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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
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 Identification No.)
incorporation or organization)
15415 Shelbyville Road, Louisville, KY 40245
(Address of principal executive offices)
Registrant's telephone number, including area code: 502-245-2110
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X].
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ].
Aggregate market value of the voting stock (which consists solely of shares of
common stock) held by non-affiliates of the registrant as of March 31, 2004,
computed by reference to the closing price of the registrant's common stock, as
quoted in the Nasdaq National Market System on such date: $211,559,989.
Number of shares of the registrant's Common Stock outstanding at December 3,
2004: 12,854,644.
Portions of the registrant's annual report to shareholders for the fiscal year
ended September 30, 2004 are incorporated by reference into Part II. Portions of
the definitive proxy statement furnished to shareholders of the registrant in
connection with the annual meeting of shareholders to be held on January 27,
2005 are incorporated by reference into Part III.
References to "we", "us" or "our" refer collectively to Steel Technologies Inc.
and its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
Steel Technologies Inc. is incorporated under the laws of the state of Kentucky.
Our company was founded in 1971 with the vision to become the leader in the
steel processing industry and we are now one of the largest independent
flat-rolled steel processors in North America. We purchase commercial tolerance
steel in coils from major integrated steel mills and mini-mills. We process
these coils to precise tolerances that are unavailable from primary steel
producers.
Our North American platform of 20 facilities, including our joint ventures, is
strategically positioned in steel producing and consuming markets near customers
and suppliers to ensure efficient just-in-time delivery of products throughout
the United States and Mexico. We utilize the most advanced equipment to produce
high-quality steel products and specialize in meeting exact specifications for
customers in a variety of industries and end markets. Our broad geographic
coverage allows us to provide our customers with efficient just-in-time
delivery.
We, along with our joint ventures, have consistently increased our processes and
capabilities, adding 20 facilities and over 100 installations of precision
equipment since our initial public offering. Since fiscal 1994, we have invested
approximately $44 million in five acquisitions, approximately $179 million in
capital expenditures and approximately $9 million establishing our two joint
ventures. We intend to continue to pursue growth through acquisitions, expansion
of existing facilities, Greenfield construction and development of our joint
venture operations.
STEEL PROCESSING
Our production facilities are strategically located near customers and suppliers
to ensure efficient just-in-time delivery of products across the markets we
serve. Together with our joint ventures, we have 20 facilities. Steel
Technologies' facilities are located in Kentucky, Indiana, Missouri, Michigan,
Ohio, North Carolina, South Carolina and Mexico. Each of our Steel Technologies
facilities maintains one or more internationally recognized Quality Management
Systems such as QS9000 or ISO 9001. Mi-Tech Steel has facilities in Alabama,
Indiana, Mississippi and Tennessee. We also own 49% of Ferrolux Metals, a
certified minority-owned business processing steel for exposed automotive
applications, which has a facility in Michigan.
Our principal processing capabilities, among others, include:
Pickling and Leveling. A chemical process using an acidic solution to remove
surface oxide which develops on hot-rolled steel and may also be performed
in conjunction with coating and lubricating steel;
Slitting. Coils are cut to specific widths on precision machines called
slitters. Coils of fully-processed strip or wide sheet coil are passed
through rotary slitting knives and rewound in narrow-width coils as
required by customer specifications;
Cold Reducing. Coils are reduced in thickness on high-powered precision rolling
mills to achieve exact tolerances in thickness, finish and mechanical
properties;
Annealing. Steel is heat treated in high convection, 100% hydrogen furnaces to
recrystalize the internal structure, creating a softer, more workable
material;
Cut-to-length. Cuts and levels steel to exact shapes and widths;
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Blanking. Steel is stamped in blanking presses utilizing precision tools and
dies to generate flat steel shapes that are subsequently formed by our
customers into finished parts;
Multi-Blanking. Coils are cut to specified multiple widths and then sheared to a
precise length;
Oscillating. Steel is produced on multi-head slitting and oscillate winding
equipment as a means of producing exceptionally long lengths of narrow
strip steel by winding consecutive coils, much like thread is wound on a
spool;
Laser-cutting. The laser-cutting of steel parts in excess of one-inch thick to
precise customer specifications;
Edging. The process of conditioning the edge of the steel to eliminate jagged
edges or burrs;
Automotive Inspection. Inspection of a coil to ensure surface quality suitable
for automotive body panels; and
Edgetrimming. The process of trimming the edge of a steel coil creating a
clean-cut slit edge.
Our processed products include: cold-rolled strip and sheet, cold-rolled
one-pass strip, high carbon and alloy strip and sheet, hot-rolled sheet, high
strength low alloy strip and sheet, coated strip and sheet, hot-rolled pickled
and oiled sheet and tin plate. Both our own and our joint venture operations
utilize the most technologically advanced and modern equipment in the industry,
including: rolling mills, slitting lines, cut-to-length lines, multi-blanking
lines, exposed inspection lines, blanking presses, oscillating slitters, edging
lines, annealing units, a pickling line, and laser cutting capabilities.
We purchase inventory to match a specific customer's requirements based on their
forecasted or historical usage. The customer's orders are entered into a
computerized order entry system and appropriate inventory is then selected and
scheduled for processing in accordance with a specified delivery date. We
maximize yield from our inventory by scheduling customer orders to use, to the
fullest extent practicable, the purchased widths of our inventory.
We have been willing to invest in the technology, equipment and inventory
required to further process steel for use in manufacturing operations. Our
industry has experienced a reduction in the overall number of processors due to
the increasing cost of entry and the rationalization by purchasers of processed
steel of the number of suppliers they utilize. These industry forces have
created a market in which the strength of our business is based upon our
capability to process steel to more precise specifications and to service the
steel purchasing and delivery requirements of our customers more expeditiously
than the primary steel producers.
We have achieved high quality and productivity levels by using technologically
advanced, modern and efficient equipment to perform the pickling, slitting, cold
reduction, annealing and blanking processes. Our pickling facility is capable of
high volume pickling, leveling, coating and slitting of hot rolled steel to
specifications greater than industry standards. Our slitting lines are capable
of maintaining width tolerances of +/- 0.002 inches. We have computerized all of
our rolling equipment, which has improved its capability to deliver flat-rolled
steel products processed to closer than standard tolerances. Our computerized
rolling mills are capable of maintaining thickness tolerances of +/- 0.0003
inches.
Computers monitor thickness during the cold reduction process, rapidly adjusting
roll position to maintain the proper tolerance as the steel passes through the
rolling mill. The computers also provide both visual displays and documented
records of the thickness maintained throughout the entire coil. Annealing is
accomplished in high convection bell furnaces that feature extraordinary thermal
consistency, rapid water cooling and advanced atmosphere controls for good
surface cleanliness of the rolled steel product. Our blanking lines are capable
of producing blanks from coils up to 84 inches in width and a maximum gauge of
0.25 inches thick. The flatness of the steel is controlled by an automatic
hydraulic leveler and diagnostic equipment that continually monitors the steel
during processing to minimize scrap and provide up-to-the minute production
information.
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QUALITY CONTROL
The ability to obtain high quality steel from suppliers on a consistent basis is
critical to our business. Through our technical services department, we have
instituted strict quality control measures to assure that the quality of
purchased raw materials will allow us to meet the specifications of our
customers and to reduce the costs of production interruptions resulting from
lesser quality steel. Physical, chemical and metallographic analyses are
performed on selected raw material to verify acceptable mechanical and
dimensional properties, cleanliness, surface characteristics and chemical
content. Similar analyses are conducted on processed steel on a selected basis
before delivery to the customer. We also use statistical process control
techniques to monitor our slitting and cold reduction processes to allow
management to verify to customers that certain required tolerances have been
continuously maintained throughout processing. This close attention to product
quality has enabled us to limit the amount of customer returns and allowances.
Our metallurgical laboratories are located at the Eminence, Kentucky and Ottawa,
Ohio facilities.
Our Technical Services Department is comprised of metallurgical engineers,
quality management system employees and laboratory technicians. These
individuals are located at our various facilities and are closely involved with
many aspects of our business, with strong emphasis on sales, purchasing and
quality assurance. In addition to administering our testing and laboratory
facilities, they provide input into process design and control, product quality
and material specifications. The metallurgical engineers work closely with our
sales department to assist our customers with the selection of appropriate
flat-rolled steel products for new applications. Technical Services personnel
play a major role in providing metallurgical assistance to our customers and
suppliers. They work closely with our purchasing department to assure
appropriate supply from our vendor base and play an essential part in our ISO
quality system registrations.
SALES AND MARKETING
We employ a highly skilled and experienced sales and marketing staff consisting
of field sales people assigned to seven regions located throughout the markets
we serve. This group is primarily responsible for selling our products and
services to both existing and new accounts. They cover 38 states, Canada and
Mexico and service all market segments. Their efforts are centrally coordinated
by a Senior Vice President of Sales and eight Regional Vice Presidents or
Regional Managers. In addition, we have a centralized customer service team that
manages the daily sales and service requirements of existing and potential
customers. Our sales and marketing staff plays a key role in cultivating new
markets and identifying growth opportunities. Our advertising, marketing and
sales expenses were less than 2% of sales during fiscal 2004, 2003 and 2002.
CUSTOMERS AND DISTRIBUTION
We produce to customer order rather than for inventory. Although some blanket
orders are taken for periods of up to one year, such blanket orders represent a
projection of anticipated customer requirements and do not become firm orders
until the customer calls for delivery of specified quantities of particular
products at specified times. We are therefore required to maintain a substantial
inventory of raw material to meet the short lead times and just-in-time delivery
requirements of many of our customers. Customers typically place firm orders for
delivery within two to three weeks.
We also "toll process" steel for steel mills, large end-users, service centers
and other processors. Under toll processing, we perform certain processes on the
steel while the customer retains title to the steel and has the responsibility
for the end product.
We process steel for sale to a variety of industrial customers, including those
in the automotive, appliance, lawn and garden, office furniture, agriculture,
railcar, construction, hardware and consumer goods markets. During fiscal 2004,
2003 and 2002, direct sales to the automotive industry accounted for 6%, 10% and
10% of total sales, respectively and sales to the automotive supply industry
accounted for 49%, 50% and 50%, respectively of our total sales. No single
customer accounted for more than 10% of our sales in fiscal 2004, 2003 and 2002.
We believe our long-term relationships with our major customers are a
significant factor in the success of our business.
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We supply processed steel to over 850 customer locations across 38 states,
Canada and Mexico. Our customers are generally located within 300 miles of one
of our plants. The location of our facilities near concentrations of customers
permits the efficient distribution of our products by truck. Independent
trucking companies afford a convenient and expeditious means for shipping
approximately two-thirds of our products to our customers. We also maintain a
fleet of trucks to provide flexible delivery service to those customers who do
not arrange for their own shipping needs.
COMPETITION
The steel processing business is highly fragmented and competitive. We compete
with a number of other processors on a region-by-region basis, based primarily
on the precision and range of achievable tolerances, quality, price, raw
materials and inventory availability and the ability to meet the delivery
schedules of our customers. We compete with companies of various sizes, some of
which have more established brand names and relationships in certain markets we
serve than we do. Increased competition could force us to lower our prices or
offer services at a higher cost to us, which could reduce our operating income.
SUPPLIERS
We have long-term relationships with key suppliers to support our raw material
requirements. Raw material meeting our quality specifications is purchased from
both integrated and mini-mill steel producers. Our raw material suppliers are
primarily North American producers that are selected based on their
capabilities, product range and proximity to our locations. All our raw material
is purchased to a specific customer's requirements based on their forecast or
historical usage. We support the just-in-time delivery requirements of our
customer base and maintain inventory levels based on customer demand and raw
material lead times.
In fiscal 2004, we obtained steel for processing from a number of integrated and
mini-mill sources close to our facilities and a limited number of foreign steel
companies. We obtain the raw material that we require by ordering steel with
specified physical qualities and alloy content. We believe that we are not
dependent on any one of our suppliers for raw material and that our
relationships with our suppliers are good.
The steel industry as whole is cyclical and pricing can be volatile as a result
of general economic conditions, labor costs, competition, import duties, tariffs
and currency exchange rates. In addition, the supplier base is shrinking through
consolidation. This volatility and reduction in the number of suppliers can
significantly affect steel costs and availability.
WORKING CAPITAL PRACTICES
We extend credit to our customers after an evaluation of their creditworthiness
using information obtained from the customer's credit application, financial
statements and published information from credit monitoring service providers.
Our terms are granted based on customer creditworthiness, competitive
considerations, and other specific factors. Our days sales outstanding averaged
57 days during fiscal 2004. We expect average days sales outstanding to increase
to 60 days during the first quarter of fiscal 2005.
We are required to maintain substantial inventories in order to accommodate the
short lead times and just-in-time requirements of our customers. Accordingly, we
generally maintain our inventory at levels that we believe our sufficient to
satisfy the anticipated needs of our customers based upon historical or
forecasted usage and market conditions. Our inventory on hand averaged 92 days
during fiscal 2004. We expect average inventory days to decrease to 65 days
during the first quarter of fiscal 2005.
We are able to negotiate favorable terms with our raw material suppliers because
our strong balance sheet has allowed us to maintain our financing on an
unsecured basis. Our average payment days to suppliers was 47 days during fiscal
2004. We expect average payment days to suppliers to decrease to 45 days during
the first quarter of fiscal 2005.
4
We allow sales returns within a limited time period after customer takes title
to the material in the event that we agree with the customer's determination
that the processed steel does not meet their specifications. The impact of sales
returns are mitigated in certain circumstances when our supplier grants us a
return if they agree with our determination that the steel purchased did not
meet our specifications in our purchase order. Our close attention to product
quality has enabled us to limit the amount of sales returns and allowance to
less than 2% of sales in fiscal 2004.
UNCONSOLIDATED AFFILIATES
Mi-Tech Steel, Inc.
In April 1987, we formed Mi-Tech Steel, Inc., 50% of which is owned by us and
50% of which is owned by a subsidiary of Mitsui & Co. of Tokyo, Japan. Mi-Tech
Steel was established to own and operate high-volume, high quality steel
processing facilities to serve Japanese transplant and domestic automotive and
appliance parts manufacturers located in the United States. Mitsui provides its
commercial expertise with Japanese automotive and appliance producers, while we
provide operational, technical service, commercial, purchasing and accounting
support.
Mi-Tech Steel's initial processing facility was opened in December 1987 in
Murfreesboro, Tennessee, strategically selected for its proximity to various
automotive and automotive part manufacturers and appliance customers. In January
1990, Mi-Tech Steel opened a second processing facility in Greensburg, Indiana,
again, strategically located close to various Japanese transplant automotive
manufacturers and their associated part suppliers. A third processing facility,
with pickling and slitting capabilities, opened in December 1997 in Decatur,
Alabama. The Decatur facility was closed in mid-2001 in anticipation of one of
its primary suppliers, a nearby mini-mill, discontinuing its operations. Mi-Tech
Steel recorded an impairment charge associated with the closing of its Decatur
facility based on its estimates of fair value. The Decatur facility's slitting
section was reopened in mid-2003 as a result of the reopening of the nearby
mini-mill under new ownership. A fourth steel processing facility was opened in
September 2003 in Madison, Mississippi, to facilitate all of the steel
processing requirements of Nissan Motor Company's nearby automobile production
manufacturing facility.
