10-Q 1 zeus20240331_10q.htm FORM 10-Q zeus20240331_10q.htm
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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2024

 

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

 

For the transition period from __________ to ____________

 

Commission File Number 0-23320

 

 

OLYMPIC STEEL, INC.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34-1245650

 
 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 
     
 

22901 Millcreek Boulevard, Suite 650, Highland Hills, OH

 

44122

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, without par value

ZEUS

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer ☐

Accelerated filer

 

Non-accelerated filer ☐

Smaller reporting company

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the Exchange Act). Yes No ☒

 

Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date:

 

 

Class

 

Outstanding as of May 3, 2024

 
 

Common stock, without par value

 

11,132,542

 

 



 

 

 
 

Olympic Steel, Inc.

Index to Form 10-Q

 

 

Page No.

   

Part I. FINANCIAL INFORMATION

3

   
 

Item 1. Financial Statements

3

     
   

Consolidated Balance Sheets – March 31, 2024 and December 31, 2023 (unaudited)

3

       
   

Consolidated Statements of Comprehensive Income – for the three months ended March 31, 2024 and 2023 (unaudited)

4

       
   

Consolidated Statements of Cash Flows – for the three months ended March 31, 2024 and 2023 (unaudited)

5

       
   

Supplemental Disclosures of Cash Flow Information – for the three months ended March 31, 2024 and 2023 (unaudited)

6

       
   

Consolidated Statements of Shareholders’ Equity – for the three months ended March 31, 2024 and 2023 (unaudited)

7

       
   

Notes to Unaudited Consolidated Financial Statements

8

       
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

21

     
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

     
 

Item 4. Controls and Procedures.

34

     

Part II. OTHER INFORMATION

35

   
 

Item 5. Other Information

35

     
 

Item 6. Exhibits

36

     

SIGNATURES

37

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 
  

(unaudited)

 

Assets

        

Cash and cash equivalents

 $10,340  $13,224 

Accounts receivable, net

  214,753   191,149 

Inventories, net (includes LIFO reserves of $12,443 and $12,043 as of March 31, 2024 and December 31, 2023, respectively)

  397,567   386,535 

Prepaid expenses and other

  9,304   12,261 

Total current assets

  631,964   603,169 

Property and equipment, at cost

  487,968   483,448 

Accumulated depreciation

  (303,462)  (297,340)

Net property and equipment

  184,506   186,108 

Goodwill

  52,091   52,091 

Intangible assets, net

  91,559   92,621 

Other long-term assets

  18,864   16,466 

Right of use assets, net

  32,795   34,380 

Total assets

 $1,011,779  $984,835 
         

Liabilities

        

Accounts payable

 $149,429  $119,718 

Accrued payroll

  16,475   30,113 

Other accrued liabilities

  19,273   22,593 

Current portion of lease liabilities

  7,786   7,813 

Total current liabilities

  192,963   180,237 

Credit facility revolver

  196,800   190,198 

Other long-term liabilities

  22,420   20,151 

Deferred income taxes

  10,897   11,510 

Lease liabilities

  25,714   27,261 

Total liabilities

  448,794   429,357 

Shareholders' Equity

        

Preferred stock

  -   - 

Common stock

  137,063   136,541 

Accumulated other comprehensive income

  -   41 

Retained earnings

  425,922   418,896 

Total shareholders' equity

  562,985   555,478 

Total liabilities and shareholders' equity

 $1,011,779  $984,835 

 

 

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

 

 

 

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31,

 

(in thousands, except per share data)

 

   

2024

   

2023

 
   

(unaudited)

 
                 

Net sales

  $ 526,642     $ 573,076  

Costs and expenses

               

Cost of materials sold (excludes items shown separately below)

    407,538       452,636  

Warehouse and processing

    32,893       30,649  

Administrative and general

    30,152       33,185  

Distribution

    16,758       17,741  

Selling

    11,536       10,397  

Occupancy

    4,493       4,544  

Depreciation

    6,006       5,077  

Amortization

    1,328       1,124  

Total costs and expenses

    510,704       555,353  

Operating income

    15,938       17,723  

Other loss, net

    19       11  

Income before interest and income taxes

    15,919       17,712  

Interest and other expense on debt

    4,010       4,223  

Income before income taxes

    11,909       13,489  

Income tax provision

    3,212       3,617  

Net income

  $ 8,697     $ 9,872  

Loss on cash flow hedge

    (41 )     (405 )

Tax effect on cash flow hedge

    -       101  

Total comprehensive income

  $ 8,656     $ 9,568  
                 

Earnings per share:

               

