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 March 31, 2003
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
Indiate by check mark whether the Registrant is an accelerated filed (as defined
in Rule 12b-2 of the Act. Yes X No
There were 9,763,687 shares outstanding of the Registrant's common stock as of
April 30, 2003.
1
STEEL TECHNOLOGIES INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 2003
(Unaudited) and September 30, 2002 (Audited) ................. 3
Condensed Consolidated Statements of Income and Comprehensive
Income Three Months and Six Months Ended March 31, 2003
and 2002 (Unaudited) ......................................... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 2003 and 2002 (Unaudited) ......... 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 12-17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ......................................................... 18
Item 4. Control and Procedures ....................................... 18
Item 6. Exhibits and Reports on Form 8-K ............................. 18
SIGNATURE ............................................................ 18
Certifications ...................................................... 19-20
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
2
Part I. - FINANCIAL INFORMATION
Item 1. Financial Statements
STEEL TECHNOLOGIES INC.
Condensed Consolidated Balance Sheets
March 31 September 30
2003 2002
----------- ------------
(In thousands) (Unaudited) (Audited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 5,274 $ 2,127
Trade accounts receivable, net .............. 73,843 74,000
Inventories ................................. 89,151 87,741
Deferred income taxes ....................... 1,732 1,841
Prepaid expenses and other assets ........... 4,014 2,789
--------- ---------
Total current assets ..................... 174,014 168,498
Property, plant and equipment, net ............. 106,647 102,560
Investments in corporate joint ventures ........ 16,955 16,590
Goodwill ....................................... 18,148 18,148
Other assets ................................... 1,389 1,319
--------- ---------
$ 317,153 $ 307,115
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 34,248 $ 65,466
Accrued liabilities ......................... 12,016 12,922
Income taxes payable ........................ - 2,158
Long-term debt due within one year .......... 5,736 5,759
--------- ---------
Total current liabilities ................ 73,992 86,285
Long-term debt ................................. 115,680 74,900
Deferred income taxes .......................... 14,571 14,200
--------- ---------
Total liabilities ........................ 182,251 175,385
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value: 500,000 shares
authorized; none issued or outstanding..... -- --
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding sares:
9,762,021 at March 31, 2003 and
9,663,468 at September 30, 2002............. 20,302 18,733
Treasury stock at cost: 2,573,953 shares at
March 31, 2003 and 2,518,645 at September
30, 2002.................................... (23,169) (22,090)
Additional paid-in capital .................. 4,909 4,909
Retained earnings ........................... 138,679 133,869
Accumulated other comprehensive loss ........ (5,819) (3,691)
--------- ---------
Total shareholders' equity ................ 134,902 131,730
--------- ---------
$ 317,153 $ 307,115
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
STEEL TECHNOLOGIES INC.
Condensed Consolidated Statements of Income
(Amounts in thousands, Three Months Ended Six Months Ended
except per share data, unaudited) March 31 March 31
- --------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------
Sales ................................ $130,140 $114,703 $256,149 $216,279
Cost of goods sold ................... 118,979 101,388 231,218 192,061
-------- -------- -------- --------
Gross profit ................... 11,161 13,315 24,931 24,218
Selling, general and
administrative expenses ........... 6,915 7,889 14,047 15,041
Equity in net income of unconsolidated
corporate joint ventures .......... 85 530 410 883
-------- -------- -------- --------
Operating income .................. 4,331 5,956 11,294 10,060
Interest expense, net ................ 1,346 1,300 2,548 2,723
(Gain) loss on disposals/writeoffs of
property, plant and equipment ..... (217) 90 (102) (256)
-------- -------- -------- --------
Income before income taxes ........ 3,202 4,566 8,848 7,593
Provision for income taxes ........... 1,210 1,714 3,066 2,877
-------- -------- -------- --------
Net income ....................... $ 1,992 $ 2,852 $ 5,782 $ 4,716
-------- -------- -------- --------
Diluted weighted average number of
