Olympic Steel(ZEUS) - 2021 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements, including balance sheets, income, cash flows, equity, and notes, detailing financial position and performance Consolidated Balance Sheets | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $887,689 | $640,605 | +$247,084 | | Total Liabilities | $533,869 | $339,595 | +$194,274 | | Total Shareholders' Equity | $353,820 | $301,010 | +$52,810 | - Significant increases in current assets, particularly accounts receivable (+$112.85 million) and inventories (+$133.28 million), and a substantial rise in credit facility revolver borrowings (+$108.37 million) were key drivers of balance sheet changes[10][143][145] Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended June 30, 2021 (in thousands) | Three Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Net sales | $556,077 | $248,296 | $1,019,201 | $602,676 | | Operating income (loss) | $42,437 | $(7,485) | $74,026 | $(4,434) | | Net income (loss) | $29,649 | $(6,454) | $51,657 | $(5,861) | | Basic EPS | $2.58 | $(0.56) | $4.50 | $(0.51) | | Diluted EPS | $2.58 | $(0.56) | $4.49 | $(0.51) | | Gross profit as % of net sales | 22.9% | 21.0% | 23.1% | 20.6% | - Net sales increased by 124.0% in Q2 2021 and 69.1% in H1 2021 year-over-year, primarily due to a 63.4% increase in average selling prices and a 37.1% increase in consolidated volume in Q2 2021[100][101] - The company swung from a net loss in 2020 to significant net income in 2021, with gross profit as a percentage of net sales improving due to rapidly increasing average selling prices outpacing inventory cost increases[103][109] Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash from (used for) operating activities | $(95,744) | $3,512 | | Net cash used for investing activities | $(4,556) | $(5,583) | | Net cash from financing activities | $106,403 | $3,434 | | Net change in cash | $6,103 | $1,363 | - Operating activities used $95.7 million in cash during H1 2021, primarily due to a $162.2 million increase in working capital, driven by higher inventories (+$133.3 million) and accounts receivable (+$112.9 million)[140][143] - Financing activities provided $106.4 million in cash in H1 2021, mainly from $108.4 million in net borrowings under the ABL Credit Facility[145] Supplemental Disclosures of Cash Flow Information | Metric | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------- | :-------------------------------------------- | :-------------------------------------------- | | Interest paid | $3,240 | $3,959 | | Income taxes paid | $10,578 | $67 | - No new financing lease obligations were incurred during the six months ended June 30, 2021, compared to $1.0 million in the prior year period[18] Consolidated Statements of Shareholders' Equity | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Total Shareholders' Equity | $353,820 | $301,010 | | Retained Earnings | $224,057 | $172,843 | | Accumulated Other Comprehensive Loss | $(3,153) | $(4,215) | - The increase in total shareholders' equity was primarily driven by net income of $51.7 million and a positive change in the fair value of hedges, net of tax, of $1.06 million during the first six months of 2021[21] Notes to Unaudited Consolidated Financial Statements 1. Basis of Presentation - The company operates in three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products, with certain assets and resources shared between the flat products segments[25] - Acquisitions like Action Stainless & Alloys, Inc. (Dec 2020) expanded the specialty metals segment, while McCullough Industries and EZ Dumper® (2019) expanded the carbon flat products segment[25] - The company is an essential business and continues to monitor the uncertain impact of the COVID-19 pandemic on its financial condition[27] 2. Revenue Recognition - Revenue for substantially all sales is recognized at a point in time upon shipment or delivery when control transfers to the customer[30] | Segment | Q2 2021 Revenue % | H1 2021 Revenue % | | :-------------------------- | :---------------- | :---------------- | | Carbon flat products | 58.6% | 56.1% | | Specialty metals flat products | 24.8% | 25.9% | | Tubular and pipe products | 16.6% | 18.0% | 3. Accounts Receivable | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Accounts receivable, net | $264,451 | $151,601 | | Allowance for credit losses and unissued credits | $4,400 | $3,600 | 4. Inventories | Inventory Type | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--------------- | :----------------------------- | :------------------------------- | | Unprocessed | $300,693 | $194,614 | | Processed and finished | $72,584 | $45,387 | | Total Inventories | $373,277 | $240,001 | - The company recorded LIFO expense of $4.0 million for Q2 2021 and $5.0 million for H1 2021, compared to LIFO income in the prior year periods, due to anticipated increases in metals prices[36] - Approximately 13.4% of consolidated inventory ($50.1 million) was reported under the LIFO method as of June 30, 2021[35] 5. Goodwill and Intangible Assets | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | | Goodwill | $5,234 | $5,123 | | Intangible assets, net | $31,666 | $32,593 | - Goodwill increased by $111 thousand due to adjustments to the preliminary purchase price allocation of the Action Stainless acquisition[40][41] - Estimated amortization expense for intangible assets subject to amortization is approximately $1.5 million per year for the next two years[41] 6. Leases | Lease Type | H1 2021 Cost (in thousands) | H1 2020 Cost (in thousands) | | :----------- | :-------------------------- | :-------------------------- | | Operating lease cost | $3,415 | $3,555 | | Finance lease cost | $477 | $146 | | Lease Type | June 30, 2021 Weighted Average Remaining Lease Term (years) | June 30, 2021 Weighted Average Discount Rate | | :----------- | :-------------------------------------------------------- | :------------------------------------------- | | Operating leases | 6 | 3.74% | | Finance leases | 4 | 3.50% | 7. Debt | Debt Component | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Asset-based revolving credit facility due June 16, 2026 | $268,975 | - | | Asset-based revolving credit facility due December 8, 2022 | - | $160,609 | | Total debt | $268,975 | $160,609 | - The company amended and extended its ABL Credit Facility to $475 million, maturing on June 16, 2026[44] - As of June 30, 2021, the company was in compliance with its debt covenants and had approximately $202 million of availability under the ABL Credit Facility[48] 8. Derivative Instruments - The company uses nickel swaps to mitigate customer risk of metals price volatility, which are not designated as hedging instruments[50][51] - A five-year forward starting fixed rate interest rate hedge (2.57%) is in place for $75 million of LIBOR-based borrowings under the ABL Credit Facility[52][153] | Derivative Type | H1 2021 Net Gain (Loss) (in thousands) | H1 2020 Net Gain (Loss) (in thousands) | | :---------------------- | :------------------------------------- | :------------------------------------- | | Fixed interest rate hedge | $(931) | $(596) | | Metals swaps | $228 | $(27) | | Embedded customer derivatives | $(228) | $27 | | Total loss | $(931) | $(596) | 9. Fair Value of Assets and Liabilities | Item | June 30, 2021 Fair Value (in thousands) | | :-------------------------- | :------------------------------------ | | Assets: Metal Swaps | $131 | | Liabilities: Embedded customer derivative | $131 | | Liabilities: Fixed interest rate hedge | $4,204 | - All fair value measurements for these items are classified as Level 2, indicating valuation techniques using observable inputs other than quoted prices[55] 10. Accumulated Other Comprehensive Loss - The fair value of the interest rate hedge, net of tax, amounting to $4.2 million, is included in 'Accumulated other comprehensive loss' on the Consolidated Balance Sheets as of June 30, 2021[58] 11. Equity Plans | Metric | H1 2021 (in thousands) | H1 2020 (in thousands) | | :---------------------- | :--------------------- | :--------------------- | | RSU expense before taxes | $520 | $687 | - The company grants Restricted Stock Units (RSUs) to non-employee directors and executive officers, with vesting periods typically ranging from one to five years[60][61][62] - Outstanding RSUs at June 30, 2021, totaled 623,636 shares with a weighted average granted price of $18.43[64] 12. Income Taxes | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Income tax provision (benefit) | $10,772 | $(2,948) | $18,689 | $(2,746) | | Effective tax rate | 26.7% | 31.4% (benefit) | 26.6% | 31.9% (benefit) | - The tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, with quarterly updates and cumulative adjustments[66] 13. Shares Outstanding and Earnings Per Share | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Weighted average basic shares outstanding | 11,492 | 11,446 | 11,491 | 11,445 | | Basic earnings per share | $2.58 | $(0.56) | $4.50 | $(0.51) | | Diluted earnings per share | $2.58 | $(0.56) | $4.49 | $(0.51) | 14. Stock Repurchase Program - The Board of Directors authorized a stock repurchase program for up to 550,000 shares of common stock[69] - As of June 30, 2021, 360,212 shares remain authorized for repurchase under the program[70] - No shares were repurchased during the three or six months ended June 30, 2021[70] 15. Segment Information - The company operates in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products, with performance evaluated primarily by operating income[72][71] | Segment | H1 2021 Net Sales (in thousands) | H1 2020 Net Sales (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Specialty metals flat products | $264,354 | $142,983 | | Carbon flat products | $571,884 | $343,778 | | Tubular and pipe products | $182,963 | $115,915 | | Total net sales | $1,019,201 | $602,676 | | Segment | H1 2021 Operating Income (Loss) (in thousands) | H1 2020 Operating Income (Loss) (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Specialty metals flat products | $21,724 | $4,726 | | Carbon flat products | $51,633 | $(10,774) | | Tubular and pipe products | $9,359 | $6,530 | | Corporate expenses | $(8,690) | $(4,916) | | Total operating income (loss) | $74,026 | $(4,434) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial condition and operations, covering performance drivers, segment results, liquidity, capital resources, and critical accounting policies Forward-Looking Information - The report contains forward-looking statements subject to risks and uncertainties, including those related to COVID-19, metals prices, supply chain disruptions, and economic conditions[80][81] - Factors that could cause actual results to differ materially include supply chain disruption, falling metals prices, inflationary pressures, and global economic conditions[81] Overview - Olympic Steel is a leading metals service center operating in three reportable segments, providing processing and distribution services for a wide range of customers[83] - Results are significantly affected by external factors such as general economic conditions, metals pricing, demand, availability, transportation costs, and global supply chain dynamics[84] - The company maintains substantial metals inventories and uses nickel swaps and metals hedges to mitigate price volatility, but cannot guarantee passing on future price increases to customers[85] Reportable Segments - The company operates in three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products, with performance assessed primarily by operating income[88][89] - There are significant differences in average selling prices and gross profit percentages across segments; the tubular and pipe products segment generally has the highest average selling price and gross profit percentage[90] - The LIFO inventory valuation method used for certain tubular and pipe products can impact the segment's gross margin[90] Specialty metals flat products - This segment focuses on processed stainless and aluminum flat-rolled sheet and coil products, flat bar, and fabricated parts[91] - Serves industries such as food service, commercial appliances, agriculture equipment, transportation, and automotive equipment[91] Carbon flat products - This segment focuses on large volumes of processed carbon and coated flat-rolled sheet, coil, and plate products, and fabricated parts[92] - Serves a wide range of metals-consuming industries, including transportation, construction, farm machinery, and energy generation equipment[92] - Operates 27 processing and distribution facilities in the U.S. and one in Monterrey, Mexico[93] Tubular and pipe products - This segment, consisting of the Chicago Tube and Iron (CTI) business, distributes metal tubing, pipe, bar, valves, and fittings[94] - It also fabricates pressure parts supplied to various industrial markets from eight locations in the Midwestern and southeastern United States[94] Corporate expenses - Corporate expenses include unallocated costs for managing the entire company, such as payroll for certain personnel, board of directors' expenses, and audit fees[95] Results of Operations - Metals prices have continuously increased since August 2020, reaching record levels in Q2 2021, with hot rolled coil index prices 249% higher than Q2 2020[96] - The increased pricing is attributed to supply chain disruptions, rising raw material costs, supply shortages, increased transportation costs, and recovering demand post-COVID-19[96] - Sales volumes were negatively impacted by supply chain disruptions, but net sales and profitability were positively impacted by price increases[97] Consolidated Operations | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $556,077 | $248,296 | $1,019,201 | $602,676 | | Gross profit | $127,373 | $52,059 | $235,833 | $123,917 | | Operating income (loss) | $42,437 | $(7,485) | $74,026 | $(4,434) | | Net income (loss) | $29,649 | $(6,454) | $51,657 | $(5,861) | - Net sales increased by 124.0% in Q2 2021 and 69.1% in H1 2021 year-over-year, driven by a 63.4% increase in average selling prices and a 37.1% increase in consolidated volume in Q2 2021[100][101] - Gross profit as a percentage of net sales improved to 22.9% in Q2 2021 (from 21.0%) and 23.1% in H1 2021 (from 20.6%) due to rapidly increasing average selling prices[103] - Operating expenses increased by $25.4 million (42.6%) in Q2 2021 but decreased as a percentage of net sales to 15.3% (from 24.0%)[104] Segment Operations Specialty metals flat products | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $138,035 | $54,495 | $264,354 | $142,983 | | Total tons sold | 40,188 | 24,337 | 82,075 | 58,907 | | Average selling price per ton | $3,435 | $2,239 | $3,221 | $2,427 | | Operating income | $13,702 | $1,991 | $21,724 | $4,726 | - Net sales increased by 153.3% in Q2 2021, driven by a 65.1% increase in sales volume and a 53.4% increase in average selling prices, reflecting recovery from COVID-19 impacts and increased industry metals pricing[113][114] - Gross profit as a percentage of net sales increased to 22.1% in Q2 2021 (from 17.3%) due to rapidly increasing average selling prices[117] Carbon flat products | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $325,511 | $140,811 | $571,884 | $343,778 | | Total tons sold | 244,383 | 184,824 | 484,231 | 447,934 | | Average selling price per ton | $1,332 | $762 | $1,181 | $767 | | Operating income (loss) | $30,434 | $(9,428) | $51,633 | $(10,774) | - Net sales increased by 131.2% in Q2 2021, driven by a 74.8% increase in average selling prices and a 32.2% increase in tons sold, reflecting a strong market recovery[122][123] - The segment turned an operating loss of $9.4 million in Q2 2020 into an operating income of $30.4 million in Q2 2021[128] Tubular and pipe products | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $92,531 | $52,990 | $182,963 | $115,915 | | Gross profit | $21,348 | $16,761 | $44,822 | $36,536 | | Operating income | $3,039 | $2,225 | $9,359 | $6,530 | - Net sales increased by 74.6% in Q2 2021, driven by a 48.9% increase in shipping volume and a 17.3% increase in average selling prices[131] - Gross profit as a percentage of net sales decreased to 23.1% in Q2 2021 (from 31.6%) due to a $4.0 million LIFO expense recorded in the quarter[133][134] Corporate expenses | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | H1 2021 (in thousands) | H1 2020 (in thousands) | | :--------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Corporate expenses | $4,738 | $2,273 | $8,690 | $4,916 | - Corporate expenses increased by 108.4% in Q2 2021 and 76.8% in H1 2021, primarily due to increased performance-based incentive compensation[137] Liquidity, Capital Resources and Cash Flows - The company's principal capital requirements include funding working capital, purchasing equipment, making acquisitions, and paying dividends, primarily funded by cash from operations and its ABL Credit Facility[138] - Management believes available funds from the ABL Credit Facility and operations will provide sufficient liquidity for at least the next 12 months[139] Operating Activities - Net cash used for operations was $95.7 million in H1 2021, a significant shift from $3.5 million generated in H1 2020[140] - This was primarily due to a $162.2 million use for working capital, driven by a $133.3 million increase in inventories and a $112.9 million increase in accounts receivable[140][143] Investing Activities - Net cash used for investing activities totaled $4.6 million in H1 2021, a slight decrease from $5.6 million in H1 2020[144] - Capital expenditures in both periods were primarily for additional processing equipment at existing facilities[144] Financing Activities - Financing activities generated $106.4 million in cash during H1 2021, mainly from $108.4 million in net borrowings under the ABL Credit Facility[145] - Dividends paid were $0.4 million for both H1 2021 and H1 2020[146] Stock Repurchase Program - The company has an authorized stock repurchase program for up to 550,000 shares, with 360,212 shares remaining authorized as of June 30, 2021[147] - No shares were repurchased during the three or six months ended June 30, 2021[148] - Repurchases are subject to ABL Credit Facility covenants, including a $5.0 million annual aggregate limit with dividends[147] Debt Arrangements - The ABL Credit Facility was amended and extended on June 16, 2021, providing a $475 million revolving credit facility that matures on June 16, 2026[149] - As of June 30, 2021, the company was in compliance with its covenants and had approximately $202 million of availability under the ABL Credit Facility[151] - A five-year interest rate hedge fixes the rate at 2.57% on $75 million of LIBOR-based borrowings[153] Critical Accounting Policies - The financial statements are prepared in conformity with GAAP, requiring management to make estimates and assumptions that affect reported amounts[154] - The company reviews its financial reporting and accounting practices quarterly to ensure accuracy and transparency[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details exposure to market risks from fluctuating metals prices and interest rates, explaining their impact on sales, profitability, and working capital - The company is exposed to market risks from volatile metals prices (carbon, coated, stainless steel, aluminum, pipe, and tube) due to cyclical industry conditions and external factors[156] - Rising metals prices increase working capital requirements and influence the ability to pass on costs, while declining prices can lead to lower sales, gross profits, and potential impairment charges[158][159] - Primary interest rate risk stems from variable rate debt, partially mitigated by a five-year interest rate swap that fixed the rate at 2.57% on $75 million of revolving debt[163] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[164] - No changes in internal control over financial reporting occurred during Q2 2021 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[165] - The company is continuously monitoring and assessing the COVID-19 pandemic's impact on its internal controls[165] Part II. OTHER INFORMATION Item 6. Exhibits Lists all documents filed as exhibits to the Form 10-Q, including corporate amendments, credit facility details, and required certifications - Key exhibits include the Fourth Amendment to Third Amended and Restated Loan and Security Agreement (ABL Credit Facility) and certifications from the Principal Executive Officer and Principal Financial Officer[167] SIGNATURES Contains official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the submission of the Quarterly Report on Form 10-Q - The report is signed by Richard T. Marabito, Chief Executive Officer, and Richard A. Manson, Chief Financial Officer[169]