UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________
Commission File Number
OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| | | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date:
| Class | Outstanding as of August 6, 2020 | |
| Common stock, without par value | |
Olympic Steel, Inc.
Index to Form 10-Q
| Page No. | |
| Part I. FINANCIAL INFORMATION |
3 |
| Item 1. Financial Statements |
3 |
| Consolidated Balance Sheets – June 30, 2020 and December 31, 2019 (unaudited) |
3 |
| Consolidated Statements of Comprehensive Income (Loss) – for the three and six months ended June 30, 2020 and 2019 (unaudited) |
4 |
| Consolidated Statements of Cash Flows – for the six months ended June 30, 2020 and 2019 (unaudited) |
5 |
| Supplemental Disclosures of Cash Flow Information – for the six months ended June 30, 2020 and 2019 (unaudited) |
6 |
| Consolidated Statements of Shareholders’ Equity – for the three and six months ended June 30, 2020 and 2019 (unaudited) |
7 |
| Notes to Unaudited Consolidated Financial Statements |
8 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
34 |
| Item 4. Controls and Procedures |
35 |
| Part II. OTHER INFORMATION |
36 |
| Item 1A. Risk Factors | 36 |
| Item 6. Exhibits |
37 |
| SIGNATURES |
38 |
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
| As of | ||||||||
| June 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net (includes LIFO debits of and as of June 30, 2020 and December 31, 2019, respectively) | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Right of use assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Other accrued liabilities | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Credit facility revolver | ||||||||
| Other long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Lease liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock | ||||||||
| Common stock | ||||||||
| Treasury stock | ( | ) | ||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share data)
(unaudited)
| Three months ended |
Six months ended |
|||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
| Costs and expenses |
||||||||||||||||
| Cost of materials sold (excludes items shown separately below) |
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| Warehouse and processing |
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| Administrative and general |
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| Distribution |
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| Selling |
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| Occupancy |
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| Depreciation |
||||||||||||||||
| Amortization |
||||||||||||||||
| Total costs and expenses |
||||||||||||||||
| Operating income (loss) |
( |
) | ( |
) | ||||||||||||
| Other loss, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income (loss) before interest and income taxes |
( |
) | ( |
) | ||||||||||||
| Interest and other expense on debt |
||||||||||||||||
| Income (loss) before income taxes |
( |
) | ( |
) | ||||||||||||
| Income tax provision (benefit) |
( |
) | ( |
) | ||||||||||||
| Net income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Loss on cash flow hedge |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Tax effect on cash flow hedge |
||||||||||||||||
| Total comprehensive income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Earnings per share: |
||||||||||||||||
| Net income (loss) per share - basic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted average shares outstanding - basic |
||||||||||||||||
| Net income (loss) per share - diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted average shares outstanding - diluted |
||||||||||||||||
| Dividends declared per share of common stock |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(in thousands)
(unaudited)
| 2020 |
2019 |
|||||||
| Cash flows from (used for) operating activities: |
||||||||
| Net income (loss) |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash from (used for) operating activities - |
||||||||
| Depreciation and amortization |
||||||||
| (Gain) loss on disposition of property and equipment |
( |
) | ||||||
| Stock-based compensation |
||||||||
| Other long-term assets |
( |
) | ( |
) | ||||
| Other long-term liabilities |
( |
) | ||||||
| Changes in working capital: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
||||||||
| Prepaid expenses and other |
( |
) | ( |
) | ||||
| Accounts payable |
( |
) | ||||||
| Change in outstanding checks |
( |
) | ( |
) | ||||
| Accrued payroll and other accrued liabilities |
( |
) | ( |
) | ||||
| ( |
) | |||||||
| Net cash from operating activities |
||||||||
| Cash flows from (used for) investing activities: |
||||||||
| Acquisition |
( |
) | ||||||
| Capital expenditures |
( |
) | ( |
) | ||||
| Proceeds from disposition of property and equipment |
||||||||
| Net cash used for investing activities |
( |
) | ( |
) | ||||
| Cash flows from (used for) financing activities: |
||||||||
| Credit facility revolver borrowings |
||||||||
| Credit facility revolver repayments |
( |
) | ( |
) | ||||
| Principal payment under capital lease obligation |
( |
) | ||||||
| Credit facility fees and expenses |
( |
) | ||||||
| Repurchase of common stock |
( |
) | ( |
) | ||||
| Dividends paid |
( |
) | ( |
) | ||||
| Net cash from (used for) financing activities |
( |
) | ||||||
| Cash and cash equivalents: |
||||||||
| Net change |
( |
) | ||||||
| Beginning balance |
||||||||
| Ending balance |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Supplemental Disclosures of Cash Flow Information
For the Six Months Ended June 30,
(in thousands)
(unaudited)
| 2020 |
2019 |
|||||||
| Interest paid |
$ | $ | ||||||
| Income taxes paid |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements. Olympic Steel, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands)
(unaudited)
| For the Three Months Ended June 30, 2020 |
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| Accumulated |
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| Other |
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| Common |
Treasury |
Comprehensive |
Retained |
Total |
||||||||||||||||
| Stock |
Stock |
Loss |
Earnings |
Equity |
||||||||||||||||
| Balance at March 31, 2020 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||
| Payment of dividends |
( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Restricted stock units converted to stock |
( |
) | ||||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||||||
| Other |
( |
) | ||||||||||||||||||
| Balance at June 30, 2020 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| For the Six Months Ended June 30, 2020 |
||||||||||||||||||||
| Accumulated |
||||||||||||||||||||
| Other |
||||||||||||||||||||
| Common |
Treasury |
Comprehensive |
Retained |
Total |
||||||||||||||||
| Stock |
Stock |
Loss |
Earnings |
Equity |
||||||||||||||||
| Balance at December 31, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||
| Payment of dividends |
( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Restricted stock units converted to stock |
( |
) | ||||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ||||||||||||||||
| Other |
( |
) | ||||||||||||||||||
| Balance at June 30, 2020 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| For the Three Months Ended June 30, 2019 |
||||||||||||||||||||
| Accumulated |
||||||||||||||||||||
| Other |
||||||||||||||||||||
| Common |
Treasury |
Comprehensive |
Retained |
Total |
||||||||||||||||
| Stock |
Stock |
Loss |
Earnings |
Equity |
||||||||||||||||
| Balance at March 31, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
| Net income |
||||||||||||||||||||
| Payment of dividends |
( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
| For the Six Months Ended June 30, 2019 |
||||||||||||||||||||
| Accumulated |
||||||||||||||||||||
| Other |
||||||||||||||||||||
| Common |
Treasury |
Comprehensive |
Retained |
Total |
||||||||||||||||
| Stock |
Stock |
Loss |
Earnings |
Equity |
||||||||||||||||
| Balance at December 31, 2018 |
$ | $ | ( |
) | $ | $ | $ | |||||||||||||
| Net income |
||||||||||||||||||||
| Payment of dividends |
( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2020
| 1. | Basis of Presentation: |
The accompanying Consolidated Financial Statements have been prepared from the financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively, Olympic or the Company), without audit and reflect all normal and recurring adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods covered by this report. Year-to-date results are not necessarily indicative of 2020 annual results and these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. All intercompany transactions and balances have been eliminated in consolidation.
The Company operates in three reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segments are at times consolidated and referred to as the flat products segments. Certain of the flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the carbon flat products segment and the specialty metals flat products segment based upon an established allocation methodology. The carbon flat products segment sells and distributes large volumes of processed carbon and coated flat-rolled sheet, coil and plate products, and fabricated parts. Through its acquisition of McCullough Industries (McCullough) on January 2, 2019, the carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and through its acquisition of certain assets related to the manufacturing of the EZ-Dumper® hydraulic dump inserts (EZ Dumper) on August 5, 2019, to include steel and stainless-steel dump inserts for pickup truck and service truck beds. The specialty metals flat products segment sells and distributes processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. Through its acquisition of Berlin Metals, LLC (Berlin Metals) on April 2, 2018, the specialty metals flat products segment expanded its product offerings to include differing types of stainless flat-rolled sheet and coil and prime tin mill products. The tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary (CTI), distributes metal tubing, pipe, bar, valves and fittings and fabricates pressure parts supplied to various industrial markets.
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The pandemic had a material impact on the Company’s Consolidated Financial Statements for the three months ended June 30, 2020, resulting in lower sales and a net loss for the quarter. The Company is an essential business and remains open in all locations, adhering to all health guidelines to operate safely provided by the Center for Disease Control and Prevention and local authorities. The COVID-19 pandemic had and could continue to have material and adverse effects on our financial condition, results of operations and cash flows in the near term due to, but not limited to (i) reduced sales and profit levels, (ii) the slower payment of accounts receivable and potential increases in uncollectible accounts receivable, (iii) falling metals prices that could lead to lower of cost or market inventory adjustments and the impairment of intangible and long-lived assets, (v) reduced availability and productivity of our employees, (vi) increased operational risks as a result of remote work arrangements, including the potential effects on internal controls, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events, (vii) negative impacts on our liquidity position, (viii) inability to access our traditional financing sources on the same or reasonably similar terms as were available before the COVID-19 pandemic, and (ix) increased costs and less ability to access funds under our ABL Credit Facility (as defined below in Note 7) and the capital markets. The Company has implemented actions to maintain its financial health and liquidity. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business. However, as a result of the many uncertainties surrounding the COVID-19 pandemic, we are unable to predict the impact that it ultimately will have on its financial condition, results of operations, comprehensive loss, and cash flows.
