OLYMPIC STEEL INC - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 2014

For the transition period from __________ to ____________

Commission File Number 0-23320

OLYMPIC STEEL, INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (216) 292-3800

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 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:

Indicate by check mark whether the registrant is a shell company (as defined Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date:

Olympic Steel, Inc.

Index to Form 10-Q

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Olympic Steel, Inc.

Consolidated Balance Sheets

(in thousands)

The accompanying notes are an integral part of these consolidated statements.

Olympic Steel, Inc.

Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated statements.

Olympic Steel, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

(in thousands)

The accompanying notes are an integral part of these consolidated statements.

Olympic Steel, Inc.

Supplemental Disclosures of Cash Flow Information

For the Nine Months Ended September 30,

(in thousands)

At September 30, 2013, the Company accrued $3.0 million to construction in progress related to its St. Paul, Minnesota expansion for the tubular and pipe products segment. The non-cash transaction was recorded to “Property and equipment, at cost” and “Other accrued liabilities” on the accompanying Balance Sheet as of September 30, 2013 and has been excluded from the Consolidated Statement of Cash Flows for the nine months ended September 30, 2013.

The accompanying notes are an integral part of these consolidated statements.Olympic Steel, Inc.

Olympic Steel, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2014

The accompanying consolidated financial statements have been prepared from the financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively, Olympic or the Company), without audit and reflect all normal and recurring adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods covered by this report. Year-to-date results are not necessarily indicative of 2014 annual results and these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. All significant intercompany transactions and balances have been eliminated in consolidation.

The Company operates in two reportable segments; flat products and tubular and pipe products. Through its flat products segment, the Company sells and distributes large volumes of processed carbon, coated, aluminum and stainless flat-rolled sheet, coil and plate products. Through its tubular and pipe products segment, the Company distributes metal tubing, pipe, bar, valve and fittings and fabricates pressure parts supplied to various industrial markets.

Corporate expenses are reported as a separate line item in the segment reporting. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., both segments), including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees.

Accounts receivable are presented net of allowances for doubtful accounts and unissued credits of $3.5 million and $3.2 million as of September 30, 2014 and December 31, 2013, respectively. The allowance for doubtful accounts is maintained at a level considered appropriate based on historical experience and specific customer collection issues that have been 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 and unissued credits each quarter.

Inventories consisted of the following:  

Inventories are stated at the lower of cost or market and include the costs of purchased metals, inbound freight, external processing and applicable labor and overhead costs. Costs of our flat products segment’s inventories, including flat-rolled sheet, coil and plate products are determined using the specific identification method.

The Company values certain of its tubular and pipe products inventory using the last-in, first-out (LIFO) method. At September 30, 2014 and December 31, 2013, approximately $46.4 million, or 14.1%, of consolidated inventory, and $43.9 million, or 15.3%, of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out (FIFO) method.

During the third quarter of 2014, $200 thousand of LIFO expense was recorded as the current projections anticipate increased pricing of inventory at December 31, 2014 compared to December 31, 2013. In the first quarter of 2013, the Company made an out-of-period adjustment to record previously unrecognized LIFO adjustments, which resulted in an increase to after-tax income of $1.2 million. In the third quarter of 2013, the Company recorded $188 thousand of LIFO income.

If the FIFO method had been in use, inventories would have been $3.0 million lower than reported at September 30, 2014 and $3.6 million lower than reported at December 31, 2013.

4.           Intangible Assets:

Intangible assets, net, consisted of the following as of September 30, 2014 and December 31, 2013:  

The Company estimates that amortization expense for its intangible assets subject to amortization will be $889 thousand for the year ending December 31, 2014 and $889 thousand per year in each of the next five years.

5.             Debt:

The Company’s debt is comprised of the following components: 

On June 30, 2014, the Company amended its existing asset-based credit facility (the ABL Credit Facility). The ABL Credit Facility amendment provides for, among other things: (i) a reduction in the applicable margin for loans under the Company’s Loan and Security Agreement; (ii) a consolidation of the previous $315.0 million revolver and then outstanding $44.5 million term loan into a $365 million revolving credit facility; (iii) the removal of the Company’s real estate as collateral for borrowings; and (iv) the extension of the maturity date until June 30, 2019. 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 September 30, 2014) 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 (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 September 30, 2014, the Company was in compliance with its covenants and had approximately $90 million of availability under the ABL Credit Facility.   

As of September 30, 2014, $3.6 million of bank financing fees, including $1.1 million related to the amended ABL Credit Facility, 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.

