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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 March 31, 2003
--------------
( ) 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ( ) No (X)
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 May 13, 2003
-------------------------------------- ------------------------------
Common stock, without par value 9,645,038
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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 - March 31, 2003 and 3
December 31, 2002
Consolidated Statements of Operations - for the three months 4
ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows - for the three 5
months ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-17
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
CERTIFICATIONS 21-24
EXHIBITS 25-26
Page 2 of 26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
---------------- ----------------
(unaudited)
Assets
Cash $ 4,094 $ 1,736
Accounts receivable, net 59,167 48,877
Inventories 92,435 101,837
Prepaid expenses and other 4,432 9,399
Assets held for sale 837 837
--------- ---------
Total current assets 160,965 162,686
--------- ---------
Property and equipment, at cost 151,648 151,563
Accumulated depreciation (56,317) (54,240)
--------- ---------
Net property and equipment 95,331 97,323
--------- ---------
Investments in joint ventures 608 637
Deferred financing fees, net 2,078 2,265
--------- ---------
Total assets $ 258,982 $ 262,911
========= =========
Liabilities
Current portion of long-term debt $ 4,493 $ 6,973
Accounts payable 23,633 28,665
Accrued payroll 2,519 2,498
Other accrued liabilities 5,021 5,826
--------- ---------
Total current liabilities 35,666 43,962
--------- ---------
Credit facility revolver 63,177 57,560
Term loans 37,317 38,056
Industrial revenue bonds 4,093 4,204
--------- ---------
Total long-term debt 104,587 99,820
--------- ---------
Deferred income taxes 3,705 3,634
--------- ---------
Total liabilities 143,958 147,416
--------- ---------
Shareholders' Equity
Preferred stock -- --
Common stock 99,771 99,766
Officer note receivable (723) (726)
Retained earnings 15,976 16,455
--------- ---------
Total shareholders' equity 115,024 115,495
--------- ---------
Total liabilities and shareholders' equity $ 258,982 $ 262,911
========= =========
The accompanying notes are an integral part of these balance sheets.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(in thousands, except per share and tonnage data)
2003 2002
---------------- ----------------
(unaudited)
Tons sold
Direct 229,501 268,725
Toll 39,434 40,367
--------- ---------
268,935 309,092
--------- ---------
Net sales $ 114,880 $ 110,239
Cost of materials sold 90,987 82,094
--------- ---------
Gross profit 23,893 28,145
Operating expenses
Warehouse and processing 7,988 8,929
Administrative and general 5,808 6,188
Distribution 3,764 4,288
Selling 2,754 3,293
Occupancy 1,113 1,039
Depreciation 2,087 2,138
--------- ---------
Total operating expenses 23,514 25,875
--------- ---------
Operating income 379 2,270
Income (loss) from joint ventures (29) 192
--------- ---------
Income before financing costs and income taxes 350 2,462
Interest and other expense on debt 1,148 1,727
--------- ---------
Income (loss) from continuing operations before income taxes and
cumulative effect of a change in accounting principle (798) 735
Income tax benefit (provision) 319 (283)
--------- ---------
Income (loss) from continuing operations before cumulative effect of a
change in accounting principle (479) 452
Discontinued operations:
Loss from discontinued tube operation, net of income tax benefit
of $156 in 2002 -- (250)
--------- ---------
Income (loss) before cumulative effect of a change in accounting principle (479) 202
Cumulative effect of a change in accounting principle, net of income
tax benefit of $1,298 in 2002 -- (2,117)
--------- ---------
Net loss $ (479) $ (1,915)
========= =========
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.05) $ 0.05
Loss from discontinued operations -- (0.03)
Cumulative effect of a change in accounting principle -- (0.22)
--------- ---------
Net loss per share $ (0.05) $ (0.20)
========= =========
Weighted average shares outstanding 9,644 9,631
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(in thousands)
2003 2002
-------- --------
(unaudited)
Cash flows from operating activities:
Net loss $ (479) $ (1,915)
Adjustments to reconcile net loss to net cash from
operating activities-
Depreciation and amortization 2,274 2,595
(Income) loss from joint ventures 29 (192)
Cumulative effect of a change in accounting principle,
net of tax -- 2,117
Long-term deferred income taxes 71 145
-------- --------
1,895 2,750
Changes in working capital:
Accounts receivable (11,562) (17,097)
Inventories 9,402 1,683
Prepaid expenses and other 4,967 (1,005)
Accounts payable (5,032) 3,977
Accrued payroll and other accrued liabilities (784) 1,022
-------- --------
(3,009) (11,420)
-------- --------
Net cash used for operating activities (1,114) (8,670)
-------- --------
Cash flows from investing activities:
Capital expenditures (95) (449)
Proceeds from disposition of property and equipment 1,275 --
-------- --------
Net cash from (used for) investing activities 1,180 (449)
-------- --------
Cash flows from financing activities:
Credit facility revolver borrowings, net 5,617 8,894
Term loans and industrial revenue bonds (3,330) (61)
Proceeds from employee stock purchases 5 --
-------- --------
Net cash from financing activities 2,292 8,833
-------- --------
Cash:
Net change 2,358 (286)
Beginning balance 1,736 1,054
-------- --------
Ending balance $ 4,094 $ 768
======== ========
The accompanying notes are an integral part of these statements.
5 of 26
OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(dollars in thousands, except share and per share amounts)
(1) BASIS OF PRESENTATION:
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.
Cost of materials sold primarily includes the costs of the purchased steel,
external processing, and inbound freight. As of January 1, 2003, the Company
reclassified internal processing costs for toll processing sales from cost of
materials sold to operating expenses. Prior year results have been reclassified
to conform to the current year presentation.
(2) INVESTMENTS IN JOINT VENTURES:
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), a certified Minority Business Enterprise
company supporting the flat-rolled steel requirements of the automotive
industry. As of March 31, 2003, Olympic guaranteed 50% of OLP's $16,258 and 49%
of GSP's $1,422 of outstanding debt on a several basis.
The following table sets forth selected data for the Company's OLP joint
venture:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
RESULTS OF OPERATIONS: 2003 2002
- ---------------------- ------ ------
Net sales $7,014 $6,453
Gross profit 2,737 2,392
Operating income 231 553
Net income $ 55 $ 397
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(3) GOODWILL:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which
required that the Company cease amortization of goodwill and conduct periodic
impairment tests of goodwill. The Company estimated the fair value of its
reporting units using a present value method that discounted future cash flows.
The cash flow estimates incorporated 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 No. 142 required the
Company to complete the second step of the goodwill impairment test and compare
the implied fair value of each reporting unit's goodwill with the carrying value
of that goodwill. As a result of this assessment, the Company recorded a
non-cash, 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.
(4) DEBT:
In December 2002, the Company entered into a new 3-year, $132,000 secured
bank-financing agreement (the Credit Facility) comprised of a revolver and two
term loan components. The Credit Facility is collateralized by the Company's
accounts receivable, inventories, and substantially all property and equipment.
Revolver borrowings are limited to the lesser of a borrowing base, comprised of
eligible receivables and inventories, or $90,000 in the aggregate. The Company
has the option to borrow based on the agent bank's base rate or Eurodollar Rates
(EURO) plus a premium. The Company incurred $2,225 of closing fees and expenses
in connection with the new Credit Facility, which have been capitalized and
included in "Deferred Financing Fees, Net" on the accompanying consolidated
balance sheets. These costs are being amortized to interest and other expense on
debt over the 3-year term of the agreement.
The Company's effective borrowing rate inclusive of deferred financing fees for
the first three months of 2003 was 5.0% compared to 10.0% in 2002. Monthly
principal repayments of $367 commenced February 1, 2003 for the term loan
components of the Credit Facility.
The Credit Facility requires the Company to comply with various covenants, the
most significant of which include: (i) minimum availability of $10,000, tested
monthly, (ii) a minimum fixed charge coverage ratio of 1.25, and a maximum
leverage ratio of 1.75, which are tested quarterly commencing March 31, 2003,
(iii) restrictions on additional indebtedness, and (iv) limitations on capital
expenditures. At March 31, 2003, the Company had $22,264 of availability under
its Credit Facility and was in compliance with its various covenants.
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Included in the Credit Facility revolver balances on the accompanying
consolidated balance sheets are $6,839 and $2,065 of checks issued that have not
cleared the bank as of March 31, 2003, and December 31, 2002, respectively.
(5) DISCONTINUED OPERATIONS:
In 2002, the Company closed its unprofitable tube processing operation (Tubing)
in Cleveland, Ohio. In accordance with Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," Tubing has been accounted for as a discontinued operation.
As a result, Tubing's after-tax operating loss of $250 for the first three
months of 2002 is shown separate from the Company's results from continuing
operations. In December 2002, the Company sold the equipment located at the
Tubing operation for $1,275 (its approximate appraised and net book value) and
used the proceeds from the sale to reduce debt. The Tubing real estate is
recorded as "Assets Held for Sale" on the accompanying consolidated balance
sheets for $837. The Company anticipates selling the Tubing real estate during
2003 and will use the proceeds to reduce debt.
During the first three months of 2003, the Company paid $51 of post-closure
tenancy costs related to the Tubing facility. The accompanying March 31, 2003
and December 31, 2002 consolidated balance sheets include $263 and $314,
respectively, in "Other Accrued Liabilities" for remaining Tubing liabilities,
which the Company expects to be paid in 2003.
Operating results of the discontinued Tubing operation were as follows for the
quarter ended March 31, 2002:
Net sales $ 1,778
Loss before income taxes (406)
Income tax benefit 156
-------
Net loss from discontinued operations $ (250)
=======
Basic and diluted net loss per share from discontinued operations $ (.03)
=======
(6) SHARES OUTSTANDING AND EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Basic and diluted weighted average shares outstanding were
9.6 million for both periods presented. Stock options to purchase 982,833 shares
at March 31, 2003 and 885,833 at
8 of 26
March 31, 2002, were not dilutive and therefore were not included in the
computation of diluted loss per share amounts.
(7) STOCK OPTIONS:
Options to purchase 982,833 shares are currently outstanding, of which 492,666
are exercisable at prices ranging from $1.97 to $15.50 per share.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date under SFAS No. 123, net income
and earnings per share would have been reduced by the amounts shown below:
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
2003 2002
------- -------
Net loss, as reported $ (479) $(1,915)
Pro forma expense, net of tax (59) (33)
------- -------
Pro forma net loss $ (538) $(1,948)
======= =======
Basic and diluted net loss per share:
As reported $ (0.05) $ (0.20)
======= =======
Pro forma $ (0.06) $ (0.20)
======= =======
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(8) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first three months of 2003 and 2002 totaled $607 and
$1,138, 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 income tax refunds of $3,684 in July
2002 and $1,157 in March 2003 after filing its federal income tax returns for
the fiscal years ended December 31, 2001 and 2002, respectively, and the related
carryback claims. Income tax refunds in the first three months of 2003 totaled
$1,182, compared to $42 of income tax payments made in the first three months of
2002.
10 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from these
estimates under different assumptions or conditions. On an ongoing basis, the
Company monitors and evaluates its estimates and assumptions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in preparation of its consolidated
financial statements:
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
experience and specific customer collection issues that the Company has
identified. Estimation of such losses requires adjusting historical loss
experience for current economic conditions and judgments about the probable
effects of economic conditions on certain customers. The Company can not
guarantee that the rate of future credit losses will be similar to past
experience. The Company considers all available information when assessing each
quarter the adequacy of its allowance for doubtful accounts.
Inventory Valuation
The Company's inventories are stated at the lower of cost or market and include
the costs of the purchased steel, internal and external processing, and inbound
freight. Cost is determined using the specific identification method. The
Company regularly reviews its inventory on hand and records provisions for
obsolete and slow-moving inventory based on historical and current sales trends.
Changes in product demand and the Company's customer base may affect the value
of inventory on hand, which may require higher provisions for obsolete or
slow-moving inventory.
11 of 26
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related
estimated remaining lives whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Events or changes in
circumstances which could trigger an impairment review include significant
underperformance relative to the expected historical or projected future
operating results, significant changes in the manner of the use of the acquired
assets or the strategy for the overall business or significant negative industry
or economic trends. The Company records an impairment or change in useful life
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or the useful life has changed.
Income Taxes
The Company records operating loss and tax credit carryforwards and the
estimated effect of temporary differences between the tax basis of assets and
liabilities and the reported amounts in its consolidated balance sheets. The
Company follows detailed guidelines in each tax jurisdiction when reviewing tax
assets recorded on the balance sheet and provides for valuation allowances as
required. Deferred tax assets are reviewed for recoverability based on
historical taxable income, the expected reversals of existing temporary
differences, tax planning strategies and, most importantly, on projections of
future taxable income. The projections of future taxable income require
assumptions regarding volume, selling prices, gross profits, expense levels and
industry cyclicality. If the Company is unable to generate sufficient future
taxable income in certain tax jurisdictions, the Company will be required to
record a valuation allowance against its deferred tax assets.
OVERVIEW
The Company's results of operations are affected by numerous external factors,
such as general business, 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
profits. Products that have more value-added processing generally have a greater
gross profit. Accordingly, the Company's overall gross profit 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
12 of 26
Detroit and Georgia operations. As of January 1, 2003, the Company reclassified
internal processing costs for toll processing sales from cost of materials sold
to operating expenses. Prior year results have been reclassified to conform to
the current year presentation.
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), 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 March 31, 2003, Olympic guaranteed 50% of OLP's $16.3 million
and 49% of GSP's $1.4 million of outstanding debt on a several basis.
Financing costs include interest expense on debt and deferred financing fees
amortized to expense over the terms of the Company's bank-financing agreements
(the Financing Costs).
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. Domestic steel producers generally supply domestic customers before
meeting foreign demand, particularly during periods of supply constraints.
In 2002, the Company closed its unprofitable tube processing operation (Tubing)
in Cleveland, Ohio. In accordance with Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," Tubing has been accounted for as a discontinued operation.
As a result, Tubing's after-tax operating loss of $250 thousand for the first
three months of 2002 is shown separate from the Company's results from
continuing operations. In December 2002, the Company sold the equipment located
at the Tubing operation for $1.3 million (its approximate appraised and net book
value) and used the proceeds from the sale to reduce debt. The Tubing real
estate is recorded as "Assets Held for Sale" on the accompanying consolidated
balance sheets for $837 thousand. The Company anticipates selling the Tubing
real estate during 2003 and will use the proceeds to reduce debt.
In April 2003, the Company's collective bargaining agreement covering its
Minneapolis plate processing facility was renewed to March 31, 2006. The
Company's collective bargaining agreement covering its Detroit hourly plant
maintenance personnel (6 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, there can be no
assurance that such a resolution will occur. The Company has never experienced a
work
13 of 26
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.
RESULTS OF OPERATIONS
Tons sold decreased 13.0% to 269 thousand in the first quarter of 2003 from 309
thousand in the first quarter of 2002. Tons sold in the first quarter of 2003
included 230 thousand from direct sales and 39 thousand from toll processing,
compared with 269 thousand direct tons and 40 thousand toll tons in the
comparable period of last year. The decrease in tons sold was attributable to
depressed customer demand across substantially all markets served by the
Company. The Company does not expect shipment levels to improve in the second
quarter of 2003, as demand for flat-rolled steel remains weak.
Net sales increased 4.2% to $114.9 million in the first quarter of 2003 from
$110.2 million in the first quarter of 2002. First quarter average selling
prices increased 19.8% from last year's first quarter but declined 1.2% from the
fourth quarter 2002.
As a percentage of net sales, gross profit decreased to 20.8% in the first
quarter of 2003 from 25.5% in the first quarter of 2002. The gross profit
decrease was primarily attributable to selling higher-priced steel purchased
during tight supply conditions experienced during the first nine months of 2002
coupled with soft demand. Material purchase costs for hot rolled steel (the
majority of Olympic's revenues) have declined approximately 25% from October
2002 to March 2003 as demand for steel weakened. This downward pricing trend has
continued into the second quarter of 2003. As a result, the Company expects its
second quarter 2003 gross profit percentages to remain consistent with first
quarter 2003 performance.
Operating expenses in the first quarter of 2003 decreased 9.1% to $23.5 million
from $25.9 million in last year's first quarter. The operating expense decreases
are the result of personnel reductions and additional cost cutting measures, as
well as decreased sales volumes. As a percentage of net sales, operating
expenses decreased to 20.5% for the first quarter of 2003 from 23.5% in the
comparable 2002 period.
Loss from joint ventures totaled $29 thousand in the first quarter of 2003,
compared to income of $192 thousand in the first quarter of 2002.
14 of 26
Financing Costs in the first quarter of 2003 decreased to $1.1 million from $1.7
million in the first quarter of 2002. The Company's effective borrowing rate
inclusive of deferred financing fees for the first three months of 2003 was 5.0%
compared to 10.0% in 2002. Effective borrowing rates decreased as a result of
the Company's new credit facility completed in December 2002.
For the first quarter of 2003, the Company reported a loss from continuing
operations before income taxes of $798 thousand. In the 2002 first quarter,
income from continuing operations before income taxes and cumulative effect of a
change in accounting principle totaled $735 thousand. An income tax benefit of
40.0% was recorded in the first quarter of 2003 compared to an income tax
provision of 38.5% in the first quarter of 2002.
Loss from the discontinued Tubing operation, net of a 38.5% income tax benefit,
totaled $250 thousand or $.03 per share in the first quarter of 2002.
Included in the Company's first quarter 2002 net loss is an after-tax cumulative
effect of a change in accounting principle charge of $2.1 million, or $.22 per
share, from the Company's adoption of Financial Accounting Standards Board
Statement No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets."
