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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, 2000
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of August 3, 2000
-------------------------------------- --------------------------------
Common stock, without par value 9,674,800
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2000 and 3
December 31, 1999
Consolidated Statements of Income - for the three and six
months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - for the six
months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-14
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBITS 18-35
</TABLE>
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PART I. FINANCIAL INFORMATION
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Assets
Cash $ 1,535 $ 1,433
Accounts receivable 14,505 9,802
Inventories 114,509 119,585
Prepaid expenses and other 5,979 6,693
--------- ---------
Total current assets 136,528 137,513
--------- ---------
Property and equipment 158,523 156,849
Accumulated depreciation (37,006) (32,645)
--------- ---------
Net property and equipment 121,517 124,204
--------- ---------
Unexpended IRB funds 746 1,668
Goodwill 3,571 3,622
Joint venture investments and advances (385) (42)
--------- ---------
Total assets $ 261,977 $ 266,965
========= =========
Liabilities
Current portion of long-term debt $ 6,050 $ 6,061
Accounts payable 14,131 20,671
Accrued payroll 3,403 3,595
Other accrued liabilities 6,029 5,921
--------- ---------
Total current liabilities 29,613 36,248
--------- ---------
Revolving credit agreement 51,599 47,892
Term loans 26,141 29,076
Industrial revenue bonds 10,194 10,397
--------- ---------
Total long-term debt 87,934 87,365
--------- ---------
Deferred income taxes 7,748 6,532
--------- ---------
Total liabilities 125,295 130,145
--------- ---------
Shareholders' Equity
Preferred stock - -
Common stock 100,459 102,237
Retained earnings 36,223 34,583
--------- ---------
Total shareholders' equity 136,682 136,820
--------- ---------
Total liabilities and shareholders' equity $ 261,977 $ 266,965
========= =========
</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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Tons sold
Direct 267,802 270,112 557,125 521,662
Toll 46,949 58,513 97,624 110,937
--------- --------- --------- ---------
314,751 328,625 654,749 632,599
========= ========= ========= =========
Net sales $ 138,962 $ 133,802 $ 283,649 $ 263,194
Cost of sales 108,805 100,998 219,883 200,029
--------- --------- --------- ---------
Gross margin 30,157 32,804 63,766 63,165
Operating expenses
Warehouse and processing 8,593 8,937 17,062 16,911
Administrative and general 6,630 7,003 14,387 14,049
Distribution 5,192 4,679 10,677 9,225
Selling 3,138 3,882 6,495 7,642
Occupancy 1,113 1,119 2,399 2,352
Depreciation and amortization 2,275 1,891 4,543 3,767
--------- --------- --------- ---------
Total operating expenses 26,941 27,511 55,563 53,946
--------- --------- --------- ---------
Operating income 3,216 5,293 8,203 9,219
Loss from joint ventures (317) (135) (489) (397)
--------- --------- --------- ---------
Income before financing costs and taxes 2,899 5,158 7,714 8,822
Interest expense 1,649 949 3,235 1,819
Receivable securitization expense 987 784 1,834 1,476
--------- --------- --------- ---------
Income before taxes 263 3,425 2,645 5,527
Income taxes 100 1,319 1,005 2,128
--------- --------- --------- ---------
Net income $ 163 $ 2,106 $ 1,640 $ 3,399
========= ========= ========= =========
Basic and diluted income per share $ 0.02 $ 0.20 $ 0.17 $ 0.32
========= ========= ========= =========
Weighted average shares outstanding 9,836 10,565 9,936 10,626
========= ========= ========= =========
</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)
2000 1999
-------- --------
(unaudited)
Cash flows from operating activities:
Net income $ 1,640 $ 3,399
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 4,543 3,767
Loss from joint ventures 489 397
Long-term deferred income taxes 1,216 1,741
-------- --------
7,888 9,304
Changes in working capital:
Accounts receivable (4,703) (10,854)
Inventories 5,076 12,995
Prepaid expenses and other 685 403
Accounts payable (6,540) (7,862)
Accrued payroll and other accrued liabilities (84) 1,410
-------- --------
(5,566) (3,908)
-------- --------
Net cash from operating activities 2,322 5,396
-------- --------
Cash flows from investing activities:
Facility construction and improvements (230) (2,792)
Equipment purchases and deposits (1,195) (1,916)
Other capital expenditures, net (350) (876)
Investment in joint venture (147) -
-------- --------
Net cash used for investing activities (1,922) (5,584)
-------- --------
Cash flows from financing activities:
Revolving credit agreement 3,707 (300)
Term loans and IRB's (3,149) 1,117
Repurchase of common stock (1,778) (2,423)
Proceeds from IRB issuance - 5,973
Unexpended IRB funds 922 (5,921)
-------- --------
Net cash used for financing activities (298) (1,554)
-------- --------
Cash:
Net change 102 (1,742)
Beginning balance 1,433 1,825
-------- --------
Ending balance $ 1,535 $ 83
======== ========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. (Olympic or the Company) and its
wholly-owned subsidiaries, without audit and reflect all adjustments which are,
in the opinion of management, necessary to fairly present the results of the
interim periods covered by this report. All significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
the Company's joint ventures are accounted for under the equity method. Certain
amounts in the 1999 consolidated financial statements have been reclassified to
conform to the 2000 presentation.
(1) SHARES OUTSTANDING AND EARNINGS PER SHARE:
During the quarter ended June 30, 2000, the Company completed its 1 million
shares repurchase program by purchasing 266,800 shares at an average price of
$4.42 per share. The 1 million shares were purchased at an average price of
$5.86 per share. On July 28, 2000, the Company's board of directors authorized a
one-year program to purchase up to an additional 1 million shares of Olympic
common stock. Repurchased shares are held in treasury and are available for
general corporate purposes.
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Basic and diluted earnings per share are the same, as the
effect of outstanding stock options is not dilutive.
(2) ACCOUNTS RECEIVABLE:
As of June 30, 2000, and December 31, 1999, $55 million and $52 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.
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(3) LONG -TERM DEBT:
Interest rates under the Company's various credit agreements are generally based
on LIBOR plus a premium (the Premium) determined quarterly, which varies with
the Company's operating performance and financial leverage. Commencing December
1, 1999, the LIBOR Premium increased from 1.5% to 2.0%. The overall effective
interest rate for all debt for the three and six month periods ended June 30,
2000 was 8.2% and 8.1%, respectively, compared to 6.8% for both periods in 1999.
The Company did not meet a required interest coverage covenant contained in its
bank credit agreement at June 30, 2000. However, the Company and its bank group
have agreed to amend the interest coverage requirement effective June 30, 2000.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $10.7 million and $6.3 million of checks issued that have not
cleared the bank as of June 30, 2000, and December 31, 1999, respectively.
(4) STOCK OPTIONS:
During April and May 2000, additional non-qualified options to purchase 171,500
shares of common stock were issued to the Company's outside directors, executive
officers and senior managers at an option price of $4.84, the average market
value of a share of common stock at the grant date. After issuance of the new
grants, options to purchase 441,833 shares were outstanding, of which 152,011
were exercisable at prices ranging from $7.18 to $15.50 per share. Shares
available under the stock option plan were increased to 950,000 from 450,000, by
shareholder vote on April 26, 2000.
(5) JOINT VENTURE:
In February 2000, the Company advanced its 49% proportionate share, or $147
thousand, to its Trumark Steel & Processing joint venture.
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(6) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first half of 2000 and 1999 totaled $3.2 million and
$1.9 million, respectively. Income taxes paid during the first half of 2000 and
1999 totaled $54 thousand and $159 thousand, respectively.
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by numerous external
factors, such as general economic and political conditions, competition, steel
pricing and availability, and work stoppages by automotive manufacturers.
Olympic sells a broad range of products, many of which have different
gross margins. Products that have more value-added processing generally have a
greater gross margin. Accordingly, the Company's overall gross margin is
affected by product mix and the amount of processing performed, as well as
volatility in selling prices and material purchase costs. The Company performs
toll processing of customer-owned steel, the majority of which is performed by
its Detroit and Georgia 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 two joint ventures include 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 50%
interest in OLP and 49% interest in TSP are accounted for under the equity
method. The Company guarantees portions of outstanding debt under both of the
joint ventures' bank credit facilities. As of June 30, 2000, Olympic guaranteed
50% of OLP's $19.4 million and 49% of TSP's $2.9 million of outstanding debt on
a several basis.
OLP constructed a new facility and has initially equipped it with two
automated laser-welding lines, which are both in production. During the second
half of 2000, two additional manual-feed lines are expected to become
operational at OLP. Start-up costs for OLP have been expensed as incurred.
Financing costs include interest expense on debt and costs associated
with the Company's accounts receivable securitization program (the Financing
Costs). Interest rates paid by the Company under its credit agreement are
generally based on LIBOR plus a premium (the Premium) determined quarterly,
which varies based on the Company's operating performance
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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.
