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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23320
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OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1245650
- --------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5096 Richmond Road, Bedford Heights, Ohio 44146
- ----------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
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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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of November 11, 2002
------------------------------- -----------------------------------
Common stock, without par value 9,641,080
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OLYMPIC STEEL, INC.
Index to Form 10-Q
PAGE NO.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2002 and 3
December 31, 2001
Consolidated Statements of Income - for the three and nine 4
months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows - for the nine 5
months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-16
CONDITION AND RESULTS OF OPERATIONS
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 17
Item 4. CONTROLS AND PROCEDURES 17
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
SARBANES-OXLEY CERTIFICATIONS 20-25
EXHIBITS 26-30
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
September 30, December 31,
2002 2001
------------ -------------
(unaudited) (audited)
Assets
Cash $ 400 $ 1,054
Accounts receivable 59,544 38,754
Inventories 99,289 72,287
Prepaid expenses and other 5,361 3,514
Assets held for sale 2,235 1,660
------------ ------------
Total current assets 166,829 117,269
------------ ------------
Property and equipment, at cost 154,723 159,544
Accumulated depreciation (52,172) (48,433)
------------ ------------
Net property and equipment 102,551 111,111
------------ ------------
Investments in joint ventures 693 31
Other assets 2,527 3,589
Goodwill -- 3,415
------------ ------------
Total assets $ 272,600 $ 235,415
============ ============
Liabilities
Current portion of long-term debt $ 5,297 $ 4,786
Accounts payable 28,810 20,143
Accrued payroll 3,212 3,200
Other accrued liabilities 6,069 4,326
------------ ------------
Total current liabilities 43,388 32,455
------------ ------------
Credit facility revolver 62,790 24,359
Term loans 35,575 48,237
Industrial revenue bonds 6,793 7,117
------------ ------------
Total long-term debt 105,158 79,713
------------ ------------
Deferred income taxes 5,144 1,975
------------ ------------
Total liabilities 153,690 114,143
------------ ------------
Shareholders' Equity
Preferred stock -- --
Common stock 99,754 99,733
Officer note receivable (675) (675)
Retained earnings 19,831 22,214
------------ ------------
Total shareholders' equity 118,910 121,272
------------ ------------
Total liabilities and shareholders' equity $ 272,600 $ 235,415
============ ============
The accompanying notes are an integral part of these balance sheets.
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Olympic Steel, Inc.
Consolidated Statements of Income
(in thousands, except per share and tonnage data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited)
Tons sold
Direct 244,192 226,726 796,006 732,930
Toll 35,542 30,703 117,214 97,225
------------ ------------ ------------ ------------
279,734 257,429 913,220 830,155
------------ ------------ ------------ ------------
Net sales $ 116,465 $ 96,770 $ 352,183 $ 322,597
Cost of sales 90,356 72,244 268,804 244,927
------------ ------------ ------------ ------------
Gross margin 26,109 24,526 83,379 77,670
Operating expenses
Warehouse and processing 7,819 7,318 23,784 22,978
Administrative and general 6,069 6,022 18,743 19,218
Distribution 4,321 3,840 13,544 12,137
Selling 3,286 2,988 10,182 9,438
Occupancy 944 977 3,237 3,563
Depreciation and amortization 2,426 2,799 7,624 7,436
Plant shutdown charge -- -- 3,300 --
------------ ------------ ------------ ------------
Total operating expenses 24,865 23,944 80,414 74,770
------------ ------------ ------------ ------------
Operating income 1,244 582 2,965 2,900
Income (loss) from joint ventures (31) (50) 662 (214)
------------ ------------ ------------ ------------
Income before interest and taxes 1,213 532 3,627 2,686
Interest expense 969 2,156 4,059 4,329
Receivable securitization expense -- -- -- 1,260
------------ ------------ ------------ ------------
Income (loss) before taxes 244 (1,624) (432) (2,903)
Income tax provision (benefit) 94 (626) (166) (1,118)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle 150 (998) (266) (1,785)
Cumulative effect of change in accounting principle,
net of tax of $1,298 -- -- 2,117 --
------------ ------------ ------------ ------------
Net income (loss) $ 150 $ (998) $ (2,383) $ (1,785)
============ ============ ============ ============
Basic and diluted net income (loss) per share $ 0.02 $ (0.10) $ (0.25) $ (0.19)
============ ============ ============ ============
Weighted average shares outstanding 9,638 9,631 9,635 9,574
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
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Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(in thousands)
2002 2001
------------ ------------
(unaudited)
Cash flows from operating activities:
Net loss $ (2,383) $ (1,785)
Adjustments to reconcile net loss to net cash
from (used for) operating activities-
Depreciation and amortization 7,624 7,436
Non-cash plant shutdown charge 2,600 --
(Income) loss from joint ventures (662) 214
Loss on disposition of property and equipment 219 --
Cumulative effect of change in accounting
principle, net of tax 2,117 --
Long-term deferred income taxes 4,467 (380)
------------ ------------
13,982 5,485
Changes in working capital:
Accounts receivable (20,790) (43,890)
Inventories (27,002) 11,913
Prepaid expenses and other (1,847) (4,363)
Accounts payable 8,667 (1,571)
Accrued payroll and other accrued liabilities 1,755 944
------------ ------------
(39,217) (36,967)
------------ ------------
Net cash used for operating activities (25,235) (31,482)
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,011) (2,301)
Proceeds from disposition of property and equipment 1,615 --
Investments in joint ventures -- (1,012)
------------ ------------
Net cash used for investing activities (1,396) (3,313)
------------ ------------
Cash flows from financing activities:
Credit facility revolver 38,431 11,903
Term loans and IRB's (12,475) 21,758
Proceeds from exercise of stock options 21 --
------------ ------------
Net cash from financing activities 25,977 33,661
------------ ------------
Cash:
Net decrease (654) (1,134)
Beginning balance 1,054 1,449
------------ ------------
Ending balance $ 400 $ 315
============ ============
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(dollars in thousands, except share and per share amounts)
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries
(collectively Olympic or the Company), without audit and reflect all normal and
recurring adjustments which are, in the opinion of management, necessary to
fairly present the results of the interim periods covered by this report. All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in the Company's joint ventures are accounted for
under the equity method.
(1) JOINT VENTURES:
On April 1, 2002, Michael J. Guthrie and Carlton L. Guthrie (the Guthries)
withdrew as majority members of Trumark Steel & Processing, LLC (TSP). On that
date, Thomas A. Goss and Gregory F. Goss, executive officers of the Goss Group,
Inc., an insurance enterprise, assumed the Guthries 51% majority ownership
interest. On May 17, 2002, TSP's name was changed to G.S.P., LLC (GSP). GSP is a
certified member of the Michigan Minority Business Development Council.
On April 30, 2002, the Company's Olympic Laser Processing, LLC (OLP) joint
venture entered into a new 2-year bank financing agreement.
As of September 30, 2002, Olympic guaranteed 50% of OLP's $17,130 and 49% of
GSP's $1,822 of outstanding debt on a several basis.
(2) GOODWILL:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
Company estimated the fair value of its reporting units using a present value
method that discounted future cash flows. The cash flow estimates incorporate
assumptions on future cash flow growth, terminal values and discount rates. Any
such valuation is sensitive to these assumptions. Because the fair value of each
reporting unit was below its carrying value (including goodwill), application of
SFAS 142 required the Company to complete the second step of the goodwill
impairment test and compare
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the implied fair value of each reporting unit's goodwill with the carrying value
of that goodwill. As a result, the Company recorded a before tax impairment
charge of $3,415 ($2,117 after tax) to write-off the entire goodwill amount as a
cumulative effect of a change in accounting principle.
The Financial Accounting Standards Board also issued Statement of Accounting
Standards No. 141 (SFAS 141), "Business Combinations," which requires all
business combinations after June 30, 2001 to be accounted for under the purchase
method.
As a result of adopting SFAS 142 and SFAS 141, the accounting policy for excess
of cost over net assets acquired is as follows, effective January 1, 2002:
Excess of Cost Over Net Assets Acquired: The Company recognizes the excess of
the cost of an acquired entity over the net amount assigned to assets acquired
and liabilities assumed as goodwill. Goodwill is tested for impairment on an
annual basis and between annual tests in certain circumstances. Impairment loss
is recognized whenever the implied fair value of goodwill is less than its
carrying value. Prior to January 1, 2002, goodwill was amortized over periods
ranging from 15 to 40 years. Beginning January 1, 2002, goodwill is no longer
amortized.
