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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2023

 

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

 

For the transition period from __________ to ____________

 

Commission File Number 0-23320

 

 

OLYMPIC STEEL, INC.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34-1245650

 
 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 
     
 

22901 Millcreek Boulevard, Suite 650, Highland Hills, OH

 

44122

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, without par value

ZEUS

The NASDAQ Stock Market LLC

 

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

 

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

 

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

 

 

Large accelerated filer ☐

Accelerated filer

 

Non-accelerated filer ☐

Smaller reporting company

  

Emerging growth company

 

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

 

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

 

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

 

 

Class

 

Outstanding as of November 3, 2023

 
 

Common stock, without par value

 

11,132,542

 

 



 

 

 

 
 

Olympic Steel, Inc.

Index to Form 10-Q

 

 

Page No.

   

Part I. FINANCIAL INFORMATION

3

   
 

Item 1. Financial Statements

3

     
   

Consolidated Balance Sheets – September 30, 2023 and December 31, 2022 (unaudited)

3

       
   

Consolidated Statements of Comprehensive Income – for the three and nine months ended September 30, 2023 and 2022 (unaudited)

4

       
   

Consolidated Statements of Cash Flows – for the nine months ended September 30, 2023 and 2022 (unaudited)

5

       
   

Supplemental Disclosures of Cash Flow Information – for the nine months ended September 30, 2023 and 2022 (unaudited)

6

       
   

Consolidated Statements of Shareholders’ Equity – for the three and nine months ended September 30, 2023 and 2022 (unaudited)

7

       
   

Notes to Unaudited Consolidated Financial Statements

8

       
 

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

22

     
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

     
 

Item 4. Controls and Procedures.

35

     

Part II. OTHER INFORMATION

36

   
 

Item 5. Other Information

36

     
 

Item 6. Exhibits

37

     

SIGNATURES

38

 

2

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

 

  

As of

 
  

September 30, 2023

  

December 31, 2022

 
  

(unaudited)

 

Assets

        

Cash and cash equivalents

 $9,091  $12,189 

Accounts receivable, net

  227,847   219,789 

Inventories, net (includes LIFO reserves of $17,301 and $20,301 as of September 30, 2023 and December 31, 2022, respectively)

  392,354   416,931 

Prepaid expenses and other

  12,608   9,197 

Total current assets

  641,900   658,106 

Property and equipment, at cost

  466,499   429,810 

Accumulated depreciation

  (292,280)  (281,478)

Net property and equipment

  174,219   148,332 

Goodwill

  43,690   10,496 

Intangible assets, net

  84,028   32,035 

Other long-term assets

  15,425   14,434 

Right of use assets, net

  33,544   28,224 

Total assets

 $992,806  $891,627 
         

Liabilities

        

Accounts payable

 $127,671  $101,446 

Accrued payroll

  29,617   40,334 

Other accrued liabilities

  22,069   16,824 

Current portion of lease liabilities

  7,015   6,098 

Total current liabilities

  186,372   164,702 

Credit facility revolver

  196,527   165,658 

Other long-term liabilities

  17,531   12,619 

Deferred income taxes

  15,869   10,025 

Lease liabilities

  27,186   22,655 

Total liabilities

  443,485   375,659 

Shareholders' Equity

        

Preferred stock

  -   - 

Common stock

  135,981   134,724 

Accumulated other comprehensive income

  461   1,311 

Retained earnings

  412,879   379,933 

Total shareholders' equity

  549,321   515,968 

Total liabilities and shareholders' equity

 $992,806  $891,627 

 

 

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

 

3

 

 

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended September 30,

 

(in thousands, except per share data)

 

 

Three months ended

 

Nine months ended

 
 

September 30,

 

September 30,

 
 

2023

 

2022

 

2023

 

2022

 
  (unaudited) 
             

Net sales

$526,411 $634,437 $1,668,755 $2,039,946 

Costs and expenses

            

Cost of materials sold (excludes items shown separately below)

 414,480  527,466  1,308,988  1,643,119 

Warehouse and processing

 28,954  27,397  91,125  79,069 

Administrative and general

 26,181  26,929  91,047  88,520 

Distribution

 16,342  15,131  51,531  46,613 

Selling

 9,587  10,589  30,373  31,905 

Occupancy

 3,797  3,173  12,452  10,053 

Depreciation

 5,008  4,062  15,330  12,766 

Amortization

 1,177  604  3,529  1,828 

Total costs and expenses

 505,526  615,351  1,604,375  1,913,873 

Operating income

 20,885  19,086  64,380  126,073 

Other loss, net

 28  17  67  38 

Income before interest and income taxes

 20,857  19,069  64,313  126,035 

Interest and other expense on debt

 3,953  3,007  12,379  7,276 

Income before income taxes

 16,904  16,062  51,934  118,759 

Income tax provision

 4,674  4,016  14,813  31,787 

Net income

$12,230 $12,046 $37,121 $86,972 

Gain (loss) on cash flow hedge

 (527) 2,291  (1,133) 4,336 

Tax effect on cash flow hedge

 132  (573) 283  (1,084)

Total comprehensive income

$11,835 $13,764 $36,271 $90,224 
             

Earnings per share:

            

Net income per share - basic

$1.06 $1.04 $3.21 $7.53 

Weighted average shares outstanding - basic

 11,586  11,548  11,568  11,543 

Net income per share - diluted

$1.06 $1.04 $3.21 $7.53 

Weighted average shares outstanding - diluted

 11,592  11,557  11,571  11,548 
             

Dividends declared per share of common stock

$0.125 $0.090 $0.375 $0.270 

 

 

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

 

4

 

 

Olympic Steel, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

 

(in thousands)

 

  

2023

  

2022

 
  (unaudited) 
         

Cash flows from (used for) operating activities:

        

Net income

 $37,121  $86,972 

Adjustments to reconcile net income to net cash from operating activities -

        

Depreciation and amortization

  18,859   14,594 

Amortization of deferred financing fees

  523   342 

Gain on disposition of property and equipment

  (75)  (2,184)

Stock-based compensation

  1,257   997 

Other long-term assets

  5,333   863 

Other long-term liabilities

  4,169   5,537 
   67,187   107,121 

Changes in working capital:

        

Accounts receivable

  2,539   5,226 

Inventories

  41,813   (23,074)

Prepaid expenses and other

  (3,989)  2,567 

Accounts payable

  22,188   14,830 

Change in outstanding checks

  518   3,602 

Accrued payroll and other accrued liabilities

  (9,257)  (11,972)
   53,812   (8,821)

Net cash from operating activities

  120,999   98,300 
         

Cash flows from (used for) investing activities:

        

Acquisition, net of cash acquired

  (129,476)  - 

Capital expenditures

  (19,564)  (13,963)

Proceeds from disposition of property and equipment

  129   3,293 

Net cash used for investing activities

  (148,911)  (10,670)
         

Cash flows from (used for) financing activities:

        

Credit facility revolver borrowings

  552,666   575,336 

Credit facility revolver repayments

  (521,797)  (658,900)

Principal payment under finance lease obligation

  (737)  (542)

Credit facility fees and expenses

  (1,143)  (100)

Dividends paid on common stock

  (4,175)  (3,004)

Net cash from (used for) financing activities

  24,814   (87,210)
         

Cash and cash equivalents:

        

Net change

  (3,098)  420 

Beginning balance

  12,189   9,812 

Ending balance

 $9,091  $10,232 

 

 

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

 

5

 

Olympic Steel, Inc.

Supplemental Disclosures of Cash Flow Information

For the Nine Months Ended September 30,

 

(in thousands)

 

  

2023

  

2022

 
  

(unaudited)

 
         

Interest paid

 $11,475  $6,896 

Income taxes paid

 $5,599  $23,283 

 

 

The Company incurred $1.8 million of new financing lease obligations during the nine months ended September 30, 2023. The Company incurred a nominal amount of new financing lease obligations during the nine months ended September 30, 2022. These non-cash transactions have been excluded from the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022.

 

 

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

 

6

 

 

Olympic Steel, Inc.

Consolidated Statements of Shareholders Equity

(in thousands)

(unaudited)

 

  

For the Three Months Ended September 30, 2023

 
      

Accumulated

         
      

Other

         
  

Common

  

Comprehensive

  

Retained

  

Total

 
  

Stock

  

Income

  

Earnings

  

Equity

 
                 

Balance at June 30, 2023

 $135,566  $856  $402,041  $538,463 

Net income

  -   -   12,230   12,230 

Payment of dividends on common stock

  -   -   (1,392)  (1,392)

Stock-based compensation

  415   -   -   415 

Changes in fair value of hedges, net of tax

  -   (395)  -   (395)

Balance at September 30, 2023

 $135,981  $461  $412,879  $549,321 

 

   

For the Nine Months Ended September 30, 2023

 
           

Accumulated

                 
           

Other

                 
   

Common

   

Comprehensive

   

Retained

   

Total

 
   

Stock

   

Income

   

Earnings

   

Equity

 
                                 

Balance at December 31, 2022

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

Net income

    -       -       37,121       37,121  

Payment of dividends on common stock

    -       -       (4,175 )     (4,175 )

Stock-based compensation

    1,257       -       -       1,257  

Changes in fair value of hedges, net of tax

    -       (850 )     -       (850 )

Balance at September 30, 2023

  $ 135,981     $ 461     $ 412,879     $ 549,321  

 

 

   

For the Three Months Ended September 30, 2022

 
           

Accumulated

                 
           

Other

                 
   

Common

   

Comprehensive

   

Retained

   

Total

 
   

Stock

   

Income

   

Earnings

   

Equity

 
                                 

Balance at June 30, 2022

  $ 134,089     $ (462 )   $ 365,932     $ 499,559  

Net income

    -       -       12,046       12,046  

Payment of dividends on common stock

    -       -       (1,002 )     (1,002 )

Stock-based compensation

    335       -       -       335  

Changes in fair value of hedges, net of tax

    -       1,718       -       1,718  

Other

    (1 )     -       -       (1 )

Balance at September 30, 2022

  $ 134,423     $ 1,256     $ 376,976     $ 512,655  

 

   

For the Nine Months Ended September 30, 2022

 
           

Accumulated

                 
           

Other

                 
   

Common

   

Comprehensive

   

Retained

   

Total

 
   

Stock

   

Income

   

Earnings

   

Equity

 
                                 

Balance at December 31, 2021

  $ 133,427     $ (1,996 )   $ 293,008     $ 424,439  

Net income

    -       -       86,972       86,972  

Payment of dividends on common stock

    -       -       (3,004 )     (3,004 )

Stock-based compensation

    997       -       -       997  

Changes in fair value of hedges, net of tax

    -       3,252       -       3,252  

Other

    (1 )     -       -       (1 )

Balance at September 30, 2022

  $ 134,423     $ 1,256     $ 376,976     $ 512,655  

 

 

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

 

7

 

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2023

 

 

 

 

1.

Basis of Presentation:

 

The accompanying consolidated financial statements have been prepared from the financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively, Olympic or the Company), without audit and reflect all normal and recurring adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods covered by this report. Year-to-date results are not necessarily indicative of 2023 annual results and these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. All intercompany transactions and balances have been eliminated in consolidation.

 

The Company operates in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products. The specialty metals flat products segment and the carbon flat products segment are at times consolidated and referred to as the flat products segments. Some of the flat products segments’ assets and resources are shared by the specialty metals and carbon flat products segments, and both segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment. As such, total assets and capital expenditures are reported in the aggregate for the flat products segments. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the specialty metals flat products segment and the carbon flat products segment based upon an established allocation methodology.

 

The primary focus of the specialty metals flat products segment is on the direct sale and distribution of processed stainless and aluminum flat-rolled sheet and coil products, flat bar products and fabricated parts. Through recent acquisitions, the specialty metals flat products segment has expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe and prime tin mill products.

 

The primary focus of the carbon flat products segment is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Through recent acquisitions, the carbon flat products segment has expanded its product offerings to include self-dumping metal hoppers, and steel and stainless-steel dump inserts for pickup truck and service truck beds. Through the acquisition of Metal-Fab, Inc. (Metal-Fab) on January 3, 2023, the carbon flat products segment further expanded its product offerings to include venting, micro air and clean air products for residential, commercial and industrial applications.

 

The flat products segment acts as an intermediary between metals producers and manufacturers that require processed metals for their operations. The flat products segment serves customers in most metals consuming industries, including manufacturers and fabricators of transportation and material handling equipment, construction and farm machinery, storage tanks, environmental and energy generation equipment, automobiles, military vehicles and equipment, as well as general and plate fabricators and metals service centers. These products are primarily distributed through a direct sales force.

 

Combined, the carbon and specialty metals flat products segments have 36 strategically located processing and distribution facilities in the United States and one in Monterrey, Mexico. Many of our facilities service both the carbon and the specialty metals flat products segments, and certain assets and resources are shared by the segments. Our geographic footprint allows us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the midwestern, eastern and southern United States.

 

Through its tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary (CTI), the Company distributes metal tubing, pipe, bar, valves and fittings and fabricates parts supplied to various industrial markets. CTI operates from seven locations in the Midwestern and southeastern United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.  With the recent acquisition of Central Tube and Bar, Inc. (CTB) on October 2, 2023, the tubular and pipe products segment expanded its geographic reach and the acquisition's processing capabilities include fabricated tube and bar products, including round, square, rectangular and special shaped tubes.  Based on the acquisition date, CTB's operational results are not included in this Quarterly Report on Form 10-Q.  

 

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

 

8

 

Critical Accounting Policies

 

Employee Retention Credit

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided refundable employee retention credits, which could be used to offset payroll tax liabilities.  On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA).  The ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the CARES Act, through December 31, 2021. 

 

As there is no authoritative guidance under GAAP for accounting for grants to for-profit business entities, the Company accounts for the grant by analogy to International Accounting Standards 20, "Accounting for Government Grants and Disclosure of Government Assistance" (IAS 20).  During the three months ended September 30, 2023, the Company recorded an employee retention credit of approximately $4.0 million upon completion of an analysis that it met the conditions set forth in the CARES Act and it was reasonable assured that it will receive the employee retention credit.  The employee retention credit is recorded in "Warehouse and processing", "Administrative and general", "Distribution" and "Selling" expenses in the manner in which the qualified wages and related costs were classified.  The Company recorded income of $2.0 million, $1.2 million, $0.2 million and $0.6 million to reduce "Warehouse and processing", "Administrative and general", "Distribution" and "Selling" expenses, respectively, in the accompanying Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023.  As of September 30, 2023, the employee retention credit receivable of $4.0 million is included in "Accounts receivable, net" in the accompanying Consolidated Balance Sheets.  

 

Impact of Recently Issued Accounting Pronouncements

 

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The objective of this ASU is to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, FASB issued ASU No. 2022-06, “Deferral of the Sunset Date of Topic 848”, which amends and extends the sunset date to December 31, 2024. The new standard was applied beginning in the first quarter of 2023 as the Company adjusted their asset-based credit facility (ABL Credit Facility) and fixed interest rate hedge.  The application did not have a material impact on the Company’s Consolidated Financial Statements.

 

 

2.

Acquisitions:

 

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

 

The Company paid total cash consideration of $131.2 million, consisting of a base purchase price of $131.0 million and a cash adjustment of $0.2 million. The acquisition was funded with borrowings under the Company’s ABL Credit Facility.  During 2023, the Company incurred $2.6 million of direct acquisition-related costs, which are included in “Administrative and general” in the Consolidated Statements of Comprehensive Income, and $2.1 million of non-recurring amortization of inventory step up to fair market value adjustments, which are included in “Costs of materials sold” in the Consolidated Statements of Comprehensive Income, for the nine months ended September 30, 2023.

 

Purchase Price Allocation

 

The acquisition of Metal-Fab was accounted for as a business combination and the assets and liabilities were valued at fair market value on January 3, 2023, the date of acquisition. 

 

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

 

Details of Acquisition (in thousands)

 

Total

 
     

Assets acquired

    

Cash and cash equivalents

 $1,728 

Accounts receivable, net

  10,597 

Prepaid expenses and other

  740 

Inventories, net

  17,236 

Property and equipment

  20,408 

Goodwill

  33,194 

Intangible assets

  54,740 

Right-of-use and other long-term assets

  6,930 

Total assets acquired

  145,573 

Total liabilities assumed

  (14,369)

Cash paid

 $131,204 

 

In connection with the acquisition of Metal-Fab, the Company identified and valued certain intangible assets, including the Metal-Fab trade name, internally developed technology and know-how, restrictive covenants and customer relationships. The intangible assets were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation methodology. The trade name intangible asset was valued at $11.5 million, and the useful life was determined to be indefinite primarily due to their history and reputation in the marketplace, the Company’s expectation that the trade name will continue to be used, and the conclusion that there are currently no other factors identified that would limit their useful life. The internally developed technology and know-how intangible asset was valued at $5.3 million, and the useful life was determined to be 15 years. The non-compete agreements intangible asset was valued at $1.4 million, and the useful life was determined to be the length of the non-compete agreements, which range from two to five years. The customer relationships intangible asset was valued at $36.5 million, and the useful life was determined to be 26 years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the 26 year amortization period.

 

9

 

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

 

Pro Forma Financial Information

 

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

 

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

 

  

For the three months ended September 30, 2022

 
                 
      

Historical

  

Pro Forma

  

Pro Forma

 
  

Historical OSI

  

Metal-Fab

  

Adjustments

  

Combined

 

(in thousands, except per share amounts)

                

Pro forma (unaudited):

                

Net sales

 $634,437  $25,803  $184  $660,424 

Net income (loss)

 $12,046  $5,023  $(2,817) $14,252 
                 

Basic earnings per share

 $1.04  $0.43  $(0.24) $1.23 

Diluted earnings per share

 $1.04  $0.43  $(0.24) $1.23 

 

  

For the nine months ended September 30, 2022

 
                 
      

Historical

  

Pro Forma

  

Pro Forma

 
  

Historical OSI

  

Metal-Fab

  

Adjustments

  

Combined

 

(in thousands, except per share amounts)

                

Pro forma (unaudited):

                

Net sales

 $2,039,946  $72,605  $552  $2,113,103 

Net income (loss)

 $86,972  $12,868  $(10,035) $89,805 
                 

Basic earnings per share

 $7.53  $1.11  $(0.86) $7.78 

Diluted earnings per share

 $7.53  $1.11  $(0.86) $7.78 

 

 

3.

Revenue Recognition:

 

The Company provides metals processing, distribution and delivery of large volumes of processed carbon, coated flat-rolled sheet, coil and plate products, aluminum, and stainless flat-rolled products, prime tin mill products, flat bar products, metal tubing, pipe, bar, valves, fittings, fabricated parts, venting, micro air and clean air products. The Company's contracts with customers are comprised of purchase orders with standard terms and conditions. Occasionally the Company may also have longer-term agreements with customers. Substantially all of the contracts with customers require the delivery of metals, which represent single performance obligations that are satisfied at a point in time upon transfer of control of the product to the customer.

 

Transfer of control is assessed based on the use of the product distributed and rights to payment for performance under the contract terms. Transfer of control and revenue recognition for substantially all of the Company’s sales occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms depend on the customer contract. An invoice for payment is issued at time of shipment and terms are generally net 30 days. The Company has certain fabrication contracts in one business unit for which revenue is recognized over time as performance obligations are achieved. This fabrication business is not material to the Company's consolidated results.

 

10

 

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

 

  

Disaggregated Revenue by Products Sold

 
  

For the Three Months Ended September 30, 2023

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  25.2%  -   -   25.2%

Hot Rolled

  -   32.7%  -   32.7%

Tube

  -   -   16.9%  16.9%

Plate

  -   8.9%  -   8.9%

Coated

  -   6.2%  -   6.2%

Cold Rolled

  -   4.2%  -   4.2%

Other

  -   5.9%  -   5.9%

Total

  25.2%  57.9%  16.9%  100.0%

 

  

Disaggregated Revenue by Products Sold

 
  

For the Nine Months Ended September 30, 2023

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  26.7%  -   -   26.7%

Hot Rolled

  -   30.1%  -   30.1%

Tube

  -   -   16.9%  16.9%

Plate

  -   11.7%  -   11.7%

Coated

  -   5.4%  -   5.4%

Cold Rolled

  -   3.9%  -   3.9%

Other

  -   5.3%  -   5.3%

Total

  26.7%  56.4%  16.9%  100.0%

 

  

Disaggregated Revenue by Products Sold

 
  

For the Three Months Ended September 30, 2022

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  29.7%  -   -   29.7%

Hot Rolled

  -   28.0%  -   28.0%

Tube

  -   -   17.3%  17.3%

Plate

  -   13.7%  -   13.7%

Coated

  -   4.6%  -   4.6%

Cold Rolled

  -   4.5%  -   4.5%

Other

  -   2.2%  -   2.2%

Total

  29.7%  53.0%  17.3%  100.0%

 

11

 
  

Disaggregated Revenue by Products Sold

 
  

For the Nine Months Ended September 30, 2022

 
  

Specialty

             
  

metals flat

  

Carbon flat

  

Tubular and

     
  

products

  

products

  

pipe products

  

Total

 

Specialty

  30.1%  -   -   30.1%

Hot Rolled

  -   29.7%  -   29.7%

Tube

  -   -   16.6%  16.6%

Plate

  -   13.2%  -   13.2%

Coated

  -   4.6%  -   4.6%

Cold Rolled

  -   4.8%  -   4.8%

Other

  -   1.0%  -   1.0%

Total

  30.1%  53.3%  16.6%  100.0%

 

 

4.

Accounts Receivable:

 

Accounts receivable are presented net of allowances for credit losses and unissued credits of $4.5 million and $4.3 million as of September 30, 2023 and December 31, 2022, respectively. The allowance for credit losses is maintained at a level considered appropriate based on historical experience, specific customer collection issues that have been identified, current market conditions and estimates for supportable forecasts when appropriate. Estimations are based upon a calculated percentage of accounts receivable, which remains fairly level from year to year, and judgments about the probable effects of economic conditions on certain customers, which can fluctuate significantly from year to year. The Company cannot guarantee that the rate of future credit losses will be similar to past experience. The Company considers all available information when assessing the adequacy of its allowance for credit losses and unissued credits.

 

 

5.

Inventories:

 

Inventories consisted of the following:

 

  

Inventory as of

 

(in thousands)

 

September 30, 2023

  

December 31, 2022

 

Unprocessed

 $294,972  $356,588 

Processed and finished

  97,382   60,343 

Totals

 $392,354  $416,931 

 

The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At September 30, 2023 and December 31, 2022, approximately $38.6 million, or 9.8% of consolidated inventory, and $46.3 million, or 11.1% of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out (FIFO) method.

