2013 Annual Report
About the Company
Olympic Steel, Inc. (Nasdaq: ZEUS) is a leading U.S. metals service center that specializes in the direct sale and distribution
of large volumes of processed carbon, coated, aluminum and stainless flat-rolled sheet, coil and plate metal products. The
Company also distributes metal tubing, pipe, bar, valves and fittings and highly engineered fabricated pressure parts to
various industrial markets. These products are purchased from domestic and international metal producers, processed and
inventoried by the Company and delivered just-in-time to a diverse customer base. Olympic Steel serves customers in metal
consuming industries, including manufacturers and fabricators of transportation and material handling equipment, construction
and farm machinery, storage tanks, environmental and energy generation equipment, automobiles, food service and electrical
equipment, military vehicles and equipment, as well as general and plate fabricators and metals service centers.
Olympic Steel offers a variety of processing services, including both traditional service center processes of cutting-to-
length, slitting and shearing and higher value-added processes of blanking, tempering, plate burning, laser cutting, precision
machining, welding, fabricating, bending and painting to process metal to specified lengths, widths and shapes pursuant to
specific customer needs.
Financial Information
In thousands, except per-share and ratio data
2013
2012
2011
For the Year
Net sales
Operating income
Net income
Net income per diluted share
Weighted average diluted shares outstanding
Capital expenditures
At Year End
Inventories
Accounts receivable, net
Total assets
Total debt
Shareholders’ equity
Shareholders’ equity per share
Debt-to-equity ratio
$ 1,263,331
$ 1,383,701
$ 1,261,872
19,655
7,647
0.69
11,074
16,098
18,449
2,277
0.21
10,995
23,373
44,468
24,970
2.28
10,951
39,487
$ 286,371
$ 290,023
$ 277,765
115,288
697,349
199,269
298,616
27.24
112,841
705,994
241,711
289,857
26.54
122,579
707,499
244,123
286,576
26.28
0.67 to 1
0.83 to 1
0.85 to 1
2013 Letter to Shareholders
Over the past several years, we have made substantial progress building on Olympic Steel’s foundation in traditional steel
service center distribution. During 2013, we continued to expand and enhance processing capabilities, increasing the scope
of products and services offered in close proximity to key customers and markets. The capital build-out phase of this strategy
is now concluded, and our focus has shifted to generating better financial performance by improving operating efficiency and
growing sales volume. It is my pleasure to provide you highlights from the past year and our plans moving forward.
YEAR IN REVIEW
Early in 2013, business conditions reflected a fragile recovery. Housing and employment data exhibited painfully slow growth,
trailing other post-recession expansions by a wide margin. Through the end of 2013, annual GDP growth averaged less than
2.5% since the “Great Recession” ended 4 1/2 years ago. However, as the year progressed, economic conditions began to
improve. Seasonally adjusted GDP grew 4.1% in the third quarter, before moderating to a 2.4% rate in the final quarter of
2013. This marks a second half pace of 3.3%, up sharply from 1.8% in the first half. Entering 2014, we are cautiously optimistic
that this is not another false start and hope momentum sustains and economic expansion accelerates.
Metal prices rode a similar wave, declining early and rebounding higher in the second half of the year. By the fourth quarter,
volume and prices had improved over 2012 levels, however, not by enough to offset earlier softness. For the fiscal year,
volume of carbon flat products was modestly lower versus the prior year.
In 2013, other product categories performed better for us than carbon steel. Sales of specialty metals grew to more than $160
million and represented 13% of consolidated revenue, up from 10% in 2012. This was due to higher stainless steel volume
in the transportation and food service industries and healthy sales of aluminum products in the automotive sector. Olympic
Steel’s market share in stainless steel has grown from around 1% five years ago to 4.3% last year. We are earning a larger
share of these strategic markets by bundling in-house processing services with our traditional metal procurement and inventory
management capabilities. This enables customers to run leaner operations by reducing working capital requirements, which
provides them an opportunity to improve their cash flow.
The pipe and tubular products segment had another strong year. Since our acquisition of Chicago Tube & Iron in 2011, this
subsidiary has been consistently accretive to earnings. Today we inventory and sell these products from our flat-rolled facilities
in Ohio, Kentucky, Georgia and Mexico. By utilizing available warehouse space in our flat products segment, we expended
very little capital to increase distribution and cross-selling opportunities.
FINANCIAL REVIEW
Compared with the Company’s all-time record high of $1.4 billion of net sales in 2012, full-year net sales in 2013 were $1.3
billion, a decline of 9%. However, net income tripled to $7.6 million, or $0.69 per diluted share, up from $2.3 million, or $0.21
per diluted share, in the previous year. Net income in 2012 was encumbered by a $6.6 million pre-tax goodwill impairment
charge and a higher effective income tax rate. In 2013, we benefited from $3.6 million in pre-tax LIFO income, which added
$0.19 to reported earnings per diluted share.
Operating income improved and free cash flow was generated in 2013, as we wound down the expansion phase of our multi-
year growth strategies. Higher earnings, inventory reductions and smart working capital management nearly doubled the
amount of cash generated from operating activities to $55 million, up from $28 million in 2012. Most of the cash generated
during the year was used to reduce debt by $42 million. More than $110 million in debt has been paid down in less than two
years, since it peaked in May 2012, at $310 million. Total debt stood at $199 million, lowering our debt-to-equity ratio from 83%
at the end of last year, to 67% at the end of 2013.
OPERATING AND STRATEGIC REVIEW
Our primary focus has shifted from expanding capacity to increasing sales volume and generating better bottom-line results.
By collaborating to produce sub-assemblies, fabrications and part kits, and integrating into customers’ supply chains, we
are developing long-term competitive advantages for ourselves and customers. This is how our expertise in procurement,
processing and inventory management will create value over time.
Just-in-time manufacturing has become the norm, and customers cannot tolerate waiting for late deliveries. We service some
customers multiple times each day, perpetually replenishing material inventories for production. Our products are in our
customers’ product lines often within hours of arrival. This lessens capital needed for floor space and raw material inventory,
and improves our customers’ operating efficiencies and return on invested capital.
2013 Letter to Shareholders
In addition to enabling current domestic OEMs to run leaner operations, our strategy has perfectly positioned us to serve
manufacturers onshoring operations back to North America. Global manufacturers have started taking advantage of the better
economics of operating in the United States. This is an emerging trend and one that has the potential to substantially improve
our markets. The wage gap is narrowing and currency risks are eroding historical advantages of offshoring. This is all very
good news for Olympic Steel!
OUR COMMUNITIES AND PEOPLE
This past year was monumental not only in continuing our transformation, but also in the internal development of our
management team. I would like to recognize a few of the people who have been instrumental to our success and the recent
positive changes at Olympic Steel. These appointments signify our ability to internally develop professional talent, as well as
provide progressive opportunities for career advancement.
Promotions last year included tapping Raymond Walker as President and Chief Operating Officer-Flat Rolled. Ray has been
with Olympic Steel for 28 years and now oversees all of the Company’s flat rolled operations in this new role. John Howard
was welcomed to the newly created position of Director, Operational Excellence in October. We look forward to his important
contributions as we execute on process improvements to enhance operating efficiency and net income. John Mooney, a
25-year Olympic Steel veteran, was promoted to assume Ray’s former role as Vice President-Eastern Region, and Jeremy
Thiessen was promoted to the newly created position of General Manager-Mount Sterling, Ky. Jeremy has worked at Olympic
Steel for the past 19 years. Additionally, Zachary Siegal was promoted to the position of General Manager-Cleveland.
We were also pleased by the outside recognition of our senior management team. Our Chief Information Officer, Esther
Potash, was named “CIO of the Year” by Crain’s Cleveland Business. This was soon followed by the same publication naming
our Chief Financial Officer, Richard Marabito, “CFO of the Year.” These accolades further illustrate the caliber of the leadership
who come to work every day at Olympic Steel and make our achievements possible.
Even with all the success among the people who make Olympic Steel the well-respected company it has become, we were
saddened this year by the passing of our Founder and Chairman Emeritus Sol Siegal. His grace and genuine concern for the
well-being of employees, customers and our communities will always be remembered.
In closing, according to the Metal Center News annual survey, today Olympic Steel is among the top 10 largest steel service
centers in North America. This growth did not happen by chance; rather it is the result of a deliberative and collective team
effort. I want to express sincere appreciation to our shareholders, customers and employees. Your continued support is
invaluable as we execute our clear-cut strategy. We are excited about the future and look forward to our next level of success.
Sincerely,
Michael D. Siegal
March 24, 2014
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
( X )
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Year Ended December 31, 2013
( )
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
(State or other jurisdiction of incorporation or organization)
34-1245650
(I.R.S. Employer Identification Number)
22901 Millcreek Boulevard, Suite 650, Highland Hills, OH
(Address of principal executive offices)
44122
(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
Common Stock, without par value
Name of each Exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ( ) No (X)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ( ) No (X)
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one:)
Large accelerated filer ( )
Non-accelerated filed ( )
(Do not check if a smaller reporting company)
Accelerated filer (X)
Small reporting company ( )
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ( ) No (X)
As of June 28, 2013, the aggregate market value of voting stock held by nonaffiliates of the registrant based on the closing price at which such stock was
sold on the Nasdaq Global Select Market on such date approximated $222,115,114.
The number of shares of common stock outstanding as of February 27, 2014 was 10,965,459.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days of the close of its fiscal year ended December 31, 2013, portions of which document shall be deemed to be
incorporated by reference in Part III of this Annual Report on Form 10-K from the date such document is filed.
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TABLE OF CONTENTS
Part I
Item 1.
Business .........................................................................................................................................................
Item 1A. Risk Factors ...................................................................................................................................................
Item 1B. Unresolved Staff Comments ..........................................................................................................................
Properties .......................................................................................................................................................
Item 2.
Legal Proceedings .........................................................................................................................................
Item 3.
Mine Safety Disclosures ................................................................................................................................
Item 4.
Executive Officers of the Registrant ..............................................................................................................
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .......................................................................................................................................................
Selected Financial Data .................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................................................................
Financial Statements and Supplementary Data .............................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................
Item 9A. Controls and Procedures ................................................................................................................................
Item 9B. Other Information ..........................................................................................................................................
Part III
Item 10. Directors, Executive Officers and Corporate Governance ............................................................................
Executive Compensation ...............................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......
Item 12.
Certain Relationships and Related Transactions, and Director Independence ..............................................
Item 13.
Principal Accountant Fees and Services ........................................................................................................
Item 14.
Part IV
Item 15.
Exhibits and Financial Statement Schedules ................................................................................................
Signatures ......................................................................................................................................................
Index to Exhibits............................................................................................................................................
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PART I
ITEM 1. BUSINESS
The Company
We are a leading metals service center that operates in two reportable segments; flat products and tubular and pipe
products. We provide metals processing and distribution services for a wide range of customers. Our primary flat products
focus is on the direct sale and distribution of large volumes of processed carbon, coated, aluminum and stainless flat-rolled
sheet, coil and plate products. We sometimes refer to stainless and aluminum as specialty metals. Commencing with the
July 1, 2011 acquisition of Chicago Tube and Iron Company, or CTI, we distribute metal tubing, pipe, bar, valves and
fittings and fabricate pressure parts supplied to various industrial markets. Products that require more value-added
processing generally have a higher gross profit. In addition, tubular and pipe products segment gross profits are generally
higher than our traditional flat products segment gross profits. 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 North, Central and South America. International sales are immaterial to our
consolidated financial results and to the individual segments’ results.
Segment reporting information is contained in Note 17 of Notes to Consolidated Financial Statements, which can be found
in Part II, Item 8 of this Annual Report on Form 10-K and which is incorporated herein by reference.
We are incorporated under the laws of the State of Ohio. Our executive offices are located at 22901 Millcreek Boulevard,
Suite 650, Highland Hills, Ohio 44122. Our telephone number is (216) 292-3800, and our website address is
www.olysteel.com. We are not including the information on our website as a part of, or incorporating it by reference into,
this Annual Report on Form 10-K.
Industry Overview
The metals industry is comprised of three types of entities: metals producers, intermediate metals processors and metals
service centers. Metals producers have historically emphasized the sale of metals to volume purchasers and have generally
viewed intermediate metals processors and metals service centers as part of their customer base. However, all three types of
entities can compete for certain customers who purchase large quantities of metals. Intermediate metals processors tend to
serve as processors in large quantities for metals producers and major industrial consumers of processed metals, including
automobile and appliance manufacturers.
Services provided by metals service centers can range from storage and distribution of unprocessed metal products to
complex, precision value-added metals processing. Metals service centers respond directly to customer needs and
emphasize value-added processing of metals pursuant to specific customer demands, such as cutting-to-length, slitting,
shearing, roll forming, shape correction and surface improvement, blanking, tempering, plate burning and stamping. These
processes produce metals to specified lengths, widths, shapes and surface characteristics through the use of specialized
equipment. Metals service centers typically have lower cost structures than, and provide services and value-added
processing not otherwise available from, metals producers.
End product manufacturers and other metals users seek to purchase metals on shorter lead times and with more frequent
and reliable deliveries than can normally be provided by metals producers. Metals service centers generally have lower
labor costs than metals producers and consequently process metals on a more cost-effective basis. In addition, due to this
lower cost structure, metals service centers are able to handle orders in quantities smaller than would be economical for
metals producers. The benefits to customers purchasing products from metals service centers include lower inventory
levels, lower overall cost of raw materials, more timely response and decreased manufacturing time and expense.
Customers also benefit from a lower investment in buildings and equipment, which allows them to focus on the
engineering, assembly and marketing of their products. We believe that customers’ demands for just-in-time delivery have
made the value-added inventory, processing and delivery functions performed by metals service centers increasingly
important.
1
Corporate History
Our company was founded in 1954 by the Siegal family as a general steel service center. Michael Siegal, the son of one of
the founders, began his career with us in the early 1970s and has served as our Chief Executive Officer since 1984, and as
our Chairman of the Board of Directors since 1994. David Wolfort, our President and Chief Operating Officer, joined us as
General Manager in 1984. In the late 1980s, our business strategy changed from a focus on warehousing and distributing
steel from a single facility with no major processing equipment to a focus on growth, geographic and customer diversity
and value-added processing. An integral part of our growth has been the acquisition and start-up of processing and sales
operations, and the investment in processing equipment. In 1994, we completed an initial public offering and, in 1996, we
completed a follow-on offering of our common stock. In July 2011, we acquired CTI, a private leading distributor of
tubing, pipe, bar, valves, and fittings, which represents our tubular and pipe products segment.
Business Strategy and Objectives
We believe that the metals service center and processing industry is driven by four primary trends: (i) return of domestic
manufacturing processes by North American original equipment manufacturers; (ii) shift by customers to fewer suppliers
that are larger and financially strong; (iii) increased customer demand for more frequent, higher quality products and
services; and (iv) consolidation and globalization of metals industry participants.
In recognition of these industry trends, our focus has been on achieving profitable geographic and product growth through
the start-up and acquisition of service centers, processors, fabricators and related businesses, and investments in people,
information systems, higher value-added processing equipment and services, while continuing our commitment to
expanding and improving our operating efficiencies, sales and servicing efforts.
We are focusing on operational excellence initiatives in order to transform the order-to-delivery process by improving three
key sub-systems:
Operating system: Focused on continuously improving processes through waste and variation elimination using
Lean Six Sigma tools.
Cultural system: Focused on creating the environment to facilitate change and improve the way we work and
create value.
Management system: Focused on creating the measurements and governance structure to support continuous
improvement.
In addition, we are focused on specific operating objectives including: (i) investing in automation and value-added
processing equipment; (ii) managing inventory turnover; (iii) maintaining targeted cash turnover rates; (iv) investing in
technology and business information systems; (v) improving safety awareness; and (vi) improving on-time delivery and
quality performance for our customers.
These operating objectives are supported by:
● A set of core values, which are communicated, practiced and measured throughout the Company.
● Our “flawless execution” program (Fe), which is an internal program that empowers employees to achieve
profitable growth by delivering superior customer service and exceeding customer expectations and
recognizes them for their efforts.
● On-going business process enhancements and redesigns to improve efficiencies and reduce costs.
● New systems and key metric reporting to focus managers on achieving specific operating objectives.
● Alignment of compensation with the financial objectives and performance of the Company and the
achievement of specific financial and operating objectives.
We believe our depth of management, facilities, locations, processing capabilities, inventory, focus on safety, quality and
customer service, extensive and experienced sales force, and the strength of our customer and supplier relationships provide
a strong foundation for implementation of our strategy and achievement of our objectives. Certain elements of our strategy
are set forth in more detail below.
2
Investments and Acquisitions. We have invested in processing and automation equipment to support customer demand and
to respond to the growing trend among original equipment manufacturers (our customers) to outsource non-core production
processes, such as plate processing, machining, welding and fabrication, in order to concentrate on engineering, design and
assembly. When the results of sales and marketing efforts and our financial justifications indicate that there is sufficient
customer demand for a particular product, process or service, we may purchase equipment to satisfy that demand. We also
evaluate our existing equipment to ensure that it remains productive, and we upgrade, replace, redeploy or dispose of
equipment when necessary.
Investments in automated laser cutters, welding lines, paint lines, precision machining equipment, blanking lines, shot
blasters, plate processing equipment and customized temper mills with heavy gauge cut-to-length capabilities have allowed
us to further increase our higher value-added processing services.
On July 1, 2011, we acquired all of the outstanding common shares of CTI. CTI is our tubular and pipe products segment.
CTI stocks, processes and fabricates metal tubing, pipe, bar, valves and fittings and pressure parts at operating facilities
located primarily throughout the Midwestern United States. The acquisition of CTI enhances our commercial opportunities
by adding new product offerings to an expanded customer base and by increasing our distribution footprint.
Our recent capital investments allowed us to further expand our processing and value-added services. In 2013, we opened a
new facility in Latrobe, Pennsylvania and added tube and pipe distribution out of our Cleveland, Ohio and Monterey,
Mexico facilities. Our new specialty metals facility in Streetsboro, Ohio became operational during the third quarter of
2012, and our new temper mill and cut-to-length line in Gary, Indiana became operational at the end of December 2011.
Other capital expenditures were attributable to additional processing equipment at our existing facilities and building
improvements to our new facilities.
Sales and Marketing. We believe that our commitment to quality, service, just-in-time delivery and field sales personnel
has enabled us to build and maintain strong customer relationships. We continuously analyze our customer base to ensure
that strategic customers are properly targeted and serviced, while focusing our efforts to supply and service our larger
customers on a national basis, where we successfully service multi-location customers from multi-location Olympic
facilities. We continue to service our customers with both flat and tubular and pipe products with cross-stocking of
products in certain facilities.
We offer business solutions to our customers through value-added and value-engineered services. We also provide
inventory stocking programs and in-plant Olympic Steel employees located at certain customer locations to help reduce
customers’ costs. Our owned truck fleet further enhances our just-in-time deliveries based on our customers’ requirements.
Our Fe program is a commitment to provide superior customer service while striving to exceed customer expectations. This
program includes tracking actual on-time delivery and quality performance against objectives, and recognition of initiatives
to improve efficiencies, streamline processes or reduce operating expenses at each operation.
We believe our sales force is among the largest and most experienced in the industry. Our sales force makes direct daily
sales calls to customers throughout the continental United States and in Mexico. The continuous interaction between our
sales force and active and prospective customers provides us with valuable market information and sales opportunities,
including opportunities for outsourcing, improving customer service and increased sales.
Our sales efforts are further supported by metallurgists, engineers, technical service personnel and product specialists who
have specific expertise in carbon and stainless steel, aluminum, alloy plate and steel fabrication as well as tubular and pipe
products. Since 2009, we have expanded our stainless steel and aluminum products and added sales personnel to grow sales
in these areas. Our services for specific customers also include integration into our internal business systems to provide cost
efficiencies for both us and our customers.
Management. We believe one of our strengths is the depth, knowledge and experience of our management team. In addition
to our executive officers, members of our senior management team have a diversity of backgrounds within the metals
industry, including management positions at metals producers and other metals service centers. They average 29 years of
experience in the metals industry and 22 years with our companies.
3
Products, Processing Services and Quality Standards
We maintain inventory of carbon, stainless and aluminum coil, plate and sheet products, and tubular and pipe products.
Coil is in the form of a continuous sheet, typically 36 to 96 inches wide, between 0.015 and 0.625 inches thick, and rolled
into 10 to 30 ton coils. Because of the size and weight of these coils and the equipment required to move and process them
into smaller sizes, such coils do not meet the requirements, without further processing, of most customers. Plate is typically
thicker than coil and is processed by laser, plasma or oxygen burning.
Through our CTI subsidiary, we maintain inventory of round, square, and rectangular mechanical and structural tubing;
hydraulic and stainless tubing; boiler tubing; carbon, stainless, and aluminum pipe; and valves and fittings. Overall, CTI
maintains over 30,000 line items within its inventory. CTI provides a variety of value added services to its tube and pipe
product line, including saw cutting, laser cutting, threading and grooving. CTI also fabricates boiler pressure components
for the electric utility industry and other industrial applications.
Customer orders are entered or electronically transmitted into computerized order entry systems, and appropriate inventory
is then selected and scheduled for processing in accordance with the customer’s specified delivery date. We attempt to
maximize yield and equipment efficiency through the use of computer software and by combining customer orders for
processing each coil, plate, tube or pipe to the fullest extent practicable.
Our services include both traditional service center processes of cutting-to-length, slitting, flattening, sawing and shearing
and higher value-added processes of blanking, tempering, plate burning, laser cutting, precision machining, welding,
fabricating, bending, polishing, kitting and painting to process metals to specified lengths, widths and shapes pursuant to
specific customer orders. Cutting-to-length involves cutting metal along the width of the coil. Slitting involves cutting
metal to specified widths along the length of the coil. Shearing is the process of cutting sheet metal. Blanking cuts the metal
into specific shapes with close tolerances. Tempering improves the uniformity of the thickness and flatness of the metals
through a cold rolling process. Plate and laser processing is the process of cutting metal into specific shapes and sizes. Our
forming activities include bending metal. Our machining activities include drilling, milling, tapping, boring and sawing.
Tube processing includes tube bending and end finishing. Finishing activities include shot blasting, grinding, edging and
polishing. Our fabrication activities include additional machining, welding, assembly and painting of component parts.
The following table sets forth, as of December 31, 2013, the major pieces of processing equipment in operation by
segment:
Processing
Equipment
Cutting-to-length
Slitting
Shearing
Blanking
Tempering
Plate processing
Laser processing
Forming
Machining
Painting
Tube processing
Finishing
Total
Flat
Products
13
8
10
4
3
29
26
23
45
4
2
25
192
Tubular and
Pipe Products
11
-
-
-
-
-
6
-
78
1
32
3
131
Total
24
8
10
4
3
29
32
23
123
5
34
28
323
Our quality assurance system, led by certified specialists and engineers, establishes controls and procedures covering all
aspects of our products from the time the material is ordered through receipt, processing and shipment to the customer.
These controls and procedures encompass periodic supplier audits, customer satisfaction surveys, workshops with
customers, inspection equipment and criteria, preventative actions, traceability and certification. We have quality testing
labs adjacent to our temper mill facilities in Cleveland, Ohio and Bettendorf, Iowa.
4
In addition, 24 of our facilities have earned International Organization for Standardization (ISO) 9001:2008 certifications.
Our Detroit operation is also TS-16949 certified. CTI has earned The American Society of Mechanical Engineers S
Certification and The National Board of Boiler & Pressure Vessel Inspectors R Certification. We have met the
requirements for ISO 14001 (environmental management) in most of our facilities. Our office building in Winder, Georgia
has received Leadership in Energy and Environmental Design certification.
Customers and Distribution
We have a diverse customer and geographic base, which helps to reduce the inherent risk and cyclicality of our business.
Net sales to our top three customers, in the aggregate, approximated 11.1%, 10.4% and 11.4% of our consolidated net sales
in 2013, 2012 and 2011, respectively. We serve customers in metals consuming industries, including manufacturers and
fabricators of transportation and material handling equipment, construction, mining and farm equipment, storage tanks,
environmental and energy generation equipment, automobiles, food service and electrical equipment, military vehicles and
equipment, as well as general and plate fabricators and metals service centers. The table below shows the percentage of our
consolidated net sales to the largest industries for the past three years.
Industry
Industrial machinery and equipment manufacturers and their
fabricators
Automobile manufacturers and their suppliers
Residential and commercial construction
Steel service centers
All others <5%
2013
2012
2011
50.2%
8.9%
8.2%
7.4%
25.3%
50.1%
8.4%
6.1%
7.6%
27.8%
51.8%
8.7%
3.9%
8.6%
27.0%
While we ship products throughout the United States, most of our customers are located in the midwestern, eastern and
southern regions of the United States. Most domestic customers are located within a 250-mile radius of one of our
processing facilities, thus enabling an efficient delivery system capable of handling a high frequency of short lead time
orders. We transport our products directly to customers via our in-house truck fleet, which further supports our just-in-time
delivery requirements imposed by our customers, and third-party trucking firms. Products sold to foreign customers, which
have been immaterial to our consolidated results, are shipped either directly from metals producers to the customer or to an
intermediate processor, and then to the customer by rail, truck or ocean carrier. With the addition of our facility in
Monterrey, Mexico, we are able to stock material and service our customers in that country with shorter lead times.
We process our metals to specific customer orders as well as for stocking programs. Many of our larger customers commit
to purchase on a regular basis at agreed upon or indexed prices for periods ranging from three to twelve months. To help
mitigate price volatility risks, these price commitments are generally matched with corresponding supply arrangements, or
to a lesser degree by nickel hedging. Customers notify us of specific release dates as the processed products are required.
Customers typically notify us of release dates anywhere from a just-in-time basis to one month before the release date.
Therefore, we are required to carry sufficient inventory to meet the short lead time and just-in-time delivery requirements
of our customers. CTI produces engineered products for the industrial boiler industry. These products typically take several
months to produce due to their size and complexity. Due to the time required for production, we may require progress
payments throughout the construction period.
The current global economic environment has resulted in increased vendor scrutiny by our customers and potential
customers. We believe our size, our strong financial position and our focus on quality and customer service are
advantageous in maintaining our customer base and in securing new customers.
Raw Materials
Our principal raw materials are carbon, coated and stainless steel and aluminum, in the forms of pipe and tube, flat rolled
sheet, coil 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 material can be volatile due to numerous factors beyond our control,
including general domestic and global economic conditions, labor costs, sales levels, competition, consolidation of metals
producers, fluctuations in the costs of raw materials necessary to produce metals, import duties and tariffs and currency
exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.
5
Inventory management is a key profitability driver in the metals service center industry. We, like many other metals service
centers, maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery
requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we
believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, contracts
with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in
effect at the time we place our orders. We have no long-term, fixed-price metals purchase contracts, except for the pass-
through nickel hedges. When metals prices increase, competitive conditions will influence how much of the price increase
we can pass on to our customers. 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.
Suppliers
We concentrate on developing supply relationships with high-quality metals producers, using a coordinated effort to be the
customer of choice for business critical suppliers. We employ sourcing strategies maximizing the quality, production and
transportation economies of a global supply base. We are an important customer of flat-rolled coil, plate, pipe and tube for
many of our principal suppliers, but we are not dependent on any one supplier. We purchase in bulk from metals producers
in quantities that are efficient for such producers. This enables us to maintain a continued source of supply at what we
believe to be competitive prices. We believe the access to our facilities and equipment, and our high quality customer
services and solutions, combined with our long-standing and continuous prompt pay practices, will continue to be an
important factor in maintaining strong relationships with metals suppliers. We purchase metals at regular intervals from a
number of domestic and foreign producers.
The metals producing supply base has experienced significant consolidation, with a few suppliers accounting for a majority
of the domestic carbon steel market. We purchased approximately 42% and 44% of our total metals requirements from our
three largest suppliers in 2013 and 2012, respectively. Although we have no long-term supply commitments, we believe we
have good relationships with each of our metals suppliers. If, in the future, we are unable to obtain sufficient amounts of
metals on a timely basis, we may not be able to obtain metals from alternate sources at competitive prices. In addition,
interruptions or reductions in our supply of metals could make it difficult to satisfy our customers’ just-in-time delivery
requirements, which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Competition
Our principal markets are highly competitive. We compete with other regional and national metals service centers, single
location service centers and, to a certain degree, metals producers and intermediate metals processors on a regional basis.
We have different competitors for each of our products and within each region. We compete on the basis of price, product
selection and availability, customer service, value-added capabilities, quality, financial strength and geographic proximity.
Certain of our competitors have greater financial and operating resources than we have.
With the exception of certain Canadian or Mexican operations, foreign-located metals service centers are generally not a
material competitive factor in our principal domestic markets.
Management Information Systems
Information systems are an important component of our strategy. We have invested in technologies and human resources as
a foundation for growth. We depend on our Enterprise Resource Planning (ERP) systems for financial reporting,
management decision-making, inventory management, order tracking and fulfillment and production optimization. We
continue to upgrade and consolidate our systems for optimal use of resources and to assure we are taking the best advantage
of technology offerings.
Our information systems focus on the following core application areas:
Inventory Management. Our information systems track the status and cost of inventories by product, location and
process on a daily basis. This information is essential to superior management of inventory.
6
Differentiated Services To Customers. Our information systems support value-added services to customers,
including quality control and on-time delivery monitoring and reporting, just-in-time inventory management and
shipping services.
E-Commerce and Advanced Customer Interaction. We are actively participating in electronic commerce initiatives
to reduce processing cost and time. In addition to full electronic data interchange (EDI) capabilities with our
customers and vendors, we also have implemented extranet sites for specific customers, which are integrated with
our internal business systems.
System and Process Enhancements. We have completed development of business system alternatives to replace
our legacy information systems and have successfully implemented new ERP systems at most of our major
locations and have decommissioned two legacy systems as of December 31, 2013. We continue to roll out these
new systems to provide streamlined business processes, enhanced inventory management, production cost, and
sales information, and reduced technical support requirements. Our business analysts work with our ISO quality
team to identify opportunities for efficiency and improved customer service. We collaborate across the metal
supply chain, working with metal producers, service providers, customers, and industry-sponsored organizations
to develop industry processing standards to drive cost out of the supply chain.
Information security and continuous availability of information processing are of highest priority. Our information
professionals employ proven security and monitoring practices and tools. In case of physical emergency or threat, our new
ERP systems, accounting system, internet and communications systems are duplicated at a secure off-site computing
facility, with migration of our other systems now in progress.
Employees
At December 31, 2013, we employed approximately 1,790 people. Approximately 333 of the hourly plant personnel are
represented by ten separate collective bargaining units. The table below shows the expiration dates of the collective
bargaining agreements.
Facility
Duluth, Minnesota
Locust, North Carolina
Romeoville, Illinois
Minneapolis coil, Minnesota
Indianapolis, Indiana
Minneapolis plate, Minnesota
Detroit, Michigan
St. Paul, Minnesota
Milan, Illinois
Kansas City, Missouri
Expiration date
December 21, 2014
March 4, 2015
May 31, 2015
September 30, 2015
January 29, 2016
March 31, 2017
August 31, 2017
May 25, 2018
August 12, 2018
November 18, 2018
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.
Service Marks, Trade Names and Patents
We conduct our business under the name “Olympic Steel.” A provision of federal law grants exclusive rights to the word
“Olympic” to the U.S. Olympic Committee. The U.S. Supreme Court has recognized, however, that certain users may be
able to continue to use the word based on long-term and continuous use. We have used the name Olympic Steel since 1954,
but are prevented from registering the name “Olympic” and from being qualified to do business as a foreign corporation
under that name in certain states. In such states, we have registered under different names, including “Oly Steel” and
“Olympia Steel.” Our wholly-owned subsidiary, Olympic Steel Lafayette, Inc., does business in certain states under the
names “Olympic Steel Detroit,” “Lafayette Steel and Processing” and “Lafayette Steel.” Our North Carolina operation
conducts business under the name “Olympic Steel North Carolina.” Our Integrity Stainless operation conducts business
7
under the name “Integrity Stainless”. Our CTI North Carolina operation conducts business under the name “CTI Power.”
Our operation in Monterrey, Mexico operates under the name “Metales de Olympic S. de.R.L. de C.V.”
We also hold a trademark for our stainless steel sheet and plate product “OLY-FLATBRITE,” which has a unique
combination of surface finish and flatness.
Government Regulation
Our operations are governed by many laws and regulations, including those relating to workplace safety and worker health,
principally the Occupational Safety and Health Act and regulations thereunder. We believe that we are in material
compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Environmental
Our facilities are subject to certain federal, state and local requirements relating to the protection of the environment. We
believe that we are in material compliance with all environmental laws, do not anticipate any material expenditures to meet
environmental requirements and do not believe that compliance with such laws and regulations will have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Seasonality
Seasonal factors may cause demand fluctuations within the year which could impact our results of operations. However,
due to our diverse customer and geographic base our operations have not shown any material seasonal trends. Typically,
the first half of the year is stronger than the second half of the year, as it contains more ship days and is not impacted by the
seasonal shut-downs in July, November and December due to holidays.
Effects of Inflation
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing
equipment, purchased metals, energy and borrowings under our credit facility. General inflation, excluding the price of
metals and increased distribution and fuel expense, has not had a material effect on our financial results during the past
three years.
Backlog
Because we conduct our operations generally on the basis of short-term orders, we do not believe that backlog is a material
or meaningful indicator of future performance.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities
Exchange Act of 1934. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public
can obtain any documents that are filed by the Company at http://www.sec.gov.
8
In addition, our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K
and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor
Relations” section of our website at www.olysteel.com as soon as reasonably practicable after such reports are
electronically filed with or furnished to the SEC.
Information relating to our corporate governance at Olympic Steel, including our Business Ethics Policy, information
concerning our executive officers, directors and Board committees (including committee charters), and transactions in our
securities by directors and officers, is available free of charge on or through the “Investor Relations” section of our website
at www.olysteel.com. We are not including the information on our website as a part of, or incorporating it by reference
into, this Annual Report on Form 10-K.
9
Forward-Looking Information
This Annual Report on Form 10-K and other documents we file with the SEC contain various forward-looking statements
that are based on current expectations, estimates, forecasts and projections about our future performance, business, our
beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements
in press releases or written statements, or in our communications and discussions with investors and analysts in the normal
course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as “may,”
“will,” “anticipate,” “should,” “intend,” “expect,” “believe,” “estimate,” “project,” “plan,” “potential,” and “continue,” as
well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those
implied by such statements including, but not limited to, those set forth in Item 1A (Risk Factors) below and the following:
● general and global business, economic, financial and political conditions, including the ongoing effects of the
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global economic recovery;
access to capital and global credit markets;
competitive factors such as the availability, global production levels and pricing of metals, industry shipping and
inventory levels and rapid fluctuations in customer demand and metals pricing;
cyclicality and volatility within the metals industry;
the ability of our customers (especially those that may be highly leveraged, and those with inadequate liquidity) to
maintain their credit availability;
the ability of our newer locations to achieve expected results;
events or circumstances that could adversely impact the successful operation of our processing equipment and
operations;
the ability to comply with the terms of our asset-based credit facility and to make the required term loan payments;
the ability of our customers and third parties to honor their agreements related to derivative instruments;
customer, supplier and competitor consolidation, bankruptcy or insolvency;
reduced production schedules, layoffs or work stoppages by our own or our suppliers’ or customers’ personnel;
the success of union contract renewals;
the availability and costs of transportation and logistical services;
the amounts, successes and our ability to continue our capital investments and strategic growth initiatives and our
business information system implementations;
the successes of our operational excellence initiatives to improve our operating systems, cultural systems and
management systems;
the successes of our strategic efforts and initiatives to increase sales volumes, maintain or improve working capital
turnover and free cash flows, manage inventory turnover; improve our customer service, and achieve cost savings;
the timing and outcome of inventory lower of cost or market adjustments;
the inflation or deflation existing within the metals industry, as well as our 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 reserve;
the adequacy of our existing information technology and business system software;
●
● our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends;
● our ability to generate free cash flow through operations and decreased future capital expenditures, reduce
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inventory and repay debt within anticipated time frames;
events or circumstances that could impair or adversely impact the carrying value of any of our assets;
risks and uncertainties associated with intangible assets, including potential impairment charges;
the enacted federal healthcare legislation’s impact on the healthcare benefits required to be provided by us and the
impact of such legislation on our compensation and administrative costs; and
● unanticipated developments that could occur with respect to contingencies such as litigation and environmental
matters, including any developments that would require any increase in our costs for such contingencies.
Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated
events or circumstances after the date hereof, except as otherwise required by law.
10
ITEM 1A. RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K and our other filings with the SEC, the following
risk factors should be carefully considered in evaluating us and our business before investing in our common stock. The
risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, not presently
known to us or otherwise, may also impair our business. If any of the risks actually occur, our business, financial condition
or results of operations could be materially and adversely affected. In that case, the trading price of our common stock
could decline, and investors may lose all or part of their investment.
Risks Related to our Business
Volatile metals prices can cause significant fluctuations in our operating results. Our sales and operating income
could decrease if metals prices decline or if we are unable to pass producer price increases on to our customers.
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, labor costs, sales levels, competition, levels of inventory held by other
metals service centers, consolidation of metals producers, higher raw material costs for the producers of metals, import
duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw
materials for us.
We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times
and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our
inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic
buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are
generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price metals
purchase contracts, except for the nickel hedges. 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 market adjustments as we use 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 revolving credit facility, as well as result in us incurring
inventory or goodwill impairment charges. Changing metals prices therefore could significantly impact our net sales, gross
profit, operating income and net income, and could impair or adversely impact the carrying value of any of our assets.
China is the world’s largest producer and consumer of metals and metals products, which are integral to its current large
scale industrial expansion. This large and growing demand for metals by China has significantly affected the global metals
industry. Actions by domestic and foreign producers, including metals companies in China, to increase production could
result in an increased supply of metals in the United States, which could result in lower prices for our products. Further,
should China experience an economic downturn or slowing of its growth, its metals consumption could decrease and some
of the supply it currently uses could be diverted to the U.S. markets we serve, which could depress metals prices. A decline
in metals prices could adversely affect our sales, gross profits and profitability.
We service industries that are highly cyclical, and any downturn in our customers’ demand could reduce our sales,
gross profits and profitability.
We sell our products in a variety of industries, including capital equipment manufacturers for industrial, agricultural and
construction use, the automotive industry, the utilities industry, and manufacturers of fabricated metals products. Our
largest category of customers is producers of industrial machinery and equipment. Numerous factors, such as general
economic conditions, government stimulus or regulation, availability of adequate credit and financing, consumer
confidence, significant business interruptions, labor shortages or work stoppages, energy prices, seasonality, customer
inventory levels and other factors beyond our control, may cause significant demand fluctuations from one or more of these
industries. Any decrease in demand within one or more of these industries may be significant and may last for a lengthy
period of time. In periods of economic slowdown or recession in the United States, excess customer or service center
inventory or a decrease in the prices that we can realize from sales of our products to customers in any of these industries
could result in lower sales, gross profits and profitability.
11
Approximately 8.9% of our 2013 consolidated net sales were to automotive manufacturers or manufacturers of automotive
components and parts, whom we refer to as automotive customers. Historically, due to the concentration of customers in
the automotive industry, our gross profits on these sales have generally been less than our gross profits on sales to
customers in other industries.
Our success is dependent upon our relationships with certain key customers.
We have derived and expect to continue to derive a significant portion of our revenues from a relatively limited number of
customers. Collectively, our top three customers accounted for approximately 11.1% and 10.4% of our consolidated net
sales in 2013 and 2012, respectively. Many of our larger customers commit to purchase on a regular basis at agreed upon
prices over periods from three to twelve months. We generally do not have long-term contracts with our customers. As a
result, the relationship, as well as particular orders, can generally be terminated with relatively little advance notice. The
loss of any one of our major customers or decrease in demand by those customers or credit constraints placed on them
could have a material adverse effect on our business, our results of operations and our cash flows.
Our newer locations may be unable to achieve expected results, and events or circumstances that could adversely
impact the successful operation of our newer processing equipment and operations could have a material adverse
effect on our results of operations.
We have invested in new facilities and new processing equipment to support customer demand. Although we have
successfully integrated new facilities and installed new processing equipment in the past, we can provide no assurance that
the recent integrations and installations will be successful, or achieve expected results. Risks associated with the integration
and installations include, but are not limited to:
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a significant use of management and employee time;
the possibility that the performance of the new facilities and new equipment does not meet expectations; and
the possibility that disruptions from the integration and installations may make it difficult for us to maintain
relationships with our respective customers, employees or suppliers.
Difficulties associated with the integration of new facilities and installations of new processing equipment could adversely
affect our business, our customer service, our results of operations and our cash flows.
Customer and third-party credit constraints and credit losses could have a material adverse effect on our results of
operations.
Some of our customers may experience difficulty obtaining and/or maintaining credit availability. In particular, certain
customers that are highly leveraged represent an increased credit risk. Some customers have reduced their purchases
because of these credit constraints. Moreover, our disciplined credit policies have, in some instances, resulted in lost sales.
If we have misjudged our credit estimations and they result in future credit losses, lost sales or lost customers, there could
be a material adverse effect on our business, financial condition, results of operations, cash flows and our allowance for
doubtful accounts.
Our implementation of new information systems could adversely affect our results of operations and cash flows.
We are in the process of implementing new information systems and eliminating our legacy operating systems into the new
systems. The objective is to standardize and streamline business processes and improve support for our growing service
center and fabrication business. Risks associated with the phased implementation include, but are not limited to:
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a significant deployment of capital and a significant use of management and employee time;
the possibility that the software vendors may not be able to support the project as planned;
the possibility that the timelines, costs or complexities related to the new system implementations will be
greater than expected;
the possibility that the software, once fully implemented, does not work as planned;
the possibility that benefits from the new systems may be less or take longer to realize than expected;
12
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the possibility that disruptions from the implementation may make it difficult for us to maintain relationships
with our respective customers, employees or suppliers; and
limitations on the availability and adequacy of proprietary software or consulting, training and project
management services, as well as our ability to retain key personnel assigned to the project.
Although we have successfully initiated use of the new systems at most of our locations, we can provide no assurance that
the rollout to the remaining locations will be successful or will occur as planned and without disruption to operations.
Difficulties associated with the design and implementation of new information systems could adversely affect our business,
our customer service, our results of operations and our cash flows.
The failure of our key computer-based systems could have a material adverse effect on our business.
Until our new systems implementations are completed, we maintain separate regional computer-based systems in the
operation of our business and we depend on these systems to a significant degree, particularly for inventory management.
These systems are vulnerable to, among other things, damage or interruption from fire, flood, tornado and other natural
disasters, power loss, computer system and network failures, operator negligence, physical and electronic loss of data or
security breaches and computer viruses. Although we have secure back-up systems off-site, the destruction or failure of any
one of our computer-based systems for any significant period of time could materially adversely affect our business,
financial condition, results of operations and cash flows.
Risks associated with our growth strategy may adversely impact our ability to sustain our growth.
Historically, we have grown internally by increasing sales and services to our existing customers, aggressively pursuing
new customers and services, building or purchasing new facilities and acquiring and upgrading processing equipment in
order to expand the range of customer services and products that we offer. In addition, we have grown through the
acquisition of other service centers and related businesses. We intend to actively pursue our growth strategy in the future.
We have completed a number of expansion projects and completed an acquisition in the past three years. These, or future
expansion or construction projects, could have adverse effects on our results of operations due to the impact of the
associated start-up costs and the potential for underutilization in the start-up phase of a facility. While we are pursuing
potential acquisition targets, we are unable to predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed. Moreover, in pursuing acquisition opportunities, we may
compete for acquisition targets with other companies with similar growth strategies that may be larger and have greater
financial and other resources than we have. Competition among potential acquirers could result in increased prices for
acquisition targets. As a result, we may not be able to consummate acquisitions on satisfactory terms to us, or at all.
The pursuit of acquisitions may divert management’s time and attention away from day-to-day operations. In order to
achieve growth through acquisitions, expansion of current facilities, greenfield construction or otherwise, additional
funding sources may be needed and we may not be able to obtain the additional capital necessary to pursue our growth
strategy on terms that are satisfactory to us, or at all.
Although we expect to finance our future and in-process growth initiatives through borrowings under our credit
facility, we may have to find additional sources of funding, which could be difficult. Additionally, increased leverage
could adversely impact our business and results of operations.
In March 2012, we amended the agreement governing our credit facility. We expect to finance our future and in-process
growth initiatives through borrowings under our credit facility, which matures on June 30, 2016. However, our credit
facility may not be sufficient or available to finance our growth initiatives, and we may have to find additional sources of
financing. It may be difficult for us in the future to obtain the necessary funds and liquidity to run and expand our business.
13
Additionally, if we incur substantial additional debt, including under our credit facility, our leverage could increase as
could the risks associated with such leverage. A high degree of leverage could have important consequences to us. For
example, it could:
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increase our vulnerability to adverse economic and industry conditions;
require us to dedicate a substantial portion of cash from operations to the payment of debt service, thereby
reducing the availability of cash to fund working capital, capital expenditures, dividends and other general
corporate purposes;
limit our ability to obtain additional financing for working capital, capital expenditures, general corporate
purposes or acquisitions;
● place us at a disadvantage compared to our competitors that are less leveraged; and
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increase our costs and limit our flexibility in planning for, or reacting to, changes in our business.
We depend on our senior management team and the loss of any member could prevent us from implementing our
business strategy.
Our success is dependent upon the management and leadership skills of our senior management team. We have
employment agreements, which include non-competition provisions, with our Chief Executive Officer, our President and
Chief Operating Officer, the President of our recently acquired subsidiary, CTI, and our Chief Financial Officer that expire
on January 1, 2018, January 1, 2016, July 1, 2016 and January 1, 2017, respectively. The loss of any member of our senior
management team or the failure to attract and retain additional qualified personnel could prevent us from implementing our
business strategy.
We may not achieve the expected results of our Operational Excellence initiatives.
We are in the process of an Operational Excellence initiative, which is expected to improve our operating systems, cultural
systems and management systems. The initiative is focused on continuously improving processes through waste and
variation elimination using Lean Six Sigma tool. The risks associated with this initiative include, but are not limited to:
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a significant use of management and employee time;
the possibility that the initiative does not meet expectations; and
the possibility that the initiative does not provide the expected economic results.
Difficulties associated with our Operational Excellence initiative could adversely affect our business, our customer service,
our results of operations and our cash flows
Labor disruptions at any of our facilities or those of major customers could adversely affect our business, results of
operations and financial condition.
At December 31, 2013, we employed approximately 1,790 people. Approximately 333 of the hourly plant personnel are
represented by ten separate collective bargaining units. 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.
In addition, many of our larger customers, including those in the automotive industry, have unionized workforces and some
in the past have experienced significant labor disruptions such as work stoppages, slow-downs and strikes. A labor
disruption at one or more of our major customers could interrupt production or sales by that customer and cause that
customer to halt or limit orders for our products. Any such reduction in the demand for our products could adversely affect
our business, financial condition, results of operations and cash flows.
An interruption in the sources of our metals supply could have a material adverse effect on our results of operations.
In recent years, the metals producing supply base has experienced significant consolidation with a few domestic producers
accounting for a majority of the domestic metals market. Collectively, we purchased approximately 42% and 44% of our
total metals requirements from our three largest suppliers in 2013 and 2012, respectively. The number of available
suppliers could be reduced in the future by factors such as further industry consolidation or bankruptcies affecting metals
14
suppliers. Additionally, fewer available suppliers increases the risk of supply disruption through both scheduled and
unscheduled supplier outages. We have no long-term supply commitments with our metals suppliers. If, in the future, we
are unable to obtain sufficient amounts of metals on a timely basis, we may not be able to obtain metals from alternate
sources at competitive prices. In addition, interruptions or reductions in our supply of metals could make it difficult to
satisfy our customers’ just-in-time delivery requirements, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Conversely, the addition of new mill sources and decreased domestic demand could lead to domestic over capacity, which
could lead to a decrease in steel prices.
We may not be able to retain or expand our customer base if the U.S. manufacturing industry continues to erode or
if the U.S. dollar strengthens.
Our customer base primarily includes manufacturing and industrial firms in the United States, some of which are, or have
considered, relocating production operations outside the United States or outsourcing particular functions outside the
United States. Some customers have closed because they were unable to compete successfully with foreign competitors.
Our facilities are primarily located in the United States and, therefore, to the extent that our customers relocate or move
operations where we do not have a presence, we could lose their business.
Some customers have been able to continue to manufacture items in the United States for export to foreign markets, due to
the relative strength of certain foreign currencies against the U.S. dollar. If the U.S. dollar were to strengthen, products
made by U.S. manufacturers could become less attractive to foreign buyers. Less purchases by foreign buyers could reduce
our metals sales to those U.S. manufacturers.
Our business is highly competitive, and increased competition could reduce our market share and harm our
financial performance.
Our business is highly competitive. We compete with metals service centers and, to a certain degree, metals producers and
intermediate metals processors, on a regular basis, primarily on quality, price, inventory availability and the ability to meet
the delivery schedules and service requirements of our customers. We have different competitors for each of our products
and within each region. Certain of these competitors have financial and operating resources in excess of ours. Increased
competition could lower our gross profits or reduce our market share and have a material adverse effect on our financial
performance.
Increases in energy prices would increase our operating costs, and we may be unable to pass all these increases on to
our customers in the form of higher prices.
If our energy costs increase disproportionately to our revenues, our earnings could be reduced. We use energy to process
and transport our products. Our operating costs increase if energy costs, including electricity, diesel fuel and natural gas,
rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price
increases without reducing demand for our products. In addition, we generally do not hedge our exposure to higher prices
via energy futures contracts. Increases in energy and fuel prices will increase our operating costs and may reduce our
profitability if we are unable to pass all of the increases on to our customers.
We are subject to significant environmental, health and safety laws and regulations and related compliance
expenditures and liabilities.
Our businesses are subject to many federal, state and local environmental, health and safety laws and regulations,
particularly with respect to the use, handling, treatment, and disposal of substances and wastes used or generated in our
manufacturing processes. We have incurred and expect to continue to incur expenditures to comply with applicable
environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit
requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial
orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or
remedial actions.
15
We may in the future be required to incur costs relating to the investigation or remediation of property, and for addressing
environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and
former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to
causation or knowledge of contamination. Consequently, we cannot assure you that existing or future circumstances, the
development of new facts or the failure of third parties to address contamination at current or former facilities or properties
will not require significant expenditures by us.
We expect to continue to be subject to environmental and health and safety laws and regulations. It is difficult to predict the
future interpretation and development of environmental and health and safety laws and regulations or their impact on our
future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and
operating costs. Any increase in these costs, or unanticipated liabilities arising for example out of discovery of previously
unknown conditions or more aggressive enforcement actions, could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
The market price for our common stock may be volatile.
Risks Related to Our Common Stock
Historically, there has been volatility in the market price for our common stock. Furthermore, the market price of our
common stock could fluctuate substantially in the future in response to a number of factors, including, but not limited to,
the risk factors described herein. Examples include:
changes in commodity prices, especially metals;
announcement of our quarterly operating results or the operating results of other metals service centers;
changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
the operating and stock performance of other companies that investors may deem comparable;
●
●
●
●
● developments affecting us, our customers or our suppliers;
● press releases, earnings releases or publicity relating to us or our competitors or relating to trends in the metals
service center industry;
inability to meet securities analysts’ and investors’ quarterly or annual estimates or targets of our performance;
sales of our common stock by large shareholders;
the amount of shares acquired for short-term investments;
●
●
●
● general domestic or international economic, market and political conditions;
changes in the legal or regulatory environment affecting our business; and
●
announcements by us or our competitors of significant acquisitions, dispositions or joint ventures, or other
●
material events impacting the domestic or global metals industry.
In the past, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons unrelated to their specific operating
performance. These factors may adversely affect the trading price of our common stock, regardless of actual operating
performance.
In addition, stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or
disproportionate to the operating performance of companies. In the past, some shareholders have brought securities class
action lawsuits against companies following periods of volatility in the market price of their securities. We may in the
future be the target of similar litigation. Securities litigation, regardless of whether our defense is ultimately successful,
could result in substantial costs and divert management’s attention and resources.
Our quarterly results may be volatile.
Our operating results have varied on a quarterly basis during our operating history and are likely to fluctuate significantly
in the future. Our operating results may be below the expectations of our investors or stock market analysts as a result of a
variety of factors, many of which are outside of our control. Factors that may affect our quarterly operating results include,
but are not limited to, the risk factors listed above.
16
Many factors could cause our revenues and operating results to vary significantly in the future. Accordingly, we believe
that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the
results of one quarter as an indication of our future performance. Further, it is our practice not to provide forward-looking
sales or earnings guidance and not to endorse any analyst’s sales or earnings estimates. Nonetheless, if our results of
operations in any quarter do not meet analysts’ expectations, our stock price could materially decrease.
Certain provisions in our charter documents and Ohio law could delay or prevent a change in management or a
takeover attempt that you may consider to be in your best interest.
We are subject to Chapter 1704 of the Ohio Revised Code, which prohibits certain business combinations and transactions
between an “issuing public corporation” and an “Ohio law interested shareholder” for at least three years after the Ohio law
interested shareholder attains 10% ownership, unless the Board of Directors of the issuing public corporation approves the
transaction before the Ohio law interest shareholder attains 10% ownership. We are also subject to Section 1701.831 of the
Ohio Revised Code, which provides that certain notice and informational filings and special shareholder meeting and
voting procedures must be followed prior to consummation of a proposed “control share acquisition.” Assuming
compliance with the notice and information filings prescribed by the statute, a proposed control share acquisition may be
made only if the acquisition is approved by a majority of the voting power of the issuer represented at the meeting and at
least a majority of the voting power remaining after excluding the combined voting power of the “interested shares.”
Certain provisions contained in our Amended and Restated Articles of Incorporation and Amended and Restated Code of
Regulations and Ohio law could delay or prevent the removal of directors and other management and could make a merger,
tender offer or proxy contest involving us that you may consider to be in your best interest more difficult. For example,
these provisions:
allow our Board of Directors to issue preferred stock without shareholder approval;
●
● provide for our Board of Directors to be divided into two classes of directors serving staggered terms;
●
●
limit who can call a special meeting of shareholders; and
establish advance notice requirements for nomination for election to the Board of Directors or for proposing
matters to be acted upon at shareholder meetings.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over
market price or adversely affect the market price of, and the voting and other rights of the holders of our common stock.
These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect
directors other than the candidates nominated by our Board of Directors.
Principal shareholders who own a significant numbers of shares of our common stock may have interests that
conflict with yours.
Michael D. Siegal, our Chief Executive Officer and Chairman of the Board and one of our largest shareholders, owned
approximately 11.4% of our outstanding common stock as of December 31, 2013. Mr. Siegal may have the ability to
significantly influence matters requiring shareholder approval. In deciding how to vote on such matters, Mr. Siegal may be
influenced by interests that conflict with yours.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
In 2013, we relocated our executive office suite from Bedford Heights, Ohio to an 8,600 square foot leased facility in
Highland Hills, Ohio. The new corporate office suite houses executives responsible for the strategic direction and oversight
of all of the Company's combined operations including its flat product and tubular and pipe products segments, as well as
our growing specialty metals product line. The lease expires on August 31, 2023.
We believe that our properties are strategically situated relative to our domestic suppliers, our customers and each other,
allowing us to support customers from multiple locations. This enables us to provide inventory and processing services,
which are available at one operation but not another. Product is shipped from the most advantageous facility, regardless of
where the customer order is taken. The facilities are located in the hubs of major metals consumption markets, and within a
250-mile radius of most of our customers, a distance approximating the one-day driving and delivery limit for truck
shipments. The following table sets forth certain information concerning our principal properties within our flat products
and tubular and pipe products segments:
Operation
Location
Flat Products Segment Facilities
Square
Feet
Function
Cleveland ............................Bedford Heights, Ohio (1)
Bedford Heights, Ohio (1)
Bedford Heights, Ohio (1)
Dover, Ohio
Minneapolis ........................Plymouth, Minnesota
Plymouth, Minnesota
Roseville, Minnesota
Chambersburg ...................Chambersburg, Pennsylvania
Chambersburg, Pennsylvania
Iowa .....................................Bettendorf, Iowa
Kansas City, Missouri
Winder ................................Winder, Georgia
Detroit .................................Detroit, Michigan
Kentucky .............................Mt. Sterling, Kentucky
Mt. Sterling, Kentucky
Gary ....................................Gary, Indiana
Connecticut .........................Milford, Connecticut
Chicago ...............................Schaumburg, Illinois
North Carolina ...................Siler City, North Carolina
Streetsboro ..........................Streetsboro, Ohio
Washington .........................Moses Lake, Washington
Latrobe, Pennsylvania
244,000
121,500
127,000
157,000
150,000
196,800
112,200
62,000
59,500
Corporate offices, coil processing and
distribution center
Coil and plate processing, distribution
center for flat, tubular and pipe
products and offices
Plate processing, distribution center
and offices
Plate processing, fabrication and
distribution center
Coil and plate processing, distribution
center and offices
Plate processing, fabrication,
distribution center and offices
Distribution center for flat and tubular
and pipe products
Plate processing, distribution center
and offices
Plate processing, fabrication,
distribution center and offices
Coil and plate processing, fabrication,
distribution center and offices
43,000 Distribution center and offices
57,000
Coil and plate processing, distribution
center and offices
Coil processing, distribution center
and offices
Plate processing and distribution
center
Distribution center for flat and tubular
and pipe products, offices
Coil processing, distribution center
and offices
Coil processing, distribution center
and offices
Coil and sheet processing, distribution
center and offices
Plate processing, fabrication,
distribution center and offices
Coil and sheet processing, distribution
center and offices
Coil and sheet processing, distribution
center
43,200
50,100 Distribution center
66,200
80,500
74,000
256,000
100,000
107,000
183,000
134,000
285,000
18
Owned or
Leased
Owned
Owned
Leased (2)
Owned
Owned
Owned
Leased (3)
Owned
Owned
Owned
Leased (4)
Owned
Owned
Owned
Owned (5)
Owned
Owned
Owned
Owned
Owned
Leased (6)
Leased (7)
Operation
Location
Flat Products Segment Facilities
Square
Feet
Function
Mexico
Monterrey, Mexico
15,000
Distribution center for flat, tubular
and pipe products
Owned or
Leased
Leased (8)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
The Bedford Heights facilities are all adjacent properties.
This facility is leased from a related party. The lease expires on December 31, 2018 with renewal options.
The lease on this facility expires on November 30, 2016, with renewal options.
The lease on this facility expires on August 31, 2014, with an option to purchase.
50% of the facility is leased to an unrelated party whose lease expires on December 31, 2014.
The lease on this facility expires on May 1, 2016.
The Moses Lake location is comprised of four different facilities. The leases on these facilities expire on February 28, 2014,
March 31, 2014, November 30, 2014 and January 4, 2015, with renewal options.
The lease on this facility expires on June 1, 2014, with an annual renewal option.
In addition to the facilities listed above, we have sales offices located in Media, Pennsylvania; Jacksonville, Florida;
Miami, Florida; Houston, Texas; and Monterrey, Mexico. All of the properties listed in the table as owned are subject to
mortgages securing borrowings under our credit facility. Management believes we will be able to accommodate our
capacity needs for the immediate future at our existing facilities.
Operation
Chicago
St. Paul
Tubular and Pipe Products Segment Locations
Square
Feet
Location
Function
Owned or
Leased
Romeoville, Illinois
363,000
Corporate offices, fabrication and
distribution center
Owned
St. Paul, Minnesota
132,000 Distribution center and offices
Owned
Charlotte
Locust, North Carolina
127,600 Fabrication and offices
Owned
Fond du Lac
Fond du Lac, Wisconsin
117,000 Distribution center and offices
Owned
Indianapolis
Indianapolis, Indiana
79,000 Distribution center and offices
Owned
Quad Cities
Milan, Illinois
57,600 Distribution center and offices
Owned
Des Moines
Ankeny, Iowa
50,000 Distribution center and offices
Owned
Duluth
Duluth, Minnesota
32,400 Distribution center and offices
Leased (1)
Owatonna cutting
Owatonna, Minnesota
23,000 Production cutting center
Owned
(1)
The lease on this facility expires on November 30, 2014.
ITEM 3. LEGAL PROCEEDINGS
We are party to various legal actions that we believe are ordinary in nature and incidental to the operation of our business.
In the opinion of management, the outcome of the proceedings to which we are currently a party will not have a material
adverse effect upon our results of operations, financial condition or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included in this Annual Report on Form 10-K pursuant to Instruction 3 of Item 401(b) of Regulation S-
K. The following is a list of our executive officers and a brief description of their business experience. Each executive
officer will hold office until his successor is chosen and qualified.
Michael D. Siegal, age 61, has served as our Chief Executive Officer since 1984, and as Chairman of our Board of
Directors since 1994. From 1984 until January 2001, he also served as our President. He has been employed by us in a
variety of capacities since 1974. He is the Chair of the Board of Trustees Jewish Federations in North America. He is also
the former Board Chair of the Jewish Federation of Cleveland and currently serves on the Development Corporation for
Israel and the Rock and Roll Hall of Fame and Museum, in Cleveland, Ohio.
David A. Wolfort, age 61, has served as our President since January 2001 and Chief Operating Officer since 1995. He has
been a director since 1987. He previously served as Vice President Commercial from 1987 to 1995, after having joined us
in 1984 as General Manager. Prior thereto, he spent eight years with a primary steel producer in a variety of sales
assignments. Mr. Wolfort is a past director of the Metals Service Center Institute and previously served as Chairman of its
Political Action Committee and Governmental Affairs Committee. He is a trustee of the Board of the Musical Arts
Association (Cleveland Orchestra) and of Ohio University and serves as the Chairman of its Academic Committee and is a
member of the Executive Committee. He also serves as a member of the United States International Trade Committee for
Steel (ITAC).
Richard T. Marabito, age 50, serves as our Chief Financial Officer. He joined us in 1994 as Corporate Controller and
served in this capacity until being named Chief Financial Officer in March 2000. He also served as Treasurer from 1994
through 2002 and again from 2010 through 2012. Prior to joining us, Mr. Marabito served as Corporate Controller for a
publicly traded wholesale distribution company and was employed by a national accounting firm in its audit department.
Mr. Marabito served as a board member and Audit Committee Chairman for Hawk Corporation (ASE: HWK) from 2008
until Hawk was sold in November 2010, and is a Governance board member and Treasurer of the Make-A-Wish
Foundation of Ohio, Kentucky and Indiana. Mr. Marabito serves on the Board of Trustees and as Treasurer for Hawken
School in Cleveland, Ohio. He is also a director and Executive Committee member of the Metals Service Center Institute
and is a past Chairman of its Foundation for Education and Research.
Richard A. Manson, age 45, has served as our Vice President and Treasurer since January 2013 and has been employed by
us since 1996. From March 2010 through December 2012, he served as our Vice President of Human Resources and
Administration. From January 2003 through March 2010, he served as our Treasurer and Corporate Controller. From 1996
through 2002, he served as our Director of Taxes and Risk Management. Prior to joining us, Mr. Manson was employed
for seven years by a national accounting firm in its tax department. Mr. Manson is a Board Member and the Treasurer of
the West Side Catholic Center. He also serves on the Board of Directors of the Boys and Girls Clubs of Cleveland and the
Cleveland Catholic Cemeteries Association. Mr. Manson is a certified public accountant and member of the Ohio Society
of Certified Public Accountants and the American Institute of Certified Public Accountants.
Donald McNeeley, age 59, has served as the President and CEO of CTI, a wholly owned subsidiary of Olympic Steel, Inc.,
since the acquisition on July 1, 2011. He joined CTI in 1972 and has held several operational and executive positions
within the company. After serving as CTI’s Vice President of Operations and subsequently Executive Vice President, in
1990, Dr. McNeeley was appointed President and Chief Operating Officer. He is a former Chairman of the Metals Service
Center Institute. Dr. McNeeley is an adjunct professor at Northwestern University where he teaches in the graduate
engineering program. He serves on the board of directors of Saulsbury Industries in Odessa, Texas, where he chairs the
Audit Committee. Dr. McNeeley also serves on the board of directors of Vail Rubber Industries in St. Joseph, Michigan,
and is a former director of The Committee for Monetary Research in Greenwich, Connecticut.
20
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market under the symbol “ZEUS.” The following table sets forth,
for each quarter in the two-year period ended December 31, 2013, the high and low sales prices of our common stock as
reported by the Nasdaq Global Select Market:
2013
2012
High
Low
High
Low
$
First quarter
Second quarter
Third quarter
Fourth quarter
25.39 $
26.83
29.48
31.68
18.52 $
19.54
24.46
24.56
28.31 $
25.02
19.20
22.21
21.78
15.00
14.77
16.61
Holders of Record
As of February 1, 2014, we estimate there were approximately 50 holders of record and 4,715 beneficial holders of our
common stock.
Dividends
During 2013, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 15,
2013, June 17, 2013, September 16, 2013 and December 16, 2013.
During 2012, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 15,
2012, June 15, 2012, September 17, 2012 and December 17, 2012.
We expect to make regular quarterly dividend distributions in the future, subject to the continuing determination by our
Board of Directors that the dividend remains in the best interest of our shareholders. The agreement governing our credit
facility restricts the amount of dividends that we can pay to $2.5 million annually. Any determinations by the Board of
Directors to pay cash dividends in the future will take into account various factors, including our financial condition, results
of operations, current and anticipated cash needs, plans for expansion and restrictions under our credit agreement and any
agreements governing our future debt. We cannot assure you that dividends will be paid in the future or that, if paid, the
dividends will be at the same amount or frequency.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the quarter ended December 31, 2013.
Recent Sales of Unregistered Securities
We did not have any unregistered sales of equity securities during the quarter ended December 31, 2013.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other data of the Company for each of the five years in the period
ended December 31, 2013. The data presented should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
Income Statement Data:
Net sales
Cost of materials sold
Gross profit (a)
Operating expenses (b)
Operating income (loss)
Interest and other expense on debt
Income (loss) before income taxes
Net income (loss)
Per Share Data:
Net income (loss) - basic (c)
Net income (loss) - diluted
Dividends declared
Shares Outstanding:
Weighted average shares - basic
Weighted average shares - diluted
Balance Sheet Data (as of December 31):
Current assets
Current liabilities
Working capital
Total assets
Total debt
Shareholders' equity
For the Years Ended December 31,
2013
2012
2010
2011
(in thousands, except per share data)
2009
$ 1,263,331 $ 1,383,701 $ 1,261,872 $
999,207 1,113,852 1,008,462
253,410
269,849
264,124
208,942
251,400
244,469
44,468
18,449
19,655
5,953
8,357
6,703
37,485
10,139
12,924
24,970 $
2,277 $
7,647 $
$
805,043 $
650,398
154,645
148,543
6,102
2,305
3,797
2,132 $
523,395
502,134
21,261
118,588
(97,327)
2,217
(99,544)
(61,228)
$
$
$
$
0.69 $
0.69
0.08 $
0.21 $
0.21
0.08 $
2.28 $
2.28
0.08 $
0.20 $
0.20
0.08 $
(5.62)
(5.62)
0.11
11,065
11,074
10,989
10,995
10,937
10,951
10,905
10,918
10,887
10,887
417,631 $
165,633
251,998
697,349
199,269
298,616 $
422,377 $
142,442
279,935
705,994
241,711
289,857 $
420,859 $
139,575
281,284
707,499
244,123
286,576 $
298,809 $
102,625
196,184
429,438
55,235
261,638 $
214,617
66,254
148,363
338,294
-
259,612
The data in the table above includes CTI information since the acquisition on July 1, 2011.
(a) Gross profit is calculated as net sales less the cost of materials sold (includes inventory lower of cost or market
adjustment in 2009 of $81,063 and LIFO income of $3,572 in 2013).
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold (and the inventory lower of
cost or market adjustment in 2009 and LIFO income in 2013). 2012 operating expenses include $6,583 of goodwill
impairment charges related to the Company’s flat products segment.
(c) Calculated by dividing net income (loss) by weighted average shares outstanding.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains 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 this Annual Report on Form 10-K. The following section is qualified in its entirety by the
more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this
Annual Report.
Overview
We are a leading metals service center that operates in two reportable segments; flat products and tubular and pipe
products. We provide metals processing and distribution services for a wide range of customers. Our primary flat products
focus is on the direct sale and distribution of large volumes of processed carbon, coated, aluminum and stainless flat-rolled
sheet, coil and plate products. We sometimes refer to stainless and aluminum as specialty metals. Commencing with the
July 1, 2011 acquisition of Chicago Tube and Iron Company, or CTI, we distribute metal tubing, pipe, bar, valves and
fittings and fabricate pressure parts supplied to various industrial markets. Products that require more value-added
processing generally have a higher gross profit. In addition, tubular and pipe products segment gross profits are generally
higher than our traditional flat products segment gross profits. 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 North, Central and South America. 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; competition; metals pricing, demand, global production
levels and availability; energy prices; pricing and availability of raw materials used in the production of metals; global
supply and inventory held in the supply chain; customers’ ability to manage their credit line 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 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. 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. 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 as we sell existing metals inventory.
Chicago Tube and Iron Company Acquisition
On July 1, 2011, we acquired all of the outstanding common shares of CTI, pursuant to the terms of an Agreement and Plan
of Merger dated May 18, 2011. CTI stocks, processes and fabricates metal tubing, pipe, bar, valves and fittings and
pressure parts at nine operating facilities located primarily throughout the Midwestern United States. The acquisition of
CTI enhances our commercial opportunities by adding new product offerings to an expanded customer base and by
increasing our distribution footprint.
Reportable Segments
We operate in two reportable segments; flat products and tubular and pipe products. 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 our chief operating decision maker, or
CODM, to assess performance and make operating and resource allocation decisions. Our CODM evaluates performance
23
and allocates resources based primarily on operating income (loss). Our operating segments are based on internal
management reporting.
Commencing with the first quarter of 2013, corporate expenses are now reported as a separate line item in the segment
reporting. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., both
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. Prior to 2013, these expenses were included in
the flat products segment’s operating results. The 2012 and 2011 financial information has been revised to reflect the new
reporting structure.
Flat products
The primary focus of our flat products segment is on the direct sale and distribution of large volumes of processed carbon,
coated, aluminum and stainless flat-rolled sheet, coil and plate products. We act as an intermediary between metals
producers and manufacturers that require processed metals for their operations. We serve customers in most metals
consuming industries, including manufacturers and fabricators of transportation and material handling equipment,
construction and farm machinery, storage tanks, environmental and energy generation equipment, automobiles, food
service and electrical equipment, military vehicles and equipment, as well as general and plate fabricators and metals
service centers. We distribute these products primarily through a direct sales force.
The flat products segment has 24 strategically-located processing and distribution facilities in the United States and one in
Monterrey, Mexico. This 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. The flat products
segment distributes these products primarily through a direct sales force.
Tubular and pipe products
The tubular and pipe products segment consists of the CTI business, acquired in 2011. Through our tubular and pipe
products segment, we distribute metals tubing, pipe, bar, valve and fittings and fabricate pressure parts supplied to various
industrial markets. Founded in 1914, CTI operates from nine locations in the midwestern and southeastern United States.
The tubular and pipe products segment distributes its products primarily through a direct sales force.
Results of Operations
2013 Compared to 2012
The following table sets forth certain consolidated income statement data for the years ended December 31, 2013 and 2012
(dollars shown in thousands):
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Operating income
Other income (loss), net
Interest and other expense on debt
Income before income taxes
Income taxes
Net income
2013
$
$ 1,263,331
999,207
264,124
244,469
19,655
(28)
6,703
12,924
5,277
7,647
$
% of net
sales
2012
$
% of net
sales
100.0 $ 1,383,701
1,113,852
269,849
251,400
18,449
47
8,357
10,139
7,862
2,277
79.1
20.9
19.3
1.6
(0.0)
0.6
1.0
0.4
0.6 $
100.0
80.5
19.5
18.2
1.3
0.0
0.6
0.7
0.5
0.2
(a) Includes $3,572 of LIFO income for 2013 (inclusive of a $1,932 out-of-period LIFO adjustment recorded in 2013)
(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. 2012 operating expenses
include $6,583 of goodwill impairment charges related to the Company's flat-product segment.
24
Net sales decreased 8.7% to $1.3 billion in 2013 from $1.4 billion in 2012. Flat products net sales decreased 9.8%, or $111
million, and were 81.3% of total net sales in 2013 compared to 82.2% in 2012. Tubular and pipe products net sales declined
3.7%, or $9 million, and were 18.7% of total net sales in 2013 compared to 17.8% of total net sales in 2012. The decrease
in sales for the year ended December 31, 2013 was due to a 4.1% decline in consolidated sales volume as well as a 4.8%
decline in consolidated average selling prices in 2013 compared to 2012.
Cost of materials sold decreased 10.3% to $1.0 billion in 2013 from $1.1 billion in 2012. The decrease in cost of materials
sold during 2013 was due to a 4.1% decline in consolidated sales volume as well as a 6.4% decline in consolidated cost of
materials sold in 2013 compared to 2012. In the first quarter of 2013, we made an out-of-period adjustment to record
previously unrecognized last-in, first-out (LIFO) income, which resulted in a decrease to cost of materials sold of $1.9
million. The total impact of LIFO income in 2013 was a $3.6 million decrease to cost of materials sold.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 20.9% in 2013 from
19.5% in 2012. Gross profit as a percentage of sales increased in both segments. The impact of LIFO income increased
gross profit by 0.3% of sales in 2013. The increase in gross profit during 2013 was primarily due to the cost of materials
sold decreasing more than selling prices, as well as the impact of LIFO income.
Operating expenses in 2013 decreased $6.9 million, or 2.8%, from 2012. As a percentage of net sales, operating expenses
increased to 19.3% in 2013 from 18.2% in 2012. The decrease in operating expenses resulted primarily from a $6.6 million
goodwill impairment charge related to the flat products segment’s Southern region that was included in operating expenses
in 2012. During 2013, expenses related to medical claims and workers compensation expenses increased $1.0 million over
2012. These expenses are included in “Warehouse and processing”, “Administrative and general” and “Selling” on the
accompanying Consolidated Statements of Comprehensive Income. Selling expenses decreased $2.7 million in 2013
compared to 2012 as a result of decreased variable compensation, decreased discretionary spending and decreased bad debt
expense. Depreciation and occupancy expense increased $2.1 million in 2013 as a result of our recent capital spending on
new facilities and new processing equipment at existing facilities. We continue to monitor and control our expenses,
especially headcount, temporary labor and overtime and discretionary spending to ensure alignment with our sales and
operating income.
Interest and other expense on debt totaled $6.7 million in 2013 compared to $8.4 million in 2012. Our effective borrowing
rate, exclusive of deferred financing fees and commitment fees, was 2.3% in 2013 compared to 2.7% in 2012. The decrease
in interest and other expense on debt in 2013 was primarily attributable to lower average borrowings and lower rate
premiums under our credit facility.
For 2013, income before income taxes totaled $12.9 million compared to income before income taxes of $10.1 million in
2012. 2013 included LIFO income of $3.6 million, inclusive of an out-of-period LIFO income adjustment of $1.9 million
recorded in the first quarter of 2013.
An income tax provision of 40.8% was recorded for 2013, compared to an income tax provision of 77.5% in 2012. The
2012 effective income tax rate was unusually high due to the non-deductibility of the goodwill impairment charge and the
impact of permanent non-deductible tax items applied to a low pre-tax income level in 2012. We expect our 2014 income
tax rate to approximate 39%.
Net income for 2013 totaled $7.6 million or $0.69 per basic and diluted share, compared to net income of $2.3 million or
$0.21 per basic and diluted share for 2012. The impact of LIFO income in 2013 increased earnings per share by $0.19 per
basic and diluted shares. The out-of-period LIFO income adjustment accounted for $0.10 per basic and diluted share of the
increase.
25
Segment Results of Operations
Flat products
The following table sets forth certain income statement data for the flat products segment for the years ended December 31,
2013 and 2012 (dollars shown in thousands, except per ton data):
2013
2012
% of net sales
% of net sales
Direct tons sold
Toll tons sold
Total tons sold
Net sales
Average selling price per ton
Cost of materials sold
Gross profit (a)
Operating expenses (b)
Operating income
$
$
1,007,511
81,226
1,088,737
1,026,769
943
834,994
191,775
179,669
12,106
1,061,603
80,866
1,142,469
1,138,063
996
941,192
196,871
189,841
7,030
100.0 $
81.3
18.7
17.5
1.2 $
100.0
82.7
17.3
16.7
0.6
(a) Gross profit is calculated as net sales less the cost of materials sold.
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold. 2012 operating expenses
include a $6,583 goodwill impairment charge related to the Southern region.
Tons sold decreased 4.7% to 1.09 million tons in 2013 from 1.14 million tons in 2012. Toll tons sold was flat at
approximately 81,000 tons in 2013 and 2012. The decrease in tons sold was due to decreased customer demand during
2013.
Net sales decreased 9.8% to $1.03 billion in 2013 from $1.14 billion in 2012. Average selling prices in 2013 decreased to
$943 per ton, compared to $996 per ton in 2012. The decrease in sales was due to a 4.7% decline in sales volume as well as
a 5.3% decline in the average sell price during 2013. We expect metals prices in the first quarter of 2014 to be higher than
the fourth quarter of 2013.
Cost of materials sold decreased 11.3% to $835.0 million in 2013 from $941.2 million in 2012. The decrease in cost of
materials sold was due to the volume decrease of 4.7% as well as a 6.9% decline in the average cost of materials sold per
ton during 2013 compared to 2012.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 18.7% in 2013 from
17.3% in 2012. The increase in gross profit percentage in 2013 was primarily due to the cost of materials sold decreasing
more than selling prices. The average gross profit per ton sold totaled $176 in 2013 and $172 in 2012. During 2013, we
increased the proportion of our product sales mix that contained more processing, which also contributed to the higher
gross profit percentage and gross profit per ton sold in the current year as compared to 2012.
Operating expenses in 2013 decreased $10.2 million, or 5.4%, from 2012. As a percentage of net sales, operating expenses
increased to 17.5% for 2013 from 16.7% in 2012. Variable operating expenses, such as distribution, warehouse and
processing, and selling expenses, decreased as a result of lower sales volume, net sales and gross profits. Depreciation and
occupancy expenses increased as a result of the recent investments in new facilities. 2012 operating expenses included a
goodwill impairment charge for the Southern region of $6.6 million.
Operating income for 2013 increased to $12.1 million, or 1.2% of net sales, from $7.0 million, or 0.6% of net sales in 2012.
26
Tubular and pipe products
The following table sets forth certain income statement data for the tubular and pipe products segment for 2013 and 2012
(dollars shown in thousands).
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Operating income
$
$
2013
% of net sales
100.0 $
69.4
30.6
24.3
6.3 $
236,562
164,213
72,349
57,368
14,981
2012
% of net sales
100.0
70.3
29.7
22.4
7.3
245,638
172,660
72,978
54,981
17,997
(a) Includes $3,572 of LIFO income in 2013 (inclusive of a $1,932 out-of-period LIFO adjustment)
(b) Gross profit is calculated as net sales less the cost of materials sold.
(c) Operating expenses are calculated as total costs and expenses less the cost of materials sold.
Net sales decreased 3.7% to $236.6 million in 2013 from $245.6 million in 2012. The decrease in sales was due to a 7.9%
decline in the average selling price offset by a 4.6% increase in sales volume during 2013.
Cost of materials sold decreased 4.9% to $164.2 million in 2013 from $172.7 million in 2012. The decrease in cost of
materials sold was due to a 9.1% decline in the average cost of materials sold per ton offset by a 4.6% increase in sales
volume during 2013 compared to 2012. In the first quarter of 2013, we made an out-of-period adjustment to record
previously unrecognized LIFO income, which resulted in a decrease to cost of materials sold of $1.9 million. Due to the
continued declining prices for metals in 2013, we recorded an additional $1.7 million of LIFO income during 2013. Total
LIFO income recorded in 2013 was $3.6 million.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) totaled 30.6% in 2013 compared to
29.7%, in 2012. The impact of LIFO income increased gross profit by 1.5% of sales in 2013, of which the out-of-period
LIFO income adjustment amounted to 0.8%.
Operating expenses increased $2.4 million to $57.4 million, or 24.3% of net sales, in 2013 compared to $55.0 million, or
22.4% of net sales in 2012. Variable operating expenses such as warehouse and processing, distribution and selling
expenses increased as a result of increased sales volume in 2013.
Operating income for 2013 totaled $15.0 million, or 6.3% of net sales, compared to $18.0 million, or 7.3% of net sales, for
2012. Operating income for 2013 included the impact of LIFO income of $3.6 million, inclusive of the $1.9 million out-of-
period LIFO income adjustment recorded in the first quarter of 2013.
Corporate expenses
Commencing with the first quarter of 2013, corporate expenses are reported as a separate line item in the segment reporting
and are disclosed separately to reconcile segment operating income to consolidated operating income on the Consolidated
Statements of Comprehensive Income. Corporate expenses include the unallocated expenses related to managing the entire
Company (i.e., both 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. Prior to 2013, these
expenses were included in the flat products segment’s operating results.
Corporate expenses totaled $7.4 million in 2013 compared to $6.6 million for 2012. The increase in Corporate expenses in
2013 is attributable to higher variable incentive compensation, increased professional fees and the relocation of certain of
the Company’s executive offices from Bedford Heights, Ohio to Highland Hills, Ohio.
27
2012 Compared to 2011
The following table sets forth certain consolidated income statement data for the years ended December 31, 2012 and 2011
(dollars shown in thousands):
2012
2011 (a)
Net sales
Cost of materials sold
Gross profit (b)
Operating expenses (c)
Operating income
Other income (loss), net
Interest and other expense on debt
Income before income taxes
Income taxes
Net income
$
$
$
1,383,701
1,113,852
269,849
251,400
18,449
47
8,357
10,139
7,862
2,277
% of net sales
100.0 $
80.5
19.5
18.2
1.3
0.0
0.6
0.7
0.5
0.2 $
$
1,261,872
1,008,462
253,410
208,942
44,468
(1,030)
5,953
37,485
12,515
24,970
% of net sales
100.0
79.9
20.1
16.6
3.5
(0.1)
0.5
3.0
1.0
2.0
(a) Includes data for the tubular and pipe products segment since the July 1, 2011 CTI acquisition.
(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. 2012 operating expenses
include $6,583 of goodwill impairment charges related to the Company's flat-products segment.
Net sales increased 9.7% to $1.4 billion in 2012 from $1.3 billion in 2011. The increase in sales for the year ended
December 31, 2012 was due to the July 1, 2011 acquisition of CTI. CTI sales during 2012 totaled $245.6 million compared
to $118.2 million during the six months after the July 1, 2011 acquisition.
Cost of materials sold increased 10.5% to $1.1 billion in 2012 from $1.0 billion in 2011. The increase in cost of materials
sold during 2012 was due to the July 1, 2011 acquisition of CTI and higher cost material. CTI cost of materials sold during
2012 totaled $172.6 million compared to $84.7 million during 2011.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 19.5% in 2012 from
20.1% in 2011. The decrease in gross profit during 2012 was primarily due to market pricing pressures in the flat rolled
segment, as steel prices declined during 2012.
Operating expenses in 2012 increased $42.5 million, or 20.3%, from 2011. As a percentage of net sales, operating expenses
increased to 18.2% in 2012 from 16.7% in 2011. During 2012, higher operating expenses were primarily attributable to a
full year of CTI operating expenses, increased variable expenses, the goodwill impairment charge related to the flat
products Southern region and increased depreciation expense related to our new facilities. CTI operating expenses totaled
$55.0 million during 2012, compared to $26.3 million during 2011, which accounted for 67.5% of the increase. Variable
expenses, such as distribution and warehouse and processing increased during 2012 due to increased shipments in the flat
products segment and increased headcount and operating expenses at our new facilities. The goodwill impairment charge
for the flat products Southern region of $6.6 million was a non-cash, non-recurring charge that accounted for 15.5% of the
operating expense increase. Depreciation expense increased $2.3 million related to our new facilities and new processing
equipment at existing facilities. The increase in depreciation expense accounted for 5.4% of the increase in operating
expenses.
Interest and other expense on debt totaled $8.4 million in 2012 compared to $6.0 million in 2011. Our effective borrowing
rate, exclusive of deferred financing fees and commitment fees, was 2.7% in 2012 compared to 3.1% in 2011. The increase
in interest and other expense on debt in 2012 was primarily attributable to the additional debt incurred for the acquisition of
CTI and higher financing fee amortization. The lower effective borrowing rate in 2012 was a result of lower rate premiums
under our credit facility.
For 2012, income before income taxes totaled $10.1 million, compared to income before income taxes of $37.5 million in
2011. An income tax provision of 77.5% was recorded for 2012, compared to an income tax provision of 33.4% in 2011.
The increase in our 2012 effective income tax rate was mainly due to the non-deductibility of the goodwill impairment
charge and the impact of permanent non-deductible tax items applied to a low pre-tax income level in 2012. The unusually
low 2011 effective income tax rate was mainly due to changes in unrecognized tax benefits during 2011.
28
Net income for 2012 totaled $2.3 million or $0.21 per basic and diluted share, compared to net income of $25.0 million or
$2.28 per basic and diluted share for 2011.
Segment Operations
Flat products
The following table sets forth certain income statement data for the flat products segment for the years ended December 31,
2012 and 2011 (dollars shown in thousands, except per ton data):
2012
2011
% of net sales
% of net sales
Direct tons sold
Toll tons sold
Total tons sold
Net sales
Average selling price per ton
Cost of materials sold
Gross profit (a)
Operating expenses (b)
Operating income
$
$
1,061,603
80,866
1,142,469
1,138,063
996
941,192
196,871
189,841
7,030
1,053,670
72,710
1,126,380
1,143,708
1,015
923,763
219,945
182,683
37,262
100.0 $
82.7
17.3
16.7
0.6 $
100.0
80.8
19.2
16.0
3.2
(a) Gross profit is calculated as net sales less the cost of materials sold.
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold. 2012 operating expenses
include a $6,583 goodwill impairment charge related to the Southern region.
Tons sold increased 1.4% to 1.14 million in 2012 from 1.13 million in 2011. Toll tons sold in 2012 increased as our new
Gary, Indiana temper-mill facility secured customer tolling business.
Net sales remained flat at $1.14 billion in 2012 and 2011. Average selling prices in 2012 decreased to $996 per ton,
compared to $1,015 per ton 2011. In 2012, despite increased tons sold, net sales decreased due to lower average selling
prices.
Cost of materials sold increased 1.9% to $941.2 million in 2012 from $923.8 million in 2011. Cost of materials sold was
higher during 2012 than 2011 as tons sold increased in 2012 and the average cost of inventory was higher entering 2012
than 2011.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 17.3% in 2012 from
19.2% in 2011. The decrease in gross profit during 2012 was primarily due to competitive market pressures associated with
declining prices for metals in 2012, lower gross profit in our start-up locations as we secured new business and the
comparative effect to a rising pricing environment in the first half or 2011.
Operating expenses in 2012 increased $7.2 million, or 3.9%, from 2011. As a percentage of net sales, operating expenses
increased to 16.7% in 2012 from 16.0% in 2011. During 2012, higher operating expenses were primarily attributable to
increased variable expenses, the goodwill impairment charge of the Southern region and increased depreciation expense,
related to our new facilities. Variable expenses, such as distribution and warehouse and processing increased during 2012
due to increased shipments and increased headcount and operating expenses at our new facilities. The goodwill impairment
charge for the Southern region of $6.6 million is a non-cash, non-recurring charge that accounted for 92.0% of the
operating expense increase.
Operating income for 2012 totaled $7.0 million compared to $37.3 million in 2011.
29
Tubular and pipe products
The following table sets forth certain income statement data for the tubular and pipe products segment for 2012 and the
second half of 2011 (dollars shown in thousands).
2012
2011 (a)
Net sales
Cost of materials sold
Gross profit (b)
Operating expenses (c)
Operating income
$
$
245,638
172,660
72,978
54,981
17,997
% of net sales
100.0 $
70.3
29.7
22.4
7.3 $
118,164
84,699
33,465
26,259
7,206
% of net sales
100.0
71.7
28.3
22.2
6.1
(a) Includes data since the July 1, 2011 acquisition.
(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 107.9% to $245.6 million in 2012 from $118.2 million in 2011. The increase was a result of including a
full year of sales in 2012 compared to six months in 2011 after the July 1, 2011 acquisition and increased sales in 2012 over
comparable periods in 2011.
Cost of materials sold increased 103.9% to $172.7 million from $84.7 million in 2011. The increase is a result of including
a full year of cost of materials sold in 2012 compared to six months in 2011 after the July 1, 2011 acquisition.
Gross profits are higher than our traditional flat products segment. As a percentage of net sales, gross profit (as defined in
footnote (b) in the table above) totaled 29.7% in 2012 compared to 28.3% in 2011. As part of purchase price accounting,
certain CTI inventory was adjusted to its fair market value or its selling price on July 1, 2011, and then subsequently
expensed to cost of goods sold. This resulted in lower 2011 tubular and pipe products segment gross profits of
approximately $1.2 million, or 1.0% of segment sales.
Operating expenses were $55.0 million, or 22.4% of net sales, in 2012 compared to $26.3 million, or 22.2% of net sales, in
2011. Operating expenses increased during 2012 due to increased warehouse labor expense and additional overtime
required at the North Carolina facility.
Operating income for 2012 totaled $18.0 million, or 7.3% of net sales, compared to $7.2 million, or 6.1% of net sales, for
the last six months of 2011.
Corporate expenses
Corporate expenses totaled $6.6 million in 2012 compared to $7.0 million for 2011. The decrease in Corporate expenses in
2012 was attributable to lower variable incentive compensation due to lower income before income taxes.
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 facility to fund these requirements.
We believe that funds available under our credit facility, lease arrangement proceeds and the sale of equity or debt
securities, 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 business
acquisitions over at least the next 12 months. 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.
30
2013 Compared to 2012
Operating Activities
During 2013, we generated $54.7 million of net cash from operations, of which $29.1 million was generated from operating
activities and $25.5 million was generated from working capital. During 2012, we generated $27.7 million of net cash from
operations, of which $31.5 million was generated from operating activities and $3.7 million was used for working capital.
Net cash from operations totaled $29.1 million during 2013 and was generated from net income of $7.6 million, and
depreciation and amortization of $23.6 million. Net cash from operations totaled $31.5 million during 2012 and was
generated from net income of $2.3 million, depreciation and amortization of $22.2 million and $6.6 million from the non-
cash goodwill impairment in the Southern region.
Working capital at December 31, 2013 totaled $252.0 million, a $27.9 million decrease from December 31, 2012. The
decrease was primarily attributable to a $24.5 million increase in accounts payable, a $4.6 million decrease in cash and a
$3.7 million decrease in inventory.
Investing Activities
Net cash used for investing activities was $16.1 million during 2013, compared to $22.9 million during 2012. In 2013,
capital expenditures were primarily attributable to the expansion of our tubular and pipe products segment’s St. Paul
facility and additional processing equipment at our flat products and tube and pipe products existing facilities. During 2014,
we expect to continue to limit our capital spending to less than our annual depreciation expense (approximately $21
million).
Financing Activities
In 2013, we used $43.2 million for financing activities, which primarily consisted of $42.4 million of net repayments under
our credit facility, industrial revenue bond and capital lease obligations.
In February 2014, our Board of Directors approved a regular quarterly dividend of $0.02 per share, which is payable on
March 17, 2014 to shareholders of record as of March 3, 2014. Our Board previously approved 2013 regular quarterly
dividends of $0.02 per share, which were paid on each of March 15, 2013, June 17, 2013, September 16, 2013 and
December 16, 2013. Dividend distributions in the future are subject to the availability of cash, the $2.5 million annual
limitation on cash dividends under our ABL Credit Facility (as defined below) and continuing determination by our Board
of Directors that the payment of dividends remains in the best interest of our shareholders.
Debt Arrangements
In March 2012, we amended our existing asset-based credit facility (ABL Credit Facility). The amendment provided,
among other things: (i) a reduction in the applicable margin for loans under our Loan and Security Agreement;
(ii) additional revolving commitments to us in an aggregate principal amount of $50 million, which additional revolving
commitments do not impact our incremental facilities; and (iii) permits certain transactions among us and Metales de
Olympic, S. de R.L. de C.V., an indirect subsidiary of the Company. The amended ABL Credit Facility consisted of a
revolving credit line of $315 million and a $64 million term loan, with monthly principal payments. At December 31, 2013,
the term loan balance was reduced to $49 million. Revolver borrowings are limited to the lesser of a borrowing base,
comprised of eligible receivables and inventories, or $315 million in the aggregate. The ABL Credit Facility matures on
June 30, 2016.
The ABL Credit Facility 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 our availability is less than
12.5% of the aggregate amount of revolver commitments ($39.4 million at December 31, 2013), then we must maintain a
ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.10 to 1.00 for the
most recent twelve fiscal month period; (ii) limitations on dividend payments; (iii) restrictions on additional indebtedness;
and (iv) limitations on investments and joint ventures. Effective with the March 2012 amendment, we have the option to
borrow under our revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.50% or the London
Interbank Offered Rate (LIBOR) plus a premium ranging from 1.50% to 2.00%. The interest rate under our term loan is
based on the agent’s base rate plus a premium ranging from 0.25% to 0.75% or LIBOR plus a premium ranging from
1.75% to 2.25%. The premiums for the revolver and term loan are based on revolver utilization.
31
As of December 31, 2013, we were in compliance with our covenants and had approximately $99.2 million of availability
under the ABL Credit Facility.
As of December 31, 2013, $3.4 million 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
remaining term of the ABL Credit Facility. The amortization of $1.3 million, $1.3 million and $684 thousand for 2013,
2012 and 2011 respectively, is included in “Interest and other expense on debt” on the accompanying Consolidated
Statements of Comprehensive Income.
In June 2012, we entered into a forward starting fixed rate interest rate hedge that commenced in June 2013 in order to
eliminate the variability of cash interest payments on $53.2 million of the outstanding LIBOR-based borrowings under the
ABL Credit Facility. The hedge matures on June 1, 2016 and the notional amount is reduced monthly by the principal
payments on the term loan. The hedge balance as of December 31, 2013 was $48.9 million. The interest rate hedge fixed
the rate at 1.21% plus a premium ranging from 1.75% to 2.25%. Although we are exposed to credit loss in the event of
nonperformance by the other parties to the interest rate hedge agreement, we anticipate performance by the counterparties.
As part of the CTI acquisition, we 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 on April 1st. As of December 31, 2013, $4.3 million
was outstanding on the IRB. The IRB is remarketed annually and is included in “Current portion of long-term debt” on the
accompanying Consolidated Balance Sheets. Interest is payable monthly, with a variable rate that resets weekly. As
security for payment of the bonds, the Company obtained a direct pay bank letter of credit. The letter of credit reduces
annually by the optional principal repayment amount. The interest rate at December 31, 2013 was 0.15% for the IRB debt.
We entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the above IRB. At
December 31, 2013, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement
matures April 2018, but the notional amount is reduced annually by the amount of the optional principal payments on the
bond. Although we are exposed to credit loss in the event of nonperformance by the other party to the interest rate swap
agreement, we anticipate performance by the counterparty.
2012 Compared to 2011
Operating Activities
During 2012, we generated $27.7 million of net cash from operations, of which $31.5 million was generated from operating
activities and $3.7 million was used for working capital. During 2011, we generated $15.8 million of net cash from
operations, of which $57.4 million was generated from operating activities and $41.6 million was used for working capital.
Net cash from operations totaled $31.5 million during 2012 and was generated from net income of $2.3 million,
depreciation and amortization of $22.2 million and $6.6 million from the non-cash goodwill impairment in the Southern
region. Net cash from operations totaled $57.4 million during 2011 and was generated from net income of $25.0 million,
depreciation and amortization of $16.7 million and changes in long-term deferred income taxes of $8.6 million.
Working capital at December 31, 2012 totaled $279.9 million, a $1.3 million decrease from December 31, 2011. The
decrease was primarily attributable to a $9.7 million decrease in accounts receivable and a $5.6 million increase in current
portion of long-term debt, offset by a $12.3 million increase in inventories.
Investing Activities
Net cash used for investing activities was $22.9 million during 2012. During 2012, we spent $23.4 million on capital
expenditures. The expenditures were primarily attributable to a new temper mill facility and equipment in Gary, Indiana, a
second facility in Mt. Sterling, Kentucky, additional processing equipment at our flat products and tube and pipe products
existing facilities, and costs related to the implementation of our new computer systems.
32
Financing Activities
In 2012, we used $4.5 million for financing activities, which primarily consisted of $2.5 million of net repayments under
our ABL Credit Facility and Industrial Revenue Bond.
Our Board of Directors approved regular quarterly dividends of $0.02 per share, which were paid on each of March 15,
2012, June 15, 2012, September 17, 2012 and December 17, 2012.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2013:
Contractual Obligations
(amounts in thousands)
Long-term debt obligations
Interest obligations
Unrecognized tax positions
Other long-term liabilities
Operating leases
Total contractual
obligations
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$ 9,560
$ 199,269
$ -
$ 187,884
(a)
(b)
11,050 4,635 6,372 43 -
(c) 79 27 52 - -
(d) 11,776 216 553 1,044 9,963
(e) 23,722 5,654 8,839 5,917 3,312
$ 1,825
$ 245,896
$ 20,092
$ 203,700
$ 8,829
$ 13,275
(a) See Note 9 to the Consolidated Financial Statements.
(b) Future interest obligations are calculated using the debt balances and interest rates in effect on December 31, 2013.
(c) See Note 15 to the Consolidated Financial Statements. Classification is based on expected settlement dates and the
expiration of certain statutes of limitations.
(d) Primarily consists of accrued bonuses, retirement liabilities and deferred compensation payable in future years.
(e) See Note 14 to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which a
company has (a) made guarantees, (b) a retained or a contingent interest in transferred assets, (c) any obligation under
certain derivative instruments or (d) any obligation under a material variable interest in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk support to a company, or engages in leasing, hedging, or research
and development services within a company.
Other than operating leases, which are disclosed above, and derivative instruments discussed in Note 10, as of December
31, 2013, we had no material off-balance sheet arrangements.
Effects of Inflation
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing
equipment, purchased metals, energy and borrowings under our credit facility. General inflation, excluding increases in the
price of metals and increased distribution expense, has not had a material effect on our financial results during the past
three years.
33
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based on our consolidated financial
statements, 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. Actual results could differ from these estimates under different assumptions
or conditions. On an on-going basis, we monitor and evaluate our estimates and assumptions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in
preparation of our consolidated financial statements:
Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. The allowance is maintained at a level considered appropriate based on historical experience and
specific customer collection issues that we have identified. Estimations are based upon the application of a historical
collection rate to the outstanding accounts receivable balance, 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.
We cannot be certain that the rate of future credit losses will be similar to past experience. We consider all available
information when assessing the adequacy of our allowance for doubtful accounts each quarter.
Inventory Valuation
Inventories are stated at the lower of cost or market and include the costs of the purchased metals, inbound freight, external
and internal processing and applicable labor and overhead costs. Costs of our flat product segment’s inventories, including
flat-rolled sheet, coil and plate products are determined using the specific identification method.
As a result of the acquisition of CTI, certain of our tubular metals products inventory is stated under the LIFO method. At
December 31, 2013, approximately $43.9 million, or 15.3% of consolidated inventory, was reported under the LIFO
method of accounting. The cost of the remainder of CTI’s inventory is determined using a weighted average rolling first-in,
first-out method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired. We perform an
annual impairment test of goodwill for Integrity Stainless and our CTI operations and indefinite-lived intangible assets for
our CTI operation in the fourth quarter, or more frequently if changes in circumstances or the occurrence of events indicate
potential impairment. Events or changes in circumstances that could trigger an impairment review include significant
nonperformance relative to the expected historical or projected future operating results, significant changes in the manner
of the use of the acquired assets or the strategy for the overall business or significant negative industry or economic trends.
Management uses its judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement
for each of the Company’s reporting units that carry goodwill. During 2013, we used a qualitative measurement for the
annual goodwill impairment test for both Integrity Stainless and CTI.
If a quantitative fair value measurement is used, the fair value of each indefinite-lived intangible asset is compared to its
carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. Goodwill is tested by
comparing the fair value of each reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its
fair value, the implied value of goodwill is compared to its carrying value and impairment is recognized to the extent that
the carrying value exceeds the implied fair value.
If a quantitative approach is utilized, we estimate the fair value of goodwill and other indefinite-lived intangible assets
using a discounted cash flow methodology, an income approach, and a publicly traded companies guideline method, a
market approach. Management’s assumptions used for the calculations are based on historical results, projected financial
information and recent economic events. Actual results could differ from these estimates under different assumptions or
conditions which could adversely affect the reported value of goodwill.
34
Long-Lived Assets
We evaluate the recoverability of long-lived assets and the related estimated remaining lives whenever events or
circumstances indicate that the carrying value of its depreciable long-lived assets may not be recoverable. Management
uses its judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for the
analysis. If circumstances are determined to exist where we will do a quantitative fair value analysis, an estimate of the
undiscounted future cash flows produced by the long-lived asset, or grouping of assets, is compared to the carrying value to
determine whether impairment exists. If an asset is determined to be impaired, a loss is recognized to the extent that
carrying value exceeds fair value. Fair value is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the
discounted value of estimated future cash flows. Based on the Company’s analysis in 2013 and 2012, there were no
impairments of the long-lived assets.
Income Taxes
Deferred income taxes on the consolidated balance sheet include, as an offset to the estimated temporary differences
between the tax basis of assets and liabilities and the reported amounts on the consolidated balance sheets, the tax effect of
operating loss and tax credit carryforwards. If we determine that we will not be able to fully realize a deferred tax asset, we
will record a valuation allowance to reduce such deferred tax asset to its net realizable value.
Revenue Recognition
For both direct and toll shipments, revenue is recognized when title and risk of loss is transferred, which generally occurs
upon delivery to our customers. Given the proximity of our customers to our facilities, substantially all of our sales are
shipped and received within one day. Sales returns and allowances are treated as reductions to sales and are provided for
based on historical experience and current estimates and are immaterial to the consolidated financial statements.
The engineered products produced by CTI typically take several months to manufacture due to their size and complexity.
Substantially all projects are completed within six months. The Company may request advance payments from customers
during the production of these products. These payments are included in current short-term liabilities on the Company’s
Consolidated Balance Sheets. Due to their short-term nature, the Company uses the units of delivery method to account for
these contracts. Revenue for the contracts is recognized when the product is shipped and title of the product transfers to the
customers. Revenues for these engineered products accounted for approximately 1.9%, 1.3% and 1.0% of our net sales
during 2013, 2012 and 2011, respectively.
Purchase Price Accounting
Business combinations are accounted for using the purchase method of accounting. This method requires us to record assets
and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost
of the acquisition over the fair value of the net assets acquired is recorded as goodwill. We use valuation specialists, where
necessary, to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities
assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair
values of the assets and liabilities.
Impact of Recently Issued Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible
Assets for Impairment.” This ASU intends to align impairment testing guidance among long-lived asset categories. This
ASU allows the assessment based on qualitative factors to determine whether it is more likely than not that an indefinite-
lived intangible asset is impaired prior to determining whether it is necessary to perform the quantitative impairment test in
accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The
provisions of this ASU are required to be applied to the interim and annual tests performed for fiscal years beginning after
September 15, 2012. We adopted this standard during 2012 and the adoption had no material impact to our financial
statements.
35
In February 2013, the Financial Accounting Standards Board issued ASU No. 2013-02, “Other Comprehensive Income.”
This ASU intends to improve the reporting of reclassifications out of accumulated other comprehensive income by
requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on
the respective line items in net income if the amount being reclassified is required under U.S. generally accepted
accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-
reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this
standard during 2013 and the adoption had no material impact on our financial statements.
In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, “Presentation of an Unrecognized Tax
Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU
No. 2013-11 requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net
operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. ASU No. 2013-11
is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. We
adopted this standard during 2013 and the adoption had no material impact on our financial statements.
36
ITEM 7A. 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, labor costs, sales levels, competition, levels of inventory held by other
metals service centers, consolidation of metals producers, new global capacity by metals producers, higher raw material
costs for the producers of metals, import duties and tariffs and currency exchange rates. This volatility can significantly
affect the availability and cost of raw materials for us.
We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times
and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our
inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic
buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are
generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price metals
purchase contracts. When metals prices increase, competitive conditions will influence how much of the price increase we
can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our
customers, the net sales and profitability of our business could be adversely affected. When metals prices decline, customer
demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and,
consequently, lower gross profits and inventory lower of cost or market 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 goodwill
impairment charges. Changing metals prices therefore could significantly impact our net sales, gross profits, operating
income and net income.
Rising prices result in higher working capital requirements for us and our customers. Some customers may not have
sufficient credit lines or liquidity to absorb significant increases in the price of metals. While we have generally been
successful in the past in passing on producers’ price increases and surcharges to our customers, there is no guarantee that
we will be able to pass on price increases to our customers in the future.
Declining metals prices have generally adversely affected our net sales and net income, while increasing metals prices,
have generally favorably affected our net sales and net income.
Approximately 8.9% of our consolidated net sales in 2013 were directly to automotive manufacturers or manufacturers of
automotive components and parts. Historically, due to the concentration of customers in the automotive industry, our gross
profits on these sales have generally been less than our gross profits on sales to customers in other industries.
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing
equipment, energy and borrowings under our credit facility. General inflation, excluding increases in the price of steel and
increased distribution expense, has not had a material effect on our financial results during the past two years.
We are exposed to the impact of fluctuating metals prices and interest rate changes. During 2013, 2012 and 2011, we
entered into nickel swaps at the request of customers. While these 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-through the economic effect of trading positions that we take with other third parties on
our customers’ behalf.
Our primary interest rate risk exposure results from variable rate debt. If interest rates in the future were to increase
100 basis points (1.0%) from December 31, 2013 rates and, assuming no change in total debt from December 31, 2013
levels, the additional annual interest expense to us would be approximately $1.5 million. We have the option to enter into
30- to 180-day fixed base rate LIBOR loans under the ABL Credit Facility. The Company assumed an interest rate swap
agreement on the $5.9 million of CTI IRB. 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. In June 2012, the Company entered into a
forward starting fixed rate interest rate hedge commencing July 2013 in order to eliminate the variability of cash interest
payments on approximately $53.2 million of the outstanding LIBOR-based borrowings under the ABL Credit Facility. The
balance as of December 31, 2013 was $48.9 million. The hedge matures on June 1, 2016 and the notional amount is
reduced monthly by the principal payments on the term loan. The fixed rate interest rate hedge is accounted for as a cash
flow hedging instrument for accounting purposes. The Company is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swap and fixed interest rate hedge agreements. However, the Company does not
anticipate nonperformance by the counterparties.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Olympic Steel, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ....................................................................................
Management’s Report on Internal Control Over Financial Reporting ....................................................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011 ...
Consolidated Balance Sheets as of December 31, 2013 and 2012 ..........................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011 .......................
Supplemental Disclosures of Cash Flow Information for the Years Ended December 31, 2013, 2012 and 2011 ..
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011 ........
Notes to Consolidated Financial Statements for the Years Ended December 31, 2013, 2012 and 2011 .................
39
40
41
42
43
44
45
46
Page
38
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Olympic Steel, Inc:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Olympic Steel, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 1992. The Company's management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule and on the Company's internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
February 27, 2014
39
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In
making this assessment, our management used the criteria established in Internal Control - Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Based on our assessment,
we concluded that, as of December 31, 2013, our internal control over financial reporting was effective based on those
criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
herein.
40
Olympic Steel, Inc.
Consolidated Statements of Comprehensive Income
For The Years Ended December 31,
(in thousands, except per share data)
Net sales
Costs and expenses
Cost of materials sold (excludes items shown separately below)
Warehouse and processing
Administrative and general
Distribution
Selling
Occupancy
Depreciation
Amortization
Goodwill impairment
Total costs and expenses
Operating income
Asset impairment charge of joint venture real estate
Other income (loss), net
Income before interest and income taxes
Interest and other expense on debt
Income before income taxes
Income tax provision
Net income
Net gain (loss) on interest rate hedge, net of tax ($89) in 2013 and
$362 in 2012
Total comprehensive income
Net income per share - basic
Weighted average shares outstanding - basic
Net income per share - diluted
Weighted average shares outstanding - diluted
2013
2012
2011
$
1,263,331 $
1,383,701 $
1,261,872
999,207
84,332
68,520
35,076
24,905
9,395
21,352
889
-
1,243,676
19,655
-
(28)
19,627
6,703
12,924
5,277
7,647 $
142
7,789 $
0.69 $
11,065
0.69 $
11,074
1,113,852
84,389
68,253
35,009
27,635
8,671
19,971
889
6,583
1,365,252
18,449
(36 )
83
18,496
8,357
10,139
7,862
2,277 $
(579 )
1,698 $
0.21 $
10,989
0.21 $
10,995
1,008,462
72,429
59,156
28,489
24,943
7,879
15,602
444
-
1,217,404
44,468
(953)
(77)
43,438
5,953
37,485
12,515
24,970
-
24,970
2.28
10,937
2.28
10,951
$
$
$
$
The accompanying notes are an integral part of these statements.
41
Olympic Steel, Inc.
Consolidated Balance Sheets
As of December 31,
(in thousands)
Assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net (includes LIFO debit of $3,572 as of December 31, 2013)
Prepaid expenses and other
Total current assets
Property and equipment, at cost
Accumulated depreciation
Net property and equipment
Goodwill
Intangible assets, net
Other long-term assets
Total assets
Current portion of long-term debt
Accounts payable
Accrued payroll
Other accrued liabilities
Total current liabilities
Credit facility revolver
Long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
Liabilities
Preferred stock, without par value, 5,000 shares authorized, no shares issued or
Shareholders' Equity
outstanding
Common stock, without par value, 20,000 shares authorized, 10,964 and 10,942 shares
issued and outstanding
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
2013
2012
3,186 $
115,288
286,371
12,786
417,631
361,368
(170,484 )
190,884
40,787
34,535
13,512
697,349 $
13,090 $
126,012
10,723
15,808
165,633
146,075
40,104
13,445
33,476
398,733
7,782
112,841
290,023
11,731
422,377
347,935
(151,608)
196,327
40,787
35,424
11,079
705,994
15,282
101,471
10,705
14,984
142,442
177,575
48,854
11,410
35,856
416,137
-
-
124,118
(437 )
174,935
298,616
697,349 $
122,272
(579)
168,164
289,857
705,994
$
$
$
$
The accompanying notes are an integral part of these balance sheets.
42
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For The Years Ended December 31,
(in thousands)
Cash flows from (used for) operating activities:
Net income
Adjustments to reconcile net income to net cash from operating
$
activities -
Depreciation and amortization
Purchase price inventory adjustment
Goodwill impairment
Asset impairment of joint venture real estate
(Gain) loss on disposition of property and equipment
Stock-based compensation
Other long-term assets
Other long-term liabilities
Long-term deferred income taxes
Changes in working capital:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable
Change in outstanding checks
Accrued payroll and other accrued liabilities
Net cash from operating activities
Cash flows from (used for) investing activities:
Acquisition of Chicago Tube and Iron, net of cash acquired
Capital expenditures
Proceeds from disposition of property and equipment
Proceeds from assets held for sale
Net cash used for investing activities
Cash flows from (used for) financing activities:
Credit facility revolver borrowings
Credit facility revolver repayments
Principal payments under capital lease obligations
Term loan borrowings
Term loan repayments
Industrial revenue bond repayments
Credit facility fees and expenses
Proceeds from exercise of stock options (including tax benefits)
and employee stock purchases
Dividends paid
Net cash from (used for) financing activities
2013
2012
2011
7,647 $
2,277 $
24,970
23,582
-
-
-
169
1,724
(3,771)
2,265
(2,469)
29,147
(2,447)
3,652
(1,055)
9,282
15,259
843
25,534
54,681
-
(16,098)
20
-
(16,078)
423,232
(454,732)
(1,407)
-
(8,750)
(785)
(3)
122
(876)
(43,199)
22,156
-
6,583
36
(198 )
2,342
(1,619 )
1,251
(1,358 )
31,470
9,738
(12,258 )
1,345
(2,828 )
(126 )
400
(3,729 )
27,741
-
(23,373 )
486
-
(22,887 )
535,360
(528,190 )
(170 )
-
(8,749 )
(755 )
(1,212 )
114
(873 )
(4,475 )
16,730
1,153
-
953
121
806
840
3,235
8,582
57,390
(17,342)
(26,064)
2,304
8,671
4,034
(13,153)
(41,550)
15,840
(148,759)
(39,487)
29
1,887
(186,330)
576,474
(461,304)
(65)
70,000
(3,646)
-
(4,220)
34
(872)
176,401
Cash and cash equivalents:
Net change
Beginning balance
Ending balance
(4,596)
7,782
3,186 $
379
7,403
7,782 $
5,911
1,492
7,403
$
The accompanying notes are an integral part of these statements.
43
Olympic Steel, Inc.
Supplemental Disclosures of Cash Flow Information
For The Years Ended December 31,
(in thousands)
Cash paid during the period
Interest paid
Income taxes paid
Details of acquisition
Fair value of CTI assets acquired
Fair value of CTI liabilities acquired
Cash paid
Less: Cash acquired
Net cash paid for CTI acquisition
2013
2012
2011
5,537 $
7,556 $
7,295 $
6,940 $
5,081
9,159
- $
-
-
-
- $
- $
-
-
-
- $
217,015
57,159
159,856
11,097
148,759
$
$
$
$
The Company incurred a capital lease obligation of $1.6 million when it entered into a lease for its warehouse in
Streetsboro, Ohio during the third quarter of 2011. This non-cash transaction has been excluded from the Consolidated
Statements of Cash Flows for the year ended December 31, 2011. In April 2013, the Company purchased the facility in
Streetsboro, Ohio for $1.4 million. The capital lease obligation of $1.4 million was included in “Current portion of long-
term debt” on the accompanying Consolidated Balance Sheets as of December 31, 2012.
The accompanying notes are an integral part of these statements
44
Olympic Steel, Inc.
Consolidated Statements of Shareholders’ Equity
For The Years Ended December 31,
(in thousands)
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Equity
Balance at December 31, 2010
$ 118,976 $
142,662 $
- $
261,638
Net income
Payment of dividends
Exercise of stock options and employee stock purchases (6
$
- $
-
24,970 $
(872)
shares)
Stock-based compensation
Balance at December 31, 2011
34
806
$ 119,816 $
-
-
166,760 $
Net income
Payment of dividends
Exercise of stock options and employee stock purchases (36
$
- $
-
2,277 $
(873)
- $
-
-
-
- $
- $
-
24,970
(872)
34
806
286,576
2,277
(873)
shares)
Stock-based compensation
Change in fair value of interest rate hedge
Balance at December 31, 2012
114
2,342
-
$ 122,272 $
-
-
-
168,164 $
-
-
(579)
(579) $
114
2,342
(579)
289,857
Net income
Payment of dividends
Exercise of stock options and employee stock purchases
$
- $
-
7,647 $
(876)
- $
-
7,647
(876)
(12 shares)
Stock-based compensation
Change in fair value of interest rate hedge
Balance at December 31, 2013
122
1,724
-
$ 124,118 $
-
-
-
174,935 $
-
-
142
(437) $
122
1,724
142
298,616
The accompanying notes are an integral part of these statements.
45
Olympic Steel, Inc.
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2013, 2012 and 2011
1. Summary of Significant Accounting Policies:
Nature of Business
The Company is a leading U.S. metals service center specializing in the processing and distribution of large volumes of
carbon, coated, aluminum and stainless steel, flat-rolled coil, sheet and plate products and tubular and pipe products from
facilities throughout the United States. Commencing with the July 1, 2011 acquisition of Chicago Tube and Iron Company
(CTI), the Company operates in two reportable segments; flat products and tubular and pipe products. Through its flat
products segment, the Company sells and distributes large volumes of processed carbon, coated, aluminum and stainless
flat-rolled sheet, coil and plate products. Through its tubular and pipe products segment, the Company distributes metals
tubing, pipe, bar, valve and fittings and the fabrication of pressure parts supplied to various industrial markets.
Principles of Consolidation and Basis of presentation
The accompanying consolidated financial statements include the accounts of Olympic Steel, Inc. and its wholly-owned
subsidiaries (collectively, the Company or Olympic), after elimination of intercompany accounts and transactions.
Investment in the Company’s joint venture was accounted for under the equity method.
Reclassifications and revisions
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the
current year's presentation.
During 2013, the Company revised the presentation of the Industrial Revenue Bond (IRB) indebtedness to current portion
of long-term debt on its Consolidated Balance Sheets with a conforming change to the prior period presentation because the
IRB is remarketed on an annual basis. The effect of this revision had no impact on total liabilities, but it revised the total
current liabilities as of December 31, 2012 from $138.1 million to $142.4 million.
In addition, during 2013, the Company revised the presentation of stock-based compensation from cash flows from
financing activities to cash flows from operating activities. The effect of this revision had no impact on total cash flows, but
it revised the Net cash from (used for) financing activities from ($4.1 million) for the year ended December 31, 2012 to
($4.5 million) and revised the Net cash from (used for) operating activities for the year ended December 31, 2012 from
$27.4 million to $27.7 million.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Concentration Risks
The Company is a major customer of flat-rolled coil and plate and tubular and pipe steel for many of its principal suppliers,
but is not dependent on any one supplier. The Company purchased approximately 42%, 44%, and 50% of its total steel
requirements from its three largest suppliers in 2013, 2012 and 2011, respectively.
The Company has a diversified customer and geographic base, which reduces the inherent risk and cyclicality of its
business. The concentration of net sales to the Company’s top 20 customers approximated 30%, 31% and 32% of
consolidated net sales in 2013, 2012 and 2011, respectively. In addition, the Company’s largest customer accounted for
approximately 5%, 4% and 4% of consolidated net sales in 2013, 2012 and 2011, respectively. Sales to industrial
machinery and equipment manufacturers and their fabricators accounted for 50%, 50% and 52% of consolidated net sales
in 2013, 2012 and 2011, respectively.
46
Cash and Cash Equivalents
Cash equivalents consist of short-term highly liquid investments, with a three month or less maturity, which are readily
convertible into cash.
Fair Market Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal
or most advantageous market for the liability in an orderly transaction between market participants on the measurement
date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. To
measure fair value, the Company applies a fair value hierarchy that is based on three levels of inputs, of which the first two
are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
Financial instruments, such as cash and cash equivalents, accounts receivable, accounts payable and the credit facility
revolver, are stated at their carrying value, which is a reasonable estimate of fair value. The fair value of marketable
securities is based on quoted market prices.
Accounts Receivable
The Company’s allowance for doubtful accounts is maintained at a level considered appropriate based on historical
experience and specific customer collection issues that the Company has identified. 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.
Inventories
Inventories are stated at the lower of cost or market and include the costs of purchased metals, inbound freight, external
processing and applicable labor and overhead costs. Costs of our flat products segment’s inventories, including flat-rolled
sheet, coil and plate products are determined using the specific identification method.
As a result of the acquisition of CTI, certain of the Company’s tubular and pipe products inventory is stated under the last-
in, first-out (LIFO) method. At December 31, 2013 and December 31, 2012, approximately $43.9 million, or 15.3% of
consolidated inventory, and $46.7 million, or 16.1% of consolidated inventory, respectively, was reported under the LIFO
method of accounting. The cost of the remainder of CTI’s inventory is determined using a weighted average rolling first-in,
first-out (FIFO) method.
On the Consolidated Statements of Comprehensive Income, “Cost of materials sold (exclusive of items shown separately
below)” consists of the cost of purchased metals, inbound and internal transfer freight, external processing costs, and LIFO
income.
Property and Equipment, and Depreciation
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful
lives of the assets ranging from two to 30 years. The Company capitalizes the costs of obtaining or developing internal-use
software, including directly related payroll costs. The Company amortizes those costs over five years, beginning when the
software is ready for its intended use.
47
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired. We perform an
annual impairment test of goodwill for our Integrity Stainless and CTI operations and indefinite-lived intangible assets for
our CTI operation in the fourth quarter, or more frequently if changes in circumstances or the occurrence of events indicate
potential impairment. Events or changes in circumstances that could trigger an impairment review include significant
nonperformance relative to the expected historical or projected future operating results, significant changes in the manner
of the use of the acquired assets or the strategy for the overall business or significant negative industry or economic
trends. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value
measurement for each of the Company’s reporting units that carry goodwill.
If a quantitative fair value measurement is used, the fair value of each indefinite-lived intangible asset is compared to its
carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. Goodwill is tested by
comparing the fair value of each reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its
fair value, the implied value of goodwill is compared to its carrying value and impairment is recognized to the extent that
the carrying value exceeds the implied fair value.
We estimate the fair value of goodwill and other indefinite-lived intangible assets using a discounted cash flow
methodology, an income approach, and a publicly traded companies guideline method, a market approach. Management’s
assumptions used for the calculations are based on historical results, projected financial information and recent economic
events. Actual results could differ from these estimates under different assumptions or conditions which could adversely
affect the reported value of goodwill.
Income Taxes
The Company, on its consolidated balance sheets, records as an offset to the estimated effect of temporary differences
between the tax basis of assets and liabilities and the reported amounts in its consolidated balance sheets, the tax effect of
operating loss and tax credit carryforwards. If the Company determines that it will not be able to fully realize a deferred tax
asset, it will record a valuation allowance to reduce such deferred tax asset to its realizable value. The Company recognizes
interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a
component of income tax expense.
Revenue Recognition
For both direct and toll shipments, revenue is recognized when title and risk of loss is transferred, which generally occurs
upon delivery to our customers. Given the proximity of the Company’s customers to its facilities, substantially all of the
Company’s sales are shipped and received within one day. Sales returns and allowances are treated as reductions to sales
and are provided for based on historical experience and current estimates and are immaterial to the consolidated financial
statements.
The engineered products produced by CTI typically take several months to produce due to their size and complexity.
Substantially all projects are completed within six months. The Company may request advance payments from customers
during the production of these products. These payments are included in current short-term liabilities on the Company’s
Consolidated Balance Sheet. Due to their short-term nature, the Company uses the units of delivery method to account for
these contracts. Revenue for the contracts is recognized when the product is shipped and title of the product transfers to the
customers. Revenues for these engineered products accounted for approximately 1.9%, 1.3% and 1.0% of our net sales
during 2013, 2012 and 2011, respectively.
Shipping and Handling Fees and Costs
Amounts charged to customers for shipping and other transportation are included in net sales. The distribution expense line
on the accompanying Consolidated Statements of Comprehensive Income is entirely comprised of all shipping and other
transportation costs incurred by the Company in shipping goods to its customers.
Impairment
The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances
that could trigger an impairment review include significant underperformance relative to the expected historical or
48
projected future operating results, significant changes in the manner of the use of the acquired assets or the strategy for the
overall business or significant negative industry or economic trends. The Company records an impairment or change in
useful life whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the
useful life has changed. Based on the Company’s analysis in 2013 and 2012, there were no impairments of the long-lived
assets.
Purchase Price Accounting
Business combinations are accounted for using the purchase method of accounting. This method requires the Company to
record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any
excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company
uses valuation specialists, where necessary, to perform appraisals and assist in the determination of the fair values of the
assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are
critical in determining the fair values of the assets and liabilities.
Stock-Based Compensation
The Company records compensation expense for stock options issued to employees and directors. The Company has
elected to use the modified prospective transition method where compensation expense is recorded prospectively. For
additional information, see Note 13, Equity Plans.
Impact of Recently Issued Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible
Assets for Impairment.” This ASU intends to align impairment testing guidance among long-lived asset categories. This
ASU allows the assessment based on qualitative factors to determine whether it is more likely than not that an indefinite-
lived intangible asset is impaired prior to determining whether it is necessary to perform the quantitative impairment test in
accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The
provisions of this ASU is required to be applied to the interim and annual tests performed for fiscal years beginning after
September 15, 2012. The Company adopted this standard during 2012 and the adoption had no material impact to the
Company’s financial statements.
In February 2013, the Financial Accounting Standards Board issued ASU No. 2013-02, “Other Comprehensive Income.”
This ASU intends to improve the reporting of reclassifications out of accumulated other comprehensive income by
requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on
the respective line items in net income if the amount being reclassified is required under U.S. generally accepted
accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-
reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company
adopted this standard during 2013 and the adoption had no material impact to the Company’s financial statements.
In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, “Presentation of an Unrecognized Tax
Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU
No. 2013-11 requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net
operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. ASU No. 2013-11
is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. The
Company adopted this standard during 2013 and the adoption had no material impact to the Company’s financial
statements.
2. Acquisition of Chicago Tube and Iron Company:
On July 1, 2011, the Company acquired all of the outstanding common shares of CTI pursuant to the terms of an
Agreement and Plan of Merger (the “Merger Agreement”) dated May 18, 2011. CTI stocks, processes and fabricates metal
tubing, pipe, bar, valves and fittings and pressure parts at nine operating facilities located primarily throughout the
Midwestern United States. The Company paid goodwill in conjunction with the acquisition, as CTI enhanced the
Company’s commercial opportunities by adding new product offerings to an expanded customer base and by increasing our
distribution footprint.
49
Concurrent to entering into the Merger Agreement, the Company also entered into the McNeeley Purchase Agreement,
dated as of May 18, 2011 (the “McNeeley Purchase Agreement”), with Dr. McNeeley. Pursuant to the terms of the
McNeeley Purchase Agreement, the Company agreed to pay $5 million to Dr. McNeeley (the “McNeeley Payment”) as a
condition precedent to the Company’s acquisition of CTI.
The McNeeley Payment was made at the date of closing of the acquisition and there were no additional employment or
performance contingencies tied to the McNeeley Payment. Although Dr. McNeeley entered into a post-acquisition
employment agreement with CTI (as a subsidiary of the Company), Dr. McNeeley could have terminated such employment
at any time after the closing (or not have remained a CTI employee) and still have retained the McNeeley Payment.
Pursuant to the accounting guidance in ASC 805-10-55-25, the McNeeley Payment was accounted for as additional
consideration and part of the purchase price because there are no requirements for continuing employment, and Dr.
McNeeley’s post-acquisition compensation is at a reasonable level to that of other key employees and specifically
identified in his employment agreement.
The Company paid total cash consideration of $159.9 million, consisting of a base purchase price of $150 million, plus the
closing cash, working capital and the McNeeley Payments totaling approximately $9.9 million. In addition, the Company
assumed approximately $5.9 million of indebtedness and acquired $11.1 million of cash from CTI. Olympic funded its
acquisition of CTI primarily with borrowings under its asset-based credit facility. During 2011, the Company incurred $919
thousand of direct acquisition-related costs, which are included in “Administrative and general” in the Consolidated
Statement of Operations for the year ended December 31, 2011.
3. Accounts Receivable:
Accounts receivable are presented net of allowances for doubtful accounts and unissued credits of $3.2 million and $2.8
million as of December 31, 2013 and 2012, respectively. Bad debt expense totaled $83 thousand in 2013, $322 thousand in
2012 and $1.1 million in 2011.
The Company’s allowance for doubtful accounts is maintained at a level considered appropriate based on historical
experience and specific customer collection issues that the Company has identified. 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 accounts.
4. Inventories:
Inventories consisted of the following:
(in thousands)
Unprocessed
Processed and finished
Totals
As of December 31,
2013
2012
$
$
219,401 $
66,970
286,371 $
215,526
74,497
290,023
The Company values certain of its tubular and pipe products inventory at the LIFO method. At December 31, 2013 and
December 31, 2012, approximately $43.9 million, or 15.3% of consolidated inventory, and $46.7 million, or 16.1% 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.
In the first quarter of 2013, the Company made an out-of-period adjustment to record previously unrecognized LIFO
income of $1.9 million, which resulted in an increase to after-tax income of $1.2 million. The Company determined that
this adjustment was not material to its current or prior period consolidated financial statements.
50
During 2013, the Company recorded an additional $1.7 million of LIFO income as a result of the continued decline of
metals pricing in 2013. The LIFO income increased the Company’s inventory balance and decreased its cost of materials
sold.
If the FIFO method had been in use, inventories would have been $3.6 million lower than reported at December 31, 2013.
5. Property and Equipment:
Property and equipment consists of the following:
(in thousands)
Land
Land improvements
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Computer software and equipment
Vehicles
Construction in progress
Less accumulated depreciation
Net property and equipment
Depreciable
Lives
-
5-10
7-30
2-15
3-7
2-5
2-5
-
$
$
December 31,
2013
December 31,
2012
16,193 $
2,650
132,299
172,671
6,422
25,844
1,220
4,069
361,368
(170,484)
190,884 $
16,193
2,241
126,438
167,752
6,283
25,351
1,257
2,420
347,935
(151,608)
196,327
Leasehold improvements are included with buildings and improvements and are depreciated over the life of the lease or
seven years, whichever is less.
Construction in progress, as of December 31, 2013, primarily consisted of payments for additional processing equipment at
our existing facilities that was not yet placed into service.
6. Intangible Assets:
Intangible assets, net, consisted of the following as of December 31, 2013 and 2012:
(in thousands)
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Intangible
Assets,
Net
Customer relationships - subject to amortization
Trade name - not subject to amortization
$
$
13,332 $
23,425
36,757 $
(2,222) $
-
(2,222) $
11,110
23,425
34,535
(in thousands)
Customer relationships - subject to amortization
Trade name - not subject to amortization
December 31, 2012
Gross
Carrying
Amount
Accumulated
Amortization
Intangible
Assets,
Net
13,332 $
23,425
36,757 $
(1,333) $
-
(1,333) $
11,999
23,425
35,424
$
$
51
All of the Company’s intangible assets were recorded in connection with its July 1, 2011 acquisition of CTI (See Note 2).
The intangible assets noted above were evaluated on the premise of highest and best use to a market participant, primarily
utilizing the income approach valuation methodology. The useful life of the CTI trade name was determined to be
indefinite primarily due to its history and reputation in the marketplace, the Company’s expectation that the CTI trade name
will continue to be used throughout the life of CTI, and the conclusion that there are currently no other factors identified
that would limit its useful life. The useful life of the CTI customer relationships was determined to be fifteen years, based
primarily on the consistent and predictable revenue source associated with the existing CTI customer base, the present
value of which extends through the fifteen year amortization period. The Company will continue to evaluate the useful life
assigned to our amortizable customer relationships in future periods.
The Company estimates that amortization expense for its intangible assets subject to amortization will be $0.9 million per
year in each of the next five years.
7. Goodwill:
Goodwill, by reportable segment, is as follows as of December 31, 2013 and 2012:
(in thousands)
Balance as of December 31, 2011
CTI acquisition
Impairment of Southern Region
Balance as of December 31, 2012
Acquisitions
Impairments
$
Balance as of December 31, 2013
$
Flat Products
$
Tubular and
Pipe Products
Total
40,171 $
116
-
40,287 $
-
-
40,287 $
47,254
116
(6,583)
40,787
-
-
40,787
7,083 $
-
(6,583)
500 $
-
-
500 $
The goodwill is not deductible for income tax purposes. The goodwill represents the excess of cost over the fair value of
net tangible and intangible assets acquired. The Company paid goodwill in conjunction with the acquisitions, as they
enhance the Company’s commercial opportunities by adding new product offerings to an expanded customer base and by
increasing our distribution footprint.
In accordance with the Accounting Standards Codification, on an annual basis, an impairment test of goodwill is performed
in the fourth quarter or more frequently if changes in circumstances or the occurrence of events indicate potential
impairment. Events or changes in circumstances that could trigger an impairment review include significant
nonperformance relative to the expected historical or projected future operating results, significant changes in the manner
of the use of the acquired assets or the strategy for the overall business or significant negative industry or economic trends.
During the fourth quarter of 2012, the Company engaged an independent third party valuation expert to assist with the
completion of the annual goodwill impairment testing pursuant to Accounting Standards Codification (ASC) Topic 350-20-
35, “Goodwill – Subsequent measurement.” During the step-two impairment analysis of the Flat products segment’s
Southern region, the carrying value of the assets exceed the fair value of the entity which resulted in total impairment of the
goodwill related to the Southern region. The deteriorating steel market conditions in the second half of 2012 resulted in the
Southern region having lower cash flows in the second half of the year than previously projected, which also led to
decreased cash flow projections for the next five years. As a result, the entire $6.6 million of goodwill related to the
Southern region was impaired at December 31, 2012.
The Company completed its annual impairment review of goodwill during the fourth quarter of 2013 and noted no
impairment. The Company is not aware of any triggering events which would require a goodwill impairment test as of
December 31, 2013.
8. Investments in Joint Ventures:
The Company and the United States Steel Corporation each owned 50% of Olympic Laser Processing (OLP), a company
that produced laser welded sheet steel blanks for the automotive industry. OLP ceased operations in 2006. During 2012, the
52
real estate associated with OLP was sold, resulting in a pre-tax loss on sale to the Company of $36 thousand, and the joint
venture was dissolved in December 2012.
9. Debt:
The Company’s debt is comprised of the following components:
(in thousands)
Asset-based revolving credit facility expiring June 30, 2016
Term loan due June 30, 2016
Industrial revenue bonds due April 1, 2018
Capital lease
Total debt
Less current amount
Total long-term debt
As of December 31,
2013
2012
146,075 $
48,854
4,340
-
199,269
(13,090)
186,179 $
177,575
57,604
5,125
1,407
241,711
(15,282)
226,429
$
$
In March 2012, the Company amended its existing asset-based credit facility (ABL Credit Facility). The amendment
provided, among other things: (i) a reduction in the applicable margin for loans under the Company’s Loan and Security
Agreement; (ii) additional revolving commitments to the borrowers in an aggregate principal amount of $50 million, which
additional revolving commitments do not impact the borrowers’ incremental facilities; and (iii) permits certain transactions
among the borrowers and Metales de Olympic, S. de R.L. de C.V., an indirect subsidiary of the Company. The amended
ABL Credit Facility consisted of a revolving credit line of $315 million and a $64 million term loan, with monthly
principal payments. At December 31, 2013, the term loan balance was $49 million. Revolver borrowings are limited to the
lesser of a borrowing base, comprised of eligible receivables and inventories, or $315 million in the aggregate. The ABL
Credit Facility matures on June 30, 2016.
The ABL Credit Facility 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’s
availability is less than 12.5% of the aggregate amount of revolver commitments ($39.4 million at December 31, 2013),
then the Company must maintain a ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed
charges of at least 1.10 to 1.00 for the most recent twelve fiscal month period; (ii) limitations on dividend payments; (iii)
restrictions on additional indebtedness; and (iv) limitations on investments and joint ventures. Effective with the March
2012 amendment, 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 0.50% or the London Interbank Offered Rate (LIBOR) plus a premium ranging from 1.50% to
2.00%. The interest rate under the term loan is based on the agent’s base rate plus a premium ranging from 0.25% to 0.75%
or LIBOR plus a premium ranging from 1.75% to 2.25%. The premiums for the revolver and term loan are based on
revolver utilization.
As of December 31, 2013, the Company was in compliance with its covenants and had approximately $99.2 million of
availability under the ABL Credit Facility.
As of December 31, 2013, $3.4 million 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
remaining term of the ABL Credit Facility. The amortization of $1.3 million, $1.3 million and $684 thousand for 2013,
2012 and 2011 respectively, is included in “Interest and other expense on debt” on the accompanying Consolidated
Statements of Comprehensive Income.
In June 2012, the Company entered into a forward starting fixed rate interest rate hedge that commenced June 2013, in
order to eliminate the variability of cash interest payments on $53.2 million of the outstanding LIBOR-based borrowings
under the ABL Credit Facility. The hedge matures on June 1, 2016 and the notional amount is reduced monthly by the
principal payments on the term loan. The balance as of December 31, 2013 was $48.9 million. The interest rate hedge fixed
the rate at 1.21% plus a premium ranging from 1.75% to 2.25%. Although the Company is exposed to credit loss in the
event of nonperformance by the other parties to the interest rate hedge agreement, the Company anticipates performance by
the counterparties.
53
As part of the CTI acquisition, the Company assumed approximately $5.9 million of 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 on April 1st. As of December 31, 2013 $4.3 million was outstanding on
the IRB. The IRB is remarketed annually and is included in “Current portion of long-term debt” on the accompanying
Consolidated Balance Sheets. Interest is payable monthly, with a variable rate that resets weekly. As 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 optional principal repayment amount. The interest rate at December 31, 2013 was 0.15% for the
IRB debt.
The Company entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the IRB. At
December 31, 2013, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement
matures April 2018, but the notional amount is reduced annually by the amount of the optional principal payments on the
bond. Although the Company is exposed to credit loss in the event of nonperformance by the other parties to the interest
rate swap agreement, the Company anticipates performance by the counterparties.
In April 2013, the Company purchased a facility in Streetsboro, Ohio for $1.4 million that was previously financed under a
capital lease agreement. The capital lease obligation of $1.4 million was included in “Current portion of long-term debt” on
the accompanying Consolidated Balance Sheets as of December 31, 2012.
Scheduled Debt Maturities, Interest, Debt Carrying Values
The Company’s principal payments over the next five years and thereafter are detailed in the table below:
2014
2015
(in thousands)
Revolver
Term loan
Industrial revenue bond
Total principal payments
$
$
- $
8,750
810
9,560 $
2016
- $ 146,075 $
8,750
840
31,354
865
9,590 $ 178,294 $
2017
- $
-
895
895 $
2018
Thereafter Total
- $
-
930
930 $
- $ 146,075
48,854
-
-
4,340
- $ 199,269
The ABL Credit Facility includes a $70 million term loan that is collateralized by the Company’s real estate and
equipment. The term loan matures on June 30, 2016. Under the ABL Credit Facility the Company is required to make
monthly term loan payments of $729 thousand. The interest rate under the term loan is based on the agent’s base rate plus a
premium ranging from 0.25% to 0.75% or LIBOR plus a premium ranging from 1.75% to 2.25%.
The overall effective interest rate for all debt, exclusive of deferred financing fees and deferred commitment fees, amounted
to 2.3%, 2.7% and 3.1% in 2013, 2012 and 2011, respectively. Interest paid totaled $5.5 million, $7.3 million and $5.1
million for the years ended December 31, 2013, 2012 and 2011, respectively. Average total debt outstanding was $219.2
million, $254.2 million and $165.0 million in 2013, 2012 and 2011, respectively.
10. Derivative Instruments:
Nickel swaps
During 2013, 2012 and 2011, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price
of nickel with third-party brokers. The nickel swaps are treated as derivatives for accounting purposes. The Company
entered into the swaps to mitigate its customers’ risk of volatility in the price of nickel. The outstanding nickel swaps settle
on a monthly basis from January 2014 through May 2016 with the broker 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 nickel 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 nickel swap.
While these 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 nickel and embedded customer derivative instruments are included in
“Cost of materials sold” in the Consolidated Statements of Comprehensive Income. We recognize derivative positions with
both the customer and the third party and we classify cash settlement amounts associated with them as part of “Cost of
materials sold” in the Consolidated Statements of Comprehensive Income. The embedded customer derivatives are
54
included in “Accounts receivable, net”, and the swaps are included in “Other accrued liabilities” on the Consolidated
Balance Sheets at December 31, 2013 and 2012.
Interest rate swap
CTI entered into an interest rate swap to reduce the impact of changes in interest rates on its IRB. The swap agreement
matures April 2018, the same time as the IRB, but the notional amount is reduced annually by the optional principal
payments on the IRB. Although the Company is exposed to credit loss in the event of nonperformance by the other parties
to the interest rate swap agreement, the Company anticipates performance by the counterparties. The interest rate swap is
not treated as a hedging instrument for accounting purposes.
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 that commenced June 2013 in order
to eliminate the variability of cash interest payments on $53.2 million of the outstanding LIBOR-based borrowings under
the ABL Credit Facility. The balance as of December 31, 2013 was $48.9 million. The hedge matures on June 1, 2016 and
the notional amount is reduced monthly by the principal payments on the term loan. The interest rate hedge fixed the rate at
1.21% plus a premium ranging from 1.75% to 2.25%. Although the Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate hedge agreement, the Company anticipates performance by the
counterparties. The fixed interest rate hedge is accounted for as a cash flow hedging instrument for accounting purposes.
The table below shows the total net gain or (loss) recognized in the Company’s Consolidated Statements of Comprehensive
Income of the derivatives for the years ended December 31, 2013, 2012 and 2011.
(in thousands)
Interest rate swap (CTI)
Fixed interst rate swap (ABL)
Nickel swaps
Embedded customer derivatives
Total gain (loss)
$
$
2013
Net Gain (Loss) Recognized
2012
2011
(167) $
(309)
(1,037)
1,037
(476) $
(46) $
-
(113)
113
(46) $
(68)
-
(208)
208
(68)
11. Fair Value of Assets and Liabilities:
The Company’s financial instruments include cash and cash equivalents, short-term trade receivables, derivative
instruments, accounts payable and debt instruments. For short-term instruments, other than those required to be reported at
fair value on a recurring basis and for which additional disclosures are included below, management concluded the
historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of
such instruments and their expected realization.
During 2013 and 2012, 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 December 31, 2013 and December 31, 2012. Following is a description
of the valuation methodologies used for assets and liabilities measured at fair value as of December 31, 2013 and
December 31, 2012:
Nickel swaps and embedded customer derivatives – Determined by using 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 swap – 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.
55
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a
recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company:
(in thousands)
Assets:
Embedded customer derivatives
Total assets at fair value
Liabilities:
Nickel swaps
Interest rate swap
Fixed interest rate swap
Total liabilities at fair value
Value of Items Recorded at Fair Value
As of December 31, 2013
Level 1
Level 2
Level 3
Total
$
$
$
$
- $
- $
- $
-
-
- $
614 $
614 $
614 $
279
710
1,603 $
- $
- $
- $
-
-
- $
614
614
614
279
710
1,600
(in thousands)
Liabilities:
Debt
IRB
Term loan
Revolver
Total liabilities not recorded at
fair value
Value of Items Not Recorded at Fair Value
As of December 31, 2013
Level 1
Level 2
Level 3
Total
$
4,340 $
-
-
- $
48,854
146,075
- $
-
-
4,340
48,854
146,075
$
4,340 $
194,929 $
- $
199,269
The value of the items not recorded at fair value represent the carrying value of the liabilities.
(in thousands)
Assets:
Embedded customer derivatives
Total assets at fair value
Liabilities:
Nickel swaps
Interest rate swap
Fixed interest rate swap
Total liabilities at fair value
Value of Items Recorded at Fair Value
As of December 31, 2012
Level 1
Level 2
Level 3
Total
$
$
$
$
- $
- $
- $
-
- $
113 $
113 $
168 $
446
941
1,555 $
- $
- $
- $
-
- $
113
113
168
446
941
1,555
56
(in thousands)
Liabilities:
Value of Items Not Recorded at Fair Value
As of December 31, 2012
Level 1
Level 2
Level 3
Total
Debt
IRB
Term loan
Revolver
Total liabilities not recorded at fair value
$
$
5,125 $
-
-
5,125 $
- $
57,604
177,575
235,179 $
- $
-
-
- $
5,125
57,604
177,575
240,304
The value of the items not recorded at fair value represents the carrying value of the liabilities.
The fair value of the IRB is determined using Level 1 inputs. The carrying value and the fair value of the IRB that qualify
as financial instruments were $4.3 million and $5.1 million, respectively, at December 31, 2013 and 2012.
The fair values of the revolver and term loan are determined using Level 2 inputs. The carrying values of the revolver and
the term loan were $146.1 million and $48.9 million, respectively, at December 31, 2013. The carrying value of the
revolver and the term loan were $177.6 million and $57.6 million, respectively, at December 31, 2012. The Level 2 fair
value of the Company's long-term debt was estimated using prevailing market interest rates on debt with similar
creditworthiness, terms and maturities.
12. Accumulated Other Comprehensive Loss:
In June 2012, the Company entered into a forward starting fixed rate interest rate hedge commencing July 2013 in order to
eliminate the variability of cash interest payments on $53.2 million of the outstanding LIBOR-based borrowings under the
ABL Credit Facility. The hedge matures on June 1, 2016 and the notional amount is reduced monthly by the principal
payments on the term loan. The balance as of December 31, 2013 was $48.9 million. The fixed rate interest rate hedge is
accounted for as a cash flow hedging instrument for accounting purposes. The fair value of the interest rate hedge is
included in “Accumulated other comprehensive loss” on the Consolidated Balance Sheets. The fair value of the interest rate
hedge was $437 thousand, net of tax of $273 thousand at December 31, 2013 and $579 thousand, net of tax of $362
thousand at December 31, 2012.
13. Equity Plans:
Stock Options
The following table summarizes stock-based award activity during the year ended December 31, 2013:
Weighted
Average
Exercise
Price
Number of
Options
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
(in
thousands)
Outstanding at December 31, 2012
Granted
Exercised
Canceled
Outstanding at December 31, 2013
Exercisable at December 31, 2013
40,339 $
-
(11,667)
(1,500)
27,172 $
27,172 $
21.79
-
7.33
32.63
27.40
27.40
2.6 $
2.6 $
117
117
There were 11,667 stock options exercised during 2013 and 4,168 stock options exercised during 2012. No stock options
were exercised during 2011. The total intrinsic value of stock options exercised during the years ended December 31, 2013
and 2012 was $218 thousand and $56 thousand, respectively. Net cash proceeds from the exercise of stock options,
exclusive of income tax benefits, were $86 thousand and $34 thousand for the years ended December 31, 2013 and 2012,
57
respectively. Income tax benefits of $83 thousand and $21 thousand were realized from stock option exercises during the
years ended December 31, 2013 and 2012, respectively.
Restricted Stock Units
Pursuant to the Olympic Steel 2007 Omnibus Incentive Plan (Plan), the Company may grant stock options, stock
appreciation rights, restricted shares, restricted share units, performance shares, and other stock- and cash-based awards to
employees and Directors of, and consultants to, the Company and its affiliates. Under the Plan, 500,000 shares of common
stock are available for equity grants.
On each of January 2, 2013, January 3, 2012 and March 1, 2011, the Compensation Committee of the Company’s Board of
Directors approved the grant of 1,800 restricted stock units (RSUs) to each non-employee Director. Subject to the terms of
the 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 Board of Directors.
The fair value of each RSU was estimated to be the closing price of the Company’s common stock on the date of the grant,
which was $23.41, $25.55 and $26.91 for the grants on January 2, 2013, January 3, 2012 and March 1, 2011, respectively.
In 2011, the Compensation Committee for the Company’s Board of Directors approved changes to the Senior Management
Compensation Program to include an equity component in order to encourage more ownership of common stock by the
senior management. Beginning in 2011, the Senior Management Compensation Program imposed stock ownership
requirements upon the participants. Each participant is required to own at least 750 shares of common stock for each year
that the participant participates in the Senior Management Compensation Program. Any participant that fails to meet the
stock ownership requirements will be ineligible to receive any equity awards under the Company’s equity compensation
plans, including the Plan, until the participant satisfies the ownership requirements. To assist participants in meeting the
stock ownership requirements, on an annual basis, if a participant purchases 500 shares of common stock on the open
market, the Company will award that participant 250 shares of common stock. During 2013 and 2012, the Company
matched 8,500 and 7,250 shares, respectively. Additionally, any participant who continues to comply with the stock
ownership requirements as 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 will 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 will convert into the right to receive shares of common stock upon a participant’s retirement, or earlier upon the
executive’s death or disability or upon a change in control of the Company.
In recognition of their performance and dedicated years of service, on December 31, 2011, the Compensation Committee of
the Board of Directors granted 81,475 RSUs to Messrs. Siegal, Wolfort and Marabito. The RSUs have a vesting period of
five years and will be fully vested on December 31, 2016. Except in limited circumstances, the RSUs will not convert into
shares of common stock until the retirements of Messrs. Siegal, Wolfort and Marabito, respectively. These RSU’s are not a
part of the 2011 Senior Management Compensation Program discussed above. The fair value of each RSU was estimated to
be the closing price of the common stock on the date of the grant, which was $23.32 on December 31, 2011.
Stock-based compensation expense recognized on RSUs is summarized in the following table:
For the years ended December 31,
2012
2011
2013
RSU expense before taxes
RSU expense after taxes
Impact per basic share
Impact per diluted share
$
$
$
$
936 $
554 $
0.05 $
0.05 $
1,238 $
278 $
0.03 $
0.03 $
726
484
0.04
0.04
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying
Consolidated Statements of Comprehensive Income.
58
The following table summarizes the activity related to RSUs for the twelve months ended December 31, 2013:
Number of
Shares
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2012
Granted
Converted into shares
Forfeited
Outstanding at December 31, 2013
Vested at December 31, 2013
192,819 $
38,214
-
(75 )
230,958 $
178,679 $
26.22
21.50
-
23.32
25.44 $
25.92 $
977
735
Of the RSUs granted in 2013 and 2012, 28,341 and 31,243, respectively, were used to fund supplemental executive
retirement plan contributions. There was no intrinsic value for the RSUs that were converted into shares in 2012. There
were no RSUs converted into shares during 2013 or 2011.
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying
Consolidated Statements of Comprehensive Income.
14. Commitments and Contingencies:
Operating Leases
The Company leases certain warehouses, sales offices, machinery and equipment and vehicles under long-term operating
lease agreements. The leases expire at various dates through 2023. In some cases the leases include options to extend. Rent
and lease expense was $7.5 million, $7.7 million and $6.5 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
The future annual minimum lease payments as of December 31, 2013 are as follows:
Lease payments
$
5,654 $
4,682 $
4,157 $
3,355 $
2,562 $
3,312 $
23,722
2014
2015
2016
2017
2018
Thereafter
Total
Commitments and Contingencies
The Company is party to various legal actions that it believes are ordinary in nature and incidental to the operation of its
business. In the opinion of management, the outcome of the proceedings to which the Company is currently a party will not
have a material adverse effect upon its results of operations, financial condition or cash flows.
In the normal course of business, the Company periodically enters into agreements that incorporate indemnification
provisions. While the maximum amount to which the Company may be exposed under such agreements cannot be
estimated, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on
the Company’s results of operations or financial condition.
At December 31, 2013, approximately 333 of the hourly plant personnel are represented by ten separate collective
bargaining units. The table below shows the expiration dates of the collective bargaining agreements.
59
Facility
Duluth, Minnesota
Locust, North Carolina
Romeoville, Illinois
Minneapolis coil, Minnesota
Indianapolis, Indiana
Minneapolis plate, Minnesota
Detroit, Michigan
St. Paul, Minnesota
Milan, Illinois
Kansas City, Missouri
Expiration date
December 21, 2014
March 4, 2015
May 31, 2015
September 30, 2015
January 29, 2016
March 31, 2017
August 31, 2017
May 25, 2018
August 12, 2018
November 18, 2018
15. Income Taxes:
The components of the Company’s provision (benefit) for income taxes from continuing operations were as follows:
(in thousands)
Current:
Federal
State and local
Deferred
Income tax provision
2013
As of December 31,
2012
2011
$
$
6,207 $
1,265
7,472
(2,195)
5,277 $
8,058 $
1,021
9,079
(1,217)
7,862 $
4,375
115
4,490
8,025
12,515
The components of the Company’s deferred income taxes at December 31 are as follows:
(in thousands)
Deferred tax assets:
Inventory (excluding LIFO reserve)
Net operating loss and tax credit carryforwards
Allowance for doubtful accounts
Accrued expenses
Other
$
Valuation reserve
Total deferred tax assets
Deferred tax liabilities:
LIFO reserve
Property and equipment
Intangibles
Other
Total deferred tax liabilities
Deferred tax liabilities, net
$
2013
2012
2,588 $
3,044
585
7,459
83
13,759
(1,298)
12,461
(6,213)
(24,339)
(15,259)
(24)
(45,835)
(33,374) $
2,039
3,167
615
7,592
102
13,515
(1,200)
12,315
(5,417)
(26,962)
(15,416)
-
(47,795)
(35,480)
The deferred tax liability decreased by $88 thousand related to the interest rate swap.
60
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits:
(in thousands)
Balance as of January 1
Decreases related to prior year tax positions
Increases related to current year tax positions
Decreases related to lapsing of statute of limitations
Balance as of December 31
$
$
2013
2012
2011
112 $
(37)
25
(25)
75 $
75 $
-
61
(24)
112 $
2,005
-
24
(1,954)
75
It is expected that the amount of unrecognized tax benefits will not materially change in the next twelve months. The tax
years 2010 through 2012 remain open to examination by major taxing jurisdictions to which the Company is subject.
The Company recognized interest related to uncertain tax positions in income tax expense. As of December 31, 2013 and
December 31, 2012, the Company had approximately $4 thousand and $5 thousand of gross accrued interest related to
uncertain tax positions, respectively.
The following table reconciles the U.S. federal statutory rate to the Company’s effective tax rate:
U.S. federal statutory rate
State and local taxes, net of federal benefit
Goodwill impairment
Valuation allowance
Sec. 199 manufacturing deduction
Meals and entertainment
Change in unrecognized tax benefits
All other, net
Effective income tax rate
2013
2012
2011
35.0%
3.0%
-
-
(4.2%)
3.3%
(0.2%)
3.9%
40.8%
35.0%
6.9%
22.7%
8.5%
(4.7%)
4.5%
-
4.6%
77.5%
35.0%
4.1%
-
-
(1.0%)
1.2%
(5.8%)
(0.1%)
33.4%
Income taxes paid in 2013, 2012 and 2011 totaled $7.6 million, $6.9 million and $9.2 million, respectively. Some
subsidiaries of the Company’s consolidated group file state tax returns on a separate company basis and have state net
operating loss carryforwards expiring over the next seven to 20 years. A valuation allowance is recorded to reduce certain
deferred tax assets to the amount that is more likely than not to be realized.
16. 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:
(in thousands, except per share data)
Weighted average basic shares outstanding
Assumed exercise of stock options and issuance of stock awards
Weighted average diluted shares outstanding
Net income
Basic earnings per share
Diluted earnings per share
Anti-dilutive securities outstanding
61
For the years ended December 31,
2012
2011
2013
11,065
9
11,074
10,989
6
10,995
10,937
14
10,951
$
$
$
7,647 $
2,277 $
24,970
0.69 $
0.69 $
0.21 $
0.21 $
201
194
2.28
2.28
61
17. Segment Information:
The Company follows the accounting guidance that requires the utilization of a “management approach” to define and
report the financial results of operating segments. The management approach defines operating segments along the lines
used by the Company’s chief operating decision maker (CODM) to assess performance and make operating and resource
allocation decisions. Our CODM evaluates performance and allocates resources based primarily on operating income
(loss). Our operating segments are based on internal management reporting.
The Company operates in two reportable segments: flat products and tubular and pipe products. Through its flat products
segment, the Company sells and distributes large volumes of processed carbon, coated, aluminum and stainless flat-rolled
sheet, coil and plate products. 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.
Commencing with the first quarter of 2013, corporate expenses are reported as a separate line item in the segment
reporting. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., both
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. Prior to 2013, these expenses were included in
the flat products segment’s operating results. The 2012 and 2011 financial information below has been revised to reflect the
new reporting structure.
The following table provides financial information by segment and reconciles the Company’s operating income by segment
to the consolidated income before income taxes for the years ended December 31, 2013, 2012 and 2011. The Company
assesses the performance of the segments based on operating income.
(in thousands)
Net sales
Flat products
Tubular and pipe products
Total net sales
Depreciation and amortization
Flat products
Tubular and pipe products
Corporate
Total depreciation and amortization
Operating income
Flat products
Tubular and pipe products
Corporate
Total operating income
Asset impairment charge of joint venture real estate
Other income (loss), net
Income before interest and income taxes
Interest and other expense on debt
Income before income taxes
2013
2012
2011
1,026,769 $
236,562
1,263,331 $
1,138,063 $
245,638
1,383,701 $
1,143,708
118,164
1,261,872
16,883 $
5,308
50
22,241 $
12,106 $
14,981
(7,432)
19,655 $
-
(28)
19,627
6,703
12,924 $
16,065 $
4,795
-
20,860 $
7,030 $
17,997
(6,578)
18,449 $
(36)
83
18,496
8,357
10,139 $
13,800
2,246
-
16,046
44,302
7,206
(7,040)
44,468
(953)
(77)
43,438
5,953
37,485
$
$
$
$
$
$
$
62
(in thousands)
Capital expenditures
Flat products
Tubular and pipe products
Corporate
Total capital expenditures
Goodwill
Flat products
Tubular and pipe products
Total goodwill
Assets
Flat products
Tubular and pipe products
Corporate
Total assets
$
$
$
$
$
$
2013
2012
2011
38,849
638
-
39,487
3,794 $
11,616
688
16,098 $
500 $
40,287
40,787 $
17,004 $
6,369
-
23,373 $
500
40,287
40,787
473,397 $
223,314
638
697,349 $
480,487
225,507
-
705,994
There were no material revenue transactions between the flat products and tubular and pipe products segments for the years
ended December 31, 2013, 2012 and 2011.
The Company sells certain products internationally, primarily in Canada, Puerto Rico and Mexico. International sales have
been immaterial to the consolidated financial results and to the individual segment’s results.
18. Retirement Plans:
The Company’s retirement plans consist of a 401(k) plan covering certain non-union employees, two separate 401(k) plans
covering all union employees, two profit sharing plans, a multi-employer pension plan covering certain CTI employees and
a supplemental executive retirement plan (SERP) covering certain executive officers of the Company.
The 401(k) retirement plans allow eligible employees to contribute up to the statutory maximum. The Company’s non-
union 401(k) matching contribution is determined annually by the Board of Directors and is based on a percentage of
eligible employees’ earnings and contributions. For the non-union 401(k) retirement plan, the Company matched one-half
of each eligible employee’s contribution, limited to the first 6% of eligible compensation.
For the 401(k) retirement plan at our CTI locations, the Company matched one-half of each eligible employee’s first 3% of
eligible compensation and 20% of the next 3% of eligible compensation.
All union employees now participate in the profit-sharing plan on a discretionary basis, like all non-union employees.
Company contributions to the non-union profit-sharing plan are discretionary amounts as determined annually by the Board
of Directors.
In 2005, the Board of Directors adopted the SERP. Contributions to the SERP are based on: (i) a portion of the participants’
compensation multiplied by 13%; and (ii) for certain participants a portion of the participants’ compensation multiplied by
a factor which is contingent upon the Company’s return on invested capital. Benefits are subject to a vesting schedule of up
to five years.
The Company, through its CTI subsidiary, contributes to one multiemployer pension plan – the Plumbing and Heating
Wholesalers Retirement Income Plan for the Benefit of the Shopmen’s Division of Pipe Fitters’ Association Local Union
597, EIN 36-6511016, Plan Number 001 (the Multiemployer Plan). The risks of participating in the Multiemployer Plan are
different from a single-employer plan in that 1) assets contributed to the multiemployer plan by one employer may be used
to provide benefits to employees of other participating employers, 2) if a participating employer stops contributing to the
plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and 3) if CTI chooses to
stop participating in the Multiemployer Plan, CTI may be required to pay the plan an amount based on the unfunded status
of the plan, referred to as a withdrawal liability.
63
The most recent Pension Protection Act zone status available is for the plan year beginning January 1, 2013, and the
Multiemployer Plan’s actuary has certified that the Multiemployer Plan is neither in critical status nor endangered status
and that it is in the green zone. The zone status is based on information that CTI received from the Multiemployer Plan and
is certified by the Multiemployer Plan’s actuary. Among other factors, plans in the green zone are at least 80 percent
funded.
CTI contributes to the Multiemployer Plan under the terms of a collective bargaining agreement that covers certain of its
union employees, and which expires May 31, 2015. CTI contributions to the Multiemployer Plan were immaterial for the
years ended December 31, 2013 and 2012.
Retirement plan expense, which includes all Company 401(k), profit-sharing, SERP defined contributions and the
Multiemployer Plan, amounted to $2.2 million, $2.1 million and $2.5 million for the years ended December 31, 2013, 2012
and 2011, respectively.
19. Related-Party Transactions:
The Company’s Chief Executive Officer owns 50% of a related entity that owns one of the Cleveland warehouses and
leases it to the Company at a fair market value annual rental of $204 thousand. The lease expires on December 31, 2018
with four five-year renewal options.
64
Schedule II – Valuation and Qualifying Accounts
(in thousands)
Description
Year Ended December 31, 2011
Allowance for doubtful accounts
Tax valuation reserve
Year Ended December 31, 2012
Allowance for doubtful accounts
Tax valuation reserve
Year Ended December 31, 2013
Allowance for doubtful accounts
Tax valuation reserve
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
Balance at
End of
Period
$
$
$
$
$
$
1,310 $
412 $
1,125 $
- $
213 $
- $
(921) $
(11) $
1,727
401
1,727 $
401 $
322 $
799 $
1,597 $
1,200 $
83 $
98 $
- $
- $
- $
- $
(452) $
- $
1,597
1,200
(161) $
- $
1,519
1,298
65
SUPPLEMENTAL FINANCIAL INFORMATION
Unaudited Quarterly Results of Operations
(in thousands, except per share amounts)
2013
Net sales
Operating income (a)
Income (loss) before income taxes
Net income (loss)
Basic net income (loss) per share
Weighted average shares outstanding - basic
Diluted net income (loss) per share
$
Weighted average shares outstanding - diluted
Market price of common stock: (c)
High
Low
2012
Net sales
Operating income (b)
Income before income taxes
Net income
Basic net income per share
Weighted average shares outstanding - basic
Diluted net income per share
$
Weighted average shares outstanding - diluted
$
$
$
$
$
$
$
1st
338,064 $
9,581
7,906
5,163 $
0.47 $
11,034
0.47 $
11,042
2nd
330,804 $
6,024
4,315
2,525 $
0.23 $
11,062
0.23 $
11,072
3rd
303,990 $
4,174
2,484
1,340 $
0.12 $
11,066
0.12 $
11,077
Year
4th
290,473 $ 1,263,331
19,655
12,924
7,647
0.69
11,065
0.69
11,074
(124)
(1,781)
(1,381) $
(0.12) $
11,075
(0.12) $
11,075
25.39 $
18.52
26.83 $
19.54
29.48 $
24.46
31.68 $
24.56
31.68
18.52
1st
382,052 $
12,263
10,189
6,230 $
0.57 $
10,988
0.57 $
10,997
2nd
367,365 $
9,744
7,566
4,526 $
0.41 $
10,960
0.41 $
10,989
3rd
342,560 $
4,624
2,555
1,639 $
0.15 $
10,961
0.15 $
10,967
Year
4th
291,724 $ 1,383,701
18,449
10,139
2,277
0.21
10,989
0.21
10,995
(8,182)
(10,171)
(10,118) $
(0.92) $
10,993
(0.92) $
10,993
Market price of common stock: (c)
High
Low
$
28.31 $
21.78
25.02 $
15.00
19.20 $
14.77
22.21 $
16.61
28.31
14.77
(a) Operating income includes $3,572 of LIFO income.
(b) Operating income includes $6,583 of goodwill impairment charges related to the Company's flat products Southern
region in the 4th quarter of 2012.
(c) Represents the high and low sales prices of our common stock as reported by the Nasdaq Global Select Market.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluations required by Rule 13a-15 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 Annual Report have been carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based upon such evaluations, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December
31, 2013 in providing reasonable assurance that information required to be disclosed by us in reports filed under the
Exchange Act is recorded, processed, summarized and reported within time periods specified in the rules and forms of the
SEC.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is set forth in Part II, Item 8 of this Annual Report on
Form 10-K and is incorporated herein. PricewaterhouseCoopers LLP, the Company’s independent registered public
accounting firm, has issued an attestation report on our internal control over financial reporting that is set forth in Part II,
Item 8 of this Annual Report and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2013
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
67
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
Information required by Item 10 as to the executive officers is provided in Part I of this Annual Report on Form 10-K and
is incorporated by reference into this section. Other information required by Item 10 will be incorporated herein by
reference to the information set forth in our definitive proxy statement for our 2014 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 will be incorporated herein by reference to the information set forth in our definitive proxy
statement for our 2014 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by Item 12 will be incorporated herein by reference to the information set forth in our definitive proxy
statement for our 2014 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by Item 13 will be incorporated herein by reference to the information set forth in our definitive proxy
statement for our 2014 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 will be incorporated herein by reference to the information set forth in our definitive proxy
statement for our 2014 Annual Meeting of Shareholders.
68
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)(1) The following financial statements are included in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Supplemental Disclosures of Cash Flow Information for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements for the Years Ended December 31, 2013, 2012 and 2011
(a)(2) Financial Statement Schedules.
Schedule II – Valuation and Qualifying Accounts
(a)(3) Exhibits. The Exhibits filed herewith are set forth on the Index to Exhibits filed as part of this Annual
Report and incorporated herein by reference.
69
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
February 27, 2014
OLYMPIC STEEL, INC.
By: /s/ Richard T. Marabito
Richard T. Marabito,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons in the capacities indicated and on the dates indicated.
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
/s/ Michael D. Siegal *
Michael D. Siegal
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ David A. Wolfort *
David A. Wolfort
President, Chief Operating Officer and
Director
/s/ Richard T. Marabito *
Richard T. Marabito
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
/s/ Donald R. McNeeley *
Donald R. McNeeley
President of Chicago Tube and Iron and
Director
/s/ Arthur F. Anton *
Arthur F. Anton, Director
/s/ Dirk A. Kempthorne *
Dirk A. Kempthorne, Director
/s/ Ralph M. Della Ratta, Jr. *
Ralph M. Della Ratta, Jr., Director
/s/ James B. Meathe *
James B. Meathe, Director
/s/ Howard L. Goldstein *
Howard L. Goldstein, Director
* The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the
Powers of Attorney executed by the above-named officers and directors of the Company and filed with the Securities and
Exchange Commission on behalf of such officers and directors.
By:
/s/ Richard T. Marabito
Richard T. Marabito, Attorney-in-Fact
February 27, 2014
70
OLYMPIC STEEL, INC.
INDEX TO EXHIBITS
Exhibit
2.2
3.1(i)
Description
Agreement and Plan of Merger, dated May 18, 2011, by and
among OLYAC II, Inc., Olympic Steel, Inc., Chicago Tube
and Iron Company, the Stockholders of Chicago Tube and
Iron Company listed on Schedule I, and Dr. Donald
McNeeley, as the Representative of the Stockholders.
Amended and Restated Articles of Incorporation
3.1(ii)
Amended and Restated Code of Regulations
4.22
4.23
4.24
10.1 *
Amended and Restated Loan and Security Agreement, dated
as of July 1, 2011, by and among the Registrant, the financial
institutions from time to time party thereto, Bank of America,
N.A., as administrative agent, and the other agents from time
to time party thereto.
First Amendment to Amended and Restated Loan and
Security Agreement, dated as of March 16, 2012, by and
among the Registrant, the financial institutions from time to
time party thereto, Bank of America, N.A., as administrative
agent, and the other agents from time to time party thereto.
Second Amendment to Amended and Restated Loan and
Security Agreement, dated as of March 22, 2013, by and
among Olympic Steel, Inc. and certain subsidiaries thereof,
the financial institutions from time to time party thereto, Bank
of America, N.A., as administrative agent, and the other
agents from time to time party thereto.
Olympic Steel, Inc. Stock Option Plan
10.8 *
Form of Management Retention Agreement for Senior
Executive Officers of the Company
10.9 *
Form of Management Retention Agreement for Other Officers
of the Company
10.14 *
Olympic Steel, Inc. Executive Deferred Compensation Plan
dated December 15, 2004
71
Reference
Incorporated by reference to Exhibit 2.2 to
Company’s Form 8-K filed with the
Commission on May 20, 2011 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 3.1(i) to
the Registration Statement on Form S-1
(Registration No. 33-73992) filed with the
Commission on January 12, 1994.
Incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-
8 (Registration No. 333-1439001) filed with
the Commission on June 20, 2007.
Incorporated by reference to Exhibit 4.21 to
Registrant’s Form 8-K filed with the
Commission on July 8, 2011 (Commission File
No. 0-23320).
Incorporated by reference to Exhibit 4.23 to
Registrant’s Form 8-K filed with the
Commission on March 21, 2012 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 4.24 to
Registrant’s Form 10-Q filed with the
Commission on May 3, 2013 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form S-1
(Registration No. 33-73992) filed with the
Commission on January 12, 1994.
Incorporated by reference to Exhibit 10.8 to
Registrant's Form 10-Q filed with the
Commission on August 7, 2000 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.9 to
Registrant's Form 10-Q filed with the
Commission on August 7, 2000 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.14 to
Registrant’s Form 10-K filed with the
Commission on March 14, 2005 (Commission
File No. 0-23320).
10.15 *
Form of Non-Solicitation Agreements
10.16 *
Form of Management Retention Agreement
10.17 *
Supplemental Executive Retirement Plan Term Sheet
Incorporated by reference to Exhibit 10.15 to
Registrant’s Form 8-K filed with the
Commission on March 4, 2005 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.16 to
Registrant’s Form 10-Q filed with the
Commission on August 8, 2005 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 99.1 to
Registrant’s Form 8-K filed with the
Commission on January 5, 2006 (Commission
File No. 0-23320).
10.20 *
Olympic Steel, Inc. Supplemental Executive Retirement Plan Incorporated by reference to Exhibit 10.20 to
Olympic Steel, Inc. 2007 Omnibus Incentive Plan
Olympic Steel, Inc. Senior Manager Compensation Plan
David A. Wolfort Employment Agreement effective as of
January 1, 2011
Form of Performance-Earned Restricted Stock Unit (PERS
Unit) Agreement for Mr. Manson and Ms. Potash.
Form of Performance-Earned Restricted Stock Unit (PERS
Unit) Agreement for Messrs. Siegal, Wolfort and Marabito.
Registrant’s Form 8-K filed with the
Commission on April 28, 2006 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.21 to
Registrant’s Form 8-K filed with the
Commission on May 3, 2007 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.27 to
Registrant’s Form 10-Q filed with the
Commission on May 5, 2009 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.28 to
Registrant’s Form 10-Q filed with the
Commission on May 5, 2009 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.30 to
Registrant’s Form 10-Q filed with the
Commission on May 6, 2011 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.31 to
Registrant’s Form 10-Q filed with the
Commission on May 6, 2011 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.32 to
Registrant’s Form 10-Q filed with the
Commission on November 4, 2011
(Commission File No. 0-23320).
Incorporated by reference to Exhibit 10.33 to
Registrant’s Form 8-K filed with the
Commission on November 23, 2011
(Commission File No. 0-23320).
Incorporated by reference to Exhibit 10.34 to
Registrant’s Form 10-K filed with the
Commission on February 23, 2012
(Commission File No. 0-23320).
Incorporated by reference to Exhibit 10.35 to
Registrant’s Form 8-K filed with the
Commission on November 21, 2012
(Commission File No. 0-23320).
List of Subsidiaries
Filed herewith
Consent of Independent Registered Public Accounting Firm Filed herewith
Filed herewith
Directors and Officers Powers of Attorney
Richard T. Marabito Employment Agreement effective as of
November 23, 2011
Donald McNeeley Employment Agreement effective as of
July 1, 2011
Form of RSU Agreements for Messrs. Siegal, Wolfort and
Marabito.
Michael D. Siegal Employment Agreement effective as of
December 1, 2012
10.21 *
10.27*
10.28*
10.30 *
10.31 *
10.32 *
10.33 *
10.34 *
10.35 *
21
23
24
72
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Filed herewith
Filed herewith
Furnished herewith
Furnished herewith
Certification of the Principal Executive Officer of the
Company, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer of the
Company, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Written Statement of Michael D. Siegal, Chairman and Chief
Executive Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Written Statement of Richard T. Marabito, Chief Financial
Officer of the Company pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* This exhibit is a management contract or compensatory plan or arrangement.
73
Comparison of 5 Year Cumulative Total Return
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100 through December 2013
450.00
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2008
2009
2010
2011
2012
2013
Olympic Steel Inc
NASDAQ Composite-Total Returns
Peer Group
The peer group consists of Worthington Industries, Shiloh Industries, Inc., A.M. Castle & Co., and
Reliance Steel & Aluminum Co.
Directors & Officers
BOARD OF DIRECTORS
Michael D. Siegal, 61
Chairman of the Board and Chief Executive Officer,
Olympic Steel
CORPORATE OFFICERS
Michael D. Siegal
Chief Executive Officer
David A. Wolfort
President and Chief Operating Officer
Richard T. Marabito
Chief Financial Officer
Donald R. McNeeley
President and Chief Operating Officer,
Chicago Tube & Iron, a subsidiary of Olympic Steel
Richard A. Manson
Vice President and Treasurer
Esther M. Potash
Chief Information Officer
Christopher M. Kelly
Secretary, Olympic Steel
Partner-in-Charge, Cleveland Office, Jones Day
David A. Wolfort, 61
President and Chief Operating Officer,
Olympic Steel
Arthur F. Anton, 56
President and Chief Executive Officer,
Swagelok Company
Ralph M. Della Ratta, 60
Founder and Managing Director,
Western Reserve Partners LLC
Howard L. Goldstein, CPA, 61
Partner,
Appelrouth, Farah & Co. P.A.
The Honorable Dirk A. Kempthorne, 62
President and Chief Executive Officer,
The American Council of Life Insurers
James B. Meathe, 58
Managing Partner,
Walloon Ventures
Donald R. McNeeley, 59
President and Chief Operating Officer,
Chicago Tube & Iron, a subsidiary of Olympic Steel
Shareholder Information
Corporate Headquarters
Olympic Steel, Inc.
22901 Millcreek Boulevard, Suite 650
Highland Hills, OH 44122
Phone: (216) 292-3800
Fax: (216) 682-4065
www.olysteel.com
Stock Listing
The Company’s common stock trades on the NASDAQ
Global Select Stock Market under the symbol “ZEUS.”
Transfer Agent and Registrar
Computershare
P.O. Box 358015
Pittsburgh, PA 15252
(800) 446-2617
2014 Annual Meeting
The annual meeting of shareholders will be held:
Wednesday, April 30, 2014
10:00 a.m. Eastern Time
Marriott Griffin Gate
1800 Newtown Pike
Lexington, KY 40511
For information and directions to the annual meeting and to
vote in person, contact ir@olysteel.com.
Independent Auditors
PricewaterhouseCoopers LLP
BP Tower, 18th Floor
200 Public Square
Cleveland, OH 44114
Legal Counsel
Jones Day
North Point
901 Lakeside Avenue
Cleveland, OH 44114
Investor Information
Shareholders and prospective investors are welcome
to call or write with questions or requests for additional
information. Inquiries should be directed to:
Matthew J. Dennis, CFA
Olympic Steel Investor Relations
Clear Perspective Group, LLC
Phone: (216) 672-0522
Email: ir@olysteel.com
www.olysteel.com
Form 10-K
Shareholders who wish to obtain, without charge, a
copy of Olympic Steel’s annual report on Form 10-K,
filed with the Securities and Exchange Commission
for the fiscal year ended Dec. 31, 2013, may do so
by writing to Investor Relations at the Company’s
Corporate Headquarters (address indicated above).
This product
is made from
recycled paper