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Article by DailyStocks_admin    (10-27-08 03:48 AM)

Steel Dynamics Inc. CEO KEITH E BUSSE bought 95000 shares on 10-17-2008 at $8.55

BUSINESS OVERVIEW

Our Company

We are one of the largest steel producers and, with our acquisition of OmniSource Corporation, one of the largest scrap processors in the United States based on a current estimated annual steelmaking capability of approximately 5.3 million tons and an estimated scrap processing and brokerage volume of 6.0 million tons of ferrous and 800 million pounds of nonferrous metalics. Actual 2007 steel production was 5.0 million tons. Our 2007 consolidated shipments, excluding shipments between our operating divisions, totaled 6.2 million tons, which includes steel making, fabrication and scrap processing. During 2007, our net sales were $4.4 billion.

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Steel Operations. Steel operations include our Flat Roll Division, which operates plants in Butler and Jeffersonville, Indiana; our Structural and Rail Division, which operates a plant in Columbia City, Indiana; our Engineered Bar Products Division, which operates a plant in Pittsboro, Indiana; our Roanoke Bar Division, which operates a plant in Roanoke, Virginia; and our Steel of West Virginia (SWVA) operations, which operate plants in Huntington, West Virginia and Memphis, Tennessee. These operations consist of mini-mills, producing steel from steel scrap, using electric arc furnaces, continuous casting and automated rolling mills. The Techs Holdings Inc. (The Techs) which consists of three facilities in Pittsburgh, Pennsylvania, produces a variety of galvanized sheet products using the substrate material from external suppliers and from our Flat Roll Division. Steel operations accounted for 81% of our consolidated net sales during 2007.

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 light gauge hot-rolled, galvanized, and painted products. The Structural and Rail Division sells structural steel beams and pilings and is also designed to produce and sell a variety of standard and premium-grade rail for the railroad industry. The Engineered Bar Products Division primarily sells special bar quality and merchant bar quality rounds and round-cornered squares. The Roanoke Bar Division sells billets and merchant steel products, including angles, plain rounds, flats and channels. SWVA primarily sells merchant beams, channels and specialty structural steel sections. Our 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.

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Fabrication Operations. Fabrication operations include our five New Millennium Building Systems plants located in Butler, Indiana; Lake City, Florida; Salem, Virginia; Florence, South Carolina; and Continental, Ohio. The operations located in Salem, Florence and Continental were acquired in 2006 pursuant to the Roanoke Electric merger. 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 8% of our consolidated net sales during 2007.

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Steel Scrap and Scrap Substitute Operations. Steel scrap and scrap substitute operations include, on the scrap side, the revenues and expenses associated with our own direct scrap sourcing operations, as well as with the operations of OmniSource Corporation (OmniSource), Elizabethton Herb and Metal (Elizabethton), and Shredded Products; and, on the scrap substitute side, the revenues and expenses associated with our scrap substitute manufacturing facility, Iron Dynamics (IDI). Output from these operations is used as raw materials within our steel operations or is sold or brokered to third parties. During 2007, approximately 33% of these operations sales were to our steel mills, and we expect this percentage to increase during 2008. Steel Scrap and Scrap Substitute operations accounted for 9% of our consolidated net sales during 2007.

Acquisitions

The Techs. On July 2, 2007, we purchased The Techs for approximately $373.4 million, which was funded from our existing senior secured revolving credit facility. The Techs is a Pennsylvania-based flat-rolled steel galvanizing company, which consists of three non-union galvanizing facilities: GalvTech, MetalTech, and NexTech. Each facility specializes in the galvanizing of specific types of flat-rolled steels in non-automotive applications, servicing a variety of customers in the HVAC, commercial construction, and consumer goods markets. About 85% of The Techs sales are to customers in the eastern U.S. and the Midwest. In 2006, the privately held company shipped 958,000 tons of galvanized steel and generated revenues of $831 million. We purchased The Techs to expand our market-share in the value-added steel coating business. With the addition of The Techs, we have an annual estimated galvanizing capacity of approximately 2 million tons. The Techs complement our three existing galvanizing lines located in Butler, Indiana and Jeffersonville, Indiana. The purchase of The Techs allows us to access markets that require widths or gauges that our existing facilities can not currently supply. The Techs operations are reflected in our steel operations segment beginning July 2007.

OmniSource Corporation. On October 26, 2007, we completed our acquisition of OmniSource Corporation, one of North America's largest scrap recycling companies. We acquired all of the outstanding stock of OmniSource in a transaction valued at approximately $1.1 billion, including $449.1 million in cash, 9.7 million shares of Steel Dynamics common stock valued at approximately $455.0 million, and the assumption of approximately $210.6 million of debt, which we repaid at closing. OmniSource will operate as a wholly-owned subsidiary of Steel Dynamics and will continue to focus on

the ferrous and nonferrous scrap processing, brokerage, and industrial scrap management needs of its customers, as well as our own ferrous scrap needs. OmniSource operations are reported in our steel scrap and scrap substitute operating segment.

Elizabethton Herb and Metal. We purchased the property, plant, equipment and inventory of Elizabethton on April 1, 2007. Elizabethton is comprised of two scrap processing yards located in Elizabethton and Johnson City, Tennessee. These two yards generally process in excess of 225,000 tons of ferrous scrap annually. Elizabethton supplied our Roanoke Bar Division with a portion of its steel scrap requirements before the purchase and continues to do so. The Elizabethton operations are reflected in our steel scrap and scrap substitute operating segment beginning April 1, 2007.

Financing

At December 31, 2007, our total outstanding debt was $2.0 billion. Our total debt to capitalization ratio, representing our total debt divided by the sum of our total debt and our total stockholders' equity, was 57% at December 31, 2007.

We have a five-year $750 million senior secured revolving credit facility, which includes a provision to increase the new facility by as much as $350 million under certain circumstances. At December 31, 2007 there were outstanding borrowings of $239.0 million under the revolving credit facility, which was classified as a current maturity on our consolidated balance sheet.

On September 11, 2007, we amended our existing $750 million senior secured revolving credit facility to allow for the addition of a $550 million Term A Loan Facility (Term A Loan). The Term A Loan amortizes at 2.5% per quarter beginning in December 2007, with the balance due on June 19, 2012. The senior secured credit agreement is secured by substantially all of our and our wholly-owned subsidiary's receivables and inventories and by pledges of all shares of capital stock and inter-company debt held by us and each of our wholly-owned subsidiaries. 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 within the terms of the revolver is dependent upon our continued compliance with the financial covenants and other covenants contained in the senior secured credit agreement. We were in compliance with these covenants at January 31, 2008, and expect to remain in compliance during the next twelve months.

Steel Dynamics, Inc. was incorporated in August 1993, in Indiana. We maintain our principal executive offices at 6714 Pointe Inverness Way, Suite 200, Fort Wayne, Indiana 46804. Our telephone number is (260) 969-3500. At December 31, 2007, we had 5,940 employees, of which approximately 14% are represented by collective bargaining agreements at the SWVA operation and at certain OmniSource locations.

Competitive Strengths

We believe that the following are some of our competitive strengths:

One of the Lowest Cost Producers in the United States; State-of-the-Art Facilities

We believe that our facilities are among the lowest-cost steel producing facilities in the United States. Our low operating costs are primarily a result of our efficient plant designs and operations, our high productivity rate, such as our productivity rate of approximately 0.3 man hours per hot band ton produced at our Flat Roll Division's mini-mill, low ongoing maintenance cost requirements and strategic locations near sources of our primary raw material, scrap steel and our customers. Experienced Management Team and Unique Corporate Culture

Our senior management team is highly experienced and has a proven track record in the steel industry, including pioneering the development of thin-slab flat rolled technology. Their objectives are closely aligned with our stockholders through meaningful stock ownership positions and performance-based compensation programs. Our corporate culture is also unique for the steel industry. We emphasize decentralized decision making and have established incentive compensation programs specifically designed to reward employee teams for their efforts towards enhancing productivity, improving profitability and controlling costs.

