2016 Annual Report
About the Company
We are a leading metals service center that operates in three reportable segments; carbon flat products, specialty metals flat
products and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segment are
at times consolidated and referred to as the flat products segments. Some of the flat products segments’ assets and resources
are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and,
in some locations, processed on shared equipment. We provide metals processing and distribution services for a wide range
of customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed
carbon and coated flat-rolled sheet, coil and plate products, and fabricated parts. Our specialty metals flat products segment’s
focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar
products and fabricated parts. Through our tubular and pipe products segment, which consists of our Chicago Tube & Iron
subsidiary, 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. Accordingly, our overall gross profit is
affected by, among other things, product mix, the amount of processing performed, the demand for and availability of metals,
and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned metals. We sell
certain products internationally, primarily in Canada, Mexico and the Dominican Republic. International sales have increased
to 2.2% of consolidated net sales in 2016.
Financial Information
In thousands, except per-share and ratio data
2016
2015
2014
For the Year
Net sales
Goodwill and intangible asset impairment
Operating income (loss)
Net loss
Net loss 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
$ 1,055,116) $ 1,175,543) $ 1,436,270
-)
5,748)
(1,078)
(0.10)
11,210)
6,824)
(24,951)
(27,779)
(26,777)
(2.39)
11,192)
7,317)
(23,836)
(9,208)
(19,064)
(1.71)
11,120
7,834
$ 254,526) $ 206,645)
$ 311,108
101,902)
556,068)
166,424)
253,390)
23.11)
92,877)
511,880)
148,490)
254,695)
23.25)
123,804
700,748
247,620
280,781
25.55
0.66 to 1)
0.58 to 1)
0.88 to 1
2016 Letter to Shareholders
Dear Fellow Shareholders
Our investments since the last recession have positioned Olympic Steel to grow and benefit from a recovery in the metals
sector. We diversified product lines, extended geographic reach and expanded processing capabilities. At the same time,
persistently tenuous demand and illegal imports have pressured market prices. Through these near-term challenges, we
remained committed to our long-term growth strategy and focused on continuous operating improvements, effective working-
capital management and market share growth.
Thanks to these priorities, we were well prepared for protracted market weakness in 2016. For the second consecutive
year, our ongoing profit-improvement efforts produced gross margin expansion, quicker inventory turnover and permanent
reductions in operating expenses. We also earned record market share during 2016 in each of our product categories.
Year in Review
The year began with metal prices rising from the depressed levels of late 2015, despite deteriorating demand and lower
industry-wide shipping activity. Prices were supported by supply-side factors, which included reduced steelmaking capacity
and higher raw material costs. Steel import volumes were also declining from record-high levels with less foreign-subsidized
steel being illegally dumped on U.S. shores.
With no demand recovery in sight, by June prices began to deteriorate, and continued through early November. During that
period, the CRU Index for hot rolled coil steel fell by more than 24%, or by $156 per ton. Strategically, we accelerated inventory
turnover and lowered operating expenses to alleviate the adverse impact of falling steel prices.
Following the November election and a decisive improvement in business confidence, pricing and demand began to recover.
However, lower year-over-year pricing throughout 2016 resulted in net sales declining 10%, to $1.1 billion. This compared to
net sales of $1.2 billion in 2015. Gross profit in 2016, however, increased to $235 million, up $2 million from 2015 due to gross
margin expansion. Gross margin improved to 22.3% of sales in 2016, up from 19.8% in 2015.
During 2016, operating expenses declined by $7 million or 3%, excluding 2015’s impairment charges. This helped us more
than double operating income from last year’s level. Despite generating a pre-tax profit in 2016, after recording our tax
provision we incurred a net loss of $1.1 million, or $0.10 per share – an improvement from 2015’s net loss of $26.8 million, or
$2.39 per share, which included impairment charges to write down goodwill and intangible assets.
Industry-wide steel shipments in 2016 declined more than 6% from 2015, due to lower demand from industrial machinery and
equipment manufacturers serving weak end markets including mining, energy, military and agriculture. In last year’s letter, I
declared our intention to increase market share “regardless of what the market brings.” That is exactly what we did, despite
the overall market decline. This was accomplished by expanding our commercial sales coverage and exceeding customers’
expectations for service and value.
Our Company
We set new company records for market share in carbon flat rolled and plate products, and our share of the carbon pipe and
tube market also reached an all-time high. Our specialty metals segment now represents more than 5.5% of the stainless-steel
sheet and coil markets; and nearly 2% of the aluminum sheet and coil markets. Both of those are new highs for Olympic Steel.
During 2016, we also set the stage for several key management successions to support growth in 2017 and beyond. In
December, we announced Ray Walker’s retirement from his position of President of our carbon flat rolled business. During
his 30 years at the Company, Ray played a notable role in growing our business. We thank Ray for his service and wish him
2016 Letter to Shareholders
a long and happy retirement. John Mooney, who has been at Olympic Steel since 1989, and most recently served as Vice
President of our Eastern Region, succeeds Ray as President and Chief Operating Officer of the carbon flat rolled business.
We also announced that Andy Markowitz has assumed leadership of our specialty metals segment. Andy was formerly Vice
President of Specialty Metals. He filled the President’s role vacated by Andrew Greiff when Andrew was promoted in August to
Executive Vice President and Chief Operating Officer of the corporation. Specialty metals are an important product segment
for Olympic Steel and we plan to invest in additional physical assets during 2017 to support continued growth of this business.
With proven executives leading each of our three business segments, we are well-positioned to drive our balanced growth and
diversification strategy. In 2016, carbon flat products represented 64% of consolidated net sales, specialty metals flat products
were 18%, and tubular and pipe products made up the remaining 18%. Our product mix and complementary processing
services position us well to manage cyclicality in our end markets.
Our employees continued to exemplify our commitment to the communities in which we operate. Employee contributions to
our Working for Wishes campaigns cumulatively surpassed $900,000 during the year. Since our initial campaign in 2004, our
employees have helped grant more than 100 wishes to enrich the lives of children with life-threatening medical conditions.
Through our success in the steel industry, it is a privilege to support programs like this to facilitate helping those in the
communities where we live and work. Our Company’s core values are a collective reflection of the people who comprise
Olympic Steel and we are proud of what we stand for.
Looking Ahead
What started in early November as a rebound in metal prices, transformed into a steep price rally by year end that continues
into the first quarter of 2017. Supply-side discipline, lower steel imports, higher raw material costs and rapidly improving
business sentiment, are all factors pushing prices higher. Perhaps more importantly, however, in contrast to early 2016, broad-
based demand and shipping volume are showing signs of improvement in the first half of 2017.
We remain focused on operating expense discipline and sound working capital management. Our financial condition is
excellent, with a healthy balance sheet, low-interest financing, and well-positioned inventory. At the end of 2016, we had $94
million in borrowing capacity available from our asset-based lending facility, which is in place through June 2019. By increasing
market share, improving operating efficiency, and enhancing management talent and sales presence – all during challenging
market conditions – Olympic Steel begins 2017 poised to quickly profit from an industrial revitalization.
In closing, I would like to thank our customers, employees and shareholders for their valued support. There are many reasons
to be optimistic as we look to a better future and a brighter tomorrow.
Sincerely,
Michael D. Siegal
March 20, 2017
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, 2016
( )
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 filer ( )
(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 30, 2016, 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 $247,703,193.
The number of shares of common stock outstanding as of March 2, 2017 was 10,963,863.
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, 2016, 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.
TABLE OF CONTENTS
Page
Part I
Item 1.
Business ....................................................................................................................................................
Item 1A. Risk Factors ..............................................................................................................................................
Item 1B. Unresolved Staff Comments .....................................................................................................................
Properties ..................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings.....................................................................................................................................
Item 4. Mine Safety Disclosures ...........................................................................................................................
Executive Officers of the Registrant .........................................................................................................
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................
Item 6.
Selected Financial Data ............................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................
Item 8.
Financial Statements and Supplementary Data .........................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................
Item 9.
Item 9A. Controls and Procedures ...........................................................................................................................
Item 9B. Other Information .....................................................................................................................................
Part III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................................
Item 11. Executive Compensation ..........................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
Item 13. Certain Relationships and Related Transactions, and Director Independence ..........................................
Item 14. Principal Accountant Fees and Services ...................................................................................................
Part IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................................
Item 16. Form 10-K Summary ................................................................................................................................
Signatures ................................................................................................................................................
Index to Exhibits .......................................................................................................................................
1
11
18
19
20
20
21
22
23
24
42
43
72
72
72
73
73
73
73
73
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75
76
i
PART I
ITEM 1. BUSINESS
The Company
We are a leading metals service center that operates in three reportable segments; carbon flat products, specialty metals flat
products and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segment are
at times consolidated and referred to as the flat products segments. Some of the flat products segments’ assets and resources
are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and,
in some locations, processed on shared equipment. We provide metals processing and distribution services for a wide range
of customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed
carbon and coated flat-rolled sheet, coil and plate products, and fabricated parts. Our specialty metals flat products segment’s
focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar
products and fabricated parts. Through our tubular and pipe products segment, which consists of our Chicago Tube & Iron,
or CTI, subsidiary 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. Accordingly, our overall gross profit
is affected by, among other things, product mix, the amount of processing performed, the demand for and availability of
metals, and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned
metals. We sell certain products internationally, primarily in Canada, Mexico and the Dominican Republic. International
sales have increased over the past couple of years to 2.2% of consolidated net sales in 2016, but are still immaterial to our
consolidated financial results and to the individual segments’ results.
Segment reporting information is contained in Note 15 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 production labor, buildings and equipment, which allows them to focus on the engineering,
1
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.
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, 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 geographic and product growth, 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. Andrew Greiff, our newly appointed Executive Vice President and
Chief Operating Officer joined us in 2009 and has managed the Company’s rapidly expanding specialty metals business.
Business Strategy and Objectives
We believe that the metals service center and processing industry is driven by the following primary trends: (i) shift by
customers to fewer suppliers that are larger and financially strong; (ii) increased customer demand for more frequent
deliveries, higher quality products and services; and (iii) 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.
Our profit improvement program, initiated in 2015 to reduce operating expenses and enhance margins, is now integrated into
our operations. This plan included eliminating certain leased properties, lowering transportation, labor and personnel
expenses, centralization of certain administrative functions, as well as inventory and purchasing initiatives. We successfully
executed on the initiatives of the plan, which has led to reduced operating expenses and improved efficiencies.
We are focused on specific operating objectives including: (i) managing inventory turnover; (ii) managing operating
expenses; (iii) maintaining targeted cash turnover rates; (iv) investing in value-added processing and material handling
equipment; (v) growing our market share; (vi) investing in technology and business information systems; (vii) improving
safety performance; and (viii) 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 recognition program that rewards employees who
achieve profitable growth by delivering superior customer service and exceeding customer expectations.
● Operational initiatives designed to improve efficiencies and reduce costs by improving three key sub-systems:
● Operating system: Focused on continuously improving processes through waste and variation
elimination using Lean Six Sigma tools and employee certifications.
● 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.
2
● New information 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.
Investments and Acquisitions. Historically, we have accelerated our growth through acquisitions and capital investments in
facilities and processing equipment. 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. During the five-year period ended December 31, 2012, we spent approximately
$160 million on the CTI acquisition and over $125 million on capital investments for new facilities and processing equipment
in support of our strategic growth initiatives. Since 2013, we continued to invest in processing 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.
Our capital investments during the past three years have primarily consisted of a stretcher leveling line as well as other
processing equipment for our expanded value-added customer base in Winder, Georgia, added tube and pipe distribution
capabilities from our Cleveland, Ohio and Monterey, Mexico facilities and additional processing equipment in our tubular
and pipe products segment.
Sales and Marketing. We believe that our commitments to quality, service, just-in-time delivery and field sales personnel
have 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 successfully service
multi-location customers from multi-location Olympic facilities. We service certain customers with carbon and specialty
metals flat products and tubular and pipe products through 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 flawless execution (Fe) program is a commitment to provide superior customer service while striving to exceed customer
expectations. This program includes tracking on-time delivery and quality performance against objectives, and recognition
of employee initiatives to improve efficiencies, streamline processes or reduce operating expenses at each operation.
We believe our large and experienced sales force provides strategic advantages. Our sales force makes direct daily sales calls
to customers throughout the continental United States, Canada and 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 increasing sales.
Our sales efforts are further supported by metallurgists, engineers, technical and quality 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. We have expanded our sales force to increase market share in all of our segments. Our services
for certain 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 30 years of
experience in the metals industry and 23 years with our company.
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. CTI provides a
variety of value added services to its tube and pipe product line, including saw cutting, laser cutting, beveling, threading and
grooving. CTI also fabricates pressure components supplied to various industrial markets.
Customer orders are entered or electronically transmitted into computerized order entry systems, and appropriate inventory
is 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, beveling, 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 machining, welding, assembly and painting of component parts.
Commencing with 2015, the flat products segment has been separated into two reportable segments; carbon flat products and
specialty metals flat products. The flat products segments’ assets and resources are shared by the carbon and specialty metals
segments and both segments’ products are, in some instances, stored in the shared facilities and processed on the shared
equipment.
The following table sets forth, as of December 31, 2016, the major pieces of processing equipment in operation by segment:
Processing Equipment
Tempering
Stretcher-leveling
Cutting-to-length
Slitting
Shearing
Blanking
Plate processing
Laser processing
Forming
Machining
Painting
Tube processing
Finishing
Total
Consolidated
Flat
Products
Tubular and
Pipe
Products
Total
3
2
12
10
11
4
26
27
18
53
3
2
29
200
-
-
12
-
-
-
-
8
-
84
1
39
3
147
3
2
24
10
11
4
26
35
18
137
4
41
32
347
4
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 and customer audits, workshops with customers, inspection equipment
and criteria, preventative actions, traceability and certification. We have quality testing labs at several of our facilities, as
well as adjacent to our temper mill facilities in Cleveland, Ohio and Bettendorf, Iowa.
In addition, 25 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. Our office building in Winder,
Georgia has received Leadership in Energy and Environmental Design (LEED) 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 8.9%, 11.6% and 11.1% of our consolidated net sales in
2016, 2015 and 2014, respectively. We serve customers in metals consuming industries, including manufacturers and
fabricators of transportation and material handling lift 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
Metals service centers
Residential and commercial construction
Transportation equipment manufacturers
All others <5%
2016
51.3%
9.8%
9.7%
8.3%
6.4%
14.5%
2015
49.4%
9.6%
7.2%
10.2%
7.1%
16.5%
2014
50.6%
7.9%
9.1%
8.2%
5.6%
18.6%
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 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 the just-in-time delivery requirements of
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. Through 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 commodities hedging. Customers notify us of specific release dates as 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 pressure parts and other fabricated components primarily for industrial boiler applications
representing 1.7% of consolidated net sales in 2016. 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 supply chain scrutiny by our customers and potential
customers. We believe our size, geographic footprint, financial position, and our focus on quality and customer service are
advantageous in maintaining our customer base and in securing new customers.
5
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, domestic and global supply and demand imbalance, competition, lead
times from 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.
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, purchase commitments
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.
During the past three years, we have entered into pass through nickel and carbon swaps at the request of our customers in
order to mitigate our customers’ risk of volatility in the price of metals. The swaps are settled with the brokers at maturity
and the economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the
customer. During 2014, we entered into cash flow metals hedges to mitigate our risk of volatility in the price of metals. The
cash flow hedges were settled with the brokers at maturity and the economic benefit or loss arising from the changes in fair
value of the hedges was recorded to “Cost of Materials Sold” in the Consolidated Statements of Comprehensive Income. All
of the metals cash flow hedges settled during 2015, and we have no outstanding metals cash flow hedges as of December 31,
2016.
We have no long-term, fixed-price metals purchase contracts, except for commodity hedges. When metals prices decline,
customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and,
consequently, lower gross profits and earnings as we use existing metals inventory. When metals prices increase, competitive
conditions will influence how much of the price increase we can pass on to our customers.
Suppliers
We concentrate on developing supply relationships with high-quality domestic and international metals producers, using a
coordinated effort to be the customer of choice for business critical suppliers. We employ sourcing strategies that maximize
the quality, production lead times and transportation economies of a global supply base. We are an important customer of
flat-rolled coil and 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.
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 54% and 51% of our total metals requirements from our
three largest suppliers in 2016 and 2015, respectively. Although we have no long-term supply commitments, we believe we
have good relationships 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.
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.
6
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 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 optimize management of inventory.
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 solutions to replace our
legacy information systems and have successfully implemented new ERP systems at most of our locations and have
decommissioned three legacy systems as of December 31, 2016. We continue to implement these new systems to
provide standardized business processes, enhanced inventory management, production cost, and sales administrative
controls, and reduced technical support requirements. Our business analysts work with our quality team to identify
opportunities for efficiency and improved customer service. We collaborate across the metal supply chain, working
with metals 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 systems, internet and communications systems are duplicated at a secure off-site computing facility
or through secure, multi-site cloud providers, with migration of our other systems which are in progress.
7
Employees
At December 31, 2016, we employed approximately 1,660 people. Approximately 280 of the hourly plant personnel are
represented by nine separate collective bargaining units. The table below shows the expiration dates of the collective
bargaining agreements.
