zeus20230331

zeus20230331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number 0-23320

OLYMPIC STEEL, INC.

(Exact name of registrant as specified in its charter)

	Ohio		34-1245650
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

	22901 Millcreek Boulevard, Suite 650, Highland Hills, OH		44122
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code (216) 292-3800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, without par value	ZEUS	The NASDAQ Stock Market LLC

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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 ☐		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 ☐ No ☒

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 5, 2023
	Common stock, without par value		11,132,542

Olympic Steel, Inc.

Index to Form 10-Q

Page No.

Part I. FINANCIAL INFORMATION			5

	Item 1. *Financial Statements*		5

		Consolidated Balance Sheets – March 31, 2023 and December 31, 2022 (unaudited)	5

		Consolidated Statements of Comprehensive Income – for the three months ended March 31, 2023 and 2022 (unaudited)	6

		Consolidated Statements of Cash Flows – for the three months ended March 31, 2023 and 2022 (unaudited)	7

		Supplemental Disclosures of Cash Flow Information – for the three months ended March 31, 2023 and 2022 (unaudited)	8

		Consolidated Statements of Shareholders’ Equity – for the three months ended March 31, 2023 and 2022 (unaudited)	9

		Notes to Unaudited Consolidated Financial Statements	10

	Item 2. *Management’s Discussion and Analysis of Financial Condition and Results of Operations*		22

	Item 3. *Quantitative and Qualitative Disclosures About Market Risk*		33

	Item 4. *Controls and Procedures*		34

Part II. OTHER INFORMATION			35

	Item 6. *Exhibits*		36

SIGNATURES			37

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

	As of
	March 31, 2023			December 31, 2022
	(unaudited)
Assets
Cash and cash equivalents	$	18,413		$	12,189
Accounts receivable, net		236,844			219,789
Inventories, net (includes LIFO reserves of $20,301 as of March 31, 2023 and December 31, 2022)		407,983			416,931
Prepaid expenses and other		6,257			9,197
Total current assets		669,497			658,106
Property and equipment, at cost		455,975			429,810
Accumulated depreciation		(283,315	)		(281,478	)
Net property and equipment		172,660			148,332
Goodwill		43,690			10,496
Intangible assets, net		85,859			32,035
Other long-term assets		19,755			14,434
Right of use assets, net		35,328			28,224
Total assets	$	1,026,789		$	891,627

Liabilities
Accounts payable	$	142,608		$	101,446
Accrued payroll		17,863			40,334
Other accrued liabilities		20,613			16,824
Current portion of lease liabilities		6,921			6,098
Total current liabilities		188,005			164,702
Credit facility revolver		258,765			165,658
Other long-term liabilities		15,718			12,619
Deferred income taxes		10,737			10,025
Lease liabilities		29,013			22,655
Total liabilities		502,238			375,659
Shareholders' Equity
Preferred stock		-			-
Common stock		135,131			134,724
Accumulated other comprehensive income		1,007			1,311
Retained earnings		388,413			379,933
Total shareholders' equity		524,551			515,968
Total liabilities and shareholders' equity	$	1,026,789		$	891,627

The accompanying notes are an integral part of these consolidated statements.

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31,

(in thousands, except per share data)

	2023			2022

Net sales	$	573,076		$	696,333
Costs and expenses
Cost of materials sold (excludes items shown separately below)		452,636			555,107
Warehouse and processing		30,649			24,048
Administrative and general		33,185			29,622
Distribution		17,741			15,041
Selling		10,397			10,822
Occupancy		4,544			3,589
Depreciation		5,077			4,350
Amortization		1,124			632
Total costs and expenses		555,353			643,211
Operating income		17,723			53,122
Other loss, net		11			6
Income before interest and income taxes		17,712			53,116
Interest and other expense on debt		4,223			1,998
Income before income taxes		13,489			51,118
Income tax provision		3,617			13,816
Net income	$	9,872		$	37,302
Gain (loss) on cash flow hedge		(405	)		2,291
Tax effect on cash flow hedge		101			(573	)
Total comprehensive income	$	9,568		$	39,020

Earnings per share:
Net income per share - basic	$	0.85		$	3.23
Weighted average shares outstanding - basic		11,570			11,559
Net income per share - diluted	$	0.85		$	3.23
Weighted average shares outstanding - diluted		11,571			11,563

Dividends declared per share of common stock	$	0.125		$	0.090

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)

	2023			2022
Cash flows from (used for) operating activities:
Net income	$	9,872		$	37,302
Adjustments to reconcile net income to net cash from operating activities -
Depreciation and amortization		6,201			4,982
Amortization of deferred financing fees		132			114
Gain on disposition of property and equipment		(92	)		(2,198	)
Stock-based compensation		407			327
Other long-term assets		(1,587	)		1,061
Other long-term liabilities		1,020			4,506
		15,953			46,094
Changes in working capital:
Accounts receivable		(6,458	)		(34,966	)
Inventories		26,184			9,582
Prepaid expenses and other		2,412			(1,538	)
Accounts payable		37,476			13,778
Change in outstanding checks		167			1,022
Accrued payroll and other accrued liabilities		(23,294	)		(19,089	)
		36,487			(31,211	)
Net cash from operating activities		52,440			14,883

Cash flows from (used for) investing activities:
Acquisitions, net of cash acquired		(129,476	)		-
Capital expenditures		(7,415	)		(2,116	)
Proceeds from disposition of property and equipment		124			3,292
Net cash (used for) from investing activities		(136,767	)		1,176

Cash flows from (used for) financing activities:
Credit facility revolver borrowings		263,194			183,573
Credit facility revolver repayments		(170,087	)		(200,152	)
Principal payment under capital lease obligation		(220	)		(182	)
Credit facility fees and expenses		(944	)		(100	)
Dividends paid		(1,392	)		(1,001	)
Net cash from (used for) financing activities		90,551			(17,862	)

Cash and cash equivalents:
Net change		6,224			(1,803	)
Beginning balance		12,189			9,812
Ending balance	$	18,413		$	8,009

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)

	2023		2022
	(unaudited)

Interest paid	$	3,561	$	1,902
Income taxes paid	$	115	$	655

The Company incurred $1.7 million of new financing lease obligations during the three months ended March 31, 2023. The Company incurred a nominal amount of new financing lease obligations during the three months ended March 31, 2022. These non-cash transactions have been excluded from the Consolidated Statements of Cash Flows for the three months ended March 31, 2023.

Olympic Steel, Inc.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31,

(in thousands)

(unaudited)

			Accumulated
			Other
	Common		Comprehensive			Retained			Total
	Stock		Income (Loss)			Earnings			Equity

Balance at December 31, 2022	$	134,724	$	1,311		$	379,933		$	515,968
Net income		-		-			9,872			9,872
Payment of dividends		-		-			(1,392	)		(1,392	)
Stock-based compensation		407		-			-			407
Changes in fair value of hedges, net of tax		-		(304	)		-			(304	)
Balance at March 31, 2023	$	135,131	$	1,007		$	388,413		$	524,551

			Accumulated
			Other
	Common		Comprehensive			Retained			Total
	Stock		Income (Loss)			Earnings			Equity

Balance at December 31, 2021	$	133,427	$	(1,996	)	$	293,008		$	424,439
Net income		-		-			37,302			37,302
Payment of dividends		-		-			(1,001	)		(1,001	)
Stock-based compensation		327		-			-			327
Changes in fair value of hedges, net of tax		-		1,718			-			1,718
Other		-		1			-			1
Balance at March 31, 2022	$	133,754	$	(277	)	$	329,309		$	462,786

The accompanying notes are an integral part of these consolidated statements.

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

March 31, 2023

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 2023 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, 2022. All intercompany transactions and balances have been eliminated in consolidation.

The Company operates in three reportable segments; specialty metals flat products, carbon flat products, and tubular and pipe products. The specialty metals flat products segment and the carbon flat products segment are at times consolidated and referred to as the flat products segments. Some of the flat products segments’ assets and resources are shared by the specialty metals and carbon flat products 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 specialty metals flat products segment and carbon the flat products segment based upon an established allocation methodology.

The primary focus of the 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 recent acquisitions, the specialty metals flat products segment has expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe and prime tin mill products.

The primary focus of the 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. Through recent acquisitions, the carbon flat products segment has expanded its product offerings to include self-dumping metal hoppers, and steel and stainless-steel dump inserts for pickup truck and service truck beds. Through the acquisition of Metal-Fab, Inc. (Metal-Fab) on January 3, 2023, the carbon flat products segment further expanded its product offerings to include venting, micro air and clean air products for residential, commercial and industrial applications.

The Company acts as an intermediary between metals producers and manufacturers that require processed metals for their operations. The Company serves 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. These products are primarily distributed through a direct sales force.

Combined, the carbon and specialty metals flat products segments have 36 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

Through its tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary (CTI), the Company distributes metal tubing, pipe, bar, valves and fittings and fabricate pressure parts supplied to various industrial markets. CTI operates from seven 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 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.

Impact of Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The objective of this ASU is to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, FASB issued ASU No. 2022-06 “Deferral of the Sunset Date of Topic 848” which amends and extends the sunset date to December 31, 2024. The adoption of this ASU in the first quarter of 2023 did not have a material impact on the Company’s Consolidated Financial Statements.

2.	*Acquisitions:*

On January 3, 2023, the Company acquired all the outstanding shares of capital stock of Metal-Fab for a cash purchase price of $131.2 million. Metal-Fab, headquartered in Wichita, Kansas, is a manufacturer of venting, micro air and clean air products for residential, commercial and industrial applications.

The Company paid total cash consideration of $131.2 million, consisting of a base purchase price of $131.0 million and a cash adjustment of $0.2 million. The acquisition was funded with borrowings under the Company’s asset-based credit facility (ABL Credit Facility). During 2023, the Company incurred $2.6 million of direct acquisition-related costs, which are included in “Administrative and general” in the Consolidated Statements of Comprehensive Income and $2.1 million of non-recurring amortization of inventory step up to fair market value adjustments, which are included in “Costs of materials sold” in the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023.

Purchase Price Allocation

The acquisition of Metal-Fab was accounted for as a business combination and the assets and liabilities were valued at fair market value on January 3, 2023, the date of acquisition. The Consolidated Balance Sheet as of March 31, 2023, reflects the allocation of Metal-Fab’s purchase price.

The purchase price allocations presented below is based upon management’s estimate of the fair value of the acquired assets and assumed liabilities using Level 3 valuation techniques including income, cost and market approaches. The fair value estimates involve the use of estimates and assumptions, including, but not limited to, the timing and amounts of future cash flows, revenue growth rates, discount rates, and royalty rates. The table below summarizes the preliminary purchase price allocation of the fair market values of the assets acquired and liabilities assumed.

Details of Acquisition (in thousands)	Total

Assets acquired
Cash and cash equivalents	$	1,728
Accounts receivable, net		10,597
Prepaid expenses and other		740
Inventories, net		17,236
Property and equipment		20,408
Goodwill		33,194
Intangible assets		54,740
Right-of-use and other long-term assets		6,930
Total assets acquired		145,573
Total liabilities assumed		(14,369	)
Cash paid	$	131,204

In connection with the acquisition of Metal-Fab, the Company identified and valued certain intangible assets, including the Metal-Fab trade name, internally developed technology and know-how, restrictive covenants and customer relationships. 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 trade name intangible asset was valued at $11.5 million, and the useful life was determined to be indefinite primarily due to their history and reputation in the marketplace, the Company’s expectation that the trade name will continue to be used, and the conclusion that there are currently no other factors identified that would limit their useful life. The internally developed technology and know-how intangible asset was valued at $5.3 million, and the useful life was determined to be fifteen years. The non-compete agreements intangible asset was valued at $1.4 million, and the useful life was determined to be the length of the non-compete agreements, which range from two to five years. The customer relationships intangible asset was valued at $36.5 million, and the useful life was determined to be twenty-six years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the twenty-six-year amortization period.

The accompanying Consolidated Statements of Comprehensive Income includes the revenues and expenses of Metal-Fab since the acquisition date. Metal-Fab’s operations are included within the carbon flat-rolled segment.

Pro Forma Financial Information

The following unaudited pro forma summary of financial results presents the consolidated results of operations as if the Metal-Fab acquisition had occurred on January 1, 2022, after the effect of certain adjustments. The historical consolidated financial information has been adjusted to give effect to the impact of the consideration issued by the Company to Metal-Fab’s stockholders in connection with the acquisition and the effect of debt refinancing necessary to complete the transaction. The unaudited pro forma summary also includes certain purchase price accounting adjustments, including the items expected to have a continuing impact on combined results, such as depreciation and amortization expense on acquired assets. The unaudited pro forma combined financial information does not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from integration activities.

The pro forma results have been presented for comparative purposes only and are not indicative of what would have occurred had the acquisition been made on January 1, 2022, or of any potential results that may occur in the future.

	For the three months ended March 31, 2022

	Historical OSI		Historical Metal-Fab		Pro Forma Adjustments			Pro Forma Combined
(in thousands, except per share amounts)
Pro forma (unaudited):
Net sales	$	696,333	$	22,685	$	184		$	719,202
Net income (loss)	$	37,302	$	4,042	$	(4,401	)	$	36,943

Basic earnings per share	$	3.23	$	0.35	$	(0.38	)	$	3.20
Diluted earnings per share	$	3.23	$	0.35	$	(0.38	)	$	3.20

3.	*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, fabricated parts, venting, micro air and clean air products. 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, 2023
	Specialty metals flat products			Carbon flat products			Tubular and pipe products			Total
Specialty		29.1	%		-			-			29.1	%
Hot Rolled		-			27.3	%		-			27.3	%
Tube		-			-			16.9	%		16.9	%
Plate		-			13.5	%		-			13.5	%
Coated		-			4.4	%		-			4.4	%
Cold Rolled		-			3.4	%		-			3.4	%
Other		-			5.4	%		-			5.4	%
Total		29.1	%		54.0	%		16.9	%		100.0	%

	Disaggregated Revenue by Products Sold
	For the Three Months Ended March 31, 2022
	Specialty metals flat products			Carbon flat products			Tubular and pipe products		Total
Hot Rolled		-			30.3	%		-		30.3	%
Specialty		28.5	%		-			-		28.5	%
Tube		-

SEC Form 10-Q filed by Olympic Steel Inc.