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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, 2001
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( ) 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5096 RICHMOND ROAD, BEDFORD HEIGHTS, OHIO 44146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate 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 15, 2001
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Common stock, without par value 9,631,100
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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, 2001 and 3
December 31, 2000
Consolidated Statements of Income - for the three
months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows - for the three
months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-13
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET 14
RISK
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
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(unaudited) (audited)
ASSETS
Cash $ 411 $ 1,449
Accounts receivable 11,865 5,260
Inventories 84,419 89,404
Prepaid expenses and other 6,811 5,911
Assets held for sale 1,798 1,813
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Total current assets 105,304 103,837
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Property and equipment, at cost 159,708 158,843
Accumulated depreciation (43,517) (41,270)
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Net property and equipment 116,191 117,573
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Goodwill, net 3,493 3,519
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Total assets $224,988 $224,929
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LIABILITIES
Current portion of long-term debt $ 6,063 $ 6,061
Accounts payable 21,019 18,398
Accrued payroll 3,341 3,103
Other accrued liabilities 5,450 5,110
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Total current liabilities 35,873 32,672
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Revolving credit agreement 26,750 28,422
Term loans 24,162 24,588
Industrial revenue bonds 8,699 8,938
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Total long-term debt 59,611 61,948
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Deferred income taxes 5,052 4,568
Accumulated equity losses in joint ventures 543 821
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Total liabilities 101,079 100,009
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SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 99,733 99,058
Officer note receivable (675) -
Retained earnings 24,851 25,862
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Total shareholders' equity 123,909 124,920
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Total liabilities and shareholders' equity $224,988 $224,929
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AND TONNAGE DATA)
2001 2000
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(unaudited)
Tons sold
Direct 254,796 289,323
Toll 33,715 50,675
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288,511 339,998
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Net sales $117,120 $144,687
Cost of sales 90,676 111,078
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Gross margin 26,444 33,609
Operating expenses
Warehouse and processing 8,128 8,469
Administrative and general 6,742 7,757
Distribution 4,000 5,485
Selling 3,286 3,357
Occupancy 1,500 1,286
Depreciation and amortization 2,315 2,268
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Total operating expenses 25,971 28,622
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Operating income 473 4,987
Loss from joint ventures (223) (172)
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Income before financing costs and taxes 250 4,815
Interest expense 1,200 1,586
Receivable securitization expense 694 847
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Income (loss) before taxes (1,644) 2,382
Income taxes (633) 905
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Net income (loss) $ (1,011) $ 1,477
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Basic and diluted net income (loss) per share $ (0.11) $ 0.15
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Weighted average shares outstanding 9,460 10,034
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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)
2001 2000
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(unaudited)
Cash flows from operating activities:
Net income (loss) $ (1,011) $ 1,477
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities-
Depreciation and amortization 2,315 2,268
Loss from joint ventures 223 172
Long-term deferred income taxes 484 633
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2,011 4,550
Changes in working capital:
Accounts receivable (6,605) (8,011)
Inventories 4,985 (3,785)
Prepaid expenses and other (900) 1,026
Assets held for sale 15 -
Accounts payable 2,621 5,829
Accrued payroll and other accrued liabilities 578 309
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694 (4,632)
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Net cash from (used for) operating activities 2,705 (82)
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Cash flows from investing activities:
Capital expenditures, net (908) (1,084)
Investment in joint venture (500) (147)
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Net cash used for investing activities (1,408) (1,231)
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Cash flows from financing activities:
Revolving credit agreement (1,672) 1,979
Repayments of term loans and IRB's (663) (424)
Repurchase of common stock - (600)
Unexpended IRB funds - 110
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Net cash from (used for) financing activities (2,335) 1,065
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Cash:
Net decrease (1,038) (248)
Beginning balance 1,449 1,433
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Ending balance $ 411 $ 1,185
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(dollars in thousands, except share and per share amounts)
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. (Olympic or the Company) and its
wholly-owned subsidiaries, without audit and reflect all 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.
(1) SHARES OUTSTANDING AND EARNINGS PER SHARE:
In July 2000, the Company's Board of Directors authorized a one-year program to
purchase up to 1 million shares of Olympic Common Stock. During the third
quarter of 2000, the Company purchased 360,900 shares. Repurchased shares are
held in treasury and are available for general corporate purposes. The Company
does not anticipate purchasing additional shares before the program expires in
July 2001.
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Basic and diluted earnings per share are the same, as the
effect of outstanding stock options is not dilutive.
(2) ACCOUNTS RECEIVABLE:
As of March 31, 2001, and December 31, 2000, $44,000 and $48,000, respectively,
of receivables were sold under the Company's accounts receivable securitization
program. Receivables sold are reflected as a reduction of accounts receivable in
the accompanying consolidated balance sheets. The Company anticipates
terminating the securitization agreement at the end of the second quarter of
2001 in connection with the refinancing of its credit agreement, as further
described in Footnote 3.
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(3) LONG -TERM DEBT:
The Company's bank credit agreement (the Credit Facility) currently consists of
a secured $68,000 revolving credit component, a $21,000 term loan component for
the Iowa temper mill and plate processing facility, letter of credit commitments
totaling $5,069, and a $71,400 liquidity facility related to the Company's
accounts receivable securitization agreement. The banks' commitment for the
liquidity facility was extended to July 31, 2001.
Interest rates under the Company's various credit agreements are generally based
on LIBOR plus a premium (the Premium) determined quarterly, which varies with
the Company's operating performance and financial leverage. The Premium has been
3.0% since January 1, 2001. The overall effective interest rate for all debt for
the quarters ended March 31, 2001 and 2000 was 8.8% and 7.9%, respectively.
Under its debt agreements, the Company is subject to certain covenants such as
minimum net worth, interest coverages, and capital expenditure limitations. The
Company obtained waivers for non-compliance with its minimum net worth and
interest coverage covenants through March 31, 2001. In February 2001, the
Company signed a proposal with an affiliate of its current agent bank to replace
its existing Credit Facility and accounts receivable securitization program with
a secured 3-year $135,000 facility. The Company expects to complete the
refinancing by the end of the second quarter, subject to customary conditions,
due diligence, and the execution of definitive documentation.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $7,384 and $5,316 of checks issued that have not cleared the
bank as of March 31, 2001, and December 31, 2000, respectively.
(4) STOCK OPTIONS:
During the first quarter of 2001, non-qualified stock options to purchase
350,000 shares of the Company's Common Stock were granted under the Stock Option
Plan to the Company's President and COO, and to a senior manager of the Company
at option prices ranging from $1.97 to $2.38. On April 30, 2001, 152,000
additional non-qualified stock options were issued to the Company's outside
directors, executive officers and senior managers at an option price of $2.63,
the average market value of a share of common stock at the grant date. After
issuance of the new grants, options to purchase 895,833 shares were outstanding,
of which 236,422 were exercisable
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at prices ranging from $4.84 to $15.50 per share. A total of 950,000 shares
are available for issuance under the Stock Option Plan.
(5) JOINT VENTURES:
During the first quarter of 2001, the Company contributed $500 to its Olympic
Laser Processing joint venture (OLP). In April 2001, an additional $250 was
contributed to OLP, and $220 was contributed to the Company's Trumark Steel &
Processing joint venture (TSP). The Company expects to continue to fund the
working capital and capital expenditure requirements of OLP and TSP during the
remainder of 2001.
(6) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the three months ended March 31, 2001 and 2000 totaled
$1,219 and $1,460, respectively. Income taxes paid during the first three months
of 2001 and 2000 totaled $31 and $27, respectively.
(7) RELATED PARTY TRANSACTION:
David A. Wolfort, President and COO purchased 300,000 shares of the Company's
Common Stock from treasury on February 22, 2001 at the then market price. The
shares were purchased pursuant to a 5-year note due and payable to the Company
on or before January 1, 2006. The principal balance of $675 accrues interest at
5.07% per annum, and is secured by a pledge of the underlying shares until the
note is paid in full.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by numerous external
factors, such as general economic and political conditions, competition, steel
pricing and availability, energy prices, and work stoppages by automotive
manufacturers.
Olympic sells a broad range of products, many of which have different gross
margins. Products that have more value-added processing generally have a greater
gross margin. Accordingly, the Company's overall gross margin 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. Toll processing generally results in lower selling prices
and gross margin dollars per ton but higher gross margin percentages than the
Company's direct sales.
The Company's two joint ventures include: Olympic Laser Processing (OLP), a
company that processes laser welded sheet steel blanks for the automotive
industry, and Trumark Steel & Processing (TSP), a Minority Business Enterprise
(MBE) company supporting the flat-rolled steel requirements of the automotive
industry. The Company's 50% interest in OLP and 49% interest in TSP 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, 2001, Olympic guaranteed 50% of OLP's $19.8 million
and 49% of TSP's $2.7 million of outstanding debt on a several basis.
