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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
( ) 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
- ------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5080 Richmond Road, Bedford Heights, Ohio 44146
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of July 18, 1996
- -------------------------------------- -------------------------------
<S> <C>
Common stock, without par value 8,600,000
</TABLE>
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
-----------------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets - June 30, 1996 and 3
December 31, 1995
Consolidated Statements of Income - for the three and six months
ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 7-10
-----------------------------------
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ---------
(unaudited)
<S> <C> <C>
Assets
Cash $ 3,518 $ 1,884
Accounts receivable 15,821 7,405
Inventories 116,614 112,986
Prepaid expenses and other 2,590 2,096
--------- ---------
Total current assets 138,543 124,371
--------- ---------
Property and equipment 83,098 78,452
Accumulated depreciation (12,776) (10,886)
--------- ---------
Net property and equipment 70,322 67,566
--------- ---------
Goodwill 10,005 10,135
--------- ---------
Total assets $ 218,870 $ 202,072
========= =========
Liabilities
Current portion of long-term debt $ 4,719 $ 4,768
Accounts payable 26,961 15,220
Accrued payroll 3,964 2,922
Accrued and deferred income taxes 2,420 3,246
Other accrued liabilities 5,260 5,070
--------- ---------
Total current liabilities 43,324 31,226
--------- ---------
Revolving credit agreement 51,671 51,338
Term loans 21,854 24,969
Industrial revenue bonds 9,460 9,565
Taxable rate notes 7,900 7,900
--------- ---------
Total long-term debt 90,885 93,772
--------- ---------
Deferred income taxes 3,090 3,090
--------- ---------
Total liabilities 137,299 128,088
--------- ---------
Shareholders' Equity
Preferred stock -- --
Common stock 57,095 57,095
Retained earnings 24,476 16,889
--------- ---------
Total shareholders' equity 81,571 73,984
--------- ---------
Total liabilities and shareholders' equity $ 218,870 $ 202,072
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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<PAGE> 4
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share and tonnage data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Tons sold
Direct 268,318 238,862 525,529 489,023
Tolling 40,543 40,854 77,763 92,264
-------- -------- -------- --------
308,861 279,716 603,292 581,287
======== ======== ======== ========
Net sales $146,697 $142,095 $289,286 $291,153
Cost of sales 113,882 114,752 225,545 233,798
-------- -------- -------- --------
Gross margin 32,815 27,343 63,741 57,355
Operating expenses
Warehouse and processing 6,937 7,010 14,341 14,604
Administrative and general 6,286 5,460 12,377 11,033
Distribution 4,505 4,048 8,748 8,111
Selling 3,571 3,441 7,037 7,068
Occupancy 944 766 1,953 1,533
Depreciation and amortization 1,027 905 2,021 1,576
-------- -------- -------- --------
Total operating expenses 23,270 21,630 46,477 43,925
-------- -------- -------- --------
Operating income 9,545 5,713 17,264 13,430
Interest expense 1,447 2,847 2,923 5,414
Receivable securitization expense 879 -- 1,695 --
-------- -------- -------- --------
Income before taxes 7,219 2,866 12,646 8,016
Income taxes 2,888 1,145 5,059 3,228
-------- -------- -------- --------
Net income $ 4,331 $ 1,721 $ 7,587 $ 4,788
======== ======== ======== ========
Net income per share $ 0.50 $ 0.20 $ 0.88 $ 0.56
======== ======== ======== ========
Weighted average shares outstanding 8,600 8,600 8,600 8,600
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(in thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,587 $ 4,788
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation 1,891 1,463
Amortization of goodwill 130 113
Long-term deferred income taxes -- (678)
-------- --------
9,608 5,686
Changes in working capital:
Accounts receivable (8,726) (10,741)
Inventories (3,628) (2,032)
Prepaid expenses and other (494) (225)
Accounts payable 11,741 (16,396)
Accrued payroll and other accrued liabilities 1,231 2,947
Accrued and deferred income taxes (826) (2,161)
-------- --------
(702) (28,608)
-------- --------
Net cash from (used for) operating activities 8,906 (22,922)
-------- --------
Cash flows from investing activities:
Acquisition of Lafayette Steel (including working capital of $28,532) -- (52,395)
Temper mill facility and equipment (893) (5,192)
Plate facility and equipment -- (2,063)
Tubing facility and equipment -- (1,129)
Lafayette facility expansion (430) --
Additional plate processing equipment (410) --
Other capital expenditures, net (2,913) (1,015)
-------- --------
Net cash used for investing activities (4,646) (61,794)
-------- --------
Cash flows from financing activities:
Revolving credit agreement 333 69,065
Proceeds from term loans -- 16,100
Repayment of long-term debt (2,959) (1,509)
Unexpended industrial revenue bond funds -- 2,281
-------- --------
Net cash from (used for) financing activities (2,626) 85,937
-------- --------
Cash:
Net increase 1,634 1,221
Beginning balance 1,884 718
-------- --------
Ending balance $ 3,518 $ 1,939
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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) 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.
