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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, 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 August 13, 2004
------------------------------- ---------------------------------
Common stock, without par value 9,863,825
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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, 2004 (unaudited) and
December 31, 2003 (audited) 3
Consolidated Statements of Operations - for the three and six
months ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows - for the six months
ended June 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-17
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19-20
SIGNATURES 21
EXHIBITS 22-47
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2004 2003
------------ ------------
(unaudited)
Assets
Cash $ 5,670 $ 3,087
Accounts receivable, net 97,606 56,501
Inventories 132,510 92,775
Prepaid expenses and other 1,600 2,794
Assets held for sale 150 637
------------ ------------
Total current assets 237,536 155,794
------------ ------------
Property and equipment, at cost 153,069 152,085
Accumulated depreciation (66,400) (62,303)
------------ ------------
Net property and equipment 86,669 89,782
------------ ------------
Investments in joint ventures 1,797 1,625
Deferred financing fees, net 1,356 1,801
------------ ------------
Total assets $ 327,358 $ 249,002
============ ============
Liabilities
Current portion of long-term debt $ 4,892 $ 4,877
Accounts payable 60,311 31,345
Accrued payroll 11,196 2,772
Other accrued liabilities 13,106 3,580
------------ ------------
Total current liabilities 89,505 42,574
------------ ------------
Credit facility revolver 51,042 55,537
Term loans 31,053 33,629
Industrial revenue bonds 3,400 3,754
------------ ------------
Total long-term debt 85,495 92,920
------------ ------------
Deferred income taxes 9,252 1,272
------------ ------------
Total liabilities 184,252 136,766
------------ ------------
Shareholders' Equity
Preferred stock - -
Common stock 101,318 99,790
Officer note receivable (754) (749)
Retained earnings 42,542 13,195
------------ ------------
Total shareholders' equity 143,106 112,236
------------ ------------
Total liabilities and shareholders' equity $ 327,358 $ 249,002
============ ============
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,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited)
Tons sold
Direct 292,973 233,912 623,068 463,413
Toll 51,096 44,802 106,145 84,236
----------- ----------- ----------- -----------
344,069 278,714 729,213 547,649
----------- ----------- ----------- -----------
Net sales $ 222,773 $ 113,401 $ 409,806 $ 228,281
Cost of materials sold 152,247 89,430 285,793 180,417
----------- ----------- ----------- -----------
Gross profit 70,526 23,971 124,013 47,864
Operating expenses
Warehouse and processing 11,425 8,147 22,309 16,135
Administrative and general 13,360 5,752 23,037 11,560
Distribution 4,711 3,990 9,782 7,754
Selling 5,764 2,834 11,080 5,588
Occupancy 1,256 979 2,589 2,092
Depreciation 2,076 2,123 4,147 4,210
Asset impairment charge 187 - 487 -
----------- ----------- ----------- -----------
Total operating expenses 38,779 23,825 73,431 47,339
----------- ----------- ----------- -----------
Operating income 31,747 146 50,582 525
Income (loss) from joint ventures 94 19 172 (10)
----------- ----------- ----------- -----------
Income before financing costs and income taxes 31,841 165 50,754 515
Interest and other expense on debt 1,027 981 2,445 2,129
----------- ----------- ----------- -----------
Income (loss) before income taxes 30,814 (816) 48,309 (1,614)
Income tax provision (benefit) 12,314 (262) 18,962 (581)
----------- ----------- ----------- -----------
Net income (loss) $ 18,500 $ (554) $ 29,347 $ (1,033)
=========== =========== =========== ===========
Earnings per share:
Net income (loss) per share - basic $ 1.89 $ (0.06) $ 3.01 $ (0.11)
=========== =========== =========== ===========
Weighted average shares outstanding - basic 9,794 9,645 9,734 9,644
=========== =========== =========== ===========
Net income (loss) per share - diluted $ 1.82 $ (0.06) $ 2.90 $ (0.11)
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 10,182 9,645 10,108 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 SIX MONTHS ENDED JUNE 30,
(in thousands)
2004 2003
---------- ----------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 29,347 $ (1,033)
Adjustments to reconcile net income (loss) to net cash from
operating activities-