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 then outstanding LIBOR-based borrowings under the ABL Credit Facility. The hedge matures on June 1, 2016 and the notional amount is reduced monthly by $729 thousand. The hedged balance as of September 30, 2014 was $42.3 million. The interest rate hedge fixed the rate at 1.21% plus a premium ranging from 1.75% to 2.25%. Although the Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate hedge agreement, the Company anticipates performance by the counterparties.

As part of the Chicago Tube and Iron Company (CTI) acquisition in July 2011, the Company assumed approximately $5.9 million of Industrial Revenue Bond (IRB) indebtedness issued through the Stanly County, North Carolina Industrial Revenue and Pollution Control Authority. The bond matures in April 2018, with the option to provide principal payments annually on April 1st. On April 1, 2014, the Company paid an optional principal payment of $810 thousand. 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 September 30, 2014 was 0.15% 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 September 30, 2014, 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.

6.          Derivative Instruments:

Metals swaps

During 2014 and 2013, 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. 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 nineteen months remaining and the outstanding carbon swaps have one to three months remaining. 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 metals swaps are included in “Accounts receivable, net”, and the embedded customer derivatives were included in “Other accrued liabilities” on the Consolidated Balance Sheets at September 30, 2014. The embedded customer derivatives were included in “Accounts receivable, net”, and the metals swaps are included in “Other accrued liabilities” on the Consolidated Balance Sheets at December 31, 2013.

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 in April 2018, the same time as the IRB, and is 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 agreement. However, the Company does not anticipate nonperformance by the counterparties. The interest rate swap is not treated as a hedge for accounting purposes.

The periodic changes in fair value of the interest rate swap and cash settlement amounts associated with the interest rate swap are included in “Interest and other expense on debt” in the Consolidated Statements of Comprehensive Income.

Fixed rate interest rate hedge

In June 2012, the Company entered into a forward starting fixed rate interest rate hedge commencing June 2013 in order to eliminate the variability of cash interest payments on $53.2 million of then outstanding LIBOR-based borrowings under the ABL Credit Facility. The hedged balance as of September 30, 2014 was $42.3 million. The hedge matures on June 1, 2016 and is reduced monthly by $729 thousand. The fixed rate interest rate hedge is 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 three or nine months ended September 30, 2014 and 2013. The table below shows the total impact to the Company’s Consolidated Statements of Comprehensive Income through net income of the derivatives for the three and nine months ended September 30, 2014 and 2013. 

7.           Fair Value of Financial Instruments:

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.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants. 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 input, of which the first two are considered observable and the last unobservable, as follows:

Level 1 – Quoted prices in active markets for identical assets and 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.

During the nine months ended September 30, 2014, 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 September 30, 2014 since December 31, 2013. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:

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 swaps – 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.

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:

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 $3.5 million at September 30, 2014 and $4.3 million at December 31, 2013.

The fair values of the revolver and term loan are determined using Level 2 inputs. The carrying value of the revolver was $269.5 million at September 30, 2014. The carrying value of the revolver and the term loan were $146.1 million and $48.9 million, respectively, at December 31, 2013. The Level 2 fair value of the Company's long-term debt was estimated using prevailing market interest rates on debt with similar credit worthiness, terms and maturities.

8.           Equity Plans:

Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2014:

There were 7,000 and 11,667 stock options exercised during the nine months ended September 30, 2014 and 2013, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2014 and 2013 was $103 thousand and $218 thousand, respectively. All stock options outstanding are vested as of September 30, 2014.

Restricted Stock Units and Performance Share Units

Pursuant to the Olympic Steel 2007 Omnibus Incentive Plan (Plan), the Company may grant stock options, stock appreciation rights, restricted shares, restricted share units, performance shares, and other stock- and cash-based awards to employees and Directors of, and consultants to, the Company and its affiliates. Under the Plan, 500,000 shares of common stock are available for equity grants.

On March 1, 2014 and January 2, 2013, the Compensation Committee of the Company’s Board of Directors approved the grant of 2,544 and 1,800 restricted stock units (RSUs) to each non-employee Director. Subject to the terms of the Plan and the RSU agreement, the RSUs vest after one year of service (from the date of grant). The RSUs are not converted into shares of common stock until the director either resigns or is terminated from the Board of Directors.

The fair value of each RSU was estimated to be the closing price of the Company’s common stock on the date of the grant, which was $27.51 and $23.41 for the grants on March 1, 2014 and January 2, 2013, respectively.

The Company’s Senior Management Compensation Program includes an equity component in order to encourage more ownership of common stock by the senior management. The Senior Management Compensation Program imposes stock ownership requirements upon the participants. Each participant is required to own at least 750 shares of common stock for each year that the participant participates in the Senior Management Compensation Program. Any participant that fails to meet to the stock ownership requirements will be ineligible to receive any equity awards under the Company’s equity compensation plans, including the Plan, until the participant satisfies the ownership requirements. To assist participants in meeting the stock ownership requirements, on an annual basis, if a participant purchases 500 shares of common stock on the open market, the Company will award that participant 250 shares of common stock. During the nine months ended September 30, 2014 and 2013, the Company matched 8,375 and 7,000 shares, respectively. Additionally, any participant who continues to comply with the stock ownership requirements as of the five-year, 10-year, 15-year, 20-year and 25-year anniversaries of the participant’s participation in the Senior Management Compensation Program will receive a restricted stock unit award with a dollar value of $25 thousand, $50 thousand, $75 thousand, $100 thousand and $100 thousand, respectively. Restricted stock unit awards will convert into the right to receive shares of common stock upon a participant’s retirement, or earlier upon the participant’s death or disability or upon a change in control of the Company.

Stock-based compensation expense recognized on RSUs for the nine months ended September 30, 2014 and 2013, respectively, is summarized in the following table:  

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 nine months ended September 30, 2014:  

During the nine months ended September 30, 2014, 1,250 RSUs were converted into shares. No RSUs were converted into shares during the nine months ended September 30, 2013.

For the three months ended September 30, 2014, the Company recorded an income tax provision of $0.9 million, or 37.6%, compared to $1.1 million, or 46.1%, for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, the Company recorded an income tax provision of $4.5 million, or 36.4%, compared to $5.7 million, or 38.6%, for the nine months ended September 30, 2013. The lower effective tax rate for the three and nine months ended September 30, 2014 was a result of a discrete foreign income tax item recorded in the second quarter of 2014.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

Our quarterly tax provision and our quarterly estimate of our annual effective tax rate is subject to significant volatility due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in law and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

10.           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:  

11.           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. Our operating segments are based primarily on internal management reporting.

The Company operates in two reportable segments: flat products and tubular and pipe products. Through its flat products segment, the Company sells and distributes large volumes of processed carbon, coated, aluminum and stainless flat-rolled sheet, coil and plate products. Through its tubular and pipe products segment, the Company distributes metal tubing, pipe, bar, valve and fittings and fabricates pressure parts supplied to various industrial markets.

Corporate expenses are reported as a separate line item in the segment reporting. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., both segments), including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees.

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 three and nine months ended September 30, 2014 and 2013.  

There were no material revenue transactions between the flat products and tubular and pipe products segments.

The Company sells certain products internationally, primarily in Canada, Puerto Rico and Mexico. International sales are immaterial to the consolidated financial results and to the individual segments’ results.

12.           Recently Issued Accounting Updates:

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a joint project initiated by the Financial Accounting Standards Board 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. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its consolidated financial statements.

In August 2014, the Financial Accounting Standards Board (“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. The standards update is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standards update is not expected to impact the Company’s consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained herein and our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain 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 our Annual Report on Form 10-K for the year ended December 31, 2013. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appear elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Information

This Quarterly Report on Form 10-Q 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 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:

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.

Overview

We are a leading metals service center that operates in two reportable segments; flat products and tubular and pipe products. We provide metals processing and distribution services for a wide range of customers. Our primary flat products focus is on the direct sale and distribution of large volumes of processed carbon, coated, aluminum and stainless flat-rolled sheet, coil and plate products. Through our Chicago Tube and 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, Puerto Rico and Mexico. International sales are immaterial to our consolidated financial results and to the individual segments’ results.

Our results of operations are affected by numerous external factors including, but not limited to: general and global business, economic, financial, banking and political conditions; competition; metals pricing, demand and availability; energy prices; pricing and availability of raw materials used in the production of metals; global supply and inventory held in the supply chain; customers’ ability to manage their credit line availability; and layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel. The metals industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.

Like other service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and gross profits of our business could be adversely affected. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits as we sell existing metals inventory.

At September 30, 2014, we employed approximately 1,840 people. Approximately 325 of the hourly plant personnel at the facilities listed below are represented by ten separate collective bargaining units. The table below shows the expiration dates of the collective bargaining agreements. 

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.

Reportable Segments

We operate in two reportable segments; flat products and tubular and pipe products. We follow the accounting guidance that requires the utilization of a “management approach” to define and report the financial results of operating segments. The management approach defines operating segments along the lines used by the 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 primarily on internal management reporting.

Corporate expenses are reported as a separate line item in the segment reporting. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., both segments), including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees.