Net loss for the first quarter of 2003 totaled $479 thousand, or $.05 per share,
compared to a net loss of $1.9 million, or $.20 per share, in the first quarter
of 2002.
Weighted average shares outstanding totaled 9.6 million for both periods
presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund its working capital
needs, 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 March 31, 2003 increased $6.6 million from the end of the
prior year. The increase was primarily attributable to a $10.3 million increase
in accounts receivables and a $5.0 million decrease in accounts payable.
Offsetting these increases was a $9.4 million reduction of inventory from
December 31, 2002. The increase in accounts receivable at March 31, 2003 was the
result of seasonal increased tonnage sales in the first quarter of 2003 as
compared to the fourth quarter of 2002.
15 of 26
Net cash used for operating activities totaled $1.1 million for the three months
ended March 31, 2003. Cash generated from earnings before non-cash items totaled
$1.9 million, while cash used for working capital purposes totaled $3.0 million.
During the first three months of 2003, net cash generated from investing
activities totaled $1.2 million. Proceeds from the disposition of the Company's
discontinued Tubing operation equipment totaled $1.3 million. Capital spending
totaled $95 thousand in the first quarter of 2003.
Net cash provided by financing activities totaled $2.3 million and primarily
consisted of borrowings on the Company's credit facility to fund working capital
requirements offset by scheduled principal repayments under the Company's debt
agreements.
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 income tax refunds of $3.7 million in
July 2002 and $1.2 million in March 2003 after filing its federal income tax
returns for the fiscal years ended December 31, 2001 and 2002, respectively, and
the related carryback claims.
In December 2002, the Company entered into a new 3-year, $132 million secured
bank-financing agreement (the Credit Facility) which significantly reduced the
Company's financing costs. The Credit Facility is comprised of a revolver and
two term loan components. The Credit Facility is collateralized by the Company's
accounts receivable, inventories, and substantially all property and equipment.
Revolver borrowings are limited to the lesser of a borrowing base, comprised of
eligible receivables and inventories, or $90 million in the aggregate. The
Company has the option to borrow based on the agent bank's base rate or
Eurodollar Rates (EURO) plus a premium. The Company incurred $2.2 million of
closing fees and expenses in connection with the new Credit Facility, which have
been capitalized and included in "Deferred Financing Fees, Net" on the
accompanying consolidated balance sheets. These costs are being amortized to
interest and other expense on debt over the 3-year term of the agreement.
The Company's effective borrowing rate inclusive of deferred financing fees for
the first three months of 2003 was 5.0% compared to 10.0% in 2002. Monthly
principal repayments of $367 thousand commenced February 1, 2003 for the term
loan components of the Credit Facility.
The Credit Facility requires the Company to comply with various covenants, the
most significant of which include: (i) minimum availability of $10 million,
tested monthly, (ii) a minimum fixed
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charge coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are
tested quarterly commencing March 31, 2003, (iii) restrictions on additional
indebtedness, and (iv) limitations on capital expenditures. At March 31, 2003,
the Company had $22.3 million of availability under its Credit Facility and was
in compliance with its various 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.
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, economic and
political conditions; competitive factors such as the availability and pricing
of steel and fluctuations in customer demand; layoffs or work stoppages by the
Company's, suppliers', or customers' personnel; equipment malfunctions or
installation delays; the adequacy of information technology and business system
software investment; the successes of its joint ventures; the successes of the
Company's strategic efforts and initiatives to increase sales volumes, improve
cash flows and reduce debt, maintain or improve inventory turns and reduce its
costs; and customer, supplier, and competitor consolidation or insolvency.
Should one or more of these or other 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
Raw material prices for the Company's products have significantly decreased over
the last 6 months. When raw material prices decline, customer demands for lower
prices result in lower selling prices and, as the Company uses existing steel
inventory, lower gross profit dollars. Declining steel prices therefore
adversely affected the Company's results of operations in the first quarter of
2003. The Company expects the current environment of weak steel pricing and
depressed customer demand to continue to negatively impact its 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 99.1 - Certification of the Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification of the Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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: May 13, 2003 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
(Principal Accounting Officer)
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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
---------------------
Michael D. Siegal
Olympic Steel, Inc.
Chairman & Chief Executive Officer
May 13, 2003
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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/ Richard T. Marabito
-----------------------
Richard T. Marabito
Olympic Steel, Inc.
Chief Financial Officer
May 13, 2003
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