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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, 2004
( ) 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 May 10, 2004
------------------------------- ------------------------------
Common stock, without par value 9,789,007
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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, 2004 and
December 31, 2003 3
Consolidated Statements of Operations - for the three months
ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - for the three
months ended March 31, 2004 and 2003 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 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
EXHIBITS 22-27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
ASSETS
CASH $ 5,752 $ 3,087
ACCOUNTS RECEIVABLE, NET 82,319 56,501
INVENTORIES 94,739 92,775
PREPAID EXPENSES AND OTHER 3,840 2,794
ASSETS HELD FOR SALE 337 637
--------- ---------
TOTAL CURRENT ASSETS 186,987 155,794
--------- ---------
PROPERTY AND EQUIPMENT, AT COST 152,135 152,085
ACCUMULATED DEPRECIATION (64,348) (62,303)
--------- ---------
NET PROPERTY AND EQUIPMENT 87,787 89,782
--------- ---------
INVESTMENTS IN JOINT VENTURES 1,703 1,625
DEFERRED FINANCING FEES, NET 1,579 1,801
--------- ---------
TOTAL ASSETS $ 278,056 $ 249,002
========= =========
LIABILITIES
CURRENT PORTION OF LONG-TERM DEBT $ 4,889 $ 4,877
ACCOUNTS PAYABLE 34,644 31,345
ACCRUED PAYROLL 6,427 2,772
OTHER ACCRUED LIABILITIES 5,602 3,580
--------- ---------
TOTAL CURRENT LIABILITIES 51,562 42,574
--------- ---------
CREDIT FACILITY REVOLVER 59,443 55,537
TERM LOANS 32,154 33,629
INDUSTRIAL REVENUE BONDS 3,520 3,754
--------- ---------
TOTAL LONG-TERM DEBT 95,117 92,920
--------- ---------
DEFERRED INCOME TAXES 8,111 1,272
--------- ---------
TOTAL LIABILITIES 154,790 136,766
--------- ---------
SHAREHOLDERS' EQUITY
PREFERRED STOCK - -
COMMON STOCK 99,969 99,790
OFFICER NOTE RECEIVABLE (745) (749)
RETAINED EARNINGS 24,042 13,195
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 123,266 112,236
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 278,056 $ 249,002
========= =========
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)
2004 2003
--------- ---------
(UNAUDITED)
TONS SOLD
DIRECT 330,095 229,501
TOLL 55,049 39,434
--------- ---------
385,144 268,935
--------- ---------
NET SALES $ 187,033 $ 114,880
COST OF MATERIALS SOLD 133,546 90,987
--------- ---------
GROSS PROFIT 53,487 23,893
OPERATING EXPENSES
WAREHOUSE AND PROCESSING 10,884 7,988
ADMINISTRATIVE AND GENERAL 9,677 5,808
DISTRIBUTION 5,071 3,764
SELLING 5,316 2,754
OCCUPANCY 1,333 1,113
DEPRECIATION 2,071 2,087
ASSET IMPAIRMENT CHARGE 300 -
--------- ---------
TOTAL OPERATING EXPENSES 34,652 23,514
--------- ---------
OPERATING INCOME 18,835 379
INCOME (LOSS) FROM JOINT VENTURES 78 (29)
--------- ---------
INCOME BEFORE FINANCING COSTS AND INCOME TAXES 18,913 350
INTEREST AND OTHER EXPENSE ON DEBT 1,418 1,148
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 17,495 (798)
INCOME TAX PROVISION (BENEFIT) 6,648 (319)
--------- ---------
NET INCOME (LOSS) $ 10,847 $ (479)
========= =========
EARNINGS PER SHARE:
NET INCOME (LOSS) PER SHARE - BASIC $ 1.12 $ (0.05)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 9,675 9,644
========= =========
NET INCOME (LOSS) PER SHARE - DILUTED $ 1.09 $ (0.05)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 9,959 9,644
========= =========
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)
2004 2003
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 10,847 $ (479)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FROM
OPERATING ACTIVITIES-
DEPRECIATION AND AMORTIZATION 2,453 2,274
(INCOME) LOSS FROM JOINT VENTURES (78) 29
ASSET IMPAIRMENT CHARGE 300 -
LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT 28 -
LONG-TERM DEFERRED INCOME TAXES 6,839 71
-------- --------
20,389 1,895
CHANGES IN WORKING CAPITAL:
ACCOUNTS RECEIVABLE (25,814) (11,562)
INVENTORIES (1,964) 9,402
PREPAID EXPENSES AND OTHER (1,046) 4,967
ACCOUNTS PAYABLE 3,299 (5,032)
ACCRUED PAYROLL AND OTHER ACCRUED LIABILITIES 5,676 (784)
-------- --------
(19,849) (3,009)
-------- --------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 540 (1,114)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (107) (95)
PROCEEDS FROM DISPOSITION OF PROPERTY AND EQUIPMENT 3 1,275
-------- --------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (104) 1,180
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
CREDIT FACILITY REVOLVER BORROWINGS (PAYMENTS), NET 3,906 5,617
SCHEDULED REPAYMENTS OF LONG-TERM DEBT (1,697) (3,330)
CREDIT FACILITY FEES AND EXPENSES (159) -
PROCEEDS FROM EXERCISE OF STOCK OPTIONS AND EMPLOYEE
STOCK PURCHASES 179 5
-------- --------
NET CASH FROM FINANCING ACTIVITIES 2,229 2,292
-------- --------
CASH:
NET INCREASE 2,665 2,358
BEGINNING BALANCE 3,087 1,736
-------- --------
ENDING BALANCE $ 5,752 $ 4,094
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(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.
(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, 2004, Olympic guaranteed 50% of OLP's $16,818 and 49%
of GSP's $2,126 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,
--------------------
UNAUDITED RESULTS OF OPERATIONS: 2004 2003
- -------------------------------- ------- --------
Net sales $ 8,208 $ 7,014
Gross profit 3,153 2,737
Operating income 209 231
Net income $ 41 $ 55
The Company records 50% of OLP's net income or loss to its Consolidated
Statements of Operations as "Income (Loss) from Joint Ventures."
6 of 27
The following table sets forth selected data for the Company's GSP joint
venture:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
UNAUDITED RESULTS OF OPERATIONS: 2004 2003
- -------------------------------- ------- --------
Net sales $ 2,860 $ 1,270
Gross profit 461 138
Operating income (loss) 129 (104)
Net income (loss) $ 117 $ (116)
The Company records 49% of GSP's net income or loss to its Consolidated
Statements of Operations as "Income (Loss) from Joint Ventures."
(3) DEBT:
In December 2002, the Company entered into a 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 "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 also
incurred $956 of bank amendment fees in the fourth quarter of 2003 and first
quarter of 2004 related to the year ended December 31, 2003.
The Company's effective borrowing rate inclusive of deferred financing fees for
the first three months of 2004 was 6.0% compared to 5.0% in 2003. Effective
borrowing rates increased as a result of higher financing fees and margin
interest charged by the Company's bank group. 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
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March 31, 2004, the Company had $30,087 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 $12,443 and $1,716 of checks issued that have
not cleared the bank as of March 31, 2004, and December 31, 2003, respectively.
(4) 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 was accounted for as a discontinued operation and its
assets were written down to their estimated fair value less costs to sell. The
carrying value of the Tubing real estate is recorded as "Assets Held for Sale"
on the accompanying balance sheets and the carrying value was reduced by $300 to
a balance of $337 as of March 31, 2004 to reflect the revised estimated fair
value.
(5) SHARES OUTSTANDING AND EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Weighted average basic shares outstanding were 9.7 and 9.6
million for the periods ended March 31, 2004 and March 31, 2003, respectively.
Weighted average diluted shares outstanding were 10.0 and 9.6 million for the
periods ended March 31, 2004 and March 31, 2003, respectively. The dilution is
attributable to stock options as detailed in the following table:
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
-------------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
BASIC EPS
Income available to common stockholders $10,847 9,675 $ 1.12
EFFECT OF DILUTIVE SECURITIES
Stock Options 284
DILUTED EPS
Income available to common stockholders + assumed conversions
$10,847 9,959 $ 1.09
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(6) STOCK OPTIONS:
At March 31, 2004, stock options to purchase 984,833 shares were outstanding, of
which 560,333 were exercisable at prices ranging from $1.97 to $15.50 per share
(28,000 options were anti-dilutive).
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,
--------------------
2004 2003
------- --------
Net income (loss), as reported $10,847 $ (479)
Pro forma expense, net of tax (67) (59)
------- -------
Pro forma net income (loss) $10,780 $ (538)
======= =======
Basic net income (loss) per share:
As reported $ 1.12 $ (0.05)
======= =======
Pro forma $ 1.11 $ (0.06)
======= =======
Diluted net income (loss) per share:
As reported $ 1.09 $ (0.05)
======= =======
Pro forma $ 1.08 $ (0.06)
======= =======
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(7) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first three months of 2004 and 2003 totaled $1,340 and
$670, 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 an income tax refund of $1,157 in March
2003 after filing its federal income tax return for the fiscal year ended
December 31, 2002 and the related carryback claim. Income tax refunds in the
first three months of 2003 totaled $1,182. There were no income taxes paid or
refunds received in the first three months of 2004 due to the Company's net
operating loss carryforwards.
(8) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December 2003, the FASB issued revised FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 applies immediately to any
variable interest entities created after December 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 March 31, 2004,
for interests acquired in variable interest enterprises prior to January 1,
2004. The application of FIN 46 had no impact on the Company's financial
statements.
10 of 27
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.
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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 expected 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.
Revenue Recognition
Revenue is recognized in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition." For both
direct and toll shipments, revenue is recognized when steel is shipped to the
customer and title is transferred. Virtually all of the Company's sales are
shipped and received within 1 day. Sales returns and allowances are treated as
reductions to sales and are provided for based on historical experience and
current estimates and are immaterial to the consolidated financial statements.
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.
12 of 27
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
steel availability, 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.
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, 2004, Olympic guaranteed 50% of OLP's $16.8 million
and 49% of GSP's $2.1 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.
Recent international sales have been immaterial to the Company's consolidated
financial results.
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
and its assets were written down to their estimated fair value less costs to
sell. The carrying value of the Tubing real estate is recorded as "Assets Held
for Sale" on the accompanying balance sheets and the carrying value was reduced
by $300 to a balance of $337 as of March 31, 2004 to reflect the revised
estimated fair value.
In 2003, the Company's collective bargaining agreements covering its Minneapolis
plate processing facility personnel and its Detroit hourly plant maintenance
personnel were continued through March 31, 2006 and June 30, 2007, respectively.
The collective bargaining agreements covering hourly plant employees at the
Company's Detroit and Minneapolis coil facilities expire on June 30, 2004 and
September 30, 2005, respectively. The Company has never experienced a
13 of 27
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 43.2% to 385 thousand in the first quarter of 2004 from 269
thousand in the first quarter of 2003. Tons sold in the first quarter of 2004
included 330 thousand from direct sales and 55 thousand from toll processing,
compared with 230 thousand direct tons and 39 thousand toll tons in the
comparable period of last year. The increase in tons sold for the three months
of 2004 was attributable to increased customer demand across substantially all
markets. The Company believes that customer demand will remain strong as it
enters the seasonally stronger second quarter. The Company also believes that
the availability of steel will continue to remain tight, which could lead to
disruptions in the Company's ability to meet its customers' material
requirements.
Net sales increased 62.8% to $187.0 million in the first quarter of 2004 from
$114.9 million in the first quarter of 2003. Significant customer demand,
coupled with tight steel supply, has resulted in a dramatic increase in steel
pricing. Average selling prices for the first quarter of 2004 increased 13.7%
from last year's first quarter and increased 25.5% from the fourth quarter of
2003.
As a percentage of net sales, gross profit increased to 28.6% in the first
quarter of 2004 from 20.8% in the first quarter of 2003. The gross profit
increase is primarily the result of strong customer demand for steel coupled
with tight supply conditions. Increasing costs of inventories could adversely
affect the Company's gross profit percentage in subsequent quarters.
Operating expenses in the first quarter of 2004 increased 47.4% to $34.7 million
from $23.5 million in last year's first quarter. The operating expense increases
are primarily the result of increased payroll, incentive compensation and
distribution expenses associated with the increases in sales volume for the
first three months. As a percentage of net sales, operating expenses decreased
to 18.5% for the first quarter of 2004 from 20.5% in the comparable 2003 period.
The Company's share of its OLP joint venture income totaled $20 thousand in the
first quarter of 2004, compared with income of $28 thousand in the first quarter
of 2003. The Company's share of its GSP joint venture income totaled $58
thousand in the first quarter of 2004, compared with a loss of $57 thousand in
the first quarter of 2003.
14 of 27
Financing Costs in the first quarter of 2004 increased to $1.4 million from $1.1
million in the first quarter of 2003. The Company's effective borrowing rate
inclusive of deferred financing fees for the first three months of 2004 was 6.0%
compared to 5.0% in 2003. The Company has the option to borrow based on the
agent bank's base rate or Eurodollar Rates (EURO) plus a premium ("the
Premium"). Effective borrowing rates increased as a result of higher financing
fees and Premium charged by the Company's bank group. The Company expects its
effective borrowing rate to decrease in the second quarter of 2004 as a result
of a 175 basis point decline in the Premium commencing April 23, 2004.
For the first quarter of 2004, the Company reported income before income taxes
of $17.5 million compared to the 2003 first quarter loss before income taxes of
$798 thousand. An income tax provision of 38.0% was recorded in the first three
months of 2004, compared with an income tax benefit of 40.0% recorded in the
first three months of 2003. While there were no income taxes paid in the first
three months of 2004 due to the Company's net operating loss carryforwards, the
Company expects to utilize its remaining loss carryforward and to make income
tax payments later in 2004.
Net income for the first quarter of 2004 totaled $10.8 million or $1.12 per
basic share and $1.09 per diluted share, compared to a net loss of $479 thousand
or $.05 per basic share and diluted share for the first quarter of 2003.
Weighted average basic shares outstanding totaled 9.7 million and 9.6 million
for the periods ended March 31, 2004 and March 31, 2003, respectively. Weighted
average diluted shares outstanding totaled 10.0 million and 9.6 million for the
periods ended March 31, 2004 and March 31, 2003, respectively.
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, 2004 increased $22.2 million from the end of the
prior year. The increase was primarily attributable to a $25.8 million increase
in accounts receivable, offset by a $3.6 million increase in accrued payroll.
The increase in accounts receivable is the result of a 62.8% increase in sales.
15 of 27
Net cash provided by operating activities totaled $540 thousand for the three
months ended March 31, 2004. Cash generated from earnings before non-cash items
totaled $20.4 million, while cash used for working capital components totaled
$19.8 million. The increase in steel pricing has resulted in significant
increases in the Company's inventories and is partially responsible for an
increase in accounts receivable, causing a significant usage of working capital.
During the first three months of 2004, net cash used for investing activities
totaled $104 thousand. Capital spending totaled $107 thousand in the first three
months of 2004. The Company does not expect to make significant capital
expenditures during the second quarter of 2004.
Net cash generated from financing activities totaled $2.2 million and primarily
consisted of borrowings on the Company's revolving credit agreement, 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 an income tax refund of $1.2 million in
March 2003 after filing its federal income tax return for the fiscal year ended
December 31, 2002 and the related carryback claim. The Company expects to
utilize its remaining loss carryforwards and to make income tax payments later
in 2004.
In December 2002, the Company entered into a 3-year, $132 million secured
bank-financing agreement (the Credit Facility). 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 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. 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
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March 31, 2004, the Company had $30.1 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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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
Since the beginning of 2004, steel producers have significantly increased prices
and have imposed significant material surcharges. In addition, there has been a
very tight supply of steel in 2004. Raw material price increases have translated
into higher prices for the Company's products and as the Company utilizes
existing steel inventories, it has resulted in higher gross profit dollars and
margins. The Company expects raw material prices for its products to further
increase in the second quarter of 2004. Although the Company has generally been
successful in passing the increased costs and surcharges on to its customers, it
is possible that the Company may not be able to obtain all the material required
by its customers or pass the increased material costs fully to its customers due
to the competitive nature of the business. Changing steel prices could adversely
affect the Company's net sales, gross profit and net income. The Company is a
variable-rate borrower and future increases in interest rates could result in
increased interest expense.
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 March 31, 2004.
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 during the first quarter
of 2004.
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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 February 12, 2004 to report the
results of operations for the three months and the year ended
December 31, 2004.
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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 10, 2004 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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