Olympic Steel(ZEUS) - 2023 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the three and nine months ended September 30, 2023, and 2022, including balance sheets, income statements, cash flows, and shareholder equity Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $992,806 | $891,627 | | Total Current Assets | $641,900 | $658,106 | | Goodwill | $43,690 | $10,496 | | Intangible assets, net | $84,028 | $32,035 | | Total Liabilities | $443,485 | $375,659 | | Credit facility revolver | $196,527 | $165,658 | | Total Shareholders' Equity | $549,321 | $515,968 | Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $526,411 | $634,437 | $1,668,755 | $2,039,946 | | Operating Income | $20,885 | $19,086 | $64,380 | $126,073 | | Net Income | $12,230 | $12,046 | $37,121 | $86,972 | | Diluted EPS | $1.06 | $1.04 | $3.21 | $7.53 | - For the nine months ended Sep 30, 2023, net cash from operating activities was $121.0 million, compared to $98.3 million for the same period in 2022[13] - Net cash used for investing activities was $148.9 million, largely due to the $129.5 million Metal-Fab acquisition[13] - On January 3, 2023, the company acquired Metal-Fab for a cash purchase price of $131.2 million[33] - On October 2, 2023, the company acquired Central Tube and Bar, Inc. (CTB) for $37.8 million[91] - For the nine months ended Sep 30, 2023, carbon flat products contributed the most to net sales ($940.9M), followed by specialty metals ($446.3M) and tubular/pipe products ($281.5M)[85][88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion provides perspective on the company's financial condition and operational results, detailing segment performance, liquidity, capital resources, debt arrangements, and critical accounting policies - Q3 2023 net sales decreased 17.0% YoY to $526.4M, driven by a 16.2% decrease in average selling prices, while gross profit margin expanded to 21.3% from 16.9% in Q3 2022[116][120] - The acquisition of Metal-Fab on January 3, 2023, contributed to sales and increased operating expenses within the carbon flat products segment[116][121] - The company recorded a $4.0 million employee retention credit in Q3 2023, which reduced operating expenses across various categories[31][174] - As of September 30, 2023, the company had approximately $375 million of availability under its ABL Credit Facility, which was upsized to $625 million in January 2023 to fund the Metal-Fab acquisition[59][165][169] Consolidated Operations Consolidated net sales for Q3 2023 decreased by 17.0% to $526.4 million, primarily due to a 16.2% drop in average selling prices, though gross profit margin expanded to 21.3% Q3 2023 vs Q3 2022 Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $526,411 | $634,437 | -17.0% | | Gross Profit | $111,931 | $106,971 | +4.6% | | Gross Margin | 21.3% | 16.9% | +4.4 p.p. | | Operating Income | $20,885 | $19,086 | +9.4% | | Net Income | $12,230 | $12,046 | +1.7% | Nine Months 2023 vs 2022 Performance (in thousands) | Metric | 9M 2023 | 9M 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,668,755 | $2,039,946 | -18.2% | | Gross Profit | $359,767 | $396,827 | -9.3% | | Gross Margin | 21.6% | 19.5% | +2.1 p.p. | | Operating Income | $64,380 | $126,073 | -49.0% | | Net Income | $37,121 | $86,972 | -57.4% | - Operating expenses increased by 3.6% in Q3 2023 YoY, mainly due to Metal-Fab's expenses, partially offset by lower performance-based compensation and a $4.0 million employee retention credit[121][31] - Interest expense increased to $4.0 million in Q3 2023 from $3.0 million in Q3 2022 due to a higher effective borrowing rate (5.9% in 9M 2023 vs 2.9% in 9M 2022)[123] Segment Operations This section breaks down the performance of the three business segments, highlighting declines in Specialty Metals, improved margins and acquisition contributions in Carbon Flat Products, and LIFO income benefits in Tubular and Pipe Products - Specialty Metals Flat Products: Q3 2023 net sales fell 29.5% YoY to $132.8M, with operating income dropping to $4.7M from $15.1M, driven by an 18.3% decrease in tons sold and a 13.7% decrease in average selling price per ton[128][130][131] - Carbon Flat Products: Q3 2023 net sales decreased 9.5% YoY to $304.5M, but operating income surged to $9.9M from $1.7M, driven by a higher gross margin (20.3% vs 12.7%) and Metal-Fab acquisition contributions[137][139][142][144] - Tubular and Pipe Products: Q3 2023 net sales declined 18.8% YoY to $89.2M, while operating income increased to $10.0M from $7.1M, aided by $2.0M in LIFO income and a gross margin expansion to 32.3% from 24.1%[145][147][149] - Corporate expenses decreased by 21.8% in Q3 2023 to $3.8 million, primarily due to lower performance-based compensation and employee retention credits, offsetting acquisition-related costs[152] Liquidity, Capital Resources and Cash Flows The company maintains strong liquidity with $121.0 million in cash from operations and $375 million available under its ABL Credit Facility, which was increased to fund the Metal-Fab acquisition - Generated $121.0M from operations in the first nine months of 2023, compared to $98.3M in the same period of 2022[155] - Used $148.9M for investing activities, primarily for the $129.5M Metal-Fab acquisition and $19.6M in capital expenditures[158][159] - Generated $24.8M from financing activities, mainly from $30.9M in net borrowings under the ABL facility[160] - The ABL Credit Facility was amended and increased to $625 million in January 2023, with $375 million of availability as of September 30, 2023, and compliance with all covenants[165][169] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from fluctuating metals prices and interest rates, which are partially mitigated by an interest rate hedge and occasional nickel swaps - The company's results are significantly impacted by the cyclical and volatile nature of metals pricing, affecting revenue, gross profit, and inventory valuation[176][177] - Primary interest rate risk from variable-rate debt under the ABL Credit Facility is partially mitigated by a five-year fixed-rate interest rate hedge on $75 million of borrowings, amended to 2.42% (based on SOFR) in January 2023[182] - Inflation increases costs for wages, transportation, energy, and materials, and while not material recently, it may become a significant factor in the future[180] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during Q3 2023 - The Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[183] - No changes occurred in internal control over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the company's internal control[184] Part II. OTHER INFORMATION Other Information This section reports no Rule 10b5-1 trading arrangements by directors or officers and discloses the adoption of the Key Employee Severance Benefit Plan on November 2, 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the quarter ended September 30, 2023[187] - On November 2, 2023, the company's Board of Directors approved the Olympic Steel, Inc. Key Employee Severance Benefit Plan to streamline severance protection for key employees[188][189] - The Severance Plan outlines predetermined payments and benefits for qualifying terminations, including termination without cause, termination following a change in control, or in the event of death or disability[190][191] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Seventh Amendment to the Loan and Security Agreement, the new Key Employee Severance Benefit Plan, and CEO/CFO certifications - Lists filed exhibits, including the Joinder and Seventh Amendment to the Third Amended and Restated Loan and Security Agreement[194] - Exhibit 10.43 is the newly adopted Key Employee Severance Benefit Plan[194] - Includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[194] Signatures The report was duly signed and authorized by the Chief Executive Officer and Chief Financial Officer on November 3, 2023 - The report was duly signed and authorized by the Chief Executive Officer, Richard T Marabito, and the Chief Financial Officer, Richard A Manson, on November 3, 2023[196]