SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14061
STEEL TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0712014
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15415 Shelbyville Road, Louisville, KY 40245
(Address of principal executive offices)
(Registrant's telephone number, including area code) (502) 245-2110
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 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
There were 12,000,265 shares outstanding of the Registrant's common stock as
of January 31, 1998.
STEEL TECHNOLOGIES INC.
INDEX
Page Number
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 (Unaudited) and September 30,
1997 (Audited) 3
Condensed Consolidated Statements of Income
Three months ended December 31, 1997 and 1996
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three months ended December 31, 1997 and 1996
(Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 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
Part I. - FINANCIAL INFORMATION
Item 1. Financial Statements
STEEL TECHNOLOGIES INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
December 31, September 30,
1997 1997
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,310 $ 3,467
Trade accounts receivable, net 49,435 43,110
Inventories 73,381 81,086
Deferred income taxes 1,726 1,714
Prepaid expenses and other assets 680 896
Total current assets 133,532 130,273
Property, plant and equipment, net 104,246 103,796
Investments in corporate joint ventures 18,127 17,626
Goodwill, net of amortization 5,084 5,147
Other assets 725 668
$ 261,714 $ 257,510
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,166 $ 32,605
Accrued liabilities 5,913 5,156
Accrued income taxes 667 -
Long-term debt due within one year 2,195 2,195
Total current liabilities 46,941 39,956
Long-term debt 92,023 97,190
Deferred income taxes 12,027 11,535
Commitments and contingencies
Shareholders' equity:
Preferred stock - -
Common stock 16,896 16,893
Additional paid-in capital 4,909 4,909
Retained earnings 90,358 88,467
Foreign currency translation adjustme (1,440) (1,440)
110,723 108,829
$ 261,714 $ 257,510
The accompanying notes are an integral part of the condensed consolidated
financial statements.
STEEL TECHNOLOGIES INC.
Condensed Consolidated Statements of Income
(Amounts in thousands, except per share data, unaudited)
Three months ended
December 31,
1997 1996
Sales $ 96,449 $ 78,030
Cost of goods sold 86,051 68,626
Gross profit 10,398 9,404
Selling, general and administrative expenses 5,350 4,633
Equity in net income of unconsolidated
corporate joint venture 502 353
Operating income 5,550 5,124
Interest expense 1,562 1,215
Income before income taxes 3,988 3,909
Provision for income taxes 1,497 1,446
Net income $ 2,491 $ 2,463
Weighted average number of common
shares outstanding 11,998 11,962
Basic earnings per common share $ 0.21 $ 0.21
Diluted earnings per common share $ 0.21 $ 0.20
Cash dividends per basic and diluted
weighted average common share $ 0.05 $ 0.05
The accompanying notes are an integral part of the condensed consolidated
financial statements.
STEEL TECHNOLOGIES INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
Three months ended
December 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,491 $ 2,463
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 2,748 2,476
Amortization 56 -
Deferred income taxes 480 478
Equity in net income of unconsolidated
corporate joint venture (501) (353)
Increase (decrease) in cash resulting from
changes in:
Trade accounts receivable (6,325) (1,859)
Inventories 7,705 (13,189)
Accounts payable 5,561 4,409
Accrued liabilities and income taxes 1,424 1,741
Other 239 25
Net cash provided by (used in) operating activities 13,878 (3,809)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,198) (1,849)
Net cash used in investing activities (3,198) (1,849)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 8,515
Principal payments on long-term debt (5,167) (182)
Cash dividends on common stock (600) (597)
Net issuance of common stock under incentive
stock option plans 3 5
Net cash (used in) provided by financing activities (5,764) 7,741
Effect of exchange rate changes on cash (73) ( 9)
Net increase in cash and cash equivalents 4,843 2,074
Cash and cash equivalents, beginning of period 3,467 4,218
Cash and cash equivalents, end of period $ 8,310 $ 6,292
Supplemental Cash Flow Disclosures:
Cash payments for interest $ 1,962 $ 353
Cash payments for income taxes $ 17 $ 154
The accompanying notes are an integral part of the condensed consolidated
financial statements.
