Olympic Steel(ZEUS) - 2019 Q4 - Annual Report

Part I Business Olympic Steel operates as a metals service center across three segments, providing value-added processing and distribution for diverse industries The Company and Segments - Olympic Steel operates as a metals service center across three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products[17] - The company expanded its product offerings in 2019 through the acquisitions of McCullough Industries (self-dumping metal hoppers) and EZ Dumper (steel and stainless-steel dump inserts)[17] Business Strategy and Objectives - The company's strategy focuses on profitable geographic and product growth through acquisitions, start-ups, and investments in people, systems, and high value-added processing equipment[26] - Key operating objectives include improving safety, managing inventory turnover and operating expenses, diversifying products, growing market share, and investing in technology[27] - Recent growth has been accelerated through acquisitions, including EZ-Dumper® and McCullough in 2019, and Berlin Metals in 2018, as well as capital investments in facilities and equipment[29][30][31] Products, Processing Services and Quality Standards - The company provides a wide range of value-added processing services, including cutting-to-length, slitting, blanking, tempering, plate burning, laser cutting, machining, welding, and fabrication[43] Major Processing Equipment by Segment (as of Dec 31, 2019) | Processing Equipment | Flat Products | Tubular and Pipe Products | Total | | :--- | :--- | :--- | :--- | | Tempering | 3 | - | 3 | | Stretcher-leveling | 2 | - | 2 | | Cutting-to-length | 14 | 13 | 27 | | Slitting | 15 | - | 15 | | Plate processing | 23 | - | 23 | | Laser processing | 29 | 9 | 38 | | Machining | 39 | 85 | 124 | | Tube processing | 2 | 39 | 41 | | Total | 184 | 150 | 334 | - The company maintains high quality standards, with 26 facilities holding ISO 9001:2015 certifications and others holding specialized certifications like IATF 16949:2016 and ASME S Certification[47] Customers and Raw Materials Consolidated Net Sales by Industry | Industry | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Industrial machinery and equipment | 46% | 48% | 51% | | Residential and commercial construction | 13% | 13% | 9% | | Automobile manufacturers and suppliers | 11% | 10% | 9% | | Metals service centers | 8% | 10% | 11% | | Transportation equipment manufacturers | 8% | 8% | 6% | - The company's top three customers accounted for approximately 10% of consolidated net sales in 2019[48] - The company's principal raw materials (carbon, stainless steel, aluminum) are subject to cyclical price and availability volatility, with inventory managed to meet customers' just-in-time delivery needs[52][53] - In 2019, approximately 57% of total metals requirements were purchased from the company's three largest suppliers, indicating significant supplier concentration[57] Employees - As of December 31, 2019, the company employed approximately 1,860 people[67] - Approximately 300 hourly plant personnel are represented by nine separate collective bargaining units with staggered expiration dates from 2020 to 2024[67][68] Risk Factors The company faces significant risks from volatile metal prices, government tariffs, cyclical demand, customer/supplier concentration, and cybersecurity threats Risks Related to our Business - Volatile metal prices can cause significant fluctuations in operating results, as declining prices can lead to lower gross profits and inventory write-downs[84][85] - Government actions, such as Section 232 tariffs, create uncertainty and can impact metal prices, sales, and profitability[86] - The company has significant customer concentration, with the top three customers accounting for 10% of 2019 sales and the industrial machinery sector representing 46% of 2019 sales[88][89] - Supplier concentration is a risk, with approximately 57% of metal requirements in 2019 purchased from the three largest suppliers[102] - The business is exposed to cybersecurity threats and risks associated with the ongoing implementation of new ERP systems, which could disrupt operations[95][96] Risks Related to Our Common Stock - The market price of the company's common stock has been historically volatile and could fluctuate in the future due to factors like commodity prices, analyst estimates, and general economic conditions[126] - Provisions in the company's charter and Ohio law, such as a staggered board and limitations on calling special meetings, could delay or prevent a change in management or a takeover attempt[131] Properties The company's properties are strategically located near suppliers and customers, primarily in the hubs of major metals consumption markets - Properties are strategically situated, with most customers located within a 250-mile radius of a processing facility, enabling an efficient just-in-time delivery system[135] - The company operates numerous owned and leased facilities across the United States and one in Monterrey, Mexico, which serve its three business segments, with many facilities shared between the carbon and specialty metals segments[136][138] Information About Our Executive Officers This section details the business experience of the company's executive officers, reflecting a recent management succession plan - Michael D. Siegal serves as Executive Chairman of the Board since January 2019, having previously been CEO since 1984[145] - Richard T. Marabito has served as Chief Executive Officer since January 2019, previously serving as CFO since 2000[146] - Richard A. Manson has served as Chief Financial Officer since January 2019, having been with the company since 1996 in various roles[147] - Andrew S. Greiff has served as President and Chief Operating Officer since January 2020[148] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq under the symbol "ZEUS", with dividends and repurchases subject to credit facility limitations - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "ZEUS"[151] - A stock repurchase program authorized on October 2, 2015, allows for the repurchase of up to 550,000 shares of common stock[154] - Dividends and stock repurchases are restricted by the ABL Credit Facility, with an annual limit of $5.0 million without limitations, and specific availability requirements for amounts exceeding this threshold[152][154] Selected Financial Data Key financial data for 2019 shows net sales of $1.58 billion and net income of $3.9 million, reflecting a decline from 2018 Selected Financial Data (2017-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Income Statement Data: | | | | | Net sales | $1,579,040 | $1,715,081 | $1,330,696 | | Gross profit | $298,930 | $342,127 | $275,484 | | Operating income | $16,610 | $57,052 | $23,986 | | Net income | $3,856 | $33,759 | $18,963 | | Per Share Data: | | | | | Net income - diluted | $0.34 | $2.95 | $1.67 | | Balance Sheet Data (Year-End): | | | | | Total assets | $649,555 | $760,740 | $604,158 | | Total debt | $192,925 | $302,530 | $197,165 | | Shareholders' equity | $308,352 | $306,991 | $272,583 | Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance in 2019 declined due to falling metal prices and lower demand, resulting in decreased net sales and net income, offset by strong operating cash flow Results of Operations Financial results in 2019 declined due to falling metal prices and weaker demand, leading to decreased consolidated net sales and a significant drop in net income Consolidated Operations Summary (2019 vs 2018) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $1,579,040 | $1,715,081 | | Gross profit | $298,930 | $342,127 | | Operating income | $16,610 | $57,052 | | Net income | $3,856 | $33,759 | - The decrease in 2019 sales was due to a 9.3% decrease in sales volume, partially offset by a 1.5% increase in average selling prices[181] - The carbon flat products segment experienced an operating loss of $5.0 million in 2019, a sharp decline from a $44.4 million operating income in 2018, due to decreased volume and selling prices[188][195] - The tubular and pipe products segment's operating income increased to $18.6 million in 2019 from $11.5 million in 2018, largely due to a favorable LIFO adjustment ($3.7 million income in 2019 vs. $8.4 million expense in 2018)[206][208][210] Liquidity, Capital Resources and Cash Flows The company generated $129.6 million in operating cash flow in 2019, primarily from working capital reductions, used for debt repayment and investments, maintaining strong liquidity Cash Flow Summary (2019 vs 2018) | (in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $129.6 | ($50.5) | | Net cash used for investing activities | ($21.0) | ($47.5) | | Net cash (used for) from financing activities | ($112.1) | $104.3 | - The decrease in working capital was primarily due to a $95.8 million decrease in inventory and a $42.1 million decrease in accounts receivable[215] - Investing activities in 2019 included $11.1 million for the acquisitions of McCullough Industries and EZ Dumper and $10.2 million in capital expenditures[216] - As of December 31, 2019, the company had $93.3 million of availability under its ABL Credit Facility[223] Critical Accounting Policies - Key judgments and estimates are required for several accounting policies, including Allowance for Doubtful Accounts, Inventory Valuation, Intangible Assets, and Income Taxes[233] - Inventory valuation methods include specific identification for carbon and specialty metals, and a mix of LIFO and weighted average FIFO for tubular and pipe products, with 14.3% of consolidated inventory on the LIFO method as of December 31, 2019[239][240] - The company performs an annual impairment test of indefinite-lived intangible assets (goodwill and trade names) in the fourth quarter, or more frequently if impairment indicators are present[243] - Revenue is recognized when control of the product transfers to the customer, which for substantially all sales occurs upon shipment or delivery[250][251] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from volatile metals prices and fluctuating interest rates, which are partially mitigated by an interest rate swap on $75 million of debt - The company's primary market risks are volatile metals pricing and interest rate changes on its variable rate debt[260][266] - A 100 basis point (1.0%) increase in interest rates from December 31, 2019 levels would result in an estimated additional annual interest expense of $1.2 million[266] - On January 10, 2019, the company entered into a five-year interest rate swap to fix the interest rate at 2.567% on $75 million of its revolving debt[267] Financial Statements and Supplementary Data This section includes the company's consolidated financial statements, notes, and reports from independent auditors and management on internal control over financial reporting - Includes the audited consolidated financial statements, notes to the financial statements, and supplementary financial information[269][270] - Contains Management's Report on Internal Control Over Financial Reporting, which concluded that internal controls were effective as of December 31, 2019[296][299] - The company adopted the new lease accounting standard (ASU No. 2016-02) in 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[275] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[435] - No changes in internal control over financial reporting occurred during the quarter ended December 31, 2019, that materially affected, or are reasonably likely to materially affect, internal controls[437] Part III This part incorporates information on directors, executive compensation, security ownership, and related transactions by reference from the 2020 proxy statement Directors, Executive Officers of the Registrant and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2020 definitive proxy statement - Information required by this item will be incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[441] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 definitive proxy statement - Information required by this item will be incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[442] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2020 definitive proxy statement - Information required by this item will be incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[443] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 definitive proxy statement - Information required by this item will be incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[444] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2020 definitive proxy statement - Information required by this item will be incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[445] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and various exhibits filed as part of the Annual Report, including governance documents and material contracts - Lists the financial statements included in Part II, Item 8[448] - Includes Financial Statement Schedule II – Valuation and Qualifying Accounts[449] - Provides an index of all exhibits filed with the report, including governance documents, material contracts, and certifications[450][451]