Net income per share - basic

  $ 0.75     $ 0.85  

Weighted average shares outstanding - basic

    11,663       11,570  

Net income per share - diluted

  $ 0.75     $ 0.85  

Weighted average shares outstanding - diluted

    11,663       11,571  
                 

Dividends declared per share of common stock

  $ 0.150     $ 0.125  

 

 

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

 

 

 

Olympic Steel, Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

 

(in thousands)

 

   

2024

   

2023

 
    (unaudited)  
                 

Cash flows (used for) from operating activities:

               

Net income

  $ 8,697     $ 9,872  

Adjustments to reconcile net income to net cash (used for) from operating activities -

               

Depreciation and amortization

    7,334       6,201  

Amortization of deferred financing fees

    194       132  

Loss (Gain) on disposition of property and equipment

    197       (92 )

Stock-based compensation

    522       407  

Other long-term assets

    (982 )     (1,587 )

Other long-term liabilities

    330       1,020  
      16,292       15,953  

Changes in working capital:

               

Accounts receivable

    (23,604 )     (6,458 )

Inventories

    (11,032 )     26,184  

Prepaid expenses and other

    3,032       2,412  

Accounts payable

    28,779       37,476  

Change in outstanding checks

    932       167  

Accrued payroll and other accrued liabilities

    (17,007 )     (23,294 )
      (18,900 )     36,487  

Net cash (used for) from operating activities

    (2,608 )     52,440  
                 

Cash flows used for investing activities:

               

Acquisition, net of cash acquired

    -       (129,476 )

Capital expenditures

    (4,818 )     (7,415 )

Proceeds from disposition of property and equipment

    -       124  

Net cash used for investing activities

    (4,818 )     (136,767 )
                 

Cash flows from financing activities:

               

Credit facility revolver borrowings

    166,595       263,194  

Credit facility revolver repayments

    (159,993 )     (170,087 )

Principal payment under finance lease obligation

    (289 )     (220 )

Credit facility fees and expenses

    (100 )     (944 )

Dividends paid on common stock

    (1,671 )     (1,392 )

Net cash from financing activities

    4,542       90,551  
                 

Cash and cash equivalents:

               

Net change

    (2,884 )     6,224  

Beginning balance

    13,224       12,189  

Ending balance

  $ 10,340     $ 18,413  

 

 

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

 

 

Olympic Steel, Inc.

Supplemental Disclosures of Cash Flow Information

For the Three Months Ended March 31,

 

(in thousands)

 

   

2024

   

2023

 
   

(unaudited)

 
                 

Interest paid

  $ 3,590     $ 3,561  

Income taxes paid (refunded)

  $ (69 )   $ 115  

 

 

The Company incurred a nominal amount of new financing lease obligations during the three months ended March 31, 2024. The Company incurred $1.7 million of new financing lease obligations during the three months ended March 31, 2023. These non-cash transactions have been excluded from the Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023.

 

 

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

 

 

 

Olympic Steel, Inc.

Consolidated Statements of Shareholders Equity

(in thousands)

(unaudited)

 

  

For the Three Months Ended March 31, 2024

 
      

Accumulated

         
      

Other

         
  

Common

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Income

  

Earnings

  

Equity

 
                 

Balance at December 31, 2023

 $136,541  $41  $418,896  $555,478 

Net income

  -   -   8,697   8,697 

Payment of dividends on common stock ($0.150 per share)

  -   -   (1,671)  (1,671)

Stock-based compensation

  522   -   -   522 

Changes in fair value of hedges, net of tax

  -   (41)  -   (41)

Balance at March 31, 2024

 $137,063  $-  $425,922  $562,985 

 

  

For the Three Months Ended March 31, 2023

 
      

Accumulated

         
      

Other

         
  

Common

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Income

  

Earnings

  

Equity

 
                 

Balance at December 31, 2022

 $134,724  $1,311  $379,933  $515,968 

Net income

  -   -   9,872   9,872 

Payment of dividends on common stock ($0.125 per share)

  -   -   (1,392)  (1,392)

Stock-based compensation

  407   -   -   407 

Changes in fair value of hedges, net of tax

  -   (304)  -   (304)

Balance at March 31, 2023

 $135,131  $1,007  $388,413  $524,551 

 

 

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

 

 

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

March 31, 2024

 

 

 

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 2024 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, 2023. 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 aluminum and stainless flat-rolled sheet and coil products, flat bar products, prime tin mill products and fabricated parts. Through acquisitions, the specialty metals flat products segment has expanded its geographical footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, flat bar, tube and pipe and the manufacturing and distribution of stainless steel bollards and water treatment systems. 

 

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 acquisitions, the carbon flat products segment has expanded its product offerings to include self-dumping 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 food service and commercial appliances, manufacturers and fabrications 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.

 

The primary focus of the tubular and pipe products segment is on the distribution of metal tubing, pipe, bar, valve and fittings and the fabrication of pressure parts supplied to various industrial markets. Through the acquisition of Central Tube and Bar (CTB), on October 2, 2023, the tubular and pipe products segment further expanded its geographical footprint and extended its value-added contract manufacturing capabilities. The tubular and pipe products segment operates from 10 locations in the midwestern and southern United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.

 

Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including compensation for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.

 

Impact of Recently Issued Accounting Pronouncements

 

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure". The objective of this ASU is to enhance the disclosures a public entity provides about their reportable segments. The ASU does not amend any of the existing guidance or requirements in Topic 280, Segment Reporting. Under the ASU, public entities must disclose incremental segment information on both an annual and interim basis. The ASU is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024, applied retroactively. The Company does not anticipate this having a material impact on the Consolidated Financial Statements.

 

In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures". The objective of this ASU is to improve the information a reporting entity provides to users of financial statements about the entity's operations and the effects of related tax risks and tax planning on the entity's tax rate and potential future cash flows. The ASU enhances disclosures regarding the rate reconciliation, income taxes paid and other items. The ASU is effective for annual periods beginning after December 15, 2024 for public business entities. The Company is not an early adopter of this guidance and it impacts are not included prospectively or retrospectively on the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

8

 

 

 

2.

Revenue Recognition:

 

The Company provides metals processing, distribution and delivery of large volumes of processed carbon, coated flat-rolled sheet, coil and plate products, aluminum, and stainless flat-rolled products, prime tin mill products, flat bar products, metal tubing, pipe, bar, valves, fittings, 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.

 

9

 

Within the metals industry, revenue is frequently disaggregated by products sold. The table below disaggregates the Company’s revenues by segment and products sold.

 

  

Disaggregated Revenue by Products Sold

 
  

For the Three Months Ended March 31, 2024

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  24.6%  -   -   24.6%

Hot Rolled

  -   27.7%  -   27.7%

Tube

  -   -   18.3%  18.3%

Plate

  -   13.5%  -   13.5%

Coated

  -   11.1%  -   11.1%

Cold Rolled

  -   4.2%  -   4.2%

Other

  -   0.6%  -   0.6%

Total

  24.6%  57.1%  18.3%  100.0%

 

  

Disaggregated Revenue by Products Sold

 
  

For the Three Months Ended March 31, 2023

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  29.1%  -   -   29.1%

Hot Rolled

  -   27.3%  -   27.3%

Tube

  -   -   16.9%  16.9%

Plate

  -   13.5%  -   13.5%

Coated

  -   8.5%  -   8.5%

Cold Rolled

  -   3.4%  -   3.4%

Other

  -   1.3%  -   1.3%

Total

  29.1%  54.0%  16.9%  100.0%

 

10

 
 

3.

Accounts Receivable:

 

Accounts receivable are presented net of allowances for credit losses and unissued credits of $3.6 million and $4.2 million as of  March 31, 2024 and December 31, 2023, respectively. The allowance for credit losses is maintained at a level considered appropriate based on historical experience, specific customer collection issues that have been identified, current market conditions and estimates for supportable forecasts when appropriate. Estimations are based upon a calculated percentage of accounts receivable, which remains fairly level from year to year, and judgments about the probable effects of economic conditions on certain customers, which can fluctuate significantly from year to year. The Company cannot guarantee that the rate of future credit losses will be similar to past experience. The Company considers all available information when assessing the adequacy of its allowance for credit losses and unissued credits.

 

 

4.

Inventories:

 

Inventories consisted of the following:

 

  

Inventory as of

 

(in thousands)

 

March 31, 2024

  

December 31, 2023

 

Unprocessed

 $290,058  $282,565 

Processed and finished

  107,509   103,970 

Totals

 $397,567  $386,535 

 

The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. As of  March 31, 2024 and December 31, 2023, approximately $37.1 million, or 9.3% of consolidated inventory, and $38.2 million, or 9.9% of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out (FIFO) method.

 

During the three months ended March 31, 2024, the Company recorded $0.4 million of LIFO expense. The Company did not record LIFO expense or income during the three months ended March 31, 2023.

 

If the FIFO method had been in use, inventories would have been $12.4 million higher than reported as of  March 31, 2024 and $12.0 million higher than reported at December 31, 2023.

 

 

5.

Goodwill and Intangible Assets:

 

The Company's intangible assets were recorded in connection with its acquisitions of Metal-Fab and CTB in 2023, Shaw Stainless & Alloy, Inc. (Shaw) in 2021, Action Stainless & Alloys, Inc. (Action Stainless) in 2020, EZ Dumper® hydraulic dump inserts (EZ Dumper) and McCullough Industries (McCullough) in 2019, Berlin Metals, LLC (Berlin Metals) in 2018 and Chicago Tube and Iron (CTI) in 2011. The intangible assets were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation methodology.

 

11

 

Goodwill, by reportable unit, was as follows as of March 31, 2024 and December 31, 2023, respectively. The goodwill is deductible for tax purposes.

 

  

Carbon Flat

  

Specialty Metals

  

Tubular and

     

(in thousands)

 

Products

  

Flat Products

  

Pipe Products

  

Total

 

Balance as of December 31, 2023

 $34,259  $9,431  $8,401  $52,091 

Acquisitions

  -   -   -   - 

Impairments

  -   -   -   - 

Balance as of March 31, 2024

 $34,259  $9,431  $8,401  $52,091 

 

Intangible assets, net, consisted of the following as of March 31, 2024 and December 31, 2023, respectively:

 

  

As of March 31, 2024

 
  

Gross Carrying

  

Accumulated

  

Intangible

 

(in thousands)

 

Amount

  

Amortization

  

Assets, Net

 

Customer relationships - subject to amortization

 $62,559  $(15,911) $46,648 

Covenant not to compete - subject to amortization

  2,339   (783)  1,556 

Technology and know-how - subject to amortization

  7,000   (513)  6,487 

Trade name - not subject to amortization

  36,868   -   36,868 
  $108,766  $(17,207) $91,559 

 

  

As of December 31, 2023

 
  

Gross Carrying

  

Accumulated

  

Intangible

 

(in thousands)

 

Amount

  

Amortization

  

Assets, Net

 

Customer relationships - subject to amortization

 $62,559  $(15,084) $47,475 

Covenant not to compete - subject to amortization

  2,339   (679)  1,660 

Technology and know-how - subject to amortization

  7,000   (382)  6,618 

Trade name - not subject to amortization

  36,868   -   36,868 
  $108,766  $(16,145) $92,621 

 

The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $4.3 million per year for the next two years, $3.8 million the following year and then $3.3 million and $3.0 million, respectively, over the next two years.

 

 

6.

Leases:

 

The components of lease expense were as follows:

 

  

For the Three Months

 
  

Ended March 31,

 

(in thousands)

 

2024

  

2023

 

Operating lease cost

 $2,398  $2,140 
         

Finance lease cost:

        

Amortization of right-of-use assets

 $283  $229 

Interest on lease liabilities

  38   35 

Total finance lease cost

 $321  $264 

 

12

 

Supplemental cash flow information related to leases was as follows:

 

  

For the Three Months

 
  

Ended March 31,

 

(in thousands)

 

2024

  

2023

 

Cash paid for lease liabilities:

        

Operating cash flows from operating leases

 $2,386  $2,105 

Operating cash flows from finance leases

  38   35 

Financing cash flows from finance leases

  289   220 

Total cash paid for lease liabilities

 $2,713  $2,360 

 

Supplemental balance sheet information related to leases was as follows:

 

  

March 31,

  

December 31,

 

(in thousands)

 

2024

  

2023

 

Operating Leases

        

Operating lease

 $55,744  $56,117 

Operating lease accumulated amortization

  (22,949)  (21,737)

Operating lease right-of-use asset, net

  32,795   34,380 
         

Operating lease current liabilities

  7,786   7,813 

Operating lease liabilities

  25,714   27,261 

Total operating lease liabilities

 $33,500  $35,074 
         

Finance Leases

        

Finance lease

  5,732   5,686 

Finance lease accumulated depreciation

  (2,878)  (2,615)

Finance lease, net

  2,854   3,071 
         

Finance lease current liabilities

  1,034   1,087 

Finance lease liabilities

  1,934   2,106 

Total finance lease liabilities

 $2,968  $3,193 
         

Weighted Average Remaining Lease Term

        

Operating leases (in years)

  6   6 

Finance leases (in years)

  4   4 
         

Weighted Average Discount Rate

        

Operating leases

  4.10%  4.07%

Finance leases

  5.15%  5.06%

 

13

 

Maturities of lease liabilities were as follows:

 

  

Operating

  

Finance

 

(in thousands)

 

Leases

  

Leases

 

Year Ending December 31,

        

2024

 $6,898  $904 

2025

  7,552   926 

2026

  6,377   633 

2027

  5,119   432 

2028

  3,850   316 

Thereafter

  8,140   41 

Total future minimum lease payments

 $37,936  $3,252 

Less remaining imputed interest

  (4,436)  (284)

Total

 $33,500  $2,968 

 

 

7.