common shares outstanding ......... 9,889 9,804 9,925 10,026
======== ======== ======== ========
Diluted earnings per common share .... $ 0.20 $ 0.29 $ 0.58 $ 0.47
======== ======== ======== ========
Basic weighted average number of
common shares outstanding ......... 9,756 9,715 9,731 9,944
======== ======== ======== ========
Basic earnings per common share ...... $ 0.20 $ 0.29 $ 0.59 $ 0.47
======== ======== ======== ========
Cash dividends per common share ...... $ -- $ -- $ 0.10 $ 0.08
======== ======== ======== ========
Condensed Consolidated Statements of Comprehensive Income
(In thousands) Three Months Ended Six Months Ended
(Unaudited) March 31 March 31
- ---------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------
Net income ........................... $ 1,992 $ 2,852 $ 5,782 $ 4,716
Foreign currency translation
adjustment ................... (1,876) 456 (2,307) 194
Decrease in unrealized loss on cash
flow hedges, net of taxes .... 113 152 179 135
-------- --------- -------- --------
Comprehensive income ................. $ 229 $ 3,460 $ 3,654 $ 5,045
======== ========= ======== ========
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) Six Months Ended
(Unaudited) March 31
- --------------------------------------------------------------------------------
2002 2001
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 5,782 $ 4,716
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation .................................... 6,749 7,266
Amortization .................................... - 367
Deferred income taxes ........................... 681 204
Equity in net income of unconsolidated
corporate joint ventures ...................... (410) (883)
(Gain) loss on sale of assets ................... (102) (256)
Increase (decrease) in cash resulting from
changes in:
Trade accounts receivable ................. 725 (3,407)
Inventories ............................... (1,139) 3,835
Prepaid expenses and other assets ......... (1,706) 460
Accounts payable .......................... (30,567) 1,673
Accrued liabilities and income taxes ...... (2,299) 578
--------- ---------
Net cash (used in) provided by operating activities .... (22,286) 14,553
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition ......................................... (9,853) -
Purchases of property, plant and equipment .......... (5,629) (3,568)
Proceeds from sale of property, plant and equipment . 591 793
Distributions from unconsolidated corporate joint
venture .......................................... 45 -
--------- ---------
Net cash used in investing activities .................. (14,846) (2,775)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................ 52,500 18,000
Principal payments on long-term debt ................ (11,743) (23,084)
Cash dividends on common stock ...................... (972) (813)
Repurchase of common stock .......................... (1,079) (6,549)
Net issuance of common stock ........................ 1,569 31
Other ............................................... 175 175
--------- ---------
Net cash used in by financing activities ............... 40,450 (12,240)
--------- ---------
Effect of exchange rate changes on cash ................ (171) 22
--------- ---------
Net (decrease) increase in cash and cash equivalents ... 3,147 (440)
Cash and cash equivalents, beginning of year ........... 2,127 3,380
--------- ---------
Cash and cash equivalents, end of period ............... $ 5,274 $ 2,940
========= =========
Supplemental Cash Flow Disclosures:
Cash payment for interest ............................ $ 2,507 $ 2,942
Cash payment for income taxes ........................ $ 5,086 $ 2,389
Supplemental Schedule of Noncash Investing and Financing
Activities:
Fair value of assets acquired ...................... $ 9,913 $ -
Liabilities assumed................................. $ 60 $ -
-------- --------
Net cash paid....................................... $ 9,853 $ -
======== ========
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 March 31, 2003 and the condensed
consolidated statements of income and comprehensive income (loss) for the three
and six months ended March 31, 2003 and 2002, and condensed consolidated cash
flows for the six months ended March 31, 2003 and 2002 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 March 31, 2003 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, 2002. The results of operations for the six months ended
March 31, 2003 are not necessarily indicative of the operating results for the
full year.
2. ACQUISITION
On March 7, 2003 the Company completed the purchase of certain assets from Cold
Metal Products Company, Inc. (Cold Metal Products) as approved by the U.S.