Facility
Minneapolis plate, Minnesota
Detroit, Michigan
Duluth, Minnesota
St. Paul, Minnesota
Milan, Illinois
Locust, North Carolina
Romeoville, Illinois
Minneapolis coil, Minnesota
Indianapolis, Indiana
Expiration date
March 31, 2017
August 31, 2017
December 21, 2017
May 25, 2018
August 12, 2018
March 4, 2020
May 31, 2020
September 30, 2020
January 29, 2021
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
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 wholly-owned subsidiary, Olympic Steel Iowa, Inc.
does business in certain states under the name “Oly Steel Iowa, Inc.”. Our North Carolina operation conducts business under
the name “Olympic Steel North Carolina.” Our Integrity Stainless operation conducts business 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.
8
Seasonality
Seasonal factors may cause demand fluctuations within the year which could impact our results of operations. Typically,
demand in 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 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.
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.
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;
●
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;
●
9
●
●
●
●
the strengthening of the U.S. dollar and the related impact on foreign steel pricing, U.S. exports, and foreign imports
to the United States;
the levels of imported steel in the United States and any associated tariffs and duties;
the availability and costs of transportation and logistical services;
the successes of our strategic efforts and initiatives to increase sales volumes, maintain or improve working capital
turnover and free cash flows, improve our customer service, and achieve cost savings, including our internal program
to improve earnings;
●
●
●
●
●
●
●
●
●
● our ability to generate free cash flow through operations 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 additional impairment charges related to indefinite
●
lived intangible assets;
events or circumstances that could adversely impact the successful operation of our processing equipment and
operations;
the amounts, successes and our ability to continue our capital investments and strategic growth initiatives, including
our business information system implementations;
the successes of our operational initiatives to improve our operating, cultural and management systems and reduce
our costs;
the ability to comply with the terms of our asset-based credit facility;
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, our suppliers’ or customers’ personnel;
the impacts of union organizing activities and the success of union contract renewals;
the timing and outcomes of inventory lower of cost or market adjustments and last-in, first-out, or LIFO, income,
especially during periods of declining market pricing;
the ability of our customers (especially those that may be highly leveraged, and those with inadequate liquidity) to
maintain their credit availability;
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 LIFO inventory valuation;
the adequacy of our existing information technology and business system software, including duplication and
security processes;
the adequacy of our efforts to mitigate cyber security risks and threats;
access to capital and global credit markets;
●
●
● our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends;
● our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any;
● unanticipated developments that could occur with respect to contingencies such as litigation, arbitration and
environmental matters, including any developments that would require any increase in our costs for such
contingencies; and
changes in laws or regulations or the manner of their interpretation or enforcement could impact our financial
performance and restrict our ability to operate our business or execute our strategies.
●
●
●
●
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 and stainless steel and aluminum flat rolled coil, sheet, plate, pipe and tube 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, sales levels, competition, levels of inventory held by other metals service centers, producer
lead times, higher raw material costs for the producers of metals, imports, 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 entered into metals hedges, which carry
counterparty performance risk, in order to mitigate our risk of volatility in the price of metals. We have no long-term, fixed-
price metals purchase contracts, except for metals hedges. Declining metals prices, customer demand for lower prices and
our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and
potentially 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 asset impairment charges. 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. 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. Its expansion of metals production has
significantly affected the global metals industry. The recent economic downturn in China, the slowing of its growth and
decreased metals consumption has led to an increased supply of metals in the United States, which result in lower prices for
our products. Actions by domestic and foreign producers, including metals companies in China, to further increase production
could result in an increased supply of metals in the United States, which could result in lower prices for our products. 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. Numerous
factors, such as general economic conditions, strengthening of the US dollar, 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 51.3% of our 2016 consolidated net sales were to industrial machinery and equipment manufacturers and
their fabrications. Due to the concentration of customers in the industrial machinery and equipment industry, a decline in
production levels in that industry could result in lower sales, gross profits and profitability. Approximately 9.8% of our 2016
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.
We may not be able to retain or expand our customer base if the U.S. manufacturing industry erodes or if the U.S.
dollar continues to strengthen.
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 historically manufactured products in the United States for export to foreign markets. As the U.S.
dollar has strengthened, products made by U.S. manufacturers have become less attractive to foreign buyers. Fewer purchases
by foreign buyers reduces our metals sales to those U.S. manufacturers and adversely affects our sales and results of
operations.
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 8.9% and 11.6% of our consolidated net sales
in 2016 and 2015, 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.
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 54% and 51% of our
total metals requirements from our three largest suppliers in 2016 and 2015, respectively. The number of available suppliers
could be reduced in the future by factors such as further industry consolidation or bankruptcies affecting metals 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 depend, in part, on third parties for transportation services, and increases in costs or the availability of
transportation could adversely affect our business and operations.
We ship products throughout the United States via our in-house truck fleet or by third-party trucking firms. Products sold to
foreign customers 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. Our business depends on the transportation of a large number of products. We
depend to a certain extent on third parties for transportation of our products as well as delivery of our raw materials.
12
If any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to process and
deliver our products in response to customer demand. In addition, if any of these third parties were to cease operations or
cease doing business with us, we may be unable to replace them at a reasonable cost. In addition, such failure of a third-party
transportation provider could harm our reputation, negatively affect our customer relationships and have a material adverse
effect on our financial position and results of operations.
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. The objective
is to standardize and streamline business processes and improve support for our service center and fabrication business. Risks
associated with the phased implementation include, but are not limited to:
●
●
●
●
●
●
●
a significant deployment of capital and a significant use of management and employee time;
the possibility that software and implementation vendors may not be able to support the project as planned;
the possibility that the timelines, costs or complexities related to the new system implementation will be greater
than expected;
the possibility that the software, once fully implemented, does not function as planned;
the possibility that benefits from the new systems may be less or take longer to realize than expected;
the possibility that disruptions from the implementation may make it difficult for us to maintain relationships
with our 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.
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 legacy 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 since 2010. 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.
13
The pursuit of acquisitions and other growth initiatives 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.
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, the President of
CTI, our Executive Vice President and Chief Operating Officer and our Chief Financial Officer that expire on January 1,
2018, December 31, 2020, June 30, 2021, July 1, 2020 and January 1, 2021, 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 profit improvement programs or operational initiatives.
The profit improvement programs initiated in 2015 to reduce operating expenses and enhance margins included eliminating
certain leased properties, lowering transportation, labor and personnel expenses, centralization of certain administrative
functions, as well as inventory and purchasing initiatives.
In addition, our operational initiatives are designed to improve efficiencies and lower our costs. The initiatives are focused
on continuously improving processes through waste and variation elimination using Lean Six Sigma tools and employee
certifications. The risks associated with these initiatives include, but are not limited to:
●
●
●
a significant use of management and employee time;
the possibility that the initiatives do not meet expectations; and
the possibility that the initiatives do not provide the expected or sustained economic results.
Difficulties associated with executing our profit improvement plan and operational initiatives could adversely affect our
business, our customer service, our results of operations and our cash flows.
Processing equipment investments at our existing locations may be unable to achieve expected results, and events or
circumstances that could adversely impact the successful operation of new processing equipment and operations could
have a material adverse effect on our results of operations.
We continue to invest in processing equipment to support customer demand. Although we have successfully installed new
and used processing equipment in the past, we can provide no assurance that future installations will be successful, or achieve
expected results. Risks associated with the installations include, but are not limited to:
●
●
●
a significant use of management and employee time;
the possibility that the performance of the equipment does not meet expectations; and
the possibility that disruptions from the installations may make it difficult for us to maintain relationships with
our respective customers, employees or suppliers.
Difficulties associated with the installation 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
14
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.
Although we expect to finance our growth initiatives through borrowings under our credit facility, we may have to
find additional sources of funding, which could be difficult. Additionally, increased leverage and borrowing rates
could adversely impact our business and results of operations.
We expect to finance our growth initiatives through borrowings under our credit facility, which matures on June 30, 2019.
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.
The borrowings under our credit facility are primarily at variable interest rates. If interest rates in the future were to increase
100 basis points (1.0%) from December 31, 2016 rates and, assuming no change in total debt from December 31, 2016 levels,
the additional annual interest expense to us would be approximately $1.6 million.
Our information technology systems could be negatively affected by cyber security threats.
Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted
computer crime pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our
data. Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems and
those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification
or destruction of proprietary and other key information, production downtimes and operational disruptions, which in turn
could adversely affect our results of operations. We may face greater risks in this area than our competitors as we implement
the ERP system because among other things, we must simultaneously protect both the ERP and legacy systems until the ERP
project is complete.
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, 2016, we employed approximately 1,660 people. Approximately 280 of the hourly plant personnel are
represented by nine 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
have experienced significant labor disruptions in the past 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.
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.
15
Impairment in the carrying value of intangible assets could result in the incurrence of impairment charges and
negatively impact our results of operations.
The net carrying value of intangibles represents trade names and customer relationships, net of accumulated amortization,
related to our tubular and pipe products segment. Indefinitely lived assets are evaluated for impairment annually or whenever
events or changes in circumstance indicate that the carrying amounts of these assets may not be recoverable. Amortizable
intangible assets are evaluated for impairment whenever events or changes in circumstance indicate that the carrying amounts
of these assets may not be recoverable. Impairments to intangible assets may be caused by factors outside our control, such
as increased competitive pricing pressures, lower than expected revenue and profit growth rates, changes in discount rates
based on changes in the cost of capital (interest rates, etc.), or the loss of a significant customer and could result in the
incurrence of impairment charges and negatively impact our results of operations.
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.
Participation in multiemployer pension plans carry withdrawal liability risks which could impact our results of
operations and financial condition.
Through our CTI subsidiary, we contribute to one multiemployer pension 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.
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 waste 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.
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.
16
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our
financial performance and restrict our ability to operate our business or execute our strategies.
New laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or enforcement,
could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. In particular,
there may be significant changes in U.S. laws and regulations and existing international trade agreements by the new U.S.
presidential administration that could affect a wide variety of industries and businesses, including those businesses we own
and operate. It remains unclear what the new U.S. presidential administration will do, if anything, with respect to existing
laws, regulations, or trade agreements. If the new U.S. presidential administration materially modifies U.S. laws and
regulations and international trade agreements, our business, financial condition, and results of operations could be affected.
Risks Related to Our Common Stock
The market price for our common stock may be volatile.
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;
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;
●
●
●
fluctuations in the value of the US dollar;
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.
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
17
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 our largest shareholder, owned approximately
11.3% of our outstanding common stock as of December 31, 2016. 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.
18
ITEM 2. PROPERTIES
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. 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. During 2016, we terminated leases on certain warehouse facilities in Moses Lake, Washington and Roseville,
Minnesota and gave notice to terminate the lease in Oklahoma City, Oklahoma in 2017.
The following table sets forth certain information concerning our principal properties including which segment’s products
are serviced out of each location:
Pipe
and
Tube
✔
✔
✔
✔
Operation
Location
Square
Feet
Function
Segment
Owned or
Leased
Carbon
Specialty
Metals
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
Cleveland
Bedford Heights, Ohio (1)
127,000 Corporate offices, coil processing and distribution
Bedford Heights, Ohio (1)
121,500 Coil and plate processing, distribution center and
center
Owned
✔
Bedford Heights, Ohio (1)
Dover, Ohio
offices
✔
59,500 Plate processing, distribution center and offices Leased (2) ✔
62,000 Plate processing, fabrication and distribution
Owned
Owned
Owned
Owned
Owned
Owned
✔
✔
✔
✔
✔
Owned
✔
Leased (3) ✔
Owned
Owned
✔
✔
Owned
✔
Owned (4) ✔
✔
✔
Owned
Owned
Owned
Owned
✔
✔
Owned
Leased (5)
Leased (6) ✔
Leased (7) ✔
Winder
Detroit
Kentucky
Gary
Connecticut
Chicago
Minneapolis
Plymouth, Minnesota
196,800 Coil and plate processing, distribution center and
offices
Plymouth, Minnesota
112,200 Plate processing, fabrication, distribution center
and offices
Chambersburg Chambersburg, Pennsylvania 157,000 Plate processing, distribution center and offices
Chambersburg, Pennsylvania 150,000 Plate processing, fabrication, distribution center
center
Iowa
Bettendorf, Iowa
Oklahoma City, Oklahoma
Winder, Georgia
and offices
244,000 Coil and plate processing, fabrication, distribution
center and offices
33,000 Distribution center
285,000 Coil and plate processing, fabrication, distribution
center and offices
Detroit, Michigan
Mt. Sterling, Kentucky
256,000 Coil processing, distribution center and offices
100,000 Plate processing, fabrication and distribution
center
Mt. Sterling, Kentucky
Gary, Indiana
Milford, Connecticut
Schaumburg, Illinois
107,000 Distribution center and offices
183,000 Coil processing, distribution center and offices
134,000 Coil processing, distribution center and offices
80,500 Coil and sheet processing, distribution center and
offices
North Carolina Siler City, North Carolina
74,000 Plate processing, fabrication, distribution center
and offices
Streetsboro
Streetsboro, Ohio
66,200 Coil and sheet processing, distribution center and
Washington
Mexico
Latrobe, Pennsylvania
Moses Lake, Washington
Monterrey, Mexico
43,200 Coil and sheet processing, distribution center
14,000 Distribution center
60,000 Distribution center
offices
19
Operation
Location
Square
Feet
Function
Chicago
Romeoville, Illinois
363,000 Corporate offices, fabrication and distribution
Segment
Owned or
Leased
Carbon
Specialty
Metals
Pipe
and
Tube
St. Paul
Charlotte
Fond du Lac
Indianapolis
Quad Cities
Des Moines
Duluth
Owatonna
St. Paul, Minnesota
Locust, North Carolina
Fond du Lac, Wisconsin
Indianapolis, Indiana
Milan, Illinois
Ankeny, Iowa
Proctor, Minnesota
Owatonna, Minnesota
center
132,000 Distribution center and offices
127,600 Distribution center, fabrication and offices
117,000 Distribution center and offices
79,000 Distribution center and offices
57,600 Distribution center and offices
50,000 Distribution center and offices
45,202 Distribution center and offices
23,000 Production cutting center
✔
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased (8)
Owned
✔
✔
✔
✔
✔
✔
✔
✔
✔
(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 July 7, 2017.
50% of the facility is leased to an unrelated party whose lease expires on December 31, 2017.
The lease on this facility expires on May 1, 2019.
The Moses Lake location is comprised of two different facilities located in Moses Lake and Quincy, Washington.
The facilities are leased on a month-to-month basis.
The lease on this facility expires on August 31, 2021. 75% of the facility is leased to an unrelated party whose
lease expires on September 30, 2017 with renewal options.
The lease on this facility expires on April 30, 2019.
In addition to the facilities listed above, our executive office is located in Highland Hills, Ohio and we have leased sales
offices located in Media, Pennsylvania; Miami, Florida; and Monterrey, Mexico. Management believes we will be able to
accommodate our capacity needs for the immediate future at our existing facilities.
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.
20
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 64, 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. Mr. Siegal serves on the Board of Directors of Cliffs Natural Resources, Inc. He is also the immediate
past Board Chair of the Jewish Federations of North America and is currently on the Board of the Development Corporation
for Israel and the Jewish Agency for Israel.
David A. Wolfort, age 64, has served as our President since January 2001. He has been a director since 1987. He previously
served as Chief Operating Officer from 1995 to 2016 and 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 where he serves as the Chairman of The Board of Trustees and is
a member of the Executive Committee. He also serves as a member of the United States Industry Trade Advisory Committee
for steel (ITAC).
Andrew S. Greiff, age 55, has served as our Executive Vice President and Chief Operating Officer since August 2016. He
previously served as President, Specialty Metals from 2011 to 2016 after having joined us in 2009 as Vice President of
Specialty Metals. Prior thereto, Mr. Greiff spent 24 years in various positions within the steel industry and served as the
President and CEO of his own steel trading company. Mr. Greiff serves on the board of Hawken School and the MSCI
Specialty Metals Product Council.
Richard T. Marabito, age 53, 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
is a Governance board member of the Make-A-Wish Foundation of Ohio, Kentucky and Indiana and also serves as the Chair
of its Northeast Ohio regional board. Mr. Marabito serves on the Board of Trustees and as Treasurer for Hawken School in
Cleveland, Ohio. He is also a Vice Chair and Executive Committee member of the Metals Service Center Institute and is a
past Chair of its Foundation for Education and Research.
Richard A. Manson, age 48, 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 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 62, has served as the President 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.
21
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, 2016, the high and low sales prices of our common stock as reported
by the Nasdaq Global Select Market:
First quarter
Second quarter
Third quarter
Fourth quarter
Holders of Record
High
$
2016
2015
Low
High
Low
17.50 $
27.48
31.19
28.67
7.98 $
15.41
17.42
17.14
18.57 $
20.93
17.92
12.60
12.86
10.44
6.40
8.98
As of February 1, 2017, we estimate there were approximately 43 holders of record and 3,670 beneficial holders of our
common stock.
Dividends
During 2016, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 15,
2016, June 15, 2016, September 15, 2016 and December 15, 2016.
During 2015, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 16,
2015, June 15, 2015, September 15, 2015 and December 15, 2015.
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. Our asset-based credit facility (the ABL Credit
Facility) restricts the aggregate amount of dividends and common stock repurchases 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 purchase any of our equity securities during the quarter ended December 31, 2016.
On October 2, 2015, we announced that our Board of Directors authorized a stock repurchase program of up to 550,000
shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated
block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected
through Rule 10b5-1 plans. Any of the repurchased shares will be held in our treasury, or canceled and retired as our Board
may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL
Credit Facility. Our ABL Credit Facility restricts the aggregate amount of dividends and common stock repurchases that we
can pay to $2.5 million annually. Purchases in excess of $2.5 million require us to (i) maintain availability in excess of 25%
of the aggregate revolver commitments or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver
commitments and we must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to
fixed charges of at least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will
depend upon several factors, including market and business conditions, and limitations under the ABL Credit Facility, and
repurchases may be discontinued at any time.
22
Recent Sales of Unregistered Securities
We did not have any unregistered sales of equity securities during the quarter ended December 31, 2016.
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, 2016. 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.
For the Years Ended December 31,
2016
2015
2014
(in thousands, except per share data)
2013
2012
Income Statement Data:
Net sales
Cost of materials sold
Gross profit (a)
Operating expenses (b)
Goodwill and intangible asset impairment
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 (d)
Dividends paid
Shares Outstanding:
Weighted average shares - basic
Weighted average shares - diluted
Balance Sheet Data (as of December 31):
Current assets (e)
Current liabilities (e)
Working capital (f)
Total assets (e)
Total debt
Shareholders' equity
$ 1,055,116 $ 1,175,543 $1,436,270 $ 1,263,331 $1,383,701
820,040 942,214 1,160,310 999,207 1,113,852
235,076 233,329 275,960 264,124 269,849
229,328 236,157 261,332 244,469 244,817
6,583
18,449
8,357
10,139
2,277
23,836
24,951
(9,208)
(27,779)
6,780
5,690
(33,594)
(16,114)
(26,777) $ (19,064) $
-
19,655
6,703
12,924
7,647 $
-
5,748
5,273
420
(1,078)
$
$
(0.10) $
(0.10)
0.08 $
(2.39) $
(2.39)
0.08 $
(1.71) $
(1.71)
0.08 $
0.69 $
0.69
0.08 $
0.21
0.21
0.08
11,210
11,210
11,192
11,192
11,120
11,120
11,065
11,074
10,989
10,995
$ 364,940 $ 308,946 $ 458,709 $ 417,631 $ 422,377
77,060 131,977 165,633 142,442
104,898
260,042 231,886 326,732 251,998 279,935
556,068 511,880 699,154 695,375 705,085
166,424 148,490 247,620 199,269 241,711
$ 253,390 $ 254,695 $ 280,781 $ 298,616 $ 289,857
(a) Gross profit is calculated as net sales less the cost of materials sold (includes LIFO income of $1,489 and $3,347 in
2016 and 2015, respectively, LIFO expense of $365 in 2014 and LIFO income of $3,572 in 2013).
(b) Operating expenses are calculated as total costs and expenses less the cost of materials sold. It does not include the
goodwill and intangible asset impairment charge shown separately below.
(c) Calculated by dividing net income (loss) by weighted average basic shares outstanding.
(d) Calculated by dividing net income (loss) by weighted average diluted shares outstanding.
(e)
(f)
Prospective adjustment of deferred tax assets and liabilities in 2016, prior periods were not retrospectively adjusted.
Calculated as current assets less current liabilities.
23
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 three reportable segments; carbon flat products, specialty metals flat
products, and tubular and pipe products. We provide metals processing and distribution services for a wide range of
customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed
carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Our specialty metals flat products segment’s
focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar
products and fabricated parts. In addition, 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. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing
performed, the demand for and availability of metals, and volatility in selling prices and material purchase costs. We also
perform toll processing of customer-owned metals. We sell certain products internationally, primarily in Canada, Mexico and
Dominican Republic. 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; fluctuations in the value of the U.S. dollar to foreign currencies,
competition; metals pricing, demand and availability; energy prices; pricing and availability of raw materials used in the
production of metals; global supply, the level of metals imported into the United States, 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 metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and
just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory
at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts,
historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals
are generally at prevailing market prices in effect at the time we place our orders. We have entered into nickel and carbon
swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals, and we have
entered into metals hedges to mitigate our risk of volatility in the price of metals. We have no long-term, fixed-price metals
purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those
demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals
inventory. When metals prices increase, competitive conditions will influence how much of the price increase we can pass
on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the
net sales and gross profits of our business could be adversely affected.
Reportable Segments
The Company operates in three reportable segments; carbon flat products, specialty metals flat products and tubular and pipe
products. The carbon flat products segment and the specialty metals flat products segment are at times consolidated and
referred to as the flat products segment. Some of the flat products segments’ assets and resources are shared by the carbon
and specialty metals segments and both segments’ products are stored in the shared facilities and, in some locations, processed
on shared equipment. As such, total assets and capital expenditures are reported in the aggregate for the flat products
segments. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the
carbon flat products segment and the specialty metals flat products segment based upon an established allocation
methodology. The financial information for 2014 has been recast to reflect the new segment reporting structure.
24
We follow the accounting guidance that requires the utilization of a “management approach” to define and report the financial
results of operating segments. The management approach defines operating segments along the lines used by the chief
operating decision maker, or CODM, to assess performance and make operating and resource allocation decisions. Our
CODM evaluates performance and allocates resources based primarily on operating income. Our operating segments are
based on internal management reporting.
Due to the nature of the products sold in each segment, there are significant differences in the segments’ average selling price
and the cost of materials sold. The tubular and pipe products segment generally has the highest average selling price among
the three segments followed by the specialty metals flat products and carbon flat products segments. Due to the nature of the
tubular and pipe products, we do not report tons sold or per ton information. Gross profit per ton is generally higher in the
specialty metals flat products segment than the carbon flat products segment. Gross profit as a percentage of net sales is
generally highest in the tubular and pipe products segment, followed by the carbon and specialty metals flat products
segments.
Due to the differences in average selling prices, gross profit and gross profit percentage among the segments, a change in the
mix of sales could impact total net sales, gross profit, and gross profit percentage. In addition, certain inventory in the tubular
and pipe products segment is valued under the LIFO method. Adjustments to the LIFO inventory value are recorded to cost
of materials sold and may impact the gross margin and gross margin percentage at the consolidated Company and tubular
and pipe products segment levels.
Carbon flat products
The primary focus of our carbon flat products segment is on the direct sale and distribution of large volumes of processed
carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. 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, 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.
Specialty metals flat products
The primary focus of our specialty metals flat products segment is on the direct sale and distribution of processed stainless
and aluminum flat-rolled sheet and coil products, flat bar products and fabricated parts. We act as an intermediary between
metals producers and manufacturers that require processed metals for their operations. We serve customers in various
industries, including manufacturers of food service and commercial appliances, agriculture equipment, transportation and
automotive equipment. We distribute these products primarily through a direct sales force.
Combined, the carbon and specialty metals flat products segments have 22 strategically-located processing and distribution
facilities in the United States and one in Monterrey, Mexico. Many of our facilities service both the carbon and the specialty
metals flat products segments, and certain assets and resources are shared by the segments. Our geographic footprint allows
us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the
midwestern, eastern and southern United States.
Tubular and pipe products
The tubular and pipe products segment consists of the Chicago Tube and Iron, or CTI, business, acquired in 2011. Through
our tubular and pipe products segment, we distribute metal tubing, pipe, bar, valve and fittings and fabricate pressure parts
supplied to various industrial markets. Founded in 1914, CTI operates from nine locations in the midwestern and southeastern
United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.
Corporate expenses
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the
unallocated expenses related to managing the entire Company (i.e., all three segments), including compensation for certain
personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various
other professional fees.
25
Results of Operations
2016 Compared to 2015
Our results of operations are impacted by the market price of metals. Over the past 24 months, metals prices have fluctuated
significantly and changes to our net sales, cost of materials sold, gross profit, cost of inventory and profitability, are all
impacted by industry metals pricing.
During 2015, the hot-rolled carbon coil index pricing declined by approximately 36% as a result of the strengthened U.S.
dollar, a historically high level of imported material arriving in the United States, low raw material costs to produce metals
and a global oversupply of metals. The pricing environment in 2015 drove our average selling prices down and caused
margins to be pressured as the average cost of inventory did not decrease as quickly as the average selling price as we
traditionally keep approximately two and a half to three months of inventory on hand.
During the first six months of 2016, the market price of metals increased and fully recovered the decrease experienced during
2015. Metals market pricing peaked in June 2016, and then decreased until November 2016. Metals prices in December 2016
were not as high as the June 2016 prices, but were more than 65% per ton higher than the December 2015 prices. Although
prices increased during 2016, the average selling price during 2016 was still lower than the average selling price during 2015.
Transactional or “spot” selling prices generally move in tandem with market price changes, while fixed selling prices typically
lag and reset quarterly. Similarly, inventory costs (and therefore cost of materials sold) tend to move slower than market
selling price changes due to mill lead times and inventory turnover impacting the rate of change in average cost. As sales
volumes were relatively flat between the years, lower average selling prices were the driver for our decreased net sales in
2016. When the average selling price decreases, and net sales decreases, the gross profit and operating expenses as a
percentage of net sales will generally increase.
The following table sets forth certain consolidated income statement data for the years ended December 31, 2016 and 2015
(dollars shown in thousands):
2016
2015
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Goodwill and intangible asset impairment (d)
Operating loss
Other loss, net
Interest and other expense on debt
Income (loss) before income taxes
Income taxes
Net loss
$
$ 1,055,116
820,040
235,076
229,328
-
5,748
(55)
5,273
420
1,498
(1,078)
$
% of net
sales
$
% of net
sales
100.0 $ 1,175,543
942,214
77.7
233,329
22.3
236,157
21.7
24,951
(0.0)
(27,779)
0.5
(125)
(0.0)
5,690
0.5
(33,594)
0.0
(6,817)
0.1
(26,777)
(0.1) $
100.0
80.2
19.8
20.1
2.1
(2.4 )
(0.0 )
0.5
(2.9 )
(0.6 )
(2.3 )
(a) Includes $1,489 and $3,347 of LIFO income for 2016 and 2015, respectively.
(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. Excludes goodwill and
intangible asset impairment shown seperately below for comparability purposes.
(d) The 2015 non-cash goodwill and intangible asset impairment charge is seperately displayed for operating expense
comparability purposes. $24,451 of the impairment charge is related to the tubular and pipe products segment and $500
is related to the specialty metals flat products segment.
26
Net sales decreased $120.4 million, or 10.2%, to $1.06 billion in 2016 from $1.18 billion in 2015. Carbon flat products net
sales decreased $94.4 million, or 12.3%, and were 63.6% of total net sales in 2016 compared to 65.1% in 2015. Specialty
metals flat products net sales decreased $2.6 million, or 1.3%, and were 18.0% of total net sales in 2016 compared to 16.4%
in 2015. Tubular and pipe products net sales decreased $23.4 million, or 10.8%, and were 18.4% of total net sales in 2016
compared to 18.5% of total net sales in 2015. The decrease in sales for the year ended December 31, 2016 was due to a 10.2%
decrease in average selling prices as sales volumes were flat between years. Average selling prices decreased in all segments
during 2016 compared to 2015 as market pricing for metals was still lower year-over-year. During the year, we increased our
market share for all of the product categories that we sell.
Cost of materials sold decreased $122.2 million, or 13.0%, to $820.0 million in 2016 from $942.2 million in 2015. During
2016, we recorded LIFO income of $1.5 million compared to LIFO income of $3.3 million recorded in 2015. The decrease
in cost of materials sold in 2016 is due to the decreased metals costs of 12.9% during 2016 as sales volumes were flat between
years.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 22.3% in 2016 from
19.8% in 2015. Gross profit as a percentage of net sales increased in the carbon flat products segment to 21.2% from 19.2%
in 2015 and in the tubular and pipe products segment to 32.6% from 32.5% in 2015. Gross profit as a percentage of net sales
increased in the specialty metals flat products segment to 15.7% in 2016 from 8.2% in 2015. LIFO income increased gross
profit by 0.1% and 0.3% of net sales in 2016 and 2015, respectively. The increase in gross profit as a percentage of net sales
during 2016 was primarily due to the cost of materials sold decreasing more than selling prices in all segments.
Operating expenses (as defined in footnote (c) in the table above) decreased $6.8 million, or 2.9%, to $229.3 million in 2016
from $236.2 million in 2015. As a percentage of net sales, operating expenses increased to 21.7% in 2016 from 20.1% in
2015. Warehouse and processing costs decreased $5.9 million, or 6.9%, primarily due to reductions in labor hours worked.
Administrative costs decreased by $1.9 million, or 3.0%, primarily related to reductions in labor and personnel expenses and
lower variable based incentive compensation. Distribution expense increased by $0.4 million, or 1.2%, on flat sales volumes.
Selling expenses increased $1.9 million, or 9.0%, as a result of hiring additional sales professionals. Occupancy expenses
decreased $0.8 million as a result of elimination of certain leased warehouse space. Depreciation expense decreased $0.6
million, or 3.0%, as a result of certain assets being fully depreciated in 2016. Operating expenses in the carbon flat products
segment decreased $7.6 million, operating expenses in the specialty metals products segment increased $3.0 million,
operating expenses in the tubular and pipe products segment decreased $2.5 million, and Corporate expenses increased $0.3
million.
The goodwill and intangible asset impairment charge in 2015 included a $16.5 million non-cash goodwill impairment and a
$8.0 million intangible asset impairment for the tubular and pipe products segment as well as a $0.5 million goodwill
impairment for the specialty metals flat products segment. The 2015 goodwill impairment charges fully impaired the goodwill
for both the tubular and pipe products segment and the specialty metals flat products segment.
Interest and other expense on debt totaled $5.3 million in 2016 compared to $5.7 million in 2015. Our effective borrowing
rate, exclusive of deferred financing fees and commitment fees, was 2.4% in 2016 compared to 2.1% in 2015. The decrease
in interest and other expense on debt in 2016 was attributable to lower average borrowings during 2016 compared to 2015.
Income before income taxes totaled $0.4 million in 2016 compared to a loss before income taxes of $33.6 million in 2015.
2015 loss before income taxes includes goodwill impairment charges of $17.0 million and a $8.0 million intangible asset
impairment charge.
An income tax provision of 356.7% was recorded for 2016, compared to an income tax benefit of (20.3%) in 2015. The
effective tax rate is disproportionately high in 2016 from comparative periods due to low income before taxes relative to
items that impact the effective tax rate. The 2016 effective income tax rate was impacted by increased valuation allowances
and non-deductible expenses. The 2015 effective income tax rate was impacted by the non-deductibility of the goodwill
impairment charges. The income tax benefit for 2015 prior to the goodwill impairment charge was 39.8%. We expect our
2017 income tax rate to approximate 38% to 40%.
Net loss for 2016 totaled $1.1 million, or $0.10 per basic and diluted share, compared to net loss of $26.8 million, or $2.39
per basic and diluted share, for 2015. The goodwill and intangible asset impairments in 2015 impacted earnings per share by
$1.93 per basic and diluted shares.
27
Segment Results of Operations
Carbon flat products
The following table sets forth certain income statement data for the carbon flat products segment for the years ended
December 31, 2016 and 2015 (dollars shown in thousands, except per ton data):
2016
% of net
sales
2015
% 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 loss
$
$
952,888
73,880
1,026,768
670,983
653
529,021
141,962
146,333
(4,371)
935,165
102,360
1,037,525
765,400
738
618,674
146,726
153,943
(7,217)
100.0 $
78.8
21.2
21.8
(0.6) $
100.0
80.8
19.2
20.1
(0.9 )
(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.
Tons sold decreased 1.0% to 1.03 million tons in 2016 from 1.04 million tons in 2015. Toll tons sold decreased 27.8% to 74
thousand tons in 2016 from 102 thousand tons in 2015. The decrease in tons sold is due to decreased customer demand and
lower industry-wide shipments by U.S. service centers in 2016 compared to 2015. Despite the further softening of industry-
wide shipments in 2016, we grew our market share in all of the carbon flat product categories we sell.
Net sales decreased $94.4 million, or 12.3%, to $671.0 million in 2016 from $765.4 million in 2015. Average selling prices
in 2016 decreased 11.4% to $653 per ton, compared to $738 per ton in 2015. The decrease in sales was primarily due to a
11.4% decrease in average selling prices during 2016 as volumes were down only 1%. The decrease in the average selling
price is a result of lower prices in the metals industry during 2016 discussed in the overview of Results of Operations above.
We expect market carbon flat metals prices in the first quarter of 2017 to increase over the prices in the fourth quarter of
2016.
Cost of materials sold decreased $89.7 million, or 14.5%, to $529.0 million in 2016 from $618.7 million in 2015. The decrease
in cost of materials sold was due to a 13.6% decrease in the average cost of materials sold per ton during 2016 compared to
2015 as volumes were down only 1% between years.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 21.2% in 2016 from
19.2% in 2015. The increase in gross profit percentage in 2016 was primarily due to the cost of materials sold decreasing
more than selling prices. The average gross profit per ton sold declined to $138 in 2016 from $141 in 2015 due to the
significant decline in market prices for metals in 2016.
Operating expenses in 2016 decreased $7.6 million, or 4.9%, to $146.3 million from $153.9 million in 2015 exceeding the
sales volume decrease of 1.0%. As a percentage of net sales, operating expenses increased to 21.8% for 2016 from 20.1% in
2015. Operating expenses decreased through reductions in labor and personnel expenses, lower variable based incentive
compensation, lower depreciation expense and lower occupancy expense as a result of elimination of certain leased
warehouse space offset by an increase in distribution expense and increased selling expenses as a result of hiring additional
sales professionals.
Operating loss for 2016 totaled $4.4 million compared to operating loss of $7.2 million in 2015.
28
Specialty metals flat products
The following table sets forth certain income statement data for the specialty metals flat products segment for the years ended
December 31, 2016 and 2015 (dollars shown in thousands, except per ton data):
2016
% of net
sales
2015
% 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)
Goodwill impairment charge (c)
Operating income (loss)
$
$
82,156
129
82,285
189,930
2,308
160,185
29,745
19,904
-
9,841
72,041
36
72,077
192,516
2,671
176,686
15,830
16,904
500
(1,574)
100.0 $
84.3
15.7
10.5
-
5.2 $
100.0
91.8
8.2
8.8
0.2
(0.8 )
(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. Excludes goodwill
impairment charge shown separately below for comparability purposes.
(c) The 2015 non-cash goodwill impairment charge is separately displayed for operating expense comparability purposes.
Tons sold increased 14.2% to 82 thousand tons in 2016 from 72 thousand tons in 2015. The specialty metals flat products
segment increased its market share in both the stainless steel and aluminum products it sells.
Net sales decreased $2.6 million, or 1.3%, to $189.9 million in 2016 from $192.5 million in 2015. Average selling prices in
2016 decreased to $2,308 per ton, compared to $2,671 per ton in 2015. The decrease in sales was due to a 13.6% decrease in
the average selling price during 2016 offset by a 14.2% increase in sales volume. The decrease in the year-over-year average
selling price per ton is a result of lower market prices of stainless steel and aluminum in 2016. Average market prices for
nickel (a component of stainless steel) were also lower in 2016 compared to 2015. We expect stainless steel and aluminum
market prices in the first quarter of 2017 to increase over the fourth quarter 2016 prices.
Cost of materials sold decreased $16.5 million, or 9.3%, to $160.2 million in 2016 from $176.7 million in 2015. The decrease
in cost of materials sold was due to a 20.6% decrease in the average cost of materials sold per ton during 2016 compared to
2015, offset by a 14.2% sales volume increase.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 15.7% in 2016 from 8.2%
in 2015. The average gross profit per ton sold totaled $361 in 2016 compared to $220 per ton in 2015. The increase in the
gross profit percentage is a result of our cost of materials sold decreasing more than the average selling price in 2016
compared to 2015 as inventory turnover improved in 2016.
Operating expenses (as defined in footnote (b) in the table above) increased $3.0 million, or 17.7%, to $19.9 million in 2016
from $16.9 million in 2015. The increase in operating expenses is related to the increased sales volume of 14.2%. As a
percentage of net sales, operating expenses increased to 10.5% of net sales in 2016 from 8.8% in 2015. Variable operating
expenses, such as distribution, wages and variable based incentive compensation increased as a result of higher sales volumes
and improved profitability. In 2015 we recorded a $0.5 million non-cash goodwill impairment charge as a result of the
continued market pressures which fully eliminated the goodwill for the specialty metals flat products segment.
Operating income for 2016 totaled $9.8 million compared to operating loss of $1.6 million in 2015.
29
Tubular and pipe products
The following table sets forth certain income statement data for the tubular and pipe products segment for 2016 and 2015
(dollars shown in thousands).
2016
2015
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Goodwill and intangible asset impairment (d)
$
Operating income (loss)
$
$ 194,203
130,834
63,369
55,656
-
7,713
% of net
sales
100.0 $
67.4
32.6
28.7
-
3.9 $
$
217,627
146,854
70,773
58,190
24,451
(11,868)
% of net
sales
100.0
67.5
32.5
26.8
11.2
(5.5)
(a) Includes $1,489 and $3,347 of LIFO income in 2016 and 2015, respectively.
(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.
(d) The 2015 non-cash goodwill and intangible asset impairment charges are separately displayed for operating
expense comparability purposes.
Net sales decreased $23.4 million, or 10.8%, to $194.2 million in 2016 from $217.6 million in 2015. The decrease in net
sales was due to a 0.8% decrease in sales volume and a 10.0% decrease in average selling prices during 2016. The decrease
in volume was due to decreased customer demand and lower industry-wide shipments of pipe and tube products. The decrease
in average selling prices were due to lower industry market prices for metals in 2016 compared to 2015.
Cost of materials sold decreased $16.0 million, or 10.9%, to $130.8 million in 2016 from $146.9 million in 2015. The decrease
in cost of materials sold was due to a 0.8% decrease in sales volume and a 10.2% decrease in the average cost of materials
sold which was impacted by the LIFO income of $1.5 million in 2016 compared to LIFO income of $3.3 million in 2015.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) remained relatively flat at 32.6% in
2016 compared to 32.5%, in 2015. The LIFO income increased gross profit by 0.8% of net sales in 2016 compared to 1.5%
of net sales in 2015.
Operating expenses (as defined in footnote (c) in the table above) decreased $2.5 million, or 4.4%, to $55.7 million from
$58.2 million in 2015. As a percentage of net sales, operating expenses increased to 28.7% in 2016 compared to 26.8% in
2015. Variable operating expenses, such as variable performance-based incentive compensation, decreased in 2016 as a result
of lower sales and income before impairment charges.
In 2015 we recorded a $16.5 million non-cash goodwill impairment charge and an $8.0 million non-cash intangible asset
impairment charge. There were no intangible asset impairment charges recorded in 2016.
Operating income for 2016 totaled $7.7 million, compared to an operating loss of $11.9 million in 2015. The operating loss
for 2015 was the result of the goodwill impairment of $16.5 million and the asset impairment charge of $8.0 million.
Corporate expenses
Corporate expenses increased $0.3 million, or 4.4%, to $7.4 million in 2016 compared to $7.1 million in 2015. The increase
in corporate expenses is primarily attributable to our President of Specialty Metals being appointed to the position of
Executive Vice President and Chief Operating Officer and the associated transfer of expenses from the Specialty Metals flat
products segment to the Corporate expenses in 2016. Corporate expenses include the unallocated expenses related to
managing the entire Company (i.e. all three segments), including compensation for certain personnel, expenses related to
being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees.
30
2015 Compared to 2014
The metals industry experienced a significant decline in the price of metals during 2015 as a result of the strengthened U.S.
dollar, a historically high level of imported materials arriving in the United States, low raw material costs to produce metals
and a global oversupply of metals. The price of hot-rolled carbon flat steel decreased approximately 41% during 2015.
Similarly, the price of stainless steel and aluminum decreased during 2015. The declines in metals shipments and pricing
negatively impacted our 2015 sales and earnings. Industry demand also softened in 2015 compared to 2014 as evidenced by
lower year over year shipments by metals service centers in the United States. During the second quarter of 2015, we recorded
an impairment charge in our tubular and pipe products segment as a result of the continued decline in metals pricing and its
impact on the tubular and pipe products segment results. The impairment charge consisted of a $16.5 million goodwill
impairment, which eliminated the remaining goodwill in the tubular and pipe products segment, and a partial impairment of
$8.0 million related to the segment’s tradename. The tradename is an indefinitely lived intangible asset with a remaining
value of $15.4 million. In the fourth quarter of 2015, we recorded a $0.5 million impairment charge, which fully eliminated
the goodwill in our specialty metals flat products segment.
The following table sets forth certain consolidated income statement data for the years ended December 31, 2015 and 2014
(dollars shown in thousands):
2015
2014
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Goodwill and intangible asset impairment (d)
Operating loss
Other loss, net
Interest and other expense on debt
Loss before income taxes
Income taxes
Net loss
$
$ 1,175,543
942,214
233,329
236,157
24,951
(27,779)
(125)
5,690
(33,594)
(6,817)
(26,777)
$
% of net
sales
$
% of net
sales
100.0 $ 1,436,270
80.2 1,160,310
275,960
19.8
261,332
20.1
23,836
2.1
(9,208)
(2.4)
(126)
(0.0)
6,780
0.5
(16,114)
(2.9)
2,950
(0.6)
(19,064)
(2.3) $
100.0
80.8
19.2
18.1
1.7
(0.6 )
(0.0 )
0.5
(1.1 )
0.2
(1.3 )
(a) Includes $3,347 of LIFO income for 2015 and $365 of LIFO expense for 2014.
(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. Excludes goodwill and
intangible asset impairment shown separately below for comparability purposes.
(d) The non-cash goodwill and intangible asset impairment charge is separately displayed for operating expense
comparability purposes. $24,451 in 2015 and $23,836 in 2014 of the impairment charge is related to the tubular and pipe
products segment and $500 in 2015 is related to the specialty metals flat products segment.
Net sales decreased $261 million, or 18.2%, to $1.18 billion in 2015 from $1.44 billion in 2014. Carbon flat products net
sales decreased $220 million, or 22.3%, and were 65.1% of total net sales in 2015 compared to 68.6% in 2014. Specialty
metals flat products net sales decreased $14.2 million, or 6.9%, and were 16.4% of total net sales in 2015 compared to 14.4%
in 2014. Tubular and pipe products net sales decreased $26.9 million, or 11.0%, and were 18.5% of total net sales in 2015
compared to 17.0% of total net sales in 2014. The decrease in sales for the year ended December 31, 2015 was due to a 10.2%
decrease in sales volume and an 8.9% decrease in average selling prices in 2015 compared to 2014. The decrease in tons sold
was due to decreased customer demand, specifically in the heavy equipment, agriculture, mining and energy sectors, and
lower industry-wide shipments in 2015 compared to 2014.
Cost of materials sold decreased $218 million, or 18.8%, to $942 million in 2015 from $1.16 billion in 2014. During 2015,
we recorded LIFO income of $3.3 million compared to LIFO expense of $0.4 million recorded in 2014. The decrease in cost
of materials sold in 2015 is primarily due to the decreased sales volume of 10.2%, decreased metals costs of 9.6% during
2015 and the impact of LIFO income during 2015 compared to LIFO expense in 2014.
31
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 19.8% in 2015 from
19.2% in 2014. Gross profit as a percentage of net sales increased in the carbon flat products segment to 19.2% from 18.2%
in 2014 and in the tubular and pipe products segment to 32.5% from 28.9% in 2014. Gross profit as a percentage of net sales
decreased in the specialty metals flat products segment to 8.2% in 2015 from 12.5% in 2014. LIFO income increased gross
profit by 0.3% of net sales in 2015 and had no consolidated gross profit impact in 2014. The increase in gross profit as a
percentage of net sales during 2015 was primarily due to the cost of materials sold decreasing more than selling prices in the
carbon flat rolled and tubular and pipe products segments, as well as the impact of LIFO income in 2015 compared to LIFO
expense in 2014.
Operating expenses (as defined in footnote (c) in the table above) decreased $25.2 million, or 9.6%, to $236.2 million in 2015
from $261.3 million in 2014. As a percentage of net sales, operating expenses increased to 20.1% in 2015 from 18.1% in
2014. Operating expenses decreased in all categories as reported on the Company’s Consolidated Statements of
Comprehensive Income. During 2015, we executed on our profit improvement plan, which contributed to the cost reductions.
Distribution expense decreased by $5.2 million, or 12.7%, due to the decreased sales volume. Warehouse and processing
costs decreased $6.8 million, or 7.3%, primarily due to reductions in labor and personnel expenses and reduced warehouse
consumables expenses related to the 10.2% 2015 volume decrease. Administrative costs decreased by $7.2 million, or 10.0%,
primarily related to reductions in labor and personnel expenses, centralization of certain administrative functions, lower
variable based incentive compensation and decreases in travel and entertainment expenses. Selling expenses decreased $3.6
million, or 14.7%, as a result of decreased variable compensation associated with fewer sales employees and decreased
discretionary spending. Occupancy expenses decreased $0.6 million as a result of decreased heating and snow removal
expenses. Depreciation expense decreased $1.7 million, or 8.8%, as a result of certain assets being fully depreciated in 2014.
Operating expenses in the carbon flat products segment decreased $19.0 million, operating expenses in the specialty metals
products segment decreased $2.4 million, operating expenses in the tubular and pipe products segment decreased $1.8 million,
and Corporate expenses decreased $0.9 million.
The goodwill and intangible asset impairment charge in 2015 included a $16.5 million non-cash goodwill impairment and an
$8.0 million intangible asset impairment for the tubular and pipe products segment as well as a $0.5 million goodwill
impairment for the specialty metals flat products segment. The 2015 goodwill impairment charges fully impaired the goodwill
for both the tubular and pipe products segment and the specialty metals flat products segment. The goodwill and intangible
asset impairment charge in 2014 included a $23.8 million goodwill impairment for the tubular and pipe products segment.
Interest and other expense on debt totaled $5.7 million in 2015 compared to $6.8 million in 2014. Our effective borrowing
rate, exclusive of deferred financing fees and commitment fees, was 2.1% in 2015 compared to 2.4% in 2014. The decrease
in interest and other expense on debt in 2015 was primarily attributable to lower average borrowings and lower average
borrowing rates during 2015 compared to 2014.
For 2015, loss before income taxes totaled $33.6 million compared to loss before income taxes of $16.1 million in 2014.
2015 includes goodwill impairment charges of $17.0 million and a $8.0 million intangible asset impairment charge and LIFO
income of $3.3 million. 2014 included a goodwill impairment charge of $23.8 million related to the tube and pipe segment
and LIFO expense of $0.4 million.
An income tax benefit of (20.3%) was recorded for 2015, compared to an income tax provision of 18.3% in 2014. The 2015
and 2014 effective income tax rates were impacted by the non-deductibility of the goodwill impairment charges. The income
tax benefit for 2015 prior to the goodwill impairment charge was 39.8%. The income tax provision for 2014 prior to the
goodwill impairment charge was 38.2%.
Net loss for 2015 totaled $26.8 million, or $2.39 per basic and diluted share, compared to net loss of $19.1 million, or $1.71
per basic and diluted share, for 2014. The goodwill and intangible asset impairments in 2015 impacted earnings per share by
$1.93 per basic and diluted shares. The goodwill impairment in 2014 impacted earnings per basic and diluted shares by $2.14.
32
Segment Results of Operations
Carbon flat products
The following table sets forth certain income statement data for the carbon flat products segment for the years ended
December 31, 2015 and 2014 (dollars shown in thousands, except per ton data):
2015
% of net
sales
2014
% 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 (loss)
$
$
935,165
102,360
1,037,525
765,400
738
618,674
146,726
153,943
(7,217)
1,059,409
106,725
1,166,134
985,039
845
805,747
179,292
172,986
6,306
100.0 $
80.8
19.2
20.1
(0.9) $
100.0
81.8
18.2
17.6
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.
Tons sold decreased 11.0% to 1.04 million tons in 2015 from 1.17 million tons in 2014. Toll tons sold decreased 4.1% to 102
thousand tons in 2015 from 107 thousand tons in 2014. The decrease in tons sold was due to decreased customer demand,
specifically in the heavy equipment, agriculture, mining and energy sectors, and lower industry-wide shipments of carbon
flat products in 2015 compared to 2014.
Net sales decreased $220 million, or 22.3%, to $765.4 million in 2015 from $985.0 million in 2014. Average selling prices
in 2015 decreased 12.7% to $738 per ton, compared to $845 per ton in 2013. The decrease in sales was due to an 11.0%
decrease in sales volume and a 12.7% decrease in average selling prices during 2015. The decrease in the average selling
price is a result of declining prices in the metals industry during 2015 discussed in the overview of Results of Operations
above.
Cost of materials sold decreased $187.1 million, or 23.2%, to $618.7 million in 2015 from $805.7 million in 2014. The
decrease in cost of materials sold was due to the volume decrease of 11.0% as well as a 13.7% decrease in the average cost
of materials sold per ton during 2015 compared to 2014.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 19.2% in 2015 from
18.2% in 2014. The increase in gross profit percentage in 2015 was primarily due to the cost of materials sold decreasing
more than selling prices. The average gross profit per ton sold declined to $141 in 2015 from $154 in 2014 due to the
significant decline in market prices for metals in 2015.
Operating expenses in 2015 decreased $19.0 million, or 11.0%, to $153.9 million from $173.0 million in 2014 mirroring the
sales volume decrease of 11.0%. As a percentage of net sales, operating expenses increased to 20.1% for 2015 from 17.6%
in 2014. Operating expenses decreased through reductions in labor and personnel expenses, lower variable based incentive
compensation, decreases in travel and entertainment expenses, and lower distribution expense as a result of lower sales
volumes.
Operating loss for 2015 totaled $7.2 million compared to operating income of $6.3 million in 2014.
33
Specialty metals flat products
The following table sets forth certain income statement data for the specialty metals flat products segment for the years ended
December 31, 2015 and 2014 (dollars shown in thousands, except per ton data):
2015
% of net
sales
2014
% 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)
Goodwill impairment charge (c)
Operating income (loss)
$
$
72,041
36
72,077
192,516
2,671
176,686
15,830
16,904
500
(1,574)
72,917
45
72,962
206,692
2,833
180,812
25,880
19,771
-
6,109
100.0 $
91.8
8.2
8.8
0.2
(0.8 ) $
100.0
87.5
12.5
9.5
-
3.0
(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. Excludes goodwill
impairment charge shown separately below for comparability purposes.
(c) The non-cash goodwill impairment charge is separately displayed for operating expense comparability purposes.
Tons sold decreased 1.2% to 72 thousand tons in 2015 from 73 thousand tons in 2014. The decrease in tons sold was due to
decreased customer demand and lower industry wide shipments of stainless and aluminum flat products.
Net sales decreased $14.2 million, or 6.9%, to $192.5 million in 2015 from $206.7 million in 2014. Average selling prices in
2015 decreased to $2,671 per ton, compared to $2,833 per ton in 2014. The decrease in sales was due to a 1.2% decrease in
sales volume and a 5.7% decrease in the average selling price during 2015. The decrease in the year over year average selling
price per ton is a result of declining market price of nickel and aluminum, which continue to pressure stainless and aluminum
pricing.
Cost of materials sold decreased $4.1 million, or 2.3%, to $176.7 million in 2015 from $180.8 million in 2014. The decrease
in cost of materials sold was due to the volume decrease of 1.2% and a 1.1% decrease in the average cost of materials sold
per ton during 2015 compared to 2014.
As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 8.2% in 2015 from 12.5%
in 2014. The average gross profit per ton sold totaled $220 in 2015 compared to $355 per ton in 2014. The decrease in the
gross profit percentage is a result of the declining price of nickel, which is a large component of stainless steel and aluminum
pricing, and the cost of our material not declining as fast as the average sell price due to slower inventory turns in 2015.
Operating expenses (as defined in footnote (b) in the table above) decreased $2.9 million, or 14.5%, to $16.9 million in 2015
from $19.8 million in 2014. The decrease in operating expenses exceeded the decrease in sales volume of 1.2%. As a
percentage of net sales, operating expenses decreased to 8.8% of net sales in 2015 from 9.5% in 2014. Variable operating
expenses, such as distribution and wages decreased as a result of lower sales volumes. Expenses also decreased as a result of
the profit improvement plan initiated in 2015 and the decrease in variable performance-based incentive compensation in 2015
compared to 2014. In 2015 we recorded a $0.5 million non-cash goodwill impairment charge as a result of the continued
market pressures which fully eliminated the goodwill for the specialty metals flat products segment.
Operating loss for 2015 totaled $1.6 million compared to operating income of $6.1 million in 2014.
34
Tubular and pipe products
The following table sets forth certain income statement data for the tubular and pipe products segment for 2015 and 2014
(dollars shown in thousands).
2015
% of net
sales
2014
% of net
sales
Net sales
Cost of materials sold (a)
Gross profit (b)
Operating expenses (c)
Goodwill and intangible asset impairment (d)
Operating loss
$
$
217,627
146,854
70,773
58,190
24,451
(11,868)
100.0 $
67.5
32.5
26.8
11.2
(5.5 ) $
244,539
173,751
70,788
60,603
23,836
(13,651)
100.0
71.1
28.9
24.8
9.7
(5.6)
(a) Includes $3,347 of LIFO income in 2015 and $365 of LIFO expense in 2014.
(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.
(d) The non-cash goodwill and intangible asset impairment charges are separately displayed for operating expense
comparability purposes.
Net sales decreased $26.9 million, or 11.0%, to $217.6 million in 2015 from $244.5 million in 2014. The decrease in net
sales was due to a 5.7% decrease in the sales volume and a 5.6% decrease in the average selling price during 2015. The
decrease in volume was due to decreased customer demand and lower industry-wide shipments of pipe and tube products.
Cost of materials sold decreased $26.9 million, or 15.5%, to $146.9 million in 2015 from $173.8 million in 2014. The decrease
in cost of materials sold was due to a 5.7% decrease in sales volume and a 10.4% decrease in the average cost of materials
sold which was impacted by the LIFO income of $3.3 million in 2015 compared to LIFO expense of $0.4 million in 2014.
As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 32.5% in 2015 from
28.9%, in 2014. The LIFO income recorded in 2015 increased gross profit by 1.5% of net sales and the LIFO expense recorded
in 2014, decreased gross profit by 0.2% of net sales. Gross profit as a percentage of net sales increased as a result of increased
value added processing sales and an increase in the product mix to higher margin sales.
Operating expenses (as defined in footnote (c) in the table above) decreased $2.4 million, or 4.0%, to $58.2 million from
$60.6 million in 2014. As a percentage of net sales, operating expenses increased to 26.8% for 2015 compared to 24.8% for
2014. Variable operating expenses, such as distribution and certain selling expenses, decreased as a result of lower sales
volume and net sales. Depreciation expense increased as a result of recent investments in processing equipment.
In 2015 we recorded a $16.5 million non-cash goodwill impairment charge and an $8.0 million non-cash intangible asset
impairment charge. In 2014 we recorded a $23.8 million non-cash goodwill impairment charge.
Operating loss for 2015 totaled $11.9 million, compared to an operating loss of $13.7 million in 2014. The operating loss for
2015 was the result of the goodwill impairment of $16.5 million and the asset impairment charge of $8.0 million. The 2014
operating loss was a result of the $23.8 million goodwill impairment as well as LIFO expense of $0.4 million.
Corporate expenses
Corporate expenses decreased $0.9 million, or 10.7%, to $7.1 million in 2015 compared to $8.0 million in 2014. The decrease
in corporate expenses is primarily attributable to decreases in travel and entertainment expenses and lower variable
performance-based compensation in 2015 compared to 2014. Corporate expenses include the unallocated expenses related to
managing the entire Company (i.e. all three segments), including compensation for certain personnel, expenses related to
being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees.
35
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 share repurchases 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.
2016 Compared to 2015
Operating Activities
During 2016, we used $9.8 million of cash for operations, of which $16.8 million was generated from operating activities
and $26.6 million was used for working capital. During 2015, we generated $107.5 million of cash from operations, of which
$12.4 million was generated from operating activities and $95.1 million was generated from working capital.
Net cash used for operations totaled $16.8 million during 2016 and was primarily comprised of depreciation and amortization
of $19.4 million offset by the net change in long-term assets and liabilities of $1.7 million and the net loss of $1.1 million.
Net cash from operations totaled $12.4 million during 2015 and was primarily comprised of depreciation and amortization
of $19.9 million and the non-cash goodwill and intangible asset impairment of $25.0 million, offset by the net loss of $26.8
million.
Working capital at December 31, 2016 totaled $260.0 million, a $28.2 million increase from December 31, 2015. The increase
was primarily attributable to a $47.9 million increase in inventory (resulting from increased inventory purchases at the end
of 2016), a $9.0 million increase in accounts receivable (resulting primarily from higher sales volume at the end of 2016)
offset by a $23.8 million increase in accounts payable and outstanding checks (resulting from the increased inventory
purchases at the end of 2016) and a $4.9 million increase in accrued payroll and other accrued liabilities.
Investing Activities
Net cash used for investing activities was $6.4 million during 2016, compared to $7.3 million during 2015. In 2016 capital
expenditures were primarily attributable to additional processing equipment and facilities maintenance. During 2017, we
expect our capital spending to approximate our annual depreciation levels of $17 million.
Financing Activities
In 2016, $17.0 million of cash was generated from financing activities which primarily consisted of $18.8 million of net
borrowings under our ABL Credit Facility. In 2015, $100.8 million of cash was used for financing activities which primarily
consisted of $98.3 million of net repayments under our ABL facility.
In February 2017, our Board of Directors approved a regular quarterly dividend of $0.02 per share, which is payable on
March 15, 2017 to shareholders of record as of March 1, 2017. Our Board previously approved 2016 regular quarterly
dividends of $0.02 per share, which were paid on each of March 15, 2016, June 15, 2016, September 15, 2016 and December
15, 2016. 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 and continuing determination by our Board of Directors that the payment of
dividends remains in the best interest of our shareholders.
36
Stock Repurchase Program
On October 2, 2015, we announced that our Board of Directors authorized a stock repurchase program of up to 550,000
shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated
block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected
through Rule 10b5-1 plans. Repurchased shares are held in our treasury, or canceled and retired as our Board may determine
from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility.
Under the ABL Credit Facility, we may repurchase common stock and pay dividends up to $2.5 million in the aggregate
during any trailing twelve months without restrictions. Purchases in excess of $2.5 million require us to (i) maintain
availability in excess of 25% of the aggregate revolver commitments ($91.3 million at December 31, 2016) or (ii) to maintain
availability equal to or greater than 15% of the aggregate revolver commitments ($54.8 million at December 31, 2016) and
we must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at
least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will depend upon several
factors, including market and business conditions, and limitations under the ABL Credit Facility, and repurchases may be
discontinued at any time. During 2017, we expect to be limited to the $2.5 million available without restrictions to repurchase
common stock and pay dividends.
There were no shares repurchased during 2016. During the fourth quarter of 2015, we repurchased 65,283 shares for a total
cost of $0.7 million.
Debt Arrangements
Our ABL Credit Facility is collateralized by our accounts receivable and inventory. The ABL Credit Facility consists of a
revolving credit line of $365 million. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible
receivables and inventories, or $365 million in the aggregate. The ABL Credit Facility matures on June 30, 2019.
The ABL Credit Facility requires us to comply with various covenants, the most significant of which include: (i) if any
commitments or obligations are outstanding and our availability is less than the greater of $30 million or 10.0% of the
aggregate amount of revolver commitments ($36.5 million at December 31, 2016) then we must maintain a ratio of EBITDA
minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve
fiscal month period; (ii) limitations on dividend payments and stock repurchases; and (iii) restrictions on additional
indebtedness. We have the option to borrow under our revolver based on the agent’s base rate plus a premium ranging from
0.00% to 0.25% or the London Interbank Offered Rate (LIBOR) plus a premium ranging from 1.25% to 3.00%.
As of December 31, 2016, we were in compliance with our covenants and we had approximately $94.3 million of availability
under the ABL Credit Facility.
As of December 31, 2016, $2.0 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 five-
year term of the ABL Credit facility and are included in “Interest and other expense on debt” on the accompanying
Consolidated Statements of Comprehensive Income.
We 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 then outstanding LIBOR-based borrowings under the ABL Credit
Facility. The hedge, which matured on June 1, 2016, fixed the rate at 1.21% plus a premium ranging from 1.25% to 1.75%.
As part of the CTI acquisition in July 2011, we assumed approximately $5.9 million of Industrial Revenue Bond (IRB)
indebtedness. The bond matures in April 2018, with the option to provide principal payments annually on April 1st. On April
1, 2016, we paid an optional principal payment of $0.9 million. Since the IRB is remarketed annually, it 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 a security for payment of the bonds, we obtained a direct pay letter of credit issued by
JPMorgan Chase Bank, N.A. The letter of credit reduces annually by the principal reduction amount. The interest rate at
December 31, 2016 was 1.0% for the IRB debt.
CTI entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the above IRB. At
December 31, 2016, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement matures
in April 2018, and is reduced annually by the amount of the optional principal payments on the bond. We are exposed to
credit loss in the event of nonperformance by the other parties to the interest rate swap agreement. However, we do not
anticipate nonperformance by the counterparties.
37
2015 Compared to 2014
Operating Activities
During 2015, we generated $107.5 million of cash from operations, of which $12.4 million was generated from operating
activities and $95.1 million was generated from working capital. During 2014, we used $39.6 million of cash for operations,
of which $25.4 million was generated from operating activities and $65.0 million was used for working capital.
Net cash from operations totaled $12.4 million during 2015 and was primarily comprised of depreciation and amortization
of $19.9 million and the non-cash goodwill and intangible asset impairment of $25.0 million, offset by the net loss of $26.8
million. Net cash from operations totaled $25.4 million during 2014 and was primarily comprised of depreciation and
amortization of $21.8 million and the non-cash goodwill impairment of $23.8 million, offset by the net loss of $19.1 million.
Working capital at December 31, 2015 totaled $231.9 million, a $94.8 million decrease from December 31, 2014. The
decrease was primarily attributable to a $104.5 million decrease in inventory (resulting from decreased inventory purchases
and lower metals cost in 2015 compared to 2014) and a $30.9 million decrease in accounts receivable (resulting from lower
sales volume and selling prices), offset by a $35.6 million decrease in accounts payable and outstanding checks and a $18.5
million decrease in accrued payroll and other accrued liabilities. The decrease in prepaid expenses and other and accrued
payroll and other accrued liabilities is mainly related to the decrease in metals derivatives.
Investing Activities
Net cash used for investing activities was $7.3 million during 2015, compared to $7.8 million during 2014. In 2015, capital
expenditures were primarily attributable to additional processing equipment at our flat products (carbon and specialty metals)
and tube and pipe products existing facilities.
Financing Activities
In 2015, $100.8 million of cash was used for financing activities which primarily consisted of $98.3 million of net repayments
under our ABL Credit Facility. In 2014, $46.4 million of cash was generated from financing activities, which primarily
consisted of $49.2 million of net borrowings under our credit facility, including the payoff of our term loan of $48.9 million
upon refinancing and subsequent borrowings under our revolving credit facility, offset by $1.2 million of additional deferred
financing fees incurred as part of the June 30, 2014 amendment to the ABL Credit Facility (as defined below).
Our Board previously approved 2015 and 2014 regular quarterly dividends of $0.02 per share, which were paid in March,
June, September and December of 2015 and 2014.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2016:
Contractual Obligations
(amounts in thousands)
Long-term debt obligations
Interest obligations
Unrecognized tax positions
Other long-term liabilities
Operating leases
Total contractual obligations
(a)
(b)
(c)
(d)
(e)
$
$
Less than
1 year
Total
166,424 $
9,885
40
10,422
26,466
213,237 $
1-3 years 3-5 years
- $
-
-
3,078
6,235
9,313 $
165,529 $
5,910
26
5,448
10,315
187,228 $
895 $
3,975
14
607
6,634
12,125 $
More than
5 years
-
-
-
1,288
3,282
4,570
(a) See Note 6 to the Consolidated Financial Statements.
(b) Future interest obligations are calculated using the debt balances and interest rates in effect on December 31, 2016.
(c) See Note 12 to the Consolidated Financial Statements. Classification is based on expected settlement dates and the
expiration of certain statutes of limitations.
(d) Primarily consists of retirement liabilities and deferred compensation payable in future years.
(e) See Note 11 to the Consolidated Financial Statements.
38
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 7 to the Consolidated
Financial Statements, as of December 31, 2016, 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.
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.
Certain of our tubular and pipe products inventory is stated under the LIFO method. At December 31, 2016, approximately
$43.4 million, or 17.1% of consolidated inventory, was reported under the LIFO method of accounting. The cost of the
remainder of tubular and pipe product segment’s inventory is determined using a weighted average rolling first-in, first-out
method.
Intangible Assets
The Company performs an annual impairment test of indefinite-lived intangible assets for the tubular and pipe products
segment 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
39
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 intangible assets.
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. The Company estimates the
fair value of indefinite-lived intangible assets using a discounted cash flow methodology. 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 intangible assets.
Long-Lived Assets
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 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.
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.
Certain engineered products produced by CTI can 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 “Other accrued 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 1.7%, 1.8% and 1.7% of our net sales during
2016, 2015 and 2014, respectively.
Impact of Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No 2016-
15, “Classification of certain cash receipts and cash payments”. This ASU addresses the following eight specific cash flow
issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent
consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from
the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs));
distributions received from equity method investees; beneficial interests in securitization transactions; and separately
identifiable cash flows and application of the predominance principle. The guidance will be effective for annual reporting
periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. The
adoption of this ASU is not expected to materially impact the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This
ASU is part of the FASB’s Simplification Initiative and has been issued to reduce complexity in the presentation of employee
share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The guidance will be effective for annual reporting periods
40
beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The adoption
of this ASU is not expected to materially impact the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which specifies the accounting for leases. The objective is
to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements
about the amount, timing and uncertainty of cash flows arising from a lease. This ASU introduces the recognition of lease
assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance
will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years
with early adoption permitted. We are in the process of evaluating the impact of the future adoption of this standard on our
consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU is part
of the FASB’s Simplification Initiative and has been issued to reduce complexity in the presentation of deferred taxes. This
new guidance eliminates the requirement for entities that present a classified statement of financial position to classify
deferred tax assets and liabilities as current and noncurrent, and instead require that they classify all deferred tax assets and
liabilities as noncurrent. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability.
However, the guidance does not change the existing requirement that only permits offsetting within a jurisdiction. Companies
are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another
jurisdiction. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years, with early adoption permitted. The guidance may be applied either prospectively,
for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied
prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied
retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods.
The prospective adoption of this guidance on January 1, 2016 did not have a material impact on our consolidated financial
statements and the prior periods were not retrospectively adjusted.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU is part
of the FASB’s Simplification Initiative and has been issued to reduce the complexity in the presentation of debt issuance
costs. This new guidance requires companies to present debt issuance costs the same way they currently present debt
discounts, as a direct deduction from the carrying value of that debt liability. The guidance is limited to simplifying the
presentation of debt issuance costs and does not impact the recognition and measurement guidance for debt issuance costs.
This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years, with early adoption permitted. The amendments of ASU No. 2015-03 must be applied
retrospectively, where the balance sheet of each presented individual period is adjusted to indicate the period-specific impact
of using the new guidance. The FASB considered that because both debt issuance costs and debt discounts are amortized
using the effective interest method, there would be no effect on the income statement upon adoption of the amendments. The
adoption of this guidance on January 1, 2016 did not have an impact on our consolidated financial statements because it does
not apply to revolving credit agreements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern”. This ASU
contains new guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern and to provide related footnote disclosures. Management must evaluate whether it is probable
that known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’s ability to
continue as a going concern within one year after the date that the financial statements are issued. If such conditions or events
are identified, the standard requires management's mitigation plans to alleviate the doubt or a statement of the substantial
doubt about the entity’s ability to continue as a going concern to be disclosed in the financial statements. This ASU is effective
for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The adoption of this
ASU did not impact our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a joint project
initiated by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and
to develop a common revenue standard for U.S. generally accepted accounting principles and International Financial
Reporting Standards that will: remove inconsistencies and weaknesses in revenue requirements; provide a more robust
framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries,
jurisdictions and capital markets; provide more useful information to users of financial statements through improved
disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to
which an entity must refer. As originally proposed, the guidance is effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. The adoption of this ASU is not expected to
41
materially impact the Company’s consolidated financial statements. In August 2015, the FASB issued ASU No. 2015-14,
“Revenue from Contracts with Customers.” This ASU deferred the effective date of ASU No. 2014-09 by one year.
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, the levels of metals imported into the United States, labor costs, sales levels,
competition, levels of inventory held by other metals service centers, consolidation of metals producers, new global capacity
by metals producers, higher raw material costs for the producers of metals, import duties and tariffs and currency exchange
rates. This volatility can significantly affect the availability and cost of raw materials for us.
We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times
and just-in-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 intangible asset impairment
charges. Changing metals prices therefore could significantly impact our net sales, gross profits, operating income and net
income.
Rising metals prices result in higher working capital requirements for us and our customers. Some customers may not have
sufficient credit lines or liquidity to absorb significant increases in the price of metals. While we have generally been
successful in the past in passing on producers’ 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 51%, 49% and 51% of our consolidated net sales in 2016, 2015 and 2014, respectively, were directly related
to industrial machinery and equipment manufacturers and their fabricators.
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing
equipment, energy and borrowings under our credit facility. General inflation has not had a material effect on our financial
results during the past three years.
We are exposed to the impact of fluctuating metals prices and interest rate changes. During 2016, 2015 and 2014, we entered
into metals 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. In 2014, we entered into carbon swaps in order to mitigate the volatility in the price of metals. The carbon swaps were
accounted for as cash flow hedges and all of them settled in 2015. We had no outstanding metals cash flow hedges at
December 31, 2016.
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, 2016 rates and, assuming no change in total debt from December 31, 2016 levels, the
additional annual interest expense to us would be approximately $1.6 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. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate
nonperformance by the counterparties.
42
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, 2016, 2015 and 2014 .............
Consolidated Balance Sheets as of December 31, 2016 and 2015 ....................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 .................................
Supplemental Disclosures of Cash Flow Information for the Years Ended December 31, 2016, 2015 and 2014 ............
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 ..................
Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014 ...........................
44
45
46
47
48
49
50
51
Page
43
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, 2016 and 2015, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2016 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, 2016, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). 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
March 2, 2017
44
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, 2016. In
making this assessment, our management used the criteria established in Internal Control - Integrated Framework (2013),
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we
concluded that, as of December 31, 2016, 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, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
herein.
45
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 and intangible asset impairment
Total costs and expenses
Operating income (loss)
Other loss, net
Income (loss) before interest and income taxes
Interest and other expense on debt
Income (loss) before income taxes
Income tax provision (benefit)
Net loss
Gain (loss) on cash flow hedges
Tax effect of hedges
Reclassification of loss included in net income, net of tax of $804
for 2015
Total comprehensive loss
Net loss per share - basic
Weighted average shares outstanding - basic
Net loss per share - diluted
Weighted average shares outstanding - diluted
Dividends declared per share of common stock
2016
2015
2014
$
1,055,116 $
1,175,543 $
1,436,270
820,040
79,521
63,054
36,490
23,060
8,718
17,596
889
-
1,049,368
5,748
(55)
5,693
5,273
420
1,498
(1,078) $
942,214
85,411
64,987
36,073
21,158
9,492
18,147
889
24,951
1,203,322
(27,779 )
(125 )
(27,904 )
5,690
(33,594 )
(6,817 )
(26,777 ) $
1,160,310
92,170
72,219
41,312
24,799
10,052
19,891
889
23,836
1,445,478
(9,208 )
(126 )
(9,334 )
6,780
(16,114 )
2,950
(19,064 )
114
(44)
(1,816 )
699
12
(125 )
-
(1,008) $
1,596
(26,298 ) $
-
(19,177 )
(0.10) $
11,210
(0.10) $
11,210
(2.39 ) $
11,192
(2.39 ) $
11,192
(1.71 )
11,120
(1.71 )
11,120
0.08 $
0.08 $
0.08
$
$
$
$
$
The accompanying notes are an integral part of these statements.
46
Olympic Steel, Inc.
Consolidated Balance Sheets
As of December 31,
(in thousands)
Cash and cash equivalents
Accounts receivable, net
Inventories, net (includes LIFO debit of $8,045 and $6,555 as of December 31, 2016
$
Assets
and 2015, respectively)
Prepaid expenses and other
Total current assets
Property and equipment, at cost
Accumulated depreciation
Net property and equipment
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
Other long-term liabilities
Deferred income taxes
Total liabilities
Liabilities
$
$
Commitments and contingencies (Note 11)
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, 10,963 and 10,955 shares
issued and outstanding
Treasury stock, at cost, 57 and 65 shares held
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$
2016
2015
2,315 $
101,902
1,604
92,877
254,526
6,197
364,940
374,242
(218,476 )
155,766
23,869
11,493
556,068 $
1,825 $
79,458
8,445
15,170
104,898
164,599
10,062
23,119
302,678
206,645
7,820
308,946
372,129
(205,591)
166,538
24,757
11,639
511,880
2,690
55,685
6,884
11,801
77,060
145,800
9,829
24,496
257,185
-
-
128,619
(609 )
-
125,380
253,390
556,068 $
128,129
(699)
(70)
127,335
254,695
511,880
The accompanying notes are an integral part of these balance sheets.
47
Olympic Steel, Inc.
Consolidated Statements of Cash Flows
For The Years Ended December 31,
(in thousands)
Cash flows from (used for) operating activities:
Net loss
Adjustments to reconcile net income (loss) to net cash from
operating activities -
Depreciation and amortization
Goodwill and intangible asset impairment
(Gain) loss on disposition of property and equipment
Stock-based compensation
Other long-term assets
Other long-term liabilities
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 (used for) operating activities
Cash flows from (used for) investing activities:
Capital expenditures
Proceeds from disposition of property and equipment
Net cash used for investing activities
Cash flows from (used for) financing activities:
Credit facility revolver borrowings
Credit facility revolver repayments
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
Repurchase of common stock
Dividends paid
Net cash from (used for) financing activities
Cash and cash equivalents:
Net change
Beginning balance
Ending balance
2016
2015
2014
$
(1,078) $
(26,777 ) $
(19,064 )
19,402
-
(376)
534
(638)
(1,074)
16,770
(9,025)
(47,881)
1,620
28,619
(4,846)
4,930
(26,583)
(9,813)
19,873
24,951
15
1,759
44
(7,500 )
12,365
30,927
104,463
13,808
(21,923 )
(13,644 )
(18,511 )
95,120
107,485
(6,824)
376
(6,448)
(7,317 )
3
(7,314 )
307,298
(288,499)
-
(865)
(131)
46
-
(877)
16,972
311,372
(409,662 )
-
(840 )
(127 )
30
(699 )
(879 )
(100,805 )
21,840
23,836
248
2,074
(766 )
(2,754 )
25,414
(8,516 )
(24,737 )
(7,648 )
(24,090 )
(10,670 )
10,663
(64,998 )
(39,584 )
(7,834 )
68
(7,766 )
632,726
(534,711 )
(48,854 )
(810 )
(1,218 )
147
-
(878 )
46,402
711
1,604
2,315 $
(634 )
2,238
1,604 $
(948 )
3,186
2,238
$
The accompanying notes are an integral part of these statements.
48
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
2016
2015
2014
$
$
4,300 $
982 $
5,083 $
565 $
5,793
4,658
The accompanying notes are an integral part of these statements
49
Olympic Steel, Inc.
Consolidated Statements of Shareholders’ Equity
For The Years Ended December 31,
(in thousands)
Accumulated
Other
Common Treasury Comprehensive Retained Total
Earnings Equity
Loss
Stock Stock
Balance at December 31, 2013
Net loss
Payment of dividends
Exercise of stock options and employee stock
purchases (7 shares)
Stock-based compensation
Changes in fair value of hedges
Other
$ 124,118 $
$
- $
-
147
2,074
-
-
- $
- $
-
-
-
-
-
(437) $ 174,935 $ 298,616
- $ (19,064) $ (19,064)
(878)
(878)
-
-
-
(113)
1
-
-
-
(2)
147
2,074
(113)
(1)
Balance at December 31, 2014
$ 126,339 $
- $
(549) $ 154,991 $ 280,781
Net loss
Repurchase of common stock
Payment of dividends
Exercise of stock options and employee stock
purchases (2 shares)
Stock-based compensation
Changes in fair value of hedges
Other
$
- $
-
-
- $
(699)
-
- $ (26,777) $ (26,777)
(699)
-
-
(879)
(879)
-
30
1,759
-
1
-
-
-
-
-
-
479
-
-
-
-
-
30
1,759
479
1
Balance at December 31, 2015
$ 128,129 $
(699) $
(70) $ 127,335 $ 254,695
Net loss
Payment of dividends
Employee stock purchases (3 shares)
Stock-based compensation
Changes in fair value of hedges
$
- $
-
46
444
-
- $
-
-
90
-
- $
-
-
-
70
(1,078) $
(877)
-
-
-
(1,078)
(877)
46
534
70
Balance at December 31, 2016
$ 128,619 $
(609)
- $ 125,380 $ 253,390
The accompanying notes are an integral part of these statements.
50
Olympic Steel, Inc.
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2016, 2015 and 2014
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. The Company operates in three reportable segments; carbon flat products, specialty metals flat
products, and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segments are at
times consolidated and referred to as the flat products segments. The flat products segments’ assets and resources are shared by
the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and, in some locations,
processed on shared equipment. Due to the shared assets and resources, certain of the flat products segment expenses are allocated
between the carbon flat products segment and the specialty metals flat products segment based upon an established allocation
methodology. Through its carbon flat products segment, the Company sells and distributes large volumes of processed carbon
and coated flat-rolled sheet, coil and plate products, and fabricated parts. Through its specialty metals flat products segment, the
Company sells and distributes processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and
fabricated parts. Through our tubular and pipe products segment, which consists of our Chicago Tube & Iron subsidiary, or CTI,
we distribute metal tubing, pipe, bar, valves and fittings and fabricate 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.
Reclassifications and revisions
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current
year's presentation.
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 54%, 51% and 43% of its total steel requirements
from its three largest suppliers in 2016, 2015 and 2014, 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 29%, 31% and 29% of consolidated net sales in
2016, 2015 and 2014, respectively. In addition, the Company’s largest customer accounted for approximately 4%, 6% and 6%
of consolidated net sales in 2016, 2015 and 2014, respectively. Sales to industrial machinery and equipment manufacturers and
their fabricators accounted for 51%, 49% and 51% of consolidated net sales in 2016, 2015 and 2014, respectively.
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.
51
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 carbon and specialty metals flat products segments’ inventories,
including flat-rolled sheet, coil and plate products are determined using the specific identification method.
Certain of the Company’s tubular and pipe products inventory is stated under the last-in, first-out (LIFO) method. At December
31, 2016 and December 31, 2015, approximately $43.4 million, or 17.1% of consolidated inventory, and $42.7 million, or 20.7%
of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of tubular
and pipe product segment’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 or
expense.
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.
52
Intangible Assets and Recoverability of Long-lived Assets
The Company performs an annual impairment test of indefinite-lived intangible assets for the tubular and pipe products segment
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 intangible assets.
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. The Company estimates the fair value
of indefinite-lived intangible assets using a discounted cash flow methodology. 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 intangible
assets.
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 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.
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 administrative
and general 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.
Certain engineered products produced by the tubular and pipe products segment typically take several months to produce due to
their size and complexity. Substantially all projects are completed within nine 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 1.7%, 1.8% and 1.7% of our
consolidated net sales during 2016, 2015 and 2014, respectively.
Shipping and Handling Fees and Costs
Amounts charged to customers for shipping and other transportation services 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.
53
Stock-Based Compensation
The Company records compensation expense for stock awards issued to employees and directors. For additional information,
see Note 10, Equity Plans.
Impact of Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No 2016-15,
“Classification of certain cash receipts and cash payments”. This ASU addresses the following eight specific cash flow issues:
Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-
owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity
method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the
predominance principle. The guidance will be effective for annual reporting periods beginning after December 15, 2017, and
interim periods within those fiscal years with early adoption permitted. The adoption of this ASU is not expected to materially
impact our consolidated financial statements.
In March 2016, the FASB issued ASU No 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This ASU
is part of the FASB’s Simplification Initiative and has been issued to reduce complexity in the presentation of employee share-
based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The guidance will be effective for annual reporting periods beginning after
December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The adoption of this ASU is not
expected to materially impact our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which specifies the accounting for leases. The objective is to
establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the
amount, timing and uncertainty of cash flows arising from a lease. This ASU introduces the recognition of lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for
annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption
permitted. We are in the process of evaluating the impact of the future adoption of this standard on our consolidated financial
statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU is part of
the FASB’s Simplification Initiative and has been issued to reduce complexity in the presentation of deferred taxes. This new
guidance eliminates the requirement for entities that present a classified statement of financial position to classify deferred tax
assets and liabilities as current and noncurrent, and instead require that they classify all deferred tax assets and liabilities as
noncurrent. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. However, the
guidance does not change the existing requirement that only permits offsetting within a jurisdiction. Companies are still
prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. This
ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within
those fiscal years, with early adoption permitted. The guidance may be applied either prospectively, for all deferred tax assets
and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are
required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also
required to include quantitative information about the effects of the change on prior periods. The prospective adoption of this
guidance on January 1, 2016 did not have a material impact on the Company’s consolidated financial statements and the prior
periods were not retrospectively adjusted.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU is part of
the FASB’s Simplification Initiative and has been issued to reduce the complexity in the presentation of debt issuance costs. This
new guidance requires companies to present debt issuance costs the same way they currently present debt discounts, as a direct
deduction from the carrying value of that debt liability. The guidance is limited to simplifying the presentation of debt issuance
costs and does not impact the recognition and measurement guidance for debt issuance costs. This ASU is effective for financial
statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early
adoption permitted. The amendments of ASU No. 2015-03 must be applied retrospectively, where the balance sheet of each
presented individual period is adjusted to indicate the period-specific impact of using the new guidance. The FASB considered
that because both debt issuance costs and debt discounts are amortized using the effective interest method, there would be no
effect on the income statement upon adoption of the amendments. The adoption of this guidance on January 1, 2016 did not have
an impact on the Company’s consolidated financial statements because it does not apply to revolving credit agreements.
54
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern”. This ASU
contains new guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern and to provide related footnote disclosures. Management must evaluate whether it is probable that
known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’s ability to continue as a
going concern within one year after the date that the financial statements are issued. If such conditions or events are identified,
the standard requires management's mitigation plans to alleviate the doubt or a statement of the substantial doubt about the
entity’s ability to continue as a going concern to be disclosed in the financial statements. This ASU is effective for fiscal years
and interim periods beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU did not impact
the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a joint project
initiated by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to
develop a common revenue standard for U.S. generally accepted accounting principles and International Financial Reporting
Standards that will: remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for
addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and
capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and
simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. As
originally proposed, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. The adoption of this ASU is not expected to materially impact our consolidated financial
statements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers.” This ASU deferred
the effective date of ASU No. 2014-09 by one year.
2. Accounts Receivable:
Accounts receivable are presented net of allowances for doubtful accounts and unissued credits of $2.4 million and $3.1 million
as of December 31, 2016 and 2015, respectively. Bad debt expense totaled $0.4 million in 2016, $0.5 million in both 2015 and
2014.
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.
3. Inventories:
Inventories consisted of the following:
(in thousands)
Unprocessed
Processed and finished
Totals
As of December 31,
2016
$
$
203,256 $
51,270
254,526 $
2015
163,942
42,703
206,645
During 2016 and 2015, the Company recorded $1.5 million and $3.3 million, respectively of LIFO income as a result of decreased
metals pricing during 2016 and 2015. 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 $8.0 million and $6.6 million lower than reported at December
31, 2016 and 2015, respectively.
55
4. 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
$
Depreciable
Lives
-
5 - 10
7 - 30
2 - 15
3 - 7
2 - 5
2 - 5
-
December 31,
2016
December 31,
2015
16,001 $
3,133
133,010
185,676
6,311
27,848
1,456
807
374,242
(218,476)
155,766 $
16,001
2,799
131,294
185,555
6,582
27,350
1,274
1,274
372,129
(205,591)
166,538
Less accumulated depreciation
Net property and equipment
$
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, 2016, primarily consisted of payments for additional processing equipment at our
existing facilities that was not yet placed into service and capitalized costs related to the implementation of ERP systems.
5. Goodwill and Intangible Assets:
In accordance with the Accounting Standards Codification (ASC), an impairment test of indefinitely lived intangible assets is
performed at least annually 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 2015, the metals industry experienced a significant decline in the price of metals as a result of the strengthened U.S.
dollar, a historically high level of imported materials arriving in the United States, low raw material costs to produce metals, and
an oversupply of metals. The challenging market conditions negatively impacted the Company’s financial performance and the
decrease of the Company’s market capitalization led the Company to perform the two-step quantitative impairment test during
the year by comparing the fair value of the segment carrying goodwill with its carrying value. During the second quarter of 2015,
the Company recorded a full impairment to the tubular and pipe products segment’s goodwill. In addition, the Company
concluded that the indefinitely lived intangible asset, Trade name, was partially impaired and the impairment in the amount of
$8 million was recorded. During the annual impairment analysis in the fourth quarter of 2015 the Company fully impaired the
goodwill related to the specialty metals flat products segment as the asset impairment testing determined that the carrying value
of the operations was in excess of the fair value and impairments were identified. The determination of fair value of the reporting
units used to perform the first step of the impairment test requires judgment and involves significant estimates and assumptions
about the expected future cash flows and the impact of market conditions on those assumptions. Due to the inherent uncertainty
associated with these estimates, actual results could differ materially from these estimates.
56
Goodwill, by reportable segment, was as follows as of December 31, 2016 and 2015:
(in thousands)
Balance as of December 31, 2014
Acquisitions
Impairments
Balance as of December 31, 2015
Acquisitions
Impairments
$
$
Balance as of December 31, 2016
$
Specialty
Metals
Flat Products
Tubular and
Pipe Products
16,451 $
-
(16,451)
- $
-
-
- $
500 $
-
(500)
- $
-
-
- $
Total
16,951
-
(16,951)
-
-
-
-
All of the Company’s intangible assets were recorded in connection with its July 1, 2011 acquisition of CTI. The intangible assets
were evaluated on the premise of highest and best use to a market participant, primarily utilizing the income approach valuation
methodology. The 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.
During 2016, a step zero test was performed for the indefinitely lived intangible assets and no indication of impairment was
present. Due to the impairment of the tubular and pipe segment’s goodwill in the second quarter of 2015, a triggering event
occurred for the intangible assets subject to amortization and an impairment test was completed. The test revealed no impairment
to the Company’s intangible assets subject to amortization.
Intangible assets, net, consisted of the following as of December 31, 2016 and 2015:
(in thousands)
Customer relationships - subject to amortization
Trade name - not subject to amortization
(in thousands)
Customer relationships - subject to amortization
Trade name - not subject to amortization
As of December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Impairments
Intangible
Assets, Net
$
$
13,332 $
15,425
28,757 $
(4,888) $
-
(4,888) $
- $
-
- $
8,444
15,425
23,869
As of December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Impairments
Intangible
Assets, Net
$
$
13,332 $
23,425
36,757 $
(4,000) $
-
(4,000) $
- $
(8,000)
(8,000) $
9,332
15,425
24,757
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.
57
6. Debt:
The Company’s debt is comprised of the following components:
(in thousands)
Asset-based revolving credit facility due June 30, 2019
Industrial revenue bond due April 1, 2018
Total debt
Less current amount
Total long-term debt
As of
December 31, December 31,
2016
2015
$
$
164,599 $
1,825
166,424
(1,825)
164,599 $
145,800
2,690
148,490
(2,690)
145,800
The Company’s existing asset-based credit facility (the ABL Credit Facility) is collateralized by the Company’s accounts
receivable and inventory. The ABL Credit Facility consists of a revolving credit line of $365 million. Revolver borrowings are
limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $365 million in the aggregate. The
ABL Credit Facility matures on June 30, 2019.
The ABL Credit 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 the greater of $30 million or 10.0% of the aggregate amount of revolver commitments ($36.5 million at December 31, 2016),
then the Company must maintain a ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of
at least 1.00 to 1.00 for the most recent twelve fiscal month period; (ii) limitations on dividend payments and common stock
repurchases; and (iii) restrictions on additional indebtedness. The Company has the option to borrow under its revolver based on
the agent’s base rate plus a premium ranging from 0.00% to 0.25% or the London Interbank Offered Rate (LIBOR) plus a
premium ranging from 1.25% to 3.00%.
As of December 31, 2016, the Company was in compliance with its covenants and had approximately $94.3 million of availability
under the ABL Credit Facility.
As of December 31, 2016, $2.0 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 five-year term
of the ABL Credit facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements
of Comprehensive Income.
As part of the CTI acquisition in July 2011, the Company assumed approximately $5.9 million of Industrial Revenue Bond (IRB)
indebtedness. The bond matures in April 2018, with the option to provide principal payments annually on April 1st. On April 1,
2016, the Company paid an optional principal payment of $0.9 million. Since the IRB is remarketed annually, it 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 a security for payment of the bonds, the Company obtained a direct pay letter of credit issued
by JPMorgan Chase Bank, N.A. The letter of credit reduces annually by the principal reduction amount. The interest rate at
December 31, 2016 was 1.0% for the IRB debt.
CTI entered into an interest rate swap agreement to reduce the impact of changes in interest rates on the above IRB. At December
31, 2016, the effect of the swap agreement on the bond was to fix the rate at 3.46%. The swap agreement matures in April 2018,
and is reduced annually by the amount of the optional principal payments on the bond. The Company is exposed to credit loss in
the event of nonperformance by the other parties to the interest rate swap agreement. However, the Company does not anticipate
nonperformance by the counterparties.
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 then outstanding LIBOR-based borrowings under the
ABL Credit Facility. The hedge, which matured on June 1, 2016, fixed the rate at 1.21% plus a premium ranging from 1.25% to
1.75%.
58
Scheduled Debt Maturities, Interest, Debt Carrying Values
The Company’s principal payments over the next three years are detailed in the table below:
(in thousands)
ABL Credit Facility
Industrial revenue bond
Total principal payments
2017
2018
2019
Total
$
$
- $
895
895 $
- $
930
930 $
164,599 $
-
164,599 $
164,599
1,825
166,424
The overall effective interest rate for all debt, exclusive of deferred financing fees and deferred commitment fees, amounted to
2.4%, 2.1% and 2.4% in 2016, 2015 and 2014, respectively. Interest paid totaled $4.3 million, $5.1 million and $5.8 million for
the years ended December 31, 2016, 2015 and 2014, respectively. Average total debt outstanding was $152.5 million, $211.2
million and $234.7 million in 2016, 2015 and 2014, respectively.
7. Derivative Instruments:
Metals swaps
During 2016, 2015 and 2014, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price of
nickel with third-party brokers. In 2014, the Company entered into carbon swaps indexed to the New York Mercantile Exchange
(NYMEX) price of U.S. Midwest Domestic Hot-Rolled Coil Steel with third-party brokers. The nickel and carbon swaps are
treated as derivatives for accounting purposes and are included in “Other accrued liabilities” and “Prepaid expenses and other”
on the Consolidated Balance Sheet at December 31, 2016 and 2015. The Company entered into the swaps to mitigate its
customers’ risk of volatility in the price of metals. The outstanding nickel swaps have one to five months remaining and the there
are no outstanding carbon swaps as of December 31, 2016. The swaps are settled with the brokers at maturity. The economic
benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer. The primary
risk associated with the metals swaps is the ability of customers or third-party brokers to honor their agreements with the
Company related to derivative instruments. If the customer or third-party brokers are unable to honor their agreements, the
Company’s risk of loss is the fair value of the metals swaps.
While 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 metals and embedded customer derivative instruments are included in “Cost of materials
sold” in the Consolidated Statements of Comprehensive Income. The Company recognizes derivative positions with both the
customer and the third party for the derivatives and classifies cash settlement amounts associated with them as part of “Cost of
materials sold” in the Consolidated Statements of Comprehensive Income. The cumulative change in fair value of the metals
swaps that have not yet settled are included in “Other accrued liabilities”, and the embedded customer derivatives are included
in “Accounts receivable, net” on the Consolidated Balance Sheets at December 31, 2016 and 2015.
In 2014, the Company entered into cash flow metals hedges to mitigate its risk of volatility in the price of metals. The cash flow
metals hedges are indexed to the NYMEX price of U.S. Midwest Domestic Hot-Rolled Coil Steel with third-party brokers. There
were no cash flow metals hedges outstanding as of December 31, 2016 or 2015. The metals hedges were accounted for as cash
flow hedges. The impact of the mark-to-market adjustment on settled hedges is recorded in “Cost of materials sold” in the
accompanying Consolidated Statements of Comprehensive Income. The impact for the twelve months ended December 31, 2015
was $2.4 million of expense.
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.
59
Fixed rate interest rate hedge
In June 2012, the Company entered into a forward starting fixed rate interest rate hedge commencing June 2013 in order to
eliminate the variability of cash interest payments on $53.2 million of the then outstanding LIBOR-based borrowings under the
ABL Credit Facility. The hedge, which matured on June 1, 2016, fixed the rate at 1.21% plus a premium ranging from 1.25% to
1.75%. The fixed rate interest rate hedge was accounted for as a cash flow hedging instrument for accounting purposes.
There was no net impact from the nickel swaps or embedded customer derivative agreements to the Company’s Consolidated
Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014. The table below shows the total
impact to the Company’s Consolidated Statements of Comprehensive Income through “Net income (loss)” of the derivatives for
the years ended December 31, 2016, 2015 and 2014.
(in thousands)
Interest rate swap (CTI)
Fixed interest rate swap (ABL)
Cash flow metals hedges
Metals swaps
Embedded customer derivatives
Total loss
8. Fair Value of Assets and Liabilities:
Net Gain (Loss) Recognized
2015
2014
2016
$
$
(66 ) $
(98 )
-
68
(68 )
(164 ) $
(77) $
(365)
(2,400)
(2,304)
2,304
(2,842) $
(100 )
(472 )
(312 )
934
(934 )
(884 )
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 2016 and 2015, 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, 2016 and December 31, 2015. Following is a description of the
valuation methodologies used for assets and liabilities measured at fair value as of December 31, 2016 and December 31, 2015:
Metals swaps and embedded customer derivatives – Determined by using Level 2 inputs that include the price of nickel
indexed to the LME and the price of Hot Rolled Coil Steel indexed to the NYMEX. 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.
60
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:
Metals swaps
Interest rate swap (CTI)
Total liabilities recorded at fair value
(in thousands)
Liabilities:
IRB
ABL Credit Facility
Total liabilities not recorded at fair value
Value of Items Recorded at Fair Value
As of December 31, 2016
Level 1 Level 2 Level 3 Total
$
$
$
$
- $
- $
113 $
113 $
- $
- $
113
113
- $
-
- $
113 $
36
149 $
- $
-
- $
113
36
149
Value of Items Not Recorded at Fair Value
As of December 31, 2016
Level 1 Level 2 Level 3 Total
$
$
1,825 $
- $
- 164,599
1,825 $ 164,599 $
- $
1,825
- 164,599
- $ 166,424
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:
Metals swaps
Interest rate swap (CTI)
Fixed interest rate swap (ABL)
Total liabilities recorded at fair value
(in thousands)
Liabilities:
IRB
ABL Credit Facility
Total liabilities not recorded at fair value
Value of Items Recorded at Fair Value
As of December 31, 2015
Level 1 Level 2 Level 3 Total
$
$
$
$
- $
- $
384 $
384 $
- $
- $
384
384
- $
-
-
- $
384 $
102
114
600 $
- $
-
-
- $
384
102
114
600
Value of Items Not Recorded at Fair Value
As of December 31, 2015
Level 1 Level 2 Level 3 Total
$
$
2,690 $
- $
- 145,800
2,690 $ 145,800 $
- $
2,690
- 145,800
- $ 148,490
The value of the items not recorded at fair value represent 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 $1.8 million and $2.7 million at December 31, 2016 and 2015, respectively.
The fair value of the ABL Credit Facility is determined using Level 2 inputs. The carrying value of the ABL Credit Facility was
$164.6 million and $145.8 million at December 31, 2016 and 2015, respectively. 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.
61
9. 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 matured on June 1, 2016 and the notional amount was reduced monthly by $0.7 million. The balance
as of December 31, 2015 was $31.4 million. The fixed rate interest rate hedge was accounted for as a cash flow hedging
instrument for accounting purposes. The fair value of the interest rate hedge was included in “Accumulated other comprehensive
loss” on the Consolidated Balance Sheets at December 31, 2015.
10. Equity Plans:
Pursuant to the Amended and Restated 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, 1,000,000 shares of
common stock have been authorized cumulatively for equity grants.
On May 1, 2016 and March 1, 2015, the Compensation Committee of the Company’s Board of Directors approved the grant of
3,094 and 4,639 restricted stock units (RSUs), respectively, 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 $22.62 and $15.09 on May
1, 2016 and March 1, 2015, respectively.
On July 1, 2016, the Company created a new Senior Management Stock Incentive Program (the New Plan) for certain
participants. Under the New Plan, each participant is awarded RSUs with a dollar value equal to 10% of the participant’s base
salary, up to a maximum of $17,500. The RSUs have a five-year vesting period and the RSUs will convert into the right to receive
shares of common stock upon a participant’s retirement, or earlier upon the participant’s death or disability or upon a change in
control of the Company. The carbon and specialty metals flat products segments adopted the New Plan on July 1, 2016 and the
tubular and pipe products segment adopted the New Plan on January 1, 2017.
Prior to July 1, 2016, the Company’s Senior Management Compensation Program included an equity component in order to
encourage more ownership of common stock by the senior management (the Old Plan). The Old Plan imposed stock ownership
requirements upon the participants. Each participant was required to own at least 750 shares of common stock for each year that
the participant participated in the Old Plan. Any participant that failed to meet the stock ownership requirements would be
ineligible to receive any equity awards under the Company’s equity compensation plans, including the Plan, until the participant
satisfied the ownership requirements. To assist participants in meeting the stock ownership requirements, on an annual basis, if
a participant purchased 500 shares of common stock on the open market, the Company awarded that participant 250 shares of
common stock. During 2016 and 2015, the Company matched 2,500 and 9,000 shares, respectively. Additionally, any participant
who continued 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 would receive a restricted stock
unit award with a dollar value of $25 thousand, $50 thousand, $75 thousand, $100 thousand and $100 thousand, respectively.
Restricted stock unit awards would convert into the right to receive shares of common stock upon a participant’s retirement, or
earlier upon the participant’s death or disability or upon a change in control of the Company. The carbon and specialty metals
flat products segments terminated this plan on July 1, 2016 and the tubular and pipe products segment terminated the plan on
January 1, 2017.
As part of the termination of the Old Plan and the transition to the New Plan, participants were paid the RSU grants that were
earned to date, or a pro-rata amount of the RSUs earned, depending on the participants’ length of time they participated in the
plan. After the payment of the RSUs noted above, the remaining liability of approximately $1.0 million was reversed during
2016 in accordance with ASC No. 718.
During the third quarter of 2016, the Company adopted a formal RSU award program for employees who are promoted to an
executive level position. During the quarter, Andrew Greiff received 10,573 RSUs upon his promotion to Executive Vice
President and Chief Operating Officer. These RSUs vest on the fifth anniversary of his promotion.
62
Stock-based compensation income or expense recognized on RSUs is summarized in the following table:
(in thousands)
RSU expense before taxes of New Plan
RSU (income) expense before taxes of Old Plan
RSU (income) expense after taxes
$
$
For the years ended December 31,
2015
2014
2016
42 $
(73) $
81
- $
1,047 $
631
-
1,252
774
All pre-tax charges related to RSUs were included in the caption “Administrative and general” on the accompanying
Consolidated Statements of Comprehensive Income.
The following table summarizes the activity related to RSUs for the twelve months ended December 31, 2016:
Outstanding at December 31, 2015
Granted
Converted into shares
Forfeited
Outstanding at December 31, 2016
Vested at December 31, 2016
Number of
Shares
Weighted
Average
Estimated Fair
Value
287,894 $
137,935
(3,239)
(1,104)
421,486 $
411,794 $
22.39
15.19
19.12
18.03
19.92
19.89
Of the RSUs granted in 2016, 2015 and 2014, 51,075, 47,639 and 21,506, respectively, were used to fund supplemental executive
retirement plan contributions. There was no intrinsic value for the RSUs that were converted into shares in 2016, 2015 and 2014.
11. 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 2024. In some cases, the leases include options to extend. Rent and lease
expense was $9.1 million, $8.7 million and $8.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The future annual minimum lease payments as of December 31, 2016 are as follows:
(in thousands)
Lease payments
2017
2018
2019
2020
2021
Thereafter Total
$
6,634 $
5,804 $
4,511 $
3,661 $
2,574 $
3,282 $ 26,466
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. During 2016, the Company paid $1.7 million
related to an arbitration decision for a 2015 foreign steel purchase. The amount was included in “Cost of materials sold” in the
Consolidated Statements of Comprehensive Income. We have not incurred any charges of this nature in the comparable periods.
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, 2016, approximately 280 of the hourly plant personnel are represented by nine separate collective bargaining
units. The table below shows the expiration dates of the collective bargaining agreements.
63
Facility
Minneapolis plate, Minnesota
Detroit, Michigan
Duluth, Minnesota
St. Paul, Minnesota
Milan, Illinois
Locust, North Carolina
Romeoville, Illinois
Minneapolis coil, Minnesota
Indianapolis, Indiana
Expiration date
March 31, 2017
August 31, 2017
December 21, 2017
May 25, 2018
August 12, 2018
March 4, 2020
May 31, 2020
September 30, 2020
January 29, 2021
12. 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 (benefit)
2016
As of December 31,
2015
2014
$
$
2,563 $
929
3,492
(1,994)
1,498 $
(149 ) $
(752 )
(901 )
(5,916 )
(6,817 ) $
4,859
657
5,516
(2,566)
2,950
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
Total deferred tax liabilities
Deferred tax liabilities, net
2016
2015
2,531 $
3,224
533
7,228
169
13,685
(2,017 )
11,668
(5,874 )
(19,846 )
(9,067 )
(34,787 )
(23,119 ) $
2,986
2,926
500
7,311
143
13,866
(1,030)
12,836
(6,018)
(22,535)
(9,396)
(37,949)
(25,113)
$
$
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
$
$
2016
2015
2014
38 $
-
13
(13)
38 $
58 $
(20)
13
(13)
38 $
75
(17)
13
(13)
58
It is expected that the amount of unrecognized tax benefits will not materially change in the next twelve months. The tax years
2013 through 2015 remain open to examination by major taxing jurisdictions to which the Company is subject.
64
The Company recognized interest related to uncertain tax positions in income tax expense.
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
Valuation allowance
Goodwill impairment
All other, net
Effective income tax rate
2016
2015
2014
35.0%
11.8%
205.4%
0.0%
104.4%
356.6%
35.0%
1.4%
0.0%
(17.1%)
1.0%
20.3%
35.0%
(1.6% )
0.0%
(51.8% )
0.1%
(18.3% )
The Company's effective tax rate is disproportionately high in 2016 from comparative periods due to low income before taxes
relative to items that impact the effective tax rate. Other differences reflect permanent differences of $0.8 million offset by
credits and manufacturing deductions of $0.3 million. During 2016, the Company recorded a valuation allowance of $0.9 million
to reduce certain state deferred tax assets to the amount that is more likely than not to be realized.
Income taxes paid in 2016, 2015 and 2014 totaled $1.0 million, $0.6 million and $4.7 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.
13. 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)
For the years ended December 31,
2015
2016
2014
Weighted average basic shares outstanding
Assumed exercise of stock options and issuance of stock awards
Weighted average diluted shares outstanding
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Anti-dilutive securities outstanding
$
$
$
11,210
-
11,210
(1,078) $
(0.10) $
(0.10) $
167
11,192
-
11,192
(26,777) $
(2.39) $
(2.39) $
125
11,120
-
11,120
(19,064)
(1.71)
(1.71)
118
14. Stock Repurchase Program:
On October 2, 2015, the Company announced that its Board of Directors authorized a stock repurchase program of up to 550,000
shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated block
transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through
Rule 10b5-1 plans. Any of the repurchased shares are held in the Company’s treasury, or canceled and retired as the Board may
determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility.
Under the ABL Credit Facility, the Company may repurchase common stock and pay dividends up to $2.5 million in the
aggregate during any trailing twelve months without restrictions. Purchases of common stock or dividend payments in excess of
$2.5 million in the aggregate require the Company to (i) maintain availability in excess of 25% of the aggregate revolver
commitments ($91.3 million at December 31, 2016) or (ii) to maintain availability equal to or greater than 15% of the aggregate
revolver commitments ($54.8 million at December 31, 2016) and the Company must maintain a pro-forma ratio of EBITDA
minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00.
There were no shares repurchased during 2016. During the fourth quarter of 2015, the Company repurchased 65,283 shares of
outstanding common stock at an average cost of $10.71 per share.
65
15. 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 primarily on internal management reporting.
The Company operates in three reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe
products. The flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both
segments’ products are stored in the shared facilities and, in some locations, processed on shared equipment. As such, total assets
and capital expenditures are reported in the aggregate for the flat products segments. Due to the shared assets and resources,
certain of the flat products segment expenses are allocated between the carbon flat products segment and the specialty metals flat
products segment based upon an established allocation methodology. Through its carbon flat products segment, the Company
sells and distributes large volumes of processed carbon and coated flat-rolled sheet, coil and plate products. Through its specialty
metals flat products segment, the Company sells and distributes processed aluminum and stainless flat-rolled sheet and coil
products, flat bar products and fabricated parts. Through its tubular and pipe products segment, the Company distributes metal
tubing, pipe, bar, valve and fittings and fabricates pressure parts supplied to various industrial markets.
Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the
unallocated expenses related to managing the entire Company (i.e., all three segments), including compensation for certain
personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various
other professional fees.
66
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, 2016, 2015 and 2014. The Company assesses
the performance of the segments based on operating income.
(in thousands)
Net sales
Carbon flat products
Specialty metals flat products
Tubular and pipe products
Total net sales
Depreciation and amortization
Carbon flat products
Specialty metals flat products
Tubular and pipe products
Corporate
Total depreciation and amortization
Operating income
$
$
$
$
Carbon flat products
Specialty metals flat products
Tubular and pipe products
Corporate
Goodwill and intangible asset impairment (a)
$
$
Total operating income (loss)
Other loss, net
Income (loss) before interest and income taxes
Interest and other expense on debt
Income (loss) before income taxes
$
For the Year Ended
December 31,
2015
2014
2016
670,983 $
189,930
194,203
1,055,116 $
765,400 $
192,516
217,627
1,175,543 $
985,039
206,692
244,539
1,436,270
11,690 $
797
5,896
102
18,485 $
(4,371) $
9,841
7,713
(7,435)
-
5,748 $
(55)
5,693
5,273
420 $
12,200 $
698
6,036
102
19,036 $
(7,217 ) $
(1,074 )
12,583
(7,120 )
(24,951 )
(27,779 ) $
(125 )
(27,904 )
5,690
(33,594 ) $
14,250
805
5,624
101
20,780
6,306
6,109
10,185
(7,972)
(23,836)
(9,208)
(126)
(9,334)
6,780
(16,114)
(a) $24,451 of the goodwill and intangible asset impairment in 2015 related to the tubular and pipe products segment, $500
related to the specialty metals flat products segment. The goodwill impairment in 2014 related to the tubular and pipe
products segment.
(in thousands)
Capital expenditures
Flat products
Tubular and pipe products
Corporate
Total capital expenditures
Assets
Flat products
Tubular and pipe products
Corporate
Total assets
2016
2015
2014
5,105 $
1,719
-
6,824 $
4,295 $
3,022
-
7,317 $
4,540
3,273
21
7,834
363,626 $
192,088
354
556,068 $
328,295
183,129
456
511,880
$
$
$
$
There were no material revenue transactions between the carbon flat products, specialty metals flat products and tubular and pipe
products segments for the years ended December 31, 2016, 2015 and 2014.
The Company sells certain products internationally, primarily in Canada, Mexico and Dominican Republic. International sales
have been immaterial to the consolidated financial results and to the individual segment’s results.
67
16. Retirement Plans:
The Company’s retirement plans consist of two 401(k) plans covering certain non-union employees, two separate 401(k) plans
covering all union employees, a 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 flat rolled segments’ 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 union flat rolled segments’ 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 contribution,
limited to the first 6% 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 a SERP, which has been amended from time to time. 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.
The most recent Pension Protection Act zone status available is for the plan year beginning January 1, 2016, 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 green 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, 2020. CTI contributions to the Multiemployer Plan were immaterial for the years ended
December 31, 2016 and 2015.
Retirement plan expense, which includes all Company 401(k), profit-sharing, SERP defined contributions and the Multiemployer
Plan, amounted to $2.2 million, $2.0 million and $2.2 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
68
The fair values of the Company’s SERP assets as of December 31, 2016 are as follows:
(in thousands)
Money market funds
Fixed income
Mutual funds
Total
Quoted Prices Observable
in Active Markets
Level 1
Inputs
Level 2
Unobservable
Inputs
Level 3
-
-
- $
2,403
120
3,297
5,820 $
-
-
-
$
17. Related-Party Transactions:
The Company’s Chief Executive Officer owns 50% of an entity that owns one of the Cleveland warehouses and leases it to the
Company at a fair market value annual rental of $0.2 million. The lease expires on December 31, 2018 with four five-year
renewal options.
69
Schedule II – Valuation and Qualifying Accounts
(in thousands)
Description
Year Ended December 31, 2014
Allowance for doubtful accounts
Tax valuation reserve
Year Ended December 31, 2015
Allowance for doubtful accounts
Tax valuation reserve
Year Ended December 31, 2016
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
$
$
$
$
$
$
1,519 $
1,298 $
467 $
83 $
1,348 $
1,381 $
506 $
- $
1,299 $
1,030 $
369 $
987 $
- $
- $
- $
- $
- $
- $
(638) $
- $
1,348
1,381
(555) $
(351) $
1,299
1,030
(283) $
- $
1,385
2,017
70
SUPPLEMENTAL FINANCIAL INFORMATION
(in thousands, except per share data)
2016
Net sales
Operating income (loss) (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
2015
Net sales
Operating income (loss) (b)
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
$
$
$
$
$
$
$
2nd
1st
258,349 $ 273,608 $
8,339
7,007
3,550 $
0.32 $
11,216
0.32 $
11,216
35
(1,255)
(767) $
(0.07) $
11,182
(0.07) $
11,182
3rd
268,255 $
27
(1,288)
(1,757) $
(0.16) $
11,219
(0.16) $
11,219
Year
4th
254,904 $ 1,055,116
5,748
420
(1,078)
(0.10)
11,210
(0.10)
11,210
(2,653)
(4,044)
(2,104) $
(0.19) $
11,221
(0.19) $
11,221
17.50 $
7.98
27.48 $
15.41
31.19 $
17.42
28.67 $
17.14
31.19
7.98
2nd
1st
345,865 $ 315,251 $
(24,398)
(25,895)
(22,260) $
(1.99) $
11,201
(1.99) $
11,201
3,345
1,751
1,069 $
0.10 $
11,195
0.10 $
11,195
3rd
276,922 $
453
(1,036)
(598) $
(0.05) $
11,203
(0.05) $
11,203
Year
4th
237,505 $ 1,175,543
(27,779)
(33,594)
(26,777)
(2.39)
11,192
(2.39)
11,192
(7,179)
(8,414)
(4,988) $
(0.45) $
11,173
(0.45) $
11,173
Market price of common stock: (c)
High
Low
$
18.57 $
12.86
20.93 $
10.44
17.92 $
6.40
12.60 $
8.98
20.93
6.40
(a) Operating income (loss) includes $1,489 of LIFO income related to the Company's tubular and pipe products segment.
(b) Operating income (loss) includes $3,347 of LIFO income related to the Company's tubular and pipe products segment
as well as a $16,451 goodwill impairment charge and a $8,000 intangible asset impairment charge recorded in the second
quarter related to the Company's tubular and pipe products segment and a $500 goodwill impairment charge recorded in
the fourth quarter related to the specialty metals flat products segment.
(c) Represents the high and low sales prices of our common stock as reported by the Nasdaq Global Select Market.
71
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, 2016 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, 2016 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
72
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 2017 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 2017 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 2017 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 2017 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 2017 Annual Meeting of Shareholders.
73
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, 2016, 2015 and 2014
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Supplemental Disclosures of Cash Flow Information for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014
(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.
ITEM 16. FORM 10-K SUMMARY
None
74
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
March 2, 2017
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.
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
/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 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/ Ralph M. Della Ratta, Jr. *
Ralph M. Della Ratta, Jr., Lead Director
/s/ Arthur F. Anton *
Arthur F. Anton, Director
/s/ Dirk A. Kempthorne *
Dirk A. Kempthorne, Director
/s/ Michael G. Rippey *
Michael G. Rippey, 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
March 2, 2017
75
OLYMPIC STEEL, INC.
INDEX TO EXHIBITS
Description
Reference
Exhibit
2.2
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.
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).
3.1(i)
Amended and Restated Articles of Incorporation
Incorporated by reference to Exhibit 3.1(i) to the
3.1(ii) Amended and Restated Code of Regulations
Incorporated by reference to Exhibit 3.1 to
Company’s Form 10-Q filed with the
Commission on August 6, 2015 (Commission
File No. 0-23320).
Registration Statement on Form S-1
(Registration No. 33-73992) filed with the
Commission on January 12, 1994.
Incorporated by reference to Exhibit 4.25 to
Registrant’s Form 8-K filed with the
Commission on July 3, 2014 (Commission File
No. 0-23320).
4.25
4.26
4.27
Second Amended and Restated Loan and Security
Agreement, dated as of June 30, 2014, 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 Second Amended and Restated Loan and
Security Agreement, dated as of October 30, 2015, 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 Second Amended and Restated Loan
and Security Agreement, dated as of December 1, 2016, 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.
Filed herewith
Filed herewith
10.1 * Olympic Steel, Inc. Stock Option Plan
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.
10.8 * Form of Management Retention Agreement for Senior
Incorporated by reference to Exhibit 10.8 to
Executive Officers of the Company
Registrant's Form 10-Q filed with the
Commission on August 7, 2000 (Commission
File No. 0-23320).
10.9 * Form of Management Retention Agreement for Other
Incorporated by reference to Exhibit 10.9 to
Officers of the Company
10.14
*
Olympic Steel, Inc. Executive Deferred Compensation Plan
dated December 15, 2004
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).
76
Form of Non-Solicitation Agreements
Description
Reference
Form of Management Retention Agreement
Supplemental Executive Retirement Plan Term Sheet
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).
Olympic Steel, Inc. Supplemental Executive Retirement Plan Incorporated by reference to Exhibit 10.20 to
Exhibit
10.15
*
10.16
*
10.17
*
10.20
*
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).
Registrant’s Form 8-K filed with the
Commission on April 28, 2006 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 4.3 to
Registrant’s Registration Statement on Form S-8
(Registration No. 333-211023) filed with the
Commission on April 29, 2016.
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).
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 8-K filed with the
Commission on December 31, 2015
(Commission File No. 0-23320).
Incorporated by reference to Exhibit 10.32 to
Registrant’s Form 8-K filed with the
Commission on March 31, 2016 (Commission
File No. 0-23320).
Incorporated by reference to Exhibit 10.13 to
Registrant’s Form 8-K filed with the
Commission on November 23, 2016
(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).
10.21
*
Amended and Restated Olympic Steel, Inc. 2007 Omnibus
Incentive Plan
10.27* Form of Performance-Earned Restricted Stock Unit (PERS
Unit) Agreement for Messrs. Siegal, Wolfort and Marabito.
10.28* Form of Performance-Earned Restricted Stock Unit (PERS
Unit) Agreement for Mr. Manson and Ms. Potash.
10.31
*
David A. Wolfort Employment Agreement effective as of
January 1, 2016
10.32
*
Donald McNeeley Employment Agreement effective as of
March 31, 2016
10.33
*
Richard T. Marabito Employment Agreement effective as of
November 23, 2016
10.34
*
Form of RSU Agreements for Messrs. Siegal, Wolfort and
Marabito.
77
Olympic Steel, Inc. Senior Manager Compensation Plan
Incorporated by reference to Exhibit 10.30 to
10.30
*
Exhibit
10.35 * Michael D. Siegal Employment Agreement effective as of
Description
December 1, 2012
Reference
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).
10.36 * Departure of Directors or Certain Officers; Election of
Incorporated by reference to Exhibit 10.36 to
Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers.
10.37*
Amendment to Form of Management Retention Agreement
for Senior Executive Officers of the Company
Registrant’s Form 8-K filed with the
Commission on December 30, 2014
(Commission File No. 0-23320).
Incorporated by reference to Exhibit 10.1 to
Registrant’s Form 10-Q filed with the
Commission on May 1, 2015 (Commission File
No. 0-23320).
10.38 * Andrew S. Greiff Employment Agreement effective as of
Incorporated by reference to Exhibit 10.38 to
August 19, 2016
Registrant’s Form 8-K filed with the
Commission on August 19, 2016 (Commission
File No. 0-23320).
21
23
24
31.1
31.2
32.1
32.2
List of Subsidiaries
Filed herewith
Consent of Independent Registered Public Accounting Firm Filed herewith
Filed herewith
Directors and Officers Powers of Attorney
Filed 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
Filed herewith
Furnished herewith
Furnished herewith
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Document
* This exhibit is a management contract or compensatory plan or arrangement.
78
Comparison of 5 Year Cumulative Total Return
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100 through December 2016
250.00
200.00
150.00
100.00
50.00
0.00
2011
2012
2013
2014
2015
2016
Olympic Steel Inc.
NASDAQ Composite-Total Returns
Peer Group
The peer group consists of Worthington Industries, Ryerson Holding Corporation, Shiloh Industries, Inc.,
A.M. Castle & Co., and Reliance Steel & Aluminum Co.
Directors & Officers
BOARD OF DIRECTORS
Michael D. Siegal, 64
Chairman of the Board and Chief Executive Officer,
Olympic Steel
David A. Wolfort, 64
President,
Olympic Steel
Arthur F. Anton, 59
President and Chief Executive Officer,
Swagelok Company
Ralph M. Della Ratta, 63
Founder and Managing Director,
Western Reserve Partners LLC
Howard L. Goldstein, CPA, 64
Partner,
Appelrouth, Farah & Co. P.A.
The Honorable Dirk A. Kempthorne, 65
President and Chief Executive Officer,
The American Council of Life Insurers
Donald R. McNeeley, 62
President and Chief Operating Officer,
Chicago Tube & Iron, a subsidiary of Olympic Steel
Michael G. Rippey, 59
Senior Advisor,
Nippon Steel USA
CORPORATE OFFICERS
Michael D. Siegal
Chief Executive Officer
David A. Wolfort
President
Richard T. Marabito
Chief Financial Officer
Andrew Greiff
Executive Vice President and Chief Operating Officer
Richard A. Manson
Vice President and Treasurer
Donald R. McNeeley
President and Chief Operating Officer,
Chicago Tube & Iron, a subsidiary of Olympic Steel
Esther M. Potash
Chief Information Officer
Christopher M. Kelly
Secretary, Olympic Steel
Partner, Practice Leader Capital Markets, Jones Day
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 30170
College Station, TX 77842-3170
(800) 446-2617
2017 Annual Meeting
The annual meeting of shareholders will be held:
Friday, April 28, 2017
10:00 a.m. Eastern Time
Olympic Steel, Inc.
5096 Richmond Road
Bedford Heights, OH 44146
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, 2016, may do so
by writing to Investor Relations at the Company’s
Corporate Headquarters (address indicated above).
This product
is made from
recycled paper