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, 2017March 31, 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) | ( | |||
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 (X)☒ No ( )☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes (X)☒ 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: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 (X)☒
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 | |||
Common stock, without par value |
|
Olympic Steel, Inc.
Index to Form 10-Q
Page No.
Part I. FINANCIAL INFORMATION |
| ||||
| 5 | ||||
Consolidated Balance Sheets – | 5 | ||||
Consolidated | 6 | ||||
Consolidated | 7 | ||||
Supplemental Disclosures of Cash Flow Information – for the | 8 | ||||
Consolidated Statements of Shareholders’ Equity – for the three months ended March 31, 2023 and 2022 (unaudited) | 9 | ||||
Notes to Unaudited Consolidated Financial Statements | 10 | ||||
Item 2. Management’ | 22 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 33 | ||||
| |||||
Item 4. Controls and Procedures | 34 | ||||
Part II. OTHER INFORMATION | 35 | ||||
Item 6. Exhibits | 36 | ||||
SIGNATURES | 37 |
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Olympic Steel, Inc.
Consolidated Balance Sheets
(in
Olympic Steel, Inc.
Consolidated Balance Sheets
(in thousands)
As of | As of | |||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2023 | December 31, 2022 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,157 | $ | 2,315 | $ | 18,413 | $ | 12,189 | ||||||||
Accounts receivable, net | 150,692 | 101,902 | 236,844 | 219,789 | ||||||||||||
Inventories, net (includes LIFO debit of $6,569 as of September 30, 2017 and $8,045 as of December 31, 2016) | 280,223 | 254,526 | ||||||||||||||
Inventories, net (includes LIFO reserves of $20,301 as of March 31, 2023 and December 31, 2022) | 407,983 | 416,931 | ||||||||||||||
Prepaid expenses and other | 5,510 | 6,197 | 6,257 | 9,197 | ||||||||||||
Assets held for sale | 844 | - | ||||||||||||||
Total current assets | 441,426 | 364,940 | 669,497 | 658,106 | ||||||||||||
Property and equipment, at cost | 374,653 | 374,242 | 455,975 | 429,810 | ||||||||||||
Accumulated depreciation | (226,553 | ) | (218,476 | ) | (283,315 | ) | (281,478 | ) | ||||||||
Net property and equipment | 148,100 | 155,766 | 172,660 | 148,332 | ||||||||||||
Goodwill | 43,690 | 10,496 | ||||||||||||||
Intangible assets, net | 23,202 | 23,869 | �� | 85,859 | 32,035 | |||||||||||
Other long-term assets | 12,170 | 11,493 | 19,755 | 14,434 | ||||||||||||
Right of use assets, net | 35,328 | 28,224 | ||||||||||||||
Total assets | $ | 624,898 | $ | 556,068 | $ | 1,026,789 | $ | 891,627 | ||||||||
Liabilities | ||||||||||||||||
Current portion of long-term debt | $ | 930 | $ | 1,825 | ||||||||||||
Accounts payable | 80,189 | 79,458 | $ | 142,608 | $ | 101,446 | ||||||||||
Accrued payroll | 12,339 | 8,445 | 17,863 | 40,334 | ||||||||||||
Other accrued liabilities | 10,911 | 15,170 | 20,613 | 16,824 | ||||||||||||
Current portion of lease liabilities | 6,921 | 6,098 | ||||||||||||||
Total current liabilities | 104,369 | 104,898 | 188,005 | 164,702 | ||||||||||||
Credit facility revolver | 220,409 | 164,599 | 258,765 | 165,658 | ||||||||||||
Other long-term liabilities | 11,482 | 10,062 | 15,718 | 12,619 | ||||||||||||
Deferred income taxes | 20,176 | 23,119 | 10,737 | 10,025 | ||||||||||||
Lease liabilities | 29,013 | 22,655 | ||||||||||||||
Total liabilities | 356,436 | 302,678 | 502,238 | 375,659 | ||||||||||||
Shareholders' Equity | ||||||||||||||||
Preferred stock | - | - | - | - | ||||||||||||
Common stock | 129,490 | 128,619 | 135,131 | 134,724 | ||||||||||||
Treasury stock | (527 | ) | (609 | ) | ||||||||||||
Accumulated other comprehensive income | 1,007 | 1,311 | ||||||||||||||
Retained earnings | 139,499 | 125,380 | 388,413 | 379,933 | ||||||||||||
Total shareholders' equity | 268,462 | 253,390 | 524,551 | 515,968 | ||||||||||||
Total liabilities and shareholders' equity | $ | 624,898 | $ | 556,068 | $ | 1,026,789 | $ | 891,627 |
The accompanying notes are an integral part of these consolidated statements.
Olympic Steel, Inc.
Consolidated StatementsStatements of Comprehensive Income
For the Three Months Ended March 31,
(in thousands, except per share data)
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Net sales | $ | 331,442 | $ | 268,255 | $ | 1,022,530 | $ | 800,212 | $ | 573,076 | $ | 696,333 | ||||||||||||
Costs and expenses | ||||||||||||||||||||||||
Cost of materials sold (excludes items shown separately below) | 265,351 | 211,037 | 806,846 | 616,545 | 452,636 | 555,107 | ||||||||||||||||||
Warehouse and processing | 20,531 | 20,034 | 65,870 | 61,561 | 30,649 | 24,048 | ||||||||||||||||||
Administrative and general | 16,647 | 16,003 | 52,699 | 48,054 | 33,185 | 29,622 | ||||||||||||||||||
Distribution | 10,574 | 8,995 | 31,507 | 27,762 | 17,741 | 15,041 | ||||||||||||||||||
Selling | 6,797 | 5,629 | 19,804 | 17,361 | 10,397 | 10,822 | ||||||||||||||||||
Occupancy | 2,150 | 2,135 | 6,651 | 6,630 | 4,544 | 3,589 | ||||||||||||||||||
Depreciation | 3,883 | 4,172 | 12,516 | 13,231 | 5,077 | 4,350 | ||||||||||||||||||
Amortization | 223 | 223 | 667 | 667 | 1,124 | 632 | ||||||||||||||||||
Total costs and expenses | 326,156 | 268,228 | 996,560 | 791,811 | 555,353 | 643,211 | ||||||||||||||||||
Operating income | 5,286 | 27 | 25,970 | 8,401 | 17,723 | 53,122 | ||||||||||||||||||
Other income (loss), net | (22 | ) | 21 | (76 | ) | (42 | ) | |||||||||||||||||
Other loss, net | 11 | 6 | ||||||||||||||||||||||
Income before interest and income taxes | 5,264 | 48 | 25,894 | 8,359 | 17,712 | 53,116 | ||||||||||||||||||
Interest and other expense on debt | 1,966 | 1,336 | 5,380 | 3,895 | 4,223 | 1,998 | ||||||||||||||||||
Income (loss) before income taxes | 3,298 | (1,288 | ) | 20,514 | 4,464 | |||||||||||||||||||
Income before income taxes | 13,489 | 51,118 | ||||||||||||||||||||||
Income tax provision | 1,018 | 469 | 5,738 | 3,438 | 3,617 | 13,816 | ||||||||||||||||||
Net income (loss) | $ | 2,280 | $ | (1,757 | ) | $ | 14,776 | $ | 1,026 | |||||||||||||||
Net gain on cash flow hedge | - | - | - | 114 | ||||||||||||||||||||
Net income | $ | 9,872 | $ | 37,302 | ||||||||||||||||||||
Gain (loss) on cash flow hedge | (405 | ) | 2,291 | |||||||||||||||||||||
Tax effect on cash flow hedge | - | - | - | (44 | ) | 101 | (573 | ) | ||||||||||||||||
Total comprehensive income | $ | 2,280 | $ | (1,757 | ) | $ | 14,776 | $ | 1,096 | $ | 9,568 | $ | 39,020 | |||||||||||
Earnings per share: | ||||||||||||||||||||||||
Net income (loss) per share - basic | $ | 0.20 | $ | (0.16 | ) | $ | 1.30 | $ | 0.09 | |||||||||||||||
Net income per share - basic | $ | 0.85 | $ | 3.23 | ||||||||||||||||||||
Weighted average shares outstanding - basic | 11,386 | 11,219 | 11,384 | 11,206 | 11,570 | 11,559 | ||||||||||||||||||
Net income (loss) per share - diluted | $ | 0.20 | $ | (0.16 | ) | $ | 1.30 | $ | 0.09 | |||||||||||||||
Net income per share - diluted | $ | 0.85 | $ | 3.23 | ||||||||||||||||||||
Weighted average shares outstanding - diluted | 11,386 | 11,219 | 11,384 | 11,206 | 11,571 | 11,563 | ||||||||||||||||||
Dividends declared per share of common stock | $ | 0.125 | $ | 0.090 |
The accompanying notes are an integral part of these consolidated statements.statements.
Olympic Steel, Inc.
Consolidated StatementsStatements of Cash Flows
For the NineThree Months Ended September 30,March 31,
(in thousands)
2017 | 2016 | |||||||||||||||
(unaudited) | 2023 | 2022 | ||||||||||||||
Cash flows from (used for) operating activities: | ||||||||||||||||
Net income | $ | 14,776 | $ | 1,026 | $ | 9,872 | $ | 37,302 | ||||||||
Adjustments to reconcile net income to net cash from (used for) operating activities - | ||||||||||||||||
Adjustments to reconcile net income to net cash from operating activities - | ||||||||||||||||
Depreciation and amortization | 13,872 | 14,586 | 6,201 | 4,982 | ||||||||||||
Amortization of deferred financing fees | 132 | 114 | ||||||||||||||
Gain on disposition of property and equipment | (38 | ) | (161 | ) | (92 | ) | (2,198 | ) | ||||||||
Stock-based compensation | 944 | 400 | 407 | 327 | ||||||||||||
Other long-term assets | (1,264 | ) | (3,713 | ) | (1,587 | ) | 1,061 | |||||||||
Other long-term liabilities | (1,523 | ) | 4,192 | 1,020 | 4,506 | |||||||||||
26,767 | 16,330 | 15,953 | 46,094 | |||||||||||||
Changes in working capital: | ||||||||||||||||
Accounts receivable | (48,790 | ) | (18,112 | ) | (6,458 | ) | (34,966 | ) | ||||||||
Inventories | (25,697 | ) | (24,175 | ) | 26,184 | 9,582 | ||||||||||
Prepaid expenses and other | 710 | 1,618 | 2,412 | (1,538 | ) | |||||||||||
Accounts payable | 178 | 10,913 | 37,476 | 13,778 | ||||||||||||
Change in outstanding checks | 553 | (1,518 | ) | 167 | 1,022 | |||||||||||
Accrued payroll and other accrued liabilities | (363 | ) | 5,256 | (23,294 | ) | (19,089 | ) | |||||||||
(73,409 | ) | (26,018 | ) | 36,487 | (31,211 | ) | ||||||||||
Net cash used for operating activities | (46,642 | ) | (9,688 | ) | ||||||||||||
Net cash from operating activities | 52,440 | 14,883 | ||||||||||||||
Cash flows from (used for) investing activities: | ||||||||||||||||
Acquisitions, net of cash acquired | (129,476 | ) | - | |||||||||||||
Capital expenditures | (6,470 | ) | (5,335 | ) | (7,415 | ) | (2,116 | ) | ||||||||
Proceeds from disposition of property and equipment | 814 | 161 | 124 | 3,292 | ||||||||||||
Net cash used for investing activities | (5,656 | ) | (5,174 | ) | ||||||||||||
Net cash (used for) from investing activities | (136,767 | ) | 1,176 | |||||||||||||
Cash flows from (used for) financing activities: | ||||||||||||||||
Credit facility revolver borrowings | 310,734 | 230,911 | 263,194 | 183,573 | ||||||||||||
Credit facility revolver repayments | (254,925 | ) | (213,195 | ) | (170,087 | ) | (200,152 | ) | ||||||||
Industrial revenue bond repayments | (895 | ) | (865 | ) | ||||||||||||
Principal payment under capital lease obligation | (220 | ) | (182 | ) | ||||||||||||
Credit facility fees and expenses | (125 | ) | (125 | ) | (944 | ) | (100 | ) | ||||||||
Proceeds from exercise of stock options (including tax benefits) and employee stock purchases | 9 | 34 | ||||||||||||||
Dividends paid | (658 | ) | (657 | ) | (1,392 | ) | (1,001 | ) | ||||||||
Net cash from financing activities | 54,140 | 16,103 | ||||||||||||||
Net cash from (used for) financing activities | 90,551 | (17,862 | ) | |||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Net change | 1,842 | 1,241 | 6,224 | (1,803 | ) | |||||||||||
Beginning balance | 2,315 | 1,604 | 12,189 | 9,812 | ||||||||||||
Ending balance | $ | 4,157 | $ | 2,845 | $ | 18,413 | $ | 8,009 |
The accompanying notes are an integral part of these consolidated statements.statements.
Olympic Steel, Inc.
Supplemental Disclosures of Cash Flow Information
For the NineThree Months Ended September 30,March 31,
(in thousands)
2017 | 2016 | 2023 | 2022 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Interest paid | $ | 4,691 | $ | 3,257 | $ | 3,561 | $ | 1,902 | ||||||||
Income taxes paid | $ | 7,918 | $ | 890 | $ | 115 | $ | 655 |
The Company incurred $1.7 million of new financing lease obligations during the three months ended March 31, 2023. The Company incurred a nominal amount of new financing lease obligations during the three months ended March 31, 2022. These non-cash transactions have been excluded from the Consolidated Statements of Cash Flows for the three months ended March 31, 2023.
Olympic Steel, Inc.