Financing costs include interest expense on debt and costs associated with
the Company's accounts receivable securitization program (the Financing Costs).
Interest rates paid by the Company under its credit agreement are generally
based on LIBOR plus a premium (the Premium) determined quarterly, which varies
based on the Company's operating performance and financial leverage. Receivable
securitization costs are based on commercial paper rates calculated on the
amount of receivables sold.
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The Company sells certain products internationally, primarily in Mexico and
Puerto Rico. All international sales and payments are made in United States
dollars. These sales historically involve the Company's direct representation of
steel producers and may be covered by letters of credit or trade receivable
insurance. Typically, international sales are more transactional in nature with
lower gross margins than domestic sales. Domestic steel producers generally
supply domestic customers before meeting foreign demand, particularly during
periods of supply constraints.
RESULTS OF OPERATIONS
Tons sold decreased 15.1% to 289 thousand in the first quarter of 2001 from
340 thousand in the first quarter of 2000. Tons sold in the first quarter of
2001 included 255 thousand from direct sales and 34 thousand from toll
processing, compared with 289 thousand direct tons and 51 thousand toll tons in
the comparable period of last year. The decrease in direct and toll tons sold
was attributable to continued depressed demand primarily in the automotive,
transportation, and other service center sectors.
Net sales decreased 19.1% to $117.1 million for the first quarter of 2001
from $144.7 million for 2000. Average selling prices decreased 4.6% due to
depressed steel pricing from last year's first quarter.
As a percentage of net sales, gross margin decreased to 22.6% for the first
quarter of 2001 from 23.2% for 2000. The margin decline is the result of the
sharp decrease in the market price for steel between periods, as well as a lower
proportion of toll sales. First quarter 2001 gross margin improved 3.8
percentage points from the fourth quarter of 2000.
Operating expenses in the first quarter of 2001 decreased 9.3% to $26.0
million from $28.6 million in the same period last year. The decrease was
primarily attributable to lower distribution and administrative and general
expense. Distribution expense declined $1.5 million primarily as a result of the
decrease in tons sold. Administrative and general expense decreased $1.0 million
from the first quarter of last year due to the cost reduction efforts of the
Company and over $500 thousand of non-recurring consulting fees in the prior
year period. As a percentage of net sales, operating expenses increased to 22.2%
for the first quarter of 2001 from 19.8% for 2000. Operating expenses were
negatively impacted in the first three months of 2001 by higher fuel and natural
gas costs.
Losses from joint ventures totaled $223 thousand in the first quarter of
2001, compared to $172 thousand in 2000.
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Financing Costs in the first quarter of 2001 decreased to $1.9 million from
$2.4 million in the first quarter of 2000. The decrease between years is
attributable to a $24.1 million reduction in average borrowing levels and a $7.3
million reduction in average receivables sold under the receivable
securitization program. The Company's effective bank borrowing rate increased to
8.8% in the 2001 period, from 7.9% for 2000. The Company's Premium has been 3.0%
since January 1, 2001.
Loss before taxes for the first quarter of 2001 totaled $1.6 million,
compared to $2.4 million of income for 2000. An income tax benefit of
approximately 38.5% was recorded in the first quarter of 2001, compared to an
income tax provision of 38.0% in 2000.
Net loss for the first quarter of 2001 totaled $1.0 million, or $.11 per
share, compared to net income of $1.5 million, or $.15 per share for 2000.
Average shares outstanding totaled 9.5 million in the first quarter of 2001
compared to 10.0 million in last year's first quarter.
The Company expects the weakness in steel pricing and customer demand
experienced during the first quarter to continue throughout the remainder of
2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund its working
capital requirements, upgrading its information technology and business system
software, its investments in joint ventures, and historically its purchase and
upgrading of processing equipment and services, the construction and upgrading
of related facilities, and acquisitions. The Company uses cash generated from
operations, its revolving credit facility, and proceeds from its accounts
receivable securitization program to finance its working capital requirements.
Historically, the Company has also used long-term debt obligations, equity
offerings, and leasing transactions to fund its capital requirements.
Net cash from operating activities represents primarily earnings before
non-cash charges for depreciation, amortization and losses from joint ventures,
as well as changes in working capital. During the first three months of 2001,
$2.7 million of net cash was provided from operating activities, consisting of
$2.0 million of cash generated from earnings before non-cash charges and $.7
million of cash generated from working capital components.
Working capital at March 31, 2001 decreased by $1.7 million since December
31, 2000. The decrease is primarily attributable to a $5.0 million decrease in
inventory and a $2.6 million increase in accounts payable, offset by a $6.6
million increase in accounts receivable.
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As of March 31, 2001, and December 31, 2000, $44 million and $48 million,
respectively, of eligible receivables were sold under the Company's accounts
receivable securitization program. The amount of trade receivables sold by the
Company typically changes monthly depending upon the level of defined eligible
receivables available for sale at each month end.
During the first three months of 2001, net cash used for investing
activities totaled $1.4 million, consisting primarily of information technology
spending and contributions to the Company's Olympic Laser Processing joint
venture.
During the first three months of 2001, net cash used for financing
activities totaled $2.3 million and consisted of paydowns on the Company's
revolving credit agreement and scheduled payments under its other existing
long-term debt agreements.
The Company's bank credit agreement (the Credit Facility) and its other
long-term debt agreements contain certain financial covenants including minimum
net worth, interest coverages, and capital expenditure limitations. The Company
obtained waivers for non-compliance with its minimum net worth and interest
coverage covenants through March 31, 2001. In February 2001, the Company signed
a proposal with an affiliate of its current agent bank to replace its existing
Credit Facility and accounts receivable securitization program with a secured
3-year, $135 million facility. The Company expects to complete the refinancing
in the second quarter, subject to customary conditions, due diligence, and the
execution of definitive documentation. The Company believes the new agreement,
when executed, will provide the Company with sufficient availability to meet its
anticipated working capital requirements and capital expenditure requirements
over the next 12 months.
As of March 31, 2001, approximately $67.3 million was available under the
Company's revolving credit and accounts receivable securitization facilities.
The Company believes that funds available under its existing financing
facilities and its proposed new financing 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 and
capital expenditure requirements over the next 12 months. Capital requirements
are subject to change as business conditions warrant and opportunities arise. In
connection with its internal and external expansion strategies, the Company may
from time to time seek additional funds to finance other new facilities and
equipment, acquisitions and significant improvements to processing equipment to
respond to customers' demands.
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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
and economic conditions; competitive factors such as the availability and
pricing of steel and fluctuations in demand, specifically in the automotive,
transportation, and other service centers markets served by the Company; work
stoppages by the Company's, suppliers', or customers' personnel; potential
equipment malfunction; equipment 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 initiatives to
increase sales volumes, improve gross margins, quality, service, inventory turns
and reduce its costs. Should one or more of these 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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QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and
fluctuating steel prices. The Company has not entered into interest rate or
steel commodity transactions for speculative purposes or otherwise.
Inflation generally affects the Company by increasing the cost of
personnel, transportation services, processing equipment, purchased steel,
energy, and borrowings under the various credit agreements. In the first quarter
of 2001, higher energy prices did have an adverse effect on the Company's
distribution and occupancy expense. The increase in the Company's Premium from
last year's first quarter adversely impacted the Company's Financing Costs
during the first quarter of 2001. Additionally, when raw material prices
decline, as has occurred since April 2000, customer demands for lower prices
result in lower selling prices and, as the Company uses existing steel
inventory, lower margins. Declining steel prices therefore have adversely
affected the Company's net sales, gross margins and net income since the first
quarter of 2000.
Olympic's primary interest rate risk exposure results from floating rate
debt. If interest rates were to increase 100 basis points (1.0%) from March 31,
2001 rates, and assuming no changes in debt from March 31, 2001 levels, the
additional annual interest expense to the Company would be approximately $657
thousand. The Company currently does not hedge its exposure to floating interest
rate risk.
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Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
David A. Wolfort, President and COO purchased 300,000 shares
of the Company's Common Stock from treasury on February 22,
2001 at the then market price. The shares were purchased
pursuant to a 5-year note payable to the Company due and
payable on or before January 1, 2006. The principal balance of
$675,000 accrues interest at 5.07% per year and is secured by
a pledge of the acquired shares until the note is paid in
full.
Item 6. Exhibits and Reports on Form 8-K
None.
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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 15, 2001 By: /s/ Michael D. Siegal
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MICHAEL D. SIEGAL
Chairman of the Board and Chief
Executive Officer
By: /s/ Richard T. Marabito
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RICHARD T. MARABITO
Chief Financial Officer and
Treasurer (Principal Accounting
Officer)
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