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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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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
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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)
5080 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 November 1, 1996
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Common stock, without par value 10,692,000
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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 - September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income - for the three and nine months
ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows - for the nine months
ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
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(UNAUDITED)
ASSETS
CASH $ 3,982 $ 1,884
ACCOUNTS RECEIVABLE 17,493 7,405
INVENTORIES 117,561 112,986
PREPAID EXPENSES AND OTHER 2,371 2,096
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TOTAL CURRENT ASSETS 141,407 124,371
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PROPERTY AND EQUIPMENT 89,073 78,452
ACCUMULATED DEPRECIATION (13,756) (10,886)
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NET PROPERTY AND EQUIPMENT 75,317 67,566
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GOODWILL 9,940 10,135
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TOTAL ASSETS $226,664 $202,072
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LIABILITIES
CURRENT PORTION OF LONG-TERM DEBT $ 1,894 $ 4,768
ACCOUNTS PAYABLE 25,396 15,220
ACCRUED PAYROLL 4,875 2,922
ACCRUED AND DEFERRED INCOME TAXES 2,117 3,246
OTHER ACCRUED LIABILITIES 3,380 5,070
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TOTAL CURRENT LIABILITIES 37,662 31,226
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REVOLVING CREDIT AGREEMENT 32,918 51,338
TERM LOANS 651 24,969
INDUSTRIAL REVENUE BONDS 9,460 9,565
TAXABLE RATE NOTES 7,900 7,900
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TOTAL LONG-TERM DEBT 50,929 93,772
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DEFERRED INCOME TAXES 3,872 3,090
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TOTAL LIABILITIES 92,463 128,088
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SHAREHOLDERS' EQUITY
PREFERRED STOCK - -
COMMON STOCK 106,195 57,095
RETAINED EARNINGS 28,006 16,889
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TOTAL SHAREHOLDERS' EQUITY 134,201 73,984
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $226,664 $202,072
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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
(IN THOUSANDS, EXCEPT PER SHARE AND TONNAGE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1996 1995 1996 1995
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(UNAUDITED)
TONS SOLD
DIRECT 249,644 219,813 775,173 708,836
TOLLING 35,593 27,952 113,356 120,216
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285,237 247,765 888,529 829,052
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NET SALES $134,971 $132,673 $424,257 $423,826
COST OF SALES 104,568 107,786 330,113 341,584
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GROSS MARGIN 30,403 24,887 94,144 82,242
OPERATING EXPENSES
WAREHOUSE AND PROCESSING 7,613 6,887 21,954 21,491
ADMINISTRATIVE AND GENERAL 6,304 4,936 18,681 15,969
DISTRIBUTION 4,082 3,984 12,830 12,095
SELLING 3,198 3,262 10,235 10,330
OCCUPANCY 898 745 2,851 2,278
DEPRECIATION AND AMORTIZATION 1,045 804 3,066 2,380
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TOTAL OPERATING EXPENSES 23,140 20,618 69,617 64,543
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OPERATING INCOME 7,263 4,269 24,527 17,699
INTEREST EXPENSE 899 2,894 3,822 8,308
RECEIVABLE SECURITIZATION EXPENSE 848 - 2,543 -
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INCOME BEFORE TAXES 5,516 1,375 18,162 9,391
INCOME TAXES 1,986 540 7,045 3,768
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NET INCOME $ 3,530 $ 835 $ 11,117 $ 5,623
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NET INCOME PER SHARE $ 0.36 $ 0.10 $ 1.23 $ 0.65
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WEIGHTED AVERAGE SHARES OUTSTANDING 9,801 8,600 9,003 8,600
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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 NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
1996 1995
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 11,117 $ 5,623
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FROM (USED FOR) OPERATING ACTIVITIES-
DEPRECIATION 2,871 2,211
AMORTIZATION OF GOODWILL 195 169
LONG-TERM DEFERRED INCOME TAXES 782 (1,153)
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14,965 6,850
CHANGES IN WORKING CAPITAL:
ACCOUNTS RECEIVABLE (10,398) (9,538)
INVENTORIES (4,575) 11,995
PREPAID EXPENSES AND OTHER (275) (146)
ACCOUNTS PAYABLE 10,176 (16,154)
ACCRUED PAYROLL AND OTHER ACCRUED LIABILITIES 263 2,124
ACCRUED AND DEFERRED INCOME TAXES (1,129) (1,255)
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(5,938) (12,974)
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NET CASH FROM (USED FOR) OPERATING ACTIVITIES 9,027 (6,124)
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CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF LAFAYETTE STEEL (INCLUDING WORKING CAPITAL OF $28,532) - (52,395)
TEMPER MILL FACILITY AND EQUIPMENT (1,176) (6,795)
LAFAYETTE FACILITY EXPANSION (2,013) -
PURCHASE OF PREVIOUSLY LEASED PROCESSING EQUIPMENT (1,855) -
PLATE FACILITY AND PROCESSING EQUIPMENT (623) (2,063)
TUBING FACILITY AND EQUIPMENT - (1,154)
OTHER CAPITAL EXPENDITURES, NET (4,955) (1,296)
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NET CASH USED FOR INVESTING ACTIVITIES (10,622) (63,703)
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CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM SALE OF COMMON STOCK 49,100 -
REVOLVING CREDIT AGREEMENT (18,420) 56,753
PROCEEDS FROM TERM LOANS - 16,100
REPAYMENT OF LONG-TERM DEBT (26,987) (2,311)
UNEXPENDED INDUSTRIAL REVENUE BOND FUNDS - 2,281
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NET CASH FROM FINANCING ACTIVITIES 3,693 72,823
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CASH:
NET INCREASE 2,098 2,996
BEGINNING BALANCE 1,884 718
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ENDING BALANCE $ 3,982 $ 3,714
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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
SEPTEMBER 30, 1996
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.
(1) PUBLIC SALE OF COMMON STOCK:
The Company completed the sale of 2,084,000 shares of common stock in August,
1996. The net proceeds of $49.1 million were used to repay borrowings
outstanding under the Company's bank credit agreement.
(2) EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average shares
outstanding during each of the periods presented. Primary and fully diluted
earnings per share are the same as the effect of dilutive outstanding stock
options was immaterial. Shares outstanding for the periods presented were
8,600,000 through August 8, 1996, and 10,684,000 thereafter.
(3) LONG-TERM DEBT:
On October 4, 1996, the Company entered into a new credit agreement with a bank
group. The credit facility consists of an unsecured revolving credit component
of $50 million and letter of credit commitments of approximately $77.2 million.
The agreement expires on June 30, 1999. Each year the Company may request to
extend the agreement expiration date one year with the approval of the bank
group.
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Interest rates under the Company's various credit agreements are generally based
on prime or LIBOR plus a premium determined quarterly, which varies with the
Company's operating performance and financial leverage. Borrowing rates for the
first nine months of 1996 averaged prime plus .78% and LIBOR plus 1.78%.
Commencing October 4, 1996, rates decreased to prime and LIBOR plus .75%. The
majority of the Company's borrowings are based on the LIBOR option. The overall
effective interest rate for all debt for the three and nine month periods ended
September 30, 1996 amounted to 6.7% and 7.2%, respectively, compared to 7.8% and
7.7%, respectively, in 1995.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $12.9 million and $9.8 million of checks issued that have not
cleared the bank as of September 30, 1996 and December 31, 1995, respectively.
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the nine months ended September 30, 1996 and 1995 totaled
$4.0 million and $8.8 million, respectively. Income taxes paid during the nine
months ended September 30, 1996 and 1995 totaled $7.7 million and $6.0 million,
respectively.
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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, and
steel pricing and availability.