Debt:

 

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

 

  

As of

 
  

March 31,

  

December 31,

 

(in thousands)

 

2024

  

2023

 

Asset-based revolving credit facility due June 16, 2026

 $196,800  $190,198 

Total debt

 $196,800  $190,198 

 

The Company's ABL Credit Facility is collateralized by the Company's accounts receivable, inventory and personal property. 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, the Company 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 the Company’s discretion. The ABL Credit Facility matures on June 16, 2026.

 

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 $30 million or 10.0% of the aggregate amount of revolver commitments ($62.5 million at March 31, 2024) or 10.0% of the aggregate borrowing base ($56.8 million at March 31, 2024), then the Company must maintain a ratio of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve fiscal month period.

 

As of March 31, 2024, the Company was in compliance with its covenants and had approximately $366 million of availability under the ABL Credit Facility.

 

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

 

14

 

As of March 31, 2024 and December 31, 2023, $1.6 million and $1.7 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.

 

 

8.

Derivative Instruments:

 

Metals swaps and embedded customer derivatives

 

During 2024 and 2023, 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 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 March 31, 2024, are included in “Other accrued liabilities” and the embedded customer derivatives are included in “Accounts receivable, net” on the Consolidated Balance Sheets as of March 31, 2024.  

 

Fixed rate interest rate hedge

 

On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. January 3, 2023, the Company amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. The interest rate hedge agreement ended on January 10, 2024.

 

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 months ended March 31, 2024 and 2023, respectively.

 

  

Net Gain (Loss) Recognized

 
  

For the Three Months

 
  

Ended March 31,

 

(in thousands)

 

2024

  

2023

 

Fixed interest rate hedge

 $55  $319 

Metals swaps

  1   (276)

Embedded customer derivatives

  (1)  276 

Total gain

 $55  $319 

 

15

 
 

9.

Fair Value of Assets and Liabilities:

 

During the three months ended March 31, 2024, 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 as of  March 31, 2024 since December 31, 2023.

 

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

 

  

Value of Items Recorded at Fair Value

 
  

As of March 31, 2024

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Metal swaps

 $-  $4,098  $-  $4,098 

Embedded customer derivative

  -   407   -   407 

Supplemental executive retirement plan

  13,726   -   -   13,726 

Total assets at fair value

 $13,726  $4,505  $-  $18,231 
                 

Liabilities:

                

Metal swaps

 $-  $4,505  $-  $4,505 

Total liabilities recorded at fair value

 $-  $4,505  $-  $4,505 

 

  

Value of Items Recorded at Fair Value

 
  

As of December 31, 2023

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Metal swaps

 $-  $4,458  $-  $4,458 

Embedded customer derivative

  -   766   -   766 

Fixed interest rate hedge

  -   55   -   55 

Supplemental executive retirement plan

  11,617   -   -   11,617 

Total assets at fair value

 $11,617  $5,279  $-  $16,896 
                 

Liabilities:

                

Metal swaps

 $-  $5,224  $-  $5,224 

Total liabilities at fair value

 $-  $5,224  $-  $5,224 

 

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 $196.8 million and $190.2 million at March 31, 2024 and December 31, 2023, respectively.  Management believes that the ABL Credit Facility’s carrying value approximates its fair value due to the variable interest rate on the ABL Credit Facility.

 

 

10.

Accumulated Other Comprehensive Income:

 

On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. January 3, 2023, the Company amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. The interest rate hedge agreement ended on January 10, 2024

 

 

11.

Equity Plans:

 

Restricted Shares, 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 (RS), restricted share units (RSU), 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, 1,400,000 shares of common stock have been authorized for equity grants. On an annual basis, the compensation committee of the Company’s Board of Directors awards RSs or RSUs to each non-employee director as part of their annual compensation.

 

The annual award for 2024 per director was $110,000 of RSs. Subject to the terms of the Incentive Plan and the RS agreement, one-third of the RSs vest on each December 31, 2024, December 31, 2025 and December 31, 2026. The grantee will not be entitled to vote on the RSs or receive dividends with respect to RSs until they vest. 

 

The annual award for 2023 per director was $80,000 of RSUs. Subject to the terms of the Incentive Plan and the RSU agreement, the 2023 RSUs vest after one 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.

 

16

 

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 units (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. For 2024, the total long-term award target is $1.1 million for the Chief Executive Officer, $0.8 million for the President and Chief Operating Officer and $0.5 million for the Chief Financial Officer. For 2023, the total long-term award target is $1.1 million for the Chief Executive Officer, $0.6 million for the President and Chief Operating Officer and $0.3 million for the Chief Financial Officer. The PSUs will vest if the return on net assets, calculated as EBITDA divided by Average Accounts Receivable, Inventory and Property and Equipment, exceeds five percent. Each RSU and service-based cash incentive vests three years after the grant date. Each vested RSU will convert into the right to receive one share of common stock. During 2024, a total of 17,243 RSUs and 17,243 PSUs were granted to the participants under the C-Suite Plan, and $37,400 and $37,400, respectively, were granted in service-based and performance-based cash awards. During 2023, a total of 20,000 RSUs and 20,000 PSUs were granted to the participants under the C-Suite Plan, and $0.3 million million and $0.3 million million, respectively, were granted in service-based and performance-based cash awards. If the return on net assets falls below 5 percent, no performance-based incentive will be awarded. The maximum performance-based award is achieved if return on net assets exceeds ten percent, and is capped at 150% of the grant.

 

Stock-based compensation expense recognized on RSUs for the three months ended March 31, 2024 and 2023, respectively, is summarized in the following table:

 

  

For the Three Months Ended

 
  

March 31,

 

(in thousands, except per share data)

 

2024

  

2023

 

RS and RSU expense before taxes

 $479  $407 

RS and RSU expense after taxes

 $350  $298 

 

All pre-tax charges related to RS and RSU were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income.

 

The following table summarizes the activity related to RS for the three months ended March 31, 2024 and 2023, respectively:

 

  

As of March 31, 2024

  

As of March 31, 2023

 
  

Number of

  

Weighted Average

  

Number of

  

Weighted Average

 
  

Shares

  

Granted Price

  

Shares

  

Granted Price

 

Outstanding at December 31

  -  $-   -  $- 

Granted

  10,050   65.65   -   - 

Outstanding at March 31

  10,050  $65.65   -  $- 

Vested at March 31

  -  $-   -  $- 

 

The following table summarizes the activity related to RSU for the three months ended March 31, 2024 and 2023, respectively:

 

 

As of March 31, 2024

As of March 31, 2023

 

Number of

 

Weighted Average

Number of

 

Weighted Average

 

Shares

 

Granted Price

Shares

 

Granted Price

Outstanding at December 31

 662,103 $20.28 617,518 $18.95

Granted

 34,486  66.70 49,768  36.63

Converted into shares

 -  - (2,610) 18.78

Forfeited

 (2,570) 16.99 -  -

Outstanding at March 31

 694,019 $22.60 664,676 $20.28

Vested at March 31

 529,725 $20.10 438,914 $24.95

 

 

12.

Income Taxes:

 

For the three months ended March 31, 2024, the Company recorded an income tax provision of $3.2 million, or 27.0%, compared to an income tax provision of $3.6 million, or 26.8%, for the three months ended March 31, 2023

 

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 pre-tax income is lower.

 

17

 
 

13.

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

 
  

March 31,

 

(in thousands, except per share data)

 

2024

  

2023

 

Weighted average basic shares outstanding

  11,663   11,570 

Assumed exercise of stock options and issuance of stock awards

  -   1 

Weighted average diluted shares outstanding

  11,663   11,571 

Net income

 $8,697  $9,872 

Basic earnings per share

 $0.75  $0.85 

Diluted earnings per share

 $0.75  $0.85 

Unvested RSs and RSUs

  174   226 

 

 

14.

Stock Repurchase Program:

 

On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’s 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. Any of the repurchased shares are held in the Company’s treasury, or canceled and retired as the Board 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, the Company may repurchase common stock and pay dividends up to $15 million in the aggregate during any trailing twelve months without restrictions. Purchases of common stock or dividend payments in excess of $15 million in the aggregate require the Company to (i) maintain availability in excess of 20.0% of the aggregate revolver commitments ($125.0 million at March 31, 2024) or (ii) to maintain availability equal to or greater than 15.0% of the aggregate revolver commitments ($93.8 million at March 31, 2024) and the Company must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00.

 

There were no shares repurchased during the three months ended March 31, 2024 and 2023.  As of March 31, 2024, 360,212 shares remain authorized for repurchase under the program.

 

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 $50 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on September 3, 2021 with KeyBanc Capital Markets Inc. (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 the Company’s sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and the Company. 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 months ended March 31, 2024 and 2023.

 

 

15.

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.

 

18

 

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, as certain 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. Since the October 2, 2023 acquisition, CTB's financial results are included in the tubular and pipe products segment. 

 

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 months ended March 31, 2024 and 2023, respectively.

 

  

For the Three Months Ended

 
  

March 31,

 

(in thousands)

 

2024

  

2023

 

Net sales

        

Specialty metals flat products

 $129,534  $166,564 

Carbon flat products

  300,975   309,818 

Tubular and pipe products

  96,133   96,694 

Total net sales

 $526,642  $573,076 
         

Depreciation and amortization

        

Specialty metals flat products

 $988  $984 

Carbon flat products

  4,081   3,607 

Tubular and pipe products

  2,248   1,593 

Corporate

  17   17 

Total depreciation and amortization

 $7,334  $6,201 
         

Operating income

        

Specialty metals flat products

 $3,931  $9,259 

Carbon flat products

  8,657   5,946 

Tubular and pipe products

  7,627   9,741 

Corporate expenses

  (4,277)  (7,223)

Total operating income

 $15,938  $17,723 

Other loss, net

  19   11 

Income before interest and income taxes

  15,919   17,712 

Interest and other expense on debt

  4,010   4,223 

Income before income taxes

 $11,909  $13,489 

 

19

 
  

For the Three Months Ended

 
  

March 31,

 

(in thousands)

 

2024

  

2023

 

Capital expenditures

        

Flat products segments

 $3,410  $4,502 

Tubular and pipe products

  1,408   2,913 

Total capital expenditures

 $4,818  $7,415 

 

  

As of

 
  

March 31,

  

December 31,

 

(in thousands)

 

2024

  

2023

 

Assets

        

Flat products segments

 $674,903  $649,744 

Tubular and pipe products

  335,528   333,677 

Corporate

  1,348   1,414 

Total assets

 $1,011,779  $984,835 

 

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. 

 

 

 

Item 2. Managements 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, 2023. 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, 2023, 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; 

  supplier consolidation or addition of new capacity;
 

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;

  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;
  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; 
 

our ability to successfully integrate recent acquisitions 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;

 

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;

 

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;
 

risks and uncertainties associated with intangible assets, including impairment charges related to indefinite lived intangible assets;
 

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;
 

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 focused on the direct sale and value-added processing of carbon and coated sheet, plate and coil products; stainless steel sheet, plate, bar and coil; aluminum sheet, plate and coil; pipe, tube bar, valves and fittings, tin plate and metal-intensive end-use products. We provide metals processing and distribution services for a wide range of customers. We operate in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products. Our specialty metals flat products segment's focus 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 acquisitions, our specialty metals flat products segment has expanded its geographical footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tube and pipe and the manufacturing and distribution of stainless steel bollards and water treatment systems. 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 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., or 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. Our tubular and pipe products segment's focus is on the distribution of metal tubing, pipe, bar, valves and fittings and the fabrication of parts supplied to various industrial markets. Through the acquisition of Central Tube and Bar, or CTB, on October 2, 2023, the tubular and pipe products segment further expanded its geographic footprint and extended its value-added contract manufacturing capabilities. 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: metals pricing, demand and availability; the availability, and increased costs of labor; global supply, the level of metals imported into the United States, tariffs, and inventory held in the supply chain; general and global business, economic, financial, banking and political conditions; competition; layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel; fluctuations in the value of the U.S. dollar to foreign currencies; transportation and energy costs; pricing and availability of raw materials used in the production of metals and customers’ ability to manage their credit line availability. 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 pass-through 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 March 31, 2024, we employed approximately 2,163 people.  Approximately 245 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 products, 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 tubular and pipe products and specialty metals flat products segments than the carbon 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 acquisitions, our specialty metals flat products segment has expanded its geographical footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tube and pipe and the manufacturing and distribution of stainless steel bollards and water treatment systems. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve customers in various industries, including manufacturers of food service and commercial appliances, agriculture equipment, transportation and automotive equipment. We distribute these products primarily through a direct sales force.

 

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 acquisitions, our carbon flat products segment has expanded its product offerings to include self-dumping hoppers and 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. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve 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. We distribute these products primarily 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.

 

Tubular and pipe products

 

The primary focus of our tubular and pipe products segment is on the distribution of metal tubing, pipe, bar, valve and fittings and the fabrication of pressure parts supplied to various industrial markets. Through the acquisition of CTB on October 2, 2023, the tubular and pipe products segment further expanded its geographic footprint and extended its value-added contract manufacturing capabilities. The tubular and pipe products segment operates from 10 locations in the Midwestern and Southern United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.

 

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 first quarter of 2024 by $344 per ton, or 31.3%. Hot rolled coil index prices were 29.1% lower in the first quarter of 2024 compared to the first quarter of 2023.  Metals prices in our specialty metals flat-product segment decreased during the three months ended March 31, 2024, primarily due to a 8.4% decrease in stainless steel surcharges. The average price of stainless surcharges decreased 36.6% during the first three months of 2024 compared to the first three months of 2023.  

 

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 decrease, and net sales decrease, gross profit and operating expenses as a percentage of net sales will generally increase. 

 

Consolidated Operations

 

The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands):

 

   

For the Three Months Ended March 31,

 
   

2024

   

2023

 
           

% of net

           

% of net

 
   

$

   

sales

   

$

   

sales

 

Net sales

  $ 526,642       100.0     $ 573,076       100.0  

Cost of materials sold (a)

    407,538       77.4       452,636       79.0  

Gross profit (b)

    119,104       22.6       120,440       21.0  

Operating expenses (c)

    103,166       19.6       102,717       17.9  

Operating income

    15,938       3.0       17,723       3.1  

Other loss, net

    19       0.0       11       0.0  

Interest and other expense on debt

    4,010       0.7       4,223       0.7  

Income before income taxes

    11,909       2.3       13,489       2.4  

Income taxes

    3,212       0.6       3,617       0.7  

Net income

  $ 8,697       1.7     $ 9,872       1.7  

 

(a) Includes $400 of LIFO expense for the three months ended March 31, 2024.

(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 $46.4 million, or 8.1%, to $526.6 million in the first quarter of 2024 from $573.1 million in the first quarter of 2023. Specialty metals flat products net sales were 24.6% of total net sales in the first quarter of 2024 compared to 29.1% of total net sales in the first quarter of 2023. Carbon flat products net sales were 57.1% of total net sales in the first quarter of 2024 compared to 54.0% of total net sales in the first quarter of 2023. Tubular and pipe products net sales were 18.3% of total net sales in the first quarter of 2024 compared to 16.9% of total net sales in the first quarter of 2023. The decrease in net sales was due to a consolidated 8.7% decrease in average selling prices during the first quarter of 2024 compared to the first quarter of 2023 partially offset by a 0.6% increase in sales volume.

 

Cost of materials sold decreased $45.1 million, or 10.0%, to $407.5 in the first quarter of 2024 from $452.6 in the first quarter of 2023. The decrease in cost of materials sold in the first quarter and first three months of 2024 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 22.6% in the first quarter of 2024 from 21.0% in the first quarter of 2023. 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. 

 

Operating expenses in the first quarter of 2024 increased $0.5 million, or 0.4%, to $103.2 million from $102.7 million in the first quarter of 2023. As a percentage of net sales, operating expenses increased to 19.6% for the first quarter of 2024 from 17.9% in the first quarter of 2023. Operating expenses in the specialty metals flat products segment decreased $1.6 million, operating expenses in the carbon flat products segment increased $1.3 million, operating expenses in the tubular and pipe products segment increased $3.7 million and Corporate expenses decreased $3.0 million in the first quarter of 2024 compared to the first quarter of 2023. The increase in operating expenses was primarily attributable to the inclusion of CTB operating expenses offset by lower variable performance-based compensation and the year-over-year absence of acquisition-related expenses.

 

Interest and other expense on debt totaled $4.0 million, or 0.7% of net sales, in the first quarter of 2024 compared to $4.2 million, or 0.7% of net sales, in the first quarter of 2023. The decrease was due to lower average borrowings partially offset by a higher effective borrowing rate in the first three months of 2024 compared to the first three months of 2023. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 7.0% for the first three months of 2024 compared to 5.7% for the first three months of 2023.

 

In the first quarter of 2024, income before income taxes totaled $11.9 million compared to income before income taxes of $13.5 million in the first quarter of 2023. 

 

An income tax provision of 27.0% was recorded for the first quarter of 2024, compared to an income tax provision of 26.8% for the first quarter of 2023. 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 first quarter of 2024 totaled $8.7 million, or $0.75 per basic share and diluted share, compared to net income of $9.9 million, or $0.85 per basic and diluted share, for the first quarter of 2023. 

 

 

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 March 31,

 
   

2024

   

2023

 
           

% of net

           

% of net

 
           

sales

           

sales

 

Direct tons sold

    28,933               31,548          

Toll tons sold

    970               968          

Total tons sold

    29,903               32,516          
                                 

Net sales

  $ 129,534       100.0     $ 166,564       100.0  

Average selling price per ton

    4,332               5,123          

Cost of materials sold

    107,590       83.1       137,713       82.7  

Gross profit (a)