Olympic Steel(ZEUS) - 2021 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements Presents the unaudited consolidated financial statements and related notes for the period ended September 30, 2021 Consolidated Balance Sheets As of September 30, 2021, total assets increased significantly to $971.3 million from $640.6 million at year-end 2020, primarily driven by higher inventories and accounts receivable amid rising metal prices Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $748,817 | $402,204 | | Inventories, net | $417,979 | $240,001 | | Accounts receivable, net | $303,236 | $151,601 | | Total assets | $971,306 | $640,605 | | Total current liabilities | $229,434 | $126,725 | | Credit facility revolver | $297,880 | $160,609 | | Total liabilities | $572,591 | $339,595 | | Total shareholders' equity | $398,715 | $301,010 | Consolidated Statements of Comprehensive Income The company demonstrated a significant financial turnaround, reporting a net income of $44.5 million for Q3 2021, compared to a $1.5 million loss in Q3 2020 Performance Summary (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $668,466 | $299,921 | $1,687,667 | $902,597 | | Operating income (loss) | $62,160 | $(363) | $136,186 | $(4,797) | | Net income (loss) | $44,533 | $(1,520) | $96,190 | $(7,381) | | Diluted EPS | $3.87 | $(0.13) | $8.36 | $(0.64) | Consolidated Statements of Cash Flows For the first nine months of 2021, the company used $126.9 million in cash for operating activities, a major shift from the $28.7 million generated in the same period of 2020 Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from (used for) operating activities | $(126,937) | $28,653 | | Net cash from (used for) investing activities | $1,800 | $(6,818) | | Net cash from (used for) financing activities | $134,747 | $(22,433) | | Net change in cash | $9,610 | $(598) | Notes to Unaudited Consolidated Financial Statements Details the basis of presentation, key accounting policies, and significant events including asset sales, acquisitions, LIFO expense, and credit facility amendments - The company operates in three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products[23] - On September 17, 2021, the company sold its Detroit operation for $58.4 million plus a working capital adjustment, resulting in a net gain of $3.5 million[79] - Subsequent to the quarter end, on October 1, 2021, the company acquired Shaw Stainless & Alloy, Inc. for $12.0 million[80] - Due to rising metals prices, the company recorded LIFO expense of $12.0 million for the nine months ended September 30, 2021, compared to LIFO income of $1.1 million in the prior-year period[35] - On June 16, 2021, the company amended and extended its ABL Credit Facility, increasing the total facility to $475 million with a maturity date of June 16, 2026[43] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the record financial results in Q3 and the first nine months of 2021 to surging metals prices and strong end-market demand, detailing performance, liquidity, and capital allocation Overview The company is a metals service center operating in three segments, with performance highly dependent on external factors like metals pricing, demand, and supply chain dynamics - The company's business is organized into three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products[87][92] - Results are significantly affected by external factors such as metals pricing, supply chain disruptions, customer demand, and U.S. trade policy[85][88] - On September 17, 2021, the company sold its Detroit operation, which primarily served domestic automotive manufacturers and was part of the carbon flat-rolled segment[87] Results of Operations - Consolidated Consolidated net sales for Q3 2021 increased 122.9% year-over-year to $668.5 million, driven by higher prices and volume, leading to a significant shift to operating income Consolidated Operations Summary (in thousands) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net sales | $668,466 | $299,921 | | Gross profit | $147,600 | $59,954 | | Gross profit % | 22.1% | 20.0% | | Operating income (loss) | $62,160 | $(363) | - The increase in net sales was driven by a 98.9% increase in consolidated average selling prices and a 12.0% increase in consolidated volume in Q3 2021 vs Q3 2020[105] - The pricing environment was exceptionally strong, with hot rolled coil index prices 226% higher in Q3 2021 compared to Q3 2020[101] Results of Operations - Specialty Metals Flat Products The specialty metals segment's net sales grew 102.9% to $164.2 million in Q3 2021, propelled by increased prices and tons sold, boosting operating income more than tenfold Specialty Metals Segment Q3 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Sales | $164,179 | $80,904 | | Total Tons Sold | 41,203 | 33,735 | | Avg. Selling Price/Ton | $3,985 | $2,398 | | Gross Profit % | 26.8% | 13.7% | | Operating Income | $24,663 | $2,448 | - The increase in tons sold was attributed to the acquisition of Action Stainless and the recovery of customer demand from COVID-19 pandemic levels[117] Results of Operations - Carbon Flat Products The carbon flat products segment's net sales surged 140.9% to $404.6 million in Q3 2021, driven by higher prices and volume, achieving a significant turnaround to operating income Carbon Flat Products Segment Q3 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Sales | $404,596 | $167,948 | | Total Tons Sold | 244,519 | 224,199 | | Avg. Selling Price/Ton | $1,655 | $749 | | Gross Profit % | 20.7% | 19.7% | | Operating Income (Loss) | $37,164 | $(1,604) | - Tons sold increased 9.1% year-over-year despite the negative impact from the sale of the Detroit operation on September 17, 2021[126] Results of Operations - Tubular and Pipe Products Net sales for the tubular and pipe segment rose 95.2% to $99.7 million in Q3 2021, reflecting higher prices and volume, though gross margin contracted due to a significant LIFO expense Tubular and Pipe Products Segment Q3 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Sales | $99,691 | $51,069 | | Gross Profit | $20,057 | $15,737 | | Gross Profit % | 20.1% | 30.8% | | Operating Income | $2,354 | $744 | - The segment recorded a $7.0 million LIFO expense in Q3 2021 versus a $0.1 million LIFO income in Q3 2020, which significantly impacted the gross profit percentage[137] Liquidity, Capital Resources and Cash Flows The company's liquidity was primarily supported by its ABL Credit Facility, funding increased working capital, with enhanced financial flexibility from an upsizing of the facility and a new equity program - For the nine months ended Sep 30, 2021, net cash used for operating activities was $126.9 million, compared to $28.7 million generated in the prior-year period[144] - Working capital increased by $243.9 million since year-end 2020, mainly from a $178.0 million increase in inventories and a $151.6 million increase in accounts receivable[146] - As of September 30, 2021, the company had approximately $173 million of availability under its $475 million ABL Credit Facility[47][155] - On September 3, 2021, the company commenced a $50 million at-the-market (ATM) equity program, though no shares were sold during the quarter[152] Critical Accounting Policies Management confirms that the company's critical accounting policies, which involve significant judgments and estimates, have not changed from those disclosed in the 2020 Annual Report on Form 10-K - The company's critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2020, and there have been no changes[159] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company identifies its primary market risks as the volatility of metals prices and changes in interest rates, with interest rate risk partially mitigated by a five-year interest rate swap - The company's principal market risks stem from the cyclical and volatile nature of metals pricing and interest rate fluctuations on its debt[160][165] - Declining metals prices can adversely affect gross profits and may lead to inventory impairment, while rising prices increase working capital requirements[161][162] - To manage interest rate risk, the company entered into a five-year interest rate swap that fixed the rate at 2.57% on $75 million of its revolving debt[166] Item 4. Controls and Procedures Based on management's evaluation, the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[167] - There were no material changes in internal control over financial reporting during the third quarter of 2021[168] Part II. OTHER INFORMATION Item 6. Exhibits This section lists the exhibits filed concurrently with the Form 10-Q, including key agreements, certifications, and financial data in Inline XBRL format - Filed exhibits include the Asset Purchase Agreement for the Detroit operation sale, CEO/CFO certifications (Sections 302 and 906), and Inline XBRL data files[171][173]