Diversified Product Mix

Our current products on a company-wide basis include hot rolled, cold rolled, galvanized, GalvalumeĀ® and painted sheet steel; various structural steel beams and rails; special bar quality steel; various merchant steel products, including beams, angles, flats and channels; and steel joists and deck materials. We are in the process of constructing a second structural rolling mill at our Columbia City, Indiana facility. In addition, our acquisition of The Techs expands our galvanizing capabilities. This diversified mix of products enables us to access a broader range of end-user markets, serve a broader customer base and mitigate our exposure to cyclical downturns in commodity grade flat-rolled products or in any one product or end-user market. During 2007, we further increased the extent of our diversification to include both ferrous and nonferrous scrap processing, scrap management, transportation, and brokerage and trading products and services through our acquisition of OmniSource.

Strategic Geographic Locations

The locations of our steelmaking facilities, near sources of scrap materials and near our customer base, allow us to realize freight savings for inbound scrap as well as for outbound steel products destined for our customers. Steel scrap and scrap substitutes represent the most significant component of our costs of manufacturing. Our mini-mills are located in the Upper Midwest and South Eastern United States, regions which we believe account for a majority of the total scrap produced in the United States. Our Jeffersonville, Indiana galvanizing facility, located on the Ohio River, also provides us with an expanded geographic reach to Southern markets. Our scrap processing facilities are located in multiple states throughout the Midwest and South Atlantic regions.

Business Strategy

Expand Product Offerings

The completion of our structural and rail mill expansion, the completion of the paint line by our Flat Roll Division, our acquisitions of the Pittsboro, Indiana bar mill and the Jeffersonville, Indiana galvanizing facility, as well as the expansions and upgrades of both facilities, notably the bar finishing facility in Pittsboro, and the addition of a paint line and GalvalumeĀ® production capabilities in Jeffersonville are important steps in pursuing our strategy of product line expansion. The Structural and Rail Division is strategically located to serve the Upper Midwest, Northeast and Canadian markets, which we believe are attractive and under-served markets. Our strategy to expand our flat rolled steel product offerings is to focus on the production of high value-added light gauge products, galvanized products and various coated products. The margins on high value-added products typically exceed those of the commodity grade and the number of producers that make them is more limited. Our Engineered Bar Products Division is likewise strategically located to cost-effectively serve SBQ markets. Our addition of OmniSource expands our product offerings with an array of both ferrous and nonferrous scrap products and services.

We will continue to seek additional opportunities to further expand our range of products through the expansion of existing facilities, greenfield projects and acquisitions of other steel producers or steelmaking assets as well as scrap recycling companies that may become available through the continuing consolidation of both the domestic steel and recycling industries.

Enter New Geographic Markets

We may seek to enter new steel markets in strategic geographic locations that offer attractive growth opportunities. The recent acquisition of The Techs, in Pittsburg, PA and our expansion of the Jeffersonville facility on the Ohio river, which provides access to southern markets, are examples of such activities. In addition, the location of some of our recently acquired scrap processing faculties further expands our geographic service areas.

Continue to Maintain Low Production Costs

We are focused on continuing to maintain one of the lowest operating cost structures in the North American steel industry, based upon operating cost per ton. We will continue to strive to optimize the use of our equipment, enhance our productivity and explore new technologies to further improve our unit costs of production at each of our facilities.

Foster Entrepreneurial Culture

We intend to continue to foster our entrepreneurial corporate culture and emphasize decentralized decision making and responsibility, while rewarding teamwork, innovation and operating efficiency. We will also continue to focus on maintaining the effectiveness of our incentive-based bonus plans that are designed to enhance overall productivity and align the interests of our management and employees with our stockholders.

Industry Segments

Under Statement of Financial Accounting Standards Statement No. 131, Disclosures About Segments of an Enterprise and Related Information , we have three reportable segments: Steel Operations, Fabrication Operations and Steel Scrap and Scrap Substitute Operations.

Available Information

Our internet website address is http://www.steeldynamics.com . We make available on our internet website, under "Investor Relationsā€”SEC Filings," free of charge, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC., our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as well as press releases, ownership reports pursuant to Section 16(a) of the Securities Act of 1933, our Code of Ethics for Principal Executive Officers and Senior Financial Officers and any amendments thereto to or waivers thereof, as well as our Audit, Compensation and Nominating and Corporate Governance Committee charters. We do not intend to incorporate the contents of our or any other website into this report. A

CEO BACKGROUND

Keith E. Busse has been our Chief Executive Officer and a director since 1993. From 1993 until May 2007, Mr. Busse was also our President. Prior to 1993, for a period of twenty-one years, Mr. Busse worked for Nucor Corporation, where he last held the office of Vice President. Mr. Busse is a co-founder of our Company. Mr. Busse is also a director of Tower Financial Corporation, a publicly held bank holding company.

Mark D. Millett has been our Executive Vice President, President and Chief Operating Officer for Flat Rolled Steels and Ferrous Resources since May 2007. From 1993 to May 2007, Mr. Millett was Vice President and General Manager of our Flat Roll Division. Prior to 1993, Mr. Millett worked for Nucor Corporation, which he joined in 1982. Mr. Millett is a co-founder of our Company and has been a director since 1993.

Richard P. Teets, Jr. has been our Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products since May 2007. From 1993 to May 2007, Mr. Teets was Vice President and General Manager of our Structural and Rail Division. Prior to 1993, Mr. Teets worked for Nucor Corporation, which he joined in 1987. Mr. Teets is a co-founder of our Company and has been a director since 1993.

Daniel M. Rifkin has been our Executive Vice President, President and Chief Operating Officer for Metals Recycling since October 2007. Prior to that, and since June 2007, Mr. Rifkin was President and Chief Executive Officer of OmniSource Corporation, a scrap metal recycling company, which we acquired in October 2007. Prior to June 2007, Mr. Rifkin was OmniSource's Vice President and Chief Operating Officer. Mr. Rifkin was appointed as a director is October 2007, incident to the OmniSource acquisition.

John C. Bates is the President and Chief Executive Officer and a director of Heidtman Steel Products, Inc., which he joined in 1963, and for which he has served as its President and Chief Executive Officer and a director since 1969. Mr. Bates is a co-founder of our Company and has been a director since 1993. Heidtman Steel is our largest customer for our steel products.

Frank D. Byrne, M.D. is currently President of St. Marys Hospital Medical Center in Madison, Wisconsin. Previously, he served eight years as President and Medical Director of Parkview Hospital in Fort Wayne, Indiana. Prior to that, Dr. Byrne practiced pulmonary and critical care medicine in Fort Wayne. He is currently a member of the board of directors of Lincare Holdings, Inc., a publicly traded medical equipment company, and serves on its audit committee. Dr. Byrne has been a director since 2005 and is a member of both our Compensation Committee and of our Corporate Governance and Nominating Committee.

Paul B. Edgerley has been Managing Director of Bain Capital, Inc., a venture capital firm, since May 1993 and, from 1990 to 1993, was a general partner of Bain Venture Capital. He is also a director of Keystone Automotive Operations, Inc. and Sensata Technologies, both of them publicly held corporations. Mr. Edgerley has been a director since 2002 and is a member of and Co-chair of our Audit Committee.

Richard J. Freeland has been the President and Chief Executive Officer for more than twenty-nine years of Pizza Hut of Fort Wayne, Inc. and six affiliated companies that own and operate more than 40 Pizza Hut franchised restaurants in Indiana and Ohio. Mr. Freeland has been a director since 2000 and is a member of our Compensation Committee and our Corporate Governance and Nominating Committee.

Dr. JĆ¼rgen Kolb, retired, was a member of the executive board of Salzgitter, AG, a German steelmaker, until 2001, and from 1986 to 2001, served as its Director of Sales. Dr. Kolb has been a director since 1996 and is a member of our Audit Committee and our Corporate Governance and Nominating Committee.

James C. Marcuccilli has served as President and Chief Executive Officer of STAR Financial Bank, a regional bank based in Fort Wayne, Indiana, since 1997. Mr. Marcuccilli serves as a director of STAR Financial Group, Inc., the holding company parent of STAR Financial Bank, as well as a director of STAR Financial Bank. Mr. Marcuccilli has been a director since 2005 and is a member of our Audit Committee and of our Corporate Governance and Nominating Committee.

Joseph D. Ruffolo has been a principal in Ruffolo Benson LLC, a business and financial consulting firm, since 1994. Prior to that, Mr. Ruffolo was the President and Chief Executive Officer of North American Van Lines, Inc. Mr. Ruffolo is a director of Tower Financial Corporation, a publicly held bank holding company. Mr. Ruffolo has been a director since 1999 and a member and Co-Chair of our Audit Committee and a member of our Compensation Committee.

MANAGEMENT DISCUSSION FROM LATEST 10K

Operations

We are one of the largest steel producers in the United States based on an estimated annual steelmaking capability of 5.3 million tons, with 2007 shipments from steel operations, including galvanizing, totaling 5.6 million tons. We plan to increase our annual steelmaking capacity to 6.7 million tons by the end of 2008. Pursuant to our acquisition of OmniSource Corporation in October 2007, we are also now one of North America's largest scrap recycling companies. Our total 2007 consolidated shipments, which exclude shipments between our operating divisions, totaled 6.2 million tons.

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Steel Operations. Steel operations include our Flat Roll Division, Structural and Rail Division, Engineered Bar Products Division, Roanoke Bar Division, Steel of West Virginia (SWVA) 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. Steel operations accounted for 81%, 89% and 91% of the company's consolidated net sales during 2007, 2006 and 2005, respectively. The Flat Roll Division accounted for 32%, 48% and 60% of our consolidated net sales during 2007, 2006 and 2005, respectively. This decreased concentration in steel operations and flat rolled products reflects our continued growth and escalating product diversification.

Our 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 light gauge hot-rolled, galvanized, GalvalumeĀ® and painted products. Our Structural and Rail Division sells structural steel beams and pilings and is also designed to produce and sell a variety of standard and premium-grade rail for the railroad industry. Our Engineered Bar Products Division primarily sells special bar quality and merchant bar quality rounds and round-cornered squares. Our Roanoke Bar Division sells billets and merchant steel products, including angles, plain rounds, flats and channels. SWVA primarily sells merchant beams, channels and specialty structural steel sections. 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. Our 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.

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Fabrication Operations. Fabrication operations include our five New Millennium Building Systems 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 8%, 8% and 6% of our consolidated net sales during 2007, 2006 and 2005, respectively.

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Steel Scrap and Scrap Substitute Operations. Steel scrap and scrap substitute operations include the revenues and expenses associated with our existing steel scrap processing locations and those related to our October 26, 2007 acquisition of OmniSource. In addition our Iron Dynamics (IDI) facility is included in this segment. Output from these operations is generally used as raw materials within our steel operations. Steel scrap and scrap substitute operations accounted for 9% of our consolidated net sales during 2007.

Acquisitions

OmniSource. On October 26, 2007, we completed our acquisition of OmniSource, one of North America's largest scrap recycling companies. We acquired all of the outstanding stock of OmniSource in a transaction valued at approximately $1.1 billion, including $449.1 million in cash, 9.7 million shares of Steel Dynamics common stock valued at approximately $455.0 million, and the assumption of approximately $210.6 million of debt, which was repaid at closing. We have in the past, and will continue in the future, to purchase a portion of our raw material needs for the steel operations segment from OmniSource.

We purchased OmniSource to significantly expand our strategic expansion into the steel scrap and recycled metals sector. OmniSource primarily procures and processes an array of ferrous and non-ferrous scrap materials and also provides brokerage and materials management services for these materials. Aside from the fact that scrap is the single largest cost component for our steelmaking operations, the acquisition provides an entry for further profitable growth in a sector that is continuing to grow on a global basis. OmniSource employs over 2,000 people in 40 facilities located in the eastern United States and Canada.

OmniSource will operate as a wholly-owned subsidiary of Steel Dynamics and will continue to focus on the ferrous and nonferrous scrap processing, brokerage, and industrial scrap management needs of its customers. OmniSource operations are reported in our steel scrap and scrap substitute operating segment. OmniSource operating results are reflected in our financial statements from the effective date of the merger, October 26, 2007, through December 31, 2007.

The Techs. On July 2, 2007, we purchased The Techs for approximately $373.4 million, which was funded from our existing senior secured revolving credit facility. The Techs is a Pennsylvania-based flat-rolled steel galvanizing company, which consists of three non-union galvanizing facilities: GalvTech, MetalTech, and NexTech. Each facility specializes in the galvanizing of specific types of flat-rolled steels in non-automotive applications, servicing a variety of customers in the HVAC, commercial construction, and consumer goods markets. About 85% of The Techs sales are to customers in the eastern U.S. and the Midwest. In 2006, the privately held company shipped 958,000 tons of galvanized steel and generated revenues of $831.3 million. We purchased The Techs to expand our market-share in the value-added steel coating business. With the addition of The Techs, we have an annual estimated galvanizing capacity of approximately 2 million tons. The Techs complements our three existing galvanizing lines located in Butler, Indiana and Jeffersonville, Indiana. The purchase of The Techs allows us to access markets that require widths or gauges that our existing facilities can not currently supply. The Techs operations are reflected in our steel operations segment. The Techs operating results are reflected in our financial statements from the effective date of the merger July 2, 2007, through December 31, 2007.

Income Statement Classifications

Net Sales. Net sales from our operations are a factor of net tons shipped, product mix and related pricing. Except for our fabrication operations, we recognize revenue 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. Net sales from steel fabrication are recognized from construction contracts utilizing a percentage-of-completion method, which is based on the percentage of steel consumed to date as compared to the estimated total steel required for each contract. Steel fabrication revenues accounted for approximately 8% of our total net sales during both 2007 and 2006. We charge premium prices for certain grades of steel, product dimensions, or certain smaller volumes, and for value-added processing or coating of steel products.

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 scrap substitutes, alloys, zinc, natural gas, argon, direct and indirect labor and related benefits, electricity, oxygen, electrodes, depreciation, materials and freight. Our metallic raw materials, steel scrap and scrap substitutes, represent the most significant component of our costs of goods sold. The primary costs related to our steel scrap and scrap substitute operations is the cost of 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 labor and benefits, professional services, financing cost amortization, property taxes, and profit-sharing expense.

Interest Expense. Interest expense consists of interest associated with our senior credit facilities and other debt (described in the notes to our financial statements) net of capitalized interest costs that are related to construction expenditures during the construction period of material 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 and income from equity investments. Other expense consists of any non-operating costs.

Operating Results 2007 vs. 2006

Net income was $394.6 million or $4.02 per diluted share during 2007, compared with $396.7 million or $3.77 per diluted share during 2006. Our gross margin percentage was 21% and 26% during 2007 and 2006, respectively. The decrease in our gross margin percentage during 2007 was due to several factors, primarily weaker flat roll steel markets and the acquisition of The Techs and OmniSource. Although The Techs generally elicits higher selling values due to value-added products, the gross margin for the galvanized steels produced by The Techs is lower than that of our other galvanizing lines due to the incremental cost of purchasing a steel coil to be coated versus producing that coil at cost, as we do at our Flat Roll Division. OmniSource is primarily engaged in the collection and processing of ferrous and non-ferrous materials for resale to steel producers, brokers, and other processors. This type of business operates at lower margins than we have historically experienced as a steel producer.

Gross Profit. During 2007, our net sales increased $1.1 billion, or 35%, to $4.4 billion, while our consolidated shipments increased 1.5 million tons, or 32%, to 6.2 million tons, when compared with 2006. The increase in shipments was due to increased shipments at several of our steelmaking operations and to shipments from our acquired operations: The Techs and OmniSource.

Steel operations accounted for 81%, 89% and 91% or our consolidated net sales and 88%, 96% and 96% of our consolidated gross margin during 2007, 2006, and 2005, respectively. Our Flat Roll Division decreased shipments by 46,000 tons, or 2%. Our Structural and Rail Division increased shipments by 156,000 tons, or 15%, which resulted from increased demand for structural products for the non-residential construction industry. Our Engineered Bar Products Division increased shipments by 44,000 tons, or 9%, during this period as a result of increased demand for special-bar-quality products and the continued development of longer-term customer supply relationships. In 2007 our Roanoke Bar Division and Steel of West Virginia shipped 595,000 tons and 284,000 tons respectively for the full year compared to 458,000 tons and 237,000 tons respectively for the period April 12, 2006 to December 31, 2006.

Our 2007 average steel operations' selling price per ton shipped increased $33 compared with 2006. During 2007 strong demand for structural steel products allowed us to increase our annual average selling price by more than 16%, while the inverse was true for our flat roll products. Due to weaker demand during 2007 and the overhang of inventories from the impact of lower priced inventory during the third and fourth quarters of 2006, our annual average selling price for flat roll products decreased by more than 6%. However, throughout the second half of 2007, steel service center inventories continued to decline and were at a two-year low by the end of the year. Due in part to supply constraints that have arisen from lower import levels and shuttered or in-repair domestic manufacturing facilities, in addition to increased demand from the service centers, we have seen a recovery in our flat-rolled order pricing during the first quarter of 2008. We currently anticipate an increase in our steel operations' average pricing when comparing to the fourth quarter of 2007.

Metallic raw materials used in our electric arc furnaces represent our most significant manufacturing cost. Our metallic raw material cost per net ton consumed in our steel operations increased $25 during 2007 as compared to 2006. During 2007 and 2006 our metallic raw material costs represented 50% and 54% of our steel operation's manufacturing costs and 44% and 53% of our total consolidated manufacturing costs. We are experiencing an increase in steel scrap prices during the first quarter of 2008, which, when coupled with our anticipated increase in average product pricing would result in stable to increasing margins when compared to the fourth quarter of 2007.

ā€”Steel Fabrication Operations

Fabrication operations accounted for 8%, 8% and 6% of our consolidated net sales during 2007, 2006, and 2005, respectively. During April 2006, we purchased three additional joist manufacturing facilities. We have renovated these facilities during 2006 and 2007 and anticipate increased production during 2008. Our average steel fabrication operations' selling price per ton shipped increased $146, or 13%, during 2007 when compared with 2006. The purchase of various steel products is the largest single cost of production for our fabrication operations. During 2007 and 2006, respectively, the cost of steel products purchased represented 67% and 69% or the total cost of manufacturing for our fabrication operations.

Consolidated Results 2007 vs. 2006

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $224.5 million during 2007, as compared to $170.9 million during 2006, an increase of $53.6 million, or 31%. Our selling, general and administrative expenses represented 5% of our total net sales during both 2007 and 2006. During 2007, we incurred an expense of $2.3 million related to the write-off of previously capitalized financing costs when we redeemed our $300 million 9 1 / 2 % senior notes due 2009 (9 1 / 2 % Notes).

We recorded expense of $50.2 million and $45.0 million during 2007 and 2006, respectively, related to our Steel Dynamics performance-based profit sharing plan allocation which is currently calculated as 8% of pretax earnings. During 2007 and 2006, respectively, we recorded additional profit sharing expense of $8.3 million and $5.3 million, related to certain subsidiaries whose employees did not participate in the aforementioned plan. Our board of directors approved an increase from 6% to the current 8% in the profit sharing rate effective August 1, 2006, in recognition of the additional plan participants added as a result of acquisition activity.

Interest Expense. During 2007, gross interest expense increased $35.3 million, or 105%, to $69.1 million and capitalized interest increased $12.0 million to $13.7 million, when compared to 2006. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities at our steel operations and fabrication operations. During 2007, interest expense was also reduced by $3.4 million related to the recognition of the remaining unamortized bond premium associated with the redemption of our 9 1 / 2 % Notes. We currently anticipate gross interest expense to increase for 2008, as we have additional outstanding borrowings related to our recent acquisition of OmniSource, which was principally financed with the issuance of the $700.0 million 7 3 / 8 % senior notes due 2012.

Other (Income) Expense. Other expense was $5.5 million during 2007, as compared to other income of $4.5 million during 2006. During 2007, other expense was principally comprised of $7.1 million of additional expense related to the call premium associated with the redemption of our 9 1 / 2 % Notes and the termination of a related fixed-to-floating interest rate swap which resulted in a $5.0 million loss on hedging activities. These expenses were partially offset by interest income, certain non-operating revenues, and income from certain equity investments. During 2006, other income was principally comprised of certain non-operating revenues recognized at several of the Roanoke Electric subsidiaries.

Income Taxes. During 2007, our income tax provision was $235.7 million, as compared to $234.8 million during 2006. Our effective income tax rate was 37.4% and 37.2% during 2007 and 2006, respectively. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the basis differences reverse.

We adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes , an interpretation of FASB Statement No. 109, on January 1, 2007. The implementation of FIN 48 did not have a significant impact on our financial position or results of operations. Included in the balance of unrecognized tax benefits at December 31, 2007 are potential benefits of $26.7 million that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to our tax contingencies on a net-of-tax basis in income tax expense. During 2007, we recognized interest of $1.2 million, net of tax, and penalties of $1.3 million. At December 31, 2007, we had $5.6 million accrued for the payment of interest and penalties.

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. We are 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 $20.5 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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Second Quarter Operating Results 2008 vs. 2007



Gross Profit. Net income was $210.5 million or $1.05 per diluted share during the second quarter of 2008 compared with $93.9 million or $.48 per diluted share during the second quarter of 2007. When comparing the second quarter of 2008 with the second quarter of 2007, our net sales increased $1.5 billion, or 164%, to $2.4 billion. Our gross margin percentage was 20% during the second quarter of 2008 as compared to 24% for the second quarter of 2007 and as compared to 18% on a linked-quarter basis. Second quarter 2008 financial results include the operations from The Techs and OmniSource, which were purchased in the second half of 2007. These operations generally elicit lower gross margins as compared to our steel manufacturing facilities due to their product offerings or production process. The inclusion of these operations in our second quarter 2008 operating results was the primary driver of the decrease in our year-to-year gross margin percentage.

Steel operations accounted for 63% and 87% of our consolidated external net sales and 79% and 94% of our combined segment operating income (excluding ā€œAll Otherā€ and ā€œEliminationsā€ segments), during the second quarter of 2008 and 2007, respectively. Our steel operationsā€™ second quarter 2008 average selling price per ton shipped increased $315 per ton when compared to the second quarter of 2007 and $229 per ton compared with the first quarter of 2008. Shipments increased 385,000 tons, or 31%, to 1.6 million tons, when comparing the second quarter of 2008 with same period in 2007. The increase in shipments was primarily due to increased shipments of 127,000 tons at our Flat Roll Division and to the inclusion of 263,000 tons from The Techs, which was newly acquired in July 2007. Demand for our structural steel and bar products has remained strong during the first part of 2008 and based on several factors, including current order entry activity, we anticipate this to remain the case for much of the year. In addition, the flat rolled steel markets have strengthened considerably during the year due to supply-side demand factors. The primary customers for flat rolled products are intermediary steel service centers. Service center inventory levels were at two-year lows at the end of 2007 and remain at lower relative levels during 2008 so far. This coupled with a lack of significant import activity has encouraged increased demand for flat rolled steels.



During the first six months of 2008, the volume of steel products imported into the United States decreased for certain products. We believe import volumes could remain at lower levels in the short term as a result of stronger global demand, a weak dollar, and high transportation costs; however, import activity is difficult to forecast. Currently, we anticipate an increase in our third quarter average selling values; however, we believe this increase in pricing may be partially offset by an expected increase in our costs of steel scrap consumed.

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 $181 during the second quarter of 2008 as compared to the second quarter of 2007 and increased $144 on a linked-quarter basis. During the second quarter of 2008 and 2007, respectively, our metallic raw material costs represented 57% and 61% of our total manufacturing costs in the steel operations segment, excluding the operations of The Techs. These costs represented 38% and 58% of our consolidated manufacturing costs during the second quarter of 2008 and 2007, respectively. This percentage decrease is due to the change in composition of our manufacturing cost structure due to the addition of OmniSource and The Techs during 2007. We anticipate our cost of steel scrap consumed to remain relatively level in the third quarter as a result of the current cost of commodities consumed and existing inventory levels.



Steel Fabrication Operations



Fabrication operations accounted for 4% and 10% of our consolidated external net sales and 1% and 4% of our combined segment operating income (excluding ā€œAll Otherā€ and ā€œEliminationsā€ segments), during the second quarter of 2008 and 2007, respectively. Revenues from our five plants are generated from the fabrication of trusses, girders, steel joists and steel decking used within the non-residential construction industry. Shipments increased approximately 7,000 tons to approximately 76,000 tons during the second quarter of 2008 compared to the second quarter of 2007. However, the average selling value decreased $40 per ton to $1,227 compared with the second quarter of 2007. In addition, the cost of steel used in the production process (the segmentā€™s largest single cost of production) increased during the second 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 general continued decline in non-residential construction fostered in part by the tightening credit markets coupled with the weakened U.S. economy.



Metals recycling and ferrous resources operations accounted for 31% and 2% of our consolidated external net sales and 19% and 2% of our combined segment operating income (excluding ā€œAll Otherā€ and ā€œEliminationsā€ segments), during the second quarter of 2008 and 2007, respectively. Our steel scrap 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; therefore, our second quarter 2008 results are significantly higher than our results for the same period in 2007. During the second quarter of 2008, the metals recycling and ferrous resources segment recorded shipments of 1.6 million tons of ferrous and scrap substitute materials, in addition to approximately 254 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.



Given the increase in global demand for commodity products, including ferrous and non-ferrous materials, in addition to our believed decrease in the availability of domestic ferrous materials due the decrease in industrial generation of ferrous scrap, we are currently experiencing a tightening of availability and therefore increase in costs for ferrous materials. The industry is experiencing record high levels of exporting of ferrous materials and record level pricing. A portion of our non-ferrous sales are within the Asian markets. We anticipate relatively level ferrous material costs throughout the third quarter of 2008.



Selling, General and Administrative Expenses . Selling, general and administrative expenses were $121.6 million during the second quarter of 2008, as compared to $48.9 million during the same period in 2007, an increase of $72.7 million. During the second quarter of 2008 and 2007 our selling, general and administrative expenses, including profit sharing and amortization expense, represented 5% of our total net sales. The additional total costs in selling, general and administrative expenses in the second quarter of 2008 compared to the second quarter of 2007 primarily relate to additional costs related to the newly acquired operations of The Techs (acquired July 2007) and OmniSource (acquired October 2007).



We also had additional costs related to the amortization of certain intangible assets related to the above acquisitions. During the second quarter of 2008 and 2007, respectively, we recorded amortization of intangible assets of $8.1 million and $3.4 million, respectively. We anticipate amortization of intangibles to be approximately $10.4 million per quarter for the remainder of 2008.



Interest Expense, net Capitalized Interest . During the second quarter of 2008, gross interest expense increased $31.8 million to $41.0 million and capitalized interest increased $3.6 million to $5.5 million when compared to the same period in 2007. The increase in gross interest expense for the second quarter of 2008 compared to the second quarter of 2007 is a result of increased borrowings for, among other things, acquisitions and capital outlays for our expansion projects. Our effective interest rate was 6.6% and 7.7% during the second quarter of 2008 and 2007, respectively. The interest capitalization that occurred during these periods resulted from the interest required to be capitalized with respect to construction activities primarily at our Flat Roll and Structural and Rail divisions. We currently anticipate gross interest expense to increase somewhat during the remainder of 2008 as we have issued $500 million of 7Ā¾ % senior notes during April 2008.



Other Income, net Other Expense . Other income, net other expense was $16.9 million during the second quarter of 2008 as compared to net expense of $11.5 million during the same period in 2007. During 2008, other income of $14.9 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 will no longer be included in these earnings. During 2007, other income was offset by $7.1 million of expense related to the call premium associated with the redemption of our 9 Ā½% 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 Taxes . During the second quarter of 2008, our income tax provision was $129.0 million as compared to $55.0 million during the same period in 2007. Our effective income tax rate was 38.0% and 36.9% during the second quarters of 2008 and 2007, respectively.

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. We are 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, we are 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. We recognize interest and penalties related to our tax contingencies on a net-of-tax basis in income tax expense. During the six-month period ended June 30, 2008, we recognized interest of $434,000, net of tax, and penalties of $107,000. At June 30, 2008, we had $6.5 million accrued for the payment of interest and penalties.

CONF CALL

Fred Warner

Welcome to today's Steel Dynamics conference call being webcast today, October 16, 2008, from Fort Wayne, Indiana. A replay of this call can be heard and downloaded as a podcast from our website, www.steeldynamics.com.

Today's management discussion includes forward-looking statements. We caution that actual future results and events may differ materially from statements or projections that are made today.

You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements, by referring to our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission, and in other reports we file from time to time with the Commission. Specifically, please refer to those sections in our Form 10-K and Form 10-Q reports entitled, forward-looking statements and risk factors.

These reports that we file from time to time with the Commission are publicly available on the SEC website, www.sec.gov, and on our website, www.steeldynamics.com.

After today's management discussions, we will open the call for questions from participants who have informed us they may wish to ask questions. Today's call will begin with remarks by our Chairman and Chief Executive Officer, Keith Busse.

Keith Busse

It is our pleasure to be with you this morning, and to highlight the operating results that Steel Dynamics had during the third quarter of 2008. I guess you saw in the announcement that our earnings per share, which as one of the key focuses was $0.98 per share, which was down about 8% sequentially from the $210 million or $1.05 per share that we reported in the second quarter.

I think somewhere in the early morning press, I read in one of the research reports that was reported, it's a soft quarter. I would hardly say that it was a soft quarter, and that this was the second best quarter that Steel Dynamics has ever reported in its history.

So it was not the quarter we had hoped for, and I think in the body of this report we went on to offer as much information about the quarter and the uncertainties that face the steel community on a go-forward basis as we possibly could, as this press release was a little more detailed than many of the releases we've had.

One of the things we wanted to emphasize was the fact that our cost structure -- and I noticed that our friends in Nucor emphasized the same thing, and they are probably the only other company in this space that has a variable cost structure similar to Steel Dynamics. And they had excellent earnings results in the third quarter; and kudos to Nucor for that.

But our quarter could have been in my opinion a record quarter for the company. The principal miss, if you will, was really related to our scrap operating unit. In our prognostications of July of this year, we, as you could see from the operating segment data; OmniSource had a record third quarter, and that's in spite of a very nasty September.

No one that I know of, could have ever forecasted that scrap was going to take the sharp drop that it did in the late August/early September timeframe. I think people thought the market was going to come down somewhat, but I don't think anyone saw a $300 crash in the pricing of prime grades, it's just unanticipated.

So the earnings that we had forecast for September of this year were at the same pace of July and August. And obviously when you are buying material throughout the month of August that you are going to deliver to your clients in the month of September, and the price falls $300, there's going to be trauma during that period, and there was. As we reported, that had about a net of profit and net of tax is about a $0.12 effect on our earnings.

Of course, if you do the math there and add that back to $0.98, you end up with $1.10 or right about in the middle of the range. But I would remind many of you who are listening, who attended many of the fall conferences that we guided to the very, very low end of our announced July range. We generally don't correct those numbers even if we have visibility into them, if the miss is as narrow as this. So, I think we had a really good quarter.

When you look at the impact on the steel operating units, we missed our shipment a little bit in September in the structural division for a wide variety of reasons, couldn't get railcars, etcetera. Really wasn't that big of a deal, but obviously in the flat-rolled universe, we missed our shipment forecast in September considerably. There was some net effect of that probably on the order of magnitude of $0.05, $0.10 a share I would tell you.

When you look at all these things collectively, had September been as advertised or as forecast and scrap not come down in this period, we might well have had a record quarter. That's the past, and we've tried to talk a little bit more about what's going to go on in the future, because I think that's what everyone is really concerned with today.

You can read all the data about where our steel shipments were. They were 12% lower than the second quarter and that weakness is primarily flat-rolled and primarily September related. With regards to shipments in the merchant bar structural arena, they were either up to sideways kind of activity, and probably will remain fairly strong as we march forward through the fourth quarter, maybe off a little bit in the fourth quarter, but probably not materially from a long products perspective.

OmniSource ferrous shipments were 1.8 million tons, which is up about 17% compared to the second quarter of '08, but of course, shipments are one thing and results are another. And as I said earlier, September was a difficult month for the recycling community in general, not just OmniSource.

Iron Dynamics continued to operate well during the quarter and reported a very nice profit during the quarter. It should remain profitable, although the price it receives for its output does vary with market circumstances, so profitability may well [repressible]? Than the Iron Dynamics arena, but that's really not all that material to our results in the end.

Wanted to point out that scrap yard inventories typically are three weeks maybe four weeks, sometimes two weeks, they're all over the map. So we had an impact in September and obviously with scrap prices falling substantially now in the month of October, there's going to be another sort of upside down effect or another tough, difficult month for recycling in the month of October, although we expect that their earnings will come back in the November, December timeframe.

Of course, volumes of shipments could be lower because it's expected that demand for their products will be lower. But they should be back in a profitable zip code with normal margins and we would expect; anticipated further improvement in the first quarter of '09 and throughout the year '09.

I said in the release, that the bright side of all this is a significant drop in the cost of raw material inputs, and that's been very, very good for the steel business in general, from a cost of inputs perspective. We think in the fourth quarter that pricing and the volume of steel production shipments in that quarter will depend on the [tenure] of the market at any given point in time.

I think we wouldn't tell you anything any different than anybody else has. We're living hand-to-mouth in flat-rolled. We live from day to day to day to day from an order book perspective. It's altogether different in the long products business. We have still good backlogs there in Structural and a decent backlog in Bars and a decent backlog in the SBQ arena, and so on and so forth, and we would expect those businesses to continue to perform rather well on a go forward basis.

The issue will be Flat-Roll, and it's impossible to predict where we're at, although in our forecasting and modeling, we gave I guess the best signal we could. We expect our earnings to be about, about being the key word, half of what they were in the third quarter. But I would point out to you, if about means about half, then if you annualize that earnings rate, that still annualizes to or is equivalent to the second best year that Steel Dynamics has ever had at the very bottom of the trough.

So we, as you know, we withdrew our guidance. I think that could have easily been achieved. We had the marketplace not literally fallen apart or imploded during the fourth quarter. You might ask is it the economy and is it demand? I think, we all can see that demand has considerably weakened in the commodity universe, if you want to call steel a commodity.

There are a lot of value added elements with regards to the steel products, but it clearly has weakened. But I don't know that it's weakened to the degree that that order entry reflects. I would guess that in our personal lives, we've looked at liquidity, and a lot of people turned the personal accounts and the cash fearing uncertainties in the marketplace. And I don't think that it's any different in the business universe, I think.

There are orders from headquarters out there, so to speak, to reduce inventories. Inventories at the end user level are probably at all-time record high prices and there are there are expectations in a recessionary period that prices will fall. People are cleaning house, turning inventories into cash, and they were already fairly low, and they are going to get lower as the buyers for some period of time continue to sit on their hands.

But all is not lost, they will return. I can't tell whether they are going to return in November or they're going to return in December or return in January. They're certainly not going to return at 100% of level they were at. I saw some research this morning that would suggest that the industry may operate, it was suggested at a 75% to 80% level next year, this is due to economic circumstances.

I don't know that I have any quarrel with that, and I would tell you that's exactly what we modeled, essentially, is that kind of activity. It seems like all we're doing these days is modeling, modeling, modeling, but we've modeled any kind of scenario you can imagine from 75% of capacity to 40% of capacity.

I don't think in our wildest dreams, we could ever imagine a situation where we kind of operated 40% of our capability, but it's kind of fun exercise of the model. And I might tell you, for those of you that fear harm to our earnings, that even at 40% in flat-rolled, operating level, even at 100,000 ton operating level, you can't drive Butler to a loss. I repeat; you can't drive Butler to a loss.

Now that statement is being made with the caveat that resource costs remain very soft. I can't imagine with an economy that soft, but we all think it's going to be, the resource costs are going to go up, they are just not. This may be a very bad year in the resource business. Probably going to be followed by a very good year in 2010 or if the economy turns in the spring of this year or mid-year, it's still possible that there could be very good returns in the resource arena.

But if it remains as soft as it has been, resource costs are going to remain soft. And when they do, when you couple that with our conversion costs, I don't think there's anyone out there in this industry that can stay with us from a cost of production perspective, save only Nucor, whose culture is similar and whose variable cost structure is similar in nature to ours.

I had breakfast with a gentleman this morning; who made an interesting observation. He said Keith, you guys may well actually perform better in a distressed economy than you do in a vibrant economy. I said that's probably true. I said in a vibrant economy, our resource costs tend to rise sharply and so do selling values. It's nice to be able to cherry pick the upper end of the market, and have the kind of great margins and $200 a ton operating profits we had.

But our best ability to compete is probably in a different zip code. When times are really, really tough and resource costs are tough, we can, and you've heard me say this. We can convert scrap metal or inputs into our furnaces from a flat-roll perspective, on a vanilla basis, $125 a ton.

On an alloyed basis, with the exotic kind of product we make, maybe $145 a ton kind of number. And loaded with the kitchen sink and including all of our corporate costs if you allocated it all to everyone, even though we do. Be mindful to everybody, when we talk about our pretax income at our operating units, it certainly includes depreciation and amortization and also includes interest charges.

When I said earlier, you can't cause Butler to lose money; that includes interest at a 100k level. So we have an awesome cost structure, it is variable, and I hope this recession doesn't last very long, but certainly when you think you've got resources in the $200 arena, the cost of inputs, and a conversion cost in the $125 to $140 arena, I don't think there's anybody out there that could make the claim we can, and I'll let you guys do all the math on the spreads.

I haven't seen any pundit prognostications that would suggest that hot [pans] are going back to $400. I haven't seen anything like that, and you haven't, either. I don't know where they are going to be. You can take the worst prognostications out there today in the pricing environment and couple that with that kind of (inaudible) knowledge that you are now armed with relative to cost to make an [hard] man and you can imagine that spreads could actually expand during that timeframe for Steel Dynamics, and results could actually get better.

So, when we said in this report that it's not unreasonable, that we could a good year in '09, I think that's exactly right. It's not. We could actually have, and I wouldn't call where everybody's at in terms of looking at 2008. I'll let you be the judge. But what I read this morning, I wouldn't call those numbers.

So 2009, given the resource costs remained soft, and in this kind of business climate, I think they will. We could have a better year in '09 than we actually had in '08. It's not an unreasonable assumption. Nobody has a crystal ball, you can't look out that far. But I think, for all of those people that were panicked about what's happening to the selling [guy] and happening to volumes and what not. I think we are better girded to live through all that than almost anybody out there.

I think we have one of the best, if not the best cost structures. We have a good balance sheet, but certainly we don't have a balance sheet as strong as Nucor's, but for those of you who worry about things like that, we'll let Theresa address that, when she has an opportunity to speak with everyone here this morning.

There's also been some early morning [press] about these guys operating costs or conversion costs were up. I don't think there's any way to measure that. There is just some errors in thinking out there. Our operating costs although higher than Butler's in other arenas by the sheer nature of business, wouldn't come anywhere close to the kind of number I was reading.

I think the mix-up probably comes from somebody subtracting, taking an average selling value and subtracting an operating profit of $200 a ton and arriving at a cost structure and making all kinds of assumptions about what makes up that cost structure. Well, first of all that cost structure is dramatically affected by the likes of the taxes, where they purchased substrate, it's dramatically affected by value-added product, and we shipped more value-added products in the third quarter than we did in the second quarter or any quarter for that matter. We had more success in that arena.

It's not that simple of an exercise. If you make the wrong assumption on resource costs, you end up with a bad answer. Let me just say that from a cost of conversion perspective, I think we are in great shape. I don't think resource costs, unfortunately, they may go down again in the month of November, it likely will. I think there's huge amounts of scrap sitting around out there that didn't get taken off the shelf this month because demand activities at the mills, ours included, everyone's included, was very light.

So you could see a further softening in that arena, and for those who like to think about things, dream about things like people going long in December and creating a panic in scrap, I don't think that's going to happen. We have no intention to go along, and it's not a plan. We are no different than metal management from execution perspective.

So I would tell you that although there might be an opportunity with changing circumstances for scrap to rise next year. I would, number one, hope we are not going to see the kind of volatility that we've seen, and number two, if the economy is as bad as some people think it might be, and everybodyā€™s operating rates are going to be down, then there's very little opportunity for scrap to rise.

I would tell you, our cost structure is just in great shape, as you measure it against any kind of pundit prognostications about where pricing may or may not go.

As I said in our press release, I think our shares adverb missing? , and I don't mind saying it, everybody's shares for that matter. You just can't believe what's happened to the steel community. If you talk about an oversold universal panic, and I think a lot of that has to do with the hedge funds or more kindly said, momentum stocks. When people bailed out of commodities, they bailed out with a lot of horsepower, and they've drove this thing to almost to a silly level, where I think yesterday we were below our actual book value. So I think the shares are just truly way, way oversold.

I'm going to let Dick talk a little bit about steel, Mark talk a little bit about scrap. We'll get into the Q and A. I do want to point out again that our operating profit in our steel operations was $200 a ton; not bad. Although I think the fourth quarter is going to be a dark quarter for everyone, I think we all have to just look through that.

I think the first quarter will be an improved quarter. Now, what does improved mean? I don't know. I would guess it's going to be better than the first quarter of '08, that's my thinking, and I think the year could be better than the year '08. But we'll wait and see, and we'll give you more guidance on that as time goes along, and we have a better view of it.

But a $200 operating profit is still one of the best in the industry today. I think our selling values were higher than the average [bearers]. I think our team has done a good job. I think our people are doing an excellent job. Need to remind all of you too that our employees suffer during times like this, because their income is tied, is variable in nature. And more of their [W2] earnings are related to bonuses, which they are not earning, than it is to base pay.

So there is everybody suffering here. It's kind of a share the pain time. But I think we're going to be back and back with great horsepower in the year '09, in spite of the fact that we may be facing a recessionary period. And I certainly hope it doesn't turn into a recession.

I was a little disappointed last night as I listened to the debates that there wasn't more conversation about the impact on the presidential race of a candidate who might want to raise the capital gains tax rate. There is a lot of things that this economy in the world is dealing with; the housing crisis, the mortgage crisis, the financial crisis and Wall Street, China pulling back. There's a lot on everybody's mind.

But the infusion of capital in to the markets; I mean whether it's a bond market or the stock market and people's ability to earn a long-term capital gain on their investments is clearly one of the key engines that drive economic success in this country. I was disappointed candidates kept talking about marginal tax rates and whether or not there's going to be a rebate check for the poor and this and that.

I don't care whether you make $250,000 or $100 million, your 10 million, whatever the number is. If you earned it, you deserve to keep it. And redistributing the wealth is a bad idea and raising the capital gains rate is a horrible idea. So, I'll get off to my political views here, but we've got a lot of problems out there, including people selling short into markets. There is no time for short selling, and it just destroys value and causes fear and panic in a market where there it doesn't need to be fear and panic. So, having said all that, I'm going to turn it over to Dick for a few brief comments.

Richard Teets

Alright Keith, thank you very much. I'd like to just add a few comments about the steel operations, in addition to what Keith and the press release have already covered. At Butler, I'm proud to report that the Butler Division after having achieved the various status in the Voluntary Protection Program from (inaudible) disaster?. So their safety program is well underway to achieving star status. Butler is our first of our steel mills to participate in this program in the first steel producing facility in Indiana with melting and casting operations to achieve it.

Butler is our major project that we have underway, with our expansion to produce 3 million tons a year and that involves replacing all four of our hard furnace [shell] with the deeper bottoms and taller side wall panels to allow for single charge opportunities, and we are in the process of finishing the first two furnaces and then we'll look at doing the other two when the equipment comes in.

The fact that they have substantially improved the safety performance by reducing both the (inaudible) and loss time accidents; and I am very proud to say that the [next] Tech has achieved zero in both of those categories on a year-to-date status. Congratulations to everyone.

In the long products arena at Columbia City (inaudible), I'm happy to say the mill produced and shipped its 5 million ton since inception. Also, their safety performance was exemplary with two minor loss time accidents, achieved in over 330,000 man-hours worked.

From a project perspective, they are number two rolling mill is up and running. We're staffing at five days a week, 24 hours a day, producing 8, 10, and 12-inch product. Continue to expand those products as we need to do our roll pass designs, cut the rolls and the guides. Also, the number (inaudible) is under construction. The building foundations are complete. The buildingā€™s steel is being erected and we're expecting equipment deliveries just after the first of the year with (inaudible) on that immediately follow.

At Roanoke, the productivity was an all-time high at record rates in spite of numerous projects that were underway, which tend to be somewhat disruptive. Projects there include a replacement to our guide [house] systems and also a scrap yard expansion to allow for more thorough inventory control.

In Pittsboro, all three quarters have been record shipments throughout the course of this year, with our third quarter being our best ever. Also productivity was a record in all the operating departments in the third quarter. Modifications to both the casters and the rolling mill are underway. We're finishing the foundations with two new rolling mill stands (inaudible) as we speak, and looking forward to the completion of those projects which will take our opportunity to produce to 750,000 tons of (inaudible).

Bar finishing continues to make inroads into the oil patch market. Highly engineered steel is a very high quality application, and we've been earning that business through high quality and delivery performance. At Steel of West Virginia, in spite of the decline in transportation markets they have been able to supplement their product mix serving other markets such as the RV and manufactured housing and merchant business.

Also, they have had record productivity in the number one rolling mill and the second highest quarterly productivity in number two mill in their history. So a very great performance there. Thank you so much. Keith.

Keith Busse

Thanks Dick. Mark, couple comments?

Mark Millet

Yes. A special welcome to our employees that are listening in. I guess it certainly has been an interesting time to transition my responsibilities to the metal recycling side of our business. I take full responsibility in my two month short tenures for the $600 plunge in scrap pricing. Fortunately, I'm in good company to manage through the unprecedented times.

The OmniSource organization, both in the Midwest and the Southeast is full of talented, passionate, dedicated people with a deep understanding of the scrap business. We have assembled an excellent management team with broad operational and marketing backgrounds that will lead the company towards continued growth and success.

From an operational performance perspective; first scrap shipments for the quarter were approximately 1.6 million gross tons, 1.8 million net tons, 17% over the second quarter, and they increased principally due to the added contribution of Omni Southeast. Non-ferrous shipments were approximately 240 million pounds, a little down over the second quarter, like 5% down, from that prior quarter.

As domestic steel production was curtailed through the quarter and export shipments diminished, scrap demand dropped abruptly resulting in that unprecedented drop of almost $300 per gross ton in August for prime grades for September delivery. As you can appreciate, margins were squeezed in September as scrap purchased at high prices flowed through the system, and with another dramatic drop of roughly $300 per gross ton in October, this margin squeeze will continue into the early part of the fourth quarter.