STEEL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1997 and the
condensed consolidated statements of income for the three month periods ended
December 31, 1997 and 1996, and the condensed consolidated statements of cash
flows for the three-month periods then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at December 31, 1997 and for
all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's annual report to shareholders for the
year ended September 30, 1997. The results of operations for the three
months ended December 31, 1997 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
December 31, September 30,
1997 1997
(Unaudited) (Audited)
(Amounts in thousands)
Inventories consist of:
Raw Materials $ 59,184 $ 67,463
Finished goods and
work in process 14,197 13,623
$ 73,381 $ 81,086
3. RETAINED EARNINGS
Three months ended
December 31, 1997
(Amounts in thousands)
Retained Earnings consists of:
Balance, beginning of year $ 88,467
Net income 2,491
Cash dividends on common stock (600)
Balance, end of period $ 90,358
4. FOREIGN CURRENCY TRANSLATION
Prior to January 1, 1997, the monetary assets and liabilities of the Mexican
subsidiary were translated into U.S. dollars at the year-end rate of exchange
and revenues and expenses were translated at average rates of exchange in
effect during the period. Resulting translation adjustments were
accumulated in a separate component of shareholders' equity. Foreign
currency transaction gains and losses were included in net income when
incurred. Effective January 1, 1997, the Company changed to the
monetary/non-monetary method of accounting for foreign currency translation as
the Mexican economy is now considered hyper-inflationary for financial
reporting. This method requires non-monetary assets and liabilities to be
translated at historical rates of exchange and the functional currency to be
U.S. dollars.
5. EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". Statement 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings per share is computed similarly to
fully diluted earnings per share pursuant to APB No. 15. SFAS No. 128 is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. Earnings per share for all periods
presented have been calculated and presented in accordance with SFAS No. 128.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
Three months ended
December 31, 1997 December 31, 1996
Income Common Per-Share Income Common Per-Share
Available Shares Amount Available Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $2,491 11,998 $0.21 $2,463 11,962 $0.21
Effect of dilutive stock
options:
Employee stock option plan 44 112 (0.01)
Directors stock option plan 3 - -
Diluted earnings per share $2,491 12,045 $0.21 $2,463 12,074 $0.20
</TABLE>
Options to purchase 130,000 shares of common stock at prices ranging from
$11.625-$12.788 under the stock option plan were outstanding during the three
months ended December 31, 1997 but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive.
6. ACQUISITION
On April 1, 1997, the Company completed the purchase of 100% of the common
stock of Atlantic Coil Processing, Inc. (ACP) for approximately $19,600,000
in cash, notes payable and assumption of other liabilities. The Company
financed the transaction with a combination of bank borrowings, issuance of
a note payable to the former ACP shareholders and the assumption of ACP trade
payables and other liabilities. The transaction was accounted for by the
purchase method of accounting. The results of the operations for ACP, now
referred to as Steel Technologies North Carolina, are included in the
consolidated financial statements of the Company from the date of the
acquisition.
7. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 requires companies to classify items defined as "other comprehensive
income" by their nature in a financial statements, and to display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The adoption of SFAS No. 130 will not have a material impact on the
consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
When used in the following discussion, the word "expects" 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; cyclicality of demand in
the steel industry, specifically in the automotive market; work stoppages or
other business interruptions affecting automotive manufacturers; competitive
factors such as pricing and availability of steel; reliance on key
customers; and potential equipment malfunctions. 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.
Results of Operations
The Company posted record first quarter 1998 sales of $96,449,000, which
represented a 24% increase from sales of $78,030,000 in the first quarter a
year ago. The increase in revenues in the first quarter 1998 benefited from
the inclusion of $11,600,000 of revenues from Steel Technologies North
Carolina which was acquired April 1, 1997. Revenues from existing core
processing operations increased approximately $6,819,000 or 9% from a year
ago. The Company continues to focus significant resources on the automotive
industry and to generate a major portion of business from selling to
industrial customers manufacturing component parts for use in the automotive
industry. Demand in the automotive and other steel consuming markets during
the quarter ended December 31, 1997 was comparable to the levels of the prior
year. The Company continues to increase its market share and to be successful
in developing a substantial amount of new business with both existing and
new customers. As a result of the ACP acquisition and market share gains,
tons shipped in the first quarter of 1998 increased 26% while average selling
prices for the first quarter of 1998 decreased 2% from the prior year. The
sales outlook is good based on current order activity and backlog.
The capital investments completed in recent years have added new capacity and
increased the products and services offered by the Company. The most recent
expansion of the Company's processing capabilities is the blanking lines added
in November 1997 at the Eminence, Kentucky facility. The additional product
offerings are allowing the Company to pursue significant new business
opportunities and to further enhance its market share. The acquisition of ACP
added new capacity, geographic diversity and cut-to-length capabilities, which
will further enhance the Company's position in the marketplace.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Results of Operations (Cont.)
The gross profit margin decreased to 10.8% for the first quarter of fiscal 1998
compared to 12.1% a year ago as a result of increases in the purchase price of
hot-rolled steel from the primary steel mills. These purchase price increases
were not fully offset with selling price increases to its customers. During
1997, a number of steel mills experienced temporary production problems and
work stoppages which negatively impacted the available supply of raw
materials. In fiscal 1998, the Company expects improvement in pricing of
raw material, especially in hot rolled steel, as new steelmaking capacity
and increased imports enter the market. However, future fluctuations in
raw material prices may affect corresponding selling prices to customers.
The gross margin is expected to be positively impacted by production cost
efficiencies associated with the anticipated higher sales volumes.
Additionally, the Company expects to increase the amount of higher margin
toll processing revenue generated by the Company's pickling facility and
blanking lines. Toll processing, primarily of customer-owned steel,
generates higher gross margin percentages than the Company's traditional
processing customers.
The Company continues to actively manage the level at which selling, general
and administrative costs are added to its cost structure. Sales increased
24% in the first quarter, while selling, general and administrative costs
increased approximately 15% from the comparable 1997 period, primarily due
to the addition of Steel Technologies North Carolina. Selling, general and
administrative expenses as a percentage of sales decreased to 5.5% for the
quarter ended December 31, 1997 from 5.9% a year ago.
The Company's equity in the net income of Mi-Tech Steel, Inc., its
unconsolidated corporate joint venture, increased to $502,000 for the first
quarter of fiscal 1998 from $353,000 in the prior year, principally the
result of higher sales levels.
Interest expense increased to $1,562,000 for the quarter ended December 31,
1997 from $1,215,000 compared to prior year. The increase is the result of
higher average borrowings used to finance the acquisition of ACP, capital
additions and working capital needs of the Company during the first quarter of
fiscal 1998.
The Company's effective income tax rate was approximately 37.5% in the first
quarter ended December 31, 1997 compared to 37.0% a year ago.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Liquidity and Capital Resources
At December 31, 1997, the Company had $86,591,000 of working capital,
maintained a current ratio of 2.8:1 and had long-term debt at 46% of total
capitalization. The Company manages the levels of accounts receivable,
inventories and other working capital items in relation to the trends in
sales and the overall market. For the first quarter of fiscal 1998, the
combination of increased sales levels and more effective inventory
management resulted in increased inventory turnover. The Company expects
the sales trends to remain strong during the 1998 fiscal year based on the
current backlogs and order entry activity. The working capital needs, if
any, associated with the expected higher sales volumes are anticipated to
be funded with a combination of cash flows from operations and available
borrowing capabilities. The combination of the expected sales levels and
increased availability of raw material will increase the inventory turnover,
reducing the number of days carried in inventory.
The Company's capital expenditures for the first quarter of fiscal 1998 totaled
$3,198,000. The Company has expanded its production and processing capacity
and added new processing capabilities over the last few years and expects
capital additions for all existing facilities including Mexico to approximate
$12,000,000 for fiscal 1998.
On January 22, 1998, the Company's Board of Directors approved a plan under
which Steel Technologies may repurchase up to 500,000 shares of its common
stock over the next three years. Shares may be purchased from time to time at
prevailing prices in open market transactions, subject to market conditions,
share price and other considerations. The Company anticipates that
cash flows from operations and available borrowing
capabilities will fund the stock repurchase program.
Pursuant to a joint venture agreement, Steel Technologies has guaranteed
$6,250,000 of the bank financing required for the working capital purposes of
Mi-Tech Steel, Inc. Mi-Tech Steel had significant capital additions in 1997
to construct a pickling and slitting facility in Decatur, Alabama. To
participate equally with its joint venture partner in the financing of this
project, Steel Technologies contributed $5 million of additional equity to
the joint venture in the third quarter of fiscal 1997. Additional equity
contributions to the joint venture are not expected for the foreseeable future.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Liquidity and Capital Resources (Cont.)
The Company believes that it currently has sufficient liquidity and available
capital resources to meet its existing needs. The Company expects funds
generated from operations and the availability of $35,000,000 as of December
31, 1997 under its unsecured $80,000,000 bank line of credit to be sufficient
to finance the capital expenditures plans as well as the working capital
requirements for fiscal 1998. At this time the Company has no known
material obligations, commitments or demands which must be met beyond the
next twelve months other than the ten year notes and the line of credit.
The ten year notes do not require any principal payments until fiscal 1999
and the line of credit is expected to be renewed at the end of the term.
The Company intends to use any additional funds for its growth, including
strategic acquisitions and joint ventures, the construction of new plants
and the investment in its production and processing capabilities. The form
of such financing may vary depending upon the prevailing market and related
conditions, and may include short or long-term borrowings or the issuance of
debt or equity securities.
At December 31, 1997, the Company had $92,023,000 long-term debt outstanding.
Under its various debt agreements, the Company has agreed to maintain
specified levels of working capital and net worth, maintain certain ratios and
limit the addition of substantial debt. The Company is in compliance with
all of its loan covenants, and none of these covenants would restrict the
Company from completing currently planned capital expenditures.
The Company maintains an equity investment of approximately $6,700,000 in its
80% owned Mexican subsidiary. In fiscal 1998, the Company plans to invest
approximately $2,700,000 in additional production equipment and expansion of
the existing production facility in Mexico. The cumulative inflation rate in
Mexico over the three year period ended December 31, 1996 was approximately
100%, resulting in the Mexican economy being considered hyper-inflationary
for financial reporting. Accordingly, the Company now uses the
monetary/non-monetary method of accounting. The impact on the Company's
profitability, is limited to the effect of currency fluctuations related to
net monetary assets, which at December 31, 1997 was approximately
$1,600,000. For the fiscal quarter ended December 31, 1997, the impact on
profitability was not significant. Due to the costs of hedging currency
risks, the Company did not enter into any hedging arrangements for the first
quarter of fiscal 1998.
The Company maintains an investment, principally in preferred stock of
Processing Technology, Inc., a corporate joint venture. The Company
periodically evaluates the possible conversion of its preferred stock
investment into common stock of Processing Technology, Inc. The Company's
decision to convert its investment to common stock will be based upon the
joint venture attaining certain financial criteria established by Steel
Technologies. Upon conversion, the Company would be obligated to guarantee
a proportionate share, currently approximating $9,200,000, of the joint
venture's loan and lease commitments. The conversion is not expected to occur
in the near term.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Liquidity and Capital Resources (Cont.)
The Company believes its manufacturing facilities are in compliance with
applicable federal and state environmental regulations. The Company is not
presently aware of any fact or circumstance which would require the
expenditure of material amounts for environmental compliance in the future.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 requires companies to classify items defined as "other comprehensive
income" by their nature in a financial statements, and to display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The adoption of SFAS No. 130 will not have a material impact on the
consolidated financial statements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as a part of this report:
27 -- Financial Data Schedule
(b) On October 28, 1997, the Company reported on Form 8-K that Joseph P.
Bellino had been elected its Chief Financial Officer on October 16, 1997.
Kenneth R. Bates resigned his positions as Vice President-Finance, Chief
Financial Officer, Treasurer and Secretary on October 12, 1997.
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 thereunto duly authorized.
STEEL TECHNOLOGIES INC.
(Registrant)
By /s/ Joseph P. Bellino
______________________
Joseph P. Bellino
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Dated February 17, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at December 31, 1997 and condensed
consolidated statement of income for the quarter ended December 31, 1997 and
related footnotes and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000771790
<NAME> STEEL TECHNOLOGIES INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,310
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<RECEIVABLES> 50,378
<ALLOWANCES> (943)
<INVENTORY> 73,381
<CURRENT-ASSETS> 133,532
<PP&E> 156,353
<DEPRECIATION> (52,107)
<TOTAL-ASSETS> 104,246
<CURRENT-LIABILITIES> 46,941
<BONDS> 92,023
0
0
<COMMON> 16,896
<OTHER-SE> 93,827
<TOTAL-LIABILITY-AND-EQUITY> 261,714
<SALES> 96,449
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</TABLE>
