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 May 3, 2024 | |||
| Common stock, without par value | |
Index to Form 10-Q
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 | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net (includes LIFO reserves of $ and $ as of March 31, 2024 and December 31, 2023, 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 Months Ended March 31,
(in thousands, except per share data)
| 2024 |
2023 |
|||||||
| (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 |
$ | $ | ||||||
| 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 Three Months Ended March 31,
(in thousands)
| 2024 |
2023 |
|||||||
| (unaudited) | ||||||||
| Cash flows (used for) from operating activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash (used for) from operating activities - |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of deferred financing fees |
||||||||
| Loss (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 (used for) from operating activities |
( |
) | ||||||
| Cash flows 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 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 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 Three Months Ended March 31,
(in thousands)
| 2024 |
2023 |
|||||||
| (unaudited) |
||||||||
| Interest paid |
$ | $ | ||||||
| Income taxes paid (refunded) |
$ | ( |
) | $ | ||||
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.
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 | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Payment of dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock-based compensation | - | |||||||||||||||
| Changes in fair value of hedges, net of tax | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ||||||||||||
| For the Three Months Ended March 31, 2023 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Other | ||||||||||||||||
| Common | Comprehensive | Retained | Total | |||||||||||||
| Stock | Income | Earnings | Equity | |||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Payment of dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock-based compensation | - | |||||||||||||||
| Changes in fair value of hedges, net of tax | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated statements.
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 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
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
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.
| 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.
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 | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| 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 | % | % | ||||||||||||||
| Hot Rolled | % | % | ||||||||||||||
| Tube | % | % | ||||||||||||||
| Plate | % | % | ||||||||||||||
| Coated | % | % | ||||||||||||||
| Cold Rolled | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | % | % | ||||||||||||
| 3. | Accounts Receivable: |
Accounts receivable are presented net of allowances for credit losses and unissued credits of $
| 4. | Inventories: |
Inventories consisted of the following:
| Inventory as of | ||||||||
| (in thousands) | March 31, 2024 | December 31, 2023 | ||||||
| Unprocessed | $ | $ | ||||||
| Processed and finished | ||||||||
| Totals | $ | $ | ||||||
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 $
During the three months ended March 31, 2024, the Company recorded $
If the FIFO method had been in use, inventories would have been $
| 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.
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 | $ | $ | $ | $ | ||||||||||||
| Acquisitions | ||||||||||||||||
| Impairments | ||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ( | ) | $ | |||||||
| Covenant not to compete - subject to amortization | ( | ) | ||||||||||
| Technology and know-how - subject to amortization | ( | ) | ||||||||||
| Trade name - not subject to amortization | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2023 | ||||||||||||
| Gross Carrying | Accumulated | Intangible | ||||||||||
| (in thousands) | Amount | Amortization | Assets, 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 | - | |||||||||||
| $ | $ | ( | ) | $ | ||||||||
The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $
| 6. | Leases: |
The components of lease expense were as follows:
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| (in thousands) | 2024 | 2023 | ||||||
| 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 | ||||||||
| Ended March 31, | ||||||||
| (in thousands) | 2024 | 2023 | ||||||
| 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:
| March 31, | December 31, | |||||||
| (in thousands) | 2024 | 2023 | ||||||
| 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, | ||||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less remaining imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Total debt | $ | $ | ||||||
The Company's ABL Credit Facility is collateralized by the Company's accounts receivable, inventory and personal property. The $
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 March 31, 2024, 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
As of March 31, 2024 and December 31, 2023, $
| 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 -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 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 | $ | $ | ||||||
| Metals swaps | ( | ) | ||||||
| Embedded customer derivatives | ( | ) | ||||||
| Total gain | $ | $ | ||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| Embedded customer derivative | ||||||||||||||||
| Supplemental executive retirement plan | ||||||||||||||||
| 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, 2023 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Metal swaps | $ | $ | $ | $ | ||||||||||||
| Embedded customer derivative | ||||||||||||||||
| Fixed interest rate hedge | ||||||||||||||||
| Supplemental executive retirement plan | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Metal swaps | $ | $ | $ | $ | ||||||||||||
| Total liabilities 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 $
| 10. | 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 $
| 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,
The annual award for 2024 per director was $
The annual award for 2023 per director was of RSUs. Subject to the terms of the Incentive Plan and the RSU agreement, the 2023 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 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 $
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 | $ | $ | ||||||
| RS and RSU expense after taxes | $ | $ | ||||||
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 | ||||||||||||||||
| Outstanding at March 31 | $ | $ | ||||||||||||||
| 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 | $ | $ | ||||||||
| Granted | ||||||||||
| Converted into shares | ( | ) | ||||||||
| Forfeited | ( | ) | ||||||||
| Outstanding at March 31 | $ | $ | ||||||||
| Vested at March 31 | $ | $ | ||||||||
| 12. | Income Taxes: |
For the three months ended March 31, 2024, 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 pre-tax income is lower.
