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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 March 31, 2021

 

         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, 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 May 7, 2021 
 Common stock, without par value 11,077,322 

 

 

 
 

 

 

Olympic Steel, Inc.

Index to Form 10-Q

 

  Page No.
   
Part I. FINANCIAL INFORMATION  3
Item 1. Financial Statements  3
Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 (unaudited)  3
Consolidated Statements of Comprehensive Income – for the three months ended March 31, 2021 and 2020 (unaudited)  4
Consolidated Statements of Cash Flows – for the three months ended March 31, 2021 and 2020 (unaudited)  5
Supplemental Disclosures of Cash Flow Information – for the three months ended March 31, 2021 and 2020 (unaudited)  6
Consolidated Statements of Shareholders’ Equity – for the three months ended March 31, 2021 and 2020 (unaudited)  7
Notes to Unaudited Consolidated Financial Statements  8
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
Part II. OTHER INFORMATION 31
Item 6. Exhibits 32
SIGNATURES 33

 

2

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

 

  

As of

 
  

March 31, 2021

  

December 31, 2020

 
  

(unaudited)

 

Assets

        

Cash and cash equivalents

 $8,309  $5,533 

Accounts receivable, net

  210,695   151,601 

Inventories, net (includes LIFO debit of $1,115 and $2,115 as of March 31, 2021 and December 31, 2020, respectively)

  278,174   240,001 

Prepaid expenses and other

  10,940   5,069 

Total current assets

  508,118   402,204 

Property and equipment, at cost

  436,850   434,579 

Accumulated depreciation

  (282,226)  (277,379)

Net property and equipment

  154,624   157,200 

Goodwill

  5,234   5,123 

Intangible assets, net

  32,026   32,593 

Other long-term assets

  14,260   18,131 

Right of use assets, net

  24,097   25,354 

Total assets

 $738,359  $640,605 
         

Liabilities

        

Accounts payable

 $122,485  $87,291 

Accrued payroll

  15,661   10,985 

Other accrued liabilities

  29,830   22,869 

Current portion of lease liabilities

  5,436   5,580 

Total current liabilities

  173,412   126,725 

Credit facility revolver

  191,903   160,609 

Other long-term liabilities

  16,408   22,478 

Deferred income taxes

  13,968   9,818 

Lease liabilities

  18,893   19,965 

Total liabilities

  414,584   339,595 

Shareholders' Equity

        

Preferred stock

  -   - 

Common stock

  132,644   132,382 

Accumulated other comprehensive loss

  (3,499)  (4,215)

Retained earnings

  194,630   172,843 

Total shareholders' equity

  323,775   301,010 

Total liabilities and shareholders' equity

 $738,359  $640,605 

 

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

 

3

 

 

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the Three Months Ended March 31,

 

(in thousands, except per share data)

 

  

2021

  

2020

 
  

(unaudited)

 

Net sales

 $463,124  $354,380 

Costs and expenses

        

Cost of materials sold (excludes items shown seperately below)

  354,665   282,522 

Warehouse and processing

  23,407   23,076 

Administrative and general

  23,054   19,059 

Distribution

  13,562   12,289 

Selling

  8,466   6,810 

Occupancy

  3,145   2,660 

Depreciation

  4,650   4,516 

Amortization

  585   397 

Total costs and expenses

  431,534   351,329 

Operating income

  31,590   3,051 

Other income (loss), net

  (10)  (17)

Income before interest and income taxes

  31,580   3,034 

Interest and other expense on debt

  1,655   2,239 

Income before income taxes

  29,925   795 

Income tax provision

  7,917   202 

Net income

 $22,008  $593 

Gain (loss) on cash flow hedge

  955   (3,397)

Tax effect on cash flow hedge

  (239)  849 

Total comprehensive income (loss)

 $22,724  $(1,955)
         

Earnings per share:

        

Net income per share - basic

 $1.92  $0.05 

Weighted average shares outstanding - basic

  11,490   11,444 

Net income per share - diluted

 $1.91  $0.05 

Weighted average shares outstanding - diluted

  11,496   11,459 
         

Dividends declared per share of common stock

 $0.02  $0.02 

 

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

 

4

 

 

Olympic Steel, Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

 

(in thousands)

 

  

2021

  

2020

 
  

(unaudited)

 

Cash flows from (used for) operating activities:

        

Net income

 $22,008  $593 

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

        

Depreciation and amortization

  5,372   5,042 

Loss on disposition of property and equipment

  -   71 

Stock-based compensation

  262   359 

Other long-term assets

  5,114   (312)

Other long-term liabilities

  (1,575)  (764)
   31,181   4,989 

Changes in working capital:

        

Accounts receivable

  (59,094)  (32,210)

Inventories

  (38,173)  5,977 

Prepaid expenses and other

  (5,796)  608 

Accounts payable

  31,388   10,283 

Change in outstanding checks

  3,806   3,227 

Accrued payroll and other accrued liabilities

  10,968   (4,859)
   (56,901)  (16,974)

Net cash used for operating activities

  (25,720)  (11,985)
         

Cash flows from (used for) investing activities:

        

Capital expenditures

  (2,286)  (4,235)

Net cash used for investing activities

  (2,286)  (4,235)
         

Cash flows from (used for) financing activities:

        

Credit facility revolver borrowings

  113,571   107,391 

Credit facility revolver repayments

  (82,277)  (91,264)

Principal payment under capital lease obligation

  (176)  - 

Credit facility fees and expenses

  (115)  - 

Repurchase of common stock

  -   (145)

Dividends paid

  (221)  (220)

Net cash from financing activities

  30,782   15,762 
         

Cash and cash equivalents:

        

Net change

  2,776   (458)

Beginning balance

  5,533   5,742 

Ending balance

 $8,309  $5,284 

 

 

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

 

5

 

Olympic Steel, Inc.

Supplemental Disclosures of Cash Flow Information

For the Three Months Ended March 31,

 

(in thousands)

 

 

 

  

2021

  

2020

 
  

(unaudited)

 
         

Interest paid

 $1,479  $2,153 

Income taxes paid

 $240  $(7)

 

 

 

The Company incurred financing lease obligations of $1.0 million during the three months ended March 31, 2020. There were no new financing lease obligations during the three months ended March 31, 2021. This non-cash transaction has been excluded from the Consolidated Statements of Cash Flows for the three months ended March 31, 2020.

 

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

 

6

 

 

 

Olympic Steel, Inc.

Consolidated Statements of Shareholders Equity

For The Three Months Ended March 31,

 

(in thousands)

(unaudited)

 

          

Accumulated

         
          

Other

         
  

Common

  

Treasury

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Stock

  

Loss

  

Earnings

  

Equity

 
                     

Balance at December 31, 2020

 $132,382  $-  $(4,215) $172,843  $301,010 

Net income

 $-  $-  $-  $22,008  $22,008 

Payment of dividends

  -   -   -   (221)  (221)

Stock-based compensation

  262   -   -   -   262 

Changes in fair value of hedges, net of tax

  -   -   716   -   716 

Balance at March 31, 2021

 $132,644  $-  $(3,499) $194,630  $323,775 

 

 

 

                   

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 income

  $ -     $ -     $ -     $ 593     $ 593  

Payment of dividends

    -       -       -       (220 )     (220 )

Stock-based compensation

    359       -       -       -       359  

Changes in fair value of hedges, net of tax

    -       -       (2,548 )     -       (2,548 )

Repurchase of common stock

    -       (145 )     -       -       (145 )

Other

    -       -       -       1       1  

Balance at March 31, 2020

  $ 132,006     $ (480 )   $ (4,829 )   $ 179,695     $ 306,392  

 

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

 

7

 

 

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

March 31, 2021

 

 

 

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 2021 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, 2020. 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 the acquisitions of McCullough Industries (McCullough) and certain assets related to the manufacturing of the EZ Dumper® hydraulic dump inserts (EZ Dumper) in 2019, the carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and 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 the acquisition of Action Stainless & Alloys, Inc. (Action Stainless) on December 14, 2020, the specialty metals flat products segment expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe. Action Stainless offers a range of processing capabilities, including plasma, laser and waterjet cutting and computer numerical control (CNC) machining. Through the 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 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 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, the Company is unable to predict the impact that it ultimately will have on its financial condition, results of operations, comprehensive income (loss), and cash flows.

 

Impact of Recently Issued Accounting Pronouncements

 

There were no recently issued accounting pronouncements that would 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, and fabricated parts. 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 at a point in time upon transfer of control of the product to the customer.

 

8

 

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 time of shipment and terms are generally net 30 days. The Company has certain fabrication contracts in one business unit for which revenue is recognized over time as performance obligations are achieved. This fabrication business is not material to the Company's consolidated results.

 

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 March 31, 2021

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  28.1%  0.0%  0.0%  28.1%

Plate

  8.7%  0.0%  0.0%  8.7%

Cold Rolled

  6.2%  0.0%  0.0%  6.2%

Coated

  8.8%  0.0%  0.0%  8.8%

Specialty

  0.0%  25.6%  0.0%  25.6%

Tube

  0.0%  0.0%  19.5%  19.5%

Other

  1.4%  1.7%  0.0%  3.1%

Total

  53.2%  27.3%  19.5%  100.0%

 

 

  Disaggregated Revenue by Products Sold 
  

For the Three Months Ended March 31, 2020

 
  

Carbon flat

products

  

Specialty

metals flat

products

  

Tubular and

pipe products

  

Total

 

Hot Rolled

  30.0%  0.0%  0.0%  30.0%

Plate

  11.6%  0.0%  0.0%  11.6%

Cold Rolled

  5.6%  0.0%  0.0%  5.6%

Coated

  8.6%  0.0%  0.0%  8.6%

Specialty

  0.0%  25.0%  0.0%  25.0%

Tube

  0.0%  0.0%  17.8%  17.8%

Other

  1.4%  0.0%  0.0%  1.4%

Total

  57.2%  25.0%  17.8%  100.0%

 

 

 

3.

Accounts Receivable:

 

Accounts receivable are presented net of allowances for credit losses and unissued credits of $4.1 million and $3.6 million as of March 31, 2021 and December 31, 2020, 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.

 

9

 
 

4.

Inventories:

 

Inventories consisted of the following:

 

   

Inventory as of

 

(in thousands)

 

March 31, 2021

   

December 31, 2020

 

Unprocessed

  $ 220,466     $ 194,614  

Processed and finished

    57,708       45,387  

Totals

  $ 278,174     $ 240,001  

 

The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At March 31, 2021 and December 31, 2020, approximately $45.9 million, or 16.5% of consolidated inventory, and $50.3 million, or 21.0% 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.

 

During the three months ended March 31, 2021, the Company recorded $1.0 million of LIFO expense, as current projections anticipate increased metals prices by December 31, 2021 compared to December 31, 2020. During the three months ended March 31, 2020, the Company recorded $0.5 million of LIFO income.

 

If the FIFO method had been in use, inventories would have been $1.1 million and $2.1 million lower than reported at March 31, 2021 and December 31, 2020, respectively.

 

 

 

5.

Goodwill and Intangible Assets:

 

The Company’s intangible assets were recorded in connection with its acquisitions that occurred between 2011 and 2020. 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 noncompete agreements in future periods.

 

Goodwill, by reportable unit, was as follows as of March 31, 2021 and December 31, 2020, respectively. The goodwill is deductible for tax purposes. The change in goodwill during 2021 is related to adjustments to the preliminary purchase price allocation of the fair market values of the assets acquired and liabilities assumed for Action Stainless.

 

(in thousands)

 

Carbon Flat

Products

  

Specialty Metals

Flat Products

  

Tubular and

Pipe Products

  

Total

 
                 

Balance as of December 31, 2020

 $1,065  $4,058  $-  $5,123 

Acquisitions

  -   111   -   111 

Impairments

  -   -   -   - 

Balance as of March 31, 2021

 $1,065  $4,169  $-  $5,234 

 

10

 

Intangible assets consisted of the following as of March 31, 2021 and December 31, 2020, respectively:

 

  

As of March 31, 2021

 

(in thousands)

 

Gross Carrying Amount

  

Accumulated Amortization

  

Intangible Assets, Net

 
             

Customer relationships - subject to amortization

 $21,259  $(9,457) $11,802 

Covenant not to compete - subject to amortization

  259   (203)  56 

Trade name - not subject to amortization

  20,168   -   20,168 
  $41,686  $(9,660) $32,026 

 

  

As of December 31, 2020

 

(in thousands)

 

Gross Carrying Amount

  

Accumulated Amortization

  

Intangible Assets, Net

 
             

Customer relationships - subject to amortization

 $21,442  $(9,101) $12,341 

Covenant not to compete - subject to amortization

  259   (186)  73 

Trade name - not subject to amortization

  20,179   -   20,179 
  $41,880  $(9,287) $32,593 

 

The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $1.5 million per year for the next two years and $1.4 million per year for the three years thereafter.

 

 

 

6.

 Leases:

 

The components of lease expense were as follows:

 

  

Three Months Ended

  

Three Months Ended

 
  

March 31,

  

March 31,

 

(in thousands)

 

2021

  

2020

 
         

Operating lease cost

 $1,674  $1,777 
         

Finance lease cost:

        

Amortization of right-of-use assets

 $212  $60 

Interest on lease liabilities

  27   14 

Total finance lease cost

 $239  $74 

 

Supplemental cash flow information related to leases was as follows:

 

  

Three Months Ended

  

Three Months Ended

 
  

March 31,

  

March 31,

 

(in thousands)

 

2021

  

2020

 
         

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows from operating leases

 $1,645  $1,759 

Operating cash flows from finance leases

  27   14 

Financing cash flows from finance leases

  202   57 

Total cash paid for amounts included in the measurement of lease liabilities

 $1,874  $1,830 

 

11

 

Supplemental balance sheet information related to leases was as follows:

 

  

March 31,

  

December 31,

 

(in thousands)

 

2021

  

2020

 
         

Operating Leases

        

Operating lease

 $35,547  $36,060 

Operating lease accumulated amortization

  (11,450)  (10,706)

Operating lease right-of-use asset, net

  24,097   25,354 
         

Operating lease current liabilities

  5,436   5,580 

Operating lease liabilities

  18,893   19,965 

Total operating lease liabilities

 $24,329  $25,545 
         

Finance Leases

        

Finance lease

 $3,582  $3,582 

Finance lease accumulated depreciation

  (545)  (333)

Finance lease, net

  3,037   3,249 
         

Finance lease current liabilities

  822   815 

Finance lease liabilities

  2,245   2,453 

Total finance lease liabilities

 $3,067  $3,268 
         

Weighted Average Remaining Lease Term

        

Operating leases (in years)

  7   7 

Finance leases (in years)

  5   6 
         

Weighted Average Discount Rate

        

Operating leases

  3.75%  3.76%

Finance leases

  3.50%  3.80%

 

Maturities of lease liabilities were as follows:

 

  

Operating

  

Finance

 

(in thousands)

 

Leases

  

Leases

 
         

Year Ending December 31,

        

2021

 $4,775  $685 

2022

  5,475   851 

2023

  4,496   578 

2024

  3,791   492 

2025

  2,491   325 

Thereafter

  6,409   388 

Total future minimum lease payments

 $27,437  $3,319 

Less remaining imputed interest

  (3,108)  (252)

Total

 $24,329  $3,067 

 

12

 
 
 

7.

 Debt:

 

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

 

  

As of

 
  

March 31,

  

December 31,

 

(in thousands)

 

2021

  

2020

 

Asset-based revolving credit facility due December 8, 2022

 $191,903  $160,609 

Total debt

 $191,903  $160,609 

 

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 $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.

 

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 aggregate amount of revolver commitments ($47.5 million at March 31, 2021) or 10.0% of the aggregate borrowing base ($35.8 million at March 31, 2021) 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 March 31, 2021, the Company was in compliance with its covenants and had approximately $162 million of availability under the ABL Credit Facility.

 

As of March 31, 2021 and December 31, 2020, $0.8 million and $0.9 million, respectively, 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 2021 and 2020, 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 2021. 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.

 

13

 

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 as of March 31, 2021 are included in “Other accrued liabilities”, and the embedded customer derivatives are included in “Accounts Receivable, net” on the Consolidated Balance Sheets as of March 31, 2021. There were no outstanding metals swaps or embedded customer derivatives as of December 31, 2020.

 

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 March 31, 2021. 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.

 

The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income (Loss) through net income of the derivatives for the three months ended March 31, 2021 and 2020, respectively.

 

  

Net Gain (Loss) Recognized

 
  

For the Three Months Ended March 31,

 

(in thousands)

 

2021

  

2020

 

Fixed interest rate hedge

 $(463) $(202)

Metals swaps

  (17)  (112)

Embedded customer derivatives

  17   112 

Total loss

 $(463) $(202)

 

 

 

9.

Fair Value of Assets and Liabilities:

 

During the three months ended March 31, 2021, 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 March 31, 2021 since December 31, 2020.

 

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 March 31, 2021

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Embedded customer derivative

 $-  $15  $-  $15 

Total assets at fair value

 $-  $15  $-  $15 
                 

Liabilities:

                

Metal Swaps

 $-  $15  $-  $15 

Fixed interest rate hedge

     4,666      4,666 

Total liabilities recorded at fair value

 $-  $4,681  $-  $4,681 

 

14

 
  

Value of Items Recorded at Fair Value

 
  

As of December 31, 2020

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Liabilities:

                

Fixed interest rate hedge

 $-  $5,620  $-  $5,620 

Total liabilities recorded at fair value

 $-  $5,620  $-  $5,620 

 

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 $191.9 million and $160.6 million at March 31, 2021 and December 31, 2020, respectively. As the ABL Credit Facility was amended on December 14, 2020, 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 $4.7 million, net of tax of $1.2 million is included in “Accumulated other comprehensive loss” on the Consolidated Balance Sheets at March 31, 2021.

 

 

 

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 (RSUs), 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 RSUs, to each non-employee director as part of their annual compensation. The annual awards for 2021 and 2020 per director were $80,000. Subject to the terms of the Incentive 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 Incentive 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. Due to the COVID-19 pandemic, no awards were granted in 2020.

 

Under the Incentive Plan, the Company awards RSUs to newly-appointed executive officers, based upon a percentage of their base salary. 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 months ended March 31, 2021 and 2020, respectively, is summarized in the following table:

 

  

For the Three Months Ended

 
  

March 31,

 

(in thousands, except per share data)

 

2021

  

2020

 

RSU expense before taxes

 $262  $360 

RSU expense after taxes

 $193  $269 

 

15

 

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

 

The following table summarizes the activity related to RSUs for the three months ended March 31, 2021 and 2020, respectively:

 

  

As of March 31, 2021

  

As of March 31, 2020

  

Number of

  

Weighted Average

  

Number of

  

Weighted Average

  

Shares

  

Granted Price

  

Shares

  

Granted Price

Outstanding at December 31

  610,540  $18.25   636,086  $19.25

Granted

  20,604   23.29   70,588   11.92

Converted into shares

  -   -   (5,329)  15.94

Forfeited

  (2,172)  16.96   (494)  27.31

Outstanding at March 31

  628,972  $18.42   700,851  $18.53

Vested at March 31

  414,902  $17.94   445,781  $20.22

 

 

 

12.

Income Taxes:

 

For the three months ended March 31, 2021, the Company recorded an income tax provision of $7.9 million, or 26.5%, compared to an income tax provision of $0.2 million, or 25.4%, for the three months ended March 31, 2020.

 

For the three months ended March 31, 2021, the tax provision or benefit for the interim period 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 months ended March 31, 2020.

 

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.

 

 

 

13.

 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

 
  

March 31,

 

(in thousands, except per share data)

 

2021

  

2020

 

Weighted average basic shares outstanding

  11,490   11,444 

Assumed issuance of stock awards

  6   15 

Weighted average diluted shares outstanding

  11,496   11,459 

Net income

 $22,008  $593 

Basic earnings per share

 $1.92  $0.05 

Diluted earnings per share

 $1.91  $0.05 

Unvested RSUs

  214   255 

 

16

 
 

14.

  Stock Repurchase Program:

 

On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’s 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. Any of the repurchased shares are held in the Company’s treasury, or canceled and retired as the 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, the Company may repurchase common stock and pay dividends up to $5.0 million in the aggregate during any trailing twelve months without restrictions. Purchases of common stock or dividend payments in excess of $5.0 million in the aggregate require the Company to (i) maintain availability in excess of 20.0% of the aggregate revolver commitments ($95.0 million at March 31, 2021) or (ii) to maintain availability equal to or greater than 15.0% of the aggregate revolver commitments ($71.3 million at March 31, 2021) and the Company must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00.

 

During the three months ended March 31, 2020, the Company repurchased 15,000 shares for an aggregate cost of $145 thousand. There were no shares repurchased during the three months ended March 31, 2021. As of March 31, 2021, 360,212 shares remain authorized for repurchase under the program.

 

 

 

15.

  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 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, as 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.

 

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.

 

17

 

The following table provides financial information by segment and reconciles the Company’s operating income by segment to the consolidated income before income taxes for the three months ended March 31, 2021 and 2020, respectively.

 

  

For the Three Months Ended

 
  

March 31,

 

(in thousands)

 

2021

  

2020

 

Net sales

        

Specialty metals flat products

 $126,320  $88,488 

Carbon flat products

  246,373   202,967 

Tubular and pipe products

  90,431   62,925 

Total net sales

 $463,124  $354,380 
         

Depreciation and amortization

        

Specialty metals flat products

 $903  $497 

Carbon flat products

  2,923   3,010 

Tubular and pipe products

  1,391   1,364 

Corporate

  18   42 

Total depreciation and amortization

 $5,235  $4,913 
         

Operating income (loss)

        

Specialty metals flat products

 $8,022  $2,735 

Carbon flat products

  21,200   (1,346)

Tubular and pipe products

  6,320   4,305 

Corporate expenses

  (3,952)  (2,643)

Total operating income

 $31,590  $3,051 

Other income (loss), net

  (10)  (17)

Income before interest and income taxes

  31,580   3,034 

Interest and other expense on debt

  1,655   2,239 

Income before income taxes

 $29,925  $795 

 

 

  

For the Three Months Ended

  

March 31,

(in thousands)

 

2021

  

2020

Capital expenditures

       

Flat products segments

 $1,561  $3,981

Tubular and pipe products

  725   254

Corporate

  -   -

Total capital expenditures

 $2,286  $4,235

 

 

  

As of

  

March 31,

  

December 31,

(in thouands)

 

2020

  

2020

Assets

       

Flat products segments

 $495,002  $404,269

Tubular and pipe products

  242,607   235,516

Corporate

  750   820

Total assets

 $738,359  $640,605

 

There were no material revenue transactions between the specialty metals products, carbon flat 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.

 

18

 
 
 

Item 2. Managements 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, 2020. 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, 2020, 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 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 supply chain disruption resulting from the COVID-related imbalance of metal supply and end-user demands; increased customer demand without corresponding increase in metal supply could lead to an inability to meet customer demand and result in lower sales and profits;

 

risks associated with the COVID-19 pandemic, including, but not limited to 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 net realizable value 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;

  supply disruptions and inflationary pressures, including the availability and rising costs of transportation and logistical services and labor:
 

general and global business, economic, financial and political conditions, including legislation passed under the new administration;

 

competitive factors such as the availability, and global pricing of metals and production levels, industry shipping and inventory levels and rapid fluctuations in customer demand and metals pricing;

 

supplier consolidation or addition of additional capacity;

 

customer, supplier and competitor consolidation, bankruptcy or insolvency;

 

reduced production schedules, layoffs or work stoppages by our own, our suppliers’ or customers’ personnel;

 

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;

 

the adequacy of our efforts to mitigate cyber security risks and threats, especially with employees working remotely due to the COVID-19 pandemic;

 

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;

 

19

 

 

the adequacy of our existing information technology and business system software, including duplication and security processes;

 

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 net realizable value 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 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, prime tin mill products and fabricated parts.  Through the acquisition of Action Stainless & Alloys, Inc., or Action Stainless, on December 14, 2020, our specialty metals flat products segment expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe.  Action Stainless offers a range of processing, including plasma, laser and waterjet cutting and computer numerical control, or CNC, machining.  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 acquisitions of McCullough Industries, or McCullough, and the EZ Dumper® hydraulic dump inserts, or EZ Dumper, in 2019, our carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and carbon and stainless-steel dump inserts for pickup truck and service truck beds.  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; 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, 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.

 

20

 

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 March 31, 2021, we employed approximately 1,673 people. Approximately 269 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

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

Minneapolis (coil), Minnesota

September 30, 2025

Indianapolis, Indiana

January 29, 2026

 

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.

 

 

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.

 

21

 

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 the acquisition of Action Stainless on December 14, 2020, our specialty metals flat products segment expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe. Through its 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. 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.

 

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 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.

 

Combined, the carbon and specialty metals flat products segments have 27 strategically-located processing and distribution facilities in the United States and one 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

 

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.  Since August 2020, metals prices have continuously increased and metals pricing in the first quarter of 2021 reached record levels.  Hot rolled coil index prices were 133% higher in the first quarter of 2021 compared to the first quarter of 2020.  The increased industry metals pricing is primarily caused by disruptions in the supply chain, increased raw material pricing; supply shortages, including increased lead times and delivery delays; and increased demand as the economy recovers from the COVID-19 pandemic.    

 

22

 

Transactional or “spot” selling prices generally move in tandem with market price changes, while fixed 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. During the first quarter of 2021, our sales volumes were negatively impacted by supply chain disruptions, which limited our spot sales; however, our net sales were positively impacted by the price increases experienced in the quarter, in particular for carbon flat products, which increased our profitability during the first quarter of 2021.

 

 

Consolidated Operations

 

The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands):

 

   

For the Three Months Ended March 31,

 
   

2021

   

2020

 
      $    

% of net sales

      $    

% of net sales

 

Net sales

  $ 463,124       100.0     $ 354,380       100.0  

Cost of materials sold (a)

    354,665       76.6       282,522       79.7  

Gross profit (b)

    108,459       23.4       71,858       20.3  

Operating expenses (c)

    76,869       16.6       68,807       19.4  

Operating income

    31,590       6.8       3,051       0.9  

Other loss, net

    (10 )     -       (17 )     -  

Interest and other expense on debt

    1,655       0.4       2,239       0.6  

Income before income taxes

    29,925       6.4       795       0.3  

Income tax provision

    7,917       1.7       202       0.1  

Net income

  $ 22,008       4.7     $ 593       0.2  

 

(a) Includes $1,000 of LIFO expense and $500 of LIFO income in 2021 and 2020, respectively.

(b) Gross profit is calculated as net sales less the cost of materials sold.

(c) Operating expenses are calculated as total costs and expenses from the Statement of Comprehensive Income (Loss) less the cost of materials sold.

 

Net sales increased 30.7% to $463.1 million in the first quarter of 2021 from $354.4 million in the first quarter of 2020. Specialty metals flat products net sales were 27.3% of total net sales in the first quarter of 2021 compared to 25.0% of total net sales in the first quarter of 2020. Carbon flat products net sales were 53.2% of total net sales in the first quarter of 2021 compared to 57.3% of total net sales in the first quarter of 2020. Tubular and pipe products net sales were 19.5% of total net sales for the first quarter of 2021 compared to 17.8% of total net sales in the first quarter of 2020. The increase in net sales was due to a consolidated 32.1% increase in average selling prices during the first quarter of 2021 compared to the first quarter of 2020, offset by a 1.0% consolidated decrease in volume. We expect shipping levels in the second quarter of 2021 to remain flat with the first quarter of 2021, and metals prices to remain elevated.

 

Cost of materials sold increased 25.5% to $354.7 million in the first quarter of 2021 from $282.5 million in the first quarter of 2020. The increase in cost of materials sold in the first quarter of 2021 is related to the increased metals pricing discussed above.

 

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 23.4% in the first quarter of 2021 from 20.3% in the first quarter of 2020. The increase in the gross profit as a percentage of net sales is due to the impact of the rapidly increasing average selling prices, while the average costs of inventory did not increase as quickly as the average selling price.

 

Operating expenses in the first quarter of 2021 increased $8.1 million, or 11.7%, to $76.9 million from $68.8 million in the first quarter of 2020. As a percentage of net sales, operating expenses decreased to 16.6% for the first quarter of 2021 from 19.4% in the comparable 2020 period. Operating expenses in the specialty metals flat products segment increased $5.2 million, operating expenses in the carbon flat products segment decreased $0.2 million, operating expenses in the tubular and pipe products segment increased $1.7 million and Corporate expenses increased $1.3 million compared to prior year’s first quarter. The increase in operating expenses was primarily attributable to increased variable performance-based incentive compensation and the inclusion of operating expenses related to the December 2020 acquisition of Action Stainless.

 

23

 

Interest and other expense on debt totaled $1.7 million, or 0.4% of net sales, for the first quarter of 2021 compared to $2.2 million, or 0.6% of net sales, for the first quarter of 2020. The decrease was due to lower borrowings and lower interest rates. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 3.1% for the first three months of 2021 compared to 3.9% for the first three months of 2020.

 

For the first quarter of 2021, income before income taxes totaled $29.9 million compared to $0.8 million in the first quarter of 2020.

 

An income tax provision of 26.5% was recorded for the first quarter of 2021, compared to an income tax provision of 25.4% for the first quarter of 2020. 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. During the first quarter of 2020, due to the COVID-19 pandemic and our inability to accurately forecast the impact of the pandemic, we recorded the tax provision for the first quarter of 2020 using an actual effective tax rate as of March 31, 2020.

 

Net income for the first quarter of 2021 totaled $22.0 million or $1.92 per basic share and $1.91 per diluted share, compared to $0.6 million or $0.05 per basic and diluted share for the first quarter of 2020.

 

 

Segment Operations

 

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 March 31,

 
   

2021

   

2020

 
           

% of net

sales

           

% of net

sales

 

Direct tons sold

    39,597               32,372          

Toll tons sold

    2,290               2,198          

Total tons sold

    41,887               34,570          
                                 

Net sales

  $ 126,320       100.0     $ 88,488       100.0  

Average selling price per ton

    3,016               2,560          

Cost of materials sold

    103,534       82.0       76,235       86.2  

Gross profit (a)

    22,786       18.0       12,253       13.8  

Operating expenses (b)

    14,764       11.7       9,518       10.8  

Operating income

  $ 8,022       6.3     $ 2,735       3.1  

 

(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 increased 21.2% to 42 thousand in the first quarter of 2021 from 35 thousand in the first quarter of 2020. The increase in tons sold was due to the acquisition of Action Stainless as well as increased customer demand.

 

Net sales in our specialty metals flat products segment increased $37.8 million, or 42.8%, to $126.3 million in the first quarter of 2021 from $88.5 million in the first quarter of 2020. The increase in sales was due to a 21.2% increase in sales volume and a 17.8% increase in average selling prices during the first quarter of 2021 compared to the first quarter of 2020. Average selling prices in the first quarter of 2021 were $3,016 per ton, compared with $2,560 per ton in the first quarter of 2020, and $2,624 per ton in the fourth quarter of 2020. The increase in the year over year average selling price per ton is a result of the increased industry metals pricing discussed above. We expect shipping levels in the second quarter of 2021 to remain flat with the first quarter of 2021, and metals prices to remain elevated.

 

Cost of materials sold in our specialty metals flat products segment increased $27.3 million, or 35.8%, to $103.5 million in the first quarter of 2021 from $76.2 million in the first quarter of 2020. The increase in cost of materials sold was due to the 21.2% increase in sales volume and a 12.1% increase in the average cost of materials sold during the first quarter of 2021 compared to the first quarter of 2020.

 

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As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 18.0% in the first quarter of 2021 from 13.8% in the first quarter of 2020. The gross profit per ton increased 53.5% to $544 per ton in the first quarter of 2021 from $354 per ton in the first quarter of 2020.

 

Operating expenses in the first quarter of 2021 increased $5.2 million, or 55.1%, to $14.8 million in the first quarter of 2021 from $9.5 million in the first quarter of 2020. As a percentage of net sales, operating expenses increased to 11.7% for the first quarter of 2021 compared to 10.8% for the first quarter of 2020. The increase in operating expenses was primarily attributable to inclusion of operating expenses related to the December 14, 2020 acquisition of Action Stainless, increased variable performance-based incentive compensation, and increased distribution expense due to increased shipping levels.

 

Operating income for the first quarter of 2021 totaled $8.0 million, or 6.3% of net sales, compared to $2.7 million, or 3.1% of net sales, for the first quarter of 2020.

 

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 March 31,

 
   

2021

   

2020

 
           

% of net

sales

           

% of net

sales

 

Direct tons sold

    226,048               247,100          

Toll tons sold

    13,800               16,010          

Total tons sold

    239,848               263,110          
                                 

Net sales

  $ 246,373       100.0     $ 202,967       100.0  

Average selling price per ton

    1,027               771          

Cost of materials sold

    184,173       74.8       163,137       80.4  

Gross profit (a)

    62,200       25.2       39,830       19.6  

Operating expenses (b)

    41,000       16.6       41,176       20.3  

Operating income

  $ 21,200       8.6     $ (1,346 )     (0.7 )

 

(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 carbon flat products segment decreased 8.8% to 240 thousand in the first quarter of 2021 from 263 thousand in the first quarter of 2020.  The decrease in tons sold is due to supply chain disruptions, which limited spot sales and continued temporary closures, reduced hours and staggered production schedules due to the COVID-19 pandemic at certain of our customers.  We expect shipping levels in the second quarter of 2021 to remain flat with the first quarter of 2021, and metals prices to remain elevated. 

 

Net sales in our carbon flat products segment increased $43.4 million, or 21.4%, to $246.4 million in the first quarter of 2021 from $203.0 million in the first quarter of 2020. The increase in sales was attributable to a 33.2% increase in average selling prices in the first quarter of 2021 compared to the first quarter of 2020, offset by an 8.8% decrease in tons sold. Average selling prices in the first quarter of 2021 increased to $1,027 per ton, compared with $771 per ton in the first quarter of 2020 and $792 per ton in the fourth quarter of 2020.

 

Cost of materials sold increased $21.0 million, or 12.9%, to $184.2 million in the first quarter of 2021 from $163.1 million in the first quarter of 2020. The average cost of materials sold per ton increased by 23.8% in the first quarter of 2021 compared to the same period in 2020. The increase was due to the increased market price for metals discussed above and the impact of selling higher costed inventory during the first quarter of 2021 compared to the first quarter of 2020.

 

As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 25.2% in the first quarter of 2021 compared to 19.6% in the first quarter of 2020. The increase in gross profit percentage in 2021 was primarily due to the impact of higher average selling prices.

 

Operating expenses in the first quarter of 2021 decreased $0.2 million, or 0.4%, to $41.0 million from $41.2 million in the first quarter of 2020. Operating expenses decreased as a result of our continuation of the cost reduction efforts implemented as a result of the COVID-19 pandemic and reduced travel expenses, partially offset by an increase in increased variable performance-based incentive compensation. As a percentage of net sales, operating expenses decreased to 16.6% for the first quarter of 2021 compared to 20.3% for first quarter of 2020.

 

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Operating income for the first quarter of 2021 totaled $21.2 million, or 8.6% of net sales, compared to operating loss of $1.3 million, or 0.7% of net sales, for the first quarter of 2020.

 

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 March 31,

 
   

2021

   

2020

 
       $    

% of net

sales

      $    

% of net

sales

 

Net sales

  $ 90,431       100.0     $ 62,925       100.0  

Cost of materials sold (a)

    66,958       74.0       43,150       68.6  

Gross profit (b)

    23,473       26.0       19,775       31.4  

Operating expenses (c)

    17,153       19.0       15,470       24.6  

Operating income

  $ 6,320       7.0     $ 4,305       6.8  

 

(a) Includes $1,000 of LIFO expense and $500 of LIFO income for 2021 and 2020, respectively.

(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 increased $27.5 million, or 43.7%, to $90.4 million in the first quarter of 2021 from $62.9 million in the first quarter of 2020.  The increase is a result of a 54.2% increase in shipping volume (due to a large one-time pipe contract shipment in the first quarter of 2021) offset by a 6.8% decrease in average selling prices during the first quarter of 2021 compared to the first quarter of 2020. We expect shipping levels for the tubular and pipe products segment to decrease in the second quarter of 2021 due to the non-recurrence of the large one-time contract shipment, but expect prices to remain elevated.    

 

Cost of materials sold increased $23.8 million, or 55.2%, to $67.0 million in the first quarter of 2021 from $43.2 million in the first quarter of 2020.  The increase in cost of materials sold is primarily a result of the 43.7% increase in sales volume in the first quarter of 2021 compared to the first quarter of 2020.   As a result of rapidly increasing prices, during the first quarter of 2021, our tubular and pipe products segment recorded $1.0 million of LIFO expense, compared to $0.5 million of LIFO income recorded in the first quarter of 2020.

 

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreased to 26.0% in the first quarter of 2021 compared to 31.4% in the first quarter of 2020. As a percentage of net sales, the LIFO expense recorded in the first quarter of 2021 decreased gross profit by 1.1% compared to the LIFO income recorded in the first quarter of 2020, which increased gross profit by 0.8%.

 

Operating expenses in the first quarter of 2021 increased $1.7 million, or 10.9%, to $17.2 million from $15.5 million in the first quarter of 2020.  Operating expenses increased in the first quarter of 2021 as a result of increased variable expenses related to increased sales volume and increased variable performance-based incentive compensation.  Operating expenses decreased to 19.0% of net sales in the first quarter of 2021 compared to 24.6% in the first quarter of 2020. 

 

Operating income for the first quarter 2021 totaled $6.3 million, or 7.0% of net sales, compared to $4.3 million, or 6.8% of net sales, for the first quarter of 2020.

 

 

Corporate expenses

 

Corporate expenses were $4.0 million in the first quarter of 2021 compared to $2.6 million in the first quarter of 2020. Corporate expense increased in the first quarter of 2021 as a result of increased performance-based incentive compensation.

 

 

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.

 

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We believe that funds available under our asset-based credit facility, or 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. 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 three months ended March 31, 2021, we used $25.7 million of net cash for operations, of which $31.2 million was generated from operating activities and $56.9 million was used for working capital. For the three months ended March 31, 2020, we used $12.0 million of net cash for operations, of which $5.0 million was generated from operating activities and $17.0 million was used for working capital.

 

Net cash from operations totaled $31.2 million during the first quarter of 2021 and was mainly comprised of net income of $22.0 million, the non-cash depreciation and amortization addback of $5.4 million and a decrease in other long-term assets of $5.1 million, offset by changes in other long-term liabilities of $1.6 million.  Net cash from operations totaled $5.0 million during the first quarter of 2020 and was mainly comprised of the non-cash depreciation and amortization add back of $5.0 million, net income of $0.6 million and stock-based compensation of $0.4 million, offset by changes in other long-term assets and other long-term liabilities of $1.1 million. 

 

Working capital at March 31, 2021 totaled $334.7 million, a $59.2 million increase from December 31, 2020. The increase was primarily attributable to a $59.1 million increase in accounts receivable (resulting from higher sales and increased average selling prices in the first quarter of 2021 compared to the fourth quarter of 2020) and a $38.2 million increase in inventories (resulting from increased metals prices in the first quarter of 2021) and a $5.8 million increase in pre-paid expenses and other, offset by a $35.2 million increase in accounts payable and outstanding checks and a $11.0 million increase in accrued payroll and other accrued liabilities.

 

Investing Activities

 

Net cash used for investing activities totaled $2.3 million during the three months ended March 31, 2021, compared to $4.2 million during the three months ended March 31, 2020. The capital expenditures in the first quarter of 2021 and 2020 were primarily attributable to additional processing equipment at our existing facilities. During 2021, we expect our capital spending to be less than our annual depreciation expense.

 

Financing Activities

 

During the first three months of 2021, $30.8 million of cash was generated from financing activities, which primarily consisted of $31.3 million of net borrowings under our ABL Credit Facility offset by $0.2 million of dividends paid, $0.2 million used for principal payments under capital lease obligations and $0.1 million used for credit facilities fees.

 

Dividends paid were $0.2 million for both the three months ended March 31, 2021 and March 31, 2020. In May 2021, our Board of Directors approved a regular quarterly dividend of $0.02 per share, which will be paid on June 15, 2021 to shareholders of record as of June 1, 2021. 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 of Directors that the payment of dividends remains in the best interest of our shareholders.

 

Stock Repurchase Program

 

In 2015, our Board of Directors 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 March 31, 2021) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($71.3 million at March 31, 2021) and we must maintain a pro-forma ratio of 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. As of March 31, 2021, 360,212 shares remain authorized for repurchase under the program.

 

27

 

During the three months ended March 31, 2020 we repurchased 15,000 shares, for an aggregate cost of $145 thousand. There were no shares repurchased during the three months ended March 31, 2021.

 

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 ($47.5 million at March 31, 2021) or 10.0% of the aggregate borrowing base ($35.8 million at March 31, 2021) then we must maintain a ratio of Earnings before Interest, Taxes, Depreciation and Amortization, or 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 the London Interbank Offered Rate, or LIBOR, plus a premium ranging from 1.25% to 2.75%.

 

As of March 31, 2021, we were in compliance with our covenants and had approximately $162 million of availability under the ABL Credit Facility.

 

As of March 31, 2021, $0.8 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, 2020.

 

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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 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. 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 41% and 45% of our consolidated net sales during the first three months of 2021 and 2020, 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 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 2021 and 2020, 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.

 

29

 

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 March 31, 2021, our disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during the first quarter of 2021 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’s impact on our internal controls to minimize the impact on their design and operating effectiveness.

 

30

 

 

Part II. OTHER INFORMATION

 

Items 1, 1A, 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.

 

31

 

 

Item 6. Exhibits

 

 

Exhibit

Description of Document

 

Reference

       

31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

       

31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

       

32.1

Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

       

32.2

Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

       

101

The following materials from Olympic Steel’s Quarterly Report on Form 10-Q for the period ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (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.

   

104

Cover Pager Interactive Data File (embedded with the Inline XBRL document).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

OLYMPIC STEEL, INC.

 

  (Registrant)  
     
Date:  May 7, 2021 By: /s/ Richard T. Marabito  
  Richard T. Marabito  
  Chief Executive Officer  
     
  By: /s/ Richard A. Manson  
  Richard A. Manson  
  Chief Financial Officer  
  (Principal Financial and Accounting Officer)  

 

33