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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | 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
OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
| | | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
| | | |||
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
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.
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).
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 ☐ | | |
| 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
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 November 3, 2023 | |||
| Common stock, without par value | |
Index to Form 10-Q
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
| As of | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net (includes LIFO reserves of $and $ as of September 30, 2023 and December 31, 2022, respectively) | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Right of use assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Other accrued liabilities | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Credit facility revolver | ||||||||
| Other long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Lease liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock | ||||||||
| Common stock | ||||||||
| Accumulated other comprehensive income | ||||||||
| Retained earnings | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30,
(in thousands, except per share data)
| Three months ended | Nine months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| (unaudited) | ||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||
| Costs and expenses | ||||||||||||
| Cost of materials sold (excludes items shown separately below) | ||||||||||||
| Warehouse and processing | ||||||||||||
| Administrative and general | ||||||||||||
| Distribution | ||||||||||||
| Selling | ||||||||||||
| Occupancy | ||||||||||||
| Depreciation | ||||||||||||
| Amortization | ||||||||||||
| Total costs and expenses | ||||||||||||
| Operating income | ||||||||||||
| Other loss, net | ||||||||||||
| Income before interest and income taxes | ||||||||||||
| Interest and other expense on debt | ||||||||||||
| Income before income taxes | ||||||||||||
| Income tax provision | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||
| Gain (loss) on cash flow hedge | ( | ) | ( | ) | ||||||||
| Tax effect on cash flow hedge | ( | ) | ( | ) | ||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||
| Earnings per share: | ||||||||||||
| Net income per share - basic | $ | $ | $ | $ | ||||||||
| Weighted average shares outstanding - basic | ||||||||||||
| Net income per share - diluted | $ | $ | $ | $ | ||||||||
| Weighted average shares outstanding - diluted | ||||||||||||
| Dividends declared per share of common stock | $ | $ | $ | $ | ||||||||
The accompanying notes are an integral part of these consolidated statements.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(in thousands)
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| Cash flows from (used for) operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities - | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing fees | ||||||||
| Gain on disposition of property and equipment | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Other long-term assets | ||||||||
| Other long-term liabilities | ||||||||
| Changes in working capital: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other | ( | ) | ||||||
| Accounts payable | ||||||||
| Change in outstanding checks | ||||||||
| Accrued payroll and other accrued liabilities | ( | ) | ( | ) | ||||
| ( | ) | |||||||
| Net cash from operating activities | ||||||||
| Cash flows from (used for) investing activities: | ||||||||
| Acquisition, net of cash acquired | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from disposition of property and equipment | ||||||||
| Net cash used for investing activities | ( | ) | ( | ) | ||||
| Cash flows from (used for) financing activities: | ||||||||
| Credit facility revolver borrowings | ||||||||
| Credit facility revolver repayments | ( | ) | ( | ) | ||||
| Principal payment under finance lease obligation | ( | ) | ( | ) | ||||
| Credit facility fees and expenses | ( | ) | ( | ) | ||||
| Dividends paid on common stock | ( | ) | ( | ) | ||||
| Net cash from (used for) financing activities | ( | ) | ||||||
| Cash and cash equivalents: | ||||||||
| Net change | ( | ) | ||||||
| Beginning balance | ||||||||
| Ending balance | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated statements.
Supplemental Disclosures of Cash Flow Information
For the Nine Months Ended September 30,
(in thousands)
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The Company incurred $1.8 million of new financing lease obligations during the nine months ended September 30, 2023. The Company incurred a nominal amount of new financing lease obligations during the nine months ended September 30, 2022. These non-cash transactions have been excluded from the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022.
The accompanying notes are an integral part of these consolidated statements.
Consolidated Statements of Shareholders’ Equity
(in thousands)
(unaudited)
| For the Three Months Ended September 30, 2023 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Other | ||||||||||||||||
| Common | Comprehensive | Retained | Total | |||||||||||||
| Stock | Income | Earnings | Equity | |||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Payment of dividends on common stock | ( | ) | ( | ) | ||||||||||||
| Stock-based compensation | ||||||||||||||||
| Changes in fair value of hedges, net of tax | ( | ) | ( | ) | ||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2023 |
||||||||||||||||
| Accumulated |
||||||||||||||||
| Other |
||||||||||||||||
| Common |
Comprehensive |
Retained |
Total |
|||||||||||||
| Stock |
Income |
Earnings |
Equity |
|||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | $ | ||||||||||||
| Net income |
||||||||||||||||
| Payment of dividends on common stock |
( |
) | ( |
) | ||||||||||||
| Stock-based compensation |
||||||||||||||||
| Changes in fair value of hedges, net of tax |
( |
) | ( |
) | ||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | $ | ||||||||||||
| For the Three Months Ended September 30, 2022 |
||||||||||||||||
| Accumulated |
||||||||||||||||
| Other |
||||||||||||||||
| Common |
Comprehensive |
Retained |
Total |
|||||||||||||
| Stock |
Income |
Earnings |
Equity |
|||||||||||||
| Balance at June 30, 2022 |
$ | $ | ( |
) | $ | $ | ||||||||||
| Net income |
||||||||||||||||
| Payment of dividends on common stock |
( |
) | ( |
) | ||||||||||||
| Stock-based compensation |
||||||||||||||||
| Changes in fair value of hedges, net of tax |
||||||||||||||||
| Other |
( |
) | ( |
) | ||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2022 |
||||||||||||||||
| Accumulated |
||||||||||||||||
| Other |
||||||||||||||||
| Common |
Comprehensive |
Retained |
Total |
|||||||||||||
| Stock |
Income |
Earnings |
Equity |
|||||||||||||
| Balance at December 31, 2021 |
$ | $ | ( |
) | $ | $ | ||||||||||
| Net income |
||||||||||||||||
| Payment of dividends on common stock |
( |
) | ( |
) | ||||||||||||
| Stock-based compensation |
||||||||||||||||
| Changes in fair value of hedges, net of tax |
||||||||||||||||
| Other |
( |
) | ( |
) | ||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated statements.
Notes to Unaudited Consolidated Financial Statements
September 30, 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 the carbon 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 flat products segment acts as an intermediary between metals producers and manufacturers that require processed metals for their operations. The flat products segment 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 fabricates 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. With the recent acquisition of Central Tube and Bar, Inc. (CTB) on October 2, 2023, the tubular and pipe products segment expanded its geographic reach and the acquisition's processing capabilities include fabricated tube and bar products, including round, square, rectangular and special shaped tubes. Based on the acquisition date, CTB's operational results are not included in this Quarterly Report on Form 10-Q.
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.
Critical Accounting Policies
Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided refundable employee retention credits, which could be used to offset payroll tax liabilities. On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA). The ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the CARES Act, through December 31, 2021.
As there is no authoritative guidance under GAAP for accounting for grants to for-profit business entities, the Company accounts for the grant by analogy to International Accounting Standards 20, "Accounting for Government Grants and Disclosure of Government Assistance" (IAS 20). During the three months ended September 30, 2023, the Company recorded an employee retention credit of approximately $
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 new standard was applied beginning in the first quarter of 2023 as the Company adjusted their asset-based credit facility (ABL Credit Facility) and fixed interest rate hedge. The application 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 $
The Company paid total cash consideration of $131.2 million, consisting of a base purchase price of $
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 final 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 final 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 | $ | |||
| Accounts receivable, net | ||||
| Prepaid expenses and other | ||||
| Inventories, net | ||||
| Property and equipment | ||||
| Goodwill | ||||
| Intangible assets | ||||
| Right-of-use and other long-term assets | ||||
| Total assets acquired | ||||
| Total liabilities assumed | ( | ) | ||
| Cash paid | $ | |||
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 $
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 September 30, 2022 | ||||||||||||||||
| Historical | Pro Forma | Pro Forma | ||||||||||||||
| Historical OSI | Metal-Fab | Adjustments | Combined | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| Pro forma (unaudited): | ||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Basic earnings per share | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted earnings per share | $ | $ | $ | ( | ) | $ | ||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||
| Historical | Pro Forma | Pro Forma | ||||||||||||||
| Historical OSI | Metal-Fab | Adjustments | Combined | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| Pro forma (unaudited): | ||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Basic earnings per share | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted earnings per share | $ | $ | $ | ( | ) | $ | ||||||||||
| 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 September 30, 2023 | ||||||||||||||||
| Specialty | ||||||||||||||||
| metals flat | Carbon flat | Tubular and | ||||||||||||||
| products | products | pipe products | Total | |||||||||||||
| Specialty | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Nine Months Ended September 30, 2023 | ||||||||||||||||
| Specialty | ||||||||||||||||
| metals flat | Carbon flat | Tubular and | ||||||||||||||
| products | products | pipe products | Total | |||||||||||||
| Specialty | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Three Months Ended September 30, 2022 | ||||||||||||||||
| Specialty | ||||||||||||||||
| metals flat | Carbon flat | Tubular and | ||||||||||||||
| products | products | pipe products | Total | |||||||||||||
| Specialty | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| Disaggregated Revenue by Products Sold | ||||||||||||||||
| For the Nine Months Ended September 30, 2022 | ||||||||||||||||
| Specialty | ||||||||||||||||
| metals flat | Carbon flat | Tubular and | ||||||||||||||
| products | products | pipe products | Total | |||||||||||||
| Specialty | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| 4. | Accounts Receivable: |
Accounts receivable are presented net of allowances for credit losses and unissued credits of $
| 5. | Inventories: |
Inventories consisted of the following:
| Inventory as of | ||||||||
| (in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Unprocessed | $ | $ | ||||||
| Processed and finished | ||||||||
| Totals | $ | $ | ||||||
The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At September 30, 2023 and December 31, 2022, approximately $
During the three and nine months ended September 30, 2023, the Company recorded $
If the FIFO method had been in use, inventories would have been $
| 6. | Goodwill and Intangible Assets: |
The Company’s intangible assets were recorded in connection with its acquisitions of Shaw Stainless & Alloy, Inc. (Shaw) in 2021, Action Stainless & Alloys, Inc. (Action Stainless) in 2020 and Berlin Metals, LLC in 2018 for the specialty metals flat products segment and Metal-Fab in 2023 and certain assets related to the manufacturing of the EZ Dumper® hydraulic dump inserts and McCullough Industries in 2019 for the carbon flat products segment. The intangible assets were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation methodology.