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
significant toll processing of customer-owned steel, primarily through its
Lafayette Steel operation. Toll processing generally results in lower selling
prices and gross margin dollars per ton but higher gross margin percentages than
the Company's historical direct sales.
In August 1996, the Company completed the sale of 2.1 million shares of
common stock in a public offering (the Offering). The net proceeds therefrom,
which totaled $49.1 million, were used to repay outstanding bank debt.
Financing costs include interest expense on debt and costs associated
with the Company's $65 million trade accounts receivable securitization program
which commenced in December 1995 (the Financing Costs). Interest rates paid by
the Company under its credit agreement, dated October 4, 1996, (the Credit
Facility) are generally based on prime or LIBOR plus a premium (the Premium)
determined quarterly, which varies with the Company's operating performance and
financial leverage. Receivable securitization costs are based on commercial
paper rates calculated on the amount of receivables sold.
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. As a result, domestic and international sales
tend to be countercyclical.
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Because the Company conducts its operations generally on the basis of
short-term orders, backlog is not a meaningful indicator of future performance.
RESULTS OF OPERATIONS
Tons sold increased 15.1% to 285 thousand in the third quarter of 1996
from 248 thousand in the third quarter of 1995, and increased 7.2% in the first
nine months of 1996 to 889 thousand from 829 thousand in 1995. Tons sold in the
third quarter of 1996 include 250 thousand from direct sales and 35 thousand
from toll processing, compared with 220 thousand direct tons and 28 thousand
tolling tons in the comparable period last year. Tons sold in the first nine
months of 1996 include 775 thousand from direct sales and 114 thousand from toll
processing, compared with 709 thousand direct tons and 120 thousand tolling tons
in the comparable period last year. Substantially all tolling tons were
processed by Lafayette Steel.
Net sales increased 1.7% to $135.0 million for the third quarter of
1996 from $132.7 million for the third quarter of 1995. For the first nine
months, net sales increased slightly to $424.3 million from $423.8 million in
the 1995 period. Average selling prices have declined between years,
particularly for stainless steel products. International sales represented 5.1%
and 5.3% of consolidated net sales for the three and nine month periods ended
September 30, 1996, compared to 6.3% and 3.1%, respectively, for the 1995
periods.
As a percentage of net sales, gross margin increased to 22.5% for the
third quarter of 1996 from 18.8% for 1995. For the nine month period, gross
margin increased to 22.2% in 1996 from 19.4% in 1995. The 1996 margin increases
reflect the impact of centralized steel purchasing efforts, improved inventory
turns, and an increase in higher value-added processing. Third quarter margins
were also enhanced as a result of increased tolling and lower international
sales in the current year period as compared to last year's third quarter.
As a percentage of net sales, operating expenses increased to 17.1% for
the third quarter of 1996 from 15.5% for 1995, and to 16.4% for the first nine
months of 1996 from 15.2% in 1995. The increases are attributable to lower
average selling prices in 1996, as on a per ton basis, operating expenses
actually declined in comparison to the prior year periods. Operating expenses in
the 1996 periods include incremental costs associated with the new Cleveland
temper mill and Minneapolis plate processing facilities, expansion of
Philadelphia plate processing, and increased management information systems
expenditures.
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Financing Costs decreased to $1.7 million for the third quarter of 1996
from $2.9 million in 1995, and to $6.4 million for the first nine months of 1996
from $8.3 million in 1995. The decreases are attributable to lower average
borrowings outstanding in 1996 primarily as a result of the Offering and lower
inventory levels, lower effective borrowing rates in 1996, and rate savings
associated with the receivable securitization program implemented in December
1995. The Company's effective borrowing rates for the third quarter and first
nine months of 1996 were 6.7% and 7.2%, respectively, compared to 7.8% and 7.7%,
respectively, in the comparable periods of 1995. These reductions were offset by
interest costs associated with the temper mill equipment and facility financing
that were capitalized during the 1995 construction period.
