OLYMPIC STEEL INC - Annual Report: 2015 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ( ) No (X)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ( ) No (X)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No ( )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes (X) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one:)

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

As of June 30, 2015, the aggregate market value of voting stock held by nonaffiliates of the registrant based on the closing price at which such stock was sold on the Nasdaq Global Select Market on such date approximated $158,339,063.

The number of shares of common stock outstanding as of February 25, 2016 was 10,955,046.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days of the close of its fiscal year ended December 31, 2015, portions of which document shall be deemed to be incorporated by reference in Part III of this Annual Report on Form 10-K from the date such document is filed.

TABLE OF CONTENTS

PART I

The Company

We are a leading metals service center that operates in three reportable segments; carbon flat products, specialty metals flat products and tubular and pipe products. The carbon flat products segment and the specialty metals flat products segment are at times consolidated and referred to as the flat products segments. Some of the flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and processed on the shared equipment. We provide metals processing and distribution services for a wide range of customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products, and fabricated parts. Our specialty metals flat products segment’s focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. Through our 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.

Segment reporting information is contained in Note 15 of Notes to Consolidated Financial Statements, which can be found in Part II, Item 8 of this Annual Report on Form 10-K and which is incorporated herein by reference.

We are incorporated under the laws of the State of Ohio. Our executive offices are located at 22901 Millcreek Boulevard, Suite 650, Highland Hills, Ohio 44122. Our telephone number is (216) 292-3800, and our website address is www.olysteel.com. We are not including the information on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

Industry Overview

The metals industry is comprised of three types of entities: metals producers, intermediate metals processors and metals service centers. Metals producers have historically emphasized the sale of metals to volume purchasers and have generally viewed intermediate metals processors and metals service centers as part of their customer base. However, all three types of entities can compete for certain customers who purchase large quantities of metals. Intermediate metals processors tend to serve as processors in large quantities for metals producers and major industrial consumers of processed metals, including automobile and appliance manufacturers.

Services provided by metals service centers can range from storage and distribution of unprocessed metal products to complex, precision value-added metals processing. Metals service centers respond directly to customer needs and emphasize value-added processing of metals pursuant to specific customer demands, such as cutting-to-length, slitting, shearing, roll forming, shape correction and surface improvement, blanking, tempering, plate burning and stamping. These processes produce metals to specified lengths, widths, shapes and surface characteristics through the use of specialized equipment. Metals service centers typically have lower cost structures than, and provide services and value-added processing not otherwise available from, metals producers.

End product manufacturers and other metals users seek to purchase metals on shorter lead times and with more frequent and reliable deliveries than can normally be provided by metals producers. Metals service centers generally have lower labor costs than metals producers and consequently process metals on a more cost-effective basis. In addition, due to this lower cost structure, metals service centers are able to handle orders in quantities smaller than would be economical for metals producers. The benefits to customers purchasing products from metals service centers include lower inventory levels, lower overall cost of raw materials, more timely response and decreased manufacturing time and expense. Customers also benefit from a lower investment in production labor, buildings and equipment, which allows them to focus on the engineering, assembly and marketing of their products. We believe that customers’ demands for just-in-time delivery have made the value-added inventory, processing and delivery functions performed by metals service centers increasingly important.

Corporate History

Our company was founded in 1954 by the Siegal family as a general steel service center. Michael Siegal, the son of one of the founders, began his career with us in the early 1970s and has served as our Chief Executive Officer since 1984, and as our Chairman of the Board of Directors since 1994. David Wolfort, our President and Chief Operating Officer, joined us as General Manager in 1984. In the late 1980s, our business strategy changed from a focus on warehousing and distributing steel from a single facility with no major processing equipment to a focus on geographic and product growth, customer diversity and value-added processing. An integral part of our growth has been the acquisition and start-up of processing and sales operations, and the investment in processing equipment. In 1994, we completed an initial public offering and, in 1996, we completed a follow-on offering of our common stock. In July 2011, we acquired CTI, a private leading distributor of tubing, pipe, bar, valves, and fittings, which represents our tubular and pipe products segment.

Business Strategy and Objectives

We believe that the metals service center and processing industry is driven by four primary trends: (i) return of domestic manufacturing processes by North American original equipment manufacturers; (ii) shift by customers to fewer suppliers that are larger and financially strong; (iii) increased customer demand for more frequent, higher quality products and services; and (iv) globalization of metals industry participants.

In recognition of these industry trends, our focus has been on achieving profitable geographic and product growth through the start-up and acquisition of service centers, processors, fabricators and related businesses, and investments in people, information systems, higher value-added processing equipment and services, while continuing our commitment to expanding and improving our operating efficiencies, sales and servicing efforts.

In 2015, we initiated a profit improvement program to reduce operating expenses and enhance margins. This plan included eliminating certain leased properties, lowering transportation, labor and personnel expenses, centralization of certain administrative functions, as well as inventory and purchasing initiatives. We successfully executed on the initiatives of the plan, which contributed to a $24.1 million year over year operating expense reduction.

We are focused on specific operating objectives including: (i) managing inventory turnover; (ii) managing operating expenses; (iii) maintaining targeted cash turnover rates; (iv) investing in automation and value-added processing equipment; (v) growing our market share; (vi) investing in technology and business information systems; (vii) improving safety awareness; and (viii) improving on-time delivery and quality performance for our customers.

These operating objectives are supported by:

We believe our depth of management, facilities, locations, processing capabilities, inventory, focus on safety, quality and customer service, extensive and experienced sales force, and the strength of our customer and supplier relationships provide a strong foundation for implementation of our strategy and achievement of our objectives. Certain elements of our strategy are set forth in more detail below.

Investments and Acquisitions. Historically, we have accelerated our growth through acquisitions and capital investments in facilities and processing equipment. Over the five year period from 2008 to 2012, we spent approximately $160 million on the CTI acquisition and over $125 million on capital investments for new facilities and processing equipment in support of our strategic growth initiatives. Since that period of concentrated investments, we have limited our capital spending to less than our annual depreciation expense (which was approximately $18 million in 2015). Within this self-imposed limitation, we continue to invest in processing and automation equipment to support customer demand and to respond to the growing trend among original equipment manufacturers (our customers) to outsource non-core production processes, such as plate processing, machining, welding and fabrication, in order to concentrate on engineering, design and assembly. When the results of sales and marketing efforts and our financial justifications indicate that there is sufficient customer demand for a particular product, process or service, we may purchase equipment to satisfy that demand. We also evaluate our existing equipment to ensure that it remains productive, and we upgrade, replace, redeploy or dispose of equipment when necessary.

Our capital investments during the past three years have primarily consisted of a stretcher leveling line as well as other processing equipment for our expanded value-added customer base in Winder, Georgia, a new specialty metals facility in Latrobe, Pennsylvania, added tube and pipe distribution capabilities from our Cleveland, Ohio and Monterey, Mexico facilities and additional processing equipment in our tubular and pipe products segment.

Sales and Marketing. We believe that our commitments to quality, service, just-in-time delivery and field sales personnel have enabled us to build and maintain strong customer relationships. We continuously analyze our customer base to ensure that strategic customers are properly targeted and serviced, while focusing our efforts to supply and service our larger customers on a national basis, where we successfully service multi-location customers from multi-location Olympic facilities. We service certain customers with carbon and specialty metals flat products and tubular and pipe products through cross-stocking of products in certain facilities.

We offer business solutions to our customers through value-added and value-engineered services. We also provide inventory stocking programs and in-plant Olympic Steel employees located at certain customer locations to help reduce customers’ costs. Our expanding owned truck fleet further enhances our just-in-time deliveries based on our customers’ requirements.

Our flawless execution (Fe) program is a commitment to provide superior customer service while striving to exceed customer expectations. This program includes tracking actual on-time delivery and quality performance against objectives, and recognition of employee initiatives to improve efficiencies, streamline processes or reduce operating expenses at each operation.

We believe our large and experienced sales force provides strategic advantages. Our sales force makes direct daily sales calls to customers throughout the continental United States and in Mexico. The continuous interaction between our sales force and active and prospective customers provides us with valuable market information and sales opportunities, including opportunities for outsourcing, improving customer service and increased sales.

Our sales efforts are further supported by metallurgists, engineers, technical and quality service personnel and product specialists who have specific expertise in carbon and stainless steel, aluminum, alloy plate and steel fabrication as well as tubular and pipe products. We have expanded our stainless steel and aluminum products and services, and added sales personnel to grow sales in these areas. Our services for certain customers also include integration into our internal business systems to provide cost efficiencies for both us and our customers.

Management. We believe one of our strengths is the depth, knowledge and experience of our management team. In addition to our executive officers, members of our senior management team have a diversity of backgrounds within the metals industry, including management positions at metals producers and other metals service centers. They average 30 years of experience in the metals industry and 23 years with our company.

Products, Processing Services and Quality Standards

We maintain inventory of carbon, stainless and aluminum coil, plate and sheet products, and tubular and pipe products. Coil is in the form of a continuous sheet, typically 36 to 96 inches wide, between 0.015 and 0.625 inches thick, and rolled into 10 to 30 ton coils. Because of the size and weight of these coils and the equipment required to move and process them into smaller sizes, such coils do not meet the requirements, without further processing, of most customers. Plate is typically thicker than coil and is processed by laser, plasma or oxygen burning.

Through our CTI subsidiary, we maintain inventory of round, square, and rectangular mechanical and structural tubing; hydraulic and stainless tubing; boiler tubing; carbon, stainless, and aluminum pipe; and valves and fittings. Overall, CTI maintains over 30,000 line items within its inventory. CTI provides a variety of value added services to its tube and pipe product line, including saw cutting, laser cutting, beveling, threading and grooving. CTI also fabricates pressure components supplied to various industrial markets.

Customer orders are entered or electronically transmitted into computerized order entry systems, and appropriate inventory is selected and scheduled for processing in accordance with the customer’s specified delivery date. We attempt to maximize yield and equipment efficiency through the use of computer software and by combining customer orders for processing each coil, plate, tube or pipe to the fullest extent practicable.