 

During the three and nine months ended September 30, 2023, the Company recorded $2.0 million and $3.0 million of LIFO income, respectively. During the three and nine months ended September 30, 2022, the Company recorded $1.5 million of LIFO expense.

 

If the FIFO method had been in use, inventories would have been $17.3 million higher than reported at September 30, 2023 and $20.3 million higher than reported at December 31, 2022.

 

 

6.

Goodwill and Intangible Assets:

 

The Company’s intangible assets were recorded in connection with its acquisitions of Shaw Stainless & Alloy, Inc. (Shaw) in 2021, Action Stainless & Alloys, Inc. (Action Stainless) in 2020 and Berlin Metals, LLC in 2018 for the specialty metals flat products segment and Metal-Fab in 2023 and certain assets related to the manufacturing of the EZ Dumper® hydraulic dump inserts and McCullough Industries in 2019 for the carbon flat products segment. The intangible assets were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation methodology.

 

12

 

Goodwill, by reportable unit, was as follows as of September 30, 2023 and December 31, 2022, respectively. The goodwill is deductible for tax purposes.

 

  

Specialty Metals

  

Carbon Flat

     

(in thousands)

 

Flat Products

  

Products

  

Total

 

Balance as of December 31, 2022

 $9,431  $1,065  $10,496 

Acquisitions

  -   33,194   33,194 

Impairments

  -   -   - 

Balance as of September 30, 2023

 $9,431  $34,259  $43,690 

 

Intangible assets, net, consisted of the following as of September 30, 2023 and December 31, 2022, respectively:

 

  

As of September 30, 2023

 
  

Gross Carrying

  

Accumulated

  

Intangible Assets,

 

(in thousands)

 

Amount

  

Amortization

  

Net

 

Customer relationships - subject to amortization

 $59,059  $(14,313) $44,746 

Covenant not to compete - subject to amortization

  1,949   (570)  1,379 

Technology and know-how - subject to amortization

  5,300   (265)  5,035 

Trade name - not subject to amortization

  32,868   -   32,868 
  $99,176  $(15,148) $84,028 

 

  

As of December 31, 2022

 
  

Gross Carrying

  

Accumulated

  

Intangible Assets,

 

(in thousands)

 

Amount

  

Amortization

  

Net

 

Customer relationships - subject to amortization

 $22,559  $(12,100) $10,459 

Covenant not to compete - subject to amortization

  509   (301)  208 

Trade name - not subject to amortization

  21,368   -   21,368 
  $44,436  $(12,401) $32,035 

 

The Company estimates that amortization expense for its intangible assets subject to amortization will be approximately $3.7 million per year for the next two years, $3.2 million the following year and then $2.7 million and $2.4 million, respectively, for the next two years after.

 

 

7.

Leases:

 

The components of lease expense were as follows:

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Operating lease cost

 $2,099  $1,898  $6,354  $5,484 
                 

Finance lease cost:

                

Amortization of right-of-use assets

 $264  $180  $756  $549 

Interest on lease liabilities

  37   16   112   44 

Total finance lease cost

 $301  $196  $868  $593 

 

13

 

Supplemental cash flow information related to leases was as follows:

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Cash paid for lease liabilities:

                

Operating cash flows from operating leases

 $2,079  $1,865  $6,267  $5,335 

Operating cash flows from finance leases

  37   16   112   44 

Financing cash flows from finance leases

  265   176   737   542 

Total cash paid for lease liabilities

 $2,381  $2,057  $7,116  $5,921 

 

Supplemental balance sheet information related to leases was as follows:

 

  

September 30,

  

December 31,

 

(in thousands)

 

2023

  

2022

 

Operating Leases

        

Operating lease

 $53,648  $45,987 

Operating lease accumulated amortization

  (20,104)  (17,763)

Operating lease right-of-use asset, net

  33,544   28,224 
         

Operating lease current liabilities

  7,015   6,098 

Operating lease liabilities

  27,186   22,655 

Total operating lease liabilities

 $34,201  $28,753 
         

Finance Leases

        

Finance lease

  5,165   3,144 

Finance lease accumulated depreciation

  (2,307)  (1,585)

Finance lease, net

  2,858   1,559 
         

Finance lease current liabilities

  1,031   594 

Finance lease liabilities

  1,941   1,025 

Total finance lease liabilities

 $2,972  $1,619 
         

Weighted Average Remaining Lease Term

        

Operating leases (in years)

  7   6 

Finance leases (in years)

  4   3 
         

Weighted Average Discount Rate

        

Operating leases

  4.01%  3.41%

Finance leases

  4.88%  3.56%

 

14

 

Maturities of lease liabilities were as follows:

 

  

Operating

  

Finance

 

(in thousands)

 

Leases

  

Leases

 

Year Ending December 31,

        

2023

 $2,120  $219 

2024

  8,021   1,117 

2025

  6,808   810 

2026

  5,890   518 

2027

  4,751   340 

Thereafter

  11,439   251 

Total future minimum lease payments

 $39,029  $3,255 

Less remaining imputed interest

  (4,828)  (283)

Total

 $34,201  $2,972 

 

 

8.

Debt:

 

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

 

  

As of

 
  

September 30,

  

December 31,

 

(in thousands)

 

2023

  

2022

 

Asset-based revolving credit facility due June 16, 2026

 $196,527  $165,658 

Total debt

 $196,527  $165,658 

 

On January 3, 2023, the Company entered into the Sixth Amendment to Third Amended and Restated Loan and Security Agreement, which amended the Company’s existing ABL Credit Facility. The amendment increased the borrowing capacity under the ABL Credit Facility by $150 million from $475 million to $625 million. The $625 million ABL Credit Facility consists of: (i) a revolving credit facility of up to $595 million, including a $20 million sub-limit for letters of credit, and (ii) a first in, last out revolving credit facility of up to $30 million. Under the terms of the ABL Credit Facility, the Company may, subject to the satisfaction of certain conditions, request additional commitments under the revolving credit facility in the aggregate principal amount of up to $200 million to the extent that existing or new lenders agree to provide such additional commitments, and add real estate as collateral at the Company’s discretion. The ABL Credit Facility matures on June 16, 2026.

 

The ABL Credit Facility is collateralized by the Company’s accounts receivable, inventory, personal property and certain real estate. The ABL Credit Facility contains customary representations and warranties and certain covenants that limit the ability of the Company to, among other things: (i) incur or guarantee additional indebtedness; (ii) pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; (iii) make investments; (iv) sell assets; (v) enter into agreements that restrict distributions or other payments from restricted subsidiaries to the Company; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; and (viii) engage in transactions with affiliates. In addition, the ABL Credit Facility contains a financial covenant which requires if any commitments or obligations are outstanding and the Company’s availability is less than the greater of $30 million or 10.0% of the aggregate amount of revolver commitments ($62.5 million at September 30, 2023) or 10.0% of the aggregate borrowing base ($57.7 million at September 30, 2023), then the Company must maintain a ratio of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve fiscal month period.

 

As of September 30, 2023, the Company was in compliance with its covenants and had approximately $375 million of availability under the ABL Credit Facility.

 

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

 

On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding London Interbank Offered Rate (LIBOR) based borrowings under the ABL Credit Facility. On January 3, 2023, the Company amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

 

15

 

As of September 30, 2023 and December 31, 2022, $1.8 million and $1.2 million, respectively, of bank financing fees were included in “Prepaid expenses and other” and “Other long-term assets” on the accompanying Consolidated Balance Sheets. The financing fees are being amortized over the five-year term of the ABL Credit Facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.

 

 

9.

Derivative Instruments:

 

Metals swaps and embedded customer derivatives

 

During 2023 and 2022, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price of nickel with third-party brokers. The nickel swaps are accounted for as derivatives for accounting purposes. The Company entered into them to mitigate its customers’ risk of volatility in the price of metals. The outstanding nickel swaps mature in 2023 and 2024. The swaps are settled with the brokers at maturity. The economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer. The primary risk associated with the metals swaps is the ability of customers or third-party brokers to honor their agreements with the Company related to derivative instruments. If the customer or third-party brokers are unable to honor their agreements, the Company’s risk of loss is the fair value of the metals swaps.

 

These derivatives have not been designated as hedging instruments. The periodic changes in fair value of the metals and embedded customer derivative instruments are included in “Cost of materials sold” in the Consolidated Statements of Comprehensive Income. The Company recognizes derivative positions with both the customer and the third party for the derivatives and classifies cash settlement amounts associated with them as part of “Cost of materials sold” in the Consolidated Statements of Comprehensive Income. The cumulative change in fair value of the metals swaps that had not yet settled as of September 30, 2023, are included in “Other accrued liabilities” and the embedded customer derivatives are included in “Accounts receivable, net” on the Consolidated Balance Sheets as of September 30, 2023.  

 

Fixed rate interest rate hedge

 

On January 10, 2019, the Company entered into a 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, the Company amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. The interest rate hedge is included in “Prepaid expenses and other” on the Consolidated Balance Sheets as of September 30, 2023. Although the Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, the Company anticipates performance by the counterparty.

 

The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income through net income of the derivatives for the three and nine months ended September 30, 2023 and 2022, respectively.