The following table presents a comparison of the first nine months of 2002
results to the first nine months of 2001 adjusted to exclude goodwill
amortization expense:
Nine Months Ended
September 30,
--------------------------------------
(in thousands, except per share data) 2002 2001
------------ ------------
Loss before cumulative effect of change in accounting principle $ (266) $ (1,785)
Cumulative effect of change in accounting principle, net of tax (2,117) --
------------ ------------
Reported net loss (2,383) (1,785)
Addback: goodwill amortization, net of tax -- 48
------------ ------------
Adjusted net loss $ (2,383) $ (1,737)
============ ============
Basic and diluted net loss per share:
- -------------------------------------
Loss before cumulative effect of change in accounting principle $ (.03) $ (.19)
Cumulative effect of change in accounting principle, net of tax (.22) --
------------ ------------
Reported net loss (.25) (.19)
Addback: goodwill amortization, net of tax -- --
------------ ------------
Adjusted net loss $ (.25) $ (.19)
============ ============
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(3) DEBT:
In June 2001, the Company entered into a 3-year, $135,000 secured financing
agreement (The Credit Facility). The Credit Facility is secured by the Company's
accounts receivable, inventories, and substantially all property and equipment.
Borrowings under the Credit Facility are limited to the lesser of a borrowing
base, comprised of eligible receivables, inventories and property and equipment,
or $135,000 in the aggregate. The Company has the option to borrow based on the
agent bank's base rate or London Interbank Offered Rates (LIBOR) plus a premium.
In August 2002, the Credit Facility was amended to allow the Company to prepay
and permanently reduce $10,000 of the outstanding term B loan. The Company
borrowed $10,000 from the revolver component of its Credit Facility to pay down
the term B loan. In connection with the prepayment, the agent bank waived $617
of deferred pay interest, which the Company previously expensed. The
accompanying third quarter and year-to-date 2002 consolidated income statements
reflect the waived amount as a reduction to interest expense.
The Company's effective borrowing rate for the first nine months of 2002,
excluding the waived deferred pay interest, was 7.7% compared to 8.8% in 2001.
On January 1, 2002, the term loan B component deferred pay rate declined from
9.0% to 7.0%. Term loan A monthly principal repayments of $167 commenced April
1, 2002.
The Credit Facility requires the Company to comply with various covenants, the
most significant of which include: (i) minimum excess availability of $10,000,
(ii) a minimum fixed charge coverage ratio, which commences in December 2002,
(iii) restrictions on additional indebtedness, and (iv) limitations on capital
expenditures. At September 30, 2002, the Company had $29,514 of excess
availability under its Credit Facility and was in compliance with its various
covenants.
Included in the Credit Facility revolver balances on the accompanying
consolidated balance sheets are $9,409 and $5,187 of checks issued that have not
cleared the bank as of September 30, 2002, and December 31, 2001, respectively.
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(4) PLANT SHUTDOWN CHARGE:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 provides a single, comprehensive accounting model
for impairment and disposal of long-lived assets and discontinued operations. In
the second quarter of 2002, the Company recorded a before tax $3,300 plant
shutdown charge in connection with the closure of its tube operation in
Cleveland, Ohio. The non-cash portion of the charge totaled $2,600 to write-down
property and equipment to estimated sales value in accordance with SFAS 144. The
cash portion of the charge, recorded in accordance with EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity", totaled $700 and primarily related to employee and tenancy costs.
Through September 30, 2002, the Company has paid or incurred $161 of the $700
cash portion of the charge. The Company anticipates selling these assets within
the next 12 months and will use the proceeds to reduce long-term debt. The
property and equipment for sale are included in assets held for sale on the
accompanying September 30, 2002 consolidated balance sheet.
(5) SHARES OUTSTANDING AND EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Basic and diluted earnings per share are the same, as the
effect of outstanding stock options is not dilutive.
(6) STOCK OPTIONS:
Shares available under the Stock Option Plan were increased from 950,000 to
1,300,000 by shareholder vote on April 26, 2002. Options to purchase 996,333
shares are currently outstanding, of which 427,500 are exercisable at prices
ranging from $1.97 to $15.50 per share. During the nine months ended September
30, 2002, options to purchase 9,000 shares were exercised at prices ranging from
$2.63 to $4.84.
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(7) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first nine months of 2002 and 2001 totaled $4,006 and
$2,824, respectively.