Our services include both traditional service center processes of cutting-to-length, slitting, flattening, sawing and shearing and higher value-added processes of blanking, tempering, plate burning, laser cutting, precision machining, welding, fabricating, bending, beveling, polishing, kitting and painting to process metals to specified lengths, widths and shapes pursuant to specific customer orders. Cutting-to-length involves cutting metal along the width of the coil. Slitting involves cutting metal to specified widths along the length of the coil. Shearing is the process of cutting sheet metal. Blanking cuts the metal into specific shapes with close tolerances. Tempering improves the uniformity of the thickness and flatness of the metals through a cold rolling process. Plate and laser processing is the process of cutting metal into specific shapes and sizes. Our forming activities include bending metal. Our machining activities include drilling, milling, tapping, boring and sawing. Tube processing includes tube bending and end finishing. Finishing activities include shot blasting, grinding, edging and polishing. Our fabrication activities include machining, welding, assembly and painting of component parts.

Commencing with the first quarter of 2015, the flat products segment has been separated into two reportable segments; carbon flat products and specialty metals flat products. The flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are, in some instances, stored in the shared facilities and processed on the shared equipment.

The following table sets forth, as of December 31, 2015, the major pieces of processing equipment in operation by segment:

Our quality assurance system, led by certified specialists and engineers, establishes controls and procedures covering all aspects of our products from the time the material is ordered through receipt, processing and shipment to the customer. These controls and procedures encompass periodic supplier and customer audits, workshops with customers, inspection equipment and criteria, preventative actions, traceability and certification. We have quality testing labs at several of our facilities, as well as adjacent to our temper mill facilities in Cleveland, Ohio and Bettendorf, Iowa.

In addition, 25 of our facilities have earned International Organization for Standardization (ISO) 9001:2008 certifications. Our Detroit operation is also TS-16949 certified. CTI has earned The American Society of Mechanical Engineers S Certification and The National Board of Boiler & Pressure Vessel Inspectors R Certification. Our office building in Winder, Georgia has received Leadership in Energy and Environmental Design (LEED) certification.

Customers and Distribution

We have a diverse customer and geographic base, which helps to reduce the inherent risk and cyclicality of our business. Net sales to our top three customers, in the aggregate, approximated 11.6%, 11.1% and 11.1% of our consolidated net sales in 2015, 2014 and 2013, respectively. We serve customers in metals consuming industries, including manufacturers and fabricators of transportation and material handling lift equipment, construction, mining and farm equipment, storage tanks, environmental and energy generation equipment, automobiles, food service and electrical equipment, military vehicles and equipment, as well as general and plate fabricators and metals service centers. The table below shows the percentage of our consolidated net sales to the largest industries for the past three years.

While we ship products throughout the United States, most of our customers are located in the midwestern, eastern and southern regions of the United States. Most customers are located within a 250-mile radius of one of our processing facilities, thus enabling an efficient delivery system capable of handling a high frequency of short lead time orders. We transport our products directly to customers via our in-house truck fleet, which further supports the just-in-time delivery requirements of our customers, and third-party trucking firms. Products sold to foreign customers, which have been immaterial to our consolidated results, are shipped either directly from metals producers to the customer or to an intermediate processor, and then to the customer by rail, truck or ocean carrier. Through our facility in Monterrey, Mexico, we are able to stock material and service our customers in that country with shorter lead times.

We process our metals to specific customer orders as well as for stocking programs. Many of our larger customers commit to purchase on a regular basis at agreed upon or indexed prices for periods ranging from three to twelve months. To help mitigate price volatility risks, these price commitments are generally matched with corresponding supply arrangements, or to a lesser degree by commodities hedging. Customers notify us of specific release dates as processed products are required. Customers typically notify us of release dates anywhere from a just-in-time basis to one month before the release date. Therefore, we are required to carry sufficient inventory to meet the short lead time and just-in-time delivery requirements of our customers. CTI produces pressure parts and other fabricated components primarily for industrial boiler applications representing 9.7% of CTI sales. These products typically take several months to produce due to their size and complexity. Due to the time required for production, we may require progress payments throughout the construction period.

The current global economic environment has resulted in increased supply chain scrutiny by our customers and potential customers. We believe our size, geographic footprint, financial position, and our focus on quality and customer service are advantageous in maintaining our customer base and in securing new customers.

Raw Materials

Our principal raw materials are carbon, coated and stainless steel and aluminum, in the forms of pipe and tube, flat rolled sheet, coil and plate that we typically purchase from multiple primary metals producers. The metals industry as a whole is cyclical and at times pricing and availability of material can be volatile due to numerous factors beyond our control, including general domestic and global economic conditions, labor costs, domestic and global supply and demand imbalance, competition, consolidation of metals producers, fluctuations in the costs of raw materials necessary to produce metals, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.

Inventory management is a key profitability driver in the metals service center industry. We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, contracts with customers and market conditions.

Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. During the past three years, we have entered into pass through nickel and carbon swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals. The swaps are settled with the brokers at maturity and the economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer. During 2014, we entered into cash flow metals hedges to mitigate our risk of volatility in the price of metals. The cash flow hedges are settled with the brokers at maturity and the economic benefit or loss arising from the changes in fair value of the hedges is recorded to “Cost of Materials Sold” in the Consolidated Statements of Comprehensive Income. All of the metals cash flow hedges settled during 2015, and we have no outstanding metals hedges as of December 31, 2015.

We have no long-term, fixed-price metals purchase contracts, except for commodity hedges. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers.

Suppliers

We concentrate on developing supply relationships with high-quality domestic and international metals producers, using a coordinated effort to be the customer of choice for business critical suppliers. We employ sourcing strategies that maximize the quality, production lead times and transportation economies of a global supply base. We are an important customer of flat-rolled coil and plate, pipe and tube for many of our principal suppliers, but we are not dependent on any one supplier. We purchase in bulk from metals producers in quantities that are efficient for such producers. This enables us to maintain a continued source of supply at what we believe to be competitive prices. We believe the access to our facilities and equipment, and our high quality customer services and solutions, combined with our long-standing and continuous prompt pay practices, will continue to be an important factor in maintaining strong relationships with metals suppliers.

The metals producing supply base has experienced significant consolidation, with a few suppliers accounting for a majority of the domestic carbon steel market. We purchased approximately 51% and 43% of our total metals requirements from our three largest suppliers in 2015 and 2014, respectively. Although we have no long-term supply commitments, we believe we have good relationships with our metals suppliers. If, in the future, we are unable to obtain sufficient amounts of metals on a timely basis, we may not be able to obtain metals from alternate sources at competitive prices. In addition, interruptions or reductions in our supply of metals could make it difficult to satisfy our customers’ just-in-time delivery requirements, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Competition

Our principal markets are highly competitive. We compete with other regional and national metals service centers, single location service centers and, to a certain degree, metals producers and intermediate metals processors on a regional basis. We have different competitors for each of our products and within each region. We compete on the basis of price, product selection and availability, customer service, value-added capabilities, quality, financial strength and geographic proximity. Certain of our competitors have greater financial and operating resources than we have.

With the exception of certain Canadian or Mexican operations, foreign-located metals service centers are generally not a material competitive factor in our principal domestic markets.

Management Information Systems

Information systems are an important component of our strategy. We have invested in technologies and human resources as a foundation for growth. We depend on our Enterprise Resource Planning (ERP) systems for financial reporting, management decision-making, inventory management, order tracking and fulfillment and production optimization. We continue to upgrade and consolidate our systems for optimal use of resources and to assure we are taking advantage of technology offerings.

Our information systems focus on the following core application areas:

Inventory Management. Our information systems track the status and cost of inventories by product, location and process on a daily basis. This information is essential to optimize management of inventory.

Differentiated Services To Customers. Our information systems support value-added services to customers, including quality control and on-time delivery monitoring and reporting, just-in-time inventory management and shipping services.

E-Commerce and Advanced Customer Interaction. We are actively participating in electronic commerce initiatives to reduce processing cost and time. In addition to full electronic data interchange (EDI) capabilities with our customers and vendors, we also have implemented extranet sites for specific customers which are integrated with our internal business systems.

System and Process Enhancements. We have completed development of business system alternatives to replace our legacy information systems and have successfully implemented new ERP systems at most of our locations and have decommissioned three legacy systems as of December 31, 2015. We continue to implement these new systems to provide standardized business processes, enhanced inventory management, production cost, and sales administrative controls, and reduced technical support requirements. Our business analysts work with our ISO quality team to identify opportunities for efficiency and improved customer service. We collaborate across the metal supply chain, working with metals producers, service providers, customers, and industry-sponsored organizations to develop industry processing standards to drive cost out of the supply chain.

Information security and continuous availability of information processing are of highest priority. Our information professionals employ proven security and monitoring practices and tools. In case of physical emergency or threat, our new ERP systems, accounting system, internet and communications systems are duplicated at a secure off-site computing facility, with migration of our other systems now in progress.

Employees

At December 31, 2015, we employed approximately 1,740 people. Approximately 305 of the hourly plant personnel are represented by nine separate collective bargaining units. The table below shows the expiration dates of the collective bargaining agreements.

We have never experienced a work stoppage and we believe that our relationship with employees is good. However, any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Service Marks, Trade Names and Patents

We conduct our business under the name “Olympic Steel.” A provision of federal law grants exclusive rights to the word “Olympic” to the U.S. Olympic Committee. The U.S. Supreme Court has recognized, however, that certain users may continue to use the word based on long-term and continuous use. We have used the name Olympic Steel since 1954, but are prevented from registering the name “Olympic” and from being qualified to do business as a foreign corporation under that name in certain states. In such states, we have registered under different names, including “Oly Steel” and “Olympia Steel.” Our wholly-owned subsidiary, Olympic Steel Lafayette, Inc., does business in certain states under the names “Olympic Steel Detroit,” “Lafayette Steel and Processing” and “Lafayette Steel.” Our wholly-owned subsidiary, Olympic Steel Iowa, Inc. does business in certain states under the name “Oly Steel Iowa, Inc.”. Our North Carolina operation conducts business under the name “Olympic Steel North Carolina.” Our Integrity Stainless operation conducts business under the name “Integrity Stainless”. Our CTI North Carolina operation conducts business under the name “CTI Power.” Our operation in Monterrey, Mexico operates under the name “Metales de Olympic S. de.R.L. de C.V.”

We also hold a trademark for our stainless steel sheet and plate product “OLY-FLATBRITE,” which has a unique combination of surface finish and flatness.

Government Regulation

Our operations are governed by many laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder. We believe that we are in material compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will have a material adverse effect on our business, financial condition, results of operations and cash flows.

Environmental

Our facilities are subject to certain federal, state and local requirements relating to the protection of the environment. We believe that we are in material compliance with all environmental laws, do not anticipate any material expenditures to meet environmental requirements and do not believe that compliance with such laws and regulations will have a material adverse effect on our business, financial condition, results of operations and cash flows.

