the notes to our financial statements herein), net of capitalized interest costs that are related to construction expenditures during the construction period of material capital projects.

 

Other Income, net Other Expense.  Other income consists of interest income earned on our cash deposits and any other non-operating income activity, including gains on certain short-term investments and income from investments accounted for under the equity method of accounting. Other expense consists of any non-operating costs.

 

Acquisitions

 

        On June 24, 2008, we completed the acquisition of certain assets of Sturgis Iron & Metal, an operator of scrap collection and processing locations in Indiana, Michigan and Georgia.  The assets were purchased for approximately $43.4 million in cash through bankruptcy proceedings and will be operated as a part of our wholly-owned subsidiary, OmniSource Corporation.  We purchased the assets to continue the expansion of our metals recycling operations and have begun operating three of these acquired locations.

 

        On June 9, 2008, we completed the acquisition of Recycle South, LLC, one of the largest regional, privately-held, scrap metal recycling companies.  Recycle South employs approximately 600 people in 22 locations throughout North Carolina, South Carolina and Georgia.  Pursuant to the agreement, OmniSource, which already owned 25% of Recycle South, acquired the remaining outstanding stock, in a transaction valued at approximately $376.3 million.  Recycle South shareholders received 3,938,000 shares of our common stock and $236.6 million in cash, including transaction costs.  In addition we assumed debt of approximately $144.9 million, of which we repaid approximately $142.8 million upon the closing of the transaction.  Recycle South operates as a wholly-owned subsidiary of OmniSource and will continue to

 

14



Table of Contents

 

focus on the ferrous and nonferrous scrap processing, brokerage, and industrial scrap management needs of our customers.  Recycle South operations are included in our metals recycling and ferrous resources reporting segment.

 

        The Techs and OmniSource acquisitions were effective July 1, 2007 and October 26, 2007, respectively; therefore, the results of these operations are not reflected in our entire full-year 2007 results.

 

Third Quarter Operating Results 2008 vs. 2007

 

        Net income was $193.0 million or $.98 per diluted share during the third quarter of 2008 compared with $100.6 million or $.53 per diluted share during the third quarter of 2007.

 

        Gross Profit.   When comparing the third quarter of 2008 with the third quarter of 2007, our net sales increased $1.4 billion, or 122%, to $2.6 billion.  Our gross margin percentage was 17% during the third quarter of 2008 as compared to 20% for the third quarter of 2007 and as compared to 20% on a linked-quarter basis.  Third quarter 2008 financial results include the operations from The Techs and OmniSource, which were purchased in the second half of 2007, and Recycle South, which was purchased in June 2008.  These operations generally elicit lower gross margins as compared to our steel manufacturing facilities due to their production process or product offerings.  The inclusion of these operations in our third quarter 2008 operating results was the primary driver of the decrease in our year-to-year quarterly gross margin percentage.  On a linked-quarter basis, gross margin was negatively impacted primarily by a significant increase in metallic raw material costs per ton consumed.  The increase in our cost of goods sold per ton, driven by the dramatic rise in metallic raw material costs, exceeded the increase in our overall consolidated average selling values during the quarter.

 

Steel Operations

 

 

 

Three Months Ended

 

Nine Months Ended

 

First

 

Second

 

 

 

September 30,

 

September 30,

 

Quarter

 

Quarter

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2008

 

Shipments (net tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

Flat Roll Division

 

576,059

 

689,762

 

1,967,660

 

1,881,361

 

685,320

 

706,281

 

Structural and Rail Division

 

281,126

 

302,141

 

866,963

 

895,618

 

299,687

 

286,150

 

Engineered Bar Products Division

 

149,708

 

133,795

 

442,741

 

408,130

 

147,948

 

145,085

 

Roanoke Bar Division

 

148,128

 

142,243

 

436,078

 

453,253

 

151,368

 

136,582

 

Steel of West Virginia

 

62,849

 

69,024

 

218,907

 

214,457

 

75,724

 

80,334

 

The Techs

 

209,191

 

230,691

 

734,110

 

230,691

 

262,011

 

262,908

 

Total shipments

 

1,427,061

 

1,567,656

 

4,666,459

 

4,083,510

 

1,622,058

 

1,617,340

 

Intercompany

 

(141,113

)

(134,614

)

(395,926

)

(372,537

)

(130,685

)

(124,128

)

External shipments

 

1,285,948

 

1,433,042

 

4,270,533

 

3,710,973

 

1,491,373

 

1,493,212

 

 

        Steel operations accounted for 61% and 88% of our consolidated external net sales and 74% and 94% of our combined segment operating income (excluding “All Other” and “Eliminations” segments), during the third quarter of 2008 and 2007, respectively.  Our steel operations’ third quarter 2008 average selling price per ton shipped increased $487 per ton when compared to the third quarter of 2007 and increased $175 per ton when compared with the second quarter of 2008.  Shipments decreased 141,000 tons, or 9%, to 1.4 million tons, when comparing the third quarter of 2008 with same period in 2007.  Demand for our structural steel and bar products remained strong during the first nine months of 2008; however, we currently anticipate the long products market to soften during the remainder of the year.  The flat rolled steel markets weakened significantly during the last part of the third quarter due to decreased demand resulting from the weak economy and dramatic decrease in steel scrap prices during August and September which caused our customers to delay ordering in anticipation of further price decreases.  With further significant deterioration of steel scrap prices in October, in conjunction with curtailed domestic manufacturing expected throughout the fourth quarter of 2008, we expect continued weakness in demand for flat rolled steel products into early 2009.

 

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        Metallic raw materials used in our electric arc furnaces represent our most significant manufacturing cost.  Our metallic raw material cost per net ton consumed increased $290 during the third quarter of 2008 as compared to the third quarter of 2007 and increased $87 on a linked-quarter basis. During the third quarter of 2008 and 2007, respectively, our metallic raw material costs represented 72% and 55% of our steel operations manufacturing costs, excluding the operations of The Techs, which purchases rather than produces the steel it further processes.  These costs represented 39% and 42% of our consolidated manufacturing costs during the third quarter of 2008 and 2007, respectively.  This percentage decrease is due to the change in composition of our manufacturing cost structure due largely to the addition of OmniSource and The Techs during 2007.  We anticipate our cost of steel scrap consumed to decrease in the fourth quarter; however, as a result of existing higher-cost scrap inventory acquired during the third quarter, our scrap costs will not be as low as current market indicators.

 

Steel Fabrication Operations

 

        Fabrication operations accounted for 4% and 8% of our consolidated external net sales and 1% and 4% of our combined segment operating income (excluding “All Other” and “Eliminations” segments), during the third quarter of 2008 and 2007, respectively.  Revenues from our plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry.  Shipments increased approximately 8,000 tons to approximately 78,000 tons during the third quarter of 2008 compared to the third quarter of 2007.  The average selling value increased $10 per ton to $1,413 compared with the third quarter of 2007.  In addition, the cost of steel used in the production process (the segment’s largest single cost of production) increased during the third quarter, resulting in decreased margins for this segment of our business.   We are currently experiencing weakened demand for the products provided by our fabrication operations due to the continued decline in non-residential construction fostered by the lack of credit availability coupled with the weakened U.S. economy.

 

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Metals Recycling and Ferrous Resources Operations

 

 

 

Three Months Ended

 

Nine Months Ended

 

First

 

Second

 

 

 

September 30,

 

September 30,

 

Quarter

 

Quarter

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2008

 

Metals Recycling and Ferrous Resources

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments (net tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous

 

1,755,608

 

106,138

 

4,654,495

 

256,979

 

1,391,382

 

1,507,505

 

Iron Dynamics

 

69,658

 

61,036

 

204,379

 

185,275

 

67,994

 

66,727

 

Total shipments

 

1,825,266

 

167,174

 

4,858,874

 

442,254

 

1,459,376

 

1,574,232

 

Intercompany

 

(783,893

)

(135,039

)

(2,036,623

)

(391,232

)

(531,886

)

(720,844

)

External shipments

 

1,041,373

 

32,135

 

2,822,251

 

51,022

 

927,490

 

853,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-ferrous (pounds)

 

243,897,104

 

 

736,833,059

 

 

238,787,934

 

254,148,021

 

 

        Metals recycling and ferrous resources operations accounted for 34% and 2% of our consolidated external net sales and 25% and 2% of our combined segment operating income (excluding “All Other” and “Eliminations” segments), during the third quarter of 2008 and 2007, respectively.  Our metals recycling operations primarily engage in the brokerage, collection and processing of ferrous and non-ferrous metals for resale to steel companies, brokers and other metals processors.  We acquired OmniSource in October 2007 and Recycle South in June 2008; therefore, our third quarter 2008 segment results are significantly higher than our results for the same period in 2007.  During the third quarter of 2008, the metals recycling and ferrous resources segment recorded shipments of 1.8 million tons of ferrous and scrap substitute materials, in addition to approximately 242 million pounds of non-ferrous material.

 

        The results of the metals recycling and ferrous resources operations include the consolidated results of Recycle South beginning June 9, 2008.

 

        Elevated global demand for commodity products, including ferrous and non-ferrous materials, in addition to decreased availability of domestic ferrous materials due to the decrease in industrial generation of ferrous scrap, drove a tightening of availability and unprecedented cost increases for ferrous materials during the first half of 2008.  However, the global economy precipitated a sharp decline in ferrous and non-ferrous material costs at the end of the third quarter and into October.

 

             Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $109.0 million during the third quarter of 2008, as compared to $54.5 million during the same period in 2007, an increase of $54.5 million.  During the third quarter of 2008 and 2007 our selling, general and administrative expenses, including profit sharing and amortization expense, represented 4% of our total net

 

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sales.   The increase in the third quarter of 2008 compared to the third quarter of 2007 primarily relates to additional costs from the acquired operations of The Techs (acquired July 2007), OmniSource (acquired October 2007) and Recycle South (acquired June 2008).

 

        We also had additional costs from the amortization of certain intangible assets related to the above acquisitions.  During the third quarter of 2008 and 2007, we recorded amortization of intangible assets of $10.8 million and $1.9 million, respectively.   We currently anticipate amortization of intangibles to be approximately $11 million for the remainder of 2008; however, we have not yet finalized our valuation of Recycle South and this estimate could change.

 

        Interest Expense, net Capitalized Interest.  During the third quarter of 2008, gross interest expense increased $22.4 million to $42.2 million and capitalized interest decreased $459,000 to $4.8 million when compared to the same period in 2007.  The increase in gross interest expense for the third quarter of 2008 compared to the third quarter of 2007 is a result of increased borrowings for, among other things, acquisitions, capital outlays for our expansion projects and share purchases.  The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities primarily at our Structural and Rail division.  We currently anticipate gross interest expense to remain relatively steady during the remainder of 2008.

 

        Other Income, net Other Expense.  Other income, net other expense was $8.3 million during the third quarter of 2008 as compared to $600,000 during the same period in 2007.  During 2008, other income of $8.6 million was attributable to income from the sale of marketable securities.

 

        Income TaxesDuring the third quarter of 2008, our income tax provision was $114.1 million as compared to $59.3 million during the same period in 2007.  Our effective income tax rate was 37.1% during the third quarters of 2008 and 2007.

 

        We file income tax returns in the U.S. federal jurisdiction as well as income tax returns in various state jurisdictions. The Internal Revenue Service (IRS) completed an examination of our federal income tax returns for 1997 through 2001 in the third quarter of 2007. The final examination adjustments did not result in a material change to our financial position or results of operations. The state of Indiana completed its examination of the calendar years 2000 through 2005 during the third quarter of 2008.  The total tax paid on October 1, 2008, to settle the examination was $20.7 million and was included in the balance of the unrecognized tax benefits at September 30, 2008.  The additional tax settlement related primarily to the deductibility of intercompany royalty and interest payments.  Indiana did not assess any interest or penalties.  With few exceptions we are no longer subject to federal, state and local income tax examinations by tax authorities for the years ended before 2004.

 

        Included in the balance of unrecognized tax benefits at September 30, 2008 are potential benefits of $50.8 million that, if recognized, would decrease the effective tax rate. We recognize interest and penalties related to tax contingencies on a net-of-tax basis in income tax expense. During the nine-month period ended September 30, 2008, we recognized interest income of $394,000, net of tax, and penalties of $142,000.  At September 30, 2008, we had $5.2 million accrued for the payment of interest and penalties.

 

First Nine Months Operating Results 2008 vs. 2007

 

        Net income was $546.1 million or $2.75 per diluted share during the first nine months of 2008, compared with $296.7 million or $1.51 per diluted share during the first nine months of 2007.

 

        Gross Profit.    When comparing the first nine months of 2008 with the same period in 2007, our net sales increased $3.9 billion, or 134%, to $6.9 billion.  Our gross margin percentage was 19% during the first nine months of 2008 as compared to 23% during the first nine months of 2007.  First nine months 2008 financial results include the operations from The Techs and OmniSource, as well as Recycle South during the third quarter of 2008.  These operations generally elicit lower gross margins as compared to our steel manufacturing facilities due to their production process or product offerings.  The inclusion of these operations in our 2008 operating results was the primary driver of the decrease in our year-to-year gross margin percentage.

 

        Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $326.0 million during the first nine months of 2008, as compared to $148.5 million during the same period in 2007, an increase of $177.4 million, or 119%.  During both the first nine months of 2008 and 2007, selling, general and administrative expenses represented approximately 5% of net sales. The additional total costs in selling, general and administrative expenses in the first nine months of 2008 compared to the first nine months of 2007 primarily relate to additional costs related to the newly acquired operations of The Techs, OmniSource and Recycle South.

 

        Interest Expense, net Capitalized Interest.  During the first nine months of 2008, gross interest expense increased $80.4 million, or 214%, to $118.0 million and capitalized interest increased $6.8 million, or 80%, to $15.3 million as compared to the same period in 2007.  The increase in gross interest expense for the first nine months of 2008 compared to the first nine months of 2007 is a result of increased borrowings for, among other things, acquisitions, company stock repurchases, and capital outlays for our expansion projects. The interest capitalization that occurred during these periods primarily resulted from the interest required to be capitalized with respect to construction activities at our Structural and Rail division.

 

        Other Income, net Other Expense.  Other income, net other expense was $33.0 million during the first nine months of 2008, as compared to net expense of $10.2 million during the same period in 2007.   During 2008, other income of $21.0 million was attributable to earnings from investments in scrap procurement and processing entities which were accounted for under the equity method of accounting. As of the date of its acquisition, Recycle South is no longer included in these earnings, as its results are consolidated in our financial statements after acquisition.  In addition, we also realized gains on sales of marketable securities during 2008 of $8.6 million.  During 2007, other income was offset by $7.1

 

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Table of Contents

 

million of expense related to the call premium associated with the redemption of our 9 ½% notes and the termination of a related fixed-to-floating interest rate swap which resulted in a $5.0 million loss on hedging activities.

 

        Income TaxesDuring the first nine months of 2008, our income tax provision was $330.5 million, as compared to $176.9 million during the same period in 2007.  During the first nine months of 2008 and 2007 our effective income tax rates were 37.7% and 37.4%, respectively.

 

        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 operations and to remain in compliance 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. Historically, we have met these liquidity requirements with cash provided by operations, equity offerings, long-term borrowings, and state and local grants.

 

        Working Capital.  During the first nine months of 2008, our operational working capital position, representing our cash invested in trade receivables and inventories less trade payables and accruals, increased $436.0 million to $1.4 billion compared to December 31, 2007.  Trade receivables increased $408.5 million or 57% during the first nine months of 2008 to $1.1 billion, of which approximately 93% were current or less than 60 days past due.  Of this increase in trade receivables, $123.0 million was the result of the acquisition of Recycle South.  The remaining increase in receivables was driven primarily by the significant increase in average selling prices of our products during the year.  Our largest customer is an affiliated company, Heidtman Steel, which represented 7% and 6% of our outstanding trade receivables at September 30, 2008 and December 31, 2007, respectively.

 

        Our trade payables and general accruals increased $398.1 million, or 75%, during the first nine months of 2008.  Of this increase in trade payables and general accruals, $46.9 million was the result of the acquisition of Recycle South. The dollar value of our raw materials, primarily steel scrap inventories, increased by approximately $260.0 million in comparing the third quarter of 2008 with the fourth quarter of 2007; likewise, the value of our finished goods inventory increased by approximately $110.4 million over the same periods.  During the first nine months of 2008 our total inventories increased $452.6 million, or 50%, to $1.4 billion.  Of this increase in total inventories, $76.7 million was the result of the acquisition of Recycle South.  The remaining increase during the year was driven primarily by the significant increase in the cost of steel scrap used in our manufacturing process.

 

        Capital Expenditures.  During the first nine months of 2008, we invested $310.6 million in property, plant and equipment, of which $102.2 million or 33% related primarily to the addition of a second rolling mill and second caster at our Structural and Rail Division, $59.5 million related to OmniSource operations and $56.7 million related to construction at Mesabi Nugget, our planned iron-nugget manufacturing facility.   The remaining capital expenditures primarily represented improvement projects at our other facilities.  We believe these capital investments will increase our net sales and related cash flows as each project develops.

 

Capital Resources and Long—term Debt.   During the first nine months of 2008, our total outstanding debt increased $846.1 million to $2.9 billion.  Our total long-term debt to capitalization ratio, representing our long-term debt, including current maturities divided by the sum of our long-term debt and our total stockholders’ equity, was 62% and 57% at September 30, 2008 and December 31, 2007, respectively.  At September 30, 2008, there were outstanding borrowings of $575.0 million under our $874 million senior secured revolver and $584.3 million outstanding under our term A loan (both due July 2012).

 

       The senior secured credit agreement contains financial covenants and other covenants that limit or restrict our ability to make capital expenditures; incur indebtedness; permit liens on property; enter into transactions with affiliates; make restricted payments or investments; enter into mergers, acquisitions or consolidations; conduct asset sales; pay dividends or distributions and enter into other specified transactions and activities. Our ability to borrow funds under the combined facilities is dependent upon our continued compliance with the financial covenants and other covenants contained in the senior secured credit agreement, as amended and restated.  We expect to remain in compliance with these covenants.

 

        During April 2008, we issued $500.0 million of 7¾% senior notes due April 2016.  The net proceeds were used to repay amounts outstanding under our senior secured revolving credit facility and for general corporate purposes.

 

During the first nine months of 2008, holders of our convertible subordinated 4.0% notes converted $37.3 million of the notes to Steel Dynamics common stock, resulting in the issuance of 8.8 million shares of the company’s treasury stock.  As of September 30, 2008, all the outstanding notes have been converted to Steel Dynamics common stock.

 

        Common Stock Purchases.  During the first nine months of 2008, we purchased 20.9 million shares of our common stock in open market trades at an average purchase price of $23.21 per share, of which 18.9 million shares were purchased during the third quarter at an average price of $23.21 per share.  As of September 30, 2008, 5.0 million shares remain authorized and available for purchase. Our board of directors authorized increases of 10.0 million and 5.0 million shares to our existing share repurchase program on August 26, 2008, and September 17, 2008, respectively.

 

        Cash Dividends.  During the third quarter of 2008, our board of directors approved a $0.10 per common share regular quarterly cash dividend. The dividend was payable to shareholders of record at the close of business on September 30, 2008 and was payable on October 10, 2008.  We anticipate continuing comparable quarterly cash dividends throughout 2008.  The determination to pay cash dividends in the future will be at the discretion of our board of directors after taking into account various factors, including our financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs, and growth plans.  In addition, the terms of our senior secured revolving credit agreement and the indenture relating to our senior notes restrict the amount of cash dividends we can pay.

 

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Table of Contents

 

        Two-for One Stock Split.  Our board of directors authorized a two-for-one stock split effective for shareholders of record at the close of business on March 19, 2008 with an increase in our authorized common shares from 200 million with a par value of $.005 per common share to 900 million shares (with the approval of shareholders on May 21, 2008) with a par value of $.0025 per common share.  All prior period share and per share amounts have been adjusted to reflect this stock split.

 

        Other.  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 regulatory 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 two years for making required payments of principal and interest on our indebtedness, funding working capital requirements, and funding anticipated capital expenditures.

 

Other Matters

 

        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, 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 are subject to change, and we may become subject to more stringent environmental laws and regulations in the future.

 

        We are involved in an environmental remediation project at one of our steel fabrication locations.  Accrued liabilities for these remediation activities totaled $378,000 at September 30, 2008, of which the entire amount is classified as current.

 

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Table of Contents

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk.  In the normal course of business we are exposed to interest rate changes.  Our objectives in managing exposure to interest rate changes are to limit the impact of these rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to our borrowings.  We generally maintain fixed rate debt as a percentage of our net debt between a minimum and maximum percentage.  A portion of our debt has an interest component that resets on a periodic basis to reflect current market conditions.  On November 4, 2008, we entered into an interest rate swap agreement with a notional amount of $185 million pursuant to which we have agreed to receive LIBOR payments on the twenty-eighth day of each month and will make fixed rate payments of 2.21%  This interest rate swap matures October 28, 2009, and will be accounted for as a cash flow hedge.

 

        During April 2008, we issued $500 million of 7¾% senior notes due April 2016.  The net proceeds were used to repay amounts outstanding under our senior secured revolving credit facility and for general corporate purposes.

 

        Commodity Risk.  In the normal course of business we are exposed to the market risk and price fluctuations related to the sale of steel products and to the purchase of commodities used in our production process, such as metallic raw materials, electricity, natural gas, and alloys.  Our risk strategy associated with product sales has generally been to obtain competitive prices for our products and to allow operating results to reflect market price movements dictated by supply and demand.  Our risk strategy associated with the purchase of commodities utilized within our production process has generally been to make certain commitments with suppliers relating to future expected requirements for such commodities.  Certain of these commitments contain provisions which require us to “take or pay” for specified quantities without regard to actual usage for periods of up to two years for physical commodity requirements and for up to 15 years for commodity transportation requirements.  Historically, we have fully utilized all such “take or pay” requirements, and we believe that our future production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process.  At September 30, 2008, no material changes had occurred related to these commodity risks from the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

        (a)  Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2008. The term “disclosure controls and procedures,” as we use that term and as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures that are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Based on the evaluation of our disclosure controls and procedures as of September 30, 2008, our principal executive officer and our principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported to our management, including our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

        We completed the acquisition of Recycle South on June 9, 2008.  We will exclude Recycle South from our assessment of and conclusion on the effectiveness of our internal controls over financial reporting.  See Note 2 included in our unaudited consolidated financial statements contained in this quarterly report for further details on the transaction.

 

        (b)  Changes in Internal Controls Over Financial Reporting.  Except for the acquisition of Recycle South, during the quarter ended September 30, 2008, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II

OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

Steel Dynamics, as well as its various subsidiaries, including OmniSource Corporation, are from time to time involved in various lawsuits and/or governmental claims in the ordinary course of business. None of such lawsuits or claims at the present time, singly or in the aggregate, except as disclosed below, is material.

 

        On February 1, 2008, the company was served with a complaint by Prime Eagle Group Limited (Plaintiff), a corporation with its principal place of business in Thailand.  The complaint alleges that the company, which performed certain consulting services for a management company formed to assist a Thailand-based steel company, Nakornthai Strip Mill Public Company, Limited (NSM) in its operational start-up in 1998, caused NSM’s start-up efforts to fail by falsely and fraudulently expressing its opinion that there were certain equipment and design issues that needed to be addressed.  The complaint alleges damages in excess of $1.1 billion.  The company believes that the allegations and claims set forth in the complaint are without merit and accordingly has not accrued a liability for this complaint.  On April 30, 2008, the company filed a Motion to Dismiss the entire lawsuit.  The Motion to Dismiss has been fully briefed and is awaiting a ruling from the Court.

 

        On September 17, 2008, Steel Dynamics, Inc. was served with a class action antitrust complaint alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against Steel Dynamics and eight other steel manufacturing companies.  The Complaint, filed in the United States District Court for the Northern District of Illinois in Chicago, alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products.  Since the original filing, six additional lawsuits, each of them materially similar to the original, have been filed in the same federal court, each of them likewise seeking similar class certification.  All but one of the Complaints purport to be brought on behalf of a class consisting of all purchasers of steel products directly from the defendants between January 1, 2005 and the present.  The other Complaint purports to be brought on behalf of a class consisting of all indirect purchasers of steel products from the defendants within the same time period.  All Complaints seek treble damages and costs, including reasonable attorney fees, pre- and post-judgment interest and injunctive relief.  Although the company believes that the lawsuits are without merit and plans to aggressively defend these actions, the company cannot presently predict the outcome of this litigation or make any judgment with respect to its potential exposure, if any.

 

ITEM 1A.  RISK FACTORS.

 

        No material changes have occurred to the indicated risk factors as disclosed in our 2007 Annual Report on Form 10-K.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

                (C) Share Repurchases

 

The following table indicates shares repurchases pursuant to Section 12 of the Exchange Act during the three months ended September 30, 2008.

 

 

 

 

 

 

 

 

 

Total Shares Still

 

 

 

 

 

 

 

 

 

Available For

 

Period

 

Total Shares

 

Average Price

 

Total Program

 

Purchase

 

2008

 

Purchased

 

Paid Per Share

 

Shares Purchased

 

Under the Program

 

 

 

 

 

 

 

 

 

 

 

August 1-29

 

8,400,000

 

$

25.68

 

8,400,000

 

10,526,998

 

September 2-24

 

10,525,000

 

21.23

 

10,525,000

 

5,001,998

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

        None.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

        None.

 

ITEM 5.  OTHER INFORMATION

 

        None.

 

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Table of Contents

 

ITEM 6.  EXHIBITS

 

Executive Officer Certifications

 

31.1*                    Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*                    Certification of Chief Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*                    Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*                    Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*      Filed concurrently herewith

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

November 7, 2008

 

 

STEEL DYNAMICS, INC.

 

 

 

By:

/s/ Theresa E. Wagler

 

 

Theresa E. Wagler

 

 

Chief Financial Officer

 

23