Form 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 September 30, 2008
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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 filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 November 7, 2008 |
Common stock, without par value |
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10,861,710 |
1 of 34
Olympic Steel, Inc.
Index to Form 10-Q
2 of 34
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
2,420 |
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$ |
7,707 |
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Accounts receivable, net |
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131,797 |
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88,414 |
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Inventories |
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313,598 |
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178,530 |
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Prepaid expenses and other |
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6,894 |
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8,737 |
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Total current assets |
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454,709 |
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283,388 |
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Property and equipment, at cost |
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202,295 |
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183,850 |
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Accumulated depreciation |
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(95,577 |
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(94,199 |
) |
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Net property and equipment |
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106,718 |
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89,651 |
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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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6,097 |
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6,461 |
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Total assets |
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$ |
574,107 |
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$ |
386,083 |
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Liabilities |
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Accounts payable |
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$ |
111,012 |
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$ |
73,408 |
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Accrued payroll |
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19,251 |
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9,393 |
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Other accrued liabilities |
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15,473 |
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9,489 |
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Total current liabilities |
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145,736 |
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92,290 |
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Credit facility revolver |
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89,583 |
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16,707 |
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Other long-term liabilities |
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14,651 |
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9,779 |
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Deferred income taxes |
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1,830 |
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3,787 |
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Total liabilities |
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251,800 |
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122,563 |
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Shareholders Equity |
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Preferred stock |
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Common stock |
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118,716 |
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114,582 |
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Retained earnings |
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203,591 |
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148,938 |
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Total shareholders equity |
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322,307 |
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263,520 |
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Total liabilities and shareholders equity |
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$ |
574,107 |
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$ |
386,083 |
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The accompanying notes are an integral part of these balance sheets.
3 of 34
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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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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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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237,576 |
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271,716 |
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837,655 |
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841,891 |
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Toll |
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30,090 |
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37,241 |
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98,849 |
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114,780 |
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267,666 |
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308,957 |
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936,504 |
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956,671 |
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Net sales |
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$ |
335,222 |
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$ |
256,089 |
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$ |
973,611 |
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$ |
792,907 |
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Costs and expenses |
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Cost of materials sold
(exclusive of items
shown separately below) |
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247,184 |
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205,706 |
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716,372 |
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639,466 |
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Warehouse and processing |
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16,607 |
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15,670 |
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50,022 |
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43,617 |
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Administrative and general |
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17,524 |
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9,893 |
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49,875 |
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31,428 |
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Distribution |
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7,047 |
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6,594 |
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22,723 |
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19,367 |
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Selling |
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5,195 |
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3,890 |
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15,984 |
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11,856 |
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Occupancy |
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1,484 |
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1,483 |
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5,298 |
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4,687 |
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Depreciation |
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2,384 |
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2,175 |
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6,984 |
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6,527 |
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Total costs and expenses |
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297,425 |
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245,411 |
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867,258 |
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756,948 |
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Operating income |
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37,797 |
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10,678 |
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106,353 |
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35,959 |
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Interest and other expense on debt |
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350 |
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640 |
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537 |
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2,520 |
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Income before income taxes |
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37,447 |
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10,038 |
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105,816 |
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33,439 |
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Income tax provision |
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13,280 |
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4,009 |
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38,890 |
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12,712 |
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Net income |
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$ |
24,167 |
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$ |
6,029 |
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$ |
66,926 |
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$ |
20,727 |
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Earnings per share: |
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Net income per share basic |
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$ |
2.22 |
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$ |
0.56 |
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$ |
6.17 |
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$ |
1.96 |
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Weighted average shares
outstanding basic |
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10,871 |
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10,727 |
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10,840 |
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10,595 |
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Net income per share diluted |
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$ |
2.21 |
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$ |
0.56 |
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$ |
6.13 |
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$ |
1.93 |
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Weighted average shares
outstanding diluted |
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10,952 |
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10,821 |
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10,916 |
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10,747 |
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The accompanying notes are an integral part of these statements.
4 of 34
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(in thousands)
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2008 |
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2007 |
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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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$ |
66,926 |
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$ |
20,727 |
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Adjustments to reconcile net income to net cash from
operating activities - |
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Depreciation |
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6,984 |
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6,527 |
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(Gain) loss on disposition of property and equipment |
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(476 |
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29 |
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Stock-based compensation |
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1,236 |
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529 |
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Other long-term assets |
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364 |
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(3,243 |
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Other long-term liabilities |
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4,872 |
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2,314 |
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Long-term deferred income taxes |
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(1,957 |
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(591 |
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77,949 |
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26,292 |
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Changes in working capital: |
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Accounts receivable |
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(43,383 |
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(23,176 |
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Inventories |
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(135,068 |
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38,241 |
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Prepaid expenses and other |
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1,843 |
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(1,945 |
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Accounts payable |
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32,642 |
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8,864 |
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Accrued payroll and other accrued liabilities |
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15,842 |
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1,910 |
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(128,124 |
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23,894 |
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Net cash from (used for) operating activities |
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(50,175 |
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50,186 |
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Cash flows from (used for) investing activities: |
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Capital expenditures |
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(24,391 |
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(8,312 |
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Proceeds from disposition of property and equipment |
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816 |
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13 |
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Net cash used for investing activities |
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(23,575 |
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(8,299 |
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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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72,876 |
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(43,328 |
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Change in outstanding checks |
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4,962 |
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(213 |
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Proceeds from exercise of stock options (including tax benefit)
and employee stock purchases |
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2,898 |
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4,667 |
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Dividends paid |
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(12,273 |
) |
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(1,064 |
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Net cash from (used for) financing activities |
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68,463 |
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(39,938 |
) |
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Cash and cash equivalents: |
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Net change |
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(5,287 |
) |
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1,949 |
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Beginning balance |
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7,707 |
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5,211 |
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Ending balance |
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$ |
2,420 |
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$ |
7,160 |
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The accompanying notes are an integral part of these statements.
5 of 34
Olympic Steel, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 2008
(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 2008 annual results and these financial
statements should be read in conjunction with the Companys 2007 Annual Report on Form 10-K for the
period ended December 31, 2007. 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 $3.2 million and
$2.9 million at September 30, 2008 and December 31, 2007, respectively. The allowance for doubtful
accounts is maintained at a level considered appropriate based on historical experience and
specific customer collection issues that have been identified. Estimations are based upon a
calculated percentage of accounts receivable, which remains fairly level from year to year, and
judgments about the probable effects of economic conditions on certain customers, which can
fluctuate significantly from year to year. The Company cannot guarantee that the rate of future
credit losses will be similar to past experience. The Company considers all available information
when assessing each quarter the adequacy of its allowance for doubtful accounts.
6 of 34
(3) Inventories:
Steel inventories consist of the following:
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September 30, |
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December 31, |
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(in thousands) |
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2007 |
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2007 |
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Unprocessed |
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$ |
256,963 |
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$ |
133,319 |
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Processed and finished |
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56,635 |
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45,211 |
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Totals |
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$ |
313,598 |
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$ |
178,530 |
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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. OLP
ceased operations during the first quarter of 2006. In December 2006, the Company advanced $3.2
million to OLP to cover a loan guarantee. As of September 30, 2008, the investment in and advance
to OLP was valued at $2.5 million on the Companys Consolidated Balance Sheet. The Company
believes the underlying value of OLPs remaining real estate, upon liquidation, will be sufficient
to repay the $2.5 million advance at a later date.
(5) 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 $130 million in the aggregate. A May 2008 amendment
extended the maturity date of the Credit Facility to December 15, 2011, with annual extensions at
the banks option.
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 September 30, 2008, the Company had approximately $39 million of availability
under the Credit Facility, and the Company was in compliance with its
7 of 34
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 $18.9 million as of September 30, 2008 and $13.9 million as
of December 31, 2007.
(6) 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:
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|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding |
|
|
10,871 |
|
|
|
10,727 |
|
|
|
10,840 |
|
|
|
10,595 |
|
Assumed exercise of stock options and
issuance of stock awards |
|
|
81 |
|
|
|
94 |
|
|
|
76 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
outstanding |
|
|
10,952 |
|
|
|
10,821 |
|
|
|
10,916 |
|
|
|
10,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,167 |
|
|
$ |
6,029 |
|
|
$ |
66,926 |
|
|
$ |
20,727 |
|
|
Basic earnings per share |
|
$ |
2.22 |
|
|
$ |
0.56 |
|
|
$ |
6.17 |
|
|
$ |
1.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
2.21 |
|
|
$ |
0.56 |
|
|
$ |
6.13 |
|
|
$ |
1.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no anti-dilutive securities outstanding.
(7) 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 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
8 of 34
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 September 30, 2008, 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), Share-Based Payment, and elected to use the modified
prospective transition method. The modified prospective transition method required 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 did 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
because all stock options granted by the Company had an exercise price equal to or greater than the
market value of the underlying common stock on the option grant date.
The following table summarizes the effect of the impact of SFAS No. 123-R on the results of
operations:
9 of 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense before taxes |
|
$ |
53 |
|
|
$ |
53 |
|
|
$ |
158 |
|
|
$ |
97 |
|
Stock option expense after taxes |
|
$ |
35 |
|
|
$ |
33 |
|
|
$ |
100 |
|
|
$ |
60 |
|
Impact per basic share |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
Impact per diluted share |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
$ |
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.
No options were granted during the first nine months of 2008. Options to purchase 24,170 shares of
common stock were granted during the second quarter of 2007. The fair value of options granted
during 2007 was $22.55 per share.
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 assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
N/A |
|
|
|
4.58 |
% |
Expected life in years |
|
|
N/A |
|
|
|
10 |
|
Expected volatility |
|
|
N/A |
|
|
|
57.7 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
0.4 |
% |
The expected volatility assumption was derived by referring to changes in the Companys historical
common stock prices over a time frame similar to that of the expected life of the award.
The following table summarizes stock option award activity during the nine months ended September
30, 2008:
10 of 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Average Remaining |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(in thousands) |
|
Outstanding at
December 31, 2007 |
|
|
203,807 |
|
|
$ |
10.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(133,800 |
) |
|
|
7.97 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008 |
|
|
70,007 |
|
|
$ |
16.75 |
|
|
6.0 years |
|
$ |
1,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2008 |
|
|
49,893 |
|
|
$ |
12.15 |
|
|
5.2 years |
|
$ |
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the nine months ended September 30,
2008 and 2007 was $4.8 million and $8.4 million, respectively. Net cash proceeds from the exercise
of stock options were $1.1 million and $1.5 million for the nine months ended September 30, 2008
and 2007, respectively. Income tax benefits of $1.8 million and $3.2 million were realized from
stock option exercises during the nine months ended September 30, 2008 and 2007, respectively. The
fair value of options vested during the nine months ended September 30, 2008 and 2007 totaled $158
thousand and $97 thousand, respectively.
As of September 30, 2008, approximately $324 thousand of expense, before taxes, with respect to
non-vested stock option awards has yet to be recognized and will be amortized into expense over a
weighted-average period of 1.27 years.
(8) 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 grants.
On May 1, 2007 and January 2, 2008, the Compensation Committee of the Companys Board of Directors
approved the grant of 1,800 restricted stock units (RSUs) to each non-employee Director. Subject
to the terms of the Plan and the RSU agreement, the RSUs vest at the end of
2007 and 2008, respectively. The RSUs are not converted into shares of common stock until the
Board member either resigns or is terminated from the Board of Directors.
11 of 34
The Compensation Committee of the Companys Board of Directors also granted 32,378 and 34,379
performance-earned restricted stock units (PERSUs) to the senior management of the Company on May
1, 2007 and January 2, 2008, respectively. The PERSUs may be earned based on the Companys
performance for periods ranging from 32 to 36 months from the date of grant, and would be converted
to shares of common stock 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 the performance measures 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 nine months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
PERSUs |
|
|
|
Vested |
|
|
Unvested |
|
|
Vested |
|
|
Unvested |
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
9,000 |
|
|
|
|
|
|
|
32,378 |
|
Granted |
|
|
|
|
|
|
9,000 |
|
|
|
|
|
|
|
34,379 |
|
Vested |
|
|
9,000 |
|
|
|
(9,000 |
) |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008 |
|
|
9,000 |
|
|
|
9,000 |
|
|
|
|
|
|
|
66,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under SFAS No. 123-R, stock-based compensation expense recognized on RSUs and PERSUs for the nine
months ended September 30, 2008 and 2007, respectively, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award expense before taxes |
|
$ |
360 |
|
|
$ |
292 |
|
|
$ |
1,079 |
|
|
$ |
431 |
|
Stock award expense after taxes |
|
$ |
231 |
|
|
$ |
179 |
|
|
$ |
682 |
|
|
$ |
267 |
|
Impact per basic share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.03 |
|
Impact per diluted share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.03 |
|
All pre-tax charges related to RSUs and PERSUs were included in the caption, Administrative and
General, on the accompanying Consolidated Statement of Operations.
12 of 34
(9) Supplemental Cash Flow Information:
Interest paid during the first nine months of 2008 totaled $830 thousand, compared to $3.0 million
in the first nine months of 2007. Income taxes paid during the first nine months of 2008 and 2007
totaled $35.9 million and $9.1 million, respectively.
(10) Impact of Recently Issued Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board (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 Statement of Financial Account Standards 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 was initially effective as of January 1, 2008, but in
February 2008, the FASB delayed the effective date for applying the standard to non-financial
assets and non-financial liabilities that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis. We adopted SFAS No. 157 as of January 1, 2008 for
assets and liabilities within its scope and the impact was immaterial to our financial statements.
Non-financial assets and non-financial liabilities for which we have not applied the provisions of
SFAS No. 157 included those measured at fair value in goodwill impairment testing.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS No.
160), Noncontrolling Interests in Consolidated Financial Statements an Amendment of Accounting
Research Bulletin No. 51. SFAS No. 160 requires all entities to report noncontrolling interests in
subsidiaries (also known as minority interests) as a separate component of equity in the
consolidated statement of financial position, to clearly identify consolidated net income
attributable to the parent and to the noncontrolling interest on the face
13 of 34
of the consolidated statement of income and to provide sufficient disclosure that clearly
identifies and distinguishes between the interest of the parent and the interests of controlling
owners. SFAS No. 160 is effective as of January 1, 2009. The Company is currently evaluating SFAS
No. 160; however, it does not expect any material financial statement implications relating to the
adoption of this statement, because the Company does not currently have any non-controlling
interests in its subsidiaries.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (SFAS No.
141R), Business Combinations. This statement requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the transaction,
establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed and requires the acquirer to disclose certain information related to the
nature and financial effect of the business combination. SFAS No. 141R is effective for business
combinations entered into in fiscal years beginning on or after December 15, 2008. Depending on
the terms, conditions and details of the business combinations, if any, that take place subsequent
to January 1, 2009, SFAS No. 141R may have a material impact on the Companys future financial
statements.
14 of 34
|
|
|
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,
2007. The following Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in the forward-looking statements.
Factors that might cause a difference include, but are not limited to, those discussed under Item
1A (Risk Factors) in our Annual Report on Form 10-K. The following section is qualified in its
entirety by the more detailed information, included in our financial statements and the notes
thereto, which appears elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading U.S. steel service center with over 53 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, construction and farm machinery, storage tanks, environmental and energy
generation, automobiles, food service and electrical equipment, military vehicles and 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 17 strategically-located processing and distribution
facilities in Connecticut, Georgia, Illinois, Iowa, Michigan, Minnesota, North Carolina, Ohio,
Pennsylvania and South Carolina. 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
15 of 34
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
material purchase costs. We also perform toll processing of customer-owned steel, the majority of
which is performed by our Michigan operation. We sell certain products internationally, primarily
in Puerto Rico and Mexico. All international sales and payments are made in U.S. 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, monetary and political conditions, competition, steel
pricing and availability, energy and transportation prices, pricing and availability of raw
materials used in the production of steel, inventory held in the supply chain, 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.
At September 30, 2008, we employed approximately 1,200 people, of which approximately 200 of the
hourly plant personnel at our Minneapolis and Detroit facilities are represented by four separate
collective bargaining units. A collective bargaining agreement covering approximately five Detroit
maintenance workers was extended to July 31, 2009. Collective bargaining agreements covering
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.
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.
16 of 34
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, 2007.
