Forward-Looking Statements
This report contains some predictive statements about future events, including statements related to conditions in domestic or global economies, conditions in steel, aluminum, and recycled metals market places, Steel Dynamics' revenues, costs of purchased materials, future profitability and earnings, and the operation of new, existing or planned facilities. These statements, which we generally precede or accompany by such typical conditional words as "anticipate", "intend", "believe", "estimate", "plan", "seek", "project", or "expect", or by the words "may", "will", or "should", are intended to be made as "forward-looking", subject to many risks and uncertainties, within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These statements speak only as of this date and are based upon information and assumptions, which we consider reasonable as of this date, concerning our businesses and the environments in which they operate. Such predictive statements are not guarantees of future performance, and we undertake no duty to update or revise any such statements. Some factors that could cause such forward-looking statements to turn out differently than anticipated include: (1) domestic and global economic factors; (2) global steelmaking overcapacity and imports of steel and North American aluminum flat rolled supply deficit, together with increased scrap prices; (3) pandemics, epidemics, widespread illness or other health issues, such as the COVID-19 pandemic; (4) the cyclical nature of the steel industry and the industries we serve; (5) volatility and major fluctuations in prices and availability of scrap metal, scrap substitutes, and our potential inability to pass higher costs on to our customers; (6) cost and availability of electricity, natural gas, oil, or other energy resources are subject to volatile market conditions; (7) increased environmental, greenhouse gas emissions and sustainability considerations or regulations; (8) compliance with and changes in environmental and remediation requirements; (9) significant price and other forms of competition from other steel and aluminum producers, scrap processors and alternative materials; (10) availability of an adequate source of supply of scrap for our metals recycling operations; (11) cybersecurity threats and risks to the security of our sensitive data and information technology; (12) the implementation of our growth strategy; (13) litigation and legal compliance; (14) unexpected equipment downtime or shutdowns; (15) governmental agencies may refuse to grant or renew some of our licenses and permits; (16) our senior unsecured credit facility contains, and any future financing agreements may contain, restrictive covenants that may limit our flexibility; (17) the impacts of impairment charges; (18) unanticipated difficulties in integrating or starting up new assets; and (19) risks and uncertainties involving product and/or technology development. More specifically, we refer you to our more detailed explanation of these and other factors and risks that may cause such predictive statements to turn out differently, as set forth in our most recent Annual Report on Form 10-K under the headings Special Note Regarding Forward-Looking Statements and Risk Factors for the year ended December 31, 2021, in our quarterly reports on Form 10-Q, or in other reports which we from time to time file with the Securities and Exchange Commission. These reports are available publicly on the Securities and Exchange Commission website, www.sec.gov, and on our website, www.steeldynamics.com under "Investors - SEC Filings."
Description of the Business
We are one of the largest domestic steel producers and metal recyclers in the United States, based on estimated steelmaking and steel coating capacity of approximately 16 million tons, including 3 million tons related to our new Southwest-Sinton Flat Roll Division (Sinton), and actual metals recycling volumes, with one of the most diversified product and end-market portfolios in the domestic steel industry. Our primary sources of revenue are from the manufacture and sale of steel products, the processing and sale of recycled ferrous and nonferrous metals, and the fabrication and sale of steel joists and deck products. We have three reportable segments: steel operations, metals recycling operations, and steel fabrication operations. 16
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Operating Statement Classifications
Net Sales. Net sales from our operations are a factor of volumes shipped, product mix and related pricing. We charge premium prices for certain grades of steel, product dimensions, certain smaller volumes, and for value-added processing or coating of our steel products. Except for the steel fabrication operations, we recognize revenues from sales and the allowance for estimated returns and claims from these sales at the point in time control of the product transfers to the customer, upon shipment or delivery. Our steel fabrication operations recognize revenues over time based on completed fabricated tons to date as a percentage of total tons required for each contract. Costs of Goods Sold. Our costs of goods sold represent all direct and indirect costs associated with the manufacture of our products. The principal elements of these costs are scrap and scrap substitutes (which represent the most significant single component of our consolidated costs of goods sold), steel substrate, direct and indirect labor and related benefits, alloys, zinc, transportation and freight, repairs and maintenance, utilities such as electricity and natural gas, and depreciation. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of all costs associated with our sales, finance and accounting, and administrative departments, including, among other items, labor and related benefits, and professional services.
Company-wide profit sharing and amortization of intangible assets are each
separately presented in the statement of income.
Interest Expense, net of Capitalized Interest. Interest expense consists of
interest associated with our senior credit facilities and other debt, net of
interest costs that are required to be capitalized during the construction
period of certain capital investment projects.
Other (Income) Expense, net. Other income consists of interest income earned on our temporary cash deposits; any other non-operating income activity, including income from investments in unconsolidated affiliates accounted for under the equity method. Other expense consists of any non-operating costs, such as certain acquisition and financing expenses.
Results Overview
In the third quarter of 2022 we achieved record steel shipments of 3.2 million tons, record steel fabrication operating income of $676.7 million, and record cash flow from operations of $1.5 billion. During the third quarter of 2022, steel demand remained strong, most notably in the construction industry, and complemented by the automotive, industrial, and energy sectors, resulting in record steel shipments. Our steel fabrication segment achieved record operating income and record shipments during the quarter, on robust non-residential construction demand and continued increasing record average selling prices. Consolidated operating income decreased $102.2 million, or 8%, to $1.2 billion for the third quarter of 2022, compared to the third quarter of 2021, as record steel fabrication operating income was more than offset by lower steel operating income. Third quarter 2022 net income attributable to Steel Dynamics, Inc. decreased $76.4 million, or 8%, to $914.3 million, compared to the third quarter of 2021, consistent with the decreased operating income. Consolidated operating income increased $1.5 billion, or 51%, to $4.3 billion for the first nine months of 2022, compared to the first nine months of 2021, due to a $1.6 billion increase in steel fabrication operating income. First nine months 2022 net income attributable to Steel Dynamics, Inc. increased 52% to $3.2 billion, compared to the first nine months of 2021, consistent with the increased operating income. 17 Table of Contents
Segment Operating Results 2022 vs. 2021 (dollars in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2022 % Change 2021 2022 % Change 2021 Net sales: Steel Operations Segment $ 3,873,544 (1)% $ 3,911,173$ 12,051,813 21% $ 9,948,462 Metals Recycling Operations Segment 984,625 (19)% 1,212,117 3,483,824 1% 3,443,135 Steel Fabrication Operations Segment 1,145,826 132% 493,926 3,166,124 192% 1,084,661 Other 318,544 (6)% 340,127 952,741 (2)% 972,958 6,322,539 5,957,343 19,654,502 15,449,216 Intra-company (670,832) (869,055) (2,220,015) (2,351,023) $ 5,651,707 11% $ 5,088,288$ 17,434,487 33% $ 13,098,193 Operating income (loss): Steel Operations Segment $ 654,677 (51)% $ 1,346,967$ 2,920,412 (3)% $ 2,997,375 Metals Recycling Operations Segment 6,735 (85)% 43,616 106,138 (25)% 141,775 Steel Fabrication Operations Segment 676,726 657% 89,389 1,742,792 1265% 127,652 Other (137,160) 1% (138,576) (473,889) (33)% (357,183) 1,200,978 1,341,396 4,295,453 2,909,619 Intra-company 18,866 (19,351) 37,321 (37,640) $ 1,219,844 (8)% $ 1,322,045$ 4,332,774 51% $ 2,871,979 Steel Operations Segment
Steel operations consist of our electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills, and numerous value-added downstream steel coating and processing operations. Our steel operations sell directly to end-users, steel fabricators, and service centers. These products are used in numerous industry sectors, including the construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets. Steel operations accounted for 66% and 72% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 67% and 72% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Steel Operations Segment Shipments (tons):