Depreciation and amortization 4,910 4,584
(Income) loss from joint ventures (172) 10
Asset impairment charge 487 -
Loss (gain) on disposition of property and equipment 28 (3)
Long-term deferred income taxes 7,980 179
---------- ----------
42,580 3,737
Changes in working capital:
Accounts receivable (41,110) (11,663)
Inventories (39,735) 15,238
Prepaid expenses and other 1,194 4,742
Accounts payable 28,966 (6,999)
Accrued payroll and other accrued liabilities 18,429 (1,008)
---------- ----------
(32,256) 310
---------- ----------
Net cash from operating activities 10,324 4,047
---------- ----------
Cash flows from (used for) investing activities:
Capital expenditures (1,065) (237)
Proceeds from disposition of property and equipment 3 1,280
---------- ----------
Net cash from (used for) investing activities (1,062) 1,043
---------- ----------
Cash flows used for financing activities:
Credit facility revolver borrowings (payments), net (4,495) 317
Scheduled repayments of long-term debt (2,915) (4,543)
Credit facility fees and expenses (318) 45
Proceeds from exercise of stock options and employee
stock purchases 1,049 8
---------- ----------
Net cash used for financing activities (6,679) (4,173)
---------- ----------
Cash:
Net increase 2,583 917
Beginning balance 3,087 1,736
---------- ----------
Ending balance $ 5,670 $ 2,653
========== ==========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
Year-to-date results are not necessarily indicative of 2004 annual results and
these financial statements should be read in conjunction with the Company's 2003
Form 10-K. 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 are 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, 2004, Olympic guaranteed 50% of OLP's $16,815 and 49%
of GSP's $3,143 outstanding debt on a several basis.
The following table sets forth selected data for the Company's OLP joint
venture:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
RESULTS OF OPERATIONS: 2004 2003 2004 2003
- ---------------------- ---- ---- ---- ----
Net sales $ 8,067 $ 8,492 $ 16,275 $ 15,506
Gross profit 3,221 3,353 6,374 6,090
Operating income (29) 294 180 525
Net income (loss) $ (192) $ 141 $ (151) $ 196
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:
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FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
RESULTS OF OPERATIONS: 2004 2003 2004 2003
- ---------------------- ---- ---- ---- ----
Net sales $ 3,777 $ 1,061 $ 6,637 $ 2,331
Gross profit 800 137 1,261 275
Operating income 404 (95) 533 (199)
Net income (loss) $ 387 $ (105) $ 504 $ (221)
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 this Credit Facility, which have been
capitalized and included in "Deferred Financing Fees, Net" on the accompanying
consolidated balance sheets. The Company also incurred $956 of bank amendment
and waiver fees in the fourth quarter of 2003 and the first quarter of 2004
related to the year ended December 31, 2003. These fees and expenses are being
amortized to "Interest and Other Expense on Debt." In May 2004, the Credit
Facility was extended through December 15, 2006.
The Company's effective borrowing rate inclusive of deferred financing fees for
the first six months of 2004 was 5.8% compared to 4.6% in 2003. 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 June
30, 2004, the Company had $38,318 of availability under its Credit Facility and
was in compliance with its covenants. Using the formulas provided in the Credit
Facility, at June 30, 2004, the Company had assets to support an additional
$43,129 of borrowings; however the
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maximum $90,000 size of the revolver portion of the Credit Facility precludes
such additional borrowings.
The Company expects to increase the revolver portion of the Credit Facility by
$20,000 during the third quarter of 2004.
Included in the Credit Facility revolver balances on the accompanying
consolidated balance sheets are $9,922 and $1,716 of checks issued that have not
cleared the bank as of June 30, 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 to a
balance of $150 as of June 30, 2004 to reflect the contractual sales price of
the property. The sale is expected to be completed in the third quarter of 2004.
The $487 reduction is recorded as an "Asset Impairment Charge" on the
accompanying Consolidated Statement of Operations.
(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 9.8 and 9.6
million for the quarter ended June 30, 2004 and June 30, 2003, respectively.
Weighted average basic shares outstanding were 9.7 and 9.6 million for the six
months ended June 30, 2004 and June 30, 2003, respectively. Weighted average
diluted shares outstanding were 10.2 and 9.6 million for the quarter ended June
30, 2004 and June 30, 2003, respectively. Weighted average diluted shares
outstanding were 10.1 and 9.6 million for the six months ended June 30, 2004 and
June 30, 2003, respectively. The dilution is attributable to stock options as
detailed in the following table:
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FOR THE THREE MONTHS ENDED JUNE 30, 2004
----------------------------------------
SHARES PER SHARE
INCOME (IN THOUSANDS) AMOUNT
------ -------------- ------
BASIC EPS
Income available to common shareholders $18,500 9,794 $ 1.89
EFFECT OF DILUTIVE SECURITIES
Stock Options 388
DILUTED EPS
Income available to common shareholders plus assumed
conversions $18,500 10,182 $ 1.82
FOR THE SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------
SHARES PER SHARE
INCOME (IN THOUSANDS) AMOUNT
------ -------------- ------
BASIC EPS
Income available to common shareholders $29,347 9,734 $ 3.01
EFFECT OF DILUTIVE SECURITIES
Stock Options 374
DILUTED EPS
Income available to common shareholders plus assumed
conversions $29,347 10,108 $ 2.90
(6) STOCK OPTIONS:
At June 30, 2004, stock options to purchase 1,064,629 shares were outstanding,
of which 615,462 were exercisable at prices ranging from $1.97 to $15.50 per
share, none of which were anti-dilutive as of June 30, 2004. For the periods
ended June 30, 2003, all stock 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
9 OF 47
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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $ 18,500 $ (554) $ 29,347 $ (1,033)
Pro forma expense, net of tax (658) (179) (725) (238)
---------- ------- ---------- ---------
Pro forma net income (loss) $ 17,842 $ (733) $ 28,622 $ (1,271)
========== ======= ========== =========
Basic net income (loss) per share:
As reported $ 1.89 $ (0.06) $ 3.01 $ (0.11)
========== ======= ========== =========
Pro forma $ 1.83 $ (0.07) $ 2.94 $ (0.13)
========== ======= ========== =========
Diluted net income (loss) per share:
As reported $ 1.82 $ (0.06) $ 2.90 $ (0.11)
========== ======= ========== =========
Pro forma $ 1.75 $ (0.07) $ 2.83 $ (0.13)
========== ======= ========== =========
(7) INVENTORIES:
Inventories consist of the following:
JUNE 30, DEC. 31,
2004 2003
------- --------
Unprocessed $ 95,674 $65,709
Processed and Finished 36,836 27,066
-------- -------
Totals $132,510 $92,775
======== =======
(8) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first six months of 2004 and 2003 totaled $2,007 and
$1,517, respectively. Taxes paid during the first six months of 2004 and 2003
totaled $4,146 and $0, respectively.
10 of 47
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial conditions and results
are based upon the 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 us 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, we monitor and evaluate our
estimates and assumptions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparation of our consolidated
financial statements:
Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The allowance is
maintained at a level considered appropriate based on historical experience and
specific customer collection issues that we have identified. Estimations are
based upon a calculated percentage of accounts receivable and judgments about
the probable effects of economic conditions on certain customers. We can not
guarantee that the rate of future credit losses will be similar to past
experience. We consider all available information when assessing each quarter
the adequacy of our allowance for doubtful accounts.
Inventory Valuation
Our 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. We regularly review
our inventory on hand and record provisions for obsolete and slow-moving
inventory based on historical and current sales trends. Changes in product
demand and our 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
We evaluate 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 or the use of the assets or the strategy for the overall business, or
significant negative industry or economic trends. We record 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
At December 31, 2003, on the consolidated balance sheet, in Deferred Income
Taxes, we recorded, as an offset to the estimated temporary differences between
the tax basis of assets and liabilities and the reported amounts on the
consolidated balance sheets, the tax effect of operating loss and tax credit
carryforwards. During the first half of 2004, we generated sufficient income to
utilize all of the operating loss and tax credit carryforwards.
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 our 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
Our results of operations are affected by numerous external factors, such as
general business, economic and political conditions, competition, steel pricing
and availability, energy prices, pricing and availability of raw materials used
in the production of steel, customer demand for steel and their ability to
manage their credit line availability in an escalating price market and layoffs
or work stoppages by suppliers' or customers' personnel.
We sell a broad range of products, many of which have different gross profits
and margins. Products that have more value-added processing generally have a
greater gross profit and higher margins. Accordingly, our overall gross profit
is affected by product mix, the amount of
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processing performed, the availability of steel, volatility in selling prices
and material purchase costs. We perform toll processing of customer-owned steel,
the majority of which is performed by our Detroit and Georgia operations.
Our two joint ventures are 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. Our 50% interest
in OLP and 49% interest in GSP are accounted for under the equity method. We
guarantee portions of outstanding debt under both of the joint venture
companies' bank credit facilities. As of June 30, 2004, we guaranteed 50% of
OLP's $16.8 million and 49% of GSP's $3.1 million of outstanding debt on a
several basis.
Financing costs include interest expense on debt and deferred financing and bank
amendment fees amortized to expense.
We sell certain products internationally, primarily in Puerto Rico and Mexico.
All international sales and payments are made in United States dollars. Recent
international sales have been immaterial to our consolidated financial results.
In 2002, we closed our 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 to a
balance of $150 thousand as of June 30, 2004 to reflect the contractual sales
price of the property. The sale is expected to be completed in the third quarter
of 2004. The $487 thousand reduction is recorded as an "Asset Impairment Charge"
on the accompanying Consolidated Statements of Operations.
The collective bargaining agreement covering hourly plant employees at our
Detroit facility expired on June 30, 2004, however, negotiations are on-going. A
collective bargaining agreement for employees at our Minneapolis coil facility
expires on September 30, 2005, whereas agreements covering other Detroit and
Minneapolis employees expire in 2006 and subsequent years. From time-to-time,
union organizing activities have been held at our other locations and a union
election is scheduled in the third quarter at our Iowa facility. We have never
experienced a work stoppage and we believe that our relationship with employees
is good. However, any prolonged work stoppages by our personnel represented by
collective bargaining units could have a material adverse effect on our results.
13 OF 47
RESULTS OF OPERATIONS
Tons sold increased 23.4% to 344 thousand in the second quarter of 2004 from 279
thousand in the second quarter of 2003. Tons sold in the second quarter of 2004
included 293 thousand from direct sales and 51 thousand from toll processing,
compared with 234 thousand direct tons and 45 thousand toll tons in the
comparable period of last year. Tons sold in the first half of 2004 increased
33.2% to 729 thousand from 548 thousand last year. Tons sold in the first half
included 623 thousand from direct sales and 106 thousand from toll processing,
compared with 464 thousand direct tons and 84 thousand toll tons in the
comparable period of last year. The increase in tons sold was attributable to
increased customer demand across substantially all markets. We expect strong
customer demand to continue in the second half of the year, but note that the
second half contains 8 fewer shipping days than the first half of the year, as
well as seasonal closings of certain automotive and manufacturing customers. We
believe that the availability of steel will continue to remain constrained,
which could lead to disruption in our ability to meet our customers' material
requirements.
Net sales increased 96.4% to $222.8 million in the second quarter of 2004 from
$113.4 million in the second quarter of 2003. For the first half of 2004, net
sales increased 79.5% to $409.8 million from $228.3 million. Strong customer
demand, combined with tight supply and rising raw material costs for steel
production, has resulted in a dramatic increase in steel pricing. Average
selling prices for the second quarter of 2004 increased 59.1% from last year's
second quarter and increased 33.3% from the first quarter of 2004. Market prices
for steel are expected to continue to increase in the third quarter of 2004.
As a percentage of net sales, gross profit increased to 31.7% in the second
quarter of 2004 from 21.1% in the second quarter of 2003. For the first half of
2004, gross profit increased to 30.3% from 21.0% in last year's first half. The
gross profit increase is primarily the result of strong customer demand for
steel coupled with tight supply conditions. If we are unable to pass on to our
customers the increasing costs of inventories our gross profit percentage in
subsequent quarters could be adversely affected.
Operating expenses in the second quarter of 2004 increased 62.8% to $38.8
million from $23.8 million in last year's second quarter. For the first half of
2004, operating expenses increased 55.1% to $73.4 million from $47.3 million in
last year's first half. The operating expense increases are primarily the result
of increased payroll, incentive compensation, retirement plan expenses and
distribution expenses associated with increases in sales volume and income for
the first six months. As a percentage of net sales, operating expenses decreased
to 17.4% for the second quarter of 2004 from 21.0% in the comparable 2003
period. For the first half of 2004, operating expenses decreased to 17.9% of net
sales from 20.7% in last year's first half.
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Income from joint ventures totaled $94 thousand in the second quarter of 2004,
compared with $19 thousand in the second quarter of 2003. For the first half of
2004, income from joint ventures totaled $172 thousand compared with losses of
$10 thousand in 2003.
Financing costs totaled $1.0 million for both the second quarter of 2004 and
2003. For the first six months of 2004, Financing costs increased to $2.4
million from $2.1 million in 2003. Our effective borrowing rate inclusive of
deferred financing fees for the first six months of 2004 was 5.8% compared to
4.6% in 2003. We have the option to borrow based on the agent bank's base rate
or Eurodollar Rate (EURO) plus a premium (the Premium). Effective borrowing
rates primarily increased as a result of waiver and amendment fees charged by
our bank group for the period ended December 31, 2003.
For the second quarter of 2004, we reported income before income taxes of $30.8
million compared to the 2003 second quarter loss before income taxes of $816
thousand. An income tax provision of 40.0% was recorded for the second quarter
of 2004 and a tax benefit of 32.1% was recorded for the second quarter of 2003.
For the first six months of 2004, we reported income before income taxes of
$48.3 million compared to the 2003 six month loss before income taxes of $1.6
million. An income tax provision of 39.3% was recorded during the first six
months of 2004 compared to a 36.0% benefit recorded during the comparable 2003
period. We expect the effective tax rate, which includes federal, state and
local income taxes, to approximate 40% for the balance of the year. Taxes paid
in the second quarter of 2004 and the first six months of 2004 totaled $4.1
million. There were no taxes paid during the first six months of 2003.
Net income for the second quarter of 2004 totaled $18.5 million or $1.82 per
diluted share, compared to a net loss of $554 thousand or $.06 per diluted share
for the second quarter of 2003. Net income for the first half of 2004 totaled
$29.3 million or $2.90 per diluted share, compared to a net loss of $1.0 million
or $.11 per diluted share in the first half of 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs, the
purchase and upgrading of processing equipment and facilities, and investments
in joint ventures. We use cash generated from operations, leasing transactions,
and our credit facility to fund these requirements.
Working capital at June 30, 2004 increased $34.8 million from the end of the
prior year. The increase was primarily attributable to a $41.1 million increase
in accounts receivables and a $39.7 million increase in inventories, offset in
part by a $29.0 million increase in accounts payable and an $18 million increase
in accrued payroll and accrued liabilities from December 31,
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2003. We diligently managed our accounts receivable and inventories. Since the
beginning of 2004, days sales outstanding decreased by 7 days and the number of
shipping days held in inventory decreased by 6 days.
Net cash provided by operating activities totaled $10.3 million for the six
months ended June 30, 2004. Cash generated from earnings before non-cash items
totaled $42.6 million, while cash used for working capital components totaled
$32.3 million. The increases in steel pricing and sales volume have resulted in
higher levels of inventory and accounts receivable, causing a significant usage
of working capital. Steel prices are expected to increase further in the third
quarter, resulting in a continued significant usage of working capital.
During the first six months of 2004, net cash used for investing activities
totaled $1.1 million, consisting of capital spending. We do not expect to make
significant capital expenditures during the remainder of the year; however, we
anticipate acquiring $3-$4 million of new laser processing equipment which will
be financed through leases.
Net cash used for financing activities during the first half of 2004 totaled
$6.7 million and primarily consisted of scheduled principal repayments under our
debt agreements and reductions in borrowings under our revolving credit line,
partially offset by proceeds from the exercise of stock options.
In December 2002, we entered into a 3-year, $132 million secured bank-financing
agreement (the Credit Facility) which significantly reduced our financing costs.
The Credit Facility is comprised of a revolver and two term loan components. The
Credit Facility is collateralized by our 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. We incurred $2.2 million of closing fees and
expenses in connection with this Credit Facility, which have been capitalized
and included in "Deferred Financing Fees, Net" on the accompanying consolidated
balance sheets. These costs, along with the bank waiver and amendment fees, are
being amortized to interest and other expense. Monthly principal payments of
$367 thousand commenced February 1, 2003 for the term loan components of the
Credit Facility. In May 2004, the credit facility was extended through December
15, 2006.
The Credit Facility requires us 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 June
30, 2004, we had $38.3 million of availability under our Credit Facility and we
were in compliance
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with our covenants. Using the formulas provided in the Credit Facility, at June
30, 2004, we had assets to support an additional $43.1 million of borrowings;
however the maximum $90 million size of the revolver portion of the Credit
Facility precludes such additional borrowings.
We expect to increase the revolver portion of the Credit Facility by $20 million
during the third quarter of 2004.
We believe that funds available under our Credit Facility, together with funds
generated from operations, will be sufficient to provide us with the liquidity
necessary to fund anticipated working capital requirements, capital expenditure
requirements, and scheduled debt maturities over the next 12 months. Capital
requirements are subject to change as business conditions warrant and
opportunities arise.
FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "expect," "believe," "estimated," "project," "plan" and similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks, uncertainties
and assumptions including, but not limited to: general business, economic and
political conditions; competitive factors such as the availability and pricing
of steel and fluctuations in customer demand; the ability of customers to
maintain their credit availability in periods of escalating prices, layoffs or
work stoppages by our own or our suppliers', or customers' personnel; equipment
malfunctions or installation delays; the adequacy of information technology and
business system software; the successes of our joint ventures; the successes of
our strategic efforts and initiatives to increase sales volumes, improve cash
flows and reduce debt, maintain or improve inventory turns and reduce 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. We undertake 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 raw material surcharges. In addition, steel has
been in tight supply and demand has increased significantly during 2004. Raw
material price increases have translated into higher prices for our products. As
we utilize existing steel inventories, it has resulted in higher gross profit
dollars and margins. We expect raw material prices for our products to further
increase in the third quarter of 2004. Although we have generally been
successful in passing the increased costs and surcharges on to our customers, it
is possible that we may not be able to obtain all the material required by our
customers or pass the increased material costs fully to our customers due to the
competitive nature of the business and, in limited circumstances, contractual
limitations.
We are a variable-rate borrower and future increases in interest rates could
result in increased interest expense. Based on total variable debt levels at
June 30, 2004, a one hundred basis point increase in interest rates would
increase annual interest expense by approximately $850 thousand.
ITEM 4. CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operations of our
disclosure controls and procedures as of June 30, 2004. These disclosure
controls and procedures are the controls and other procedures that were designed
to ensure that information required to be disclosed in reports that are filed
with or submitted to the SEC is (i) accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures and (ii) recorded, processed,
summarized and reported within the time periods specified in applicable law and
regulations. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2004, our disclosure controls
and procedures were effective.
There were no changes in our internal controls over financial reporting that
occurred during the second quarter of 2004 that has materially affected, or is
reasonably like to materially affect, our internal control over financial
reporting.
We have hired an outside consultant to assist with the Section 404 internal
control obligations of the Sarbanes-Oxley Act.
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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 April 29,
2004.
(b) At the annual meeting, the Company's shareholders elected David A.
Wolfort, Ralph M. Della Ratta, Jr., Martin H. Elrad and Howard L.
Goldstein as Directors for a two-year term, which expires at the
annual meeting of shareholders in 2006.
The following tabulation represents voting for the Directors:
For Abstained
--- ---------
David A Wolfort 7,754,907 104,562
Ralph M. Della Ratta, Jr 7,831,979 27,490
Martin H. Elrad 7,754,907 104,562
Howard L. Goldstein 7,831,407 28,062
ITEM 5. OTHER INFORMATION
The Company has entered into employment agreements, effective July 1, 2004, with
Michael D. Siegal and Richard T. Marabito, its Chief Executive Officer and Chief
Financial Officer, respectively. The agreements, which run through December 31,
2006, contain both non-competition and non-solicitation covenants. Messrs.
Siegal's and Marabito's base salaries are $575,000 and $300,000, respectively.
The Board of Directors has also approved, effective July 1, 2004, an increase in
the salary of David Wolfort, the Company's President and Chief Operating
Officer, to $425,000. Finally, the compensation of each director was increased
to $45,000 per annum, effective January 1, 2005, with the Chairman of the Audit
Committee receiving an additional $10,000 and the Chairs of the Compensation and
Nominating Committees each receiving an additional $5,000 per annum.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.8 - Amendment No. 6 to Amended and Restated Credit
Agreement dated May 21, 2004 by and among Olympic
Steel, Inc., five banks and Comerica Bank, as
Administrative Agent.
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Exhibit 10.12 - Michael D. Siegal Employment Contract, dated July
1, 2004.
Exhibit 10.13 - Richard T. Marabito Employment Contract, dated
July 1, 2004.
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 April 29, 2004 to report the results of
operations for the three months ended March 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: August 13, 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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