RESULTS OF OPERATIONS
Tons sold decreased 4.2% to 315 thousand in the second quarter of 2000
from 329 thousand for the second quarter of 1999, but increased 3.5% in the
first half of 2000 to 655 thousand from 633 thousand last year. Tons sold in the
second quarter of 2000 included 268 thousand from direct sales and 47 thousand
from toll processing, compared with 270 thousand direct tons and 59 thousand
toll tons in the comparable period of last year. Tons sold in the first half of
2000 included 557 thousand from direct sales and 98 thousand from toll
processing, compared with 522 thousand direct tons and 111 thousand toll tons in
the first half of last year. The decrease in second quarter tons sold was
attributable to weakened customer demand for steel commencing in April 2000.
Lower demand was particularly evident in the Company's automotive,
transportation, and other service center sectors. The Company expects this
weakness in demand to continue during the second half of 2000.
Net sales increased 3.9% to $139.0 million for the second quarter of
2000 from $133.8 million for 1999. For the first half, net sales increased 7.8%
to $283.7 million from $263.2 million. Average selling prices increased 8.4% and
4.1% for the three and six month periods, respectively, primarily due to rising
market prices for steel.
As a percentage of net sales, gross margin decreased to 21.7% for the
second quarter of 2000 from 24.5% for 1999, and to 22.5% for the first half of
2000 from 24.0% last year. The decreases reflect supply side price increases not
fully passed on to all customers, as well as lower proportions of toll sales in
the current year periods.
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<PAGE> 11
Operating expenses in the second quarter of 2000 decreased 2.1% to
$26.9 million from $27.5 million in the same period last year. For the six
months, operating expenses increased 3.0% to $55.6 million from $53.9 million.
As a percentage of net sales, operating expenses decreased to 19.4% for the
second quarter of 2000 from 20.6% for 1999. For the first half of 2000,
operating expenses decreased to 19.6% of net sales compared to 20.5% last year.
Operating expenses were negatively impacted in the first half of 2000 by rising
fuel costs, the effect of additional shipping days, and over $600 thousand of
strategic consulting fees. Fees associated with the strategic planning firm's
services ended in April 2000.
Losses from joint ventures totaled $317 thousand in the second quarter
of 2000, compared to $135 thousand in 1999. For the first half of 2000, losses
from joint ventures totaled $489 thousand compared to $397 thousand last year.
Financing Costs for the second quarter of 2000 increased to $2.6
million from $1.7 million in the second quarter of 1999. For the first half of
2000, Financing Costs increased to $5.1 million from $3.3 million. Average
borrowings outstanding in the 2000 periods increased primarily as a result of
higher inventory levels and the repurchase of the Company's common stock (the
Stock Purchase). Receivable securitization expense increased due to higher
commercial paper interest rates in the current year. The Company's effective
bank borrowing rate increased to 8.2% in the second quarter of 2000 from 6.8% in
the comparable 1999 period. For the first half of 2000, the Company's effective
borrowing rate increased to 8.1% compared to 6.8% last year. The Company's
Premium has been 2.0% since December 1, 1999.
Income before taxes for the second quarter of 2000 decreased to $263
thousand from $3.4 million for 1999. For the first half of 2000, income before
taxes decreased to $2.6 million from $5.5 million in 1999. Income taxes
approximated 38.0% in the 2000 periods compared to 38.5% in 1999.
Net income for the second quarter of 2000 totaled $163 thousand, or
$.02 per share, compared to $2.1 million, or $.20 per share for 1999. For the
first six months of 2000, net income totaled $1.6 million, or $.17 per share,
compared to $3.4 million, or $.32 per share in 1999. As a result of the Stock
Purchase, average shares outstanding totaled 9.8 million in the second quarter
of 2000 compared to 10.6 million in last year's second quarter. For the first
half of 2000, average shares outstanding were 9.9 million compared to 10.6 last
year.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund the purchase and
upgrading of processing equipment and services, the construction and upgrading
of related facilities, its working capital requirements, and historically its
investments in joint ventures and acquisitions. The Company uses cash generated
from operations, long-term debt obligations, equity offerings, and leasing
transactions to fund these requirements. Historically, the Company has used
revolving credit borrowings and proceeds from its accounts receivable
securitization program to finance working capital requirements.
Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation, amortization and losses from joint ventures,
as well as changes in working capital. During the first six months of 2000, $2.3
million of net cash was provided from operating activities, consisting of $7.9
million of cash generated from net income and non-cash charges offset by $5.6
million of cash used for working capital purposes.
Working capital at June 30, 2000 increased by $5.7 million since
December 31, 1999. The increase is primarily attributable to a $4.7 million
increase in accounts receivable and a $6.5 million decrease in accounts payable,
offset by a $5.1 decrease in inventory. The accounts receivable increase is the
result of higher net sales. The decrease in accounts payable coincides with the
decrease in inventory for the six-month period.
As of June 30, 2000, and December 31, 1999, $55 million and $52
million, respectively, of eligible receivables were sold under the Company's
accounts receivable securitization program. The amount of trade receivables sold
by the Company typically changes monthly depending upon the level of defined
eligible receivables available for sale at each month end.
During the first half of 2000, net cash used for investing activities
totaled $1.9 million, primarily consisting of progress payments made for a new
slitter in Detroit, which is expected to become operational in the fourth
quarter of 2000, as well as expenditures for the new Chambersburg plate
processing and machining facility.
Cash flows from financing activities primarily consisted of net
borrowings under the Company's revolving credit agreement, the Stock Purchase,
and scheduled payments under its other existing long-term agreements. On April
23, 1999, the Company's board of directors authorized a program to purchase up
to 1 million shares of Olympic common stock. In June 2000, the Company completed
the 1 million shares repurchase program at a total cost of $5.8
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million. On July 28, 2000, the Company's board of directors authorized a
one-year program to purchase up to an additional 1 million shares of common
stock. The cost of purchasing such shares has been funded from the Company's
revolving credit facility.
The Company did not meet a required interest coverage covenant contained in its
bank credit agreement at June 30, 2000. However, the Company and its bank group
have agreed to amend the interest coverage requirement effective June 30, 2000.
As of June 30, 2000, approximately $31.4 million in unused availability
existed under the Company's revolving credit and accounts receivable
securitization facilities. The Company believes that funds available under its
revolving credit facility, other credit and financing agreements and funds
generated from operations will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital, capital expenditure
requirements and the Stock Purchase over the next 12 months. Capital
requirements are subject to change as business conditions warrant and
opportunities arise. In connection with its internal and external expansion
strategies, the Company may from time to time seek additional funds to finance
other new facilities, acquisitions and significant improvements to processing
equipment to respond to customers' demands.
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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, transportation, and
other service centers markets served by the Company; work stoppages by
automotive or steel manufacturers; potential equipment malfunction; equipment
installation and facility construction delays, particularly for the new slitter
in Detroit and the laser welding lines at OLP; the successes of its joint
ventures; and the successes of the Company's ability to increase sales volumes,
improve gross margins, quality, service and inventory turns and reduce its
costs. 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.
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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,
2000.
(b) At the annual meeting, the Company's shareholders elected David A.
Wolfort, Martin H. Elrad, and Suren A. Hovsepian as Directors for
a two-year term, which expires at the annual meeting of
shareholders in 2002.
The following tabulation represents voting for the Directors:
For Withheld Authority
--- ------------------
David A. Wolfort 8,484,138 625,265
Martin H. Elrad 8,479,658 629,745
Suren A. Hovsepian 8,485,558 623,845
(c) At the annual meeting, the Company's shareholders ratified the
appointment of Arthur Andersen, LLP as auditors of the Company for
2000. The holders of 9,038,356 shares of common stock voted to
ratify the appointment, the holders of 40,747 shares voted against
the ratification, and the holders of 30,300 abstained.
(d) At the annual meeting, the Company's shareholders ratified the
amendment of the Company's Stock Option Plan to increase the
shares available for issuance under the Plan by an aggregate of
500,000 shares, to 950,000 shares. The holders of 8,010,236 shares
of common stock voted to ratify the amendment, the holders of
881,974 voted against the ratification, and the holders of 19,175
abstained.
On May 22, 2000, the Company appointed William E. MacDonald, III to fill a
vacancy on its board of directors for a term expiring in 2001.
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Item 6. Exhibits and Reports on Form 8-K
Exhibit 10.8 - Form of Management Retention Agreement for Senior
Executive Officers of the Company.
Exhibit 10.9 - Form of Management Retention Agreement for Other
Officers of the Company.
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: August 3, 2000 By: /s/ Michael D. Siegal
-----------------------------------
MICHAEL D. SIEGAL
Chief Executive Officer
By: /s/ Richard T. Marabito
-----------------------------------
RICHARD T. MARABITO
Chief Financial Officer
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