| 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 | ||||||||
| Assumed exercise of stock options and issuance of stock awards | ||||||||
| Weighted average diluted shares outstanding | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
| Unvested RSs and RSUs | ||||||||
| 14. | 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 shares repurchased during the three months ended March 31, 2024 and 2023. As of March 31, 2024,
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 $
| 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.
The Company operates in 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 | $ | $ | ||||||
| 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 Three Months Ended | ||||||||
| March 31, | ||||||||
| (in thousands) | 2024 | 2023 | ||||||
| Capital expenditures | ||||||||
| Flat products segments | $ | $ | ||||||
| Tubular and pipe products | ||||||||
| Total capital expenditures | $ | $ | ||||||
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands) | 2024 | 2023 | ||||||
| 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.
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, 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) |
21,944 | 16.9 | 28,851 | 17.3 | ||||||||||||
| Operating expenses (b) |
18,013 | 13.9 | 19,592 | 11.7 | ||||||||||||
| Operating income |
$ | 3,931 | 3.0 | $ | 9,259 | 5.6 | ||||||||||
(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 8.0% to 29 thousand in the first quarter of 2024 from 32 thousand in the first quarter of 2023. The decrease in tons sold was due to a shift towards lower volume fabrication and value-added services. We do not report tons sold for our end-use products.
Net sales in our specialty metals flat products segment decreased $37.0 million, or 22.2%, to $129.5 million in the first quarter of 2024 from $166.6 million in the first quarter of 2023. The decrease in sales was due to a 15.4% decrease in average selling prices and an 8.0% decrease in sales volume during the first quarter of 2024 compared to the first quarter of 2023. Average selling prices in the first quarter of 2024 were $4,332 per ton, compared with $5,123 per ton in the first quarter of 2023.
Cost of materials sold in our specialty metals flat products segment decreased $30.1 million, or 21.9%, to $107.6 million in the first quarter of 2024 from $137.7 million in the first quarter of 2023. 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 16.9% in the first quarter of 2024 from 17.3% in the first quarter of 2023. The decrease in the gross profit as a percentage of net sales is due to the average selling prices decreasing more than the average cost of inventory.
Operating expenses decreased $1.6 million, or 8.1%, to $18.0 million in the first quarter of 2023 from $19.6 million in the first quarter of 2023. As a percentage of net sales, operating expenses increased to 13.9% in the first quarter of 2024 compared to 11.7% in the first quarter of 2023. 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 first quarter of 2024 totaled $3.9 million, or 3.0% of net sales, compared to $9.3 million, or 5.6% of net sales, in the first quarter of 2023.
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 March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| % of net |
% of net |
|||||||||||||||
| sales |
sales |
|||||||||||||||
| Direct tons sold |
211,191 | 209,782 | ||||||||||||||
| Toll tons sold |
8,484 | 8,556 | ||||||||||||||
| Total tons sold |
219,675 | 218,338 | ||||||||||||||
| Net sales |
$ | 300,975 | 100.0 | $ | 309,818 | 100.0 | ||||||||||
| Average selling price per ton |
1,370 | 1,419 | ||||||||||||||
| Cost of materials sold |
235,615 | 78.3 | 248,436 | 80.2 | ||||||||||||
| Gross profit (a) |
65,360 | 21.7 | 61,382 | 19.8 | ||||||||||||
| Operating expenses (b) |
56,703 | 18.8 | 55,436 | 17.9 | ||||||||||||
| Operating income |
$ | 8,657 | 2.9 | $ | 5,946 | 1.9 | ||||||||||
(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 carbon flat products segment increased 0.6% to 219 thousand in the first quarter of 2024 from 218 thousand in the first quarter of 2023.
Net sales in our carbon flat products segment decreased $8.8 million, or 2.9%, to $301.0 million in the first quarter of 2024 from $309.8 million in the first quarter of 2023. The decrease in sales was attributable to a 3.4% decrease in average selling prices in the first quarter of 2024 compared to the first quarter of 2023, partially offset by a 0.6% increase in tons sold. Average selling prices in the first quarter of 2024 decreased to $1,370 per ton, compared with $1,419 per ton in the first quarter of 2023.
Cost of materials sold decreased $12.8 million, or 5.2%, to $235.6 million in the first quarter of 2024 from $248.4 million in the first quarter of 2023. The decrease was due to the decreased market price for metals discussed above in Results of Operations partially offset by the year-over-year absence of $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 21.7% in the first quarter of 2024 compared to 19.8% in the first quarter of 2023. 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.
Operating expenses in thefirst quarter of 2024 increased $1.3 million, or 2.3%, to $56.7 million from $55.4 million in the first quarter of 2023. Operating expenses increased to 18.8% of net sales in the first quarter of 2024 compared to 17.9% in the first quarter of 2023.
Operating income in the first quarter of 2024 totaled $8.7 million, or 2.9% of net sales, compared to operating income of $5.9 million, or 1.9% of net sales, in the first quarter of 2023.
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 March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| % of net |
% of net |
|||||||||||||||
| $ |
sales |
$ |
sales |
|||||||||||||
| Net sales |
$ | 96,133 | 100.0 | $ | 96,694 | 100.0 | ||||||||||
| Cost of materials sold (a) |
64,333 | 66.9 | 66,487 | 68.8 | ||||||||||||
| Gross profit (b) |
31,800 | 33.1 | 30,207 | 31.2 | ||||||||||||
| Operating expenses (c) |
24,173 | 25.2 | 20,466 | 21.1 | ||||||||||||
| Operating income |
$ | 7,627 | 7.9 | $ | 9,741 | 10.1 | ||||||||||
(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 $0.6 million, or 0.6%, to $96.1 million in the first quarter of 2024 from $96.7 million in the first quarter of 2023. The decrease is a result of a 11.7% decrease in average selling prices partially offset by a 12.5% increase in shipping volume due to the CTB acquisition during the first quarter of 2024 compared to the first quarter of 2023.
Cost of materials sold decreased $2.2 million, or 3.2%, to $64.3 million in the first quarter of 2024 from $66.5 million in the first quarter of 2023. During the three months ended March 31, 2024, we recorded $0.4 million of LIFO expense. We did not record LIFO expense or income during the three months ended March 31, 2023. 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 33.1% in the first quarter of 2024 compared to 31.2% in the first quarter of 2023. As a percentage of net sales, the LIFO expense recorded in the first quarter of 2024 reduced gross profit by 0.4%.
Operating expenses in the first quarter of 2024 increased $3.7 million, or 18.1%, to $24.2 million from $20.5 million in the first quarter of 2023. Operating expenses increased to 25.2% of net sales in the first quarter of 2024 compared to 21.1% in the first quarter of 2023. The increase in operating expenses was primarily due to the inclusion of CTB operating expenses, partially offset by lower variable performance-based incentive compensation.
Operating income in the first quarter 2024 totaled $7.6 million, or 7.9% of net sales, compared to $9.7 million, or 10.1% of net sales, in the first quarter of 2023.
Corporate expenses
Corporate expenses decreased $3.0 million, or 40.8%, to $4.3 million in the first quarter of 2024 from $7.2 million in the first quarter of 2023. Corporate expense primarily decreased due to the year-over-year absence of acquisition-related expenses.
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 three months ended March 31, 2024, we used $2.6 million of net cash from operations, of which $16.3 million was generated from operating activities and $18.9 million was used for working capital requirements. For the three months ended March 31, 2023, we generated $52.4 million of net cash from operations, of which $16.0 million was generated from operating activities and $36.5 million was generated from working capital.
Net cash from operating activities totaled $16.3 million during the first three months of 2024 and was mainly comprised of net income of $8.7 million and the non-cash depreciation and amortization addback of $7.5 million. Net cash from operations totaled $16.0 million during the first three months of 2023 and was mainly comprised of net income of $9.9 million, the non-cash depreciation and amortization addback of $6.3 million and changes in other long-term liabilities of $1.0 million partially offset by changes in other long-term assets of $1.6 million.
Working capital at March 31, 2024 totaled $439.0 million, a $16.1 million increase from December 31, 2023. The increase was primarily attributable to a $29.7 million increase in accounts payable and outstanding checks and a $3.0 million decrease in prepaid expenses and other, offset by a $23.6 million increase in accounts receivable, a $11.0 million increase in inventory and a $17.0 million decrease in accrued payroll and other liabilities.
Investing Activities
Net cash used for investing activities totaled $4.8 million during the three months ended March 31, 2024 and primarily consisted new capital expenditures. Net cash used for investing activities totaled $136.8 million during the three months ended March 31, 2023, and primarily consisted of $129.5 million acquisition of Metal-Fab, inclusive of cash acquired of $1.7 million and $7.4 million in new capital expenditures partially offset by $0.1 million in proceeds from the disposition of property and equipment.
The capital expenditures in the first three months of 2024 and 2023 were primarily attributable to additional processing equipment at our existing facilities.
Financing Activities
During the first three months of 2024, $4.5 million of cash was generated from financing activities, which primarily consisted of $6.6 million of net borrowings under our ABL Credit Facility, offset by $1.7 million of dividends paid, $0.3 million of principal payments under finance lease obligations and $0.1 million of credit facility fees and expenses related to the amended ABL Credit Facility. During the first three months ended of 2023, $90.6 million was generated from financing activities, which primarily consisted of $93.1 million of net borrowings under our ABL Credit Facility, $1.4 million of dividends paid, $0.9 million of credit facility fees and expenses related to amending the ABL Credit Facility and $0.2 million of principle payments under finance lease obligations.
Dividends paid were $1.7 million and $1.4 million for the three months ended March 31, 2024 and March 31, 2023, respectively. In May 2024, our Board of Directors approved a regular quarterly dividend of $0.150 per share, which will be paid on June 17, 2024 to shareholders of record as of June 3, 2024. 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 March 31, 2024) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($93.8 million at March 31, 2024) 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 March 31, 2024, 360,212 shares remain authorized for repurchase under the program.
There were no shares repurchased during 2024 or 2023.
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 months ended March 31, 2024 or March 31, 2023.
Debt Arrangements
Our ABL Credit Facility is collateralized by our 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 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 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 March 31, 2024) or 10.0% of the aggregate borrowing base ($56.8 million at March 31, 2024), 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.
As of March 31, 2024, we were in compliance with our covenants and had approximately $366 million of availability under the ABL Credit Facility.
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%.
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.
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, 2023.
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 49% and 50%, respectively, of our consolidated net sales during the first three months of 2024 and 2023 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 quarter of 2024, 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 2024 and 2023, 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%. The interest rate hedge agreement ended on January 10, 2024. 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 March 31, 2024, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the first quarter of 2024 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 March 31, 2024, 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).
| Exhibit |
Description of Document |
Reference |
|
| 10.45 * | Form of Restricted Share Agreement for Outside Directors. | Filed herewith | |
| 31.1 |
Filed herewith |
||
| 31.2 |
Filed herewith |
||
| 32.1 |
Furnished herewith |
||
| 32.2 |
Furnished herewith |
||
| 101 |
The following materials from Olympic Steel’s Quarterly Report on Form 10-Q for the period ended March 31, 2024, 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. |
||
| 104 |
Cover Pager Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101). |
* This exhibit is a management contract or compensatory plan or arrangement.
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) |
||
| Date: May 3, 2024 |
By: |
/s/ Richard T. Marabito |
| Richard T. Marabito |
||
| Chief Executive Officer |
||
| By: |
/s/ Richard A. Manson |
|
| Richard A. Manson |
||
| Chief Financial Officer |
||
| (Principal Financial and Accounting Officer) |
||