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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, 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 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
--------------
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 November 13, 2003
------------------------------- -----------------------------------
Common stock, without par value 9,647,068
1 0F 28
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, 2003 and 3
December 31, 2002
Consolidated Statements of Operations - for the three and nine 4
months ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows - for the nine months 5
ended September 30, 2003 and 2002
Notes to Consolidated Financial Statements 6-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12-19
CONDITION AND RESULTS OF OPERATIONS
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 20
Item 4. CONTROLS AND PROCEDURES 20
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
CERTIFICATIONS 23-28
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------- ----------------
(UNAUDITED)
ASSETS
CASH $ 2,555 $ 1,736
ACCOUNTS RECEIVABLE, NET 65,925 48,877
INVENTORIES 82,230 101,837
PREPAID EXPENSES AND OTHER 1,812 9,399
ASSETS HELD FOR SALE 637 837
---------------- ----------------
TOTAL CURRENT ASSETS 153,159 162,686
---------------- ----------------
PROPERTY AND EQUIPMENT, AT COST 151,947 151,563
ACCUMULATED DEPRECIATION (60,344) (54,240)
---------------- ----------------
NET PROPERTY AND EQUIPMENT 91,603 97,323
---------------- ----------------
INVESTMENTS IN JOINT VENTURES 483 637
DEFERRED FINANCING FEES, NET 1,664 2,265
---------------- ----------------
TOTAL ASSETS $ 246,909 $ 262,911
================ ================
LIABILITIES
CURRENT PORTION OF LONG-TERM DEBT $ 4,504 $ 6,973
ACCOUNTS PAYABLE 24,150 28,665
ACCRUED PAYROLL 2,882 2,498
OTHER ACCRUED LIABILITIES 3,951 5,826
---------------- ----------------
TOTAL CURRENT LIABILITIES 35,487 43,962
---------------- ----------------
CREDIT FACILITY REVOLVER 56,961 57,560
TERM LOANS 35,104 38,056
INDUSTRIAL REVENUE BONDS 3,868 4,204
---------------- ----------------
TOTAL LONG-TERM DEBT 95,933 99,820
---------------- ----------------
DEFERRED INCOME TAXES 1,143 3,634
---------------- ----------------
TOTAL LIABILITIES 132,563 147,416
---------------- ----------------
SHAREHOLDERS' EQUITY
PREFERRED STOCK - -
COMMON STOCK 99,779 99,766
OFFICER NOTE RECEIVABLE (740) (726)
RETAINED EARNINGS 15,307 16,455
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 114,346 115,495
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 246,909 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
(UNAUDITED)
TONS SOLD
DIRECT 253,337 241,960 716,750 784,419
TOLL 48,422 35,542 132,658 117,214
------------- ------------- ------------ ------------
301,759 277,502 849,408 901,633
------------- ------------- ------------ ------------
NET SALES $ 115,850 $ 116,465 $ 344,131 $ 348,417
COST OF MATERIALS SOLD 90,845 89,083 271,262 261,336
------------- ------------- ------------ ------------
GROSS PROFIT 25,005 27,382 72,869 87,081
OPERATING EXPENSES
WAREHOUSE AND PROCESSING 8,072 9,093 24,207 27,789
ADMINISTRATIVE AND GENERAL 5,697 6,069 17,257 18,417
DISTRIBUTION 4,211 4,320 11,965 13,352
SELLING 2,613 3,286 8,201 10,055
OCCUPANCY 884 944 2,976 3,027
DEPRECIATION 2,037 2,072 6,247 6,356
------------- ------------- ------------ ------------
TOTAL OPERATING EXPENSES 23,514 25,784 70,853 78,996
------------- ------------- ------------ ------------
OPERATING INCOME 1,491 1,598 2,016 8,085
INCOME (LOSS) FROM JOINT VENTURES (644) (31) (654) 662
------------- ------------- ------------ ------------
INCOME BEFORE FINANCING COSTS AND INCOME TAXES 847 1,567 1,362 8,747
INTEREST AND OTHER EXPENSE ON DEBT 993 1,323 3,122 4,884
------------- ------------- ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (146) 244 (1,760) 3,863
INCOME TAX BENEFIT (PROVISION) 31 (94) 612 (1,488)
------------- ------------- ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (115) 150 (1,148) 2,375
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED TUBE OPERATION,
NET OF INCOME TAX BENEFIT - - - (1,042)
LOSS ON DISPOSITION OF DISCONTINUED TUBE OPERATION,
NET OF INCOME TAX BENEFIT - - - (1,599)
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (115) 150 (1,148) (266)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAX BENEFIT - - - (2,117)
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (115) $ 150 $ (1,148) $ (2,383)
============= ============= ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (0.01) $ 0.02 $ (0.12) $ 0.25
LOSS FROM DISCONTINUED OPERATIONS - - - (0.28)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - - - (0.22)
------------- ------------- ------------ ------------
NET INCOME (LOSS) PER SHARE $ (0.01) $ 0.02 $ (0.12) $ (0.25)
============= ============= ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 9,646 9,638 9,645 9,635
The accompanying notes are an integral part of these statements.
4 of 28
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
2003 2002
---------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,148) $ (2,383)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FROM
OPERATING ACTIVITIES-
DEPRECIATION AND AMORTIZATION 6,804 7,624
LOSS (INCOME) FROM JOINT VENTURES 654 (662)
LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT 4 219
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 (2,491) 5,468
---------------- ----------------
3,823 13,982
CHANGES IN WORKING CAPITAL:
ACCOUNTS RECEIVABLE (18,337) (20,790)
INVENTORIES 19,607 (27,002)
PREPAID EXPENSES AND OTHER 7,587 (1,847)
ACCOUNTS PAYABLE (4,515) 8,667
ACCRUED PAYROLL AND OTHER ACCRUED LIABILITIES (1,291) 1,755
---------------- ----------------
3,051 (39,217)
---------------- ----------------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 6,874 (25,235)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (549) (3,011)
PROCEEDS FROM DISPOSITION OF PROPERTY AND EQUIPMENT 1,292 1,615
INVESTMENTS IN JOINT VENTURES (500) -
---------------- ----------------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES 243 (1,396)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
CREDIT FACILITY REVOLVER BORROWINGS (PAYMENTS), NET (599) 38,431
CREDIT FACILITY CLOSING FEES AND EXPENSES 45 -
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (5,757) (12,475)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS AND EMPLOYEE
STOCK PURCHASES 13 21
---------------- ----------------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (6,298) 25,977
---------------- ----------------
CASH:
NET CHANGE 819 (654)
BEGINNING BALANCE 1,736 1,054
---------------- ----------------
ENDING BALANCE $ 2,555 $ 400
================ ================
The accompanying notes are an integral part of these statements.
5 of 28
OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2003, Olympic guaranteed 50% of OLP's $16,794 and
49% of GSP's $1,050 of outstanding debt on a several basis.
The following table sets forth selected data for the Company's OLP joint
venture:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
UNAUDITED RESULTS OF OPERATIONS: 2003 2002
- -------------------------------- -------------- ---------------
Net sales $ 22,414 $ 18,978
Gross profit 8,069 7,858
Operating income (loss) (569) 1,972
Net income (loss) $(1,056) $ 1,428
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The Company records 50% of OLP's net income or loss to its Consolidated
Statements of Operations as "Income (Loss) from Joint Ventures."
The following table sets forth selected data for the Company's GSP joint
venture:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
UNAUDITED RESULTS OF OPERATIONS: 2003 2002
- -------------------------------- -------------- ---------------
Net sales $ 4,131 $ 4,787
Gross profit 505 702
Operating loss (227) (42)
Net loss $ (257) $ (105)
The Company records 49% of GSP's net income or loss to its Consolidated
Statements of Operations as "Income (Loss) from Joint Ventures."
(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
7 of 28
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.
The Company's effective borrowing rate inclusive of deferred financing fees for
the first nine months of 2003 was 4.5% compared to 8.4% 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, (iii) restrictions on
additional indebtedness, and (iv) limitations on capital expenditures. At
September 30, 2003, the Company had $23,889 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 $6,421 and $2,065 of checks issued that have not
cleared the bank as of September 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 nine
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. At September 30, 2003, the carrying value of the
Tubing real estate was $637 and is recorded as "Assets Held for Sale" on the
accompanying consolidated balance sheets.
8 of 28
Operating results of the discontinued Tubing operation were as follows for the
nine months ended September 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. Weighted average shares outstanding were 9.6 million for all
periods presented. Stock options to purchase 1,098,333 shares at September 30,
2003 and 996,333 at September 30, 2002 were not included in the computation of
diluted loss per share amounts because to do so would be antidilutive.
(7) STOCK OPTIONS:
At September 30, 2003, stock options to purchase 1,098,333 shares were
outstanding, of which 613,833 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.
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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 NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2003 2002
-------------- ---------------
Net loss, as reported $(1,148) $(2,383)
Pro forma expense, net of tax (242) (100)
-------------- ---------------
Pro forma net loss $(1,390) $(2,483)
============== ===============
Basic and diluted net loss per share:
As reported $ (0.12) $ (0.25)
============== ===============
Pro forma $ (0.14) $ (0.26)
============== ===============
(8) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first nine months of 2003 and 2002 totaled $2,296 and
$4,006, 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 nine months of 2003 totaled
$1,182. For the first nine months of 2002, income tax refunds net of taxes paid
totaled $3,584.
(9) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 applies immediately to any
variable interest entities created after January 31, 2003, and to variable
interest entities in which an interest is obtained after that date. The
interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities and
results of operations of the variable interest entity must be included in the
consolidated financial statements with those of the business
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enterprise. This interpretation is applicable to the Company in the quarter
ended September 30, 2003, for interests acquired in variable interest
enterprises prior to February 1, 2003. The Company is currently evaluating the
impact of FIN 46 on its financial statements.
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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 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
13 of 28
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 September 30, 2003, Olympic guaranteed 50% of OLP's $16.8
million and 49% of GSP's $1.1 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
nine 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. At September 30, 2003, the
carrying value of the Tubing real estate was $637 thousand and is recorded as
"Assets Held for Sale" on the accompanying consolidated balance sheets.
14 of 28
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 increased 8.7% to 302 thousand in the third quarter of 2003 from 278
thousand in the third quarter of 2002. Tons sold in the third quarter of 2003
included 253 thousand from direct sales and 49 thousand from toll processing,
compared with 242 thousand direct tons and 36 thousand toll tons in the
comparable period of last year. Tons sold in the first nine months of 2003
decreased 5.8% to 849 thousand from 902 thousand last year. Tons sold in the
first nine months included 717 thousand from direct sales and 132 thousand from
toll processing, compared with 785 thousand direct tons and 117 thousand toll
tons in the comparable period of last year. The decrease in tons sold for the
nine months of 2003 was attributable to depressed customer demand across
substantially all markets served by the Company. Although third quarter results
reflected an increase in customer demand, the Company believes the market
remains fragile as it enters the seasonally weak fourth quarter.
Net sales decreased .5% to $115.9 million in the third quarter of 2003 from
$116.5 million in the third quarter of 2002. Average selling prices for the
third quarter of 2003 decreased 8.5% from last year's third quarter and declined
5.6% from the second quarter of 2003. For the first nine months of 2003, net
sales decreased 1.2% to $344.1 million from $348.4 million despite an average
selling price increase of 4.8%.
As a percentage of net sales, gross profit decreased to 21.6% in the third
quarter of 2003 from 23.5% in the third quarter of 2002. For the first nine
months of 2003, gross profit decreased to 21.2% from 25.0% in last year's first
nine months. 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.
Operating expenses in the third quarter of 2003 decreased 8.8% to $23.5 million
from $25.8 million in last year's third quarter. For the first nine months of
2003, operating expenses decreased 10.3% to $70.9 million from $79.0 million in
last year's first nine months. The operating expense decreases are the result of
personnel reductions and additional cost cutting
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measures, as well as decreased sales volumes for the first nine months. As a
percentage of net sales, operating expenses decreased to 20.3% for the third
quarter of 2003 from 22.1% in the comparable 2002 period. For the first nine
months of 2003, operating expenses decreased to 20.6% of net sales from 22.7% in
last year's first nine months.
The Company's share of its OLP joint venture losses totaled $626 thousand in the
third quarter of 2003, compared with $14 thousand of income in the third quarter
of 2002. For the first nine months of 2003, the Company's share of OLP losses
totaled $528 thousand compared to income of $714 in 2002. OLP's earnings have
declined in 2003 as a result of slower than expected sales, laser equipment
downtime and related additional labor costs. OLP's sales levels and operating
results are not expected to improve in the last 3 months of 2003. The Company's
share of its GSP joint venture losses totaled $18 thousand in the third quarter
of 2003, compared with $45 thousand in the third quarter of 2002. For the first
nine months of 2003, the Company's share of GSP losses totaled $126 thousand
compared to $52 thousand in 2002.
Financing Costs in the third quarter of 2003 decreased to $1.0 million from $1.3
million in the third quarter of 2002. For the first nine months of 2003,
Financing Costs decreased to $3.1 million from $4.9 million in 2002. The
Company's effective borrowing rate inclusive of deferred financing fees for the
first nine months of 2003 was 4.5% compared to 8.4% 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 third quarter of 2003, the Company reported a loss from continuing
operations before income taxes of $146 thousand. In the 2002 third quarter,
income from continuing operations before income taxes and cumulative effect of a
change in accounting principle totaled $244 thousand. For the first nine months
of 2003, loss from continuing operations before income taxes totaled $1.8
million. For the first nine months of 2002, income from continuing operations
before income taxes and cumulative effect of a change in accounting principle
totaled $3.9 million. An income tax benefit of 34.8% was recorded in the first
nine months of 2003. 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. An income tax
provision of 38.5% was recorded in the first nine months of 2002.
For the first nine 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 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
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Financial Accounting Standards Board Statement No. 142 (SFAS No. 142), "Goodwill
and Other Intangible Assets."
Net loss for the third quarter of 2003 totaled $115 thousand or $.01 per share,
compared to net income of $150 thousand or $.02 per share for the third quarter
of 2002. Net loss for the first nine months of 2003 totaled $1.1 million or $.12
per share, compared to a net loss of $2.4 million or $.25 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, 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, 2003 decreased $1.1 million from the end of the
prior year. The decrease was primarily attributable to a $19.6 million inventory
reduction offset by an $18.3 million increase in accounts receivable from
December 31, 2002. The Company plans to increase its inventory levels in the
last 3 months of 2003.
Net cash provided by operating activities totaled $6.9 million for the nine
months ended September 30, 2003. Cash generated from earnings before non-cash
items totaled $3.8 million, while cash generated from working capital components
totaled $3.1 million.
During the first nine months of 2003, net cash generated from investing
activities totaled $243 thousand. Proceeds from the disposition of the Company's
discontinued Tubing operation equipment totaled $1.3 million. Capital spending
totaled $549 thousand in the first nine months of 2003.
Net cash used for financing activities totaled $6.3 million and primarily
consisted of scheduled principal repayments under the Company's debt agreements
and paydowns on the Company's revolving credit agreement.
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
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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 nine months of 2003 was 4.5% compared to 8.4% 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, (iii) restrictions
on additional indebtedness, and (iv) limitations on capital expenditures. At
September 30, 2003, the Company had $23.9 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.
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IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 applies immediately to any
variable interest entities created after January 31, 2003, and to variable
interest entities in which an interest is obtained after that date. The
interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities and
results of operations of the variable interest entity must be included in the
consolidated financial statements with those of the business enterprise. This
interpretation is applicable to the Company in the quarter ended September 30,
2003, for interests acquired in variable interest enterprises prior to February
1, 2003. The Company is currently evaluating the impact of FIN 46 on its
financial statements.
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 decreased over the last 9
months. When raw material prices decline, market forces lower prices and, as the
Company uses existing higher cost steel inventory, result in lower gross profit
dollars. Declining steel prices therefore adversely affected the Company's
results of operations in the first nine months of 2003. The Company expects raw
material prices for its products to increase in the last 3 months of 2003.
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
(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 July 31, 2003 to report the results of
operations for the three and six months ended June 30, 2003.
Report on Form 8-K dated October 30, 2003 to report the results
of operations for the three and nine months ended September 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: November 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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