 

  

Net Gain (Loss) Recognized

 
  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Fixed interest rate hedge

 $543  $(77) $1,347  $(871)

Metals swaps

  (428)  (141)  (1,204)  577 

Embedded customer derivatives

  428   141   1,204   (577)

Total income (loss)

 $543  $(77) $1,347  $(871)

 

16

 
 

10.

Fair Value of Assets and Liabilities:

 

During the nine months ended September 30, 2023, there were no transfers of financial assets between Levels 1, 2 or 3 fair value measurements. There have been no changes in the methodologies used at September 30, 2023 since December 31, 2022.

 

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

 

  

Value of Items Recorded at Fair Value

 
  

As of September 30, 2023

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Metal Swaps

 $-  $4,877  $-  $4,877 

Embedded customer derivative

  -   530   -   530 

Fixed interest rate hedge

  -   615   -   615 

Total assets at fair value

 $-  $6,022  $-  $6,022 
                 

Liabilities:

                

Metal Swaps

 $-  $5,407  $-  $5,407 

Total liabilities recorded at fair value

 $-  $5,407  $-  $5,407 

 

  

Value of Items Recorded at Fair Value

 
  

As of December 31, 2022

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Fixed interest rate hedge

 $-  $1,748  $-  $1,748 

Total assets at fair value

 $-  $1,748  $-  $1,748 

 

The value of the items not recorded at fair value represent the carrying value of the liabilities.

 

The carrying value of the ABL Credit Facility was $196.5 million and $165.7 million at September 30, 2023 and December 31, 2022, respectively.  Management believes that the ABL Credit Facility’s carrying value approximates its fair value due to the variable interest rate on the ABL Credit Facility.

 

 

11.

Accumulated Other Comprehensive Income:

 

On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. On January 3, 2023, the Company amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. The fair value of the interest rate hedge of $0.6 million, net of tax of $0.2 million is included in “Accumulated other comprehensive income” on the Consolidated Balance Sheets at September 30, 2023. The fair value of the interest rate hedge was $1.7 million, net of tax of $0.4 million at December 31, 2022.

 

 

12.

Equity Plans:

 

Restricted Stock Units and Performance Share Units

 

Pursuant to the Amended and Restated Olympic Steel 2007 Omnibus Incentive Plan (the Incentive Plan), the Company may grant stock options, stock appreciation rights, restricted shares, restricted share units (RSUs), performance shares, and other stock- and cash-based awards to employees and directors of, and consultants to, the Company and its affiliates. Since adoption of the Incentive Plan, 1,400,000 shares of common stock have been authorized for equity grants.

 

On an annual basis, the compensation committee of the Company’s Board of Directors awards RSUs to each non-employee director as part of their annual compensation. The annual awards for 2023 and 2022 per director were $80,000. Subject to the terms of the Incentive Plan and the RSU agreement, the RSUs vest after one year of service (from the date of grant). The RSUs are not converted into shares of common stock until the director either resigns or is terminated from the Company's Board of Directors.

 

17

 

In January 2022, the Company adopted a new C-Suite Long-Term Incentive Plan (the C-Suite Plan) that operates under the Senior Manager Stock Incentive Plan. Under the C-Suite Plan, the Chief Executive Officer, the Chief Financial Officer and the President and Chief Operating Officer are eligible for participation. In each calendar year, the Committee may award eligible participants a long-term incentive of both a RSU grant and a performance stock unit (PSU) grant. Additionally, the Committee may offer a long-term cash incentive (split equally between service and performance-based portions) to supplement both the RSU and PSU grants in order to arrive at the total long-term award target. The total long-term award target is $1.1 million for the Chief Executive Officer, $0.3 million for the Chief Financial Officer and $0.6 million for the President and Chief Operating Officer. The PSUs will vest if the return on net assets, calculated as EBITDA divided by Average Accounts Receivable, Inventory and Property and Equipment, exceeds five percent. Each RSU and service-based cash incentive vests three years after the grant date. Each vested RSU will convert into the right to receive one share of common stock. During 2023, a total of 20,000 RSUs and 20,000 PSUs were granted to the participants under the C-Suite Plan, and $0.3 million and $0.3 million, respectively, were granted in service-based and performance-based cash awards. During 2022, a total of 20,000 RSUs and 20,000 PSUs were granted to the participants under the C-Suite Plan, and $0.5 million and $0.5 million, respectively, were granted in service-based and performance-based cash awards. If the return on net assets falls below 5 percent, no performance-based incentive will be awarded. The maximum performance-based award is achieved if return on net assets exceeds ten percent, and is capped at 150% of the grant.

 

Stock-based compensation expense recognized on RSUs for the three and nine months ended September 30, 2023 and 2022, respectively, is summarized in the following table:

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30,