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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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 0-23320

 

 

OLYMPIC STEEL, INC.

(Exact name of registrant as specified in its charter)

 

   

 Ohio 34-1245650   
 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number) 
     
 22901 Millcreek Boulevard, Suite 650, Highland Hills, OH 44122 
 (Address of principal executive offices) (Zip Code) 

 

Registrant's telephone number, including area code (216) 292-3800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, without par value

ZEUS

The NASDAQ Stock Market, LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

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). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐ 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   No ☒

 

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 November 5, 2020 
 Common stock, without par value 11,074,900 

 

 

 

 
 

Olympic Steel, Inc.

Index to Form 10-Q

 

  Page No.
   
Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets – September 30, 2020 and December 31, 2019 (unaudited) 3
Consolidated Statements of Comprehensive Income (Loss) – for the three and nine months ended September 30, 2020 and 2019 (unaudited) 4
Consolidated Statements of Cash Flows – for the nine months ended September 30, 2020 and 2019 (unaudited) 5
Supplemental Disclosures of Cash Flow Information – for the nine months ended September 30, 2020 and 2019 (unaudited) 6
Consolidated Statements of Shareholders’ Equity – for the three and nine months ended September 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

 

2

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

 

  

As of

 
  

September 30, 2020

  

December 31, 2019

 
  

(unaudited)

 

Assets

        

Cash and cash equivalents

 $5,144  $5,742 

Accounts receivable, net

  148,555   133,572 

Inventories, net (includes LIFO debits of $1,698 and $598 as of September 30, 2020 and December 31, 2019, respectively)

  232,897   273,531 

Prepaid expenses and other

  8,120   6,997 

Total current assets

  394,716   419,842 

Property and equipment, at cost

  420,382   416,511 

Accumulated depreciation

  (272,769)  (260,264)

Net property and equipment

  147,613   156,247 

Goodwill

  3,423   3,423 

Intangible assets, net

  28,305   29,259 

Other long-term assets

  17,263   14,439 

Right of use assets, net

  27,983   26,345 

Total assets

 $619,303  $649,555 
         

Liabilities

        

Accounts payable

 $69,665  $69,452 

Accrued payroll

  10,313   13,196 

Other accrued liabilities

  10,541   12,850 

Current portion of lease liabilities

  5,985   5,589 

Total current liabilities

  96,504   101,087 

Credit facility revolver

  171,299   192,925 

Other long-term liabilities

  20,470   14,068 

Deferred income taxes

  10,011   12,262 

Lease liabilities

  22,184   20,861 

Total liabilities

  320,468   341,203 

Shareholders' Equity

        

Preferred stock

  -   - 

Common stock

  132,089   131,647 

Treasury stock

  -   (335)

Accumulated other comprehensive loss

  (4,532)  (2,281)

Retained earnings

  171,278   179,321 

Total shareholders' equity

  298,835   308,352 

Total liabilities and shareholders' equity

 $619,303  $649,555 

 

The accompanying notes are an integral part of these consolidated statements.

 

3

 

 

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share data)

(unaudited)

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $299,921  $384,230  $902,597  $1,259,300 

Costs and expenses

                

Cost of materials sold (excludes items shown separately below)

  239,967   311,104   718,726   1,028,980 

Warehouse and processing

  19,471   25,204   62,173   75,938 

Administrative and general

  16,507   18,552   52,577   58,077 

Distribution

  11,226   11,840   33,133   37,170 

Selling

  6,130   6,999   18,863   21,759 

Occupancy

  2,256   2,308   7,355   7,572 

Depreciation

  4,347   4,292   13,422   13,211 

Amortization

  380   350   1,145   998 

Total costs and expenses

  300,284   380,649   907,394   1,243,705 

Operating income (loss)

  (363)  3,581   (4,797)  15,595 

Other income (loss), net

  (25)  12   (68)  (33)

Income (loss) before interest and income taxes

  (388)  3,593   (4,865)  15,562 

Interest and other expense on debt

  1,693   2,569   5,823   8,985 

Income (loss) before income taxes

  (2,081)  1,024   (10,688)  6,577 

Income tax provision (benefit)

  (561)  433   (3,307)  1,831 

Net income (loss)

 $(1,520) $591  $(7,381) $4,746 

Gain (loss) on cash flow hedge

  470   (596)  (3,001)  (3,792)

Tax effect on cash flow hedge

  (118)  155   750   986 

Total comprehensive income (loss)

 $(1,168) $150  $(9,632) $1,940 
                 

Earnings per share:

                

Net income (loss) per share - basic

 $(0.13) $0.05  $(0.64) $0.41 

Weighted average shares outstanding - basic

  11,452   11,420   11,447   11,526 

Net income (loss) per share - diluted

 $(0.13) $0.05  $(0.64) $0.41 

Weighted average shares outstanding - diluted

  11,452   11,420   11,447   11,526 
                 

Dividends declared per share of common stock

 $0.02  $0.02  $0.06  $0.06 

 

The accompanying notes are an integral part of these consolidated statements.

 

4

 

 

Olympic Steel, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

(in thousands) 

(unaudited)

 

  

2020

  

2019

 
         

Cash flows from (used for) operating activities:

        

Net income (loss)

 $(7,381) $4,746 

Adjustments to reconcile net income (loss) to net cash from (used for) operating activities -

        

Depreciation and amortization

  14,955   14,597 

(Gain) loss on disposition of property and equipment

  2,030   (195)

Stock-based compensation

  922   1,898 

Other long-term assets

  (3,329)  (3,154)

Other long-term liabilities

  1,981   1,602 
   9,178   19,494 

Changes in working capital:

        

Accounts receivable

  (14,983)  7,676 

Inventories

  40,634   86,221 

Prepaid expenses and other

  (1,197)  3,213 

Accounts payable

  2,491   (12,160)

Change in outstanding checks

  (2,278)  5,403 

Accrued payroll and other accrued liabilities

  (5,192)  (10,492)
   19,475   79,861 

Net cash from operating activities

  28,653   99,355 
         

Cash flows from (used for) investing activities:

        

Acquisition

  -   (11,133)

Capital expenditures

  (7,968)  (7,479)

Proceeds from disposition of property and equipment

  1,150   234 

Net cash used for investing activities

  (6,818)  (18,378)
         

Cash flows from (used for) financing activities:

        

Credit facility revolver borrowings

  245,255   433,742 

Credit facility revolver repayments

  (266,880)  (513,269)

Credit facility fees and expenses

  -   (100)

Repurchase of common stock

  (145)  (1,522)

Dividends paid

  (663)  (659)

Net cash used for financing activities

  (22,433)  (81,808)
         

Cash and cash equivalents:

        

Net change

  (598)  (831)

Beginning balance

  5,742   9,319 

Ending balance

 $5,144  $8,488 

 

The accompanying notes are an integral part of these consolidated statements.

 

5

 

Olympic Steel, Inc.

Supplemental Disclosures of Cash Flow Information

For the Nine Months Ended September 30,

(in thousands)

(unaudited)

 

   

2020

   

2019

 
                 

Interest paid

  $ 5,515     $ 8,849  

Income taxes paid

  $ 37     $ 351  

  

The accompanying notes are an integral part of these consolidated statements. Olympic Steel, Inc.

 

6

 

 

Consolidated Statements of Shareholders’ Equity

 (in thousands)

(unaudited)

 

  

For the Three Months Ended September 30, 2020

 
          

Accumulated

         
          

Other

         
  

Common

  

Treasury

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Stock

  

Loss

  

Earnings

  

Equity

 
                     

Balance at June 30, 2020

 $131,803  $-  $(4,885) $173,020  $299,938 
                     

Net loss

  -   -   -   (1,520)  (1,520)

Payment of dividends

  -   -   -   (221)  (221)

Stock-based compensation

  286   -   -   -   286 

Restricted stock units converted to stock

  -   -   -   -   - 

Changes in fair value of hedges, net of tax

  -   -   352   -   352 

Other

  -   -   1   (1)  - 

Balance as of September 30, 2020

 $132,089  $-  $(4,532) $171,278  $298,835 

 

  

For the Nine Months Ended September 30, 2020

 
          

Accumulated

         
          

Other

         
  

Common

  

Treasury

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Stock

  

Loss

  

Earnings

  

Equity

 
                     

Balance at December 31, 2019

 $131,647  $(335) $(2,281) $179,321  $308,352 
                     

Net loss

  -   -   -   (7,381)  (7,381)

Payment of dividends

  -   -   -   (663)  (663)

Stock-based compensation

  922   -   -   -   922 

Restricted stock units converted to stock

  (480)  480   -   -   - 

Changes in fair value of hedges, net of tax

  -   -   (2,251)  -   (2,251)

Repurchase of common stock

  -   (145)  -   -   (145)

Other

  -   -   -   1   1 

Balance as of September 30, 2020

 $132,089  $-  $(4,532) $171,278  $298,835 

 

  

For the Three Months Ended September 30, 2019

 
          

Accumulated

         
          

Other

         
  

Common

  

Treasury

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Stock

  

Loss

  

Earnings

  

Equity

 
                     

Balance at June 30, 2019

 $132,420  $(1,653) $(2,365) $180,061  $308,463 
                     

Net income

  -   -   -   591   591 

Payment of dividends

  -   -   -   (220)  (220)

Stock-based compensation

  256   -   -   -   256 

Changes in fair value of hedges, net of tax

  -   -   (441)  -   (441)

Repurchase of common stock

  -   (1)  -   -   (1)

Balance as of September 30, 2019

 $132,676  $(1,654) $(2,806) $180,432  $308,648 

 

  

For the Nine Months Ended September 30, 2019

 
          

Accumulated

         
          

Other

         
  

Common

  

Treasury

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Stock

  

Loss

  

Earnings

  

Equity

 
                     

Balance at December 31, 2018

 $130,778  $(132) $-  $176,345  $306,991 
                     

Net income

  -   -   -   4,746   4,746 

Payment of dividends

  -   -   -   (659)  (659)

Stock-based compensation

  1,898   -   -   -   1,898 

Changes in fair value of hedges, net of tax

  -   -   (2,806)  -   (2,806)

Repurchase of common stock

  -   (1,522)  -   -   (1,522)

Balance as of September 30, 2019

 $132,676  $(1,654) $(2,806) $180,432  $308,648 

 

The accompanying notes are an integral part of these consolidated statements.

 

7

 

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2020

 

 

1.      Basis of Presentation:

 

The accompanying Unaudited 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 Unaudited Consolidated 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 segment 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 flat products 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 novel coronavirus (COVID-19) outbreak as a pandemic. The pandemic had a significant impact on the Company’s Consolidated Financial Statements for the nine months ended September 30, 2020, resulting in lower sales and a net loss for the year. 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 net realizable value 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.

 

8

 

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 September 30, 2020

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  27.3%  -   -   27.3%

Plate

  9.2%  -   -   9.2%

Cold Rolled

  6.3%  -   -   6.3%

Coated

  12.3%  -   -   12.3%

Specialty

  -   24.8%  -   24.8%

Tube

  -   -   17.0%  17.0%

Other

  0.9%  2.2%  -   3.1%

Total

  56.0%  27.0%  17.0%  100.0%

 

 

  

Disaggregated Revenue by Products Sold

 
  

For the Nine Months Ended September 30, 2020

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  29.3%  -   -   29.3%

Plate

  10.9%  -   -   10.9%

Cold Rolled

  5.8%  -   -   5.8%

Coated

  9.5%  -   -   9.5%

Specialty

  -   22.8%  -   22.8%

Tube

  -   -   18.5%  18.5%

Other

  1.2%  2.0%  -   3.2%

Total

  56.7%  24.8%  18.5%  100.0%

 

9

 

 

  

Disaggregated Revenue by Products Sold

 
  

For the Three Months Ended September 30, 2019

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  30.4%  -   -   30.4%

Plate

  11.8%  -   -   11.8%

Cold Rolled

  5.5%  -   -   5.5%

Coated

  8.1%  -   -   8.1%

Specialty

  -   23.4%  -   23.4%

Tube

  -   -   18.5%  18.5%

Other

  0.3%  2.0%  -   2.3%

Total

  56.1%  25.4%  18.5%  100.0%

 

 

  

Disaggregated Revenue by Products Sold

 
  

For the Nine Months Ended September 30, 2019

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  32.9%  -   -   32.9%

Plate

  12.6%  -   -   12.6%

Cold Rolled

  5.5%  -   -   5.5%

Coated

  7.7%  -   -   7.7%

Specialty

  -   20.3%  -   20.3%

Tube

  -   -   18.1%  18.1%

Other

  0.8%  2.1%  -   2.9%

Total

  59.5%  22.4%  18.1%  100.0%

 

 

 

 

3.

Accounts Receivable:

 

Accounts receivable are presented net of allowances for doubtful accounts and unissued credits of $2.9 million and $3.7 million as of September 30, 2020 and December 31, 2019, respectively. The allowance for credit losses is maintained at a level considered appropriate based on historical experience, specific customer collection issues that have been identified, current market conditions and estimates for supportable forecasts when appropriate. Estimations are based upon a calculated percentage of accounts receivable, which remains fairly level from year to year, and judgments about the probable effects of economic conditions on certain customers, which can fluctuate significantly from year to year. The Company cannot guarantee that the rate of future credit losses will be similar to past experience. The Company considers all available information when assessing the adequacy of its allowance for credit losses and unissued credits each quarter.

 

 

 

4.

Inventories:

 

Inventories consisted of the following:

 

  

Inventory as of

 

(in thousands)

 

September 30, 2020

  

December 31, 2019

 

Unprocessed

 $188,264  $220,787 

Processed and finished

  44,633   52,744 

Totals

 $232,897  $273,531 

 

10

 

The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At September 30, 2020 and December 31, 2019, approximately $36.9 million, or 15.8% of consolidated inventory, and $39.1 million, or 14.3% of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out (FIFO) method.

 

The Company recorded $0.1 million and $1.1 million of LIFO income during the three and nine months ended September 30, 2020, respectively, as current projections anticipate declining metals prices, which would increase the LIFO debit by December 31, 2020. The Company recorded $1.0 million and $1.3 million of LIFO income during the three and nine months ended September 30, 2019, respectively.

 

If the FIFO method had been in use, inventories would have been $1.7 million lower than reported at September 30, 2020 and $0.6 million lower than reported at December 31, 2019.

 

 

 

5.

Goodwill and Intangible Assets:

 

The Company’s intangible assets were recorded in connection with its acquisitions of EZ Dumper and McCullough (2019), its acquisition of Berlin Metals (2018) and its acquisition of CTI (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 fifteen years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the fifteen-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 one to five 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 non-compete agreements in future periods.

 

Goodwill, by reportable segment, was as follows as of September 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

 $1,065  $2,358  $-  $3,423 

Acquisitions

  -   -   -   - 

Impairments

  -   -   -   - 

Balance as of September 30, 2020

 $1,065  $2,358  $-  $3,423 

 

Intangible assets consisted of the following as of September 30, 2020 and December 31, 2019, respectively:

 

  

As of September 30, 2020

 

(in thousands)

 

Gross Carrying

Amount

  

Accumulated Amortization

  

Intangible Assets,

Net

 
             

Customer relationships - subject to amortization

 $18,022  $(8,801) $9,221 

Covenant not to compete - subject to amortization

  259   (170)  89 

Trade names - not subject to amortization

  18,995   -   18,995 
  $37,276  $(8,971) $28,305 

 

  

As of December 31, 2019

 

(in thousands)

 

Gross Carrying

Amount

  

Accumulated Amortization

  

Intangible Assets,

Net

 
             

Customer relationships - subject to amortization

 $18,022  $(7,900) $10,122 

Covenant not to compete - subject to amortization

  259   (117)  142 

Trade names - not subject to amortization

  18,995   -   18,995 
  $37,276  $(8,017) $29,259 

 

11

 

The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $1.3 million per year for the next year and $1.2 million per year for the four years thereafter.

 

 

 

6.

Leases:

 

The components of lease expense were as follows:

 

  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 
                 

Operating lease cost

 $1,767  $1,736  $5,322  $5,262 
                 

Finance lease cost:

                

Amortization of right-of-use assets

 $62  $20  $182  $38 

Interest on lease liabilities

  13   5   39   14 

Total finance lease cost

 $75  $25  $221  $52 

 

Supplemental cash flow information related to leases was as follows:

 

  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 
                 

Cash paid for lease liabilities:

                

Operating cash flows from operating leases

 $1,742  $1,712  $5,251  $5,256 

Operating cash flows from finance leases

  13   5   39   14 

Financing cash flows from finance leases

  58   19   173   31 

Total cash paid for lease liabilities

 $1,813  $1,736  $5,463  $5,301 

 

Supplemental balance sheet information related to leases was as follows:

 

  

September 30,

  

December 31,

 

(in thousands)

 

2020

  

2019

 
         

Operating Leases

        

Operating lease right-of-use asset

 $35,809  $31,624 

Operating lease accumulated depreciation

  (9,538)  (5,825)

Operating lease right-of-use asset, net

  26,271   25,799 
         

Other current liabilities

  5,689   5,481 

Operating lease liabilities

  20,753   20,418 

Total operating lease liabilities

 $26,442  $25,899 

 

12

 
  

September 30,

  

December 31,

 

(in thousands)

 

2020

  

2019

 
         

Finance Leases

        

Property and equipment, at cost

 $1,967  $613 

Accumulated depreciation

  (255)  (67)

Property and equipment, net

  1,712   546 
         

Other current liabilities

  296   108 

Other long-term liabilities

  1,431   443 

Total finance lease liabilities

 $1,727  $551 
         

Weighted Average Remaining Lease Term

        

Operating leases (in years)

  7   7 

Finance leases (in years)

  6   6 
         

Weighted Average Discount Rate

        

Operating leases

  3.76%  3.72%

Finance leases

  3.80%  4.01%

 

Maturities of lease liabilities were as follows:

 

  

Operating

  

Finance

 

(in thousands)

 

Leases

  

Leases

 
         

Year Ending December 31,

        

2020

 $1,730  $89 

2021

  6,312   353 

2022

  5,291   340 

2023

  4,313   296 

2024

  3,680   271 

Thereafter

  8,668   579 

Total future minimum lease payments

 $29,994  $1,928 

Less remaining imputed interest

  (3,552)  (201)

Total

 $26,442  $1,727 

 

 

 

7.

Debt:

 

The Company’s debt is comprised of the following components:

 

  

As of

 
  

September 30,

  

December 31,

 

(in thousands)

 

2020

  

2019

 

Asset-based revolving credit facility due December 8, 2022

 $171,299  $192,925 

Total debt

 $171,299  $192,925 

 

The Company’s asset-based credit facility (the ABL Credit Facility) is collateralized by the Company’s accounts receivable, inventory and personal property. The $475 million 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, the Company 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.

 

13

 

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 $30 million or 10.0% of the Line Cap, (which is defined as the lessor of the aggregate amount of revolver commitments or 10.0% of the aggregate borrowing base), then the Company must maintain a 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 for the most recent twelve fiscal month period.

 

The Company has 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 the London Interbank Offered Rate (LIBOR) plus a premium ranging from 1.25% to 2.75%.

 

On January 10, 2019, the Company 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%. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

 

As of September 30, 2020, the Company was in compliance with its covenants and had approximately $106 million of availability under the ABL Credit Facility.   

 

As of September 30, 2020, $1.0 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 (Loss).

 

 

 

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 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 nickel swaps matured in 2020. The swaps were settled with the brokers at maturity. The economic benefit or loss arising from the changes in fair value of the swaps was 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). There were no outstanding metals swaps as of September 30, 2020. The cumulative change in fair value of the metals swaps that had not yet settled are included in “Other accrued liabilities” on the Consolidated Balance Sheet as of December 31, 2019. The embedded customer derivatives are included in “Accounts Receivable, net” on the Consolidated Balance Sheet as of December 31, 2019.

 

Fixed-rate interest rate hedge

 

On January 10, 2019, the Company 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%. The interest rate hedge is included in “Other long-term liabilities” on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

 

14

 

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 nine months ended September 30, 2020 and 2019, respectively.

 

  

Net Gain (Loss) Recognized

 
  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 

Fixed interest rate hedge

 $(459) $(57) $(1,055) $(88)

Metals swaps

  82   177   55   310 

Embedded customer derivatives

  (82)  (177)  (55)  (310)

Total loss

 $(459) $(57) $(1,055) $(88)

 

 

 

9.

Fair Value of Assets and Liabilities:

 

During the three and nine months ended September 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 September 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 September 30, 2020

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Liabilities:

                

Fixed interest rate hedge

  -   6,043   -   6,043 

Total liabilities recorded at fair value

 $-  $6,043  $-  $6,043 

 

 

  

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

 $-  $4  $-  $4 

Total assets at fair value

 $-  $4  $-  $4 
                 

Liabilities:

                

Metals swaps

 $-  $4  $-  $4 

Fixed interest rate hedge

  -   3,042   -   3,042 

Total liabilities recorded at fair value

 $-  $3,046  $-  $3,046 

 

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 $171.3 million and $192.9 million as of September 30, 2020 and December 31, 2019, respectively. Management believes that its carrying value approximates fair value.

 

 

 

10.

Accumulated Other Comprehensive Loss:

 

On January 10, 2019, the Company 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%. The fair value of the interest rate hedge of $6.0 million, net of tax of $1.5 million is included in “Accumulated other comprehensive loss” on the Consolidated Balance Sheet as of September 30, 2020. The fair value of the interest rate hedge of $3.0 million, net of tax of $0.8 million is included in “Accumulated other comprehensive loss” on the Consolidated Balance Sheet as of December 31, 2019.

 

15

 
 

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, 1,000,000 shares of common stock have been authorized for equity grants.

 

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 $80,000. Subject to the terms of the Senior Management Stock Incentive Plan (the Plan) and the RSU agreement, the RSUs vest after one year of service (from the date of grant). The RSUs are not converted into shares of common stock until the director either resigns or is terminated from the board of directors.

 

Under the Plan, each eligible participant is awarded RSUs with a dollar value equal to 10% of the participant’s base salary, up to an annual maximum of $17,500. The RSUs have a five-year vesting period and the RSUs will convert into the right to receive shares of common stock upon a participant’s retirement, or earlier upon the participant’s death or disability or upon a change in control of the Company. New awards under the Plan for 2020 have been suspended.

 

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 51,506 RSUs and 14,891 RSUs, respectively. Upon Mr. Greiff’s promotion to President and Chief Operating Officer on January 1, 2020, he received 15,694 RSUs. The RSUs will vest five years from the grant date, or earlier upon death or disability or upon a change in control of the Company.

 

Stock-based compensation expense recognized on RSUs for the three and nine months ended September 30, 2020 and 2019, respectively, is summarized in the following table:

 

  

For the Three Months

Ended Septembeer 30,

  

For the Nine Months

Ended September 30,

 

(in thousands, except per share data)

 

2020

  

2019

  

2020

  

2019

 

RSU expense before taxes

 $286  $265  $973  $685 

RSU expense after taxes

 $204  $180  $672  $494 

 

All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

16

 

The following table summarizes the activity related to RSUs for the three and nine months ended September 30, 2020 and 2019:

 

  

 

As of September 30, 2020

 

  

 

As of September 30, 2019

 

 
  

Number of

  

Weighted Average

  

Number of

  

Weighted Average

 
  

Shares

  

Granted Price

  

Shares

  

Granted Price

 

Outstanding at December 31

  636,086  $19.25   527,546  $20.65 

Granted