On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was
signed into law. A significant portion of this law is a temporary extension of
the net operating loss carryback period from two to five years for net operating
losses arising in taxable years ending in 2001 and 2002. As a result of this
change in tax law, the Company received a $3.7 million tax refund in July 2002
after filing its federal income tax return for the fiscal year ended December
31, 2001 and the related carryback claim. The Company received $3.6 million of
net income tax refunds in the first nine months of 2002, compared to $98 of
income tax payments made in the first nine months of 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by numerous external factors,
such as general economic and political conditions, competition, steel pricing
and availability, energy prices, customer demand for steel, and layoffs or work
stoppages by suppliers' or customers' personnel.
Olympic sells a broad range of products, many of which have different gross
margins. Products that have more value-added processing generally have a greater
gross margin. Accordingly, the Company's overall gross margin is affected by
product mix and the amount of processing performed, as well as volatility in
selling prices and material purchase costs. The Company performs toll processing
of customer-owned steel, the majority of which is performed by its Detroit
operation. Toll processing generally results in lower selling prices and gross
margin dollars per ton but higher gross margin percentages than the Company's
direct sales.
The Company's two joint ventures include: Olympic Laser Processing, LLC (OLP), a
company that processes laser welded sheet steel blanks for the automotive
industry, and G.S.P., LLC (GSP) (formerly Trumark Steel & Processing, LLC), a
certified Minority Business Enterprise company supporting the flat-rolled steel
requirements of the automotive industry. The Company's 50% interest in OLP and
49% interest in GSP are accounted for under the equity method. The Company
guarantees portions of outstanding debt under both of the joint venture
companies' bank credit facilities. As of September 30, 2002, Olympic guaranteed
50% of OLP's $17.1 million and 49% of GSP's $1.8 million of outstanding debt on
a several basis.
Financing costs historically included interest expense on debt and costs
associated with the Company's accounts receivable securitization program (the
Financing Costs). In connection with the refinancing of its bank credit
agreement on June 28, 2001 (the Credit Facility), the Company's accounts
receivable securitization program was terminated. Receivable securitization
expense was based on commercial paper rates calculated on the amount of
receivables sold.
The Company sells certain products internationally, primarily in Puerto Rico and
Mexico. All international sales and payments are made in United States dollars.
These sales historically involve the Company's direct representation of steel
producers. Typically, international sales are more transactional in nature with
lower gross margins than domestic sales. Domestic steel producers generally
supply domestic customers before meeting foreign demand, particularly during
periods of supply constraints.
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RESULTS OF OPERATIONS
Tons sold increased 8.7% to 280 thousand in the third quarter of 2002 from 257
thousand in the third quarter of 2001. Tons sold in the third quarter of 2002
included 244 thousand from direct sales and 36 thousand from toll processing,
compared with 227 thousand direct tons and 30 thousand toll tons in the
comparable period of last year. Tons sold in the first nine months of 2002
increased 10.0% to 913 thousand from 830 thousand last year. Tons sold in the
first nine months of 2002 included 796 thousand from direct sales and 117
thousand from toll processing, compared with 733 thousand direct tons and 97
thousand toll tons in the comparable period of last year. The increases in
direct and toll tons sold were primarily attributable to the Company's
automotive customer base. However, customer demand for steel and consumer
confidence remain weak and are significant risk factors to maintaining fourth
quarter 2002 tons sold levels compared to the first nine months of 2002.
Net sales increased 20.4% to $116.5 million in the third quarter of 2002 from
$96.8 million in the third quarter of 2001. Third quarter average selling prices
increased 10.7% from last year's third quarter and 16.6% from first quarter
2002. For the first nine months of 2002, net sales increased 9.2% to $352.2
million from $322.6 million last year, in spite of an average selling price
decline of 0.8%.
As a percentage of net sales, gross margin decreased to 22.4% in the third
quarter of 2002 from 25.3% in the third quarter of 2001. For the first nine
months of 2002, gross margin decreased to 23.7% from 24.1% in the comparable
period of 2001. During the first nine months of 2002, the Company has
experienced a significant increase in its material purchase costs as a result of
tightening steel supply caused by the idling or closure of domestic steel
production facilities as well as U.S. government imposed import restrictions
placed on certain steel products. Although the Company has generally been
successful in passing on price increases to its customers, competitive pressures
on pricing in its market segments have resulted in lower gross margins compared
to last year.
Operating expenses in the third quarter of 2002 increased 3.8% to $24.9 million
from $23.9 million in last year's third quarter. Operating expenses in the first
nine months of 2002 include a $3.3 million plant shutdown charge associated with
the Company's closure of its tubing operation. Excluding the plant shutdown
charge, operating expenses in the first nine months increased 3.1% to $77.1
million from $74.8 million in the comparable 2001 period. The operating expense
increases are the result of increased sales levels and $1.0 million of
incremental financing fee amortization in the first nine months of 2002
associated with the refinancing of the Company's Credit Facility. As a
percentage of net sales, operating expenses decreased to 21.3% for the third
quarter of 2002 from 24.7% in the comparable 2001 period. For
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the first nine months of 2002, operating expenses excluding the plant shutdown
charge decreased to 21.9% of net sales from 23.2% in the comparable 2001 period.
Loss from joint ventures totaled $31 thousand in the third quarter of 2002,
compared to a loss of $50 thousand in the third quarter of 2001. For the first
nine months of 2002, income from joint ventures totaled $662 thousand, compared
to a loss of $214 thousand in 2001.
In August 2002, the Credit Facility was amended to allow the Company to prepay
and permanently reduce $10.0 million of the outstanding term B loan. The Company
borrowed $10.0 million from the revolver component of its Credit Facility to pay
down the term B loan. The prepayment will allow the Company to recognize
on-going savings as the revolver carries an effective interest rate of
approximately 5.0%, compared to 15.0% for the term B loan. In connection with
the prepayment, the agent bank waived $617 of deferred pay interest, which the
Company previously expensed. The accompanying third quarter and year-to-date
consolidated income statements reflect the waived amount as a reduction to
interest expense.
As a result of the Credit Facility amendment and lower base borrowing rates,
Financing Costs in the third quarter of 2002 decreased to $969 thousand from
$2.2 million in the third quarter of 2001. For the first nine months of 2002,
Financing Costs decreased to $4.1 million from $5.6 million in the comparable
2001 period. Effective interest rates, excluding the waived deferred pay
interest, were 7.1% and 7.7% for the three and nine month periods ended
September 30, 2002, compared to 9.4% and 8.8%, respectively, in 2001.
Income before taxes for the third quarter of 2002 totaled $244 thousand,
compared with a loss before taxes of $1.6 million in the comparable 2001 period.
An income tax provision of 38.5% was recorded in the third quarter of 2002,
compared with an income tax benefit of 38.5% in the comparable 2001 period. For
the first nine months of 2002, loss before taxes totaled $432 thousand compared
to a loss of $2.9 million in the comparable 2001 period. An income tax benefit
of 38.5% was recorded in the first nine months for both 2002 and 2001. Excluding
the plant shutdown charge, income before taxes totaled $2.9 million in the first
nine months of 2002.
Net income for the third quarter of 2002 totaled $150 thousand, or $.02 per
share, compared to a net loss of $998 thousand, or $.10 per share, in the third
quarter of 2001. For the first nine months of 2002, net loss totaled $2.4
million, or $.25 per share, compared to a net loss of $1.8 million, or $.19 per
share in the comparable 2001 period. Included in the first nine months of 2002
results is an after tax charge of $2.1 million, or $.22 per share, from the
Company's adoption of Financial Accounting Standards Board Statement No. 142
(SFAS 142) "Goodwill and Other Intangible Assets." SFAS 142 requires an annual
assessment of goodwill impairment by applying a fair-value-based test. As a
result of this assessment, the Company wrote off its
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entire goodwill amount as of January 1, 2002 as a cumulative effect of change in
accounting principle. Excluding both the plant shutdown and goodwill charges,
net income totaled $1.8 million or $.18 per share in the first nine months of
2002.
Weighted average shares outstanding totaled 9.6 million for all periods
presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund its working capital
needs, its development of information technology and business systems, the
purchase and upgrading of processing equipment and facilities, and its
investments in joint ventures. The Company uses cash generated from operations,
leasing transactions, and its Credit Facility to fund these requirements.
Working capital at September 30, 2002 increased $38.6 million from the end of
the prior year. The increase was primarily attributable to a $27.0 million
increase in inventories and a $20.8 million increase in accounts receivable.
Offsetting these increases was a combined $10.4 million increase in accounts
payable, accrued payroll and other accrued liabilities. The increase in accounts
receivable at September 30, 2002 was the result of increased sales as compared
to the fourth quarter of 2001. The inventory increase is primarily related to
increased steel prices as well as increased tonnage levels due to lower than
anticipated sales volumes in the third quarter of 2002.
Net cash used for operating activities totaled $25.2 million for the nine months
ended September 30, 2002. Cash generated from earnings before non-cash charges
totaled $14.0 million, while cash used for working capital components totaled
$39.2 million.
During the first nine months of 2002, net cash used for investing activities
totaled $1.4 million. Proceeds from the disposition of the Company's Elk Grove
Village, Illinois facility and a slitter in Iowa totaled $1.6 million. During
the first nine months of 2002, capital spending totaled $3.0 million, consisting
primarily of progress payments for a new slitter in Minneapolis and information
technology spending.
During the first nine months of 2002, net cash provided by financing activities
totaled $26.0 million and primarily consisted of borrowings on the Company's
Credit Facility to fund working capital requirements and the $10.0 million term
B loan prepayment.
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On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was
signed into law. A significant portion of this law is a temporary extension of
the net operating loss carryback period from two to five years for net operating
losses arising in taxable years ending in 2001 and 2002. As a result of this
change in tax law, the Company received a $3.7 million tax refund in July 2002
after filing its federal income tax return for the fiscal year ended December
31, 2001 and the related carryback claim.
As of September 30, 2002, the Company had approximately $29.5 million of excess
availability under its Credit Facility and was in compliance with all of its
bank covenants. The Company believes that funds available under its Credit
Facility, together with funds generated from operations, will be sufficient to
provide the Company with the liquidity necessary to fund its anticipated working
capital requirements, capital expenditure requirements, and scheduled debt
maturities over the next 12 months. Capital requirements are subject to change
as business conditions warrant and opportunities arise.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates and judgments, including those related to accounts
receivable, inventories, deferred tax assets, equity investments, goodwill and
intangible assets, and revenue recognition. Estimates and judgments are based on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
For further information regarding the accounting policies the Company believes
to be critical accounting policies and that affect the more significant
judgments and estimates used in preparing the consolidated financial statements,
see Footnote 1 of Notes to Consolidated Financial Statements from the Company's
December 31, 2001 Form 10-K.
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FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "expect," "believe," "estimated," "project," "plan" and 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 statements are subject to certain risks, uncertainties
and assumptions including, but not limited to: general business and economic
conditions; competitive factors such as the availability and pricing of steel
and fluctuations in demand, specifically in the automotive, transportation, and
other service centers markets served by the Company; layoffs or work stoppages
by the Company's, suppliers', or customers' personnel; potential equipment
malfunction; equipment installation delays; the adequacy of information
technology and business system investment; the successes of its joint ventures;
the successes of the Company's efforts and initiatives to: (i) increase sales
volumes; (ii) maintain gross margins--especially during periods of increased
material purchase costs and tightened steel availability; (iii) improve cash
flows and reduce debt; (iv) maintain or improve inventory turns; and (v) reduce
its costs. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, expected, believed, estimated, projected or
planned. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change during the nine months ended September 30,
2002 from the disclosures about market risk provided in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. However, the Company
is experiencing a significant increase in its material purchase costs as a
result of tightening steel supply caused by the idling or closure of domestic
steel production facilities as well as U.S. government imposed import
restrictions placed on certain steel products. Due to competitive pressures on
pricing in its market segments, the Company has not been able to pass along all
of the increased costs to its customers, which has resulted in decreased gross
margins.
In October 2002, the Company's collective bargaining agreement covering its
Minneapolis coil processing facility was renewed to September 30, 2005. The
Company's collective bargaining agreement covering its Detroit hourly plant
maintenance personnel (7 employees) expired on July 31, 2002. Employees covered
under this agreement continue to operate as a new agreement is negotiated. While
the Company expects to be able to negotiate a new agreement or an extension of
the existing agreement, there can be no assurance that such resolutions will
occur. The Company has never experienced a work stoppage and believes that its
relationship with its employees is good. However, any prolonged disruption in
business arising from work stoppages by Company personnel represented by
collective bargaining units could have a material adverse effect on the
Company's results of operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. The Company has evaluated the effectiveness of
the design and operation of disclosure controls and procedures under supervision
and with the participation of management, including Olympic's Chief Executive
Officer and Chief Financial Officer, within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic Securities and Exchange
Commission filings. No significant changes were made to the Company's internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 4.3 - First Amendment to Credit and Security Agreement dated
August 23, 2002 by and among the Registrant, six banks and National
City Commercial Finance, Inc., as Administrative Agent.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
OLYMPIC STEEL, INC.
(Registrant)
Date: November 11, 2002 By: /s/ Michael D. Siegal
--------------------------------------
MICHAEL D. SIEGAL
Chairman of the Board and Chief
Executive Officer
By: /s/ Richard T. Marabito
--------------------------------------
RICHARD T. MARABITO
Chief Financial Officer and
Treasurer (Principal Accounting
Officer)
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Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Michael D. Siegal, Chairman and Chief Executive Officer of Olympic Steel,
Inc. (the "Company"), certify that to the best of my knowledge, based upon a
review of the Quarterly Report on Form 10-Q for the period ended September 30,
2002, of the Company (the "Report"):
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results
of operations of the Company.
By: /s/ Michael D. Siegal
--------------------------------------
Michael D. Siegal
Olympic Steel, Inc.
Chairman & Chief Executive Officer
November 11, 2002
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Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Richard T. Marabito, Chief Financial Officer of Olympic Steel, Inc. (the
"Company"), certify that to the best of my knowledge, based upon a review of the
Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the
Company (the "Report"):
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results
of operations of the Company.
By: /s/ Richard T. Marabito
------------------------------------
Richard T. Marabito
Olympic Steel, Inc.
Chief Financial Officer
November 11, 2002
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Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Michael D. Siegal, the Chairman & Chief Executive Officer of Olympic Steel,
Inc. (the "Company"), certify that:
(1) I have reviewed this quarterly report on Form
10-Q of the Company;
(2) Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact
or omit to state a material fact necessary to make
the statements made, in light of the circumstances
under which such statements were made, not misleading
with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements,
and other financial information included in this
quarterly report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the Company as of, and
for, the periods presented in this quarterly report;
(4) The Company's other certifying officer and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:
(a) designed such disclosure
controls and procedures to ensure
that material information relating
to the Company, including its
consolidated subsidiaries, is made
known to us by others within those
entities, particularly during the
period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of
the Company's disclosure controls
and procedures as of a date within
90 days prior to the filing date of
this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly
report our conclusions about the
effectiveness of the disclosure
controls and procedures based on our
evaluation as of the Evaluation
Date;
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(5) The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to
the Company's auditors and the audit committee of
Company's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in
the design or operation of internal
controls which could adversely
affect the Company's ability to
record, process, summarize and
report financial data and have
identified for the Company's
auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not
material, that involves management
or other employees who have a
significant role in the Company's
internal controls; and
(6) The Company's other certifying officer and I have
indicated in this quarterly report whether or not
there were significant changes in internal controls
or in other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
By: /s/ Michael D. Siegal CEO
-----------------------------------
Michael D. Siegal
Olympic Steel, Inc.
Chairman & Chief Executive Officer
November 11, 2002
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Certification of the Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Richard T. Marabito, the Chief Financial Officer of Olympic Steel, Inc. (the
"Company"), certify that:
(1) I have reviewed this quarterly report on Form
10-Q of the Company;
(2) Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact
or omit to state a material fact necessary to make
the statements made, in light of the circumstances
under which such statements were made, not misleading
with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements,
and other financial information included in this
quarterly report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the Company as of, and
for, the periods presented in this quarterly report;
(4) The Company's other certifying officer and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:
(a) designed such disclosure
controls and procedures to ensure
that material information relating
to the Company, including its
consolidated subsidiaries, is made
known to us by others within those
entities, particularly during the
period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of
the Company's disclosure controls
and procedures as of a date within
90 days prior to the filing date of
this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly
report our conclusions about the
effectiveness of the disclosure
controls and procedures based on our
evaluation as of the Evaluation
Date;
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(5) The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to
the Company's auditors and the audit committee of
Company's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in
the design or operation of internal
controls which could adversely
affect the Company's ability to
record, process, summarize and
report financial data and have
identified for the Company's
auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not
material, that involves management
or other employees who have a
significant role in the Company's
internal controls; and
(6) The Company's other certifying officer and I have
indicated in this quarterly report whether or not
there were significant changes in internal controls
or in other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
By: /s/ Richrd T. Marabito
-------------------------------
Richard T. Marabito
Olympic Steel, Inc.
Chief Financial Officer
November 11, 2002
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