Olympic Steel, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
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o |
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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
OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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34-1245650 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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5096 Richmond Road, Bedford Heights, Ohio
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44146 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares of each of the issuers classes of common stock, as of the latest
practicable date:
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Class |
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Outstanding as of August 8, 2007 |
Common stock, without par value
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10,702,465 |
Olympic Steel, Inc.
Index to Form 10-Q
2 of 60
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
8,940 |
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$ |
5,211 |
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Accounts receivable, net |
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120,600 |
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85,883 |
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Inventories |
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197,021 |
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210,738 |
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Prepaid expenses and other |
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9,464 |
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6,383 |
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Total current assets |
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336,025 |
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308,215 |
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Property and equipment, at cost |
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179,237 |
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173,745 |
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Accumulated depreciation |
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(90,721 |
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(86,386 |
) |
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Net property and equipment |
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88,516 |
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87,359 |
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Goodwill |
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6,583 |
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6,583 |
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Other long-term assets |
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6,292 |
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3,163 |
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Total assets |
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$ |
437,416 |
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$ |
405,320 |
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Liabilities |
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Accounts payable |
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$ |
89,936 |
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$ |
75,095 |
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Accrued payroll |
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8,722 |
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7,698 |
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Other accrued liabilities |
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9,780 |
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9,547 |
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Total current liabilities |
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108,438 |
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92,340 |
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Credit facility revolver |
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64,296 |
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68,328 |
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Other long-term liabilities |
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8,014 |
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6,664 |
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Deferred income taxes |
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3,550 |
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3,751 |
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Total liabilities |
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184,298 |
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171,083 |
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Shareholders Equity |
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Preferred stock |
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Common stock |
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113,893 |
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109,075 |
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Retained earnings |
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139,225 |
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125,162 |
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Total shareholders equity |
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253,118 |
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234,237 |
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Total liabilities and shareholders equity |
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$ |
437,416 |
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$ |
405,320 |
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The accompanying notes are an integral part of these balance sheets.
3 of 60
Olympic Steel, Inc.
Consolidated Statements of Operations
(in thousands, except per share and tonnage data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(unaudited) |
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(unaudited) |
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Tons sold |
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Direct |
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296,849 |
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287,810 |
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570,175 |
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569,615 |
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Toll |
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39,276 |
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54,775 |
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77,539 |
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111,139 |
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336,125 |
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342,585 |
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647,714 |
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680,754 |
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Net sales |
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$ |
277,413 |
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$ |
256,155 |
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$ |
536,818 |
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$ |
495,026 |
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Costs and expenses |
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Cost of materials sold (exclusive of
depreciation shown below) |
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221,729 |
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202,795 |
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433,760 |
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394,508 |
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Warehouse and processing |
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14,272 |
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13,657 |
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27,947 |
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25,294 |
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Administrative and general |
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11,271 |
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9,743 |
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21,535 |
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19,047 |
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Distribution |
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6,464 |
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6,953 |
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12,773 |
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13,201 |
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Selling |
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4,185 |
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3,597 |
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7,966 |
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7,033 |
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Occupancy |
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1,451 |
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1,272 |
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3,204 |
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2,963 |
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Depreciation |
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2,170 |
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2,096 |
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4,352 |
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4,104 |
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Total costs and expenses |
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261,542 |
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240,113 |
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511,537 |
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466,150 |
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Operating income |
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15,871 |
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16,042 |
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25,281 |
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28,876 |
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Loss from joint ventures |
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(30 |
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(137 |
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Loss from disposition of joint ventures |
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(2,000 |
) |
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(2,000 |
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Income before financing costs and income taxes |
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15,871 |
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14,012 |
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25,281 |
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26,739 |
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Interest and other expense on debt |
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853 |
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345 |
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1,880 |
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499 |
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Income before income taxes |
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15,018 |
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13,667 |
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23,401 |
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26,240 |
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Income tax provision |
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5,572 |
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5,296 |
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8,703 |
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9,888 |
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Net income |
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$ |
9,446 |
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$ |
8,371 |
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$ |
14,698 |
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$ |
16,352 |
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Earnings per share: |
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Net income per share basic |
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$ |
0.89 |
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$ |
0.80 |
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$ |
1.40 |
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$ |
1.58 |
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Weighted average shares outstanding basic |
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10,603 |
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10,416 |
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10,527 |
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10,338 |
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Net income per share diluted |
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$ |
0.88 |
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$ |
0.79 |
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$ |
1.37 |
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$ |
1.54 |
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Weighted average shares outstanding diluted |
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10,753 |
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10,661 |
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10,716 |
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10,615 |
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The accompanying notes are an integral part of these statements.