Seasonality

Seasonal factors may cause demand fluctuations within the year which could impact our results of operations. Typically, the first half of the year is stronger than the second half of the year, as it contains more ship days and is not impacted by the seasonal shut-downs in July, November and December due to holidays.

Effects of Inflation

Inflation generally affects us by increasing the cost of employee wages and benefits, transportation services, processing equipment, purchased metals, energy and borrowings under our credit facility. General inflation has not had a material effect on our financial results during the past three years.

Backlog

Because we conduct our operations generally on the basis of short-term orders, we do not believe that backlog is a material or meaningful indicator of future performance.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by the Company at http://www.sec.gov.

In addition, our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor Relations” section of our website at www.olysteel.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

Information relating to our corporate governance at Olympic Steel, including our Business Ethics Policy, information concerning our executive officers, directors and Board committees (including committee charters), and transactions in our securities by directors and officers, is available free of charge on or through the “Investor Relations” section of our website at www.olysteel.com. We are not including the information on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. 

Forward-Looking Information

This Annual Report on Form 10-K and other documents we file with the SEC contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as “may,” “will,” “anticipate,” “should,” “intend,” “expect,” “believe,” “estimate,” “project,” “plan,” “potential,” and “continue,” as well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to, those set forth in Item 1A (Risk Factors) below and the following:

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.

In addition to the other information in this Annual Report on Form 10-K and our other filings with the SEC, the following risk factors should be carefully considered in evaluating us and our business before investing in our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, not presently known to us or otherwise, may also impair our business. If any of the risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and investors may lose all or part of their investment.

Risks Related to our Business

Volatile metals prices can cause significant fluctuations in our operating results. Our sales and operating income could decrease if metals prices decline or if we are unable to pass producer price increases on to our customers.

Our principal raw materials are carbon and stainless steel and aluminum flat rolled coil, sheet, plate, pipe and tube that we typically purchase from multiple primary metals producers. The metals industry as a whole is cyclical and, at times, pricing and availability of metals can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by other metals service centers, consolidation of metals producers, higher raw material costs for the producers of metals, imports, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.

We, like many other metals service centers, maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. We entered into metals hedges, which carry counterparty performance risk, in order to mitigate our risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts, except for metals hedges. Declining metals prices, customer demand for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and potentially inventory lower of cost or market adjustments as we use existing inventory. Significant or rapid declines in metals prices or reductions in sales volumes could adversely impact our ability to remain in compliance with certain financial covenants in our revolving credit facility, as well as result in us incurring inventory or asset impairment charges. When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our business could be adversely affected. Changing metals prices therefore could significantly impact our net sales, gross profit, operating income and net income, and could impair or adversely impact the carrying value of any of our assets.

China is the world’s largest producer and consumer of metals and metals products. Its expansion of metals production has significantly affected the global metals industry. The recent economic downturn in China, the slowing of its growth and decreased metals consumption has led to an increased supply of metals in the United States, which result in lower prices for our products. Actions by domestic and foreign producers, including metals companies in China, to further increase production could result in an increased supply of metals in the United States, which could result in lower prices for our products. A decline in metals prices could adversely affect our sales, gross profits and profitability.

We service industries that are highly cyclical, and any downturn in our customers’ demand could reduce our sales, gross profits and profitability.

We sell our products in a variety of industries, including capital equipment manufacturers for industrial, agricultural and construction use, the automotive industry, the utilities industry, and manufacturers of fabricated metals products. Our largest category of customers is producers of industrial machinery and equipment. Numerous factors, such as general economic conditions, strengthening of the US dollar, government stimulus or regulation, availability of adequate credit and financing, consumer confidence, significant business interruptions, labor shortages or work stoppages, energy prices, seasonality, customer inventory levels and other factors beyond our control, may cause significant demand fluctuations from one or more of these industries. Any decrease in demand within one or more of these industries may be significant and may last for a lengthy period of time. In periods of economic slowdown or recession in the United States, excess customer or service center inventory or a decrease in the prices that we can realize from sales of our products to customers in any of these industries could result in lower sales, gross profits and profitability.

Approximately 9.6% of our 2015 consolidated net sales were to automotive manufacturers or manufacturers of automotive components and parts, whom we refer to as automotive customers. Historically, due to the concentration of customers in the automotive industry, our gross profits on these sales have generally been less than our gross profits on sales to customers in other industries.

We may not be able to retain or expand our customer base if the U.S. manufacturing industry continues to erode or if the U.S. dollar continues to strengthen.

Our customer base primarily includes manufacturing and industrial firms in the United States, some of which are, or have considered, relocating production operations outside the United States or outsourcing particular functions outside the United States. Some customers have closed because they were unable to compete successfully with foreign competitors. Our facilities are primarily located in the United States and, therefore, to the extent that our customers relocate or move operations where we do not have a presence, we could lose their business.

Some customers have historically manufactured products in the United States for export to foreign markets. As the U.S. dollar has strengthened, products made by U.S. manufacturers have become less attractive to foreign buyers. Fewer purchases by foreign buyers reduces our metals sales to those U.S. manufacturers and adversely affects our sales and results of operations.

Our success is dependent upon our relationships with certain key customers.

We have derived and expect to continue to derive a significant portion of our revenues from a relatively limited number of customers. Collectively, our top three customers accounted for approximately 11.6% and 11.1% of our consolidated net sales in 2015 and 2014, respectively. Many of our larger customers commit to purchase on a regular basis at agreed upon prices over periods from three to twelve months. We generally do not have long-term contracts with our customers. As a result, the relationship, as well as particular orders, can generally be terminated with relatively little advance notice. The loss of any one of our major customers or decrease in demand by those customers or credit constraints placed on them could have a material adverse effect on our business, our results of operations and our cash flows.

An interruption in the sources of our metals supply could have a material adverse effect on our results of operations.

In recent years, the metals producing supply base has experienced significant consolidation with a few domestic producers accounting for a majority of the domestic metals market. Collectively, we purchased approximately 51% and 43% of our total metals requirements from our three largest suppliers in 2015 and 2014, respectively. The number of available suppliers could be reduced in the future by factors such as further industry consolidation or bankruptcies affecting metals suppliers. Additionally, fewer available suppliers increases the risk of supply disruption through both scheduled and unscheduled supplier outages. We have no long-term supply commitments with our metals suppliers. If, in the future, we are unable to obtain sufficient amounts of metals on a timely basis, we may not be able to obtain metals from alternate sources at competitive prices. In addition, interruptions or reductions in our supply of metals could make it difficult to satisfy our customers’ just-in-time delivery requirements, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Conversely, the addition of new mill sources and decreased domestic demand could lead to domestic over capacity, which could lead to a decrease in steel prices.

We depend, in part, on third parties for transportation services, and increases in costs or the availability of transportation could adversely affect our business and operations.

We ship products throughout the United States via our in-house truck fleet or by third-party trucking firms. Products sold to foreign customers, are shipped either directly from metals producers to the customer or to an intermediate processor, and then to the customer by rail, truck or ocean carrier. Our business depends on the transportation of a large number of products. We depend to a certain extent on third parties for transportation of our products as well as delivery of our raw materials.

If any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to process and deliver our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost. In addition, such failure of a third-party transportation provider could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial position and results of operations.

Expansions at our existing locations may be unable to achieve expected results, and events or circumstances that could adversely impact the successful operation of new processing equipment and operations could have a material adverse effect on our results of operations.

We have invested in new processing equipment to support customer demand. Although we have successfully installed new processing equipment in the past, we can provide no assurance that the recent or future installations will be successful, or achieve expected results. Risks associated with the installations include, but are not limited to:

Difficulties associated with the installations of new processing equipment, including our 2015 equipment investments in Winder, Georgia, could adversely affect our business, our customer service, our results of operations and our cash flows.

Our implementation of new information systems could adversely affect our results of operations and cash flows.

We are in the process of implementing new information systems and eliminating our legacy operating systems. The objective is to standardize and streamline business processes and improve support for our growing service center and fabrication business. Risks associated with the phased implementation include, but are not limited to:

Although we have successfully initiated use of the new systems at most of our locations, we can provide no assurance that the rollout to the remaining locations will be successful or will occur as planned and without disruption to operations. Difficulties associated with the design and implementation of new information systems could adversely affect our business, our customer service, our results of operations and our cash flows.

The failure of our key computer-based systems could have a material adverse effect on our business.

Until our new systems implementations are completed, we maintain separate regional computer-based systems in the operation of our business and we depend on these systems to a significant degree, particularly for inventory management. These systems are vulnerable to, among other things, damage or interruption from fire, flood, tornado and other natural disasters, power loss, computer system and network failures, operator negligence, physical and electronic loss of data or security breaches and computer viruses. Although we have secure back-up systems off-site, the destruction or failure of any one of our computer-based systems for any significant period of time could materially adversely affect our business, financial condition, results of operations and cash flows.

We may not achieve the expected results of our profit improvement plan or Operational Excellence initiatives.

In 2015, we initiated a profit improvement program to reduce operating expenses and enhance margins. This plan included eliminating certain leased properties, lowering transportation, labor and personnel expenses, centralization of certain administrative functions, as well as inventory and purchasing initiatives.

In addition, our operational excellence initiatives are designed to improve efficiencies and lower our costs. The initiatives are focused on continuously improving processes through waste and variation elimination using Lean Six Sigma tools. The risks associated with these initiatives include, but are not limited to:

Difficulties associated with executing our profit improvement plan and Operational Excellence initiatives could adversely affect our business, our customer service, our results of operations and our cash flows.

Risks associated with our growth strategy may adversely impact our ability to sustain our growth.

Historically, we have grown internally by increasing sales and services to our existing customers, aggressively pursuing new customers and services, building or purchasing new facilities and acquiring and upgrading processing equipment in order to expand the range of customer services and products that we offer. In addition, we have grown through the acquisition of other service centers and related businesses. We intend to actively pursue our growth strategy in the future.

We have completed a number of expansion projects since 2010. Future expansion or construction projects, could have adverse effects on our results of operations due to the impact of the associated start-up costs and the potential for underutilization in the start-up phase of a facility. While we are pursuing potential acquisition targets, we are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. Moreover, in pursuing acquisition opportunities, we may compete for acquisition targets with other companies with similar growth strategies that may be larger and have greater financial and other resources than we have. Competition among potential acquirers could result in increased prices for acquisition targets. As a result, we may not be able to consummate acquisitions on satisfactory terms to us, or at all.