Pretax income for the third quarter of 1996 increased 301.2% to $5.5
million from $1.4 million for 1995. For the first nine months of 1996, pretax
income increased 93.4% to $18.2 million from $9.4 million for 1995. Income taxes
approximated 36% and 38.8% of pretax income for the third quarter and first nine
months of 1996, respectively, compared to 39.3% and 40.1% for the comparable
1995 periods.
Net income for the third quarter of 1996 increased 322.8% to $3.5
million, or $.36 per share, from $.8 million, or $.10 per share for 1995. Net
income for the first nine months of 1996 increased 97.7% to $11.1 million, or
$1.23 per share, from $5.6 million, or $.65 per share in the 1995 period. As a
result of the Offering, weighted average shares outstanding increased from 8.6
million for the 1995 periods to 9.8 million for the third quarter and 9.0
million for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including strategic acquisitions, the purchase and upgrading of processing
equipment and services, the construction and upgrading of related facilities and
additional working capital. The Company uses cash generated from operations,
long-term debt obligations, proceeds from the Company's accounts receivable
securitization program and leasing transactions to fund these requirements.
Historically, the Company has used revolving credit borrowings under its Credit
Facility to finance its working capital requirements and has financed
acquisitions and capital additions from the proceeds of long-term indebtedness
or leases.
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Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation and amortization, and changes in working
capital. During the first nine months of 1996, $9.0 million of net cash was
provided by operating activities, consisting of $14.9 million of net income and
non-cash charges, offset by $5.9 million of cash used for working capital
purposes.
As of September 30, 1996, $53.0 million of eligible receivables were
sold under the Company's accounts receivable securitization program, compared to
$53.7 million at December 31, 1995. 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.
Working capital at September 30, 1996 increased $10.6 million or 11.4%
since December 31, 1995. The increase is primarily attributable to increases in
inventory and accounts receivable, offset in part by an increase in accounts
payable due to the timing of inventory purchases.
During the first nine months of 1996, net cash used for investing
activities consisted of $10.6 million of capital expenditures, primarily related
to completion of the temper mill facility, commencement of a 72,000 square foot
expansion of Lafayette Steel's existing facility (scheduled for completion by
the end of 1996), processing equipment purchased under a lease buyout option,
two additional plasma burning tables, upgrading the Company's information
systems, and construction of additional office space. Cash flows from financing
activities in the first nine months of 1996 consists of $49.1 million of net
proceeds from the Offering, offset by net debt repayments of $45.4 million.
On October 4, 1996, the Company entered into a new credit agreement
with a bank group, which consists of an unsecured revolving credit component of
$50 million and letter of credit commitments of approximately $77.2 million. The
Credit Facility, which matures on June 30, 1999, contains restrictive covenants
which require minimum net worth levels, maintenance of certain financial ratios
and limitations on capital expenditures. The Company is in compliance with all
covenants. The Company had approximately $40.2 million in unused revolving
credit borrowing availability under its then existing credit facility at
September 30, 1996.
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The Company believes that funds available under the Credit Facility,
other credit and financing agreements and 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 significant improvements to processing
equipment to respond to customers' demands.
FORWARD LOOKING INFORMATION
When used in the preceding discussion, the words "believes", "intends"
and other 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 forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Specific risks and uncertainties
include, but are 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 market; work stoppages by
automotive manufacturers; potential equipment malfunction; and equipment
installation and construction delays. 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 4.1 - Credit Agreement Dated October 4, 1996, By
and Among the Registrant, Three Banks, and
National City Bank, Agent.
Exhibit 27 - Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
OLYMPIC STEEL, INC.
(Registrant)
Date: November 1, 1996 By: /s/ R. Louis Schneeberger
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R. LOUIS SCHNEEBERGER
Chief Financial Officer
By: /s/ Richard T. Marabito
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RICHARD T. MARABITO
Treasurer and Corporate Controller
(Principal Accounting Officer)
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