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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, 1998
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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
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5096 Richmond Road, Bedford Heights, Ohio 44146
- ----------------------------------------- ----------
(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 4, 1998
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Common stock, without par value 10,692,000
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1998 and 3
December 31, 1997
Consolidated Statements of Income - for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - for the three
months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
</TABLE>
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Part I. FINANCIAL INFORMATION
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -----------
(unaudited)
Assets
<S> <C> <C>
Cash $ 3,529 $ 1,748
Accounts receivable 21,089 6,417
Inventories 121,637 132,230
Prepaid expenses and other 2,052 1,780
--------- ---------
Total current assets 148,307 142,175
--------- ---------
Property and equipment 131,770 124,292
Accumulated depreciation (21,756) (20,301)
--------- ---------
Net property and equipment 110,014 103,991
--------- ---------
Goodwill 13,190 13,278
Investments in joint ventures 5,935 6,090
--------- ---------
Total assets $ 277,446 $ 265,534
========= =========
Liabilities
Current portion of long-term debt $ 3,147 $ 3,722
Accounts payable 26,209 24,266
Accrued payroll 3,077 3,618
Other accrued liabilities 6,230 5,520
--------- ---------
Total current liabilities 38,663 37,126
--------- ---------
Revolving credit agreement 52,648 48,809
Term loans 24,228 20,148
Industrial revenue bonds 7,245 7,245
--------- ---------
Total long-term debt 84,121 76,202
--------- ---------
Deferred income taxes 6,229 6,032
--------- ---------
Total liabilities 129,013 119,360
--------- ---------
Shareholders' Equity
Preferred stock - -
Common stock 106,319 106,319
Retained earnings 42,114 39,855
--------- ---------
Total shareholders' equity 148,433 146,174
--------- ---------
Total liabilities and shareholders' equity $ 277,446 $ 265,534
========= =========
</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
For the Three Months Ended March 31,
(in thousands, except per share and tonnage data)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Tons sold
Direct 289,177 273,337
Toll 79,139 42,487
--------- ---------
368,316 315,824
--------- ---------
Net sales $ 155,707 $ 149,473
Cost of sales 123,409 118,830
--------- ---------
Gross margin 32,298 30,643
Operating expenses
Warehouse and processing 8,761 8,266
Administrative and general 6,931 6,603
Distribution 4,589 4,485
Selling 3,605 3,335
Occupancy 1,126 1,139
Depreciation and amortization 1,653 1,289
--------- ---------
Total operating expenses 26,665 25,117
--------- ---------
Operating income 5,633 5,526
Income (loss) and (start-up costs) from joint ventures (116) 101
--------- ---------
Income before financing costs and taxes 5,517 5,627
Interest expense 964 917
Receivable securitization expense 909 799
--------- ---------
Income before taxes 3,644 3,911
Income taxes 1,385 1,466
--------- ---------
Net income $ 2,259 $ 2,445
========= =========
Net income per share $ 0.21 $ 0.23
========= =========
Weighted average shares outstanding 10,692 10,692
========= =========
</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 Three Months Ended March 31,
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,259 $ 2,445
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 1,653 1,289
(Income) loss and start-up costs from joint ventures 116 (101)
Long-term deferred income taxes 197 212
-------- --------
4,225 3,845
Changes in working capital:
Accounts receivable (14,672) (11,397)
Inventories 10,593 442
Prepaid expenses and other (289) 175
Accounts payable 1,943 6,218
Accrued payroll and other accrued liabilities 169 (1,264)
-------- --------
(2,256) (5,826)
-------- --------
Net cash from (used for) operating activities 1,969 (1,981)
-------- --------
Cash flows from investing activities:
Equipment purchases and deposits (4,135) (1,456)
Facility construction and improvements (3,157) (1,437)
Other capital expenditures, net (240) (273)
Investments in joint ventures - (5,322)
-------- --------
Net cash used for investing activities (7,532) (8,488)
-------- --------
Cash flows from financing activities:
Revolving credit agreement 3,839 11,972
Borrowings (repayments) of term loans and IRB's 3,505 (3)
-------- --------
Net cash from financing activities 7,344 11,969
-------- --------
Cash:
Net increase 1,781 1,500
Beginning balance 1,748 2,018
-------- --------
Ending balance $ 3,529 $ 3,518
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 three joint ventures are accounted for under the equity method.