Currently, Mi-Tech Steel's value-added capabilities are slitting, cut-to-length,
blanking and automotive inspection as well as a variety of inventory management
and just-in-time services. The facilities in Tennessee and Indiana are QS9000
and ISO 9001 certified, while each of the Alabama and Mississippi facilities are
on schedule for ISO 9001 certification. Mi-Tech Steel is highly regarded as a
quality steel processor with recent awards from well known companies, including
the Calsonic North America Eagle Award, the Denso Certification of Merit Award
and the Nissan Outstanding Quality Achievement Award.
Ferrolux Metals Co. LLC
In September 2001, we purchased a 49% stake in Ferrolux Metals Co., LLC.
Ferrolux Metals is a minority-owned and certified business enterprise that
operates a facility in Wayne, Michigan as a steel processor specializing in
exposed automotive steel processing and just-in-time services.
MANAGEMENT INFORMATION SYSTEMS
We utilize a combination of mainframe and server technology and all of our
locations are connected by a secure network. Our proprietary software
applications manage inventory levels and status, customer requirements, order
fulfillment, equipment capacity, production data, shipment status and invoicing.
Our applications allow the flexibility to meet unique customer requirements and
demanding service expectations. Our customer service website provides
twenty-four-hours-a-day and seven-days-a-week access to order information,
material certification and product history on a real time basis. In addition,
real time shipping release and shipment status information is available. Our
focus is to continually improve all areas of our system to maximize efficiency
and improve customer satisfaction. We continue to update and upgrade our
proprietary and commercially available systems and computer hardware in order to
maximize our efficiency and effectiveness.
5
ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS
Our operations are subject to various environmental statutes and regulations,
including those addressing materials and processes used in the processing of our
products. In addition, certain of our operations are subject to federal, state
and local environmental laws and regulations that impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. We believe that
we are in material compliance with all environmental laws, regulations and
permits and that we have made sufficient capital expenditures to maintain
compliance with existing laws and regulations.
Our operations are also governed by laws and regulations relating to workplace
safety and worker health including those concerning occupational injury and
illness and employee exposure to hazardous materials. We believe that we are in
material compliance with these laws and regulations.
EMPLOYEES
As of October 31, 2004, Steel Technologies employed approximately 1,172
full-time people, of which approximately 102 are represented by a collective
bargaining agreement. We have never experienced a significant work stoppage and
consider our employee relations to be good.
AVAILABLE INFORMATION
The Company maintains an Internet website at www.steeltechnologies.com. We make
available, free of charge, on or through this web site, our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). We also make available through our
website other reports filed with the SEC under the Exchange Act, including our
proxy statements and reports filed by our officers and directors under Section
16 of that Act. We do not intend for information contained in our website to be
part of this Annual Report on Form 10-K.
6
ITEM 2. PROPERTIES
The Company's and unconsolidated affiliates' principal processing plants and
distribution facilities are as follows:
Square Year Opened/
Plant Location Footage Acquired
- -------------- ------- ------------
Steel Technologies
Eminence, Kentucky 233,700 sq.ft. 1971
Portage, Indiana 242,000 sq.ft. 1987
Canton, Michigan 230,000 sq.ft. 1991
Monterrey, Mexico 80,000 sq.ft. 1994
Ghent, Kentucky 230,000 sq.ft. 1995
Puebla, Mexico 14,000 sq.ft. 1997
Clinton, North Carolina 110,000 sq.ft. 1997
Clinton, North Carolina 35,000 sq.ft. 1998
Cleveland, Ohio 77,000 sq.ft. 1998
Berkeley, South Carolina 140,000 sq.ft. 1999
Kennett, Missouri 94,000 sq.ft. 2000
Matamoros, Mexico 50,000 sq.ft. 2000
Ottawa, Ohio 204,000 sq.ft. 2003
Queretaro, Mexico 16,000 sq.ft. 2003
Mi-Tech Steel
Murfreesboro, Tennessee 236,000 sq.ft. 1987
Murfreesboro, Tennessee 50,000 sq.ft. 1999
Greensburg, Indiana 200,000 sq.ft. 1990
Decatur, Alabama 160,000 sq.ft. 1997
Madison, Mississippi 135,000 sq.ft. 2003
Ferrolux Metals
Wayne, Michigan 80,000 sq.ft. 2001
Certain of our facilities are leased. Each of the Puebla facility, Queretaro
facility and 35,000 square-foot Clinton facility are leased. The 50,000
square-foot Mi-Tech Steel facility in Murfreesboro and the Ferrolux Metals
facility in Wayne are also leased. All operating properties are in good repair
and in suitable condition for the purposes for which they are used.
Our executive offices are located in Louisville, Kentucky in a 30,000
square-foot building owned by us. Our administrative services offices are
located in 14,371 square feet of leased space in Louisville, Kentucky.
ITEM 3. LEGAL PROCEEDINGS
We are a party to certain legal actions relating to commercial disputes and
other routine matters in the ordinary course of business. We do not believe that
any liability which might result from any of these actions would have a material
adverse effect on our financial condition, results of future operations or cash
flows. We maintain liability insurance against risks arising out of the normal
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, positions held and ages of all the
executive officers of the Company:
Name Age Title
- ---- --- -----
Bradford T. Ray 46 Chairman of the Board and Chief Executive Officer and
Director
Michael J. Carroll 47 President and Chief Operating Officer and Director
Joseph P. Bellino 54 Chief Financial Officer and Treasurer
Brad A. Goranson 50 Senior Vice President-Sales
Howard F. Bates, Jr. 58 Vice President-Technical Services
Officers are elected annually by and serve at the discretion of the Board of
Directors. Mr. Bradford T. Ray and Mr. Michael J. Carroll are members of the
Company's Board of Directors.
Mr. Bradford T. Ray has served as Chairman of the Board since January 2002 and
Vice Chairman and Chief Executive Officer since November 1999. He previously
held the positions President and Chief Operating Officer from November 1994
until November 1999, Executive Vice President from April 1993 to November 1994
and Vice President-Manufacturing of the Company from January 1987 to April 1993.
Mr. Michael J. Carroll has served as President and Chief Operating Officer since
November 1999. He previously held the positions of Executive Vice President from
January 1995 until November 1999, Senior Vice President-Sales from April 1993 to
January 1995 and Vice President-Sales from July 1987 to April 1993.
Mr. Joseph P. Bellino has served as Chief Financial Officer and Treasurer of the
Company since October 1997.
Mr. Brad A. Goranson has served as Senior Vice President - Sales of the Company
since July 2000. He previously served as Vice President - Manufacturing from
August 1998 to July 2000 and Vice President - Sales, Midwest Region from August
1991 to July 1998.
Mr. Howard F. Bates, Jr. has served as Vice President-Technical Services since
November 1981. From August 1977 to November 1981, he held the position of
Manager of Technical Services.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Except as presented below, the information required for Item 5 is incorporated
by reference herein, pursuant to General Instruction G(2), from the information
provided under the section entitled "Market Price and Dividend Information" on
page 11 of the Company's annual report to shareholders for the year ended
September 30, 2004.
ITEM 6. SELECTED FINANCIAL DATA
The information required for Item 6 is incorporated by reference herein,
pursuant to General Instruction G(2), from the information provided under the
section entitled "Selected Financial Data" on page 10 of the Company's annual
report to shareholders for the year ended September 30, 2004.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required for Item 7 is incorporated by reference herein,
pursuant to General Instruction G(2), from the information provided under the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 12 through 19 of the Company's annual report
to shareholders for the year ended September 30, 2004.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
At September 30, 2004, our debt is comprised of variable-rate borrowings under
our line of credit facility which matures in September 2009. As of September 30,
2004, there was $114,000,000 outstanding on this credit facility at a weighted
average interest rate of 3.43%. Accordingly, we are exposed to market risks
related to changes in interest rates. We continually monitor these risks and
develop appropriate strategies to manage them. Accordingly, from time to time,
we may enter into certain derivative financial instruments to manage interest
rate exposures. We do not enter into derivative financial instrument
transactions for speculative purposes.
FOREIGN CURRENCY RISK
The translation of the assets and liabilities of our Mexican subsidiary from
their local currencies to the U.S. dollar subjects us to exposure related to
fluctuating exchange rates. We do not use any derivative instruments to manage
this risk.
Our Mexican subsidiary uses the peso as the functional currency and the assets
and liabilities of our Mexican subsidiary are translated into U.S. dollars at
the year-end rate of exchange. Resulting translation adjustments were $902,000,
$2,201,000 and $1,714,000 during fiscal 2004, 2003 and 2002, respectively, and
are reported as a reduction in comprehensive income. A stronger exchange rate of
the peso relative to the U.S. dollar of 1% at September 30, 2004 would result in
additional comprehensive income of approximately $200,000. Likewise, a weaker
exchange rate of the peso relative to the U.S. dollar of 1% at September 30,
2004 would result in additional comprehensive loss of approximately $200,000.
However, this exposure is mitigated somewhat by a large percentage of
transactions denominated in the U.S. dollar. The effect of the change in the
exchange rate from the date a transaction is initiated until the date a
transaction is settled with a cash receipt or cash payment is recorded as a
transaction gain or loss in our financial statements. Foreign currency
transaction gains included in sales were $468,000, $353,000 and $371,000 and
during fiscal 2004, 2003 and 2002, respectively. A stronger average exchange
rate of the peso during fiscal 2004 relative to the U.S. dollar of 1% would
result in additional foreign currency transaction losses of approximately
$100,000. Likewise, a weaker average exchange rate of the peso during fiscal
2004 relative to the U.S. dollar of 1% would result in additional foreign
currency transaction gains of approximately $100,000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Steel Technologies Inc. and
Subsidiaries on pages 20 through 33 and Report of Independent Registered Public
Accounting Firm on page 34 which are included in the Company's annual report to
shareholders for the year ended September 30, 2004, and the sections entitled
"Selected Quarterly Financial Data" and "Market Price and Dividend Information"
on page 11 thereof are incorporated herein by reference.
Consolidated Balance Sheets - September 30, 2004 and 2003
Consolidated Statements of Income - Years ended September 30, 2004, 2003
and 2002
Consolidated Statements of Comprehensive Income - Years ended September 30,
2004, 2003 and 2002
Consolidated Statements of Shareholders' Equity - Years ended September 30,
2004, 2003 and 2002
Consolidated Statements of Cash Flows - Years ended September 30, 2004,
2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the fourth fiscal quarter of the period
covered by this Annual Report on Form 10-K. Based upon that evaluation, our
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 our
company, including our consolidated subsidiaries, particularly during the period
for which reports of our company, including this Annual Report on Form 10-K, are
being prepared and to permit the Company to report that information within the
time period specified to the Securities and Exchange Commission. There were no
changes in our internal control over financial reporting that occurred during
our fourth fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3), the information required by Item 10 is
incorporated by reference herein from the material under the sections entitled
"Election of Directors" contained on pages 3 through 8, "Committees of the
Board" on page 7, "Election of Directors Section 16(a) Beneficial Ownership
Reporting Compliance" on page 8 and "Audit Committee Report" on pages 15 through
16 in the Company's definitive proxy statement filed with the Securities and
Exchange Commission related to the annual meeting of shareholders of Steel
Technologies Inc. to be held on January 27, 2005. The information regarding
Executive Officers required by Item 401 of Regulation S-K is included in Part I
hereof under the section entitled "Executive Officers of the Registrant".
In November 2003, the Company adopted a Code of Ethics for the Chief Executive
Officer, Financial Executives, and Financial Professionals. This Code of Ethics
contains specific principles to which the Chief Executive Officer, Chief
Financial Officer, Controller, and Tax Manager are expected to adhere. The full
text of the Code of Ethics for Financial Executives is incorporated by reference
as Exhibit 14 in this Annual Report on Form 10-K.
10
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), the information required by Item 11 is
incorporated by reference herein from the material under the sections entitled
"Election of Directors - Independence and Compensation of Directors" contained
on page 8 and "Executive Compensation" contained on pages 9 through 11 in the
Company's definitive proxy statement filed with the Securities and Exchange
Commission related to the Company's annual meeting of shareholders to be held on
January 27, 2005.
Information appearing in the sections entitled "Compensation Committee Report on
Executive Compensation" contained on pages 12 through 14 and "Performance Graph"
contained on page 17 in the Company's definitive proxy statement filed with the
Securities and Exchange Commission related to the Company's annual meeting of
shareholders to be held on January 27, 2005 shall not be deemed to be
incorporated by reference in this report, notwithstanding any general statement
contained herein incorporating portions of such proxy statement by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Pursuant to General Instruction G(3), the information required by Item 12 is
incorporated by reference herein from the material under the sections entitled
"Voting Securities" contained on pages 2 through 3 and "Election of Directors"
contained on pages 3 through 8 in the Company's definitive proxy statement filed
with the Securities and Exchange Commission related to the Company's annual
meeting of shareholders to be held on January 27, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information required by Item 13 is
incorporated by reference herein from the material under the sections entitled
"Certain Transactions" contained on page 11 and "Election of Directors"
contained on pages 3 through 8 in the Company's definitive proxy statement filed
with the Securities and Exchange Commission related to the Company's annual
meeting of shareholders to be held on January 27, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to General Instruction G(3), the information required by Item 14 is
incorporated by reference herein from the material under the section entitled
"Audit Committee Report" contained on pages 15 through 16 and "Election of
Directors" contained on pages 3 through 8 in the Company's definitive proxy
statement filed with the Securities and Exchange Commission related to the
Company's annual meeting of shareholders to be held on January 27, 2005.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The response to this portion of Item 15 is submitted as a separate
section of this report--See List of Financial Statements under Item 8.
(a) (2) The following consolidated financial statement schedule of Steel
Technologies Inc. and its subsidiaries is included in a separate section of
this report, following the index to exhibits on page E-1:
Valuation and Qualifying Accounts - Schedule II
Report of Independent Registered Public Accounting Firm
11
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) (3) Listing of Exhibits--See Index to Exhibits contained herein on page E-1
of this report. The index to exhibits specifically identifies each
management contract or compensatory plan required to be filed as an Exhibit
to this Form 10-K.
(b) Exhibits filed with this report are attached hereto
12
Page E-1
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2004
Ref. # Exhibit # Description
(a) 3.1 Second Restated Articles of Incorporation of the
Registrant
(a) 3.2 Second Amended By-Laws of the Registrant
(b) 4 Rights Agreement dated as of April 24, 1998, between
Steel Technologies Inc. and National City Bank, as
Successor Rights Agent
(c) 10.1 Credit Agreement dated as of September 2, 2004, by
and between the Registrant and PNC Bank, National
Association, SunTrust Bank, Bank One, NA an
Affiliate of JPMorgan Chase & Company, National City
Bank of Kentucky, U.S. Bank National Association
and Fifth Third Bank
(d) 10.2 Note Agreement dated as of October 21, 2004
between the Registrant and The Guardian Life
Insurance Company of America, The Prudential
Insurance Company of America, Baystate
Investments, LLC, Physicians Mutual Insurance
Company, Nationwide Life Insurance Company,
Nationwide Life Insurance Company of America and
Nationwide Life & Annuity Insurance Company
(e) 10.3(a) Registrant's 1995 Stock Option Plan *
(a) 10.3(b) Registrant's 2000 Stock Option Plan *
10.4 Restated Cash Bonus Plan of Steel Technologies Inc.*
10.5 Steel Technologies Inc. Nonqualified Deferred
Compensation Plan*
(f) 10.6 Employment Agreement between Registrant and
President and Chief Operating Officer effective
as of November 19, 2004*
(g) 10.7 Agreement dated March 30, 1987 between Mitsui &
Co., LTD., Mitsui & Co. (U.S.A.), Inc., Mitsui
Steel Development Co., Inc., and the Registrant
(g) 10.8 Amendment #1, dated February 28, 1989 to the
Agreement dated March 30, 1987 between Mitsui &
Co., LTD., Mitsui & Co. (U.S.A.), Inc., Mitsui Steel
Development Co., Inc., and the Registrant
(h) 10.09 Form of Indemnification Agreement between the
Registrant and its Directors *
(a) 10.10(a) Steel Technologies Inc. Restated Retirement Savings
Plan
(a) 10.10(b) Amendment No. 1 to the Steel Technologies Inc.
Retirement Savings Plan
(i) 10.11 Second Steel Technologies Inc. Nonemployee Directors
Stock Plan *
(n) 10.12 Redemption and Noncompetition Agreement *
13 2004 Annual Report to Shareholders, filed herewith.
The annual report shall not be deemed to be filed
with the Commission except to the extent that
information is specifically incorporated by
reference herein
(g) 14 Code of Ethics for the Chief Executive
Officer, Financial Executives, and Financial
Professionals
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting
Firm
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 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
32.2 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
13
Page E-1 (continued)
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2004
Alphabetic filed exhibit reference:
(a) Incorporated herein by reference to exhibits filed with the
Company's Annual Report of Form 10-K (file #0-14061) for the
fiscal year ended September 30, 2000.
(b) Incorporated herein by reference to exhibits filed with the
Company's Current Report on Form 8-K (file #0-14061) filed
April 27, 1998.
(c) Incorporated herein by reference to exhibits filed with the
Company's Form 8-K (file #0-14061) filed September 8, 2004.
(d) Incorporated herein by reference to exhibits filed with the
Company's Form 8-K (file #0-14061) filed October 26, 2004.
(e) Incorporated herein by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q (file #0-14061) for the
quarter ended March 31, 1995.
(f) Incorporated herein by reference to exhibits filed with the
Company's Form 8-K (file #0-14061) filed November 24, 2004.
(g) Incorporated herein by reference to exhibits filed with the
Company's Annual Report on Form 10-K (file #0-14061) for the
fiscal year ended September 30, 2003.
(h) Incorporated herein by reference to exhibits filed with the
Company's Annual Report on Form 10-K (file #0-14061) for the
fiscal year ended September 30, 1990.
(i) Incorporated herein by reference to exhibits filed with the
Company's Form S-8 Registration Statement under the Securities Act
of 1933 (No. 333-91798), which became effective June 14, 2002.
(j) Incorporated herein by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q (file #0-14061) for the
quarter ended December 31, 2001.
* Indicates management contract or compensatory plan or arrangement
14
STEEL TECHNOLOGIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Deductions Period
- --------------------------------------------------------------------------------
Year Ended September 30, 2004:
Allowance for doubtful
accounts $1,807,947 $1,709,786 $ 199,291(A) $3,318,442
Year Ended September 30, 2003:
Allowance for doubtful
accounts $1,496,247 $1,273,994 $ 962,294(A) $1,807,947
Year Ended September 30, 2002:
Allowance for doubtful
accounts $2,671,387 $1,165,022 $2,340,162(A) $1,496,247
(A) Uncollectible accounts charged off, less recoveries.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Steel Technologies Inc.
Our audits of the consolidated financial statements referred to in our report
dated December 9, 2004 appearing in the 2004 Annual Report to Shareholders of
Steel Technologies Inc. and its subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
December 9, 2004
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: December 14, 2004 By:/s/Joseph P. Bellino
-----------------------
Joseph P. Bellino
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Date Title
- --------- ---- -----
/s/ Bradford T. Ray 12/14/04 Director, Chairman of the Board of Directors
- ------------------- Chief Executive Officer (Principal Executive
Bradford T. Ray Officer)
/s/ Michael J. Carroll 12/14/04 Director, President and Chief
- ---------------------- Operating Officer
Michael J. Carroll
/s/ Joseph P. Bellino 12/14/04 Chief Financial Officer and Treasurer
- --------------------- (Principal Financial and Accounting Officer)
Joseph P. Bellino
/s/ Merwin J. Ray 12/14/04 Founding Chairman and Director
- -----------------
Merwin J. Ray
/s/ Stuart N. Ray 12/14/04 Director and Vice President,
- ----------------- President, Mi-Tech Steel, Inc.
Stuart N. Ray
/s/ Doug A. Bawel 12/14/04 Director
- -----------------
Doug A. Bawel
/s/ Jimmy Dan Conner 12/14/04 Director
- --------------------
Jimmy Dan Conner
/s/ Mark G. Essig 12/14/04 Director
- -----------------
Mark G. Essig
/s/ William E. Hellmann 12/14/04 Director
- -----------------------
William E. Hellmann
/s/ Andrew J. Payton 12/14/04 Director
- --------------------
Andrew J. Payton
16
EXHIBIT 10.4
Restated Cash Bonus Plan
of Steel Technologies Inc.
1. Title: The title of the plan shall be the Restated Cash Bonus Plan of Steel
Technologies Inc ("Bonus Plan").
2. Total Available Bonus: A total available cash bonus equal to seven percent
(7%) of the Company's adjusted income (excluding Mi-Tech Steel and Ferrolux
Metals) determined before taxes, bonuses and LIFO inventory adjustment
shall be distributed among the participants of the Plan.
3. Administration: The Chairman of the Board shall review with the
Compensation Committee his recommendation for participating shares of each
Executive Officer in the Bonus Plan at least annually. The Compensation
Committee shall decide the participating shares of each Executive Officer
in the Bonus Plan. All decisions by the Committee related to the Bonus Plan
are reviewed by the full Board of Directors except where required to be
made solely by the Committee. The Chief Executive Officer shall decide
which other employees shall participate in the Bonus Plan and the
participating share for each.
4. Distribution: The bonus amounts allocated to each participant shall be paid
following the end of each fiscal quarter.
Effective November 2004
1
EXHIBIT 10.5
STEEL TECHNOLOGIES INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
This is the Steel Technologies Inc. Nonqualified Deferred Compensation Plan
(the "Plan") effective as of September 1, 2002, between Steel Technologies Inc.
(the "Employer") and these employees of the Employer listed on Annex A.
RECITAL
The Employer adopts this nonqualified deferred compensation plan to provide
a method whereby select management and highly-compensated employees may defer
compensation other than by participation in the Employer's 401(k) plan, receive
employer matching contributions lost under the Employer's 401(k) plan because of
the application of Sections 401(a)(17), 401(k), 401(m), 401(a)(4) and 415 of the
Internal Revenue Code, and allow the Employer to award additional deferred
compensation in its discretion.
PLAN
Section 1 - Definitions
For purposes of this Plan, the following words and phrases shall have the
meanings indicated, unless the context clearly indicates otherwise.
1.1 "Administrator" means the Compensation Committee of the Employer's Board of
Directors.
1.2 "Beneficiary" means the person, persons or entity designated by a
Participant as provided in Section 5.1 to receive any benefits payable
under this Plan upon the death of the Participant. The Beneficiary referred
to in this paragraph may be designated or changed by the Participant
(without the consent of any prior Beneficiary) by a writing delivered to
the Employer before the Participant's death
1.3 "Board" means the Board of Directors or other highest-ranking governing
body of the Employer in existence from time to time.
1.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.5 "Compensation" of a Participant means the Participant's Compensation as
defined in the 401(k) Plan, but without regard to (a) any Elective
Deferrals under Section 3.2 of this Plan (i.e., those amounts shall be
included in Compensation under this Plan); and (b) any limit on
compensation imposed by Section 401(a)(17) of the Code.
1
1.6 "Deferred Compensation Account" or "Account" means the total of the
Participant's Elective Deferral, Match and Nonelective Employer Amounts
Accounts.
1.7 "Elective Deferral Account" means a separate bookkeeping account maintained
by the Employer for the Participant which shall be credited with credits on
behalf of the Participant pursuant to Section 3.2, and deemed earnings and
losses thereon pursuant to Section 3.5.
1.8 "Employee" means any common law employee of the Employer.
1.9 "Employer" means Steel Technologies Inc. and any affiliate, successor or
assign of either company.
1.10 "401(k) Plan" means the Steel Technologies, Inc. 401(k) Retirement Savings
Plan, as amended from time to time.
1.11 "Highly Compensated Employee" means an Employee who is considered a highly
compensated employee within the meaning of Section 414(q) of the Code.
1.12 "Match Account" means a separate bookkeeping account maintained by the
Employer for the Participant which shall be credited with credits on behalf
of the Participant pursuant to Section 3.3, and deemed earnings and losses
thereon pursuant to Section 3.5.
1.13 "Nonelective Employer Amounts Account" means a separate bookkeeping account
maintained by the Employer for the Participant which shall be credited with
credits on behalf of the Participant pursuant to Section 3.4, and deemed
earnings and losses thereon pursuant to Section 3.5.
1.14 "Participant" means an Employee who has been selected for participation in
the Plan in accordance with Section 2 and who has reached his effective
date of participation as designated on Annex A to this Plan.
1.15 "Plan Year" means the twelve month period beginning each January 1 and
ending the following December 31.
Section 2 - Participation
As of the Effective Date of the Plan, and effective each January 1st
beginning January 1, 2003, the Administrator shall select those Employees who
shall be Participants in this Plan beginning on the Effective Date or for the
calendar year beginning on that January 1st, provided that no Employee shall be
selected for participation unless the Employee (1) is an exempt employee; and
(2) is, or is reasonably expected to be, a Highly Compensated Employee. The
Administrator shall limit those employees selected for participation to a select
group of management and highly compensated employees. The Administrator shall
record those Employees eligible for participation and the effective date of each
Employee's participation on Annex A to this Plan. Each Participant shall be
eligible to defer Compensation under this Plan as described in Section 3.2(c).
An Employee who qualifies for participation and then fails to so qualify in a
subsequent year shall continue to be a Participant solely with respect to any
credits to
2
his or her Account during the period the Employee so qualified.
Section 3 - Accounts and Contributions
3.1 Deferred Compensation Accounts. Each Participant's Account shall be
credited with Elective Deferrals pursuant to Section 3.2, Matching
Contributions pursuant to Section 3.3 and Employer Nonelective Amounts
pursuant to Section 3.4, and deemed earnings and losses pursuant to Section
3.5.
3.2 Elective Deferral of Compensation.
(a) Elective Deferrals Credited. A Participant's elective deferral of
Compensation under this Plan (the "Elective Deferrals") shall not be
paid to the Participant currently, but shall be credited to his
Elective Deferral Account as described in Section 3.7. To the extent
that the Employer is required to withhold any taxes or other amounts
from the Participant's deferred compensation under this Plan pursuant
to any state, federal or local law, such amounts shall be taken out of
the portion of the Participant's Compensation which is not deferred
under this Plan.
(b) Limits on Elective Deferral Amounts. In no event shall any
Participant's Elective Deferrals for a calendar year under this Plan
exceed 15% of the Participant's Compensation for that calendar year.
(c) Election to Defer Compensation. Elections to defer compensation shall
be made by Participants on the form attached hereto as Annex B. A
Participant's initial election to defer the receipt of Compensation
under the terms of this Plan must be made, and notice thereof received
by the Employer, no later than 30 days after the date the Employee's
participation is initially effective, and such election shall be
effective for the first pay period beginning after the election is
received. A Participant's election to defer compensation under this
Plan shall remain in effect in subsequent calendar years unless he
files with the Administrator a new election modifying or revoking his
earlier election. The Participant's election to increase or decrease
the amount of Compensation deferred must be made, and written notice
thereof received by the Employer, no later than the December 31 before
the Plan Year for which the election to increase or decrease the
amount of Compensation to be deferred is to be effective, and such
election shall be effective on the first day of such Plan Year.
(d) Election is Irrevocable. A Participant's election to defer the receipt
of Compensation under this Plan shall be irrevocable during the Plan
Year for which the election to defer the receipt of Compensation is
effective.
3
3.3 Matching Account Credits. For each Plan Year, the Employer shall credit to
the Match Account of each Participant who makes Elective Deferrals to this
Plan a matching contribution amount determined as follows:
(i) determine the matching contribution that would be made under the
matching contribution formula used in the 401(k) Plan for the Plan
Year based on the combined total of Elective Deferrals to this Plan
and elective contributions to the 401(k) Plan for the Plan Year, and
based on Compensation as defined in this Plan, and without regard to
any limits in Sections 401(m) or 415 of the Code;
(ii) subtract from the match determined in subsection (i) above the actual
matching contribution made or to be made to the 401(k) Plan for the
Participant for the Plan Year. The resulting amount is the amount that
shall be credited to the Participant's Match Account under this Plan
for the Plan Year. Such amount shall be credited no later than the
time matching contributions are credited to the 401(k) Plan accounts.
3.4 Employer Nonelective Amounts. For each Plan Year, the Employer will credit
the amount (if any) determined by the Administrator for each Participant to
the Participant's Employer Nonelective Amount Account. Contributions may
vary by Participant and shall be fully discretionary from year to year.
3.5 Earnings Credited. Each Participant's Account under this Plan shall be
deemed to be invested as elected by the Participant from time to time from
among the investment alternatives designated by the Administrator from time
to time. The Employer shall have no obligation to actually invest any
bookkeeping Account hereunder in accordance with this deemed investment
provision. This provision is merely a mechanism for determining the amount
eventually payable to Participants
3.6 Vesting of Accounts. Employees shall be 100 percent vested in their
Accounts at all times, but shall have no right to receive the funds
credited to that Account except as described in Section 4.
3.7 Determination of Deferred Compensation Account Balances. As of each
business day (the "Accounting Date"), the Employer shall determine the
balance in each Participant's Deferred Compensation Account. Each Account
shall be credited with Elective Deferrals within a reasonable period of
time after the amounts would otherwise have been paid to the Participant as
wages, and with Match and Employer Nonelective Amounts no later than the
time the Employer makes such contributions to the 401(k) Plan for any Plan
Year. In addition, the Accounts shall be credited (or debited) on each
Accounting Date with deemed earnings or losses determined in accordance
with Section 3.5.
4
3.8 Statement of Account. The Employer shall deliver to each Participant a
statement, in such form as the Employer deems desirable, setting forth the
balance of his Deferred Compensation Account, at least annually.
Section 4 - Distribution of Benefits
4.1 Distribution Upon Termination of Employment.
(a) Termination Prior To Age 65. If a Participant terminates employment
with the Employer prior to attaining age 65, an amount equal to the
Participant's Account shall be paid to him by the Employer in 3
approximately equal annual installments in cash, beginning within a
reasonable period of time after termination, unless the Participant
has elected at least 12 months before such termination that payment be
made in annual installments over 5 or 10 years beginning within a
reasonable time after termination. Notwithstanding the foregoing, the
Administrator in its complete discretion may allow a Participant to
elect at least 12 months before termination that payment be made in a
lump sum in cash within a reasonable period after termination. All
payments under this Plan shall be net of an amount sufficient to
satisfy any federal, state or local income and employment tax
withholding obligations.