(2) LONG-TERM DEBT:
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 five months of 1996 were prime plus 1% and LIBOR plus 2%. Commencing June
1, 1996, rates decreased to prime plus .5% and LIBOR plus 1.5%. The majority of
the Company's borrowings are based on the LIBOR option. The overall effective
interest rate for all debt for both the three and six month periods ended June
30, 1996 amounted to 7.4%, compared to 7.7% and 7.6%, respectively, in 1995.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $12.7 million and $9.8 million of checks issued that have not
cleared the bank as of June 30, 1996 and December 31, 1995, respectively.
(3) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the six months ended June 30, 1996 and 1995 totaled $3.2
million and $5.4 million, respectively. Income taxes paid during the six months
ended June 30, 1996 and 1995 totaled $6.1 million and $6.0 million,
respectively.
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<PAGE> 7
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.
Financing costs include interest expense on debt and costs associated
with the $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 December 29, 1994, as amended (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.
Because the Company conducts its operations generally on the basis of
short-term orders, backlog is not a meaningful indicator of future performance.
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<PAGE> 8
RESULTS OF OPERATIONS
Tons sold increased 10.4% to 308,861 in the second quarter of 1996 from
279,716 in the second quarter of 1995, and 3.8% in the first half of 1996 to
603,292 from 581,287 in the first half of 1995. Tons sold in the second quarter
of 1996 include 268,318 from direct sales and 40,543 from toll processing,
compared with 238,862 direct tons and 40,854 tolling tons in the comparable
periods of last year. Tons sold in the first half of 1996 include 525,529 from
direct sales and 77,763 from toll processing, compared with 489,023 direct tons
and 92,264 tolling tons in the comparable periods of last year. Substantially
all tolling tons were processed by Lafayette Steel.
Net sales increased 3.2% to $146.7 million for the second quarter of
1996 from $142.1 million for the second quarter of 1995. For the first half, net
sales decreased 0.6% to $289.3 million from $291.2 million in the 1995 period.
The decrease in net sales for the six month period is attributable to a 4.2%
decline in average selling prices between years, partially offset by an increase
in tons sold. International sales represented 5.7% and 5.3% of consolidated net
sales for the three and six month periods ended June 30, 1996, compared to 1.8%
and 1.7%, respectively, for the 1995 periods.
As a percentage of net sales, gross margin increased to 22.4% for the
second quarter of 1996 from 19.2% for 1995. For the six month period, gross
margin increased to 22.0% in 1996 from 19.7% in 1995. The margin increases
reflect the impact of centralized steel purchasing efforts and an increased
amount of higher value-added plate processing and tempering performed in 1996,
partially offset by lower tolling sales and increased international sales in
1996.
As a percentage of net sales, operating expenses increased to 15.9% for
the second quarter of 1996 from 15.2% for 1995, and to 16.1% for the first six
months of 1996 from 15.1% in 1995. The increases are primarily due to lower
average selling prices in 1996, and incremental costs associated with the new
Cleveland temper mill and Minneapolis plate processing facilities, expansion of
Philadelphia plate processing, and higher management information systems
expenditures.
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<PAGE> 9
Financing Costs decreased to $2.3 million for the second quarter of
1996 from $2.8 million in 1995, and to $4.6 million for the first half of 1996
from $5.4 million in 1995. The decreases are attributable to lower average
borrowings outstanding primarily as a result of lower inventory levels in 1996,
lower effective borrowing rates in 1996, and rate savings associated with the
receivable securitization program implemented in December 1995. The Company's
effective borrowing rate for both the second quarter and first half of 1996 was
7.4%, compared to 7.7% and 7.6%, 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 expensed in 1996. Such costs
were capitalized during the 1995 construction period.
Pretax income for the second quarter of 1996 increased 151.9% to $7.2
million from $2.9 million for 1995. For the first six months of 1996, pretax
income increased 57.8% to $12.6 million from $8.0 million for 1995. Income taxes
approximated 40% of pretax income for all periods presented. Net income for the
second quarter of 1996 increased 151.7% to $4.3 million, or $.50 per share, from
$1.7 million, or $.20 per share for 1995. Net income for the first six months of
1996 increased 58.5% to $7.6 million, or $.88 per share, from $4.8 million, or
$.56 per share in the 1995 period.
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 sale and leaseback 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.
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 six months of 1996, $8.9 million of net cash was
provided by operating activities, consisting of $9.6 million of net income and
non-cash charges, offset by $0.7 million of cash used for working capital
purposes.
As of June 30, 1996, $57 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.
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<PAGE> 10
Working capital at June 30, 1996 increased $2.1 million or 2.2% 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 half of 1996, net cash used for investing activities
consisted of $4.6 million of capital expenditures, primarily related to
completion of the temper mill facility, construction of additional office space,
commencement of a 72,000 square foot expansion of Lafayette Steel's existing
facility (scheduled for completion by the end of 1996), the purchase of two
additional plasma burning tables, and upgrading the Company's information
systems. Cash flows used for financing activities in the first half of 1996
consists of net debt repayments of $2.6 million.
Approximately $21.5 million in unused revolving credit borrowing
availability existed under the Credit Facility at June 30, 1996. The Credit
Facility, which matures on June 30, 1998, contains restrictive covenants which
require minimum net worth levels, maintenance of certain financial ratios and
limitations on capital expenditures. The Company has remained in compliance with
these covenants since the inception of the Credit Facility.
The Company has filed a registration statement with the Securities and
Exchange Commission to offer 2.5 million shares of common stock in a public
offering (the Offering). The Company anticipates completing the Offering in
August 1996, and intends to use the net proceeds therefrom to repay the term
loans and a portion of its revolving credit borrowings under the Credit
Facility.
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.
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<PAGE> 11
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; potential
equipment malfunction; 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of shareholders was held on April
26,1996.
(b) At the annual meeting, the Company's shareholders elected Bruce S.
Adelstein, R. Louis Schneeberger, and Martin H. Elrad as Directors for
a two-year term which expires at the annual meeting of shareholders in
1998.
The term of office of Michael D. Siegal, David A. Wolfort, Thomas M.
Forman and Janice M. Margheret, as Directors, continued after the 1996
meeting; such term expires at the annual shareholders meeting in 1997.
(c) At the annual meeting, the Company's shareholders ratified the
appointment of Arthur Andersen, LLP as auditors of the Company for
1996. The holders of 7,978,835 shares of Common Stock voted to ratify
the appointment, the holders of 8,300 shares voted against the
ratification, and the holders of 1,904 shares abstained.
The following tabulation represents voting for the Directors:
<TABLE>
<CAPTION>
For Withheld Authority
-------------------- ------------------
<S> <C> <C>
Bruce S. Adelstein 7,967,689 21,350
R. Louis Schneeberger 7,967,389 21,650
Martin H. Elrad 7,967,689 21,350
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
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<PAGE> 12
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: July 19, 1996 By: /s/ R. LOUIS SCHNEEBERGER
--------------------------
R. LOUIS SCHNEEBERGER
Chief Financial Officer
By: /s/ RICHARD T. MARABITO
--------------------------
RICHARD T. MARABITO
Treasurer and Corporate Controller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,518
<SECURITIES> 0
<RECEIVABLES> 15,821
<ALLOWANCES> 0
<INVENTORY> 116,614
<CURRENT-ASSETS> 138,543
<PP&E> 83,098
<DEPRECIATION> (12,776)
<TOTAL-ASSETS> 218,870
<CURRENT-LIABILITIES> 43,324
<BONDS> 0
<COMMON> 57,095
0
0
<OTHER-SE> 24,476
<TOTAL-LIABILITY-AND-EQUITY> 218,870
<SALES> 289,286
<TOTAL-REVENUES> 289,286
<CGS> 225,545
<TOTAL-COSTS> 225,545
<OTHER-EXPENSES> 46,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,923
<INCOME-PRETAX> 12,646
<INCOME-TAX> 5,059
<INCOME-CONTINUING> 5,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,587
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