Bankruptcy Court in Youngstown, Ohio. The purchase price consisted of
approximately $9,853,000 and the assumption of approximately $60,000 of
liabilities. The assets purchased included land, building and certain steel
processing equipment at the Ottawa, Ohio facility, certain equipment located in
Indianapolis, Indiana; and selected inventory and accounts receivable. The
Company financed the acquisition with its existing credit facility.
The acquisition has been recorded under the purchase method of accounting, with
the operating results being included in the Company's condensed consolidated
financial statements since the date of acquisition. The following unaudited pro
forma consolidated results of operations have been prepared as if the
acquisition of the assets of Cold Metal Products had occurred at October 1,
2001.
(Unaudited)
(In thousands except per share data)
Three Months Ended Six Months Ended
2003 2002 2003 2002
-------- -------- -------- --------
Sales ......................... $134,446 $123,899 $267,813 $234,367
Net income .................... $ 1,893 $ 3,000 $ 5,669 $ 4,966
Diluted net income per share .. $ 0.19 $ 0.31 $ 0.57 $ 0.50
Basic net income per share .... $ 0.19 $ 0.31 $ 0.58 $ 0.50
This unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of future operating results.
6
3. INVENTORIES:
Inventory consists of:
March 31 September 30
2003 2002
----------- ------------
(In thousands) Unaudited Audited
- -------------------------------------------------------------------------------
Raw materials .................................... $ 61,176 $ 66,535
Finished goods and work in process ............... 27,975 21,206
---------- ----------
$ 89,151 $ 87,741
========== ==========
4. LONG-TERM DEBT
During the first quarter of fiscal 2003, the Company extended the maturity date
of its existing bank line of credit to August 31, 2005. In April 2003, the
Company reached an agreement with its bank group to increase availability under
its unsecured line of credit from $125,000,000 to $151,000,000.
5. STOCK OPTIONS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require more prominent and frequent disclosures in financial
statement about the effects of stock-based compensation. The transition guidance
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002, while the interim disclosure provisions are
effective for periods beginning after December 15, 2002.
At March 31, 2003, the Company had stock-based compensation plans which are
described more fully in Note 11 of the consolidated financial statements
included in the Company's annual report to stockholders for the year ended
September 30, 2002. As permitted by SFAS No. 123, the Company follows the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its stock
option plans under the intrinsic value based method. Accordingly, no
stock-based compensation expense has been recognized for stock options issued
under the plans as all stock options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Had compensation expense been determined based on the fair value of the
stock options at the grant date consistent with the provisions of SFAS No. 123,
the Company's net income and basic and diluted net income per share would have
been increased for the three and six months ended March 31, 2003 and 2002 to the
pro forma amounts which follow (in thousands except per share data).
7
(In thousands except per share data)
(Unaudited) Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------
2003 2002 2003 2002
------ ------ ------ ------
Net income - as reported $1,992 $2,852 $5,782 $4,716
Total stock-based employee compensation
expense (benefit)determined under
fair value method for all awards,
net of taxes 25 (144) 63 (108)
------ ------ ------ ------
Net income - pro forma $1,967 $2,996 $5,719 $4,824
====== ====== ====== ======
Diluted net income per share - as reported $ 0.20 $ 0.29 $ 0.58 $ 0.47
Diluted net income per share - pro forma $ 0.20 $ 0.31 $ 0.58 $ 0.48
Basic net income per share - as reported $ 0.20 $ 0.29 $ 0.59 $ 0.47
Basic net income per share - pro forma $ 0.20 $ 0.31 $ 0.59 $ 0.49
6. 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) March 31
- -----------------------------------------------------------------------------
2003 2002
-------------------
Net income .............................................. $ 1,992 $ 2,852
------- --------
Shares (denominator) used for
diluted per share computations:
Weighted average shares of common stock outstanding . 9,756 9,715
Plus: dilutive effect of stock options .............. 133 89
------- --------
Diluted weighted average shares 9,889 9,804
------- --------