(b) Termination After Attaining Age 65. If a Participant terminates
employment with the Employer on or after attaining age 65, an amount
equal to the Participant's Account shall be paid to him by the
Employer, in a lump sum in cash, within a reasonable period of time
after termination, unless the Participant has elected at least 12
months before such termination that payment be made in annual
installments over 3, 5 or 10 years beginning within a reasonable time
after termination. All payments under this Plan shall be net of an
amount sufficient to satisfy any federal, state or local income and
employment tax withholding obligations.
4.2 Distribution Upon Unforeseeable Emergency.
(a) Request for Early Distribution. A Participant may request a
distribution due to Unforeseeable Emergency by submitting a written
request to the Administrator accompanied by evidence to demonstrate
that the circumstances being experienced qualify as an Unforeseeable
Emergency. The Administrator shall require such evidence as it deems
necessary to determine if a distribution is warranted. If an
application for a hardship distribution due to an Unforeseeable
Emergency is approved, the distribution is limited to an amount
sufficient to meet the emergency. The allowed distribution shall be
payable in a method determined by the Administrator as soon as
possible after approval of such distribution. A Participant who has
commenced receiving installment payments under the Plan may request
acceleration of such payments in the event of an Unforeseeable
Emergency. The Administrator may permit accelerated payments to the
extent such accelerated payment does not exceed the amount necessary
to meet the emergency.
(b) Unforeseeable Emergency. "Unforeseeable Emergency" means a severe
financial hardship to the Participant resulting from a sudden and
unexpected illness or accident of the Participant or of a dependent of
the Participant, loss of the Participant's property due to
5
casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant. The circumstances that constitute an "Unforeseeable
Emergency" depend upon the facts of each case, but, in any case,
payment may not be made in the event that such hardship is or may be
relieved:
(1) Through reimbursement or compensation by insurance or otherwise,
(2) by liquidation of the Participant's assets, to the extent that
liquidation of such assets would not itself cause severe
financial hardship, or
(3) by cessation of Elective Deferrals under the Plan.
The need to send a Participant's child to college or the desire to purchase a
home shall not be an Unforeseeable Emergency.
Section 5 - Beneficiary Designation
5.1 Beneficiary Designation. The Participant may, from time to time, designate
in writing a Beneficiary or Beneficiaries to whom payment of all unpaid
benefits under this Plan shall be paid in the event of his death prior to
complete distribution to the Participant of the benefits due him under this
Plan. A Beneficiary designation may be revoked in writing at any time, but
no new designation or revocation of a Beneficiary designation shall be
effective until it is actually received and acknowledged by the Employer.
If the Participant fails to designate a Beneficiary, or if his Beneficiary
designation is revoked without execution of a new designation, or if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits under this Plan, then
the Participant shall be deemed to have designated the following
Beneficiaries (if living at the time of the death of the Participant) in
the following order of priority:
(a) The Participant's spouse;
(b) The Participant's children, including adopted children, in equal
shares;
(c) The Participant's natural parents, in equal shares; and
(d) The Participant's estate.
5.2 Effect of Payment. The payment to the Participant or Beneficiary shall
completely discharge the Employer's obligations under this Plan.
Section 6 - Administration
6.1 Administrator. This Plan shall be administered by the Administrator. The
Administrator shall have the authority to make, amend, interpret and
enforce all appropriate rules and regulations for the administration of
this Plan and decide or resolve any and all questions of interpretations of
this Plan, as may arise in connection with this Plan, including factual
determinations.
6
6.2 Agents. In the administration of this Plan, the Administrator may, from
time to time, employ agents and delegate to them such administrative duties
as it sees fit and may, from time to time, consult with counsel (who may be
counsel to the Employer).
6.3 Binding Effect of Decisions. The decision or action of the Administrator
with respect to any question arising out of or in connection with the
administration, interpretation and application of this Plan and the rules
and regulations promulgated hereunder shall be final, conclusive and
binding upon all persons having any interest in this Plan.
6.4 Indemnity of Administrator. The Employer shall indemnify and hold the
Administrator, and any member thereof, harmless against any and all claims,
loss, damage, expense or liability arising from any action or failure to
act with respect to this Plan, except in the case of gross negligence or
willful misconduct by the member.
Section 7 - Claims Procedure
7.1 Claims for Benefits. Any claim for benefits shall be made in writing to the
Administrator. In the event such a claim to all or any part of any benefit
under this Plan shall be denied, the Administrator shall provide to the
claimant, within 90 days (or such additional period required by special
circumstances, but not to exceed an additional 90 days, provided, written
notice of the extension shall be furnished to the claimant prior to the
commencement of the extension) after receipt of such claim, a written
notice setting forth, in a manner calculated to be understood by the
claimant:
(a) The specific reason or reasons for the denial;
(b) Specific references to the pertinent Plan provisions on which the
denial is based;
(c) A description of any additional material or information necessary for
the claimant to perfect the claim and an explanation as to why such
material or information is necessary; and
(d) An explanation of the Plan's procedure for review of the denial of a
claim.
7.2 Review of Denial of Claims. Within 60 days after receipt of the above
material, the claimant may appeal the claim denial to the Board for a full
and fair review. Within such 60 days, the claimant or his duly authorized
representative:
(a) May request a review upon written notice to the Board;
(b) May review pertinent documents; and
(c) May submit issues and comments in writing.
7.3 Decision on Review of Denial. A decision by the Board (exclusive of the
Participant, if he is then serving as a member of the Board) will be made
no later than 60 days
7
(or such additional period required by special circumstances, but not to
exceed an additional 60 days, provided, written notice of the extension
shall be furnished to the claimant prior to the commencement of the
extension) after receipt of a request for review. The Board's decision on
review shall be written and shall include specific reasons for the
decision, written in a manner calculated to be understood by the claimant,
with specific references to the pertinent Plan provisions on which the
decision is based.
7.4 Final Decision. The Board's decision on review shall be final, conclusive
and binding upon all persons having any interest in this Plan. The
provisions of this Section shall apply to and include any and every claim
or right asserted under this Plan, regardless of the basis asserted for the
claim and when the act or omission upon which the claim is based occurred.
Section 8 - Amendment or Termination
8.1 Right to Terminate. The Employer may, in its sole discretion, terminate
this Plan and Participants' elections to defer Compensation hereunder at
any time. In the event the Plan and Participants' elections to defer
Compensation hereunder are terminated, each Participant and Beneficiary
shall receive a single sum payment equal to the balance in his Account. The
single sum payment shall be made as soon as practicable following the date
the Plan is terminated and shall be in lieu of any other benefit which may
be payable to the Participant or Beneficiary under this Plan.
8.2 Right to Amend. The Employer may, in its sole discretion, amend the Plan on
thirty days' prior notice to affected Participants. If any amendment to
this Plan shall adversely affect the rights of Participants with respect to
existing account balances, each Participant must consent in writing to such
amendment before it can be enforced against that Participant with respect
to account balances in existence on the effective date of the amendment. If
such individual does not consent to the amendment, then, in the Employer's
sole discretion, the Plan and related election to defer Compensation shall
be deemed to be terminated with respect to such individual and he shall
receive a single sum payment of his Account as soon thereafter as is
practicable. Notwithstanding the foregoing, the change in any investment
funds or investment index on which increases in the Participant's Account
are based or the restriction of future Elective Deferrals or Match or
Employer Nonelective credits to a Participant's Account shall not be deemed
to adversely affect any Participant's rights.
Section 9 - Miscellaneous
9.1 Unsecured General Creditor. The Participant and his Beneficiaries, heirs,
successors and assigns shall have no legal or equitable rights, interests
or claims in any property or assets of the Employer. Any and all of the
Employer's assets shall be, and remain, the general, unpledged,
unrestricted assets of the Employer. The Employer's obligation under this
Plan shall be merely that of an unfunded and unsecured promise of the
Employer to pay money in the future, and the Participant's rights to
benefits shall be solely that of an unsecured general creditor of the
Employer.
8
9.2 Nonassignability. Neither the Participant nor any other person shall have
any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey in advance of actual
receipt the amounts, if any, credited to the Accounts under this Plan. No
part of the amounts credited to the Accounts under this Plan shall, prior
to actual distribution, be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by
the Participant or any other person, or be transferable by operation of the
law in the event of the Participant's or any other person's bankruptcy or
insolvency.
9.3 Not a Contract of Employment. The terms and conditions of this Plan shall
not be deemed to constitute a contract of employment between the Employer
and the Participant, and the Participant (or his Beneficiary) shall have no
rights against the Employer except as may otherwise be specifically
provided herein. Moreover, nothing in this Plan shall be deemed to give the
Participant the right to be retained in the service of the Employer or to
interfere with the right of the Employer to discharge him or change his
employment status at any time.
9.4 Successor. The provisions of this Plan shall bind and inure to the benefit
of the Employer and its successors and assigns. The term successors as used
herein shall include any corporate or other business entity which shall,
whether by merger, consolidation, purchase or otherwise (a
"Reorganization") acquire all or substantially all of the business and
assets of the Employer, and successors of any such corporation or other
business entity. The Employer shall not enter into any Reorganization or
otherwise lease its business activities or terminate its existence without
having made adequate provision for the fulfillment of its obligations
hereunder.
9.5 Participating Employers. The Employer, in its sole discretion, and upon
such terms as it may prescribe, may permit any corporation or other entity
directly or indirectly controlled by the Employer to participate in this
Plan with respect to its employees.
9.6 Term. The term of this Plan shall begin on the date hereof and shall,
except as otherwise provided in Section 9, continue to apply until
termination of all Participants' employment with the Employer and
thereafter until all benefits have been distributed.
9.7 Risk. The Participants agree on behalf of themselves and their designated
Beneficiaries to assume all risk in connection with any decrease in value
of their Accounts which are deemed to be invested or reinvested in
accordance with the provisions of this Plan.
9.8 Plan not Funded or Qualified. This Plan is intended to be, and shall be
construed and administered as, an employee benefit pension plan under the
provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), and is intended as an unfunded "top hat" plan under Section
201(2) of ERISA maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated
employees. The Plan is not intended to be qualified under Section 401(a) of
the Code.
9.9 Severability and Governing Law. This instrument shall be governed by the
laws of the Commonwealth of Kentucky to the extent not preempted by federal
law. The invalidity or unenforceability of any provision of this Plan shall
not affect the validity or enforceability of any
9
one or more of the other provisions hereof. The parties hereby agree that
this Plan shall be so interpreted as to give effect and validity to all the
provisions hereof to the fullest extent permitted by law.
9.10 Masculine, Feminine, Singular and Plural. The masculine shall be read in
the feminine, the singular in the plural, and vice versa, wherever the
context shall so require.
9.11 Notices. Any notices required to be given under the terms of this Plan
shall be given in writing by personal delivery or by certified mail (return
receipt requested). If given by mail, the date of mailing shall be deemed
to be the date as of which the same was given or furnished to the
addressee. Any notice required under this Plan may be waived in writing by
the person entitled to such notice.
9.12 Headings. Headings in this Plan are for convenience only and shall not be
used to interpret or construe its provisions.
IN WITNESS WHEREOF, the Employer has adopted this Plan as of the year and
date first written above, but actually on the date set forth below.
STEEL TECHNOLOGIES INC.
By: /s/ Bradford T. Ray
Title: Chief Executive Officer
Date: July 29, 2004
10
EXHIBIT 13
2004 ANNUAL REPORT TO SHAREHOLDERS
Steel Technologies Inc.
Selected Financial Data
(In thousands, except per share results)
Years Ended September 30
------------------------
INCOME STATEMENT DATA 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------
Sales $786,852 $512,704 $475,398 $436,655 $469,632
Cost of goods sold 695,684 467,780 415,763 388,363 418,680
Gross profit 91,168 44,924 59,635 48,292 50,952
Selling, general and
administrative expenses 34,347 28,153 29,664 29,382 28,133
Equity in net income (loss) of
unconsolidated affiliates(1) 2,852 1,058 1,540 (6,832) 898
Operating income (2) 59,673 17,829 31,511 12,078 23,717
Income before income taxes 55,612 13,292 25,465 5,497 16,177
Net income 35,206 9,152 15,794 764 10,212
Diluted earnings per common share $ 3.05 $ 0.92 $ 1.60 $ 0.07 $ 0.94
Diluted weighted average number
of common shares outstanding 11,533 9,899 9,886 10,308 10,857
Basic earnings per common share $ 3.12 $ 0.94 $ 1.62 $ 0.07 $ 0.94
Basic weighted average number of
common shares outstanding 11,284 9,748 9,762 10,267 10,818
Cash dividends per common share $ 0.20 $ 0.20 $ 0.16 $ 0.12 $ 0.12
September 30
--------------------------------------------
BALANCE SHEET DATA 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------
Working capital $200,371 $101,986 $ 82,363 $ 80,427 $ 97,428
Total assets 463,006 313,175 305,912 289,103 315,389
Long-term debt 114,000 94,680 74,900 89,110 115,394
Shareholders' equity 218,249 137,941 131,730 124,985 127,032
Years Ended September 30
------------------------
OTHER DATA 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------
Capital expenditures, including
acquisitions and investments in
and advances to unconsolidated
affiliates $17,255 $ 26,462 $ 7,128 $ 11,033 $ 32,010
Shareholders' equity per common
share 17.05 14.13 13.63 12.23 12.14
Depreciation and amortization 14,889 13,878 15,108 15,351 13,929
(1) 2001 includes $7,500 impairment charge
(2) 2002, 2001 and 2000 includes goodwill amortization of $733, $731 and $623,
respectively
1
Steel Technologies Inc.
Selected Quarterly Financial Data
(In thousands, except per share results)
Fiscal Year 2004 First Second Third Fourth
- ------------------------------------------------------------------------
Sales $130,789 $184,842 $232,041 $239,180
Gross profit 10,777 19,576 26,409 34,406
Net income 2,398 6,902 10,537 15,369
Diluted earnings per common share $ 0.24 $ 0.68 $ 0.81 $ 1.18
Basic earnings per common share $ 0.25 $ 0.70 $ 0.83 $ 1.20
Fiscal Year 2003 First Second Third Fourth
- ------------------------------------------------------------------------
Sales $126,009 $130,140 $129,603 $126,952
Gross profit 13,770 11,161 9,235 10,758
Net income 3,790 1,992 972 2,398
Diluted earnings per common share $ 0.38 $ 0.20 $ 0.10 $ 0.24
Basic earnings per common share $ 0.39 $ 0.20 $ 0.10 $ 0.25
Market Price and Dividend Information:
The Company's common stock trades on The Nasdaq Stock Market under the symbol
STTX. At December 3, 2004, there were approximately 403 shareholders of record.
The Company's current dividend policy provides for semiannual payments of cash
dividends. The following table shows cash dividends and high and low prices for
the common stock for each quarter of fiscal 2004 and 2003. Nasdaq National
Market System quotations are based on actual transactions.
Stock Price
---------------------------------------------
Fiscal Year 2004 High Low Close Dividends
- --------------------------------------------------------------------------------
First Quarter $19.44 $12.20 $17.69 $ 0.10
Second Quarter $20.93 $15.51 $19.32
Third Quarter $24.80 $18.85 $22.08 $ 0.10
Fourth Quarter $26.61 $19.38 $25.62
Stock Price
---------------------------------------------
Fiscal Year 2003 High Low Close Dividends
- --------------------------------------------------------------------------------
First Quarter $23.25 $15.01 $16.96 $ 0.10
Second Quarter $19.45 $ 8.50 $ 8.96
Third Quarter $11.50 $ 8.75 $10.11 $ 0.10
Fourth Quarter $13.00 $ 9.53 $12.47
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; risk of
business interruptions affecting automotive manufacturers; competitive factors
such as pricing and availability of steel; reliance on key customers; and
potential equipment malfunctions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. We undertake no obligation to republish revised forward-looking
statements to reflect the occurrence of unanticipated events or circumstances
after the date hereof. Unless the context otherwise requires, references to
"we", "us" or "our" refer collectively to Steel Technologies Inc. and its
subsidiaries.
Application of Critical Accounting Policies
- -------------------------------------------
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results could differ from these estimates under different assumptions and
conditions. On an ongoing basis, we monitor and evaluate our estimates and
assumptions.
A summary of significant accounting policies used in the preparation of the
consolidated financial statements is described in Note 1 of the Notes to
Consolidated Financial Statements.
Our most critical accounting policies include the valuation of accounts
receivable, which impacts selling, general and administrative expense, and the
assessment of recoverability of goodwill and long-lived assets. Management
reviews the estimates, including, but not limited to, the allowance for doubtful
accounts on a regular basis and makes adjustments based on historical
experience, current market conditions and future expectations. The reviews are
performed regularly and adjustments are made as required by currently available
information. We believe these estimated are reasonable, but actual results could
differ from these estimates.
Allowance for Doubtful Accounts Receivable
- ------------------------------------------
Our accounts receivable represent those amounts which have been billed to our
customers but not yet collected. An allowance for doubtful accounts is
maintained for estimated losses resulting from the inability of our 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, sales, recoveries and
credit losses, the monitoring of portfolio credit quality, and current and
projected economic and market conditions. If the financial condition of our
customers were to deteriorate, resulting in an impairment of the ability to make
payments beyond previously established terms, additional allowances may be
required. Uncollectible accounts receivable are written off against the
allowance for doubtful accounts receivable when management determines that the
probability of payment is remote and collections efforts have ceased.
Long-Lived Assets
- -----------------
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives in proportion to the economic value consumed. We
review the carrying value of our 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
3
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 estimates of fair value could
affect the valuations.
Goodwill is reviewed annually, or sooner if indicators of impairment exist, for
impairment using the present value technique to determine the estimated fair
value of goodwill associated with each reporting entity. If the goodwill is
indicated as being impaired (the present value of cash flows (fair value) of the
reporting unit is less than the carrying amount), the fair value of the
reporting unit would then be allocated to our assets and liabilities in a manner
similar to the purchase price allocation in order to determine the implied fair
value of the reporting unit goodwill. This implied fair value of the reporting
unit goodwill would then be compared with the carrying amount of the reporting
unit goodwill and, if it were less, we would then recognize an impairment loss.
Considerable management judgment is necessary to assess impairment and estimate
fair value. The projection of future cash flows for the goodwill impairment
analysis requires significant judgment and estimates with respect to future
revenues related to the assets and the future cash outlays related to those
revenues. Actual revenues and related cash flows or changes in anticipated
revenues and related cash flows could result in changes in the assessment and
result in an impairment charge. The assumptions used in our evaluations, such as
forecasted growth rates, cost of capital, tax rates and residual values are
consistent with our internal projections and operating plans. The use of
different assumptions, including cash flows and discount rates, could increase
or decrease the related impairment charge.
Overview
- --------
We are one of the largest independent flat-rolled steel processors in North
America. Our North American platform of 20 facilities, including our
unconsolidated affiliates, is strategically positioned in the steel producing
and consuming markets throughout the United States and Mexico. We bring value to
our customers through precision steel processing as well as supply chain
management, quality control and technical support. We utilize the most advanced
equipment to produce high-quality steel products and specialize in meeting exact
specifications for customers in a variety of industries and end use markets
including automotive, lawn and garden, appliance and rail car industries. Our
broad geographic coverage allows us to provide our customers with efficient
just-in-time delivery.
We focus our sales and marketing strategies to more fully leverage our North
American platform of value added steel processing facilities. We have been
successful in growing our volume across all operations and have gained
meaningful market growth, both with existing and new customers across a wide
range of end use markets. Our broad capabilities and geographic presence offers
distinct competitive advantages to customers that have multi-plant operations
throughout the United States, Canada and Mexico. This has allowed us to expand
with regional and large national accounts.
Sales increased 53% to a record $786,852,000 in fiscal 2004 from $512,704,000 in
fiscal 2003 and net income increased to $35,206,000 or $3.05 per diluted share
in fiscal 2004 from $9,152,000 or $0.92 per diluted share in fiscal 2003 on
approximately 17% more weighted average diluted shares outstanding. In fiscal
2004, our tons sold of company-owned steel products increased 31% over fiscal
2003 to a record 1,248,000 tons. In fiscal 2004, we worked through market
conditions that were unlike any we have experienced in the past. We worked
closely with our customers through very tight supply conditions and an
unprecedented pricing environment. We anticipate continued volume growth of
approximately 10% to 15% for the first quarter of fiscal 2005. With our recent
investments we are well positioned to manage these higher volumes.
Our largest unconsolidated affiliate, Mi-Tech Steel, Inc. (Mi-Tech Steel),
experienced 47% growth in revenue in fiscal 2004 compared to fiscal 2003.
Mi-Tech Steel is well positioned with their network of facilities to grow with
transplant automotive customers and other large national accounts.
4
Our gross profit margin was 11.6% in fiscal 2004 compared to 8.8% in fiscal
2003. Our gross profit margin improved due to higher sales levels primarily
related to our market growth and to a lesser extent our increases in selling
prices in the latter half of the year to offset increased raw material costs.
During 2004, our steel suppliers were impacted by the shortage of raw materials
resulting in unprecedented increases affecting the cost to steel producers on
scrap, coke, iron ore and energy. As a result, the North American steel
producers implemented temporary raw material price increases to offset these
costs until conditions subside. We are currently subject to raw material price
increases from our suppliers. We intend to continue to pass on these price
increases to our customers. As a result we anticipate continued selling price
increases in fiscal 2005. To the extent we are unable to continue to pass on
these price increases, the profitability of our business could be adversely
affected.
As a result of a weaker U.S. dollar, increasing demand, the consolidation of the
steel producing industry and continued shortages of raw materials, our raw
material costs increased in fiscal 2004. We remain diligent and focused on our
supplier relations and in securing material to support our customer
requirements. As supply conditions may remain tight in the foreseeable future,
we have aligned our business with the most viable North American producer base
and expect to maintain adequate supply to support our valued customers and
projected growth.
During fiscal 2004 we have enhanced our capital structure in three ways. First,
we successfully completed a secondary public stock offering during our second
fiscal quarter of 2004. We raised approximately $47,322,000 which was used to
reduce the debt outstanding on our unsecured line of credit facility. Next, we
entered into a five year, $135,000,000 unsecured revolving credit facility in
September 2004 which may be expanded to $200,000,000 under certain
circumstances. Finally, in October 2004, we issued $50,000,000 in unsecured
senior notes with an average term of 9.4 years and a blended interest rate of
5.67%. This financial structure allows us to continue to implement strategic
growth initiatives, through additional investments in current operations, future
potential acquisitions and existing affiliates.
Financial Highlights
--------------------
(in thousands except per share data, other data and percentages)
----------------------------------------------------------------
For the Year Ended September 30
2004 2003
--------------- ------------------
% of % of %
(Unaudited) Actual Sales Actual Sales Change
- --------------------------------- -------- ------- -------- --------- --------
Sales $786,852 100.0% $512,704 100.0% 53%
Gross profit 91,168 11.6 44,924 8.8 103
Selling, general and
administrative expenses 34,347 4.4 28,153 5.5 22
Equity in net income of
unconsolidated affiliates 2,852 0.4 1,058 0.2 170
Operating income 59,673 7.6 17,829 3.5 235
Interest expense, net 4,029 0.5 4,906 0.9 (18)
Net income 35,206 4.5 9,152 1.8 285
Diluted earnings per common share $3.05 $0.92 232
Cash dividends per common share 0.20 0.20 -
Other data
- ----------
Average days sales outstanding 56.5 52.4 8
Inventory turnover 3.9 5.5 (29)
Return on equity 16.1% 6.6% 144
5
RESULTS OF OPERATIONS - FISCAL 2004 COMPARED TO FISCAL 2003
Sales
- -----
We posted net sales of $786,852,000 for the fiscal year ended September 30,
2004, an increase of 53% from sales of $512,704,000 for the fiscal year ended
September 30, 2003. Tons shipped of company-owned steel products in the fiscal
2004 increased approximately 31% to 1,248,000 tons compared to fiscal 2003 as a
result of continued market growth with large national accounts and improved
economic conditions. The average selling price of company-owned steel products
increased approximately 18% for fiscal 2004 as compared to the previous year.
Gross profit
- ------------
In fiscal 2004 our gross profit margin was 11.6% compared to 8.8% for fiscal
2003. Cost of goods sold increased 48.7% in fiscal 2004 compared to fiscal 2003.
Cost of materials sold increased $210,218,000 due to higher sales volume and
increased raw material costs. The remaining increase in cost of goods sold of
$17,686,000 was primarily a result of increased labor costs and related fringe
benefits and increased delivery costs due to higher sales volume.
Our gross profit margin improved somewhat from an escalating price environment
due to rising raw material costs. We expect average raw material costs in the
first quarter of fiscal 2005 to exceed average raw material costs of fiscal 2004
as a result of steel supply shortages, steel industry consolidation and higher
raw material price increases that were implemented by our suppliers. We intend
to continue to pass on these price increases to our customers to mitigate the
impact on our gross profit margin. If we are unable to continue to pass through
future price increases to our customers, our gross margins will decrease.
However, we may also be able to offset rising material costs and positively
impact gross profit by achieving production cost efficiencies and product mix
improvements.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative costs for fiscal 2004 were $34,347,000
compared to $28,153,000 for fiscal 2003, an increase of $6,194,000. The increase
is primarily attributable to an increase in company wide bonus plan expenses of
approximately $4,266,000 which are tied to company profits, higher selling and
travel expenses of $1,846,000 to increase our market coverage, an increase in
bad debt expense of $436,000 attributable to higher sales levels and an increase
of $386,000 in remaining general expenses. The increase was partially offset by
cost reductions achieved in 2004 in the amount of $740,000 from a combined
non-recurring state payroll tax incentive and a reduction of property tax
expenses as a result of receiving an assessment at amounts significantly lower
than estimated.
Selling, general and administrative costs were 4.4% and 5.5% of sales in 2004
and 2003 respectively. We continue to actively manage the level at which
selling, general and administrative expenses are added to our cost structure.
Equity in net income of unconsolidated affiliates
- -------------------------------------------------
Our share of the income of our unconsolidated affiliates increased to $2,852,000
for fiscal 2004 compared to $1,058,000 for fiscal 2003. Our largest
unconsolidated affiliate, Mi-Tech Steel, experienced 47% sales growth during
fiscal 2004 as compared to fiscal 2003. The continued ramping up of the Nissan
Motor Co., Ltd.'s new Canton, Mississippi operation contributed positively to
Mi-Tech Steel's earnings. Mi-Tech Steel's newest facility located near the
Nissan Mississippi operation has completed a $4,000,000 follow-on expansion to
handle automotive exposed processing to service Nissan and other businesses in
the southern region of the U.S.
6
Interest expense
- ----------------
Net interest expense for fiscal 2004 decreased to $4,029,000 from $4,906,000 for
fiscal 2003. The decrease is primarily attributable to lower interest rates on
variable rate debt during fiscal 2004 as compared to fiscal 2003 partially
offset by a $269,000 expense related to the early retirement of our private
placement note in June 2004.
Gain on disposals/writeoffs of property, plant and equipment
- ------------------------------------------------------------
In fiscal 2003, we recorded a $369,000 pre-tax gain on disposals/writeoffs of
property, plant and equipment primarily from the sale of our Elkton, Maryland
facility.
Income tax expense
- ------------------
For fiscal 2004 and 2003 our effective income tax rate was 36.7% and 31.1%,
respectively. During fiscal 2003, we recorded an income tax benefit of
approximately $294,000 attributable to state and foreign income tax
apportionment that were more favorable than originally estimated and recognized
a non-recurring state income tax benefit of approximately $200,000. These items
decreased the effective income tax by 3.8% in fiscal 2003.
RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002
Sales
- -----
We achieved sales of $512,704,000 in fiscal 2003, an increase of 37,306,000 or
8% from fiscal 2002 sales of $475,398,000. Tons shipped of company-owned steel
products in fiscal 2003 decreased approximately 3% compared to fiscal 2002 while
the average selling price of company-owned steel products for the year increased
approximately 11% from the previous year. In fiscal 2003, the average sales
price of company-owned steel products reflected pricing levels resulting from
price increases initiated in the fourth quarter of fiscal 2002. Accordingly, the
average sales price for the first nine months of fiscal 2003 was significantly
higher compared to the corresponding nine month period in the prior year. During
the fourth quarter of fiscal 2003, the average sales price began to trend down
compared to the previous year.
We focus significant resources on the automotive industry and generate a major
portion of business from selling manufacturing component parts to the automotive
industry. Year-to-date production levels in the North American automotive
industry over our 2003 fiscal year decreased 3% as compared to fiscal 2002,
which adversely impacted our sales. We attempt to increase market share
utilizing our network of resources by developing a substantial amount of new
business with both existing and new customers.
Gross profit
- ------------
Our gross profit margin was 8.8% in 2003 compared to 12.5% in 2002. Cost of
goods sold increased 13% in fiscal 2003 compared to fiscal 2002. Higher priced
inventory acquired in the first half of fiscal 2003, which was not fully offset
by price increases to customers, adversely impacted our gross profit margin.
Lower sales volume and a 17% increase in the average cost of materials sold
contributed to an increase of $50,297,000 in cost of goods sold. The remaining
increase in cost of goods sold of $1,720,000 is attributable to lower volume
spread over certain fixed manufacturing costs. The steel tariffs implemented
during 2002 may have had the effect of reducing foreign supply. However, we
believe that a weaker U.S. dollar, shipping costs and domestic steel industry
consolidation have had, and may have, more of an impact on the pricing and
availability of steel inventory in the U.S. than tariffs. A weaker U.S. dollar
made it difficult for many foreign steel producers to profitably sell steel
products in the U. S., which resulted in a decreased supply of steel, increasing
U.S. steel prices. Also, escalating overseas freight costs made it more
expensive for foreign producers to ship steel products into the U.S. Further,
domestic steel consolidations resulted in a shutdown of equipment at a number of
mills which reduced the availability of steel products, increasing U.S. steel
prices.