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31,
(in thousands)
(unaudited)
Accumulated | ||||||||||||||||
Other | ||||||||||||||||
Common | Comprehensive | Retained | Total | |||||||||||||
Stock | Income (Loss) | Earnings | Equity | |||||||||||||
Balance at December 31, 2022 | $ | 134,724 | $ | 1,311 | $ | 379,933 | $ | 515,968 | ||||||||
Net income | - | - | 9,872 | 9,872 | ||||||||||||
Payment of dividends | - | - | (1,392 | ) | (1,392 | ) | ||||||||||
Stock-based compensation | 407 | - | - | 407 | ||||||||||||
Changes in fair value of hedges, net of tax | - | (304 | ) | - | (304 | ) | ||||||||||
Balance at March 31, 2023 | $ | 135,131 | $ | 1,007 | $ | 388,413 | $ | 524,551 |
Accumulated | ||||||||||||||||
Other | ||||||||||||||||
Common | Comprehensive | Retained | Total | |||||||||||||
Stock | Income (Loss) | Earnings | Equity | |||||||||||||
Balance at December 31, 2021 | $ | 133,427 | $ | (1,996 | ) | $ | 293,008 | $ | 424,439 | |||||||
Net income | - | - | 37,302 | 37,302 | ||||||||||||
Payment of dividends | - | - | (1,001 | ) | (1,001 | ) | ||||||||||
Stock-based compensation | 327 | - | - | 327 | ||||||||||||
Changes in fair value of hedges, net of tax | - | 1,718 | - | 1,718 | ||||||||||||
Other | - | 1 | - | 1 | ||||||||||||
Balance at March 31, 2022 | $ | 133,754 | $ | (277 | ) | $ | 329,309 | $ | 462,786 |
The accompanying notes are an integral part of these consolidated statements.statements.
Olympic Steel, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2017March 31, 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 20172023 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, 2016.2022. All intercompany transactions and balances have been eliminated in consolidation.
The Company operates in three reportable segments; carbonspecialty metals flat products, specialty metalscarbon flat products, and tubular and pipe products. The carbonspecialty metals flat products segment and the specialty metalscarbon flat products segmentssegment are at times consolidated and referred to as the flat products segments. CertainSome of the flat products segments’ assets and resources are shared by the carbon and 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 carbonspecialty metals flat products segment and carbon the specialty metals 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 Company sellsdirect sale and distributesdistribution 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 Company acts as an intermediary between metals producers and manufacturers that require processed metals for their operations. The Company 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 segment,segments have 36 strategically located processing and distribution facilities in the Company sellsUnited States and distributes processed aluminumone in Monterrey, Mexico. Many of our facilities service both the carbon and stainless flat-rolled sheetthe specialty metals flat products segments, and coil products, flat bar productscertain assets and fabricated parts. 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 fabricate pressure 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.
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including payroll expensescompensation for certain personnel, expenses related to being a publicly traded entity such as board of directors’directors’ expenses, audit expenses, and various other professional fees.
Impact of Recently Issued Accounting Pronouncements
In March 2020, the first quarterFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of 2017, the Company made an out-of-period adjustment to correct and record previously unrecognized deferred tax assets, and the associated tax benefit, related to the supplemental executive retirement plan (SERP)Effects of Reference Rate Reform on Financial Reporting”. The adjustment, which had accumulated sinceobjective of this ASU is to ease the inceptionpotential 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 plan in 2005, resulted in an increaseSunset Date of Topic 848” which amends and extends the sunset date to after-tax incomeDecember 31, 2024. The adoption of $1.9 millionthis ASU in the first quarter of 2017. 2023 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 asset-based credit facility (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 three months ended March 31, 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 Consolidated Balance Sheet as of March 31, 2023, reflects the allocation of Metal-Fab’s purchase price.
The 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 preliminary 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 this adjustmentthe 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 fifteen 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 twenty-six years, based primarily on the consistent and predictable revenue source associated with the existing customer base, the present value of which extends through the twenty-six-year amortization period.
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 March 31, 2022 | ||||||||||||||||
Historical OSI | Historical Metal-Fab | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Pro forma (unaudited): | ||||||||||||||||
Net sales | $ | 696,333 | $ | 22,685 | $ | 184 | $ | 719,202 | ||||||||
Net income (loss) | $ | 37,302 | $ | 4,042 | $ | (4,401 | ) | $ | 36,943 | |||||||
Basic earnings per share | $ | 3.23 | $ | 0.35 | $ | (0.38 | ) | $ | 3.20 | |||||||
Diluted earnings per share | $ | 3.23 | $ | 0.35 | $ | (0.38 | ) | $ | 3.20 |
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 its current or prior periodthe Company's consolidated financial statements.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, 2023 | ||||||||||||||||
Specialty metals flat products | Carbon flat products | Tubular and pipe products | Total | |||||||||||||
Specialty | 29.1 | % | - | - | 29.1 | % | ||||||||||
Hot Rolled | - | 27.3 | % | - | 27.3 | % | ||||||||||
Tube | - | - | 16.9 | % | 16.9 | % | ||||||||||
Plate | - | 13.5 | % | - | 13.5 | % | ||||||||||
Coated | - | 4.4 | % | - | 4.4 | % | ||||||||||
Cold Rolled | - | 3.4 | % | - | 3.4 | % | ||||||||||
Other | - | 5.4 | % | - | 5.4 | % | ||||||||||
Total | 29.1 | % | 54.0 | % | 16.9 | % | 100.0 | % |
Disaggregated Revenue by Products Sold | ||||||||||||||||
For the Three Months Ended March 31, 2022 | ||||||||||||||||
Specialty metals flat products | Carbon flat products | Tubular and pipe products | Total | |||||||||||||
Hot Rolled | - | 30.3 | % | - | 30.3 | % | ||||||||||
Specialty | 28.5 | % | - | - | 28.5 | % | ||||||||||
Tube | - | - | 16.8 | % | 16.8 | % | ||||||||||
Plate | - | 13.3 | % | - | 13.3 | % | ||||||||||
Cold Rolled | - | 5.0 | % | - | 5.0 | % | ||||||||||
Coated | - | 5.0 | % | - | 5.0 | % | ||||||||||
Other | 0.1 | % | 1.0 | % | - | 1.1 | % | |||||||||
Total | 28.6 | % | 54.6 | % | 16.8 | % | 100.0 | % |
| Accounts Receivable: |
Accounts receivable are presented net of allowances for doubtful accountscredit losses and unissued credits of $3.2$4.7 million and $2.4$4.3 million as of September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. The allowance for doubtful accountscredit losses is maintained at a level considered appropriate based on historical experience, and specific customer collection issues that have been identified.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 doubtful accountscredit losses and unissued credits each quarter.credits.
|
|
Inventories consisted of the following:
Inventory as of | ||||||||
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Unprocessed | $ | 232,123 | $ | 203,256 | ||||
Processed and finished | 48,100 | 51,270 | ||||||
Totals | $ | 280,223 | $ | 254,526 |
Inventory as of | ||||||||
(in thousands) | March 31, 2023 | December 31, 2022 | ||||||
Unprocessed | $ | 313,002 | $ | 356,588 | ||||
Processed and finished | 94,981 | 60,343 | ||||||
Totals | $ | 407,983 | $ | 416,931 |
The Company values certain of its tubular and pipe products inventory at the last-in, first-out (LIFO) method. At September 30, 2017March 31, 2023 and December 31, 2016,2022, approximately $50.5$44.1 million, or 18.0%10.8% of consolidated inventory, and $43.4$46.3 million, or 17.1%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.
The Company did not record any LIFO expense or income for the three months ended March 31, 2023 as current inventory price and volume projections anticipate no material change to the LIFO reserve by December 31, 2023. The Company did not record any LIFO expense or income for the three months ended March 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 (Action Stainless) in 2020 and Berlin Metals, LLC in 2018 for the specialty metals flat products segment and Metal-Fab in 2023 and EZ Dumper® 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.
During
Goodwill, by reportable unit, was as follows as of March 31, 2023 and December 31, 2022, respectively. The goodwill is deductible for tax purposes.
(in thousands) | Specialty Metals Flat Products | Carbon Flat Products | Total | |||||||||
Balance as of December 31, 2022 | $ | 9,431 | $ | 1,065 | $ | 10,496 | ||||||
Acquisitions | - | 33,194 | 33,194 | |||||||||
Impairments | - | - | - | |||||||||
Balance as of March 31, 2023 | $ | 9,431 | $ | 34,259 | $ | 43,690 |
Intangible assets, net, consisted of the threefollowing as of March 31, 2023 and nine months ended September 30, 2017, theDecember 31, 2022, respectively:
As of March 31, 2023 | ||||||||||||
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | |||||||||
Customer relationships - subject to amortization | $ | 59,059 | $ | (12,838 | ) | $ | 46,221 | |||||
Covenant not to compete - subject to amortization | 1,949 | (391 | ) | 1,558 | �� | |||||||
Technology and know-how - subject to amortization | 5,300 | (88 | ) | 5,212 | ||||||||
Trade name - not subject to amortization | 32,868 | - | 32,868 | |||||||||
$ | 99,176 | $ | (13,317 | ) | $ | 85,859 |
As of December 31, 2022 | ||||||||||||
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, 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 recorded $0.7estimates that amortization expense for its intangible assets subject to amortization will be approximately $3.3 million and $1.5 million of LIFO expense, respectively, as the current projections anticipate increased pricing and volume of LIFO inventoryper year for the remainder ofnext three years, $2.8 million the year. Duringfollowing year and then $2.0 million for the three and nine months ended September 30, 2016, the Company recorded $0.7 million of LIFO income.next year after.
If the FIFO method had been in use, inventories would have been $6.6 million lower than reported at September 30, 2017 and $8.0 million lower than reported at December 31, 2016.
|
|
During the second quarterThe components of 2017, the Company began actively marketing for sale certain property at the flat product segment’s Siler City, North Carolina facility. As a result of that decision, the Company reclassified $0.8 million of net book valuelease expense were as follows:
For the Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Operating lease cost | $ | 2,140 | $ | 1,784 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | $ | 229 | $ | 185 | ||||
Interest on lease liabilities | 35 | 14 | ||||||
Total finance lease cost | $ | 264 | $ | 199 |
Supplemental cash flow information related to that property along with certain machineryleases was as follows:
For the Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cash paid for lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 2,105 | $ | 1,751 | ||||
Operating cash flows from finance leases | 35 | 14 | ||||||
Financing cash flows from finance leases | 220 | 182 | ||||||
Total cash paid for lease liabilities | $ | 2,360 | $ | 1,947 |
Supplemental balance sheet information related to leases was as follows:
March 31, | December 31, | |||||||
(in thousands) | 2023 | 2022 | ||||||
Operating Leases | ||||||||
Operating lease | $ | 53,709 | $ | 45,987 | ||||
Operating lease accumulated amortization | (18,381 | ) | (17,763 | ) | ||||
Operating lease right-of-use asset, net | 35,328 | 28,224 | ||||||
Operating lease current liabilities | 6,921 | 6,098 | ||||||
Operating lease liabilities | 29,013 | 22,655 | ||||||
Total operating lease liabilities | $ | 35,934 | $ | 28,753 | ||||
Finance Leases | ||||||||
Finance lease | $ | 4,957 | $ | 3,144 | ||||
Finance lease accumulated depreciation | (1,785 | ) | (1,585 | ) | ||||
Finance lease, net | 3,172 | 1,559 | ||||||
Finance lease current liabilities | 922 | 594 | ||||||
Finance lease liabilities | 2,334 | 1,025 | ||||||
Total finance lease liabilities | $ | 3,256 | $ | 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 | 3.91 | % | 3.41 | % | ||||
Finance leases | 4.80 | % | 3.56 | % |
Finance lease right-of-use assets are included within “Property and equipment, as assets held for sale inat cost” and “Accumulated depreciation” on the Consolidated Balance Sheets. The salecurrent portion of those assets is expected to be completedfinance lease liabilities are included within “Other accrued liabilities” and the next twelve months andlong-term portion of finance lease liabilities are presented as current. Basedincluded within “Other long-term liabilities” on the present real estate market and discussions with the Company’s real estate adviser, no impairment of the recorded amounts has occurred as of September 30, 2017.Consolidated Balance Sheets, respectively.
Maturities of lease liabilities were as follows:
Operating | Finance | |||||||
(in thousands) | Leases | Leases | ||||||
Year Ending December 31, | ||||||||
2023 | $ | 6,176 | $ | 802 | ||||
2024 | 7,657 | 977 | ||||||
2025 | 6,435 | 769 | ||||||
2026 | 5,517 | 486 | ||||||
2027 | 4,388 | 315 | ||||||
Thereafter | 10,947 | 244 | ||||||
Total future minimum lease payments | $ | 41,120 | $ | 3,593 | ||||
Less remaining imputed interest | (5,186 | ) | (337 | ) | ||||
Total | $ | 35,934 | $ | 3,256 |
| Debt: |
The Company’sCompany’s debt is comprised of the following components:
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2017 | 2016 | ||||||
Asset-based revolving credit facility due June 30, 2019 | $ | 220,409 | $ | 164,599 | ||||
Industrial revenue bond due April 1, 2018 | 930 | 1,825 | ||||||
Total debt | 221,339 | 166,424 | ||||||
Less current amount | (930 | ) | (1,825 | ) | ||||
Total long-term debt | $ | 220,409 | $ | 164,599 |
As of | ||||||||
March 31, | December 31, | |||||||
(in thousands) | 2023 | 2022 | ||||||
Asset-based revolving credit facility due June 16, 2026 | 258,765 | 165,658 | ||||||
Total debt | $ | 258,765 | $ | 165,658 |
On January 3, 2023, the Company entered into a Sixth Amendment to Third Amended and Restated Loan and Security Agreement, which amended the Company’s existing ABL Credit Facility. The amendment increased the 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 Company’s asset-based credit facility (theCompany’s the ABL Credit Facility)Facility is collateralized by the Company’s accounts receivable, inventory, personal property and inventory.certain real estate. The ABL Credit Facility consistscontains customary representations and warranties and certain covenants that limit the ability of a revolving credit line of $365 million. Revolver borrowings are limitedthe 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 lesserCompany; (vi) incur liens securing indebtedness; (vii) consolidate, merge or transfer all or substantially all of a borrowing base, comprised of eligible receivablesthe Company’s assets; and inventories, or $365 million(viii) engage in transactions with affiliates. In addition, the aggregate. The ABL Credit Facility matures on June 30, 2019.
The ABL Credit Facilitycontains a financial covenant which requires the Company to comply with various covenants, the most significant of which include: (i) until maturity of the ABL Credit Facility, if any commitments or obligations are outstanding and the Company’sCompany’s availability is less than the greater of $30 million or 10.0% of the aggregate amount of revolver commitments ($36.562.5 million at September 30, 2017)March 31, 2023) or 10.0% of the aggregate borrowing base ($61.9 million at March 31, 2023), then the Company must maintain a ratio of EBITDAEarnings 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; (ii) limitations on dividend payments and common stock repurchases; and (iii) restrictions on additional indebtedness. period.
The Company has the option to borrow under its revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.25% or the London Interbank OfferedSecured Overnight Financing Rate (LIBOR)(SOFR) plus a premium ranging from 1.25% to 3.00%2.75%.
On January 10, 2019, the Company entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. 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.
As of September 30, 2017,March 31, 2023, the Company was in compliance with its covenants and had approximately $110$355 million of availability under the ABL Credit Facility.
As of September 30, 2017, $1.4March 31, 2023, and December 31, 2022, $2.0 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-yearfive-year term of the ABL Credit facilityFacility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.
As part of the CTI acquisition in July 2011, the Company assumed approximately $5.9 million of Industrial Revenue Bond (IRB) indebtedness issued through the Stanly County, North Carolina Industrial Revenue and Pollution Control Authority. The bond matures in April 2018, with the option to provide principal payments annually in April. On April 3, 2017, the Company paid an optional principal payment of $0.9 million. The remaining balance of the IRB is included in “Current portion of long-term debt” on the accompanying Consolidated Balance Sheets as the payment is due in April 2018. Interest is payable monthly, with a variable rate that resets weekly. As a security for payment of the bonds, the Company obtained a direct pay letter of credit issued by JPMorgan Chase Bank, N.A. The letter of credit reduces annually by the principal reduction amount. The interest rate at September 30, 2017 was 0.9% for the IRB debt.
CTI entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the IRB. At September 30, 2017, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement matures in April 2018, and is reduced annually by the amount of the optional principal payments on the bond. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the counterparties.
| Derivative Instruments: |
Metals swaps and embedded customer derivatives
During 20172023 and 2016,2022, 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’customers’ risk of volatility in the price of metals. The outstanding nickel swaps mature in 2017 and 2018.2023. 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.
While theseThese derivatives are intended to help the Company manage risk, they 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 havehad not yet been settled as of March 31, 2023, are included in “Other accrued liabilities” and the embedded customer derivatives are included in “Other accrued liabilities”, and “Accounts receivable, net” on the Consolidated Balance Sheets at September 30, 2017 and Decemberas of March 31, 2016.2023.
Fixed rate interest rate hedge
Interest rate swap
CTIOn January 10, 2019, the Company entered into ana five-year forward starting fixed rate interest rate swaphedge in order to reduceeliminate the impactvariability of changes incash interest ratespayments on its IRB. The swap$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 matures in April 2018, the same timeto use SOFR as the IRB,reference rate and updated the fixed rate to 2.42% from 2.57%. The interest rate hedge is reduced annually by the amount of the optional principal paymentsincluded in “Prepaid expenses and other” on the IRB. TheConsolidated Balance Sheets as of March 31, 2023. Although the Company is exposed to credit loss in the event of nonperformance by the other partiesparty to the interest rate swap agreement. However,hedge agreement, the Company does not anticipate nonperformanceanticipates performance by the counterparties. The interest rate swap is not treated as a hedge for accounting purposes.counterparty.
The periodic changes in fair value of the interest rate swap and cash settlement amounts associated with the interest rate swap are included in “Interest and other expense on debt” in the Consolidated Statements of Comprehensive Income.
Fixed rate interest rate hedge
In June 2012, the Company entered into a forward starting fixed rate interest rate hedge commencing June 2013 in order to eliminate the variability of cash interest payments on $53.2 million of the then outstanding LIBOR-based borrowings under the ABL Credit Facility. The hedge, which matured on June 1, 2016, fixed the rate at 1.21% plus a premium ranging from 1.25% to 1.75%. The fixed rate interest rate hedge was accounted for as a cash flow hedging instrument for accounting purposes.
There was no net impact from the nickel swaps or embedded customer derivative agreements to the Company’s Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016. 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, 2017March 31, 2023 and 2016.2022, respectively.
Net Gain (Loss) Recognized | Net Gain (Loss) Recognized | |||||||||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
Interest rate swap (CTI) | $ | (6 | ) | $ | (19 | ) | $ | (24 | ) | $ | (52 | ) | ||||||||||||
Fixed interest rate swap (ABL) | - | - | - | (98 | ) | |||||||||||||||||||
Fixed interest rate hedge | $ | 319 | $ | (451 | ) | |||||||||||||||||||
Metals swaps | 156 | 111 | 79 | 173 | (276 | ) | 2,163 | |||||||||||||||||
Embedded customer derivatives | (156 | ) | (111 | ) | (79 | ) | (173 | ) | 276 | (2,163 | ) | |||||||||||||
Total loss | $ | (6 | ) | $ | (19 | ) | $ | (24 | ) | $ | (150 | ) | $ | 319 | $ | (451 | ) |
| Fair Value of |
During the three months ended September 30, 2017,March 31, 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, 2017March 31, 2023 since December 31, 2016. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value as of September 30, 2017 and December 31, 2016:2022.
Metals swaps and embedded customer derivatives – Determined by using Level 2 inputs that include the price of nickel indexed to the LME. The fair value is determined based on quoted market prices and reflects the estimated amounts the Company would pay or receive to terminate the nickel swaps.
Interest rate swaps – Based on the present value of the expected future cash flows, considering the risks involved, and using discount rates appropriate for the maturity date. Market observable Level 2 inputs are used to determine the present value of future cash flows.
The following table presents information about the Company’sCompany’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 | Value of Items Recorded at Fair Value | |||||||||||||||||||||||||||||||
As of September 30, 2017 | As of March 31, 2023 | |||||||||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Metal Swaps | $ | - | $ | 70 | $ | - | $ | 70 | $ | - | $ | 2,964 | $ | - | $ | 2,964 | ||||||||||||||||
Embedded customer derivative | - | 256 | - | 256 | ||||||||||||||||||||||||||||
Fixed interest rate hedge | - | 1,343 | - | 1,343 | ||||||||||||||||||||||||||||
Total assets at fair value | $ | - | $ | 70 | $ | - | $ | 70 | $ | - | $ | 4,563 | $ | - | $ | 4,563 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Embedded customer derivative | $ | - | $ | 40 | $ | - | $ | 40 | ||||||||||||||||||||||||
Interest rate swap (CTI) | - | 12 | - | 12 | ||||||||||||||||||||||||||||
Metal Swaps | $ | - | $ | 3,140 | $ | - | $ | 3,140 | ||||||||||||||||||||||||
Total liabilities recorded at fair value | $ | - | $ | 52 | $ | - | $ | 52 | $ | - | $ | 3,140 | $ | - | $ | 3,140 |
Value of Items Not Recorded at Fair Value | ||||||||||||||||
As of September 30, 2017 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
IRB | $ | 930 | $ | - | $ | - | $ | 930 | ||||||||
Revolver | - | 220,409 | - | 220,409 | ||||||||||||
Total liabilities not recorded at fair value | $ | 930 | $ | 220,409 | $ | - | $ | 221,339 |
The value of the items not recorded at fair value represent the carrying value of the liabilities.
Value of Items Recorded at Fair Value | ||||||||||||||||
As of December 31, 2016 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Embedded customer derivative | $ | - | $ | 113 | $ | - | $ | 113 | ||||||||
Total assets at fair value | $ | - | $ | 113 | $ | - | $ | 113 | ||||||||
Liabilities: | ||||||||||||||||
Metals swaps | $ | - | $ | 113 | $ | - | $ | 113 | ||||||||
Interest rate swap (CTI) | - | 36 | - | 36 | ||||||||||||
Total liabilities recorded at fair value | $ | - | $ | 149 | $ | - | $ | 149 |
Value of Items Not Recorded at Fair Value | ||||||||||||||||
As of December 31, 2016 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
IRB | $ | 1,825 | $ | - | $ | - | $ | 1,825 | ||||||||
Revolver | - | 164,599 | - | 164,599 | ||||||||||||
Total liabilities not recorded at fair value | $ | 1,825 | $ | 164,599 | $ | - | $ | 166,424 |
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 faircarrying value of the IRB is determined using Level 1 inputs. The carrying value and the fair value of the IRB that qualify as financial instrumentsABL Credit Facility was $0.9$258.8 million and $1.8$165.7 million at September 30, 2017March 31, 2023 and December 31, 2016,2022, 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 Loss: |
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 revolverinterest rate hedge of $1.3 million, net of tax of $0.3 million is determined using Level 2 inputs.included in “Accumulated other comprehensive loss” on the Consolidated Balance Sheets at March 31, 2023. The Level 2 fair value of the Company's long-term debtinterest rate hedge was estimated using prevailing market interest rates on debt with similar credit worthiness, terms and maturities.$1.7 million, net of tax of $0.4 million at December 31, 2022.
| Equity Plans: |
Restricted Stock Units and Performance Share Units
Pursuant to the Amended and Restated Olympic Steel 2007 Omnibus Incentive Plan (the(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 Directorsdirectors of, and consultants to, the Company and its affiliates. UnderSince adoption of the Incentive Plan, 1,000,0001,400,000 shares of common stock are availablehave been authorized for equity grants.
On March 13, 2017 and May 1, 2016,an annual basis, the Compensation Committeecompensation committee of the Company’sCompany’s Board of Directors approved the grant of 3,501 and 3,094 restricted stock units (RSUs), respectively,awards RSUs to each non-employee Director.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 Boardboard of Directors.directors.
In January 2022, the Company adopted a new C-Suite Long-Term Incentive Plan (the C-Suite Plan) that operates under the Senior Manager Stock Incentive Plan. Under the C-Suite Plan, the Chief Executive Officer, the Chief Financial Officer and the President and Chief Operating Officer are eligible for participation. In each calendar year, the Committee may award eligible participants a long-term incentive of both a RSU grant and a performance stock unit (PSU) grant. Additionally, the Committee may offer a long-term cash incentive (split equally between service and performance-based portions) to supplement both the RSU and PSU grants in order to arrive at the total long-term award target. The fair value of eachtotal 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 was estimated to be the closing price of the Company’s common stock on the date ofand service-based cash incentive vests three years after the grant which was $19.99 and $22.62 on March 31, 2017 and May 1, 2016, respectively.
On July 1, 2016, the Company created a new Senior Management Stock Incentive Program (the New Plan) for certain participants. Under the New Plan, each participant, subject to the terms and conditions of the plan and the attainment of minimum performance requirements, can be awarded RSUs with a dollar value equal to 10% of the participant’s base salary, up to an annual maximum of $17,500. The RSUs have a five-year vesting period and the RSUsdate. Each vested RSU will convert into the right to receive shares of common stock upon a participant’s retirement, or earlier upon the participant’s death or disability or upon a change in control of the Company. The carbon and specialty metals flat products segments adopted the New Plan on July 1, 2016 and the tubular and pipe products segment adopted the New Plan on January 1, 2017.
Prior to July 1, 2016, the Company’s Senior Management Compensation Program included an equity component in order to encourage more ownership of common stock by the senior management (the Old Plan). The Old Plan imposed stock ownership requirements upon the participants. Each participant was required to own at least 750 shares of common stock for each year that the participant participated in the Old Plan. Any participant that failed to meet the stock ownership requirements would be ineligible to receive any equity awards under the Company’s equity compensation plans, including the Plan, until the participant satisfied the ownership requirements. To assist participants in meeting the stock ownership requirements, on an annual basis, if a participant purchased 500 shares of common stock on the open market, the Company awarded that participant 250 sharesone share of common stock. During 2016,2023, a total of 20,000 RSUs and 20,000 PSUs were granted to the Company matched 2,500 shares. Additionally, any participant who continuedparticipants 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 comply with the stock ownership requirements asparticipants 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 five-year, 10-year, 15-year, 20-year and 25-year anniversaries of the participant’s participation in the Senior Management Compensation Program would receive a restricted stock unit award with a dollar value of $25 thousand, $50 thousand, $75 thousand, $100 thousand and $100 thousand, respectively. Restricted stock unit awards would convert into the right to receive shares of common stock upon a participant’s retirement, or earlier upon the participant’s death or disability or upon a change in control of the Company. The carbon and specialty metals flat products segments terminated this plan on July 1, 2016 and the tubular and pipe products segment terminated the plan on January 1, 2017.
As part of the termination of the Old Plan and the transition to the New Plan, participants were paid the RSU grants that were earned to date, or a pro-rata amount of the RSUs earned, depending on the participants’ length of time they participated in the plan. After the payment of the RSUs noted above, the remaining liability of approximately $1.0 million was reversed during 2016 in accordance with ASC No. 718.
During the third quarter of 2016, the Company adopted a formal RSU award program for employees who are promoted to an executive level position. During the third quarter of 2016, Andrew Greiff received 10,573 RSUs upon his promotion to Executive Vice President and Chief Operating Officer. These RSUs vest on the fifth anniversary of his promotion.grant.
Stock-based compensation expense or income recognized on RSUs for the three and nine months ended September 30, 2017March 31, 2023 and 2016,2022, respectively, is summarized in the following table:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
RSU expense before taxes of New Plan | $ | 141 | $ | - | $ | 408 | $ | - | ||||||||
RSU expense (income) before taxes of Old Plan | - | $ | 162 | $ | - | $ | (170 | ) | ||||||||
RSU expense (income) after taxes | $ | 97 | $ | 220 | $ | 294 | $ | (39 | ) |
For the Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands, except per share data) | 2023 | 2022 | ||||||
RSU expense before taxes | $ | 407 | $ | 327 | ||||
RSU expense after taxes | $ | 298 | $ | 239 |
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying Consolidated Statements of Comprehensive Income.
The following table summarizes the activity related to RSUs for the ninethree months ended September 30, 2017:March 31, 2023 and 2022, respectively:
Number of | Weighted Average | As of March 31, 2023 | As of March 31, 2022 | |||||||||||||||||||||
Shares | Granted Price | Number of | Weighted Average | Number of | Weighted Average | |||||||||||||||||||
Outstanding at December 31, 2016 | 421,486 | $ | 19.92 | |||||||||||||||||||||
Shares | Granted Price | Shares | Granted Price | |||||||||||||||||||||
Outstanding at December 31 | 617,518 | $ | 18.95 | 576,867 | $ | 18.40 | ||||||||||||||||||
Granted | 73,021 | 20.01 | 49,768 | 36.63 | 35,558 | 26.72 | ||||||||||||||||||
Converted into shares | (7,658 | ) | 17.62 | (2,610 | ) | 18.78 | - | - | ||||||||||||||||
Forfeited | - | - | - | - | - | - | ||||||||||||||||||
Outstanding at September 30, 2017 | 486,849 | $ | 19.97 | |||||||||||||||||||||
Vested at September 30, 2017 | 421,849 | $ | 19.71 | |||||||||||||||||||||
Outstanding at March 31 | 664,676 | $ | 20.28 | 612,425 | $ | 18.89 | ||||||||||||||||||
Vested at March 31 | 438,914 | $ | 24.95 | 411,310 | $ | 20.41 |
| Income Taxes: |
OurFor the three months ended March 31, 2023, the Company recorded an income tax provision of $3.6 million, or 26.8%, compared to an income tax provision of $13.8 million, or 27.0%, for the three months ended March 31, 2022.
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 ourthe quarterly estimate of ourthe annual effective tax rate is subject to significant volatility due to several factors, including variability in accurately predicting our income before taxesthe Company’s pre-tax and taxable income and loss 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, ourthe effective tax rate can be more or less volatile based on the amount of income before taxes.pre-tax income. For example, the impact of discrete items and non-deductible expenses on ourthe effective tax rate is greater when our income before taxes is lower.
For the three months ended September 30, 2017, the Company recorded an income tax provision of $1.0 million, or 30.9% of pre-tax income compared to an income tax provision of $0.5 million on loss before taxes of $1.3 million for the three months ended September 30, 2016 resulting in an effective tax rate of negative 36.4%. The tax provision recorded for the three months ended September 30, 2017 included a $0.3 million favorable return to provision adjustment. The tax provision recorded for the three months ended September 30, 2016 is primarily a result of an increase in tax expense from state and local income taxes applied against forecasted income for 2016 and discrete tax expense recorded during the third quarter of 2016, applied against a net loss for the quarter.lower.
For the nine months ended September 30, 2017, the Company recorded an income tax provision of $5.7 million, or 28.0% of pre-tax income, compared to an income tax provision of $3.4 million, or 77.0%, for the nine months ended September 30, 2016. In the first quarter of 2017, the Company made an out-of-period adjustment to correct and record previously unrecognized deferred tax assets, and the associated tax benefit, related to the SERP. The adjustment, which accumulated since the inception of the plan in 2005, resulted in an increase to after-tax income of $1.9 million in the first quarter of 2017. The Company determined that this adjustment was not material to its current or prior period consolidated financial statements. During the nine months ended September 30, 2016, the Company recorded a valuation allowance of $0.8 million to reduce certain state deferred tax assets to the amount that is more likely than not to be realized. The valuation allowance increased the Company’s effective tax rate by 18.3% for the nine months ended September 30, 2016.
| Shares Outstanding and Earnings Per Share: |
Earnings per share have been calculated based on the weighted average number of shares outstanding as set forth below:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31 | ||||||||||||||||||||||
(in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
Weighted average basic shares outstanding | 11,386 | 11,219 | 11,384 | 11,206 | 11,570 | 11,559 | ||||||||||||||||||
Assumed exercise of stock options and issuance of stock awards | - | - | - | - | 1 | 4 | ||||||||||||||||||
Weighted average diluted shares outstanding | 11,386 | 11,219 | 11,384 | 11,206 | 11,571 | 11,563 | ||||||||||||||||||
Net income | $ | 2,280 | $ | (1,757 | ) | $ | 14,776 | $ | 1,026 | |||||||||||||||
Net income (loss) | $ | 9,872 | $ | 37,302 | ||||||||||||||||||||
Basic earnings per share | $ | 0.20 | $ | (0.16 | ) | $ | 1.30 | $ | 0.09 | $ | 0.85 | $ | 3.23 | |||||||||||
Diluted earnings per share | $ | 0.20 | $ | (0.16 | ) | $ | 1.30 | $ | 0.09 | $ | 0.85 | $ | 3.23 | |||||||||||
Anti-dilutive securities outstanding | 65 | 167 | 65 | 167 | ||||||||||||||||||||
Unvested RSUs | 226 | 201 |
15. | Equity Programs: |
11. Segment Information:Stock Repurchase Program
On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Any of the repurchased shares are held in the Company’s treasury, or canceled and retired as the Board may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility. Under the ABL Credit Facility, the Company may repurchase common stock and pay dividends up to $15.0 million in the aggregate during any trailing twelve months without restrictions. Purchases of common stock or dividend payments in excess of $15.0 million in the aggregate require the Company to (i) maintain availability in excess of 20.0% of the aggregate revolver commitments ($125.0 million at March 31, 2023) or (ii) to maintain availability equal to or greater than 15.0% of the aggregate revolver commitments ($93.8 million at March 31, 2023) and the Company must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00.
There were no shares repurchased during the three months ended March 31, 2023 or March 31, 2022. As of March 31, 2023, 360,212 shares remain authorized for repurchase under the program.
At-the-Market Equity Program
On September 3, 2021, the Company commenced an at-the-market (ATM) equity program under its shelf registration statement, which allows it to sell and issue up to $50 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on September 3, 2021 with KeyBanc Capital Markets Inc. (KeyBanc) relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as the Company’s sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and the Company. KeyBanc will be entitled to compensation for shares sold pursuant to the program of 2.0% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement. No shares were sold under the ATM program during the three months ended March 31, 2023 and March 31, 2022.
16. | Segment Information: |
The Company follows the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the Company’sCompany’s chief operating decision maker (CODM) to assess performance and make operating and resource allocation decisions. OurThe CODM evaluates performance and allocates resources based primarily on operating income. OurThe operating segments are based primarily on internal management reporting.
The Company operates in three reportable segments; carbonspecialty metals flat products, specialty metalscarbon flat products, and tubular and pipe products. CertainThe 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 carbon and 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 expendituresSince the January 3, 2023 acquisition, Metal-Fab’s financial results are reportedincluded 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 carbon flat products segment and the specialty metals flat products segment based upon an established allocation methodology. Through its carbon flat products segment, the Company sells and distributes large volumes of processed carbon and coated flat-rolled sheet, coil and plate products. Through its specialty metals flat products segment, the Company sells and distributes processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. Through its tubular and pipe products segment, the Company distributes metal tubing, pipe, bar, valve and fittings and fabricates pressure parts supplied to various industrial markets.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’directors’ expenses, audit expenses, and various other professional fees.
The following table provides financial information by segment and reconciles the Company’sCompany’s operating income by segment to the consolidated income (loss) before income taxes for the three and nine months ended September 30, 2017March 31, 2023 and 2016.2022, respectively.
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Specialty metals flat products | $ | 166,564 | $ | 199,479 | ||||||||||||||||||||
Carbon flat products | $ | 215,843 | $ | 169,372 | $ | 669,817 | $ | 503,928 | 309,818 | 379,549 | ||||||||||||||
Specialty metals flat products | 57,554 | 49,539 | 173,789 | 144,898 | ||||||||||||||||||||
Tubular and pipe products | 58,045 | 49,344 | 178,924 | 151,386 | 96,694 | 117,305 | ||||||||||||||||||
Total net sales | $ | 331,442 | $ | 268,255 | $ | 1,022,530 | $ | 800,212 | $ | 573,076 | $ | 696,333 | ||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||
Specialty metals flat products | $ | 984 | $ | 1,005 | ||||||||||||||||||||
Carbon flat products | $ | 2,493 | $ | 2,795 | $ | 8,287 | $ | 8,737 | 3,607 | 2,674 | ||||||||||||||
Specialty metals flat products | 185 | 203 | 609 | 586 | ||||||||||||||||||||
Tubular and pipe products | 1,403 | 1,372 | 4,211 | 4,499 | 1,593 | 1,286 | ||||||||||||||||||
Corporate | 25 | 25 | 76 | 76 | 17 | 17 | ||||||||||||||||||
Total depreciation and amortization | $ | 4,106 | $ | 4,395 | $ | 13,183 | $ | 13,898 | $ | 6,201 | $ | 4,982 | ||||||||||||
Operating income (loss) | ||||||||||||||||||||||||
Operating income | ||||||||||||||||||||||||
Specialty metals flat products | $ | 9,259 | $ | 34,084 | ||||||||||||||||||||
Carbon flat products | $ | 3,698 | $ | (3,613 | ) | $ | 18,312 | $ | (122 | ) | 5,946 | 9,875 | ||||||||||||
Specialty metals flat products | 2,074 | 3,003 | 8,918 | 7,326 | ||||||||||||||||||||
Tubular and pipe products | 1,608 | 2,773 | 6,439 | 7,149 | 9,741 | 14,582 | ||||||||||||||||||
Corporate expenses | (2,094 | ) | (2,136 | ) | (7,699 | ) | (5,952 | ) | (7,223 | ) | (5,419 | ) | ||||||||||||
Total operating income | $ | 5,286 | $ | 27 | $ | 25,970 | $ | 8,401 | $ | 17,723 | $ | 53,122 | ||||||||||||
Other income (loss), net | (22 | ) | 21 | (76 | ) | (42 | ) | |||||||||||||||||
Other loss, net | 11 | 6 | ||||||||||||||||||||||
Income before interest and income taxes | 5,264 | 48 | 25,894 | 8,359 | 17,712 | 53,116 | ||||||||||||||||||
Interest and other expense on debt | 1,966 | 1,336 | 5,380 | 3,895 | 4,223 | 1,998 | ||||||||||||||||||
Income (loss) before income taxes | $ | 3,298 | $ | (1,288 | ) | $ | 20,514 | $ | 4,464 | |||||||||||||||
Income before income taxes | $ | 13,489 | $ | 51,118 |
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
Capital expenditures | ||||||||||||||||||||||||
Flat products segments | $ | 1,110 | $ | 1,145 | $ | 4,292 | $ | 3,930 | $ | 4,502 | $ | 2,023 | ||||||||||||
Tubular and pipe products | 891 | 593 | 2,178 | 1,405 | 2,913 | 93 | ||||||||||||||||||
Total capital expenditures | $ | 2,001 | $ | 1,738 | $ | 6,470 | $ | 5,335 | $ | 7,415 | $ | 2,116 |
As of | As of | |||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | ||||||||||||||
Total assets | ||||||||||||||||
(in thouands) | 2023 | 2022 | ||||||||||||||
Assets | ||||||||||||||||
Flat products segments | $ | 427,786 | $ | 363,626 | $ | 758,858 | $ | 631,607 | ||||||||
Tubular and pipe products | 196,834 | 192,088 | 266,322 | 258,412 | ||||||||||||
Corporate | 278 | 354 | 1,609 | 1,608 | ||||||||||||
Total assets | $ | 624,898 | $ | 556,068 | $ | 1,026,789 | $ | 891,627 |
There were no material revenue transactions between the specialty metals products, carbon flat products, specialty metals products and tubular and pipe products segments.
The Company sells certain products internationally, primarily in Canada Mexico and Central and South America.Mexico. International sales are immaterial to the consolidated financial results and to the individual segments’ results.
12. Recently Issued Accounting Updates:
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In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No 2017-09, “Compensation – Stock Compensation (Topic 718)”. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This Update is the final version of proposed Accounting Standards Update 2016-360, “Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting,” which has been deleted. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The adoption of this ASU is not expected to materially impact our consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update (ASU) No 2016-15, “Classification of certain cash receipts and cash payments”. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. The adoption of this ASU is not expected to materially impact our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which specifies the accounting for leases. The objective is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This ASU introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are in the process of evaluating the impact of the future adoption of this standard on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a joint project initiated by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. generally accepted accounting principles and International Financial Reporting Standards that will: remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. As originally proposed, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The modified retrospective adoption of this ASU is not expected to materially impact our consolidated financial statements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers.” This ASU deferred the effective date of ASU No. 2014-09 until annual reporting periods beginning after December 15, 2017.
Item 2. Management’sManagement’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’sManagement’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, 2016.2022. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2016.2022, and in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appear elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the Securities and Exchange Commission, or SEC, contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and management’smanagement’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as “may,” “will,” “anticipate,” “should,” “intend,” “expect,” “believe,” “estimate,” “project,” “plan,” “potential,” and “continue,” as well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to:
● | risks of falling metals prices and inventory devaluation; | |
● | supply disruptions and inflationary pressures, including the availability and rising costs of transportation, energy, logistical services and labor; | |
● | risks associated with shortages of skilled labor, increased labor costs and our ability to attract and retain qualified personnel; | |
● | rising interest rates and their impacts on our variable interest rate debt; | |
● | risks associated with supply chain disruption resulting from the imbalance of metal supply and end-user demands related to the novel coronavirus, or COVID-19, including additional shutdowns in large markets, such as China, and other factors; | |
● | risks associated with the invasion of Ukraine, including economic sanctions, or additional war or military conflict, could adversely affect global metals supply and pricing; | |
● | general and global business, economic, financial and political | |
● | supplier consolidation or addition of new capacity; | |
● | risks associated with the COVID-19 pandemic, 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 on the same or reasonably similar terms as were available before the COVID-19 pandemic and increased costs associated with and less ability to access funds under our asset-based credit facility, or ABL Credit Facility, and the capital markets; | |
● | our ability to successfully integrate recent acquisitions 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 levels of imported steel in the United States and the tariffs initiated by the U.S. government in 2018 under Section 232 of the Trade Expansion Act of 1962 and imposed tariffs and duties on exported steel or other products, U.S. trade policy and its impact on the U.S. manufacturing industry; | |
● | the inflation or deflation existing within the metals industry, as well as product mix and inventory levels on hand, which can impact our cost of materials sold as a result of the fluctuations in the last-in, first-out, or LIFO, inventory valuation; | |
● | increased customer demand without corresponding increase in metal supply could lead to an inability to meet customer demand and result in lower sales and profits; |
● | competitive factors such as the availability, and global |
● | 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; | |
● | reduced production schedules, layoffs or work stoppages by our own, our suppliers’ or customers’ personnel; | |
● | 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; |
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● | the successes of our efforts and initiatives to |
● | our ability to generate free cash flow through operations and repay |
● | the adequacy of our existing information technology and business system software, including duplication and security processes; | |
● | 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; |
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● | 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 |
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Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as otherwise required by law.
Overview
We are a leading metals service center that operates in three reportable segments; carbonspecialty metals flat products, specialty metalscarbon flat products, and tubular and pipe products. We provide metals processing and distribution services for a wide range of customers. 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. 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 the acquisition of Shaw Stainless & Alloy, Inc., or Shaw, on October 1, 2021 and Action Stainless & Alloys, Inc., or Action Stainless, on December 14, 2020, our specialty metals flat products segment expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe. Shaw also manufactures and distributes stainless steel bollards and water treatment systems. Action Stainless offers a range of processing capabilities, including plasma, laser and waterjet cutting and computer numerical control, or CNC, machining. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Through acquisitions, our carbon flat products segment expanded its product offerings to include self-dumping metal hoppers and steel and stainless-steel dump inserts for pickup truck and service truck beds. Through the acquisition of Metal-Fab, Inc., or Metal-Fab, on January 3, 2023, our carbon flat products segment expanded its product offerings to include the manufacture of venting, micro air and clean air products for residential, commercial and industrial applications. In addition, we distribute metal tubing, pipe, bar, valves and fittings and fabricate pressure parts supplied to various industrial markets.markets through our tubular and pipe products segment. Products that require more value-added processing generally have a higher gross profit. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the demand for and availability of metals, and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned metals. We sell certain products internationally, primarily in Canada Mexico and Central and South America.Mexico. International sales are immaterial to our consolidated financial results and to the individual segments’ results.
Our results of operations are affected by numerous external factors, including, but not limited to: general and global business, economic, financial, banking and political conditions;conditions; fluctuations in the value of the U.S. dollar to foreign currencies, competition;competition; metals pricing, demand and availability;availability; transportation and energy prices;costs; pricing and availability of raw materials used in the production of metals;metals; global supply, the level of metals imported into the United States, tariffs, and inventory held in the supply chain; customers’chain; the availability and increased costs of labor; customers’ ability to manage their credit line availability;availability; and layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel. The metals industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.
Like other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. WeFrom time to time, we have entered into nickel and carbon swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals, and we have entered into metals hedges to mitigate our risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and gross profits of our business could be adversely affected.
At September 30, 2017,March 31, 2023, we employed approximately 1,6601,961 people. Approximately 270186 of the hourly plant personnel at the facilities listed below are represented by nineseven separate collective bargaining units. The table below shows the expiration dates of the collective bargaining agreements.
Facility | Expiration date |
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Locust, North Carolina | March 4, 2025 |
St. Paul, Minnesota | May 25, |
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Romeoville, Illinois | May 31, |
Minneapolis | September 30, |
Indianapolis, Indiana | January 29, |
Minneapolis | March 31, |
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August 31, 2022
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
The Company operatesWe operate in three reportable segments; carbonsegments: specialty metals flat products, specialty metalscarbon flat products and tubular and pipe products. The carbonspecialty metals flat products segment and the specialty metalscarbon flat products segment are at times consolidated and referred to as the flat products segment. Some of the flat products segments’segments’ assets and resources are shared by the carbon and 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 carbonspecialty metals flat products segment and the specialty metalscarbon 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’segments’ average selling price and the cost of materials sold. The tubular and pipespecialty metals flat products segment generally has the highest average selling price among the three segments followed by the specialty metals flattubular and pipe products segment and carbon flat products segments.segment. Due to the nature of the tubular and pipe product and our operations that manufacture end user products within the flat product segments, we do not report tons sold or per ton information. Gross profit per ton is generally higher in the specialty metals flat products segment than the carbon flat products segment. Gross profit as a percentage of net sales is generally highesthigher in the specialty metals flat products and tubular and pipe products segment, followed bysegments than the carbon and specialty metals flat products segments.
segment. Due to the differences in average selling prices, gross profit and gross profit percentage among the segments, a change in the mix of sales could impact total net sales, gross profit, and gross profit percentage. In addition, certain inventory in the tubular and pipe products segment is valued under the LIFO method. Adjustments to the LIFO inventory value are recorded to cost of materials sold and may impact the gross margin and gross margin percentage at the consolidated Company and tubular and pipe products segment levels.
Specialty metals flat products
The primary focus of our specialty metals flat products segment is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products, prime tin mill products and fabricated parts. Through recent acquisitions, our specialty metals flat products segment has expanded its geographic footprint and enhanced its product offerings in stainless steel and aluminum plate, sheet, angles, rounds, flat bar, tubing and pipe and prime tin mill products.
Carbon flat products
The primary focus of our carbon flat products segment is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Through prior acquisitions, our carbon flat products segment expanded its product offerings to include self-dumping metal hoppers, steel and stainless-steel dump inserts for pickup truck and service truck beds. Through the recent acquisition of Metal-Fab on January 3, 2023, the carbon flat products segment further expanded its product offerings to include venting, micro air and clean air products for residential, commercial and industrial applications. These new product offerings generate higher gross profit as a percentage of sales when compared to traditional carbon service center business.
We act as an intermediary between metals producers and manufacturers that require processed metalsmetal for their operations. We serve customers in most metalsmetal 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 metalsmetal service centers. We distribute these products primarily through a directdirected sales force.
Specialty metals flat products
The primary focus of our 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. 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.
Combined, the carbon and specialty metals flat products segments have 2036 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
TheThrough our tubular and pipe products segment, which consists of the Chicago Tube and Iron subsidiary, or CTI, business, acquired in 2011. Through our tubular and pipe products segment, we distribute metal tubing, pipe, bar, valve and fittings and fabricate pressure parts supplied to various industrial markets. Founded in 1914, CTI operates from nineseven locations in the midwesternMidwestern and southeastern 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’directors’ expenses, audit expenses, and various other professional fees.
Results of Operations
Our results of operations are impacted by the market price of metals. Over the past 24 months, metalsMetals prices have fluctuatedfluctuate 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. Metals market prices in the third quarter and first nine months of 2017 were approximately 5% and 20% higher, respectively, than metals market prices in the third quarter and first nine months of 2016. Average quarterly metals market prices Index pricing on carbon steel increased during 2017 have remained relatively flat after increasing in the first quarter.quarter of 2023 by $488 per ton, or 73.5%. Despite the increase in index pricing during 2023, our average selling prices and average cost of materials sold were lower during the first quarter of 2023 than during record high prices experienced the same period of 2022.
Transactional or “spot” selling prices generally move in tandem with market price changes, while fixed selling prices typically lag and reset quarterly. Similarly, inventory costs (and, therefore, cost of materials sold) tend to move slower than market selling price changes due to mill lead times and inventory turnover impacting the rate of change in average cost. When average selling prices increase, and net sales increase, gross profit and operating expenses as a percentage of net sales will generally decrease. Our year over year net sales and earnings comparisons were positively impacted by the price increases and improved customer demand during the first nine months of 2017, and increased sales volume of products that we sell.
During the second quarter of 2017, we announced the permanent closure of our carbon flat products segment’s Siler City, North Carolina operation. The facility ceased operations in July 2017. The land and building associated with the operation is classified as Assets held for sale on the accompanying Consolidated Balance Sheets. The operating loss related to the Siler City, North Carolina operation was $1.2 million for the nine months ended September 30, 2017.
Consolidated Operations
The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
% of net sales | % of net sales | % of net sales | % of net sales | $ | % of net sales | $ | % of net sales | |||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 331,442 | 100.0 | $ | 268,255 | 100.0 | $ | 1,022,530 | 100.0 | $ | 800,212 | 100.0 | $ | 573,076 | 100.0 | $ | 696,333 | 100.0 | ||||||||||||||||||||||||||||||
Cost of materials sold (a) | 265,351 | 80.1 | 211,037 | 78.7 | 806,846 | 78.9 | 616,545 | 77.0 | 452,636 | 79.0 | 555,107 | 79.7 | ||||||||||||||||||||||||||||||||||||
Gross profit (b) | 66,091 | 19.9 | 57,218 | 21.3 | 215,684 | 21.1 | 183,667 | 23.0 | 120,440 | 21.0 | 141,226 | 20.3 | ||||||||||||||||||||||||||||||||||||
Operating expenses (c) | 60,805 | 18.3 | 57,191 | 21.3 | 189,714 | 18.6 | 175,266 | 21.9 | 102,717 | 17.9 | 88,104 | 12.7 | ||||||||||||||||||||||||||||||||||||
Operating income | $ | 5,286 | 1.6 | $ | 27 | 0.0 | $ | 25,970 | 2.5 | $ | 8,401 | 1.1 | 17,723 | 3.1 | 53,122 | 7.6 | ||||||||||||||||||||||||||||||||
Other income (loss), net | (22 | ) | (0.0 | ) | 21 | 0.0 | (76 | ) | (0.0 | ) | (42 | ) | (0.0 | ) | ||||||||||||||||||||||||||||||||||
Other loss, net | 11 | 0.0 | 6 | 0.0 | ||||||||||||||||||||||||||||||||||||||||||||
Interest and other expense on debt | 1,966 | 0.6 | 1,336 | 0.5 | 5,380 | 0.5 | 3,895 | 0.5 | 4,223 | 0.7 | 1,998 | 0.3 | ||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 3,298 | 1.0 | (1,288 | ) | (0.5 | ) | 20,514 | 2.0 | 4,464 | 0.6 | ||||||||||||||||||||||||||||||||||||||
Income before income taxes | 13,489 | 2.4 | 51,118 | 7.3 | ||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 1,018 | 0.3 | 469 | 0.2 | 5,738 | 0.6 | 3,438 | 0.4 | 3,617 | 0.6 | 13,816 | 2.0 | ||||||||||||||||||||||||||||||||||||
Net income (loss) | 2,280 | 0.7 | (1,757 | ) | (0.7 | ) | 14,776 | 1.4 | 1,026 | 0.2 | ||||||||||||||||||||||||||||||||||||||
Net income | $ | 9,872 | 1.7 | $ | 37,302 | 5.3 |
(a) | No LIFO income or expense was recorded for the three | |
(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 increased $63.1 million, or 23.6%,decreased 17.7% to $331.4$573.1 million in the thirdfirst quarter of 20172023 from $268.3$696.3 million in the thirdfirst quarter of 2016. Carbon flat products net sales were 65.1% of total net sales in the third quarter of 2017 compared to 63.1% of total net sales in the third quarter of 2016.2022. Specialty metals flat products net sales were 17.4%29.1% of total net sales in the thirdfirst quarter of 20172023 compared to 18.5%28.6% of total net sales in the thirdfirst quarter of 2016.2022. Carbon flat products net sales were 54.0% of total net sales in the first quarter of 2023 compared to 54.6% of total net sales in the first quarter of 2022. Tubular and pipe products net sales were 17.5% of total net sales in the third quarter of 2017 compared to 18.4% of total net sales in the third quarter of 2016. The increase in net sales was due to a 13.4% increase in sales volume and an 8.9% increase in average selling prices during the third quarter of 2017 compared to the third quarter of 2016. Average selling prices increased sequentially from the second quarter of 2017 by approximately 2.2%. Sales volumes and average selling prices increased in all three operating segments during the third quarter of 2017 compared to the third quarter of 2016 as discussed above.