Nonetheless, inbound price has also dropped, as spreads should widen back to normality in November or December. I think significantly, the spread between [bushling] and shredded scrap has backed off from an over baked $290 per gross ton in July to a historically normal $20 to $30 in October.

The supply and demand environment would suggest, as Keith also suggested that the scrap market will remain soft for some months ahead, although I think everyone has a clouded crystal ball right there and it's little difficult to define the exact supply-demand balance.

There are many drivers at play. On the demand side, a significant reduction in domestic steel production, a transition of BOF charge, or scrap charge away from prime grades towards a larger percentage of secondary grades, lower export rates, mills trying to sustain cash, reducing their inventories and not buying, are all contributing to a reduced demand position.

In contrast, supply is going to be curtailed somewhat by the reduced demand. It's going to be reduced by (inaudible) obviously scrap manifest by lower scale prices is going to reduce the flow. There's also a reduced flow of prime scrap from manufacturers and the automotive producers hit by the economy. Additionally, some scrap yards, they are holding high price scrap waiting for a rebound and all these things will constrain availability.

I think no matter what the outcome, OmniSource is in a great position for any eventuality. Iron Dynamics continues to perform very, very well. It's surpassed all previous production and safety records. Q3 shipments totaled 70,000 net tons for a record $26 million pretax net income. I guess our vision, albeit perhaps several years premature, along with the patience and dedication of the team is finally paying off. So congratulations to all involved there.

Mesabi Nugget probably continues to go well. A lot of the infrastructure is in place. A lot of the buildings are being roofed in and should give us cover before the snow flies. [Permitting] is going very, very well. We had a great public hearing up there just recently. And we still intend to produce concentrate by the end of 2010. Keith.

Keith Busse

Thanks Mark. Theresa.

Theresa Wagler

Yes.

Keith Busse

Wait a minute. Before we get there Theresa; Gary, you want to tell us a little about the world of fabrication?

Gary Heasley

Sure. Recently I have had an expansion of my responsibilities to include now New Millennium and I've spent much of the last couple of weeks traveling around with a plan to meeting the team. Iā€™ll tell you it's an exciting thing to be part of this. It's a great team with great equipment, and we're very well-positioned out there. It's just great to be part of the team with Burt Holman and the rest of the folks at New Millennium.

As I said, the markets have been softening in the joist business for probably more than a year now. We've seen bookings slow considerably for the industry in the recent three or four months, with August being up off by 36% for bookings year-over-year. In the face of that, of course, we've completed the re-modernization, the modernization of all the plants that were acquired in 2006 as part of Roanoke Electric, when we acquired that company. And now we have the newest, most efficient plants in the country.

So we are very well-positioned there with a low cost structure. We have a very variable cost structure as does the rest of SDI, and so the seas may be a bit stormy, but the ship is well-positioned to sail through them. We are aggressively pursuing business, and very actively going out to look for new customers and to go through this tough time with the most aggressive position we can.

Certainly as we see these markets strengthen when they do come back, at some point in the future we will be very well positioned to earn great returns on these facilities. So that's all there is to talk about right now. Things are going as well as can be, and frankly we have been very impressed with the performance of this team in what has been a continually softening market. Keith.

Keith Busse

Thanks, Gary. I know there have been a lot of people that have had a lot of conversations about our balance sheet. It may not be as strong as Nucor's, but it's not in bad shape. Theresa would want to talk about that on CapEx and many other subjects if you care to elaborate on.

Theresa Wagler

Thank you, Steve. I'll just take a few minutes to discuss some of the quarter's highlights. To begin with I know everyone's interested in the mix of flat-rolled shipments.

During the quarter we shipped hot-rolled of 255,000 tons; pickled and oiled, 41,000 tons; cold-rolled at 34,000 tons; hot-rolled galvanized 78,000 tons; cold-rolled galvanized 55,000 tons; painted, 85,000 tons; and [galvanized] up 28,000 tons for a total of 576,000 tons.

Now on to some more specific balance sheet items. Our accounts receivable, days outstanding actually decreased during the third quarter to 45 days, and it's really consistent with prior periods, but between 90% and 95% of our accounts are current or less than 60 days outstanding.

We're monitoring and we always do the credit worthiness of our customer base very aggressively and we believe that our reserves are adequate. From a finished goods perspective, we remain at about 20% to 25% of our total inventory values being a part of finished goods. Scrap inventories actually increased somewhat from about 35% of our total inventories in the first quarter to between 40% and 45%.

Keith suggested a significant amount of material is currently [staying] at the Flat Roll division and we expect to work through that throughout the remainder of 2008. We expect significant overall inventory balances to decrease through both decreases in volume and value through the fourth quarter.

Our working capital has increased about 400 million during the first nine months of this year, due to price and volume reductions we anticipate generating additional strong cash flow for reductions in working capital during the fourth quarter.

From a capital investments perspective, for the first nine months of the year, we had investments of $116 million, $33 million of which was related to the structural division and the completion of the second rolling mill and the start of construction of the second caster, $27 million was related to our metals recycling operation, $27 million was also related to our Mesabi Nugget plant, and the remainder were other growth projects predominantly at the steel operations.

For the fourth quarter, we're currently expecting to spend about $110 million on capital projects, and that would consist of about $10 million at the structural mill for the second caster, $15 million to $20 million at our metals recycling operation, $60 million to $65 million for the continued construction of the Mesabi Nugget plant, and then the remainder at our steel operations.

Regarding 2009, we typically don't give guidance this early for capital projects. We've tried to look in general at the various preliminary estimates, but currently we've identified about $100 million of projects in addition to approximately $70 million that would be spent on the completion of the second caster at the structural division during 2009, and approximately $200 million to $210 million of our investment at the Mesabi Nugget plant.

For depreciation and amortization, we had $55 million during the quarter and we would anticipate this into the fourth quarter and throughout 2009. Our effective tax rate for the first six months of the year was 38%. We lowered the annual rate in the third quarter to 37.7%, as a result of reduction in our FIN-48 exposures, and this caused our third quarter's effective rate to be about 37.1%.

From an interest expense perspective, the gross interest expenses for the quarter was $42 million, with an overall effective rate of 6.3%, and our capitalized interest for our construction projects was $5 million during the quarter. We would expect fourth quarter gross interest to be around $40 million.

From a share perspective, at the end of the quarter, we had just over 183 million shares outstanding. We issued 3.8 million shares during the quarter related to the final conversion of our 4% subordinated notes. We purchased 18.9 million shares during the quarter for about $439 million, and we would expect that fourth quarter diluted shares would be approximately between 183 million and 184 million shares.

Finally, I would like to address our liquidity position for just a few minutes. At the end of the quarter, we had $575 million outstanding on our revolving credit facility. The facility is an $874 million facility, it matures July 2012, and it includes an accordion feature of about 250 million.

As a part of this credit facility, we also have a $584 million term loan ā€˜Aā€™ layer. This amortizes $65 million annually until maturity, and that again, then there's a (inaudible) that's payable in the mid-year of 2012. These payments are principally the only meaningful debt service requirements that we have.

Our current debt-to-EBITDA ratio improved from 2.5 times at the end of 2007 to 2.2 times at the end of the third quarter. We currently anticipate an even lower leveraged ratio at the end of 2008 based on where we believe the fourth quarter is going to result. Again, we believe this will drop back to levels that we experienced earlier in the year regarding our debt-to-equity ratio as well.

At the end of September, we had liquidity of approximately $350 million to $360 million between cash and revolver availability. Again, we plan to manage our strong cash flow in the fourth quarter and expect to increase our available funds through the coming months.

We continue to be easily in compliance with our covenant requirements, and we expect to remain well. We believe the reduction in our working capital and connection with our proven low-cost operating structure will drive significant cash flow generation. During the fourth quarter and into 2009, we intend to use free cash flow to repay borrowings on our revolver, as well as to fund capital projects, which are currently underway. Keith.

Keith Busse

Theresa, thank you. I think it's time to open it up to Q&A piece of the conference call.


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