The pursuit of acquisitions and other growth initiatives may divert management’s time and attention away from day-to-day operations. In order to achieve growth through acquisitions, expansion of current facilities, greenfield construction or otherwise, additional funding sources may be needed and we may not be able to obtain the additional capital necessary to pursue our growth strategy on terms that are satisfactory to us, or at all.

We depend on our senior management team and the loss of any member could prevent us from implementing our business strategy.

Our success is dependent upon the management and leadership skills of our senior management team. We have employment agreements, which include non-competition provisions, with our Chief Executive Officer, our President and Chief Operating Officer, the President of CTI, and our Chief Financial Officer that expire on January 1, 2018, January 1, 2020, July 1, 2016 and January 1, 2017, respectively. The loss of any member of our senior management team or the failure to attract and retain additional qualified personnel could prevent us from implementing our business strategy.

Customer and third-party credit constraints and credit losses could have a material adverse effect on our results of operations.

Some of our customers may experience difficulty obtaining and/or maintaining credit availability. In particular, certain customers that are highly leveraged represent an increased credit risk. Some customers have reduced their purchases because of these credit constraints. Moreover, our disciplined credit policies have, in some instances, resulted in lost sales. If we have misjudged our credit estimations and they result in future credit losses, lost sales or lost customers, there could be a material adverse effect on our business, financial condition, results of operations, cash flows and our allowance for doubtful accounts.

Although we expect to finance our growth initiatives through borrowings under our credit facility, we may have to find additional sources of funding, which could be difficult. Additionally, increased leverage and borrowing rates could adversely impact our business and results of operations.

We expect to finance our growth initiatives through borrowings under our credit facility, which matures on June 30, 2019. However, our credit facility may not be sufficient or available to finance our growth initiatives, and we may have to find additional sources of financing. It may be difficult for us in the future to obtain the necessary funds and liquidity to run and expand our business.

The borrowings under our credit facility are primarily at variable interest rates. If interest rates in the future were to increase 100 basis points (1.0%) from December 31, 2015 rates and, assuming no change in total debt from December 31, 2015 levels, the additional annual interest expense to us would be approximately $1.1 million.

Our information technology systems could be negatively affected by cyber security threats.

Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted computer crime pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our data. Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification or destruction of proprietary and other key information, production downtimes and operational disruptions, which in turn could adversely affect our results of operations. We may face greater risks in this area than our competitors as we implement the ERP system because among other things, we must simultaneously protect both the ERP and legacy systems until the ERP project is complete.

Labor disruptions at any of our facilities or those of major customers could adversely affect our business, results of operations and financial condition.

At December 31, 2015, we employed approximately 1,740 people. Approximately 305 of the hourly plant personnel are represented by nine separate collective bargaining units. Any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.

In addition, many of our larger customers, including those in the automotive industry, have unionized workforces and some have experienced significant labor disruptions in the past such as work stoppages, slow-downs and strikes. A labor disruption at one or more of our major customers could interrupt production or sales by that customer and cause that customer to halt or limit orders for our products. Any such reduction in the demand for our products could adversely affect our business, financial condition, results of operations and cash flows.

Our business is highly competitive, and increased competition could reduce our market share and harm our financial performance.

Our business is highly competitive. We compete with metals service centers and, to a certain degree, metals producers and intermediate metals processors, on a regular basis, primarily on quality, price, inventory availability and the ability to meet the delivery schedules and service requirements of our customers. We have different competitors for each of our products and within each region. Certain of these competitors have financial and operating resources in excess of ours. Increased competition could lower our gross profits or reduce our market share and have a material adverse effect on our financial performance.

Increases in energy prices would increase our operating costs, and we may be unable to pass all these increases on to our customers in the form of higher prices.

If our energy costs increase disproportionately to our revenues, our earnings could be reduced. We use energy to process and transport our products. Our operating costs increase if energy costs, including electricity, diesel fuel and natural gas, rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. In addition, we generally do not hedge our exposure to higher prices via energy futures contracts. Increases in energy and fuel prices will increase our operating costs and may reduce our profitability if we are unable to pass all of the increases on to our customers.

Impairment in the carrying value of intangible assets could result in the incurrence of impairment charges and negatively impact our results of operations.

The net carrying value of intangibles represents trade names and customer relationships, net of accumulated amortization, related to our tubular and pipe products segment. Indefinitely lived assets are evaluated for impairment annually or whenever events or changes in circumstance indicate that the carrying amounts of these assets may not be recoverable. Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstance indicate that the carrying amounts of these assets may not be recoverable. Impairments to intangible assets may be caused by factors outside our control, such as increased competitive pricing pressures, lower than expected revenue and profit growth rates, changes in discount rates based on changes in the cost of capital (interest rates, etc.), or the bankruptcy of a significant customer and could result in the incurrence of impairment charges and negatively impact our results of operations.

Participation in multiemployer pension plans carry withdrawal liability risks which could impact our results of operations and financial condition.

Through our CTI subsidiary, we contribute to one multiemployer pension plan. The risks of participating in the multiemployer plan are different from a single-employer plan in that 1) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, 2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and 3) if CTI chooses to stop participating in the multiemployer plan, CTI may be required to pay the plan an amount based on the unfunded status of the plan, referred to as a withdrawal liability.

We are subject to significant environmental, health and safety laws and regulations and related compliance expenditures and liabilities.

Our businesses are subject to many federal, state and local environmental, health and safety laws and regulations, particularly with respect to the use, handling, treatment, and disposal of substances and waste used or generated in our manufacturing processes. We have incurred and expect to continue to incur expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.

We may in the future be required to incur costs relating to the investigation or remediation of property, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.

We expect to continue to be subject to environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising for example, out of discovery of previously unknown conditions or more aggressive enforcement actions, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks Related to Our Common Stock

The market price for our common stock may be volatile.

Historically, there has been volatility in the market price for our common stock. Furthermore, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including, but not limited to, the risk factors described herein. Examples include:

In the past, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their specific operating performance. These factors may adversely affect the trading price of our common stock, regardless of actual operating performance.

In addition, stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. In the past, some shareholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation, regardless of whether our defense is ultimately successful, could result in substantial costs and divert management’s attention and resources.

Our quarterly results may be volatile.

Our operating results have varied on a quarterly basis during our operating history and are likely to fluctuate significantly in the future. Our operating results may be below the expectations of our investors or stock market analysts as a result of a variety of factors, many of which are outside of our control. Factors that may affect our quarterly operating results include, but are not limited to, the risk factors listed above.

Many factors could cause our revenues and operating results to vary significantly in the future. Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one quarter as an indication of our future performance. Further, it is our practice not to provide forward-looking sales or earnings guidance and not to endorse any analyst’s sales or earnings estimates. Nonetheless, if our results of operations in any quarter do not meet analysts’ expectations, our stock price could materially decrease.

Certain provisions in our charter documents and Ohio law could delay or prevent a change in management or a takeover attempt that you may consider to be in your best interest.

We are subject to Chapter 1704 of the Ohio Revised Code, which prohibits certain business combinations and transactions between an “issuing public corporation” and an “Ohio law interested shareholder” for at least three years after the Ohio law interested shareholder attains 10% ownership, unless the Board of Directors of the issuing public corporation approves the transaction before the Ohio law interest shareholder attains 10% ownership. We are also subject to Section 1701.831 of the Ohio Revised Code, which provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition.” Assuming compliance with the notice and information filings prescribed by the statute, a proposed control share acquisition may be made only if the acquisition is approved by a majority of the voting power of the issuer represented at the meeting and at least a majority of the voting power remaining after excluding the combined voting power of the “interested shares.”

Certain provisions contained in our Amended and Restated Articles of Incorporation and Amended and Restated Code of Regulations and Ohio law could delay or prevent the removal of directors and other management and could make a merger, tender offer or proxy contest involving us that you may consider to be in your best interest more difficult. For example, these provisions:

These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our Board of Directors.

Principal shareholders who own a significant numbers of shares of our common stock may have interests that conflict with yours.

Michael D. Siegal, our Chief Executive Officer and Chairman of the Board and our largest shareholders, owned approximately 11.3% of our outstanding common stock as of December 31, 2015. Mr. Siegal may have the ability to significantly influence matters requiring shareholder approval. In deciding how to vote on such matters, Mr. Siegal may be influenced by interests that conflict with yours.

None.

We believe that our properties are strategically situated relative to our domestic suppliers, our customers and each other, allowing us to support customers from multiple locations. Product is shipped from the most advantageous facility, regardless of where the customer order is taken. The facilities are located in the hubs of major metals consumption markets, and within a 250-mile radius of most of our customers, a distance approximating the one-day driving and delivery limit for truck shipments. During 2015, we terminated leases on certain warehouse facilities in Moses Lake, Washington and Winder, Georgia.

The following table sets forth certain information concerning our principal properties including which segment’s products are serviced out of each location:

In addition to the facilities listed above, our executive office is located in Highland Hills, Ohio and we have sales offices located in Media, Pennsylvania; Miami, Florida; and Monterrey, Mexico. Management believes we will be able to accommodate our capacity needs for the immediate future at our existing facilities.

We are party to various legal actions that we believe are ordinary in nature and incidental to the operation of our business. In the opinion of management, the outcome of the proceedings to which we are currently a party will not have a material adverse effect upon our results of operations, financial condition or cash flows.

Not applicable. 

EXECUTIVE OFFICERS OF THE REGISTRANT

This information is included in this Annual Report on Form 10-K pursuant to Instruction 3 of Item 401(b) of Regulation S-K. The following is a list of our executive officers and a brief description of their business experience. Each executive officer will hold office until his successor is chosen and qualified.

Michael D. Siegal, age 63, has served as our Chief Executive Officer since 1984 and as Chairman of our Board of Directors since 1994.  From 1984 until January 2001, he also served as our President.  He has been employed by us in a variety of capacities since 1974. Mr. Siegal serves on the Board of Directors of Cliffs Natural Resources, Inc. He is also the immediate past Board Chair of the Jewish Federations of North America and is currently on the Board of the Development Corporation for Israel.

