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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

Commission File Number 0-21719

Steel Dynamics, Inc.

(Exact name of registrant as specified in its charter)

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, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

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

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

As of August 5, 2008, Registrant had 200,492,268 outstanding shares of common stock.

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STEEL DYNAMICS, INC.

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STEEL DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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.

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)

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.

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STEEL DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

See notes to consolidated financial statements.

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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 56%, and 84% of the company’s net sales during the three-month periods ended June 30, 2008 and 2007, respectively and approximately 57% and 85% during the six-month periods ended June 30, 2008 and 2007, respectively.

Fabrication Operations.  Fabrication operations include the company’s five New Millennium Building System’s plants located in Butler, Indiana; Lake City, Florida; Salem, Virginia; Florence, South Carolina; and Continental, Ohio. 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 3% and 9% of the company’s net sales during the three and six-month periods ended June 30, 2008 and 2007, respectively.

Metals Recycling and Ferrous Resources Operations. This segment, formerly referred to as steel scrap and scrap substitute operations, has been renamed to more accurately reflect the nature of its operations, which remain unchanged. The 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 operations which were acquired on June 9, 2008 (See Note2). In addition, the expenses 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 40% and 6% of the company’s net sales during the three-month periods ended June 30, 2008 and 2007, respectively and approximately 38% and 4% during the six-month periods ended June 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 company is currently under examination by the state of Indiana for calendar years 2000 through 2005. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of this audit or other state income tax audits. Based on the current audits in process, the payment of taxes as a result of audit settlements could be in an amount from zero to $20.1 million by the end of 2008, primarily related to the deductibility of intercompany royalty and related interest payments. With few exceptions, and as noted for the state of Indiana, the company is no longer subject to federal, state and local income tax examinations by tax authorities for years ended before 2004.

Included in the balance of unrecognized tax benefits at June 30, 2008 are potential benefits of $29.7 million that, if recognized, would affect 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 six-month period ended June 30, 2008, the company recognized interest of $434,000, net of tax, and penalties of $107,000. At June 30, 2008, the company had $6.5 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.

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Comprehensive Income.  The components of comprehensive income during the three and six-month periods ended June 30 are summarized in the following table (in thousands):

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

Recent Accounting Pronouncements.

FASB Statement No. 159.  In February 2007, the 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 bankrupt Sturgis Iron & Metal, an operator of scrap yards in Indiana, Michigan and Georgia.  The assets were purchased for approximately $42.2 million in cash through bankruptcy proceedings.  The Sturgis Iron & Metal assets will be operated as a part of our wholly-owned subsidiary, OmniSource Corporation.  The company purchased the assets to continue its expansion of its metals recycling operations and expects to begin operating certain of these acquired scrap yards during the second half of 2008.

Recycle South Acquisition

On June 9, 2008, OmniSource Corporation, the company’s wholly-owned subsidiary, completed its acquisition of Recycle South, LLC, 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 with a value of approximately $139.8 million.  In addition, OmniSource assumed approximately $144.9 million of net debt, of which the company repaid approximately $142.8 million 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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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OmniSource purchased Recycle South to significantly expand its metals recycling business. Recycle South will provide a significant presence in the southeastern United States through its 22 locations throughout 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 with much refinement still to be made.  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):

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):

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 estimated intangible asset amortization expense related to the total acquisition of Recycle South for the next five years and thereafter follows (in thousands):

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).

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 and second quarters 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 subject to further adjustments based on additional determination of actual acquisition costs and the fair value, and lives of the acquired assets, assumed liabilities and identifiable intangible assets (in thousands):

Preliminary goodwill and intangible assets of $307.1 million and $305.0 million, respectively, were recorded as a result of the acquisition. The goodwill is expected to be deductible for tax purposes.  In addition, goodwill recorded for tax purposes is approximately $135.0 million greater than goodwill recorded for financial statement purposes.  For tax purposes, the excess tax-goodwill will be amortized over a 15-year period, and the resulting tax benefit will be 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):

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 six-month periods ended June 30, 2008 was $4.5 and $10.0 million, respectively.  The estimated intangible asset amortization expense related to the OmniSource transaction for the next five years and thereafter follows (in thousands):

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):

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 three and six-month periods ended June 30, 2008 and 2007 and OmniSource Corporation for the three and six-month periods ended June 30, 2007. The actual results of OmniSource are included in the consolidated results of the company for the three and six-month periods ended June 30, 2008.

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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 for the three and six-month periods ended June 30, 2008 and 2007, respectively (in thousands, except per share data):

During the three and six-month periods ended June 30, 2008, holders of the company’s subordinated convertible 4% notes converted $21.3 million of the notes to Steel Dynamics common stock, resulting in the issuance of 5.0 million shares of the company’s treasury stock.  As of June 30, 2008, there were 3.8 million shares still available for conversion pursuant to these notes.

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.

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 (in thousands):

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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 assts 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 June 30, 2008 (in thousands):

Note 7.  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.

Based upon current knowledge, including discussions with legal counsel, the company believes that the results of any threatened or pending litigation will not have a material effect on the company’s financial position, results of operations or cash flows.

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 consist of further processing, slitting, and sale of certain steel products; the resale of certain secondary and excess steel products; and the operations of the company’s railroad tie manufacturing plant.  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.

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.

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STEEL DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The company’s segment results for the three and six-month periods ended June 30 are as follows (in thousands):