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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 1998
------------------------------- -----------------------------------
Common stock, without par value 10,692,000
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1998 and 3
December 31, 1997
Consolidated Statements of Income - for the three and nine
months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-16
PART II. OTHER INFORMATION
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
Assets
<S> <C> <C>
Cash $ 919 $ 1,748
Accounts receivable 15,304 6,417
Inventories 141,650 132,230
Prepaid expenses and other 1,863 1,780
--------- ---------
Total current assets 159,736 142,175
--------- ---------
Property and equipment 143,315 124,292
Accumulated depreciation (24,534) (20,301)
--------- ---------
Net property and equipment 118,781 103,991
--------- ---------
Goodwill 13,121 13,278
Investments in joint ventures 5,716 6,090
--------- ---------
Total assets $ 297,354 $ 265,534
========= =========
Liabilities
Current portion of long-term debt $ 3,147 $ 3,722
Accounts payable 26,848 24,266
Accrued payroll 4,003 3,618
Other accrued liabilities 4,784 5,520
--------- ---------
Total current liabilities 38,782 37,126
--------- ---------
Revolving credit agreement 64,553 48,809
Term loans 29,384 20,148
Industrial revenue bonds 7,140 7,245
--------- ---------
Total long-term debt 101,077 76,202
--------- ---------
Deferred income taxes 7,320 6,032
--------- ---------
Total liabilities 147,179 119,360
--------- ---------
Shareholders' Equity
Preferred stock - -
Common stock 106,319 106,319
Retained earnings 43,856 39,855
--------- ---------
Total shareholders' equity 150,175 146,174
--------- ---------
Total liabilities and shareholders' equity $ 297,354 $ 265,534
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND TONNAGE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Tons sold
Direct 244,365 265,752 816,567 830,186
Toll 51,236 59,284 172,175 149,436
--------- --------- --------- ---------
295,601 325,036 988,742 979,622
--------- --------- --------- ---------
Net sales $ 132,035 $ 145,223 $ 439,996 $ 452,291
Cost of sales 104,208 115,078 347,862 359,111
--------- --------- --------- ---------
Gross margin 27,827 30,145 92,134 93,180
Operating expenses
Warehouse and processing 9,221 8,032 26,730 24,886
Administrative and general 6,496 6,868 20,366 20,142
Distribution 4,295 4,306 13,513 13,574
Selling 3,522 3,327 10,830 10,276
Occupancy 1,035 920 3,196 3,102
Depreciation and amortization 1,761 1,598 5,115 4,353
--------- --------- --------- ---------
Total operating expenses 26,330 25,051 79,750 76,333
--------- --------- --------- ---------
Operating income 1,497 5,094 12,384 16,847
Start-up costs in excess of income from joint ventures (46) (173) (251) (10)
--------- --------- --------- ---------
Income before financing costs and taxes 1,451 4,921 12,133 16,837
Interest expense 1,030 1,247 2,807 3,145
Receivable securitization expense 903 930 2,872 2,733
--------- --------- --------- ---------
Income (loss) before taxes (482) 2,744 6,454 10,959
Income taxes (183) 1,029 2,453 4,110
--------- --------- --------- ---------
Net income (loss) $ (299) $ 1,715 $ 4,001 $ 6,849
========= ========= ========= =========
Net income (loss) per share $ (0.03) $ 0.16 $ 0.37 $ 0.64
========= ========= ========= =========
Weighted average shares outstanding 10,692 10,692 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 NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,001 $ 6,849
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 5,115 4,353
Loss on sale of fixed assets 370 -
Loss from joint ventures 251 10
Long-term deferred income taxes 1,288 1,069
-------- --------
11,025 12,281
Changes in working capital:
Accounts receivable (8,887) (10,584)
Inventories (9,339) 608
Prepaid expenses and other 176 (567)
Accounts payable 2,582 (1,359)
Accrued payroll and other accrued liabilities (628) 138
-------- --------
(16,096) (11,764)
-------- --------
Net cash from (used for) operating activities (5,071) 517
-------- --------
Cash flows from investing activities:
Acquisition of JNT (net of working capital of $113) (755) -
Acquisition of Southeastern (net of working capital of $422) - (13,689)
Equipment purchases and deposits, net (10,317) (8,481)
Facility construction and improvements (7,329) (2,571)
Other capital expenditures, net (1,657) (764)
Investments in joint ventures - (6,075)
-------- --------
Net cash used for investing activities (20,058) (31,580)
-------- --------
Cash flows from financing activities:
Revolving credit agreement 15,744 22,359
Term loans and IRB'S 8,556 9,074
-------- --------
Net cash from financing activities 24,300 31,433
-------- --------
Cash:
Net change (829) 370
Beginning balance 1,748 2,018
-------- --------
Ending balance $ 919 $ 2,388
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. Certain amounts
in the 1997 consolidated financial statements have been reclassified to conform
to the 1998 presentation.
(1) TOLLING TONS SOLD ADJUSTMENT:
Tons invoiced for storage services provided by the Company's Southeastern
operation had been reported in tolling tons sold from November 1997 through June
1998. To conform the 1998 and 1997 presentations, 39 thousand storage tons
previously included in tolling tons sold during the first half of 1998 have been
removed. The adjustment had no impact on net sales or net earnings for any
periods presented.
(2) 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 outstanding
stock options were not dilutive.
(3) ACQUISITION:
Effective June 26, 1998, the Company acquired certain assets and assumed certain
liabilities of JNT Precision Machining, Inc. (JNT), a machining center located
in McConnellsburg, Pennsylvania, which operates lathes, machine centers, drills
and saws.
The preliminary cash purchase price, which is subject to post-closing
adjustments and includes a loan to the sellers, totaled $755 thousand. The
acquisition has been accounted for as a purchase and, accordingly, assets and
liabilities are reflected at estimated fair values. The preliminary purchase
price allocation resulted in goodwill of $108 thousand.
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The JNT operation is operating from its current facility in McConnellsburg,
until a new facility is constructed in nearby Chambersburg, Pennsylvania.
Olympic plans to initially spend approximately $6.8 million to construct an
80,000 square foot facility to house the existing JNT operation and additional
plate processing equipment. The new facility is projected to be operational in
the third quarter of 1999.
(4) ACCOUNTS RECEIVABLE:
As of September 30, 1998, and December 31, 1997, $54 million and $64 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.
(5) LONG-TERM DEBT:
Interest rates under the Company's various credit agreements are generally based
on prime or LIBOR plus a premium determined quarterly (each March 1, June 1,
September 1, and December 1), which varies with the Company's operating
performance and financial leverage. Borrowing rates for the first five months of
1998 were prime plus 0% and LIBOR plus 1.0%. Since June 1, 1998, the LIBOR
premium has been 1.25%. The majority of the Company's borrowings are based on
the LIBOR option. The overall effective interest rate for all debt for the three
and nine month periods ended September 30, 1998 amounted to 7.0% and 6.9%,
respectively, compared to 6.9% and 6.8%, for the respective periods in 1997.
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 September 30, 1998, Iowa Term Loan
borrowings outstanding totaled $15.7 million, and cumulative capitalized
interest has totaled $865 thousand.
The Company's various debt agreements contain certain quarterly profitability
and financial leverage requirements. The Company believes that it may not
achieve a required yearend minimum interest coverage ratio, and has requested
and expects to obtain, based upon discussions with its banks, a waiver of this
covenant.
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Included in the revolving credit balances on the accompanying consolidated
balance sheets are $18.3 million and $5.2 million of checks issued that have not
cleared the bank as of September 30, 1998 and December 31, 1997, respectively.
(6) JOINT VENTURES:
The Company's financial statements include the results of its three joint
ventures: Olympic Continental Resources (OCR), Olympic Laser Processing (OLP),
and Trumark Steel & Processing (TSP). The Company's 45% interest in OCR, 50%
interest in OLP and 49% interest in TSP are accounted for under the equity
method. Start-up costs for both OLP and TSP are being expensed as incurred, and
are expected to continue through the remainder of 1998.
The Company guarantees portions of outstanding debt under all three of the joint
venture companies' bank credit facilities. As of September 30, 1998, Olympic
guaranteed 50% of OCR's $12.3 million of outstanding debt on a joint and several
basis, and 50% of OLP's $15.2 million and 49% of TSP's $2.2 million of
outstanding debt on a several basis.
OCR generates a significant portion of its revenue from one of its joint venture
partners, Atlas Iron Processors, Inc. (Atlas) or affiliates of Atlas. As a
result, OCR maintains significant receivable balances with Atlas. The Company
believes that Atlas is experiencing financial difficulties. If the financial
condition and operations of Atlas continue to deteriorate, OCR's operating
results will be adversely affected. OCR's receivable from Atlas totaled
approximately $6 million and $4.8 million at September 30, 1998, and December
31, 1997, respectively, which represented 25% and 24% of OCR's total accounts
receivable balances at the respective dates. The OLP and TSP ventures are still
in startup and do not have significant receivables from joint venture partners.
(7) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the nine months ended September 30, 1998 and 1997 totaled
$3.6 million and $3.2 million, respectively. Interest paid includes $742
thousand in 1998, and $157 thousand in 1997, which has been capitalized,
primarily relating to the Company's Iowa temper mill facility project. Income
taxes paid during the first nine months of 1998 and 1997 totaled $3.2 million
and $3.4 million, respectively.
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(8) 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. In
addition, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" have been issued and are effective for yearend 1998.
These statements also will not have an impact on the Company, as Olympic does
not operate in different market segments, and has no postretirement benefit
plans.
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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.
The Company's 1998 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. Additionally, effective June
26, 1998, the Company's consolidated balance sheet reflects the acquired net
assets of JNT Precision Machining, Inc. (JNT), a machining center located in
McConnellsburg, Pennsylvania. JNT's results of operations are included in the
Company's results commencing in the third quarter of 1998.
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 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 (MBE). The Company's 45% interest in
OCR, 50% interest in OLP and 49% interest in TSP are accounted for under the
equity method. The Company guarantees portions of outstanding debt under all
three of the joint venture companies' bank credit facilities. As of September
30, 1998, Olympic guaranteed 50% of OCR's $12.3 million of outstanding debt on a
joint and several basis, and 50% of OLP's $15.2 million and 49% of TSP's $2.2
million of outstanding debt on a several basis. OCR generates a significant
portion of its revenue from one of its joint venture partners, Atlas Iron
Processors, Inc. (Atlas) or affiliates of Atlas. As a result, OCR maintains
significant receivable balances with Atlas. The Company believes that Atlas is
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experiencing financial difficulties. If the financial condition and operations
of Atlas continue to deteriorate, OCR's operating results will be adversely
affected. OCR's receivable from Atlas totaled approximately $6 million and $4.8
million at September 30, 1998, and December 31, 1997, respectively, which
represented 25% and 24% of OCR's total accounts receivable balances at the
respective dates. The OLP and TSP ventures are still in startup and do not have
significant receivables from joint venture partners.
OLP has constructed a new facility and is initially equipping it with
two laser-welding lines. Prototyping has begun on OLP's first welding line and
full production is expected to begin on both lines in the beginning of 1999.
TSP's start-up has been slower than expected, as TSP continues to await
certification as an MBE from the Michigan Minority Business Development Council.
Start-up costs for both OLP and TSP are being expensed as incurred, and are
expected to continue through the remainder of 1998.
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.
Four separate collective bargaining units represent approximately 310
of the Company's hourly plant personnel at its Minneapolis and Lafayette Steel
facilities. In September 1998, the two collective bargaining agreements at
Lafayette were renewed to July 2001 and July 2002, respectively, and the
agreement covering personnel at the Minneapolis coil facility was renewed to
September 30, 2002. The Minneapolis plate processing facility agreement expires
on March 31, 1999. The Company has never experienced a work stoppage and
believes that its relationship with its employees is good.
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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RESULTS OF OPERATIONS
Tons sold decreased 9.1% to 296 thousand in the third quarter of 1998
from 325 thousand for the third quarter of 1997, and increased .9% in the first
nine months of 1998 to 989 thousand from 980 thousand in 1997. Tons sold in the
third quarter of 1998 include 245 thousand from direct sales and 51 thousand
from toll processing, compared with 266 thousand direct tons and 59 thousand
tolling tons in the comparable period of last year. Tons sold in the first nine
months of 1998 include 817 thousand from direct sales and 172 thousand from toll
processing, compared to 830 thousand direct tons and 150 thousand tolling tons
in the comparable periods of 1997. The increase in tolling tons for the first
nine months is due to the addition of Southeastern, offset by a reduction at
Lafayette attributable to the impact of the General Motors (GM) strike (the
Strike). The decrease in direct tons is primarily attributable to the impact of
the Strike and a decrease in international sales to Mexico.