David A. Wolfort, age 63, has served as our President since January 2001 and Chief Operating Officer since 1995. He has been a director since 1987. He previously served as Vice President Commercial from 1987 to 1995, after having joined us in 1984 as General Manager. Prior thereto, he spent eight years with a primary steel producer in a variety of sales assignments. Mr. Wolfort is a past director of the Metals Service Center Institute and previously served as Chairman of its Political Action Committee and Governmental Affairs Committee. He is a trustee of the Board of the Musical Arts Association (Cleveland Orchestra) and of Ohio University where he serves as the Vice-Chairman of The Board of Trustees and is a member of the Executive Committee. He also serves as a member of the United States International Trade Committee for Steel (ITAC).

Richard T. Marabito, age 52, serves as our Chief Financial Officer. He joined us in 1994 as Corporate Controller and served in this capacity until being named Chief Financial Officer in March 2000. He also served as Treasurer from 1994 through 2002 and again from 2010 through 2012. Prior to joining us, Mr. Marabito served as Corporate Controller for a publicly traded wholesale distribution company and was employed by a national accounting firm in its audit department. Mr. Marabito is a Governance board member of the Make-A-Wish Foundation of Ohio, Kentucky and Indiana and also serves as the Chair of its Northeast Ohio regional board. He previously served as a board member and audit committee chair for Hawk Corporation. Mr. Marabito serves on the Board of Trustees and as Treasurer for Hawken School in Cleveland, Ohio. He is also a director and Executive Committee member of the Metals Service Center Institute and is a past Chair of its Foundation for Education and Research.

Richard A. Manson, age 47, has served as our Vice President and Treasurer since January 2013 and has been employed by us since 1996.  From March 2010 through December 2012, he served as our Vice President of Human Resources and Administration.  From January 2003 through March 2010, he served as our Treasurer and Corporate Controller.  From 1996 through 2002, he served as our Director of Taxes and Risk Management.  Prior to joining us, Mr. Manson was employed for seven years by a national accounting firm in its tax department.  Mr. Manson is a Board Member and the Treasurer of the West Side Catholic Center. He also serves on the Board of Directors of the Boys and Girls Clubs of Cleveland and the Cleveland Catholic Cemeteries Association.  Mr. Manson is a certified public accountant and member of the Ohio Society of Certified Public Accountants and the American Institute of Certified Public Accountants.

Donald McNeeley, age 61, has served as the President and Chief Operating Officer of CTI, a wholly owned subsidiary of Olympic Steel, Inc., since the acquisition on July 1, 2011.   He joined CTI in 1972 and has held several operational and executive positions within the company. After serving as CTI’s Vice President of Operations and subsequently Executive Vice President, in 1990, Dr. McNeeley was appointed President and Chief Operating Officer. He is a former Chairman of the Metals Service Center Institute.  Dr. McNeeley is an adjunct professor at Northwestern University where he teaches in the graduate engineering program.  He serves on the board of directors of Saulsbury Industries in Odessa, Texas, where he chairs the Audit Committee. Dr. McNeeley also serves on the board of directors of Vail Rubber Industries in St. Joseph, Michigan, and is a former director of The Committee for Monetary Research in Greenwich, Connecticut.  

PART II

Price Range of Common Stock

Our common stock trades on the Nasdaq Global Select Market under the symbol “ZEUS.” The following table sets forth, for each quarter in the two-year period ended December 31, 2015, the high and low sales prices of our common stock as reported by the Nasdaq Global Select Market:

Holders of Record

As of February 1, 2016, we estimate there were approximately 46 holders of record and 3,609 beneficial holders of our common stock.

Dividends

During 2015, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 16, 2015, June 15, 2015, September 15, 2015 and December 15, 2015.

During 2014, our Board of Directors approved regular quarterly dividends of $0.02 per share that were paid on March 17, 2014, June 16, 2014, September 16, 2014 and December 15, 2014.

We expect to make regular quarterly dividend distributions in the future, subject to the continuing determination by our Board of Directors that the dividend remains in the best interest of our shareholders. Our asset-based credit facility (the ABL Credit Facility) restricts the aggregate amount of dividends and common stock repurchases that we can pay to $2.5 million annually. Any determinations by the Board of Directors to pay cash dividends in the future will take into account various factors, including our financial condition, results of operations, current and anticipated cash needs, plans for expansion and restrictions under our credit agreement and any agreements governing our future debt. We cannot assure you that dividends will be paid in the future or that, if paid, the dividends will be at the same amount or frequency.

Issuer Purchases of Equity Securities

On October 2, 2015, we announced that our Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Any of the repurchased shares will be held in our treasury, or canceled and retired as our Board may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility. Our ABL Credit Facility restricts the aggregate amount of dividends and common stock repurchases that we can pay to $2.5 million annually. Purchases in excess of $2.5 million require us to (i) maintain availability in excess of 25% of the aggregate revolver commitments or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments and we must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will depend upon several factors, including market and business conditions, and limitations under the ABL Credit Facility, and repurchases may be discontinued at any time.

Recent Sales of Unregistered Securities

We did not have any unregistered sales of equity securities during the quarter ended December 31, 2015. 

The following table sets forth selected financial and other data of the Company for each of the five years in the period ended December 31, 2015. The data presented should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

The data in the table above includes CTI information since the acquisition on July 1, 2011.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A, Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

We are a leading metals service center that operates in three reportable segments; carbon flat products, specialty metals flat products, and tubular and pipe products. We provide metals processing and distribution services for a wide range of customers. Our carbon flat products segment’s focus is on the direct sale and distribution of large volumes of processed carbon and coated flat-rolled sheet, coil and plate products and fabricated parts. Our specialty metals flat products segment’s focus is on the direct sale and distribution of processed aluminum and stainless flat-rolled sheet and coil products, flat bar products and fabricated parts. In addition, we distribute metal tubing, pipe, bar, valves and fittings and fabricate pressure parts supplied to various industrial markets. Products that require more value-added processing generally have a higher gross profit. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the demand for and availability of metals, and volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned metals. We sell certain products internationally, primarily in Canada, 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; fluctuations in the value of the U.S. dollar to foreign currencies, competition; metals pricing, demand and availability; energy prices; pricing and availability of raw materials used in the production of metals; global supply, the level of metals imported into the United States, and inventory held in the supply chain; customers’ ability to manage their credit line availability; and layoffs or work stoppages by our own, our suppliers’ or our customers’ personnel. The metals industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.

Like other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers.  Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers and market conditions.  Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders.  We have entered into nickel and carbon swaps at the request of our customers in order to mitigate our customers’ risk of volatility in the price of metals, and we have entered into metals hedges to mitigate our risk of volatility in the price of metals.  We have no long-term, fixed-price metals purchase contracts.  When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we use existing metals inventory.  When metals prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers.  To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and gross profits of our business could be adversely affected.

Reportable Segments

The Company now operates in three reportable segments; carbon flat products, specialty metals flat products and tubular and pipe products. Commencing with the first quarter of 2015, the flat products segment has been separated into two reportable segments; carbon flat products and specialty metals flat products. The flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and processed on the shared equipment. As such, total assets and capital expenditures are reported in the aggregate for the flat products segments. Due to the shared assets and resources, certain of the flat products segment expenses are allocated between the carbon flat products segment and the specialty metals flat products segment based upon an established allocation methodology. The financial information for 2014 has been recast to reflect the new segment reporting structure. The financial information for 2013 has not been recast due to system limitations and the carbon and specialty metals flat products segment financial information is reported consolidated.

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.

Carbon flat products

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

Specialty metals flat products

The primary focus of our specialty metals flat products segment is on the direct sale and distribution of processed stainless and aluminum flat-rolled sheet and coil products, flat bar products and fabricated parts. We act as an intermediary between metals producers and manufacturers that require processed metals for their operations. We serve customers in various industries, including manufacturers of food service and commercial appliances, agriculture equipment, transportation and automotive equipment. We distribute these products primarily through a direct sales force.

Combined, the carbon and specialty metals flat products segments have 23 strategically-located processing and distribution facilities in the United States and one in Monterrey, Mexico. Many of our facilities service both the carbon and the specialty metals flat products segments, and certain assets and resources are shared by the segments. Our geographic footprint allows us to focus on regional customers and larger national and multi-national accounts, primarily located throughout the midwestern, eastern and southern United States.

Tubular and pipe products

The tubular and pipe products segment consists of the CTI business, acquired in 2011. Through our tubular and pipe products segment, we distribute metal tubing, pipe, bar, valve and fittings and fabricate pressure parts supplied to various industrial markets. Founded in 1914, CTI operates from nine locations in the midwestern and southeastern United States. The tubular and pipe products segment distributes its products primarily through a direct sales force.

Corporate expenses

Corporate expenses are reported as a separate line item for segment reporting purposes. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e., all three segments), including 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.

Due to the nature of the products sold in each segment, there are significant differences in the segments’ average selling price and the cost of materials sold. The tubular and pipe products segment generally has the highest average selling price among the three segments followed by the specialty metals flat products and carbon flat products segments. Due to the nature of the tubular and pipe products, we do not report tons sold or per ton information. Gross profit per ton is generally higher in the specialty metals flat products segment than the carbon flat products segment. Gross profit as a percentage of net sales is generally highest in the tubular and pipe products segment, followed by the carbon and specialty metals flat products segments.

Due to the differences in average selling prices, gross profit and gross profit percentage among the segments, a change in the mix of sales impacts total net sales, gross profit, and gross profit percentage. In addition, certain inventory in the tubular and pipe products segment is valued under the last-in, first-out, or LIFO, method. Adjustments to the LIFO inventory value are recorded to cost of materials sold and may impact the gross margin and gross margin percentage at the consolidated Company and tubular and pipe products segment levels.

Results of Operations

2015 Compared to 2014

The metals industry experienced a significant decline in the price of metals during 2015 as a result of the strengthened U.S. dollar, a historically high level of imported materials arriving in the United States, low raw material costs to produce metals and a global oversupply of metals. The price of hot-rolled carbon flat steel decreased approximately 41% during 2015. Similarly, the price of stainless steel and aluminum decreased during 2015. The declines in metals shipments and pricing have negatively impacted our 2015 sales and earnings. Industry demand has also softened in 2015 compared to 2014 as evidenced by lower year over year shipments by metals service centers in the United States. During the second quarter of 2015, we recorded an impairment charge in our tubular and pipe products segment as a result of the continued decline in metals pricing and its impact on the tubular and pipe products segment results. The impairment charge consisted of a $16.5 million goodwill impairment, which eliminated the remaining goodwill in the tubular and pipe products segment, and a partial impairment of $8.0 million related to the segment’s tradename. The tradename is an indefinitely lived intangible asset with a remaining value of $15.4 million. In the fourth quarter of 2015, we recorded a $500 thousand impairment charge, which fully eliminated the goodwill in our specialty metals flat products segment.

The following table sets forth certain consolidated income statement data for the years ended December 31, 2015 and 2014 (dollars shown in thousands):

Net sales decreased $261 million, or 18.2%, to $1.18 billion in 2015 from $1.44 billion in 2014. Carbon flat products net sales decreased $220 million, or 22.3%, and were 65.1% of total net sales in 2015 compared to 68.6% in 2014. Specialty metals flat products net sales decreased $14.2 million, or 6.9%, and were 16.4% of total net sales in 2015 compared to 14.4% in 2014. Tubular and pipe products net sales decreased $26.9 million, or 11.0%, and were 18.5% of total net sales in 2015 compared to 17.0% of total net sales in 2014. The decrease in sales for the year ended December 31, 2015 was due to a 10.2% decrease in sales volume and an 8.9% decrease in average selling prices in 2015 compared to 2014. The decrease in tons sold was due to decreased customer demand, specifically in the heavy equipment, agriculture, mining and energy sectors, and lower industry-wide shipments in 2015 compared to 2014.

Cost of materials sold decreased $218 million, or 18.8%, to $942 million in 2015 from $1.16 billion in 2014. During 2015, we recorded LIFO income of $3.3 million compared to LIFO expense of $365 thousand recorded in 2014. The decrease in cost of materials sold in 2015 is primarily due to the decreased sales volume of 10.2%, decreased metals costs of 9.6% during 2015 and the impact of LIFO income during 2015 compared to LIFO expense in 2014.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 19.8% in 2015 from 19.2% in 2014. Gross profit as a percentage of net sales increased in the carbon flat products segment to 19.2% from 18.2% in 2014 and in the tubular and pipe products segment to 32.5% from 28.9% in 2014. Gross profit as a percentage of net sales decreased in the specialty metals flat products segment to 8.2% in 2015 from 12.5% in 2014. LIFO increased gross profit by 0.3% of net sales in 2015 and had no consolidated gross profit impact in 2014. The increase in gross profit as a percentage of net sales during 2015 was primarily due to the cost of materials sold decreasing more than selling prices in the carbon flat rolled and tubular and pipe products segments, as well as the impact of LIFO income in 2015 compared to LIFO expense in 2014.

Operating expenses (as defined in footnote (c) in the table above) decreased $25.2 million, or 9.6%, to $236.2 million in 2015 from $261.3 million in 2014. As a percentage of net sales, operating expenses increased to 20.1% in 2015 from 18.1% in 2014. Operating expenses decreased in all categories as reported on the Company’s Consolidated Statements of Comprehensive Income. During 2015, we executed on our profit improvement plan, which contributed to the cost reductions. Distribution expense decreased by $5.2 million, or 12.7%, due to the decreased sales volume. Warehouse and processing costs decreased $6.8 million, or 7.3%, primarily due to reductions in labor and personnel expenses and reduced warehouse consumables expenses related to the 10.2% 2015 volume decrease. Administrative costs decreased by $7.2 million, or 10.0%, primarily related to reductions in labor and personnel expenses, centralization of certain administrative functions, lower variable based incentive compensation and decreases in travel and entertainment expenses. Selling expenses decreased $3.6 million, or 14.7%, as a result of decreased variable compensation associated with fewer sales employees and decreased discretionary spending. Occupancy expenses decreased $560 thousand as a result of decreased heating and snow removal expenses. Depreciation expense decreased $1.7 million, or 8.8%, as a result of certain assets being fully depreciated in 2014. Operating expenses in the carbon flat products segment decreased $19.0 million, operating expenses in the specialty metals products segment decreased $2.4 million, operating expenses in the tubular and pipe products segment decreased $1.8 million, and Corporate expenses decreased $0.9 million.

The goodwill and intangible asset impairment charge in 2015 includes a $16.5 million non-cash goodwill impairment and a $8.0 million intangible asset impairment for the tubular and pipe products segment as well as a $500 thousand goodwill impairment for the specialty metals flat products segment. The 2015 goodwill impairment charges fully impaired the goodwill for both the tubular and pipe products segment and the specialty metals flat products segment. The goodwill and intangible asset impairment charge in 2014 included a $23.8 million goodwill impairment for the tubular and pipe products segment.

Interest and other expense on debt totaled $5.7 million in 2015 compared to $6.8 million in 2014. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 2.1% in 2015 compared to 2.4% in 2014. The decrease in interest and other expense on debt in 2015 was primarily attributable to lower average borrowings and lower average borrowing rates during 2015 compared to 2014.

For 2015, loss before income taxes totaled $33.6 million compared to loss before income taxes of $16.1 million in 2014. 2015 includes goodwill impairment charges of $17.0 million and a $8.0 million intangible asset impairment charge and LIFO income of $3.3 million. 2014 included a goodwill impairment charge of $23.8 million related to the tube and pipe segment and LIFO expense of $365 thousand.

An income tax benefit of 20.3% was recorded for 2015, compared to an income tax provision of (18.3%) in 2013. The 2015 and 2014 effective income tax rates were impacted by the non-deductibility of the goodwill impairment charges. The income tax benefit for 2015 prior to the goodwill impairment charge was 39.8%. The income tax provision for 2014 prior to the goodwill impairment charge was 38.2%. We expect our 2016 income tax rate to approximate 38% to 40%.

Net loss for 2015 totaled $26.8 million, or $2.39 per basic and diluted share, compared to net loss of $19.1 million, or $1.71 per basic and diluted share, for 2014. The goodwill and intangible asset impairments in 2015 impacted earnings per share by $1.93 per basic and diluted shares. The goodwill impairment in 2014 impacted earnings per basic and diluted shares by $2.14.

Segment Results of Operations

Carbon flat products

The following table sets forth certain income statement data for the carbon flat products segment for the years ended December 31, 2015 and 2014 (dollars shown in thousands, except per ton data):

Tons sold decreased 11.0% to 1.04 million tons in 2015 from 1.17 million tons in 2014. Toll tons sold decreased 4.1% to 102 thousand tons in 2015 from 107 thousand tons in 2014. The decrease in tons sold was due to decreased customer demand, specifically in the heavy equipment, agriculture, mining and energy sectors, and lower industry-wide shipments of carbon flat products in 2015 compared to 2014.

Net sales decreased $220 million, or 22.3%, to $765.4 million in 2015 from $985.0 million in 2014. Average selling prices in 2015 decreased 12.7% to $738 per ton, compared to $845 per ton in 2013. The decrease in sales was due to an 11.0% decrease in sales volume and a 12.7% decrease in average selling prices during 2015. The decrease in the average selling price is a result of declining prices in the metals industry during 2015 discussed in the overview of Results of Operations above. We expect market carbon flat metals prices in the first quarter of 2016 to increase slightly over the prices in the fourth quarter of 2015.

Cost of materials sold decreased $187.1 million, or 23.2%, to $618.7 million in 2015 from $805.7 million in 2014. The decrease in cost of materials sold was due to the volume decrease of 11.0% as well as a 13.7% decrease in the average cost of materials sold per ton during 2015 compared to 2014.

As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) increased to 19.2% in 2015 from 18.2% in 2014. The increase in gross profit percentage in 2015 was primarily due to the cost of materials sold decreasing more than selling prices. The average gross profit per ton sold declined to $141 in 2015 from $154 in 2014 due to the significant decline in market prices for metals in 2015.

Operating expenses in 2015 decreased $19.0 million, or 11.0%, to $153.9 million from $173.0 million in 2014 mirroring the sales volume decrease of 11.0%. As a percentage of net sales, operating expenses increased to 20.1% for 2015 from 17.6% in 2014. Operating expenses decreased through reductions in labor and personnel expenses, lower variable based incentive compensation, decreases in travel and entertainment expenses, and lower distribution expense as a result of lower sales volumes.

Operating loss for 2015 totaled $7.2 million compared to operating income of $6.3 million in 2014.  

Specialty metals flat products

The following table sets forth certain income statement data for the specialty metals flat products segment for the years ended December 31, 2015 and 2014 (dollars shown in thousands, except per ton data):

Tons sold decreased 1.2% to 72 thousand tons in 2015 from 73 thousand tons in 2014. The decrease in tons sold was due to decreased customer demand and lower industry wide shipments of stainless and aluminum flat products.

Net sales decreased $14.2 million, or 6.9%, to $192.5 million in 2015 from $206.7 million in 2014. Average selling prices in 2015 decreased to $2,671 per ton, compared to $2,833 per ton in 2014. The decrease in sales was due to a 1.2% decrease in sales volume and a 5.7% decrease in the average selling price during 2015. The decrease in the year over year average selling price per ton is a result of declining market price of nickel and aluminum, which continue to pressure stainless and aluminum pricing. We expect market stainless and aluminum prices in the first quarter of 2016 to continue to be pressured.

Cost of materials sold decreased $4.1 million, or 2.3%, to $176.7 million in 2015 from $180.8 million in 2014. The decrease in cost of materials sold was due to the volume decrease of 1.2% and a 1.1% decrease in the average cost of materials sold per ton during 2015 compared to 2014.

As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 8.2% in 2015 from 12.5% in 2014. The average gross profit per ton sold totaled $220 in 2015 compared to $355 per ton in 2015. The decrease in the gross profit percentage is a result of the declining price of nickel, which is a large component of stainless steel and aluminum pricing, and the cost of our material not declining as fast as the average sell price due to slower inventory turns in 2015.

Operating expenses (as defined in footnote (b) in the table above) decreased $2.9 million, or 14.5%, to $16.9 million in 2015 from $19.8 million in 2014. The decrease in operating expenses exceeded the decrease in sales volume of 1.2%. As a percentage of net sales, operating expenses decreased to 8.8% of net sales in 2015 from 9.5% in 2014. Variable operating expenses, such as distribution and wages decreased as a result of lower sales volumes. Expenses also decreased as a result of the profit improvement plan initiated in 2015 and the decrease in variable performance-based incentive compensation in 2015 compared to 2014. In 2015 we recorded a $500 thousand non-cash goodwill impairment charge as a result of the continued market pressures which fully eliminated the goodwill for the specialty metals flat products segment.

Operating loss for 2015 totaled $1.6 million compared to operating income of $6.1 million in 2015.

Tubular and pipe products

The following table sets forth certain income statement data for the tubular and pipe products segment for 2015 and 2014 (dollars shown in thousands).

Net sales decreased $26.9 million, or 11.0%, to $217.6 million in 2015 from $244.5 million in 2014. The decrease in net sales was due to a 5.7% decrease in the sales volume and a 5.6% decrease in the average selling price during 2015. The decrease in volume was due to decreased customer demand and lower industry-wide shipments of pipe and tube products.

Cost of materials sold decreased $26.9 million, or 15.5%, to $146.9 million in 2015 from $173.8 million in 2014. The decrease in cost of materials sold was due to a 5.7% decrease in sales volume and a 10.4% decrease in the average cost of materials sold which was impacted by the LIFO income of $3.3 million in 2015 compared to LIFO expense of $365 thousand in 2014.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) increased to 32.5% in 2015 from 28.9%, in 2014. The LIFO income recorded in 2015 increased gross profit by 1.5% of net sales and the LIFO expense recorded in 2014, decreased gross profit by 0.2% of net sales. Gross profit as a percentage of net sales increased as a result of increased value added processing sales and an increase in the product mix to higher margin sales.

Operating expenses (as defined in footnote (c) in the table above) decreased $2.4 million, or 4.0%, to $58.2 million from $60.6 million in 2014. As a percentage of net sales, operating expenses increased to 26.8% for 2015 compared to 24.8% for 2014. Variable operating expenses, such as distribution and certain selling expenses, decreased as a result of lower sales volume and net sales. Depreciation expense increased as a result of recent investments in processing equipment.

In 2015 we recorded a $16.5 million non-cash goodwill impairment charge and an $8.0 million non-cash intangible asset impairment charge. In 2014 we recorded a $23.8 million non-cash goodwill impairment charge.

Operating loss for 2015 totaled $11.9 million, compared to an operating loss of $13.7 million in 2014. The operating loss for 2015 was the result of the goodwill impairment of $16.5 million and the asset impairment charge of $8.0 million. The 2014 operating loss was a result of the $23.8 million goodwill impairment as well as LIFO expense of $365 thousand.

Corporate expenses

Corporate expenses decreased $0.9 million, or 10.7%, to $7.1 million in 2015 compared to $8.0 million in 2014. The decrease in corporate expenses is primarily attributable to decreases in travel and entertainment expenses and lower variable performance-based compensation in 2015 compared to 2014. Corporate expenses include the unallocated expenses related to managing the entire Company (i.e. all three segments), including 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.

2014 Compared to 2013

The following table sets forth certain consolidated income statement data for the years ended December 31, 2014 and 2013 (dollars shown in thousands):

Net sales increased $173 million, or 13.7%, to $1.44 billion in 2014 from $1.26 billion in 2013. Flat products net sales increased $165 million, or 16.1%, and were 83.0% of total net sales in 2014 compared to 81.3% in 2013. Tubular and pipe products net sales increased $8 million, or 3.4%, and were 17.0% of total net sales in 2014 compared to 18.7% of total net sales in 2013. The increase in sales for the year ended December 31, 2014 was due to a 13.3% increase in sales volume and a 0.3% increase in average selling prices in 2014 compared to 2013.

Cost of materials sold increased $161 million, or 16.1%, to $1.16 billion in 2014 from $999 million in 2013. During 2014, we recorded LIFO expense of $365 thousand compared to $3.6 million of LIFO income recorded in 2013. In the first quarter of 2013, we made an out-of-period adjustment to record previously unrecognized LIFO adjustments, which resulted in a 2013 decrease to cost of materials sold of $1.9 million.  The increase in cost of materials sold in 2014 was primarily due to the increased sales volume of 13.3%, increased metals costs of 2.1% during 2014 and the impact of LIFO expense during 2014 compared to LIFO income in 2013.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) decreased to 19.2% in 2014 from 20.9% in 2013. Gross profit as a percentage of net sales decreased in both segments. LIFO had no consolidated gross profit impact in 2014 and increased gross profit by 0.3% of net sales in 2013. The decrease in gross profit as a percentage of net sales during 2014 was primarily due to the cost of materials sold increasing more than selling prices in the flat rolled segment, as well as the impact of LIFO expense in 2014 compared to LIFO income in 2013.

Operating expenses in 2014 increased $40.7 million, or 16.6%, from 2013. As a percentage of net sales, operating expenses increased to 19.8% in 2014 from 19.3% in 2013. The increase in operating expenses resulted primarily from a $23.8 million non-cash goodwill impairment charge related to the tubular and pipe products segment. The goodwill impairment charge accounted for 58.6% of the operating expense increase. During 2014, distribution expense increased by $6.2 million, or 17.8%, due to the increased volume during 2014 as well as the inflationary dynamics in the transportation industry. Warehouse and processing costs increased $7.8 million, or 9.3%, primarily due to increased payroll and warehouse consumables expenses related to the 13.3% 2014 volume increase. Administrative costs increased by $3.7 million, or 5.4%, primarily related to employee travel, education and training, non-income taxes and one-time costs related to the CTI centennial celebration in 2014. Selling expenses decreased $0.1 million, or 0.4%, in 2014 compared to 2013 on a 13.7% sales increase as a result of decreased variable compensation associated with fewer sales employees and decreased discretionary spending, offset by $467 thousand of increased bad debt expense. Occupancy expense increased $657 thousand in 2014 compared to 2013 as a result of higher utility and snow removal costs during the harsh winter in the first quarter of 2014. Depreciation expense decreased $1.5 million in 2014 as a result of certain assets becoming fully depreciated in 2014.

Interest and other expense on debt totaled $6.8 million in 2014 compared to $6.7 million in 2013. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, was 2.4% in 2014 compared to 2.3% in 2013. The increase in interest and other expense on debt in 2014 was primarily attributable to the fixed interest rate hedge and higher average borrowings, offset by lower rate premiums under our credit facility.

For 2014, loss before income taxes totaled $16.1 million compared to income before income taxes of $12.9 million in 2013. 2014 included a goodwill impairment charge of $23.8 million related to the tube and pipe segment and LIFO expense of $365 thousand. 2013 income before taxes included LIFO income of $3.6 million, inclusive of an out-of-period LIFO income adjustment of $1.9 million recorded in the first quarter of 2013.

An income tax provision of (18.3%) was recorded for 2014, compared to an income tax provision of 40.8% in 2013. The 2014 effective income tax rate was unusual due to the non-deductibility of the goodwill impairment charge for the tubular and pipe products segment. The income tax provision for 2014 prior to the goodwill impairment charge was 38.2%.

Net loss for 2014 totaled $19.1 million or $1.71 per basic and diluted share, compared to net income of $7.6 million or $0.69 per basic and diluted share for 2013. The goodwill impairment impacted earnings per share by $2.14 per basic and diluted shares and the LIFO expense decreased earnings per share by $0.02 per basic and diluted share. The impact of LIFO income in 2013 increased earnings per share by $0.19 per basic and diluted shares. The out-of-period LIFO income adjustment accounted for $0.10 per basic and diluted share of the increase.

Segment Results of Operations

Flat products

Commencing with the first quarter of 2015, the flat products segment has been separated into two reportable segments; carbon flat products and specialty metals flat products. The flat products segments’ assets and resources are shared by the carbon and specialty metals segments and both segments’ products are stored in the shared facilities and processed on the shared equipment. Separate carbon flat products and specialty metals flat products segment data is not available for 2013 due to system limitations. As a result, the carbon flat products and specialty metals flat products segments’ 2014 results have been consolidated into the flat products segment in the discussion below. The following table sets forth certain income statement data for the flat products segment for the years ended December 31, 2014 and 2013 (dollars shown in thousands, except per ton data):

Tons sold increased 13.8% to 1.24 million tons in 2014 from 1.09 million tons in 2013. The increase in tons sold was due to increased customer demand and increased market share. Toll tons sold increased 31.4% to 107 thousand tons in 2014 from 81 thousand tons in 2013. The increase in toll tons sold was due to a shift by some customers from direct sales to toll sales in 2014.

Net sales increased $165 million, or 16.1%, to $1.19 billion in 2014 from $1.03 billion in 2013. Average selling prices in 2014 increased to $962 per ton, compared to $943 per ton in 2013. The increase in sales was due to a 13.8% increase in sales volume as well as a 2.0% increase in the average sell price during 2014.

Cost of materials sold increased $151.6 million, or 18.2%, to $986.6 million in 2014 from $835.0 million in 2013. The increase in cost of materials sold was due to the volume increase of 13.8% as well as a 3.8% increase in the average cost of materials sold per ton during 2014 compared to 2013.

As a percentage of net sales, gross profit (as defined in footnote (a) in the table above) decreased to 17.2% in 2014 from 18.7% in 2013. The decrease in gross profit percentage in 2014 was primarily due to the cost of materials sold increasing more than selling prices. The average gross profit per ton sold totaled $166 in 2014 and $176 in 2013. The decrease in gross profit percentage in 2014 compared to 2013 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 2014 increased $13.1 million, or 7.3%, from 2013. As a percentage of net sales, operating expenses decreased to 16.2% for 2014 from 17.5% in 2013. Freight and distribution expenses increased $5.3 million, or 20.2%, as a result of increased volume as well as the inflationary dynamics in the transportation industry. Warehouse and processing expenses increased $7.7 million, or 11.2%, as a result of higher sales volumes. Administrative and general expenses increased $1.7 million, or 4.1%, primarily as a result of increased compensation expenses. Depreciation decreased $1.8 million, or 10.8%, as a result of fully depreciated assets. Occupancy expenses increased as a result of higher utility and snow removal costs during the first quarter of 2014.

Operating income for 2014 increased to $12.4 million, or 1.0% of net sales, from $12.1 million, or 1.2% of net sales in 2013.

Tubular and pipe products

The following table sets forth certain income statement data for the tubular and pipe products segment for 2014 and 2013 (dollars shown in thousands).

Net sales increased $8.0 million, or 3.4%, to $244.5 million in 2014 from $236.6 million in 2013. The increase in net sales was due to a 6.2% increase in the sales volume offset by a 2.7% decrease in the average selling price during 2014.

Cost of materials sold increased $9.5 million, or 5.8%, to $173.8 million in 2014 from $164.2 million in 2013. The increase in cost of materials sold was due to a 6.2% increase in sales volume and the impact of LIFO expense of $365 thousand in 2014 compared to LIFO income of $3.6 million in 2013, offset by a decrease in the average cost of materials sold of 2.7%.

As a percentage of net sales, gross profit (as defined in footnote (b) in the table above) totaled 28.9% in 2014 compared to 30.6%, in 2013. The LIFO expense recorded in 2014 decreased gross profit by 0.2% of net sales and the LIFO income recorded in 2013, increased gross profit by 1.5% of net sales, resulting in pre-LIFO gross margin as a percentage of net sales remaining constant at 29.1% in both 2014 and 2013.

Operating expenses increased $27.1 million, or 47.2%, to $84.4 million, or 34.5% of net sales, in 2014 compared to $57.4 million, or 24.3%, of net sales in 2013. In 2014, we recorded a non-cash goodwill impairment charge of $23.8 million. The impairment charge accounted for 88.0% of the operating expense increase. Distribution expense increased $913 thousand, or 10.5%, as a result of the increased sales volume as well as the inflationary dynamics in the transportation industry. Warehouse and processing expense increased $132 thousand, or 0.8%, on a 6.2% increase in sales volume. Selling, administrative and general expenses increased $1.7 million, or 6.5%, due to non-recurring costs related to CTI’s Centennial events in 2014 and increased payroll costs. Depreciation expense increased $316 thousand, or 7.2%, as a result of the St. Paul facility expansion in 2013 and new processing equipment.

Operating loss for 2014 totaled $13.7 million, or (5.6%) of net sales, compared to operating income of $15.0 million, or 6.3% of net sales, for 2013. The operating loss for 2014 was the result of the goodwill impairment of $23.8 million as well as LIFO expense of $365 thousand. Operating income for 2013 included LIFO income of $3.6 million.

Corporate expenses

Corporate expenses increased $540 thousand, or 7.3%, to $8.0 million in 2014, compared to $7.4 million in 2013. The increase in Corporate expenses in 2014 is mainly attributable to a full year of office rent and increased professional fees and travel 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 credit facility, lease arrangement proceeds and the sale of equity or debt securities, together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements, our dividend payments and share repurchases and any business acquisitions over at least the next 12 months. In the future, we may as part of our business strategy, acquire and dispose of assets or other companies in the same or complementary lines of business, or enter into or exit strategic alliances and joint ventures. Accordingly, the timing and size of our capital requirements are subject to change as business conditions warrant and opportunities arise.

2015 Compared to 2014

Operating Activities

During 2015, we generated $107.5 million of cash from operations, of which $12.4 million was generated from operating activities and $95.1 million was generated from working capital. During 2014, we used $39.6 million of cash for operations, of which $25.4 million was generated from operating activities and $65.0 million was used for working capital.

Net cash from operations totaled $12.4 million during 2015 and was primarily comprised of depreciation and amortization of $19.9 million and the non-cash goodwill and intangible asset impairment of $25.0 million, offset by the net loss of $26.8 million. Net cash from operations totaled $25.4 million during 2014 and was primarily comprised of depreciation and amortization of $21.8 million and the non-cash goodwill impairment of $23.8 million, offset by the net loss of $19.1 million.

Working capital at December 31, 2015 totaled $231.9 million, a $94.8 million decrease from December 31, 2014. The decrease was primarily attributable to a $104.5 million decrease in inventory (resulting from decreased inventory purchases and lower metals cost in 2015 compared to 2014) and a $30.9 million decrease in accounts receivable (resulting from lower sales volume and selling prices), offset by a $35.6 million decrease in accounts payable and outstanding checks and a $18.5 million decrease in accrued payroll and other accrued liabilities. The decrease in prepaid expenses and other and accrued payroll and other accrued liabilities is mainly related to the decrease in metals derivatives.

Investing Activities

Net cash used for investing activities was $7.3 million during 2015, compared to $7.8 million during 2014. In 2015, capital expenditures were primarily attributable to additional processing equipment at our flat products (carbon and specialty metals) and tube and pipe products existing facilities. During 2016, we expect to limit our capital spending to less than our annual depreciation expense (approximately $18 million in 2016).

Financing Activities

In 2015, $100.8 million of cash was used for financing activities which primarily consisted of $98.3 million of net repayments under our ABL Credit Facility.   In 2014, $46.4 million of cash was generated from financing activities, which primarily consisted of $49.2 million of net borrowings under our credit facility, including the payoff of our term loan of $48.9 million upon refinancing and subsequent borrowings under our revolving credit facility, offset by $1.2 million of additional deferred financing fees incurred as part of the June 30, 2014 amendment to the ABL Credit Facility (as defined below).

In February 2016, our Board of Directors approved a regular quarterly dividend of $0.02 per share, which is payable on March 15, 2016 to shareholders of record as of March 1, 2016. Our Board previously approved 2015 regular quarterly dividends of $0.02 per share, which were paid on each of March 16, 2015, June 15, 2015, September 15, 2015 and December 15, 2015. Dividend distributions in the future are subject to the availability of cash, the $2.5 million annual limitation on cash dividends under our ABL Credit Facility and continuing determination by our Board of Directors that the payment of dividends remains in the best interest of our shareholders.

Stock Repurchase Program

On October 2, 2015, we announced that our Board of Directors authorized a stock repurchase program of up to 550,000 shares of the Company’s issued and outstanding common stock, which could include open market repurchases, negotiated block transactions, accelerated stock repurchases or open market solicitations for shares, all or some of which may be effected through Rule 10b5-1 plans. Any of the repurchased shares will be held in our treasury, or canceled and retired as our Board may determine from time to time. Any repurchases of common stock are subject to the covenants contained in the ABL Credit Facility. Under the ABL Credit Facility, we may repurchase common stock and pay dividends up to $2.5 million in the aggregate during any trailing twelve months without restrictions. Purchases in excess of $2.5 million require us to (i) maintain availability in excess of 25% of the aggregate revolver commitments ($91.3 million at December 31, 2015) or (ii) to maintain availability equal to or greater than 15% of the aggregate revolver commitments ($54.8 million at December 31, 2015) and we must maintain a pro-forma ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00. The timing and amount of any repurchases under the stock repurchase program will depend upon several factors, including market and business conditions, and limitations under the ABL Credit Facility, and repurchases may be discontinued at any time. During 2016, we expect to be limited to the $2.5 million available without restrictions to repurchase common stock and pay dividends.

During the fourth quarter of 2015, we repurchased 65,283 shares for a total cost of $699 thousand.

Debt Arrangements

Our ABL Credit Facility is collateralized by our accounts receivable and inventory. The ABL Credit Facility consists of a revolving credit line of $365 million. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $365 million in the aggregate. The ABL Credit Facility matures on June 30, 2019.

The ABL Credit Facility requires us to comply with various covenants, the most significant of which include: (i) 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 December 31, 2015) then we must maintain a ratio of EBITDA minus certain capital expenditures and cash taxes paid to fixed charges of at least 1.00 to 1.00 for the most recent twelve fiscal month period; (ii) limitations on dividend payments and stock repurchases; and (iii) restrictions on additional indebtedness. We have the option to borrow under our revolver based on the agent’s base rate plus a premium ranging from 0.00% to 0.25% or the London Interbank Offered Rate (LIBOR) plus a premium ranging from 1.25% to 3.00%.

As of December 31, 2015, the Company was in compliance with its covenants and had approximately $87.7 million of availability under the ABL Credit Facility.

As of December 31, 2015, $2.8 million of bank financing fees were included in “Prepaid expenses and other” and “Other long-term assets” on the accompanying Consolidated Balance Sheets. The financing fees are being amortized over the five-year term of the ABL Credit facility and are included in “Interest and other expense on debt” on the accompanying Consolidated Statements of Comprehensive Income.

We entered into a forward starting fixed rate interest rate hedge that commenced June 2013, in order to eliminate the variability of cash interest payments on $53.2 million of 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 remaining hedged balance as of December 31, 2015 was $31.4 million. The interest rate hedge fixed the rate at 1.21% plus a premium ranging from 1.25% to 1.75%. Although we are exposed to credit loss in the event of nonperformance by the other parties to the interest rate hedge agreement, we anticipate performance by the counterparties.

As part of the CTI acquisition in July 2011, 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, 2015, we paid an optional principal payment of $840 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, we obtained a direct pay letter of credit issued by JPMorgan Chase Bank, N.A. The letter of credit reduces annually by the principal reduction amount. The interest rate at December 31, 2015 was 0.11% for the IRB debt.

2014 Compared to 2013

Operating Activities

During 2014, we used $39.6 million of cash from operations, of which $25.4 million was generated from operating activities and $65.0 million was used for working capital. During 2013, we generated $54.7 million of net cash from operations, of which $29.1 million was generated from operating activities and $25.5 million was generated from working capital.

Net cash from operations totaled $25.4 million during 2014 and was primarily generated from depreciation and amortization of $21.8 million and the non-cash goodwill impairment of $23.8 million, offset by the net loss of $19.1 million. Net cash from operations totaled $29.1 million during 2013 and was primarily generated from net income of $7.6 million, and depreciation and amortization of $23.6 million.

Working capital at December 31, 2014 totaled $326.7 million, a $74.7 million increase from December 31, 2013. The increase was primarily attributable to a $24.7 million increase in inventory (a result of increased inventory tonnage related to increased sales), an $8.5 million increase in accounts receivable (a result of increased sales), a $34.8 million decrease in accounts payable (a result of less inventory purchases at the end of the year in 2014 compared to 2013), and a $7.6 million increase in prepaid expenses and other, offset by a $10.7 million increase in accrued payroll and other accrued liabilities. The increase in prepaid expenses and other and accrued payroll and other accrued liabilities is mainly related to the increase in metals derivatives.

Investing Activities

Net cash used for investing activities was $7.8 million during 2014, compared to $16.1 million during 2013. In 2014, capital expenditures were primarily attributable to additional processing equipment at our flat products and tube and pipe products existing facilities.

Financing Activities

In 2014, $46.4 million of cash was generated from financing activities, which primarily consisted of $49.2 million of net borrowings under our credit facility, including the payoff of our term loan of $48.9 million upon refinancing and subsequent borrowings under our revolving credit facility, offset by $1.2 million of additional deferred financing fees incurred as part of the June 30, 2014 amendment to the ABL Credit Facility.

Our Board of Directors approved regular quarterly dividends of $0.02 per share, which were paid on each of March 17, 2014, June 16, 2014, September 16, 2014 and December 15, 2014.

Contractual Obligations

The following table reflects our contractual obligations as of December 31, 2015: