SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14061
STEEL TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0712014
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15415 Shelbyville Road, Louisville, KY 40245
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(502) 245-2110
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
There were 9,572,235 shares outstanding of the Registrant's common stock as of
June 30, 2002.
1
STEEL TECHNOLOGIES INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets June 30, 2002
(Unaudited) and September 30, 2001 (Audited) ................. 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) Three Months and Nine Months Ended June 30, 2002
and 2001 (Unaudited) ......................................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001 (Unaudited) ......... 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 10-15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ......................................................... 16
SIGNATURE ............................................................ 17
2
Part I. - FINANCIAL INFORMATION
Item 1. Financial Statements
STEEL TECHNOLOGIES INC.
Condensed Consolidated Balance Sheets
June 30 September 30
2002 2001
----------- ------------
(In thousands) (Unaudited) (Audited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 3,474 $ 3,380
Trade accounts receivable, net .............. 68,619 64,632
Inventories ................................. 65,622 66,951
Deferred income taxes ....................... 3,351 2,998
Prepaid expenses and other assets ........... 1,771 1,364
--------- ---------
Total current assets ..................... 142,837 139,325
Property, plant and equipment, net ............. 105,823 112,405
Investments in corporate joint ventures ........ 16,453 15,127
Goodwill, net of amortization .................. 18,331 18,879
Other assets ................................... 1,372 1,922
--------- ---------
$ 284,816 $ 287,658
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 53,078 $ 43,088
Accrued liabilities ......................... 10,228 8,073
Income taxes payable ........................ 1,673 1,349
Long-term debt due within one year .......... 5,825 6,283
--------- ---------
Total current liabilities ................ 70,804 58,793
Long-term debt ................................. 73,400 89,110
Deferred income taxes .......................... 15,266 14,437
Other long term liabilities .................... -- 333
--------- ---------
Total liabilities ........................ 159,470 162,673
--------- ---------
Commitments and contingencies .................. -- --
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued or outstanding .... -- --
Common stock, no par value; 50,000,000 shares
authorized; issued and outstanding shares:
9,572,235 in 2002 and 10,216,949 in 2001... 17,573 17,348
Treasury stock at cost: 2,500,000 shares in
2002 and 1,823,000 shares in 2001 ......... (21,795) (15,203)
Additional paid-in capital .................. 4,909 4,909
Retained earnings ........................... 127,759 119,652
Accumulated other comprehensive loss ........ (3,100) (1,721)
--------- ---------
Total shareholders' equity ................ 125,346 124,985
--------- ---------
$ 284,816 $ 287,658
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
STEEL TECHNOLOGIES INC.
Condensed Consolidated Statements of Operations
(Amounts in thousands, Three Months Ended Nine Months Ended
except per share data, unaudited) June 30 June 30
- --------------------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------
Sales ................................ $127,591 $109,247 $344,255 $330,802
Cost of goods sold ................... 111,801 96,352 303,862 294,062
-------- -------- -------- --------
Gross profit ................... 15,790 12,895 40,393 36,740
Selling, general and
administrative expenses ........... 7,546 7,460 22,587 21,711
Equity in net income (loss) of
unconsolidated corporate joint
ventures (including impairment
charge of $7.5 million in 2001) ... 443 285 1,326 (7,129)
-------- -------- -------- --------
Operating income (loss) ........... 8,687 5,720 19,132 7,900
Interest expense, net ................ 680 1,514 3,532 5,233
-------- -------- -------- --------
Income (loss) before income taxes . 8,007 4,206 15,600 2,667
Provision for income taxes ........... 3,039 1,635 5,916 3,670
-------- -------- -------- --------
Net income (loss) ................ $ 4,968 $ 2,571 $ 9,684 $(1,003)
-------- -------- -------- --------
Diluted weighted average number of
common shares outstanding ......... 9,679 10,272 9,910 10,281
======== ======== ======== ========
Diluted earnings (loss) per common
share ............................. $ 0.51 $ 0.25 $ 0.98 $ (0.10)
======== ======== ======== ========
Basic weighted average number of
common shares outstanding ......... 9,556 10,223 9,815 10,281
======== ======== ======== ========
Basic earnings per common share ...... $ 0.52 $ 0.25 $ 0.99 $ (0.10)
======== ======== ======== ========
Cash dividends per common share ...... $ 0.08 $ 0.06 $ 0.08 $ 0.06
======== ======== ======== ========
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands) Three Months Ended Nine Months Ended
(Unaudited) June 30 June 30
- ---------------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------
Net income (loss) .................... $ 4,968 $ 2,571 $ 9,684 $(1,003)
Foreign currency translation
adjustment ................... (1,457) 1,156 (1,263) 130
Change in unrealized loss on cash
flow hedges, net of taxes .... (251) -- (116) --
-------- --------- -------- --------
Comprehensive income (loss) .......... $ 3,260 $ 3,727 $ 8,305 $ (873)
======== ========= ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
STEEL TECHNOLOGIES INC.
