** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****                 ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal quarter ended June 30, 2003**

 

**OR**

 

**o****                 ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES AND EXCHANGE ACT OF 1934**

 

**Commissionfile number: 1-7537**

 

**EARLE M.JORGENSEN COMPANY**

**(Exactname of registrant as specified in its charter)**

** **

| **Delaware**                                                    |   | **95-0886610**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **3050 East Birch Street, Brea, California**                    |   | **92821**                             |
| (Address of principal executive  offices)                       |   | (Zip Code)                            |

 

Registrant’s telephone number:  **(714)579-8823**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that registrantwas required to file such reports), and (2) has been subject to such filing requirementsfor the 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

 

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

 

 

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**EARLEM. JORGENSEN COMPANY**

#### **TABLE OF CONTENTS**

 
| PART   I  | -      | FINANCIAL INFORMATION                                                                                                                  |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                   |
| Item 1.             |   | Financial Statements                                                                                                                   |
|                |   |                                                                                                                                   |
|                |   | Consolidated Condensed Balance Sheets at  June 30, 2003 and March 31, 2003                                                             |
|                |   |                                                                                                                                   |
|                |   | Consolidated Condensed Statements of  Operations and Comprehensive Income   for the Three Months Ended June 30, 2003 and June 27, 2002 |
|                |   |                                                                                                                                   |
|                |   | Consolidated Condensed Statements of Cash  Flows   for the Three Months Ended June 30, 2003 and June 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**

 

**Item1.**        **FINANCIAL STATEMENTS**

 

**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

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

** **
|                                                                                                                                      |   | **June 30, 2003** |    | **March  31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|---------------------|--------|
|                                                                                                                                      |   | **(Unaudited)**   |    |                |   |
|                                                                                                                                      |   |              |    |                |   |
| **ASSETS**                                                                                                                                |   |              |    |                |   |
| Current assets:                                                                                                                           |   |              |    |                |   |
| Cash                                                                                                                                      |   | $                 | 14,009  |                | $      | 20,030 |   |
| Accounts receivable, less allowance for  doubtful accounts of $690 and $390 at June 30, 2003 and March 31, 2003,  respectively       |   | 104,068           |    | 97,292              |   |
| Inventories                                                                                                                               |   | 227,745           |    | 213,590             |   |
| Other current assets                                                                                                                      |   | 6,916             |    | 6,402               |   |
| Total current assets                                                                                                                      |   | 352,738           |    | 337,314             |   |
|                                                                                                                                      |   |              |    |                |   |
| Property, plant and equipment, net of  accumulated depreciation of $84,586 and $81,859 at June 30, 2003 and March  31, 2003, respectively |   | 112,066           |    | 113,037             |   |
| Net cash surrender value of life insurance  policies                                                                                      |   | 36,815            |    | 31,007              |   |
| Debt issue costs, net of accumulated  amortization                                                                                        |   | 7,902             |    | 8,232               |   |
| Other assets                                                                                                                              |   | 1,169             |    | 1,151               |   |
| Total assets                                                                                                                              |   | $                 | 510,690 |                | $      | 490,741 |   |
|                                                                                                                                      |   |              |    |                |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                             |   |              |    |                |   |
| Current liabilities:                                                                                                                      |   |              |    |                |   |
| Accounts payable                                                                                                                          |   | $                 | 121,916 |                | $      | 119,815 |   |
| Accrued employee compensation and related  taxes                                                                                          |   | 7,834             |    | 12,185              |   |
| Accrued employee benefits                                                                                                                 |   | 11,747            |    | 14,150              |   |
| Accrued interest                                                                                                                          |   | 14,879            |    | 16,186              |   |
| Other accrued liabilities                                                                                                                 |   | 6,276             |    | 2,993               |   |
| Deferred income taxes                                                                                                                     |   | 19,450            |    | 19,450              |   |
| Current portion of long-term debt                                                                                                         |   | 3,850             |    | 2,330               |   |
| Total current liabilities                                                                                                                 |   | 185,952           |    | 187,109             |   |
|                                                                                                                                      |   |              |    |                |   |
| Long term debt                                                                                                                            |   | 344,799           |    | 328,207             |   |
| Deferred income taxes                                                                                                                     |   | 15,936            |    | 15,936              |   |
| Other long-term liabilities                                                                                                               |   | 7,677             |    | 7,505               |   |
|                                                                                                                                      |   |              |    |                |   |
| Stockholder’s equity:                                                                                                                |   |              |    |                |   |
| 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                                                                                                            |   | 35,284            |    | 35,284              |   |
| Accumulated other comprehensive loss                                                                                                      |   | (2,336            | )       | (3,884              | )      |
| Accumulated deficit                                                                                                                       |   | (76,622           | )       | (79,416             | )      |
| Total stockholder’s deficit                                                                                                          |   | (43,674           | )       | (48,016             | )      |
| Total liabilities and stockholder’s equity                                                                                           |   | $                 | 510,690 |                | $      | 490,741 |   |

 

See accompanying notes to consolidated condensed financial statements.