Flat products

The primary focus of our flat products segment is on the direct sale and distribution of large volumes of processed carbon, coated, aluminum and stainless flat-rolled sheet, coil and plate products. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve customers in most metals consuming industries, including manufacturers and fabricators of transportation and material handling equipment, construction and farm machinery, storage tanks, environmental and energy generation equipment, automobiles, food service and electrical equipment, military vehicles and equipment, as well as general and plate fabricators and metals service centers. We distribute these products primarily through a direct sales force.

The flat products segment has 24 strategically-located processing and distribution facilities in the United States and one in Monterrey, Mexico. This geographic footprint allows us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the midwestern, eastern and southern United States. The flat products segment distributes these products primarily through a direct sales force.

Tubular and pipe products

The tubular and pipe products segment consists of the CTI business, acquired in 2011. Founded in 1914, CTI operates from ten locations in the midwestern and southeastern United States and distributes tube and pipe products from some flat products locations as well. The tubular and pipe products segment distributes its products primarily through a direct sales force.

Through our tubular and pipe products segment, we distribute metals tubing, pipe, bar, valve and fittings and fabricate pressure parts supplied to various industrial markets. The Company values certain of its tubular and pipe products inventory using the last-in, first-out, or LIFO, method. At September 30, 2014 and December 31, 2013, approximately $46.4 million, or 14.1%, of consolidated inventory, and $43.9 million, or 15.3%, of consolidated inventory, respectively, was reported under the LIFO method of accounting. The cost of the remainder of the tubular and pipe products inventory is determined using a weighted average rolling first-in, first-out, or FIFO, method. During periods of rising prices, the LIFO method of accounting increases the cost of goods sold (through LIFO expense) resulting in lower earnings than if FIFO inventory valuation had been used. During periods of decreasing metals pricing, the LIFO method of accounting decreases the cost of good sold (through LIFO income) resulting in higher earnings than if FIFO inventory valuation had been used.

Results of Operations

Consolidated Operations

The following table presents consolidated operating results for the periods indicated (dollars are shown in thousands): 

Net sales increased 23.9% to $376.6 million in the third quarter of 2014 from $304.0 million in the third quarter of 2013. Flat products net sales were 83.0% of total net sales in the third quarter of 2014 compared to 81.7% of total net sales in the third quarter of 2013. Tubular and pipe products net sales were 17.0% of total net sales in the third quarter of 2014 compared to 18.3% of total net sales in the third quarter of 2013. The increase in net sales was due to a 21.4% increase in sales volume and a 2.0% increase in selling prices during the third quarter of 2014 compared to the third quarter of 2013. The average direct selling price increased 2.8% in the flat products segment and 6.3% in the tubular and pipe products segment during the third quarter of 2014 compared to the third quarter of 2013.

Net sales increased 14.1% to $1.1 billion during the nine months ended September 30, 2014 from $972.9 million during the nine months ended September 30, 2013. Flat products net sales were 82.8% of total net sales during the nine months ended September 30, 2014 compared to 81.4% of total net sales during the nine months ended September 30, 2013. Tubular and pipe products net sales were 17.2% of total net sales during the nine months ended September 30, 2014 compared to 18.6% of total net sales during the nine months ended September 30, 2013. The increase in net sales was due to a 13.5% increase in sales volume and a 0.5% increase in selling prices during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The average direct selling price increased 1.9% in the flat products segment during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, but decreased 3.3% in the tubular and pipe products segment during the nine months ended September 30, 2014 compared to the same period in 2013.

Cost of materials sold increased 26.6% to $305.1 million in the third quarter of 2014 from $241.0 million in the third quarter of 2013. During the third quarter of 2014, we recorded $200 thousand of LIFO expense compared to $188 thousand of LIFO income in the third quarter of 2013. The increase in cost of materials sold in 2014 is primarily due to increased sales volumes of 21.4%, increased metals prices of 4.3% in the third quarter of 2014 compared to the third quarter of 2013, and the impact of LIFO expense during the three months ended September 30, 2014 compared to LIFO income during the three months ended September 30, 2013.

Cost of materials sold increased 16.0% to $892.0 million during the nine months ended September 30, 2014 from $769.0 million during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we recorded LIFO expense of $600 thousand compared to $2.5 million of LIFO income during the nine months ended September 30, 2013. In the first quarter of 2013, we made an out-of-period adjustment to record previously unrecognized LIFO adjustments, which resulted in a decrease to cost of materials sold of $1.9 million.  The increase in cost of materials sold in 2014 is primarily due to increased sales volume of 13.5%, increased metals prices of 2.2% during the first nine months of 2014 compared to the first nine months of 2013, and the impact of LIFO expense during the nine months ended September 30, 2014 compared to LIFO income during the nine months ended September 30, 2013.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreased to 19.0% in the third quarter of 2014 compared to 20.7% in the third quarter of 2013. The decrease in gross profit for the nine months ended September 30, 2014 was primarily due to an increase in the mix of flat products segment sales with lower gross margins than pipe and tube segment sales, lower gross margins year-over-year in each segment due to competitive pressures, and the impact of LIFO expense in the third quarter of 2014 compared to LIFO income in the third quarter of 2013.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreased to 19.6% in the nine months ended September 30, 2014 compared to 21.0% in the nine months ended September 30, 2013. As a percentage of net sales, the LIFO income adjustment in 2013 increased gross profit by 0.3%. The decrease in the gross profit as percentage of sales for the nine months ended September 30, 2014 was primarily due to an increase in the mix of flat product segment sales which have a lower gross margin than pipe and tube segment sales, lower gross margins year-over-year due to competitive pressures, and the impact of LIFO expense recorded in 2014 compared to the LIFO income adjustment made in 2013. We expect our gross profit in the fourth quarter of 2014 to be consistent with the third quarter of 2014.

Operating expenses in the third quarter of 2014 increased $8.6 million, or 14.6%, to $67.4 million from $58.8 million in the third quarter of 2014. As a percentage of net sales, operating expenses decreased to 17.9% for the third quarter of 2014 from 19.3% in the comparable 2013 period. Operating expenses in the flat products segment increased $5.3 million, operating expenses in the tubular and pipe products segment increased $3.0 million and Corporate expenses increased $0.3 million. Variable operating expenses, such as distribution, warehouse and processing, and selling expenses, increased $6.5 million, or 18.2%, as a result of the 21.4% sales volume and 23.9% net sales increase. In addition, distribution expenses also increased as a result of inflationary pressures in the transportation industry. The increase of $0.1 million in occupancy expense is primarily related to expanded warehouse facilities. Depreciation expense decreased $0.7 million due to certain assets being fully depreciated in 2014.

Operating expenses in the first nine months of 2014 increased $16.1 million, or 8.7%, to $200.2 million from $184.1 million in the first nine months of 2013. As a percentage of net sales, operating expenses decreased to 18.0% for the nine months ended September 30, 2014 from 19.0% in the comparable 2013 period. Operating expenses in the flat products segment increased $11.6 million, operating expenses in the tubular and pipe products segment increased $3.9 million and Corporate expenses increased $0.6 million. Variable operating expenses, such as distribution, warehouse and processing, and selling expenses, increased $12.5 million, or 11.5%, as a result of the 13.5% sales volume increase and the 14.1% net sales increase. In addition, distribution expenses increased as a result of inflationary pressures in the transportation industry. Occupancy expenses increased $0.5 million as a result of our expanded warehouse facilities. Administrative and general expenses increased $3.4 million as a result of increased non-income taxes, employee training and benefit costs and non-recurring costs related to CTI’s Centennial events in 2014. Depreciation expense decreased $0.4 million as a result of certain assets being fully depreciated in 2014.

Interest and other expense on debt totaled $1.6 million, or 0.4% of net sales, in the third quarter of 2014 compared to $1.7 million, or 0.6% of net sales, in the third quarter of 2013. Interest and other expense on debt totaled $5.1 million, or 0.5% of net sales, in both the first nine months of 2014 and 2013. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 2.3% for the first nine months of 2014 compared to 2.2% for the first nine months of 2013. Effective with the June 30, 2014 amendment to our asset-based credit facility, our borrowing rate decreased by 25 basis points.

For both the third quarter of 2014 and 2013, income before income taxes totaled $2.5 million. Income before income taxes included LIFO expense of $200 thousand for the third quarter of 2014 compared to LIFO income of $188 thousand for the third quarter of 2013. For the first nine months of 2014, income before income taxes totaled $12.3 million compared to $14.7 million for the first nine months of 2013. Income before income taxes included LIFO expense of $600 thousand for the first nine months of 2014 compared to LIFO income of $2.5 million for the first nine months of 2013.

An income tax provision of 37.6% was recorded for the third quarter of 2014, compared to 46.1% for the third quarter of 2013. An income tax provision of 36.4% was recorded for the first nine months of 2014, compared to 38.6% for the first nine months of 2013. The lower effective tax rate for the nine months ended September 30, 2014 was a result of a discrete foreign income tax item recorded in the second quarter of 2014. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. We expect our effective tax rate to approximate 36% to 38% on an annual basis in 2014.

Net income for the third quarter of 2014 totaled $1.6 million or $0.14 per basic and diluted share, compared to $1.3 million or $0.12 per basic and diluted share for the third quarter of 2013. Net income for the first nine months of 2014 totaled $7.8 million or $0.70 per basic and diluted share, compared to $9.0 million or $0.82 per basic and diluted share for the first nine months of 2013. For the nine months ended September 30, 2014, the impact of LIFO expense decreased earnings per share by $0.03 per basic and diluted shares, while for the nine months ended September 30, 2013, the impact of LIFO income increased earnings per share by $0.14 per basic and diluted shares inclusive of the out-of-period LIFO income adjustment.

Segment Operations

Flat products

The following table presents selected operating results for our flat products segment for the periods indicated (dollars are shown in thousands): 

Tons sold by our flat products segment increased 22.4% to 324 thousand in the third quarter of 2014 from 265 thousand in the third quarter of 2013. Tons sold by our flat products segment increased 13.9% to 954 thousand in the first nine months of 2014 from 837 thousand in the first nine months of 2013. The increase in tons sold is due to increased customer demand associated with a recovering economy, market share gains in flat products, and increased toll business in the first nine months of 2014 compared to the first nine months of 2013.

Net sales in our flat products segment increased 25.9% to $312.8 million in the third quarter of 2014 from $248.5 million in the third quarter of 2013. The increase in net sales was due to a 22.4% increase in sales volume and a 2.8% increase in average selling prices, as metals industry market prices are higher year-over-year. Average selling prices in the third quarter of 2014 were $966 per ton, compared with $939 per ton in the third quarter of 2013 and $969 per ton in the second quarter of 2014. 2014 market prices for flat products peaked in July and have been declining since.

Net sales in our flat products segment increased 16.1% to $918.8 million in the first nine months of 2014 from $791.7 million in the first nine months of 2013. The increase in sales was due to a 13.9% increase in sales volume as well as a 1.9% increase in average selling prices, as metals industry market prices are higher year-over-year. Average selling prices in the first nine months of 2014 were $964 per ton, compared with $945 per ton in the first nine months of 2013.

Cost of materials sold increased 28.9% to $259.8 million in the third quarter of 2014 from $201.6 million in the third quarter of 2013. The increase in cost of materials sold was due to a 22.4% increase in sales volume and a 5.3% increase in metals pricing during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Cost of materials sold increased 17.6% to $756.6 million in the first nine months of 2014 from $643.2 million in the first nine months of 2013. The increase in cost of materials sold was due to a 13.9% increase in sales volume and a 3.3% increase in metals pricing during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 16.9% in the third quarter of 2014 compared to 18.9% in the third quarter of 2013. As a percentage of net sales, gross profit totaled 17.7% in the nine months ended September 30, 2014 compared to 18.7% in the nine months ended September 30, 2013. The decrease in gross profit percentage for the three and nine months ended September 30, 2014 was primarily due to the competitive market pressures associated with the growth in shipments and a higher mix of toll sales and lower gross margin percentage stainless and aluminum sales versus carbon sales.

Operating expenses in the third quarter of 2014 increased $5.3 million, or 12.0%, to $49.6 million from $44.3 million in the third quarter of 2013. As a percentage of net sales, operating expenses decreased to 15.8% for the third quarter of 2014 from 17.8% in the comparable 2013 period. Operating expenses in the first nine months of 2014 increased $11.6 million, or 8.6%, to $147.6 million from $136.0 million in the first nine months of 2013. As a percentage of net sales, operating expenses decreased to 16.1% for the first nine months of 2014 from 17.2% in the comparable 2013 period. Variable operating expenses, such as distribution, warehouse and processing, and selling expenses, increased as a result of higher sales volume and net sales. In addition, distribution expenses increased as a result of inflationary pressures in the transportation industry. Occupancy expenses increased as a result of expanded warehouse facilities. Administrative and general expenses increased as a result of increased non-income taxes, employee training and benefit costs. Depreciation expense decreased $0.9 million as a result of certain assets becoming fully depreciated in 2014.

Operating income for the third quarter of 2014 totaled $3.4 million, or 1.1% of net sales, compared to operating income of $2.6 million, or 1.1% of net sales, in the third quarter of 2013. Operating income for the first nine months of 2014 totaled $14.6 million, or 1.6% of net sales, compared to operating income of $12.4 million, or 1.5% of net sales, in the first nine months of 2013.

Tubular and pipe products

The following table presents selected operating results for our tubular and pipe products segment for the periods indicated (dollars are shown in thousands): 

Net sales increased 15.0% to $63.8 million in the third quarter of 2014 from $55.5 million in the third quarter of 2013. The increase is a result of an 8.2% increase in sales volume and a 6.3% increase in average selling prices over the third quarter of 2013. Net sales increased 5.3% to $190.7 million in the first nine months of 2014 from $181.2 million in the first nine months of 2013. The increase is a result of an 8.9% increase in sales volume over 2013 resulting in market share gains for tubular and pipe products, offset by a 3.3% decline in pipe and tube products segment average selling prices as a result of the competitive market environment and an increase in the sales mix of products with a lower average selling price.        

Cost of materials sold increased 14.8% to $45.2 million in the third quarter of 2014 from $39.4 million in the third quarter of 2013. The increase in cost of material sold in the third quarter of 2014 is primarily related to an 8.2% increase in sales volume, a 6.1% increase in metals pricing and $200 thousand of LIFO expense recorded in the quarter compared to $188 thousand of LIFO income recorded in the third quarter of 2013. Cost of materials sold increased 7.7% to $135.4 million in the first nine months of 2014 from $125.7 million in the first nine months of 2013. The increase in cost of material sold in the first nine months of 2014 is primarily related to a 8.9% increase in sales volume offset by a 1.1% decrease in metals pricing due to falling prices and $600 thousand of LIFO expense recorded in the first nine months of 2014 compared to $2.5 million of LIFO income recorded in the first nine months of 2013 (inclusive of an out-of-period adjustment to record previously unrecognized LIFO income adjustments, which resulted in a decrease to cost of materials sold of $1.9 million). 

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) totaled 29.1% in both the third quarter of 2014 and 2013. As a percentage of net sales, the LIFO adjustment in 2014 decreased third quarter gross profit by 0.3%, compared to an increase of 0.3% in the third quarter of 2013. As a percentage of net sales, gross profit totaled 29.0% in the first nine months of 2014 compared to 30.6% in the first nine months of 2013. As a percentage of net sales, the LIFO adjustment in the first nine months of 2014 decreased gross profit by 0.3% compared to the increase to gross profit by 1.4% in the first nine months of 2013.

Operating expenses in the third quarter of 2014 increased $3.0 million, or 23.1%, to $15.8 million from $12.8 million in the third quarter of 2013. Operating expenses were 24.7% of net sales in the third quarter of 2014 compared to 23.1% in the third quarter of 2013. Operating expenses in the first nine months of 2014 increased $3.9 million, or 9.1%, to $46.3 million from $42.4 million in the first nine months of 2013. Operating expenses were 24.2% of net sales in the first nine months of 2014 compared to 23.4% in the first nine months of 2013. The increase in operating expense for the three and nine months ended September 30, 2014 is primarily related to the increased distribution expense related to increased sales volumes and the inflationary pressures in the transportation industry and increased depreciation expense as a result of recent investments in processing equipment. Administrative and general expenses increased due to non-recurring costs related to CTI’s Centennial events in 2014 and increased payroll costs.

Operating income for the third quarter 2014 totaled $2.8 million, or 4.4% of net sales, compared to $3.3 million, or 6.0% of net sales, for the third quarter of 2013. Operating income for the first nine months of 2014 totaled $9.1 million, or 4.8% of net sales, compared to $13.1 million, or 7.2% of net sales, for the first nine months of 2013. The LIFO adjustment decreased operating income for the third quarter of 2014 by $200 thousand compared to an increase of $188 thousand in the third quarter of 2013. The LIFO adjustment decreased operating income for the first nine months of 2014 by $600 thousand compared to an increase of $2.5 million in the first nine months of 2013.

Corporate expenses

Corporate expenses include the unallocated expenses related to managing the entire Company, (i.e., both segments) including payroll expenses for certain personnel, expenses related to being a publicly traded entity such as board of directors expenses, audit expenses, and various other professional fees. Corporate expenses increased $0.3 million in the third quarter of 2014 to $2.0 million, compared to $1.7 million in the third quarter of 2013. Corporate expenses increased $0.6 million in the first nine months of 2014 to $6.3 million, compared to $5.7 million in the first nine months of 2013. The increase in Corporate expenses is related to the relocation of the executive offices in the second half of 2013 and other public company costs.

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 existing asset-based credit facility (the ABL Credit Facility), lease arrangement proceeds and the sale of equity or debt securities, together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements, our dividend payments and any business acquisitions over at least the next 12 months. In the future, we may, as part of our business strategy, acquire and dispose of assets, enter, renew or exit from lease agreements 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.

Operating Activities

For the nine months ended September 30, 2014, we used $59.0 million of net cash for operations, of which $23.9 million was generated from operating activities and $82.9 million was used for working capital. For the nine months ended September 30, 2013, we generated $48.6 million of net cash from operations, of which $23.4 million was generated from operating activities and $25.2 million was generated from working capital.

Net cash from operations totaled $23.9 million during the first nine months of 2014 and was primarily generated from net income of $7.8 million and depreciation and amortization of $16.9 million offset primarily by changes in other long-term assets and liabilities of $2.5 million. Net cash from operations totaled $23.4 million during the first nine months of 2013 and was generated from net income of $9.0 million and depreciation and amortization of $17.4 million offset primarily by changes in other long-term assets and liabilities of $4.3 million.

Working capital at September 30, 2014 totaled $350.4 million, a $98.4 million increase from December 31, 2013. The increase was primarily attributable to a $43.1 million increase in inventory and a $37.4 million increase in accounts receivable (resulting from higher sales volume and sales prices in the first nine months of 2014 compared to the fourth quarter of 2013, as our days of sales outstanding remained fairly consistent), and a $4.6 million net decrease in accounts payable and outstanding checks.

Investing Activities

Net cash used for investing activities was $7.2 million during the nine months ended September 30, 2014, compared to $9.6 million during the nine months ended September 30, 2013. Both 2014 and 2013 capital expenditures were attributable to additional processing equipment at our existing facilities. In 2014 and 2015, we plan for capital spending to be less than our estimated annual depreciation expense.

Financing Activities

During the first nine months of 2014, $72.1 million of cash was generated from financing activities, which primarily consisted of $123.4 million of net borrowings under our ABL Credit Facility, including the payoff of our term loan of $48.9 million upon refinancing and subsequent borrowings on our revolver, offset by $1.1 million of additional deferred financing fees incurred as part of the June 30, 2014 amendment of the ABL Credit Facility, discussed below in Debt Arrangements.

Dividends paid were $0.7 million for both the nine months ended September 30, 2014 and September 30, 2013. In November 2014, our Board of Directors approved a regular quarterly dividend of $0.02 per share, which will be paid on December 15, 2014 to shareholders on record as of December 1, 2014. Our Board of Directors previously approved regular quarterly dividends of $0.02 per share, which were paid on March 17, 2014, June 16, 2014 and September 16, 2014 to shareholders of record as of March 3, 2017, June 2, 2014 and September 2, 2014, respectively. Regular 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 the continuing determination by our Board of Directors that the payment of dividends remains in the best interest of our shareholders.

Debt Arrangements

On June 30, 2014, we amended our ABL Credit Facility. The amendment provides for, among other things: (i) a reduction in the applicable margin for loans under the Company’s Loan and Security Agreement; (ii) a consolidation of the previous $315.0 million revolver and then outstanding $44.5 million term loan into a $365 million revolving credit facility; (iii) the removal of the Company’s real estate as collateral for borrowings; and (iv) the extension of the maturity date until June 30, 2019. 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) until maturity of the ABL Credit Facility, 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 September 30, 2014) 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 (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 September 30, 2014, we were in compliance with our covenants and had approximately $90 million of availability under the ABL Credit Facility.

As of September 30, 2014, $3.6 million of bank financing fees, including $1.1 million related to the amended ABL Credit Facility were included in “Prepaid expenses and other” and “Other long-term assets” on the accompanying Consolidated Balance Sheets. The financing fees are being amortized over the remaining term of the ABL Credit Facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.

As part of the 2011 CTI acquisition, we assumed approximately $5.9 million of Industrial Revenue Bond (IRB) indebtedness issued through the Stanly County, North Carolina Industrial Revenue and Pollution Control Authority. The bond matures in April 2018, with the option to provide principal payments annually on April 1st. On April 1, 2014, we paid an optional principal payment of $810 thousand. The IRB is remarketed annually and is included in “Current portion of long-term debt” on the accompanying Consolidated Balance Sheets. Interest is payable monthly, with a variable rate that resets weekly. As 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 September 30, 2014 was 0.15% for the IRB debt.

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the consolidated financial statements included in this Quarterly Report on Form 10-Q, 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. We monitor and evaluate our estimates and assumptions, based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

We review our financial reporting and disclosure practices and accounting practices quarterly to ensure they provide accurate and transparent information relative to the current economic and business environment. For further information regarding the accounting policies that we believe to be critical accounting policies that affect our more significant judgments and estimates used in preparing our consolidated financial statements, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk