================================================================================ 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, 2002 -------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-23320 ------- 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 -------------- 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 13, 2001 ------------------------------- ------------------------------ Common stock, without par value 9,633,100 ================================================================================ 1 of 42
OLYMPIC STEEL, INC. Index to Form 10-Q <TABLE> <CAPTION> PAGE NO. ------------- <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - March 31, 2002 and 3 December 31, 2001 Consolidated Statements of Income - for the three months 4 ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows - for the three 5 months ended March 31, 2002 and 2001 Notes to Consolidated Financial Statements 6-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9-14 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET 14 RISK PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 16 EXHIBITS 17-42 </TABLE> 2 of 42
PART I. FINANCIAL INFORMATION OLYMPIC STEEL, INC. CONSOLIDATED BALANCE SHEETS (in thousands) March 31, December 31, 2002 2001 --------- --------- (unaudited) (audited) Assets Cash $ 768 $ 1,054 Accounts receivable 55,851 38,754 Inventories 70,604 72,287 Prepaid expenses and other 4,519 3,514 Assets held for sale 1,660 1,660 --------- --------- Total current assets 133,402 117,269 --------- --------- Property and equipment, at cost 159,991 159,544 Accumulated depreciation (50,672) (48,433) --------- --------- Net property and equipment 109,319 111,111 --------- --------- Investments in joint ventures 223 31 Goodwill 3,415 3,415 Other assets 3,235 3,589 --------- --------- Total assets $ 249,594 $ 235,415 ========= ========= Liabilities Current portion of long-term debt $ 5,286 $ 4,786 Accounts payable 24,120 20,143 Accrued payroll 2,431 3,200 Other accrued liabilities 6,117 4,326 --------- --------- Total current liabilities 37,954 32,455 --------- --------- Credit facility revolver 33,253 24,359 Term loans 47,676 48,237 Industrial revenue bonds 7,117 7,117 --------- --------- Total long-term debt 88,046 79,713 --------- --------- Deferred income taxes 2,120 1,975 --------- --------- Total liabilities 128,120 114,143 --------- --------- Shareholders' Equity Preferred stock - - Common stock 99,733 99,733 Officer note receivable (675) (675) Retained earnings 22,416 22,214 --------- --------- Total shareholders' equity 121,474 121,272 --------- --------- Total liabilities and shareholders' equity $ 249,594 $ 235,415 ========= ========= The accompanying notes are an integral part of these balance sheets. 3 of 42
OLYMPIC STEEL, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, (in thousands, except per share and tonnage data) <TABLE> <CAPTION> 2002 2001 ---------------- ---------------- (unaudited) <S> <C> <C> Tons sold Direct 273,190 254,796 Toll 40,367 33,715 ---------------- ---------------- 313,557 288,511 ---------------- ---------------- Net sales $112,017 $117,120 Cost of sales 85,026 90,676 ---------------- ---------------- Gross margin 26,991 26,444 Operating expenses Warehouse and processing 7,528 8,128 Administrative and general 6,353 6,742 Distribution 4,376 4,000 Selling 3,352 3,286 Occupancy 1,159 1,500 Depreciation and amortization 2,595 2,315 ---------------- ---------------- Total operating expenses 25,363 25,971 ---------------- ---------------- Operating income 1,628 473 Income (loss) from joint ventures 192 (223) ---------------- ---------------- Income before interest and taxes 1,820 250 Interest expense 1,491 1,200 Receivable securitization expense - 694 ---------------- ---------------- Income (loss) before taxes 329 (1,644) Income taxes 127 (633) ---------------- ---------------- Net income (loss) $ 202 $ (1,011) ================ ================ Basic and diluted net income (loss) per share $ 0.02 $ (0.11) ================ ================ Weighted average shares outstanding 9,631 9,460 ================ ================ </TABLE> The accompanying notes are an integral part of these statements. 4 of 42
OLYMPIC STEEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (in thousands) <Table> <Caption> 2002 2001 -------- -------- (unaudited) <S> <C> <C> Cash flows from operating activities: Net income (loss) $ 202 $ (1,011) Adjustments to reconcile net income (loss) to net cash from (used for) operating activities- Depreciation and amortization 2,595 2,315 (Income) loss from joint ventures (192) 223 Long-term deferred income taxes 145 484 -------- -------- 2,750 2,011 Changes in working capital: Accounts receivable (17,097) (6,605) Inventories 1,683 4,985 Prepaid expenses and other (1,005) (885) Accounts payable 3,977 2,621 Accrued payroll and other accrued liabilities 1,022 578 -------- -------- (11,420) 694 -------- -------- Net cash from (used for) operating activities (8,670) 2,705 -------- -------- Cash flows from investing activities: Capital expenditures, net (449) (908) Investments in joint ventures - (500) -------- -------- Net cash used for investing activities (449) (1,408) -------- -------- Cash flows from financing activities: Credit facility revolver 8,894 (1,672) Term loans and IRB's (61) (663) -------- -------- Net cash from (used for) financing activities 8,833 (2,335) -------- -------- Cash: Net decrease (286) (1,038) Beginning balance 1,054 1,449 -------- -------- Ending balance $ 768 $ 411 ======== ======== </Table> The accompanying notes are an integral part of these statements. 5 of 42