Net sales decreased 9.1% to $132 million for the third quarter of 1998
from $145.2 million for 1997. For the first nine months, net sales decreased
2.7% to $440 million from $452.3 million in the prior year period. Average
selling prices remained constant for the three month periods, but declined 3.6%
for the nine month periods, primarily due to an increase in the nine month
proportion of tolling sales in 1998 and declines in direct average selling
prices of 0.7% for the third quarter and 1.5% for the first nine months.
International sales declined $11.8 million in the first nine months of 1998, as
a result of declining participation in the Mexican market.
The Company's sales to GM decreased by $6.6 million, or 45% in the
first nine months of 1998 compared to the same period of 1997, due to the impact
of the Strike, as well as a continued decline in the Company's participation
with GM. The Company's sales to suppliers of GM also declined in the third
quarter due to the Strike. Approximately 20% of the Company's 1998 year-to-date
total sales were made to customers in the automotive industry, and the Company
estimates that approximately 40% of its automotive-related sales are made to GM
or its suppliers. The Company believes that the Strike adversely impacted its
third quarter 1998 earnings results by approximately $.08 per share. The
Company's shipping levels to GM and its suppliers have not yet returned to
pre-Strike levels.
As a percentage of net sales, gross margin increased to 21.1% for the
third quarter of 1998 from 20.8% for 1997, and to 20.9% for the first nine
months of 1998 from 20.6% in 1997. The increases reflect the impact of enhanced
margins from the Company's non-automotive sales and a decrease in international
sales.
As a percentage of net sales, operating expenses increased to 19.9% for
the third quarter of 1998 from 17.3% for 1997, and to 18.1% for the first nine
months of 1998 from 16.9% in
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1997. The increases are primarily due to lower third quarter sales volume; lower
average selling prices; start-up costs; and a non-recurring charge of $370
thousand, or $.02 per share, included in third quarter 1998 warehouse and
processing expense, related to the disposition of replaced processing equipment.
Start-up costs included in operating expenses for the first nine months of 1998
totaled $1.5 million compared to $253 thousand in 1997. These costs relate to
the $26 million temper mill and plate processing facility under construction in
Bettendorf, Iowa (the Iowa Facility) and the new tube mill in Cleveland.
Start-up costs for the Iowa Facility are expected to continue in the fourth
quarter of 1998.
Joint venture start-up costs exceeded income by $46 thousand in the
third quarter and $251 thousand in the first nine months of 1998, and by $173
thousand and $10 thousand, respectively, for the comparable periods of 1997.
Prior year joint venture results reflect OCR and OLP only. Start-up costs
related to OLP and TSP are being expensed as incurred, and totaled $217 thousand
in the third quarter of 1998. Third quarter start-up costs from joint ventures
combined with those included in operating expenses for the Iowa and tube mill
projects totaled approximately $1.2 million, or $.07 per share in 1998, compared
to $420 thousand or $.02 per share in 1997.
Financing Costs decreased to $1.9 million for the third quarter of 1998
from $2.2 million in 1997, and to $5.7 million for the first nine months of 1998
from $5.9 million in 1997. Average borrowings outstanding in the first nine
months of 1998 totaled $75.8 million (which include $11.6 million of average
borrowings for the construction and equipping of the Iowa Facility), compared to
$70.4 million in 1997. Interest costs associated with the Iowa Facility are
being capitalized. The Company's effective bank borrowing rate for the third
quarter of 1998 was 7.0% compared to 6.9% in 1997, and 6.9% in the first nine
months of 1998 compared to 6.8% in 1997. The Company's Premium increased to
1.25% on June 1, 1998, and will continue to be 1.25% through February 28, 1999.
Pretax loss for the third quarter of 1998 was $482 thousand compared to
pretax income of $2.7 million for 1997. For the first nine months of 1998,
pretax income decreased 41.1% to $6.5 million from $11 million in 1997. Income
taxes approximated 38.0% of pretax income in the 1998 periods compared to 37.5%
in the 1997 periods. The increase in the income tax percentage is primarily
attributable to the decrease in international sales and an increase in
non-deductible expenses.
Net loss for the third quarter of 1998 totaled $299 thousand, or $.03
per share, compared to net income of $1.7 million, or $.16 per share for 1997.
For the first nine months of 1998, net income totaled $4 million, or $.37 per
share, compared to $6.8 million, or $.64 per share in 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 nine
months of 1998, $5.1 million of net cash was used for operating activities,
consisting of $11 million of cash generated from net income and non-cash charges
offset by $16.1 million of cash used for working capital purposes.
Working capital at September 30, 1998 increased by $15.9 million or
15.1% since December 31, 1997. The increase is primarily attributable to a $9.4
million increase in inventory and an $8.9 million increase in accounts
receivable, partially offset by a $2.6 million increase in accounts payable. The
accounts receivable increase is the result of traditionally weaker December
sales as compared to other quarter-end months, while the inventory increase
primarily relates to increased purchases of imported steel and lower third
quarter 1998 sales volume.
As of September 30, 1998, and December 31, 1997, $54 million and $64
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 each month end.
Net cash used for investing activities in the first nine months of 1998
totaled $20.1 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 payments on its new tube mill in Cleveland and new
cut-to-length line in Detroit, which were both installed during the first
quarter of 1998. The cut-to-length line became fully operational in the second
quarter of 1998. The tube mill is operational, but is not expected to be at
rated capacity until the end of 1998. The Company has also substantially
completed a $2.7 million, 35,000 square foot facility expansion and equipment
upgrade project at its Southeastern operation, which is also expected to become
operational by the end of 1998.
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JNT is operating from its current facility in McConnellsburg until it
is relocated to a new 80,000 square foot facility being constructed in nearby
Chambersburg, Pennsylvania. Olympic plans to spend approximately $6.8 million to
construct the facility, relocate existing machining equipment, and purchase new
plate processing equipment. The new facility is projected to be operational in
the third quarter of 1999. The Company expects to finance the Chambersburg
project with the proceeds from industrial revenue bonds.
Cash flows used from financing activities primarily consists of net
borrowings under the Company's revolving credit agreement and term loan draws
for the Iowa Facility, offset by scheduled payments under other existing
long-term debt agreements.
As of September 30, 1998, approximately $19.4 million in unused
availability existed under the Company's revolving credit and accounts
receivable securitization facilities, and $1.3 million was available under the
$17 million Iowa term loan. The Company believes that it may not achieve a
required yearend minimum interest coverage ratio, and has requested and expects
to obtain, based upon discussions with its banks, a waiver of this covenant. 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.
YEAR 2000 COMPLIANCE
The Company continues to invest in information technology, including
systems assessments, software, programming and testing for Year 2000 (Y2K)
compliance. The Company expects its information systems and steel processing
systems to be Year 2000 compliant by the end of the first half of 1999, at a
total projected cost of approximately $1 million. Most of the Company's
information systems hardware and software is currently compliant, and all is
expected to be compliant and tested by the end of the first half of 1999.
Systems assessment, remediation, and testing is being performed by the Company's
IT employees, whose costs are being included in operating expenses as incurred.
The Company has also purchased two computers to perform parallel testing
specifically for Y2K compliance.
15 of 18
<PAGE> 16
All plant systems and steel processing equipment are currently being
evaluated for compliance by an outside consultant. The consultant has evaluated
three of the Company's processing facilities to date and discovered no
significant Y2K issues. Evaluation of the remaining processing facilities is
expected to be completed by the end of 1998.
The Company has also contacted all of its vendors, including providers
of communications systems services, in an attempt to ascertain the readiness of
each to be Year 2000 compliant. Testing of vendor and other third party
assertions in critical areas is expected to be completed by the end of the first
half of 1999. However, the Company can not assure that its third-party business
partners and service providers will be sufficiently compliant by the end of
1999.
The Company currently does not have a formalized Y2K contingency plan,
but expects to develop one by the end of the first half of 1999 after the
results of compliance testing have been evaluated.
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 "believe," "estimate," "expect," "intend," "plan,"
"project," 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 Company personnel or automotive manufacturers;
potential equipment malfunction; equipment installation and facility
construction delays, particularly for the Iowa Facility, the new tube mill, and
the JNT and Southeastern expansion projects; the impact of the Year 2000
problem, especially as it relates to third-party business partners and service
providers; the ability to obtain a yearend loan covenant waiver from the
Company's banks; and successes of the Company's joint ventures and the continued
successes of its joint venture partners, who are also significant customers of
the 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 estimated, expected, planned or projected.
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.
16 of 18
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 10, 1998, the Company appointed Betsy S. Atkins to its board of
directors to fill the vacancy created by the resignation of Janice M. Margheret.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
17 of 18
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
OLYMPIC STEEL, INC.
(Registrant)
Date: November 11, 1998 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)
18 of 18
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<FISCAL-YEAR-END> DEC-31-1998
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