Goodwill, by reportable unit, was as follows as of September 30, 2023 and December 31, 2022, respectively. The goodwill is deductible for tax purposes.
| Specialty Metals | Carbon Flat | |||||||||||
| (in thousands) | Flat Products | Products | Total | |||||||||
| Balance as of December 31, 2022 | $ | $ | $ | |||||||||
| Acquisitions | ||||||||||||
| Impairments | ||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | |||||||||
Intangible assets, net, consisted of the following as of September 30, 2023 and December 31, 2022, respectively:
| As of September 30, 2023 | ||||||||||||
| Gross Carrying | Accumulated | Intangible Assets, | ||||||||||
| (in thousands) | Amount | Amortization | Net | |||||||||
| Customer relationships - subject to amortization | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Technology and know-how - subject to amortization | ( | ) | ||||||||||
| Trade name - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2022 | ||||||||||||
| Gross Carrying | Accumulated | Intangible Assets, | ||||||||||
| (in thousands) | Amount | Amortization | Net | |||||||||
| Customer relationships - subject to amortization | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Trade name - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $
| 7. | Leases: |
The components of lease expense were as follows:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
Supplemental cash flow information related to leases was as follows:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Cash paid for lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
| Total cash paid for lease liabilities | $ | $ | $ | $ | ||||||||||||
Supplemental balance sheet information related to leases was as follows:
| September 30, | December 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
| Operating Leases | ||||||||
| Operating lease | $ | $ | ||||||
| Operating lease accumulated amortization | ( | ) | ( | ) | ||||
| Operating lease right-of-use asset, net | ||||||||
| Operating lease current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance Leases | ||||||||
| Finance lease | ||||||||
| Finance lease accumulated depreciation | ( | ) | ( | ) | ||||
| Finance lease, net | ||||||||
| Finance lease current liabilities | ||||||||
| Finance lease liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases (in years) | ||||||||
| Finance leases (in years) | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Maturities of lease liabilities were as follows:
| Operating | Finance | |||||||
| (in thousands) | Leases | Leases | ||||||
| Year Ending December 31, | ||||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less remaining imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 8. | Debt: |
The Company’s debt is comprised of the following components:
| As of | ||||||||
| September 30, | December 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
| Asset-based revolving credit facility due | $ | $ | ||||||
| Total debt | $ | $ | ||||||
On January 3, 2023, the Company entered into the Sixth Amendment to Third Amended and Restated Loan and Security Agreement, which amended the Company’s existing ABL Credit Facility. The amendment increased the borrowing capacity under the ABL Credit Facility by $
The ABL Credit Facility is collateralized by the Company’s accounts receivable, inventory, personal property and certain real estate. 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 if any commitments or obligations are outstanding and the Company’s availability is less than the greater of $
As of September 30, 2023, the Company was in compliance with its covenants and had approximately $
The Company has the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from
On January 10, 2019, the Company entered into a -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
As of September 30, 2023 and December 31, 2022, $
| 9. | Derivative Instruments: |
Metals swaps and embedded customer derivatives
During 2023 and 2022, 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 2023 and 2024. 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. 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. The cumulative change in fair value of the metals swaps that had not yet settled as of September 30, 2023, are included in “Other accrued liabilities” and the embedded customer derivatives are included in “Accounts receivable, net” on the Consolidated Balance Sheets as of September 30, 2023.
Fixed rate interest rate hedge
On January 10, 2019, the Company entered into a -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income through net income of the derivatives for the three and nine months ended September 30, 2023 and 2022, respectively.
| Net Gain (Loss) Recognized | ||||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Fixed interest rate hedge | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Metals swaps | ( | ) | ( | ) | ( | ) | ||||||||||
| Embedded customer derivatives | ( | ) | ||||||||||||||
| Total income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 10. | Fair Value of Assets and Liabilities: |
During the nine months ended September 30, 2023, 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 September 30, 2023 since December 31, 2022.
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 September 30, 2023 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Metal Swaps | $ | $ | $ | $ | ||||||||||||
| Embedded customer derivative | ||||||||||||||||
| Fixed interest rate hedge | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Metal Swaps | $ | $ | $ | $ | ||||||||||||
| Total liabilities recorded at fair value | $ | $ | $ | $ | ||||||||||||
| Value of Items Recorded at Fair Value | ||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Fixed interest rate hedge | $ | $ | $ | $ | ||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
The value of the items not recorded at fair value represent the carrying value of the liabilities.
The carrying value of the ABL Credit Facility was $
| 11. | Accumulated Other Comprehensive Income: |
On January 10, 2019, the Company entered into a -year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $
| 12. | Equity Plans: |
Restricted Stock Units and Performance Share Units
Pursuant to the Amended and Restated Olympic Steel 2007 Omnibus Incentive Plan (the Incentive Plan), the Company may grant stock options, stock appreciation rights, restricted shares, restricted share units (RSUs), performance shares, and other stock- and cash-based awards to employees and directors of, and consultants to, the Company and its affiliates. Since adoption of the Incentive Plan,
On an annual basis, the compensation committee of the Company’s Board of Directors awards RSUs to each non-employee director as part of their annual compensation. The annual awards for 2023 and 2022 per director were Subject to the terms of the Incentive Plan and the RSU agreement, the RSUs vest after year of service (from the date of grant). The RSUs are not converted into shares of common stock until the director either resigns or is terminated from the Company's Board of Directors.
In January 2022, the Company adopted a new C-Suite Long-Term Incentive Plan (the C-Suite Plan) that operates under the Senior Manager Stock Incentive Plan. Under the C-Suite Plan, the Chief Executive Officer, the Chief Financial Officer and the President and Chief Operating Officer are eligible for participation. In each calendar year, the Committee may award eligible participants a long-term incentive of both a RSU grant and a performance stock unit (PSU) grant. Additionally, the Committee may offer a long-term cash incentive (split equally between service and performance-based portions) to supplement both the RSU and PSU grants in order to arrive at the total long-term award target. The total long-term award target is $
Stock-based compensation expense recognized on RSUs for the three and nine months ended September 30, 2023 and 2022, respectively, is summarized in the following table:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| RSU expense before taxes | $ | $ | $ | $ | ||||||||||||
| RSU expense after taxes | $ | $ | $ | $ | ||||||||||||
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income.
The following table summarizes the activity related to RSUs for the nine months ended September 30, 2023 and 2022, respectively:
| As of September 30, 2023 | As of September 30, 2022 | |||||||||||||||
| Number of | Weighted Average | Number of | Weighted Average | |||||||||||||
| Shares | Granted Price | Shares | Granted Price | |||||||||||||
| Outstanding at December 31 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Converted into shares | ( | ) | ( | ) | ||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Outstanding at September 30 | $ | $ | ||||||||||||||
| Vested at September 30 | $ | $ | ||||||||||||||
| 13. | Income Taxes: |
For the three months ended September 30, 2023, the Company recorded an income tax provision of $
The tax provision for the interim period is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter, the Company updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment.
The quarterly tax provision and the quarterly estimate of the annual effective tax rate is subject to significant volatility due to several factors, including variability in accurately predicting the Company’s pre-tax and taxable income and the mix of jurisdictions to which they relate, changes in law and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, the effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when the pre-tax income is lower.
| 14. | Shares Outstanding and Earnings Per Share: |
Earnings per share have been calculated based on the weighted average number of shares outstanding as set forth below:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Assumed exercise of stock options and issuance of stock awards | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Unvested RSUs | ||||||||||||||||
| 15. | Stock Repurchase Program: |
On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to
There were
At-the-Market Equity Program
On September 3, 2021, the Company commenced an at-the-market (ATM) equity program under its shelf registration statement, which allows it to sell and issue up to $
| 16. | Segment Information: |
The Company follows the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the Company’s chief operating decision maker (CODM) to assess performance and make operating and resource allocation decisions. The CODM evaluates performance and allocates resources based primarily on operating income. The operating segments are based primarily on internal management reporting.
The Company operates in
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.
The following table provides financial information by segment and reconciles the Company’s operating income by segment to the consolidated income before income taxes for the three and nine months ended September 30, 2023 and 2022, respectively.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net sales | ||||||||||||||||
| Specialty metals flat products | $ | $ | $ | $ | ||||||||||||
| Carbon flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Specialty metals flat products | $ | $ | $ | $ | ||||||||||||
| Carbon flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Corporate | ||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Operating income | ||||||||||||||||
| Specialty metals flat products | $ | $ | $ | $ | ||||||||||||
| Carbon flat products | ||||||||||||||||
| Tubular and pipe products | ||||||||||||||||
| Corporate expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating income | $ | $ | $ | $ | ||||||||||||
| Other loss, net | ||||||||||||||||
| Income before interest and income taxes | ||||||||||||||||
| Interest and other expense on debt | ||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Capital expenditures | ||||||||
| Flat products segments | $ | $ | ||||||
| Tubular and pipe products | ||||||||
| Corporate | ||||||||
| Total capital expenditures | $ | $ | ||||||
| As of | ||||||||
| September 30, | December 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
| Assets | ||||||||
| Flat products segments | $ | $ | ||||||
| Tubular and pipe products | ||||||||
| Corporate | ||||||||
| Total assets | $ | $ | ||||||
There were no material revenue transactions between the specialty metals products, carbon flat products and tubular and pipe products segments.
The Company sells certain products internationally, primarily in Canada and Mexico. International sales are immaterial to the consolidated financial results and to the individual segments’ results.
| 17. | Subsequent Events: |
On October 2, 2023, the Company purchased CTB for cash of $
In connection with the CTB acquisition, the Company entered into a Seventh Amendment to Third Amended and Restated Loan and Security Agreement. The amendment allows the Company to include the eligible assets of CTB in its borrowing base.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained herein and our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2022. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appear elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the Securities and Exchange Commission, or SEC, contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as “may,” “will,” “anticipate,” “should,” “intend,” “expect,” “believe,” “estimate,” “project,” “plan,” “potential,” and “continue,” as well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to:
| ● |
risks of falling metals prices and inventory devaluation; |
| ● |
supply disruptions and inflationary pressures, including the availability and rising costs of transportation, energy, logistical services and labor; |
| ● |
risks associated with shortages of skilled labor, increased labor costs and our ability to attract and retain qualified personnel; |
| ● |
rising interest rates and their impacts on our variable interest rate debt; |
| ● |
risks associated with the invasion of Ukraine, including economic sanctions, and the conflicts in the Middle East, or additional war, military conflict, or hostilities could adversely affect global metals supply and pricing; |
| ● | risks associated with supply chain disruption resulting from the imbalance of metal supply and end-user demands, including additional shutdowns as a result of infectious disease outbreaks in large markets, such as China, and other factors; |
| ● |
general and global business, economic, financial and political conditions, including, but not limited to, recessionary conditions and legislation passed under the current administration; |
|
| ● | reduced production schedules, layoffs or work stoppages by our own, our suppliers’ or customers’ personnel; |
| ● |
supplier consolidation or addition of new capacity; |
| ● |
risks associated with infectious disease outbreaks, including, but not limited to customer closures, reduced sales and profit levels, slower payment of accounts receivable and potential increases in uncollectible accounts receivable, falling metals prices that could lead to lower of cost or net realizable value inventory adjustments and the impairment of intangible and long-lived assets, negative impacts on our liquidity position, inability to access our traditional financing sources and increased costs associated with and less ability to access funds under our asset-based credit facility, or ABL Credit Facility, and the capital markets; |
| ● |
our ability to successfully integrate recent acquisitions, including Central Tube and Bar, Inc., or CTB, into our business and risks inherent with the acquisitions in the achievement of expected results, including whether the acquisition will be accretive and within the expected timeframe; |
|
| ● |
the adequacy of our existing information technology and business system software, including duplication and security processes; |
| ● |
the levels of imported steel in the United States and the tariffs initiated by the U.S. government in 2018 under Section 232 of the Trade Expansion Act of 1962 and imposed tariffs and duties on exported steel or other products, U.S. trade policy and its impact on the U.S. manufacturing industry; |
| ● |
the inflation or deflation existing within the metals industry, as well as product mix and inventory levels on hand, which can impact our cost of materials sold as a result of the fluctuations in the last-in, first-out, or LIFO, inventory valuation; |
| ● |
increased customer demand without corresponding increase in metal supply could lead to an inability to meet customer demand and result in lower sales and profits; |
| ● |
competitive factors such as the availability, and global pricing of metals and production levels, industry shipping and inventory levels and rapid fluctuations in customer demand and metals pricing; |
| ● |
customer, supplier and competitor consolidation, bankruptcy or insolvency; |
| ● |
the timing and outcomes of inventory lower of cost or net realizable value adjustments and LIFO income or expense; |
| ● |
cyclicality and volatility within the metals industry; |
| ● |
reduced availability and productivity of our employees, increased operational risks as a result of remote work arrangements, including the potential effects on internal controls, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events; |
| ● |
fluctuations in the value of the U.S. dollar and the related impact on foreign steel pricing, U.S. exports, and foreign imports to the United States; |
| ● |
the successes of our efforts and initiatives to improve working capital turnover and cash flows, and achieve cost savings; |
| ● |
our ability to generate free cash flow through operations and repay debt; |
| ● |
the amounts, successes and our ability to continue our capital investments and strategic growth initiatives, including acquisitions and our business information system implementations; |
| ● |
events or circumstances that could adversely impact the successful operation of our processing equipment and operations; |
| ● |
the impacts of union organizing activities and the success of union contract renewals; |
| ● |
changes in laws or regulations or the manner of their interpretation or enforcement could impact our financial performance and restrict our ability to operate our business or execute our strategies; |
| ● |
events or circumstances that could impair or adversely impact the carrying value of any of our assets; |
| ● |
risks and uncertainties associated with intangible assets, including impairment charges related to indefinite lived intangible assets; |
| ● |
our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; |
| ● |
our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any; |
| ● |
our ability to sell shares of our common stock under the at-the-market equity program; and |
| ● |
unanticipated developments that could occur with respect to contingencies such as litigation, arbitration and environmental matters, including any developments that would require any increase in our costs for such contingencies. |
Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as otherwise required by law.
Overview
We are a leading metals service center that operates in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products. We provide metals processing and distribution services for a wide range of customers. Our specialty metals flat products segment’s focus 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, our 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 and prime tin mill products. Shaw Stainless & Alloy, Inc., or Shaw, manufactures and distributes stainless steel bollards and water treatment systems. Action Stainless & Alloys, Inc., or Action Stainless, offers a range of processing capabilities, including plasma, laser and waterjet cutting and computer numerical control, or CNC, machining. Our carbon flat products segment’s focus 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 acquisitions, our 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. Through the acquisition of Metal-Fab, Inc., or Metal-Fab, on January 3, 2023, our carbon flat products segment expanded its product offerings to include venting, micro air and clean air products for residential, commercial and industrial applications. In addition, our tubular and pipe segment distributes metal tubing, pipe, bar, valves and fittings and fabricate parts supplied to various industrial markets. Through the acquisition of CTB on October 2, 2023, our tubular and pipe products segment expanded its geographic reach and the acquisition's processing capabilities include fabricated tube and bar products, including round, square, rectangular and special shaped tubes. Products that require more value-added processing generally have a higher gross profit. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the demand for and availability of metals, and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned metals. We sell certain products internationally, primarily in Canada and Mexico. International sales are immaterial to our consolidated financial results and to the individual segments’ results.
Our results of operations are affected by numerous external factors, including, but not limited to: general and global business, economic, financial, banking and political conditions; fluctuations in the value of the U.S. dollar to foreign currencies, competition; metals pricing, demand and availability; transportation and energy costs; pricing and availability of raw materials used in the production of metals; global supply, the level of metals imported into the United States, tariffs, and inventory held in the supply chain; the availability and increased costs of labor; customers’ ability to manage their credit line availability; and layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel. The metals industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.
Like other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. From time to time, we have entered into nickel swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and gross profits of our business could be adversely affected.
At September 30, 2023, we employed approximately 2,017 people. Approximately 239 of the hourly plant personnel at the facilities listed below are represented by seven separate collective bargaining units. The table below shows the expiration dates of the collective bargaining agreements.
| Facility |
Expiration date |
| Hammond, Indiana |
November 30, 2024 |
| Locust, North Carolina |
March 4, 2025 |
| St. Paul, Minnesota |
May 25, 2025 |
| Romeoville, Illinois |
May 31, 2025 |
| Minneapolis (coil), Minnesota |
September 30, 2025 |
| Indianapolis, Indiana |
January 29, 2026 |
| Minneapolis (plate), Minnesota |
March 31, 2027 |
We have never experienced a work stoppage and we believe that our relationship with employees is good. However, any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Reportable Segments
We operate 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 segment. 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 the carbon flat products segment based upon an established allocation methodology.
We follow the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the chief operating decision maker, or CODM, to assess performance and make operating and resource allocation decisions. Our CODM evaluates performance and allocates resources based primarily on operating income. Our operating segments are based primarily on internal management reporting.
Due to the nature of the products sold in each segment, there are significant differences in the segments’ average selling price and the cost of materials sold. The specialty metals flat products segment generally has the highest average selling price among the three segments followed by the tubular and pipe products segment and carbon flat products segment. Due to the nature of the tubular and pipe product and our operations that manufacture end user products within the flat product segments, we do not report tons sold or per ton information. Gross profit per ton is generally higher in the specialty metals flat products segment than the carbon flat products segment. Gross profit as a percentage of net sales is generally higher in the carbon flat products and tubular and pipe products segments than the specialty metals flat products segment. Due to the differences in average selling prices, gross profit and gross profit percentage among the segments, a change in the mix of sales could impact total net sales, gross profit, and gross profit percentage. In addition, certain inventory in the tubular and pipe products segment is valued under the LIFO method. Adjustments to the LIFO inventory value are recorded to cost of materials sold and may impact the gross margin and gross margin percentage at the consolidated Company and tubular and pipe products segment levels.
Specialty metals flat products
The primary focus of our specialty metals flat products segment is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products, prime tin mill products and fabricated parts. Through recent acquisitions, our 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.
Carbon flat products
The primary focus of our 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 prior acquisitions, our carbon flat products segment expanded its product offerings to include self-dumping metal hoppers, steel and stainless-steel dump inserts for pickup truck and service truck beds. Through the acquisition of 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. These new product offerings generate higher gross profit as a percentage of sales when compared to traditional carbon service center business.
We act as an intermediary between metals producers and manufacturers that require processed metal for their operations. We serve customers in most metal 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 metal service centers. We distribute these products primarily through a directed 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.
Tubular and pipe products
Through our tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary, or CTI, we distribute metal tubing, pipe, bar, valve and fittings and fabricate 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. Through the acquisition of CTB on October 2, 2023, our tubular and pipe products segment expanded its geographic reach and the acquisition's processing capabilities include fabricated tube and bar products, including round, square, rectangular and special shaped tubes.
Corporate expenses
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.
Results of Operations
Our results of operations are impacted by the market price of metals. Metals prices fluctuate significantly and changes to our net sales, cost of materials sold, gross profit, cost of inventory and profitability, are all impacted by industry metals pricing. Index pricing on carbon steel decreased during the third quarter of 2023 by $212 per ton, or 24.1%, and negligibly increased during the first nine months of 2023 by $2 per ton, compared to the same periods in 2022. Metals prices in our specialty metals flat-product segment decreased during the three and nine months ended September 30, 2023, primarily due decreased metal surcharges, when compared to the same periods in 2022. The average price of stainless surcharges decreased 14.5% during the first nine months of 2023 compared to the first nine months of 2022. Our average selling prices and average cost of materials sold were lower in the third quarter and the first nine months of 2023 than during the same periods of 2022, primarily due to the market price decline in metals in 2023 when compared to the elevated pricing environment experienced in 2022.
Transactional or “spot” selling prices generally move in tandem with market price changes, while fixed selling prices typically lag and reset quarterly. Similarly, inventory costs (and, therefore, cost of materials sold) tend to move slower than market selling price changes due to mill lead times and inventory turnover impacting the rate of change in average cost. When average selling prices increase, and net sales increase, gross profit and operating expenses as a percentage of net sales will generally decrease.
Consolidated Operations
The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands):
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||||
| % of net |
% of net |
% of net |
% of net |
|||||||||||||||||||||||||||||
| $ |
sales |
$ |
sales |
$ |
sales |
$ |
sales |
|||||||||||||||||||||||||
| Net sales |
$ | 526,411 | 100.0 | $ | 634,437 | 100.0 | $ | 1,668,755 | 100.0 | $ | 2,039,946 | 100.0 | ||||||||||||||||||||
| Cost of materials sold (a) |
414,480 | 78.7 | 527,466 | 83.1 | 1,308,988 | 78.4 | 1,643,119 | 80.5 | ||||||||||||||||||||||||
| Gross profit (b) |
111,931 | 21.3 | 106,971 | 16.9 | 359,767 | 21.6 | 396,827 | 19.5 | ||||||||||||||||||||||||
| Operating expenses (c) |
91,046 | 17.3 | 87,885 | 13.9 | 295,387 | 17.7 | 270,754 | 13.3 | ||||||||||||||||||||||||
| Operating income |
20,885 | 4.0 | 19,086 | 3.0 | 64,380 | 3.9 | 126,073 | 6.2 | ||||||||||||||||||||||||
| Other loss, net |
28 | 0.0 | 17 | 0.0 | 67 | 0.0 | 38 | 0.0 | ||||||||||||||||||||||||
| Interest and other expense on debt |
3,953 | 0.8 | 3,007 | 0.5 | 12,379 | 0.7 | 7,276 | 0.4 | ||||||||||||||||||||||||
| Income before income taxes |
16,904 | 3.2 | 16,062 | 2.5 | 51,934 | 3.1 | 118,759 | 5.8 | ||||||||||||||||||||||||
| Income taxes |
4,674 | 0.9 | 4,016 | 0.6 | 14,813 | 0.9 | 31,787 | 1.6 | ||||||||||||||||||||||||
| Net income |
$ | 12,230 | 2.3 | $ | 12,046 | 1.9 | $ | 37,121 | 2.2 | $ | 86,972 | 4.3 | ||||||||||||||||||||
(a) Includes $2,000 and $3,000, respectively, of LIFO income for the three and nine months ended September 30, 2023. Includes $1,500 of LIFO expense for the three and nine months ended September 30, 2022.
(b) Gross profit is calculated as net sales less the cost of materials sold.
(c) Operating expenses are calculated as total costs and expenses less the cost of materials sold.
Net sales decreased $108 million, or 17.0%, to $526.4 million in the third quarter of 2023 from $634.4 million in the third quarter of 2022. Specialty metals flat products net sales were 25.2% of total net sales in the third quarter of 2023 compared to 29.7% of total net sales in the third quarter of 2022. Carbon flat products net sales were 57.8% of total net sales in the third quarter of 2023 compared to 53.0% of total net sales in the third quarter of 2022. Tubular and pipe products net sales were 16.9% of total net sales in the third quarter of 2023 compared to 17.3% of total net sales in the third quarter of 2022. The decrease in net sales was due to a consolidated 16.2% decrease in average selling prices during the third quarter of 2023 compared to the third quarter of 2022 and a 1.0% decrease in sales volume, partially offset by the addition of Metal-Fab in 2023.
Net sales decreased $371 million, or 18.2%, to $1.7 billion in the first nine months of 2023 from $2.0 billion in the first nine months of 2022. Specialty metals flat products net sales were 26.7% of total net sales in the first nine months of 2023 compared to 30.1% of total net sales in the first nine months of 2022. Carbon flat products net sales were 56.4% of total net sales in the first nine months of 2023 compared to 53.3% of total net sales in the first nine months of 2022. Tubular and pipe products net sales were 16.9% of total net sales in the first nine months of 2023 compared to 16.6% of total net sales in the first nine months of 2022. The decrease in net sales was due to a consolidated 18.8% decrease in average selling prices during the first nine months of 2023 compared to the first nine months of 2022, partially offset by a 0.7% increase in sales volume and the addition of Metal-Fab in 2023.
Cost of materials sold decreased $113 million, or 21.4%, to $414.5 million in the third quarter of 2023 from $527.5 million in the third quarter of 2022. Cost of materials sold decreased $334 million, or 20.3%, to $1.3 billion in the first nine months of 2023 from $1.6 billion in the first nine months of 2022. The decrease in cost of materials sold in the third quarter and first nine months of 2023 is related to the decreased metals pricing discussed above in Results of Operations.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 21.3% in the third quarter of 2023 from 16.9% in the third quarter of 2022. As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 21.6% in the first nine months of 2023 from 19.5% in the first nine months of 2022. The increase in the gross profit as a percentage of net sales is due to the average cost of inventory decreasing more than the average selling prices and additional gross profit generated from the Metal-Fab acquisition.
Operating expenses in the third quarter of 2023 increased $3.2 million, or 3.6%, to $91.0 million from $87.9 million in the third quarter of 2022. As a percentage of net sales, operating expenses increased to 17.3% for the third quarter of 2023 from 13.9% in the third quarter of 2022. Operating expenses in the specialty metals flat products segment decreased $6.2 million, operating expenses in the carbon flat products segment increased $11.0 million, operating expenses in the tubular and pipe products segment decreased $1.0 million and Corporate expenses decreased $1.0 million in the third quarter of 2023 compared to the third quarter of 2022. The increase in operating expenses was primarily attributable to the inclusion of Metal-Fab operating expenses partially offset by lower variable performance-based compensation and employee retention credits, or ERCs, provided through The Coronavirus Aid, Relief and Economic Security, or CARES, Act.
Operating expenses in the first nine months of 2023 increased $24.6 million, or 9.1%, to $295.4 million from $270.8 million in the first nine months of 2022. As a percentage of net sales, operating expenses increased to 17.7% in the first nine months of 2023 from 13.3% in the first nine months of 2022. Operating expenses in the specialty metals flat products segment decreased $19.4 million, operating expenses in the carbon flat products segment increased $38.9 million, operating expenses in the tubular and pipe products segment increased $4.9 million and Corporate expenses increased $0.2 million in the first nine months of 2023 compared to the first nine months of 2022. The increase in operating expenses was primarily attributable to the inclusion of Metal-Fab operating expenses, acquisition-related expenses and the year-over-year absence of the gain on the sale of the Milan, Illinois facility in the first quarter of 2022 partially offset by lower performance-based incentive compensation and ERCs provided through the CARES Act.
Interest and other expense on debt totaled $4.0 million, or 0.8% of net sales, in the third quarter of 2023 compared to $3.0 million, or 0.5% of net sales, in the third quarter of 2022. Interest and other expense on debt totaled $12.4 million, or 0.7% of net sales, in the first nine months of 2023 compared to $7.3 million, or 0.4% of net sales, in the first nine months of 2022. The increase was due to a higher effective borrowing rate partially offset by lower average borrowings in the first nine months of 2023 compared to the first nine months of 2022. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 5.9% for the first nine months of 2023 compared to 2.9% for the first nine months of 2022.
In the third quarter of 2023, income before income taxes totaled $16.9 million compared to income before income taxes of $16.1 million in the third quarter of 2022. In the first nine months of 2023, income before income taxes totaled $51.9 million compared to income before income taxes of $118.8 million in the first nine months of 2022.
An income tax provision of 27.7% was recorded for the third quarter of 2023, compared to an income tax provision of 25.0% for the third quarter of 2022. An income tax provision of 28.5% was recorded for the first nine months of 2023, compared to an income tax provision of 26.8% for the first nine months of 2022. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are considered in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Net income for the third quarter of 2023 totaled $12.2 million, or $1.06 per basic share and diluted share, compared to net income of $12.0 million, or $1.04 per basic and diluted share, for the third quarter of 2022. Net income for the first nine months of 2023 totaled $37.1 million, or $3.21 per basic share and diluted share, compared to net income of $87.0 million, or $7.53 per basic and diluted share, for the first nine months of 2022.
Segment Operations
Specialty metals flat products
The following table presents selected operating results for our specialty metals flat products segment for the periods indicated (dollars are shown in thousands, except for per ton information):
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||||
| % of net |
% of net |
% of net |
% of net |
|||||||||||||||||||||||||||||
| sales |
sales |
sales |
sales |
|||||||||||||||||||||||||||||
| Direct tons sold |
27,160 | 31,877 | 86,803 | 106,050 | ||||||||||||||||||||||||||||
| Toll tons sold |
776 | 2,312 | 2,360 | 4,969 | ||||||||||||||||||||||||||||
| Total tons sold |
27,936 | 34,189 | 89,163 | 111,019 | ||||||||||||||||||||||||||||
| Net sales |
$ | 132,763 | 100.0 | $ | 188,301 | 100.0 | $ | 446,327 | 100.0 | $ | 614,744 | 100.0 | ||||||||||||||||||||
| Average selling price per ton |
4,752 | 5,508 | 5,006 | 5,537 | ||||||||||||||||||||||||||||
| Cost of materials sold |
111,622 | 84.1 | 150,546 | 79.9 | 371,935 | 83.3 | 455,977 | 74.2 | ||||||||||||||||||||||||
| Gross profit (a) |
21,141 | 15.9 | 37,755 | 20.1 | 74,392 | 16.7 | 158,767 | 25.8 | ||||||||||||||||||||||||
| Operating expenses (b) |
16,473 | 12.4 | 22,683 | 12.0 | 53,786 | 12.1 | 73,138 | 11.9 | ||||||||||||||||||||||||
| Operating income |
$ | 4,668 | 3.5 | $ | 15,072 | 8.0 | $ | 20,606 | 4.6 | $ | 85,629 | 13.9 | ||||||||||||||||||||
(a) Gross profit is calculated as net sales less the cost of materials sold.
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold.
Tons sold by our specialty metals flat products segment decreased 18.3% to 28 thousand in the third quarter of 2023 from 34 thousand in the third quarter of 2022. Tons sold by our specialty metals flat products segment decreased 19.7% to 89 thousand in the first nine months of 2023 from 111 thousand in the first nine months of 2022. The decrease in tons sold was primarily due to an overall market decrease in the demand for stainless steel as domestic stainless steel mills ended their allocation programs during the second half of 2022 into the beginning of 2023.
Net sales in our specialty metals flat products segment decreased $55.5 million, or 29.5%, to $132.8 million in the third quarter of 2023 from $188.3 million in the third quarter of 2022. The decrease in sales was due to a 13.7% decrease in average selling prices and an 18.3% decrease in sales volume during the third quarter of 2023 compared to the third quarter of 2022. Average selling prices in the third quarter of 2023 were $4,752 per ton, compared with $5,508 per ton in the third quarter of 2022, and $5,120 per ton in the second quarter of 2023.
Net sales in our specialty metals flat products segment decreased $168.4 million, or 27.4%, to $446.3 million in the first nine months of 2023 from $614.7 million in the first nine months of 2022. The decrease in sales was due to a 9.6% decrease in average selling prices and a 19.7% decrease in sales volume during the first nine months of 2023 compared to the first nine months of 2022. Average selling prices in the first nine months of 2023 were $5,006 per ton, compared with $5,537 per ton in the first nine months of 2022.
Cost of materials sold in our specialty metals flat products segment decreased $38.9 million, or 25.9%, to $111.6 million in the third quarter of 2023 from $150.5 million in the third quarter of 2022. Cost of materials sold in our specialty metals flat products segment decreased $84.0 million, or 18.4%, to $371.9 million in the first nine months of 2023 from $456.0 million in the first nine months of 2022. The decrease in cost of materials sold was due to the decreased industry metals pricing discussed above in Results of Operations and decreased sales volume.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 15.9% in the third quarter of 2023 from 20.1% in the third quarter of 2022. As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 16.7% in the first nine months of 2023 from 25.8% in the first nine months of 2022. The decrease in the gross profit as a percentage of net sales was due to the impact of the decreased average selling prices discussed above in Results of Operations.
Operating expenses decreased $6.2 million, or 27.4%, to $16.5 million in the third quarter of 2022 from $22.7 million in the third quarter of 2022. As a percentage of net sales, operating expenses increased to 12.4% in the third quarter of 2023 compared to 12.0% in the third quarter of 2022. Operating expenses decreased $19.4 million, or 26.5%, to $53.8 million in the first nine months of 2023 from $73.1 million in the first nine months of 2022. As a percentage of net sales, operating expenses increased to 12.1% in the first nine months of 2023 compared to 11.9% in the first nine months of 2022. The decrease in operating expenses was primarily attributable to decreased variable performance-based incentive compensation and decreased variable operating expenses due to decreased sales volume.
Operating income in the third quarter of 2023 totaled $4.7 million, or 3.5% of net sales, compared to $15.1 million, or 8.0% of net sales, in the third quarter of 2022. Operating income in the first nine months of 2023 totaled $20.6 million, or 4.6% of net sales, compared to $85.6 million, or 13.9% of net sales, in the first nine months of 2022.
Carbon flat products
The following table presents selected operating results for our carbon flat products segment for the periods indicated (dollars are shown in thousands, except for per ton information):
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||||
| % of net |
% of net |
% of net |
% of net |
|||||||||||||||||||||||||||||
| sales |
sales |
sales |
sales |
|||||||||||||||||||||||||||||
| Direct tons sold |
198,767 | 196,282 | 625,332 | 598,803 | ||||||||||||||||||||||||||||
| Toll tons sold |
8,378 | 6,840 | 26,426 | 21,006 | ||||||||||||||||||||||||||||
| Total tons sold |
207,145 | 203,122 | 651,758 | 619,809 | ||||||||||||||||||||||||||||
| Net sales |
$ | 304,478 | 100.0 | $ | 336,259 | 100.0 | $ | 940,925 | 100.0 | $ | 1,086,473 | 100.0 | ||||||||||||||||||||
| Average selling price per ton |
1,470 | 1,655 | 1,444 | 1,753 | ||||||||||||||||||||||||||||
| Cost of materials sold |
242,532 | 79.7 | 293,498 | 87.3 | 744,040 | 79.1 | 931,844 | 85.8 | ||||||||||||||||||||||||
| Gross profit (a) |
61,946 | 20.3 | 42,761 | 12.7 | 196,885 | 20.9 | 154,629 | 14.2 | ||||||||||||||||||||||||
| Operating expenses (b) |
51,997 | 17.1 | 41,029 | 12.2 | 166,295 | 17.7 | 127,404 | 11.7 | ||||||||||||||||||||||||
| Operating income |
$ | 9,949 | 3.3 | $ | 1,732 | 0.5 | $ | 30,590 | 3.3 | $ | 27,225 | 2.5 | ||||||||||||||||||||
(a) Gross profit is calculated as net sales less the cost of materials sold.
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold.
Tons sold by our carbon flat products segment increased 2.0% to 207 thousand in the third quarter of 2023 from 203 thousand in the third quarter of 2022. Tons sold by our carbon flat products segment increased 5.2% to 652 thousand in the first nine months of 2023 from 620 thousand in the first nine months of 2022.
Net sales in our carbon flat products segment decreased $31.8 million, or 9.5%, to $304.5 million in the third quarter of 2023 from $336.3 million in the third quarter of 2022. The decrease in sales was attributable to a 11.2% decrease in average selling prices in the third quarter of 2023 compared to the third quarter of 2022, partially offset by a 2.0% increase in tons sold and an increase in sales generated from the Metal-Fab acquisition, which does not report tons sold. Average selling prices in the third quarter of 2023 decreased to $1,470 per ton, compared with $1,655 per ton in the third quarter of 2022 and $1,444 per ton in the second quarter of 2023.
Net sales in our carbon flat products segment decreased $145.5 million, or 13.4%, to $940.9 million in the first nine months of 2023 from $1.1 billion in the first nine months of 2022. The decrease in sales was attributable to a 17.6% decrease in average selling prices in the first nine months of 2023 compared to the first nine months of 2022, offset by a 5.2% increase in tons sold and an increase in sales generated from the Metal-Fab acquisition, which does not report tons sold. Average selling prices in the first nine months of 2023 decreased to $1,444 per ton, compared with $1,753 per ton in the first nine months of 2022.
Cost of materials sold decreased $51.0 million, or 17.4%, to $242.5 million in the third quarter of 2023 from $293.5 million in the third quarter of 2022. Cost of materials sold decreased $187.8 million, or 20.2%, to $744.0 million in the first nine months of 2023 from $931.8 million in the first nine months of 2022. The decrease was due to the decreased market price for metals discussed above in Results of Operations partially offset by an increase in sales volume and an increase in the cost of material sold from the Metal-Fab acquisition. In addition, we recorded $2.1 million of non-recurring amortization expense of inventory step up to fair market value adjustments made as part of the Purchase Price Allocation for the January 3, 2023 acquisition of Metal-Fab.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 20.3% in the third quarter of 2023 compared to 12.7% in the third quarter of 2022. As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 20.9% in the first nine months of 2023 compared to 14.2% in the first nine months of 2022. The increase in the gross profit as a percentage of net sales was due to average cost of inventory decreasing more than the average selling prices and additional gross profit generated from the Metal-Fab acquisition.
Operating expenses in the third quarter of 2023 increased $11.0 million, or 26.7%, to $52.0 million from $41.0 million in the third quarter of 2022. Operating expenses increased to 17.1% of net sales in the third quarter of 2023 compared to 12.2% in the third quarter of 2022. Operating expenses in the first nine months of 2023 increased $38.9 million, or 30.5%, to $166.3 million from $127.4 million in the first nine months of 2022. Operating expenses increased to 17.7% of net sales in the first nine months of 2023 compared to 11.7% in the first nine months of 2022. The year-over-year increase in operating expenses was primarily attributable to the inclusion of Metal-Fab operating expenses partially offset by lower variable performance-based compensation and ERCs provided through the CARES Act.
Operating income in the third quarter of 2023 totaled $9.9 million, or 3.3% of net sales, compared to operating income of $1.7 million, or 0.5% of net sales, in the third quarter of 2022. Operating income in the first nine months of 2023 totaled $30.6 million, or 3.3% of net sales, compared to operating income of $27.2 million, or 2.5% of net sales, in the first nine months of 2022.
Tubular and pipe products
The following table presents selected operating results for our tubular and pipe products segment for the periods indicated (dollars are shown in thousands):
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||||
| % of net |
% of net |
% of net |
% of net |
|||||||||||||||||||||||||||||
| $ |
sales |
$ |
sales |
$ |
sales |
$ |
sales |
|||||||||||||||||||||||||
| Net sales |
$ | 89,170 | 100.0 | $ | 109,877 | 100.0 | $ | 281,503 | 100.0 | $ | 338,729 | 100.0 | ||||||||||||||||||||
| Cost of materials sold (a) |
60,326 | 67.7 | 83,422 | 75.9 | 193,013 | 68.6 | 255,298 | 75.4 | ||||||||||||||||||||||||
| Gross profit (b) |
28,844 | 32.3 | 26,455 | 24.1 | 88,490 | 31.4 | 83,431 | 24.6 | ||||||||||||||||||||||||
| Operating expenses (c) |
18,811 | 21.1 | 19,360 | 17.6 | 59,345 | 21.1 | 54,454 | 16.1 | ||||||||||||||||||||||||
| Operating income |
$ | 10,033 | 11.3 | $ | 7,095 | 6.5 | $ | 29,145 | 10.4 | $ | 28,977 | 8.6 | ||||||||||||||||||||
(a) Includes $2,000 and $3,000, respectively, of LIFO income for the three and nine months ended September 30, 2023. Includes $1,500 of LIFO expense for the three and nine months ended September 30, 2022.
(b) Gross profit is calculated as net sales less the cost of materials sold.
(c) Operating expenses are calculated as total costs and expenses less the cost of materials sold.
Net sales decreased $20.7 million, or 18.8%, to $89.2 million in the third quarter of 2023 from $109.9 million in the third quarter of 2022. The decrease is a result of a 17.4% decrease in average selling prices and a 1.7% decrease in shipping volume during the third quarter of 2023 compared to the third quarter of 2022. Net sales decreased $57.2 million, or 16.9%, to $281.5 million in the first nine months of 2023 from $338.7 million in the first nine months of 2022. The decrease was a result of a 12.0% decrease in average selling prices and a 5.6% decrease in shipping volume during the first nine months of 2023 compared to the first nine months of 2022.
Cost of materials sold decreased $23.1 million, or 27.7%, to $60.3 million in the third quarter of 2023 from $83.4 million in the third quarter of 2022. Cost of materials sold decreased $62.3 million, or 24.4%, to $193.0 million in the first nine months of 2023 from $255.3 million in the first nine months of 2022. During the three and nine months ended September 30, 2023, we recorded $2.0 and $3.0 million, respectively, of LIFO income. We recorded $1.5 million of LIFO expense for the three and nine months ended September 30, 2022. The decrease in cost of materials sold was due to the decreased industry metals pricing discussed above in Results of Operations.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 32.3% in the third quarter of 2023 compared to 24.1% in the third quarter of 2022. As a percentage of net sales, the LIFO income recorded in the third quarter of 2023 increased gross profit by 2.2% and the LIFO expense recorded in the third quarter of 2022 reduced gross profit by 1.4%. As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 31.4% in the first nine months of 2023 compared to 24.6% in the first nine months of 2022. As a percentage of net sales, the LIFO income recorded in the first nine months of 2023 increased gross profit by 1.1% and the LIFO expense recorded in the first nine months of 2022 reduced gross profit by 0.4%.
Operating expenses in the third quarter of 2023 decreased $0.5 million, or 2.8%, to $18.8 million from $19.4 million in the third quarter of 2022. Operating expenses increased to 21.1% of net sales in the third quarter of 2023 compared to 17.6% in the third quarter of 2022. Operating expenses in the first nine months of 2023 increased $4.9 million, or 9.0%, to $59.3 million from $54.5 million in the first nine months of 2022. Operating expenses increased to 21.1% of net sales in the first nine months of 2023 compared to 16.1% in the first nine months of 2022. The increase in operating expenses was primarily due to increased variable performance-based compensation, the year-over-year absence of the gain on the sale of the Milan, Illinois facility in the first quarter of 2022 and higher inflation-driven distribution expense.
Operating income in the third quarter 2023 totaled $10.0 million, or 11.3% of net sales, compared to $7.1 million, or 6.5% of net sales, in the third quarter of 2022. Operating income in the first nine months of 2023 totaled $29.1 million, or 10.4% of net sales, compared to $29.0 million, or 8.6% of net sales, in the first nine months of 2022.
Corporate expenses
Corporate expenses decreased $1.0 million, or 21.8%, to $3.8 million in the third quarter of 2023 from $4.8 million in the third quarter of 2022. Corporate expenses increased $0.2 million, or 1.3%, to $16.0 million in the first nine months of 2023 from $15.8 million in the first nine months of 2022. Corporate expense primarily increased due to the $2.6 of acquisition-related expenses partially offset by lower performance-based compensation and ERCs provided through the CARES Act.
Liquidity, Capital Resources and Cash Flows
Our principal capital requirements include funding working capital needs, purchasing, upgrading and acquiring processing equipment and facilities, making acquisitions and paying dividends. We use cash generated from operations and borrowings under our ABL Credit Facility to fund these requirements.
We believe that funds available under our ABL Credit Facility, together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements, our dividend payments and any share repurchases and business acquisitions over at least the next 12 months and for the foreseeable future thereafter. In the future, we may as part of our business strategy, acquire and dispose of assets or other companies in the same or complementary lines of business, or enter into or exit strategic alliances and joint ventures. Accordingly, the timing and size of our capital requirements are subject to change as business conditions warrant and opportunities arise.
Operating Activities
For the nine months ended September 30, 2023, we generated $121.0 million of net cash from operations, of which $67.2 million was generated from operating activities and $53.8 million was generated from working capital. For the nine months ended September 30, 2022, we generated $98.3 million of net cash from operations, of which $107.1 million was generated from operating activities and $8.8 million was used for working capital.
Net cash from operating activities totaled $67.2 million during the first nine months of 2023 and was mainly comprised of net income of $37.1 million, the non-cash depreciation and amortization addback of $18.9 million, changes in other long-term assets of $5.3 million and decreases in other long-term liabilities of $4.2 million. Net cash from operating activities totaled $107.1 million during the first nine months of 2022 and was mainly comprised of net income of $87.0 million, the non-cash depreciation and amortization addback of $14.9 million, changes in other long-term liabilities of $5.5 million and decreases in other long-term assets of $0.9 million.
Working capital at September 30, 2023, including amounts acquired from the January 3, 2023 acquisition of Metal-Fab, totaled $455.5 million, a $37.9 million decrease from December 31, 2022. Exclusive of the $22.1 million working capital acquired from Metal-Fab, the decrease was primarily attributable to a $9.3 million decrease in accrued payroll and other accrued liabilities and a $4.0 million increase in prepaid expenses and other, offset by a $41.8 million decrease in inventories, a $2.5 million decrease in accounts receivable and a $22.7 million increase in accounts payable and outstanding checks.
Investing Activities
Net cash used for investing activities totaled $148.9 million during the nine months ended September 30, 2023, compared to $10.7 million during the nine months ended September 30, 2022. Net cash used for investing activities primarily consisted of the $129.5 million acquisition of Metal-Fab, inclusive of cash acquired of $1.7 million, $19.6 million in new capital expenditures offset by $0.1 million in proceeds from the disposition of property and equipment. Net cash used for investing activities totaled $10.7 million during the nine months ended September 30, 2022, and primarily consisted of $14.0 million in new capital expenditures offset by $3.3 million in proceeds primarily from the sale of the Milan, Illinois facility.
The capital expenditures in the first nine months of 2023 and 2022 were primarily attributable to additional processing equipment at our existing facilities.
Financing Activities
During the first nine months of 2023, $24.8 million of cash was generated from financing activities, which primarily consisted of $30.9 million of net borrowings under our ABL Credit Facility, offset by $4.2 million of dividends paid, $1.1 million of credit facility fees and expenses related to the amended ABL Credit Facility and $0.7 million of principal payments under capital lease obligations.
Dividends paid were $4.2 million and $3.0 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. In November 2023, our Board of Directors approved a regular quarterly dividend of $0.125 per share, which will be paid on December 15, 2023 to shareholders of record as of December 1, 2023. Regular dividend distributions in the future are subject to the availability of cash, the $15.0 million annual limitation on cash dividends and common stock repurchases under our ABL Credit Facility and continuing determination by our Board of Directors that the payment of dividends remains in the best interest of our shareholders.
Stock Repurchase Program
In 2015, our Board of Directors authorized a stock repurchase program of up to 550,000 shares of our issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Repurchased shares will be held in our treasury, or canceled and retired as our Board of Directors may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility. Under the ABL Credit Facility, we may repurchase common stock and pay dividends up to $15.0 million in the aggregate during any trailing twelve months without restrictions. Purchases in excess of $15.0 million require us to (i) maintain availability in excess of 20% of the aggregate revolver commitments ($125.0 million at September 30, 2023) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($86.5 million at September 30, 2023) and we must maintain a pro forma ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will depend upon several factors, including market and business conditions, and limitations under the ABL Credit Facility, and repurchases may be discontinued at any time. As of September 30, 2023, 360,212 shares remain authorized for repurchase under the program.
There were no shares repurchased during 2023 or 2022.
At- the-Market Equity Program
On September 3, 2021, we commenced an at-the-market, or ATM, equity program under our shelf registration statement, which allows us to sell and issue up to $50 million in shares of our common stock from time to time. We entered into an Equity Distribution Agreement on September 3, 2021 with KeyBanc Capital Markets Inc., or KeyBanc, relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. KeyBanc will be entitled to compensation for shares sold pursuant to the program of 2.0% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement. No shares were sold under the ATM program during the three and nine months ended September 30, 2023, or September 30, 2022.
Debt Arrangements
On January 3, 2023, we entered into the Sixth Amendment to Third Amended and Restated Loan and Security Agreement, which amended our existing ABL Credit Facility. The amendment increased the borrowing availability under the ABL Credit Facility by $150 million from $475 million to $625 million. The $625 million ABL Credit Facility consists of: (i) a revolving credit facility of up to $595 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 we may, subject to the satisfaction of certain conditions, request additional commitments under the revolving credit facility in the aggregate principal amount of up to $200 million to the extent that existing or new lenders agree to provide such additional commitments, and add real estate as collateral at our discretion. The ABL Credit Facility matures on June 16, 2026.
The ABL Credit Facility is collateralized by our accounts receivable, inventory, personal property and certain real estate. The ABL Credit Facility contains customary representations and warranties and certain covenants that limit our ability 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 us; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of their assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires if any commitments or obligations are outstanding and the our availability is less than the greater of $30 million or 10.0% of the aggregate amount of revolver commitments ($62.5 million at September 30, 2023) or 10.0% of the aggregate borrowing base ($57.7 million at September 30, 2023), then we 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.
We have 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 Secured Overnight Financing Rate, or SOFR, plus a premium ranging from 1.25% to 2.75%.
On January 10, 2019, we 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 London Interbank Offered Rate, or LIBOR, based borrowings under the ABL Credit Facility. On January 3, 2023, we amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. Although we are exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, we anticipate performance by the counterparty.
As of September 30, 2023, we were in compliance with our covenants and had approximately $375 million of availability under the ABL Credit Facility.
As of September 30, 2023, and December 31, 2022, $1.8 million and $1.2 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.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We monitor and evaluate our estimates and assumptions, based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
We review our financial reporting and disclosure practices and accounting practices quarterly to ensure they provide accurate and transparent information relative to the current economic and business environment. For further information regarding the accounting policies that we believe to be critical accounting policies that affect our more significant judgments and estimates used in preparing our consolidated financial statements, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2022.
Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security, or CARES Act, provided refundable employee retention credits, which could be used to offset payroll tax liabilities. On March 11, 2021, President Biden signed the American Rescue Plan Act, or ARPA. The ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the CARES Act, through December 31, 2021.
As there is no authoritative guidance under GAAP for accounting for grants to for-profit business entities, we have accounted for the grant by analogy to International Accounting Standards 20, "Accounting for Government Grants and Disclosure of Government Assistance" (IAS 20). During the three months ended September 30, 2023, we recorded an employee retention credit of approximately $4.0 million upon completion of an analysis that it met the conditions set forth in the CARES Act and it was reasonable assured that we will receive the employee retention credit. The employee retention credit is recorded in "Warehouse and processing", "Administrative and general", "Distribution" and "Selling" expenses in the manner in which the qualified wages and related costs were classified. We recorded income of $2.0 million, $1.2 million, $0.2 million and $0.6 million to reduce "Warehouse and processing", "Administrative and general", "Distribution" and "Selling" expenses, respectively, in the accompanying Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023. As of September 30, 2023, the employee retention credit receivable of $4.0 million is included in "Accounts receivable, net" in the accompanying Consolidated Balance Sheets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our principal raw materials are carbon, coated and stainless steel, aluminum, pipe and tube, flat rolled coil, sheet and plate that we typically purchase from multiple primary metals producers. The metals industry as a whole is cyclical and, at times, pricing and availability of metals can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, the levels of metals imported into the United States, labor costs, sales levels, competition, levels of inventory held by other metals service centers, consolidation of metals producers, new global capacity by metals producers, higher raw material costs for the producers of metals, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.
We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times and just‑in‑time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. We have no long‑term, fixed‑price metals purchase contracts. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our business could be adversely affected. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and inventory lower of cost or net realizable value adjustments as we sell existing inventory. Significant or rapid declines in metals prices or reductions in sales volumes could adversely impact our ability to remain in compliance with certain financial covenants in the ABL credit facility, as well as result in us incurring inventory or intangible asset impairment charges. Changing metals prices therefore could significantly impact our net sales, gross profits, operating income and net income.
Rising metals prices result in higher working capital requirements for us and our customers. Some customers may not have sufficient credit lines or liquidity to absorb significant increases in the price of metals. While we have generally been successful in the past in passing on producers’ price increases and surcharges to our customers, there is no guarantee that we will be able to pass on price increases to our customers in the future. Declining metals prices have generally adversely affected our net sales and net income, while increasing metals prices have generally favorably affected our net sales and net income.
Approximately 50% and 52%, respectively, of our consolidated net sales during the first nine months of 2023 and 2022 were directly related to industrial machinery and equipment manufacturers and their fabricators.
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, energy, borrowings under our credit facility, processing equipment, and purchased metals. Although general inflation, excluding increases in the price of metals and increased labor and distribution expense, has increased during the first half of 2023, it has not had a material effect on our financial results during the last three years, but may have a significant impact in future years.
We are exposed to the impact of fluctuating metals prices and interest rate changes. During 2023 and 2022, we entered into metals swaps at the request of customers. These derivatives have not been designated as hedging instruments. For certain customers, we enter into contractual relationships that entitle us to pass through the economic effect of trading positions that we take with other third parties on our customers’ behalf.
Our primary interest rate risk exposure results from variable rate debt. On January 10, 2019, we 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. On January 3, 2023, we amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. Although we are exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, we anticipate performance by the counterparty. We have the option to enter into 30- to 180-day fixed base rate SOFR loans under the ABL Credit Facility.
Item 4. Controls and Procedures
The evaluation required by Rule 13a-15(e) of the Securities Exchange Act of 1934, or the Exchange Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q has been carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports that are filed with or submitted to the SEC is: (i) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Items 1, 1A, 2, 3 and 4 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II.
Trading Arrangements
During the quarter ended September 30, 2023, director or officer (as defined in Rule 16a-1(f) promulgated under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).
Adoption of Key Employee Severance Benefit Plan
On November 2, 2023, the Board of Directors of the Company approved the Olympic Steel, Inc. Key Employee Severance Benefit Plan, or the Severance Plan, which became effective as of such date.
The general intent behind the Company's adoption of the Severance Plan is to streamline the severance protection offered to key employees and eventually potentially replace the individual agreements that the Company has with certain of its executive officers with participation in the Severance Plan. The Company is currently party to individual employment agreements and management retention agreements with each of Richard T. Marabito (Chief Executive Officer), Richard A. Manson (Chief Financial Officer) and Andrew S. Greiff (President and Chief Operating Officer), which set forth the terms of their severance protection. The benefits under the Severance Plan are substantially the same as the severance benefits currently payable under the individual agreements. Mr. Marabito's employment agreement will expire on January 1, 2024, at which time he will be covered by the Severance Plan.
Under the Severance Plan, participants are entitled to certain predetermined payments in the event of certain qualifying terminations of employment, as outlined below.
If a participant's employment with the Company is terminated by the Company without "cause" (as defined in the Severance Plan) (other than due to death or disability), and such termination does not occur on or within 12 months after a "change in control" (as defined in the Severance Plan), then the participant is eligible to receive:
| ● | continued base salary for a period of 24 months (in the case of a Tier 1 employee) or 12 months (in the case of a Tier 2 employee) in accordance with normal payroll practices beginning 30 days post-termination; | |
| ● | a prorated annual bonus for the year of termination, paid at the same time such bonuses are otherwise paid; and | |
| ● | coverage of full COBRA premiums and continued participation in other employee benefits, in each case for up to 24 months (in the case of a Tier I employee) or 12 months (in the case of a Tier II employee) post-termination. |
If a participant's employment with the Company is terminated by the Company without cause (other than due to death or disability) or by the participant for "good reason" (as defined in the Severance Plan), and in each case, such qualifying termination occurs on or within 12 months after a change in control, then the participant is eligible to receive:
| ● | a lump sum cash payment equal to (i) 2.99 (in the case of a Tier I employee) or 1 (in the case of a Tier II employee multiplied by (ii) the average annual base salary, bonus and dollar value of all employee benefits (other than medical, dental, disability and life insurance coverage) earned by the participant for the last three full calendar years, payable on the first business day after the 6 month anniversary of the termination date; and | |
| ● | coverage of full COBRA premiums and continued participation in disability and life insurance benefits, in each case for up to 24 months (in the case of a Tier I employee) or 12 months (in the case of a Tier II employee) post-termination. |
In the event of a participant's death or disability prior to or in connection with his or her separation from service with the Company, the participant (or his or her beneficiary or estate) is eligible to receive:
| ● | continued base salary for a period of 12 months in accordance with normal payroll practices beginning 30 days post-termination; | |
| ● | any earned but unpaid annual bonus, at the same time such bonus would have been paid to participant had participant remained employed; and | |
| ● | coverage of full COBRA premiums for up to 12 months port-termination. |
If the payments of benefits payable under the Severance Plan would be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, then those payments or benefits will be reduced if such reduction would result in a higher net after tax benefit to the participant. Each participant must execute and deliver an effective release of claims and continue to comply with any applicable restrictive covenants in order to receive the payments and benefits provided under the Severance Plan.
The Severance Plan may be amended or terminated at any time, provided that any amendment or termination that would be adverse to a participant requires 24 months' advance written notice.
The foregoing is not a complete description of the Severance Plan and is qualified in its entirety by reference to the full text of the Severance Plan, a copy of which is filed as Exhibit 10.43 to this Quarterly Report on Form 10-Q.
| Exhibit |
Description of Document |
Reference |
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| 4.33 | Joinder and Seventh Amendment to Third Amended and Restated Loan and Security Agreement, dated as of October 13, 2023, among Olympic Steel, Inc., Olympic Steel Minneapolis, Inc., Olympic Steel Iowa, Inc., Oly Steel NC, Inc., IS Acquisition, Inc., Chicago Tube and Iron Company, B Metals, Inc., MCI, Inc., ACT Acquisition, Inc., SHAQ, Inc., OS Holdings, Inc., Metal-Fab, Inc., Central Tube and Bar, Inc., the lenders from time to time party thereto and Bank of America, N.A. as Agent for the Lenders. | Filed herewith | |
| 10.43 | Key Employee Severance Benefit Plan. | Filed herewith | |
| 31.1 |
Filed herewith |
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| 31.2 |
Filed herewith |
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| 32.1 |
Furnished herewith |
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| 32.2 |
Furnished herewith |
||
| 101 |
The following materials from Olympic Steel’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Statements of Cash Flows, (iv) the Supplemental Disclosures of Cash Flow Information, (v) the Consolidated Statements of Shareholders’ Equity, (vi) Notes to Unaudited Consolidated Financial Statements and (vii) document and entity information. |
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| 104 |
Cover Pager Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OLYMPIC STEEL, INC. (Registrant) |
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| Date: November 3, 2023 |
By: |
/s/ Richard T. Marabito |
| Richard T. Marabito |
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| Chief Executive Officer |
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| By: |
/s/ Richard A. Manson |
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| Richard A. Manson |
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| Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |
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