Three Months Ended September 30, Nine Months Ended September 30, 2022 % Change 2021 2022 % Change 2021 Total shipments 3,154,857 13% 2,803,571 9,163,930 8% 8,517,121 Intra-segment shipments (339,980) (291,868) (1,080,989) (841,743)
Steel Operations Segment shipments 2,814,877 12% 2,511,703
8,082,941 5% 7,675,378 External shipments 2,694,709 14% 2,366,928 7,796,390 7% 7,281,752 18 Table of Contents [[Image Removed: Graphic]]
Steel Operations Segment Results 2022 vs. 2021
During the third quarter of 2022, steel demand remained steady compared to the first half of 2022, with the construction, automotive, industrial and energy sectors continuing to lead steel demand. This continued strong demand resulted in record quarterly total shipments, including 268,000 tons from Sinton. Sheet steel pricing continued to trend downward, as it had throughout the first half of 2022, resulting in lower realized selling values than in the third quarter of 2021. Third quarter 2022 total steel segment average selling prices decreased 12%, or $181 per ton, compared to third quarter of 2021. Steel operations segment shipments, including Sinton, increased 12% in the third quarter 2022, as compared to the same period in 2021. Net sales for the steel operations in the third quarter 2022 were comparable to the same period in 2021, due to the decrease in average steel selling prices offsetting increased shipments. Net sales for the steel operations increased 21%, which included Sinton, in the first nine months of 2022 when compared to the same period in 2021, due to the 5% increase in steel shipments combined with a 15% increase in average selling prices. Metallic raw materials used in our electric arc furnaces represent our single most significant steel manufacturing cost, generally comprising approximately 55% to 65% of our steel mill operations' manufacturing costs. Our metallic raw material cost per net ton consumed in our steel operations decreased $17, or 3%, in the third quarter of 2022, compared to the same period in 2021, consistent with overall decreased domestic scrap pricing noted below in the metals recycling operations segment discussion. In the first nine months of 2022, our metallic raw material cost per ton increased $62, or 14% compared to the same period in 2021. As a result of average selling prices decreasing more than scrap costs, specifically for sheet steel products, metal spread (which we define as the difference between average steel mill selling prices and the cost of ferrous scrap consumed in our steel mills) decreased 14% in the third quarter of 2022 compared to the third quarter of 2021. As a result of this metal spread compression and additional costs during start-up at Sinton, operating income for the steel operations decreased 51%, to $657.4 million, in the third quarter of 2022, compared to the same period in 2021. First nine months 2022 operating income decreased 3%, to $2.9 billion, compared to the first nine months of 2021 due to additional costs during start-up at Sinton during 2022. 19
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Metals Recycling Operations Segment
Metals recycling operations includes both ferrous and nonferrous scrap metal processing, transportation, marketing, brokerage, and scrap management services. Our steel mills utilize a large portion of the ferrous scrap sold by our metals recycling operations as raw material in our steelmaking operations, and the remainder is sold to other consumers, such as other steel manufacturers and foundries. In the third quarters of 2022 and 2021, 68% and 65%, respectively, of metals recycling operations ferrous scrap was sold to our own steel mills, as our steel mills utilization was 93% in the third quarters of 2022 and 2021. Our metals recycling operations accounted for 8% and 12% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 10% and 12% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively.
Metals Recycling Operations Segment Shipments:
Three Months Ended September 30,
Nine Months Ended September 30,
2022 % Change 2021 2022 % Change 2021 Ferrous metal (gross tons) Total 1,320,117 (4)% 1,371,126 3,944,068 (5)% 4,167,416 Inter-company (896,933) 0% (895,559) (2,645,655) (3)% (2,733,941) External shipments 423,184 (11)% 475,567 1,298,413 (9)% 1,433,475 Nonferrous metals (thousands of pounds) Total 257,710 (5)% 271,325 785,381 (4)% 818,993 Inter-company (37,523) (31,840) (98,183) (103,324) External shipments 220,187 (8)% 239,485 687,198 (4)% 715,669
Metals Recycling Operations Segment Results 2022 vs. 2021
Our metals recycling operations were challenged by sharply decreasing selling prices for recycled scrap in the third quarter of 2022. Net sales decreased 19% during the third quarter of 2022 compared to the same period in 2021, driven by lower average selling prices for both ferrous and nonferrous metals, and lower shipments as domestic steel mill utilization rates declined. Domestic steel mill utilization rates were approximately 78% in the third quarter of 2022, as compared to approximately 85% in the third quarter of 2021. Ferrous scrap average selling prices decreased 20% during the third quarter of 2022 compared to the same period in 2021, while average nonferrous scrap prices decreased 7%. Ferrous metal spread (which we define as the difference between average selling prices and the cost of purchased scrap) decreased 22%, and nonferrous metal spread decreased 11% during the third quarter of 2022 compared to the same period in 2021. As a result of the lower shipments and compressed ferrous and nonferrous metals spreads, metals recycling operations operating income decreased 85% to $6.7 million in the third quarter of 2022 compared to the third quarter of 2021. Net sales for our metals recycling operations in the first nine months of 2022 were comparable to the same period in 2021, driven by increased pricing while shipments decreased. Ferrous scrap average selling prices increased 5% during the first nine months of 2022 compared to the same period in 2021, while nonferrous average selling prices increased 9%. Ferrous pricing increased consistently during the first nine months of 2021, but has decreased at a slower pace during the first nine months of 2022. Ferrous and nonferrous shipments decreased 5% and 4%, respectively, in the first nine months of 2022 compared to the first nine months of 2021. Ferrous metal spread increased 4%, while nonferrous metal spread increased 2% in the first nine months of 2022 compared to the first nine months of 2021. Metals recycling operations operating income in the first nine months of 2022 of $106.1 million decreased 25% from the first nine months of 2021 operating income of $141.8 million, as increased ferrous and nonferrous metal spread, was more than offset by decreased shipments. 20
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Steel Fabrication Operations Segment
Steel fabrication operations include seven New Millennium Building Systems joist and deck plants located throughout the United States, and in Northern Mexico. Revenues from these plants are generated from the fabrication of steel joists, trusses, girders and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 20% and 10% of our consolidated net sales during the three-month periods ended September 30, 2022 and 2021, respectively, and 18% and 8% of our consolidated net sales during the nine-month periods ended September 30, 2022 and 2021, respectively. [[Image Removed: Graphic]]
Steel Fabrication Operations Segment Results 2022 vs. 2021
Our steel fabrication operations continue to benefit from the strong non-residential construction market, resulting in continued historically high order backlog and forward-pricing at the end of the third quarter of 2022. We achieved record quarterly segment operating income of $676.7 million on record shipments of 218,000 tons. Net sales for the steel fabrication operations increased 132% during the third quarter of 2022 compared to the same period in 2021, as average selling prices significantly increased $2,906 per ton, or 124%, while shipments increased 3%. Net sales for the segment increased 192% during the first nine months of 2022, compared to the same period in 2021, as shipments increased 11%, and average selling prices increased 164%, or $3,041 per ton. The purchase of various steel products is the largest single cost of production for our steel fabrication operations, historically representing approximately two-thirds of the total cost of manufacturing, increasing to approximately three-fourths during 2021 and the first nine months of 2022 consistent with the increased steel costs. The average cost per ton of steel consumed increased 11% in the third quarter 2022, as compared to the same period in 2021. As a result of selling prices per ton increasing significantly more than steel input costs per ton, metal spread (which we define as the difference between average selling prices and the cost of purchased steel) more than quadrupled in the third quarter of 2022 compared to the same period in 2021. This expanded metal spread and increased shipments resulted in record operating income of $676.7 million in the third quarter 2022, more than six times the $89.4 million in the same period in 2021. For the first nine months of 2022, operating income increased $1.6 billion to $1.7 billion compared to the first nine months of 2021, as a 369% increase in metal spread combined with the 11% increase in shipments resulted in record nine-month results. 21 Table of Contents Other Operations
Third Quarter Consolidated Results 2022 vs. 2021
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $132.6 million during the third quarter of 2022 decreased 16% from the $157.5 million during the third quarter of 2021. Selling, general and administrative expenses represented 2.3% and 3.1% of net sales during third quarter 2022 and 2021, respectively. The decrease in third quarter 2022 compared to third quarter 2021 is due primarily to the costs associated with the construction of Sinton being reported in selling, general and administrative in 2021, prior to the completion of the mill's construction and start-up in early 2022. Profit sharing expense during the third quarter of 2022 of $105.1 million decreased 8% from the $113.9 million during the same period in 2021, consistent with decreased pretax earnings. The company profit sharing component represents 8% of pretax earnings. Interest Expense, net of Capitalized Interest. During the third quarter of 2022, interest expense was $25.3 million, an increase of $12.6 million compared to the third quarter of 2021. The higher interest expense in the third quarter 2022 compared to the same period in 2021 was due to higher capitalized interest in 2021 related to the construction of Sinton. Income Tax Expense. Third quarter 2022 income tax expense of $290.0 million, at an effective income tax rate of 24.0%, decreased 4% compared to the $302.4 million, at an effective income tax rate of 23.2%, during the third quarter of 2021, consistent with decreased pretax earnings.
First Nine Months Consolidated Results 2022 vs. 2021
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $403.0 million during the first nine months of 2022 decreased 13% compared to the $461.7 million during the first nine months of 2021, representing 2.3% and 3.5% of net sales during each period, respectively. The decrease in 2022 compared to 2021 is due primarily to a $27.9 million decrease in certain equity-based compensation expense, as well as $34.6 million more costs associated with the construction of Sinton being reported in selling, general and administrative in 2021, prior to the completion of the mill's construction and start-up in early 2022. Profit sharing expense during the first nine months of 2022 of $373.3 million increased 52% from the $244.9 million during the same period in 2021, consistent with increased pretax earnings. Interest Expense, net of Capitalized Interest. During the first nine months of 2022, interest expense of $67.7 million increased 51% from $44.9 million during the first nine months of 2021. The higher interest expense in 2022 compared to 2021 was due to higher capitalized interest in 2021 related to the construction of Sinton. Income Tax Expense. First nine months 2022 income tax expense of $1.0 billion, at an effective income tax rate of 24.0%, was up 57% from the $649.1 million, at an effective income tax rate of 23.2%, during the first nine months of 2021, consistent with increased pretax earnings.
Liquidity and Capital Resources
Capital Resources and Long-term Debt. Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our operations, and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily from working capital requirements, capital expenditures, including expansion projects, principal and interest payments related to our outstanding indebtedness (no significant principal payments until 2024), dividends to our shareholders, and potential stock repurchases and acquisitions or investments. We have met and intend to continue to meet these liquidity 22
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requirements primarily with available cash and cash provided by operations, and
long-term borrowings, and we also have availability under our unsecured
Revolver. Our liquidity at September 30, 2022, is as follows (in thousands):
Cash and equivalents $ 1,420,497 Short-term investments 583,211 Revolver availability 1,190,835 Total liquidity $ 3,194,543 Our total outstanding debt of $3.0 billion decreased 2% during the first nine months of 2022 from reductions in revolver borrowings at one of our controlled subsidiaries. Our total long-term debt to capitalization ratio (representing our long-term debt, including current maturities, divided by the sum of our long-term debt, redeemable noncontrolling interests, and our total stockholders' equity) was 27.7% and 32.9% at September 30, 2022, and December 31, 2021, respectively. Our unsecured credit agreement has a senior unsecured revolving credit facility (Facility), which provides a $1.2 billion unsecured Revolver, and matures in December 2024. Subject to certain conditions, we have the opportunity to increase the Facility size by $500.0 million. The unsecured Revolver is available to fund working capital, capital expenditures, and other general corporate purposes. The Facility contains financial covenants and other covenants pertaining to our ability to incur indebtedness and permit liens on certain assets. Our ability to borrow funds within the terms of the unsecured Revolver is dependent upon our continued compliance with the financial and other covenants. At September 30, 2022, we had $1.2 billion of availability on the Revolver, $9.2 million of outstanding letters of credit and other obligations which reduce availability, and there were no borrowings outstanding. The financial covenants under our Facility state that we must maintain an interest coverage ratio of not less than 2.50:1.00. Our interest coverage ratio is calculated by dividing our last-twelve-months (LTM) consolidated Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain other non-cash transactions as allowed in the Facility) by our LTM gross interest expense, less amortization of financing fees. In addition, a debt to capitalization ratio of not more than 0.60:1.00 must be maintained. At September 30, 2022, our interest coverage ratio and debt to capitalization ratio were 60.45:1.00 and 0.28:1.00, respectively. We were, therefore, in compliance with these covenants at September 30, 2022, and we anticipate we will continue to be in compliance during the next twelve months. Working Capital. We generated cash flow from operations of $3.3 billion in the first nine months of 2022 compared to $1.5 billion in the same 2021 period. Operational working capital (representing amounts invested in trade receivables and inventories, less current liabilities other than income taxes payable and debt) increased $313.2 million, or 9%, to $3.7 billion at September 30, 2022, due primarily to increased accounts receivable and inventory values, consistent with increased net sales and selling prices, compared to an increase of $1.2 billion for the same period in 2021. Capital Investments. During the first nine months of 2022, we invested $564.7 million in property, plant and equipment, primarily within our steel operations segment, compared with $801.7 million invested during the same period in 2021. Spending on Sinton decreased in the first nine months of 2022 versus the same period in 2021 as we completed the construction phase. We entered 2022 with ample liquidity of $2.4 billion and anticipated operating cash flow generation to provide for our planned 2022 capital requirements, including the four new flat roll coating lines at Sinton and Heartland. We announced in July our plans to invest $2.2 billion in a new state-of-the-art low-carbon aluminum flat rolled mill with two supporting satellite recycled aluminum slab centers, which will be funded by available cash and cash flow from operations. Expenditures began in the third quarter of 2022 and are expected to continue through 2026. Cash Dividends. As a reflection of continued confidence in our current and future cash flow generation ability and financial position, we increased our quarterly cash dividend by 31% to $0.34 per share in the first quarter of 2022 (from $0.26 per share in 2021), resulting in declared cash dividends of $186.5 million during the first nine months of 2022, compared to $160.2 million during the same period in 2021. We paid cash dividends of $177.1 million and $161.0 million during the first nine months of 2022 and 2021, respectively. Our board of directors, along with executive 23
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management, approves the payment of dividends on a quarterly basis. The determination to pay cash dividends in the future is at the discretion of our board of directors, after taking into account various factors, including our financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs and growth plans. Other. In February 2020, our board of directors authorized a share repurchase program of up to $500.0 million of our common stock, which was fully utilized in July 2021. In July 2021, our board of directors authorized an additional share repurchase program of up to $1.0 billion of our common stock, which was fully utilized in March 2022. In February 2022, our board of directors authorized an additional share repurchase program of up to $1.25 billion of our common stock. Under the share repurchase programs, purchases take place as and when we determine in open market or private transactions made based upon the market price of our common stock, the nature of other investment opportunities or growth projects, our cash flows from operations, and general economic conditions. The share repurchase programs do not require us to acquire any specific number of shares, and may be modified, suspended, extended or terminated by us at any time. The share repurchase programs do not have an expiration date. There were $1.4 billion and $730.8 million of share repurchases during the first nine months of 2022 and 2021, respectively. As of September 30, 2022, we had $245.5 million remaining available to purchase under the 2022 share repurchase program. Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will depend upon general economic, financial, and business conditions, along with competition, legislation and regulatory factors that are largely beyond our control. In addition, we cannot assure that our operating results, cash flows, access to credit markets and capital resources will be sufficient for repayment of our indebtedness in the future. We believe that based upon current levels of operations and anticipated growth, cash flows from operations, together with other available sources of funds, including borrowings under our Revolver, if necessary, will be adequate for the next twelve months for making required payments of principal and interest on our indebtedness, funding working capital requirements, and funding anticipated capital expenditures. 24
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