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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, 1999
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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)
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 7, 1999
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Common stock, without par value 10,684,500
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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, 1999 and 3
December 31, 1998
Consolidated Statements of Income - for the
three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows - for the
three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-15
PART II. OTHER INFORMATION
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,
1999 1998
----------- ------------
(unaudited)
ASSETS
Cash $ 814 $ 1,825
Accounts receivable 15,933 3,096
Inventories 112,517 121,407
Prepaid expenses and other 5,699 5,752
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Total current assets 134,963 132,080
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Property and equipment 146,827 144,762
Accumulated depreciation (27,161) (25,450)
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Net property and equipment 119,666 119,312
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Goodwill 3,700 3,726
Investments in joint ventures 728 990
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Total assets $ 259,057 $ 256,108
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LIABILITIES
Current portion of long-term debt $ 4,862 $ 4,888
Accounts payable 29,249 28,911
Accrued payroll 3,053 2,977
Other accrued liabilities 7,304 6,449
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Total current liabilities 44,468 43,225
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Revolving credit agreement 37,423 37,450
Term loans 27,773 28,097
Industrial revenue bonds 6,085 6,085
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Total long-term debt 71,281 71,632
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Deferred income taxes 4,272 3,508
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Total liabilities 120,021 118,365
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SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 106,319 106,319
Retained earnings 32,717 31,424
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Total shareholders' equity 139,036 137,743
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Total liabilities and shareholders' equity $ 259,057 $ 256,108
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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)
1999 1998
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(unaudited)
Tons sold
Direct 251,550 289,177
Toll 52,424 55,411
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303,974 344,588
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Net sales $ 129,147 $ 155,707
Cost of sales 99,031 123,409
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Gross margin 30,116 32,298
Operating expenses
Warehouse and processing 7,974 8,761
Administrative and general 7,046 6,931
Distribution 4,301 4,589
Selling 3,760 3,605
Occupancy 1,233 1,126
Depreciation and amortization 1,876 1,653
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Total operating expenses 26,190 26,665
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Operating income 3,926 5,633
Loss from joint ventures (262) (116)
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Income before financing costs and taxes 3,664 5,517
Interest expense 870 964
Receivable securitization expense 692 909
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Income before taxes 2,102 3,644
Income taxes 809 1,385
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Net income $ 1,293 $ 2,259
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Net income per share $ 0.12 $ 0.21
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Weighted average shares outstanding 10,692 10,692
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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)
1999 1998
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(unaudited)
Cash flows from operating activities:
Net income $ 1,293 $ 2,259
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 1,876 1,653
Loss from joint ventures 262 116
Long-term deferred income taxes 764 197
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4,195 4,225
Changes in working capital:
Accounts receivable (12,837) (14,672)
Inventories 8,890 10,593
Prepaid expenses and other 36 (289)
Accounts payable 338 1,943
Accrued payroll and other accrued liabilities 931 169
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(2,642) (2,256)
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Net cash from operating activities 1,553 1,969
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Cash flows from investing activities:
Facility construction and improvements (1,144) (3,157)
Equipment purchases and deposits (651) (4,135)
Other capital expenditures, net (392) (240)
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Net cash used for investing activities (2,187) (7,532)
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Cash flows from financing activities:
Revolving credit agreement (27) 3,839
Borrowings (repayments) of term loans and IRB's (350) 3,505
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Net cash from (used for) financing activities (377) 7,344
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Cash:
Net change (1,011) 1,781
Beginning balance 1,825 1,748
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Ending balance $ 814 $ 3,529
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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, 1999
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. Certain
amounts in the 1998 consolidated financial statements have been reclassified to
conform to the 1999 presentation.
(1) EARNINGS PER SHARE:
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 dilutive outstanding stock options is immaterial.
(2) ACCOUNTS RECEIVABLE:
As of March 31, 1999, and December 31, 1998, $55 million and $57 million,
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.
(3) LONG-TERM DEBT:
Interest rates under the Company's various credit agreements are generally based
on LIBOR plus a premium determined quarterly, which varies with the Company's
operating performance and financial leverage. Commencing March 1, 1999, the
LIBOR premium increased from 1.25% to 1.5%. The overall effective interest rate
for all debt for the quarters ended March 31, 1999 and 1998 was 6.6% and 6.8%,
respectively.