Condensed Consolidated Statements of Cash Flows
(In thousands) Nine Months Ended
(Unaudited) June 30
- --------------------------------------------------------------------------------
2002 2001
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 9,684 $ (1,003)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation ................................... 10,855 10,923
Amortization ................................... 550 548
Deferred income taxes .......................... 690 (555)
Equity in net (income) loss of unconsolidated
corporate joint venture ...................... (1,326) 7,129
Gain on sale of assets ......................... (222) (21)
Increase (decrease) in cash resulting from
changes in:
Trade accounts receivable ................ (4,611) 1,267
Inventories .............................. 830 8,570
Prepaid expenses and other assets ........ (63) (122)
Accounts payable ......................... 10,336 (3,155)
Accrued liabilities and income taxes ..... 2,203 3,288
--------- ---------
Net cash provided by operating activities ............. 28,926 26,869
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ......... (5,631) (8,020)
Proceeds from sale of property, plant and equipment 865 737
--------- ---------
Net cash used in investing activities ................. (4,766) (7,283)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ....................... 18,000 4,000
Principal payments on long-term debt ............... (34,168) (24,169)
Cash dividends on common stock ..................... (1,577) (1,237)
Repurchase of common stock ......................... (6,549) (1,330)
Net issuance of common stock ....................... 183 45
Other .............................................. 175 175
--------- ---------
Net cash used in by financing activities .............. (23,936) (22,516)
--------- ---------
Effect of exchange rate changes on cash ............... (130) (5)
--------- ---------
Net increase (decrease) in cash and cash equivalents .. 94 (2,935)
Cash and cash equivalents, beginning of year .......... 3,380 4,469
--------- ---------
Cash and cash equivalents, end of period .............. $ 3,474 $ 1,534
========= =========
Supplemental Cash Flow Disclosures:
Cash payment for interest ........................... $ 4,087 $ 6,134
Cash payment for income taxes ....................... $ 4,419 $ 2,513
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
STEEL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 2002 and the condensed
consolidated statements of operations and comprehensive income (loss) for the
three and nine months ended June 30, 2002 and 2001, and condensed consolidated
cash flows for the nine months ended June 30, 2002 and 2001 have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at June 30, 2002
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's annual report to shareholders for the year
ended September 30, 2001. The results of operations for the nine months ended
June 30, 2002 are not necessarily indicative of the operating results for the
full year.
2. INVENTORIES:
Inventory consists of:
June 30 September 30
2002 2001
----------- ------------
(In thousands) Unaudited Audited
- -------------------------------------------------------------------------------
Raw materials .................................... $ 48,800 $ 47,159
Finished goods and work in process ............... 16,822 19,792
---------- ----------
$ 65,622 $ 66,951
========== ==========
6
3. NET INCOME PER SHARE COMPUTATIONS:
The following is a reconciliation of the denominator of the basic and diluted
per share computations:
Three Months Ended
(In thousands, except per share results) June 30
- -----------------------------------------------------------------------------
2002 2001
-------------------
Net income .............................................. $ 4,968 $ 2,571
------- --------
Shares (denominator) used for
diluted per share computations:
Weighted average shares of common stock outstanding . 9,556 10,223
Plus: dilutive effect of stock options .............. 123 49
------- --------
Diluted weighted average shares 9,679 10,272
------- --------
Shares (denominator) used for
basic per share computations:
Weighted average shares of common stock outstanding . 9,556 10,223
------- --------
Net income (loss) per share data:
Diluted ............................................. $ 0.51 $ 0.25
======= =======
Basic ............................................... $ 0.52 $ 0.25
======= =======
Nine Months Ended
(In thousands, except per share results) June 30
- -----------------------------------------------------------------------------
2002 2001
-------------------
Net income (loss) ....................................... $ 9,684 $(1,003)
------- --------
Shares (denominator) used for
diluted per share computations:
Weighted average shares of common stock outstanding . 9,815 10,281
Plus: dilutive effect of stock options .............. 95 --
------- --------
Diluted weighted average shares 9,910 10,281
------- --------
Shares (denominator) used for
basic per share computations:
Weighted average shares of common stock outstanding . 9,815 10,281
------- --------
Net income (loss) per share data:
Diluted ............................................. $ 0.98 $(0.10)
======= =======
Basic ............................................... $ 0.99 $(0.10)
======= =======
Options to purchase 301,000 shares at June 30, 2002 were excluded from the
calculations above because the exercise prices on the options were greater than
the average market price of the Company's stock during the periods. Options to
purchase 577,500 shares at June 30, 2001 were excluded from the calculations
above because the exercise prices on the options were greater than the average
market price of the Company's stock during the three months ended June 30, 2001.
Options to purchase 791,500 shares at June 30, 2001 were excluded from the
calculations above because they were antidilulitve for the nine months ended
June 30, 2001.
7
4. RELATED PARTIES
Summarized condensed income statement information of Mi-Tech Steel, Inc.
(Mi-Tech), a fifty percent owned corporate joint venture accounted for by the
equity method, follows:
(In Thousands) Three Months Ended Nine Months Ended
(Unaudited) June 30 June 30
----------------- --------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $38,193 $33,429 $108,026 $105,019
Net Income (Loss) 736 572 2,336 (12,152)
The Company has various transactions with Mi-Tech Steel, Inc. Included in
operating income of the Company are management fees, interest earned on advances
and equity from the joint venture earnings (losses) totaling $542,000 and
$1,687,000 for the quarter and year ended June 30, 2002, respectively, compared
to $460,000 and $(6,607,000) for the quarter and year ended June 30, 2001,
respectively. The Company is a guarantor of up to $8,250,000 of Mi-Tech Steel,
Inc's borrowings under a revolving line of credit due October 15, 2002. As of
June 30, 2002, there was $3,000,000 outstanding on this credit facility. The
lender has the ability to call the debt if debt covenants are violated. The
Company's equity in undistributed net income of Mi-Tech Steel, Inc. was
$5,492,000 and $4,324,000 at June 30, 2002 and 2001, respectively.
During the third quarter and first nine months of fiscal 2002, the Company
recorded sales of $1,334,000 and $3,098,000, respectively, for products sold to
a company owned by certain officers and directors of the Company compared to
sales of $1,018,000 and $2,556,000, respectively, during the third quarter and
first nine months of fiscal 2001.
5. SHAREHOLDERS' EQUITY
On January 22, 1998, the Board of Directors approved a plan under which Steel
Technologies may repurchase up to 500,000 shares of its common stock from time
to time at prevailing prices in open market transactions, subject to market
conditions, share price and other considerations. Subsequently, the Board of
Directors authorized repurchase of an additional 1,000,000 shares on September
30, 1998 and another additional 1,000,000 shares on April 30, 2000 for a total
of 2,500,000 shares. During fiscal year 2002, the Company repurchased 677,000
shares at an aggregate cost of $6,592,000. The Company has completed the program
with 2,500,000 shares of common stock repurchased from inception for
$21,795,000.
8
6. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations," which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS No.
141 apply to all business combinations initiated or completed after June 30,
2001. The Company will apply the provisions of SFAS No. 141 to any future
business combinations.
In addition, the FASB issued Statement of Financial Accounting Standards No. 142
(SFAS No. 142), "Goodwill and Other Intangible Assets," which establishes the
accounting for goodwill and other intangible assets following their recognition.
SFAS No. 142 applies to all goodwill and other intangible assets whether
acquired singly, as part of a group, or in a business combination. SFAS No. 142
provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS No. 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 142 is effective for the Company beginning on October 1, 2002. Upon
adoption, the Company will be required to perform a transitional impairment test
under SFAS No. 142 for all goodwill recorded as of October 1, 2002. Any
impairment loss recorded as a result of completing the transitional impairment
test will be treated as a change in accounting principle. Management of the
Company is currently analyzing the impact of SFAS No. 142 and cannot estimate
the impact of the adoption of SFAS No. 142 as of October 1, 2002 at this time.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144). SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 121 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The objectives of SFAS No. 144 are to address significant issues
relating to the implementation of SFAS No. 121 and to develop a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. Management of the Company is currently analyzing the impact of
SFAS No. 144 and cannot estimate the impact of the adoption of SFAS No. 144 as
of October 1, 2002 at this time.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in the following discussion, the word "expects" and other similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Specific risks and uncertainties include, but are not limited
to, general business and economic conditions; cyclicality of demand in the steel
industry, specifically in the automotive market; work stoppages; risks of
business interruptions affecting automotive manufacturers; competitive factors
such as pricing and availability of steel; reliance on key customers; ability to
integrate acquisitions; and potential equipment malfunctions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
republish revised forward-looking statements to reflect the occurrence of
unanticipated events or circumstances after the date hereof.
Application of Critical Accounting Policies
- -------------------------------------------
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from these estimates under different
assumptions or conditions. On an ongoing basis, the Company monitors and
evaluates its estimates and assumptions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements and the consolidated financial statements of Mi-Tech Steel,
Inc.:
Allowance for Doubtful Accounts Receivable
------------------------------------------
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. The allowance is maintained at a level considered appropriate
based on historical and other factors that affect collectibility. The
factors include historical trends of write-offs, recoveries and credit
losses; the monitoring of portfolio credit quality; and current and
projected economic and market conditions. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of the
ability to make payments, additional allowances may be required.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews the carrying value of its long-lived assets for
impairment whenever changes in events and circumstances indicate that the
carrying amount of the assets may not be recoverable. If an evaluation is
10
required, the estimated future undiscounted cash flows associated with an
asset would be compared to the asset's carrying value to determine if a
write-down to market value or undiscounted cash flows value is required.
Future changes in circumstances, cash flow estimates and fair value could
affect the valuations.
Results of Operations
- ----------------------
Steel Technologies posted record sales of $127,591,000 for the third quarter
ended June 30, 2002, an increase of 17% from sales of $109,247,000 for the third
quarter ended June 30, 2001. Tons shipped of Company-owned steel products in the
third quarter of fiscal 2002 increased approximately 21% compared to the third
quarter of fiscal 2001 while the average selling price of Company-owned steel
products for the third quarter fiscal 2002 decreased approximately 4% from the
previous year.
Sales for the nine months ended June 30, 2002 increased by 4% to $344,255,000
compared to $330,802,000 for the nine months ended June 30, 2001. Tons shipped
in the first nine months of fiscal 2002 increased 12% compared to the first nine
months of fiscal 2001. Average selling prices of steel for the first nine months
of fiscal 2002 decreased approximately 7% as compared to the previous year.
The Company focuses significant resources on the automotive industry and
generates a major portion of business from selling manufacturing component parts
to the automotive industry. The Company continues to increase market share and
to develop a substantial amount of new business with both existing and new
customers.
The gross profit margin was 12.4% in the third quarter of fiscal 2002 compared
to 11.8% in the third quarter of fiscal 2001. For the first nine months of
fiscal 2002 and 2001, the gross profit margin was 11.7% and 11.1%, respectively.
The increase is attributable to higher sales volume spread over certain fixed
manufacturing expenses, operating efficiencies and improved productivity as a
result of equipment improvements and upgrades at several facilities in recent
years. The Company expects raw material costs to continue a trend of higher
purchase prices that began in the second quarter of fiscal 2002. Raw material
prices have increased as a result of slightly improving economic conditions,
idled domestic steel producing capacity and the reduction in foreign steel
imports resulting from the Section 201 trade tariffs. Should raw material costs
increase significantly and not be offset by corresponding price increases, gross
margins could be negatively impacted. In general, production cost efficiencies
and product mix improvements may positively impact gross margins and somewhat
offset rising raw material costs.
Selling, general and administrative costs for the third quarter increased
approximately 1.2% from the comparable quarter of fiscal 2001. As a percentage
of sales these costs declined to 5.9% for the third quarter of fiscal 2002 as
compared to 6.8% for the third quarter of fiscal 2001. Selling, general and
administrative expenses increased 4% from the comparable nine months ended June
30, 2001 and as a percentage of sales remained constant for the first nine
months of both fiscal 2002 and 2001 at 6.6%. The year-to-date increase was
primarily attributable to the write-off of unamortized loan costs relating to
two industrial revenue bonds issued in Maryland and Missouri that were retired
11
before their scheduled maturity. Steel Technologies continues to actively manage
the level at which selling, general and administrative costs are added to its
cost structure.
The Company's share of income (loss) of its joint venture operations was
$443,000 and $1,326,000, respectively for the third quarter and nine months of
fiscal 2002 compared to $285,000 and ($7,129,000), respectively for the third
quarter and nine months ended June 30, 2001. The results in 2001 include the
Company's share of approximately $7.5 million of asset impairment charges
recorded during the second fiscal quarter of 2001 relating to its joint venture
operations.
Net interest expense for the third quarter of fiscal 2002 was $680,000 compared
to $1,514,000 for the third quarter of fiscal 2001. Net interest expense for the
first nine months of fiscal 2002 was $3,532,000 compared to $5,233,000 for first
nine months of fiscal 2001. The decrease is primarily the result of lower
average borrowings, slightly lower interest rates during the first nine months
of fiscal 2002 as compared to fiscal 2001 and foreign currency gains recorded in
2002 for its Mexican subsidiary as a result of the weakening peso relative to
the dollar.
The Company's effective income tax rate was approximately 38.0% and 37.9%
respectively for the third quarter and nine months of fiscal 2002 compared to
38.9% and 41.1% for the comparable periods of fiscal 2001, excluding the asset
impairment charges recorded in equity in net income (loss) of joint ventures
during the second quarter of fiscal 2001. The year to date decrease is
attributable to a higher percentage of overall earnings from the Mi-Tech joint
venture, which are not fully taxable to the Company, and a lower percentage of
overall earnings in 2002 from items not deductible for tax purposes including
goodwill amortization.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2002, Steel Technologies had $72,033,000 of working capital,
maintained a current ratio of 2.0:1 and had total debt at 39% of capitalization.
The Company continues to manage the levels of accounts receivable, inventories
and other working capital items in relation to the trends in sales and the
overall market. For the first nine months of fiscal 2002, net income,
depreciation and working capital management contributed to the $28,926,000 of
cash provided by operations compared to $26,869,0000 for the nine months ended
June 30, 2001.
Capital expenditures for the first nine months of fiscal 2002 totaled
approximately $5,631,000. The major expenditures were for various capacity
expansion projects. Steel Technologies continues to expand production capacity
and processing facilities to serve the growing needs of customers. For fiscal
2002, the capital additions to all facilities are expected to approximate
$10,000,000.
Steel Technologies maintains an equity investment of approximately $18,244,000
in its 90%-owned Mexican subsidiary. Additional investments in the Company's
Mexican operations, if required, would be financed with available funds from the
Company's bank line of credit.
12
The translation of the financial statements of the Company's Mexican subsidiary
from local currencies to the U.S. dollar subjects the Company to exposure
relating to fluctuating exchange rates. However, this exposure is mitigated
somewhat by a large percentage of transactions denominated in the U.S. dollar.
Management does not consider its exposure to exchange rate risks to be material
and considers the Mexican peso a relatively stable currency. The Company does
not typically manage its related foreign currency exchange rate risk through the
use of financial instruments. Foreign currency transaction gains were $412,000
and $284,000 during the first three and nine months of fiscal 2002,
respectively, compared to transaction losses of $52,000 and $9,000 during the
first three and nine months of fiscal 2001, respectively.
Pursuant to a joint venture agreement, Steel Technologies has guaranteed
$8,250,000 of the bank financing required for the working capital purposes of
Mi-Tech. As of June 30, 2002, there was $3,000,000 outstanding on this credit
facility which matured on June 30, 2002 and was extended to October 15, 2002.
Management expects to refinance Mi-Tech's existing line of credit facility prior
to October 15, 2002.
The Company maintains a 50% equity investment in Mi-Tech and a 49% equity
investment in Ferrolux Metals Co., LLC. Additional equity contributions to the
Company's joint venture operations are not expected for the foreseeable future,
but, if required, would be financed with available funds from the Company's bank
line of credit.
The Company has a $125,000,000 line of credit agreement expiring on August 31,
2004, with various variable options on the interest rate, none of which are
greater than the bank's prime. During the first nine months of fiscal 2002, the
Company borrowed $18,000,000 and repaid $34,168,000 in debt from its operating
cash flows. At June 30, 2002, there was $62,000,000 outstanding on the credit
facility.
Cash flows from operations and available borrowing capabilities are expected to
be sufficient to finance the capital expenditure plans as well as the working
capital needs for fiscal 2002. Operating cash flows are somewhat influenced by
cyclicality of demand in the steel industry, especially in the automotive
market.
The Company has approximately $17,120,000 outstanding at June 30, 2002 on the
ten-year note which requires annual principal payments of approximately
$5,700,000 through March 2005. Any additional funds will be used for growth,
including strategic acquisitions, investment in joint ventures, construction of
new plant capacity, and investment in production and processing capabilities.
The form of such financing may vary depending upon the prevailing market and
related conditions, and may include short or long-term borrowings or the
issuance of debt or equity securities.
13
Provisions contained in the Company's various debt agreements require the
Company to maintain specified levels of net worth, maintain certain financial
ratios and limit the addition of substantial debt. The Company's line of credit
agreement and private placement note contain cross-default provisions with
respect to the line of credit agreement and private placement note. The Company
is in compliance with all covenants and none of these covenants would restrict
the completion of currently planned capital expenditures.
In June 2002, the Company entered into a contract to purchase electricity
through June 2005 to meet its needs for its Canton, Michigan facility. At this
time, the Company has no other known material obligations, commitments or
demands that must be met beyond the next twelve months.
On January 22, 1998, the Board of Directors approved a plan under which Steel
Technologies may repurchase up to 500,000 shares of its common stock from time
to time at prevailing prices in open market transactions, subject to market
conditions, share price and other considerations. Subsequently, the Board of
Directors authorized repurchase of an additional 1,000,000 shares on September
30, 1998 and another additional 1,000,000 shares on April 30, 2000 for a total
of 2,500,000 shares. During fiscal year 2002, the Company repurchased 677,000
shares at an aggregate cost of $6,592,000. The Company has completed the program
with 2,500,000 shares of common stock repurchased from inception for
$21,795,000.
Steel Technologies believes all manufacturing facilities are in compliance with
applicable federal and state environmental regulations. The Company is not
presently aware of any fact or circumstance, which would require the expenditure
of material amounts for environmental compliance.
Certain Transactions
- --------------------
The Company has recorded sales of $1,334,000 and $3,098,000 during the third
quarter and first nine months of fiscal 2002, respectively, for products sold to
a company owned by certain officers and directors of the Company compared to
sales of $1,018,000 and $2,556,000 during the third quarter and first nine
months of fiscal 2001, respectively. The Company believes these transactions are
in the best interests of the Company and the terms and conditions of these
transactions are in the aggregate not materially more favorable or unfavorable
to the Company than would be obtained on an arm's length basis from unaffiliated
parties. See also information contained under "Certain Transactions" included on
page 13 in the Company's 2002 Proxy Statement.
14
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations," which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS No.
141 apply to all business combinations initiated or completed after June 30,
2001. The Company will apply the provisions of SFAS No. 141 to any future
business combinations.
In addition, the FASB issued Statement of Financial Accounting Standards No. 142
(SFAS No. 142), "Goodwill and Other Intangible Assets," which establishes the
accounting for goodwill and other intangible assets following their recognition.
SFAS No. 142 applies to all goodwill and other intangible assets whether
acquired singly, as part of a group, or in a business combination. SFAS No. 142
provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS No. 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 142 is effective for the Company beginning on October 1, 2002. Upon
adoption, the Company will be required to perform a transitional impairment test
under SFAS No. 142 for all goodwill recorded as of October 1, 2002. Any
impairment loss recorded as a result of completing the transitional impairment
test will be treated as a change in accounting principle. Management of the
Company is currently analyzing the impact of SFAS No. 142 and cannot estimate
the impact of the adoption of SFAS No. 142 as of October 1, 2002 at this time.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144). SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 121 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The objectives of SFAS No. 144 are to address significant issues
relating to the implementation of SFAS No. 121 and to develop a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. Management of the Company is currently analyzing the impact of
SFAS No. 144 and cannot estimate the impact of the adoption of SFAS No. 144 as
of October 1, 2002 at this time.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change during the first nine months ended June 30,
2002 from the disclosures about market risk provided in the Company's Annual
Report on Form 10-K for the year ended September 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEEL TECHNOLOGIES INC.
(Registrant)
By /s/
-------------------------------
Joseph P. Bellino
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Dated July 29, 2002
17