17 of 34
Results of Operations
The following table sets forth certain income statement data for the three and nine months ended
September 30, 2008 and 2007 (dollars are shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
$ |
|
sales |
|
$ |
|
sales |
|
$ |
|
sales |
|
$ |
|
sales |
Net sales |
|
$ |
335,222 |
|
|
|
100.0 |
% |
|
$ |
256,089 |
|
|
|
100.0 |
% |
|
$ |
973,611 |
|
|
|
100.0 |
% |
|
$ |
792,907 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (1) |
|
|
88,038 |
|
|
|
26.3 |
% |
|
|
50,383 |
|
|
|
19.7 |
% |
|
|
257,239 |
|
|
|
26.4 |
% |
|
|
153,441 |
|
|
|
19.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(2) |
|
|
50,241 |
|
|
|
15.0 |
% |
|
|
39,705 |
|
|
|
15.5 |
% |
|
|
150,886 |
|
|
|
15.5 |
% |
|
|
117,482 |
|
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
37,797 |
|
|
|
11.3 |
% |
|
$ |
10,678 |
|
|
|
4.2 |
% |
|
$ |
106,353 |
|
|
|
10.9 |
% |
|
$ |
35,959 |
|
|
|
4.5 |
% |
|
|
|
(1) |
|
Gross profit is calculated as net sales less the cost of materials sold. |
|
(2) |
|
Operating expenses are calculated as total costs and expenses less the cost of materials sold. |
Tons sold decreased 13.4% to 268 thousand in the third quarter of 2008 from 309 thousand in the
third quarter of 2007. Tons sold in the third quarter of 2008 included 238 thousand from direct
sales and 30 thousand from toll processing, compared with 272 thousand direct tons and 37 thousand
toll tons in the comparable period of last year. Tons sold decreased 2.1% to 937 thousand in the
first nine months of 2008 from 957 thousand in the first nine months of 2007. Tons sold in the
first nine months of 2008 included 838 thousand direct tons and 99 thousand from toll processing,
compared with 842 thousand direct tons and 115 thousand toll tons in the comparable period last
year. Tons sold in the fourth quarter of 2008 are expected to be lower than third quarter 2008
levels due to normal seasonal patterns. Additionally, recessionary fears in the United States and
unprecedented volatility in global financial markets could lead to further declines in sales levels
during the fourth quarter of 2008.
Net sales increased 30.9% to $335.2 million in the third quarter of 2008 from $256.1 million in the
third quarter of 2007. Net sales increased 22.8% to $973.6 million in the first nine months of
2008 from $792.9 million in the first nine months of 2007. The increase in net sales was primarily
attributable to higher average selling prices. Total average selling prices for the third quarter
of 2008 increased 51.1% over selling prices in the third quarter of 2007 and increased 21.8% over
the selling prices in the second quarter of 2008.
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As a percentage of net sales, gross profit increased to 26.3% in the third quarter of 2008 from
19.7% in the third quarter of 2007. For the first nine months of 2008, gross profit increased to
26.4% from 19.4% in the first nine months of 2007. Higher selling prices were primarily the result
of higher steel prices from steel producers that were passed through to our customers.
Carbon steel prices have increased significantly during 2008, resulting in higher cost of materials
sold. For the three and nine month periods ended September 30, 2008, the increase in average
selling prices exceeded the increase in average cost of materials sold, resulting in higher gross
profit, as we sold inventory which was acquired earlier in the year, at lower prices. The price of
steel purchased from steel producers began to decrease in the late third quarter of 2008. In the
fourth quarter of 2008, we expect our average selling prices to decrease from third quarter 2008
levels. We also expect our average cost of materials sold in the fourth quarter of 2008 to
increase from third quarter 2008 levels, as we sell inventory which was acquired in the third
quarter at higher price levels. As a result, we expect our average fourth quarter 2008 gross
margin profit to fall from levels recognized in the third quarter of 2008.
Operating expenses in the third quarter of 2008 increased $10.5 million from the third quarter of
2007. Operating expenses in the first nine months of 2008 increased $33.4 million from the first
nine months of 2007. Higher operating expenses in the first nine months of 2008 were primarily
attributable to increased levels of variable incentive compensation associated with higher levels
of profitability (the majority of which was recorded in general and administrative operating
expense captions, with a portion also recorded in the warehouse and processing and selling expense
captions), increased distribution expense resulting from higher fuel costs (recorded in the
distribution expense caption) and increased warehouse and processing expense associated with higher
levels of value-added services provided to our customers. As a percentage of net sales, operating
expenses decreased to 15.0% for the third quarter of 2008 from 15.5% in the comparable 2007 period.
Operating expenses increased to 15.5% for the first nine months of 2008, compared to 14.8% during
the first nine months of 2007.
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Interest and other expense on debt totaled $350 thousand for the third quarter of 2008 compared to
$640 thousand for the third quarter of 2007. Interest and other expense on debt totaled $537
thousand for the first nine months of 2008, compared to $2.5 million for the first nine months of
2007. The decrease in interest expense was primarily attributable to lower average borrowings and
borrowing rates, and the capitalization of interest into certain long-term capital projects in
2008. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, for
the first nine months of 2008 was 4.0% compared to 6.9% in the first nine months of 2007.
For the third quarter of 2008, income before income taxes totaled $37.4 million compared to $10.0
million in the third quarter of 2007. For the first nine months of 2008, income before taxes
totaled $105.8 million, compared to $33.4 million in the first nine months of 2007. An income
tax provision of 36.8% was recorded for the first nine months of 2008, compared to a provision of
38.0% for the first nine months of 2007. We expect the effective tax rate to approximate 37% for
the remainder of 2008. Income taxes paid totaled $35.9 million and $9.1 million for the first nine
months of 2008 and 2007, respectively.
Net income for the third quarter of 2008 totaled $24.2 million or $2.21 per diluted share, compared
to net income of $6.0 million or $.56 per diluted share for the third quarter of 2007. Net income
for the first nine months of 2008 totaled $66.9 million or $6.13 per diluted share, compared to net
income of $20.7 million or $1.93 per diluted share for the first nine months of 2007.
Liquidity and Capital Resources
Our principal capital requirements include funding working capital needs, purchasing, upgrading and
acquiring processing equipment, facilities and other businesses and paying dividends. We use cash
generated from operations, leasing transactions and our revolving credit facility to fund these
requirements.
Working capital at September 30, 2008 totaled $309.0 million, a $117.9 million increase from
December 31, 2007. Significant working capital changes included a $135.1 million increase in
inventories and a $43.4 million increase in accounts receivable, partially offset by a $37.6
million increase in accounts payable (including outstanding checks). The fluctuations in
inventories, accounts receivable and accounts payable are primarily attributable to higher steel
prices and higher net sales.
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For the nine months ended September 30, 2008, we used $50.2 million of net cash for operations, of
which $77.9 million of cash flow was generated from cash earnings and $128.1 million was used for
working capital.
During the first nine months of 2008, we spent $24.4 million on capital expenditures. As of
September 30, 2008, we anticipate an additional $27 million of capital expenditures to be spent
during the next twelve months to further our value-added strategies in both existing and new
facilities, equipment and technologies. In October 2008, we began construction of a new facility
in Sumter, South Carolina. The facility is expected to be completed by the end of the second
quarter of 2009 and involves the construction and equipping of a 110,000 square foot building at a
total investment of approximately $12 million. A new stretcher-leveler cut-to-length line for
our Minneapolis coil facility became operational in the third quarter of 2008. In July 2008, we
purchased land and a building to house a new satellite facility in Dover, Ohio at a total
investment of approximately $5 million. We expect the Dover facility to begin operations in the
fourth quarter of 2008.
We are also continuing the process of implementing a new single information system to replace the
existing systems we currently use. During the first nine months of 2008, we have expensed $2.1
million and capitalized $3.7 million associated with the implementation of the new information
system. Since the project began in 2006, we have expensed $5.7 million and capitalized $7.7
million associated with the implementation of the new information system.
During the first nine months of 2008, we generated $68.5 million from financing activities, which
primarily consisted of $72.9 million of borrowings under our revolving credit facility.
In October 2008, our Board of Directors approved a regular quarterly dividend of $.05 per share.
The dividend is payable on December 15, 2008 to shareholders of record as of December 1, 2008.
During 2008, our Board of Directors approved regular quarterly dividends of $.04 per share, which
were paid on March 17, 2008 and June 16, 2008, and a regular quarterly dividend of $.05 per share
and a special dividend of $1.00 per share, both of which were paid on September 15, 2008. 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.
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Our secured bank-financing agreement 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 $130
million in the aggregate. A May 2008 amendment extended the maturity date of the credit facility
to December 15, 2011, 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 September 30, 2008, we had approximately $39 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.
Substantially higher steel prices in 2008 have resulted in increased working capital levels. We
believe that funds available under our credit facility and lease arrangement proceeds, together
with funds generated from operations, will be sufficient to provide us with the liquidity necessary
to fund anticipated working capital requirements, capital expenditure requirements and our dividend
declarations over at least the next 12 months. Further, we expect that our working capital levels
will decrease in the fourth quarter of 2008, as we decrease our inventory levels and steel prices
decline. 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, or enter into and exit strategic
alliances and joint ventures. Accordingly, the timing and size of our capital requirements are
subject to change as business conditions warrant and opportunities arise.
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, conferences, webcasts, phone calls and conference
calls. Words such as may, will, anticipate, should, intend, expect,
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believe,
estimate, project, plan, potential, and 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
forward-looking statements are subject to certain risks and uncertainties that could cause our
actual results to differ materially from those implied by such statements 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, 2007, and the following:
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general and global business, economic, monetary and political conditions, including
the ongoing global credit crisis; |
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competitive factors such as availability and pricing of steel, industry inventory
levels and rapid fluctuations in customer demand and steel pricing; |
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the cyclicality and volatility within the steel industry; |
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the ability of customers (especially those that may be highly leveraged, those in
the domestic automotive industry and those with inadequate liquidity) to absorb future
steel price increases and/or maintain their credit availability during periods of
rapidly increasing steel prices; |
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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 amounts, timing and successes of our capital investments, including the
construction of a new facility in Sumter, South Carolina and the start-up of our new
satellite facility in Dover, Ohio; |
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the successes of our strategic efforts and initiatives to increase sales volumes,
maintain or improve working capital turnover and free cash flows, reduce costs and debt
levels and improve customer service; |
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the adequacy of our existing information technology and business system software; |
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the successful implementation of our new enterprise-wide information system; |
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the timing and outcome of OLPs efforts and ability to liquidate its remaining
assets; and |
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our ability to pay regular quarterly cash dividends and the amounts and timing of
any future 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 or 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. Higher raw material costs for steel producers could cause the price of steel to
increase. We have witnessed unprecedented steel producer price increases during the first nine
months of 2008 and we expect steel prices to decline during the fourth quarter of 2008. 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. Rising prices also increase the working capital requirements for us and
our customers. Some customers may not have sufficient credit lines or liquidity to absorb
significant increases in the price of steel. Declining or flattening prices could reduce our gross
profit margin percentages to levels that are lower than our historical levels or our 2008 levels.
Higher inventory levels held by us, other steel service centers, or end-use customers could cause
competitive pressures that could also reduce gross profit.
Approximately 8.9% of our net sales in the first nine months of 2008 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, energy and borrowings under our credit facility.
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General inflation has not had a material effect on our financial results during the past two years;
however, we have experienced increased distribution expenses as a result of higher fuel costs.
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, as is expected
during the fourth quarter of 2008, customer demands for lower cost product result in
lower selling prices. Declining steel prices have generally adversely affected our net sales and
net income, while increasing steel prices generally 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 September 30, 2008 rates and, assuming no
change in total debt from September 30, 2008 levels, the additional annual interest expense to us
would be approximately $896 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 has 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 September 30, 2008, our disclosure controls and
procedures were effective.
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There were no changes in our internal control over financial reporting that occurred during the
third quarter of 2008 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, 3, 4 and 5 of this Part II are either inapplicable or are answered in the negative
and are omitted pursuant to the instructions to Part II.
Item 6. Exhibits
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Exhibit |
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Description of Document |
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Reference |
4.1
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Notice of Removal of Rights
Agent and Appointment of
Successor Rights Agent and
Amendment No. 1, dated as of
September 16, 2008, by and
among the Company, National
City Bank and Mellon Investors
Services LLC, to the Rights
Amendment dated as of January
1, 2000.
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Incorporated by reference to
Exhibit 4.1 to Registrants
Form 8-K filed with the
Commission on September 19,
2008 (Commission File No.
0-23320). |
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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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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: November 7, 2008
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By: |
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/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: |
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/s/ Richard T. Marabito
Richard T. Marabito
Chief Financial Officer
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(Principal Financial and Accounting
Officer) |
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