OLYMPIC STEEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (dollars in thousands, except share and per share amounts) The accompanying consolidated financial statements have been prepared from the financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively Olympic or the Company), 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. (1) JOINT VENTURES: On April 1, 2002, Michael J. Guthrie and Carlton L. Guthrie (the Guthries) withdrew as majority members of Trumark Steel & Processing, LLC (TSP). On that date, Thomas A. Goss and Gregory F. Goss, executive officers of the Goss Group, Inc., an insurance joint venture, assumed the Guthries 51% majority ownership interest. On April 30, 2002, the Company's Olympic Laser Processing, LLC (OLP) joint venture entered into a new 2-year bank financing agreement. As of March 31, 2002, Olympic guaranteed 50% of OLP's $18.5 million and 49% of TSP's $2.0 million of outstanding debt on a several basis. (2) GOODWILL: In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 (SFAS No. 141), "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." These statements, which became effective for the Company on January 1, 2002, result in modifications relative to the Company's accounting for goodwill and other intangible assets. Specifically, the Company ceased goodwill amortization beginning January 1, 2002. Additionally, intangible assets, including goodwill, are subjected to new impairment testing criteria. Other than the cessation of goodwill amortization, which approximated $104 annually, the Company has not determined the impact of adoption on the Company's financial statements. The determination of any goodwill impairment charge is expected to be completed by June 30, 2002. 6 of 42
(3) DEBT: In June 2001, the Company entered into a 3-year, $135,000 secured financing agreement (The Credit Facility). The Credit Facility is secured by the Company's accounts receivable, inventories, and substantially all property and equipment. Borrowings under the Credit Facility are limited to the lesser of a borrowing base, comprised of eligible receivables, inventories and property and equipment, or $135,000 in the aggregate. The Company has the option to borrow based on the agent bank's base rate or London Interbank Offered Rates (LIBOR) plus a premium (the Premium). The Company's effective borrowing rate for the first three months of 2002 was 8.2% compared to 8.8% in 2001. On January 1, 2002, the $20,000 term loan B component deferred pay rate declined from 9.0% to 7.0%. Beginning March 1, 2002, the Premium for both the revolver and term loan A component of the Credit Facility decreased 25 basis points based on the Company's excess availability. Additionally, on March 1, 2002, the Company's commitment fee on any unused portion of the Credit Facility was reduced from .5% to .375% based on the Company's excess availability. Term loan A monthly principal repayments of $167 commenced April 1, 2002. The Credit Facility requires the Company to comply with various covenants, the most significant of which include: (i) minimum excess availability of $10,000, (ii) a minimum fixed charge coverage ratio, which commences in December 2002, (iii) restrictions on additional indebtedness, and (iv) limitations on capital expenditures. At March 31, 2002, the Company had approximately $38,048 of excess availability under its Credit Facility. The Company was in compliance with its various covenants at March 31, 2002. Included in the Credit Facility revolver balances on the accompanying consolidated balance sheets are $8,735 and $5,187 of checks issued that have not cleared the bank as of March 31, 2002, and December 31, 2001, respectively. (4) SHARES OUTSTANDING AND EARNINGS PER SHARE: 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. 7 of 42
(5) STOCK OPTIONS: Shares available under the Stock Option Plan were increased from 950,000 to 1,300,000 by shareholder vote on April 26, 2002. Options to purchase 881,833 shares are currently outstanding, of which 451,500 are exercisable at prices ranging from $1.97 to $15.50 per share. (6) SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the first three months of 2002 and 2001 totaled $1,138 and $1,219, respectively. Income taxes paid during the first three months of 2002 and 2001 totaled $42 and $31, respectively. 8 of 42