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The Company's bank credit agreement includes a secured $21 million term loan
component to finance the construction and equipping of the new temper mill and
plate processing facility in Iowa (the Iowa Term Loan). As of April 30, 1999,
the entire $21 million Iowa Term Loan was borrowed. Annual 10% principal
repayments of $2.1 million commence May 30, 1999.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $15.3 million and $2.3 million of checks issued that have not
cleared the bank as of March 31, 1999 and December 31, 1998, respectively.
In April 1999, the Company entered into a $6 million, 5.1% fixed rate tax-exempt
industrial development bond financing agreement with a domestic lender. Proceeds
from the bonds, which have been deposited into an escrow account and are
invested in commercial paper funds, will be used for the construction and
equipping of a new $7 million, 87,000 square foot plate processing and machining
facility in Chambersburg, Pennsylvania. The new facility is expected to be
completed in the third quarter of 1999. The loan agreement includes a 15-year,
$3.1 million real estate component, and a 10-year, $2.9 million equipment
component. Quarterly repayments commence October 1, 1999. The Chambersburg land,
building and equipment secure the outstanding debt. Capitalized interest
associated with the Chambersburg project totaled $25 thousand in the first
quarter of 1999.
(4) STOCK OPTIONS:
On April 23, 1999, additional non-qualified options to purchase 184,333 shares
of common stock were issued to the Company's outside directors, executive
officers and senior managers at an option price of $8.75, the market value of a
share of common stock at the grant date. After issuance of the new grants,
options to purchase 326,833 shares were outstanding, of which 117,800 were
exercisable at prices ranging from $14.63 to $15.50 per share.
(5) STOCK REPURCHASE:
On April 23, 1999, the Company's board of directors authorized a one-year
program to purchase up to 1 million shares of Olympic common stock. Repurchased
shares will be held in treasury and will be available for general corporate
purposes.
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(6) JOINT VENTURE:
In December 1998, the Company wrote-down its entire 45% joint venture investment
in Olympic Continental Resources LLC (OCR), a broker of scrap metal and
alternate iron products. Effective April 30, 1999, Atlas Iron Processors, Inc.
(Atlas), no longer has an ownership interest in the OCR joint venture, and OCR
has ceased all business transactions with Atlas as of that date. OCR continues
its ongoing business as a joint venture between Olympic and Uwe T. Schmidt,
OCR's Chief Executive Officer. Olympic remains a guarantor of OCR's outstanding
bank debt, up to a maximum of $10 million. OCR's outstanding bank debt at
March 31, 1999 totaled $12 million.
(7) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the three months ended March 31, 1999 and 1998 totaled $1
million and $1.2 million, respectively. Income taxes paid during the March 31,
1999 and 1998 quarters totaled $58 thousand and $1.2 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, steel
pricing and availability, 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 Lafayette Steel and Southern 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 1999 first quarter results include the results of the
Company's JNT machining operation, the net assets of which were acquired
effective June 26, 1998. JNT is a machining center currently operating from its
facility in McConnellsburg, Pennsylvania, until construction of a new 87,000
square foot plate processing and machining facility is completed in nearby
Chambersburg, Pennsylvania.
The Company's three joint ventures include: Olympic Laser Processing
(OLP), a company formed in April 1997 to process laser welded sheet steel blanks
for the automotive industry; Trumark Steel & Processing (TSP), a company formed
in December 1997, to support the flat-rolled steel requirements of the
automotive industry as a Minority Business Enterprise (MBE); and Olympic
Continental Resources (OCR), a company formed in January 1997 to buy, sell and
trade ferrous and non-ferrous metals and alternate iron products to steel mills
and scrap processors. In December 1998, the Company wrote-down its entire 45%
joint venture investment in OCR. Effective April 30, 1999, Atlas Iron
Processors, Inc. (Atlas), no longer has an ownership interest in the OCR joint
venture, and OCR has ceased all business transactions with Atlas as of that
date. OCR continues its ongoing business as a joint venture between Olympic and
Uwe T. Schmidt, OCR's Chief Executive Officer. The Company's 50% interest in OLP
and 49% interest in TSP are accounted for under the equity method. The Company
guarantees portions of
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outstanding debt under all three of the joint venture companies' bank credit
facilities. As of March 31, 1999, Olympic guaranteed up to $10 million of OCR's
$12 million of outstanding debt, and 50% of OLP's $16.9 million and 49% of TSP's
$2.9 million of outstanding debt on a several basis.
OLP has constructed a new facility and has initially equipped it with two
laser-welding lines. Prototyping has begun on both welding lines and production
has begun on one line. The Company expects OLP start-up costs to continue
through 1999, as both welding lines are not expected to be operating at full
capacity until the second half of 2000. TSP obtained certification as an MBE
from the Michigan Minority Business Development Council in December 1998, and
anticipates ramping up to full production by the end of the second quarter of
1999. Start-up costs for both OLP and TSP have been expensed as incurred.
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.
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.
The collective bargaining agreement covering personnel at the Company's
Minneapolis plate facility was renewed for a four-year period ending March 31,
2003.
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RESULTS OF OPERATIONS
Tons sold decreased 11.8% to 304 thousand in the first quarter of 1999
from 345 thousand for the first quarter of 1998. Tons sold in the first quarter
of 1999 included 252 thousand from direct sales and 52 thousand from toll
processing, compared with 289 thousand direct tons and 56 thousand tolling tons
in the comparable period of last year. The decrease in direct tons sold is
primarily attributable to weaker demand from agricultural equipment
manufacturers and a decline in sales to the Company's automotive customers. One
less scheduled shipping day and several lost shipping days due to bad weather
conditions also adversely affected first quarter 1999 tons sold.
Net sales decreased 17.1% to $129.1 million for the first quarter of 1999
from $155.7 million for 1998. Average selling prices declined 6% between years,
primarily due to the lingering effect of declines in the market price of steel
experienced in the second half of 1998. An increase in the proportion of toll
sales to direct sales in 1999 also impacted the decline in average selling
prices.
As a percentage of net sales, gross margin increased to 23.3% for the
first quarter of 1999 from 20.7% for 1998. The increase reflects the impact of
selling a larger proportion of processed steel, a decline in lower margin
automotive sales, enhanced inventory management, and the increased proportion of
toll sales in 1999.
Operating expense decreased 1.8% from $26.7 million to $26.2 million.
However, on a per ton basis, operating expenses increased to $86.16 for the
first quarter of 1999 from $77.38 for 1998. As a percentage of net sales,
operating expenses increased to 20.3% for the first quarter of 1999 from 17.1%
for 1998. Operating expenses in the first quarter of 1999 include approximately
$1 million of incremental start-up costs for the Iowa temper mill and plate
processing facility which is expected to reach production capacity in the second
half of 1999. The Company has not made permanent reductions in its operating
expenses since it believes the decline in net sales is a temporary, cyclical
event.
Losses from joint ventures totaled $262 thousand in the first quarter of
1999, compared to $116 thousand in 1998. The increase is primarily due to higher
start-up costs at OLP in 1999.
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Financing Costs for the first quarter of 1999 decreased to $1.6 million
from $1.9 million in the first quarter of 1998. Average borrowings outstanding
in the 1999 period decreased primarily as a result of lower inventory levels.
Receivable securitization expense declined due to lower 1999 sales, resulting in
less accounts receivables sold than in the first quarter of 1998. The Company's
effective bank borrowing rate declined to 6.6% in the 1999 period, from 6.8% for
1998. The Company's Premium increased to 1.5% over LIBOR commencing March 1,
1999.
Pretax income for the first quarter of 1999 decreased to $2.1 million
from $3.6 million for 1998. Income taxes approximated 38.5% of pretax income in
the first quarter of 1999 compared to 38% for 1998.
Net income for the first quarter of 1999 totaled $1.3 million, or $.12
per share, compared to $2.3 million, or $.21 per share for 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including strategic acquisitions and joint ventures, the purchase and upgrading
of processing equipment and services, the construction and upgrading of related
facilities, and additional working capital requirements. The Company uses cash
generated from operations, long-term debt obligations, proceeds from the
Company's accounts receivable securitization program, equity offerings, and
leasing transactions to fund these requirements. Historically, the Company has
used revolving credit borrowings under its bank credit facility to finance
working capital requirements.
Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation, amortization and losses from joint ventures,
as well as changes in working capital. During the first three months of 1999,
$1.6 million of net cash was provided from operating activities, consisting of
$4.2 million of cash generated from net income and non-cash charges offset by
$2.6 million of cash used for working capital purposes.
Working capital at March 31, 1999 increased by $1.6 million since
December 31, 1998. The increase is primarily attributable to a $12.8 million
increase in accounts receivable, offset by an $8.9 million decrease in
inventories. The accounts receivable increase is the result of traditionally
stronger March sales as compared to December sales. December historically
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represents the lowest sales period of each year for the Company. The inventory
decrease is attributable to enhanced inventory management during 1999.
As of March 31, 1999, and December 31, 1998, $55 million and $57 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 1999, net cash used for investing
activities totaled $2.2 million, primarily consisting of progress payments made
for the new plate processing and machining facility being constructed in
Chambersburg, Pennsylvania. Olympic plans to spend approximately $7 million on
the project, of which $1.2 million was spent in the first quarter of 1999. The
new facility is projected to be completed in the third quarter of 1999. In April
1999, the Company entered into a $6 million, 5.1% fixed rate tax-exempt
industrial development bond financing agreement (IDB) with a domestic lender to
finance the Chambersburg project. Quarterly IDB repayments commence October 1,
1999.
Cash flows used for financing activities primarily consisted of net
repayments under the Company's revolving credit agreement and scheduled payments
under its other existing long-term agreements. On April 23, 1999, the Company's
board of directors authorized a one-year program to purchase up to 1 million
shares of Olympic common stock (Stock Purchase). The cost of purchasing such
shares will be funded from the Company's revolving credit facility.
As of March 31, 1999, approximately $45.6 million in unused availability
existed under the Company's revolving credit and accounts receivable
securitization facilities. As of April 30, 1999, the entire $21 million Iowa
term loan was borrowed. The Company believes that funds available under its
revolving 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, capital expenditure
requirements and the Stock Purchase 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, acquisitions and significant improvements to processing
equipment to respond to customers' demands.
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YEAR 2000 COMPLIANCE
The year 2000 (Y2K) problem refers to computer applications using only
the last two digits to refer to a year rather than all four digits. As a result,
these applications could fail or create erroneous results if they recognize "00"
as the year 1900 rather than the year 2000, or if they will not recognize "00"
as a legitimate year value.
The Company has had a project in place since the second half of 1996 to
deal with these issues. Olympic has budgeted approximately $1 million to
remediate its affected systems. The project has been staffed by in-house MIS and
user personnel, with the exception of the plant equipment assessment, which was
performed by outside experts. These costs are recorded as normal operating
expenses as incurred.
In addressing the Y2K issues, Olympic has taken initiatives in three
general areas: (i) information technology (IT) and communication systems,
(ii) non-IT systems and (iii) related third party issues. The Company remains on
budget and on schedule for the project as described in its "Year 2000
Compliance" disclosure made in its 1998 Form 10-K, with the exception of certain
compliance tasks that were originally targeted for completion by the beginning
of the second quarter that are now expected to be completed by June 30, 1999.
Olympic's description of its Y2K compliance issue is based upon
information obtained by Olympic through evaluations of Olympic's IT and
communication systems, and customer and supplier Y2K compliance assurances. No
assurance can be given that the Company will be able to address the Y2K issues
for all of its software and applications in a timely manner or that it will not
encounter unexpected difficulties or significant expenses relating to adequately
addressing the Y2K issue. If Olympic or the major customers or suppliers with
whom Olympic does business fail to address adequately the Y2K issues, or Olympic
fails to successfully integrate or convert its computer systems generally,
Olympic's business or results of operations could be materially adversely
affected. The Company is unable to provide assurances for eventualities not
known in advance, or for multiple or simultaneous occurrences beyond its
capability to handle with the resources available. The Y2K disclosures presented
in this section are considered to be a "Year 2000 Readiness Disclosure" under
the provisions of the "Year 2000 Information and Readiness Disclosure Act" of
1998. For additional disclosure of the Company's Y2K program, refer to the
Company's 1998 Form 10-K, filed with the Securities and Exchange Commission on
March 19, 1999.
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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 "expect," "believe," "anticipate," "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 market; work stoppages by
automotive or steel manufacturers; potential equipment malfunction; equipment
installation and facility construction delays, particularly for the Chambersburg
expansion project; and the successes of its joint ventures. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those expected,
believed, anticipated 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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: May 7, 1999 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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