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
(1) EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average 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, 1998, and December 31, 1997, $64 million 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 prime or LIBOR plus a premium determined quarterly, which varies with the
Company's operating performance and financial leverage. Borrowing rates for the
first three months of 1998 were prime plus 0% and LIBOR plus 1.0%. Commencing
June 1, 1998, the LIBOR premium increases to 1.25%. The majority of the
Company's borrowings are based on the LIBOR option. The overall effective
interest rate for all debt for each of the three-month periods ended March 31,
1998 and 1997 was 6.8%.
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The Company's bank credit agreement includes a secured $17 million term loan
component to finance the construction and equipping of a new temper mill
facility in Iowa (the Iowa Term Loan). As of March 31, 1998, Iowa Term Loan
borrowings outstanding totaled $9.9 million, and associated capitalized interest
has totaled $314 thousand through March 31, 1998.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $17.6 million and $5.2 million of checks issued that have not
cleared the bank as of March 31, 1998 and December 31, 1997, respectively.
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the three months ended March 31, 1998 and 1997 totaled $1.2
million and $1.0 million, respectively. Income taxes paid during the March 31,
1998 and 1997 quarters totaled $1.2 million and $1.1 million, respectively.
(5) IMPACT OF NEW ACCOUNTING STANDARD:
The Financial Accounting Standards Board has issued Statement of Accounting
Standards No. 130, "Reporting Comprehensive Income," (SFAS No.130), which
requires reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS No. 130 has no impact on
Olympic, as the Company's comprehensive income consists of net income only.
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<PAGE> 8
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.
The Company's 1998 first quarter results include the results of the
Company's Southeastern operation (Southeastern), the net assets of which were
acquired effective June 1, 1997. Southeastern has historically operated as a
metals toll processor, and is located near Atlanta, Georgia.
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 Southeastern operations. 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.
The Company's financial statements include the results of its three
joint ventures: 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; Olympic Laser Processing (OLP), a
company formed in April 1997 to process laser welded sheet steel blanks for the
automotive industry; and 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. OLP is constructing a new facility
and initially equipping it with two laser-welding lines. Production is expected
to begin in the second half of 1998. Start-up costs for both OLP and TSP are
being expensed as incurred, and are expected to continue through 1998. The
Company guarantees portions of outstanding debt under each of the joint venture
companies' bank credit facilities. The Company's 45% interest in OCR, 50%
interest in OLP and 49% interest in TSP are accounted for under the equity
method.
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<PAGE> 9
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 prime or 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.
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 16.6% to 368 thousand in the first quarter of 1998
from 316 thousand for the first quarter of 1997. Tons sold in the first quarter
of 1998 include 289 thousand from direct sales and 79 thousand from toll
processing, compared with 273 thousand direct tons and 43 thousand tolling tons
in the comparable period of last year. The increase in tolling tons is
attributable to the addition of Southeastern.
Net sales increased 4.2% to $155.7 million for the first quarter of
1998 from $149.5 million for 1997. Average selling prices declined 10.7% between
years, primarily due to an increase in the proportion of tolling sales in 1998.
Direct average selling prices declined 2.4%, with the largest decline related to
stainless steel products. International sales declined to 1.4% of consolidated
net sales in 1998, compared to 4.8% last year, as a result of declining
participation in the Mexican market.
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As a percentage of net sales, gross margin increased to 20.7% for the
first quarter of 1998 from 20.5% for 1997. The increase reflects the impact of
enhanced inventory management, increased tolling sales, and a decrease in
international sales.
On a per ton basis, operating expenses decreased to $72.40 for the
first quarter of 1998 from $79.53 for 1997. As a percentage of net sales,
operating expenses increased to 17.1% for the first quarter of 1998 from 16.8%
for 1997. The increase as a percentage of net sales is primarily due to the
impact of lower average selling prices.
