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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 June 30, 2003
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23320
OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1245650
- ---------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) of 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 August 13, 2003
------------------------------- ---------------------------------
Common stock, without par value 9,646,060
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OLYMPIC STEEL, INC.
Index to Form 10-Q
PAGE NO.
--------
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 3
Consolidated Statements of Operations - for the three and six
months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows - for the six months
ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-18
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 19
Item 4. CONTROLS AND PROCEDURES 19
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
CERTIFICATIONS 22-27
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
--------- ------------
(unaudited)
Assets
Cash $ 2,653 $ 1,736
Accounts receivable, net 59,260 48,877
Inventories 86,599 101,837
Prepaid expenses and other 4,657 9,399
Assets held for sale 837 837
--------- ---------
Total current assets 154,006 162,686
--------- ---------
Property and equipment, at cost 151,700 151,563
Accumulated depreciation (58,353) (54,240)
--------- ---------
Net property and equipment 93,347 97,323
--------- ---------
Investments in joint ventures 627 637
Deferred financing fees, net 1,846 2,265
--------- ---------
Total assets $ 249,826 $ 262,911
========= =========
Liabilities
Current portion of long-term debt $ 4,499 $ 6,973
Accounts payable 21,666 28,665
Accrued payroll 2,622 2,498
Other accrued liabilities 4,693 5,826
--------- ---------
Total current liabilities 33,480 43,962
--------- ---------
Credit facility revolver 57,877 57,560
Term loans 36,210 38,056
Industrial revenue bonds 3,981 4,204
--------- ---------
Total long-term debt 98,068 99,820
--------- ---------
Deferred income taxes 3,813 3,634
--------- ---------
Total liabilities 135,361 147,416
--------- ---------
Shareholders' Equity
Preferred stock -- --
Common stock 99,774 99,766
Officer note receivable (731) (726)
Retained earnings 15,422 16,455
--------- ---------
Total shareholders' equity 114,465 115,495
--------- ---------
Total liabilities and shareholders' equity $ 249,826 $ 262,911
========= =========
The accompanying notes are an integral part of these balance sheets.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and tonnage data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(unaudited)
Tons sold
Direct 233,912 273,734 463,413 542,459
Toll 44,802 41,305 84,236 81,672
--------- --------- --------- ---------
278,714 315,039 547,649 624,131
--------- --------- --------- ---------
Net sales $ 113,401 $ 121,713 $ 228,281 $ 231,952
Cost of materials sold 89,430 90,159 180,417 172,253
--------- --------- --------- ---------
Gross profit 23,971 31,554 47,864 59,699
Operating expenses
Warehouse and processing 8,147 9,767 16,135 18,696
Administrative and general 5,752 6,160 11,560 12,348
Distribution 3,990 4,744 7,754 9,032
Selling 2,834 3,476 5,588 6,769
Occupancy 979 1,044 2,092 2,083
Depreciation 2,123 2,146 4,210 4,284
--------- --------- --------- ---------
Total operating expenses 23,825 27,337 47,339 53,212
--------- --------- --------- ---------
Operating income 146 4,217 525 6,487
Income (loss) from joint ventures 19 501 (10) 693
--------- --------- --------- ---------
Income before financing costs and income taxes 165 4,718 515 7,180
Interest and other expense on debt 981 1,834 2,129 3,561
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes and
cumulative effect of a change in accounting principle (816) 2,884 (1,614) 3,619
Income tax benefit (provision) 262 (1,111) 581 (1,394)
--------- --------- --------- ---------
Income (loss) from continuing operations before cumulative effect of
a change in accounting principle (554) 1,773 (1,033) 2,225
Discontinued operations:
Loss from discontinued tube operation, net of income tax benefit -- (792) -- (1,042)
Loss on disposition of discontinued tube operation, net of income
tax benefit -- (1,599) -- (1,599)
--------- --------- --------- ---------
Loss before cumulative effect of a change in accounting principle (554) (618) (1,033) (416)
Cumulative effect of a change in accounting principle, net of income
tax benefit -- -- -- (2,117)
--------- --------- --------- ---------
Net loss $ (554) $ (618) $ (1,033) $ (2,533)
========= ========= ========= =========
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.06) $ 0.19 $ (0.11) $ 0.24
Loss from discontinued operations -- (0.25) -- (0.28)
Cumulative effect of a change in accounting principle -- -- -- (0.22)
--------- --------- --------- ---------
Net loss per share $ (0.06) $ (0.06) $ (0.11) $ (0.26)
========= ========= ========= =========
Weighted average shares outstanding 9,645 9,635 9,644 9,633
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(in thousands)
2003 2002
-------- --------
(unaudited)
Cash flows from operating activities:
Net loss $ (1,033) $ (2,533)
Adjustments to reconcile net loss to net cash from
operating activities-
Depreciation and amortization 4,584 5,198
Loss (income) from joint ventures 10 (693)
Loss (gain) on disposition of property and equipment (3) 218
Loss on disposition of discontinued tube operation,
net of tax -- 1,599
Cumulative effect of a change in accounting principle,
net of tax -- 2,117
Long-term deferred income taxes 179 5,114
-------- --------
3,737 11,020
Changes in working capital:
Accounts receivable (11,663) (21,229)
Inventories 15,238 (3,675)
Prepaid expenses and other 4,742 (5,492)
Accounts payable (6,999) 1,947
Accrued payroll and other accrued liabilities (1,008) 2,499
-------- --------
310 (25,950)
-------- --------
Net cash from (used for) operating activities 4,047 (14,930)
-------- --------
Cash flows from investing activities:
Capital expenditures (237) (1,477)
Proceeds from disposition of property and equipment 1,280 1,313
-------- --------
Net cash from (used for) investing activities 1,043 (164)
-------- --------
Cash flows from financing activities:
Credit facility revolver borrowings, net 317 15,966
Credit facility closing fees and expenses 45 --
Principal payments on long-term debt (4,543) (835)
Proceeds from exercise of stock options and employee
stock purchases 8 21
-------- --------
Net cash from (used for) financing activities (4,173) 15,152
-------- --------
Cash:
Net increase 917 58
Beginning balance 1,736 1,054
-------- --------
Ending balance $ 2,653 $ 1,1123
======== ========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2003, Olympic guaranteed 50% of OLP's $16,455 and 49%
of GSP's $1,352 of outstanding debt on a several basis.
The following table sets forth selected data for the Company's OLP joint
venture:
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
RESULTS OF OPERATIONS: 2003 2002
- ---------------------- ------- -------
Net sales $15,506 $13,194
Gross profit 6,090 5,576
Operating income 525 1,748
Net income $ 196 $ 1,400
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The following table sets forth selected data for the Company's GSP joint
venture:
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
RESULTS OF OPERATIONS: 2003 2002
- ---------------------- ------- -------
Net sales $ 2,331 $ 3,286
Gross profit 275 512
Operating income (loss) (199) 29
Net loss $ (221) $ (14)
(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, in 2002 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 $2,181 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.
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The Company's effective borrowing rate inclusive of deferred financing fees for
the first six months of 2003 was 4.6% compared to 9.7% 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 June 30, 2003, the Company had $22,865 of 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 $6,982 and $2,065 of checks issued that have not
cleared the bank as of June 30, 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 losses of $1,042 for the first six
months of 2002 are shown separate from the Company's results from continuing
operations. In addition, a $1,599 after-tax charge for the costs of the Tubing
closure was recorded in the second quarter of 2002. This non-cash charge
primarily related to the write down of Tubing's property and equipment to
estimated fair value less costs to sell in accordance with SFAS No. 144. 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.
During the first six months of 2003, the Company made net payments of $79 for
post-closure tenancy costs related to the Tubing facility. The accompanying June
30, 2003 and December 31, 2002 consolidated balance sheets include $235 and
$314, respectively, in "Other Accrued Liabilities" for remaining Tubing
liabilities, which the Company expects to be paid in 2003.
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Operating results of the discontinued Tubing operation were as follows for the
six months ended June 30, 2002:
Net sales $ 3,766
Loss before income taxes (1,695)
Loss from operations of discontinued tube operation, net of income tax
benefit of $653 (1,042)
Loss on disposition of discontinued tube operation, net of income tax
benefit of $1,001 (1,599)
-------
Loss from discontinued operations $(2,641)
=======
Basic and diluted net loss per share from discontinued operations $ (.28)
=======
(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 all periods presented. Stock options to purchase 1,118,833
shares at June 30, 2003 and 1,023,833 at June 30, 2002 were included in the
computation of diluted loss per share amounts.
(7) STOCK OPTIONS:
At June 30, 2003, stock options to purchase 1,118,833 shares were outstanding,
of which 630,000 were 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:
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FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
2003 2002
------- -------
Net loss, as reported $(1,033) $(2,533)
Pro forma expense, net of tax (238) (67)
-------
-------
Pro forma net loss $(1,271) $(2,600)
======= =======
Basic and diluted net loss per share:
As reported $ (0.11) $ (0.26)
======= =======
Pro forma $ (0.13) $ (0.27)
======= =======
(8) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first six months of 2003 and 2002 totaled $1,517 and
$2,110, 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 six months of 2003 totaled
$1,182, compared to $93 of income tax payments made in the first six months of
2002.
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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 using the
specific identification method and include the costs of the purchased steel,
internal and external processing, and inbound freight. 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.
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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 historical or projected future operating
results, significant changes in the manner of the use of the 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 Detroit and
Georgia operations. As of January 1, 2003, the Company reclassified internal
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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 June 30, 2003, Olympic guaranteed 50% of OLP's $16.5 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 losses of $1.0 million for the first
six months of 2002 are shown separate from the Company's results from continuing
operations. In addition, a $1.6 million after-tax charge for the costs of the
Tubing closure was recorded in the second quarter of 2002. This non-cash charge
primarily related to the write down of Tubing's property and equipment to
estimated fair value less costs to sell in accordance with SFAS No. 144. 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.
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In April 2003, the Company's collective bargaining agreement covering its
Minneapolis plate processing facility was renewed to March 31, 2006. In June
2003, the Company's collective bargaining agreement covering its Detroit hourly
plant maintenance personnel was renewed to June 30, 2007. 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.
RESULTS OF OPERATIONS
Tons sold decreased 11.5% to 279 thousand in the second quarter of 2003 from 315
thousand in the second quarter of 2002. Tons sold in the second quarter of 2003
included 234 thousand from direct sales and 45 thousand from toll processing,
compared with 274 thousand direct tons and 41 thousand toll tons in the
comparable period of last year. Tons sold in the first half of 2003 decreased
12.3% to 548 thousand from 624 thousand last year. Tons sold in the first half
included 464 thousand from direct sales and 84 thousand from toll processing,
compared with 542 thousand direct tons and 82 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
half of 2003, as demand for flat-rolled steel remains weak.
Net sales decreased 6.8% to $113.4 million in the second quarter of 2003 from
$121.7 million in the second quarter of 2002. Average selling prices for the
second quarter of 2003 increased 5.3% from last year's second quarter but
declined 4.8% from the first quarter of 2003. For the first half of 2003, net
sales decreased 1.6% to $228.3 million from $232.0 million despite an average
selling price increase of 12.2%.
As a percentage of net sales, gross profit decreased to 21.1% in the second
quarter of 2003 from 25.9% in the second quarter of 2002. For the first half of
2003, gross profit decreased to 21.0% from 25.7% in last year's first half. The
gross profit decreases are primarily the result of competitive pressures
attributable to weak demand for steel coupled with selling higher-priced steel
purchased during tight supply conditions experienced in 2002. The Company does
not expect market conditions to improve in the second half of 2003, which is
further impacted by seasonal slowdowns and customer plant shutdowns in July and
December. As a result, the Company expects its second half gross profit
percentages to remain consistent with first half 2003 performance.
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Operating expenses in the second quarter of 2003 decreased 12.8% to $23.8
million from $27.3 million in last year's second quarter. For the first half of
2003, operating expenses decreased 11.0% to $47.3 million from $53.2 million in
last year's first half. 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
21.0% for the second quarter of 2003 from 22.5% in the comparable 2002 period.
For the first half of 2003, operating expenses decreased to 20.7% of net sales
from 22.9% in last year's first half.
Income from joint ventures totaled $19 thousand in the second quarter of 2003,
compared with $501 thousand in the second quarter of 2002. For the first half of
2003, losses from joint ventures totaled $10 thousand compared with income of
$693 thousand in 2002.
Financing Costs in the second quarter of 2003 decreased to $1.0 million from
$1.8 million in the second quarter of 2002. For the first six months of 2003,
Financing Costs decreased to $2.1 million from $3.6 million in 2002. The
Company's effective borrowing rate inclusive of deferred financing fees for the
first six months of 2003 was 4.6% compared to 9.7% in 2002. Effective borrowing
rates decreased as a result of the Company's new credit facility completed in
December 2002 as well as a decline in the federal funds rate.
For the second quarter of 2003, the Company reported a loss from continuing
operations before income taxes of $816 thousand. In the 2002 second quarter,
income from continuing operations before income taxes and cumulative effect of a
change in accounting principle totaled $2.9 million. For the first half of 2003,
loss from continuing operations before income taxes totaled $1.6 million. For
the first half of 2002, income from continuing operations before income taxes
and cumulative effect of a change in accounting principle totaled $3.6 million.
An income tax provision of 38.5% was recorded in the first half of 2002.
Loss from the discontinued Tubing operation, net of a 38.5% income tax benefit,
totaled $2.4 million or $.25 per share in the second quarter of 2002. For the
first six months of 2002, loss from the discontinued Tubing operation, net of a
38.5% income tax benefit, totaled $2.6 million or $.28 per share.
Included in the Company's first half 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."
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Net loss for the second quarter of 2003 totaled $554 thousand or $.06 per share,
compared to a net loss of $618 thousand or $.06 per share for the second quarter
of 2002. Net loss for the first half of 2003 totaled $1.0 million or $.11 per
share, compared to a net loss of $2.5 million or $.26 per share in the first
half 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, 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 June 30, 2003 increased $1.8 million from the end of the
prior year. The increase was primarily attributable to a $10.4 million increase
in accounts receivables and a $7.0 million decrease in accounts payable, offset
in part by a $15.2 million inventory reduction from December 31, 2002.
Net cash provided by operating activities totaled $4.0 million for the six
months ended June 30, 2003. Cash generated from earnings before non-cash items
totaled $3.7 million, while cash generated from working capital components
totaled $310 thousand.
During the first six months of 2003, net cash generated from investing
activities totaled $1.0 million. Proceeds from the disposition of the Company's
discontinued Tubing operation equipment totaled $1.3 million. Capital spending
totaled $237 thousand in the first six months of 2003.
Net cash used for financing activities totaled $4.2 million and primarily
consisted of scheduled principal repayments under the Company's debt agreements
offset by borrowings on the Company's credit facility to fund working capital
requirements.
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
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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 six months of 2003 was 4.6% compared to 9.7% 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 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 June 30, 2003, the Company had $22.9 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
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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 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 six months
of 2003. The Company expects the current environment of 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held on May 8, 2003.
(b) At the annual meeting, the Company's shareholders elected Michael D.
Siegal, Thomas M. Forman, and James B. Meathe as Directors for a
two-year term, which expires at the annual meeting of shareholders in
2005.
The following tabulation represents voting for the Directors:
For Against
--- -------
Michael D. Siegal 7,985,464 80,165
Thomas M. Forman 7,989,592 76,037
James B. Meathe 7,991,592 74,037
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 - Certification of the Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 - Certification of the Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 - Certification of the Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2 - Certification of the Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
Report on Form 8-K dated May 8, 2003 to report the results of
operations for the three months ended March 31, 2003.
Report on Form 8-K dated July 31, 2003 to report the results of
operations for the three and six months ended June 30, 2003.
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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: August 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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