Shares (denominator) used for
basic per share computations:
Weighted average shares of common stock outstanding . 9,756 9,715
------- --------
Net income per share data:
Diluted ............................................. $ 0.20 $ 0.29
======= =======
Basic ............................................... # 0.20 $ 0.29
======= =======
8
Six Months Ended
(In thousands, except per share results) March 31
- ----------------------------------------------------------------------------
2002 2001
------------------
Net income .............................................. $ 5,782 $ 4,716
------- -------
Shares (denominator) used for
diluted per share computations:
Weighted average shares of common stock outstanding . 9,731 9,944
Plus: dilutive effect of stock options .............. 194 82
------- -------
Diluted weighted average shares 9,925 10,026
------- -------
Shares (denominator) used for
basic per share computations:
Weighted average shares of common stock outstanding . 9,731 9,944
------- -------
Net income per share data:
Diluted ............................................. $ 0.58 $ 0.47
======= ========
Basic ............................................... $ 0.59 $ 0.47
======= ========
All outstanding options are included in the diluted earnings per share
calculation above for the three and six months ended March 31, 2003. Options to
purchase 427,000 shares were excluded from the calculations above for the three
and six months ended March 31, 2002 because the exercise prices on the options
were greater than the average market price of the Company's stock during the
periods.
7. GOODWILL
The Company adopted Statement of Financial Accounting Standard No. 142 (SFAS No.
142), "Goodwill and Other Intangible Assets" effective October 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized but is tested for impairment
annually using a fair-value based approach. During the quarter ended December
31, 2002, the Company performed the initial impairment test of goodwill and no
impairments were indicated.
The following table adjusts reported net income and earnings per share for the
three and six months ended March 31, 2003 and 2002 to exclude amortization of
goodwill:
Three Months Ended
(In thousands, except per share results) March 31
- --------------------------------------------------------------------------------
2003 2002
----------------------
Net income as reported................................. $ 1,992 $ 2,852
Add back amortization of goodwill...................... - 183
--------- ---------
Adjusted net income.................................... $ 3,790 $ 3,035
--------- ---------
Earnings per common share as reported - diluted........ $ 0.20 $ 0.29
Add back amortization of goodwill...................... - 0.02
--------- ---------
Adjusted earnings per common share - diluted........... $ 0.20 $ 0.31
--------- ---------
Earnings per common share as reported - basic.......... $ 0.20 $ 0.29
Add back amortization of goodwill...................... - 0.02
--------- ---------
Adjusted earnings per common share - basic............. $ 0.20 $ 0.31
--------- ---------
9
Six Months Ended
(In thousands, except per share results) March 31
- --------------------------------------------------------------------------------
2003 2002
----------------------
Net income as reported................................. $ 5,782 $ 4,716
Add back amortization of goodwill...................... - 367
--------- ---------
Adjusted net income.................................... $ 5,782 $ 5,083
--------- ---------
Earnings per common share as reported - diluted........ $ 0.58 $ 0.47
Add back amortization of goodwill...................... - 0.04
--------- ---------
Adjusted earnings per common share - diluted........... $ 0.58 $ 0.51
--------- ---------
Earnings per common share as reported - basic.......... $ 0.59 $ 0.47
Add back amortization of goodwill...................... - 0.04
--------- ---------
Adjusted earnings per common share - basic............. $ 0.59 $ 0.51
--------- ---------
8. 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 Six Months Ended
(Unaudited) March 31 March 31
----------------- --------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $32,227 $37,287 $64,240 $69,833
Net Income 60 894 561 1,600
The Company has various transactions with Mi-Tech Steel. Included in operating
income of the Company are management fees and equity from the joint venture
earnings totaling $204,000 and $621,000 for the quarters ended March 31, 2003
and 2002, respectively. The Company's equity in undistributed net income of
Mi-Tech Steel was $5,911,000 and $5,124,000 at March 31, 2003 and 2002,
respectively.
During the second quarter and first six months of fiscal 2003, the Company
recorded sales of $1,591,000 and $3,080,000, respectively, for products sold to
a company owned by an officer and director of the Company compared to sales of
$922,000 and $1,764,000, respectively, during the second quarter and first six
months of fiscal 2002. Accounts receivable from the aforementioned company was
$1,081,000 as of March 31, 2003 and $1,029,000 as of September 30, 2002,
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" in the Company's 2003 Proxy
Statement.
9. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board (FASB) issued
10
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 Company adopted SFAS
No. 144 on October 1, 2002 and the adoption of SFAS No. 144 did not have a
material impact on the Company's results of operations or its financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
certain lease termination costs and severance-type costs under a one-time
benefit arrangement rather than an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 requires liabilities associated
with exit or disposal activities to be expensed as incurred and will impact the
timing of recognition for exit or disposal activities that are initiated after
December 31, 2002. The Company adopted the provisions of SFAS No. 146 during the
quarter ended March 31, 2003 and the adoption of SFAS No. 146 did not have a
material impact on the Company's results of operations or its financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34," (FIN 45). FIN 45
requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The adoption of the recognition provision of FIN 45 did not have a
material impact on our financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" (FIN 46). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting right
(variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46 are effective immediately for VIEs created after January
31, 2003 and no later than July 1, 2003 for VIEs created before February 1,
2003. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest make additional
disclosure in filings issued after January 31, 2003. The Company does not expect
the adoption of FIN 46 will have a material impact on our financial position,
results of operations or cash flows.
11
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. Goodwill is also
required to be assessed for impairment annually. If an evaluation is
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.
12
Results of Operations
- ----------------------
Steel Technologies posted sales of $130,140,000 for the second quarter ended
March 31, 2003, an increase of 13% from sales of $114,703,000 for the second
quarter ended March 31, 2002. Tons shipped of Company-owned steel products in
the second quarter of fiscal 2003 decreased approximately 3% compared to the
second quarter of fiscal 2002 while the average selling price of Company-owned
steel products for the second quarter of fiscal 2003 increased approximately 17%
from the previous year.
Sales for the six months ended March 31, 2003 increased by 18% to $256,149,000
compared to $216,279,000 for the six months ended March 31, 2002. Tons shipped
in the first six months of fiscal 2003 increased 3% compared to the first six
months of fiscal 2002. Average selling prices of steel for the first six months
of fiscal 2003 increased approximately 15% 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 8.6% in the second quarter of fiscal 2003 compared
to 11.6% in the second quarter of fiscal 2002. For the first six months of
fiscal 2003 and 2002, the gross profit margin was 9.7% and 11.2%, respectively.
The decrease in gross profit margin is a result of higher priced inventory which
was not fully offset by price increases to customers and lower shipment levels
in the second quarter of fiscal 2003 which adversely impacted production cost
efficiencies. The Company expects average raw material costs in fiscal 2003 to
exceed average raw material costs in fiscal 2002 and as a result gross profits
in 2003 to be below those in 2002. 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 second quarter decreased
approximately 12.3% from the comparable quarter of fiscal 2002. For the first
six months of fiscal 2003 selling, general and administrative costs decreased
6.6% from the first six months of fiscal 2002. During the second quarter and
first six months of fiscal 2003, selling, general and administrative costs as a
percentage of sales were 5.3% and 5.5%, respectively compared to 6.9% and 7.0%,
respectively, during the second quarter and first six months of fiscal 2002. The
decrease was primarily attributable to the reduction of goodwill amortization as
a result of adopting FAS 142 (see Note 7 of the Company's Notes to Condensed
Consolidated Financial Statements), the write-off of unamortized loan costs
relating to two industrial revenue bonds issued in Maryland and Missouri that
were retired before their scheduled maturity in fiscal 2002, and the continued
efforts by the Company to manage the level at which selling, general and
administrative costs are added to its cost structure.
13
The Company's share of income from its joint venture operations was $85,000 and
$530,000, respectively for the second quarters ended March 31, 2003 and 2002.
