Olympic Steel(ZEUS) - 2020 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Q1 2020 and 2019, detailing the company's financial position, performance, and cash flows Consolidated Balance Sheets | Metric | March 31, 2020 ($k) | December 31, 2019 ($k) | | :----------------------- | :-------------------- | :--------------------- | | Total Assets | 677,967 | 649,555 | | Total Liabilities | 371,575 | 341,203 | | Total Shareholders' Equity | 306,392 | 308,352 | | Accounts Receivable, net | 165,782 | 133,572 | | Inventories, net | 267,554 | 273,531 | | Credit facility revolver | 209,052 | 192,925 | Consolidated Statements of Comprehensive Income | Metric | Q1 2020 ($k) | Q1 2019 ($k) | YoY Change (%) | | :-------------------------- | :----------- | :----------- | :------------- | | Net Sales | 354,380 | 445,919 | -20.5% | | Operating Income | 3,051 | 6,074 | -49.8% | | Income Before Income Taxes | 795 | 2,846 | -72.1% | | Net Income | 593 | 2,074 | -71.4% | | Total Comprehensive Income | (1,955) | 996 | -296.4% | | Net Income Per Share - Basic| 0.05 | 0.18 | -72.2% | | Net Income Per Share - Diluted| 0.05 | 0.18 | -72.2% | Consolidated Statements of Cash Flows | Cash Flow Activity | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------------------- | :----------- | :----------- | | Net Cash Used for Operating Activities | (11,985) | (1,165) | | Net Cash Used for Investing Activities | (4,235) | (13,394) | | Net Cash From Financing Activities | 15,762 | 10,353 | | Net Change in Cash and Cash Equivalents | (458) | (4,206) | Supplemental Disclosures of Cash Flow Information | Metric | Q1 2020 ($k) | Q1 2019 ($k) | | :------------- | :----------- | :----------- | | Interest Paid | 2,153 | 3,188 | | Income Taxes Paid | (7) | 58 | Consolidated Statements of Shareholders' Equity | Metric | December 31, 2019 ($k) | March 31, 2020 ($k) | | :-------------------------------- | :--------------------- | :------------------ | | Total Shareholders' Equity | 308,352 | 306,392 | | Net Income (Q1 2020) | - | 593 | | Changes in fair value of hedges, net of tax (Q1 2020) | - | (2,548) | | Repurchase of common stock (Q1 2020) | - | (145) | 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[20] - The COVID-19 pandemic did not have a material impact on the company's financial statements for the three months ended March 31, 2020, but could have material adverse effects in the near term[22] - The adoption of ASU No 2016-13, "Financial Instruments-Credit Losses (Topic 326)", did not have a material impact on the company's Consolidated Financial Statements[23] 2. Revenue Recognition - Revenue recognition for substantially all sales occurs upon shipment or delivery of the product, when title, ownership, and risk of loss pass to the customer[26] Disaggregated Revenue by Products Sold (Q1 2020 vs Q1 2019) | Product | Q1 2020 (%) | Q1 2019 (%) | | :-------- | :---------- | :---------- | | Hot Rolled| 30.0 | 35.4 | | Plate | 11.6 | 13.2 | | Cold Rolled| 5.6 | 5.5 | | Coated | 8.6 | 7.0 | | Specialty | 25.0 | 17.8 | | Tube | 17.8 | 17.8 | | Other | 1.4 | 3.3 | | Total | 100.0 | 100.0 | 3. Accounts Receivable | Metric | March 31, 2020 ($k) | December 31, 2019 ($k) | | :-------------------------------- | :-------------------- | :--------------------- | | Allowances for credit losses and unissued credits | 3,100 | 3,700 | 4. Inventories | Inventory Type | March 31, 2020 ($k) | December 31, 2019 ($k) | | :--------------- | :------------------ | :--------------------- | | Unprocessed | 217,547 | 220,787 | | Processed and finished | 50,007 | 52,744 | - Approximately 15.3% ($41.1 million) of consolidated inventory was reported under the LIFO method at March 31, 2020[31] - The Company recorded $0.5 million of LIFO income during Q1 2020, anticipating declining metals prices[32] 5. Goodwill and Intangible Assets | Metric | March 31, 2020 ($k) | December 31, 2019 ($k) | | :-------------------- | :------------------ | :--------------------- | | Goodwill | 3,423 | 3,423 | | Intangible Assets, Net| 28,940 | 29,259 | - Estimated amortization expense for intangible assets is approximately $1.3 million per year for the next year[36] 6. Leases | Lease Cost Component | Q1 2020 ($k) | Q1 2019 ($k) | | :--------------------- | :----------- | :----------- | | Operating lease cost | 1,777 | 1,759 | | Total finance lease cost | 74 | 8 | | Lease Metric | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Operating lease right-of-use asset, net | $28,673k | $25,799k | | Weighted Average Remaining Lease Term (Operating) | 7 years | 7 years | | Weighted Average Remaining Lease Term (Finance) | 6 years | 6 years | 7. Debt | Debt Component | March 31, 2020 ($k) | December 31, 2019 ($k) | | :-------------------------------- | :-------------------- | :--------------------- | | Asset-based revolving credit facility | 209,052 | 192,925 | | Total debt | 209,052 | 192,925 | - The ABL Credit Facility has a revolving credit facility of $445 million and matures on December 8, 2022[40] - As of March 31, 2020, the Company was in compliance with its covenants and had approximately $112.2 million of availability under the ABL Credit Facility[44] - A five-year forward starting fixed rate interest rate hedge was entered into on January 10, 2019, fixing the rate at 2.57% on $75 million of LIBOR-based borrowings[43] 8. Derivative Instruments - The Company uses nickel swaps to mitigate customers' risk of volatility in metals prices; these are not designated as hedging instruments[46][47] - A fixed rate interest rate hedge was entered into on January 10, 2019, to eliminate variability of cash interest payments on $75 million of LIBOR-based borrowings, fixing the rate at 2.57%[48] Net Gain (Loss) Recognized from Derivatives | Derivative Type | Q1 2020 ($k) | Q1 2019 ($k) | | :---------------------- | :----------- | :----------- | | Fixed interest rate hedge | (202) | (9) | | Metals swaps | (112) | 130 | | Embedded customer derivatives | 112 | (130) | | Total loss | (202) | (9) | 9. Fair Value of Assets and Liabilities - All fair value measurements are classified as Level 2, indicating inputs other than quoted prices are observable[51] Fair Value of Items Recorded at Fair Value (March 31, 2020) | Item | Level 1 ($k) | Level 2 ($k) | Level 3 ($k) | Total ($k) | | :-------------------------- | :----------- | :----------- | :----------- | :--------- | | Assets: Embedded customer derivative | - | 59 | - | 59 | | Liabilities: Metal Swaps | - | 59 | - | 59 | | Liabilities: Fixed interest rate hedge | - | 6,439 | - | 6,439 | | Total liabilities recorded at fair value | - | 6,498 | - | 6,498 | 10. Accumulated Other Comprehensive Loss - The fair value of the interest rate hedge, net of tax, was $6.4 million and is included in "Accumulated other comprehensive loss" on the Consolidated Balance Sheets at March 31, 2020[54] 11. Equity Plans Restricted Stock Unit (RSU) Expense | Metric | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------- | :----------- | :----------- | | RSU expense before taxes | 360 | 275 | | RSU expense after taxes | 269 | 200 | RSU Activity (Shares Outstanding) | Metric | March 31, 2020 | March 31, 2019 | | :-------------------- | :------------- | :------------- | | Outstanding at December 31 | 636,086 | 527,546 | | Granted | 70,588 | 156,562 | | Outstanding at March 31 | 700,851 | 684,108 | 12. Income Taxes - Due to COVID-19 pandemic uncertainty, the Q1 2020 tax provision was recorded based on the actual effective tax rate for the period, rather than an estimated annual effective tax rate[62] Income Tax Provision | Metric | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------- | :----------- | :----------- | | Income tax provision | 202 | 772 | | Effective tax rate | 25.4% | 27.1% | 13. Shares Outstanding and Earnings Per Share Shares Outstanding and EPS | Metric | Q1 2020 | Q1 2019 | | :-------------------------------- | :------ | :------ | | Weighted average basic shares outstanding | 11,444k | 11,488k | | Basic earnings per share | $0.05 | $0.18 | | Diluted earnings per share | $0.05 | $0.18 | 14. Stock Repurchase Program - The Board of Directors authorized a stock repurchase program of up to 550,000 shares of common stock in October 2015[65] Common Stock Repurchases | Period | Shares Repurchased | Aggregate Cost ($k) | | :-------------------- | :----------------- | :------------------ | | Q1 2020 | 15,000 | 145 | | Q1 2019 | 3,800 | 64 | 15. Segment Information - The Company operates in three reportable segments: carbon flat products, specialty metals flat products, and tubular and pipe products[68] Segment Net Sales | Segment | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------------- | :----------- | :----------- | | Carbon flat products | 202,967 | 278,536 | | Specialty metals flat products | 88,488 | 88,097 | | Tubular and pipe products | 62,925 | 79,286 | | Total net sales | 354,380 | 445,919 | Segment Operating Income (Loss) | Segment | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------------- | :----------- | :----------- | | Carbon flat products | (1,346) | 1,226 | | Specialty metals flat products | 2,735 | 2,244 | | Tubular and pipe products | 4,305 | 5,615 | | Corporate expenses | (2,643) | (3,011) | | Total operating income | 3,051 | 6,074 | 16. Subsequent Events - The COVID-19 pandemic, classified on March 11, 2020, did not materially impact Q1 2020 financial condition or results of operations[73] - Falling metals prices due to COVID-19 could lead to lower of cost or market inventory adjustments and future impairment of long-lived assets, intangible assets, and goodwill[74] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, segment results, and liquidity, highlighting impacts from metals prices and the anticipated effects of the COVID-19 pandemic Forward-Looking Information - Forward-looking statements are subject to risks including the COVID-19 pandemic's impact on sales, profits, receivables, metals prices, employee productivity, operational risks, and liquidity[77] - Other risks include falling metals prices and inventory devaluation, general economic conditions, competitive factors, and the cyclicality of the metals industry[77] Overview - Olympic Steel is a metals service center operating in three segments: carbon flat products, specialty metals flat products, and tubular and pipe products[79] - Gross profit is influenced by product mix, processing performed, demand and availability of metals, and volatility in selling prices and material purchase costs[79] - The company maintains substantial metals inventories to meet short lead times and just-in-time delivery requirements[81] - Approximately 297 of 1,792 employees are represented by nine collective bargaining units, with agreements expiring between May 2020 and March 2025[82][83] COVID-19 - The COVID-19 pandemic had an immaterial impact on Q1 2020 results but is expected to negatively impact April and Q2 2020 sales due to customer temporary closures, especially in the automotive industry[84] - A prolonged pandemic could lead to falling metals prices, inventory adjustments, asset impairments, and higher bad debt expense[85] - The company has approximately $112 million of availability under its ABL Credit Facility and an unencumbered real estate portfolio, providing sufficient liquidity for the next 12 months[86] 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[87][88] - The tubular and pipe products segment generally has the highest average selling price and gross profit percentage among the three segments[89] Carbon flat products - Focuses on direct sale and distribution of processed carbon and coated flat-rolled sheet, coil, and plate products and fabricated parts[91] - Expanded product offerings in 2019 through acquisitions to include self-dumping metal hoppers and steel/stainless-steel dump inserts[79] Specialty metals flat products - Focuses on direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products, and fabricated parts[92] - Expanded product offerings in 2018 through the acquisition of Berlin Metals to include differing types of stainless flat-rolled sheet and coil and prime tin mill products[79] Tubular and pipe products - Consists of the Chicago Tube and Iron (CTI) business, acquired in 2011, distributing metal tubing, pipe, bar, valves, and fittings, and fabricating pressure parts[94] Corporate expenses - Includes unallocated expenses for managing the entire Company, such as compensation for certain personnel, board of directors' expenses, audit expenses, and other professional fees[95] Results of Operations - Average metals prices were 17% lower in Q1 2020 compared to Q1 2019, negatively impacting net sales and profitability[96][97] - Significant impact on business volumes is expected in Q2 2020 due to customer temporary closures related to the COVID-19 pandemic, especially in the automotive and heavy industrial segments[98] Consolidated Operations - Net sales decreased 20.5% due to a 17.0% decrease in average selling prices and a 4.2% decrease in volume[101] - Gross profit as a percentage of net sales increased to 20.3% in Q1 2020 from 17.8% in Q1 2019, driven by lower inventory costs and LIFO income[103] - Operating expenses decreased $4.7 million (6.3%) but increased as a percentage of net sales to 19.4% from 16.5%[104] Consolidated Operating Results (Q1 2020 vs Q1 2019) | Metric | Q1 2020 ($k) | % of Net Sales (Q1 2020) | Q1 2019 ($k) | % of Net Sales (Q1 2019) | | :-------------------------- | :----------- | :----------------------- | :----------- | :----------------------- | | Net Sales | 354,380 | 100.0 | 445,919 | 100.0 | | Cost of materials sold | 282,522 | 79.7 | 366,382 | 82.2 | | Gross profit | 71,858 | 20.3 | 79,537 | 17.8 | | Operating expenses | 68,807 | 19.4 | 73,463 | 16.5 | | Operating income | 3,051 | 0.9 | 6,074 | 1.3 | | Income before income taxes | 795 | 0.3 | 2,846 | 0.6 | | Net income | 593 | 0.2 | 2,074 | 0.5 | Segment Operations - All segments expect significant decreases in shipping levels during Q2 2020 due to customer actions related to the COVID-19 pandemic[111][119][125] Carbon flat products - Net sales decreased 27.1% due to a 24.3% decrease in average selling prices and a 3.7% decrease in tons sold[112] - The segment reported an operating loss of $1.3 million in Q1 2020, compared to an operating income of $1.2 million in Q1 2019[116] Carbon Flat Products Segment Operating Results | Metric | Q1 2020 | Q1 2019 | | :-------------------------- | :------ | :------ | | Total tons sold | 263,110 | 273,171 | | Net sales ($k) | 202,967 | 278,536 | | Average selling price per ton | $771 | $1,020 | | Gross profit (%) | 19.6% | 16.2% | | Operating income (loss) ($k)| (1,346) | 1,226 | Specialty metals flat products - Net sales increased 0.4% due to a 4.0% increase in average selling prices, primarily from increased surcharges on stainless steel, despite a 3.4% decrease in tons sold[119] - Operating income increased to $2.7 million in Q1 2020 from $2.2 million in Q1 2019[122] Specialty Metals Flat Products Segment Operating Results | Metric | Q1 2020 | Q1 2019 | | :-------------------------- | :------ | :------ | | Total tons sold | 34,570 | 35,784 | | Net sales ($k) | 88,488 | 88,097 | | Average selling price per ton | $2,560 | $2,462 | | Gross profit (%) | 13.8% | 13.5% | | Operating income ($k) | 2,735 | 2,244 | Tubular and pipe products - Net sales decreased 20.6% due to an 11.2% decrease in shipping volume and a 10.6% decrease in average selling prices[125] - Gross profit as a percentage of net sales increased to 31.4% in Q1 2020, with LIFO income contributing 0.8%[127] Tubular and Pipe Products Segment Operating Results | Metric | Q1 2020 ($k) | Q1 2019 ($k) | | :-------------------------- | :----------- | :----------- | | Net sales | 62,925 | 79,286 | | Gross profit (%) | 31.4% | 28.3% | | Operating income ($k) | 4,305 | 5,615 | Corporate expenses - Corporate expenses decreased to $2.6 million in Q1 2020 from $3.0 million in Q1 2019, primarily due to decreased performance-based incentive compensation[130] Liquidity, Capital Resources and Cash Flows - The company's principal capital requirements include funding working capital, purchasing equipment, making acquisitions, and paying dividends, funded by operations and credit facility borrowings[131] - The company believes its ABL Credit Facility and unencumbered real estate portfolio provide sufficient liquidity for the next 12 months, but may seek additional sources if the COVID-19 pandemic persists[132] - Capital spending is currently limited to projects already in process, essential maintenance, and safety projects due to the COVID-19 pandemic[132] Operating Activities - Net cash used for operations increased to $12.0 million in Q1 2020, primarily due to $17.0 million used for working capital[133] - Working capital at March 31, 2020, totaled $334.7 million, a $16.0 million increase from December 31, 2019, driven by a $32.2 million increase in accounts receivable and a $6.0 million decrease in inventories[135] Investing Activities - Net cash used for investing activities decreased to $4.2 million in Q1 2020 from $13.4 million in Q1 2019, primarily due to no acquisitions in 2020[136] - Capital expenditures of $4.2 million in Q1 2020 were mainly for additional processing equipment at existing facilities[136] Financing Activities - Financing activities generated $15.8 million in Q1 2020, primarily from $16.1 million of net borrowings under the ABL Credit Facility[137] - Dividends paid were $0.2 million for both Q1 2020 and Q1 2019, with a Q2 2020 dividend of $0.02 per share approved[138] Stock Repurchase Program - The company repurchased 15,000 shares for $145 thousand in Q1 2020 under its authorized program of up to 550,000 shares[140][139] - Repurchases are subject to ABL Credit Facility covenants, including availability thresholds and a pro-forma EBITDA to fixed charges ratio[139] Debt Arrangements - The ABL Credit Facility provides $445 million in revolving credit, collateralized by accounts receivable, inventory, and personal property, maturing on December 8, 2022[141] - As of March 31, 2020, the company was in compliance with its covenants and had approximately $112.2 million of availability under the ABL Credit Facility[143] - A five-year interest rate swap fixed the rate at 2.57% on $75 million of revolving debt, entered into on January 10, 2019[145] Critical Accounting Policies - The consolidated financial statements are prepared in conformity with GAAP, requiring management to make estimates and assumptions that affect reported amounts[146] - Estimates and assumptions are monitored and evaluated based on historical experience and reasonable factors, but actual results may differ[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to significant market risks from fluctuating metals prices and interest rate changes, which can materially impact financial results - Primary market risks include fluctuating metals prices (carbon, coated, stainless steel, aluminum, pipe, tube, flat rolled coil, sheet, and plate) and interest rate changes[148][153] - Metals price volatility can significantly affect the availability and cost of raw materials, the ability to pass on price increases to customers, and lead to lower gross profits or inventory adjustments[148][149] - The company uses metals swaps to mitigate customer price volatility and a five-year interest rate swap to lock the interest rate at 2.57% on $75 million of revolving debt[153][154] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal controls during Q1 - Disclosure controls and procedures were effective as of March 31, 2020, as concluded by the CEO and CFO[155] - No material changes in internal control over financial reporting occurred during the first quarter of 2020[156] - The company is continually monitoring and assessing the COVID-19 situation's impact on its internal controls[156] Part II. OTHER INFORMATION Item 1A. Risk Factors This section updates risk factors, emphasizing the potential adverse effects of the COVID-19 pandemic on business operations, financial condition, and liquidity - The COVID-19 pandemic could have a material adverse effect on the company's business, financial condition, and liquidity[160][161] - Potential impacts include reduced sales and profit levels, slower payment of accounts receivable, falling metals prices leading to inventory adjustments and asset impairments, reduced employee availability, increased operational risks from remote work, and negative impacts on liquidity[161] - The impact on customers, suppliers, vendors, and other business partners could also adversely affect the company[162] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchase of 15,000 common shares for $145 thousand in March 2020 under its existing stock repurchase program - The stock repurchase program, authorized on October 2, 2015, allows for the repurchase of up to 550,000 shares[163] Common Stock Purchases (Q1 2020) | Period | Total shares purchased | Average price paid per share | Maximum shares that may yet be purchased | | :-------------------- | :--------------------- | :--------------------------- | :--------------------------------------- | | 03/01/20 thru 03/31/20 | 15,000 | $9.64 | 360,212 | | Total | 15,000 | $9.64 | | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and various XBRL financial data documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[165] - XBRL Instance Document and Taxonomy Extension documents (Schema, Calculation, Definition, Label, Presentation Linkbase) are also filed[165] SIGNATURES The report was officially signed by the Chief Executive Officer and Chief Financial Officer on behalf of the company on May 1, 2020 - The report was signed by Richard T Marabito, Chief Executive Officer, and Richard A Manson, Chief Financial Officer, on May 1, 2020[167]