What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 102 added, 83 removed, 105 unchanged (64% of the section changed)

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Our forward-looking statements may include, but are not limited to, discussions of our industry and end markets, our business strategies and our expectations concerning future demand and major commodity product pricing and our results of operations, margins, profitability, taxes, liquidity, macroeconomic conditions, including inflation, prevailing elevated interest rates and slowing macroeconomic growth, litigation matters and capital resources.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “explore,” “estimate,” “predict,” “potential,” “preliminary,” “range,” “intend” and “continue,” the negative of these terms, and similar expressions.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “preliminary,” “range,” “intend” and “continue,” the negative of these terms, and similar expressions.

All statements contained in this report that are not statements of historical fact are forward-looking statements.

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You should review any additional disclosures we make in any subsequent press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the other sections of this quarterly report on Form 10-Q, including the consolidated financial statements and related notes contained in Item 1.

In the first quarter of 2024, demand was healthy in the majority of our end markets.

However, our operating results in the first quarter of 2024 declined from the first quarter of 2023, mainly due to lower metals prices and a decrease in tons sold, which was impacted by one less shipping day.

Gross profit margin for the first quarter of 2024 and 2023 was 31.0% and 30.9%, respectively.

We believe strong operational execution of our strategies under our resilient business model, which includes diversity in products, end markets and geographies, and increased levels of value-added processing services during a more challenging metals pricing environment in the first quarter of 2024 supported our gross profit margin at a high level consistent with the first quarter of 2023.

Our first quarter of 2024 same-store net sales decreased 8.8% compared to the first quarter of 2023 as a result of a 6.5% decline in average selling price per ton sold and a 2.9% decline in tons sold.

Our domestic tons sold in the first quarter of 2024 represented approximately 14.9% of total U.S.

industry shipments as reported by the Metals Service Center Institute, up from 14.5% for 2023.

In the first quarter of 2024 compared to the first quarter of 2023, we saw improving demand in non-residential construction and automotive, which we service through our tolling operations;

stable demand in aerospace, and modestly lower demand in semiconductors and across the overall broader manufacturing sectors we serve.

Earnings per diluted share were $5.23 and $6.43 for the first quarter of 2024 and 2023, respectively.

Cash flow from operations of $126.3 million for the first quarter of 2024 decreased from $384.6 million for the first quarter of 2023 due to increased spending on working capital and lower profitability.

Organic growth activities were substantially comprised of capital expenditures of $108.7 million for the first quarter of 2024 compared to $102.9 million for the first quarter of 2023.

We also completed an acquisition in February 2024 for $53.7 million.

Returns to stockholders for the first quarter of 2024 were comprised of $65.3 million of cash dividends.

In the first quarter of 2024, we increased our quarterly dividend rate 10% to $1.10 per common share (or $4.40 on an annualized basis).

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 and other sections of this quarterly report on Form 10-Q, including the consolidated financial statements and related notes contained in Item 1.

In the second quarter and first half of 2024, demand was relatively healthy in the majority of our end markets with our same-store tons sold relatively consistent with the prior year periods.

However, our operating results declined from the comparable 2023 periods, despite earnings contributions from three closed acquisitions, mainly due to lower metals prices and declines in gross profit margin from a declining metals pricing environment.

Our second quarter of 2024 same-store and total tons sold increased 0.7% and 4.7%, respectively, compared to the second quarter of 2023, which outperformed the 1.8% decline in industry shipments reported by the Metals Service Center Institute.

We believe our outperformance of industry peers is supported by our organic and inorganic growth activities.

Our second quarter of 2024 same-store net sales decreased 8.7% compared to the second quarter of 2023 as a result of a 9.7% decline in average selling price per ton sold, which was partially offset by a 0.7% increase in tons sold.

Same-store net sales for the six months ended June 30, 2024 were down 8.7% from the same period in 2023, reflecting an 8.1% decrease in average selling price per ton sold and a 1.1% decrease in tons sold, which was impacted by one less shipping day.

Gross profit margins for the second quarter and six months ended June 30, 2024 were 29.8% and 30.4%, respectively, compared to 31.5% and 31.2% for the respective 2023 periods.

Carbon steel products comprise more than half of our total sales.

Our gross profit margins declined from the same periods in 2023 mainly due to declines in prices for carbon steel products throughout the 2024 periods that pressured our gross profit margins.

By comparison, in the comparable 2023 periods, we had relatively stable pricing for carbon steel products.

Earnings per diluted share were $4.67 and $9.90 for the second quarter and six months ended June 30, 2024, respectively, compared to $6.49 and $12.92 for the respective 2023 periods.

Our lower earnings year-over-year are mainly due to lower metals prices.

Pricing for our products generally has a much more significant impact on our operating results than customer demand levels.

Cash flow from operations of $492.6 million for the six months ended June 30, 2024 decreased from $679.7 million for the same period in 2023 mainly due to lower net income.

Organic growth activities were substantially comprised of capital expenditures of $206.9 million for the first half of 2024 compared to $233.1 million for the first half of 2023.

We completed two acquisitions in April 2024 for $292.8 million, following an acquisition in February 2024 for $53.7 million.

Returns to stockholders in the first half of 2024 of $647.2 million were comprised of $127.9 million of cash dividends and $519.3 million of share repurchases.

2024 Acquisitions

We completed three acquisitions in 2024.

The combined 2023 annual sales of our 2024 acquisitions were nearly $500 million.

We completed three acquisitions in the first half of 2024 and announced an acquisition that is anticipated to close in the third quarter of 2024.

● On February 1, 2024, we acquired, with cash on hand, Cooksey Iron & Metal Company (“Cooksey Steel”), a metals service center that processes and distributes finished steel products, including tubing, beams, plates and bars.

Headquartered in Tifton, Georgia, Cooksey Steel operates three locations, servicing a diverse range of customers.

Included in our net sales for the first quarter of 2024 were net sales of $16.1 million from Cooksey Steel.

● On April 1, 2024, we acquired American Alloy Steel, Inc.

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American Alloy, headquartered in Houston, Texas, operates five metals service centers and a plate fabrication business in the U.S.

American Alloy is a distributor of specialty carbon and alloy steel plate and round bar, including

pressure vessel quality (PVQ) material.

For the year ended December 31, 2023, net sales for American Alloy were approximately $310 million.

American Alloy is a distributor of specialty carbon and alloy steel plate and round bar, including pressure vessel quality (PVQ) material.

● On April 1, 2024, we acquired, with cash on hand, Mid-West Materials, Inc.

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Headquartered in Perry, Ohio, MidWest Materials provides steel products including hot-rolled, high strength hot-rolled, coated, and cold-rolled products that are sold into the trailer manufacturing, agriculture, metal fabrication, and building products markets.

For the year ended December 31, 2023, net sales for MidWest Materials were approximately $87 million.

No sales from American Alloy and MidWest Materials were included in our net sales for the first quarter of 2024.

● On July 15, 2024, we announced that we had reached an agreement to acquire the toll processing assets of the FerrouSouth division of Ferragon Corporation (“FerrouSouth”), subject to customary closing conditions.

FerrouSouth is a toll processing operation headquartered in Iuka, Mississippi, which provides flat-rolled steel processing and logistics services.

For the year ended December 31, 2023, net sales for FerrouSouth were approximately $15 million.

No sales of FerrouSouth were included in our net sales for the six months ended June 30, 2024.

Included in our net sales for the six months ended June 30, 2024 were combined net sales of $115.1 million from our completed 2024 acquisitions.

2023 Acquisition

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Southern Steel is headquartered in Memphis, Tennessee and offers merchant and structural steel, pipe and tube, steel plate, ornamental products and laser cut and fabricated parts.

Included in our net sales for the first quarter of 2024 were net sales of $10.6 million from Southern Steel.

Included in our net sales for the six months ended June 30, 2024 were net sales of $20.1 million from Southern Steel.

Results of Operations

The following sets forth certain income statement data for the first quarters of 2024 and 2023 (dollars are shown in millions, except per share amounts, and certain percentages may not calculate due to rounding):

Three Months Ended March 31,

The following sets forth certain income statement data for the second quarter and six months ended June, 30 2024 and 2023 (dollars are shown in millions, except per share amounts, and certain percentages may not calculate due to rounding):

Three Months Ended

Six Months Ended

Cost of sales (exclusive of depreciation and amortization expense shown below)

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Gross profit and gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies.

First Quarter Ended March 31, 2024 Compared to First Quarter Ended March 31, 2023

Three Months Ended March 31,

Second Quarter and Six Months Ended June 30, 2024 Compared to Second Quarter and Six Months Ended June 30, 2023

(dollars in millions)

Net sales, same-store

Three Months Ended March 31,

Net sales (three months ended)

Net sales, same-store (three months ended)

Net sales (six months ended)

Net sales, same-store (six months ended)

(tons in thousands)

Tons sold, same-store

Three Months Ended March 31,

Average selling price per ton sold

Average selling price per ton sold, same-store

Our tons sold and average selling prices per ton sold exclude our tons toll processed.

Our average selling prices per ton sold includes intercompany transactions that are eliminated from our consolidated net sales.

Tons sold (three months ended)

Tons sold, same-store (three months ended)

Tons sold (six months ended)

Tons sold, same-store (six months ended)

Average selling price per ton sold (three months ended)

Average selling price per ton sold, same-store (three months ended)

Average selling price per ton sold (six months ended)

Average selling price per ton sold, same-store (six months ended)

Our tons sold and average selling price per ton sold exclude our tons toll processed.

Our average selling price per ton sold includes intercompany transactions that are eliminated from our consolidated net sales.

Same-store amounts exclude the results of our 2024 and 2023 acquisitions.

Our same-store net sales declined from the comparable 2023 periods mainly due to declines in carbon steel pricing that lowered our average selling price per ton sold.

Demand remained relatively healthy in the majority of end markets we serve.

Our same-store net sales declined from the first quarter of 2023 mainly due to lower selling prices and a decrease in tons sold, which was impacted by one less shipping day.

The decline in same-store tons sold for the six months ended June 30, 2024 mainly resulted from one less shipping day compared to the same period in 2023.

Since we primarily purchase and sell our inventories in the spot market, our average selling prices generally fluctuate similarly with the changes in the costs of the various metals we purchase;

the mix of products sold can also have an impact on our overall average selling price per ton sold.

As c arbon steel sales represented 53% of our gross sales for the first quarter of 2024, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold.

As c arbon steel sales represented 54% of our gross sales for the six months ended June 30, 2024, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold.

Y ear-over-year changes in the selling prices of our major commodity products and related mix of our tons sold are presented below:

Three Months Ended

Six Months Ended

Average Selling

Percentage of

Average Selling

Percentage of

Stainless steel

Cost of Sales and Gross Profit

Three Months Ended March 31,

(dollars in millions)

Cost of sales

LIFO income, included in cost of sales

Gross profit in the first quarter of 2024 decreased from the first quarter of 2023 mainly due to lower sales as a result of decreases in average selling price per ton sold and tons sold, which were impacted by one less shipping day.

Cost of sales (three months ended)

Cost of sales (six months ended)

Gross profit (three months ended)

Gross profit (six months ended)

LIFO income, included in cost of sales (three months ended)

LIFO income, included in cost of sales (six months ended)

Gross profit in the second quarter and six months ended June 30, 2024 decreased from the same periods in 2023 mainly due to lower sales as a result of decreases in average selling price per ton sold partially offset by gross profit contributions from our acquisitions.

Carbon steel products comprise more than half of our total sales.

Our gross profit margins declined from the same periods in 2023 mainly due to declines in prices for carbon steel products throughout the 2024 periods that pressured our gross profit margins.

By comparison, in the comparable 2023 periods, we had relatively stable pricing for carbon steel products.

In addition, we record in cost of sales non-cash adjustments to our LIFO method inventory valuation reserve that, in effect, reflects cost of sales at current replacement costs.

The inventory caption of our consolidated balance sheet included a LIFO method inventory valuation reserve of $529.3 million at March 31, 2024.

We believe that our stable year-over-year gross profit margin was supported by our product diversity, small order sizes, investments in value-added processing capabilities and healthy demand in the majority of end markets we serve.

The inventory caption of our consolidated balance sheet included a LIFO method inventory valuation reserve of $479.3 million at June 30, 2024.

See “Net Sales” above for further discussion on product pricing trends.

Three Months Ended March 31,

(dollars in millions)

SG&A expense, same-store

Depreciation & amortization expense

Our same-store SG&A expense increased mainly due to increased headcount relating to organic growth activities which was partially offset by lower incentive-based compensation resulting from lower profitability.

Our same-store SG&A expense as a percentage of sales increased mainly due to a decrease in sales.

SG&A expense (three months ended)

SG&A expense, same-store (three months ended)

SG&A expense (six months ended)

SG&A expense, same-store (six months ended)

Depreciation & amortization expense (three months ended)

Depreciation & amortization expense (six months ended)

Our same-store SG&A expense for each of the second quarter and six months ended June 30, 2024 were relatively consistent with the same periods in 2023.

Our SG&A expense in the 2024 periods reflected lower incentive-based compensation resulting from lower profitability offset by higher costs associated with wage inflation and increased headcounts related to our organic growth activities.

SG&A expense as a percentage of sales mainly increased due to lower sales levels.

Operating Income

Three Months Ended March 31,

(dollars in millions)

Operating income

The decrease in our operating income was mainly a result of lower gross profit, driven by lower metals prices and a decrease in tons sold, which was impacted by one less shipping day, along with a moderate increase in SG&A expense.

Our operating income margin in the first quarter of 2024 decreased compared to the first quarter of 2023 due to lower sales that decreased operating leverage of our SG&A expense.

Operating income (three months ended)

Operating income (six months ended)

Operating income declined for the second quarter and six months ended June 30, 2024 as compared to the same periods in 2023 as a result of lower same-store gross profit, driven by lower net sales and gross profit margin, partially offset by contributions to operating income from our acquisitions.

Our operating income margins in the second quarter and six months ended June 30, 2024 were lower than in the comparable 2023 periods mainly due to lower gross profit margins and decreased operating leverage of our SG&A expense due to lower sales levels.

See “Net Sales” above for discussion of trends in demand and product costs and “Expenses” for trends in our operating expenses.

Other Income, Net

Three Months Ended March 31,

(dollars in millions)

Other income, net

The change in other income, net in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to an increase in interest income as a result of higher cash and cash equivalent balances and interest earned thereon.

Income Tax Rate

Our effective income tax rates for the first quarters of 2024 and 2023 were 23.3% and 24.4%, respectively.

Our effective income tax rate for each of the second quarter and six months ended June 30, 2024 was 23.3%, compared to 24.4% for the same 2023 periods.

The differences between our effective income tax rates and the U.S.

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Operating Activities

Net cash provided by operations of $126.3 million in the first quarter of 2024 decreased from $384.6 million in the first quarter of 2023.

The decrease in cash flow from operations was mainly due to lower profitability and increased spending on working capital.

Net cash provided by operations of $492.6 million in the six months ended June 30, 2024 decreased $187.1 million from $679.7 million in the same period in 2023.

The year-over-year decrease was mainly due to a decline of $198.6 million in net income with relatively consistent working capital spend.

To manage our working capital, we focus on our days sales outstanding and inventory turnover rate as receivables and inventory are the two most significant elements of our working capital.

As of March 31, 2024 and 2023, our days sales outstanding rates were 40.8 days and 40.0 days, respectively.

Our inventory turnover rate (based on tons) during the first quarter of 2024 was 4.6 times (or 2.6 months on hand), compared to 4.9 times (or 2.4 months on hand) in the first quarter of 2023.

As of June 30, 2024 and 2023, our days sales outstanding rates were 41.1 days and 40.2 days, respectively.

inventory turnover rate (based on tons) during the six months ended June 30, 2024 was 4.6 times (or 2.6 months on hand), compared to 4.8 times (or 2.5 months on hand) for the same period in 2023.

Investing Activities

Net cash used in investing activities was $177.4 million in the first quarter of 2024 compared to $102.6 million in the first quarter of 2023 and was substantially comprised of capital expenditures and the purchase price for an acquisition in February 2024.

The majority of our capital expenditures in the first quarters of 2024 and 2023 were related to growth initiatives.

Net cash used in investing activities of $562.0 million for the six months ended June 30, 2024 increased $307.0 million from $255.0 million used in the same period in 2023.

The significant increase was mainly due to $346.5 million spent on three acquisitions in 2024 partially offset by $26.2 million less of capital expenditures.

The majority of our capital expenditures in the six months ended June 30, 2024 and 2023 were related to growth initiatives.

Financing Activities

Net cash used in financing activities was $90.3 million in the first quarter of 2024 compared to $639.2 million in the first quarter of 2023.

The significant decrease was mainly due to the redemption of $500.0 million aggregate outstanding principal amount of senior notes in January 2023 and a decrease in share repurchases.

We did not repurchase any shares in the first quarter of 2024 compared to $38.9 million of share repurchases in the first quarter of 2023.

On April 23, 2024, our Board of Directors declared the 2024 second quarter cash dividend of $1.10 per share.