For the six months of fiscal 2003 and fiscal 2002 the Company's share of income
from its joint venture operations was $410,000 and $883,000, respectively.
Mi-Tech Steel's earnings have declined as a result of higher priced inventory
which was not fully offset by price increases to customers, lower operating
levels and pre-operation expenses incurred in connection with its Canton,
Mississippi and Decatur, Alabama steel processing operations. Management of
Mi-Tech Steel expects average raw material costs in fiscal 2003 to exceed
average raw material costs in fiscal 2002.
Net interest expense for the second quarter of fiscal 2003 was $1,346,000
compared to $1,300,000 for the second quarter of fiscal 2002. The increase is
primarily attributable to higher average borrowings during the current quarter
as compared to last year offset by lower average interest rates compared to last
year.
Net interest expense for the first six months of fiscal 2003 was $2,548,000
compared to $2,723,000 for first six months of fiscal 2002. The decrease is
primarily attributable to lower average interest rates during the first six
months of 2003 as compared to last year offset by higher average borrowings
during the first six months of fiscal 2003 as compared to last year.
The Company's effective income tax rate was approximately 37.8% and 34.7%,
respectively, during the second quarter and first six months of fiscal 2003
compared to 36.1% during the second quarter and first six months of fiscal 2002
excluding non-deductible goodwill amortization expense of approximately $183,000
and $367,000 recorded during the second quarter and first six months of fiscal
2002, respectively (see Note 7 of the Company's Notes to Condensed Consolidated
Financial Statements). The decrease is attributable primarily to a non-recurring
state income tax benefit recorded during the quarter ended December 31, 2002.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2003, Steel Technologies had $122,014,000 of working capital,
maintained a current ratio of 3.3:1 and had total debt at 47% 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. During fiscal 2003, the Company increased inventory levels and
improved payment days to its suppliers. This working capital increase of
$39,801,000 since September 30, 2002 has been financed primarily through
borrowings from the Company's line of credit facility. These primary factors
contributed significantly to the $22,286,000 of cash used in operations during
the first six months of fiscal 2003 compared to cash provided by operating
activities of $14,553,000 for the first six months of fiscal 2002.
Capital expenditures for the first six months of fiscal 2003 totaled
approximately $5,629,000. 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
2003, the capital additions to all facilities excluding acquisitions are
expected to approximate $15,000,000 .
14
On March 7, 2003 the Company completed the purchase of certain assets from Cold
Metal Products Company, Inc. (Cold Metal Products) as approved by the U.S.
Bankruptcy Court in Youngstown, Ohio. The purchase price consisted of
approximately $9,853,000 and the assumption of approximately $60,000 of
liabilities. The assets purchased included land, building and certain steel
processing equipment at the Ottawa, Ohio facility, certain equipment located in
Indianapolis, Indiana, and selected inventory and accounts receivable. The
Company financed the acquisition with its existing credit facility.
Steel Technologies maintains an equity investment of approximately $18,845,000
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.
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 recorded during
the second quarter of fiscal 2003 and 2002 were $503,000 and $105,000,
respectively. Foreign currency transaction gains recorded during the first six
months of fiscal 2003 and 2002 were $616,000 and $129,000, respectively.
The Company maintains a 50% equity investment in Mi-Tech and a 49% equity
investment in Ferrolux Metals Co., LLC. Additional equity, if required, would be
financed with available funds from the Company's bank line of credit.
During the first quarter of fiscal 2003, the Company extended the maturity date
of its bank line of credit to August 31, 2005. In April 2003, the Company
reached an agreement with its bank group to increase availability under its
unsecured line of credit from $125,000,000 to $151,000,000. The credit agreement
has various variable options on the interest rate, none of which are greater
than the bank's prime. During the first six months of fiscal 2003, the Company
borrowed $52,500,000 and repaid $11,743,000 on its line of credit facility. At
March 31, 2003, there was $110,000,000 outstanding on the credit facility.
Cash flows from operations and available borrowing capabilities are expected to
meet the needs of the Company throughout fiscal 2003. 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. Operating cash flows
are somewhat influenced by cyclicality of demand in the steel industry,
especially in the automotive market.
The Company has $11,400,000 outstanding at March 31, 2003 on the ten-year note
which requires annual principal payments of approximately $5,700,000 through
March 2005.
Provisions contained in the Company's various debt agreements require the
Company to maintain specified levels of net worth, maintain certain financial
15
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 of its loan covenants, and none of these covenants
would restrict the completion of currently planned capital expenditures or
acquisitions.
At this time, the Company has no other known material obligations, commitments
or demands that must be met beyond the next twelve months.
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.
Related Party Transactions
- --------------------------
The Company has various transactions with Mi-Tech Steel as well as sales to a
company owned by an officer and director of the Company (see Note 8 of the
Company's Notes to Condensed Consolidated Financial Statements).
Recently Issued Accounting Pronouncements
- -----------------------------------------
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 Company adopted SFAS
No. 144 on October 1, 2002 and the adoption of SFAS No. 144 did not have a
material impact on the Company's results of operations or its financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
certain lease termination costs and severance-type costs under a one-time
benefit arrangement rather than an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 requires liabilities associated
with exit or disposal activities to be expensed as incurred and will impact the
timing of recognition for exit or disposal activities that are initiated after
December 31, 2002. The Company adopted the provisions of SFAS No. 146 during the
quarter ended March 31, 2003 and the adoption of SFAS No. 146 did not have a
material impact on the Company's results of operations or its financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and 16 Rescission of FASB Interpretation No. 34," (FIN 45). FIN
45 requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The adoption of the recognition provision of FIN 45 did not have a
material impact on our financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" (FIN 46). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting right
(variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46 are effective immediately for VIEs created after January
31, 2003 and no later than July 1, 2003 for VIEs created before February 1,
2003. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest make additional
disclosure in filings issued after January 31, 2003. The Company does not expect
the adoption of FIN 46 will have a material impact on our financial position,
results of operations or cash flows.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change during the first six months ended March 31,
2003 from the disclosures about market risk provided in the Company's Annual
Report on Form 10-K for the year ended September 30, 2002.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, management, including
the Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures with respect to the information generated for use in this
Quarterly Report on Form 10-Q. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective to ensure that material information
required to be disclosed in the reports we file or submit under the Securities
Exchange Act of 1934 is made known to us by others within the Company, including
its consolidated subsidiaries. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation or any corrective
actions with regard to significant deficiencies or material weaknesses.
Item 6. Exhibits and Reports on Form 8-K
Exhibits filed with this report are attached hereto. No reports on Form 8-K were
filed during the quarter ended March 31, 2003.
SIGNATURES
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 _____________________________
Joseph P. Bellino
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Dated May 12, 2003
18
CERTIFICATIONS
I, Bradford T. Ray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steel Technologies
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Bradford. T. Ray
- --------------------
Bradford T. Ray
Chief Executive Officer
19
I, Joseph P. Bellino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steel Technologies
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Joseph P. Bellino
- ---------------------
Joseph P. Bellino
Chief Financial Officer
19
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, I, Bradford T. Ray, Chief
Executive Officer of Steel Technologies Inc., (the Company) certify, to the best
of my knowledge, based upon a review of the Quarterly Report on Form 10-Q of the
Company for the period ended March 31, 2003:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Bradford T. Ray
-------------------
Bradford T. Ray
Chief Executive Officer
Date: May 12, 2003
EXHIBIT 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, I, Joseph P. Bellino, Chief
Financial Officer of Steel Technologies Inc., (the Company) certify, to the best
of my knowledge, based upon a review of the Quarterly Report on Form 10-Q of the
Company for the period ended March 31, 2003:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joseph P. Bellino
---------------------
Joseph P. Bellino
Chief Financial Officer
Date: May 12, 2003