7
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative costs decreased approximately 5.1% or
$1,511,000 in fiscal 2003 primarily as a result of the reduction of goodwill
amortization of $733,000 as a result of adopting FAS 142 (see Note 6 of the
Company's Notes to Consolidated Financial Statements) and reduction in
management bonuses of approximately $800,000 which are tied to our profits,
offset by an increase in miscellaneous expenses of $22,000. Selling, general and
administrative costs were 5.5% and 6.2% of sales in 2003 and 2002, respectively.
Equity in net income of unconsolidated affiliates
- -------------------------------------------------
Our share of income of our unconsolidated affiliates was $1,058,000 in fiscal
2003 and $1,540,000 in fiscal 2002. Our share of Mi-Tech Steel's earnings
declined as a result of higher priced inventory which was not fully offset by
price increases to customers, lower operating levels and an increase of
approximately $150,000 in pre-operation expenses incurred in connection with our
Canton, Mississippi and Decatur, Alabama steel processing operations.
Interest expense
- ----------------
Net interest expense decreased to $4,906,000 in fiscal 2003 from $5,232,000 in
fiscal 2002. The decrease was primarily the result of lower interest rates on
our variable rate debt in fiscal 2003 as compared to fiscal 2002 partially
offset by higher average borrowings during fiscal 2003.
Gain on disposals/writeoffs of property, plant and equipment
- ------------------------------------------------------------
In fiscal 2003, we recorded a $369,000 pre-tax gain on disposals/writeoffs of
property, plant and equipment primarily from the sale of our Elkton, Maryland
facility. In fiscal 2002, we recorded a loss on disposals/writeoffs of property,
plant and equipment of $814,000 as a result of equipment improvements and
upgrades.
Income tax expense
- ------------------
Our effective income tax rate was approximately 31.1% in fiscal 2003. During
fiscal 2003, we recorded an income tax benefit of approximately $294,000
attributable to state and foreign income tax apportionment that were more
favorable than originally estimated and recognized a non-recurring state income
tax benefit of approximately $200,000. These items decreased the effective
income tax by 3.8% in fiscal 2003.
Our effective income tax rate was approximately 38.0% in fiscal 2002.
Non-deductible goodwill amortization expense of approximately $733,000 recorded
during fiscal 2002 (see Note 6 of the Company's Notes to Consolidated Financial
Statements) increased the effective tax rate by 1.1% in fiscal 2002.
8
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had $200,371,000 of working capital, maintained a
current ratio of 2.79:1 and had total debt at 34% of total capitalization.
Generally, in periods of economic expansion and increased demand for our
products, our working capital requirements increase. Conversely, in periods of
economic contraction and reduced demand for our products, our working capital
requirements decrease.
Average days sales outstanding to customers was 57 days as of September 30, 2004
compared to 52 as of September 30, 2003. We expect average days sales
outstanding to increase to 60 days during the first quarter of fiscal 2005.
Average days inventory was 92 days as of September 30, 2004 compared to 69 days
as of September 30, 2003. We expect average days inventory to decrease to 65
days during the first fiscal quarter of 2005.
Our average payment days to suppliers was 47 days as of September 30, 2004
compared to 38 days as of September 30, 2003. We expect average payment days to
suppliers to decrease to 45 days during the first fiscal quarter of 2005.
During fiscal 2004, cash used in operations was $43,028,000, primarily working
capital related. We increased inventories by $94,769,000 and accounts receivable
by $49,538,000 to support our sales growth, which was partially offset by an
increase in accounts payable of $41,638,000. This working capital increase was
financed primarily through borrowings on our line of credit facility.
Capital expenditures for 2004 totaled $17,255,000 primarily for various capacity
improvement projects. We continue to expand production capacity to serve the
growing needs of customers and invest in automation to improve productivity and
make our operations more efficient. For fiscal 2005, the capital additions to
all facilities are expected to approximate $15,000,000.
We maintain an equity investment of approximately $25,744,000 in our 90%-owned
Mexican subsidiary. Additional investments in our Mexican operations, if
required, would be financed with available funds from our bank line of credit.
The translation of the financial statements of our Mexican subsidiary from local
currencies to the U.S. dollar subjects us 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. We do not consider
our exposure to exchange rate risks to be material and consider the Mexican peso
a relatively stable currency. We do not typically manage our related foreign
currency exchange rate risk through the use of financial instruments. Foreign
currency transaction gains included in sales were $468,000, $353,000 and
$371,000 during 2004, 2003 and 2002, respectively.
We maintain a 50% equity investment in Mi-Tech Steel and a 49% equity investment
in Ferrolux Metals Co., LLC. As part of our strategy to develop the operations
of our unconsolidated affiliates, we loaned Mi-Tech Steel $2,000,000 on
September 30, 2003. The loan is subordinate to all existing Mi-Tech Steel loans
and matures September 30, 2006. Interest is paid at maturity at a LIBOR based
interest rate.
Additional equity contributions to our unconsolidated affiliates are not
required and we do not guarantee any obligations of our unconsolidated
affiliates. While distributions from Mi-Tech Steel are permitted, if authorized
by Mi-Tech Steel's board of directors, such distributions are restricted by one
of Mi-Tech Steel's loan agreements. Such restrictions limit distributions to 15%
of Mi-Tech Steel's net income in any fiscal year. Distributions from Mi-Tech
Steel are not, and are not expected to be, material sources of liquidity for us.
Mi-Tech Steel's liquidity needs are met primarily by their cash flows from
operating activities and existing line of credit facility. Cash flows from
operations and available borrowing capabilities are expected to meet Mi-Tech
Steel's future needs.
9
On March 31, 2004, we completed a public stock offering of 2,905,000 shares of
common stock at a price of $17.25. We realized net proceeds of approximately
$47,322,000 from this offering and used these proceeds to reduce borrowings
under our line of credit facility. The completion of this offering has allowed
us to continue to implement our strategic growth initiatives.
On June 1, 2004, we prepaid the entire principal balance of $5,680,000
outstanding on the private placement note which required a final principal
payment in March 2005. With this prepayment we were required to pay a make-whole
payment of $269,000 which is included in interest expense.
Borrowings and repayments under our line of credit agreement are initiated as
needed to fund our operating and investing activities described above. During
fiscal 2004, we borrowed $88,000,000 to finance our working capital needs and
repaid $74,400,000 on our indebtedness. Net proceeds of $47,322,000 realized
from the completion of our public stock offering were used to reduce borrowings
under our line of credit facility.
On September 2, 2004, we entered into a $135,000,000 unsecured revolving credit
facility with our existing banking group which matures in September 2009. The
new credit facility replaces a $151,000,000 unsecured credit facility that was
scheduled to mature in August 2005. Our existing banking group can elect to
expand the availability to $200,000,000 at our request under certain
circumstances. Interest on the facility is paid with various variable options on
the interest rate, none of which are greater than the bank's prime. We have
primarily elected to use the LIBOR based interest rate and to a lesser extent
the prime interest rate on our outstanding borrowings under the agreement. At
September 30, 2004, there was $114,000,000 outstanding on the credit facility.
Subsequent to our fiscal year end, on October 21, 2004, we issued $50,000,000 in
unsecured senior notes which have an average term of 9.4 years and a blended
interest rate of 5.67%. The notes are comprised of $10,000,000 of 5.33% Series A
Senior Notes due October 21, 2011 and $40,000,000 of 5.75% Series B Senior Notes
due October 21, 2014. The proceeds from the notes were used to reduce borrowings
outstanding on our revolving line of credit facility.
Provisions contained in our revolving credit facility and unsecured senior notes
require us to maintain specified levels of net worth, maintain certain financial
ratios and limit capital expenditures, operating leases, capital leases and
additional debt. We are in compliance with our loan covenants, and none of these
covenants would restrict the completion of currently planned capital
expenditures.
Cash Requirements, Contractual Obligations and Contingencies
- ------------------------------------------------------------
Our liquidity needs are met primarily by our cash flows from operating
activities and our line of credit facility. Operating cash flows are somewhat
influenced by cyclicality of demand in the steel industry, especially in the
automotive market. We anticipate borrowing on our existing line of credit
facility to support our continued growth and to meet our working capital needs.
Cash flows from operations and available borrowing capabilities are expected to
meet our future needs.
We have entered into operating leases to meet the needs of our facilities. The
following table summarizes the annual payments of outstanding debt and
non-cancelable operating leases required as of September 30, 2004.
10
Payments Due By Period (in thousands of dollars)
------------------------------------------------
2005 2006 2007 2008 2009 after 2009 Total
---- ---- ---- ---- ---- ---------- -----
Debt $ - $ - $ - $ - $114,000 - $114,000
Operating Leases $1,096 $ 1,035 $ 950 $ 776 $ 530 $ 166 $ 4,553
We have entered into an agreements to purchase electricity through February 2005
to meet our minimum needs for our Canton, Michigan facility. However, there is
no minimum energy consumption required during the term of the agreements.
At this time, we have no other known material obligations, commitments or
demands that must be met beyond the next twelve months.
We believe all manufacturing facilities are in compliance with applicable
federal and state environmental regulations. We are not presently aware of any
fact or circumstance, which would require the expenditure of material amounts
for environmental compliance.
Related Party Transactions
- --------------------------
We have various transactions with Mi-Tech Steel (see Note 5 of our Notes to
Consolidated Financial Statements).
We sell scrap steel products to a company owned by Stuart N. Ray, an officer and
director of Steel Technologies (see Note 16 of our Notes to Consolidated
Financial Statements). Management reports these transactions to the Audit
Committee of the Board of Directors as frequently as requested by the Committee,
but at least annually. Most recently, in April 2004, the Audit Committee
reviewed and approved these transactions. We have the ability to continue or
cease selling scrap steel to this company at any time.
During 2002, we repurchased 600,000 shares of our common stock from our founding
chairman, Merwin J. Ray, for $6,000,000.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (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, as amended by FASB
Staff Position 46-6, "Effective Date of FIN 46," are effective immediately for
VIEs created after January 31, 2003 and no later than December 31, 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. We
have determined that we do not have any VIEs and the adoption of FIN 46 did not
have an impact on our financial position, results of operations or cash flows.
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment,
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that
11
may be settled by the issuance of such equity instruments. The proposed
Statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25 and generally would require instead that
such transactions be accounted for using a fair-value-based method. If adopted
in its current form, the proposed Statement would be effective for any interim
or annual period beginning after June 15, 2005.
On October 22, 2004 the American Jobs Creation Act of 2004 was passed. This law
provides a phased in deduction for a percentage of qualified income from
domestic production activities. We will assess the impact of this change in tax
law as further authoritative guidance becomes available.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43." SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and spoilage, and requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of SFAS No.
151 are effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, with earlier application permitted. We do not expect the
adoption of SFAS No. 151 to have a material impact on our financial position,
results of operation or cash flows.
12
STEEL TECHNOLOGIES INC.
Consolidated Balance Sheets
(In thousands, except shares)
September 30
--------------------------
2004 2003
- ----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,273 $ 2,758
Trade accounts receivable, less
allowance for doubtful accounts:
$3,318 in 2004 and $1,808 in 2003.......... 123,546 74,595
Inventories.................................. 178,490 84,301
Deferred income taxes........................ 2,471 1,198
Prepaid expenses and other assets............ 5,629 4,628
--------- ---------
Total current assets .................... 312,409 167,480
--------- ---------
Property, plant and equipment (at cost), net of
accumulated depreciation 108,593 106,615
--------- ---------
Investments in and advances to unconsolidated
affiliates.................................. 22,312 19,604
Goodwill....................................... 18,148 18,148
Other assets .................................. 1,544 1,328
--------- ---------
$ 463,006 313,175
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 90,859 $ 49,609
Accrued liabilities ........................ 14,901 10,165
Income taxes payable ....................... 6,278 -
Long-term debt due within one year ......... - 5,720
--------- ---------
Total current liabilities ............... 112,038 65,494
Long-term debt ................................ 114,000 94,680
Deferred income taxes ......................... 18,295 14,872
Other long-term liabilities 424 188
--------- ---------
Total liabilities ........................ 244,757 175,234
--------- ---------
Commitments and contingencies .................
Shareholders' equity:
Preferred stock, no par value;
500,000 shares authorized shares;
none issued or outstanding ............... - -
Common stock, no par value; 50,000,000 shares
authorized; issued and outstanding shares:
12,804,073 in 2004 and 9,765,409 in 2003 . 69,466 20,371
Treasury stock at cost: 2,626,742 shares in
2004 and 2,573,953 shares in 2003 ........ (24,238) (23,169)
Additional paid-in capital ................. 5,170 5,098
Retained earnings .......................... 174,025 141,073
Accumulated other comprehensive loss ....... (6,174) (5,432)
--------- ---------
Total shareholders' equity ............... 218,249 137,941
--------- ---------
$ 463,006 $ 313,175
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
13
STEEL TECHNOLOGIES INC.
