Olympic Steel(ZEUS) - 2022 Q4 - Annual Report

Part I Business Overview Olympic Steel is a leading U.S. metals service center operating in three segments, focusing on value-added processing and distribution, with growth driven by strategic acquisitions - The company operates through three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products[15] - Strategic growth is a key focus, achieved through acquisitions (e.g., Shaw Stainless, Action Stainless, Metal-Fab), investments in higher value-added processing equipment, and expansion of product offerings[21][24][28] - The company serves a diverse customer base, with the industrial machinery and equipment sector being the largest, accounting for 52% of net sales in 2022[49][51] - Olympic Steel relies on a concentrated supplier base, with its top three suppliers accounting for approximately 39% of total metal purchases in 2022[58] Net Sales by Industry (2020-2022) | Industry | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Industrial machinery and equipment manufacturers and their fabricators | 52% | 47% | 47% | | Metals service centers | 9% | 11% | 11% | | Residential and commercial construction | 7% | 8% | 8% | | Automobile manufacturers and their suppliers | 2% | 7% | 7% | | Transportation equipment manufacturers | 8% | 6% | 6% | | All others <5% | 22% | 21% | 21% | Risk Factors The company faces key risks from volatile metals prices, supply chain disruptions, transportation and labor dependency, cyclical customer industries, variable rate debt, and regulatory changes - Volatile metals prices are a primary risk, affecting sales, gross profit, and inventory valuation; declining prices can lead to lower sale prices and inventory write-downs[87][88] - The business is dependent on transportation and skilled labor; increased costs or decreased availability in these areas could adversely affect operations and profitability[89][91] - Supply chain disruptions, inflationary pressures, and reliance on a concentrated number of suppliers (top three provided 39% of metals in 2022) pose significant operational risks[96][100] - The company is exposed to risks from its variable rate debt, with a 100 basis point increase in interest rates projected to increase annual interest expense by approximately $0.9 million[124] - Government actions, such as the imposition or removal of tariffs and quotas on steel and aluminum, can cause significant fluctuations in operating results[127] Properties The company operates numerous strategically located processing, distribution, and manufacturing facilities across the U.S. and Mexico, with most key facilities owned - The company's facilities are strategically situated in major metals consumption markets, with most customers located within a 250-mile radius of a processing facility[145] - The company owns and leases a wide range of properties for corporate offices, coil and plate processing, fabrication, and distribution, servicing its three business segments[146][148] - A warehouse in Cleveland, Ohio is leased from an entity in which the Executive Chairman of the Board owns a 50% interest; the lease expires on December 31, 2023, with renewal options[149][351] Executive Officers An experienced executive team, including Michael D. Siegal as Executive Chairman and Richard T. Marabito as CEO, leads the company with extensive industry tenure - Michael D. Siegal serves as Executive Chairman of the Board, having previously been CEO from 1984 to 2018[153] - Richard T. Marabito has been the Chief Executive Officer since January 2019, previously serving as CFO since 2000[154] - Richard A. Manson has served as Chief Financial Officer since January 2019, having been with the company since 1996 in various roles[155] - Andrew S. Greiff has served as President and Chief Operating Officer since January 2020, having joined the company in 2009[156] Part II Common Stock and Shareholder Matters Olympic Steel's common stock trades on Nasdaq under ZEUS, with regular quarterly dividends and an active stock repurchase program - The company's common stock trades on the Nasdaq Global Select Market under the symbol "ZEUS"[159] - Regular quarterly dividends are expected to continue; dividends declared were $0.36 per share in 2022, a significant increase from $0.08 per share in 2021[160][284] - A stock repurchase program is authorized for up to 550,000 shares; as of December 31, 2022, 360,212 shares remain authorized for repurchase, with no shares purchased in Q4 2022[161][162] Management's Discussion and Analysis (MD&A) The MD&A reviews 2022 financial performance, highlighting sales growth, net income decline, margin compression, strong cash flow, and debt reduction Consolidated Results of Operations Consolidated net sales increased 10.7% to $2.6 billion in 2022 due to higher prices, but gross profit margin declined to 19.0%, leading to a 24.9% decrease in net income Consolidated Financial Highlights (2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,559,990 | $2,312,253 | $247,737 | 10.7% | | Gross Profit | $486,060 | $510,201 | ($24,141) | -4.7% | | Gross Margin | 19.0% | 22.1% | -3.1 p.p. | - | | Operating Income | $133,747 | $172,466 | ($38,719) | -22.4% | | Net Income | $90,931 | $121,051 | ($30,120) | -24.9% | - The increase in net sales was driven by a 26.0% increase in consolidated average selling prices, which rose to $2,448 per ton in 2022 from $1,942 per ton in 2021[185] - Gross profit margin decreased from 22.1% to 19.0% due to the average cost of inventory increasing more rapidly than average selling prices[187] - Net income for 2022 was $90.9 million, or $7.87 per diluted share, compared to $121.1 million, or $10.52 per diluted share, in 2021[191] Segment Results of Operations Specialty Metals saw operating income rise, while Carbon Flat Products experienced a sharp decline, and Tubular and Pipe Products significantly increased operating income Specialty Metals Flat Products Performance (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $776.0M | $585.8M | | Tons Sold | 142,092 | 157,807 | | Avg. Selling Price/ton | $5,461 | $3,712 | | Operating Income | $93.7M | $70.5M | Carbon Flat Products Performance (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $1,356.6M | $1,344.2M | | Tons Sold | 806,919 | 921,295 | | Gross Profit % | 14.2% | 21.2% | | Operating Income | $25.0M | $110.1M | Tubular and Pipe Products Performance (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $427.4M | $382.4M | | LIFO Expense | $0.6M | $21.9M | | Gross Profit % | 25.1% | 21.4% | | Operating Income | $34.9M | $7.4M | Liquidity and Capital Resources Strong cash from operations of $185.9 million in 2022 significantly improved liquidity and enabled debt reduction, with the Metal-Fab acquisition in 2023 funded by an expanded credit facility - Generated $185.9 million of cash from operations in 2022, compared to using $146.4 million in 2021; the improvement was largely due to a $71.7 million decrease in working capital[218][219] - Used cash from operations for net repayments of $162.1 million under the ABL Credit Facility during 2022[221] - As of December 31, 2022, the company had $165.7 million in borrowings outstanding and approximately $305.6 million of availability under its ABL Credit Facility[229][356] - In January 2023, the company acquired Metal-Fab for $131.0 million, funded by borrowings under its ABL Credit Facility, which was increased from $475 million to $625 million to support the transaction[223][405] Market Risk Disclosures Primary market risks include volatile metals prices impacting profitability and inventory valuation, and fluctuating interest rates on variable-rate debt, partially mitigated by an interest rate swap - The company is exposed to market risk from volatile metals prices, which can significantly affect net sales, gross profits, and inventory valuation[249][250] - The primary interest rate risk exposure is from variable rate debt; a 100 basis point (1.0%) increase in rates from December 31, 2022 levels would increase annual interest expense by approximately $0.9 million[255] - The company utilizes a five-year interest rate swap to fix the interest rate at 2.567% on $75 million of its revolving debt, mitigating some of its exposure to rising rates[256] Financial Statements and Supplementary Data The consolidated financial statements for 2022 received an unqualified opinion from Grant Thornton LLP, with Inventory Valuation noted as a critical audit matter, and key financial results detailed - The independent registered public accounting firm, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[261][271] - The critical audit matter identified by the auditor was Inventory Valuation, due to the subjective judgment required in estimating net realizable value, which is affected by future economic and market conditions[266][267] Key Financial Statement Data (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Income Statement | | | | | Net Sales | $2,559,990 | $2,312,253 | $1,234,144 | | Net Income (Loss) | $90,931 | $121,051 | $(5,595) | | Balance Sheet (Year-End) | | | | | Total Assets | $891,627 | $1,023,572 | N/A | | Total Liabilities | $375,659 | $599,133 | N/A | | Total Shareholders' Equity | $515,968 | $424,439 | N/A | | Cash Flow Statement | | | | | Net Cash from Operating Activities | $185,853 | $(146,374) | $61,652 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes during Q4 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[411] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework; this assessment was audited by Grant Thornton LLP[280][412] - No changes in internal control over financial reporting occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, these controls[413] Part III Directors, Executive Compensation, and Corporate Governance Information for these items is incorporated by reference from the 2023 Annual Meeting of Shareholders definitive proxy statement, with executive officer details in Part I - Information regarding Directors, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accountant Fees and Services is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders[418][419][420] Part IV Exhibits and Financial Statement Schedules This section lists all filed financial statements, schedules, and exhibits, including agreements for the Metal-Fab acquisition and loan facility amendments - The filing includes the Consolidated Financial Statements and Schedule II – Valuation and Qualifying Accounts[425][426] - Key exhibits filed include the Stock Purchase Agreement for the Metal-Fab acquisition (Exhibit 2.2) and the Joinder and Sixth Amendment to the Loan and Security Agreement (Exhibit 4.32), which increased the credit facility and updated the reference rate to SOFR[428][429]