Start-up costs exceeded income from joint ventures by $116 thousand in
the first quarter of 1998, compared to joint venture income of $101 thousand in
1997. Prior year joint venture results reflect OCR only. Start-up costs related
to OLP and TSP are being expensed as incurred in 1998.
Financing Costs for the first quarter of 1998 increased to $1.9 million
from $1.7 million in the first quarter of 1997. Average borrowings outstanding
in the first quarter of 1998 increased primarily as a result of the Southeastern
acquisition and borrowings for the construction and equipping of a new 190,000
square foot temper mill facility in Bettendorf, Iowa (the Iowa Facility). The
Company's effective bank borrowing rate remained the same at 6.8% for both
quarters. The Company's Premium will increase to 1.25% over LIBOR for the three
months commencing June 1, 1998.
Pretax income for the first quarter of 1998 decreased 6.8% to $3.6
million from $3.9 million for 1997. Income taxes approximated 38.0% of pretax
income in the first quarter of 1998 compared to 37.5% for 1997. The increase is
primarily attributable to the decrease in international sales and an increase in
non-deductible expenses.
Net income for the first quarter of 1998 totaled $2.3 million, or $.21
per share, compared to $2.4 million, or $.23 per share for 1997.
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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 start-up costs / income from
joint ventures, as well as changes in working capital. During the first three
months of 1998, $2.0 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 $2.2 million of cash used for working capital purposes.
Working capital at March 31, 1998 increased by $4.6 million or 4.4%
since December 31, 1997. The increase is primarily attributable to a $14.7
million increase in accounts receivable, offset by a $10.6 million decrease in
inventories. The accounts receivable increase is the result of traditionally
stronger March sales as compared to December sales. December historically
represents the lowest sales period of each year for the Company. The inventory
decrease is attributable to enhanced inventory management during 1998.
As of March 31, 1998, and December 31, 1997, $64 million 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.
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<PAGE> 12
During the first three months of 1998, net cash used for investing
activities totaled $7.5 million, primarily consisting of expenditures for the
Iowa Facility, which is planned to become operational in the fourth quarter of
1998. The Company also made progress payments on its new tube mill in Cleveland
and new cut-to-length line for its Detroit operation which were both installed
during the first quarter of 1998. Both of these pieces of equipment are expected
to become fully operational in the second quarter of 1998. The Company also
commenced a $2.7 million, 35,000 square foot facility expansion and equipment
upgrade project at its Southeastern operation in April, 1998. The facility
expansion and upgraded cut-to-length line are expected to become operational by
the end of 1998.
Cash flows used from financing activities primarily consists of net
borrowings under the Company's revolving credit agreement and the term loan for
the Iowa Facility, offset by scheduled payments under other existing long-term
agreements.
As of March 31, 1998, approximately $21.4 million in unused
availability existed under the Company's revolving credit and accounts
receivable securitization facilities, and $9.9 million was borrowed under the
$17 million Iowa term loan. 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 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,
acquisitions and significant improvements to processing equipment to respond to
customers' demands.
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FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "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 manufacturers; potential equipment malfunction;
equipment installation and facility construction delays, particularly for the
Iowa Facility and Southeastern 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 5, 1998 By:
-------------------------
R. LOUIS SCHNEEBERGER
Chief Financial Officer
By:
-------------------------
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,529
<SECURITIES> 0
<RECEIVABLES> 21,089
<ALLOWANCES> 0
<INVENTORY> 121,637
<CURRENT-ASSETS> 148,307
<PP&E> 131,770
<DEPRECIATION> (21,756)
<TOTAL-ASSETS> 277,446
<CURRENT-LIABILITIES> 38,663
<BONDS> 16,892
0
0
<COMMON> 106,319
<OTHER-SE> 42,114
<TOTAL-LIABILITY-AND-EQUITY> 277,446
<SALES> 155,707
<TOTAL-REVENUES> 155,707
<CGS> 123,409
<TOTAL-COSTS> 123,409
<OTHER-EXPENSES> 26,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 964
<INCOME-PRETAX> 3,644
<INCOME-TAX> 1,385
<INCOME-CONTINUING> 2,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,259
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
