zeus20210331

zeus20210331_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, 2021

☐ 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 7, 2021
	Common stock, without par value		11,077,322

Olympic Steel, Inc.

Index to Form 10-Q

	Page No.

Part I. FINANCIAL INFORMATION	3
Item 1. *Financial Statements*	3
Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 (unaudited)	3
Consolidated Statements of Comprehensive Income – for the three months ended March 31, 2021 and 2020 (unaudited)	4
Consolidated Statements of Cash Flows – for the three months ended March 31, 2021 and 2020 (unaudited)	5
Supplemental Disclosures of Cash Flow Information – for the three months ended March 31, 2021 and 2020 (unaudited)	6
Consolidated Statements of Shareholders’ Equity – for the three months ended March 31, 2021 and 2020 (unaudited)	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. *Management’s Discussion and Analysis of Financial Condition and Results of Operations*	19
Item 3. *Quantitative and Qualitative Disclosures About Market Risk*	29
Item 4. *Controls and Procedures*	30
Part II. OTHER INFORMATION	31
Item 6. *Exhibits*	32
SIGNATURES	33

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

	As of
	March 31, 2021			December 31, 2020
	(unaudited)
Assets
Cash and cash equivalents	$	8,309		$	5,533
Accounts receivable, net		210,695			151,601
Inventories, net (includes LIFO debit of $1,115 and $2,115 as of March 31, 2021 and December 31, 2020, respectively)		278,174			240,001
Prepaid expenses and other		10,940			5,069
Total current assets		508,118			402,204
Property and equipment, at cost		436,850			434,579
Accumulated depreciation		(282,226	)		(277,379	)
Net property and equipment		154,624			157,200
Goodwill		5,234			5,123
Intangible assets, net		32,026			32,593
Other long-term assets		14,260			18,131
Right of use assets, net		24,097			25,354
Total assets	$	738,359		$	640,605

Liabilities
Accounts payable	$	122,485		$	87,291
Accrued payroll		15,661			10,985
Other accrued liabilities		29,830			22,869
Current portion of lease liabilities		5,436			5,580
Total current liabilities		173,412			126,725
Credit facility revolver		191,903			160,609
Other long-term liabilities		16,408			22,478
Deferred income taxes		13,968			9,818
Lease liabilities		18,893			19,965
Total liabilities		414,584			339,595
Shareholders' Equity
Preferred stock		-			-
Common stock		132,644			132,382
Accumulated other comprehensive loss		(3,499	)		(4,215	)
Retained earnings		194,630			172,843
Total shareholders' equity		323,775			301,010
Total liabilities and shareholders' equity	$	738,359		$	640,605

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

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the Three Months Ended March 31,

(in thousands, except per share data)

	2021			2020
	(unaudited)
Net sales	$	463,124		$	354,380
Costs and expenses
Cost of materials sold (excludes items shown seperately below)		354,665			282,522
Warehouse and processing		23,407			23,076
Administrative and general		23,054			19,059
Distribution		13,562			12,289
Selling		8,466			6,810
Occupancy		3,145			2,660
Depreciation		4,650			4,516
Amortization		585			397
Total costs and expenses		431,534			351,329
Operating income		31,590			3,051
Other income (loss), net		(10	)		(17	)
Income before interest and income taxes		31,580			3,034
Interest and other expense on debt		1,655			2,239
Income before income taxes		29,925			795
Income tax provision		7,917			202
Net income	$	22,008		$	593
Gain (loss) on cash flow hedge		955			(3,397	)
Tax effect on cash flow hedge		(239	)		849
Total comprehensive income (loss)	$	22,724		$	(1,955	)

Earnings per share:
Net income per share - basic	$	1.92		$	0.05
Weighted average shares outstanding - basic		11,490			11,444
Net income per share - diluted	$	1.91		$	0.05
Weighted average shares outstanding - diluted		11,496			11,459

Dividends declared per share of common stock	$	0.02		$	0.02

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)

	2021			2020
	(unaudited)
Cash flows from (used for) operating activities:
Net income	$	22,008		$	593
Adjustments to reconcile net income to net cash from (used for) operating activities -
Depreciation and amortization		5,372			5,042
Loss on disposition of property and equipment		-			71
Stock-based compensation		262			359
Other long-term assets		5,114			(312	)
Other long-term liabilities		(1,575	)		(764	)
		31,181			4,989
Changes in working capital:
Accounts receivable		(59,094	)		(32,210	)
Inventories		(38,173	)		5,977
Prepaid expenses and other		(5,796	)		608
Accounts payable		31,388			10,283
Change in outstanding checks		3,806			3,227
Accrued payroll and other accrued liabilities		10,968			(4,859	)
		(56,901	)		(16,974	)
Net cash used for operating activities		(25,720	)		(11,985	)

Cash flows from (used for) investing activities:
Capital expenditures		(2,286	)		(4,235	)
Net cash used for investing activities		(2,286	)		(4,235	)

Cash flows from (used for) financing activities:
Credit facility revolver borrowings		113,571			107,391
Credit facility revolver repayments		(82,277	)		(91,264	)
Principal payment under capital lease obligation		(176	)		-
Credit facility fees and expenses		(115	)		-
Repurchase of common stock		-			(145	)
Dividends paid		(221	)		(220	)
Net cash from financing activities		30,782			15,762

Cash and cash equivalents:
Net change		2,776			(458	)
Beginning balance		5,533			5,742
Ending balance	$	8,309		$	5,284

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)

	2021		2020
	(unaudited)

Interest paid	$	1,479	$	2,153
Income taxes paid	$	240	$	(7	)

The Company incurred financing lease obligations of $1.0 million during the three months ended March 31, 2020. There were no new financing lease obligations during the three months ended March 31, 2021. This non-cash transaction has been excluded from the Consolidated Statements of Cash Flows for the three months ended March 31, 2020.

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

Olympic Steel, Inc.

Consolidated Statements of Shareholders’ Equity

For The Three Months Ended March 31,

(in thousands)

(unaudited)

					Accumulated
					Other
	*Common*		*Treasury*		*Comprehensive*			*Retained*			*Total*
	*Stock*		*Stock*		*Loss*			*Earnings*			*Equity*

Balance at December 31, 2020	$	132,382	$	-	$	(4,215	)	$	172,843		$	301,010
Net income	$	-	$	-	$	-		$	22,008		$	22,008
Payment of dividends		-		-		-			(221	)		(221	)
Stock-based compensation		262		-		-			-			262
Changes in fair value of hedges, net of tax		-		-		716			-			716
Balance at March 31, 2021	$	132,644	$	-	$	(3,499	)	$	194,630		$	323,775

						Accumulated
						Other
	*Common*		*Treasury*			*Comprehensive*			*Retained*			*Total*
	*Stock*		*Stock*			*Loss*			*Earnings*			*Equity*

Balance at December 31, 2019	$	131,647	$	(335	)	$	(2,281	)	$	179,321		$	308,352
Net income	$	-	$	-		$	-		$	593		$	593
Payment of dividends		-		-			-			(220	)		(220	)
Stock-based compensation		359		-			-			-			359
Changes in fair value of hedges, net of tax		-		-			(2,548	)		-			(2,548	)
Repurchase of common stock		-		(145	)		-			-			(145	)
Other		-		-			-			1			1
Balance at March 31, 2020	$	132,006	$	(480	)	$	(4,829	)	$	179,695		$	306,392

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

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

March 31, 2021

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 2021 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, 2020. All intercompany transactions and balances have been eliminated in consolidation.

The Company operates in three reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segment are at times consolidated and referred to as the flat products segments. Certain of the flat products segments’ assets and resources are shared by the carbon and specialty metals flat products segments, and both segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the carbon flat products segment and the specialty metals flat products segment based upon an established allocation methodology. The carbon flat products segment sells and distributes large volumes of processed carbon and coated flat-rolled sheet, coil and plate products, and fabricated parts. Through the acquisitions of McCullough Industries (McCullough) and certain assets related to the manufacturing of the EZ Dumper® hydraulic dump inserts (EZ Dumper) in 2019, the carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and steel and stainless-steel dump inserts for pickup truck and service truck beds. The specialty metals flat products segment sells and distributes processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. Through the acquisition of Action Stainless & Alloys, Inc. (Action Stainless) on December 14, 2020, the specialty metals flat products segment expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe. Action Stainless offers a range of processing capabilities, including plasma, laser and waterjet cutting and computer numerical control (CNC) machining. Through the acquisition of Berlin Metals, LLC (Berlin Metals) on April 2, 2018, the specialty metals flat products segment expanded its product offerings to include differing types of stainless flat-rolled sheet and coil and prime tin mill products. The tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary (CTI), distributes metal tubing, pipe, bar, valves and fittings and fabricates pressure parts supplied to various industrial markets.

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 payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.

On March 11, 2020, the World Health Organization classified the novel coronavirus (COVID-19) outbreak as a pandemic. The Company is an essential business and remains open in all locations, adhering to all health guidelines to operate safely provided by the Center for Disease Control and Prevention and local authorities. The Company has implemented actions to maintain its financial health and liquidity. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business. However, as a result of the many uncertainties surrounding the COVID-19 pandemic, the Company is unable to predict the impact that it ultimately will have on its financial condition, results of operations, comprehensive income (loss), and cash flows.

Impact of Recently Issued Accounting Pronouncements

There were no recently issued accounting pronouncements that would have a material impact on the Company’s Consolidated Financial Statements.

2.	*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, and fabricated parts. 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, 2021
	Carbon flat products			Specialty metals flat products			Tubular and pipe products			Total
Hot Rolled		28.1	%		0.0	%		0.0	%		28.1	%
Plate		8.7	%		0.0	%		0.0	%		8.7	%
Cold Rolled		6.2	%		0.0	%		0.0	%		6.2	%
Coated		8.8	%		0.0	%		0.0	%		8.8	%
Specialty		0.0	%		25.6	%		0.0	%		25.6	%
Tube		0.0	%		0.0	%		19.5	%		19.5	%
Other		1.4	%		1.7	%		0.0	%		3.1	%
Total		53.2	%		27.3	%		19.5	%		100.0	%

	Disaggregated Revenue by Products Sold
	For the Three Months Ended March 31, 2020
	Carbon flat products			Specialty metals flat products			Tubular and pipe products			Total
Hot Rolled		30.0	%		0.0	%		0.0	%		30.0	%
Plate		11.6	%		0.0	%		0.0	%		11.6	%
Cold Rolled		5.6	%		0.0	%		0.0	%		5.6	%
Coated		8.6	%		0.0	%		0.0	%		8.6	%
Specialty		0.0	%		25.0	%		0.0	%		25.0	%
Tube		0.0	%		0.0	%		17.8	%		17.8	%
Other		1.4	%		0.0	%		0.0	%		1.4	%
Total		57.2	%		25.0	%		17.8	%		100.0	%

3.	*Accounts Receivable*:

Accounts receivable are presented net of allowances for credit losses and unissued credits of $4.1 million and $3.6 million as of March 31, 2021 and December 31, 2020, respectively. The allowance for credit losses is maintained at a level considered appropriate based on historical experience, specific customer collection issues that have been identified, current market conditions and estimates for supportable forecasts when appropriate. Estimations are based upon a calculated percentage of accounts receivable, which remains fairly level from year to year, and judgments about the probable effects of economic conditions on certain customers, which can fluctuate significantly from year to year. The Company cannot guarantee that the rate of future credit losses will be similar to past experience. The Company considers all available information when assessing the adequacy of its allowance for credit losses and unissued credits.

4.	*Inventories:*

Inventories consisted of the following:

	Inventory as of
(in thousands)	March 31, 2021		December 31, 2020
Unprocessed	$	220,466	$	194,614
Processed and finished		57,708		45,387
Totals	$	278,174	$	240,001

The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At March 31, 2021 and December 31, 2020, approximately $45.9 million, or 16.5% of consolidated inventory, and $50.3 million, or 21.0% of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out (FIFO) method.

During the three months ended March 31, 2021, the Company recorded $1.0 million of LIFO expense, as current projections anticipate increased metals prices by December 31, 2021 compared to December 31, 2020. During the three months ended March 31, 2020, the Company recorded $0.5 million of LIFO income.

If the FIFO method had been in use, inventories would have been $1.1 million and $2.1 million lower than reported at March 31, 2021 and December 31, 2020, respectively.

5.	*Goodwill and Intangible Assets:*

The Company’s intangible assets were recorded in connection with its acquisitions that occurred between 2011 and 2020. 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 useful life of the customer relationships was determined to be fifteen years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the fifteen-year amortization period. The useful life of the non-compete agreements was determined to be the length of the non-compete agreements, which range from one to five years. The useful life of the trade names was determined to be indefinite primarily due to their history and reputation in the marketplace, the Company’s expectation that the trade names will continue to be used, and the conclusion that there are currently no other factors identified that would limit their useful life. The Company will continue to evaluate the useful life assigned to its amortizable customer relationships and noncompete agreements in future periods.

Goodwill, by reportable unit, was as follows as of March 31, 2021 and December 31, 2020, respectively. The goodwill is deductible for tax purposes. The change in goodwill during 2021 is related to adjustments to the preliminary purchase price allocation of the fair market values of the assets acquired and liabilities assumed for Action Stainless.

(in thousands)	Carbon Flat Products		Specialty Metals Flat Products		Tubular and Pipe Products		Total

Balance as of December 31, 2020	$	1,065	$	4,058	$	-	$	5,123
Acquisitions		-		111		-		111
Impairments		-		-		-		-
Balance as of March 31, 2021	$	1,065	$	4,169	$	-	$	5,234

Intangible assets consisted of the following as of March 31, 2021 and December 31, 2020, respectively:

	As of March 31, 2021
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net

Customer relationships - subject to amortization	$	21,259	$	(9,457	)	$	11,802
Covenant not to compete - subject to amortization		259		(203	)		56
Trade name - not subject to amortization		20,168		-			20,168
	$	41,686	$	(9,660	)	$	32,026

	As of December 31, 2020
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net

Customer relationships - subject to amortization	$	21,442	$	(9,101	)	$	12,341
Covenant not to compete - subject to amortization		259		(186	)		73
Trade name - not subject to amortization		20,179		-			20,179
	$	41,880	$	(9,287	)	$	32,593

The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $1.5 million per year for the next two years and $1.4 million per year for the three years thereafter.

6.	*Leases*:

The components of lease expense were as follows:

	Three Months Ended		Three Months Ended
	March 31,		March 31,
(in thousands)	2021		2020

Operating lease cost	$	1,674	$	1,777

Finance lease cost:
Amortization of right-of-use assets	$	212	$	60
Interest on lease liabilities		27		14
Total finance lease cost	$	239	$	74

Supplemental cash flow information related to leases was as follows:

	Three Months Ended		Three Months Ended
	March 31,		March 31,
(in thousands)	2021		2020

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,645	$	1,759
Operating cash flows from finance leases		27		14
Financing cash flows from finance leases		202		57
Total cash paid for amounts included in the measurement of lease liabilities	$	1,874	$	1,830

Supplemental balance sheet information related to leases was as follows:

	March 31,			December 31,
(in thousands)	2021			2020

Operating Leases
Operating lease	$	35,547		$	36,060
Operating lease accumulated amortization		(11,450	)		(10,706	)
Operating lease right-of-use asset, net		24,097			25,354

Operating lease current liabilities		5,436			5,580
Operating lease liabilities		18,893			19,965
Total operating lease liabilities	$	24,329		$	25,545

Finance Leases
Finance lease	$	3,582		$	3,582
Finance lease accumulated depreciation		(545	)		(333	)
Finance lease, net		3,037			3,249

Finance lease current liabilities		822			815
Finance lease liabilities		2,245			2,453
Total finance lease liabilities	$	3,067		$	3,268

Weighted Average Remaining Lease Term
Operating leases (in years)		7			7
Finance leases (in years)		5			6

Weighted Average Discount Rate
Operating leases		3.75	%		3.76	%
Finance leases		3.50	%		3.80	%

Maturities of lease liabilities were as follows:

	Operating			Finance
(in thousands)	Leases			Leases

Year Ending December 31,
2021	$	4,775		$	685
2022		5,475			851
2023		4,496			578
2024		3,791			492
2025		2,491			325
Thereafter		6,409			388
Total future minimum lease payments	$	27,437		$	3,319
Less remaining imputed interest		(3,108	)		(252	)
Total	$	24,329		$	3,067

7.	*Debt*:

The Company’s debt is comprised of the following components:

	As of
	March 31,		December 31,
(in thousands)	2021		2020
Asset-based revolving credit facility due December 8, 2022	$	191,903	$	160,609
Total debt	$	191,903	$	160,609

The Company’s asset-based credit facility (the ABL Credit Facility) is collateralized by the Company’s accounts receivable, inventory and personal property. The ABL Credit Facility consists of (i) a revolving credit facility of $445 million, including a $20 million sub-limit for letters of credit and (ii) a first in, last out revolving credit facility of up to $30 million. Under the terms of the ABL Credit Facility, the Company may request additional commitments in the aggregate principal amount of up to $200 million to the extent that existing or new lenders agree to provide such additional commitments. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $475 million in the aggregate. The ABL Credit Facility matures on December 8, 2022.

The ABL Credit Facility contains customary representations and warranties and certain covenants that limit the ability of the Company to, among other things: (i) incur or guarantee additional indebtedness; (ii) pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; (iii) make investments; (iv) sell assets; (v) enter into agreements that restrict distributions or other payments from restricted subsidiaries to the Company; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires (i) if any commitments or obligations are outstanding and the Company’s availability is less than the greater of $30 million or 10.0% of the aggregate amount of revolver commitments ($47.5 million at March 31, 2021) or 10.0% of the aggregate borrowing base ($35.8 million at March 31, 2021) then the Company must maintain a ratio of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve fiscal month period.

The Company has the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.25% or the London Interbank Offered Rate (LIBOR) plus a premium ranging from 1.25% to 2.75%.

On January 10,2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. The interest rate hedge fixed the rate at 2.57%. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

As of March 31, 2021, the Company was in compliance with its covenants and had approximately $162 million of availability under the ABL Credit Facility.

As of March 31, 2021 and December 31, 2020, $0.8 million and $0.9 million, respectively, of bank financing fees were included in “Prepaid expenses and other” and “Other long-term assets” on the accompanying Consolidated Balance Sheets. The financing fees are being amortized over the five-year term of the ABL Credit Facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income (Loss).

8.	*Derivative Instruments*:

Metals swaps and embedded customer derivatives

During 2021 and 2020, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price of nickel with third-party brokers. The nickel swaps are accounted for as derivatives for accounting purposes. The Company entered into them to mitigate its customers’ risk of volatility in the price of metals. The outstanding nickel swaps mature in 2021. The swaps are settled with the brokers at maturity. The economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer. The primary risk associated with the metals swaps is the ability of customers or third-party brokers to honor their agreements with the Company related to derivative instruments. If the customer or third-party brokers are unable to honor their agreements, the Company’s risk of loss is the fair value of the metals swaps.

These derivatives have not been designated as hedging instruments. The periodic changes in fair value of the metals and embedded customer derivative instruments are included in “Cost of materials sold” in the Consolidated Statements of Comprehensive Income (Loss). The Company recognizes derivative positions with both the customer and the third party for the derivatives and classifies cash settlement amounts associated with them as part of “Cost of materials sold” in the Consolidated Statements of Comprehensive Income (Loss). The cumulative change in fair value of the metals swaps that had not yet settled as of March 31, 2021 are included in “Other accrued liabilities”, and the embedded customer derivatives are included in “Accounts Receivable, net” on the Consolidated Balance Sheets as of March 31, 2021. There were no outstanding metals swaps or embedded customer derivatives as of December 31, 2020.

Fixed rate interest rate hedge

On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. The interest rate hedge fixed the rate at 2.57%. The interest rate hedge is included in “Other long-term liabilities” on the Consolidated Balance Sheets as of March 31, 2021. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income (Loss) through net income of the derivatives for the three months ended March 31, 2021 and 2020, respectively.

	Net Gain (Loss) Recognized
	For the Three Months Ended March 31,
(in thousands)	2021			2020
Fixed interest rate hedge	$	(463	)	$	(202	)
Metals swaps		(17	)		(112	)
Embedded customer derivatives		17			112
Total loss	$	(463	)	$	(202	)

9.	*Fair Value of Assets and Liabilities*:

During the three months ended March 31, 2021, there were no transfers of financial assets between Levels 1, 2 or 3 fair value measurements. There have been no changes in the methodologies used at March 31, 2021 since December 31, 2020.

The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company:

Value of Items Recorded at Fair Value

As of March 31, 2021

(in thousands)

Level 1

Level 2

Level 3

SEC Form 10-Q filed by Olympic Steel, Inc.