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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For the quarterly period ended
For the transition period from __________ to ____________
Commission File Number
OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | ||
| Non-accelerated filer ☐ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date:
| Class | Outstanding as of May 7, 2021 | |||
| Common stock, without par value |
Olympic Steel, Inc.
Index to Form 10-Q
| Page No. | |
| Part I. FINANCIAL INFORMATION | 3 |
| Item 1. Financial Statements | 3 |
| Consolidated Balance Sheets – 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. Management’s 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 |
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 | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net (includes LIFO debit of and as of March 31, 2021 and December 31, 2020, respectively) | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Right of use assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Other accrued liabilities | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Credit facility revolver | ||||||||
| Other long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Lease liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock | ||||||||
| Common stock | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31,
(in thousands, except per share data)
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| Net sales | $ | $ | ||||||
| Costs and expenses | ||||||||
| Cost of materials sold (excludes items shown seperately below) | ||||||||
| Warehouse and processing | ||||||||
| Administrative and general | ||||||||
| Distribution | ||||||||
| Selling | ||||||||
| Occupancy | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Total costs and expenses | ||||||||
| Operating income | ||||||||
| Other income (loss), net | ( | ) | ( | ) | ||||
| Income before interest and income taxes | ||||||||
| Interest and other expense on debt | ||||||||
| Income before income taxes | ||||||||
| Income tax provision | ||||||||
| Net income | $ | $ | ||||||
| Gain (loss) on cash flow hedge | ( | ) | ||||||
| Tax effect on cash flow hedge | ( | ) | ||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | ||||
| Earnings per share: | ||||||||
| Net income per share - basic | $ | $ | ||||||
| Weighted average shares outstanding - basic | ||||||||
| Net income per share - diluted | $ | $ | ||||||
| Weighted average shares outstanding - diluted | ||||||||
| Dividends declared per share of common stock | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
(in thousands)
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| Cash flows from (used for) operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash from (used for) operating activities - | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposition of property and equipment | ||||||||
| Stock-based compensation | ||||||||
| Other long-term assets | ( | ) | ||||||
| Other long-term liabilities | ( | ) | ( | ) | ||||
| Changes in working capital: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other | ( | ) | ||||||
| Accounts payable | ||||||||
| Change in outstanding checks | ||||||||
| Accrued payroll and other accrued liabilities | ( | ) | ||||||
| ( | ) | ( | ) | |||||
| Net cash used for operating activities | ( | ) | ( | ) | ||||
| Cash flows from (used for) investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used for investing activities | ( | ) | ( | ) | ||||
| Cash flows from (used for) financing activities: | ||||||||
| Credit facility revolver borrowings | ||||||||
| Credit facility revolver repayments | ( | ) | ( | ) | ||||
| Principal payment under capital lease obligation | ( | ) | ||||||
| Credit facility fees and expenses | ( | ) | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Dividends paid | ( | ) | ( | ) | ||||
| Net cash from financing activities | ||||||||
| Cash and cash equivalents: | ||||||||
| Net change | ( | ) | ||||||
| Beginning balance | ||||||||
| Ending balance | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Supplemental Disclosures of Cash Flow Information
For the Three Months Ended March 31,
(in thousands)
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ( | ) | ||||
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.
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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Net income | $ | $ | $ | $ | $ | |||||||||||||||
| Payment of dividends | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Changes in fair value of hedges, net of tax | ||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Accumulated |
||||||||||||||||||||
| Other |
||||||||||||||||||||
| Common |
Treasury |
Comprehensive |
Retained |
Total |
||||||||||||||||
| Stock |
Stock |
Loss |
Earnings |
Equity |
||||||||||||||||
| Balance at December 31, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
| Net income |
$ | $ | $ | $ | $ | |||||||||||||||
| Payment of dividends |
( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ||||||||||||||||
| Other |
||||||||||||||||||||
| Balance at March 31, 2020 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||
The accompanying notes are an integral part of these consolidated statements.
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.
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 | % | % | % | % | ||||||||||||
| Plate | % | % | % | % | ||||||||||||
| Cold Rolled | % | % | % | % | ||||||||||||
| Coated | % | % | % | % | ||||||||||||
| Specialty | % | % | % | % | ||||||||||||
| Tube | % | % | % | % | ||||||||||||
| Other | % | % | % | % | ||||||||||||
| Total | % | % | % | % | ||||||||||||
| 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 | % | % | % | % | ||||||||||||
| Plate | % | % | % | % | ||||||||||||
| Cold Rolled | % | % | % | % | ||||||||||||
| Coated | % | % | % | % | ||||||||||||
| Specialty | % | % | % | % | ||||||||||||
| Tube | % | % | % | % | ||||||||||||
| Other | % | % | % | % | ||||||||||||
| Total | % | % | % | % | ||||||||||||
| 3. | Accounts Receivable: |
Accounts receivable are presented net of allowances for credit losses and unissued credits of $
| 4. |
Inventories: |
Inventories consisted of the following:
| Inventory as of |
||||||||
| (in thousands) |
March 31, 2021 |
December 31, 2020 |
||||||
| Unprocessed |
$ | $ | ||||||
| Processed and finished |
||||||||
| Totals |
$ | $ | ||||||
The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At March 31, 2021 and December 31, 2020, approximately $
During the three months ended March 31, 2021, the Company recorded $
If the FIFO method had been in use, inventories would have been $
| 5. | Goodwill and Intangible Assets: |
The Company’s intangible assets were recorded in connection with its acquisitions 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 years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the -year amortization period. The useful life of the non-compete agreements was determined to be the length of the non-compete agreements, which range from to years. The useful life of the trade names was determined to be indefinite primarily due to their history and reputation in the marketplace, the Company’s expectation that the trade names will continue to be used, and the conclusion that there are currently no other factors identified that would limit their useful life. The Company will continue to evaluate the useful life assigned to its amortizable customer relationships and noncompete agreements in future periods.
Goodwill, by reportable 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 | $ | $ | $ | $ | ||||||||||||
| Acquisitions | ||||||||||||||||
| Impairments | ||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Trade name - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2020 | ||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | |||||||||
| Customer relationships - subject to amortization | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Trade name - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $
| 6. | Leases: |
The components of lease expense were as follows:
| Three Months Ended | Three Months Ended | |||||||
| March 31, | March 31, | |||||||
| (in thousands) | 2021 | 2020 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
Supplemental cash flow information related to leases was as follows:
| 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 | $ | $ | ||||||
| Operating cash flows from finance leases | ||||||||
| Financing cash flows from finance leases | ||||||||
| Total cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| March 31, | December 31, | |||||||
| (in thousands) | 2021 | 2020 | ||||||
| Operating Leases | ||||||||
| Operating lease | $ | $ | ||||||
| Operating lease accumulated amortization | ( | ) | ( | ) | ||||
| Operating lease right-of-use asset, net | ||||||||
| Operating lease current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance Leases | ||||||||
| Finance lease | $ | $ | ||||||
| Finance lease accumulated depreciation | ( | ) | ( | ) | ||||
| Finance lease, net | ||||||||
| Finance lease current liabilities | ||||||||
| Finance lease liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases (in years) | 7 | |||||||
| Finance leases (in years) | 5 | |||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Maturities of lease liabilities were as follows:
| Operating | Finance | |||||||
| (in thousands) | Leases | Leases | ||||||
| Year Ending December 31, | ||||||||
| 2021 | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less remaining imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 7. | Debt: |
The Company’s debt is comprised of the following components:
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands) | 2021 | 2020 | ||||||
| Asset-based revolving credit facility due December 8, 2022 | $ | $ | ||||||
| Total debt | $ | $ | ||||||
The Company’s asset-based credit facility (the ABL Credit Facility) is collateralized by the Company’s accounts receivable, inventory and personal property. The ABL Credit Facility consists of (i) a revolving credit facility of $
The ABL Credit Facility contains customary representations and warranties and certain covenants that limit the ability of the Company to, among other things: (i) incur or guarantee additional indebtedness; (ii) pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; (iii) make investments; (iv) sell assets; (v) enter into agreements that restrict distributions or other payments from restricted subsidiaries to the Company; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires (i) if any commitments or obligations are outstanding and the Company’s availability is less than the greater of $
The Company has the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from
On January 10, 2019, the Company entered into a -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
As of March 31, 2021, the Company was in compliance with its covenants and had approximately $
As of March 31, 2021 and December 31, 2020, $
| 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.
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 -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income (Loss) through net income 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 | $ | ( | ) | $ | ( | ) | ||
| Metals swaps | ( | ) | ( | ) | ||||
| Embedded customer derivatives | ||||||||
| Total loss | $ | ( | ) | $ | ( | ) | ||
| 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 | $ | $ | $ | $ | ||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Metal Swaps | $ | $ | $ | $ | ||||||||||||
| Fixed interest rate hedge | ||||||||||||||||
| Total liabilities recorded at fair value | $ | $ | $ | $ | ||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| Total liabilities recorded at fair value | $ | $ | $ | $ | ||||||||||||
The value of the items not recorded at fair value represent the carrying value of the liabilities.
The carrying value of the ABL Credit Facility was $
| 10. | Accumulated Other Comprehensive Loss: |
On January 10, 2019, the Company entered into a -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
| 11. | Equity Plans: |
Restricted Stock Units and Performance Share Units
Pursuant to the Amended and Restated Olympic Steel 2007 Omnibus Incentive Plan (the Incentive Plan), the Company may grant stock options, stock appreciation rights, restricted shares, restricted share units (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,
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 $
Under the Incentive Plan, each eligible participant is awarded RSUs with a dollar value equal to
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
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 | $ | $ | ||||||
| RSU expense after taxes | $ | $ | ||||||
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income.
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 | $ | $ | |||||||||||||
| Granted | |||||||||||||||
| Converted into shares | ( | ) | |||||||||||||
| Forfeited | ( | ) | ( | ) | |||||||||||
| Outstanding at March 31 | $ | $ | |||||||||||||
| Vested at March 31 | $ | $ | |||||||||||||
| 12. | Income Taxes: |
For the three months ended March 31, 2021, the Company recorded an income tax provision of $
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 | ||||||||
| Assumed issuance of stock awards | ||||||||
| Weighted average diluted shares outstanding | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
| Unvested RSUs | ||||||||
| 14. | Stock Repurchase Program: |
On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to
During the three months ended March 31, 2020, the Company repurchased
| 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 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.
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 | $ | $ | ||||||
| Carbon flat products | ||||||||
| Tubular and pipe products | ||||||||
| Total net sales | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Specialty metals flat products | $ | $ | ||||||
| Carbon flat products | ||||||||
| Tubular and pipe products | ||||||||
| Corporate | ||||||||
| Total depreciation and amortization | $ | $ | ||||||
| Operating income (loss) | ||||||||
| Specialty metals flat products | $ | $ | ||||||
| Carbon flat products | ( | ) | ||||||
| Tubular and pipe products | ||||||||
| Corporate expenses | ( | ) | ( | ) | ||||
| Total operating income | $ | $ | ||||||
| Other income (loss), net | ( | ) | ( | ) | ||||
| Income before interest and income taxes | ||||||||
| Interest and other expense on debt | ||||||||
| Income before income taxes | $ | $ | ||||||
| For the Three Months Ended | |||||||
| March 31, | |||||||
| (in thousands) | 2021 | 2020 | |||||
| Capital expenditures | |||||||
| Flat products segments | $ | $ | |||||
| Tubular and pipe products | |||||||
| Corporate | |||||||
| Total capital expenditures | $ | $ | |||||
| As of | |||||||
| March 31, | December 31, | ||||||
| (in thouands) | 2020 | 2020 | |||||
| Assets | |||||||
| Flat products segments | $ | $ | |||||
| Tubular and pipe products | |||||||
| Corporate | |||||||
| Total assets | $ | $ | |||||
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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained herein and our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 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; |
| ● |
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Item 6. Exhibits
| Exhibit |
Description of Document |
Reference |
|
| 31.1 |
Filed herewith |
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| 31.2 |
Filed herewith |
||
| 32.1 |
Furnished herewith |
||
| 32.2 |
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). |
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) | |||