 

2

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**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**(Dollars inthousands)**

** **
|                              |   | **Three Months  Ended** |    |
|-----------------------------------|--------|-------------------------|---------|
|                              |   | **June 30,  2003**      |    | **June 27,  2002** |   |
|                              |   | **(unaudited)**         |    |
|                              |   |                    |    |   |   |
| Revenues                          |   | $                       | 238,299 |   | $ | 225,133 |   |
|                              |   |                    |    |   |   |
| Cost of sales                     |   | 171,437                 |    | 161,867 |   |
|                              |   |                    |    |   |   |
| Gross profit                      |   | 66,862                  |    | 63,266 |   |
|                              |   |                    |    |   |   |
| Expenses:                         |   |                    |    |   |   |
| Warehouse and delivery            |   | 32,524                  |    | 30,538 |   |
| Selling                           |   | 8,418                   |    | 7,941 |   |
| General and administrative        |   | 9,679                   |    | 10,128 |   |
| Loss on early retirement of debt  |   | —                  |    | 12,278 |   |
| Total expenses                    |   | 50,621                  |    | 60,885 |   |
|                              |   |                    |    |   |   |
| Income from operations            |   | 16,241                  |    | 2,381 |   |
|                              |   |                    |    |   |   |
| Interest expense, net             |   | 12,628                  |    | 10,368 |   |
|                              |   |                    |    |   |   |
| Income (loss) before income taxes |   | 3,613                   |    | (7,987 | ) |
|                              |   |                    |    |   |   |
| Income tax expense                |   | 819                     |    | 348 |   |
|                              |   |                    |    |   |   |
| Net income (loss)                 |   | 2,794                   |    | (8,335 | ) |
|                              |   |                    |    |   |   |
| Other comprehensive income        |   | 1,548                   |    | 3,624 |   |
|                              |   |                    |    |   |   |
| Comprehensive income (loss)       |   | $                       | 4,342   |   | $ | (4,711 | ) |

 

See accompanying notes to consolidated condensed financial statements.

 

3

----

 

**EARLE M. JORGENSENCOMPANY**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**(Dollars inthousands)**

** **
|                                                                                  |   | **Three Months  Ended** |   |
|---------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                  |   | **June 30,  2003**      |   | **June 27,  2002** |   |
|                                                                                  |   | **(Unaudited)**         |   |
| **Operating  activities**:                                                            |   |                    |   |   |   |
| Net income (loss)                                                                     |   | $                       | 2,794  |   | $ | (8,335 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |   |                    |   |   |   |
| Loss on early retirement of debt                                                      |   | —                  |   | 12,278 |   |
| Depreciation and amortization                                                         |   | 2,800                   |   | 2,741 |   |
| Amortization of debt issue costs                                                      |   | 330                     |   | 452 |   |
| Accrued postretirement benefits                                                       |   | 188                     |   | 120 |   |
| Deferred income taxes                                                                 |   | —                  |   | 105 |   |
| Gain on sale of property, plant and  equipment                                        |   | (1,137                  | )      | (17 | ) |
| Provision for bad debts                                                               |   | 574                     |   | 409 |   |
| Increase in cash  surrender value of life insurance over premiums paid                |   | (5,318                  | )      | (4,152 | ) |
| Changes in  operating assets and liabilities:                                         |   |                    |   |   |   |
| Accounts  receivable                                                                  |   | (7,350                  | )      | (13,927 | ) |
| Inventories                                                                           |   | (14,155                 | )      | (11,725 | ) |
| Other current  assets                                                                 |   | (845                    | )      | (495 | ) |
| Accounts payable and accrued liabilities  and expenses                                |   | (2,677                  | )      | 16,926 |   |
| Non-trade  receivable                                                                 |   | 331                     |   | (136 | ) |
| Other                                                                                 |   | 1,392                   |   | 732 |   |
| Net cash used in  operating activities                                                |   | (23,073                 | )      | (5,024 | ) |
|                                                                                  |   |                    |   |   |   |
| **Investing  activities**:                                                            |   |                    |   |   |   |
| Additions to  property, plant and equipment                                           |   | (1,899                  | )      | (4,581 | ) |
| Proceeds from the sale of property, plant  and equipment                              |   | 1,314                   |   | 23 |   |
| Premiums paid on  life insurance policies                                             |   | (1,198                  | )      | (1,198 | ) |
| Proceeds from redemption of life insurance  policies                                  |   | 708                     |   | — |   |
| Net cash used in investing activities                                                 |   | (1,075                  | )      | (5,756 | ) |
|                                                                                  |   |                    |   |   |   |
| **Financing  activities**:                                                            |   |                    |   |   |   |
| Net borrowings under revolving loan  agreements                                       |   | 18,612                  |   | 162 |   |
| Proceeds from issuance of senior debt                                                 |   | —                  |   | 250,000 |   |
| Repayments of term loan and senior debt                                               |   | —                  |   | (201,000 | ) |
| Payments of debt issue costs                                                          |   | —                  |   | (10,161 | ) |
| Payments made upon early retirement of debt                                           |   | —                  |   | (9,596 | ) |
| Payments on other debt                                                                |   | (500                    | )      | (500 | ) |
| Cash dividend to parent                                                               |   | —                  |   | (25,000 | ) |
| Net cash provided by financing activities                                             |   | 18,112                  |   | 3,905 |   |
| Effect of  exchange rate changes on cash                                              |   | 15                      |   | 7 |   |
| Net decrease in  cash                                                                 |   | (6,021                  | )      | (6,868 | ) |
| Cash at beginning of period                                                           |   | 20,030                  |   | 21,300 |   |
|                                                                                  |   |                    |   |   |   |
| Cash at end of period                                                                 |   | $                       | 14,009 |   | $ | 14,432 |   |

 

See accompanying notes to consolidated condensed financial statements.

 

4

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**EARLE M. JORGENSENCOMPANY**

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

**June 30, 2003**

 

1.                                       Basisof 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 consolidatedcondensed financial statements include the accounts of the Company and itswholly owned subsidiaries, including Earle M. Jorgensen  (Canada) Inc. and Stainless Insurance Ltd.,a captive insurance subsidiary.  Allsignificant intercompany accounts and transactions have been eliminated.

 

In the opinion of management, theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and include all adjustments (consisting of normally recurringaccruals) and disclosures considered necessary for a fair presentation of theconsolidated financial position of the Company at June 30, 2003 and theconsolidated results of operations and comprehensive income and cash flows forthe three months ended June 30, 2003 and June 27,  2002. The consolidated results of operations and comprehensiveincome for the three months ended June 30, 2003 are not necessarily indicativeof the results to be expected for the full year. For further information, referto the consolidated financial statements and footnotes included in theCompany’s Annual Report on Form 10-K for the year ended March 31, 2003.

 

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

 

2.                                       OtherComprehensive Income

 

Other comprehensive income included foreigncurrency translation income of $1,548,000 and $699,000 for the three monthsended June 30, 2003 and June 27, 2002, respectively.  In addition, the three months ended June 27, 2002 included thereversal of a loss of $2,925,000 relating to the Company’s interest rate swapagreement that was terminated in connection with a refinancing transaction inMay 2002.

 

3.                                       Reclassificationof Loss on Early Retirement of Debt

 

Effective April 1, 2003, the Company adoptedSFAS No. 145, “Rescission of SFAS Statements No. 4, 44, and 64, Amendment ofSFAS 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-BasedCompensation

 

Stock options granted to directors, officersand other key employees of the Company under the Parent’s stock option planadopted in January 1997 are accounted for in accordance with APB No. 25. As allstock option grants are made at fair value on the date of grant, nocompensation cost is recognized by the Company.  Had compensation expense for stock options granted been recordedbased on the fair value method under SFAS No. 123, the effect on the Company’snet income for the three months ended June 30, 2003 and June 27, 2002 wouldhave been as follows:

 
|                                                                                                          |   | **Three Months Ended** |      |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                                                          |   | **June 30, 2003**      |      | **June 27, 2002** |   |
| Net income (loss), as reported                                                                                |   | $                      | 2,794,000 |   | $ | (8,335,000 | ) |
| Deduct: total stock-based compensation  expense determined using fair value method for all awards, net of tax |   | (31,000                | )         | (42,000 | ) |
| Net income (loss), as adjusted                                                                                |   | $                      | 2,763,000 |   | $ | (8,377,000 | ) |

 

5

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5.                                       Impactof Recently Issued Accounting Standards

 

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 to determine how certain financial instruments aremeasured and classified in the statement of financial position.  The provisions of SFAS No. 150 are effectivefor financial instruments entered into or modified after May 31, 2003.  This statement did not have an effect on theaccompanying consolidated condensed financial statements.

 

In April 2003, FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Transaction,”which amends and clarifies financial accounting and reporting for derivative instruments,including those embedded in other contracts, and for hedging activities underSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The provisions of SFAS No.149 are effective for contracts entered into or modified after June 30,2003.  This statement did not have aneffect on the accompanying consolidated condensed financial statements.

 

### **Item 2**.                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

# **Forward-Looking Information**

 

This Report onForm 10-Q includes both historical and forward-looking statements. We havebased these forward-looking statements on our current expectations andprojections about future results. When we use words in this document, such as“anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” “will,”“should,” and similar expressions, we do so to identify forward-lookingstatements. Such statements are intended to operate as “forward lookingstatements” of the kind permitted by the Private Securities Litigation ReformAct of 1995, incorporated in Section 27A of the Securities Act and Section 21Eof the Securities Exchange Act of 1934, as amended. That legislation protectssuch predictive statements by creating a “safe harbor” from liability in the eventthat a particular prediction does not turn out as anticipated.

 

While wealways intend to express our best judgment when we make statements about whatwe believe will occur in the future, and although we base these statements onassumptions that we believe to be reasonable when made, these forward-lookingstatements are not a guarantee of performance, and you should not place unduereliance on such statements. Forward-looking statements are subject to manyuncertainties and other variable circumstances, many of which are outside ofour control, that could cause our actual results and experience to differmaterially from those anticipated in these forward-looking statements. Theseforward-looking statements are affected by risks, uncertainties and assumptionsthat we make, which are more fully discussed in our Registration Statement onForm S-4 filed on July 3, 2002, and our periodic reports filed with theSecurities and Exchange Commission. These risks and uncertainties include, butare not limited to, economic, competitive, legal and governmental factors overwhich Earle M. Jorgensen Company has no control.  Accordingly, there is no assurance that the expectationsreflected in such forward-looking statements will be realized.  We undertake no obligation to providerevisions to any forward-looking statements should circumstances change, exceptas otherwise required by securities and other applicable laws.

 

# **Overview**

 

The metals service center industry continues to be adversely affectedby weak economic conditions in the United States.  Customers served by metals service centers have reduced theirinventories and production activities due to weakened demand and theuncertainty 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.

 

6

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Our tonnageshipped during the first quarter of fiscal 2004 increased slightly whencompared to the same period in fiscal 2003 due to increasing demand in certainkey industries we serve, particularly in markets served by our Canadianoperations.  We believe we are gainingmarket share through our core products strategy and excellent customer service,including our “on-time or free” delivery guaranty, and from productivity gainsand other benefits realized from the expansion and automation of our Chicagofacility, which was completed in June 2003.

 

However, wecontinue to be challenged to further increase our market share due tocompetitive forces and overall weak demand in the United States for our core products and services sold to customersin key industries we serve.  We believethat our well-balanced inventories, valued-added capabilities, aggressivemarketing and unequaled customer service have and will continue todifferentiate us in the marketplace and will position us to outperform theindustry when an economic recovery occurs or as general economic conditionsimprove.  We do not expect a significanteconomic recovery to occur or economic conditions to dramatically improveduring the remainder of fiscal 2004.

 

The followingtable provides a percentage breakdown of tonnage sold to our ten largest keyindustries for the three months ended June 30, 2003 and June 27, 2002:

 
|                                        |   | **Three Months Ended** |   |
|---------------------------------------------|--------|------------------------|--------|
|                                        |   | **June 30,  2003**     |   | **June 27,  2002** |   |
| Machine Tools                               |   | 26.8                   | %      | 26.7 | % |
| Industrial Equipment                        |   | 8.8                    |   | 8.9 |   |
| Construction/Farm Equipment                 |   | 8.1                    |   | 8.6 |   |
| Transportation                              |   | 7.8                    |   | 8.1 |   |
| Metal Service Centers & Wholesale Trade |   | 6.2                    |   | 6.4 |   |
| Fabricated Metal                            |   | 6.2                    |   | 7.0 |   |
| Screw Machine Products                      |   | 5.8                    |   | 5.9 |   |
| Fluid Power                                 |   | 4.9                    |   | 4.6 |   |
| Oil, Gas & Energy                       |   | 4.3                    |   | 4.0 |   |
| Power Transmission Equipment                |   | 3.9                    |   | 3.3 |   |
| All Other Industries                        |   | 17.2                   |   | 16.5 |   |
| Total                                       |   | 100.0                  | %      | 100.0 | % |

 

We continue tofocus on improving business processes and reducing costs and believe ourresults reflect the benefits realized from improved productivity and from ourability to maintain cost structures that are aligned with the prevailing levelsof business.  Our operating margin forthe first three months of fiscal 2004 was 6.8%, compared to 6.5% for the sameperiod in fiscal 2003, excluding the loss from early retirement of debt.  As of June 30, 2003, our total number ofemployees was 1,653, compared to 1,674 as of March 31, 2003 and 1,734 as ofJune 27, 2002.

 

**Statement of Operations and Other Data**

 

Allinformation contained in the following table was derived from the historicalfinancial statements for the first three months ended June 30, 2003 and June27, 2002 included elsewhere herein.

 
|                                                              |   | **Three Months Ended,** |    |
|-------------------------------------------------------------------|--------|-------------------------|---------|
| **(dollars in  thousands)**                                       |   | **June 30,  2003**      |    | **%** |   | **June 27,  2002** |   | **%** |   |
| **Statement of Operations Data:**                                 |   |                    |    |   |   |   |   |   |   |
| Revenues                                                          |   | $                       | 238,299 |   | 100.0 | % | $ | 225,133 |   | 100.0 | % |
| Gross profit                                                      |   | 66,862                  |    | 28.1 |   | 63,266 |   | 28.1 |   |
| Operating expensesexcluding the loss on early retirement of  debt |   | 50,621                  |    | 21.2 |   | 48,607 |   | 21.6 |   |
| Loss on early retirement of debt                                  |   | —                  |    | 0.0 |   | 12,278 |   | 5.5 |   |
| Income from operations                                            |   | 16,241                  |    | 6.8 |   | 2,381 |   | 1.1 |   |
| Net interest expense                                              |   | 12,628                  |    | 5.3 |   | 10,368 |   | 4.6 |   |
| Net income (loss)                                                 |   | 2,794                   |    | 1.2 |   | (8,335 | ) | (3.7 | ) |
|                                                              |   |                    |    |   |   |   |   |   |   |
| **Other Data:**                                                   |   |                    |    |   |   |   |   |   |   |
| EBITDA(1)                                                         |   | $                       | 19,041  |   |   |   | $ | 5,122 |   |   |   |
| Capital expenditures                                              |   | 1,899                   |    |   |   | 4,581 |   |   |   |
| Net cash flows used in operating activities                       |   | (23,073                 | )       |   |   | (5,024 | ) |   |   |
| Net cash flows used in investing activities                       |   | (1,075                  | )       |   |   | (5,756 | ) |   |   |
| Net cash flows provided by financing activities                   |   | 18,112                  |    |   |   | 3,905 |   |   |   |

 

7

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(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$188 and $120 for the three months ended June 30, 2003 and June 27, 2002,respectively.  In addition, our EBITDAfor the three months ended June 27, 2002 has not been adjusted for a loss of$12,278 related to early retirement of debt. We believe that EBITDA is commonly used as a measure of performance forcompanies in our industry and is frequently used by analysts, investors,lenders and other interested parties to evaluate a company’s financialperformance and its ability to incur and service debt.   Our EBITDA is used by management as aperformance measure to assess our financial results in connection withdetermining incentive compensation, and is also used by the independentappraisal firm in connection with their annual valuation of our equity.  While providing useful information, ourEBITDA should not be considered in isolation or as a substitute forconsolidated statement of operations and cash flows data prepared in accordancewith accounting principles generally accepted in the United States, and shouldnot be construed as an indication of a company’s operating performance or as ameasure of liquidity.

 
|                           |   | **Three Months Ended,**  |         |
|--------------------------------|--------|--------------------------|--------------|
| **(dollars in thousands)**     |   | **June 30,********2003** |         | **June 27,********2002** |   |
| Reconciliation  of EBITDA**:** |   |                     |         |   |   |
| Net income  (loss)             |   | $                        | 2,794        |   | $ | (8,335 | ) |
| Depreciation  and amortization |   | 2,800                    |         | 2,741 |   |
| Net interest  expense          |   | 12,628                   |         | 10,368 |   |
| Provision  for income taxes    |   | 819                      |         | 348 |   |
| EBITDA                         |   | $                        |  19,041 |   | $ |  5,122 |   |
| EBITDA Margin %                |   | 8.0                      | %            | 2.3 | % |

# ** **

# **Results of Operations - Three Months EndedJune 30, 2003 Compared To Three Months Ended June 27, 2002**

 

*Revenues*. Revenuesfor the first quarter of fiscal 2004 increased 5.9% to $238.3 million, from$225.1 million for the same period in fiscal 2003.  Revenues from our domestic operations increased 4.8% to $222.6million in the first quarter of fiscal 2004, from $212.4 million for the sameperiod in fiscal 2003.  This increasewas attributable to a 2% increase in tonnage shipped and a 4% increase inaverage selling prices when compared to the fiscal 2003 period.  Our domestic operations experiencedincreased demand in our core products and in key industries served, such asmachine tools, oil and gas services and fluid power.   Revenues from our Canadian operations increased 23.6% to $15.7million in the first quarter of fiscal 2004 from $12.7 million in the sameperiod in fiscal 2003, due to increased capacity and efficiencies from newerfacilities, effective marketing of core products and services and overallstronger economic conditions.

 

*Gross Profit*. Grossprofit for the first quarter of fiscal 2004 increased 5.7% to $66.9 million,from $63.3 million for the same period in fiscal 2003, while consolidated grossmargins for both periods were 28.1%. Gross profit for the first quarters offiscal 2004 and 2003 included no LIFO adjustments.  Gross profit from our Canadian operations was $3.6 million andgross margin was 22.9% during the first quarter of fiscal 2004, compared to$2.7 million and 21.3%, respectively, for the same period in fiscal 2003.

 

*Expenses*. Totaloperating expenses for the first quarter of fiscal 2004 increased 4.1% to $50.6million (21.2% of revenues), from $48.6 million (21.6% of revenues), excludinga $12.3 million loss on early retirement of debt, for the same period in fiscal2003. The increase in operating expenses generally reflects the changes invariable expenses impacted by higher tonnage shipped, rising prices for certaingoods and services, particularly healthcare insurance and fuel, and an increasein expenses associated with added capacity, including depreciation, lease,maintenance, utilities, and property tax and insurance expenses.  These higher expenses were partially offsetby a gain on sale of property and equipment, income attributable to our lifeinsurance programs and benefits realized from ongoing cost reduction effortsand improved productivity, including those benefits associated with therecently completed expansion and automation of our Chicago facility.

 

Warehouse anddelivery expenses for the first quarter of fiscal 2004 increased 6.6% to $32.5million (13.6% of revenues), from $30.5 million (13.5% of revenues) for thesame period in fiscal 2003. The increase in these expenses was attributable tohigher depreciation, property tax accruals and insurance costs, and increasedmaintenance expenses, some of which were related to the expansion andautomation of our Chicago facility, which became fully operational in June2003.  In addition, the first quarter offiscal 2004 included higher freight and shipping expenses, including fuel, andincreased expenses for utilities and employee benefits, particularly healthcareinsurance.  As of June 30, 2003, 1,006employees were involved in warehouse and delivery activities, compared to 1,075as of June 27, 2002.  This decrease inheadcount was primarily attributable to reductions resulting from theautomation of our Chicago facility.

 

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Sellingexpenses for the first quarter of fiscal 2004 increased 6.3% to $8.4 million(3.5% of revenues), from $7.9 million (3.5% of revenues) for the same period infiscal 2003. The increase resulted from higher compensation expense, includinghigher healthcare insurance.

 

General andadministrative expenses for the first quarter of fiscal 2004 decreased 4.0% to$9.7 million (4.1% of revenues), from $10.1 million (4.5% of revenues) for thesame period in fiscal 2003. The decrease resulted from higher income recognizedin connection with our life insurance policies and a gain on sale of propertyand equipment, partially offset by higher provisions for bad debt and increasedexpenses for professional services and insurance.

 

*Net Interest Expense*. Net interest expense was$12.6 million during the first quarter of fiscal 2004 and $10.4 million duringthe same period in fiscal 2003.  Suchamounts include interest related to our credit facilities, existing seniorsecured notes, senior notes, term loan, industrial revenue bonds and borrowingsagainst the cash surrender value of certain 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 certain life insurance policies) totaled $7.7 million for the firstquarter of fiscal 2004, compared to $6.1 million for the same period in fiscal2003.  The increase in interest expenseis the result of the larger principal amount and higher interest rate on ourexisting 93⁄4% senior securednotes as compared to our 91⁄2% senior notes and term loan which were redeemed andrepaid in the first quarter of fiscal 2003. Our average outstanding indebtedness during the first quarter of fiscal2004 was $358.0 million, compared to $356.1 million for the same period infiscal 2003. The weighted average interest rate on our indebtedness was 8.06%during the first quarter of fiscal 2004 versus 7.67% during the same period infiscal 2003. During the three months ended June 30, 2003 and June 27, 2002,borrowings under our credit facility averaged $100.6 million and $92.8 millionand the average interest rate on such borrowings was 4.22% and 5.44%,respectively.

 

Interest expense associated with borrowings against the cash surrendervalue of certain life insurance policies maintained was $4.9 million during thefirst quarter of fiscal 2004 period, 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 life insurance policies are fixed at 9.75% and 11.76%,respectively.  The interest rate on ourcredit facility is floating (3.76% as of June 30, 2003).

 

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

 

*Loss on Early Retirement of Debt. *In the first quarter of fiscal 2003, werecognized a loss of $12.3 million in connection with the early retirement ofour 91⁄2% senior notes and term loan, which consisted of the call premium paid, apayment to terminate the interest rate swap agreement, the write-off ofdeferred financing costs, and certain other expenses incurred in connectionwith the refinancing transaction.  Notax benefit was recorded in connection with this loss due to the uncertainty inrealizing the resulting deferred tax asset.

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# **Liquidity and Capital Resources**

 

Working capital increased to $166.8 million at June 30, 2003 from$150.2 million at March 31, 2003, primarily as the result of higherinventories.  During the first threemonths of fiscal 2004 our primary source of cash consisted of borrowings underour credit facility, $18.6 million.  Ourprimary uses of cash included funding operating actvities, $23.1 million, andcapital expenditures, $1.9 million.

 

Cash used in operating activities was $23.1 million in the first threemonths of fiscal 2004, compared to $5.0 million in the same period of fiscal2003.   The change was primarilyattributable to timing of payments to vendors relative to changes in workingcapital assets during the respective periods.

 

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For fiscal 2004, we have planned approximately $9.8 million of capitalexpenditures to be financed from internally generated funds and borrowingsunder our credit facility. Approximately $8.2 million is for facility improvementsand expansions (including a commitment of approximately $2.3 million for theChicago project) and routine replacement of machinery and equipment, and $1.6million is for further additions and enhancements to our management informationsystems. During the first three months of fiscal 2004, we spent $1.9 millionfor planned capital expenditures, including $0.6 million for the Chicagoproject, which became fully operational in June 2003.

 

Our ongoingcash requirements for debt service and related obligations are expected toconsist primarily of interest payments under our credit facility, interestpayments on our senior secured notes, dividend payments to Holding inconnection with the required repurchase of its capital stock from departingstockholders pursuant to Holding’s Stockholders’ Agreement and our stock bonusplan, capital expenditures and principal and interest payments on ourindustrial revenue bonds.  As of June30, 2003, principal payments required by our outstanding industrial revenuebond indebtedness amount to $0.9 million in fiscal year 2004, $2.1 million infiscal year 2005, $1.2 million in fiscal year 2006, $0.7 million in fiscalyears 2007 and 2008, and $1.5 million in the aggregate thereafter throughfiscal year 2011.  Our credit facilitywill mature in April 2006 and we will not be required to make any principalpayments on our senior secured notes until their maturity in fiscal year 2012.

 

As of June 30,2003, we were in compliance with all covenants under our credit facility,including maintenance of minimum working capital and a fixed-charge coverageratio.   However, based on our currentexpectations for the remainder of fiscal 2004, including the seasonalfluctuations in our industry during the next two quarters and our belief thatcurrent economic conditions will not dramatically improve during the remainderof fiscal 2004, there exists a possibility that we may not remain in compliancewith our fixed-charge ratio covenant in the foreseeable future.  While we fully expect that we would receivean amendment to the credit facility or a waiver of the covenant from our banksyndicate, no assurance of receipt can be given.

 

As of June 30,2003, our primary sources of liquidity were available borrowings of $93.1million under our credit facility, available borrowings of approximately $13.7million against certain life insurance policies we maintain and internallygenerated funds.  Borrowings under ourcredit facility are secured by domestic inventory and accounts receivable, andfuture availability is determined by prevailing levels of those assets.  Our 93⁄4%senior secured notes are secured by a first priority lien (subject topermitted liens) on substantially all of our current and future acquiredunencumbered real property, plant and equipment.  The life insurance policy loans are secured by the cash surrendervalue of the policies, are non-recourse, and bear interest at a rate 0.5%greater than the dividend income rate on the policies.  For the first three months of fiscal 2004,dividend income earned under the policies totaled $3.6 million, compared to$4.2 million for the same period in fiscal year 2003 and is reported as anoffset to general and administrative expenses in the accompanying statements ofoperations. As of June 30, 2003, there was approximately $36.8 million of cashsurrender value in all life insurance policies we maintain, net of borrowings.

 

In addition,our Canadian subsidiary has available its own credit facilities of up toCDN$8.6 million, including a revolving credit facility of CDN$5.1 million, aterm financial instruments facility of CDN$3.0 million to be used for hedgingforeign currency and rate fluctuations, and a special credit facility ofCDN$0.5 million for letters of guaranty in connection with a lease for a newlyconstructed facility in Toronto. As of June 30, 2003, CDN$3.3 million (USD$2.5million) was outstanding under the revolving credit facility and a letter ofguaranty for CDN$0.5 million (USD$0.4 million) was issued.  None of the term financial instrumentsfacility was used as of June 30, 2003.

 

Excluding thechanges in borrowings under our credit facility, our commitments andcontractual obligations as of June 30, 2003 did not materially change fromthose disclosed in our Annual Report on Form 10-K for the year ended March 31,2003.

 

We believe oursources of liquidity and capital resources are sufficient to meet all currentlyanticipated operating cash requirements, including debt service payments on ourcredit facility and 93⁄4% 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 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.

 

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**Critical Accounting Policies**

 

Management’sDiscussion and Analysis of Financial Position and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reported amountsof assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. Actual results could differ significantly from those estimates andjudgments under different assumptions and conditions.  Management believes the critical accounting policies and areasthat require the most significant judgments and estimates to be used in thepreparation of the consolidated financial statements are revenue recognition,allowance for doubtful accounts, inventory reserves, pension and otherpostretirement benefits, insurance reserves, incentive compensation,contingencies and income tax accounting.  These critical accounting policies, which are fully discussed in ourAnnual Report on Form 10-K for the year ended March 31, 2003, have beenconsistently applied to the consolidated condensed financial statementsincluded herein. There have been no material changes made to the criticalaccounting policies during the periods presented in the accompanyingconsolidated condensed financial statements.

 

**Item 3****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

In theordinary course of business, we are exposed to various market risk factorscaused by changes in commodity prices, interest rates and foreign currencyexchange rates.  We do not use financialinstruments or enter into hedging transactions for speculative or tradingpurposes with respect to managing these market risks.  However, we have used and will continue to evaluate the use of financialinstruments to reduce our exposure to higher interest costs during periods ofrising interest rates.

 

At June 30,2003 and March 31, 2003, no such financial instruments existed.  Our exposure to changing interest rates islimited to our revolving credit facility such that our results of operationsand cash flows during the first three months of fiscal 2004 would have beenimpacted by approximately $0.3 million for each 1% increase or decrease in theapplicable interest rate.

 

Our exposureto market risk for changes in foreign currency exchange rates is limited to ourCanadian operations and the Canadian dollar. Changes in the exchange rate of the Canadian dollar have not and are notexpected to have a material impact on our results of operations and cashflows.  We estimate that a 10% change inthe average exchange rate of the Canadian dollar during the first three monthsof fiscal 2004 would have impacted our results of operations by approximately$0.2 million.  Due to our product mixand the frequency of our buying and selling activities over normal businesscycles, our exposure to changes in commodity prices is not consideredmaterial.   

 

**Item 4****.  CONTROLS AND PROCEDURES**

 

As of the endof each fiscal quarter, an evaluation is carried out by our Chief ExecutiveOfficer and Chief Financial Officer, with the assistance of other members ofmanagement, of the effectiveness of the design and operation of disclosurecontrols and procedures (as defined in Rule 15d-14(c) under the SecuritiesExchange Act of 1934). Based upon such evaluation as of June 30, 2003, theChief Executive Officer and Chief Financial Officer concluded that thedisclosure controls and procedures were effective in ensuring that all materialinformation required to be disclosed in the reports filed or submitted by theCompany under the Securities Exchange Act of 1934, as amended, is gathered,analyzed and reported or otherwise made known to them as appropriate to allowtimely decisions regarding required disclosure.  In designing and evaluating such disclosure controls and procedures,our management 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.

 

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# **PART II - OTHERINFORMATION**

 

# **Item 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

(a)           On July 29, 2003, our sole stockholderexecuted and delivered a written consent of stockholder.

 

(b)          The consent provided for the election of ourBoard of Directors, including the election of Mr. David I. Wahrhaftig as a newdirector, and the re-election of Mr. Earl M. Mason to our Board of Directorspursuant to the rights of the holders of Holding’s Series A 13% CumulativePreferred Stock.  The consent alsoprovided for the appointment of Ernst & Young LLP as our independentauditors for the fiscal year ending March 31, 2004.

 

**Item 6.****           EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)           Exhibits

31.1  Certification of Financial Reports by ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2  Certification of Financial Reports by ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  Certification of Financial Reports by ChiefExecutive Officer and Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b)            Reports on Form 8-KWe furnished a report on Form 8-K on July 31, 2003 under Item 12 announcingour results of operations and financial position as of and for the three monthperiod ended June 30, 2003.

 

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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: August 1, 2003 | Maurice S. Nelson, Jr.                                                                              |
|                 | President, Chief Executive Officer and  Chief Operating Officer                                     |
|                 |                                                                                                |
|                 |                                                                                                |
|                 | /s/ William S. Johnson                                                                              |   |
| Date: August 1, 2003 | William S. Johnson                                                                                  |
|                 | Vice President, Chief Financial Officer and  Secretary (Principal Financial and Accounting Officer) |

 

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