Consolidated Statements of Income
(In thousands, except per share results)
For the Years Ended September 30
--------------------------------
2004 2003 2002
- --------------------------------------------------------------------------
Sales .................................. $786,852 $512,704 $475,398
Cost of goods sold ..................... 695,684 467,780 415,763
-------- -------- --------
Gross profit ......................... 91,168 44,924 59,635
Selling, general and administrative
expenses ............................. 34,347 28,153 29,664
Equity in net income of
unconsolidated affiliates ............ 2,852 1,058 1,540
-------- -------- --------
Operating income ..................... 59,673 17,829 31,511
Interest expense, net................... 4,029 4,906 5,232
Loss (gain) on disposals/writeoffs of
property, plant and equipment ........ 32 (369) 814
-------- -------- --------
Income before income taxes ........... 55,612 13,292 25,465
Provision for income taxes ............. 20,406 4,140 9,671
-------- -------- --------
Net income ........................... $ 35,206 $ 9,152 $ 15,794
======== ======== ========
Weighted average number of common shares
outstanding-diluted .................. 11,533 9,899 9,886
-------- -------- --------
Diluted earnings per common share ...... $ 3.05 $ 0.92 $ 1.60
-------- -------- --------
Weighted average number of common shares
outstanding-basic .................... 11,284 9,748 9,762
-------- -------- --------
Basic earnings per common share ........ $ 3.12 $ 0.94 $ 1.62
-------- -------- --------
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended September 30
--------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------
Net income ............................. $ 35,206 $ 9,152 $ 15,794
Foreign currency translation
adjustment ......................... (902) (2,201) (1,714)
Change in unrealized loss on cash flow
hedges, net of tax expense (benefit)
of $92 in 2004, $287 in 2003 and
($153) in 2002 ..................... 160 460 (256)
-------- -------- -------
Comprehensive income ................... $ 34,464 $ 7,411 $ 13,824
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
14
STEEL TECHNOLOGIES INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except per share amounts)
For the Years Ended September 30, 2004, 2003 and 2002
-----------------------------------------------------------------------------------------------
Common Stock Treasury Stock Accumulated
------------------ -------------------- Additional Other
Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 2001 ...... 10,217 $ 17,348 1,823 $(15,203) $ 4,909 $119,652 $ (1,721) $124,985
Net income ........................ 15,794 15,794
Net issuance of common stock under
incentive stock option plan..... 123 1,385 19 (295) 1,090
Repurchase of common stock under
stock repurchase program........ (677) 677 $ (6,592) (6,592)
Cash dividends on common stock
($.16 per share)................. (1,577) (1,577)
Foreign currency translation
adjustment ...................... (1,714) (1,714)
Change in unrealized loss on cash
flow hedges, net of tax ......... (256) (256)
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2002 ...... 9,663 $ 18,733 2,519 $(22,090) $ 4,909 $133,869 $ (3,691) $131,730
Net income ........................ 9,152 9,152
Net issuance of common stock under
incentive stock option plan..... 102 1,638 55 (1,079) 559
Tax effect of options exercised -
disqualifying dispositions...... 189 189
Cash dividends on common stock
($.20 per share)................. (1,948) (1,948)
Foreign currency translation
adjustment ...................... (2,201) (2,201)
Change in unrealized loss on cash
flow hedges, net of tax ......... 460 460
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2003 ...... 9,765 20,371 2,574 (23,169) 5,098 141,073 (5,432) 137,941
Net income ........................ 35,206 35,206
Net issuance of common stock under
public offering................ 2,905 47,322 47,322
Net issuance of common stock under
incentive stock option plan..... 134 1,773 53 (1,069) 704
Tax effect of options exercised -
disqualifying dispositions...... 72 72
Cash dividends on common stock
($.20 per share)................. (2,254) (2,254)
Foreign currency translation
adjustment ...................... (902) (902)
Change in unrealized loss on cash
flow hedges, net of tax ......... 160 160
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2004 ...... 12,804 $ 69,466 2,627 $(24,238) $ 5,170 $174,025 $ (6,174) $218,249
======= ======== ===== ======== ======== ========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
15
STEEL TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended September 30
--------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................ $ 35,206 $ 9,152 $ 15,794
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation .......................... 14,889 13,878 14,375
Amortization .......................... - - 733
Deferred income taxes ................. 2,241 1,315 1,252
Equity in net income of
unconsolidated affiliates............ (2,852) (1,058) (1,540)
Loss (gain) on disposals/writeoffs of
property, plant and equipment ....... 32 (369) 814
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable ......... (49,538) (948) (8,891)
Inventories ....................... (94,769) 3,608 (21,518)
Prepaid expenses and other assets . (2,053) (1,805) (1,094)
Accounts payable .................. 41,638 (15,193) 22,779
Accrued liabilities ............... 12,178 (2,478) 3,989
-------- -------- --------
Net cash (used in) provided by operating
activities ................................ (43,028) 6,102 26,693
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment. (17,255) (14,637) (7,132)
Proceeds from sale of property,
plant and equipment ..................... - 2,603 865
Acquisition................................ - (9,825) -
Distributions from unconsolidated
affiliates............................... 211 45 73
Investment in and advances to
unconsolidated affiliates................ - (2,000) 4
-------- -------- --------
Net cash used in investing activities ....... (17,044) (23,814) (6,190)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .............. 88,000 58,500 24,000
Principal payments on long-term debt ...... (74,400) (38,759) (38,735)
Cash dividends on common stock ............ (2,254) (1,948) (1,577)
Repurchase of common stock ................ - - (6,592)
Net issuance of common stock .............. 48,026 559 1,090
Other ...................................... 175 175 175
-------- -------- --------
Net cash provided by (used in) financing
activities ................................ 59,547 18,527 (21,639)
-------- -------- --------
Effect of exchange rate changes on cash ..... 40 (184) (117)
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents .......................... (485) 631 (1,253)
Cash and cash equivalents, beginning of year. 2,758 2,127 3,380
-------- -------- --------
Cash and cash equivalents, end of year ...... $ 2,273 $ 2,758 $ 2,127
======== ======== ========
Supplemental Cash Flow Disclosures:
Cash payments for interest ................ $ 4,200 $ 4,878 $ 5,162
Cash payments for taxes ................... $ 10,941 $ 5,636 $ 6,219
Supplemental Schedule of Noncash Investing and Financing Activities:
Fair value of assets acquired.............. $ - $ 9,845 $ -
Liabilities assumed ......................... - 20 -
-------- -------- --------
Net cash paid ............................... $ - $ 9,825 $ -
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
16
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of the Business:
Steel Technologies Inc. is an intermediate steel processor engaged in the
business of processing flat rolled steel to specified thickness, width, temper
and finish requirements for customers' manufacturing processes. A majority of
its sales are to industrial customers in North America, manufacturing component
parts for use in the automotive industry. Steel Technologies Inc. operates in
one reportable segment.
Principles of Consolidation: The consolidated financial statements include the
accounts of Steel Technologies Inc. and its majority-owned subsidiaries (the
Company). The Company's investments in unconsolidated affiliates are accounted
for by the equity method based on the percentage of common ownership and
control. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents: Cash and cash equivalents include highly liquid
investments with an original maturity of three months or less. The carrying
value of cash equivalents approximates fair value due to the short-term maturity
of the securities.
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, sales,
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 beyond previously established terms, additional
allowances may be required. Uncollectible accounts receivable are written off
against the allowance for doubtful accounts receivable when management
determines that the probability of payment is remote and collections efforts
have ceased.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for all inventories.
Depreciation and Amortization: Depreciation is computed using the straight-line
method with the following estimated useful lives:
Buildings and improvements 10 - 25 years
Machinery and equipment 3 - 12 years
When properties are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts with any resulting gain
or loss reflected in results of operations. Maintenance and repairs are expensed
in the year incurred. The Company capitalizes interest costs as part of the cost
of constructing major facilities. Interest costs of $178,000, $167,000 and
$80,000 were capitalized in 2004, 2003 and 2002, respectively.
Long-Lived assets: We review the carrying value of our 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
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.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired through acquisitions accounted for using the purchase method of
accounting. Effective October 1, 2002, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets" and ceased amortization of goodwill (see Note 6).
17
In the event that facts and circumstances indicate that the carrying value of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. 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 discounted cash flow value is
required.
Revenue Recognition: The Company recognizes revenue for the sale of
Company-owned products when the customer takes title to goods shipped, risk of
loss passes to the customer, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. The Company recognizes revenue from toll processing services upon
shipment of goods. Sales returns and allowances are recorded as reductions to
sales and are provided for based on historical experience and current customer
activities.
Stock-Based Compensation: At September 30, 2004, the Company had stock-based
compensation plans which are described more fully in Note 13. As permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation" and amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure," 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 greater than or 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 impacted as follows (in thousands except
per share data):
For the Years Ended September 30
--------------------------------
(In thousands, except per share results 2004 2003 2002
----------------------------------------------------------------------------
Net income - as reported $35,206 $9,152 $15,794
Total stock-based employee compensation expense
(benefit) determined under fair value based
method for all awards, net of taxes 395 160 (10)
------- ------- -------
Net income - pro forma $34,811 $8,992 $15,804
======= ======= =======
Diluted net income per share - as reported $ 3.05 $ 0.92 $ 1.60
Diluted net income per share - pro forma $ 3.02 $ 0.91 $ 1.60
Basic net income per share - as reported $ 3.12 $ 0.94 $ 1.62
Basic net income per share - pro forma $ 3.08 $ 0.92 $ 1.62
Earnings Per Common Share: Earnings per share for all periods presented have
been calculated and presented in accordance with SFAS No. 128, "Earnings Per
Share." Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
Foreign Currency Translation: The Mexican subsidiary uses the peso as the
functional currency and the assets and liabilities of the Mexican subsidiary are
translated into U.S. dollars at the year-end rate of exchange, and revenues and
expenses are translated at average rates of exchange in effect during the
period. Resulting translation adjustments are reported as a component of
comprehensive income. Foreign currency transaction gains are included in sales
when incurred and were $468,000, $353,000 and $371,000 for the fiscal years
ending 2004, 2003 and 2002, respectively.
18
Comprehensive Loss: Accumulated other comprehensive loss consists of the
following:
September 30
------------------------------
(In thousands) 2004 2003
--------------------------------------------------------------------------
Cumulative translation adjustment $6,174 $5,272
Unrealized loss on cash flow hedges, net of tax - 160
------ ------
$6,174 $5,432
------ ------
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current year presentation with no effect on net income or shareholders'
equity.
2. ACQUISITIONS:
On March 7, 2003, the Company completed the purchase of certain assets from Cold
Metal Products, Inc. (Cold Metal Products) as approved by the U.S. Bankruptcy
Court in Youngstown, Ohio. The purchase price consisted of approximately
$9,825,000 and the assumption of approximately $20,000 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 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 the beginning of the
corresponding period.
Years Ended September 30
(In thousands except per share data) ------------------------
(Unaudited) 2003 2002
- --------------------------------------------------------------------
Sales $524,368 $512,867
Net income $ 9,039 $ 16,233
Diluted net income per share $ 0.91 $ 1.64
Basic net income per share $ 0.93 $ 1.66
This unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of future operating results.
3. INVENTORIES:
Inventories consist of:
September 30
------------------------
(In thousands) 2004 2003
----------------------------------------------------------------------------
Raw materials $ 132,570 $ 58,204
Finished goods and work in process 45,920 26,097
--------- ---------
$ 178,490 $ 84,301
========= =========
19
4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment and related
accumulated depreciation consist of the following:
September 30
------------------------
(In thousands) 2004 2003
----------------------------------------------------------------------------
Land and improvements $ 6,283 $ 5,953
Buildings and improvements 65,847 60,732
Machinery and equipment 151,641 141,304
Construction in progress 9,124 10,517
-------- --------
232,895 218,506
Less accumulated depreciation 124,302 111,891
-------- --------
$108,593 $106,615
======== ========
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
Mi-Tech Steel owns and operates four high-volume steel slitting facilities to
serve Japanese and domestic automotive and appliance parts manufacturers in the
United States. Summarized condensed financial information of Mi-Tech Steel, a
fifty percent owned company accounted for by the equity method follows:
September 30
BALANCE SHEET (In thousands) 2004 2003
------------------------------------------------------------------------
Assets:
Current assets $ 98,154 $ 54,247
Other assets 33,435 31,796
Liabilities:
Current liabilities $ 65,786 $ 31,610
Long-term liabilities 28,654 22,390
For the Years Ended September 30
---------------------------------------
INCOME STATEMENT (In thousands) 2004 2003 2002
---------------------------------------
Net Sales $209,972 $142,559 $141,323
Gross profit $ 15,672 $ 8,829 $ 10,372
Net Income $ 5,109 $ 1,581 $ 2,614
The Company's equity in undistributed net income of Mi-Tech Steel was $8,976,000
and $6,421,000 at September 30, 2004 and 2003, respectively. While distributions
from Mi-Tech Steel are permitted if authorized by Mi-Tech Steel's Board of
Directors, such distributions are restricted by one of Mi-Tech Steel's loan
agreements. Such restrictions limit distributions to 15% of Mi-Tech Steel's net
income in any fiscal year.
Pursuant to an agreement, the Company loaned Mi-Tech Steel $2,000,000 on
September 30, 2003. The loan is subordinate to all existing Mi-Tech Steel loans
and matures September 30, 2006. Interest is paid at maturity at a LIBOR based
interest rate, which was 3.59% at September 30, 2004.
Beginning in April 2003, Mi-Tech Steel is being reimbursed for operating costs
of its Decatur, Alabama facility by Steel Technologies Inc. and Mi-Tech Steel's
other owner. Under this arrangement the Company reimbursed Mi-Tech Steel
$1,140,000 and $400,000 during fiscal 2004 and 2003, respectively. Mi-Tech Steel
is pursuing alternatives to sell its pickling equipment in Decatur, which has a
carrying value of $2,364,000.
20
The Company has various other transactions with Mi-Tech Steel. The Company has
recorded sales of $1,960,000, $1,931,000 and $2,767,000 in 2004, 2003 and 2002,
respectively and accounts receivable of $612,000 and $53,000 as of September 30,
2004 and 2003, respectively for products and services sold at prevailing market
prices to Mi-Tech Steel. Included in operating income of the Company are
management fees and equity from the net income of Mi-Tech Steel totaling
$3,476,000, $1,531,000 and $2,003,000 in 2004, 2003 and 2002, respectively.
6. GOODWILL:
The Company adopted 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 annual
impairment test was performed during the fourth quarter of fiscal 2004 and no
impairments were indicated.
The following table adjusts reported net income and earnings per share for the
year ended September 30, 2002 to exclude amortization of goodwill.
September 30
------------
(In thousands except per share data) 2002
- ----------------------------------------------------------------
Net income as reported $15,794
Add back amortization of goodwill 733
-------
Adjusted net income $16,527
=======
Earnings per common share as reported - diluted $ 1.60
Add back amortization of goodwill 0.07
-------
Adjusted earnings per common share - diluted $ 1.67
=======
Earnings per common share as reported - basic $ 1.62
Add back amortization of goodwill 0.07
-------
Adjusted earnings per common share - basic $1.69
=======
7. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30
-----------------------------
(In thousands) 2004 2003
------------------------------------------------------------------------
Notes payable to bank, unsecured under
current line of credit; interest rates at
September 30, 2004 and 2003 ranged from
3.20% to 4.75% and 2.79% to 4.00%,
respectively $ 114,000 $ 89,000
Notes payable, unsecured, interest due
monthly at 8.52% - 11,400
--------- --------
114,000 100,400
Less amount due within one year - 5,720
--------- --------
$ 114,000 $ 94,680
========= ========
In September 2004, the Company entered into a $135,000,000 unsecured revolving
credit facility with its existing banking group which matures in September 2009.
The new credit facility replaces a $151,000,000 unsecured credit facility that
was scheduled to mature in August 2005. Under certain circumstances, the new
facility can be expanded to $200,000,000.
21
Interest on the facility is paid with various variable options on the interest
rate, none of which are greater than the bank's prime. The Company has elected
to use both the LIBOR based interest rate and the prime interest rate on its
outstanding borrowings under the agreement. At September 30, 2004, there was
$114,000,000 outstanding on this credit facility.
On June 1, 2004, the Company prepaid the remaining principal balance of
$5,680,000 outstanding on the private placement note which required a final
principal payment in March 2005. With this prepayment the Company was required
to pay a make-whole payment of $269,000 which is included in interest expense.
Subsequent to the Company's fiscal year end, on October 21, 2004, the Company
issued $50,000,000 in unsecured senior notes which have an average term of 9.4
years and a blended interest rate of 5.67%. The notes are comprised of
$10,000,000 of 5.33% Series A Senior Notes due October 21, 2011 and $40,000,000
of 5.75% Series B Senior Notes due October 21, 2014. The proceeds from the notes
were used to reduce borrowings outstanding on our revolving line of credit
facility.
Provisions contained in the Company's revolving credit facility and unsecured
senior notes require the Company to maintain specified levels of net worth,
maintain certain financial ratios and limit capital expenditures, operating
leases, capital leases and additional debt. The fair value of debt instruments
approximates the carrying value at September 30, 2004.
8. FINANCIAL INSTRUMENTS:
In order to mitigate a portion of the market risk on its variable rate debt, the
Company entered into two separate interest rate swap contracts with major
financial institutions on August 30, 2001. Under the terms of the first
contract, which matured in August 2003, the Company received a LIBOR based
variable interest rate and paid a fixed interest rate of 4.24% on a notional
amount of $15,000,000. Under the terms of the second contract, which matured in
February 2004, the Company received a LIBOR based variable interest rate and
paid a fixed interest rate of 4.48% on a notional amount of $15,000,000. The
variable interest rate paid on the contracts was determined based on LIBOR on
the last day of the applicable month, which was consistent with the variable
rate determination on the underlying debt. At September 30, 2004, the Company
has no interest rate swaps.
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended, establishes accounting and reporting standards requiring that every
derivative financial instrument be recorded on the balance sheet at its fair
value. SFAS No. 133 requires all derivatives be recognized as either assets or
liabilities in the balance sheet at their fair value, and sets forth the manner
in which gains and losses thereon are to be recorded. The treatment of such
gains or losses is dependent upon the type of exposure, if any, for which the
derivative is designated as a hedge. Gains and losses for qualifying hedges can
be deferred in accumulated other comprehensive loss and recognized in the income
statement along with the related results of the hedged item. SFAS No. 133
requires that the Company formally document, designate and assess the
effectiveness of such transactions in order to qualify for hedge accounting
treatment.
The Company designated its interest rate swap contracts as cash flow hedges of
anticipated interest payments under its variable rate line of credit agreement.
Gains and losses on these swaps that were recorded in accumulated other
comprehensive loss were reclassified into net income as interest expense, net in
the periods in which the related variable interest was paid. The Company
reclassified approximately $160,000 recorded in accumulated other comprehensive
loss into net income as interest expense, net during fiscal 2004.
9. SHAREHOLDERS' EQUITY:
In March 2004, the Company completed a public stock offering of 2,905,000 shares
of common stock at a price of $17.25. The Company realized net proceeds of
approximately $47,322,000 from this offering.
In April 1998, the Company adopted a shareholder rights plan by declaring a
dividend of one right for each share of Common Stock outstanding payable to
shareholders of record on May 14, 1998. Each right entitles shareholders to buy
22
one one-hundredth of a share of series A junior participating preferred stock
for $50 per share. The rights may be exercised only if a person or group
acquires 20% or more of the outstanding shares of common stock or announces a
tender offer or exchange offer that would result in ownership of 20% or more of
the common stock. The rights currently trade with the Company's common stock and
may be redeemed by the Board of Directors for one cent per right until they
become exercisable, and thereafter under certain circumstances. The rights
expire in 2008.
The Company's Articles of Incorporation authorized 500,000 shares of no par
value preferred stock, of which 200,000 shares have been reserved and designated
Series A 1998 junior participating preferred stock for possible issuance under
the Company's shareholder rights plan. As of September 30, 2004, no preferred
shares have been issued.
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.
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. Shares were purchased from
time to time at prevailing prices in open market transactions, subject to market
conditions, share price and other considerations. The Company has completed the
program with 2,500,000 shares acquired for an aggregate of $21,795,000 through
September 30, 2002. During fiscal 2002, the Company repurchased approximately
677,000 shares of common stock for $6,592,000.
10. RETIREMENT PLAN:
The Company maintains a 401(k) defined contribution pension plan. Annual expense
provisions are based upon the level of employee participation, as the plan
requires the Company to match a certain portion of the employees' contributions.
Total retirement plan expense was $1,177,000, $1,015,000 and $948,000 in 2004,
2003 and 2002, respectively. The Company follows the policy of funding
retirement plan contributions as accrued.
11. INCOME TAXES:
The following table represents the components of the provision for income taxes:
For the Years Ended September 30
---------------------------------------
(In thousands) 2004 2003 2002
---------------------------------------------------------------------------
Current:
Federal $15,453 $ 3,043 $ 7,073
State, local and foreign 2,712 (218) 1,346
------- ------- -------
18,165 2,825 8,419
======= ======= =======
Deferred:
Federal (141) 166 521
State, local and foreign 2,382 1,149 731
------- -------- --------
2,241 1,315 1,252
------- -------- --------
$20,406 $ 4,140 $ 9,671
======= ======== ========
Undistributed earnings of the Company's foreign subsidiary at September 30,
2004, are considered to be indefinitely reinvested. Accordingly, the calculation
of and provision for deferred taxes are not practicable. Upon distribution of
those earnings in the form of dividends or otherwise, the earnings may become
taxable.
23
Deferred income taxes are recorded at currently enacted rates and result from
temporary differences in the recognition of revenues and expenses for tax and
financial statement purposes. The primary temporary differences giving rise to
the Company's deferred tax assets and liabilities are as follows:
September 30
-----------------------------
(In thousands) 2004 2003
-------------- -----------------------------
Deferred tax assets:
Inventory capitalization $ 416 $ 177
Provision for doubtful accounts 1,026 370
Non deductible liabilities 1,029 651
--------- ---------
Total deferred tax assets 2,471 1,198
Deferred tax liabilities:
Accelerated depreciation 11,112 10,113
Assets deductible for tax purposes 6,241 3,715
Undistributed earnings of
unconsolidated affiliate 691 494
Other, net 251 550
--------- ---------
Total deferred tax liabilities 18,295 14,872
--------- ---------
Net deferred tax liabilities $ 15,824 $ 13,674
========= =========
A reconciliation of the provision for income taxes with amounts computed by
applying the federal statutory rate to income before income taxes follows:
For the Years Ended September 30
--------------------------------
2004 2003 2002
---- ---- ----
Tax at U.S. federal statutory rate 35.0% 34.0% 35.0%
State and local income taxes, net
of U.S. federal tax benefit 2.8 3.1 3.0
Equity in net income of
unconsolidated affiliates (1.4) (2.2) (1.8)
Revision of prior year income tax
estimates and adjustment for
non-recurring state income tax matter - (4.2) (0.4)
Other, net 0.3 0.4 2.2
---- ---- ----
36.7% 31.1% 38.0%
==== ==== ====
12. OPERATING LEASES:
The Company leases certain property and equipment from third parties under
non-cancelable operating lease agreements. Rent expense under operating leases
was $1,767,000, $1,540,000 and $1,671,000 for the years ended September 30,
2004, 2003 and 2002, respectively. Future minimum lease payments for
non-cancelable operating leases having a remaining term in excess of one year at
September 30, 2004 are as follows:
2005 $ 1,096,000
2006 1,035,000
2007 950,000
2008 776,000
2009 530,000
Thereafter 166,000
-----------
Total $ 4,553,000
===========
24
13. CONTINGENCIES:
From time to time, in the normal course of business, the Company is involved in
certain litigation and claims pending with respect to various business matters.
In the event there is any resulting liability with respect to such claims, it is
management's opinion they will not have a material affect on the Company's
consolidated financial statements.
14. STOCK OPTION PLANS:
Under its employee stock option plans, the Company may grant employees incentive
stock options to purchase shares at not less than 100% of market value at date
of grant or non-qualified stock options at a price determined by the
Compensation Committee of the Company's Board of Directors. Generally, options
are exercisable at the rate of 20% a year beginning one year from date of grant
and expire ten years from the date of grant.
As permitted under APB 25, the Company does not recognize compensation expense
related to stock options, as no stock options are granted below the market price
on the date of grant (see Note 1).
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the year
ended September 30, 2003:
2003
----
Expected dividend yield 1.5%
Expected stock price volatility 46.0%
Weighted average risk-free interest rate 3.5%
Expected life of options (years) 7.0
There were no options granted during 2004 and 2002. The fair value of options
granted during 2003 was $6.13 per share.
The summary of the status of all of the Company's stock incentive plans as of
September 30, 2004, 2003 and 2002 and changes during the years then ended is
presented below:
Average
Shares Under Range of Option Exercise
Plans Prices Per Share Price
------------ --------------------- --------
Balance, September 30, 2001 791,500 $ 5.34 - $ 12.51 $ 9.36
Granted - $ - $ -
Exercised (135,850) $ 5.34 - $ 12.00 $ 9.76
Canceled (85,000) $ 8.73 - $ 12.51 $ 11.54
------- --------------------- -------
Balance, September 30, 2002 570,650 $ 5.34 - $ 12.00 $ 8.94
Granted 195,000 $ 10.49 - $ 11.54 $ 10.72
Exercised (150,385) $ 5.34 - $ 11.63 $ 10.33
Canceled (1,000) $ 11.38 $ 11.38
------- --------------------- -------
Balance, September 30, 2003 614,265 $ 5.34 - $ 12.00 $ 9.16
Granted - $ - $ -
Exercised (182,006) $ 5.34 - $ 12.00 $ 9.27
Canceled - $ - $ -
------- --------------------- -------
Balance, September 30, 2004 432,259 $ 5.34 - $ 12.00 $ 9.11
------- --------------------- -------
25
The following table summarizes information about stock options outstanding and
exercisable:
September 30, 2004
---------------------------------------------------------------
Options Outstanding: Options Exercisable:
------------------------------------ -------------------------
Weighted
Average Weighted
Number Remaining Average Number
Range of Outstanding Contract Exercise Exercisable Weighted
Exercise Prices at 9/30/02 Life Price at 9/30/02 Exercise Price
- --------------------------------------------------------------------------------
$ 5.34 - $ 8.00 151,004 5.87 years $ 5.68 65,404 $ 6.12
$ 8.00 - $12.00 281,255 7.04 years $10.95 125,355 $11.23
- ---------------- ------- ---------- ------ ------- -------
$ 5.34 - $12.00 432,259 6.63 years $ 9.11 190,759 $ 9.48
At September 30, 2004, there were 91,000 shares available for granting of stock
options under the Company's stock option plans. All unexercised options expire
from 2006 to 2013.
15. NET INCOME PER SHARE COMPUTATIONS:
The following is a reconciliation of the numerator of the basic and diluted per
share computations:
For the Years Ended
September 30
--------------------------
(In thousands, except for share results) 2004 2003 2002
- -------------------------------------------------------------------------------
Net income ................................... $ 35,206 $ 9,152 $15,794
------- ------- -------
Shares (denominator) used for diluted share
computations:
Weighted average shares of common stock
outstanding ................................... 11,284 9,748 9,762
Plus: dilutive effect of stock options ........ 249 151 124
------- ------- -------
Adjusted weighted average shares .......... 11,533 9,899 9,886
------- ------- -------
Shares (denominator) used for basic per share
computations:
Weighted average shares of common stock
outstanding ................................... 11,284 9,748 9,762
------- ------- -------
Net income per share data:
Basic ..................................... $ 3.12 $ 0.94 $ 1.62
Diluted ................................... $ 3.05 $ 0.92 $ 1.60
All outstanding options are included in the diluted earnings per share
calculation above for the years ended September 30, 2004 and 2002. Options to
purchase 175,665 shares for the year ended September 30, 2003 were excluded from
the calculation above because the exercise prices of the options were greater
than the average market price of the Company's stock during the periods.
16. RELATED PARTY TRANSACTIONS:
The Company has various transactions with Mi-Tech Steel (see Note 5).
The Company has recorded sales of $18,369,000, $6,936,000 and $4,674,000 in
2004, 2003 and 2002, respectively and has accounts receivable of $4,714,000 and
$1,337,000 as of September 30, 2004 and 2003, respectively, for scrap products
sold to a company owned by certain officers and directors of the Company.
Management reports these transactions to the Audit Committee of the Board of
Directors as frequently as requested by the Committee, but at least
26
annually. Most recently, in April 2004, the Audit Committee reviewed and
approved these transactions. The Company has the ability to continue or cease
selling scrap steel to this company at any time.
During 2002, the Company repurchased 600,000 shares of its common stock from its
founding chairman for $6,000,000.
17. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
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, as amended by FASB Staff Position 46-6, "Effective Date of
FIN 46," are effective immediately for VIEs created after January 31, 2003 and
no later than December 31, 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 has determined that it does
not have any VIEs and the adoption of FIN 46 does not have an impact on our
financial position, results of operations or cash flows.
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment,
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. The proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25 and
generally would require instead that such transactions be accounted for using a
fair-value-based method. If adopted in its current form, the proposed Statement
would be effective for any interim or annual period beginning after June 15,
2005.
On October 22, 2004 the American Jobs Creation Act of 2004 was passed. This law
provides a phased in deduction for a percentage of qualified income from
domestic production activities. The Company will assess the impact of this
change in tax law as further authoritative guidance becomes available.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43." SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and spoilage, and requires that these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of SFAS No.
151 are effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, with earlier application permitted. The Company does not
expect the adoption of SFAS No. 151 to have a material impact on our financial
position, results of operation or cash flows.
27
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Steel Technologies Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Steel Technologies Inc. and its subsidiaries at September 30, 2004 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
ceased amortizing goodwill effective October 1, 2002.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
December 9, 2004
EXHIBIT 21
STEEL TECHNOLOGIES INC.
SUBSIDIARIES AND AFFILIATES
Percentage of
Voting
Names Under Securities
Jurisdiction of Which Business Owned By
Name Incorporation Transacted Registrant
- --------------------------------------------------------------------------------
Steel Technologies, LLC
(Formerly Steel
Technologies Steel Technologies
Carolinas, Inc.) South Carolina Carolinas 100%
Steel Technologies, L.P. Delaware Steel Technologies General Partner
Limited partner
is Steel
Technologies,
LLC (SC)
Steel Technologies Corp.
(Formerly Roberts Steel
Company) Ohio Steel Technologies Ohio 100%
Steel Technologies, LLC Ohio Steel Technologies 100% owned by
Steel
Technologies
Corp.
Steel Technologies Ohio,
Inc. (formerly
Southern Strip Steel-
Columbus, Inc) Ohio Steel Technologies Ohio 100%
Custom Steel, Inc. Kentucky Custom Steel 100%
Steel Technologies de
Mexico, S.A. de C.V.
(formerly
Transformadora y
Commercializadora de
Metales, S.A. de C.V.) Mexico Steel Technologies de Mexico 90%
Mi-Tech Steel, Inc. Delaware Mi-Tech Steel, Inc. 50%
Ferrolux Metals Co., LCC Ohio Ferrolux 49%
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-21279, 333-91798 and 333-118548) of Steel
Technologies Inc. and its subsidiaries of our report dated December 9, 2004,
relating to the consolidated financial statements, which appears in the Annual
Report to Shareholders, which is incorporated in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
December 9, 2004 relating to the financial statement schedule, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
December 14, 2004
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradford T. Ray, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies Inc.
for the fiscal year ended September 30, 2004;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 14, 2004
/s/ Bradford. T. Ray
- --------------------
Bradford T. Ray
Chief Executive Officer
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph P. Bellino, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies Inc.
for the fiscal year ended September 30, 2004;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 14, 2004
/s/ Joseph P. Bellino
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Joseph P. Bellino
Chief Financial Officer
EXHIBIT 32.1
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 Annual Report on Form 10-K of the
Company for the year ended September 30, 2004 (the Report):
(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
as of and for the periods presented in the Report.
/s/ Bradford T. Ray
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Bradford T. Ray
Chief Executive Officer
Date: December 14, 2004
EXHIBIT 32.2
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 Annual Report on Form 10-K of the
Company for the year ended September 30, 2003 (the Report):
(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
as of and for the periods presented in the Report.
/s/ Joseph P. Bellino
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Joseph P. Bellino
Chief Financial Officer
Date: December 14, 2004