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, energy prices, customer demand for steel, and layoffs or work stoppages by suppliers' or customers' personnel. 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 operation. 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 that processes laser welded sheet steel blanks for the automotive industry, and Trumark Steel & Processing (TSP), a Minority Business Enterprise (MBE) company supporting the flat-rolled steel requirements of the automotive industry. 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 venture companies' bank credit facilities. As of March 31, 2002, Olympic guaranteed 50% of OLP's $18.5 million and 49% of TSP's $2.0 million of outstanding debt on a several basis. Financing costs historically included interest expense on debt and costs associated with the Company's accounts receivable securitization program (the Financing Costs). In connection with the refinancing of its bank credit agreement on June 28, 2001 (the Credit Facility), the Company's accounts receivable securitization program was terminated. Receivable securitization expense was based on commercial paper rates calculated on the amount of receivables sold. The Company sells certain products internationally, primarily in Puerto Rico and Mexico. All international sales and payments are made in United States dollars. These sales historically involve the Company's direct representation of steel producers. 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. 9 of 42
RESULTS OF OPERATIONS Tons sold increased 8.7% to 314 thousand in the first quarter of 2002 from 289 thousand in the first quarter of 2001. Tons sold in the first quarter of 2002 included 273 thousand from direct sales and 41 thousand from toll processing, compared with 255 thousand direct tons and 34 thousand toll tons in the comparable period of last year. The increases in direct and toll tons sold were attributable to improved demand primarily from the Company's automotive customer base. Net sales decreased 4.4% to $112.0 million for the first quarter of 2002 from $117.1 million for 2001. Average selling prices decreased 12.0% due to depressed steel pricing as compared to last year's first quarter. As a percentage of net sales, gross margin increased to 24.1% for the first quarter of 2002 from 22.6% for 2001. The gross margin percentage increase reflects the benefit of lower raw material costs in the current year quarter. The Company is currently experiencing a significant increase in its material purchase costs as a result of tightening steel supply caused by the idling or closure of domestic steel production facilities as well as lower import levels. Due to competitive pressures on pricing in its market segments, the Company may not be able to pass along all of the increased costs to its customers, which may result in decreased gross margins. Operating expenses in the first quarter of 2002 decreased 2.3% to $25.4 million from $26.0 million in the same period last year. The operating expense decrease was achieved notwithstanding the increase in tons sold and the inclusion of over $350 thousand of incremental deferred financing fee amortization associated with the refinancing of the Company's Credit Facility. For the first three months of 2002, warehouse and processing and administrative and general declined $600 thousand and $389 thousand, respectively, primarily as a result of lower payroll costs. Occupancy expense declined $341 thousand primarily as a result of lower natural gas and electric costs from last year's first quarter. As a percentage of net sales, operating expenses increased to 22.6% for the first quarter of 2002 from 22.2% for 2001 due to lower average selling prices. Income from joint ventures totaled $192 thousand in the first quarter of 2002, compared with a loss of $223 thousand in 2001. Olympic's share of OLP's income totaled $198 in the first quarter of 2002, compared to a loss of $220 in the same period last year. Olympic's share of TSP's losses totaled $6 and $3 in the first quarter of 2002 and 2001, respectively. 10 of 42
Financing Costs in the first quarter of 2002 decreased to $1.5 million from $1.9 million in the first quarter of 2001. The decrease between years is attributable to a $23.8 million reduction in average borrowing levels inclusive of receivables sold under the Company's former accounts receivable securitization program. The Company's effective bank borrowing rate, excluding receivable securitization borrowings, decreased to 8.2% in the first quarter of 2002 from 8.8% in the comparable 2001 period. Income before taxes for the first quarter of 2002 totaled $329 thousand, compared to a loss before taxes of $1.6 million for 2001. An income tax provision of 38.5% was recorded in the first quarter of 2002, compared with an income tax benefit of 38.5% in the comparable 2001 period. Net income for the first quarter of 2002 totaled $202 thousand, or $.02 per share, compared to a net loss of $1.0 million, or $.11 per share for 2001. Weighted average shares outstanding totaled 9.6 million in the first quarter of 2002 compared to 9.5 million in last year's first quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund its working capital needs, its upgrade of information technology and business system software, the purchase and upgrading of processing equipment and facilities, and its investments in joint ventures. The Company uses cash generated from operations, leasing transactions, and its Credit Facility to fund these requirements. Working capital at March 31, 2002 increased $10.6 million from the end of the prior year. The increase was primarily attributable to a $17.1 million increase in accounts receivable and a $1.0 million increase in prepaid expenses, offset by a $4.0 million increase in accounts payable and a $1.7 million decrease in inventories. The increase in accounts receivable was the result of an $18.3 million increase in net sales in the first quarter of 2002 from the fourth quarter of 2001. Included in the prepaid expenses increase are net deposits of $624 thousand for processing equipment the Company intends to lease in Minneapolis. Net cash used for operating activities totaled $8.7 million for the three months ended March 31, 2002. Cash generated from earnings before non-cash charges totaled $2.7 million, while cash used for working capital components totaled $11.4 million. During the first three months of 2002, net cash used for investing activities totaled $449 thousand, consisting primarily of information technology spending. 11 of 42