Net sales increased $222.3 million, or 27.8%, to $1.0 billion during the nine months ended September 30, 2017 from $800.2 million during the nine months ended September 30, 2016. Carbon flat products net sales were 65.5%16.9% of total net sales in the first nine monthsquarter of 20172023 compared to 63.0%16.8% of total net sales in the first nine monthsquarter of 2016. Specialty metals flat products2022. The decrease in net sales were 17.0% of total net sales induring the first nine monthsquarter of 2017 compared to 18.1% of total net sales in the first nine months of 2016. Tubular and pipe products net sales were 17.5% of total net sales in the first nine months of 2017 compared to 18.9% of total net sales in the first nine months of 2016. The increase in net sales2023 was due to a 13.2% increase18.9% decrease in average selling prices andprice, partially offset by a 12.9%1.5% increase in sales volume duringand from sales after the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Sales volumes and average selling prices increased in all three operating segments during the first nine months of 2017January 3, 2023, Metal-Fab acquisition when compared to the first nine monthsquarter of 2016.2022.
Cost of materials sold increased $54.4 million, or 25.8%,decreased 18.5% to $265.4$452.6 million in the thirdfirst quarter of 20172023 from $211.0$555.1 million in the thirdfirst quarter of 2016. Cost of materials sold increased $190.3 million, or 30.9%, to $806.8 million during the nine months ended September 30, 2017, from $616.5 million during the nine months ended September 30, 2016.2022. The increasedecrease in cost of materials sold in the thirdfirst quarter and first nine months of 20172023 is related to increasedthe decreased metals pricing discussed above and increased sales volume.in Results of Operations. In addition, we recorded $2.1 million of non-recurring amortization expense of inventory step up to fair market value adjustments made as part of the Purchase Price Allocation for the January 3, 2023 acquisition of Metal-Fab in the first quarter of 2023.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreasedincreased to 19.9%21.0% in the thirdfirst quarter of 2017 compared to 21.3%2023 from 20.3% in the thirdfirst quarter of 2016. Gross profit for the carbon flat products segment increased by 0.1%2022. The increase in the third quarter of 2017 compared to the third quarter of 2016. Grossgross profit for the specialty metals flat products segment and tubular and pipe products segment decreased by 3.2% and 4.8%, respectively, for the third quarter of 2017 compared to the third quarter of 2016. Asas a percentage of net sales gross profit decreasedis due to 21.1% in the nine months ended September 30, 2017 compared to 23.0% in the nine months ended September 30, 2016. Gross profit decreased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 by 1.7% for the carbon flat products segment, 0.7% for the specialty metals flat products segment and 3.2% for the tubular and pipe products segment.net sales decreasing less than cost of materials sold.
Operating expenses in the thirdfirst quarter of 20172023 increased $3.6$14.6 million, or 6.3%16.6%, to $60.8$102.7 million from $57.2$88.1 million in the thirdfirst quarter of 2016.2022. As a percentage of net sales, operating expenses decreasedincreased to 18.3%17.9% for the thirdfirst quarter of 20172023 from 21.3%12.7% in the comparable 2016 period.first quarter of 2022. Operating expenses in the specialty metals flat products segment decreased $4.8 million, operating expenses in the carbon flat products segment increased $2.0 million, operating expenses in the specialty metals flat products segment increased $0.4$13.5 million, operating expenses in the tubular and pipe products segment increased $1.3 million, and Corporate expenses remained flat compared to the third quarter of 2016. Operating expenses increased in all categories, except for depreciation expense, as reported on the Company’s Consolidated Statements of Comprehensive Income. Variable operating expenses, such as distribution and warehouse and processing, increased $2.1 million, or 7.2%, primarily related to the 13.4% volume increase. Selling and administrative and general expenses increased $1.8 million, or 8.4%, primarily related to increased variable performance based incentive compensation and increased direct sales representation.
Operating expenses in the first nine months of 2017 increased $14.4 million, or 8.2%, to $189.7 million from $175.3 million in the first nine months of 2016. As a percentage of net sales, operating expenses decreased to 18.6% in the first nine months of 2017 from 21.9% for the first nine months of 2016. Operating expenses in the carbon flat products segment increased $7.1 million, operating expenses in the specialty metals flat products segment increased $1.6 million, operating expenses in the tubular and pipe products segment increased $4.0$4.1 million and Corporate expenses increased $1.7$1.8 million in the first quarter of 2023 compared to the nine months ended September 30, 2016. Operatingfirst quarter of 2022. The increase in operating expenses increased in all categories, except for depreciation expense, as reportedwas primarily attributable to the inclusion of Metal-Fab operating expenses, $2.6 million of acquisition-related expenses and the year-over-year absence of the $2.1 million gain on the Company’s Consolidated Statementssale of Comprehensive Income. Variable operating expenses, such as distribution and warehouse and processing, increased $8.1 million, or 9.0%, primarily related to the 12.9% volume increase. Selling and administrative and general expenses increased $7.1 million, or 10.8%, primarily related to increased variable performance basedMilan, Iowa facility in the first quarter of 2022, partially offset by lower performance-based incentive compensation and increased direct sales representation.during the first three months of 2023.
Interest and other expense on debt totaledtotaled $4.2 million, or 0.7% of net sales, in the first quarter of 2023 compared to $2.0 million, or 0.6%0.3% of net sales, forin the thirdfirst quarter of 20172022. The increase was due to a higher effective borrowing rate partially offset by lower average borrowings in the first three months of 2023 compared to $1.3 million, or 0.5% of net sales, for the third quarter of 2016. Interest and other expense on debt totaled $5.4 million, or 0.5% of net sales, for the first ninethree months of 2017 compared to $3.9 million, or 0.5% of net sales, for the first nine months of 2016.2022. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 3.0%5.7% for the first ninethree months of 20172023 compared to 2.4%2.2% for the first ninethree months of 2016 due to the increases in LIBOR rates since 2016. Total average borrowings increased $49 million, or 33.6%, from $149 million in2022.
In the first nine months of 2016 to $198 million in the first nine months of 2017, primarily related to increased working capital needs in 2017.
For the third quarter of 2017,2023, income before income taxes totaled $3.3$13.5 million compared to lossincome before income taxes of $1.3 million in the third quarter of 2016. For the first nine months of 2017, income before income taxes totaled $20.5 million compared to $4.5$51.1 million in the first nine monthsquarter of 2016.2022.
An income tax provision of 30.9%26.8% was recorded for the thirdfirst quarter of 2017,2023, compared to an income tax provision of $0.5 million on loss before income taxes of $1.3 million27.0% for the third quarter of 2016 resulting in an effective tax rate of negative 36.4%, An income tax provision of 28.0% was recorded for the first nine months of 2017, compared to 77.0% for the first nine months of 2016. During the quarter ended March 31, 2017, we made an out-of-period adjustment to correct and record previously unrecognized deferred tax assets, and the associated tax benefit, related to the Supplemental Executive Retirement Plan. The adjustment, which accumulated since the inception of the plan in 2005, resulted in an increase to after-tax income of $1.9 million in the first quarter of 2017. During the nine months ended September 30, 2016, we recorded a valuation allowance of $0.8 million to reduce certain state deferred tax assets to the amount that is more likely than not to be realized. The valuation allowance increased the effective tax rate by 18.3% for the nine months ended September 30, 2016.2022. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into accountconsidered 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 thirdfirst quarter of 20172023 totaled $2.3$9.9 million, or $0.20$0.85 per basic share and diluted share, compared to net lossincome of $1.8$37.3 million, or $0.16 per basic and diluted share for the third quarter of 2016. Net income for the first nine months of 2017 totaled $14.8 million or $1.30 per basic and diluted share, compared to $1.0 million, or $0.09$3.23 per basic and diluted share, for the first nine monthsquarter of 2016.2022.
Segment Operations
Carbon fSpecialty metals flat productslat 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, | ||||||||||||||||
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% of net sales | % of net sales | |||||||||||||||
Direct tons sold (a) | 31,548 | 36,828 | ||||||||||||||
Toll tons sold | 968 | 1,616 | ||||||||||||||
Total tons sold | 32,516 | 38,444 | ||||||||||||||
Net sales | $ | 166,564 | 100.0 | $ | 199,479 | 100.0 | ||||||||||
Average selling price per ton | 5,123 | 5,189 | ||||||||||||||
Cost of materials sold | 137,713 | 82.7 | 140,989 | 70.7 | ||||||||||||
Gross profit (b) | 28,851 | 17.3 | 58,490 | 29.3 | ||||||||||||
Operating expenses (c) | 19,592 | 11.8 | 24,406 | 12.3 | ||||||||||||
Operating income | $ | 9,259 | 5.6 | $ | 34,084 | 17.0 |
(a) We do not report tons sold for Shaw Stainless. | ||||||||||||||||
(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. |
Tons sold by our specialty metals flat products segment decreased 15.4% to 33 thousand in the first quarter of 2023 from 38 thousand in the first quarter of 2022. The decrease in tons sold was due to current economic trends.
Net sales in our specialty metals flat products segment decreased $32.9 million, or 16.5%, to $166.6 million in the first quarter of 2023 from $199.5 million in the first quarter of 2022. The decrease in net sales was due to a 15.4% decrease in sales volumes and a 1.3% decrease in average selling prices during the first quarter of 2023 compared to the first quarter of 2022. Average selling prices in the first quarter of 2023 were $5,123 per ton, compared with $5,189 per ton in the first quarter of 2022.
Cost of materials sold in our specialty metals flat products segment decreased $3.3 million, or 2.3%, to $137.7 million in the first quarter of 2023 from $141.0 million in the first quarter of 2022. The decrease in cost of materials sold was due to a 15.4% decrease in sales volumes offset by a 15.5% increase in average cost of materials sold during the first quarter of 2023 compared to the first quarter of 2022.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 17.3% in the first quarter of 2023 from 29.3% in the first quarter of 2022. The decrease in gross profit as a percentage of net sales is due to the 15.5% increase in average costs of inventory in the first quarter of 2023 compared to the first quarter of 2022.
Operating expenses decreased $4.8 million, or 19.7%, to $19.6 million in the first quarter of 2023 from $24.4 million in the first quarter of 2022. As a percentage of net sales, operating expenses decreased to 11.8% in the first quarter of 2023 compared to 12.3% in the first quarter of 2022. The year-over-year decrease in operating expenses was primarily attributable to decreased variable performance-based incentive compensation and decreased distribution, warehouse and processing expenses due to lower sales volumes.
Operating income in the first quarter of 2023 totaled $9.3 million, or 5.6% of net sales, compared to $34.1 million, or 17.0% of net sales, in the first quarter of 2022.
Carbon flat products
The following table presents selected operating results for our carbon flat products segment for the periods indicated (dollars are shown in thousands, except for per ton information):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
% of net sales | % of net sales | % of net sales | % of net sales | % of net sales | % of net sales | |||||||||||||||||||||||||||||||||||||||||||
Direct tons sold | 256,550 | 226,152 | 822,330 | 723,019 | 209,782 | 199,821 | ||||||||||||||||||||||||||||||||||||||||||
Toll tons sold | 20,876 | 16,381 | 67,346 | 58,811 | 8,556 | 6,262 | ||||||||||||||||||||||||||||||||||||||||||
Total tons sold | 277,426 | 242,533 | 889,676 | 781,830 | 218,338 | 206,083 | ||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 215,843 | 100.0 | $ | 169,372 | 100.0 | $ | 669,817 | 100.0 | $ | 503,928 | 100.0 | $ | 309,818 | 100.0 | $ | 379,549 | 100.0 | ||||||||||||||||||||||||||||||
Average selling price per ton | 778 | 698 | 753 | 645 | 1,419 | 1,842 | ||||||||||||||||||||||||||||||||||||||||||
Cost of materials sold | 173,560 | 80.4 | 136,378 | 80.5 | 532,383 | 79.5 | 392,042 | 77.8 | 248,436 | 80.2 | 327,713 | 86.3 | ||||||||||||||||||||||||||||||||||||
Gross profit | 42,283 | 19.6 | 32,994 | 19.5 | 137,434 | 20.5 | 111,886 | 22.2 | 61,382 | 19.8 | 51,836 | 13.7 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 38,585 | 17.9 | 36,607 | 21.6 | 119,122 | 17.8 | 112,008 | 22.2 | 55,436 | 17.9 | 41,961 | 11.1 | ||||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 3,698 | 1.7 | $ | (3,613 | ) | (2.1 | ) | $ | 18,312 | 2.7 | $ | (122 | ) | (0.0 | ) | ||||||||||||||||||||||||||||||||
Operating income | $ | 5,946 | 1.9 | $ | 9,875 | 2.6 |
(a) We do not report tons sold for McCullough Industries, EZ Dumper or Metal-Fab. |
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Tons sold by our carbon flat products segment increased 35 thousand tons, or 14.4%,5.9% to 277 thousand in the third quarter of 2017 from 243 thousand in the third quarter of 2016. Tons sold by our carbon flat products segment increased 108 thousand tons, or 13.8%, to 890218 thousand in the first nine monthsquarter of 20172023 from 782206 thousand in the first nine monthsquarter of 2016.2022. The increase in tons sold is primarily due to improved customer demand in the markets we serve. Industry-wide shipments increased year over year in the first nine months of 2017.volumes to industrial machinery and equipment manufacturers and their fabricators serviced.
Net sales in our carbon flat products segment increased $46.5decreased $69.7 million, or 27.4%18.4%, to $215.8$309.8 million in the thirdfirst quarter of 20172023 from $169.4$379.5 million in the thirdfirst quarter of 2016.2022. The decrease in net sales was attributable to a 23.0% decrease in average selling prices offset by a 5.9% increase in sales volumes and an increase in sales generated from the Metal-Fab acquisition during the first quarter of 2023 when compared to the first quarter of 2022. Average selling prices in the first quarter of 2023 were $1,419 per ton, compared with $1,842 per ton in the first quarter of 2022.
Cost of materials sold decreased $79.3 million, or 24.2%, to $248.4 million in the first quarter of 2023 from $327.7 million in the first quarter of 2022. The decrease was due to a 14.4%28.4% decrease in the average cost of materials sold, partially offset by a 5.9% increase in sales volume and an 11.4% increase in average selling prices during the third quarter of 2017, compared to the third quarter of 2016. Average selling prices in the third quarter of 2017 were $778 per ton, compared with $698 per ton in the third quarter of 2016, and $769 per ton in the second quarter of 2017.
Net sales in our carbon flat products segment increased $165.9 million, or 32.9%, to $669.8 million in the first nine months of 2017 from $503.9 million in the first nine months of 2016. The increase in sales was due to a 16.8% increase in average selling prices and a 13.8% increase in sales volume. Average selling prices in the first nine months of 2017 were $753 per ton, compared with $645 per ton in the first nine months of 2016.
Cost of materials sold increased $37.2 million, or 27.3%, to $173.6 million in the third quarter of 2017 from $136.4 million in the third quarter of 2016. The increase in cost of materialsmaterial sold was due to a 14.4% increase in sales volume andfrom the increased costMetal-Fab acquisition during the first quarter of metals during 20172023 when compared to 2016.
Costthe first quarter of materials sold increased $140.32022. In addition, we recorded $2.1 million or 35.8%,of non-recurring amortization expense of inventory step up to $532.4 millionfair market value adjustments made as part of the Purchase Price Allocation for the January 3, 2023 acquisition of Metal-Fab in the first nine monthsquarter of 2017 from $392.0 million in the first nine months of 2016. The increase in cost of materials sold was due to a 13.8% increase in sales volume and increased metals cost during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.2023.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 19.6%19.8% in the thirdfirst quarter of 2017,2023 compared to 19.5%13.7% in the thirdfirst quarter of 2016. Gross profit per ton increased $16 per ton to $152 per ton2022. The increase in the third quarter of 2017 from $136 per ton in the third quarter of 2016, and decreased $2 per ton from $154 per ton in the second quarter of 2017.
Asgross profit as a percentage of net sales is due to the impact of the average costs of inventory decreasing more quickly than the decreases in average selling price and additional gross profit decreased to 20.5% ingenerated from the nine months ended September 30, 2017 compared to 22.2% in the nine months ended September 30, 2016. Gross profit per ton increased $11 per ton to $154 per ton in the nine months ended September 30, 2017 from $143 per ton in the nine months ended September 30, 2016.Metal-Fab acquisition.
Operating expenses in the thirdfirst quarter of 20172023 increased $2.0$13.5 million, or 5.4%32.1%, to $38.6$55.4 million from $36.6 million in the third quarter of 2016. As a percentage of net sales, operating expenses decreased to 17.9% for the third quarter of 2017 from 21.6% in the comparable 2016 period. Operating expenses in the first nine months of 2017 increased $7.1 million, or 6.4%, to $119.1 million from $112.0$42.0 million in the first nine monthsquarter of 2016. As a percentage of net sales, operating expenses decreased to 17.8% for the first nine months of 2017 from 22.2% in the comparable 2016 period.2022. The percentageyear-over-year increase in operating expense inexpenses was primarily attributable to the third quarter and first nine monthsinclusion of 2017 were less than the volume increases during the same periods. VariableMetal-Fab operating expenses, such as distribution and warehouse and processing, increased as a result of increased sales volume. Selling and administrative and general expenses increased primarily as a result of increased variable performance based incentive compensation.expenses.
Operating income forin the thirdfirst quarter of 20172023 totaled $3.7$5.9 million, or 1.7%1.9% of net sales, compared to operating lossincome of $3.6$9.9 million, or 2.1%2.6% of net sales, forin the thirdfirst quarter of 2016. Operating income for the nine months ended September 30, 2017 totaled $18.3 million, or 2.7% of net sales, compared to operating loss of $0.1 million, or 0.0%, of net sales for the nine months ended September 30, 2016.2022.
Specialty metalsTubular and pipe products flat products
The following table presents selected operating results for our specialty metals flat products for the periods indicated (dollars are shown in thousands, except for per ton information):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
% of net sales | % of net sales | % of net sales | % of net sales | |||||||||||||||||||||||||||||
Direct tons sold | 23,253 | 21,636 | 68,931 | 63,171 | ||||||||||||||||||||||||||||
Toll tons sold | - | 46 | 54 | 102 | ||||||||||||||||||||||||||||
Total tons sold | 23,253 | 21,682 | 68,985 | 63,273 | ||||||||||||||||||||||||||||
Net sales | $ | 57,554 | 100.0 | $ | 49,539 | 100.0 | $ | 173,789 | 100.0 | $ | 144,898 | 100.0 | ||||||||||||||||||||
Average selling price per ton | 2,475 | 2,285 | 2,519 | 2,290 | ||||||||||||||||||||||||||||
Cost of materials sold | 50,083 | 87.0 | 41,547 | 83.9 | 148,413 | 85.4 | 122,733 | 84.7 | ||||||||||||||||||||||||
Gross profit (a) | 7,471 | 13.0 | 7,992 | 16.1 | 25,376 | 14.6 | 22,165 | 15.3 | ||||||||||||||||||||||||
Operating expenses (b) | 5,397 | 9.4 | 4,989 | 10.0 | 16,458 | 9.5 | 14,839 | 10.2 | ||||||||||||||||||||||||
Operating income | $ | 2,074 | 3.6 | $ | 3,003 | 6.1 | $ | 8,918 | 5.1 | $ | 7,326 | 5.1 |
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Tons sold by our specialty metals flat products segment increased one thousand tons, or 7.2%, to 23 thousand in the third quarter of 2017 from 22 thousand in the third quarter of 2016. Tons sold by our specialty metals flat products segment increased six thousand tons, or 9.0%, to 69 thousand in the nine months ended September 30, 2017 from 63 thousand in the nine months ended September 30, 2016. The increase in tons sold is due to improved customer demand in the markets we serve. Industry-wide shipments increased year over year in the third quarter and first nine months of 2017. The specialty metals flat products segment increased its market share for stainless products in the first nine months of 2017.
Net sales in our specialty metals flat products segment increased $8.0 million, or 16.2% to $57.6 million in the third quarter of 2017 from $49.5 million in the third quarter of 2016. The increase in sales was due to an 8.3% increase in average selling prices and a 7.2% increase in sales volume during the third quarter of 2017 compared to the third quarter of 2016. Average selling prices in the third quarter of 2017 were $2,475 per ton compared to $2,285 per ton in the third quarter of 2016 and $2,586 per ton in the second quarter of 2017.
Net sales in our specialty metals flat products segment increased $28.9 million, or 19.9%, to $173.8 million in the first nine months of 2017 from $144.9 million in the first nine months of 2016. The increase in sales was due to a 10.0% increase in average selling prices and a 9.0% increase in sales volume. Average selling prices in the first nine months of 2017 were $2,519 per ton, compared with $2,290 per ton in the first nine months of 2016.
Cost of materials sold increased $8.5 million, or 20.5%, to $50.1 million in the third quarter of 2017 from $41.5 million in the third quarter of 2016. The increase was due to increased metals cost and a 7.2% increase in sales volume in the third quarter of 2017 compared to the third quarter of 2016.
Cost of materials sold increased $25.7 million, or 20.9%, to $148.4 million in the first nine months of 2017 from $122.7 million in the first nine months of 2016. The increase in cost of materials sold was due to increased metals cost and a 9.0% increase in sales volume during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 13.0% in the third quarter of 2017 from 16.1 % in the third quarter of 2016. As a percentage of net sales, gross profit decreased to 14.6% in the nine months ended September 30, 2017 from 15.3% in the nine months ended September 30, 2016.
Operating expenses in the third quarter of 2017 increased $0.4 million, or 8.2%, to $5.4 million from $5.0 million in the third quarter of 2016. As a percentage of net sales, operating expenses decreased to 9.4% of net sales for the third quarter of 2017 compared to 10.0% of net sales for the third quarter of 2016.
Operating expenses in the first nine months of 2017 increased $1.6 million, or 10.9%, to $16.5 million from $14.8 million in the first nine months of 2016. As a percentage of net sales, operating expenses decreased to 9.5% of net sales for the nine months ended September 30, 2017 compared to 10.2% for the nine months ended September 30, 2016. For both the three and nine months ended September 30, 2017 variable operating expenses, such as distribution and warehouse and processing increased as a result of higher sales volumes. Selling and administrative and general expenses increased primarily as a result of increased variable based incentive compensation related to the increased sales volume and gross profit.
Operating income for the third quarter of 2017 totaled $2.1 million, or 3.6% of net sales, compared to $3.0 million, or 6.1% of net sales, for the third quarter of 2016. Operating income for the nine months ended September 30, 2017 totaled $8.9 million, or 5.1% of net sales, compared to operating income of $7.3 million, or 5.1% of net sales, for the nine months ended September 30, 2016.
Tubular and pipe products
The following table presents selected operating results for our tubular and pipe products segment for the periods indicated (dollars are shown in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
% of net sales | % of net sales | % of net sales | % of net sales | $ | % of net sales | $ | % of net sales | |||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 58,045 | 100.0 | $ | 49,344 | 100.0 | $ | 178,924 | 100.0 | $ | 151,386 | 100.0 | $ | 96,694 | 100.0 | $ | 117,305 | 100.0 | ||||||||||||||||||||||||||||||
Cost of materials sold (a) | 41,708 | 71.9 | 33,112 | 67.1 | 126,050 | 70.4 | 101,770 | 67.2 | 66,487 | 68.8 | 86,404 | 73.7 | ||||||||||||||||||||||||||||||||||||
Gross profit (b) | 16,337 | 28.1 | 16,232 | 32.9 | 52,874 | 29.6 | 49,616 | 32.8 | 30,207 | 31.2 | 30,901 | 26.3 | ||||||||||||||||||||||||||||||||||||
Operating expenses (c) | 14,729 | 25.3 | 13,459 | 27.3 | 46,435 | 26.0 | 42,467 | 28.1 | 20,466 | 21.2 | 16,319 | 13.9 | ||||||||||||||||||||||||||||||||||||
Operating income | $ | 1,608 | 2.8 | $ | 2,773 | 5.6 | $ | 6,439 | 3.6 | $ | 7,149 | 4.7 | $ | 9,741 | 10.1 | $ | 14,582 | 12.4 |
(a) |
(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 increased $8.7decreased $20.6 million, or 17.6%, to $58.0$96.7 million in the thirdfirst quarter of 20172023 from $49.3$117.3 million in the thirdfirst quarter of 2016.2022. The increasedecrease is a result of a 8.7% increase10.1% decrease in average selling prices and a 8.2% increasean 8.3% decrease in sales volume during the third quarter of 2017 compared to the third quarter of 2016.
Net sales increased $27.5 million, or 18.2%, to $178.9 million in the nine months ended September 30, 2017 from $151.4 million in the nine months ended September 30, 2016. The increase in net sales is a result of a 12.5% increase in average selling prices and a 5.0 % increase in salesshipping volume during the first nine monthsquarter of 20172023 compared to the first nine monthsquarter of 2016.2022.
Cost of materials sold increased $8.6decreased $19.9 million, or 26.0%23.1%, to $41.7 million in the third quarter of 2017 from $33.1 million in the third quarter of 2016. During the third quarter of 2017, we recorded LIFO expense of $0.7 million compared to $0.7 million of LIFO income recorded in the third quarter of 2016.
Cost of materials sold increased $24.3 million, or 23.9% to $126.1$66.5 million in the first nine monthsquarter of 20172023 from $101.8$86.4 million in the first nine monthsquarter of 2016. During the first nine months of 2017, we recorded $1.5 million of LIFO expense compared to $0.7 million of2022. The Company did not record LIFO income recorded inor expense during the first ninethree months of 2016. The increase in cost of materials sold in 2017 is a result of increased metals cost and sales volume in 2017 compared to 2016.ended March 31, 2023, or March 31, 2022.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreasedincreased to 28.1% in the third quarter of 2017 from 32.9% in the third quarter of 2016. As a percentage of net sales, the $0.7 million LIFO expense in 2017 decreased gross profit by 1.2%. The $0.7 million of LIFO income increased gross profit by 1.4% in the third quarter of 2017. As a percentage of net sales, gross profit decreased to 29.6%31.2% in the first nine monthsquarter of 20172023 compared to 32.8%26.3% in the first nine monthsquarter of 2016. As a percentage of net sales, the $1.5 million LIFO expense recorded in the nine months ended September 30, 2017 decreased gross profit by 0.8%. The $0.7 million of LIFO income increased gross profit by 0.5% in the nine months ended September 30, 2017.2022.
Operating expenses in the thirdfirst quarter of 20172023 increased $1.2$4.1 million, or 9.4%25.4%, to $14.7$20.5 million from $13.5 million in the third quarter of 2016. As a percentage of net sales, operating expenses decreased to 25.3% for the third quarter of 2017 compared to 27.3% for the third quarter of 2016. Operating expenses in the nine months ended September 30, 2017 increased $3.9 million, or 9.3%, to $46.4 million from $42.5$16.3 million in the first nine monthsquarter of 2016. As a percentage2022. Operating expenses increased to 21.2% of net sales operating expenses decreased to 26.0% in the first nine monthsquarter of 20172023 compared to 28.1%13.9% in the first nine monthsquarter of 2016. Operating2022. The increase in operating expenses was primarily due increased variable performance-based incentive compensation and the year-over-year absence of the $2.1 million gain on the sale of the Milan, Iowa facility in the thirdfirst quarter and first nine months of 2017 primarily as a result of increased distribution expense related to increased shipments, less labor and overhead capitalized into inventory, and increased variable incentive compensation related to increased gross profit.2022.
Operating income for in the thirdfirst quarter of 20172023 totaled $1.6$9.7 million, or 2.8%10.1% of net sales, compared to $2.8$14.6 million, or 5.6%12.4% of net sales, forin the thirdfirst quarter of 2016. Operating income for the nine months ended September 30, 2017 totaled $6.4 million, or 3.6% of net sales, compared to $7.1 million, or 4.7% of net sales, for the nine months ended September 30, 2016.2022.
Corporate expenses
Corporate expenses totaled $2.1 million for both the third quarter of 2017 and 2016. Corporate expenses increased $1.7$1.8 million, or 29.4%33.3%, to $7.7$7.2 million in the nine months ended September 30, 2017 compared to $6.0first quarter of 2023 from $5.4 million in the nine months ended September 30, 2016. The increase in corporatefirst quarter of 2022. Corporate expenses is primarily attributable to increased variable performance based incentive compensation and, effective August 2016, when our President of Specialty Metals was appointeddue to the position$2.6 million of Executive Vice President and Chief Operating Officer, his associated costs were classified as Corporate expenses. Corporateacquisition-related expenses include the unallocated expenses related to managing the entire Company, (i.e. all three segments) including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors’ expenses, audit expenses, and various other professional fees.partially offset by decreased variable performance-based compensation.
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 leasing transactions and borrowings under our credit facilityABL Credit Facility to fund these requirements.
We believe that funds available under our existing asset-based credit facility (the ABL Credit Facility), lease arrangement proceeds and the sale of equity or debt securities,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.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 ninethree months ended September 30, 2017,March 31, 2023, we used $46.6generated $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. For the three months ended March 31, 2022, we generated $14.9 million of net cash for operations, of which $26.8$46.1 million was generated from operating activities and $73.4$31.2 million was used for working capital investments. For the nine months ended September 30, 2016, we used $9.7 million of net cash from operations, of which $16.3 million was generated from operating activities and $26.0 million was used for working capital investments.capital.
Net cash from operations totaled $26.8$16.0 million during the ninefirst three months ended September 30, 2017of 2023 and consisted primarilywas mainly comprised of net income of $14.8$9.9 million, andthe non-cash depreciation and amortization addback of $13.9$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. Net cash from operations totaled $16.3$46.1 million during the nine months ended September 30, 2016first quarter of 2022 and consisted primarilywas mainly comprised of net income of $1.0$37.3 million, andthe non-cash depreciation and amortization add back of $14.6$5.1 million, a $4.5 million increase in deferred income taxes and other long-term liabilities and a $1.1 million increase in other long-term assets offset by a gain on disposition of property, plant and equipment of $2.2 million.
Working capital at September 30, 2017March 31, 2023 totaled $337.1$481.5 million, a $77.0$11.9 million increasedecrease from December 31, 2016.2022. The increasedecrease was primarily attributable to a $48.8$23.3 million or 47.9%,decrease in accrued payroll and other accrued liabilities and a $6.5 million increase in accounts receivable (resulting from higher sales prices and higher sales volumes experienced in the third quarter of 2017 compared to the fourth quarter of 2016) and an $25.7offset by a $37.6 million or 10.0%, increase in inventories.accounts payable and outstanding checks, a $26.2 million decrease in inventories and a $2.4 million decrease in prepaid expenses and other.
Investing Activities
Net cash used for capital expenditures was $6.5investing activities totaled $136.8 million during the ninethree months ended September 30, 2017,March 31, 2023, compared to $5.3net cash generated from investing activities of $1.2 million during the ninethree months ended September 30, 2016.March 31, 2022. Net cash used for investing activities during the first three months ended March 31, 2023, primarily consisted of the $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 disposition of property and equipment. Net cash from investing activities totaled $1.2 million during the three months ended March 31, 2022, and primarily consisted of $3.2 million in proceeds from the sale of the Milan facility offset by $2.1 million in new capital expenditures. The 2017 capital expenditures in the first quarter of 2023 and 2022 were primarily attributable to additional processing equipment at our existing facilities.
Financing Activities
During the ninefirst three months ended September 30, 2017, $54.1of 2023, $90.6 million of cash was generated from financing activities, which primarily consisted of $55.8$93.1 million of net borrowings under our ABL Credit Facility, offset by a$1.4 million of dividends paid, $0.9 million IRB repaymentof credit facility fees and $0.7 million dividend payment. Duringexpenses related to amending the nine months ended September 30, 2016, $16.1 million of cash was generated from financing activities, which primarily consisted of $17.7 million of net borrowings under our ABL Credit Facility offset by a $0.9and $0.2 million IRB repayment and $0.7 million dividend payment.of principle payments under capital lease obligations.
Dividends paid were $0.7$1.4 million and $1.0 million for both the ninethree months ended September 30, 2017March 31, 2023 and September 30, 2016.March 31, 2022, respectively. In May 2023, our Board of Directors approved a regular quarterly dividend of $0.125 per share, which will be paid on June 15, 2023 to shareholders of record as of June 1, 2023. Regular dividend distributions in the future are subject to the availability of cash, the $2.5$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
On October 2,In 2015, we announced that our Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’sour issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Any of the repurchasedRepurchased 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 $2.5$15.0 million in the aggregate during any trailing twelve months without restrictions. Purchases in excess of $2.5$15.0 million require us to (i) maintain availability in excess of 25%20% of the aggregate revolver commitments ($91.3125.0 million at September 30, 2017)March 31,2023) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($54.893.8 million at September 30, 2017)March 31, 2023) and we must maintain a pro-formapro 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, 2023, 360,212 shares remain authorized for repurchase under the program.
There were no shares repurchased during 2023 or 2022.
At- the-Market Equity Program
On September 3, 2021, we commenced an at-the-market, or ATM, equity program under our shelf registration statement, which allows us to sell and issue up to $50 million in shares of our common stock from time to time. We entered into an Equity Distribution Agreement on September 3, 2021 with KeyBanc Capital Markets Inc., or KeyBanc, relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. KeyBanc will be entitled to compensation for shares sold pursuant to the program of 2.0% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement. No share repurchasesshares were madesold under the ATM program during the 2017three months ended March 31, 2023, or 2016 periods presented.March 31, 2022.
Debt Arrangements
OurOn January 3, 2023, we entered into a Sixth Amendment to Third Amended and Restated Loan and Security Agreement, which amended our existing ABL Credit Facility. The amendment increased the Credit Facility by $150 million from $475 million to $625 million. The $625 million ABL Credit Facility consists of: (i) a revolving credit facility of up to $595 million, including a $20 million sub-limit for letters of credit, and (ii) a first in, last out revolving credit facility of up to $30 million. Under the terms of the ABL Credit Facility we may, subject to the satisfaction of certain conditions, request additional commitments under the revolving credit facility in the aggregate principal amount of up to $200 million to the extent that existing or new lenders agree to provide such additional commitments, and add real estate as collateral at our discretion. The ABL Credit Facility matures on June 16, 2026.
The ABL Credit Facility is collateralized by our accounts receivable, inventory, personal property and inventory.certain real estate. The ABL Credit Facility consistscontains 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 a revolving credit line of $365 million. Revolver borrowings are limited totheir assets; and (viii) engage in transactions with affiliates. In addition, the lesser of a borrowing base, comprised of eligible receivables and inventories, or $365 million in the aggregate. The ABL Credit Facility matures on June 30, 2019.
The ABL Credit Facilitycontains a financial covenant which requires us to comply with various covenants, the most significant of which include: (i) until maturity of the ABL Credit Facility, 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 ($36.562.5 million at September 30, 2017)March 31, 2023) or 10.0% of the aggregate borrowing base ($61.9 million at March 31, 2023), then we must maintain a ratio of EBITDAEarnings 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; (ii) limitations on dividend payments and stock repurchases; and (iii) restrictions on additional indebtedness. period.
We have the option to borrow under ourits revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.25% or the London Interbank OfferedSecured Overnight Financing Rate (LIBOR)(SOFR) plus a premium ranging from 1.25% to 3.00%2.75%.
On January 10, 2019, we entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. On January 3, 2023, we amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. Although we are exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, we anticipate performance by the counterparty.
As of September 30, 2017,March 31, 2023, we were in compliance with ourits covenants and had approximately $110$355 million of availability under the ABL Credit Facility.
As of September 30, 2017, $1.4March 31, 2023, and December 31, 2022, $2.0 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 facilityFacility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.
As part of the CTI acquisition in July 2011, we assumed approximately $5.9 million of Industrial Revenue Bond (IRB) indebtedness ($0.9 million at September 30, 2017). The bond matures in April 2018, with the option to provide principal payments annually in April. On April 3, 2017, we made an optional principal payment of $0.9 million. The remaining balance of the IRB is included in “Current portion of long-term debt” on the accompanying Consolidated Balance Sheets as the payment is due in April of 2018. Interest is payable monthly, with a variable rate that resets weekly. As a security for payment of the bonds, we obtained a direct pay letter of credit issued by JPMorgan Chase Bank, N.A. The letter of credit reduces annually by the principal reduction amount. The interest rate at September 30, 2017 was 0.9% for the IRB debt.
CTI entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the above IRB. At September 30, 2017, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement matures in April 2018, and is reduced annually by the amount of the optional principal payments on the bond. We are exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement. However, we do not anticipate nonperformance by the counterparties.
Critical Accounting Policies
This Management’sManagement’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’sManagement’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, 2016.2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our principal raw materials are carbon, coated and stainless steel, and 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-timejust‑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-pricelong‑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 marketnet 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 our 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’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 52%50% and 51%53% of our consolidated net sales during the first ninethree months of 20172023 and 2016,2022, respectively, 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, processing equipment, energy, and borrowings under our credit facility. Generalfacility, 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 2023, it has not had a material effect on our financial results during the past twolast 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 20172023 and 2016,2022, we entered into metals swaps at the request of customers. While theseThese derivatives are intended to be effective in helping us manage risk, they have not been designated as hedging instruments. For certain customers, we enter into contractual relationships that entitle us to pass-throughpass through the economic effect of trading positions that we take with other third parties on our customers’customers’ behalf.
Our primary interest rate risk exposure results from variable rate debt. On January 10, 2019, we entered into a five-year forward starting fixed rate interest rate hedge in order to eliminate the variability of cash interest payments on $75 million of the outstanding LIBOR based borrowings under the ABL Credit Facility. On January 3, 2023, we amended the interest rate hedge agreement to use SOFR as the reference rate and updated the fixed rate to 2.42% from 2.57%. Although we are exposed to credit loss in the event of nonperformance by the other party to the interest rate hedge agreement, we anticipate performance by the counterparty. We have the option to enter into 30- to 180-day fixed base rate LIBORSOFR loans under the ABL Credit Facility. As part of the CTI acquisition, we assumed an interest rate swap agreement on the $5.9 million of IRB ($0.9 million at September 30, 2017). The swap agreement matures in April 2018, but the notional amount may be reduced annually by the amount of the optional principal payments on the IRB. We are exposed to credit loss in the event of nonperformance by the other parties to the fixed interest rate hedge agreement. However, we do not anticipate nonperformance by the counterparties.
Item 4. Controls and Procedures
The evaluation required by Rule 13a-15(e) of the Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q has been carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports that are filed with or submitted to the SEC is: (i) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,March 31, 2023, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the thirdfirst quarter of 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Items 1, 1A, 2, 3, 4 and 5 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II.
Item 6. Exhibits
Exhibit | Description of Document | Reference | |
2.2 | Stock Purchase Agreement, dated as of January 3, 2023, among Olympic Steel, Inc., OS Holdings, Inc., Metal-Fab, Inc., the sellers party thereto and the representative of the sellers. | Incorporated by reference to Exhibit 2.2 to the Registrant’s Form 8-K filed with the Commission on January 3, 2023 (Commission File No. 0-23320). | |
4.32 | Joinder and Sixth Amendment to Third Amended and Restated Loan and Security Agreement, dated as of January 3, 2023, among Olympic Steel, Inc., Olympic Steel Lafayette, Inc., Olympic Steel Minneapolis, Inc., Olympic Steel Iowa, Inc., Oly Steel NC, Inc., IS Acquisition, Inc., Chicago Tube and Iron Company, B Metals, Inc., MCI, Inc., ACT Acquisition, Inc., SHAQ, Inc., OS Holdings, Inc., Metal-Fab, Inc., the lenders from time to time party thereto and Bank of America, N.A. as Agent for the Lenders. | Incorporated by reference to Exhibit 4.32 to the Registrant’s Form 8-K filed with the Commission on January 3, 2023 (Commission File No. 0-23320). | |
31.1 | Filed herewith | ||
31.2 | Filed herewith | ||
32.1 | Furnished herewith | ||
32.2 | Furnished herewith | ||
| The following materials from Olympic Steel’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in Inline XBRL | ||
| Cover Page Interactive Data File (embedded within the Inline XBRL | ||
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SIGNATURES
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. | |||
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(Registrant) | |||
Date: | |||
May 5, 2023 |
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| 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) |
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