4 of 60
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(in thousands)
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2007 |
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2006 |
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(unaudited) |
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Cash flows from (used for) operating activities: |
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Net income |
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$ |
14,698 |
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$ |
16,352 |
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Adjustments to reconcile net income to net cash from
operating activities (net of effects from purchases of
GSP and PS&W) - |
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Depreciation |
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4,352 |
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4,104 |
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Loss from joint ventures, net of distributions |
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137 |
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Gain on disposition of property and equipment |
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(5 |
) |
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(3 |
) |
Stock-based compensation |
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154 |
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112 |
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Other long-term assets |
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(3,129 |
) |
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(2,980 |
) |
Other long-term liabilities |
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1,350 |
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|
1,430 |
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Long-term deferred income taxes |
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(201 |
) |
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(730 |
) |
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17,219 |
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18,422 |
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Changes in working capital: |
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Accounts receivable |
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(34,717 |
) |
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(23,056 |
) |
Inventories |
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13,717 |
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(32,641 |
) |
Prepaid expenses and other |
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(3,081 |
) |
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(917 |
) |
Accounts payable |
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15,700 |
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6,358 |
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Accrued payroll and other accrued liabilities |
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1,257 |
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|
242 |
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(7,124 |
) |
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(50,014 |
) |
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Net cash from (used for) operating activities |
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10,095 |
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(31,592 |
) |
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Cash flows from (used for) investing activities: |
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Purchase of GSP interest |
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(100 |
) |
Purchase of PS&W |
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(8,916 |
) |
Capital expenditures |
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(5,509 |
) |
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(8,127 |
) |
Proceeds from disposition of property and equipment |
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5 |
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3 |
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Net cash used for investing activities |
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(5,504 |
) |
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(17,140 |
) |
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Cash flows from (used for) financing activities: |
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Credit facility revolver borrowings (payments), net |
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(4,032 |
) |
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41,632 |
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Change in outstanding checks |
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(859 |
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|
574 |
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Repayments of debt |
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(2,264 |
) |
Proceeds from exercise of stock options (including tax benefit)
and employee stock purchases |
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4,664 |
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3,959 |
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Dividends paid |
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(635 |
) |
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(625 |
) |
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Net cash from (used for) financing activities |
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(862 |
) |
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43,276 |
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Cash and cash equivalents: |
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Net change |
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3,729 |
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(5,456 |
) |
Beginning balance |
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5,211 |
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|
9,555 |
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Ending balance |
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$ |
8,940 |
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$ |
4,099 |
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The accompanying notes are an integral part of these statements.
5 of 60
Olympic Steel, Inc.
Notes to Consolidated Financial Statements
June 30, 2007
(1) Basis of Presentation:
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 normal and recurring adjustments which are, in the opinion of
management, necessary to fairly present the results of the interim periods covered by this report.
Year-to-date results are not necessarily indicative of 2007 annual results and these financial
statements should be read in conjunction with the Companys 2006 Annual Report on Form 10-K for the
period ended December 31, 2006. All significant intercompany transactions and balances have been
eliminated in consolidation.
(2) Accounts Receivable:
The Company maintained allowances for doubtful accounts and unissued credits of $3.1 million and
$3.3 million at June 30, 2007 and December 31, 2006, respectively. The allowance for doubtful
accounts is maintained at a level considered appropriate based on historical experience and
specific customer collection issues that have been identified. Estimations are based upon a
calculated percentage of accounts receivable, which remains fairly level from year to year, and
judgments about the probable effects of economic conditions on certain customers, which can
fluctuate significantly from year to year. The Company cannot guarantee that the rate of future
credit losses will be similar to past experience. The Company considers all available information
when assessing each quarter the adequacy of its allowance for doubtful accounts.
6 of 60
(3) Inventories:
Steel inventories consist of the following:
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June 30, |
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December 31, |
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(in thousands) |
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2007 |
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2006 |
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Unprocessed |
|
$ |
151,423 |
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$ |
159,581 |
|
Processed and finished |
|
|
45,598 |
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|
51,157 |
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Totals |
|
$ |
197,021 |
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|
$ |
210,738 |
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(4) Investments in Joint Ventures:
The Company and the United States Steel Corporation (USS) each own 50% of Olympic Laser Processing
(OLP), a company that produced laser welded sheet steel blanks for the automotive industry. In
January 2006, the Company and USS announced the closing of OLP. In conjunction with the closing,
during the fourth quarter of 2005, the Company recorded a $3.5 million charge for the disposition
of the joint venture, consisting of $1.3 million for the impairment of the Companys investment in
OLP and a then-estimated $2.2 million to be paid pursuant to the Companys guarantee of OLPs debt.
OLP ceased operations during the first quarter of 2006. Operating losses incurred by OLP during
the first quarter of 2006 were recorded against the $3.5 million reserve. During the second and
third quarters of 2006, OLP began liquidating its remaining assets. Offers from third parties to
purchase the remaining assets were less than anticipated and the Company recorded an additional
$2.0 million charge in the second quarter of 2006 to reflect additional expected obligations under
the guarantee of OLPs debt. In December 2006, the Company and USS each advanced $3.2 million to
OLP in connection with a loan guarantee. The Company believes the underlying value of OLPs
remaining assets, upon liquidation, will be sufficient to repay the advance at a later date.
The Company recorded 50% of OLPs net income or loss to its Consolidated Statement of Operations as
Income (Loss) from Joint Ventures.
7 of 60
Prior to May 1, 2006, the Company held a 49% ownership interest in G.S.P., LLC (GSP), a venture to
support the flat-rolled steel requirements of the automotive industry as a Minority Business
Enterprise. In order to gain full control of GSP, on May 1, 2006, the Company purchased the
remaining 51% ownership interest for $100 thousand and GSP ceased qualification as a Minority
Business Enterprise.
During 2006, all of GSPs bank debt was extinguished, thereby eliminating the Companys 49%
guarantee of GSPs demand note bank agreement.
Since May 1, 2006, GSPs results have been fully consolidated in the Companys financial
statements. Prior to May 1, 2006, the Company, using the equity method of accounting, recorded 49%
of GSPs net income or loss to its Consolidated Statements of Operations as Income (Loss) from
Joint Ventures.
(5) Acquisition of Tinsley Group PS&W, Inc.:
In order to further expand value-added and fabrication capabilities, on June 2, 2006, the Company
purchased all of the outstanding stock of Tinsley Group PS&W, Inc. (PS&W) for a final purchase
price of $9.0 million, which included $6.7 million of goodwill. The results of PS&W have been
fully consolidated in the Companys financial results since June 2, 2006.
PS&W is a full service fabricating company located in North Carolina that utilizes burning,
forming, machining and painting to produce a wide variety of fabrications for large original
equipment manufacturers of heavy construction equipment.
(6) Debt:
The Companys secured bank-financing agreement (the Credit Facility) is a revolving credit facility
collateralized by the Companys accounts receivable, inventories, and substantially all of its
property and equipment. Borrowings are limited to the lesser of a borrowing base, comprised of
eligible receivables and inventories or, effective with a July 2007 amendment, $130 million in the
aggregate. An April 2007 amendment extended the maturity date of the Credit Facility to December
15, 2010, with annual extensions at the banks option. The Company has the option to borrow based
on the agents base rate or Eurodollar Rates (EURO) plus a premium.
8 of 60
The Credit Facility requires the Company to comply with various covenants, the most significant of
which include: (i) minimum availability of $10 million, tested monthly, (ii) a minimum fixed charge
coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are tested quarterly, (iii)
restrictions on additional indebtedness, and (iv) limitations on dividends, capital expenditures
and investments. At June 30, 2007, the Company had approximately $64 million of availability under
the Credit Facility and the Company was in compliance with its covenants. The Credit Facility also
contains an accordion feature which allows the Company to add up to $25 million of additional
revolver capacity in certain circumstances.
Outstanding checks are included as part of Accounts Payable on the accompanying Consolidated
Balance Sheets and such checks totaled $16.0 million as of June 30, 2007 and $16.9 million as of
December 31, 2006.
(7) Shares Outstanding and Earnings Per Share:
Earnings per share have been calculated based on the weighted average number of shares outstanding
as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Weighted average shares outstanding |
|
|
10,603 |
|
|
|
10,416 |
|
|
|
10,527 |
|
|
|
10,338 |
|
Assumed exercise of stock options and
issuance of stock awards |
|
|
150 |
|
|
|
245 |
|
|
|
189 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares |
|
|
10,753 |
|
|
|
10,661 |
|
|
|
10,716 |
|
|
|
10,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,446 |
|
|
$ |
8,371 |
|
|
$ |
14,698 |
|
|
$ |
16,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.89 |
|
|
$ |
0.80 |
|
|
$ |
1.40 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.88 |
|
|
$ |
0.79 |
|
|
$ |
1.37 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Stock Options:
In January 1994, the Olympic Steel, Inc. Stock Option Plan (Option Plan) was adopted by the Board
of Directors and approved by the shareholders of the Company. Pursuant to the provisions of the
Option Plan, key employees of the Company, non-employee directors and
9 of 60
consultants may be offered
the opportunity to acquire shares of Common Stock by the grant of stock options, including both
incentive stock options (ISOs) and nonqualified stock options.
ISOs are not available to non-employee directors or consultants. A total of 1,300,000 shares of
Common Stock were originally reserved for issuance under the Option Plan. To the extent possible,
shares of treasury stock are used to satisfy shares resulting from the exercise of stock options.
The purchase price of a share of Common Stock pursuant to an ISO will not be less than the fair
market value of a share of Common Stock at the grant date. Options vest over periods ranging from
six months to five years and all expire 10 years after the grant date.
The Option Plan terminates on January 5, 2009. Termination of the Option Plan will not affect
outstanding options. As of June 30, 2007, there were no remaining shares of Common Stock available
for grant under the Option Plan.
On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123-R (SFAS No. 123-R) and elected to use the modified prospective transition method.
The modified prospective transition method requires that compensation cost be recognized in the
financial statements for all awards granted after the date of adoption as well as for existing
awards for which the requisite service has not been rendered as of the date of the adoption. The
modified prospective transition does not require prior periods to be restated. Prior to the
adoption of SFAS No. 123-R, the Company accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. The Company has elected to use the short-cut method
to calculate the historical pool of windfall tax benefits upon adoption of SFAS No. 123-R. The
election to use the short-cut method had no effect on the Companys financial statements.
Under the intrinsic value method used prior to January 1, 2006, compensation expense for
stock-based compensation was not recognized in the Companys Consolidated Statements of Operations
as all stock options granted by the Company had an exercise price equal or greater than the market
value of the underlying Common Stock on the option grant date. The adoption of SFAS No. 123-R
resulted in the following:
10 of 60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in thousands, except per share data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Stock option expense before taxes |
|
$ |
7 |
|
|
$ |
30 |
|
|
$ |
14 |
|
|
$ |
112 |
|
Stock option expense after taxes |
|
|
5 |
|
|
|
18 |
|
|
|
9 |
|
|
|
69 |
|
Impact per basic share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
Impact per diluted share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
All pre-tax charges related to stock options were included in the caption Administrative and
General on the accompanying Consolidated Statement of Operations.
The fair value of each option grant was estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Risk-free interest rate |
|
|
4.58 |
% |
|
|
N/A |
|
Expected life in years |
|
|
10 |
|
|
|
N/A |
|
Expected volatility |
|
|
57.7 |
% |
|
|
N/A |
|
Expected dividend yield |
|
|
0.4 |
% |
|
|
N/A |
|
The expected volatility assumption was derived by referring to changes in the Companys
historical Common Stock prices over a timeframe similar to that of the expected life of the award.
No options were granted during 2006. Options to purchase 24,170 shares of Common Stock were
granted during the second quarter of 2007. The weighted-average fair value of options granted
during 2007 was $22.55.
The following table summarizes stock-based award activity during the six months ended June 30,
2007:
11 of 60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Average Remaining |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(in thousands) |
|
Outstanding at December 31, 2006 |
|
|
477,140 |
|
|
$ |
6.12 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
24,170 |
|
|
|
32.63 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(297,503 |
) |
|
|
4.94 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
203,807 |
|
|
$ |
10.99 |
|
|
5.9 years |
|
$ |
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
187,473 |
|
|
$ |
7.96 |
|
|
5.1 years |
|
$ |
3,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the six months ended June 30, 2007
and 2006 were $8.3 million and $6.3 million, respectively. Net cash proceeds from the exercise of
stock options were $1.5 million and $1.6 million for the six months ended June 30, 2007 and 2006,
respectively. Income tax benefits of $3.2 million and $2.4 million were realized from stock option
exercises during the six months ended June 30, 2007 and 2006, respectively. The fair value of
options vested during the six months ended June 30, 2007 and 2006 totaled $45 thousand and $132
thousand, respectively.
As of June 30, 2007, approximately $617 thousand of expense, before taxes, with respect to
non-vested stock-based awards has yet to be recognized and will be amortized into expense over a
weighted-average period of 1.82 years.
(9) Restricted Stock Units and Performance Share Units:
At the Annual Meeting of Shareholders held on April 27, 2007, the shareholders of the Company
approved the Olympic Steel 2007 Omnibus Incentive Plan (the Plan). The Plan authorizes the Company
to grant stock options, stock appreciation rights, restricted shares, restricted share units,
performance shares, and other stock- and cash-based awards to employees and Directors of, and
consultants to, the Company and its affiliates. Under the plan, 500,000 shares of Common Stock are
available for equity grants.
On May 1, 2007, the Compensation Committee of the Companys Board of Directors approved the grant
of 1,800 restricted stock units (RSU) to each non-employee Director. Subject to the terms of the
Plan and the RSU Agreement, the RSUs vest at the end of 2007. The RSUs are not converted into
shares of Common Stock until the Board member either resigns or is terminated from the Board of
Directors.
12 of 60
On May 1, 2007, the Compensation Committee of the Companys Board of Directors also granted 32,378
performance-earned restricted stock units (PERSU) to the senior management of the Company. The
PERSUs may be earned based on the Companys performance over a 32-month period, beginning May 1,
2007 and would be converted to shares of Common Stock in 2010, based on the achievement of two
separate financial measures: (1) the Companys EBITDA (50% weighted); and (2) return on invested
capital (50% weighted). No shares will be earned unless the threshold amounts for each performance
measure are met. Up to 150% of the targeted amount of PERSUs may be earned.
The following table summarizes the activity related to RSUs and PERSUs for the six months ended
June 30, 2007:
|
|
|
|
|
|
|
Number of |
|
|
Shares |
Unvested as of January 1, 2007 |
|
|
|
|
Granted |
|
|
41,378 |
|
Vested |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2007 |
|
|
41,378 |
|
|
|
|
|
|
Under SFAS No. 123-R, stock compensation expense recognized on RSUs and PERSUs is summarized
in the following table:
|
|
|
|
|
|
|
|
|
|
|
For the Three and Six |
|
|
Months Ended June 30, |
(in thousands, except per share data) |
|
2007 |
|
2006 |
Stock award expense before taxes |
|
$ |
139 |
|
|
$ |
|
|
Stock award expense after taxes |
|
|
88 |
|
|
|
|
|
Impact per basic share |
|
$ |
0.01 |
|
|
$ |
|
|
Impact per diluted share |
|
$ |
0.01 |
|
|
$ |
|
|
All pre-tax charges related to RSUs and PERSUs were included in the caption, Administrative
and General on the accompanying Consolidated Statement of Operations.
13 of 60
(10) Supplemental Cash Flow Information:
Interest paid during the first six months of 2007 totaled $2.1 million, compared to $290 thousand
in the first six months of 2006. Income taxes paid during the first six months of 2007 and 2006
totaled $6.0 million and $10.1 million, respectively.
(11) Impact of Recently Issued Accounting Pronouncements:
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting
for uncertainty in income taxes recognized in an entitys financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement principles for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. The Company adopted FIN 48 on January 1, 2007. The adoption had no effect
on the opening balance of retained earnings as of January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No.
157), Fair Value Measurements. This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement applies under other accounting pronouncements that require
or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. We do not expect the adoption of SFAS No. 157 will have a material impact on
our consolidated financial statements.
14 of 60
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
The following discussion and analysis should be read in conjunction with our unaudited consolidated
financial statements and accompanying notes contained herein and our consolidated financial
statements, accompanying notes and Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31,
2006. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including those described in Item 1A,
Risk Factors, of our Annual Report on Form 10-K and under the caption Forward-Looking Information
below.
Overview
We are a leading U.S. steel service center with over 50 years of experience. Our primary focus is
on the direct sale and distribution of large volumes of processed carbon, coated and stainless
flat-rolled sheet, coil and plate products. We act as an intermediary between steel producers and
manufacturers that require processed steel for their operations. We serve customers in most carbon
steel consuming industries, including manufacturers and fabricators of transportation and material
handling equipment, automobiles, construction and farm machinery, storage tanks, environmental and
energy generation, food service and electrical equipment, as well as general and plate fabricators,
and steel service centers. We distribute our products primarily through a direct sales force.
We operate as a single business segment with 16 strategically-located processing and distribution
facilities in Connecticut, Georgia, Illinois, Iowa, Michigan, Minnesota, North Carolina, Ohio and
Pennsylvania. This geographic footprint allows us to focus on regional customers and larger
national and multi-national accounts, primarily located throughout the midwestern, eastern and
southern United States.
We sell a broad range of steel products, many of which have different gross profits and margins.
Products that have more value-added processing generally have a greater gross profit and higher
margins. Accordingly, our overall gross profit is affected by, among other things, product mix,
the amount of processing performed, the availability of steel, volatility in selling prices and
15 of 60
material purchase costs. We also perform toll processing of customer-owned steel, the majority of
which is performed by our Detroit and Georgia operations. We sell certain products internationally,
primarily in Puerto Rico and Mexico. All international sales and payments are made in United
States dollars. Recent international sales have been immaterial to our consolidated financial
results.
Our results of operations are affected by numerous external factors including, but not limited to,
general and global business, economic and political conditions, competition, steel pricing and
availability, energy prices, pricing and availability of raw materials used in the production of
steel, customer demand for steel, customers ability to manage their credit line availability and
layoffs or work stoppages by our own, our suppliers or our customers personnel. The steel
industry also continues to be affected by the global consolidation of our suppliers, competitors,
and end-use customers.
On May 1, 2006, we acquired the remaining 51% interest in GSP. Prior to May 1, 2006, our 49%
interest in GSP was accounted for under the equity method. Since May 1, 2006, the results of GSP
have been fully consolidated into our financial statements. In January 2006, we announced plans to
close the OLP joint venture in Detroit, Michigan. OLP, which was a processor of laser welded steel
blanks for the automotive industry, ceased operations in the first quarter of 2006. Our 50%
interest in OLP is accounted for under the equity method.
In June 2006, we acquired all of the outstanding stock of PS&W, a North Carolina-based fabricator
of heavy construction equipment components. Since June 2, 2006, the results of PS&W have been
fully consolidated into our financial statements.
A collective bargaining agreement covering approximately five Detroit maintenance workers expired
July 31, 2007. Employees covered under this agreement continue to operate as a new agreement is
negotiated. While we expect to be able to negotiate a new agreement, there can be no assurances
that such resolution will occur. Collective bargaining agreements covering our Minneapolis and
other Detroit employees expire in 2009 and subsequent years. We have never experienced a work
stoppage and we believe that our relationship with employees is good. However, any prolonged work
stoppages by our personnel represented by collective bargaining units could have a material adverse
impact on our business, financial condition, results of operations, and cash flows.
16 of 60
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and assumptions that affect the amounts reported in the
financial statements. Actual results could differ from these estimates under different assumptions
or conditions. On an ongoing basis, we monitor and evaluate our estimates and assumptions.
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 Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in our Annual Report on Form 10-K for the year ended December
31, 2006.
17 of 60
Results of Operations
The following table sets forth certain income statement data for the three and six months ended June 30, 2007
and 2006 (dollars are shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
$ |
|
sales |
|
$ |
|
sales |
|
$ |
|
sales |
|
$ |
|
sales |
Net sales |
|
$ |
277,413 |
|
|
|
100.0 |
% |
|
$ |
256,155 |
|
|
|
100.0 |
% |
|
$ |
536,818 |
|
|
|
100.0 |
% |
|
$ |
495,026 |
|
|
|
100.0 |
% |
Gross profit (1) |
|
|
55,684 |
|
|
|
20.1 |
% |
|
|
53,360 |
|
|
|
20.8 |
% |
|
|
103,058 |
|
|
|
19.2 |
% |
|
|
100,518 |
|
|
|
20.3 |
% |
Operating expenses (2) |
|
|
39,813 |
|
|
|
14.4 |
% |
|
|
37,318 |
|
|
|
14.6 |
% |
|
|
77,777 |
|
|
|
14.5 |
% |
|
|
71,642 |
|
|
|
14.5 |
% |
Operating income |
|
$ |
15,871 |
|
|
|
5.7 |
% |
|
$ |
16,042 |
|
|
|
6.3 |
% |
|
$ |
25,281 |
|
|
|
4.7 |
% |
|
$ |
28,876 |
|
|
|
5.8 |
% |
|
|
|
(1) |
|
Gross profit is calculated as net sales less the cost of materials sold, exclusive of
depreciation. |
|
(2) |
|
Operating expenses are calculated as total costs and expenses less the cost of materials
sold. |
Tons sold decreased 1.9% to 336 thousand in the second quarter of 2007 from 343 thousand in
the second quarter of 2006. Tons sold in the second quarter of 2007 included 297 thousand from
direct sales and 39 thousand from toll processing, compared with 288 thousand direct tons and 55
thousand toll tons in the comparable period of last year. Tons sold decreased 4.9% to 648 thousand
in the first six months of 2007 from 681 thousand in the first six months of 2006. Tons sold in
the first six months of 2007 included 570 thousand direct tons and 78 thousand from toll
processing, compared with 570 thousand direct tons and 111 thousand toll tons in the comparable
period last year. The decrease in tons sold was primarily attributable to lower sales to other
steel service centers and lower toll processing sales to domestic automotive customers. Tons sold
in the third quarter of 2007 are expected to be lower than second quarter 2007 levels due to normal
seasonal patterns.
Net sales increased 8.3% to $277.4 million in the second quarter of 2007 from $256.2 million in the
second quarter of 2006. Net sales increased 8.4% to $536.8 million in the first six months of 2007
from $495.0 million in the first six months of 2006. Average selling prices for the second quarter
of 2007 increased 10.4% from last years second quarter and decreased 0.9% from the first quarter of
2007.
As a percentage of net sales, gross profit (exclusive of depreciation) decreased to 20.1% in the
second quarter of 2007 from 20.8% in the second quarter of 2006. For the first six months of 2007,
gross margin decreased to 19.2% from 20.3% in the first six months of 2006. Due to
18 of 60
normal seasonal patterns, a decrease in customer demand could lead to more competition for sales,
which could reduce our selling prices and our gross margin levels in the third quarter of 2007.
Operating expenses in the second quarter of 2007 increased 6.7% to $39.8 million from $37.3 million
in last years second quarter. Operating expenses in the first six months of 2007 increased 8.6%
to $77.8 million from $71.6 million during the first six months of 2006. The increase in operating
expenses was primarily attributable to the inclusion of PS&Ws operating expenses in 2007 results
and the costs associated with the implementation of our new information system, which commenced
during the third quarter of 2006. As a percentage of net sales, operating expenses decreased to
14.4% for the second quarter of 2007 from 14.6% in the comparable 2006 period. Operating expenses
during both the first six months of 2007 and 2006 were 14.5% of net sales.
During the second quarter of 2006, we recorded a $2 million charge to increase the reserve
associated with the closing of OLP. During 2007, all expenses associated with the closing of OLP
have been charged against that reserve.
Financing costs totaled $853 thousand for the second quarter of 2007 compared to $345 thousand for
the second quarter of 2006. Financing costs totaled $1.9 million for the first six months of 2007,
compared to $499 thousand for the first six months of 2006. Our effective borrowing rate,
inclusive of deferred financing fees and commitment fees, for the first six months of 2007 was 7.2%
compared to 8.8% in the first six months of 2006. Debt levels in 2007 have been higher than 2006
due to higher working capital levels and increased capital expenditures.
For the second quarter of 2007, income before income taxes totaled $15.0 million compared to $13.7
million in the second quarter of 2006. For the first six months of 2007, income before taxes
totaled $23.4 million, compared to $26.2 million in the first six months of 2006. An income tax
provision of 37.2% was recorded for the first six months of 2007, compared to a provision of 37.7%
for the first six months of 2006. We expect the effective tax rate to approximate 37% to 38% for
the remainder of 2007. Income taxes paid totaled $6.0 million and $10.1 million for the first six
months of 2007 and 2006, respectively.
Net income for the second quarter of 2007 totaled $9.4 million or $.88 per diluted share, compared
to net income of $8.4 million or $.79 per diluted share for the second quarter of 2006. Net income
for the first six months of 2007 totaled $14.7 million or $1.37 per diluted share,
19 of 60
compared to net income of $16.4 million or $1.54 per diluted share for the first six months of
2006.
Liquidity and Capital Resources
Our principal capital requirements include funding working capital needs, purchasing and upgrading
processing equipment and facilities, acquisitions, and paying dividends. We use cash generated
from operations, leasing transactions, and our revolving credit facility to fund these
requirements.
Working capital at June 30, 2007 totaled $227.6 million, an $11.7 million increase from the end of
the prior year. Significant working capital changes included a $34.7 million increase in accounts
receivable, partially offset by a $13.7 million decrease in inventories and a $14.8 million
increase in accounts payable.
For the six months ended June 30, 2007, we generated $10.1 million of net cash from operations, of
which $17.2 million was derived from cash earnings and $7.1 million was used for working capital.
During the first six months of 2007, we spent $5.5 million on capital expenditures. We expect to
spend between $15 million and $20 million on capital expenditures in 2007 and we anticipate using
our financial position to participate in the consolidation of the service center and fabrication
industries. In 2007, we will add a $5.5 million stretcher-leveler cut-to-length line in
Minneapolis and we have undertaken a $2.9 million project to expand our Iowa facility by
approximately 54,000 square feet in order to meet our customers need for high quality sheet
product. We have also installed additional laser and plasma cutting equipment in Cleveland,
Chicago and Chambersburg to support our growing value-added services. In July 2006, we announced
the beginning of a project to implement a new single information system to replace the three
systems we currently use. The objective is to standardize and streamline business processes and
improve support for our growing service center and fabrication business. The project will require
a significant deployment of capital and will require a significant use of managements time. The
total external costs associated with the new information system are expected to approximate $14
million over a three-year phased implementation that began in July 2006.
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During the first six months of 2007, in financing activities, we generated $4.7 million from the
exercise of stock options, $4.0 million of which was used to repay borrowings under our revolving
credit facility.
In July 2007, our Board of Directors approved a regular quarterly dividend of $.04 per share, which
is payable on September 17, 2007 to shareholders of record as of September 3, 2007. The September
quarterly dividend is $.01 per share higher than in previous quarters. Our Board of Directors
previously approved dividends of $.03 per share, which were paid on March 15, 2007 and June 15,
2007. We expect to make regular dividend distributions in the future, subject to the availability
of cash and continuing determination by our Board of Directors that the payment of dividends
remains in the best interest of our shareholders.
Our secured bank-financing agreement (the Credit Facility) is a revolving credit facility
collateralized by our accounts receivable, inventories, and substantially all of our property and
equipment. Borrowings are limited to the lesser of a borrowing base, comprised of eligible
receivables and inventories or, effective with a July 2007 amendment, $130 million in the
aggregate. An April 2007 amendment extended the maturity date of the Credit Facility to December
15, 2010, with annual extensions at the banks option.
The Credit Facility requires us to comply with various covenants, the most significant of which
include: (i) minimum availability of $10 million, tested monthly, (ii) a minimum fixed charge
coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are tested quarterly, (iii)
restrictions on additional indebtedness, and (iv) limitations on dividends, capital expenditures
and investments. At June 30, 2007, we had approximately $64 million of availability under our
Credit Facility and we were in compliance with our covenants. The Credit Facility also contains an
accordion feature which allows us to add up to $25 million of additional revolver capacity in
certain circumstances.
We believe that funds available under our Credit Facility and lease arrangements, together with
funds generated from operations, will be sufficient to provide us with the liquidity necessary to
fund anticipated working capital requirements and capital expenditure requirements over the next 12
months. In the future, we may, as part of our business strategy, acquire and dispose of other
companies in the same or complementary lines of business, enter into and exit strategic alliances
and joint ventures, and pursue other business ventures. Accordingly, the timing and size of our
capital requirements are subject to change as business conditions warrant and opportunities arise.
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Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the SEC contain various
forward-looking statements that are based on current expectations, estimates, forecasts and
projections about our future performance, business, our beliefs and managements assumptions. In
addition, we, or others on our behalf, may make forward-looking statements in press releases or
written statements, or in our communications and discussions with investors and analysts in the
normal course of business through meetings, webcasts, phone calls and conference calls. Words such
as may, will, anticipate, should, intend, expect, believe, estimate, project,
plan, potential, continue, as well as the negative of these terms or 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 those set forth in Item
1A, Risk Factors, as found in our Annual Report on
Form 10-K for the year ended December 31, 2006 and
the following:
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general and global business, economic and political conditions; |
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competitive factors such as availability and pricing of steel, industry
inventory levels and rapid fluctuations in customer demand and pricing; |
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the cyclicality and volatility within the steel industry; |
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the ability of customers (especially in the domestic automotive industry)
to maintain their credit availability; |
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customer, supplier, and competitor consolidation, bankruptcy or insolvency; |
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layoffs or work stoppages by our own or our suppliers or customers personnel; |
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the availability and costs of transportation and logistical services; |
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equipment malfunctions or installation delays; |
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the successes of our capital investments; |
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the successes of our strategic efforts and initiatives to increase sales
volumes, maintain cash turnover, maintain or improve inventory turns and reduce costs; |
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the adequacy of our information technology and business system software; |
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the successful implementation of our new information system; |
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the timing and outcome of OLPs efforts and ability to liquidate its
remaining assets; |
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the post-acquisition integration of PS&W; and |
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our ability to pay regular quarterly cash dividends. |
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Should one or more of these, or other risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those anticipated, intended
expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof. We undertake no
obligation to republish revised forward-looking statements to reflect the occurrence of
unanticipated events of circumstances after the date hereof, except as otherwise required by law.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
During the past several years, the base price of carbon flat-rolled steel has fluctuated
significantly. Declining prices could reduce our gross profit margin percentages to levels that
are lower than our historical levels. Higher levels of inventory held by us, other steel service
centers, or end-use customers could cause competitive pressures which could also reduce gross
margins. Higher raw material costs for steel producers could cause the price of steel to increase.
While we have generally been successful in the past in passing on producers price increases and
surcharges to our customers, there is no guarantee that we will be able to pass on price increases
to our customers in the future.
Approximately 9% of our net sales in the first six months of 2007 were directly to automotive
manufacturers or manufacturers of automotive components and parts. The automotive industry
experiences significant fluctuations in demand based on numerous factors such as general economic
conditions and consumer confidence. The automotive industry is also subject, from time to time, to
labor work stoppages. The domestic automotive industry, which has experienced a number of
bankruptcies, is currently involved in significant restructuring and labor contract negotiations,
which has resulted in lower production volumes. Certain customers in this industry represent an
increasing credit risk.
Inflation generally affects us by increasing the cost of employee wages and benefits,
transportation services, processing equipment, purchased steel, energy and borrowings under our
credit facility. General inflation has not had a material effect on our financial results during
the past two years; however, we have experienced increased distribution expense as a result of
higher fuel costs.
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When raw material prices increase, competitive conditions will influence how much of the steel
price increase can be passed on to our customers. When raw material prices decline, customer
demands for lower costed product result in lower selling prices. Declining steel prices have
generally adversely affected our net sales and net income, while increasing steel prices favorably
affect net sales and net income.
We are exposed to the impact of interest rate changes and fluctuating steel prices. We have not
entered into any interest rate or steel commodity hedge transactions for speculative purposes or
otherwise.
Our primary interest rate risk exposure results from variable rate debt. If interest rates in the
future were to increase 100 basis points (1.0%) from June 30, 2007 rates and, assuming no change in
total debt from June 30, 2007 levels, the additional annual interest expense to us would be
approximately $642 thousand. We currently do not hedge our exposure to variable interest rate
risk. However, we do have the option to enter into 30- to 180- day fixed base rate EURO loans
under the Credit Facility.
Item 4. Controls and Procedures
The evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 of the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Report have been carried out
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer. These disclosure controls and procedures are designed to
provide reasonable assurance that information required to be disclosed in reports that are filed
with or submitted to the SEC is: (i) accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosures; and (ii) recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and
procedures were effective.
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There were no changes in our internal controls over financial reporting that occurred during the
second quarter of 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Items 1, 1A, 2, and 3 of this Part II are either inapplicable or are answered in the negative and
are omitted pursuant to the instructions to Part II.
Item 4. Submission of Matters to a Vote of Security Holders
(a) |
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The Companys Annual Meeting of Shareholders was held on April 27, 2007. |
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(b) |
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At the Annual Meeting, the Companys shareholders elected Michael D. Siegal, Thomas M.
Forman, and James B. Meathe as Directors for a two-year term, which expires at the Annual
Meeting of Shareholders in 2009. |
The following tabulation represents voting for the Directors:
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For |
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Withheld Authority |
Michael D. Siegal |
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8,812,643 |
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1,385,480 |
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Thomas M. Forman |
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8,810,943 |
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1,388,880 |
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James B. Meathe |
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8,987,366 |
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1,036,034 |
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(c) |
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At the Annual Meeting, the Companys shareholders approved the adoption of the Olympic
Steel, Inc. 2007 Omnibus Incentive Plan. The holders of 6,993,447 shares of common stock
voted to approve the adoption, the holders of 967,757 shares voted against the adoption, the
holders of 13,875 shares abstained from voting, and the holders of 2,467,499 shares did not
vote. |
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(d) |
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At the Annual Meeting, the Companys shareholders approved the amendment to the Companys
Code of Regulations to allow uncertificated shares in accordance with Nasdaq requirements.
The holders of 9,976,987 shares of common stock voted to approve the amendment, the holders of
31,783 shares voted against the amendment, the holders of 12,030 shares abstained, and the
holders of 421,778 shares did not vote. |
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Item 6. Exhibits
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Exhibit |
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Description of Document |
|
Reference |
4.16
|
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Amendment No. 14 to Amended
and Restated Credit
Agreement dated July 18,
2007 by and among the
Registrant, five banks and
Comerica Bank, as
Administrative Agent.
|
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Incorporated by reference
to Exhibit 4.16 to
Registrants Form 8-K
filed with the Commission
on July 18, 2007. |
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10.22*
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Form of Performance-Earned
Restricted Stock Unit (PERS
Unit) Agreement for Messrs.
Siegal, Wolfort and
Marabito.
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Filed herewith |
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10.23*
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Form of Performance-Earned
Restricted Stock Unit (PERS
Unit) Agreement for Mr.
Manson and Ms. Potash.
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Filed herewith |
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31.1
|
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Certification of the
Principal Executive Officer
pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
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Filed herewith |
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31.2
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Certification of the
Principal Financial Officer
pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
|
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Filed herewith |
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32.1
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Certification of the
Principal Executive Officer
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
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Furnished herewith |
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32.2
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Certification of the
Principal Financial Officer
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
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Furnished herewith |
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* |
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This Exhibit is a management contract or compensatory plan or arrangement. |
27 of 60
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereto duly authorized.
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OLYMPIC STEEL, INC.
(Registrant)
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Date: August 8, 2007 |
By: |
/s/ Michael D. Siegal
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Michael D. Siegal |
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Chairman of the Board and Chief
Executive Officer |
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By: |
/s/ Richard T. Marabito
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Richard T. Marabito |
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Chief Financial Officer
(Principal Accounting Officer) |
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