SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
For the transition period from ___________________to____________________
Commission file number 1-12870
COLD METAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-1144965
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 GEORGETOWN DRIVE, SUITE 301, SEWICKLEY, PENNSYLVANIA 15143
(Address of principal executive offices) (Zip Code)
(724) 933-3445
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding as of October 31, 2001: 6,384,491
1
COLD METAL PRODUCTS, INC.
SEC FORM 10-Q
Quarter Ended September 30, 2001
INDEX
Page
No.
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations ...................................................3
Condensed Consolidated Balance Sheets..............................................................4
Condensed Consolidated Statements of Cash Flows....................................................5
Notes to Condensed Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................12
Item 2. Changes in Securities...................................................................12
Item 3. Defaults Upon Senior Securities.........................................................12
Item 4. Submission of Matters to a Vote of Security Holders.....................................12
Item 5. Other Information.......................................................................12
Item 6. Exhibits and Reports on Form 8-K........................................................12
Signatures..............................................................................13
2
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---------------------------------- ----------------------------------
Net sales $40,190 $58,057 $85,011 $118,357
Cost of sales 38,100 52,597 78,983 106,459
---------------------------------- ----------------------------------
Gross profit 2,090 5,460 6,028 11,898
Selling, general and administrative expenses 3,703 4,446 7,434 8,496
Special charges 340 0 340 0
Interest expense 917 1,263 1,896 2,466
---------------------------------- ----------------------------------
(Loss) income before income taxes (2,870) (249) (3,642) 936
Income tax (benefit) expense (1,087) (76) (1,377) 344
---------------------------------- ----------------------------------
Net (loss) income $(1,783) $ (173) $(2,265) $ 592
================================== ==================================
Basic and diluted net (loss) income per share $(0.28) $(0.03) $(0.35) $0.09
================================== ==================================
Weighted average shares outstanding:
Basic 6,404,962 6,391,471 6,401,719 6,391,240
================================== ==================================
Diluted 6,404,962 6,393,017 6,401,719 6,423,175
================================== ==================================
See notes to condensed consolidated financial statements.
3
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
September 30, March 31,
2001 2001
------------------------------------
Assets:
Cash $ 1,442 $1,547
Accounts receivable 24,779 25,239
Inventories 28,128 34,436
Prepaid and other current assets 2,786 3,297
------------------------------------
Total current assets 57,135 64,519
Property, plant and equipment - at cost 79,932 79,387
Less accumulated depreciation (40,799) (38,963)
------------------------------------
Property, plant and equipment - net 39,133 40,424
Other assets 19,421 18,308
------------------------------------
Total assets $115,689 $123,251
====================================
Liabilities and shareholders' equity:
Short-term debt $ 4,156 $ 4,818
Accounts payable 16,301 15,756
Other current liabilities 7,712 8,365
------------------------------------
Total current liabilities 28,169 28,939
Long-term debt 55,144 59,383
Postretirement benefits 18,148 18,432
Shareholders' equity:
Common stock. $.01 par value; 15,000,000 shares authorized;
7,532,250 shares issued 75 75
Additional paid-in capital 25,318 25,302
Retained earnings 1,864 4,129
Accumulated other comprehensive loss (7,466) (7,546)
Less treasury stock, 1,147,759 shares, at cost (5,563) (5,563)
------------------------------------
Total shareholders' equity 14,228 16,497
------------------------------------
Total liabilities and shareholders' equity $115,689 $123,251
====================================
See notes to condensed consolidated financial statements.
4
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
September 30,
2001 2000
----------------------------------
Cash flows from operating activities:
Net (loss) income $ (2,265) $ 592
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 1,993 2,059
Special charges 340 0
Deferred taxes (1,334) 0
Other items 90 44
Changes in operating assets and liabilities:
Accounts receivable 435 75
Inventories 6,323 (3,701)
Prepaid and other assets 468 1,213
Accounts payable 550 (2,881)
Other liabilities (1,203) (3,054)
----------------------------------
Net cash provided by (used in) operating activities 5,397 (5,653)
Cash flows from investing activities:
Additions to property, plant and equipment (514) (2,874)
Acquisition of Alkar 0 (137)
----------------------------------
Net cash used in investing activities (514) (3,011)
Cash flows from financing activities:
Proceeds from revolving credit and term loan facility 59,832 95,255
Payments of revolving credit and term loan facility (63,784) (85,647)
Payment of other debt (948) (870)
Payment of dividends 0 (639)
----------------------------------
Net cash (used in) provided by financing activities (4,900) 8,099
----------------------------------
Net decrease in cash (17) (565)
Effect of translation adjustment (88) (18)
Cash at beginning of period 1,547 1,559
----------------------------------
Cash at end of period $ 1,442 $ 976
==================================
See notes to condensed consolidated financial statements.
5
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. OPINION OF MANAGEMENT
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of Cold
Metal Products, Inc. and Subsidiaries (the Company) as of September 30, 2001 and
March 31, 2001, and the results of its operations and cash flows for the three
and six month periods ended September 30, 2001 and 2000. The results of
operations for the periods ended September 30, 2001 and 2000 are not necessarily
indicative of the results to be expected for the full year.
The condensed consolidated financial statements do not include footnotes
and certain financial information normally presented annually under accounting
principles generally accepted in the United States of America and, therefore,
should be read in conjunction with the audited consolidated financial statements
contained in the Company's annual report on Form 10-K for the year ended March
31, 2001.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 00-10, Accounting for Shipping
and Handling Fees and Costs, which the Company adopted in the fourth quarter of
fiscal 2001. EITF 00-10 provides that all amounts billed to a customer in a sale
transaction related to shipping and handling represent revenues earned for the
goods sold and should be classified as revenue. The Company previously offset
freight revenues against freight expenses within cost of sales. Accordingly,
$934,000 and $1,867,000 of freight billed to customers in the quarter and six
months ended September 30, 2000 has been reclassified to revenues to conform to
the presentations for the quarter and six months ended September 30, 2001. This
reclassification had no effect on the dollar amount of the Company's gross
profit or net income.
The FASB issued Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The adoption
of this standard by the Company on April 1, 2001 did not have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and proscribes that
all business combinations are to be accounted for using one method, the purchase
method, and is required to be adopted for all business combinations initiated
after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB No. 17,
"Intangible Assets," and is effective for all fiscal years beginning after
December 15, 2001. It changes the accounting for goodwill from an amortization
method to an impairment only approach. The Company has not completed its
assessment of the effect of adopting these pronouncements on its financial
statements. Amortization expense associated with
6
goodwill was $73,000, or $0.01 per share, during each of the quarters ended
September 30, 2001 and 2000, and $146,000 during the six months ended September
30, 2001 and 2000, respectively.
The FASB also issued Statement No. 143 Accounting for Asset Retirement
Obligations ("SFAS 143") in June 2001. SFAS 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred, with subsequent adjustments occurring as changes to
estimates of the settlement obligation become known. A corresponding increase in
the carrying amount of the related long-lived asset is recognized and is subject
to depreciation over the remaining useful life of the asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. SFAS 143 is required to be adopted for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
The Company has not completed its assessment of the effect of adopting this
pronouncement on its financial statements.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to
be Disposed of. SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed by sale. SFAS
144 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 is not expected to have a material effect on the
Company's financial statements.
NOTE 3. RESULTS OF FOREIGN OPERATIONS
The Company operates in one business segment, intermediate steel
processing. The Company derived revenues from customers in the United States of
approximately $28 million and $43 million for the quarters ended September 30,
2001 and 2000 and $60 million and $86 million during the six months ended
September 30, 2001 and 2000. The Company had long-lived assets in the United
States totaling approximately $53 million. The remainder of the Company's
revenues and long-lived assets are principally related to customers and
operations in Canada.
NOTE 4. INVENTORIES
September 30, March 31,
2001 2001
-------------------------------------
Raw materials $11,023,000 $16,228,000
Work-in-process 11,558,000 10,174,000
Finished goods 5,547,000 8,034,000
-------------------------------------
Total inventories $28,128,000 $34,436,000
=====================================
NOTE 5. COMPREHENSIVE INCOME
Comprehensive income (loss) is comprised of net income (loss) and foreign
currency translation adjustment for the period. Translation adjustments were
($704,000) and ($257,000) during the quarter ended September 30, 2001 and 2000,
and ($21,000) and ($655,000) for the six months ended September 30, 2001 and
2000, respectively. Total comprehensive income (loss) was ($2.5 million) and
($.4 million) for the quarter ended September 30, 2001 and 2000, and ($2.3
million) and ($.1 million) for the six months ended September 30, 2001 and 2000,
respectively.
7
NOTE 6. DEBT
As of September 30, 2001, the Company's short and long-term debt includes
$42.6 million of borrowings under a committed revolving credit and term-loan
facility that extends to April 2004, and $14.8 million of borrowings under a
term loan. On September 30, 2001 the Company was not in compliance with certain
financial ratios contained in the loan agreements, as amended, that pertain to
minimum net worth and financial leverage measurements. In November 2001 the
Company reached agreements with its senior secured creditors that further amend
these financial covenants to take into consideration prevailing market
conditions. Management of the Company anticipates that it will be able to comply
with the terms of its borrowing agreements, as amended.
NOTE 7. SPECIAL CHARGES
During the last quarter of fiscal 2001, the Company adopted a plan to
permanently idle its New Britain, Connecticut facility and reduce production at
its Hamilton, Ontario facility as part of the efforts to rationalize operating
capacity. The costs associated with reductions in force approximated $900,000.
During the quarter ended September 30, 2001 the Company incurred an additional
$340,0000 charge relating to negotiated severance costs for hourly employees
covered by a collective bargaining agreement. As of September 30, 2001
approximately $450,000 of such costs had been paid, with the remaining amounts
owed expected to be settled during the remainder of this fiscal year.
8
ITEM 2.
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial
condition and results of operations during the periods included in the
accompanying condensed consolidated financial statements and should be read in
conjunction with the annual financial statements.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as a
percentage of net sales:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------- --------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.8 90.6 92.9 89.9
-------------------------- --------------------------
Gross profit 5.2 9.4 7.1 10.1
Selling, general, and administrative expenses 9.2 7.7 8.7 7.2
Special charge 0.8 0.0 0.4 0.0
Interest expense 2.3 2.1 2.2 2.1
-------------------------- --------------------------
(Loss) income before income taxes (7.1) (0.4) (4.3) 0.8
Income tax (benefit) expense (2.7) (0.1) (1.6) 0.3
-------------------------- --------------------------
Net (loss) income (4.4)% (0.3)% (2.7)% 0.5%
========================== ==========================
Net sales for the three months ended September 30, 2001 were $40.2 million,
a decrease of $17.9 million or 30.8% less than the Company's net sales for the
corresponding period ended September 30, 2000. Volume of tons shipped decreased
22.6%, which accounted for $13.1 million of revenue decline, while the effect of
lower priced product mix contributed to a $4.8 million decline in revenues. For
the six months ended September 30, 2001 net sales were $85.0 million, a decrease
of $33.3 million or 28.2% less than the Company's net sales for the
corresponding period ended September 30, 2000. Volume of tons shipped decreased
21.5%, which accounted for $25.4 million of revenue decline, while the effect of
lower priced product mix contributed to a $7.9 million decline in revenues.
Gross profit for the three months ended September 30, 2001 was $2.1 million
or 5.2% of net sales, a $3.4million decrease over the three months ended
September 30, 2000. For the six months ended September 30, 2001, gross profit
was $6.0 million or 7.1% of net sales, which represents a $5.9 million decrease
over the comparable period in the previous fiscal year. The primary factor
contributing to the gross margin decreases for the three month and six month
periods ended September 30, 2001 was the inability to obtain material cost
reductions sufficient to offset selling price reductions in the Company's market
place, as well as the effect of low volume levels on the Company's capacity
utilization and fixed cost operating structure.
Selling, general and administrative costs of $3.7 million for the three
months ended September 30, 2001 represented 9.2% of net sales compared to $4.4
million selling and administrative costs, or 7.7% of net sales for the three
months ended September 30, 2000. For the six months ended September 30, 2001,
selling, general and administrative costs were $7.4 million or 8.7% of net
sales,
9
reflecting a $1.1 million decrease in selling, general and administrative costs
compared to the six months ended September 30, 2000. The decrease in these costs
relates primarily to cost reduction initiatives that centralized certain
activities and reduced personnel. During the quarter ended September 30, 2001,
the Company recognized special charges totaling $340,000, or 0.8% of sales,
associated with the final stages of the idling of its manufacturing facility in
New Britain, Connecticut. These costs related principally to negotiated
severance costs for employees working under the terms of a collective bargaining
agreement.
Interest expense was $0.9 million, or 2.3% of net sales for the three
months ended September 30, 2001 compared to $1.3 million or 2.2% of net sales
for the three months ended September 30, 2000. For the six months ended
September 30, 2001, interest costs declined approximately $0.6 million to $1.9
million or 2.2% of net sales, compared to the corresponding period in the prior
year when such costs totaled $2.5 million, or 2.1% of sales. The reduction in
interest expense is largely attributable to the decline in interest rates taking
effect since early 2001.
Loss before income taxes was $2.9 million, or 7.1% of net sales for the
three months ended September 30, 2001, compared to $0.2 million of loss before
income taxes, or 0.4% of sales for the three months ended September 30, 2000.
For the six months ended September 30, 2001, loss before income taxes totaled
$3.6 million, or 4.3% of net sales, compared to income before taxes of $900,000
for the six months ended September 30, 2000. This performance directly relates
to the significant decline in demand experienced in the weak 2001 economy, and
the impact of the resulting substantial decline in sales volumes.
The Company has recognized an income tax benefit of $1.1 million, or 2.7%
of net sales for the three months ended September 30, 2001 compared to an income
tax benefit of $0.1 million, or .1% of net sales for the three months ended
September 30, 2000. For the six months ended September 30, 2001, the income tax
benefit was $1.4 million, or 1.6% of sales, compared to income tax expense of
$0.3 million, or 0.3% of sales for the corresponding period in the prior fiscal
year.
Net loss for the three months ended September 30, 2001 was $1.8 million, or
$0.28 per share as compared to net loss of $0.2 million, or $.03 per share for
the three months ended September 30, 2000. For the six months ended September
30, 2001, net loss was $2.3 million, or $0.35 per share as compared to net
income of $0.6 million, or $.09 per share for the six months ended September 30,
2000.
Operating results continue to be affected by significant weakness in market
conditions that began in the second quarter of the previous fiscal year. This
continued market weakness has led to pricing declines necessary to maintain
market share that have not been fully offset with favorable material pricing
from its suppliers; however management believes that this situation is temporary
as it evaluates new sources of supply.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 30, 2001, operating activities
provided $5.4 million in cash compared to cash used of $5.7 million for the six
months ended September 30, 2000. Net loss for the first six months of fiscal
2002, adjusted for depreciation and other non-cash charges, used approximately
$1.2 million of cash compared to $2.7 million of cash provided in the
corresponding period of the prior year. However, as a result of working capital
management, including the Company's reduction of inventory by $6.3 million, the
Company was able to generate cash from operations. This compares to the
comparable period in the prior year when an inventory build of $3.7 million and
other working capital changes using $4.7 million contributed to the $5.7 million
net use of cash from operations. The Company also limited its capital investment
to maintenance levels, spending only
10
$0.5 million in the first half of fiscal 2002 compared to capital spending of
$2.9 million in the first half of the prior year.
Net cash flows used by financing activities of $4.9 million for the six
months ended September 30, 2001 were the result of using cash provided by
operations to reduce bank indebtedness. This compares to an increase in
borrowing activity during the first half of the prior year, primarily to finance
inventory growth, prior to the significant downturn in business conditions.
The recent events associated with the terrorist attacks have sent enough
uncertainty through the marketplace that management anticipates will prevail
through the end of calendar 2001. The Company continues to take steps to improve
its operating cost structure by matching production capacity with prevailing
market demand. In addition, the Company expects to continue to reduce its
overall investment in working capital and limit capital expenditures.
Accordingly, during this time the Company will continue to be dependent upon its
credit facilities to support operating and capital asset financing needs. The
Company's primary lending arrangement provides up to a maximum of $70 million of
borrowing availability, of which $42.6 million was outstanding and $9.2 million
of borrowing availability existed at September 30, 2001.
FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, but are not limited to, general
business and economic conditions, competitive factors such as availability and
pricing of steel, changes in customer demand, work stoppages by customers,
potential equipment malfunctions, changes in borrowing terms, or other risks and
uncertainties discussed in the Company's 10K report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is in the areas of possible
fluctuations in interest rates as they relate to its variable rate debt and
Canadian dollar currency rate fluctuations as they relate to U.S. dollar debt
carried on the books of the Canadian subsidiary. The Company generally does not
enter into derivative financial investments for trading or speculation purposes.
The Company would be sensitive to a 10% market rate change in interest rate in
the approximate annual after-tax amount of $100,000. The Company would be
sensitive to a 10% change in Canadian currency exchange rate in the approximate
after-tax amount of $100,000. As a result, the Company believes that its market
risk exposure is not material to the company's financial position, liquidity or
results of operations.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that are material to
its financial position.
ITEM 2. CHANGE IN SECURITIES
There have been no changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Note 6 to the Financial Statements included as Item 1 of Part I of this
Report is incorporated by reference as Item 3 of this Part II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders for 2000 was held on July
19, 2001.
(b) See Item (c) below
(c) At the Annual Meeting of Shareholders the following matters were
voted:
1. Seven directors were elected to serve for a term of one year by
the following vote:
Share Voted Share Voted
"For" "Withheld"
------------------------------
R. Quintus Anderson 6,237,247 5,008
Wilbur J. Berner 6,237,247 5,008
Claude F. Kronk 6,237,247 5,008
Heidi A. Nauleau 6,237,247 5,008
Robert D. Neary 6,237,247 5,008
Peter B. Sullivan 6,237,247 5,008
Raymond P. Torok 6,236,997 5,258
2. The selection of Deloitte & Touche LLP as independent auditors
for the Company was confirmed, ratified, and approved by a vote
of 6, 235,907 shares for 4,648 shares against and 1,700 shares
abstaining.
ITEM 5. OTHER INFORMATION
There is no other information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Number and Description - None
(b) Reports on Form 8-K - None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cold Metal Products, Inc.
(Registrant)
/s/ Raymond P. Torok
-------------------------------------------
Raymond P. Torok
President, Chief Executive Officer
/s/ Joseph C. Horvath
-------------------------------------------
Joseph C. Horvath
Vice-President, Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14, 2001
13