Prepared and filed by St Ives Burrups

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the period ended March 31, 2004
  OR
   
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   

Commission File Number 0-21719

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

Indiana   35-1929476
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
6714 Pointe Inverness Way, Suite 200, Fort Wayne, IN   46804
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code: (260) 459-3553

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

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

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

 


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STEEL DYNAMICS, INC.
Table of Contents

Explanatory Note

     The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of Steel Dynamics, Inc. for the quarter ended March 31, 2004, is to provide revised forms of certification on Exhibits 31.1 and 31.2, to conform to the format prescribed by Item 601(b)(31) of Regulation S-K, as well as to revise the form of Item 4, subsection (b) regarding “Changes in Internal Controls” (no changes). These changes constitute only format revisions.

     No attempt has been made in this Form 10-Q/A to modify or update any financial information or other disclosures presented in the original report on Form 10-Q, nor does this Form 10-Q/A reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures, including exhibits to the Form 10-Q. Information described herein reflects the disclosures made at the time of the original filing of the Form10-Q on May 4, 2004. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings.

  PART I. Financial Information  
    Page
   
 Item 1. Consolidated Financial Information:  
     
  Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 1
     
 
Consolidated Statements of Income for the three month periods ended
March 31, 2004 and 2003 (unaudited)
2
     
 
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2004 and 2003 (unaudited)
3
     
   Notes to Consolidated Financial Statements 4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
9
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
     
Item 4. Controls and Procedures 11
     
  PART II. Other Information  
     
Item 1. Legal Proceedings 12
     
Item 6. Exhibits and Reports on Form 8-K 12
     
  Signature 13

     

 


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

     March 31,
2004
  December 31,
2003
 




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




Total current assets
    487,942     407,935  
               
Property, plant and equipment, net     1,007,068     1,001,116  
               
Restricted cash     4,211     2,636  
               
Other assets     35,565     36,752  




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




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




Total current liabilities
    198,379     153,304  
               
               
Long-term debt, including unamortized bond premium of $8,413 and $8,834, as of March 31, 2004 and December 31, 2003, respectively
    587,777     591,586  
               
               
Deferred taxes     117,378     115,703  
               
Minority interest     1,262     613  
               
Commitments and contingencies              
               
Stockholders' equity:              
Common stock voting, $.01 par value; 100,000,000 shares authorized;              
51,597,116 and 51,011,839 shares issued; and 49,219,990 and 48,645,246 shares
             
outstanding, as of March 31, 2004 and December 31, 2003, respectively
    515     509  
Treasury stock, at cost; 2,377,126 and 2,366,593 shares, at March 31, 2004              
and December 31, 2003, respectively
    (28,908 )   (28,670 )
Additional paid-in capital
    372,408     362,328  
Retained earnings
    289,216     257,254  
Other accumulated comprehensive loss
    (3,241 )   (4,188 )




Total stockholders’ equity
    629,990     587,233  




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




               
               

See notes to consolidated financial statements

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

     Three Months Ended
March 31, 
 





      2004      2003  




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



Total net sales
    384,145     235,504  
               
Cost of goods sold     302,555     185,969  
 



Gross profit
    81,590     49,535  
               
Selling, general and administrative expenses     23,050     14,975  
 



Operating income
    58,540     34,560  
               
Interest expense     9,504     9,166  
Other (income) expense, net     (2,103 )   149  
 



Income before income taxes
    51,139     25,245  
               
Income taxes     19,177     9,467  
 



Net income
    31,962   $ 15,778  
 



               
               
Basic earnings per share   $ .65   $ .33  
 



               
Weighted average common shares outstanding     48,947     47,601  
 



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



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



               

 

 See notes to consolidated financial statements

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

     Three Months Ended
March 31, 
 





    2004   2003  




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




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




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




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




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




Net cash provided by financing activities
    6,104     82  




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




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




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




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




               

 

See notes to consolidated financial statements

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     

Note 1. Summary of Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries after elimination of significant intercompany accounts and transactions. Minority interest represents the minority shareholders’ proportionate share in the equity or income of the company’s consolidated subsidiaries.

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

In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These financial statements and notes should be read in conjunction with the audited financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Stock-Based Compensation. At March 31, 2004, the company had three incentive stock option plans and accounted for these plans under the recognition and measurement principles of Accounting Standards Board APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB 25, no stock-based employee compensation cost related to the incentive stock option plans is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FAS 123 to its stock-based employee compensation for the three months ended March 31 (in thousands, except per share data):

               
     2004   2003  




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



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




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

Note 2. Earnings Per Share

The company computes and presents earnings per common share in accordance with FASB Statement No. 128, “Earnings Per Share”. Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes, in addition to the above, the weighted average dilutive effect of common share equivalents outstanding during the period. Common share equivalents represent dilutive stock options and dilutive shares related to the company’s convertible subordinated debt and are excluded from the computation in periods in which they have an anti-dilutive effect. The conversion requirements for the company’s convertible debt were met during the first quarter of 2004.

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

      2004      2003   
   







 







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












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




   



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




   



   

 

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    2004   2003  




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




Excluded common share equivalents
    56     8,372  




Note 3. Comprehensive Income

The following table presents the company’s components of comprehensive income, net of related tax, for the three months ended March 31 (in thousands):

    2004   2003  




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




               
Comprehensive income   $ 32,909   $ 16,108  




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

Note 4. Inventories

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

     March 31,
2004
  December 31,
2003
 




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




Total inventories
  $ 235,989   $ 184,496  




Note 5. Segment Information

The company has two reportable segments: steel operations and steel scrap substitute operations. The steel operations segment includes the company’s Flat Roll Division, Structural and Rail Division, and Bar Products Division. The Flat Roll Division sells a broad range of hot-rolled, cold-rolled and coated steel products, including a large variety of specialty products such as thinner gauge hot-rolled products, galvanized products, and painted products. The Flat Roll Division sells directly to end-users and service centers located primarily in the Midwestern United States and these products are used in numerous industry sectors, including the automotive, construction and commercial industries.

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

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

Steel Scrap Substitute Operations. Steel scrap substitute operations include the revenues and expenses associated with the company’s wholly owned subsidiary, Iron Dynamics. From the time operations were halted in 2001 through the fourth quarter of 2002, the costs incurred at IDI were composed of those expenses required to maintain the facility and further evaluate the project and its related benefits. During the fourth quarter of 2002, IDI successfully completed certain operating trials utilizing a modified production process. This process may significantly reduce the eventual per-unit cost of liquid pig iron production. Throughout 2003, the company invested $13.3 million for capital expenditures required to implement this modified production process and Iron Dynamics restarted operations mid-November, producing approximately 15,100 tonnes of hot briquetted iron during December. Since restart, the Flat Roll Division has successfully used these iron briquettes as a part of its metallic raw material inputs. During the first quarter of 2004, IDI produced 31,800 tonnes of hot briquetted iron and

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The company’s operations are primarily organized and managed by operating segment. Operating segment performance and resource allocations are primarily based on operating results before income taxes. The accounting policies of the reportable segments are consistent with those described in Note 1 to the financial statements. Intersegment sales and any related profits are eliminated in consolidation. The external net sales of the company’s steel operations include sales to non-U.S. companies of $2.8 million and $40.3 million for the three months ended March 31, 2004 and 2003, respectively. The company’s segment results for the three months ended March 31 are as follows (in thousands):

     2004   2003  




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







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







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







 
Eliminations              
Net sales
             
External
  $   $  
Other segments
    (27,531 )   (12,548 )
Operating income (loss)
    (831 )   354  
Assets
    (112,614 )   (104,533 )







 
Consolidated              
Net sales
  $ 384,145   $ 235,504  
Operating income
    58,540     34,560  
Assets
    1,534,786     1,295,965  







 

Note 6. Short-Term Bond Transaction

During the first quarter of 2004, the company entered into a transaction relating to the short-sale of $66.0 million of U.S. Treasury Securities. The transaction was intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses. As a result of this transaction, the company recorded short-term capital gains of $1.4 million, interest income of $70,000 and interest expense of $1.6 million during the first quarter. The company has an obligation to repurchase, on or before November 12, 2004, $66.0 million of U.S. Treasury Securities that had a market value of $70.3 million at March 31, 2004. The company has placed the proceeds of $73.0 million from the short sale into an interest-bearing collateral account to provide for this repurchase. At March 31, 2004, the net obligation of this transaction was $126,000, which included net accrued interest payable of $2.8 million.

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Condensed Consolidating Information

Certain 100%-owned subsidiaries of SDI have fully and unconditionally guaranteed all of the indebtedness relating to the issuance of $300.0 million of senior notes due March 2009. Following are condensed consolidating financial statements of the company, including the guarantors. The following condensed consolidating financial statements present the financial position, results of operations and cash flows of (i) SDI (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries of SDI, (iii) the non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive at the information for the company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of the company and the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 Condensed Consolidating Balance Sheets (in thousands)     
                                 
As of March 31, 2004                                
     Parent    Guarantors   Combined
Non-guarantors
  Consolidating
Adjustments
  Total
Consolidated
 










Cash   $ 55,793   $ 624   $ 1,877   $   $ 58,294  
Accounts receivable     153,203     133,948     17,470     (140,025 )   164,596  
Inventories     193,557     23,131     19,612     (311 )   235,989  
Other current assets     30,023     150     242     (1,352 )   29,063  










Total current assets
    432,576     157,853     39,201     (141,688 )   487,942  
Property, plant and equipment, net     745,518     112,889     148,779     (118 )   1,007,068  
Other assets     298,068     59,343     225     (317,860 )   39,776  










Total assets
  $ 1,476,162   $ 330,085   $ 188,205   $ (459,666 ) $ 1,534,786  










Accounts payable   $ 109,545   $ 21,187   $ 14,530   $ (16,673 ) $ 128,589  
Accrued expenses     45,581     4,034     5,765     (1,667 )   53,713  
Current maturities of long-term debt     12,200         3,897     (20 )   16,077  










Total current liabilities
    167,326     25,221     24,192     (18,360 )   198,379  
Other liabilities     100,654     79,938     (19,732 )   (43,482 )   117,378  
Long-term debt     572,730         23,889     (8,842 )   587,777  
Minority interest     27             1,235     1,262  
                                 
Common stock     515     89,426     199,493     (288,919 )   515  
Treasury stock     (28,908 )               (28,908 )
Additional paid in capital     372,408     116,868         (116,868 )   372,408  
Retained earnings     294,593     18,632     (39,579 )   15,570     289,216  
Other accumulated comprehensive loss     (3,183 )       (58 )       (3,241 )










Total stockholders’ equity
    635,425     224,926     159,856     (390,217 )   629,990  










Total liabilities and stockholders’ equity
  $ 1,476,162   $ 330,085   $ 188,205   $ (459,666 ) $ 1,534,786  










As of December 31, 2003                                
     Parent    Guarantors   Combined
Non-guarantors
  Consolidating
Adjustments
  Total
Consolidated
 










Cash   $ 64,008   $ 496   $ 926   $   $ 65,430  
Accounts receivable     123,315     119,785     13,037     (130,114 )   126,023  
Inventories     164,024     2,579     18,397     (504 )   184,496  
Other current assets     32,938     68     168     (1,188 )   31,986  










Total current assets
    384,285     122,928     32,528     (131,806 )   407,935  
Property, plant and equipment, net     755,707     96,757     148,769     (117 )   1,001,116  
Other assets     260,538     36,855     262     (258,267 )   39,388  










Total assets
  $ 1,400,530   $ 256,540   $ 181,559   $ (390,190 ) $ 1,448,439  










                                 
Accounts payable   $ 64,069   $ 15,618   $ 11,025     (11,386 ) $ 79,326  
Accrued expenses     52,365     1,699     5,046     (1,120 )   57,990  
Current maturities of long-term debt     11,765         4,243     (20 )   15,988  










Total current liabilities
    128,199     17,317     20,314     (12,526 )   153,304  
Other liabilities     108,680     73,310     (13,587 )   (52,700 )   115,703  
Long-term debt     575,608         24,826     (8,848 )   591,586  
Minority interest     28             585     613  
                                 
Common stock     509     46,482     189,735     (236,217 )   509  
Treasury stock     (28,670 )               (28,670 )
Additional paid in capital     362,328     116,868         (116,868 )   362,328  
Retained earnings     257,919     2,563     (39,612 )   36,384     257,254  
Other accumulated comprehensive loss     (4,071 )       (117 )       (4,188 )










Total stockholders’ equity
    588,015     165,913     150,006     (316,701 )   587,233  










Total liabilities and stockholders’ equity
  $ 1,400,530   $ 256,540   $ 181,559   $ (390,190 ) $ 1,448,439  










 

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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statements of Income (in thousands)

For the Three Months Ended March 31, 2004 

    Parent   Guarantors   Combined
Non-guarantors
  Consolidating
Adjustments
  Total
Consolidated
 
   

 

 

 

 

 
Net sales   $ 364,101   $ 373,068   $ 38,608   $ (391,632 ) $ 384,145  
Cost of goods sold     283,180     367,975     35,250     (383,850 )    302,555  
   

 

 

 

 

 
Gross profit (loss)
    80,921     5,093     3,358      (7,782 )   81,590  
Selling, general and administrative     16,883     3,462     2,862     (157 )   23,050  
   

 

 

 

 

 
Operating income (loss) 
    64,038     1,631     496      (7,625  )   58,540  
Interest expense     9,883     (633 )   416     (162 )    9,504  
Other (income) expense, net                           20,285     (22,579 )   (2 )   193     (2,103 )
   

 

 

 

 

 
Income (loss) before income taxes                                
and equity in net income of subsidiaries
    33,870     24,843      82      (7,656 )   51,139  
Income taxes                             13,315     8,775     31     (2,944 )   19,177  
   

 

 

 

 

 
                                        20,555     16,068     51     (4,712 )   31,962  
Equity in net income of subsidiaries     16,119               (16,119 )    
   

 

 

 

 

 
Net income (loss)   $ 36,674   $ 16,068   $ 51   $ (20,831 ) $ 31,962  
   

 

 

 

 

 

For the Three Months Ended March 31, 2003

    Parent   Guarantors   Combined
Non-guarantors
  Consolidating
Adjustments
  Total
Consolidated
 
   

 

 

 

 

 
Net sales   $ 229,003   $ 229,003   $ 19,049   $ (241,551 ) $ 235,504  
Cost of goods sold     178,840     226,873     19,654     (239,398 )    185,969  
   

 

 

 

 

 
Gross profit (loss)
    50,163     2,130     (605 )    (2,153 )   49,535  
Selling, general and administrative     12,735     1,603     2,111     (1,474 )   14,975  
   

 

 

 

 

 
Operating income (loss) 
    37,428     527     (2,716 )    (679  )   34,560  
Interest expense     9,087     (233 )   455     (143 )    9,166  
Other (income) expense, net                           13,999     (14,022 )   (1 )   173     (149 )
   

 

 

 

 

 
Income (loss) before income taxes                                
and equity in net income of subsidiaries
    14,342     14,782     (3,170 )    (709 )   25,245  
Income taxes                             5,836     5,207     (1,189 )   (387 )   9,467  
   

 

 

 

 

 
                                        8,506     9,575     (1,981 )   (322 )   15,778  
Equity in net income of subsidiaries     7,594             (7,594 )    
   

 

 

 

 

 
Net income (loss)   $ 16,100   $ 9,575   $ (1,981 ) $ (7,916 ) $ 15,778  
   

 

 

 

 

 

Condensed Consolidating Statements of Cash Flows (in thousands)

For the Three Months Ended March 31, 2004

    Parent   Guarantors   Combined
Non-guarantors
  Total
Consolidated
 
   

 

 

 

 
Net cash provided by (used in) operations   $ 37,145   $ (26,961 ) $ 481   $ 10,655  
Net cash used in investing activities     (5,891 )   (16,192 )   (1,822 )    (23,905 )
Net cash provided by (used in)                          
financing activities
    (39,469 )   43,281     2,292     6,104  
   

 

 

 

 
Increase (decrease) in cash and equivalents
    (8,215 )   128     951     (7,136 )
Cash and equivalents at beginning of period 
    64,008     496     926     65,430  
   

 

 

 

 
Cash and equivalents at end of period
  $ 55,793   $ 624   $ 1,877   $  58,294  
   

 

 

 

 

For the Three Months Ended March 31, 2003

    Parent   Guarantors   Combined
Non-guarantors
  Total
Consolidated
 
   

 

 

 

 
Net cash provided by (used in) operations   $ 143,961   $ (116,959 ) $ (2,335 ) $ 24,667  
Net cash used in investing activities     (39,058 )   (3,253 )   (3,415 )    (45,726 )
Net cash provided by (used in)                          
financing activities
    (125,213 )   120,270     5,025     82  
   

 

 

 

 
Increase (decrease) in cash and equivalents
    (20,310 )   58     (725 )   (20,977 )
Cash and equivalents at beginning of period 
    22,530     282     1,406     24,218  
   

 

 

 

 
Cash and equivalents at end of period
  $ 2,220   $ 340   $ 681   $  3,241  
   

 

 

 

 

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

Forward-Looking Statements

Statements made in this report that are not statements of historical fact are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include, without limitation, any statements that may project, indicate or imply future results, events, performance or achievements. We refer you, however, to the section denominated "Forward-Looking Statements" and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2003, which we incorporate herein by reference, for a more detailed discussion of some of the many factors, variables, risks and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated. We caution that any forward-looking statement reflects only our reasonable belief at the time the statement is made.

Income Statement Classifications

Net Sales. Our total net sales are a factor of net tons shipped, product mix and related pricing. Our net sales are determined by subtracting product returns, sales discounts, return allowances and claims from total sales. We charge premium prices for certain grades of steel, dimensions of product, or certain smaller volumes, based on our cost of production. We also charge marginally higher prices for our value-added products from our cold mill. These products include hot-rolled and cold-rolled galvanized products, cold-rolled products, and painted products.

Cost of Goods Sold. Our cost of goods sold represents all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are steel scrap and scrap substitutes, alloys, natural gas, argon, direct and indirect labor and related benefits, electricity, oxygen, electrodes, depreciation and freight. Our metallic raw materials, steel scrap and scrap substitutes, represent the most significant component of our cost of goods sold.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, materials and transportation, and administrative departments. These costs include labor and benefits, professional services, financing cost amortization, property taxes, profit-sharing expense and start-up costs associated with new projects.

Interest Expense. Interest expense consists of interest associated with our senior credit facilities and other debt agreements as described in the notes to our financial statements set forth in our most recent Annual Report on Form 10-K, net of capitalized interest costs that are related to construction expenditures during the construction period of capital projects.

Other (Income) Expense. Other income consists of interest income earned on our cash balances and any other non-operating income activity, including gains on certain short-term investments. Other expense consists of any non-operating costs.

First Quarter 2004 vs. First Quarter 2003 Operating Results

Net income was $32.0 million or $.58 per diluted share during the first quarter of 2004, compared with $15.8 million or $.33 per diluted share during the first quarter of 2003. This increase in our net income during 2004 was due to increased selling values and increased shipping volumes.

Gross Profit. During the first quarter of 2004, our net sales increased $148.6 million, or 63%, to $384.1 million and our consolidated shipments increased 151,000 tons, or 23%, to 799,000 tons, compared with the first quarter of 2003. The increase in shipments was primarily due to increased shipments of 133,000 tons from our Structural and Rail Division, which started commercial operations mid-2002. Our first quarter 2004 average consolidated selling price increased $118 per ton compared with the first quarter of 2003 and increased $119 per ton compared with the fourth quarter of 2003. We continue to see signs of a strengthening US economy and we are experiencing a related increase in demand and product base-pricing; however, our increase in selling values during the first quarter of 2004 was also due in part to the steel industry’s initiation of a surcharge mechanism, derived from an indexed scrap number, designed to pass some of the increased costs associated with rising metallic prices through to its customers.

Our metallic raw material cost per net ton charged increased $65 during the first quarter of 2004, and increased $93 when compared to the first quarter of 2003. While our cost of goods sold during the first quarter of 2004 remained a consistent 79% of net sales when compared with the first quarter of 2003, our metallic raw material costs as a percentage of total cost of goods sold increased to 67%, an 18% increase from the first quarter of 2003. This significant increase in the cost of our primary raw material as a percentage of our total manufacturing costs necessitated the surcharge. We anticipate a decrease in domestic metallic material prices, specifically steel scrap, during the second and possibly the third quarters of 2004. As these costs fall from historical highs, the surcharge will also decline and may eventually cease to be utilized in our product price determination.

We also expect to realize an increase in our product base-prices during the second and third quarters of 2004 as the US economy continues to strengthen and demand of steel products continues to increase. We believe this will result in a corresponding increase in our margins and, combined with an anticipated increase in our shipments due to the continued ramp-up of our Structural and Rail Division and the continued start-up of our Bar Products Division, would result in increased operating income.

 

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses were $23.1 million during the first quarter of 2004, as compared to $15.0 million during the same period in 2003, an increase of $8.1 million, or 54%. During the first quarter of 2004 and 2003, selling, general and administrative expenses represented approximately 6% of net sales.

     Interest Expense. Interest expense remained relatively flat at $9.5 million during the first quarter of 2004, as compared to $9.2 million during the first quarter of 2003. During the first quarter of 2004, gross interest expense increased 12% to $11.9 million and capitalized interest increased approximately $890,000 to $2.4 million, as compared to the same period in 2003. The interest capitalization that occurred during the first quarter of 2004 resulted from the interest required to be capitalized with respect to construction activities at our Bar Products Division and Structural and Rail Division.

     Other (Income) Expense. Other income was $2.1 million during the first quarter of 2004, as compared to other expense of $149,000 during the first quarter of 2003. During the first quarter of 2004, we recorded a $1.4 million gain related to a short-term U.S. Treasury Bond transaction which is intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses.

     Income Taxes. During the first quarter of 2004, our income tax provision was $19.2 million, as compared to $9.5 million during the same period in 2003. Our effective tax rate was 37.5% for both periods.

Liquidity and Capital Resources

     Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steelmaking and finishing operations and to remain 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. We have met these liquidity requirements with cash provided by operations, equity, long-term borrowings, state and local grants and capital cost reimbursements.

     Working Capital. During the first quarter of 2004, our operational working capital position, representing our cash invested in trade receivables and inventories less trade payables and accruals increased $45.1 million to $218.3 million compared to December 31, 2003. Due to higher selling prices and increased sales volume, trade receivables increased $38.6 million during the first quarter to $164.6 million, of which $161.1 million, or 98%, were less than 60 days past due. Our largest customer is an affiliated company, Heidtman Steel, which represented 19% and 20% of our outstanding trade receivables at March 31, 2004 and December 31, 2003, respectively. During the first quarter our inventories increased $51.5 million to $236.0 million, due primarily to the increased cost of our metallic raw materials on-hand and to the start-up production of our Bar Products Division. Our trade payables increased $49.3 million during the first quarter, of which $40.1 million of the increase was associated with the amount we owed our primary metallic raw material supplier.

     Capital Expenditures. We invested $23.9 million in property, plant and equipment during the first quarter of 2004 related to our new divisions and improvement projects in our existing facilities. Approximately 68% of our capital investments were related to the continued conversion of our Bar Products Division. We believe these capital investments will increase our net sales and related cash flows as each project continues to develop.

     Capital Resources. As of March 31, 2004, $75.0 million under our senior secured revolving credit facility remained undrawn and available. Our ability to draw down the revolver is dependent upon our continued compliance with the financial covenants and other covenants contained in our senior secured credit agreement. We were in compliance with these covenants at March 31, 2004, and expect to remain in compliance during the next twelve months.

     Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance, which in turn, will depend upon general economic, financial and business conditions, along with competition, legislation and regulation factors that are largely beyond our control. In addition, we cannot assure you that our operating results, cash flow and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including additional borrowings under our senior secured credit agreement, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness and for funding anticipated capital expenditures and working capital requirements.

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 have changed rapidly in recent years and we may become subject to more stringent environmental laws and regulations in the future.

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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 portfolio of 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. At March 31, 2004, no material changes had occurred related to our interest rate risk from the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003.

     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 3 years. We believe that our production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process. At March 31, 2004, 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, 2003.

 ITEM 4. CONTROLS AND PROCEDURES

               (a) Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of registrant’s management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of registrant’s disclosure controls and procedures, as of the end of the period covered by this report. Based upon their evaluation, registrant’s principal executive officer and principal financial officer have concluded that registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective to ensure that information required to be disclosed by registrant in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

               (b) Changes in Internal Control Over Financial Reporting. During our most recent fiscal quarter, there was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 18, 2004, General Motors Corporation filed a lawsuit against us in an Oakland, Michigan state court, claiming that we are in breach of an alleged contract to provide GM with approximately 50,000 additional tons of steel during the balance of 2004 at certain pre-established prices.  We deny that there is any legally binding contract between the parties that obligates us to provide GM with the steel in dispute, at the prices alleged.  The dollar amount in dispute is less than $4 million before taxes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     

(a) Exhibits:
     
  31.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2 Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350
  32.2 Principal Financial Officer Certification pursuant to 18 U.S.C. § 1350
   
(b) Reports on Form 8-K:
       We filed the following reports on Form 8-K during the three months ended March 31, 2004.
             
    Date of Filing    Description   Reported
             
    February 5, 2004   Item 12” Disclosure of Results of   Earnings press release for the quarter and
        Operations and Financial Condition”   year ended December 31, 2003
             
    March 22, 2004   Item 9 “Regulation FD Disclosure”   Press release titled “Hollman Named a
            Vice President of Steel Dynamics”
             
    March 23, 2004   Item 9 “Regulation FD Disclosure”   Press release titled “Steel Dynamics Updates
            First Quarter Outlook”
             
    March 24, 2004   Item 9 “Regulation FD Disclosure”   Press release titled “Steel Dynamics Plans
            Building Systems Expansion in Southeastern U.S.”
             
    March 26, 2004   Item 9 “Regulation FD Disclosure”   Press release titled “Steel Dynamics Comments on
            GM Lawsuit”
             
         
         

_____________________________________________________________________________________________________________

Items 2 through 5 of Part II are not applicable for this reporting period and have been omitted.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act of 1934, Steel Dynamics, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 9, 2005

     STEEL DYNAMICS, INC.
     
  By: /s/ GARY E. HEASLEY
    Gary E. Heasley
    Chief Financial Officer
    (Principal Financial and Accounting Officer
    and Duly Authorized Officer)

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