Business Overview and History

Olympic Steel Inc (ZEUS) is a leading national metals service center that has navigated the industry’s cyclicality with a diversified business model and strategic acquisitions. The company’s focus on expanding its higher-margin fabrication and value-added processing capabilities has allowed it to weather market challenges and position itself for continued growth.

Founded in 1954 as a steel distribution partnership between two brothers, Sam Sigel and Sol Siegal, Olympic Steel has grown to become a $2.16 billion revenue company (as of 2023) with a nationwide footprint. The company operates in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products.

The business started with an initial joint investment of $17,000 and was operated out of a rented warehouse in Cleveland, Ohio. In 1974, Sol’s son, Michael Siegal, joined the business and assumed the role of Chief Executive Officer in 1984. Under his leadership, the company went public on the Nasdaq exchange in 1994, trading under the ticker symbol ZEUS, which was a nod to the mythological Greek god.

In the 1980s, Olympic Steel faced challenges navigating the cyclical nature of the metals industry and fluctuations in steel pricing and demand. The company also had to adapt to industry consolidation as suppliers, competitors, and customers merged or were acquired. Despite these challenges, Olympic Steel was able to expand its operations and geographic footprint through strategic acquisitions.

A significant milestone in the company’s growth came in 2011 with the acquisition of Chicago Tube and Iron, which expanded Olympic Steel’s product offerings and processing capabilities. This was followed by several other acquisitions in the 2010s, including Shaw Stainless Alloy, Inc. in 2021, Action Stainless Alloys, Inc. in 2020, EZ Dumper and McCullough Industries in 2019, and Berlin Metals, LLC in 2018.

In 2024, Olympic Steel celebrated two major milestones – the 50th anniversary of Executive Chairman Michael Siegal joining the business, and the company’s 70th year in operation. These achievements underscore the company’s resilience and ability to navigate industry challenges over its decades-long history.

Olympic Steel’s growth strategy has centered around strategic acquisitions that have expanded its geographic reach, product portfolio, and value-added capabilities. Since 2017, the company has completed six acquisitions, including the 2023 acquisition of Metal-Fab, Inc., a manufacturer of HVAC and venting products, and the 2023 acquisition of Central Tube and Bar, which extended the company’s value-added contract manufacturing capabilities in the tubular and pipe products segment.

Financial Performance and Liquidity

Olympic Steel’s financial performance has been resilient, despite the cyclical nature of the metals industry. In 2023, the company reported revenue of $2.16 billion, net income of $44.53 million, and operating cash flow of $175.16 million. Free cash flow for the year was $153.83 million. The company’s diversification strategy has allowed it to maintain profitability, even in challenging market conditions.

In the third quarter of 2024, Olympic Steel reported revenue of $469.996 million, net income of $2.734 million, operating cash flow of $22.418 million, and free cash flow of $13.351 million. The decrease in revenue and net income compared to the same quarter in 2023 was primarily due to a 10.8% decline in average selling prices, partially offset by a 0.1% increase in sales volume. The company recorded $2.0 million of LIFO income in both Q3 2024 and Q3 2023.

The company’s balance sheet remains strong, with a current ratio of 3.52 and a quick ratio of 1.26 as of the latest reporting period. Olympic Steel’s debt-to-equity ratio stands at 0.35. The company ended the third quarter of 2024 with $11.12 million in cash and approximately $304 million in available borrowing capacity under its $625 million asset-based revolving credit facility, which matures on June 16, 2026. This provides ample financial flexibility to fund its growth initiatives.

Operational Highlights and Diversification

Olympic Steel’s diversification strategy has been a key driver of its resilience. The company operates in three reportable segments: specialty metals flat products, carbon flat products, and tubular and pipe products.

The specialty metals flat products segment, which focuses on the distribution of aluminum and stainless-steel products, contributed 25.4% of total revenue in the first nine months of 2024. This segment has been a consistent performer, leveraging the company’s investments in value-added processing and fabrication capabilities. In the third quarter of 2024, the segment reported net sales of $125.69 million, down 5.3% from the prior year quarter due to an 11.1% decline in average selling prices, partially offset by a 6.5% increase in sales volume. Gross profit as a percentage of net sales increased to 17.7% from 15.9% in the prior year quarter. Operating income for the segment was $4.94 million, or 3.9% of net sales, compared to $4.67 million, or 3.5% of net sales, in the prior year quarter.

The carbon flat products segment, which accounts for 57.4% of total revenue, has also benefited from Olympic Steel’s focus on higher-margin opportunities. In the third quarter of 2024, this segment reported net sales of $264.85 million, down 13.0% from the prior year quarter due to an 11.8% decline in average selling prices and a 1.4% decrease in tons sold. Gross profit as a percentage of net sales increased to 21.4% from 20.3% in the prior year quarter. Operating income for the segment was $434,000, or 0.2% of net sales, compared to $9.95 million, or 3.3% of net sales, in the prior year quarter. The segment’s acquisition of Metal-Fab in 2023 has expanded its product offerings to include venting, micro air, and clean air products for residential, commercial, and industrial applications – end markets that are less cyclical than the traditional heavy equipment sector.

The tubular and pipe products segment, which contributed 17.3% of total revenue in the first nine months of 2024, has also been a source of strength for the company. In the third quarter of 2024, this segment reported net sales of $79.45 million, down 10.9% from the prior year quarter due to a 16.1% decline in average selling prices, partially offset by a 6.2% increase in shipping volume driven by the Central Tube and Bar acquisition. Gross profit as a percentage of net sales increased to 35.1% from 32.3% in the prior year quarter. Operating income for the segment was $6.48 million, or 8.2% of net sales, compared to $10.03 million, or 11.3% of net sales, in the prior year quarter. The 2023 acquisition of Central Tube and Bar has enhanced the segment’s value-added processing and contract manufacturing capabilities, driving higher margins.

Corporate expenses, which include unallocated expenses related to managing the entire company, decreased 7.2% to $4.04 million in the third quarter of 2024 from $3.77 million in the prior year quarter, primarily due to lower variable performance-based incentive compensation and the absence of acquisition-related expenses in 2024.

Olympic Steel primarily serves customers in the United States, with some sales in Canada and Mexico. International sales are immaterial to the consolidated financial results. The company has a diversified customer base serving various industries, with around 48-50% of consolidated net sales related to industrial machinery and equipment manufacturers and their fabricators.

Outlook and Growth Strategies

Looking ahead, Olympic Steel remains optimistic about its future prospects, despite expecting macroeconomic headwinds to continue in the fourth quarter of 2024 while awaiting the outcome of the presidential election and the Federal Reserve’s direction on future interest rate cuts. The company continues to invest in organic growth initiatives, including the installation of new equipment and automation at its facilities to improve efficiency and expand its fabrication and value-added processing capabilities.

For the full year 2024, Olympic Steel estimates capital expenditures of approximately $30 million, continuing its investments in automation, fabrication and processing capabilities, and other higher-return parts of the business. The company expects its 2024 tax rate to approximate 28% to 29%.

Additionally, Olympic Steel remains actively engaged in the acquisition market, seeking out well-run companies that can further diversify its product portfolio and end-market exposure. The company’s strong financial position and proven integration capabilities position it well to capitalize on strategic growth opportunities.

Risks and Challenges

As with any business, Olympic Steel faces a number of risks and challenges. The cyclical nature of the metals industry, volatile pricing and availability of raw materials, and competition from both domestic and international players are all factors that can impact the company’s performance. The metals industry continues to be affected by factors such as metals pricing, global supply, tariffs, and consolidation among suppliers, competitors, and customers.

Additionally, the company’s reliance on certain key customers and industries, such as the heavy equipment sector, introduces some concentration risk. Disruptions in these end markets could adversely affect Olympic Steel’s financial results.

However, the company’s diversification efforts and focus on higher-margin, less cyclical product lines have helped mitigate these risks to some extent. Olympic Steel has demonstrated resilience by diversifying into countercyclical steel-intensive end products and investing in higher margin opportunities like flat-rolled coated products and fabrication capabilities. The company’s management team has demonstrated a track record of navigating industry challenges and positioning the company for long-term success.

Conclusion

Olympic Steel’s diversified business model, strategic acquisitions, and focus on value-added processing and fabrication have positioned the company for continued resilience and growth in the metals industry. The company’s strong financial position, ample liquidity, and strategic initiatives suggest that it is well-equipped to navigate the current market challenges and capitalize on future opportunities. While the company faces ongoing macroeconomic headwinds, its long-term outlook remains optimistic, supported by its strategy and financial flexibility to continue investing in organic and acquisitive growth opportunities.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.