During the first three months of 2002, net cash provided by financing activities totaled $8.8 million and primarily consisted of borrowings on the Company's Credit Facility to fund working capital requirements. On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was signed into law. A significant portion of this law is a temporary extension of the net operating loss carryback period from two to five years for net operating losses arising in taxable years ending in 2001 and 2002. As a result of this change in tax law, the Company expects to receive approximately $3.0 million of tax refunds during fiscal 2002 after filing its federal income tax return for the fiscal year ended December 31, 2001. As of March 31, 2002 and December 31, 2001, the benefit associated with this tax refund is classified as an income tax receivable on the accompanying consolidated balance sheets. As of March 31, 2002, the Company had approximately $38.0 million of excess availability under its Credit Facility and was in compliance with all of its bank covenants. The Company believes that funds available under its Credit Facility, together with funds generated from operations, will be sufficient to provide the Company with the liquidity necessary to fund its anticipated working capital requirements, capital expenditure requirements, and scheduled debt maturities over the next 12 months. Capital requirements are subject to change as business conditions warrant and opportunities arise. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 (SFAS No. 141), "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." These statements, which became effective for the Company on January 1, 2002, result in modifications relative to the Company's accounting for goodwill and other intangible assets. Specifically, the Company ceased goodwill amortization beginning January 1, 2002. Additionally, intangible assets, including goodwill, are subjected to new impairment testing criteria. Other than the cessation of goodwill amortization, which approximated $104 annually, the Company has not determined the impact of adoption on the Company's financial statements. The determination of any goodwill impairment charge is expected to be completed by June 30, 2002. 12 of 42
CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, equity investment, goodwill and intangible assets, and revenue recognition. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements, see Footnote 1 of Notes to Consolidated Financial Statements from our December 31, 2001 Form 10-K. 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 "anticipate," "expect," "believe," "estimated," "project," "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; layoffs or work stoppages by the Company's, suppliers', or customers' personnel; potential equipment malfunction; equipment installation delays; the adequacy of information technology and business system software investment; the successes of its joint ventures; the successes of the Company's efforts and initiatives to increase sales volumes, maintain gross margins--especially during periods of increased material purchase costs and tightened steel availability, improve cash flows and reduce debt, maintain or improve inventory turns and reduce its costs. Should one or more 13 of 42
of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, believed, estimated, projected 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. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK There has been no material change during the three months ended March 31, 2002 from the disclosures about market risk provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. However, the Company is currently experiencing a significant increase in its material purchase costs as a result of tightening steel supply caused by the idling or closure of domestic steel production facilities as well as lower import levels. Due to competitive pressures on pricing in its market segments, the Company may not be able to pass along all of the increased costs to its customers, which may result in decreased gross margins. 14 of 42
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Exhibit 10.5 - Operating Agreement of Trumark Steel & Processing, LLC, dated April 1, 2002, by and among The Goss Group, Inc., and Oly Steel Welding, Inc. There were no Form 8-K's filed in the quarter ended March 31, 2002. However, the Company did file a Form 8-K on May 3, 2002 in connection with a change in its certifying accountant. 15 of 42
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 13, 2002 By: /s/ Michael D. Siegal --------------------------------------- MICHAEL D. SIEGAL Chairman of the Board and Chief Executive Officer By: /s/ Richard T. Marabito --------------------------------------- RICHARD T. MARABITO Chief Financial Officer and Treasurer (Principal Accounting Officer) 16 of 42