Net cash used in financing activities of $654.1 million for the six months ended June 30, 2024 declined $126.3 million from $780.4 million in the same period in 2023.

The decrease was mainly the result of lower debt repayments that offset increased share repurchases.

The prior year period included the redemption of $500.0 million of senior notes in January 2023 compared to no debt activity in the six months ended June 30, 2024.

In the six months ended June 30, 2024, we repurchased $519.3 million of our common stock compared to $112.8 million in the same period in 2023.

Our returns to stockholders also included an increase in our quarterly dividend rate of 10% in February 2024 with total dividend payments of $127.9 million in the six months ended June 30, 2024 compared to $120.6 million in the same period in 2023.

On July 23, 2024, our Board of Directors declared the 2024 third quarter cash dividend of $1.10 per share.

We have increased our quarterly dividend 31 times since our IPO in 1994, with the most recent increase of 10.0% from $1.00 to $1.10 per share effective in the first quarter of 2024.

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Share Repurchase Plan

As of March 31, 2024, we had remaining authorization to repurchase $1.44 billion of our common stock under our $1.5 billion share repurchase program authorized by our Board of Directors on October 24, 2023.

See Note 9—“Equity ” to our consolidated financial statements for information on our 2024 and 2023 share repurchases.

Subsequent to quarter end, we repurchased an additional 637,669 shares at an average cost of $285.36, for a total of $182.0 million, resulting in $738.5 million remaining as of July 25, 2024 under our $1.5 billion share repurchase program authorized by our Board of Directors effective October 30, 2023.

The share repurchase program does not obligate us to repurchase any specific number of shares, does not have a specific expiration date and may be suspended or discontinued at any time.

We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at March 31, 2024 under our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”).

We also had an aggregate of $1.15 billion principal amount of senior unsecured note obligations with various maturities through 2036 issued under indentures as of March 31, 2024 .

We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at June 30, 2024 under our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”).

We also had an aggregate of $1.15 billion principal amount of senior unsecured note obligations with various maturities through 2036 issued under indentures as of June 30, 2024 .

See Note 6—“Debt ” to our consolidated financial statements for further information on our amended credit agreement and indentures governing our debt securities.

Liquidity and Capital Resources

We believe our primary sources of liquidity, including funds generated from operations, cash and cash equivalents and our Credit Agreement, will be sufficient to satisfy our cash requirements and stockholder return activities over the next 12 months and beyond.

As of March 31, 2024, we had $934.9 million in cash and cash equivalents and our net debt-to-total capital ratio was 2.6%, up from 0.8% as of December 31, 2023.

As of March 31, 2024, we had $400.3 million of debt obligations coming due before our Credit Agreement matures on September 3, 2025.

We believe our primary sources of liquidity, including funds generated from operations, cash and cash equivalents and our $1.5 billion revolving credit facility, will be sufficient to satisfy our cash requirements and stockholder return activities over the next 12 months and beyond.

As of June 30, 2024, we had $350.8 million in cash and cash equivalents and our net debt-to-total capital ratio was 9.4%, up from 0.8% as of December 31, 2023.

As of June 30, 2024, we had $400.3 million of debt obligations coming due before our $1.5 billion revolving credit facility matures on September 3, 2025.

We believe that we will continue to have sufficient liquidity to fund our future operating needs and to repay our debt obligations as they become due .

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The covenants under the Credit Agreement include, among other things, two financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio.

We were in compliance with all financial maintenance covenants in our Credit Agreement at March 31, 2024.

We were in compliance with all financial maintenance covenants in our Credit Agreement at June 30, 2024.

Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses.

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Goodwill and Other Intangible Assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $2.13 billion at March 31, 2024, or approximately 20% of total assets and 27% of total equity.

Additionally, other intangible assets, net amounted to $986.1 million at March 31, 2024, or approximately 9% of total assets and 12% of total equity.

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $2.17 billion at June 30, 2024, or approximately 21% of total assets and 28% of total equity.

Additionally, other intangible assets, net amounted to $1.04 billion at June 30, 2024, or approximately 10% of total assets and 14% of total equity.

Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests and further evaluation when certain events occur.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S.

When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.

Some of our accounting policies are critical due to the fact that they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

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Our actual results may differ from these estimates under different assumptions or conditions.

During the quarter ended March 31, 2024, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

During the quarter ended June 30, 2024, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

Website Disclosure

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis