**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------|----------------------------------------------------------------------------------------------------------|
|       | **For the fiscal  quarter ended September 29, 2003**                                                |
|       |                                                                                                     |
| **OR**     |
|       |                                                                                                     |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 1-7537**

 

**EARLE M.JORGENSEN COMPANY**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                                                                                                                                           |   | **95-0886610**                        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                                                                                                                        |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                                                                                   |   |                                  |
| **10650 South Alameda, Lynwood, California**                                                                                                                                                           |   | **90262**                             |
| (Address of principal executive  offices)                                                                                                                                                              |   | (Zip Code)                            |
|                                                                                                                                                                                                   |   |                                  |
| Registrant’s telephone number:                         **(323) 567-1122** |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  ý

 

State the aggregate market value of the voting stock held by non-affiliatesof the registrant.   None 

 

Outstanding common stock, par value $.01 per share, at October 31,2003 - 128 shares

 

 

----

 

**EARLEM. JORGENSEN COMPANY**

**TABLEOF CONTENTS**

 
| PART I     | -      | FINANCIAL INFORMATION                                                                                                                                                    |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                     |
| Item 1.    |   | Financial Statements                                                                                                                                                     |
|       |   |                                                                                                                                                                     |
|       |   | Consolidated Condensed Balance Sheets at  September 29, 2003 and March 31, 2003                                                                                |
|       |   |                                                                                                                                                                     |
|       |   | Consolidated Condensed Statements of  Operations and Comprehensive Income for the Three Months and Six Months Ended  September 29, 2003 and September 27, 2002 |
|       |   |                                                                                                                                                                     |
|       |   | Consolidated Condensed Statements of Cash  Flows for the Six Months Ended September 29, 2003 and September 27,  2002                                           |
|       |   |                                                                                                                                                                     |
|       |   | Notes to Consolidated Condensed Financial  Statements                                                                                                                    |
|       |   |                                                                                                                                                                     |
| Item 2.    |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                              |
|       |   |                                                                                                                                                                     |
| Item 3.    |   | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                              |
|       |   |                                                                                                                                                                     |
| Item 4.    |   | Controls and Procedures                                                                                                                                                  |
|       |   |                                                                                                                                                                     |
| PART II    | -      | OTHER INFORMATION                                                                                                                                                        |
|       |   |                                                                                                                                                                     |
| SIGNATURES |

 

1

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.**           **FINANCIAL STATEMENTS**

 

**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**(Dollars inthousands, except per share data)**

 
|                                                                                                                                                     |   | **September 29,  2003** |    | **March 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|--------------------------|--------|
|                                                                                                                                                     |   | **(Unaudited)**              |    |                     |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| **ASSETS**                                                                                                                                               |   |                         |    |                     |   |
| Current assets:                                                                                                                                          |   |                         |    |                     |   |
| Cash                                                                                                                                                     |   | $                            | 13,389  |                     | $      | 20,030 |   |
| Accounts receivable, less allowance for  doubtful accounts of $451 and $390 at September 29, 2003 and  March 31, 2003, respectively            |   | 104,584                      |    | 97,292                   |   |
| Inventories                                                                                                                                              |   | 223,606                      |    | 213,590                  |   |
| Other current assets                                                                                                                                     |   | 8,643                        |    | 6,402                    |   |
| Total current assets                                                                                                                                     |   | 350,222                      |    | 337,314                  |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| Property, plant and equipment, net of  accumulated depreciation of $87,352 and $81,859 at September 29, 2003  and March 31, 2003, respectively |   | 111,612                      |    | 113,037                  |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| Net cash surrender value of life insurance  policies                                                                                                     |   | 41,471                       |    | 31,007                   |   |
| Debt issue costs, net of accumulated  amortization                                                                                                       |   | 7,571                        |    | 8,232                    |   |
| Other assets                                                                                                                                             |   | 1,152                        |    | 1,151                    |   |
| Total assets                                                                                                                                             |   | $                            | 512,028 |                     | $      | 490,741 |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                            |   |                         |    |                     |   |
| Current liabilities:                                                                                                                                     |   |                         |    |                     |   |
| Accounts payable                                                                                                                                         |   | $                            | 117,717 |                     | $      | 119,815 |   |
| Accrued employee compensation and related  taxes                                                                                                         |   | 9,115                        |    | 12,185                   |   |
| Accrued employee benefits                                                                                                                                |   | 12,167                       |    | 10,751                   |   |
| Accrued interest                                                                                                                                         |   | 26,103                       |    | 16,186                   |   |
| Other accrued liabilities                                                                                                                                |   | 7,610                        |    | 6,392                    |   |
| Deferred income taxes                                                                                                                                    |   | 19,450                       |    | 19,450                   |   |
| Current portion of long-term debt                                                                                                                        |   | 3,740                        |    | 2,330                    |   |
| Total current liabilities                                                                                                                                |   | 195,902                      |    | 187,109                  |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| Long term debt                                                                                                                                           |   | 334,951                      |    | 328,207                  |   |
| Deferred income taxes                                                                                                                                    |   | 15,936                       |    | 15,936                   |   |
| Other long-term liabilities                                                                                                                              |   | 7,838                        |    | 7,505                    |   |
|                                                                                                                                                     |   |                         |    |                     |   |
| Stockholder’s equity (deficit):                                                                                                                     |   |                         |    |                     |   |
| Preferred stock, $.01 par value; 200 shares  authorized and unissued                                                                                     |   | —                       |    | —                   |   |
| Common stock, $.01 par value; 2,800 shares  authorized;128 shares issued and outstanding                                                                 |   | —                       |    | —                   |   |
| Capital in excess of par value                                                                                                                           |   | 35,213                       |    | 35,284                   |   |
| Accumulated other comprehensive loss                                                                                                                     |   | (2,441                       | )       | (3,884                   | )      |
| Accumulated deficit                                                                                                                                      |   | (75,371                      | )       | (79,416                  | )      |
| Total stockholder’s equity (deficit)                                                                                                                |   | (42,599                      | )       | (48,016                  | )      |
| Total liabilities and stockholder’s equity  (deficit)                                                                                               |   | $                            | 512,028 |                     | $      | 490,741 |   |

 

See accompanying notes to consolidated financial statements.

 

2

----

 

**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS****AND COMPREHENSIVE INCOME**

**(Dollars inthousands)**

 
|                                   |   | **Three  Months Ended**      |    | **Six Months  Ended**        |       |
|----------------------------------------|--------|------------------------------|---------|------------------------------|------------|
|                                   |   | **September 29,  2003** |    | **September 27,  2002** |       | **September 29,  2003** |   | **September 27,  2002** |   |
|                                   |   | **(Unaudited)**              |    | **(Unaudited)**              | ** ** |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Revenues                               |   | $                            | 231,216 |                         | $          | 225,231 |   | $ | 469,516 |   | $ | 450,364 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Cost of sales                          |   | 166,976                      |    | 161,619                      |       | 338,414 |   | 323,486 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Gross profit                           |   | 64,240                       |    | 63,612                       |       | 131,102 |   | 126,878 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Expenses:                              |   |                         |    |                         |       |   |   |   |   |
| Warehouse and delivery                 |   | 32,302                       |    | 31,387                       |       | 64,826 |   | 61,925 |   |
| Selling                                |   | 8,215                        |    | 8,052                        |       | 16,632 |   | 15,993 |   |
| General and administrative             |   | 9,732                        |    | 10,324                       |       | 19,412 |   | 20,453 |   |
| Loss on early retirement of debt       |   | —                       |    | —                       |       | — |   | 12,278 |   |
| Total expenses                         |   | 50,249                       |    | 49,763                       |       | 100,870 |   | 110,649 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Income from operations                 |   | 13,991                       |    | 13,849                       |       | 30,232 |   | 16,229 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Interest expense, net                  |   | 12,583                       |    | 12,189                       |       | 25,210 |   | 22,557 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Income (loss) before income taxes      |   | 1,408                        |    | 1,660                        |       | 5,022 |   | (6,328 | ) |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Income tax expense                     |   | 158                          |    | 104                          |       | 977 |   | 452 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Net income (loss)                      |   | 1,250                        |    | 1,556                        |       | 4,045 |   | (6,780 | ) |
|                                   |   |                         |    |                         |       |   |   |   |   |
| **Other comprehensive  income (loss)** |   | (105                         | )       | (608                         | )          | 1,443 |   | 91 |   |
|                                   |   |                         |    |                         |       |   |   |   |   |
| Comprehensive income (loss)            |   | $                            | 1,145   |                         | $          | 948 |   | $ | 5,488 |   | $ | (6,689 | ) |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

**(Dollars inthousands)**

 
|                                                                                                |   | **Six Months Ended**         |       |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                |   | **September 29,  2003** |       | **September 27,  2002** |   |
|                                                                                                |   | **(Unaudited)**              | ** ** |
| OPERATING ACTIVITIES:                                                                               |   |                         |       |   |   |
| Net income (loss)                                                                                   |   | $                            | 4,045      |   | $ | (6,780 | ) |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by operating activities: |   |                         |       |   |   |
| Loss on early retirement of debt                                                                    |   | —                       |       | 12,278 |   |
| Depreciation and amortization                                                                       |   | 5,645                        |       | 5,610 |   |
| Amortization of debt issue costs                                                                    |   | 661                          |       | 816 |   |
| Accrued postretirement benefits                                                                     |   | 375                          |       | 240 |   |
| Gain on sale of property, plant and  equipment                                                      |   | (1,165                       | )          | (24 | ) |
| Provision for bad debts                                                                             |   | 1,250                        |       | 820 |   |
| Increase in cash surrender value of life  insurance over premiums paid                              |   | (10,606                      | )          | (8,305 | ) |
| Changes in operating assets and  liabilities:                                                       |   |                         |       |   |   |
| Accounts receivable                                                                                 |   | (8,542                       | )          | (15,433 | ) |
| Inventories                                                                                         |   | (10,016                      | )          | (27,736 | ) |
| Other current assets                                                                                |   | 918                          |       | (434 | ) |
| Accounts payable and accrued liabilities  and expenses                                              |   | 7,383                        |       | 42,486 |   |
| Non-trade receivable                                                                                |   | (1,323                       | )          | (308 | ) |
| Other                                                                                               |   | (566                         | )          | 300 |   |
| Net cash (used in) provided by operating  activities                                                |   | (11,941                      | )          | 3,530 |   |
|                                                                                                |   |                         |       |   |   |
| INVESTING ACTIVITIES:                                                                               |   |                         |       |   |   |
| Additions to property, plant and equipment                                                          |   | (4,293                       | )          | (9,167 | ) |
| Proceeds from the sale of property, plant  and equipment                                            |   | 1,351                        |       | 44 |   |
| Premiums paid on life insurance policies                                                            |   | (1,198                       | )          | (1,198 | ) |
| Proceeds from redemption of life insurance  policies                                                |   | 1,340                        |       | — |   |
| Net cash used in investing activities                                                               |   | (2,800                       | )          | (10,321 | ) |
|                                                                                                |   |                         |       |   |   |
| FINANCING ACTIVITIES:                                                                               |   |                         |       |   |   |
| Net borrowings (payments) under revolving  loan agreements                                          |   | 9,554                        |       | (2,184 | ) |
| Proceeds from issuance of senior debt                                                               |   | —                       |       | 250,000 |   |
| Repayments of term loan and senior debt                                                             |   | —                       |       | (201,000 | ) |
| Payments of debt issue costs                                                                        |   | —                       |       | (10,554 | ) |
| Payments made upon early retirement of debt                                                         |   | —                       |       | (9,596 | ) |
| Payments on other debt                                                                              |   | (1,400                       | )          | (1,400 | ) |
| Cash dividend to parent                                                                             |   | (71                          | )          | (25,008 | ) |
| Net cash provided by financing activities                                                           |   | 8,083                        |       | 258 |   |
| Effect of exchange rate changes on cash                                                             |   | 17                           |       | 4 |   |
| NET DECREASE IN CASH                                                                                |   | (6,641                       | )          | (6,529 | ) |
| Cash at beginning of period                                                                         |   | 20,030                       |       | 21,300 |   |
|                                                                                                |   |                         |       |   |   |
| CASH AT END OF PERIOD                                                                               |   | $                            | 13,389     |   | $ | 14,771 |   |

 

See accompanying notes to consolidated financial statements.

 

4

----

 

**EARLE M. JORGENSENCOMPANY**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL****STATEMENTS(Unaudited)**

**SEPTEMBER 29,2003**

 

1.               Basis of Presentation and Consolidation

 

The Earle M. Jorgensen Company (the“Company”) is a wholly owned subsidiary of Earle M. Jorgensen Holding Company,Inc. (“Holding”).

 

The accompanying unaudited consolidated condensedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, including Earle M. Jorgensen (Canada) Inc. and Stainless Insurance Ltd., a captive insurancesubsidiary.  All significantintercompany accounts and transactions have been eliminated.

 

In the opinion of management, theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with the instructions to Form 10-Q and include alladjustments (consisting of normally recurring accruals) and disclosuresconsidered necessary for a fair presentation of the consolidated financialposition of the Company at September 29, 2003 and the consolidated resultsof operations and comprehensive income and cash flows for the three months andsix months ended September 29, 2003 and September 27,  2002. The consolidated results of operationsand comprehensive income for the six months ended September 29, 2003 arenot necessarily indicative of the results to be expected for the full year. Forfurther information, refer to the consolidated financial statements andfootnotes included in the Company’s Annual Report on Form 10-K for the yearended March 31, 2003.

 

Certain prior year amounts have beenreclassified to conform to the current year presentation.

 

2.               Other Comprehensive Income

 

Other comprehensive income included foreigncurrency translation income (loss) of $(105,000) and $(608,000) for the threemonths ended September 29, 2003 and September 27, 2002, respectively,and $1,443,000 and $91,000 for the six months ended September 29, 2003 andSeptember 27, 2002, respectively.

 

3.               Reclassification of Loss on EarlyRetirement of Debt

 

Effective April 1, 2003, the Companyadopted SFAS No. 145, “Rescission of SFAS Statements No. 4, 44, and 64, Amendmentof SFAS No. 13, and Technical Corrections.” The provisions of SFAS No. 145relating to the rescission of SFAS No. 4, require that any gain or loss onextinguishment of debt that was classified as an extraordinary item in priorperiods presented be reclassified and included in operating expenses if it doesnot meet the criteria in APB Opinion No. 30, “Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions.”Accordingly, the Company has reclassified a loss of $12,278,000 related toearly retirement of debt that was previously reported as an extraordinary itemin the first quarter ended June 27, 2002.

 

4.               Stock-Based Compensation

 

Stock options granted to directors, officersand other key employees of the Company under Holding’s stock option planadopted in January 1997 are accounted for in accordance with APB No. 25.As all stock option grants are made at fair value on the date of grant, theCompany recognizes no compensation cost. Had compensation expense for stock options granted been recorded basedon the fair value method under SFAS No. 123, as amended by SFAS No. 148“Accounting for Stock-Based Compensation-Transition and Disclosure”, the effecton the Company’s net income for the six months ended September 29, 2003and September 27, 2002 would have been as follows:

 

5

----

 
|                                                                                                          |   | **Six Months Ended**         |      |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                          |   | **September 29,  2003** |      | **September 27,  2002** |   |
| Net income (loss), as reported                                                                                |   | $                            | 4,045,000 |   | $ | (6,780,000 | ) |
| Deduct: total stock-based compensation  expense determined using fair value method for all awards, net of tax |   | (49,000                      | )         | (77,000 | ) |
| Net income (loss), as adjusted                                                                                |   | $                            | 3,996,000 |   | $ | (6,857,000 | ) |

 

5.               Impact of Recently Issued AccountingStandards

 

In May 2003, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” whichestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equities.The provisions of SFAS No. 150 are effective for financial instruments enteredinto or modified after May 31, 2003. For nonpublic companies (under whichthe Company is classified, as defined by SFAS No. 150), application iseffective in the fiscal period beginning after December 15, 2003. TheCompany is in the process of assessing the effect of adopting SFAS No. 150.

 

In April 2003, FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingTransactions,” which amends and clarifies financial accounting and reportingfor derivative instruments, including those embedded in other contracts, and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  The provisionsof SFAS No. 149 are effective for contracts entered into or modified afterJune 30, 2003. As of September 29, 2003, the Company had no suchinstruments.

 

In January 2003, FASB issued FASBInterpretation No. 46 (“FIN No. 46”) “Consolidation of Variable InterestEntities” to expand upon and strengthen existing accounting guidance thataddresses when a company should include in its financial statements the assets,liabilities and activities of another entity. The disclosure requirements inthis interpretation are effective for financial statements of interim andannual periods ending after January 31, 2003. This statement did not have aneffect on the accompanying consolidated condensed financial statements as ofand for the periods ending September 29, 2003.

 

During June 2002, the FASB issued SFASNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities,”which nullifies Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”   SFAS No. 146 requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred. SFAS No. 146 is effective for exit and disposalactivities that are initiated after December 31, 2002. The adoption ofthis statement did not have an effect on the consolidated condensed financialstatements as of September 29, 2003. The Company anticipates an additionalexpense of approximately $500,000 in the third quarter of fiscal 2004 for therelocation of its corporate headquarters from Brea, California to Lynwood, California,in accordance with the provisions of this statement.

 

6

----

 

### **Item 2.**                 MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

# **Forward-LookingInformation**

 

This Report on Form 10-Q includes both historical and forward-lookingstatements. We have based these forward-looking statements on our currentexpectations and projections about future results. When we use words in thisdocument, such as “anticipates,” “intends,” “plans,” “believes,” “estimates,”“expects,” “will,” “should,” and similar expressions, we do so to identifyforward-looking statements. Such statements are intended to operate as “forwardlooking statements” of the kind permitted by the Private Securities LitigationReform Act of 1995, incorporated in Section 27A of the Securities Act andSection 21E of the Securities Exchange Act of 1934, as amended. Thatlegislation protects such predictive statements by creating a “safe harbor”from liability in the event that a particular prediction does not turn out asanticipated.

 

While we always intend to express our best judgment when we makestatements about what we believe will occur in the future, and although we basethese statements on assumptions that we believe to be reasonable when made,these forward-looking statements are not a guarantee of performance, and youshould not place undue reliance on such statements. Forward-looking statementsare subject to many uncertainties and other variable circumstances, many of whichare outside of our control, that could cause our actual results and experienceto differ materially from those anticipated in these forward-lookingstatements. These forward-looking statements are affected by risks,uncertainties and assumptions that we make, which are more fully discussed inour Registration Statement on Form S-4 filed on July 3, 2002, and ourother periodic reports filed with the Securities and Exchange Commission. Theserisks and uncertainties include, but are not limited to, economic, competitive,legal and governmental factors over which Earle M. Jorgensen Company has nocontrol.  Accordingly, there is noassurance that the expectations reflected in such forward-looking statementswill be realized.  We undertake noobligation to provide revisions to any forward-looking statements shouldcircumstances change, except as otherwise required by securities and otherapplicable laws.

 

**Overview**

 

The metals service center industry continuesto be adversely affected by weak economic conditions in the United States.  Customers served by metals service centershave reduced their inventories and production activities due to weakened demandand the uncertainty of an economic recovery.  Pricing for metal products remains volatile due to competitive pressuresand changes in availability of inventories held by service centers or suppliedby both domestic and foreign mills.

 

Our tonnage shipped during the first six-months of fiscal 2004increased slightly when compared to the same period in fiscal 2003 due toincreasing demand in certain key industries we serve, particularly in marketsserved by our Canadian operations.  Webelieve we are gaining market share through our core products strategy andexcellent customer service, including our “on-time or free” delivery guaranty,and from productivity gains and other benefits realized from the expansion andautomation of our Chicago facility, which was completed in June 2003.

 

However, we continue to be challenged to further increase our marketshare and revenues due to competitive forces and overall weak demand in the United States for our core productsand services sold to customers in key industries we serve.  We believe that our well-balancedinventories, valued-added capabilities, aggressive marketing and unequaledcustomer service have and will continue to differentiate us in the marketplaceand will position us to outperform the industry when an economic recoveryoccurs or as general economic conditions improve.  We do not expect a significant economic recovery to occur oreconomic conditions to dramatically improve during the remainder of fiscal2004.

 

7

----

 

The following table provides a percentage breakdown of domestic salesto our ten largest industries for the three months and six months endedSeptember 29, 2003 and September 27, 2002.

 
|                                        |   | **Three  Months Ended**      |   | **Six  Months Ended**        |   |
|---------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                        |   | **September 29,  2003** |   | **September 27,  2002** |   | **September 29,  2003** |   | **September 27,  2002** |   |
|                                        |   |                         |   |                         |   |   |   |   |   |
| Machine Tools                               |   | 27.9                         | %      | 28.0                         | %      | 27.3 | % | 27.3 | % |
| Transportation                              |   | 8.1                          |   | 8.2                          |   | 8.1 |   | 8.4 |   |
| Industrial Equipment                        |   | 7.9                          |   | 7.7                          |   | 7.8 |   | 7.9 |   |
| Metal Service Centers & Wholesale Trade |   | 6.2                          |   | 6.2                          |   | 6.1 |   | 6.3 |   |
| Fluid Power                                 |   | 5.9                          |   | 5.8                          |   | 5.9 |   | 5.8 |   |
| Fabricated Metal                            |   | 5.6                          |   | 5.9                          |   | 5.7 |   | 6.2 |   |
| Construction/Farm Equipment                 |   | 4.6                          |   | 4.8                          |   | 5.0 |   | 5.4 |   |
| Oil, Gas & Energy                       |   | 6.1                          |   | 6.1                          |   | 6.2 |   | 6.0 |   |
| Power Transmission Equipment                |   | 3.6                          |   | 3.2                          |   | 3.7 |   | 3.2 |   |
| Screw Machine Products                      |   | 4.7                          |   | 5.2                          |   | 4.8 |   | 5.1 |   |
| All Other Industries                        |   | 19.4                         |   | 18.9                         |   | 19.4 |   | 18.4 |   |
| Total                                       |   | 100                          | %      | 100                          | %      | 100 | % | 100 | % |

 

We continue to focus on improving business processes and reducing costsand believe our results reflect the benefits realized from improvedproductivity and from our ability to maintain cost structures that are alignedwith the prevailing levels of business. Our operating margin for the first six months of fiscal 2004 was 6.4%,compared to 6.3% for the same period in fiscal 2003, excluding the loss fromearly retirement of debt.  As ofSeptember 29, 2003, our total number of employees was 1,608, compared to1,674 as of March 31, 2003 and 1,713 as of September 27, 2002.

 

**Statement of Operations and Other Data**

 

All information contained in the following table was derived from thehistorical financial statements for the three and six months endedSeptember 29, 2003 and September 27, 2002 included elsewhere herein.

 
| **(dollars in thousands)**                                 |   | **Three  Months Ended**      |    | **Six Months  Ended** |   |
|------------------------------------------------------------|--------|------------------------------|---------|-----------------------|--------|
|                                                       |   | **September 29,  2003** |    | **%**                 |   | **September 27,  2002** |   | **%** |   | **September 29,  2003** |   | **%** |   | **September 27,  2002** |   | **%** |   |
| **Statement of Operations  Data:**                         |   |                         |    |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                   |   | $                            | 231,216 |                  | 100.0  | % | $ | 225,231 |   | 100.0 | % | $ | 469,516 |   | 100.0 | % | $ | 450,364 |   | 100.0 | % |
| Gross Profit                                               |   | 64,240                       |    | 27.8                  | %      | 63,612 |   | 28.2 | % | 131,102 |   | 27.9 | % | 126,878 |   | 28.2 | % |
| Operating expenses excluding the loss on                   |   |                         |    |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| retirement of debt                                         |   | 50,249                       |    | 21.7                  | %      | 49,763 |   | 22.1 | % | 100,870 |   | 21.5 | % | 98,371 |   | 21.8 | % |
| Loss on early retirement of debt                           |   | —                       |    |                  |   | — |   |   |   | — |   |   |   | 12,278 |   | 2.7 | % |
| Income from operations                                     |   | 13,991                       |    | 6.1                   | %      | 13,849 |   | 6.1 | % | 30,232 |   | 6.4 | % | 16,229 |   | 3.6 | % |
| Net interest expense                                       |   | 12,583                       |    | 5.4                   | %      | 12,189 |   | 5.4 | % | 25,210 |   | 5.4 | % | 22,557 |   | 5.0 | % |
| Net income (loss)                                          |   | 1,250                        |    | 0.5                   | %      | 1,556 |   | 0.7 | % | 4,045 |   | 0.9 | % | (6,780 | ) | -1.5 | % |
|                                                       |   |                         |    |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Data:**                                            |   |                         |    |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| EBITDA(1)                                                  |   | $                            | 16,836  |                  |   |   | $ | 16,718 |   |   |   | $ | 35,877 |   |   |   | $ | 21,839 |   |   |   |
| Capital expenditures                                       |   | 2,394                        |    |                  |   | 4,586 |   |   |   | 4,293 |   |   |   | 9,167 |   |   |   |
| Net cash flows provided by (used in)  operating activities |   | 11,132                       |    |                  |   | 8,554 |   |   |   | (11,941 | ) |   |   | 3,530 |   |   |   |
| Net cash flows used in investing activities                |   | (1,725                       | )       |                  |   | (4,565 | ) |   |   | (2,800 | ) |   |   | (10,321 | ) |   |   |
| Net cash flows provided by (used in)  financing activities |   | (10,029                      | )       |                  |   | (3,647 | ) |   |   | 8,083 |   |   |   | 258 |   |   |   |

 

8

----

 

----

(1)          “EBITDA”represents net income (loss) before net interest expense, provision for incometaxes and depreciation and amortization.Consistent with Item 10(e) of Regulation S-K, our EBITDA has not been adjustedto exclude any other non-cash charges or liabilities or any recurring ornon-recurring items, such as accruals for postretirement benefits aggregating$187 and $120 for the three-months ended September 29, 2003 andSeptember 27, 2002, respectively, and $375 and $240 for the six-monthsended September 29, 2003 and September 27, 2002, respectively.  In addition, our EBITDA for the six-monthsended September 27, 2002 has not been adjusted for a loss of $12,278related to early retirement of debt.  Webelieve that EBITDA is commonly used as a measure of performance for companiesin our industry and is frequently used by analysts, investors, lenders andother interested parties to evaluate a company’s financial performance and itsability to incur and service debt.   OurEBITDA is used by management as a performance measure to assess our financialresults in connection with determining incentive compensation, and is also usedby the independent appraisal firm in connection with their annual valuation ofour equity.  While providing usefulinformation, our EBITDA should not be considered in isolation or as asubstitute for consolidated statement of operations and cash flows dataprepared in accordance with accounting principles generally accepted in theUnited States, and should not be construed as an indication of a company’soperating performance or as a measure of liquidity.

 
| **(dollars in thousands)**    |   | **Three  Months Ended**      |   | **Six Months  Ended**        |   |
|-------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                          |   | **September 29,  2003** |   | **September 27,  2002** |   | **September 29,  2003** |   | **September 27,  2002** |   |
| Reconciliation of EBITDA:     |   |                         |   |                         |   |   |   |   |   |
| Net income (loss)             |   | $                            | 1,250  |                         | $      | 1,556 |   | $ | 4,045 |   | $ | (6,780 | ) |
| Depreciation and amortization |   | 2,845                        |   | 2,869                        |   | 5,645 |   | 5,610 |   |
| Net interest expense          |   | 12,583                       |   | 12,189                       |   | 25,210 |   | 22,557 |   |
| Provision for income taxes    |   | 158                          |   | 104                          |   | 977 |   | 452 |   |
| EBITDA                        |   | $                            | 16,836 |                         | $      | 16,718 |   | $ | 35,877 |   | $ | 21,839 |   |
| EBITDA Margin%                |   | 7.3                          | %      | 7.4                          | %      | 7.6 | % | 4.8 | % |

 

**Resultsof Operations - Three Months Ended September 29, 2003 Compared To ThreeMonths Ended September 27, 2002**

 

*Revenues*. Revenues for the second quarter offiscal 2004 increased 2.7% to $231.2 million, from $225.2 million for the sameperiod in fiscal 2003.  Revenues fromour domestic operations increased 1.7% to $216.6 million in the second quarterof fiscal 2004, from $213.0 million for the same period in fiscal 2003,reflecting an increase in tonnage shipped and higher average selling priceswhen compared to the second quarter of fiscal 2003.  The increase was due to stronger demand for product sold tocustomers in certain key industries we serve, including power transmissionequipment, industrial equipment and primary metal, mills and forgings, offsetby decreased shipments to customers in fabricated metal, screw machine productsand construction and farm equipment. Revenues from our Canadian operations increased 19.7% to $14.6 millionin the second quarter of fiscal 2004 from $12.2 million in the same period infiscal 2003, due to increased capacity and efficiencies from newer facilities,effective marketing of core products and services and overall stronger economicconditions and favorable currency conversion rates.

 

*Gross Profit*. Gross profit for the secondquarter of fiscal 2004 increased 0.9% to $64.2 million, from $63.6 million forthe same period in fiscal 2003, while consolidated gross margins were 27.8% and28.2%, respectively. There was no LIFO adjustment for fiscal 2004 or fiscal2003. Gross profit from our Canadian operations was $3.6 million and grossmargin was 24.7% during the second quarter of fiscal 2004, compared to $2.6million and 21.3%, respectively, for the same period in fiscal 2003. Grossmargin from domestic operations was 28.0% for the second quarter of fiscal 2004versus 28.6% for the same period in fiscal 2003.

 

*Expenses*. Total operating expenses for thesecond quarter of fiscal 2004 increased 0.8% to $50.2 million (21.7% ofrevenues), from $49.8 million (22.1% of revenues) for the same period in fiscal2003.  The increase in operatingexpenses generally reflects the changes in variable expenses impacted by highertonnage shipped, rising prices for certain goods and services, particularlyhealthcare insurance and fuel, and an increase in expenses associated withadded capacity, including depreciation, lease, maintenance, utilities, andproperty tax and insurance expenses. These higher expenses were partially offset by income attributable toour corporate-owned life insurance programs and benefits realized from ongoingcost reduction efforts and improved productivity, including those benefitsassociated with the recently completed expansion and automation of our Chicagofacility.

 

Warehouse and delivery expenses for the second quarter of fiscal 2004increased 2.9% to $32.3 million (14.0% of revenues), from $31.4 million (13.9%of revenues) for the same period in fiscal 2003. The increase resultedprimarily from higher costs for healthcare insurance, higher fuel and freightexpenses and higher costs associated with the maintenance of warehouseequipment offset by lower wages as the result of the automation of our Chicagofacility.

 

9

----

 

Selling expenses for the second quarter of fiscal 2004 increased 1.2%to $8.2 million (3.5% of revenues), from $8.1 million (3.6% of revenues) forthe same period in fiscal 2003. The increase resulted from higher healthcareinsurance costs and vehicle expenses offset by lower accruals for incentivecompensation.

 

General and administrative expenses for the second quarter of fiscal2004 decreased 5.8% to $9.7 million (4.2% of revenues), from $10.3 million(4.6% of revenues) for the same period in fiscal 2003. The decrease resulted fromincome attributable to our corporate-owned life insurance programs, and lowerdepreciation offset by higher professional services expense, bad debt andgeneral insurance costs. Charges of $0.7 million included in the second quarterof fiscal 2004 were associated with headcount reductions.

 

*Net Interest Expense*. Net interest expense was$12.6 million during the second quarter of fiscal 2004 and $12.2 million duringthe same period in fiscal 2003.  Suchamounts include interest related to our long-term debt and borrowings againstthe cash surrender value of corporate-owned life insurance policies wemaintain, and the amortization of debt issue costs.

 

Interest expense and amortization of debt issue costs related to ouroutstanding indebtedness (excluding those borrowings against the cash surrendervalue of our corporate-owned life insurance policies) totaled $7.7 million forthe second quarter of fiscal 2004 and compared to $7.9 million for the sameperiod in fiscal 2003.  Our averageoutstanding indebtedness during the second quarter of fiscal 2004 was $362.4million, compared to $347.8 million for the same period in fiscal 2003. Theincrease in average outstanding indebtedness was due to the issuance of $250million of our 9 3/4% seniorsecured notes on May 22, 2002 to redeem and repay aggregate indebtednessof $201 million represented by our 91⁄2% senior notes and term loan and pay adividend to our parent that was applied to our parent’s outstandingindebtedness.  The weighted averageinterest rate on our indebtedness was 7.93% during the second quarter of fiscal2004 versus 8.35% during the same period in fiscal 2003. During the threemonths ended September 29, 2003 and September 27, 2002, borrowingsunder our credit facility averaged $105.3 million and $89.6 million, and theaverage interest rate on such borrowings was 3.96% and 4.58%, respectively.

 

Interest expense associated with borrowings against the cash surrendervalue of corporate-owned life insurance policies we maintain was $4.9 millionduring the second quarter of fiscal 2004, compared to $4.3 million for the sameperiod in fiscal 2003.

 

The interest rates on our existing senior secured notes and on theborrowings under the corporate-owned life insurance policies are fixed at 9.75%and 11.76%, respectively.  The interestrate on our credit facility is floating (3.69% as of September 29, 2003).

 

*Income Taxes*. Income tax expense for thesecond quarter of fiscal 2004 and 2003 included provisions for state franchiseand foreign income taxes.  Federal taxprovisions for the second quarter of fiscal 2004 and 2003 were offset byrecognition of tax benefits associated with our loss carryforwards.

 

**Resultsof Operations - Six Months Ended September 29, 2003 Compared To Six MonthsEnded September 27, 2002**

 

*Revenues*. Revenues for the first six months offiscal 2004 increased 4.2% to $469.5 million, from $450.4 million for the sameperiod in fiscal 2003.  Revenues fromour domestic operations increased 3.2% to $439.2 million in the first sixmonths of fiscal 2004, from $425.4 million for the same period in fiscal 2003.The increase in domestic revenues reflects a 3% increase in tonnage shippedattributable to stronger demand for our product sold to customers in certainkey industries we serve, including oil and gas services and power transmissionequipment. Revenues from our Canadian operations increased 22.1% to $30.4million in the first six months of fiscal 2004 from $24.9 million in the sameperiod in fiscal 2003, due to increased capacity and efficiencies from newerfacilities, effective marketing of core products and overall stronger economicconditions and favorable currency conversion rates.

 

*Gross Profit*. Gross profit for the first sixmonths of fiscal 2004 increased 3.3% to $131.1 million, from $126.9 million forthe same period in fiscal 2003, while consolidated gross margins were 27.9% and28.2%, respectively. Gross profit for the first six months of fiscal 2004 andfiscal 2003 included no LIFO adjustment. Gross profit from our Canadian operations was $7.3 million and grossmargin was 23.9% during the first six months of fiscal 2004, compared to $5.3million and 21.3%, respectively, for the same period in fiscal 2003. Grossmargin from our domestic operations was 28.2% for the first six months of fiscal2004 compared to 28.6% for the same period in fiscal 2003.

 

10

----

 

*Expenses*. Total operating expenses for thefirst six months of fiscal 2004 decreased 8.8% to $100.9 million (21.5% ofrevenues), from $110.6 million (24.6% of revenues) for the same period infiscal 2003. Fiscal 2003 includes a loss of $12.3 million resulting from earlytermination of debt. Excluding the loss on early termination of debt, theincrease in operating expenses includes higher costs for healthcare insurance,professional services, fuel and freight, bad debt and expenses associated withour corporate-owned life insurance programs offset by income attributable toour corporate-owned life insurance programs, and sale of surplus property.

 

Warehouse and delivery expenses for the first six months of fiscal 2004increased 4.7% to $64.8 million (13.8% of revenues), from $61.9 million (13.7%of revenues) for the same period in fiscal 2003. The increase resulted fromhigher healthcare insurance costs, fuel and freight and equipment lease anddepreciation. As of September 29, 2003, 980 employees were involved inwarehouse and delivery activities, compared to 1,058 as of September 27,2002.

 

Selling expenses for the first six months of fiscal 2004 increased 3.8%to $16.6 million (3.5% of revenues), from $16.0 million (3.6% of revenues) forthe same period in fiscal 2003. The increase resulted from higher medicalinsurance and compensation costs.

 

General and administrative expenses for the first six months of fiscal2004 decreased 5.4% to $19.4 million (4.1% of revenues) from $20.5 million(4.6% of revenues), excluding the loss of $12.3 million from early terminationof debt in fiscal 2003, for the same period in fiscal 2003. The decreaseresulted from income recognized in connection with our corporate-owned lifeinsurance policies and a gain on sale of surplus property offset by highergeneral insurance, professional services and bad debt expenses.

 

*Net Interest Expense*. Net interest expense was$25.2 million during the first six months of fiscal 2004 and $22.6 millionduring the same period in fiscal 2003. Such amounts include interest related to our long-term debt andborrowings against the cash surrender value of the corporate-owned lifeinsurance policies we maintain, and the amortization of debt issue costs.

 

Interest expense and amortization of debt issue costs related to ouroutstanding indebtedness (excluding those borrowings against the cash surrendervalue of our corporate-owned life insurance policies) totaled $15.4 million forthe first six months of fiscal 2004, compared to $13.9 million for the sameperiod in fiscal 2003.  The increase ininterest expense is the result of the larger principal amount and higherinterest rate on our existing 9 3/4% seniorsecured notes as compared to our 91⁄2% senior notes and term loan which wereredeemed and repaid in the first six months of fiscal 2003.  Our average outstanding indebtedness duringthe first six months of fiscal 2004 was $435.7 million, compared to $351.8million for the same period in fiscal 2003. The increase in average outstandingindebtedness was due to the issuance of $250 million of our 9 3/4% senior secured notes on May 22,2002 to redeem and repay aggregate indebtedness of $201 million represented byour 91⁄2% senior notes and term loan.  Theweighted average interest rate on our indebtedness was 6.61% during the firstsix months of fiscal 2004 versus 8.01% during the same period in fiscal 2003. Duringthe six months ended September 29, 2003 and September 27, 2002,borrowings under our credit facility averaged $102.9 million and $91.2 million,respectively, and the average interest rate on such borrowings was 4.08% and5.01%, respectively.

 

Interest expense associated with borrowings against the cash surrendervalue of corporate-owned life insurance policies we maintain was $9.8 millionduring the first six months of 2004, compared to $8.7 million for the sameperiod in fiscal 2003.

 

The interest rates on our existing senior secured notes and on theborrowings under the life insurance policies are fixed at 9.75% and 11.76%,respectively.  The interest rate on ourcredit facility is floating (3.69% as of September 29, 2003).

 

*Income Taxes*. Income tax expense for the firstsix months of fiscal 2004 and 2003 included provisions for state franchise andforeign income taxes.  Federal taxprovisions for the first six months of fiscal 2004 and 2003 were offset byrecognition of tax benefits associated with our loss carryforwards.

 

**Liquidityand Capital Resources**

 

Working capital increased to $154.3 million at September 29, 2003from $150.2 million at March 31, 2003, primarily as the result of higherinventories.  During the six months offiscal 2004 our primary source of cash consisted of borrowings under our creditfacility, $9.6 million.  Our primaryuses of cash included funding operating actvities, $11.9 million, and capitalexpenditures, $4.3 million.

 

11

----

 

Cash used in operating activities was $11.9 million in the first sixmonths of fiscal 2004, compared to cash provided by operating activities of$3.5 million in the same period of fiscal 2003.   The change was primarily attributable to timing of payments tovendors relative to changes in working capital assets during the respectiveperiods.

 

For fiscal 2004, we have planned approximately $10.0 million of capitalexpenditures to be financed from internally generated funds and borrowingsunder our credit facility. Approximately $8.4 million is for facilityimprovements and expansions (including a commitment of approximately $2.3million for the Chicago project) and routine replacement of machinery andequipment, and $1.6 million is for further additions and enhancements to ourmanagement information systems. During the first six months of fiscal 2004, wespent $4.3 million for planned capital expenditures, including $1.5 million forthe Chicago project, which became fully operational in June 2003.

 

Our ongoing cash requirements for debt service and related obligationsare expected to consist primarily of interest payments under our creditfacility, interest payments on our senior secured notes, dividend payments toHolding in connection with the required repurchase of its capital stock fromdeparting stockholders pursuant to Holding’s Stockholders’ Agreement and ourstock bonus plan, capital expenditures and principal and interest payments onour industrial revenue bonds.  As ofSeptember 29, 2003, principal payments required by our outstanding industrialrevenue bond indebtedness amount to $2.1 million in fiscal year 2005, $1.2million in fiscal year 2006, $0.7 million in fiscal years 2007 and 2008, and$1.5 million in the aggregate thereafter through fiscal year 2011. Our creditfacility will mature in April 2006 and we will not be required to make anyprincipal payments on our senior secured notes until their maturity in fiscalyear 2012.

 

As of September 29, 2003, we were in compliance with all covenantsunder our credit facility, including maintenance of minimum working capital anda fixed-charge coverage ratio.  However, based on our current expectations for the remainder of fiscal2004, including the seasonal fluctuations in our industry during the next twoquarters and our belief that current economic conditions will not dramaticallyimprove during the remainder of fiscal 2004, there exists a possibility that wemay not remain in compliance with our fixed-charge ratio covenant in theforeseeable future.  While we fullyexpect that we would receive an amendment to the credit facility or a waiver ofthe covenant from our bank syndicate, no assurance of receipt can be given.

 

As of September 29, 2003, our primary sources of liquidity wereavailable borrowings of $100.3 million under our credit facility, availableborrowings of approximately $18.4 million against certain life insurancepolicies we maintain and internally generated funds.  Borrowings under our credit facility are secured by domesticinventory and accounts receivable. The availability of borrowings under ourcredit facility is determined by the prevailing levels of those assets.  Our 9 3/4% seniorsecured notes are secured by a first priority lien (subject to permitted liens)on substantially all of our current and future acquired unencumbered realproperty, plant and equipment.  The lifeinsurance policy loans are secured by the cash surrender value of the policies,are non-recourse, and bear interest at a rate 0.5% greater than the dividendincome rate on the policies.  For thefirst six months of fiscal 2004, dividend income earned under the policiestotaled $7.9 million, compared to $8.3 million for the same period in fiscalyear 2003 and is reported as an offset to general and administrative expensesin the accompanying statements of operations. As of September 29, 2003,there was approximately $41.5 million of cash surrender value in all lifeinsurance policies we maintain, net of borrowings.

 

In addition, our Canadian subsidiary has available its own creditfacilities of up to CDN$8.6 million, including a revolving credit facility ofCDN$5.1 million, a term financial instruments facility of CDN$3.0 million to beused for hedging foreign currency and rate fluctuations, and a special creditfacility of CDN$0.5 million for letters of guaranty in connection with a leasefor a newly constructed facility in Toronto. As of September 29, 2003,CDN$3.2 million (USD$2.3 million) was outstanding under the revolving creditfacility and a letter of guaranty for CDN$0.5 million (USD$0.4 million) was issued.  None of the term financial instrumentsfacility was used as of September 29, 2003.

 

Excluding the changes in borrowings under our credit facility, ourcommitments and contractual obligations as of September 29, 2003 did notmaterially change from those disclosed in our Annual Report on Form 10-K forthe year ended March 31, 2003.

 

We believe our sources of liquidity and capital resources aresufficient to meet all currently anticipated operating cash requirements,including debt service payments on our credit facility and 9 3/4% seniorsecured notes prior to their scheduled maturities in fiscal years 2007 and2012, respectively; however, we anticipate that it will be necessary to replaceor to refinance all or a portion of our credit facility and the senior securednotes prior to their respective maturities, although there can be no assuranceon what terms, if any, we would be able to obtain such refinancing oradditional financing. Our ability to make interest payments on our creditfacility and the senior secured notes will be

 

12

----

 

dependent on maintaining thelevel of performance reflected in the last twelve months, which will bedependent on a number of factors, many of which are beyond our control, and thecontinued availability of revolving credit borrowings.

 

**Critical Accounting Policies**

 

Management’s Discussion and Analysis of Financial Position and Resultsof Operations discusses our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses andrelated disclosure of contingent assets and liabilities.  Actual results could differ significantlyfrom those estimates and judgments under different assumptions andconditions.  Management believes thecritical accounting policies and areas that require the most significantjudgments and estimates to be used in the preparation of the consolidatedfinancial statements are revenue recognition, allowance for doubtful accounts,inventory reserves, pension and other postretirement benefits, insurancereserves, incentive compensation, contingencies and income tax accounting.   These critical accounting policies, whichare fully discussed in our Annual Report on Form 10-K for the year endedMarch 31, 2003, have been consistently applied to the consolidatedcondensed financial statements included herein. There have been no materialchanges made to the critical accounting policies during the periods presentedin the accompanying consolidated condensed financial statements.

 

**Item 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

In the ordinary course of business, we are exposed to various marketrisk factors caused by changes in commodity prices, interest rates and foreigncurrency exchange rates.  We do not usefinancial instruments or enter into hedging transactions for speculative ortrading purposes with respect to managing these market risks.  However, we have used and will continue toevaluate the use of financial instruments to reduce our exposure to higherinterest costs during periods of rising interest rates.

 

At September 29, 2003 and March 31, 2003, no such financialinstruments existed.  Our exposure tochanging interest rates is limited to our revolving credit facility such thatour results of operations and cash flows during the first six months of fiscal2004 would have been impacted by approximately $0.5 million for each 1%increase or decrease in the applicable interest rate.

 

Our exposure to market risk for changes in foreign currency exchangerates is limited to our Canadian operations and the Canadian dollar.  Changes in the exchange rate of the Canadiandollar have not and are not expected to have a material impact on our resultsof operations and cash flows.  Weestimate that a 10% change in the average exchange rate of the Canadian dollarduring the first six months of fiscal 2004 would have impacted our results ofoperations by approximately $0.2 million. Due to our product mix and the frequency of our buying and sellingactivities over normal business cycles, our exposure to changes in commodityprices is not considered material.   

 

**Item 4. CONTROLS AND PROCEDURES**

 

As of the end of each fiscal quarter, an evaluation is carried out byour Chief Executive Officer and Chief Financial Officer, with the assistance ofother members of management, of the effectiveness of the design and operationof disclosure controls and procedures (as defined in Rule 15d-14(c) underthe Securities Exchange Act of 1934). Based upon such evaluation as ofSeptember 29, 2003, the Chief Executive Officer and Chief FinancialOfficer concluded that the disclosure controls and procedures were effective inensuring that all material information required to be disclosed in the reportsfiled or submitted by the Company under the Securities Exchange Act of 1934, asamended, is gathered, analyzed and reported or otherwise made known to them asappropriate to allow timely decisions regarding required disclosure. Indesigning and evaluating such disclosure controls and procedures, ourmanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurances of achieving thedesired control objectives and they necessarily were required to apply judgmentin evaluating the cost-benefit relationship of possible controls andprocedures. We believe that our disclosure controls and procedures provide suchreasonable assurance.  There have beenno significant changes in our internal controls, or in other factors that couldsignificantly affect these controls, subsequent to the date the evaluation wascompleted.

 

13

----

 

# **PART II - OTHER INFORMATION**

# ** **

**Item 5.****        EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)          Exhibits
| 10.1 |   | First Amendment to the Earle M. Jorgensen  Employee Stock Ownership Trust dated November      ,  2003.                             |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Financial Reports by Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
| 31.2 |   | Certification of Financial Reports by Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
| 32.1 |   | Certification of Financial Reports by Chief  Executive Officer and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

(b)         Reports on Form 8-K

We furnished a report on Form 8-K on October 22, 2003 under Item12 announcing our results of operations and financial position as of and forthe three months and six-month periods ended September 29, 2003.

 

14

----

 

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 theundersigned hereunto duly authorized.

 
|                         |   | EARLE M. JORGENSEN COMPANY                                                                          |
|------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                         |   |                                                                                                |
|                         |   |                                                                                                |
|                         |   | /s/ Maurice S. Nelson, Jr.                                                                          |   |
| Date: November 13, 2003 |   | Maurice S. Nelson, Jr.                                                                              |
|                         |   | President, Chief Executive Officer and  Chief Operating Officer                                     |
|                         |   |                                                                                                |
|                         |   |                                                                                                |
|                         |   | /s/ William S. Johnson                                                                              |   |
| Date: November 13, 2003 |   | William S. Johnson                                                                                  |
|                         |   | Vice President, Chief Financial Officer and  Secretary (Principal Financial and Accounting Officer) |
|                              |        |                                                                                                     |  |  |

 

15

----