Impact of Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The ASU replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The adoption of this ASU on January 1, 2020, did not have a material impact on the Company’s Consolidated Financial Statements.
| 2. | Revenue Recognition: |
The Company provides metals processing, distribution and delivery of large volumes of processed carbon, coated flat-rolled sheet, coil and plate products, aluminum, and stainless flat-rolled products, prime tin mill products, flat bar products, metal tubing, pipe, bar, valves, fittings, fabricated parts, self-dumping hoppers, and steel dump inserts. The Company's contracts with customers are comprised of purchase orders with standard terms and conditions. Occasionally the Company may also have longer-term agreements with customers. Substantially all of the contracts with customers require the delivery of metals which represent single performance obligations that are satisfied upon transfer of control of the product to the customer.
Transfer of control is assessed based on the use of the product distributed and rights to payment for performance under the contract terms. Transfer of control and revenue recognition for substantially all of the Company’s sales occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms depend on the customer contract. An invoice for payment is issued at the time of shipment and terms are generally net 30 days.
Within the metals industry, revenue is frequently disaggregated by products sold. The table below disaggregates the Company’s revenues by segment and products sold.
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Three Months Ended June 30, 2020 | ||||||||||||||||
| Carbon flat products | Specialty metals flat products | Tubular and pipe products | Total | |||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Specialty | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Other | % | % | % | |||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Six Months Ended June 30, 2020 | ||||||||||||||||
| Carbon flat products | Specialty metals flat products | Tubular and pipe products | Total | |||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Specialty | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Other | % | % | % | |||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Three Months Ended June 30, 2019 | ||||||||||||||||
| Carbon flat products | Specialty metals flat products | Tubular and pipe products | Total | |||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Specialty | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Other | % | % | % | |||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Six Months Ended June 30, 2019 | ||||||||||||||||
| Carbon flat products | Specialty metals flat products | Tubular and pipe products | Total | |||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Specialty | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Other | % | % | % | |||||||||||||
| Total | % | % | % | % | ||||||||||||
| 3. | Accounts Receivable: |
Accounts receivable are presented net of allowances for doubtful accounts and unissued credits of $
| 4. | Inventories: |
Inventories consisted of the following:
| Inventory as of | ||||||||
| (in thousands) | June 30, 2020 | December 31, 2019 | ||||||
| Unprocessed | $ | $ | ||||||
| Processed and finished | ||||||||
| Totals | $ | $ | ||||||
The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At June 30, 2020 and December 31, 2019, approximately $
The Company recorded $
If the FIFO method had been in use, inventories would have been $
| 5. | Goodwill and Intangible Assets: |
The Company’s intangible assets were recorded in connection with its acquisitions of EZ Dumper and McCullough in 2019, its acquisition of Berlin Metals in 2018 and its acquisition of CTI in 2011. The intangible assets were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation methodology. The useful life of the customer relationships was determined to be years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the -year amortization period. The useful life of the non-compete agreements was determined to be the length of the non-compete agreements which range from to years. The useful life of the trade names was determined to be indefinite primarily due to their history and reputation in the marketplace, the Company’s expectation that the trade names will continue to be used, and the conclusion that there are currently no other factors identified that would limit their useful life. The Company will continue to evaluate the useful life assigned to its amortizable customer relationships and noncompete agreements in future periods.
Goodwill, by reportable segment, was as follows as of June 30, 2020 and December 31, 2019, respectively. The goodwill is deductible for tax purposes.
| (in thousands) | Carbon Flat Products | Specialty Metals Flat Products | Tubular and Pipe Products | Total | ||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | ||||||||||||
| Acquisitions | ||||||||||||||||
| Impairments | ||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | $ | ||||||||||||
Intangible assets consisted of the following as of June 30, 2020 and December 31, 2019, respectively:
| As of June 30, 2020 | ||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | |||||||||
| Customer relationships - subject to amortization | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Trade names - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2019 | ||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | |||||||||
| Customer relationships - subject to amortization | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Trade names - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $
| 6. | Leases: |
The components of lease expense were as follows:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
Supplemental cash flow information related to leases was as follows:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Cash paid for lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
| Total cash paid for lease liabilities | $ | $ | $ | $ | ||||||||||||
Supplemental balance sheet information related to leases was as follows:
| June 30, | December 31, | |||||||
| (in thousands) | 2020 | 2019 | ||||||
| Operating Leases | ||||||||
| Operating lease right-of-use asset | $ | $ | ||||||
| Operating lease accumulated depreciation | ( | ) | ( | ) | ||||
| Operating lease right-of-use asset, net | ||||||||
| Other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| June 30, | December 31, | |||||||
| (in thousands) | 2020 | 2019 | ||||||
| Finance Leases | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Other current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases (in years) | ||||||||
| Finance leases (in years) | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Maturities of lease liabilities were as follows:
| Operating | Finance | |||||||
| (in thousands) | Leases | Leases | ||||||
| Year Ending December 31, | ||||||||
| 2020 | $ | $ | ||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2023 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less remaining imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 7. | Debt: |
The Company’s debt is comprised of the following components:
| As of | ||||||||
| June 30, | December 31, | |||||||
| (in thousands) | 2020 | 2019 | ||||||
| Asset-based revolving credit facility due | $ | $ | ||||||
| Total debt | $ | $ | ||||||
The Company’s asset-based credit facility (the ABL Credit Facility) is collateralized by the Company’s accounts receivable, inventory and personal property. The ABL Credit Facility consists of (i) a revolving credit facility of $
The ABL Credit Facility contains customary representations and warranties and certain covenants that limit the ability of the Company to, among other things: (i) incur or guarantee additional indebtedness; (ii) pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; (iii) make investments; (iv) sell assets; (v) enter into agreements that restrict distributions or other payments from restricted subsidiaries to the Company; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires (i) if any commitments or obligations are outstanding and the Company’s availability is less than the greater of $
The Company has the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from
On January 10, 2019, the Company entered into a -year forward starting fixed-rate interest rate hedge in order to eliminate the variability of cash interest payments on $
As of June 30, 2020, the Company was in compliance with its covenants and had approximately $
As of June 30, 2020, $
| 8. | Derivative Instruments: |
Metals swaps and embedded customer derivatives
During 2020 and 2019, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price of nickel with third-party brokers. The nickel swaps are accounted for as derivatives for accounting purposes. The Company entered into them to mitigate its customers’ risk of volatility in the price of metals. The outstanding nickel swaps mature in 2020. The swaps are settled with the brokers at maturity. The economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer. The primary risk associated with the metals swaps is the ability of customers or third-party brokers to honor their agreements with the Company related to derivative instruments. If the customer or third-party brokers are unable to honor their agreements, the Company’s risk of loss is the fair value of the metals swaps.
These derivatives have not been designated as hedging instruments. The periodic changes in fair value of the metals and embedded customer derivative instruments are included in “Cost of materials sold” in the Consolidated Statements of Comprehensive Income (Loss). The Company recognizes derivative positions with both the customer and the third-party for the derivatives and classifies cash settlement amounts associated with them as part of “Cost of materials sold” in the Consolidated Statements of Comprehensive Income (Loss). The cumulative change in fair value of the metals swaps that had not yet settled are included in “Accounts Receivable, net” as of June 30, 2020 and in “Other accrued liabilities” as of December 31, 2019 on the Consolidated Balance Sheets. The embedded customer derivatives are included in “Other accrued liabilities” as of June 30, 2020 and in “Accounts Receivable, net” as of December 31, 2019 on the Consolidated Balance Sheets.
Fixed-rate interest rate hedge
On January 10, 2019, the Company entered into a -year forward starting fixed-rate interest rate hedge in order to eliminate the variability of cash interest payments on $
The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income (Loss) through net income (loss) of the derivatives for the three and six months ended June 30, 2020 and 2019, respectively.
| Net Gain (Loss) Recognized | ||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Fixed interest rate hedge | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Metals swaps | ( | ) | ||||||||||||||
| Embedded customer derivatives | ( | ) | ( | ) | ( | ) | ||||||||||
| Total loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 9. | Fair Value of Assets and Liabilities: |
During the three and six months ended June 30, 2020, there were no transfers of financial assets between Levels 1, 2 or 3 fair value measurements. There have been no changes in the methodologies used at June 30, 2020 since December 31, 2019.
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company:
| Value of Items Recorded at Fair Value | ||||||||||||||||
| As of June 30, 2020 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Metal swaps | $ | $ | $ | $ | ||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Embedded customer derivative | $ | $ | $ | $ | ||||||||||||
| Fixed interest rate hedge | ||||||||||||||||
| Total liabilities recorded at fair value | $ | $ | $ | $ | ||||||||||||
| Value of Items Recorded at Fair Value | ||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Embedded customer derivatives | $ | $ | $ | $ | ||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Metals swaps | $ | $ | $ | $ | ||||||||||||
| Fixed interest rate hedge | ||||||||||||||||
| Total liabilities recorded at fair value | $ | $ | $ | $ | ||||||||||||
The value of the items not recorded at fair value represent the carrying value of the liabilities.
The carrying value of the ABL Credit Facility was $
| 10. | Accumulated Other Comprehensive Loss: |
On January 10, 2019, the Company entered into a -year forward starting fixed-rate interest rate hedge in order to eliminate the variability of cash interest payments on $
| 11. | Equity Plans: |
Restricted Stock Units and Performance Share Units
Pursuant to the Amended and Restated Olympic Steel 2007 Omnibus Incentive Plan (the Incentive Plan), the Company may grant stock options, stock appreciation rights, restricted shares, restricted share units, performance shares, and other stock- and cash-based awards to employees and directors of, and consultants to, the Company and its affiliates. Since adoption of the Incentive Plan,
On an annual basis the compensation committee of the Company’s Board of Directors awards restricted stock units (RSUs), to each non-employee director as part of their annual compensation. The annual awards for 2020 and 2019 per director were $
Under the Senior Management Stock Incentive Program (the Plan), each eligible participant is awarded RSUs with a dollar value equal to
Under the Plan, the Company awards RSUs to newly-appointed executive officers, based upon a percentage of their base salary. Upon Mr. Marabito’s promotion to Chief Executive Officer and Mr. Manson’s promotion to Chief Financial Officer on January 1, 2019, they received
Stock-based compensation expense recognized on RSUs for the three and six months ended June 30, 2020 and 2019, respectively, is summarized in the following table:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| RSU expense before taxes | $ | $ | $ | $ | ||||||||||||
| RSU expense after taxes | $ | $ | $ | $ | ||||||||||||
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income (Loss).
The following table summarizes the activity related to RSUs for the six months ended June 30, 2020 and 2019:
| As of June 30, 2020 | As of June 30, 2019 | |||||||||||||||
| Number of | Weighted Average | Number of | Weighted Average | |||||||||||||
| Shares | Granted Price | Shares | Granted Price | |||||||||||||
| Outstanding at December 31 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Converted into shares | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Outstanding at June 30 | $ | $ | ||||||||||||||
| Vested at June 30 | $ | $ | ||||||||||||||
Of the RSUs granted in 2019,
| 12. | Restructuring and Other Charges: |
During the three and six months ended June 30, 2020, the Company recorded restructuring and other charges in the amount of $
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net loss on sale of fixed assets | $ | $ | $ | $ | ||||||||||||
| Mexico facility exit | ||||||||||||||||
| COVID-19 related severance pay and bad debt | ||||||||||||||||
| Total restructuring and other charges | $ | $ | $ | $ | ||||||||||||
The loss on sales of fixed assets was incurred as a result of the sale of real estate related to a previously idled expansion project in South Carolina. The Mexico charges relate to the exit from the Company’s leased Monterrey, Mexico facility. The COVID-19 related severance pay and bad debt relate to employee severance pay for employee reductions associated with the COVID-19 pandemic, sales declines and additional foreign bad debt expense incurred as a result of court closures and the uncertainty related to recoverability of the receivable.
| 13. | Income Taxes: |
For the three months ended June 30, 2020, the Company recorded an income tax benefit of $
Normally, the tax provision or benefit for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter the Company updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment. Due to the COVID-19 pandemic and the uncertainty around forecasting an annual effective tax rate, the tax provision was recorded based on the actual effective tax rate including discrete items for the three and six months ended June 30, 2020, including the ability to carryback losses incurred in 2020 to years where the Federal tax rate was
The quarterly tax provision and the quarterly estimate of the annual effective tax rate is subject to significant volatility due to several factors, including variability in accurately predicting the Company’s pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in law and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, the effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when the pre-tax income is lower.
| 14. | Shares Outstanding and Earnings Per Share: |
Earnings per share have been calculated based on the weighted average number of shares outstanding as set forth below:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Assumed exercise of stock options and issuance of stock awards | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic earnings per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted earnings per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Unvested RSUs | ||||||||||||||||
| 15. | Stock Repurchase Program: |
On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to
There were shares repurchased during the three months ended June 30, 2020. During the three months ended June 30, 2019, the Company repurchased
| 16. | Segment Information: |
The Company follows the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the Company’s chief operating decision maker (CODM) to assess performance and make operating and resource allocation decisions. The CODM evaluates performance and allocates resources based primarily on operating income (loss). The operating segments are based primarily on internal management reporting.
The Company operates in reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segments are at times consolidated and referred to as the flat products segments, as certain of the flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment.
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including compensation for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.
The following table provides financial information by segment and reconciles the Company’s operating income by segment to the consolidated income (loss) before income taxes for the three and six months ended June 30, 2020 and 2019.
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net sales | ||||||||||||||||
| Carbon flat products | $ | $ | $ | $ | ||||||||||||
| Specialty metals flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Restructuring and other charges | ||||||||||||||||
| Carbon flat products | $ | $ | $ | $ | ||||||||||||
| Specialty metals flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Corporate | ||||||||||||||||
| Total restructuring and other charges | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Carbon flat products | $ | $ | $ | $ | ||||||||||||
| Specialty metals flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Corporate | ||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ||||||||||||||||
| Carbon flat products | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Specialty metals flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Corporate expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Other income (loss), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before interest and income taxes | ( | ) | ( | ) | ||||||||||||
| Interest and other expense on debt | ||||||||||||||||
| Income (loss) before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Capital expenditures | ||||||||
| Flat products segments | $ | $ | ||||||
| Tubular and pipe products | ||||||||
| Corporate | ||||||||
| Total capital expenditures | $ | $ | ||||||
| As of | ||||||||
| June 30, | December 31, | |||||||
| (in thouands) | 2020 | 2019 | ||||||
| Assets | ||||||||
| Flat products segments | $ | $ | ||||||
| Tubular and pipe products | ||||||||
| Corporate | ||||||||
| Total assets | $ | $ | ||||||
There were no material revenue transactions between the carbon flat products, specialty metals products, and tubular and pipe products segments.
The Company sells certain products internationally, primarily in Canada and Mexico. International sales are immaterial to the consolidated financial results and to the individual segments’ results.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying notes contained herein and our Consolidated Financial Statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2019. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2019, and in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q. The following section is qualified in its entirety by the more detailed information, including our Unaudited Consolidated Financial Statements and the notes thereto, which appear elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the SEC contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as “may,” “will,” “anticipate,” “should,” “intend,” “expect,” “believe,” “estimate,” “project,” “plan,” “potential,” and “continue,” as well as the negative of these terms or similar expressions, are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to:
| ● |
risks associated with the novel corona virus, or COVID-19 pandemic, including, but not limited to supply chain disruptions and customer closures, reduced sales and profit levels, slower payment of accounts receivable and potential increases in uncollectible accounts receivable, falling metals prices that could lead to lower of cost or market inventory adjustments and the impairment of intangible and long-lived assets, reduced availability and productivity of our employees, increased operational risks as a result of remote work arrangements, including the potential effects on internal controls, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events, negative impacts on our liquidity position, inability to access our traditional financing sources on the same or reasonably similar terms as were available before the COVID-19 pandemic and increased costs associated with and less ability to access funds under our asset-based credit facility, or ABL Credit Facility, and the capital markets; |
| ● |
risks of falling metals prices and inventory devaluation; |
| ● |
general and global business, economic, financial and political conditions, including the 2020 U.S. election; |
| ● |
competitive factors such as the availability, global pricing of metals and production levels, industry shipping and inventory levels and rapid fluctuations in customer demand and metals pricing; |
| ● |
the levels of imported steel in the United States and the tariffs initiated by the U.S. government in 2018 under Section 232 of the Trade Expansion Act of 1962 and imposed tariffs and duties on exported steel or other products, U.S. trade policy and its impact on the U.S. manufacturing industry; |
| ● |
cyclicality and volatility within the metals industry; |
| ● |
fluctuations in the value of the U.S. dollar and the related impact on foreign steel pricing, U.S. exports, and foreign imports to the United States; |
| ● |
the successes of our efforts and initiatives to improve working capital turnover and cash flows, and achieve cost savings; |
| ● |
our ability to generate free cash flow through operations and repay debt; |
| ● |
the availability and rising costs of transportation and logistical services; |
| ● |
customer, supplier and competitor consolidation, bankruptcy or insolvency; |
| ● |
reduced production schedules, layoffs or work stoppages by our own, our suppliers’ or customers’ personnel; |
| ● |
the adequacy of our existing information technology and business system software, including duplication and security processes; |
| ● |
the adequacy of our efforts to mitigate cyber security risks and threats, especially with employees working remotely due to the COVID-19 pandemic; |
| ● |
the amounts, successes and our ability to continue our capital investments and strategic growth initiatives, including acquisitions and our business information system implementations; |
| ● |
our ability to successfully integrate recent acquisitions into our business and risks inherent with the acquisitions in the achievement of expected results, including whether the acquisition will be accretive and within the expected timeframe; |
| ● |
events or circumstances that could adversely impact the successful operation of our processing equipment and operations; |
| ● |
rising interest rates and their impacts on our variable interest rate debt; |
| ● |
the impacts of union organizing activities and the success of union contract renewals; |
| ● |
changes in laws or regulations or the manner of their interpretation or enforcement could impact our financial performance and restrict our ability to operate our business or execute our strategies; |
| ● |
events or circumstances that could impair or adversely impact the carrying value of any of our assets; |
| ● |
risks and uncertainties associated with intangible assets, including impairment charges related to indefinite lived intangible assets; |
| ● |
the timing and outcomes of inventory lower of cost or market adjustments and last-in, first-out, or LIFO, income or expense; |
| ● |
the inflation or deflation existing within the metals industry, as well as product mix and inventory levels on hand, which can impact our cost of materials sold as a result of the fluctuations in the LIFO inventory valuation; |
| ● |
our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; |
| ● |
our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any; and |
| ● |
unanticipated developments that could occur with respect to contingencies such as litigation, arbitration and environmental matters, including any developments that would require any increase in our costs for such contingencies. |
Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as otherwise required by law.
Overview
We are a leading metals service center that operates in three reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe products. We provide metals processing and distribution services for a wide range of customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Through the acquisition of McCullough Industries, or McCullough, on January 2, 2019, the carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and through the acquisition of certain assets related to the manufacturing of the EZ-Dumper® hydraulic dump inserts, or EZ Dumper, on August 5, 2019, to include steel and stainless-steel dump inserts from pickup truck and service truck beds. Our specialty metals flat products segment’s focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. Through the acquisition of Berlin Metals, LLC, or Berlin Metals, on April 2, 2018, our specialty metals flat products segment expanded its product offerings to include differing types of stainless flat-rolled sheet and coil and prime tin mill products. In addition, we distribute metal tubing, pipe, bar, valves and fittings and fabricate pressure parts supplied to various industrial markets through our tubular and pipe products segment. Products that require more value-added processing generally have a higher gross profit. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the demand for and availability of metals, and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned metals. We sell certain products internationally, primarily in Canada and Mexico. International sales are immaterial to our consolidated financial results and to the individual segments’ results.
Our results of operations are affected by numerous external factors including, but not limited to: general and global business, economic, financial, banking and political conditions, including the current impact of the COVID-19 pandemic; fluctuations in the value of the U.S. dollar to foreign currencies; competition; metals pricing, demand and availability; transportation and energy costs; pricing and availability of raw materials used in the production of metals; global supply and new domestic production capacity, the level of metals imported into the United States, tariffs, and inventory held in the supply chain; the availability, and increased costs of labor; customers’ ability to manage their credit line availability; and layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel. The metals industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.
Like other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. From time to time, we have entered into nickel swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals, and we have entered into metals hedges to mitigate our risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and gross profits of our business could be adversely affected.
At June 30, 2020, we employed approximately 1,573 people. Approximately 281 of the hourly plant personnel at the facilities listed below are represented by nine separate collective bargaining units. The table below shows the expiration dates of the collective bargaining agreements.
| Facility |
Expiration date |
| Minneapolis (coil), Minnesota |
September 30, 2020 |
| Indianapolis, Indiana |
January 29, 2021 |
| St. Paul, Minnesota |
May 25, 2021 |
| Milan, Illinois |
August 12, 2021 |
| Minneapolis (plate), Minnesota |
March 31, 2022 |
| Detroit, Michigan |
August 31, 2022 |
| Hammond, Indiana |
November 30, 2024 |
| Locust, North Carolina |
March 4, 2025 |
| Romeoville, Illinois |
May 31, 2025 |
We have never experienced a work stoppage and we believe that our relationship with employees is good. However, any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.
COVID-19
The COVID-19 pandemic had a material impact on our second quarter 2020 results. We are an essential business and remain open in all locations, adhering to all health guidelines to operate safely provided by our government officials and the U.S. Centers for Disease Control and Prevention. Since the end of the first quarter of 2020, some customers – particularly those associated with the automotive industry – announced temporary closures with re-openings in early April 2020. As April began, those automotive customers further delayed their re-openings. Additionally, customers across most other industrial segments announced temporary closings. These collective temporary closings negatively impacted our second quarter sales and operating results, especially for the carbon flat-products segment and we expect the effects will continue, at a lesser rate, into the third and fourth quarters of 2020.
In addition to negatively impacting our sales and earnings, a further prolonging of the COVID-19 pandemic could result in further falling metals prices that could lead to lower of cost or market inventory adjustments and the impairment of intangible and long-lived assets. The operations and liquidity of our customers could also be challenged.
We ended the second quarter of 2020 with $86.4 million of availability under our ABL Credit Facility. Additionally, we took proactive steps to aggressively reduce expenses to reflect the expected decreased business levels in the second quarter of 2020. During the second quarter of 2020, we recorded $3.6 million of restructuring and other charges in our carbon and specialty metals flat-products segments related to the sale of idle real estate, the exit of our leased Mexico facility and expenses incurred as a result of COVID-19 related to employee severance pay and international bad debt expense. Further, our entire real estate portfolio is unencumbered by debt and can serve as a source of liquidity beyond our ABL Credit Facility, if needed. As a result, we believe that we have sufficient liquidity and capital resources to withstand the potentially adverse effects on our financial condition and results of operations resulting from the COVID-19 pandemic for at least the next 12 months. However, the impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.
Reportable Segments
We operate in three reportable segments; carbon flat products, specialty metals flat products and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segment are at times consolidated and referred to as the flat products segment. Some of the flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment. As such, total assets and capital expenditures are reported in the aggregate for the flat products segments. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the carbon flat products segment and the specialty metals flat products segment based upon an established allocation methodology.
We follow the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the chief operating decision maker, or CODM, to assess performance and make operating and resource allocation decisions. Our CODM evaluates performance and allocates resources based primarily on operating income. Our operating segments are based primarily on internal management reporting.
Due to the nature of the products sold in each segment, there are significant differences in the segments’ average selling price and the cost of materials sold. The tubular and pipe products segment generally has the highest average selling price among the three segments followed by the specialty metals flat products and carbon flat products segments. Due to the nature of the tubular and pipe products, we do not report tons sold or per ton information. Gross profit per ton is generally higher in the specialty metals flat products segment than the carbon flat products segment. Gross profit as a percentage of net sales is generally highest in the tubular and pipe products segment, followed by the carbon and specialty metals flat products segments.
Due to the differences in average selling prices, gross profit and gross profit percentage among the segments, a change in the mix of sales could impact total net sales, gross profit, and gross profit percentage. In addition, certain inventory in the tubular and pipe products segment is valued under the LIFO method. Adjustments to the LIFO inventory value are recorded to cost of materials sold and may impact the gross margin and gross margin percentage at the consolidated Company and tubular and pipe products segment levels.
Carbon flat products
The primary focus of our carbon flat products segment is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve customers in most metals consuming industries, including manufacturers and fabricators of transportation and material handling and lift equipment, construction and farm machinery, storage tanks, environmental and energy generation equipment, automobiles, military vehicles and equipment, as well as general and plate fabricators and metals service centers. We distribute these products primarily through a direct sales force.
Specialty metals flat products
The primary focus of our specialty metals flat products segment is on the direct sale and distribution of processed stainless and aluminum flat-rolled sheet and coil products, flat bar products and fabricated parts. Through our acquisition of Berlin Metals on April 2, 2018, our specialty metals flat products segment expanded its product offerings to include differing types of stainless flat-rolled sheet and coil and prime tin mill products. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve customers in various industries, including manufacturers of food service and commercial appliances, agriculture equipment, transportation and automotive equipment. We distribute these products primarily through a direct sales force.
Combined, the carbon and specialty metals flat products segments have 22 strategically-located processing and distribution facilities in the United States. During the quarter, we recorded a $900 thousand charge due to our plan to exit our leased facility in Monterrey, Mexico. Many of our facilities service both the carbon and the specialty metals flat products segments, and certain assets and resources are shared by the segments. Our geographic footprint allows us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the midwestern, eastern and southern United States.
Tubular and pipe products
The tubular and pipe products segment consists of the Chicago Tube and Iron, or CTI, business, acquired in 2011. Through our tubular and pipe products segment, we distribute metal tubing, pipe, bar, valve and fittings and fabricate pressure parts supplied to various industrial markets. Founded in 1914, CTI operates from eight locations in the Midwestern and southeastern United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.
Corporate expenses
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including compensation for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.
Results of Operations
The COVID-19 pandemic significantly impacted people, businesses and economies across the world and the stay-at-home or shelter-in-place orders enacted in several U.S. states at the end of the first quarter of 2020 required some businesses to close, or significantly reduce their hours. The stay-at-home or shelter-in-place orders, and business closures related to the COVID-19 pandemic, substantially impacted our results of operations during the second quarter of 2020.
Olympic Steel is considered an essential business and all of our production facilities and offices remained open in all states, At the end of March, our customers announced closures, reduced hours, or staggered productions schedules, which continued into the second quarter. Our carbon flat products segment was significantly impacted as automotive and original equipment manufacturer customers were closed or significantly reduced production levels. Despite the COVID-19 pandemic, our specialty metals flat products segment and tubular and pipe products segments were profitable during the second quarter of 2020.
Our results of operations are impacted by the market price of metals. Metals prices fluctuate significantly and changes to our net sales, cost of materials sold, gross profit, cost of inventory and profitability, are all impacted by industry metals pricing. Average metals prices were 22% lower in the second quarter of 2020 compared to the second quarter of 2019, primarily due to the negative impact of the COVID-19 pandemic on the demand of metals.
Transactional or “spot” selling prices generally move in tandem with market price changes, while indexed selling prices typically lag and reset quarterly. Similarly, inventory costs (and, therefore, cost of materials sold) tend to move slower than market selling price changes due to mill lead times and inventory turnover impacting the rate of change in average cost. When average selling prices increase, and net sales increase, gross profit and operating expenses as a percentage of net sales will generally decrease.
Consolidated Operations
The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands):
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
| $ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
|||||||||||||||||||||||||
| Net sales |
$ | 248,296 | 100.0 | $ | 429,151 | 100.0 | $ | 602,676 | 100.0 | $ | 875,070 | 100.0 | ||||||||||||||||||||
| Cost of materials sold (a) |
196,237 | 79.0 | 351,494 | 81.9 | 478,759 | 79.4 | 717,876 | 82.0 | ||||||||||||||||||||||||
| Gross profit (b) |
52,059 | 21.0 | 77,657 | 18.1 | 123,917 | 20.6 | 157,194 | 18.0 | ||||||||||||||||||||||||
| Operating expenses (c) |
59,544 | 24.0 | 71,717 | 16.7 | 128,351 | 21.3 | 145,180 | 16.6 | ||||||||||||||||||||||||
| Operating income (loss) |
(7,485 | ) | (3.0 | ) | 5,940 | 1.4 | (4,434 | ) | (0.7 | ) | 12,014 | 1.4 | ||||||||||||||||||||
| Other loss, net |
26 | 0.0 | 59 | 0.0 | 43 | 0.0 | 45 | 0.0 | ||||||||||||||||||||||||
| Interest and other expense on debt |
1,891 | 0.8 | 3,174 | 0.8 | 4,130 | 0.7 | 6,416 | 0.7 | ||||||||||||||||||||||||
| Income (loss) before income taxes |
(9,402 | ) | (3.8 | ) | 2,707 | 0.6 | (8,607 | ) | (1.4 | ) | 5,553 | 0.7 | ||||||||||||||||||||
| Income taxes |
(2,948 | ) | (1.2 | ) | 626 | 0.1 | (2,746 | ) | (0.5 | ) | 1,398 | 0.2 | ||||||||||||||||||||
| Net income (loss) |
$ | (6,454 | ) | (2.6 | ) | $ | 2,081 | 0.5 | $ | (5,861 | ) | (1.0 | ) | $ | 4,155 | 0.5 | ||||||||||||||||
| (a) Includes $500 and $1,000 of LIFO income for the three and six months ended June 30, 2020, respectively. Includes $250 of LIFO expense for the three and six months ended June 30, 2019. |
| (b) Gross profit is calculated as net sales less the cost of materials sold. |
| (c) Operating expenses are calculated as total costs and expenses less the cost of materials sold. Operating expenses for the three and six months ended June 30, 2020 includes $3.6 million of restructuring and other charges. |
Net sales decreased $180.9 million, or 42.1%, to $248.3 million in the second quarter of 2020 from $429.2 million in the second quarter of 2019. The decrease in net sales was due to a 31.3% decrease in sales volume and a 15.8% decrease in average selling prices during the second quarter of 2020 compared to the second quarter of 2019. Sales volume decreased in all segments compared to the second quarter of 2019 and sequentially from the first quarter of 2020 due to impact of the COVID-19 pandemic. Average selling prices decreased in all segments during the second quarter of 2020 compared to the second quarter of 2019 and sequentially from the first quarter of 2020. Carbon flat products net sales were 56.7% of total net sales in the second quarter of 2020 compared to 59.6% of total net sales in the second quarter of 2019. Specialty metals flat products net sales were 22.0% of total net sales in the second quarter of 2020 compared to 22.4% of total net sales in the second quarter of 2019. Tubular and pipe products net sales were 21.3% of total net sales in the second quarter of 2020 compared to 18.0% of total net sales in the second quarter of 2019.
Net sales decreased $272.4 million, or 31.1%, to $602.7 million during the six months ended June 30, 2020 from $875.1 million during the six months ended June 30, 2019. The decrease in net sales was due to a 17.7% decrease in sales volume and an 16.3% decrease in the average selling prices during the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Sales volumes and average selling prices decreased in all segments during the first six months of 2020 compared to the first six months of 2019. Carbon flat products net sales were 57.0% of total net sales in the first six months of 2020 compared to 61.1% of total net sales in the first six months of 2019. Specialty metals flat products net sales were 23.7% of total net sales in the first six months of 2020 compared to 21.0% of total net sales in the first six months of 2019. Tubular and pipe products net sales were 19.2% of total net sales in the first six months of 2020 compared to 17.9% of total net sales in the first six months of 2019. We expect shipping levels in the third quarter of 2020 to increase from the second quarter of 2020 as states and customers slowly reopen across the United States; however, shipping levels are expected to remain significantly below the shipping levels of the third quarter of 2019, and the first quarter of 2020.
Cost of materials sold decreased $155.3 million, or 44.2%, to $196.2 million in the second quarter of 2020 from $351.5 million in the second quarter of 2019. The decrease in cost of materials sold in the second quarter of 2020 is due to decreased shipping volumes and decreased market metals pricing discussed above. Cost of materials sold decreased $239.1 million, or 33.3%, to $478.8 million during the six months ended June 30, 2020 from $717.9 million during the six months ended June 30, 2019. The decrease in cost of materials sold in the first six months of 2020 is related to decreased sales volumes and decreased market metals pricing discussed above.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 21.0% in the second quarter of 2020 compared to 18.1% in the second quarter of 2019. As a percentage of net sales, gross profit increased to 20.6% in the six months ended June 30, 2020 compared to 18.0% in the six months ended June 30, 2019. The increase in the gross profit as a percentage of net sales is due to the decreased average selling price as the gross profit per ton only decreased by 2% in the second quarter of 2020 and 4% during the first six months of 2020 compared to the same periods in 2019.
Operating expenses in the second quarter of 2020 decreased $12.2 million, or 17.0%, to $59.5 million from $71.7 million in the second quarter of 2019. As a percentage of net sales, operating expenses increased to 24.0% for the second quarter of 2020 from 16.7% in the comparable 2019 period. Operating expenses in the carbon flat products segment decreased $7.3 million, operating expenses in the specialty metals flat products segment decreased $2.5 million, operating expenses in the tubular and pipe products segment decreased $1.7 million, and Corporate expenses decreased $0.7 million. Operating expenses decreased in all categories, except depreciation and amortization expenses due to decreased variable expenses such as distribution expenses, labor expenses, and warehouse expenses associated with the decreased shipping volumes discussed above, decreased performance based incentive compensation and our COVID-19 related cost reduction efforts. Operating expenses in the second quarter of 2020 include $3.6 million of restructuring and other charges related to the loss on sale of idled real estate, charges related to the exit from our leased Monterrey, Mexico facility and COVID-related severance and bad debt expense which were recorded to the carbon and specialty metals flat-products segments.
Operating expenses in the first six months of 2020 decreased $16.8 million, or 11.6%, to $128.4 million from $145.2 million in the first six months of 2019. As a percentage of net sales, operating expenses increased to 21.3% in the first six months of 2020 from 16.6% for the first six months of 2019. Operating expenses in the carbon flat products segment decreased $10.1 million, operating expenses in the specialty metals flat products segment decreased $2.6 million, operating expenses in the tubular and pipe products segment decreased $3.1 million, and Corporate expenses decreased $1.1 million. Operating expenses decreased in all categories, except depreciation and amortization expenses due to decreased variable expenses such as distribution, labor expenses, and warehouse expenses associated with the decreased shipping volumes discussed above, decreased performance based incentive compensation, and our COVID-19 related cost reduction efforts. Operating expenses in the first six months of 2020 include $3.6 million of restructuring and other charges related to the loss on sale of idled real estate, charges related to the exit from our leased Monterrey, Mexico facility and COVID-related severance and bad debt expense which were recorded to the carbon and specialty metals flat-products segments.
Interest and other expense on debt totaled $1.9 million, or 0.8% of net sales, for the second quarter of 2020 compared to $3.2 million, or 0.8% of net sales, for the second quarter of 2019. Interest and other expense on debt totaled $4.1 million, or 0.7% of net sales, for the first six months of 2020 compared to $6.4 million, or 0.7% of net sales, for the first six months of 2019. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 3.4% for the first six months of 2020 compared to 4.0% for the first six months of 2019. The decreased effective borrowing rate is due to the decrease in the London Interbank Offered Rate (LIBOR) compared to the first half of 2019. Total average borrowings decreased $96.7 million, or 32.2%, from $300.4 million in the first six months of 2019 to $203.7 million in the first six months of 2020, primarily related to decreased working capital needs in 2020.
For the second quarter of 2020, loss before income taxes totaled $9.4 million compared to income of $2.7 million in the second quarter of 2019. For the first half of 2020, loss before income taxes totaled $8.6 million compared to income of $5.6 million in the first half of 2019.
An income tax benefit of 31.4% was recorded for the second quarter of 2020, compared to an income tax provision of 23.1% for the second quarter of 2019. The higher rate in 2020 was attributable to the ability for current year net operating losses to be carried back to prior years when the Federal tax rate was 35% due to changes from the Coronavirus Aid, Relief, and Economic Security Act. An income tax benefit of 31.9% was recorded for the first six months of 2020, compared to an income tax provision of 25.2% for the first six months of 2019. Normally, our tax provision or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are considered in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. However, due to the COVID-19 pandemic, we are unable to accurately forecast an estimated annual effective tax rate. Therefore, we have recorded the tax provision for the second quarter and first half of 2020 using an actual effective tax rate as of June 30, 2020.
Net loss for the second quarter of 2020 totaled $6.5 million or $0.56 per basic and diluted share, compared to income of $2.1 million or $0.18 per basic and diluted share for the second quarter of 2019. Net loss for the first six months of 2020 totaled $5.9 million or $0.51 per basic and diluted share, compared to income of $4.2 million or $0.36 per basic and diluted share for the first six months of 2019.
Segment Operations
Carbon flat products
The following table presents selected operating results for our carbon flat products segment for the periods indicated (dollars are shown in thousands, except for per ton information):
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
| $ |
% of net sales |
$ |
% of net sales |
$ |
% of ne sales |
$ |
% of net sales |
|||||||||||||||||||||||||
| Direct tons sold |
176,732 | 249,210 | 423,832 | 507,024 | ||||||||||||||||||||||||||||
| Toll tons sold |
8,092 | 17,992 | 24,102 | 33,349 | ||||||||||||||||||||||||||||
| Total tons sold |
184,824 | 267,202 | 447,934 | 540,373 | ||||||||||||||||||||||||||||
| Net sales |
$ | 140,811 | 100.0 | $ | 255,870 | 100.0 | $ | 343,778 | 100.0 | $ | 534,406 | 100.0 | ||||||||||||||||||||
| Average selling price per ton |
762 | 958 | 767 | 989 | ||||||||||||||||||||||||||||
| Cost of materials sold |
114,925 | 81.6 | 212,784 | 83.2 | 278,062 | 80.9 | 446,100 | 83.5 | ||||||||||||||||||||||||
| Gross profit (a) |
25,886 | 18.4 | 43,086 | 16.8 | 65,716 | 19.1 | 88,306 | 16.5 | ||||||||||||||||||||||||
| Operating expenses (b) |
35,314 | 25.1 | 42,614 | 16.6 | 76,490 | 22.2 | 86,608 | 16.2 | ||||||||||||||||||||||||
| Operating income (loss) |
$ | (9,428 | ) | (6.7 | ) | $ | 472 | 0.2 | $ | (10,774 | ) | (3.1 | ) | $ | 1,698 | 0.3 | ||||||||||||||||
| (a) Gross profit is calculated as net sales less the cost of materials sold. |
| (b) Operating expenses are calculated as total costs and expenses less the cost of materials sold. Operating expenses for the three and six months ended June 30, 2020 includes $3.6 million of restructuring and other charges. |
Tons sold by our carbon flat products segment decreased 82 thousand tons, or 30.1%, to 185 thousand in the second quarter of 2020 from 267 thousand in the second quarter of 2019. Tons sold by our carbon flat products segment decreased 92 thousand tons, or 17.1% to 448 thousand in the first half of 2020 from 540 thousand in the first half of 2019. Since the end of the first quarter of 2020, some customers – particularly those associated with the automotive industry – announced temporary closures due to the COVID-19 pandemic with re-openings delayed until May. Additionally, customers across most other industrial segments announced temporary closings. These collective temporary closings negatively impacted our second quarter tons sold and their effect is expected to continue in the third and fourth quarters of 2020.
Net sales in our carbon flat products segment decreased $115.1 million, or 45.0%, to $140.8 million in the second quarter of 2020 from $255.9 million in the second quarter of 2019. The decrease in sales was due to a 30.8% decrease in sales volume, and a 20.4% decrease in average selling prices during the second quarter of 2020 compared to the second quarter of 2019. Average selling prices in the second quarter of 2020 were $762 per ton, compared with $958 per ton in the second quarter of 2019, and $771 per ton in the first quarter of 2020.
Net sales in our carbon flat products segment decreased $190.6 million, or 35.7%, to $343.8 million in the first half of 2020 from $534.4 million in the first half of 2019. The decrease in sales was due to a 17.1% decrease in sales volume and a 22.4% decrease in average selling prices compared to the first half of 2019. Average selling prices in the first half of 2020 were $767 per ton, compared with $989 per ton in the first half of 2019. The decrease in the average selling price is a result of the market pricing dynamics discussed in the overview of Results of Operations above.
Cost of materials sold decreased $97.9 million, or 46.0%, to $114.9 million in the second quarter of 2020 from $212.8 million in the second quarter of 2019. Cost of materials sold decreased $168.0 million, or 37.7%, to $278.1 million in the first half of 2020 from $446.1 million in the first half of 2019. The decrease was due to decreased sales volumes and the decreased market price for metals discussed above.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 18.4% in the second quarter of 2020 compared to 16.8% in the second quarter of 2019. Gross profit decreased $21 per ton to $140 per ton in the second quarter of 2020 from $161 per ton in the second quarter of 2019.
As a percentage of net sales, gross profit increased to 19.1% in the six months ended June 30, 2020 compared to 16.5% in the six months ended June 30, 2019. Gross profit decreased $16 per ton to $147 per ton in the six months ended June 30, 2020 from $163 per ton in the six months ended June 30, 2019. The increase in gross profit percentage in 2020 was primarily due to the impact of lower average selling prices in the first half and second quarter of 2020 compared to the first half and second quarter of 2019.
Operating expenses in the second quarter of 2020 decreased $7.3 million, or 17.1%, to $35.3 million from $42.6 million in the second quarter of 2019. As a percentage of net sales, operating expenses increased to 25.1% for the second quarter of 2020 from 16.6% in the comparable 2019 period. Operating expenses in the first half of 2020 decreased $10.1 million, or 11.7%, to $76.5 million from $86.6 million in the first half of 2019. As a percentage of net sales, operating expenses increased to 22.2% for the first half of 2020 from 16.2% in the comparable 2019 period. Operating expenses decreased in all categories, except for occupancy, depreciation and amortization expenses due to decreased variable expenses such as distribution expense, labor expenses, and warehouse expenses due to the decreased shipping volumes discussed above, decreased performance based incentive compensation and our COVID-19 related cost reduction efforts. Operating expenses in 2020 include $3.6 million of restructuring and other charges related to the loss on sale of idled real estate, charges related to the exit from our leased Monterrey, Mexico facility and COVID-related severance and bad debt expense.
Operating loss for the second quarter of 2020 totaled $9.4 million, or -6.7% of net sales, compared to income of $0.5 million, or 0.2% of net sales for the second quarter of 2019. Operating loss for the six months ended June 30, 2020 totaled $10.8 million, or -3.1% of net sales, compared to income of $1.7 million, or 0.3% of net sales for the six months ended June 30, 2019.
Specialty metals flat products
The following table presents selected operating results for our specialty metals flat products segment for the periods indicated (dollars are shown in thousands, except for per ton information):
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
| $ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
|||||||||||||||||||||||||
| Direct tons sold |
21,081 | 34,271 | 53,453 | 66,461 | ||||||||||||||||||||||||||||
| Toll tons sold |
3,256 | 3,121 | 5,454 | 6,715 | ||||||||||||||||||||||||||||
| Total tons sold |
24,337 | 37,392 | 58,907 | 73,176 | ||||||||||||||||||||||||||||
| Net sales |
$ | 54,495 | 100.0 | $ | 96,058 | 100.0 | $ | 142,983 | 100.0 | $ | 184,155 | 100.0 | ||||||||||||||||||||
| Average selling price per ton |
2,239 | 2,569 | 2,427 | 2,517 | ||||||||||||||||||||||||||||
| Cost of materials sold |
45,083 | 82.7 | 82,195 | 85.6 | 121,318 | 84.8 | 158,440 | 86.0 | ||||||||||||||||||||||||
| Gross profit (a) |
9,412 | 17.3 | 13,863 | 14.4 | 21,665 | 15.2 | 25,715 | 14.0 | ||||||||||||||||||||||||
| Operating expenses (b) |
7,421 | 13.6 | 9,895 | 10.3 | 16,939 | 11.8 | 19,503 | 10.6 | ||||||||||||||||||||||||
| Operating income |
$ | 1,991 | 3.7 | $ | 3,968 | 4.1 | $ | 4,726 | 3.3 | $ | 6,212 | 3.4 | ||||||||||||||||||||
| (a) Gross profit is calculated as net sales less the cost of materials sold. |
| (b) Operating expenses are calculated as total costs and expenses less the cost of materials sold. |
Tons sold by our specialty metals flat products segment decreased 13 thousand tons, or 34.9%, to 24 thousand in the second quarter of 2020 from 37 thousand in the second quarter of 2019. Tons sold by our specialty metals flat products segment decreased 14 thousand tons, or 19.5%, to 59 thousand in the six months ended June 30, 2020 from 73 thousand in the six months ended June 30, 2019. The decrease in tons sold in the second quarter and first half of 2020 is related to decreased customer demand due to the COVID-19 pandemic.
Net sales in our specialty metals flat products segment decreased $41.6 million, or 43.3%, to $54.5 million in the second quarter of 2020 from $96.1 million in the second quarter of 2019. The decrease in sales was due to the 34.9% volume decrease and a 12.8% decrease in the average selling prices during the second quarter of 2020 compared to the second quarter of 2019. Average selling prices in the second quarter of 2020 were $2,239 per ton compared to $2,569 per ton in the second quarter of 2019 and $2,560 per ton in the first quarter of 2020.
Net sales in our specialty metals flat products segment decreased $41.2 million, or 22.4%, to $143.0 million in the first half of 2020 from $184.2 million in the first half of 2019. The decrease in sales was due to the 19.5% decrease in sales volume and 3.5% decrease in the average selling prices during the first half of 2020 compared to the first half of 2019. Average selling prices in the first half of 2020 were $2,427 per ton, compared with $2,517 per ton in the first half of 2019.
Cost of materials sold decreased $37.1 million, or 45.2%, to $45.1 million in the second quarter of 2020 from $82.2 million in the second quarter of 2019. Cost of materials sold decreased $37.1 million, or 23.4%, to $121.3 million in the first half of 2020 from $158.4 million in the first half of 2019. The decrease in cost of materials sold during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was related to the decreased sales volume and decreased metal pricing discussed above.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 17.3% in the second quarter of 2020 from 14.4% in the second quarter of 2019. As a percentage of net sales, gross profit increased to 15.2% in the first half of 2020 from 14.0% in the first half of 2019. The increase in the gross profit percentage was primarily a result of the impact of selling lower costed inventory in the second quarter and first half of 2020 compared to the comparable periods in 2019.
Operating expenses in the second quarter of 2020 decreased $2.5 million, or 25.0%, to $7.4 million from $9.9 million in the second quarter of 2019. As a percentage of net sales, operating expenses increased to 11.8% of net sales in the second quarter of 2020 from 10.6% in the second quarter of 2019. Operating expenses in the first half of 2020 decreased $2.6 million, or 13.2%, to $16.9 million from $19.5 million in the first half of 2019. As a percentage of net sales, operating expenses increased to 11.8% of net sales for the half of 2020 compared to 10.6% for the first half of 2019. Variable operating expenses decreased as a result of lower shipping volumes, lower performance based incentive compensation, and our COVID-19 related cost reduction efforts.
Operating income for the second quarter of 2020 totaled $2.0 million, or 3.7% of net sales, compared to $4.0 million, or 4.1% of net sales, for the second quarter of 2019. Operating income for the six months ended June 30, 2020 totaled $4.7 million, or 3.3% of net sales, compared to operating income of $6.2 million, or 3.4% of net sales, for the six months ended June 30, 2019.
Tubular and pipe products
The following table presents selected operating results for our tubular and pipe products segment for the periods indicated (dollars are shown in thousands):
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
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| 2020 |
2019 |
2020 |
2019 |
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| $ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
$ |
% of net sales |
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| Net sales |
$ | 52,990 | 100.0 | $ | 77,223 | 100.0 | $ | 115,915 | 100.0 | $ | 156,509 | 100.0 | ||||||||||||||||||||
| Cost of materials sold (a) |
36,229 | 68.4 | 56,515 | 73.2 | 79,379 | 68.5 | 113,336 | 72.4 | ||||||||||||||||||||||||
| Gross profit (b) |
16,761 | 31.6 | 20,708 | 26.8 | 36,536 | 31.5 | 43,173 | 27.6 | ||||||||||||||||||||||||
| Operating expenses (c) |
14,536 | 27.4 | 16,232 | 21.0 | 30,006 | 25.9 | 33,082 | 21.0 | ||||||||||||||||||||||||
| Operating income |
$ | 2,225 | 4.2 | $ | 4,476 | 5.8 | $ | 6,530 | 5.7 | $ | 10,091 | 6.5 | ||||||||||||||||||||
| (a) Includes $500 and $1,000 of LIFO income for the three and six months ended June 30, 2020, respectively. Includes $250 of LIFO income for the three and six months ended June 30, 2019. |
| (b) Gross profit is calculated as net sales less the cost of materials sold. |
| (c) Operating expenses are calculated as total costs and expenses less the cost of materials sold. |
Net sales decreased $24.2 million, or 31.4%, to $53.0 million in the second quarter of 2020 from $77.2 million in the second quarter of 2019. The decrease is a result of a 31.1% decrease in sales volume as average selling prices did not change significantly in the second quarter of 2020 compared to the second quarter of 2019. Net sales decreased $40.6 million, or 25.9%, to $115.9 million in the first half of 2020 from $156.5 million in the first half of 2019. The decrease is a result of a 21.2% decrease in sales volume and a 6.0% decrease in average selling prices during the first half of 2020 compared to the first half of 2019. The decrease in net sales in the second quarter and first half of 2020 is related to decreased customer demand due to the COVID-19 pandemic.
Cost of materials sold decreased $20.3 million, or 35.9%, to $36.2 million in the second quarter of 2020 from $56.5 million in the second quarter of 2019. The decrease in cost of materials sold is due to decreased sales volumes and decreased metals pricing. In the three and six months ended June 30, 2020, we recorded $0.5 million and $1.0 million of LIFO income, respectively, compared to $0.3 million of LIFO income in the three and six months ended June 30, 2019.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 31.6% in the second quarter of 2020 compared to 26.8% in the second quarter of 2019. As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 31.5% in the first half of 2020 compared to 27.6% in the first half of 2019. As a percentage of net sales, the LIFO income recorded in the three and six months ended June 30, 2020 increased gross profit by 0.9%. As a percentage of net sales, the LIFO income recorded in the three and six months ended June 30, 2019 increased gross profit by 0.3%. and 0.2%, respectively.
Operating expenses in the second quarter of 2020 decreased $1.7 million, or 10.5%, to $14.5 million from $16.2 million in the second quarter of 2020. Operating expenses increased to 27.4% of net sales in the second quarter of 2020 compared to 21.0% in the second quarter of 2019. Operating expenses in the first half of 2020 decreased $3.1 million, or 9.3%, to $30.0 million from $33.1 million in the first half of 2019. Operating expenses increased to 25.9% of net sales in the first half of 2020 compared to 21.0% in the first half of 2019. Operating expenses decreased in all categories, primarily as a result of lower sales volumes and our COVID-19 related cost reduction efforts.
Operating income for the second quarter of 2020 totaled $2.2 million, or 4.2% of net sales, compared to $4.5 million, or 5.8% of net sales, for the second quarter of 2019. Operating income for the first half of 2020 totaled $6.5 million, or 5.7% of net sales, compared to $10.1 million, or 6.5% of net sales, in the first half of 2019.
Corporate expenses
Corporate expenses in the second quarter of 2020 decreased $0.7 million to $2.3 million, compared to $3.0 million in the second quarter of 2019. Corporate expenses decreased $1.1 million to $4.9 million in the first half of 2020 compared to $6.0 million in the first half of 2019. The decreases in corporate expenses are primarily attributable to decreased variable incentive compensation related to decreased operating income and our COVID-19 related cost reduction efforts.
Liquidity, Capital Resources and Cash Flows
Our principal capital requirements include funding working capital needs, purchasing, upgrading and acquiring processing equipment and facilities, making acquisitions and paying dividends. We use cash generated from operations and borrowings under our credit facility to fund these requirements.
We believe that funds available under our ABL Credit Facility together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements, our dividend payments and any share repurchases and business acquisitions over at least the next 12 months. However, if the COVID-19 pandemic suppresses business levels and metals prices for a prolonged period of time, we may need to seek some sources of liquidity beyond our current ABL Credit Facility. Additionally, the COVID-10 pandemic could adversely impact our ability to access our traditional financing sources on the same or reasonably similar terms as were available before the pandemic. Our entire real estate portfolio is unencumbered by debt and could be used to generate additional liquidity, if required. We expect to generate cash and liquidity during the COVID-19 pandemic from working capital as business levels and metals pricing decreases. In addition, we have limited our capital spending during the COVID-19 pandemic to projects already in process, essential maintenance projects and safety initiatives. In the future, we may as part of our business strategy, acquire and dispose of assets or other companies in the same or complementary lines of business, or enter into or exit strategic alliances and joint ventures. Accordingly, the timing and size of our capital requirements are subject to change as business conditions warrant and opportunities arise.
Operating Activities
For the six months ended June 30, 2020, we generated $3.5 million of net cash for operations, of which $4.6 million was generated from operating activities and $1.1 million was used for working capital. For the six months ended June 30, 2019, we generated $52.2 million of net cash for operations, net of assets acquired as part of the McCullough acquisition on January 2, 2019, of which $12.6 million was generated from operating activities and $39.6 million was generated from working capital.
Net cash from operations totaled $4.6 million during the first half of 2020 and mainly consisted of depreciation and amortization of $10.1 million added back to the net loss of $5.9 million, loss on sale of fixed asset of $2.1 million, stock-based compensation of $0.6 million, offset by changes in other long-term assets of $2.6 million. Net cash from operations totaled $12.6 million during the first half of 2019 and mainly consisted of net income of $4.2 million, depreciation and amortization of $9.8 million and stock-based compensation of $1.6 million, offset by changes in other long-term assets and other long-term liabilities of $2.8 million.
Working capital at June 30, 2020 totaled $320.8 million, a $2.0 million increase from December 31, 2019. The increase was primarily attributable to a $3.5 million decrease in accounts payable and outstanding checks and a $3.5 million decrease in accrued payroll and other accrued liabilities, offset by a $4.0 million decrease in accounts receivable and a $3.8 million decrease in inventory.
Investing Activities
Net cash used for investing activities was $5.6 million during the six months ended June 30, 2020, compared to $15.2 million during the six months ended June 30, 2019. The $6.2 million of capital expenditures were primarily attributable to additional processing equipment at our existing facilities. Net cash used for investing activities in 2019 was primarily related to the $11.0 million acquisition of McCullough Industries and $4.4 million of capital expenditures for completion of a building expansion and additional processing equipment at our existing facilities. During 2020, we expect our capital spending to be significantly less than our annual depreciation expense. During the COVID-19 pandemic, we are limiting our spending to projects already in process, essential maintenance projects and safety initiatives.
Financing Activities
During the first six months of 2020, $3.4 million of cash was generated from financing activities, which primarily consisted of $4.0 million of net borrowings under our ABL Credit Facility offset by $0.1 million of stock repurchases and $0.4 million of dividends paid.
Dividends paid were $0.4 million for both the six months ended June 30, 2020 and June 30, 2019. In August 2020, our Board of Directors, or Board, approved a regular quarterly dividend of $0.02 per share, which will be paid on September 15, 2020 to shareholders of record as of September 1, 2020. Regular dividend distributions in the future are subject to the availability of cash, the $5.0 million annual limitation on cash dividends and common stock repurchases under our ABL Credit Facility and continuing determination by our Board that the payment of dividends remains in the best interest of our shareholders.
Stock Repurchase Program
In 2015, our Board authorized a stock repurchase program of up to 550,000 shares of our issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Repurchased shares will be held in our treasury, or canceled and retired as our Board may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility. Under the ABL Credit Facility, we may repurchase common stock and pay dividends up to $5.0 million in the aggregate during any trailing twelve months without restrictions. Purchases in excess of $5.0 million require us to (i) maintain availability in excess of 20% of the aggregate revolver commitments ($95.0 million at June 30, 2020) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($71.3 million at June 30, 2020) and we must maintain a pro-forma ratio of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will depend upon several factors, including market and business conditions, and limitations under the ABL Credit Facility, and repurchases may be discontinued at any time.
There were no shares repurchased during the three months ended June 30, 2020. During the three months ended June 30, 2019, we repurchased 105,534 shares, for an aggregate cost of $1.5 million. During the six months ended June 30, 2020 and 2019, we repurchased 15,000 shares and 109,334 shares, for an aggregate cost of $0.1 million and $1.5 million, respectively.
Debt Arrangements
Our ABL Credit Facility, is collateralized by our accounts receivable inventory and personal property. The ABL Credit Facility consists of (i) a revolving credit facility of $445 million, including a $20 million sub-limit for letters of credit and (ii) a first in, last out revolving credit facility of up to $30 million. Under the terms of the ABL Credit Facility, we may request additional commitments in the aggregate principal amount of up to $200 million to the extent that existing or new lenders agree to provide such additional commitments. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $475 million in the aggregate. The ABL Credit Facility matures on December 8, 2022.
The ABL Credit Facility contains customary representations and warranties and certain covenants that limit our ability to, among other things: (i) incur or guarantee additional indebtedness; (ii) pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; (iii) make investments; (iv) sell assets; (v) enter into agreements that restrict distributions or other payments from restricted subsidiaries to us; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of our assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires (i) if any commitments or obligations are outstanding our availability is less than the greater of $30 million or 10.0% of the aggregate amount of revolver commitments or 10.0% of the aggregate borrowing base then we must maintain a ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve fiscal month period.
We have the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.25% or LIBOR plus a premium ranging from 1.25% to 2.75%.
As of June 30, 2020, we were in compliance with our covenants and had approximately $86.4 million of availability under the ABL Credit Facility.
As of June 30, 2020, $1.1 million of bank financing fees were included in “Prepaid expenses and other” and “Other long-term assets” on the accompanying Consolidated Balance Sheets. The financing fees are being amortized over the five-year term of the ABL Credit Facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.
On January 10, 2019, we entered into a five-year forward starting fixed-rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. The interest rate hedge fixed the rate at 2.57%.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We monitor and evaluate our estimates and assumptions, based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
We review our financial reporting and disclosure practices and accounting practices quarterly to ensure they provide accurate and transparent information relative to the current economic and business environment. For further information regarding the accounting policies that we believe to be critical accounting policies that affect our more significant judgments and estimates used in preparing our Consolidated Financial Statements, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our principal raw materials are carbon, coated and stainless steel, and aluminum, pipe and tube, flat-rolled coil, sheet and plate that we typically purchase from multiple primary metals producers. The metals industry as a whole is cyclical and, at times, pricing and availability of metals can be volatile due to numerous factors beyond our control, including, but not limited to, general domestic and international economic conditions, the levels of metals imported into the United States, labor costs, sales levels, competition, levels of inventory held by other metals service centers, consolidation of metals producers, new global capacity by metals producers, higher raw material costs for the producers of metals, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.
We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price metals purchase contracts. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our business could be adversely affected. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and inventory lower of cost or market adjustments as we sell existing inventory. Significant or rapid declines in metals prices or reductions in sales volumes could adversely impact our ability to remain in compliance with certain financial covenants in our credit facility, as well as result in us incurring inventory or intangible asset impairment charges. Changing metals prices therefore could significantly impact our net sales, gross profits, operating income and net income.
Rising metals prices result in higher working capital requirements for us and our customers. Some customers may not have sufficient credit lines or liquidity to absorb significant increases in the price of metals, especially given the negative impact of the COVID-19 pandemic. While we have generally been successful in the past in passing on producers’ price increases and surcharges to our customers, there is no guarantee that we will be able to pass on price increases to our customers in the future. Declining metals prices have generally adversely affected our net sales and net income, while increasing metals prices have generally favorably affected our net sales and net income.
Approximately 47% and 44% of our consolidated net sales during the first six months of 2020 and 2019, respectively, were directly related to industrial machinery and equipment manufacturers and their fabricators.
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing equipment, energy and borrowings under our ABL Credit Facility. General inflation, excluding increases in the price of metals and increased distribution expense, has not had a material effect on our financial results during the past two years.
We are exposed to the impact of fluctuating metals prices and interest rate changes. During 2020 and 2019, we entered into metals swaps at the request of customers. These derivatives have not been designated as hedging instruments. For certain customers, we enter into contractual relationships that entitle us to pass-through the economic effect of trading positions that we take with other third-parties on our customers’ behalf.
Our primary interest rate risk exposure results from variable rate debt. We have the option to enter into 30- to 180-day fixed base rate LIBOR loans under the ABL Credit Facility. On January 10, 2019, we entered into a five-year interest rate swap that locked the interest rate at 2.57% on $75 million of our revolving debt.
Item 4. Controls and Procedures
The evaluation required by Rule 13a-15(e) of the Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q has been carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports that are filed with or submitted to the SEC is: (i) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
Part II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II.
Item 1A. Risk Factors
The following updates should be read in conjunction with the risk factors set forth under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended by Item 1A of Part II of the Company’s Form 10-Q for the quarter ended March 31, 2020.
The COVID-19 pandemic has had, and could continue to have an adverse effect on our business, financial condition and liquidity.
The COVID-19 pandemic has had a material impact on our second quarter 2020 results. In particular, since the end of the first quarter of 2020, some customers, particularly those associated with the automotive industry, as well as other industrial segments, have implemented temporary closures and continue to experience delays with re-openings. These collective temporary closings have negatively impacted our sales and operating results, and we expect the effects will continue into the third and fourth quarters of 2020.
Although it is not possible to predict the ultimate impact of the COVID-19 pandemic, including on our business, financial position or liquidity, such impacts that may be material include, but are not limited to: (i) reduced sales and profit levels, (ii) the slower payment of accounts receivable and potential increases in uncollectible accounts receivable, (iii) falling metals prices that could lead to lower of cost or market inventory adjustments and the impairment of intangible and long-lived assets, (v) reduced availability and productivity of our employees, (vi) increased operational risks as a result of remote work arrangements, including the potential effects on internal controls, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events, (vii) negative impacts on our liquidity position, (viii) inability to access our traditional financing sources on the same or reasonably similar terms as were available before the COVID-19 pandemic, and (ix) increased costs and less ability to access funds under our ABL Credit Facility and the capital markets. To the extent the duration of any of these conditions extends for a longer period of time, the impact will generally be a more severe adverse impact.
In addition, we cannot predict the impact that the COVID-19 pandemic will ultimately have on our customers, suppliers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of the COVID-19 pandemic may also increase other risks discussed in Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended by Item 1A of Part II of the Company’s Form 10-Q for the quarter ended March 31, 2020, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
Item 6. Exhibits
| Exhibit |
Description of Document |
Reference |
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31.1 |
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Filed herewith |
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31.2 |
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Filed herewith |
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32.1 |
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Furnished herewith |
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32.2 |
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Furnished herewith |
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101 |
The following materials from Olympic Steel’s Quarterly Report on Form 10-Q for the period ended June 30, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Statements of Cash Flows, (iv) the Supplemental Disclosures of Cash Flow Information, (v) the Consolidated Statements of Shareholders’ Equity, (vi) Notes to Unaudited Consolidated Financial Statements and (vii) document and entity information. |
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104 |
Cover Pager Interactive Data File (embedded with the Inline XBRL document). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OLYMPIC STEEL, INC. |
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| (Registrant) |
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| Date: August 6, 2020 |
By: /s/ Richard T. Marabito |
| Richard T. Marabito |
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| Chief Executive Officer |
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| By: /s/ Richard A. Manson |
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| Richard A. Manson |
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| Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |